Automotive M&A continues to be driven by new technologies, particularly those that automakers are struggling to build on their own. But hybrid vehicles—not electric ones—are fueling the most activity.

Overall, 55% of respondents believe the automotive M&A market will strengthen in the next 12 months; 30% expect no change, and 15% say it will weaken, likely as a result of lower consumer demand, high interest rates, and uncertainties related to the election. Still, Q1 got the sector off to a strong start, with M&A activity increasing 125% compared to Q4 2023.

The shift to hybrid is the key factor behind this increase in dealmaking, according to 57% of those who believe the market will strengthen in the year to come. The need to increase supply chain resiliency followed (43%), as did collaboration between automakers/suppliers with technology providers (43%).

“Hybrid is going to be the next thing to explode in our industry,” one respondent told us.

At the same time, the move towards electric and autonomous vehicles is now promoting less activity, with just 33% selecting each as a key M&A driver (compared with over 50% in both areas last year). This is probably the consequence of slowed consumer demand: EV sales, for instance, fell by 15% in Q1 compared with the previous quarter, while EV startups continue to struggle. According to a recent Gartner report, 15% of EV companies founded in the preceding decade may be acquired or bankrupted by 2027.

“Early on, we saw the first waves of consumers willing to invest in EVs and adapt to the newer technologies, managing potential infrastructure challenges along the way,” says Laura Baucus, Dykema Member and Director of the firm’s Automotive Industry Group. “Now, we’re seeing a broader consumer base that may be approaching these advancements with more caution, finding comfort in hybrid options. Ultimately, it’s about aligning with consumer preferences—that’s where the deals will emerge.”

In terms of due diligence, only 51% of automotive respondents reported that dealmakers increased their due diligence efforts over the past year, compared to 80% of dealmakers overall. This may reflect the fact that due diligence processes in the automotive sector have become more standardized as stakeholders adapt to the risks associated with electric and autonomous vehicles. However, Baucus emphasizes that cybersecurity should be a top priority in both M&A transactions and due diligence, given the vast amounts of data being collected and transmitted by modern vehicles.

With modern vehicles relying on sophisticated software and real-time data transmission, potential cybersecurity risks—such as data breaches, hacking, or system failures—must be thoroughly assessed during the due diligence process. Buyers are placing a greater emphasis on evaluating the strength of a target company’s data protection measures and cybersecurity protocols. Any weaknesses in these areas could not only impact deal value but also pose significant operational risks down the line.

Evolution of Automotive Dealmaking

• • 2004-2007: Consolidation
  • 2008-2010: Survival (in the wake of economic/automaker collapse)
  • 2011-2015: Recovery and new growth
  • 2016-2019: Innovation (new tech excitement)
  • 2020-2023: Disruption (Covid and supply chain challenges)