GLOBAL AUTO INDUSTRY Dr. Clive Vlieland-Boddy. Current Views To provide highly attractive and environmentally friendly products which satisfy global demand.

GLOBAL AUTO INDUSTRYGLOBAL AUTO INDUSTRYDr. Clive Vlieland-Boddy

Current Views

• To provide highly attractive and environmentally friendly products which satisfy global demand

• Ensure sustainability demand.

• Develop new technological standards.

• Ensuring competitiveness.

• Developing employment opportunities within a global market

Current Views

For the next years the following R&D areas are of major interest for the automobile industry:

• Urban Mobility and Transport • Safety Applications in Co-operative Systems• Alternative Fuels • Suitable Materials• Electrification of the Vehicle • Ecological and Efficient Manufacturing.

Urban Mobility and Transport

• Advanced driving-assisted vehicles

• Energy efficient transport of people and goods with improved logistics

• Safety of urban road transport

• Traffic management

• Market implementation of innovation.

Alternative Fuels

• Scenarios for alternative fuels and strategies for their market introduction

• Preparation of specifications for alternative fuels

• Optimisation of power-trains with alternative fuels

• Integrated safety of alternatively-powered vehicles

Electrification of the Vehicle

• Affordable and safe battery systems with improved performance

• Post Lithium-ion technologies• Efficient vehicle and energy management

system• High voltage systems and components• Connection to the infrastructure• Field tests and demonstrators• Road map for market penetration of the electric

vehicle.

Ecological and Efficient Manufacturing

• Innovative green painting processes• Green manufacturing of vehicles and sub-

systems• Affordable manufacturing of green vehicles• Digital manufacturing for integrated product and

process development• Virtual engineering for product and process

performance management over the whole lifecycle.

Who and Where!

• In 2007 just 10 OEMs were responsible for 75% of the world output

• Further consolidation is expected.

• New entrants from China and India will change the map.

Challenges

• Fuel Sources

• Improving technology creating longer lasting products.

• Market Saturation

Challenges

The declining fortunes of the Big Three

• Reflect the larger trend toward a U.S. economy based more on services and ideas and less on manufacturing.

• The forces of globalism where corporations with worldwide operations have moved manufacturing to places where labour is cheapest and where labour laws are least stringent.

• The big questions facing the Big Three is whether they can continue to operate with labour contracts that, despite recent modifications, largely reflect a bygone era of union strength.

The BIG 3

The automobile sector is currently facing 3 main problems

• The lack of funding creates difficulties for the consumer to finance the purchase of a new car;

• The markets are in overcapacity;

• The evolution towards an aging and a “no car” society is predictable on the structural long-term.

Responses to address these issues

• Government Financial Assistance in the short-term.

• Elaborate short-term schemes to try to stimulate demand.

• Restructure the sector on the long term.

• Finance R&D and clean cars.

• Promote efficient use of transportation.

The Big 3 are

NOWin Trouble

General Motors bailoutGeneral Motors bailoutheadline from headline from The New York The New York

TimesTimes

Thirteen years later . . .Thirteen years later . . .GM & Chrysler in bankruptcyGM & Chrysler in bankruptcy

The scale of the collapse: the The scale of the collapse: the industry drives off a cliffindustry drives off a cliff

23

Detroit’s disproportionate suffering: the Detroit’s disproportionate suffering: the Big 3 hit hardestBig 3 hit hardest

24

GM + Ford + Chrysler

Transplants and Imports

US Sales: Detroit share falls from 75% in 1985 to ~45% in 2009e

Detroit’s disproportionate suffering: 2 Detroit’s disproportionate suffering: 2 out of 3 file bankruptcyout of 3 file bankruptcy

• General Motors, after its bankruptcy, is now owned by a consortium of the US and Canadian governments, the UAW, and former bondholders

• Chrysler, after its bankruptcy, is now owned by a consortium of the US and Canadian governments, the UAW, and Fiat– Still burning cash, perhaps $500 mm per month?

