Automotive Capital Confidence Barometer

Automotive Capital Confidence Barometer

Automotive
ey.com/automotive
Capital
ConÕdence
Barometer
Continued focus on growth
Economic outlook
ConÕdence rises to two-year high
M&A
Deal volume expected to increase
Access to capital
Credit availability expected to remain strong
Growth strategies
Investment intent tops
Capital Agenda
8th
edition
Continued focus on growth
Growth mandates — driven by continued increases in conÕdence and
credit availability — will spur M&A activity within the automotive industry.
Key Ôndings
61%
consider growth their primary focus
38%
plan to pursue an acquisition
70%
expect deal volumes to improve
54%
88%
61%
have a greater focus on investing in
emerging markets
view credit availability as stable or improving
see the global economy improving, pushing
economic conÕdence to a two-year high
Jim Carter
Americas Automotive Transaction
Advisory Services Leader
“Economic optimism and
conÕdence are fueling a
growth agenda in automotive.”
A note from Jim Carter, Americas Automotive Transaction
Advisory Services Leader
Our eighth Capital ConÕdence Barometer in the automotive industry shows
rising levels of conÕdence in economic growth, employment growth, credit
availability and corporate earnings — all leading indicators that support
automotive executives’ positive sentiment toward the global economy. This
sentiment is reÖected throughout the Barometer, with companies indicating
an increased willingness to carry out growth agendas.
Sixty-one percent of respondents are focused on growth, the highest level in
two years. When combined with increased conÕdence in the number, quality
and likelihood of closing transactions compared with 12 months ago, this
growth focus has translated into increased M&A appetite within the sector.
For the 38% of executives pursuing acquisitions, also at a two-year high, the
emphasis will be placed on the emerging markets of India, Brazil and China as
the top investment destinations.
Respondents have also shifted their organic growth focus over the last six
months, from new products and changing the mix of existing products and
introducing services to investing in new geographies or markets and
exploiting existing technologies. This realignment of organic growth
strategies is conÕrmation that many companies spent the last several years
optimizing their product portfolios and are now focused on growing their core
business. Those companies that responded to the weak economic climate by
focusing internally are now in position to capitalize on growth as economic
conditions improve.
A note from Pip McCrostie, EY Global Vice Chair,
Transaction Advisory Services
ConÕdence in the global economy is at a two-year high. Companies have
weathered a prolonged period of uncertainty, during which time they
strengthened their balance sheets and optimized their capital structures. Having
warehoused cash for a number of years, and with ready access to credit, leading
corporates are in a strong Õnancial position to do deals — they now have more
conÕdence to pull the trigger.
This does not mean we will see a return to boom-time dealmaking. That was
unsustainable — but so is the M&A recession we have experienced since 2009.
For many companies, operational efÕciencies and a focus on cost-cutting can no
longer meet growth mandates. As a result, the signs are that M&A will once
again be a preferred route to achieve growth.
1
Economic outlook
ConÔdence in an improving global economy is at its highest point in two years.
Sixty-one percent of automotive executives believe the global economy is improving, with another 27% indicating the economy is stable.
Driving this conÕdence are improvements in economic conditions in mature economies and stabilization in emerging markets. The outlook
for Europe has brightened in the last six months. Higher levels of employment, rising gross domestic product (GDP) and more access to
capital provide evidence that the region’s economic downturn is subsiding. In the United States, corporate earnings, employment growth
and credit availability continue to rise.
•
Economic conÔdence reaches two-year high
•
Growth expectations continue to rise
2
ConÕdence levels have risen dramatically over the last 12 months — a clear indication the
economy is improving at an increasing rate. This conÕdence resonates from stable
underlying economic fundamentals, particularly in mature markets: growing GDP, credit
availability and increased job creation.
Eighty-Õve percent of automotive executives anticipate global growth. The majority of
respondents expect growth of between 1% and 3%, although 20% of executives expect
the global economy to grow in excess of 3% (up from 14% six months ago).
ConÕdence
continues to rise
Q:
What is your perspective on the state of the global economy today?
61%
Improving
52%
22%
27%
Stable
40%
of automotive respondents
view the economy as
improving compared with
22% a year ago
58%
12%
8%
Declining
61%
20%
Oct-13
Q:
Apr-13
Oct-12
85%
By how much do you think/expect the global economy
to grow in the next 12 months?
