CapitalConfidenceBarometer

Automotive

Acquiring innovation and forging alliances are driving the automotive transaction environment

May 2016 | ey.com/automotive | 13th edition

1Capital Confidence Barometer |II | Capital Confidence Barometer

Mark Short Global Automotive and Transportation Industry Leader, Transaction Advisory Services

Our latest Capital Confidence Barometer continues to find a healthy appetite for acquisitions within the automotive sector, with more than half of survey respondents expecting to pursue acquisitions in the next 12 months.

Automotive companies have accepted the reality of an extended low-growth global economic environment — the vast majority of our respondents expect only modest or stable economic growth. Against that backdrop, our respondents indicate continued optimism about dealmaking.

A shift to more stable deal characteristics is a strong indication of the sustainability of the current dealmarket. This stability has contributed to companies becoming more comfortable with doing larger deals, a trend demonstrated by the increasing deal intentions toward the upper-middle-market range. Larger deals — those in excess of US$250m — make up nearly 60% of planned transactions in the next 12 months, according to our automotive executives.

Changes in the way companies interact with customers — increasingly through digital channels, the rapid acceleration of vehicle technologies and the growth of alternative mobility solutions, such as car- and ride-sharing — has automotive companies planning for multiple possible futures. Acquisitions continue to be an important option to transforming business and achieving growth.

Acquiring innovation and forging alliances are driving the automotive transaction environment

For a conversation about your capital strategy, please contact us:

Cont

acts

GlobalPip McCrostieGlobal Vice ChairTransaction Advisory Servicespip.mccrostie@uk.ey.com+44 20 7980 0500Follow me on Twitter: @PipMcCrostie Steve KrouskosDeputy Global Vice ChairTransaction Advisory Servicessteve.krouskos@uk.ey.com+44 20 7980 0346Follow me on Twitter: @SteveKrouskos

Barry PerkinsGlobal Lead ResearcherTransaction Advisory Servicesbperkins@uk.ey.com+44 (0)207 951 4528

AmericasRichard M. JeanneretAmericas LeaderTransaction Advisory Servicesrichard.jeanneret@ey.com+1 212 773 2922Follow me on Twitter: @RichJeanneret

Asia-PacificJohn HopeAsia-Pacific LeaderTransaction Advisory Servicesjohn.hope@hk.ey.com+852 2846 9997

Europe, Middle East, Indiaand Africa (EMEIA)Andrea GuerzoniEMEIA LeaderTransaction Advisory Servicesandrea.guerzoni@it.ey.com+39 028 066 9707

JapanKenneth G. SmithJapan LeaderTransaction Advisory Serviceskenneth.smith@jp.ey.com+81 3 4582 6400

Automotive sector contactsMark ShortGlobal Automotive and Transportation Industry LeaderTransaction Advisory Services+1 313 628 8760mark.short@ey.com

Brad HehlCentral Region Automotive and Transportation Industry LeaderTransaction Advisory Services+1 313 628 8252 bradley.hehl@ey.com

Stephan HellmannGSA Automotive Leader+49 6196 996 25030stephan.hellmann@de.ey.com

Jim CarterAmericas AutomotiveIndustry LeaderTransaction Advisory Services+1 313 628 8690jim.carter@ey.com

Randy MillerGlobal Automotive and Transportation Leader+1 313 628 8642randall.miller@ey.com

Capital Confidence Barometer | 1

However, M&A is not the only means to acquire innovation. Alliances are becoming an attractive option to securing access to cutting-edge technologies, enhancing R&D capabilities and managing cost and risk. One-third of automotive executives tell us they intend to enter alliances to accelerate both top- and bottom-line growth and generate monetizing opportunities with underutilized assets.

Automotive companies that successfully balance their M&A plans with strategic and innovative alliances will be well-positioned to respond to the challenges of the marketplace and win in the evolving mobility ecosystem.

3Capital Confidence Barometer |2 | Capital Confidence Barometer

Macroeconomic environmentAutomotive companies have accepted the reality of prolonged, low-growth economic environment and are looking to identify new avenues for growth and to protect earnings. Acquisitions will continue to be part of the growth road map.

While growth remains at the forefront for automotive companies, in the present climate there is an increased focus on improving risk management, making better use of digital technology and analytics, as well as improving existing business processes.

and corporate strategyHeightened global and regional political instability, especially in the Middle East, the Korean Peninsula and the South China Sea, are seen as key risks to many businesses.

In addition, volatility in commodity and currency markets, which began in earnest in 2014, is now entering its third year. While the impact has been positive in certain sectors and geographies, prolonged volatility may hamper companies’ ability to plan over the short to medium term.

of automotive executives expect GDP growth to be the same as in 201552+48+M52% of automotive executives view increasing global and

regional political instability as the greatest economic risk to their business for the next 12 months and an additional …33+67+M33%

of automotive executives view the global economy as stable (52%) or improving (34%)86+14+M86%

of automotive executives view increasing volatility in commodities and currencies as the greatest economic risk to their business for the next 12 months29+71+M29%

of automotive companies will focus on improving risk management to drive growth in the next 12 months and an additional …53+47+M53%

of automotive companies will focus on making better use of digital technology and analytics to drive growth in the next 12 months48+52+M48%

5Capital Confidence Barometer |4 | Capital Confidence Barometer

Alliances: a lower risk route to growth in a complex environment

A growing number of automotive companies are evaluating or implementing new business models, in search of new sources of revenue and earnings amid a fast-changing mobility ecosystem. Alliances — in addition to and sometimes in place of acquisitions — are becoming more attractive as growth vehicles. Thirty-three percent of automotive executives in this year’s Barometer are planning to enter alliances with other companies, including competitors, to help create value from underutilized assets and take advantage of the expertise and reach of others.