• Ford avoided bankruptcy, but primarily by mortgaging itself in 2006– Roughly $25 billion raised; even the Blue Oval symbol

and trade names such as Mustang were pledged

25

But shouldn’t we have seen this But shouldn’t we have seen this coming? In market share…coming? In market share…

Source: Ward’s AutoInfobank0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

YTD

2009

GM Ford Chrysler Korean European Toyota Honda

… … and in profits?and in profits?12

.8%

16.0

%16

.1%

15.0

%15

.4%

12.7

%9.

8%12

.5%

10.5

%4.

8%10

.2%

10.8

%9.

8%4.

0% 4.7%

9.2%

9.3%

8.2%

5.2%

-3.4

%0.

4%2.

6%8.

5%9.

8%7.

5%4.

9%8.

6% 9.2%

7.9%

1.7%

-3.2

%1.

8%3.

9%9.

0%7.

6%6.

2% 6.9%

6.2%

7.6%

5.6%

0.2%

2.9% 3.

7% 4.2%

-0.8

%-2

.0%

-1.1

%-7

.9%

-10%

-7%

-4%

-1%

2%

5%

8%

11%

14%

17%

20%

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Ope

ratin

g M

argi

n

Detroit Three Operating Margin

Source: Moody’s, Company Reports

Causes of the decline and fallCauses of the decline and fall

• Short-term factors: debt, debt, and more debt

• Medium-term factor: drunk on trucks?

• Long-term factor: outmoded basic beliefs

28

29

Short-term factor: debt. The case of Short-term factor: debt. The case of General MotorsGeneral Motors

Companies facing cyclical markets should not carry a large burden of debt, in order to survive downturns.

GM’s debt exposure (year end 2007, prior to current crisis):

Owed to banks: long-term bonds: $33b

Owed to workers: retiree health care:$47b

Owed to workers: pensions: $11bOwed to suppliers: (negative) working capital:

$34bOwed to dealers: (US only) excess car inventory:

$15b… on revenue of some $180 billion

Source: company financial statements; all figures exclude financing captive (GMAC)

30

Illustration of GM’s debt problem: Illustration of GM’s debt problem: Toyota comparisonToyota comparison

Toyota (and Honda similarly) can turn to its business partners for funding to get through a downturn; GM drew down all its sources, and so had to turn to Washington for funds.

Debt exposure (year end 2007, prior to current crisis):

GM Toyota• Owed to banks: $33 $4• Owed to workers: RHC $47 $0• Owed to workers: pensions: $11 $6• Owed to suppliers: $34 $13• Owed to dealers: $15 $0

… on GM revenue of some $180 billion, Toyota some $250 billion

… and GM equity of negative $35 billion, Toyota positive $115 billion

Source: company financial statements; all figures exclude financing captives; Toyota FY ending 3/2008

31

Medium-term factor: the truck boom Medium-term factor: the truck boom

leads to a car bust.leads to a car bust. • The truck boom (SUVs and pickups)

earned the Detroit 3 vast profits…• … which they used to fund

“adventures” rather than reinvest in the core business…

• … leading to relatively neglected and uncompetitive car product lines, once the truck boom ended. Lack of R & D!

32

The truck boom of 1990-2005The truck boom of 1990-2005It is hard to overstate the shift to light trucks in the USA over the

years (due to regulation, consumer preference, and marketing).

Source: Sean McAlinden from Ward’s data

Millions of units sold, US market

33

The truck boom of 1990-2005The truck boom of 1990-2005

With profitability assured by the cash flow from trucks, Detroit’s Big Three spent much of the 1990s engaged in all sorts of adventures… not necessarily related to the core business of making cars.

• Ford bought Aston Martin, Jaguar, Land Rover, Volvo, and Hertz

• Embarked on a series of “downstream” business extensions (e.g. purchasing car maintenance companies, collision repair shops, and salvage yards

34

The truck boom of 1990-2005The truck boom of 1990-2005

• GM started and then stopped EV-1, • Diverted large sums into fuel cell research, • Spun off Delphi, • Sold Hughes Aerospace, • Aggressively expanded GMAC into home

mortgages, • Bought Daewoo Motors*, g• Got into a deal with Fiat and then back out, • Starved most of its alliances (Suzuki, Isuzu, Saab)

35

The truck boom of 1990-2005The truck boom of 1990-2005

• Chrysler of course “cashed out” (to the great benefit of its shareholders:

• The $36 billion paid would today buy Ford plus GM plus Daimler itself, with about $6 billion left over) by selling itself to an unsuspecting Daimler

Other Causes

37

Styling as a differentiator: Styling as a differentiator: reduced impact?reduced impact?

