I’m what’s called an investment banker. While the term "investment banker" may suggest that we invest or bank, investment bankers actually do neither. Instead, investment bankers advise on mergers and acquisitions and on raising capital, but we do not typically invest our own money or manage the funds of others. We’re middlemen. We exist to get in the middle of stuff.
I enjoy helping tire dealers with mergers and acquisitions but am surprised by how many tire dealers think they can do better representing themselves. Many don’t even try to “make a market” for their own business the one time it matters most. The downside is they will never know how much they really could have gotten.
The chairman of my firm, Doug Rodgers, equates it to owning a Picasso when he asks, “Would you sell it to the first buyer that knocks on your door or take it to Sotheby’s, conduct an auction and get the highest price?” Selfishly, I want to get in the middle of all the tire deals, but that’s not happening.
So I’m diversifying into auto parts to get in the middle of those deals — and it’s gonna be ‘ACES.’’
ACES stands for “autonomous driving, connectivity, electric vehicles and shared mobility.” Collectively, they are a huge disrupter to auto parts suppliers and manufacturers.
The impact of ACES is happening right now in auto parts manufacturing solely because of the electric vehicle (EV). I first became aware of accelerating EV acceptance in 2020 when we represented T-Sportline, an aftermarket supplier of wheels and accessories for Tesla owners, in its sale to Holley.
To tell the story, we described how the market was growing by listing how most all of the major, minor and new entrant original equipment vehicle manufacturers (OEMs) had EV models about to be introduced. Then in February 2021, General Motors established a goal of phasing out all gasoline-powered vehicles by 2035 and Ford announced its all-electric target for passenger vehicles in Europe by 2030.
McKinsey & Company says the EV segment is consistently growing faster than expected. They project that by 2035, EVs will likely represent more than 65% of all new light-vehicle sales globally. International climate goals, growing consumer preference and government action to boost EV adoption are driving this.
With new EV car registrations in the U.S. in January 2023 rising above 7%, even Walmart is convinced the trend will accelerate and is planning charging stations for every property they own to boost traffic and enhance revenue.
McKinsey says internal combustion engine (ICE) auto parts revenue will level out soon, if it hasn’t already, and then start seeing double-digit declines, at least at the OEM level. Already, we are seeing large auto parts suppliers like Borg Warner and Continental talking about “growth” and “harvest” categories within their product portfolio, with an eye towards accelerating investment in EV parts while “milking” and then selling off ICE assets.
While some divest, other companies like Warren Buffet’s Marmon Holdings — a division of Berkshire Hathaway that in January 2023 acquired $120 million revenue manufacturer AP Exhaust — will be betting on a long runway ahead for ICE among OEMs and in the aftermarket.
By acquiring a company with ICE parts, Marmon Holdings can diversify its product portfolio to continue serving customers who still rely on internal combustion engines and also expand into new markets. They also have the expertise and resources to help ICE parts manufacturers streamline their operations, optimize their supply chain and improve their profitability. Acquiring a company focused on making ICE parts can also help build relationships with other automakers who still produce vehicles with internal combustion engines. It’s a “last man standing” strategy that can be very profitable through 2040 on the OEM side and longer than that in the aftermarket.
The consolidation of tire dealers over the last decade has been opportunistic in nature. It’s not because anyone had a gun to their heads. Private equity first discovered that roll-ups of collision repair centers was a home run, so they pivoted to the next most profitable category, which was tires and service.
But there’s no existential crisis looming for tire dealers. I actually think it’s easier these days for small tire dealers to differentiate themselves from the chains through better customer service — and to thrive financially. Auto parts manufacturers, in comparison, have a gun to their heads. That’s why I’m getting in the middle of all that.
For tire dealers, the impact of ACES will be felt less in the near term and more as the decade progresses. ACES will eventually impact all tire dealers in the lower number of customer visits in the form of one-third fewer moving parts on perhaps fewer total vehicles; the lower profitability of those visits (margin pressure as more vehicles are fleet-owned and pricing power is lost); and potentially in the viability of their existing real estate locations for the type of work needed in the future.
Michael McGregor is a partner at Focus Investment Banking LLC (focusbankers.com/automotive/tire-and-service). He advises and assists multi-location tire dealers on mergers and acquisitions. For more information, contact him at [email protected].
