Epidemic Prevention and Response to COVID-19 in the Automobile Industry Series Issue 2 — PwC Automobile industry M&A Review and Outlook

The epidemic has prompted many practitioners and managers in the industry to re-examine and plan for the medium-and long-term development of auto industry, accelerating industry transformation and upgrade. PwC auto team emphasizes on the following aspect of tax & legal, M&A and telematics system to analyze the related solutions. In this article, we mainly focus on the M&A aspect, hoping to give some inspirational idea to the practitioners in the industry.

China’s automobile industry has developed rapidly in the opportunities. Moreover, an increasing number of companies past decade. Benefiting from “bringing in” and “going out” with advanced technology and capital will continue entering policy, both domestic and foreign OEMs have successfully into the market which fuels more M&A activities in the realized high growth through a series of mergers and automobile industry. acquisitions (M&A). Since 2018, the development of China In this article, we will analyze the automobile industry from automobile market has been slowing down, and the “CASE” four aspects: review of China’s auto industry M&A deals, trend has been having impact on OEMs. As new businesses main deal drivers and changes of auto industry, the future models are emerging, it has also led to blurring of M&A trend, and key initiatives in response to market boundaries between industries. Auto companies have been changes. actively using M&A deals to transform the automobile industry. At the beginning of 2020, the coronavirus outbreak severely impacted the supply chain of automobile industry, thus resulted in demands for business restructuring and transformation. With emergence of new business models, relaxation of industry policies, and change in consumer demands, M&A activity in China automobile market is expected to grow in the next 2-3 years. Most deals will likely be cross-region, cross-industry, and cross-function. Foreign companies will focus on optimizing strategic planning in Asia-Pacific region, especially in China, whilst local enterprises continue to accelerate globalization and seek more overseas M&A Part I: Review of China’s Auto Industry M&A Deals

In the past decade, M&A activity in China’s auto industry has been highly correlated with the industry performance. More than 900 deals were completed between 2010 and 2019. Started in 2014, M&A activities was growing rapidly. However, in 2019, due to various macro- economic changes such as Chinese economic growth slowdown, the China-U.S trade war, and the decline in consumer demand, both M&A volume and size declined drastically. Only 112 deals were completed in 2019, which was down 16% from 2018. In terms of transaction value, the cumulative amount was about $18.6 billion, which was down about 40% from 2018 due to the decrease in of the transaction volume.

Historical Transaction Deals and Size of China Auto Industry M&A 2010–2019

Vehicle Sales Volume # of deals （in mn unit） (in unit) -40% 35 350 31.4 30.9 30 300

25 250 20.8 20 18.8 18.6 200

15 13.2 150 11.9 12.4 11.3 10 8.5 100

5 50

0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Deals size (bn USD) China Vehicle Sales Volume(mn unit) # of Deals (unit)

Source: Statisata, MergerMarket, PwC analysis

2 In the last decade, M&A transactions were dominated by • Domestic transactions: Between 2010 and 2014, there domestic deals, which accounts for about 60% of total deals, were 159 deals completed, with a cumulative transaction and cross-border M&A accounted for the other 40%. As for value of ~$37.5 billion. A total of 416 domestic M&A transaction value, the cumulated deal size exceeded $170 deals (~$80 billion) closed since 2015, which is 1.6 times billion, of which domestic transaction accounted for 67% more than the previous five years. This was mainly due (about $118 billion), while cross-border transaction value to the acceleration of the industry integration. was around 37% (less than $60 billion). Between 2014 and • Cross-border transactions: in the past decade, China’s 2017, both size and volume of outbound M&A grew rapidly, auto industry has completed 363 cross-border deals, but declined significantly from 2018 onwards due to accounting for 40% of the total deals. Notably, there were tightening of foreign investment control. 194 cross-border deals closed between 2015 and 2019, which is up ~ 15% from the previous five years, and the cumulative amount increased from less than $2 billion to $40 billion, which resulted a 200% increase.

Historical Transaction Deals and Size of China Auto Industry M&A 2010–2019

Deal size # of deals (in Bn USD)

250 25

200 20

150 15 134 128 129 107 112 100 93 10

59 57 61 58 50 5

0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

# of Outbound deals Total transaction value of outbound deals (in Bn USD) # of Inbound deals Total transaction value of inbound deals (in Bn USD) # of Domestic deals Total transaction value of domestic deals (in Bn USD)

Source: MergerMarket, PwC analysis

3 The number of transactions driven by OEMs was about 10-20 deals per year, while the transactions driven by non-OEM increased significantly. The average transaction value was relatively stable. Transactions initiated by non-OEMs were the main driving force of most M&A activities in the last 10 years.