Relationships between companies are becoming more fluid and complex as business models are reinvented. These unprecedented collaboration and relationship opportunities involve customers, suppliers — and competitors. These alliances often replicate features of the so-called “sharing economy,” the internet-enabled ecosystem of facilitated peer-to-peer resources. Companies will commit underutilized assets, or assets that others are better positioned to exploit, in exchange for capabilities more efficiently owned by collaboration partners.

of automotive executives plan to enter alliances with other companies or competitors to help create a value from underutilized assets33+67+M33%

33+67+M33%Yes

Are you planning to enter alliances with other companies or competitors to help create value from underutilized assets?

Q: If you answered yes, what was the primary reason?Q:

What is your level of confidence in the following at the global level?Q:

Do you expect your company to actively pursue acquisitions in the next 12 months?Q:

M&A outlook

Preparing for multiple futuresAutomotive companies are also looking to alliances as a safer way to bolster their own research and development processes. As sectors converge rapidly, partnerships with companies in other industries, especially technology, may be a safer way to conduct R&D.

In short, alliances allow companies to plan for multiple futures, especially in a business environment marked by disruption. Many companies are not yet certain of the evolutionary path of their industries, and alliances can be a lower-risk form of exploration. Executives’ increasing willingness to consider alliances shows their growing sophistication in balancing capital allocation and strategic direction.

Deal fundamentals remain supportive of a healthy M&A marketExecutive confidence in the number and quality of acquisition opportunities, and in the likelihood of closing deals, remains supportive of a sustained positive M&A market.

While deal intentions have tapered from the strong figures of 2015, they have largely held up well above the long-term Barometer average. More than half (52%) of our automotive respondents plan to pursue an acquisition in the next 12 months.

Executives are using deals to generate their own tailwinds. They recognize the need to respond positively to disruption and complexity. Within the automotive sector, where the rate of innovation is accelerating and barriers to entry are being eroded, buying rather than building innovation may well be a better and faster option.

of automotive executives expect the M&A market to improve in the next 12 months49+51+M49%

of future transactions anticipated to exceed US$250 million in value57+43+M57%

64%

47%

26%

39%

21% 19%

33%38%

29%

52%

70%

59%52%

42%

Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 Apr 16

Auto CCB average

73%

19%

8%

To monetize both intangible andtangible assets

To monetize tangible assets(including production facilities,

land and buildings, etc.)

To monetize intangible assets(including data, brands,

intellectual property, etc.)68% 77% 57%

27%18%

38%

5% 5% 5%

Apr 15 Oct 15 Apr 16

42% 73% 50%

53%

23%

45%

5% 7% 5%

Apr 15 Oct 15 Apr 16

31% 62% 37%

63%

30%

54%

6% 8% 9%

Apr 15 Oct 15 Apr 16

Negative

Stable

Positive

Number of acquisitionopportunities

Qualityof acquisitionopportunities

Likelihood of closing

acquisitions

6 | Capital Confidence Barometer

M&A outlook

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

About EY’s Transaction Advisory ServicesHow you manage your Capital Agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you’re preserving, optimizing, raising or investing capital, EY’s Transaction Advisory Services combine a unique set of skills, insight and experience to deliver focused advice. We help you drive competitive advantage and increased returns through improved decisions across all aspects of your Capital Agenda.

Stronger growth in the United States and United Kingdom and the attractiveness of high-quality assets in Germany are making these countries popular destinations for investment.

New tax rules challenge global M&ASince the release of the Organisation for Economic Co-operation and Development’s (OECD) final base erosion and profit shifting (BEPS) guidance in October 2015, local country adoption and legislation have started to emerge globally. Our survey finds a range of attitudes toward the changes in tax regulations, with more than a third (36%) of our respondents yet to consider the implications. There has been a direct impact on current dealmaking, with a quarter of automotive respondents stating that they have altered or cancelled planned transactions in response to the guidance.

With global growth moderating and uneven, automotive companies continue to focus as much on where they are operating as what they are doing. Our survey finds automotive companies eager to look abroad to find pockets of growth, with more than three-quarters primarily looking for cross-border acquisitions in the next 12 months.

of automotive executives are planning acquisitions outside their immediate region

Top investment destinations for automotive

IndiaUnited States United Kingdom

Germany

of automotive respondents have altered or cancelled planned transactions in response to OECD’s BEPS guidance

© 2016 EYGM Limited.All Rights Reserved.

EYG no. 01115-164GBLED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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