Buy-Sell Q&A: Where the Automotive M&A Market is heading

Q: Are there any pitfalls that sellers should be mindful of that could impression their profitability and valuations?

A: The brief-expression risk we see is the chance of a recession. Some economists predict that we’re probable to have a economic downturn in 2023, which would cut down demand for automobiles and perhaps impair the very substantial revenue on automobiles that sellers are enjoying today. As earnings decline, so would valuations.

In the Q4 2021 Haig Report, we highlighted some medium to extensive-expression threats that dealers will have to have to consider:

Tesla and Other New Entrants: Tesla now has come to be the top luxury brand name in the U.S. and its following merchandise start, the Cybertruck, is aimed at the heart of the domestic makes. Other new entrants, these as Rivian Automotive and Lucid Motors, also are moving into the marketplace, as very well as new makes getting introduced by classic OEMs, like Polestar. These new entrants will probably experience blended effects in the marketplace, but there’s a good likelihood that competing sellers throughout the state will reduce prospects and income as a result. Probably a larger risk to dealers is that new entrants may possibly force traditional OEMs to drive the agency product on sellers (see underneath).

The Agency Product: Traditional OEMs have found that millions of customers are prepared to go to a internet site, purchase a car and then wait around for it to be delivered. And these OEMs also see they no more time want to make tens of millions of motor vehicles for dealers’ storage heaps, guessing at which autos prospects will in fact want, and then heavily promote and provide incentives in purchase to get buyers to acquire the cars. Their revenue per car or truck are considerably bigger when they develop only what clients want to acquire. And eventually, they see that retailers are building substantial gains. This new established of information is leading to a number of OEMs to reconsider their interactions with their sellers and shoppers. Ford’s program to individual into two divisions, the Model e Division that will create only EVs and the Blue Division that will make only inside-combustion engine (ICE) cars is an example of a possible Company Model in participate in. Prospects who want to acquire an EV will have to buy from Ford’s Design e web-site.

It doesn’t surface that customers will be equipped to order Design e cars straight from sellers. This is a profound change as the OEM will now established, as a substitute of “suggest,” retail pricing and the OEM will be the stage of make contact with with prospects. The customer can decide on which seller will produce the motor vehicle, but the cost will be decided by Ford, which also will choose how significantly to fork out the retailer. The purchaser will turn into Ford’s consumer, fairly than the dealer’s client. This company product, in which the seller becomes an agent and is not a retailer, is popular in other parts of the world. It is our comprehending that sellers in these spots make considerably fewer gain than dealers in the U.S. And Ford is not by yourself in its imagining. OEMs have been envious of Tesla’s stock industry valuation that is partly centered on this immediate product sales product.

Electrical Cars: Some sellers are involved that EVs will involve a great deal less sections and assistance work than ICE cars, which will damage their assistance departments.

Consolidation: When still a remarkably fragmented market, consolidation in auto retail accelerated in 2020 and 2021. Groups like Lithia Motors, Group 1 and Asbury Automotive Team bought dozens of outlets to grow their nationwide community of dealerships, accompanied by digital retailing tools that will permit them to market and provider consumers who desire on the internet shopping. These car groups and other sellers are ever more persuaded that big scale will make a difference far more in the potential than it has in the earlier. They program to offer shoppers a bigger assortment of autos and additional means to store than smaller sellers can give. If productive, they will achieve market place share and be sure to their OEM associates and shareholders. Their gains would appear at the cost of smaller dealers that cannot match these capabilities. Haig Partners offers prospective therapies for sellers for every of these fears. But owing to space constraints, we cannot demonstrate them in detail listed here. Even so, you can read through about these solutions on internet pages 14 and 15 in the Q4 2021 Haig Report. These risks are serious. Nonetheless, dealers are highly resilient and we count on they’ll locate techniques to mitigate these pitfalls. We are however bullish on the franchise technique.

Haig Partners gives prospective cures for dealers for every of these worries. But thanks to room constraints, we cannot explain them in depth right here. Even so, you can examine about these cures on pages 14 and 15 in the Q4 2021 Haig Report.

These risks are true. Even so, dealers are very resilient and we hope they’ll find ways to mitigate these dangers. We are nevertheless bullish on the franchise process.