More than
5%
1%
2%
19%
3%-5%
12%
of automotive respondents
expect global growth
65%
1%-3%
69%
15%
14%
Zero
growth
Negative 0%
growth 3%
Oct-13
Apr-13
3
Economic outlook, cont’d.
Improved fundamentals support
•
Commitment to job creation underscores
plans for investment
Automotive respondents’ commitment to job creation is at its highest level in two years
and highlights that companies need to hire as they prepare to capture growth.
Automotive, along with oil and gas and technology, are the sectors where the most jobs
will be created and are also among the sectors most likely to pursue acquisitions.
•
Political instability outweighs economic
concerns for automotive executives
While global political instability is believed to pose the greatest near-term risk, it is unlikely
to derail the fundamental push for growth. Similar to the Eurozone or US crises, the recent
unrest in Syria and Egypt pose challenges; however, these challenges are not expected to
be detrimental to the recovery of the global economy over the long term.
•
4
ConÔdence spans leading economic indicators
Companies are broadly positive across economic indicators. Automotive executives indicate
increased conÕdence in economic growth, employment growth, corporate earnings and credit
availability. Investors remain somewhat cautious in the short term, with only 21% of respondents
having conÕdence in short-term market stability.
increased dealmaking
Q:
59%
With regard to employment, which of the following does
your organization expect to do in the next 12 months?
Oct-13
6%
Apr-13
9%
Oct-12
10%
35%
59%
46%
45%
68%
of executives expect to create
jobs/hire talent, the highest
level ever in our automotive
edition of the Barometer
22%
Reduce workforce numbers
Keep current workforce size
Create jobs/hire talent
Q:
What do you believe to be the greatest risk to your
business over the next 6—12 months?
Increased global political instability
33%
29%
Continuation of the Eurozone crisis
Failure to manage the withdrawal
of US quantitative easing
24%
Continued slow growth in China
14%
Oct-13
Q:
Please indicate your level of conÔdence in the following at the
global level
59%
Economic
growth
26%
46%
Employment
growth
24%
41%
Credit
availability
32%
33%
of automotive executives
perceive global political
instability to be the
greatest growth barrier to
their business
59%
of executives have
conÔdence in global
economic growth
36%
33%
Corporate
earnings
23%
27%
Equity valuations/
Stock market outlook
Short-term market
stability
21%
21%
Oct-13
Oct-12
5
Access to capital — credit availability drives momentum
To advance their strategic imperatives, automotive companies will take
advantage of a continued increase in credit availability.
Over the last 12 months, automotive executives report their access to credit continues to improve, although this has only
translated into a modest uptick in debt-to-capital ratios throughout the industry. This disciplined use of leverage ensures that
companies are able to access the credit markets as they invest in both organic and inorganic growth initiatives.
•
•
Credit availability supports growth
The vast majority (88%) of automotive executives consider access to credit as stable or
improving. Furthermore, the sentiment on declining credit availability dropped by nearly half
compared to what it was 12 months ago. This conÕdence — coupled with positive views on the
global economy and sound economic fundamentals — sets the stage for a robust, dealmaking
environment.
Companies carefully manage
debt-to-capital ratios
Following the Great Recession, automotive executives have become disciplined in their use of
leverage. This discipline is expected to continue over the next 12 months with only 21% of
respondents planning to increase their debt-to-capital ratios. Automotive companies with a
well-managed capital structure will be able to opportunistically access credit markets as they
undertake larger transactions to deliver growth.
•
Planned use of more debt and equity may
signal shift to larger deals
The conÕdence to use more debt and equity to Õnance deals — even if that shift is modest —
represents a move away from risk aversion and smaller, cash-based transactions. A
willingness to use more leverage may also highlight increasing valuations and possibly larger
deals to address growth mandates while also signaling a return to a more active M&A
environment.
6
Credit markets
continue to improve
Q:
Oct-13
12%
Oct-12
47%
23%
41%
45%
Declining
Q:
88%
Please indicate your level of confidence in credit
availability at the global level
Stable
32%
of automotive executives now
consider credit availability as
either stable or improving,
the highest level in two years
Improving
Q:
What is your company’s current
debt-to-capital ratio?
