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Automonomous cars and autonomous driving

Deals: automakers turn to tech

Technology has disrupted the automotive industry value chain. A car used to be a large piece of hardware. New vehicles still have wheels and windscreens but are increasingly electronic devices run on computer code.

This means that carmakers, which once held all the aces, are now battling to retain their market position as technology suppliers grow in strength. The choices they make will determine whether they retain their dominance – or are relegated to mere assemblers of other people’s products.

Change drives M&A activity

The growth of the importance of technology in cars is undermining the traditional carmaker’s business model – consumers are increasingly making their buying decisions on the in-car interfaces and experiences rather than performance, so the greatest value-add in a new vehicle is no longer in their control.

The technology that enables advanced driver-assistance systems – the forerunner to self-driving systems – is manufactured by the biggest global parts manufacturers, such as Autoliv, Bosch and TRW (radar), and new players including Google and TomTom (navigation and mapping), and Infineon, Nvidia and Intel (semiconductors).

Against this backdrop, an unprecedented period of corporate activity has begun, as manufacturers and their suppliers fight to maintain their margins and new, powerful tech players enter the market.

While the recent emissions controversy has hit the balance sheets of carmakers, they are scrambling to bolster their tech capabilities. But this means entering a sector that they are relatively unfamiliar with.

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A decade of deals

To examine how the automotive sector is progressing with tech acquisitions, we looked at Thomson Reuters deal data for the 10-year period 2009–18.

We divided the deals into automotive businesses acquiring targets:

  1. also in the automotive sector (auto-auto deals), such as other vehicle manufacturers, repair centres, and suppliers of parts and systems (3,234 deals in total); and

  2. in the technology sector (auto-tech deals), eg suppliers of telephony equipment, software developers and platforms (365 deals in total).

The survey looks at the changing geography of auto M&A – in particular, the growing significance of China.

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Software gaining in importance

Many businesses in the auto sector have focused on the hardware that enables automated driving. But competition is intensifying in software and services assets – possibly because this where future value add lies.

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Case study: mapping the rise of HERE

The interest in Netherlands-based HERE is a good example of how auto and tech firms are becoming ever more closely knit.

In 2016, a consortium of BMW, Audi and Mercedes fended off a host of rival bidders to acquire the mapping business from Nokia for $3.1bn.

Chipmaker Intel took a 15 per cent stake in 2017; later that year, Chinese mapping company NavInfo, China's internet giant Tencent and Singapore's sovereign wealth fund GIC abandoned their attempt to buy a 10 per cent stake after the the Committee on Foreign Investment in the US, which scrutinises deals that it feels pose a threat to US national security, failed to approve the deal.

Continental and Bosch took 5 per cent stakes in early 2018, although Bosch's interest was motivated as much by transport services and industrial internet of things applications than automonous driving.

A number of manufacturers have also formed joint ventures with tech and telecoms businesses to bring new services to the dashboard. These include Google (Android Auto), Apple (CarPlay) and a variety of smartphone manufacturers (Mirrorlink). And some manufacturers have moved into wearable technology, such as BMW bringing its car apps to Samsung’s smartwatches.

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When tech and auto collide

As the auto and tech sectors converge, some of the biggest challenges to overcome can be cultural. ‘The classic suppliers like Continental have been working with carmakers for decades, but that’s completely different to working with Google,’ says Rolf Trittmann, co-head of Freshfields’ automotive group. ‘These businesses come from different planets – they just don’t understand how the other works.’

Auto and tech businesses approach transactions in different ways, affecting everything from deal timelines to the levels of protection each side expects. These nuances are amplified when those businesses come from different jurisdictions, with US companies often taking a more aggressive position in negotiations than those from Europe.

Jochen Ellrott, the other co-head of Freshfields’ automotive group who has advised both automotive and technology businesses, says: ‘The biggest auto companies are used to being in the driving seat on M&A deals, but they are often quite risk-averse and not particularly flexible. Tech businesses by contrast often move much more quickly but are not fully in line with corporate conventions. This can make executing deals extremely challenging.’