They all look the SAME

Scale trumps efficiency Definition:

• economies of scale are the key to profitability

Strategy: • pursue capacity via organic growth or

acquisition; and for any given capacity, always produce the incremental unit

Successful when: • fixed costs of product development and

manufacturing are very high, market is in a growth phase, price discrimination is easy

38

Economies of Scale are KING!Economies of Scale are KING!

Genesis of belief: • from the Model T onward into the 1980s:

production typified by:• inflexible large production lines, •product development manual and

complex,•market steadily growing, •external styling and branding to

conceal identical mechanicals under varying model names39

Past Beliefs of The IndustryPast Beliefs of The Industry

Market Saturation

• Once you have saturated the home market then you saturate all foreign emerging markets.

• Then WHAT!

• Now the move is to waste minimization and flexibility, from scale maximization;

• Developed markets have matured, reducing capacity to absorb excess units

• New competitors and smarter consumers break the pricing paradigm

41

This belief no longer applies

• Maximizing production leads to a belief that all units are equal,

• Costs of complexity are ignored: • Example: GM sells fewer cars than

Toyota, but stocks roughly three times as many part numbers, at great cost.

42

Impact of the belief in scaleImpact of the belief in scale

• OEMs push into developing markets, despite low per-car profits to offload excess capacity

• With a focus on units moved rather than on profits made, management lose sight of the fundamentals,

• This leads to “strategy by slogan” (e.g. “first mover advantage”);

• Evaluation of winners and losers by unit share, not by bottom line results;

• Where is the visionary CEO?43

Impact of the belief in scaleImpact of the belief in scale

• Pursuit of scale at all costs leads to• M&A activity in order to grow• But most M & A’s in this industry

FAIL

44

Impact of the belief in scaleImpact of the belief in scale

The Poor Track Record of Western OEM The Poor Track Record of Western OEM Mergers (partial list)Mergers (partial list)

GM-Saab bankrupt

GM-Suzuki exit

GM-Fuji exit

GM-AmGen/Hummer exiting

Ford-Jaguar exit

Ford-Land Rover exit

Ford-Aston Martin exit

Ford-Volvo exiting

Ford-Mazda success1

Chrysler-Simca exit

Chrysler-AMC success

Fiat-Lancia failure

Fiat-Alfa Romeo failure

VW-Skoda success2

VW-Audi success3

VW-SEAT failure

BMW-Rover exit

Renault-AMC exit

Renault-Nissan success4

Renault-Dacia success

Daimler-Chrysler etc exit

PSA-Simca etc failure

Peugeot-Citroen success?

Notes:

1: only after many years

2: but Skoda was rebuilt from scratch

3: Piëch has suggested this is not so

4: an alliance, not a merger

45

One qualified forecast for total NA One qualified forecast for total NA sales (CSM)sales (CSM)

46

CSM projects a slow but steady recovery to historic levels

““No recovery” implies belief in trend No recovery” implies belief in trend reversal!reversal!

47

SCRAPPAGE: At present new sales are running below annual scrapped for the first timesince World War II

Trend reversal?Trend reversal?

48

VMT: Do we think that the current dip in vehicle miles traveled is an issue?

Trend reversal?Trend reversal?

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

1950 55 1960 65 1970 75 1980 85 1990 95 2000 5 749

OWNERSHIP: What might happen to end the growth in cars per household?

Trend reversal?Trend reversal?

50

AFFORDABILITY: With any reasonable elasticity of demand assumed, sales seem likely to rise

Most affordable score since the index was first

computed in 1979!

What about the outlook for individual What about the outlook for individual OEMs? (1)OEMs? (1)

51

All else being equal, nothing tracks/forecasts OEM market share as well as averageage of an OEM’s model lineup.