How do you expect your debt-tocapital ratio to change over the
next 12 months?
37%
41%
Less than 25%
53%
34%
34%
30%
25%-49.9%
Oct-13
Apr-13
Oct-12
28%
33%
Decrease
20%
18%
50%-74.9%
31%
48%
47%
51%
Remain constant
21%
25%
16%
Increase
71%
of executives have a debt-tocapital ratio less than 50%
12%
75%-100%
9%
7%
5%
Oct-13
Q:
Apr-13
Oct-12
What is the likely primary source of your company’s
deal financing in the next 12 months?
Oct-13
20%
Apr-13
22%
Oct-12
19%
Equity
36%
44%
27%
51%
44%
Debt
37%
Cash
56%
of executives say they will use
debt and equity as their primary
source of deal funding
7
Growth strategies — investment intent tops Capital Agenda
Growth is the primary focus for automotive companies: appetite for growth has
increased to 61% from 43% last year.
With strengthened balance sheets and largely optimized capital structures, automotive companies plan to continue the
implementation of their growth agendas over the next 12 months. On the contrary, the focus of more than one quarter
of respondents on cost reduction and operational efÕciency highlights the regional variances that exist within the
industry. As production volumes return in Europe and growth returns in emerging markets, the focus is expected to shift
further to growth throughout the industry as a whole.
•
Focus on growth is at two-year high
•
Excess cash funds growth and pays down debt
•
Organic growth strategies center on core
products and existing markets
Growth is the primary focus for an increasing majority of automotive companies:
61% of automotive executives now say that their focus over the next 12 months is on
growth, compared with 43% one year ago.
Fifty-two percent of automotive companies with excess cash to deploy over the next 12 months
plan to focus on investing in growth, with the majority of growth investments placed in lower
risk, organic opportunities (38%). The remaining companies are focused on returning cash to
shareholders, with the majority doing so in the form of paying down debt (35%). This reÖects
better availability of capital and an expectation that deals can be Õnanced when needed.
Automotive companies are largely focused on lower-risk growth strategies that include
core products and existing markets. With non-core divestitures executed following the
Great Recession, automotive executives are now continuing to grow their core products
and focusing on what they know best. Companies that are looking for more accelerated
growth, albeit with higher risk, are focused on investing in new geographies/markets or
exploiting their technology to develop new markets and/or products. Companies also
need to invest capital in capex and people resources as the industry is set for a substantial
number of launches in 2014.
8
Automotive companies
focus on growth
Q:
Which statement best describes your organization’s focus
over the next 12 months?
Oct-13
1%12%
Apr-13
3% 10%
Oct-12
2%
26%
61%
32%
30%
40%
55%
23%
32%
43%
of automotive respondents say
their primary focus is on growth
over the next 12 months
Survival
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Growth
Q:
If your company has excess cash to deploy, which of the following
will be your company’s focus over the next 12 months?
Invest in growth
Return to stakeholders
35%
24%
Pay down debt
34%
38%
42%
39%
Organic growth (e.g., investing
in products, capex, talent
retention, R&D)
Inorganic growth
(e.g., acquisitions,
alliances and JVs)
Buy back stock
Oct-13
Q:
Apr-13
9%
14%
9%
Pay dividends
14%
15%
10%
4%
5%
8%
Oct-12
Oct-13
Apr-13
Exploiting technology
to develop new markets/
products
More rigorous focus
on core products/
existing markets
New sales channels
40%
29%
18%
24%
Oct-13
Apr-13
15%
6%
of executives say their
organic growth will focus
on core products and
existing markets
14%
9%
Increase R&D/
product introductions
7%
Changing mix of existing
products and services
6%
Oct-12
40%
Higher risk
Investing in new
geographies/markets
52%
of companies with excess
cash plan to invest in growth
over the next 12 months
What is the primary focus of your company’s organic
growth over the next 12 months?
Lower risk
61%
17%
15%
Oct-13
Apr-13
9
Growth strategies, cont’d.
Investment tops companies’
Q: Which statement best describes your organization’s focus over the next 12 months?