The biggest auto companies can be quite risk-averse and not particularly flexible. Tech businesses by contrast often move much more quickly.

Jochen Ellrott, co-head of Freshfields’ automotive group

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The joint venture challenge

While one of the big technology companies could one day become a car manufacturer, carmakers and technology companies are currently more collaborators than competitors. Joint ventures (JVs) enable manufacturers to provide the features their customers want while the tech companies don’t have to build their own vehicles.

For example, Toyota has invested $500m in Uber, with the two companies planning to combine their know-how in Toyota’s Sienna minivans, which Uber then plans to deploy on its network by 2021.

Meanwhile, Waymo – a Google subsidiary – uses Lexus, Chrysler and Jaguar I-Pace vehicles to develop its self-driving car technology. Google itself has agreed to supply a vehicle version of its Android operating system to Renault, Nissan and Mitsubishi. The move may mean though that the three carmakers lose out on valuable data and revenue from connected services. As Morgan Stanley says: ‘Whoever controls the car’s brain will control… the value of the car’.

JVs also allow development risks to be shared but have to be carefully structured to ensure the business to whom the technology is of strategic importance – either the vehicle maker or supplier – has sufficient control and access to any know-how and intellectual property generated. Straight acquisitions give auto companies power over the development programme but are a bigger risk. They must not only pick the right technology but also retain the target’s principal asset – its people.

Many tech businesses may prefer a JV to being acquired by a large corporate, although both sides must be aware of the challenges these present.

‘Developing new technology is hugely expensive,’ Rolf Trittmann says. ‘It’s often not possible for smaller suppliers to cover this cost. We’re seeing a rise in disputes between auto businesses and their JV partners as costs escalate and projects are dissolved. Smaller companies often don’t have the means to pre-finance significant R&D projects, but aren’t in a position to turn down JVs with the biggest players. If costs run out of control, they may end up being acquired by their partners anyway in order to keep the development project on track.’

We’re seeing a rise in disputes between auto businesses and their JV partners as costs escalate and projects are dissolved.

Rolf Trittmann, co-head of Freshfields’ automotive group

It's not just tech and auto companies coming together though. In January 2019, Ford and VW signed a memorandum of understanding to 'investigate collaboration on autonomous vehicles, mobility services and electric vehicles'. BMW and Daimler are planning to create a joint venture that will combine their mobility services, which cover the likes of car sharing, parking and charging infrastructure.

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What about a venture capital model?

Some businesses have adopted a venture capital approach to build their tech capabilities, investing seed capital across a variety of innovative firms that have the potential to deliver the next disruptive technology.

The model has enabled (non-auto) companies such as German media giant Axel Springer to transition from a traditional print business to a multimedia publisher by giving its acquisitions enough freedom to keep key people engaged and encourage creativity. Vehicle makers and suppliers may benefit from a similar strategy, although it may only be appropriate in defined circumstances.

‘Investing in lots of businesses with the expectation that a handful will flourish is more opportunistic than strategic,’ says Jochen Ellrott. ‘And manufacturers’ future depends on developing the right intelligent technology. There may only be a few companies in the world that can give them what they need, and if they manage to acquire them they can’t just let the company go and see how it develops. They need to be in control. In start-ups and smaller tech businesses, the founder may own the idea, so it’s important to ensure the IP is transferred.

Investing in lots of businesses with the expectation that a handful will flourish is more opportunistic than strategic.

Jochen Ellrott, co-head of Freshfields’ automotive group

Manufacturers also need to devise incentive programmes that foster the entrepreneurial spirit they’re paying for. ‘These are hard to implement in a corporate environment,’ says Jochen Ellrott. ‘For example, it’s rare for big auto businesses to give option schemes to their employees.’

The auto companies that master the software space will be able to shape their destiny. But acquiring this capability requires a nimble, creative strategy. Bespoke contracts, innovative compensation packages and robust IP transfer agreements are essential to gain an edge.

We examine the IP challenge in the section, Intellectual property: The new driver of value?

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