FOR SALE?

Tech companies have enough cash to buy most of the auto industry

Tech companies in search of the next market have been eying car companies for years. It turns out they can just buy much of the entire auto industry outright, according to an analysis of public financials by Sherpa Technology Group. Sixteen of the world’s top twenty automakers have a combined enterprise value of $978 billion, putting them well within reach of the $1.1 trillion held in cash and equivalents by the world’s top twenty tech companies.

That’s unlikely to happen, but the discrepancy illustrates just how much tech has come to dominate the global economy. The tech industry is now second only to the financial industry in terms of cash on hand (most financial firms’ cash are client balances). Of the more than $1.8 trillion held by non-financial companies, tech giants account for about 60% of it.

The secret to Silicon Valley’s success is unprecedented scale. In an ever-more connected world, companies can now monopolize audiences and advertising dollars due to their dominance of search and social media technologies. Much of the world uses a handful of products from Facebook, Google, or Apple to access the internet, a trend that’s accelerating, writes investor Benedict Evans of Andreessen Horowitz. The revenue of Google, Apple, Facebook and Amazon is three times that of the last set of dominant tech players, Microsoft and Intel, and six times more than that of IBM, the original tech giant.

But it’s unlikely they will pour all their money into massive acquisitions. Automakers are weighed down by capital intensive business models, a paucity of engineers, relative to tech companies, and relatively thin margins. The consulting firm McKinsey estimates mass-market carmakers spend about 75% of their cashflow on production costs leaving just 3% to 6% for research and development (R&D). Tech companies, by contrast, spend 35% to 60% of cashflow on production, with 10% to 15% devoted to R&D. There’s little room for carmakers to maneuver with profit margins hovering around 10% compared to 20% to 30% in the tech industry.

“Tech companies want to own the ‘brains’ of the vehicle because they know that’s where the biggest profit pools will be,” wrote Kevin Rivette, managing partner at Sherpa Technology Group, by email. “Intel and Microsoft did this in the PC industry, so there’s precedent.”

So far, acquisitions and interest have flowed mostly from Detroit to Silicon Valley. More than 64 carmakers and auto players have set up shop in the San Francisco Bay Area, and there’s been a flurry of high-profile acquisitions and investments—such as GM’s nearly $1 billion purchase of Cruise Automation and $500 million investment in Lyft.

That may change for a few. BMW, GM, Honda and the other smaller carmakers are all acquisition targets. Whether Silicon Valley will partner, or buy, its way into the car industry remains to be seen.

A break down of automakers’ valuations and tech companies cash stockpiles are below.

 

Correction: This post has been corrected to indicate that 16 automakers, not all of the top 20, were valued at $978 billion.

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