Even though the Indo-German trade corridor did not record major deals in 2021, the countries individually recorded high growth factors. Germany recorded the majority of the deals in the DACH region with the greatest stir caused by the takeover of Deutsche Wohnen by Vonovia. Out of a total of 1,696 deals in the DACH region in the first half of 2021, Germany accounted for 76% of the deals at 1,292 deals.
In India as well, mergers and acquisitions hit an all-time high in 2021 driven mainly by first time buyers. The disruptions led by the Covid-19 pandemic further accelerated the acquisition trend in India, where companies have been opting for the acquisition route to secure higher rates of growth. As per data by financial market tracker Refinitiv, M&As in India reached a three-year high after deals worth USD 90.4 bn were struck in the first nine months of 2021.
As a general rule, most of the deals that have taken place between Germany and India in the past revolve around the automotive sector. Germany, considered to be the birthplace of automobiles, with its world-class R&D facilities, complete industry value chain integration and highly qualified workforce have created an internationally competitive automotive environment. India on the other hand emerging as a global hub for auto component sourcing make the countries an ideal match. The automotive industry is key to both India and Germany and the industry is transforming at an alarming rate with electrical vehicles now coming into the limelight. Historically, India has been orienting towards European standards and technical regulations which have not only saved a considerable amount of time and effort for India but has also given access to emerging technologies and innovation.
That being said, the automotive industry in India is currently experiencing a tremendous slow down caused by the worldwide semiconductor chip shortage especially in the passenger vehicle segment. India has recorded a loss of atleast approx. 0.5mn units of production loss in the passenger vehicle segment.
How did the shortage in semiconductors chips come about? Semiconductors are silicon chips that cater to control and memory functions in products that could range from automobiles to cell phones and various other electronic items. There are two main reasons for the shortage of these chips. One is the increase in the usage of semiconductors in the automotive industry over the last few years in line with technological advancements and new models incorporating more and more electronic features such as Bluetooth connectivity, navigation, driver assist features, etc. According to the Centrum IB Automotive Update in February 2022, electronics cost as a percentage of total vehicle cost worldwide has risen from 22% in 2000 to 40% in 2020. The second reason appears to be the effects of the global pandemic playing out gradually. The stronger than expected demand recovery across industries has left the industry reeling with acute shortages and waiting time. The power failure after the polar vortex in Texas, fire in Renesas unit in Japan during early 2021, lockdown restrictions in key supply geographies (Malaysia and Thailand) have further significantly impacted the auto component supply chains in India which currently imports 100% of its semiconductor chip needs.
Recognising the shortage and the lowering of production across diverse industries which peaked in September 2021, India in its Union budget 2022 announced a USD 10bn incentive plan to attract semiconductor manufacturers to establish units in the subcontinent. As part of its plan to establish India as a global electronics production hub, India will extend financial support of up to 30% - 50% of a project’s cost to eligible manufacturers. Some companies that have shown an interest in this opportunity include Israel’s Tower Semiconductor, Foxconn, United Microelectronics Corp, Fujitsu, Intel and AMD. However, apart from the foreign companies, Tata Group also announced plans to invest up to USD 300mn on a semiconductor assembly and test unit and Vedanta, another local company announced its intention to invest USD 15bn on a semiconductor plant as well.
The Indian semiconductor industry is currently valued at USD 15bn in revenues and is estimated to grow to USD 63bn by 2026. Will the Government’s incentive decision turn the country into a global chipmaker and will this in turn give power to the Indo-German M&A corridor is something the deal making investors will be eagerly awaiting. With both local and international companies seizing the opportunity, the global semiconductor shortage might just be solved eventually.
Although economic optimism remains high and the factors that contributed to the record M&A market in 2021 will remain a large influence in 2022, one of the lessons that the pandemic has dealt out to the deal makers is to stay alert to the new accelerated pace of change that can have significant impacts on the deals as well as the industry. We at Ebner Stolz are here to advise you and guide you through your deal making journey not just in Germany but worldwide through our global Nexia partner.