Historical Transaction Deals of China Auto Industry by Type of Acquirers 2010–2019

Deal size # of deals (in mn USD)

150 1,000 134 128 129 125 19 18 12 112 800 107 100 93 12 18 13 600 75 59 61 57 58 400 8 50 8 3 9

25 200

0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

OEM Average transaction value of OEM (in mn USD) Non-OEM Average transaction value of non-OEM (in mn USD)

Source: MergerMarket, PwC analysis

The number of mega deals, deals over $5 million, has remained relatively stable since 2013, and peaked in 2018, as market consolidates, and large OMEs, technology and supplier consolidation, and restructuring continued to drive deal activities.

The Number of Mega Deal Transactions 2010–2019

# of Mega deals 14 14

12 11 4 10 10 1 8 8 3 8 4 1 7 7 6 6 1 4 2 4 2 6 10 4 7 7 2 2 6 2 4 4 1 3 2 2 0 1 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

>5 billion USD Between1~5 billion USD Between 0.5~1 billion USD

Mega deal transactions refer to transactions with a transaction value of more than 500 million US dollars Source：MergerMarket, PwC analysis

4 Part II: Main Deal Drivers and Changes of Auto Industry

Based on current events and on-going industry reform, we To sum up, the epidemic put pressure on upstream and will review the impact of the new coronavirus epidemic, downstream enterprises’ operation and cash flow, and scrapping JV ownership limits and “CASE” trend on the M&A reduced large amount of capital expenditures. The on- deals of China’s auto industry. going operating pressure would accelerate enterprises cooperation, restructuring and integration, spinning off 1. The new coronavirus epidemic accelerated the distressed assets, and investing in future “CASE” auto industry transformation related area.

At the beginning of 2020, the rapid spreading 2. Scrapping of foreign ownership limits has greatly coronavirus put serious pressure on both OEMs and promoted the development of JV M&A activities auto parts companies and will further accelerate the transformation From the demand side, the sales of new cars were In May 2018, the national development and reform expected to stagnate in the short term. However, due to commission (NDRC) announced that it will gradually the long-term decision-making behind car purchases, scrap foreign ownership limits and open up opportunity most of the demand will not disappear because of the for equity ratio of joint-ventures, and the plan is to fully epidemic, but the purchase behavior will be delayed. scrap any foreign ownership limit by 2022. The epidemic might promote some first-time buyer purchases. However, as the tertiary industry has been For foreign OEMs, the relaxing of foreign ownership severely affected by the epidemic, consumer disposable policy will help to realize their strategic planning in China, income has been reduced, which would restrain the and strengthen market share by increasing ownership, consumer purchase demand. establishing wholly foreign-owned enterprises or joint ventures. In addition, foreign OEMs can use joint From the supply side, the production and supply in ventures to actively expand new businesses in China. Hubei province and severe epidemic areas were disrupted temporarily. As the auto industry supply chain For domestic OEMs, this policy will further promote is highly integrated, domestic and foreign OEMs and partnerships and business restructuring, and it will parts suppliers were forced to suspend production or promote market competitiveness of Chinese brands and delay the resumption of production due to the epidemic, accelerate transformation. resulting risk of capital shortage. From the sales side, the epidemic impact led to a sharp decline of dealers’ income. High fixed cost and lagging rebate distribution would put pressures on dealers‘ cash flow.

5 3. The “CASE” trend will further promotes cross-region, cross-industry and cross-functional M&A, and drive the transformation towards smart mobility • Benefiting from “bringing in” and “going out” policy, both domestic and foreign OEMs have successfully realized high growth through a series of mergers and acquisitions In 1984, Volkswagen and SAIC established Volkswagen, the first automobile in China, symbolized opening of Chinese automobile market and entering a period of joint venture partnerships, as a result of the economic reform and the open door policy. The vigorous development of this market has brought huge profits to foreign OEMs. With the scrapping of foreign ownership limit of joint venture, dual credit policy, and the development of the “CASE” trend, Chinese and foreign OEMs have started a new round of joint venture partnership in the new field, and are striving to lead in the China market. For passenger vehicles, in early years, foreign OEMs set up joint ventures in automobile production and sales to achieve strategic expansion in China market; nowadays, they establish joint ventures in many other areas of the supply chain in order to cope with the changes in industrial policy and the market trends.

Domestic OEM Foreign OEM SAIC Greatwall Changan BYD GAC Dongfeng BAIC FAW JAC Jiangling Brilliance 50% 40% 50%

VW 2040 2000 50% 50% 680 730 Toyota 50% Sales Co.