What about the outlook for individual What about the outlook for individual OEMs? (2)OEMs? (2)

52

If this relationship holds, Detroit’s market share should continue to slip, all else being equal

Results by OEM, for 2013Results by OEM, for 2013

53

Brand Current share %

Expected change

Resultant 2013 share %

Comments

GM 20 -5 15 Organic and M&A

Ford 16 +3 19 Newest line

Chrysler 10 -6 4 Viable? Fiat role?

USA 3 46 -8 38 Tied with J3

Toyota 16 +1 17 Slowing

Honda 11 +3 14 Efficient engines

Nissan 7 +1 8 Slowing

Japan 3 34 +5 39 Tied with USA 3

Hyundai/Kia 7 +3 10 Economical

Europeans 7 0 7 VW ↑ BMW, MB ↓

Other 6 0 6 Mostly Japanese

Total 100 0 100

Forecast summary:• Demand does return to “normal,” though it will take time• We will move from a Big 3 to a Big 6 (“Europeanization”): • More balance, more market share to/fro versus steady

trends• Finally, a focus on profits rather than on volumes• Hopefully, much clearer brand propositions (pull vs.

push)• As for Detroit, one view is that GM is okay unless it

backslides; Ford is likely to gain thanks to product offensive (kudos to Mazda?); Chrysler’s fate hangs on Fiat et al.

Lessons from the fall: Lessons from the fall: general business insightsgeneral business insights

• How we got here: eerily similar to the housing and financial crisis

55

Industry Short Medium Long

Auto Excess debt

Truck boom Form trumps function; scale wins

Housing Excess debt

Long GDP b. House prices can only go up

Finance Excess debt

Derivative b. Markets are not correlated

The Rise of China

The “Million Units per Year Club”The “Million Units per Year Club”

Country Units Rank Units Rank % chg Gain LossChina 1,829,953 9 13,790,994 1 654% 11,961,041 Japan 9,895,476 2 7,934,516 2 -20% -1,960,960USA 13,024,978 1 5,708,852 3 -56% -7,316,126Germany 5,687,692 3 5,209,857 4 -8% -477,835South Korea 2,843,114 7 3,512,926 5 24% 669,812 Brazil 1,350,828 12 3,182,617 6 136% 1,831,789 India 818,193 2,632,694 7 222% 1,814,501 Spain 2,852,389 6 2,170,078 8 -24% -682,311France 3,180,193 4 2,047,658 9 -36% -1,132,535Mexico 1,549,925 11 1,561,052 10 1% 11,127 Canada 3,058,813 5 1,490,632 11 -51% -1,568,181Iran 119,419 1,395,421 12 1069% 1,276,002 UK 1,973,519 8 1,090,139 13 -45% -883,380Italy 1,701,256 10 843,239 -50% -858,017Russia 1,169,708 13 722,431 -38% -447,277Belgium 1,017,061 14 537,354 -47% -479,707

Source: OICA (Organisation Internationale des Constructeurs d'Automobiles)

1999 2009 Change

Beware the trendBeware the trend

Conclusions

Economic OutlookEconomic Outlook

• Auto production = jobs

• Jobs = political stability

• Stability = governments spend € £ ¥ $– Countries WITHOUT auto industry spend to get– Countries WITH auto industry spend to defend

• Excess investment = excess capacity

• Excess capacity = persistent overproduction

By 2020 it is likely the electric vehicle market will still be small

• An increasing proportion of cars will be hybrids.

• Further improvements in traditional combustion engines to make them even more fuel efficient

Lessons to be LearnedLessons to be Learned

• Lessons from all this might include:

– Watch your debt load and “stress test” it for extreme scenarios!

– Do not be distracted by the latest big trend (trends end)!

– Challenge beliefs that “everyone knows” are true: they may not be!

• Looking ahead – Industry requires vision

Winners & losersWinners & losers

• Challenge for future auto executives:

• Demand should = Production

• Customer loyalty is KEY

• There is a real need for VISION

• R & D is vital

Is this a SICK industry?

Bye for now! I’m ready forsome leisure time.

Please ensure you Prepare for next session