Raising: A company’s ability to raise capital is integral to
achieving its growth imperatives and Õnancial well-being.
And with credit increasingly available and more attractive,
companies now indicate a desire to take on more leverage,
which signals that larger dealmaking will be done.
Oct-13
14%
21%
20%
g
tin
Oct-12
Inv
es
Ra
i
Apr-13
g
n
i
s
14%
6%
Preserving: A company’s ability to access liquidity,
control costs and engage with key stakeholders is
essential to preserving capital amid shifting market
forces. Since most companies were forced to focus on
preservation in order to survive, they are now able to
concentrate on other areas of their Capital Agenda.
10
in
er
vin
g
iz
5%
Apr-13
Oct-12
es
Pr
Oct-13
g
The Capital
Agenda
O
im
t
p
Capital Agendas
Investing: Executives’ sentiment indicates an
investment climate is imminent, and as required levels
of growth and returns increase, companies will look
to M&A. Improving economic fundamentals will also
enable more deal-powered growth.
Oct-13
50%
Apr-13
41%
Oct-12
40%
Oct-13
Apr-13
Oct-12
Boardroom
discipline has
strengthened
companies’
Capital
Agendas,
enabling them
to pursue
growth
strategies
31%
24%
34%
Optimizing: Companies continue to employ a disciplined
approach to capital optimization with an enhanced focus
on governance and Õscal rigor. With capital structures
largely optimized, executives today are primarily focused
on reÕnancing to retire maturing debt and position
themselves with a more Öexible capital structure.
11
Mergers & acquisitions — more deals expected
With core economic fundamentals in place, the vast majority of automotive executives
expect deal volume to improve — only 4% expect a decline.
ConÕdence in the likelihood of closing deals, the quality of acquisition opportunities and the number of acquisition opportunities have all
increased markedly over the last 12 months. This conÕdence, combined with a clear focus on gaining market share, both in existing and
new markets — through inorganic growth — are clear indicators that a robust dealmaking environment is on the horizon.
•
•
Global deal volumes expected to increase
Seventy percent of automotive executives expect deal volumes to improve over the
next 12 months. Deal volumes resonate from the alignment of core fundamentals:
positive economic sentiment, enhanced credit availability, the imperative for growth
and the expectation to create jobs. Growth in volume will also come from the
returning stability of mature markets, which brings incremental growth in Brazil,
Russia, India and China (BRICs) and new frontier economies.
M&A expectations continue to rise in
automotive — driven by increased conÔdence
in the number of opportunities, quality of
opportunities and likelihood of deals closing
With core fundamentals in place to support M&A, 38% of automotive executives expect their
companies will pursue acquisitions in the next 12 months, double the pursuit sentiment from
a year ago (19%). This improvement in the number of companies expecting to pursue
acquisitions resonates with the notable increase in the last 12 months in the number and
quality of acquisition opportunities, as well as signiÕcant improvement in the likelihood of
deals closing.
•
12
Acquisitions focused on gaining market share
The vast majority of automotive executives planning to pursue acquisitions are focused on
gaining market share, whether in new markets or existing markets. To a lesser extent,
executives will leverage acquisitions to access new technologies or leverage distribution
networks. A very small number (8%) of executives plan to utilize acquisitions to reduce costs
and improve proÕtability/margin, a signiÕcant decrease from 12 months ago and a clear
signal that industry executives are focused on growth.
Deal volumes
expected to increase
Q:
70%
What is your expectation for global M&A/deal volumes in the
next 12 months?
70%
Improve
Remain the same
Decline
26%
of executives expect
global deal volumes to
improve
4%
Oct-13
Q:
Expectation to pursue
an acquisition
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27%
27%
38%
33%
38%
Quality of acquisition
opportunities
30%
20%
36%
Likelihood of closing
acquisitions
39%
40%
30%
27%
26%
21%
57%
Number of acquisition
opportunities
19%
35%
Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13
Oct-13
What are the main drivers of your company’s planned
acquisition in your chosen market/country?