Cross Cross 130 110 Mazda shareholdings 50% 50% 30 Renault 50% 130 Mitsubishi 50%

Alliance 1170 50% 1520 GM 50% 790 Hyundai 50%

Merged 280 Kia 50% 180 Ford 50% 50% 690 760 Honda 50% 110 PSA 50%

Merged <10 By 2022, BMW will FCA hold 75% of the JV 50% 50% 570 BMW 50% 50% 50% <10 550 Daimler 50% 50 JLR

*：foreign OEM ranking is based on global sales volume, domestic OEM ranking is based on China sales volume ICE(Internal combustion engine Established before 2000 Established between 2011~2020 New energy vehicle Established between 2000~2010 XX 2019 Sales Volume (thd unit) XX% % share owned by foreign OEMs Source: PwC analysis 6 For commercial vehicles, there are less joint venture partnerships than passenger vehicles. In 2020, Sichuan Hyundai became the first wholly foreign-owned enterprise in the commercial vehicle field.

Domestic OEM* Foreign OEM Dongfeng BAIC Foton CNHTC Jiangling Qingling SAIC Brillaince GAC Nanjun

50% 20% 40 60 Mitsubishi Izuku 49% 20 Renault 50% 20 Iveco 45% <10 Volvo Truck 50% 90 Daimler 50% <10 Toyota Hino 25% Hyundai acquired 90 100% shares from VW/ Sichuan Hyundai TRATON which is as the first 100% WOFE in China CV 10 market in 2020 Hyundai

*：domestic OEM ranking is based on China sales volume XX 2019 Sales Volume (thd unit) Established between 2000~2010

Established before 2000 Established between 2011~2020

Source: PwC analysis

Meanwhile, Chinese manufacturers are also actively expanding the global market through overseas M&A, which not only helped Chinese auto companies to gain access to technological advantages and enhanced their brands’ global awareness, but also helped these companies to enter overseas markets and achieve globalization. Geely as a successful example of how Chinese OEMs can achieve globalization and transformation through M&A. After acquiring 100% of Volvo’s passenger business unit, Geely also acquired 9.69% ownership of Daimler group, and it continued to look for opportunities to merge with Volvo AB. Despite a slight slowdown of deals in recent years, the diversified overseas M&A activities show that Chinese manufacturers have strong interest in cross border M&A and the demand for M&A will be on the rise

7 • The CASE trend will further promote the M&A activities, and drive the transformation towards smart mobility Since 2018, the development of China’s auto industry has begun to slow down, and the market performance was quite different. New entrants kept emerging, and the trend of “CASE” started to have an impact on industry. A large number of start-ups appear and OEMs are constantly seeking for making alliance through M&A activities. Internet companies, new players, and auto parts suppliers cooperate with traditional OEMs in the field of “CASE” more frequently: new capital and new players are actively purchase traditional OEMs to obtain profit or production qualification, and traditional enterprises actively seek for transformation.

China Players (ex. traditional OEM) Foreign Players (ex. traditional OEM)

TMT Investor Supplier Start up OEM Supplier Investor

QDWDK Alibaba Didi Baidu Shenzhou Baoneng CATL Nio Magna NIDEC MARUBENI Itochu fund

Juzhong VW Mobility Pony.ai Fengju Toyota Mobility

BMW Singulato Jurbey Daimler

Weixing Banma OS SAIC Tech

Tesla Geely

GM Thailand Greatwall & India plant

Tinnove OS Changan ChanganPSA ChanganNio NEV related Connected R&D Service Chery Innovation Center BYD RuQi Mobility GAC GAC Nio GAC Nidec Nanjing Nanjing Lingxing + Lingxing Tech Mobility Dongfeng Dongfeng AutoX Shidai Mobility BAIC Orange

Qingtu FAW Tech

Borgward Foton

Connected Shared Shared AD NEV and related equipment AD NEV and related equipment Service Mobility Mobility

Equity investment Set up JV China Players Foreign Players

8 Part 3: The future M&A trends in China's automobile industry

With the relaxation of industry policy, changes in consumer demand, the emergence of new business models and other factors, it is expected that the M & A activities in China's automobile market in the next 2-3 years will be characterized by cross-border, cross-industry, cross- function and cash flow optimization. Foreign companies will focus on strategic planning in China, or even Asia region, whereas local enterprises will accelerate the pace of globalization and seek more overseas opportunities. Moreover, an increasing number of companies with advanced technology and capital will keep entering into the market.

1. Cross-border: Global Strategic Alliances and cross shareholding are emerging, expanding scale effect, improving efficiency, reducing cost and accelerating innovation and transformation Traditional OEMs have increased cross-border M&A transactions and cross shareholding activities, in order to achieve closer cooperation, accelerate globalization. Chinese manufacturers can rely on joint ventures or foreign partners to obtain more profits; foreign enterprises can use the advantages of local manufacturers in new energy, government relations and other aspects to achieve resource sharing and enhance competitiveness.

