United States

Q3 2019 Industrial Products Industry Spotlight

INFOGRAPHIC  | 


"Tariffs continue to be the main concern of clients as they seek alternative solutions, whether by moving their operations elsewhere or trying to renegotiate pricing with their customers or vendors to share the impact of tariffs."

Hong Nguyen, Director, Transaction Advisory Services, RSM


Spotlight

The dispute between General Motors Corp. and United Auto Workers underscores the vulnerable position the U.S. automotive industry occupies as the trade war expands. The strike at its height cost GM an estimated $77 million per day in lost production. Meanwhile, citing figures from the automotive research website, Wards, RSM finds that auto sales have fallen slightly year over year, suggesting that demand has likely topped out and that the market for new vehicles will cool in the coming months. In addition, the decline within the automotive sector, combined with the existing threat from the Trump administration of a deeper trade dispute between the United States and Europe, could place additional tariffs on automotive imports. “Combined with the impact of the UAW strike, clients are increasingly concerned that these factors will exact a rolling impact on large automobile manufacturers,” explains Hong Nguyen, a director with RSM’s transaction advisory services. “In addition, commodity pricing and the impact of existing tariffs continue to put pressure on margins for companies within the automotive sectors—whether they are an OEM, a small-to-medium business or a large automotive manufacturer.” Declining profits across the automotive ecosystem will force automakers to reevaluate their investments, with ramifications for the entire supply chain at a time when softening demand and historically high prices on light trucks, the industry’s most popular vehicles, are already forcing manufacturers to improve efficiencies.

Big picture

The trade war between the United States and China continues largely unabated, despite recent progress on the first phase of a new deal. As a result, tariffs have become an even heavier weight on sentiment for deal-makers across the industrial products space in the third quarter. As RSM US LLP (RSM) observes in its latest edition of The Real Economy: Industry Outlook, that could well be because the conflict more accurately represents an aggravating force—one exacerbating secular trends in line with late-cycle behavior across the manufacturing sector. Although many proactive clients have successfully developed strategies for passing on the costs to the enterprise created by the tariffs on Chinese goods over the past year, the subsequent slowdown in overall economic activity may prove too much to weather—particularly for those operating in the middle market—if additional duties take effect later this year. Manufacturers in this segment of the industry do not have the same resources for absorbing additional costs as their larger rivals. But financial sponsors have stepped in where possible to shore up some of that decline in overall investment activity this year and, at roughly $100 billion in aggregate value through the third quarter, private equity (PE) deal flow for Europe and North America has hardly represented a complete pullback of capital in the face of the sustained uncertainty.

Looking ahead

The headwinds for manufacturers created by U.S. trade policy have increased significantly over the past several quarters, as new rounds of tariffs continue to hit the IP space in successive waves. As a result, it is increasingly difficult for deal-makers to capitalize on the potential benefits from these policy changes. Pricing hikes and negotiations between vendors and customers have become more strained, for example. Meanwhile, the potential for additional tariffs on countries like Vietnam or Mexico, to which some have shifted operations to reduce exposure to China, looms. Clients expect more, not less, difficulty finding good assets going forward, while their ability to close deals for a reasonable price and within a reasonable timeframe is hamstrung by uncertainties. Concurrently, clients with the greatest level of international exposure will continue to seek assets in markets outside tariff-targeted zones. The potential slowdown in the global economy, created by trade tensions between the United States and China, will continue to characterize the conditions in which middle market deal-makers buy and sell assets over the next 12 months. Middle market clients are, therefore, more intrigued by the prospects of finding smaller add-on or proprietary assets rather than going through the full auction process.


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