August 3, 2017

Rewired for Success—Is the Industry Sustainable Going Forward?Al Koch, Vice Chairman, AlixPartners LLP

Center for Automotive Research (CAR) Management Briefing Seminars

2

Investment and cash demands in auto: extensive—and growing

Ongoing requirements

(~10% of sales)

• Maintenance capital

• Expansion capital

• R&D capital

Cycle-related requirements

(based on historical patterns)

• Sales slowdown-related

(funding payables, bailing out

troubled suppliers, sharing

stranded fixed costs, etc.)

• Capacity-related

(overinvesting due to

uncertainty over future

volumes)

Incremental requirements

(for the conversion to “CASE”—

connected, autonomous, shared,

electric)

• Partnerships

• M&A

• Etc.

How much capital is enough?

3

Automotive ROICs pale in comparison to high-tech’s

1. Capital IQ’s Capex calculation (used here) is net of depreciation; R&D does not include acquisitions and, in some cases, double counts Capex where capitalizedSource: Bloomberg, Morningstar, Capital IQ, Compustat, New York Stern Aswath Damodaran, and AlixPartners analysis

Return on invested capital (2016) Capex + R&D/sales1 (2016)

30%

18%

16%16%

13%11%

8%6%

4%

-7%

11%

36%32%

24%

16%

-2%

Trucking

Metals & MiningAutomakers

Oil/Gas (Integrated)Oil/Gas (Production)

Computer ServicesAerospace/Defense

Information Services

ElectronicsRetail Automotive

RailroadTelecom Equipment

Chemical (Diversified)Semiconductor Equip

Air TransportComputers/Peripherals

9%2%3%

6%11%

1%3%

9%8%

3%5%

7%5%5%5%4%

12%

4

Why it’s important to focus on ROIC, not just profitsor sales

1. See ‘Exploring Links Among Long-Termism Activist Behavior and Shareholder Return’ from S&P Global Market Intelligence Research April 28,2016; ‘Why You Should Pay Attention to Companies’ Three-Year Average Return on Invested Capital, by David Trainer in Forbes Magazine June 7, 2017 and ‘The Sustainability of Growth vs Return on Invested Capital’ by Saul Stannard-Stockton in Intrinsic Investing Sept. 21, 2016

• ROIC is a principal driver of stock price1

• Low ROIC, especially in low-growth capital-intensive industries, typically generates

laggard shareholder returns:

• ROIC considerations for “CASE” investments:

− The “3 P’s”: Participate, Partner or Purchase

− The key: Having a strategy

ROIC Google Apple

General

Electric Bosch Ford

General

Motors

2016 14.2% 19.9% 3.9% 12.7% 2.7% 5.2%

2012-16 Avg. 14.1% 26.8% 3.4% 12.7% 4.0% 8.4%

5

The proof is in the pudding: Stock performance for GM and Ford, vs. Apple and Google

Relative stock-price comparison

50%

100%

150%

200%

250%

300%

350%

12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016

General Motors Ford Motor Apple GoogleSource: CapitalIQ

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Source: Maritz, AlixPartners analysis

Customer satisfaction: Built-in nav systems

A “CASE” challenge: Tesla’s over-the-air upgrades and iPad-like functions—unmatched since 2012

Customer satisfaction: Downloaded apps

Com

ple

tesatisfa

ction

Com

ple

tesatisfa

ction

2013 2014 2015 2016

30%

70%

80%

90%

0%

60%

40%

50%

Chrysler Nissan BMWHondaGM ToyotaFord Mercedes Tesla

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2013 2014 2015 2016

7

AlixPartners’ finding: More than 50 “name” companies are now working on autonomous vehicles or systems

8

Example of how fast “CASE” can change: Car-sharing stagnating; ride-sharing up (per AlixPartners survey)

Questions: “In the next 12 months, how do you think your use of car-sharing will compare to your use now?” “In the next 12 months, how do you think your use of ride share will compare to your use now?”Source: AlixPartners consumer survey May 2017

Intended usage in next 12 months vs. today (%); US consumers

Car-sharing (Zipcar, Car2Go, etc.) Ride-sharing (Uber, Lyft, etc.)

17

53

1614

More than today

+1 pt.

Do not use now and will not

use in the next year

Less than today

About the same as today

Net

expected

increase

in usage

24

67

54+18 pts.

More than today

About the same as today

Less than today

Do not use now and will not

use in the next year

Net

expected

increase

in usage

9

Could “NIH” (not-invented-here) sabotage ROIC?

AlixPartners’ finding: 294 “CASE” partnerships by OEMS, including:

• Ford: 15 (Ford produces approximately 7% of world’s vehicles)

• GM: 11 (approximately 8% of world’s vehicles)

• Volkswagen: 15 (approximately 11% of the world’s vehicles)

• BMW: 32 (approximately 3% of world’s vehicles)

Efficient use of capital suggests that:

• The industry should consider making greater use of tech companies where their

technology know-how can be an advantage

• Keep ROIC top of mind--including developing “asset-light” approaches

10

Average spending already equals half of available cash; upcoming “CASE Bump” likely to strain balance sheets

0%

20%

40%

60%

80%

100%

$10B

$30B

$25B

$20B

$0B

$5B

$15B

$11B

$7B

$4B

$1B

2007

$12B

$7B

$4B

$1B$0B

2014

$10B

$6B

$3B

2013

$12B

$7B

$4B

$1B

$9B

2012

$9B

$6B

$3B

2011

$7B

$5B

$2B

2010

$5B

2016

$12B

$3B

$4B

$1B

2015

$11B

$7B

$3B$0B

2009

$8B

$5B

$3B

Sp

en

din

g a

s %

of A

vaila

ble

Cash

2008

Sp

en

din

g

$8B

CapEx SpendR&D

Tooling Costs (CAPEX + Tooling) as % of Cash Avail.

Average Capex + R&D and Tooling Spending for Top 20 Global Automakers

The “CASE Bump”

Note: Tooling costs are estimated at ~15% of annual R&D spend per OEMSource: Capital IQ, AlixPartners analysis

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Returning to: “Is the industry’s capital adequate?”

“Yes,” if:

• ROIC is always, always kept in mind,

• ROIC improves significantly, and

• “NIH” doesn’t get in the way of business objectivity

Otherwise, the answer may be…

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"Those who cannot

remember the past are

condemned to repeat it.“GEORGE SANTAYANA, PHILOSOPHER

(1863-1952)

©2017 AlixPartners, LLP.