2. Cross-industry: cross industry investment and cooperation, share technology and resources, and accelerate the strategic development of new 3. Cross-function: business expansion between “CASE” trend and smart mobility upstream and downstream enterprises, accelerating investment in future hot sectors, In the past two years, the new cooperation mode, and improving the core value of enterprises development trend and experience related to the “CASE”, such as the connectivity of vehicles and Driven by the “CASE” trend, the traditional industry autonomous driving, have been in the outbreak stage. supply chain will be broken. Upstream and A large number of OEMs, technology giant and start- downstream enterprises will penetrate each other, ups and financial institution have actively entered the actively explore new businesses and open new profit field to promote products and services in a new way. growth points. OEMs can invest in the core auto parts This trend has also promoted non automobile company and auto parts enterprises can also extend to enterprises such as technology, finance, service, etc. the downstream to form joint ventures with OEM. By to actively invest in automobile related industries. With making alliance, both companies will be better off and the continuous change of consumer demand, improve competiveness going forward. accelerated industrial integration, realizing resource sharing and integration, and jointly promotion, China 4. Cash flow is king: accelerate business spin off auto industry is on the way to transformation. and restructuring, strengthen cash flow management, face industry challenges and stable enterprise value In recent years, an increasing number of China auto industry companies, both upstream and downstream, are facing declining in sales and profits. Speeding up the spinoff of distressed assets, implementing business restructuring and increasing investment in core high- quality assets can effectively improve the efficiency of resource utilization of enterprises, thus obtaining good financial metrics and assisting the strategy of transformation.

9 Part 4: Key initiatives in response to market changes

In order to cope with the active, diversified and increasingly 3. Dispose of distressed assets, and improve ability complex trends of M&A, the upstream and downstream to optimize capital structure and restructure enterprises in the automobile industry can improve their core competitiveness from the following aspects: The decline of car market leads to the decline of market performance and profitability. Improving the ability to dispose of non-performing assets and the ability to 1. Strengthen investment and financing capacity optimize and restructure capital structure can speed up With the emergence of a large number of new startups, the activation of funds and improve cash flow. By companies have more choices in investment and M & A analyzing asset quality, evaluating solvency and liquidity, activities, so OEMs need to be more cautious in selecting combining with operation cash flow requirement, future partners and targets. The upstream and downstream capital demand and debt repayment time, the enterprise enterprises of automobile can clarify project risk points can measure the company's capital gap and analyze the and evaluate project profitability through a series of solvency, then determine which non-core assets can be internal and external market environment analysis, disposed and how to adjust company's capital structure, in competition analysis, due diligence services (business, order to improve the company’s balance sheet. finance, operation, legal affairs, tax, human resources due Through independent financial review in the early stage, diligence), so as to enhance the accuracy of investment. enterprises can improve their capital structure and At the same time, OEMs need to consider building more complete restructuring through means of restructuring, flexible financing channels to ensure sufficient funds and debt to equity swap, introduction of strategic investors etc. reasonable costs. In addition to the main financing means of the capital market, OEMs should also consider further 4. Oversea operation capability expanding channels through industrial funds etc. The global automobile industry is in the process of “CASE” transformation. By expanding and exploring the overseas 2. Strengthen post deals management capability market, it can reduce the dependency on single market, In response to the impact of the “CASE” trend, a large and it can gain access to foreign technology, improve the number of cross-industry and cross-functional M & A business efficiency and profitability, and accelerate the transactions emerged. For the , post transformation. In addition to forming joint ventures, deal management of cross industry integration OEMs can also carry out more extensive cooperation with transactions is very important. The enterprise shall auto parts companies, dealers, foreign OEMs, formulate the integration plan in time to ensure the government agencies through cross border M & A, effective project delivery and takeover, and to stabilize industrial investment (such as establishing overseas stakeholder confidence. Also, regular review of investment platform), expanding financing channels and outstanding issues, finding new growth opportunities, and accelerating global asset allocation to maximize resource formulating short-term and medium-term development utilization. strategy is equally important. PwC’s team can provide integrated transaction support services for enterprises in all aspects of the transaction. For the full report, please contact us.

10 Contacts

Wilson Liu PwC Mainland China and Automotive Leader +86 (20) 3819 2278 [email protected]

Jun Jin PwC China Auto Consulting Lead Partner +86 (21) 2323 3263 [email protected]

Rick van Dommelen PwC Hong Kong Deals Partner +852 22891823 [email protected]

George Lu PwC China Deals Automotive Leader +86 (10) 6533 2920 [email protected]

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2020 PricewaterhouseCoopers. All rights reserved. In this document, PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.