65%
Gain share in new markets
(product or geography)
60%
44%
62%
Gain share in existing
markets
Access to technology/
intellectual property
Leverage distribution
networks
Reduce cost and improve
hjgÔlYZadalq'eYj_af
38%
44%
14%
8%
of automotive companies
expect to pursue
acquisitions this year, the
highest level in two years
46%
10%
Q:
38%
What is your expectation to pursue an acquisition and your level
of conÔdence in the following at the global level?
Apr-13
Oct-12
65%
of executives planning to
pursue acquisitions are
focused on gaining share in
new markets
17%
14%
13%
8%
8%
23%
28%
Oct-13
Apr-13
Oct-12
13
Mergers & acquisitions, cont’d.
Top cross-border investment
destinations for automotive
Q: Which are the top countries (outside your local market) in which your company is
most likely to invest?
Top investment destinations
4. United States
3. Brazil
5. South Africa
14
The interdependency
between
developed and
emerging
economies
continues to
increase
The emerging markets
are of continued and
growing interest to
dealmakers.
2. China
1. India
15
Mergers & acquisitions, cont’d.
Increased automotive dealmaking
emerging markets
•
Although acquisition capital will be
allocated globally, emerging markets remain
a priority for the automotive market
While mature markets are a desirable investment, mostly due to the perceived safety
and quality of their underlying opportunities, automotive suppliers continue to look to
the higher-growth emerging markets for growth opportunities.
•
Emerging markets interest grows
•
M&A in slowing-growth emerging markets
requires more transaction rigor
Over the last 12 months, 54% of automotive executives indicate they have placed
greater focus on investing in the BRIC (36%) and non-BRIC (18%) emerging markets as
they search for new strategic opportunities. However, the mature markets continue to
be an important investment destination as well.
While certain emerging markets have experienced slowing growth, executives remain
largely optimistic about the opportunities they present, provided greater rigor is applied
to dealmaking. Unlike their mature counterparts, emerging markets continue to rapidly
evolve and transaction risk must be managed.
16
likely to be driven by
Q:
63%
How do you expect to allocate acquisition capital in the next 12 months?
% of capital allocated
75%—100%
8%
50%—74.9%
12%
43%
25%—49.9%
of executives expect to
allocate 25% or more of
their acquisition capital to
the BRIC markets in the
next 12 months
Marked commitment
37%
Less than 25%
Emerging market — BRIC
Q:
54%
How has your sentiment toward investing in
emerging markets changed versus a year ago?
Greater focus on
emerging markets
54%
38%
Stayed the same
Less focus on
emerging markets
of executives have a
greater focus on the
emerging markets today
versus 12 months ago
8%
Oct-13
Q:
Which statement best describes your approach to M&A in those emerging
markets which are experiencing slowing growth?
Optimistic about opportunities,
have not changed approach to assessing
deals in emerging markets
23%
31%
58%
Optimistic but will apply further rigor when
assessing deal opportunities in emerging markets
45%
9%
Less optimistic and reconsidering
emerging markets strategy
Less optimistic and have already turned attention
more toward developed markets opportunities
16%
58%
of executives remain
optimistic but will apply
further rigor in the
emerging markets
4%
5%
Have discontinued emerging
6%
markets strategy for now 3%
Oct-13
Apr-13
17
Mergers & acquisitions, cont’d.
Valuation gaps are expected to
accelerates
•
Valuation gap has increased over the past
six months
Although the vast majority (75%) of automotive executives believe that the valuation gap
between buyers and sellers is 20% or less, this has fallen from 83% six months ago. With
economic fundamentals in place, sellers’ valuation expectations have risen at a faster pace than
that of buyers’.
•
Valuation gap expected to widen further over
the next 12 months
As economic conditions continue to improve and transaction volumes accelerate, this
natural divergence between buyers’ and sellers’ expectations on pricing is expected to
widen. Thirty-three percent of executives expect the valuation gap to widen over the next
12 months vs. 12% six months ago. This will likely be a short-lived phenomenon as buyers
seeking inorganic growth and sellers looking to generate cash or optimize their portfolios
will Õnd an equilibrium that allows strategic objectives to be achieved.
