Digital Transformation: Pursuing M&A Deals with Companies Specializing in Automotive Software Development

October 24, 2023

There has been a tremendous amount of disruption in the automotive and mobility sectors, but this disruption is creating companies that are better prepared to take on the market’s challenges in the coming years. As the pace of technology moves us forward and consumer preferences change, mergers and acquisitions (M&A) in this industry will also be affected. Make no mistake, M&A transactions involving software development and other automotive technology companies must be undertaken with the same careful target assessment, due diligence, and other considerations as with any other acquisition, in addition to keeping in mind other unique factors.

If you’re looking to undertake a forward-looking M&A transaction, read more about how automotive software will affect the future of acquisitions in the automotive world.

Digital Transformation Is Changing How Vehicles Are Designed and Built

For almost a century, automotive manufacturing worked according to Henry Ford’s assembly-line model, creating cars from many interchangeable physical components. Each vehicle’s features and options were determined at the factory when it was built and never changed through the vehicle’s life. Manufacturers made their profits at the time of the initial sale and that was the beginning and the end of the revenue stream, with the possible exception of replacement parts sold through dealer networks. To generate additional revenue, more new vehicles would have to be built.

Today, however, the situation is different. Over the past few years, there have been many digitally-driven changes coming to various areas of the automotive world:

Sales: Thanks to the recent COVID-19 pandemic, the digital transformation of the sales process has already begun. More and more customers are comfortable with shopping for and financing their vehicles online, often taking delivery at their homes. Most dealers have embraced this new way of buying a car.

Design: The digital transformation of vehicle design has also begun, with computerized design techniques and “digital twins” being used to simulate real-world conditions for testing and validation. This saves both time and money when bringing a new vehicle to market, as physical prototypes are no longer needed for most of the development process.

The vehicle as a platform: Digital transformation of the nature of vehicles themselves is changing the manufacturer’s role, as well as its relationship to the many potential owners of a given vehicle. Instead of a vehicle that leaves the factory and never changes, today’s digitally transformed cars, trucks, and SUVs can evolve into much more than the sum of their parts.

Software-Defined Vehicles Are the Wave of the Future

The component-based focus of the internal combustion engine (ICE) era is giving way to electric vehicles (EVs) that are built on a centralized, software-based digital architecture. This digital architecture will allow for a wide variety of upgrades to the vehicle, as well as aftermarket services that can be sold over the air to current and future owners of the vehicle. Vehicles of this type are known as software-defined vehicles. The expertise to build them can be acquired through automotive M&A deals with specialized software development companies.

The services that can be provided through software-defined vehicles can include software updates, performance upgrades, in-vehicle purchases through the car’s infotainment system, and additional options that were not purchased (or may not have been available) at the time of sale or lease. Some of these may be acquired with a one-time payment, while others may involve a recurring monthly or annual subscription fee. In addition, the monetization of the data that is generated through the consumer’s use of the car is of great value to the automakers. The potential for ongoing income generation from the sale of these added services and the acquired data can add up to many billions of dollars over the lives of these software-defined vehicles.

How Can M&A Deals Drive Digital Transformation in the Automotive Industry?

Most legacy vehicle manufacturers and suppliers will require partnerships with specialized software development companies to enhance their technological capabilities and foster digital transformation within the automotive sector. Automotive M&A activities involving these software companies have the potential to maintain a competitive edge, accelerate innovation, and improve the customer’s experience in this new digital era. M&A candidates of this type may include:

  • Battery technology
  • EV components
  • EV charging infrastructure
  • ADAS/self-driving systems
  • Software
  • Data analytics
  • Cybersecurity systems
  • Mobility as a service (MaaS)
  • Supply chain resilience
  • Green and sustainable technologies
  • Collaboration with other industries (energy, telecom, etc.)
  • Startups (to acquire new technology, distribution networks, or capabilities)
  • Companies that can ease your compliance with upcoming regulations

What Challenges and Considerations Should Automotive Companies Anticipate in M&A?

As with any M&A activity, there are certain challenges to be aware of when you are pursuing automotive M&A deals with software development companies. A potential acquirer should look at potentially unfamiliar companies in a clearheaded way, without self-deception. Potential challenges include:

Cultural Alignment: Many software companies may have a “move fast and break things” mentality, which stands in stark contrast to the traditional auto industry’s approach of extensively validating and testing every aspect of a consumer product that can be subject to recalls and lawsuits. A balance between these two very different cultures must be established and maintained.

Integration of technologies: This is where either the magic or disaster happens, requiring a complete understanding, on both sides, of how the software will be integrated with the motor vehicle. One major manufacturer (Volkswagen and its Cariad software division) has been so challenged and delayed by the internal software integration process that it has instead chosen to collaborate with a Chinese manufacturer on a platform for some of its upcoming EVs.

Effective management of changes: The development process for a software-defined vehicle must allow for the integration of both companies’ cultures as well as their technologies. While the pace of software development is usually much faster than the process of designing mechanical components, software for automotive applications needs to be completely bug-free and user-friendly before production begins. What may be an acceptable standard for a consumer electronics product is not adequate for a vehicle that peoples’ lives depend on. Management personnel need to understand the needs and limitations of those working on both the hardware and the software aspects of the vehicle or its parts.    

We cannot overestimate the importance of thorough due diligence, strategic planning, and clear communication in successful automotive M&A, especially when acquiring a software development company. These companies typically have completely different operational methods, work ethics, and definitions of success when compared to existing entities working in the legacy automotive arena. 

How Can the Dave Cantin Group Facilitate Strategic M&A in Automotive Software Development?

DCG has deep expertise in assisting automotive companies with their strategic M&A endeavors. We are your trusted partner in pursuing M&A deals for automotive software development. DCG has a unique perspective within the automotive M&A business – we represent both the buyer’s and seller’s sides of the deal. While many M&A companies are actually just ‘brokers,’ DCG is composed of financial and automotive specialists who successfully bring together both sides of the transaction, negotiating the best possible outcome for each party. 

The Dave Cantin Group’s track record in connecting businesses and facilitating deals that drive growth and innovation truly speaks for itself. We have successfully concluded transactions totaling billions of dollars in value to date across the automotive, motorcycle, RV, heavy truck, and powersports industries.

You can benefit from partnering with DCG to navigate the complexities of automotive M&A in the digital transformation landscape. Contact DCG to speak directly with our automotive M&A team and learn how our expertise can help you get the most out of your next transaction