Where Auto Investors Should Be Looking Amid Production Uncertainty – Medium Market Growth | CarTailz

The automotive industry today finds itself on rocky roads, and even the brightest headlights struggle to get a clear picture of what lies ahead. Still, mid-market investors won’t want to shut out the industry entirely: there are still acquisition targets that can withstand this market pressure or even capitalize on opportunities that arise amid disruption.

Analysts’ outlook for the automotive sector in 2023 is mixed. Supply chain disruptions have hit the industry particularly hard, leading to increases in production costs, limited inventory and higher prices. And while reduced supply can push up demand, consumers also face rising financing costs.

Moderator Clay Vanderpool, senior vice president at PNC Business Credit, said panelists at ACG Detroit’s recent Automotive Update event spent a lot of time discussing these headwinds, culminating in “that it’s not possible, exactly forecasting where vehicle volumes and demand are going to be,” he says growth in medium-sized businesses. “Obviously stocks across the country are completely depleted and these need to be rebuilt to some extent. But beyond that, it’s very difficult to predict where things are going to go.”

Short term challenges

This uncertainty is forcing players in the automotive industry to perform a delicate balancing act.

On the one hand, the pressure to ramp up production has caused manufacturers and suppliers to reconsider their pace of production. In recent months, factories that have been able to get their hands on materials have sprinted to produce as much as possible, only to close again once those materials ran out. Then they repeated the cycle all over again, Vanderpool says. “Now there aren’t as many factory closures because their view of the supply chain and knowledge of how to work in it has gotten much better.”

It’s a key improvement in a market that’s expected to see more than 30 new vehicle models launched over the next year, he notes, adding that Tier II and Tier III suppliers are becoming increasingly vulnerable due to this increase in vehicle consumption activity will have significant capital requirements.

On the downside, however, it’s unclear whether these vehicles will disappear from parking lots once stock levels recover.

And even when vehicles are sold, there is uncertainty as to whether manufacturers can reliably source the materials and parts needed to supply them. Earlier this year, IHS Markit lowered its production forecasts for the global industry for 2022 and 2023 by 2.6 million vehicles each. Analysts pointed to ongoing supply chain constraints as the biggest factor weighing on production. “The downside risk is huge,” said Mark Fulthorpe, S&P global mobility executive director for global production forecasts, in a statement in March.

“You have to weather the storm a bit,” confirms Vanderpool. “No one has a good prediction of when the supply-side issues will resolve. You don’t just open a fab and start shipping chips in a week. It is a multi-year and massive investment. It’s taking a while to get up to speed, so it doesn’t look like that’s going to change that much next year.”

No one has a good prediction of when the supply side issues will resolve.

Clay Vanderpool

PNC Business Credit

Investors are looking for resilience and opportunity

While overall sentiment for the auto sector may remain volatile, there is still plenty of room for private markets investors to spur growth.

“The auto industry is still a very attractive area for PE investing,” says Zack Taylor, vice president of private equity firm Eagle Merchant Partners, despite the headwinds. “In particular, we believe recurring auto services will continue to be heavily invested as investors look for recurring revenue models that are less vulnerable to economic headwinds.”

Eagle Merchant recently invested in one of those recession-resistant niches within the auto industry. The company acquired 19 auto crash repair shops through its investment in Puget Collision, which it announced in September.

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Taylor points to “the non-discretionary nature of demand” in the collision repair industry that makes it extremely attractive to investors even in the current uncertainty. “The industry is insulated from economic changes that are adversely affecting other industries, giving us comfort to invest now against an uncertain macro backdrop,” he says.

Other middle-market investors seem to agree: In September, investment firms Trivest Partners and LP First Capital also combined to form collision repair company OpenRoad after acquiring four industry players – Car Crafters, Drury and Moss Body Shop, 1St Election collision and helot collision.

While there are certainly areas of resilience in the automotive sector, other recent industry deals have focused on finding opportunities within the challenges.

For example, in October, Credit Bureau Connection, backed by Capstreet, announced its investment in CreditDriver Solutions, which automates lead generation and consumer finance prequalification solutions for auto dealerships, further positioning Capstreet in a market increasingly demanding tools lowering the barriers for consumers to buy vehicles and for dealers to sell them.

Recurring auto services continue to see heavy investment as investors seek recurring revenue models that are less vulnerable to economic headwinds.

Zack Taylor

Eagle Dealer Partner

Focused on growth

With many companies across the automotive industry facing an uncertain climate, it will be crucial for dealmakers to identify resilient targets that not only withstand short-term macroeconomic challenges, but also have the potential to lead the industry towards an inevitably disruptive trajectory, technology-oriented future.

For Eagle Merchant’s Taylor, the auto collision room does just that. “We believe that the adoption of advanced technology in automobiles is still in its infancy and will continue to increase rapidly in the future – which will only grow the collision repair market as the repair of parts increasingly complex and expensive,” he says. In addition, the further development of the industry will also open up further opportunities for automotive investors beyond accident repair. “The rapid growth of electric vehicles offers companies an opportunity to find niches that haven’t existed in the past, with a real first-mover advantage for those who can get in early.”

Dealmakers are already identifying these niches. For example, in May, Clearlake Capital Group acquired automotive aftermarket manufacturer BBB Industries. Experts say the aftermarket can be a solid investment given the uncertainty surrounding new vehicle sales, and BBB’s emphasis on electric vehicles and extending the life cycle of EV batteries also positions the business to benefit from the changes ahead across the industry benefit.

It’s this upcoming industry development that PNC’s Vanderpool is bullish about. Market segments such as battery life innovations and the development of improved vehicle safety show promise, he says, and these innovators will need capital and infrastructure to support their efforts.

“While there are challenges, there aren’t all downsides,” he says. “There are many opportunities out there. There’s some amazing technology coming out.”

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