Opinion: Mark Birri

These days, going green is all the rage. Hybrid cars like the Toyota Prius and Honda Insight litter the streets of Hollywood, and more and more common folk are jumping on the bandwagon.

However, you have to wonder what proportion of the Hollywood crowd are genuinely committed to environmental change, and how many just like to be seen with 'politically correct transport accessories' - a term coined by a leading environmental website.

Whilst I’m sure that the average motorist is increasingly environmentally conscious, it is fair to say that the ‘chic crowd’ probably account for a good proportion of green car sales. The evidence for this lies in the fact that supercars and 4x4s tend to be the cars which most often suffer a green makeover in the form of a shiny new battery pack. Moreover, it is widely accepted that most diesel hatchbacks will return more miles per gallon than their existing hybrid counterparts.

So when will the automotive industry enjoy a genuine green revolution?

In my opinion, for green cars to become a mass market phenomenon they will need to be cheap, safe, convenient, reliable and genuinely green.

Cue the Chevrolet Volt. GM claims that its new Volt will run entirely on batteries for 40 miles before switching to a traditional petrol engine. It will take a mere 4 hours to recharge and it comes with an 8 year, 100,000 mile warranty. So given that prices should start at below US$30,000, it sounds like it could tick all the boxes.

Whether the Volt represents the start of a genuine green revolution remains to be seen. What is certain is that OEMs’ ability to move quickly and invest in the right technology will be a key factor in protecting and growing market share further down the line.

I will finish with a point I’ve touched on before – middle market companies with innovative technology will increasingly be in the OEMs’ sights.

Carlos Ghosn, the CEO of Renault and Nissan, recently announced that he expects global car production to hit 70 million units by the end of 2010. This represents an increase of over 20% from the 57 million units produced in 2009.

Growth rates such as these in a market as large and as mature as the automotive market might seem a little optimistic. However, once you consider that this growth will largely be driven by the world’s most populated and fastest growing economies (which still have relatively low car ownership rates), Ghosn’s predictions begin to look more reasonable. Indeed, even more bearish estimates from independent industry analysts are forecasting 14% year-on-year growth to 65 million units.

So what is happening in these high growth markets?

As the world’s biggest car market with an estimated 10 million unit sales in 2010, all eyes are once again on China. Here, the Chinese authorities are providing financing for electric vehicle charging points across five major cities. Furthermore, they have announced consumer incentives of £6,000 for electric vehicles.

In addition to promoting alternatives to fossil fuel based motoring, China is also showing signs of modernisation in industrial relations. At Honda’s components factory in Foshan, 1,800 employees are striking in protest of a 24% pay rise offer which would take them from £153 to £190 per month - the workers are holding out for £250. This may be some way from the wages of their European and US counterparts, although the fact that the government has not stepped in, and that Chinese workers’ aspirations are rising fast are irrefutable signs of change.

What does this mean for industrial companies in the UK?

Firstly, it appears that development of alternatives to fossil fuel engines is now looking less like a dubious long term bet, and more like a fundamental component of all large OEMs’ strategies. Hence, acquisitions of innovative industrial companies, a large number of which operate in the UK middle market, could become more prevalent.

Moreover, with Chinese labour costs showing signs of catch up, in the near future investors may no longer regard investment in Chinese production facilities (at the expense of UK and Europe) as a 'no brainer'.

With economic recovery at the forefront of people’s minds, given the mixed messages on medium term prospects for the economy, it is difficult to tell where we are heading in respect of M&A within the engineering & industrials sectors.

So what can the facts of recent investment activity tell us?

A good indicator of market expectations is the IPO market, principally driven by investor confidence and availability of funds. Following the ‘deep freeze’ experienced during the recession, IPOs look set to resurface. Natural resource and energy companies are leading the way with Rusal, the Russian aluminium player, having raised $2.24bn in Hong Kong in January for example. More recently a number of ‘downstream’ industrial players have also been touted as IPO candidates. These have included NXP, the KKR-backed electronics company, Bilfinger Berger’s Australian construction business, Pilatus, the Swiss aircraft manufacturer, and Dutch industrial group Stork’s aerospace and technical services divisions.

Further optimism can be drawn from the UK manufacturing output figures released in February which showed an encouraging 1.3% increase versus the 1% fall experienced in January.

Finally, April has seen a large number of major industrial players formally announcing their return to the M&A market as buyers, as opposed to the distressed, non-core disposal plays we’ve become accustomed to. Bosch and Magna, two automotive giants, have both stated their intention to put their acquisition warchests to good use. Aalberts Industries and Ningbo Huaxiang, the Dutch and Chinese industrial component players, have also expressed an interest in pursuing complimentary acquisitions.

Overall, it would appear that the investment community has a positive view of where the economy is heading, particularly in the industrial sector.

And what does this all mean for the M&A market?

With IPOs once again providing private equity with an exit route, and with growing acquisition interest amongst trade players, we could soon see a return to financial and trade buyers competing for assets. This, in turn, should push up valuations and transaction activity, and so overall I'm pretty positive about the opportunities ahead over coming months.

With the global economy now tip-toeing its way out of recession, the world's major automotive players are looking to position themselves for the decade ahead.

With China having surpassed the United States as the world’s biggest automotive market in 2009, it is unsurprising therefore that many are looking to the Far East for growth.

In the past few months, a number of automotive companies have announced their intention to target the Far East through acquisition. Polaris, the US based recreational vehicle manufacturer, has expressed an interest in acquiring a Chinese manufacturing presence to target local demand, as has Titan, the European commercial wheel and tyre producer.

Large players with existing Chinese presence are also looking to grow their footprint. Volkswagen recently announced plans to build its fifth plant in China, and Continental are targeting Chinese producers with a view accessing local demand.

As our recent conversations with automotive suppliers in the UK have shown, there is still plenty of life left in the market here. The question now is, will M&A form a part of the plans of global players intent on entering the Asian market, and if so will the highly intellectual property rich UK market form part of their development strategy?