German automotive specialists often opt for joint ventures (JVs) as a way of splitting the bill for the heavy investments required to transform their businesses.

“Automotive players are facing huge challenges such as volatile demand and uncertainties associated with the technological transformation of the industry, so joint ventures and other partnerships can be a good way to share the financial risks associated with this,” Felix Mogge, Partner and automotive expert at Roland Berger, said.

An example of a deal came in July. Volkswagen Group [XETRA:VOW] announced a 50-50 JV for electric vehicle (EV) architecture and software technology with Rivian Automotive [NASDAQ:RIVN] of California. The potential deal size is up to USD 5bn.

“Joint ventures and cooperation between two large industrial players have become a common way to drive transformation in the automotive industry,” Kai Wallisch, partner at CMS, said. The required investments are so large that it is hard for players to foot the bill without a partner, he added.

Deal counts in the DACH region, which encompasses Germany, Austria and Switzerland (DACH), are booming according to Mergermarket data.

There have already been 86 deals in the year to date (YTD), which already beats every full year result for the last decade except for 2017, when 99 transactions crossed the line. The score is ahead of every YTD score for the last ten years, including YTD17.

One significant deal involves China-based Luxshare Precision Industry [SHE:002475], which signed an agreement to acquire a 50.1% stake in Leoni for EUR 205m, becoming a strategic partner to the automotive wiring systems. It also bought 100% of Leoni Kabel for EUR 320m as part of the same deal, which was announced in September.

Tough regulatory environment for M&A

Conventional M&A is still a big part of the picture, alongside JVs. For example, one large deal at the beginning of the year involved a merger of Schaeffler [ETR:SHA] and Vitesco [ETR:VTSC], which was announced in March.

Chinese bidders could look at deals as a way of sidestepping tariffs, as reported. However, regulatory hurdles, such as Foreign Subsidies Regulation (FSR) and German foreign direct investment (FDI) reviews, often present challenges, which make JVs an easier-to-execute alternative, dealmakers said.

Software drives trend

Software is an important element of EV production, but automotive players often lack the capabilities to develop it in-house. JVs can help preserve the innovative culture of software players, Hilke Herchen, partner at CMS, said, adding that automotive buyers of software companies will often need to grapple with cultural issues.

In April, BMW [ETR:BMW]  and Tata [NSE:TATATECH], announced a JV to establish an automotive software and information technology (IT) development hub in India. Meanwhile, Volvo Group and Daimler Truck signed a binding agreement to develop a software-defined vehicle JV in late October.

Other factors driving JVs include cooperating with US players to test autonomous driving in a less restrictive legal environment and developing hydrogen tech for trucks, dealmakers said.

One company to watch in the space is Brose, which could consider JVs as a way of helping the components group survive, as reported in October. It has turnover of almost EUR 8bn.

In a complex environment, expect to see many more JVs involving German automotive players as 2024 turns into 2025.