18
widen as dealmaking
Q:
Do you believe the valuation gap today between buyers and sellers is:
31%
Less than 10%
37%
38%
44%
46%
10%-20%
38%
75%
of executives believe the
valuation gap is 20% or less
21%
21%-30%
14%
19%
4%
More than 30% 3%
5%
Oct-13
Q:
Apr-13
Oct-12
Do you expect the valuation gap between buyers and sellers in the
next 12 months to:
12%
22%
Contract
30%
55%
Stay the same
66%
56%
Widen
33%
33%
of executives expect
valuation gaps to widen
compared with 12% six
months ago
12%
14%
Oct-13
Apr-13
Oct-12
Pricing gaps aside, the market fundamentals
are falling into place to support transactions
that make strategic sense
19
Mergers & acquisitions, cont’d.
Divestments are fundamental to
•
Divestments enable corporate objectives
•
Business-unit sales are the preferred structure
for divestments
Recognized for their strategic value, divestments are an effective tool to address a variety
of corporate objectives. Automotive companies will continue to shed non-strategic and
underperforming assets as they optimize their capital structures and focus on their core
business. Fewer plan to use divestments to raise capital since credit is now more readily
available. Activist shareholders and hedge fund owners within automotive companies may
serve as a catalyst for increased divestitures.
Sale of business units emerged as the most popular form of planned divestment for automotive
companies (33%), followed closely by sale of the entire business (29%). Although a spin or initial
public offering (IPO) of a business unit only accounted for 24% of automotive responses, this
area of focus for divestments saw the largest increase from that of six months ago (15%).
About this survey
The Global Capital ConÕdence Barometer gauges corporate
conÕdence in the economic outlook, and identiÕes
boardroom trends and practices in the way companies
manage their Capital Agenda — EY’s framework for
strategically managing capital.
It is a regular survey of senior executives from large
companies around the world, conducted by the Economist
Intelligence Unit (EIU). Our panel comprises select global
EY clients and contacts and regular EIU contributors.
20
driving strategic value
Q:
What are the main drivers of your company’s planned
divestment activity?
43%
Focus on core assets
55%
47%
29%
Shed underperforming
business unit
15%
17%
29%
Raise cash to compensate
for underperformance
of aggregate business
35%
30%
30%
20%
14%
Fund inorganic/
M&A growth plans
30%
17%
Oct-13
Q:
of automotive executives
plan divestments to focus
on core assets
24%
Enhance shareholder
value
43%
Apr-13
Oct-12
What form do you expect your divestments to take?
Sale of business unit
33%
29%
Sale of entire business
24%
Spin/IPO of business unit
Contribution of business
unit to joint venture
14%
Oct-13
33%
of automotive executives
indicate the sale of a business
unit is the expected form of
divestment
• In September we surveyed a panel of more than 1,600
executives in 72 countries; half were CEOs, CFOs and
other C-level executives.
• More than 900 companies would have qualiÕed for the
Fortune 1000 based on revenue.
• Automotive companies accounted for 173 of the
respondents with more than 60% having revenue in
excess of US$1b.
21
For a conversation about your capital
strategy, please contact us
Americas
Jim Carter
Americas Automotive Industry
Leader
Transaction Advisory Services
+1 313 628 8690
[email protected]
Mark Short
Global Automotive Industry Leader
Transaction Advisory Services
+1 313 628 8760
[email protected]
Europe, Middle East, India
and Africa (EMEIA)
Christian Uphaus
Partner
Transaction Advisory Services
+49 89 14331 13120
[email protected]
Far East and Oceania
Tony Tsang
Far East and Oceania Automotive
Industry Leader
Transaction Advisory Services
+86 21 2228 2358
[email protected]
Japan
Peter Wesp
Partner
Transaction Advisory Services
+49 61 96996 27282
[email protected]
Mike Hanley
Global Automotive Leader
+1 313 628 8260
[email protected]
Jeff Henning
Global Automotive Markets Leader
+1 313 628 8270
[email protected]
Acknowledgements
Our special thanks go to the
global Capital ConÕdence
Barometer panel for their
contribution to the survey.
The global Capital ConÕdence
Barometer panel comprises an
EIU panel of senior executives
and selected Ernst & Young
clients and contacts who
participate in the Capital
ConÕdence Barometer on a
biannual basis. The surveys are
conducted on an independent
basis by the EIU.
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About EY’s Transaction Advisory Services
How 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.
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refer to your advisors for specific advice.
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