I’ve always enjoyed writers who take a stab at predicting what’s going to happen over the coming year. I’ve respected those even more who look back at the end of the year and reflect on how accurate their predictions played out.
For 2021, I wanted to kick off the year by providing some thought-provoking predictions for our readers. I hope you enjoy and that these evoke some interesting thoughts, debate and discussion.
Prediction 1: America Gets Back to Work
Despite major upheaval in 2020, the U.S. economy seems to be primed for recovery, growth and continued adaptation to a new normal. Some industries will continue to suffer as long as the pandemic lasts—and beyond. Commercial-real-estate companies and bricks-and-mortar retailers are reinventing themselves for a new work-from-home, shop-from-home age.
When it is safe for business to resume as usual, the economy could take off. Americans have accumulated $2 trillion in new savings deposits since February, according to the Federal Reserve. That is more than 10% of gross domestic product waiting to be spent.
Meanwhile, our leap into the future of work will create new opportunities. Now that remote work is more widely accepted, many employees will no longer be tied to high-cost urban centers that previously held a monopoly on certain kinds of jobs. They’ll be able to move to places where one can actually build houses and raise a family comfortably. And as more people vote with their feet, state and local governments will have to become more responsive, whether on taxation and housing policy, school quality or police accountability.
People will continue to save time and money formerly spent on commuting. We could start to see exciting new uses of physical space that employers no longer need. Office buildings could be converted into housing, parking garages into outdoor parks and parking lanes into bicycle paths.
America had a rough year, but we might look back on 2020 as the start of a new, even more resilient, more inclusive and more sustainable boom.
Prediction 2: M&A and IPOs Continue at Torrid Rates
Investors are feeling emboldened by a more stable administration in the White House, the stated long term, low interest rate policy of the Fed, line of sight on a recovery from the pandemic, and over $1 trillion of uninvested capital (“dry powder”) sitting on the sidelines within Private Equity and Venture Capital funds, looking for a home.
As a result, we will see strong interest in M&A in 2021. Acquiring companies will look to supplement their R&D efforts, accelerate product roadmaps, find products to cross-sell and accelerate revenue growth through acquisition.
We will also see strong interest in taking companies public, given the strength of the markets, and of valuations.
Investor enthusiasm for electrification and autonomous-driving technology is strong right now, and it is an opportune time for electric vehicle companies to raise capital from public market investors, as valuations in the space are high. Because they offer quicker time to market and less scrutiny, SPACs are an attractive listing option for electric vehicles companies and, more broadly, highly capital-intensive startups in the pre- to early revenue stages.
Sentiment toward SPAC debuts could shift as direct listing and alternative listing options gain momentum. In late 2020, the SEC approved NYSE direct listings to include a primary capital raise concurrent with the first trade. This inability to raise capital in a direct listing has been the main argument against more companies pursuing this pathway to the public markets. With that barrier on the path to removal and the continued success of completed transactions, we expect more companies planning to go public will take advantage of the benefits of a direct listing, especially larger technology startups.
Prediction 3: Reynolds Goes Public Via SPAC
The current challenges facing CEO and owner Bob Brockman regarding a $2 billion tax evasion case, coupled with his alleged health issues, makes for a strong case for Reynolds & Reynolds to change ownership in 2021. Given their already aggressive pricing tactics in the market and strong profitability, it will be hard for a Private Equity sponsor to model out increasing revenue or cutting costs.
With the large number of SPACs currently looking for companies to take public, Reynolds may be a very attractive candidate in 2021, especially as public markets and SaaS valuations stay strong.
Prediction 4: Tekion Acquired by Salesforce.com
Tekion is the current darling of the automotive SaaS segment, attempting to take on huge incumbents Reynolds & Reynolds and CDK Global. Tekion, a cloud technology company and provider of a software-as-a-service DMS they call their “Automotive Retail Cloud”, recently announced its Series C financing round of $150 million dollars at over a $1 billion valuation. The funding round was led by global Private Equity firm Advent International.
Rumors (or maybe hopes?) of Salesforce.com entering the dealer software solution market have circulated for years. A takeout of Tekion might provide a fast path for Salesforce to find a like-minded disruptor to accelerate its entrance into both the DMS and CRM segments.
Prediction 5: Amazon Acquires Carvana
I’ve believed for years that Carvana would be a natural acquisition target for Amazon, the latter having struggled for some time around how they could provide driveway delivery of vehicles without forcing the consumer to interact face-to-face with the dealer.
