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CEOs, Private Equity

8 Predictions for Auto and Truck Manufacturing in 2017 and Beyond

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When it comes to factors impacting middle market businesses in the truck and automotive manufacturing industry; regulations and technology are arguably the biggest. “This industry very clearly has been on a forced march for lower emissions,” says David Crompton, former president of Cummins Engine Business. “It’s been a regulatory driven period during which aggressive technology was pushed into the market, at times with unfavorable impact.”

This technology was “capable but not always mature,” says Crompton, and introducing it in its current state had a “price impact to customers and a reliability impact to the entire industry,” creating an overall sense of anxiety during a volatile cycle. “We’ll see a much less volatile and stable pattern going forward,” predicts Crompton, with less focus on “advancements and more about how we optimize and integrate the current core technology.”

Crompton and Daniel Davis, former President of Cummins Northeast LLC, recently shared these and other thoughts on the future state of the industry during a webinar hosted by investment and management firm AR2 and moderated by John Murphy, Principal at Eos Consulting.

Here are eight of their predictions.

1. “Data-enabled services will become the norm.”

Crompton notes that increasing access to data around customer performance and operations will become the status quo in the truck industry. “Evidence says access to and use of data helps, and these systems will only continue to emerge.”

Right now, data enabled services seems to be at the level of OEMs, with each rolling out “proprietary packages for using data and helping customers succeed.” But whether this is a sustainable business model remains to be seen, says Crompton, noting that in the current business model, most big fleets use a variety of different trucks. In this case, accommodating and absorbing different proprietary systems may become unwieldy, providing an impetus for a more streamlined single system to emerge.

2. “Autonomous driving could eliminate a major industry constraint.”

There’s a lot of technology development around autonomous driving in the passenger world, says Crompton, which will likely make its way to the truck market as well. “In the heavy truck market, autonomous driving is a potential to eliminate a huge constraint of the industry, namely a chronic shortage of drivers.”

3. “Don’t discount the internal combustion engine.”

“The internal combustion engine is 100 years old, and its demise has been predicted numerous times,” says Davis. “Today’s engines are tremendously advanced from even 10-20 years ago.” He predicts that even in vehicles that are almost wholly electric, “there will still be a place for the combustion engine going forward. Don’t underestimate the potential for improvement.”

4. “A breakthrough in energy storage could be revolutionary.”

Even now, battery technology keeps improving and cost keeps coming down, notes Davis. “But if there is a breakthrough in energy storage, that could be revolutionary well beyond the passenger car and truck market and into the world of power generation, making things like renewables more attractive.”

5. “Valuations will still come down to fundamentals…”

“EBITDA, growth potential, how capital intensive your business is, how cyclical is, where you sit in the supply chain, whether you make a product or provide a service” — these have always been the key drivers of valuation for truck and automotive businesses in the middle market and will continue to be well into the future, says Davis. Are you a tier 1, 2, or 3 supplier? How far downstream are you? What percentage of the end product’s value does your product represent? How solid are your customer contracts? All these factors will impact the level of attention you receive from players in the industry and the valuation they assign your business.

6. “…but changes to trade and immigration could have a big impact.”

That said, “there are certain headwinds and tailwinds for valuation at the moment,” says Davis.

In particular, “a move toward nationalism” — evidenced not only in the US but also in Britain and France — could have a significant impact.

Changes to NAFTA could be highly disruptive, adds Crompton, given how much manufacturing of components currently takes place in Mexico, as well as the current flow of new and used trucks & vehicles to and from Mexico and Canada. “This is part of what makes the industry tick, and it could certainly be disruptive if something unfavorable happens.”

However, both Crompton and Davis note that while there’s been a lot of conversation around these issues, there’s no point in overreacting. “The current administration has great aspirations for change,” says Crompton, “but we’re seeing early on that it will not necessarily be fast or easy to get things across the goal line — whether they’re favorable or unfavorable for the industry.”

7. “Tax reform could have a very positive impact.”

“Any movement will be positive” when it comes to corporate tax rate cuts, says Crompton. “I think the magnitude of change will be less than everyone is hoping for, but it will be enough to have a positive impact. “The ability to repatriate cash in a more favorable way won’t affect everyone in the industry, but for more global players, it will enable a lot more capital and cash to be invested in new technology, growth, and M&A activity.”

Despite the new administration’s plans, Davis urges caution: “Right now there appears to be a significant expectation that tax reform is going to happen. That has caused a lot of optimism in the market, but if it doesn’t happen as aggressively as we think, or if it’s delayed, then it will affect valuations and potential future demand.”

8. “Overall, the industry will continue to operate from a strong base.”

“It’s an exciting time and there will be a tremendous amount of opportunity and positive change that comes about,” says Crompton. “I’d much rather be sitting here today than where we were 10 or 15 years ago.”

Davis is also optimistic about the current state of the industry. “But regardless of what we’re seeing in the news or how things we’ve discussed play themselves out, for investors or people running companies, it’s really important not to get distracted from fundamentals and continue to manage growth successfully. Those things translate to any period in business.”

For more information on upcoming webinars from AR2, contact Amit Soman at amit@ar2.global. 

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