Carvana has proven they can accomplish this at scale with Carvana-owned vehicles. The missing puzzle piece is how Carvana is going to convince dealers to list their inventory on the platform (first with used cars, but then with new cars). Once they figure this out, they will become a compelling acquisition candidate for a big player like Amazon. And if Amazon is interested, it’s likely that Walmart might be.
Could this be the year that Carvana is sold to a strategic buyer? I’m betting so.
Prediction 6: Polishing Brass Won’t Cut It Any Longer
I love the automotive technology space.
But the barriers to building software have lowered dramatically, and it’s now extremely easy to launch a technology company. This, coupled with the fact that consumer and automotive data via APIs are readily available, means that we’re continuing to see more and more new software companies emerge solving narrower and narrower “pain points” in the industry.
I love to see innovation in the space, but many of these new companies emerging with weaker value propositions may never make it. While the number of automotive technology startups increases, so will their failure rate.
Prediction 7: Storm Clouds on the Horizon
One of my favorite movies is Interstellar. I particularly like the scene where they land on the water planet where time moves at a relatively compounded rate (7 years per hour). I often think of the scene on that planet where they discover, “those aren’t mountains...they’re waves.”
To me, it seems like the auto industry can clearly see a number of waves of uncertain magnitude and distance on the horizon. Autonomy. Electrification. Connected Cars. Vehicle ownership. Margin compression brought on by consumer demand for
transparency and better buying experiences. Online car shopping sites.
While we cannot be certain of the size of these swells nor when they will hit, we can be sure they’re out there brewing, and they’re inevitably coming towards us.
When I joined Cox Enterprises, a large portion of their revenue (and a significant portion of the family’s wealth) was tied up in their newspaper assets. Pre-internet, newspapers sold at 15x EBITDA. The internet came along and decimated the newspaper business. The 2008 downturn compounded the issue.
Back in 2008, TV Guide, once a very profitable magazine franchise, was sold for $1. The buyer was willing to absorb ongoing operating losses. In 2017, the New York Daily News sold for $1, with the buyer assuming all of the paper’s operational and pension liabilities.
It’s hard to be able to judge how disruptive emerging forces will be on automotive players: the OEMs, dealers and vendors. But we’d all better keep our wits about us to monitor the horizon and prepare for the inevitable storms brewing.
Prediction 8: Blurring of Lines Between Wholesale and Retail
I firmly believe that we’re going to continue to witness a blurring of lines between wholesale and retail automotive channels.
Dealers will find creative ways to source used vehicles from any and all channels.
Fleet owners will look for creative ways to dispose of cars quicker, easier, most cost effectively and at prices closer to retail.
2021 will find us with a publicly listed ACV Auctions, who will have the capital to make bold moves in the space.
We will also see the competing third-party advertising marketplaces react to CarGurus’ acquisition of CarOffer, through either acquisitions of their own or partnerships with big players like Manheim, ADESA or ACV.
I predict that publicly-listed ACV Auctions – who has a lot of momentum due to strong revenue growth – will establish a partnership with one of the large consumer-facing marketplaces and with multiple dealer groups.
Prediction 9: Consumer Focus
One of the areas of innovation we’ll see in 2021 is around delivering consumer convenience in the car buying process. Not necessarily by any of the well-known incumbents, but by new players who can potentially disrupt these legacy players.
Many of the so called “Digital Retailing” experiences in the market simply provide the dealer with an enhanced lead (enhanced with trade-in, credit score, or finance vs. lease intent); part of the resistance to real change has been that neither consumers nor dealers have quite been ready to hand over full control (or reveal information) to the counterparty.
Leveraging the momentum of COVID-fueled consumer demand for online experiences, we will see new entrants to the market providing true ecommerce automotive shopping experiences, with a specific focus on a superior consumer convenience.
Prediction 10: The Next Wave of Automotive Tech Will Automate Processes
The automotive space has always fostered a healthy amount of innovation. Just walk around the convention floor at NADA each year to get a sense of the sheer volume of technology companies that support dealers and OEMs.
Whereas much of the focus in the past has been on helping dealers achieve incremental sales (‘Variable Ops”), the next wave of automotive tech will be on helping dealers and OEMs to automate processes and reduce costs. In many cases this will be by reducing vendor cost and complexity, reducing headcount, or making existing headcount far more efficient.
Entrepreneurs would be wise to concentrate efforts on these areas, and investors will want to keep an eye on companies focused on this space.
Well, there you have it. I hope you’ve enjoyed reading over my attempt to predict what this next year will hold for the automotive space.
We’ll see how many of these predictions play out in 2021, and I’ll be prepared to grade myself at the end of this year. In any case, we’re in for a very exciting year ahead of us.