Booz & Company Detroit, MichiganMay 2012

2012 U.S. Automotive SurveyAdvanced Look

Booz & Company

Our team today

2April 8, 2023

Brian is a Chicago-based partner in the firm’s global automotive team

He specializes in working with automotive Tier One suppliers on business unit strategy and transformation, with extensive experience in cost transformation, accelerating the growth agenda, portfolio management, and manufacturing strategy

Recent Tier One Supplier engagements include: NA manufacturing network restructuring, global turnaround strategy, sourcing transformation, and inorganic growth assessment

 

Brian CollieChicago

Scott CorwinNew York

Scott is a New York-based partner in the firm’s global automotive team Over the past twenty years, Scott has worked extensively with

automotive companies to successfully develop and implement strategy based transformations – gaining deep expertise across many areas of the automotive value chain

Client engagements have involved: corporate strategy, operational restructuring, portfolio strategy, product development, advanced R&D and innovation, supply chain management, manufacturing optimization, sales marketing and distribution, information technology, and new business models

 

Booz & Company

Introduction

Booz & Company recently conducted its U.S. Automotive Industry Survey and Confidence Index – an annual study examining current state of the U.S. automotive industry, key challenges facing it, attitudes of its executives, and what companies are doing in response

Over 200 automotive executives from more than 75 automotive vehicle manufacturers and suppliers participated in an online survey conducted during February and March

During today’s webinar we would like to:

– Share what industry executives had to say on the future of the automotive industry

– Discuss key implications for OEMs and suppliers, and

– Answer any questions you may have about the results

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Relative to last year, industry executives are significantly more bullish on the current state of the automotive industry

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31%

63%

6%

0%0%

26%

66%

7%

1%0%

Somewhat Worse About the SameMuch Worse Somewhat Better Much Better

Supplier

OEM

Perceived State of the Industry Compared to One Year Ago

In 2011, 53% of OEMs and 37% of Suppliers described the

current state of the industry has “About the Same” or

“Somewhat Worse” relative to same time prior year

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The improvement in the industry’s performance was driven in large part by the industry restructuring and pent-up demand

Key Drivers of Strong 2011 Industry PerformancePercentage of respondents that ranked a driver in their top 3

62%

58%

48%46%

34%

30%

22%

Industry Restructuring

Pent-Up Demand

Production Discipline/

Tight Inventory

Improved Customer

Confidence

Better Product

Pricing Discipline

Availability of Credit

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72%

68%

58%

34%30%

22%

16%

Industry Restructuring

Pent-Up Demand

Improved Customer

Confidence

Better Product

Availability of Credit

Pricing Discipline

Production Discipline /

Tight Inventory

OEMs Suppliers

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OEMs credit their current product portfolio and pipeline as the reason for their positive outlook in 2012

Important Internal Factors Contributing to Positive 2012 Outlook – OEMsPercentage of respondents that ranked a factor in their top 3

“Other” includes internal process execution,

leadership, and strategic vision

6

69%

60%

29%25%25%

20%18%18%16%

10%10%

OtherEngineering/ R&D

Current Product Portfolio

Product Pipeline

Retail Network/ Footprint

MarketingSales Financial Position

Customer Experience/ Relationship

Ability to Innovate

Cost Position

April 8, 2023

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For Suppliers, though product is important, customer mix, and to a lesser extent cost position, play a key role in shaping outlook

April 8, 2023

Important Internal Factors Contributing to Positive 2012 Outlook – SuppliersPercentage of suppliers that ranked a factor in their top 3

“Other” includes internal process execution,

leadership, and strategic vision

7

58%55%

43%

38%

28%27%

20%19%

7%5%

MarketingOther Customer Base and

Relationships

Current Product Portfolio

Product Pipeline

Cost PositionAbility to Innovate

Engineering/ R&D

Financial Position

Sales

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Respondents forecast U.S. sales in 2012 to approach 14M, with growth then settling to levels more consistent with GDP

2010 2011 2012 2013 2014 2015 2016

Units (Millions)

16.0

15.5

15.0

14.5

14.0

13.5

13.0

12.5

12.0

0.0

15.4

14.6

13.7

12.8

11.6

Average U.S. Light Vehicle Sales Forecasts2012–2016

Five Year Outlook for the US. Auto Industry

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8%

86%

6%10%

86%

4%

Strong growth and prosperity

Steady growth consistent with GDP

Little to no growth

Supplier

OEM

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Over the next five years, executives believe Hyundai/Kia and Volkswagen/Audi are the OEMs most likely to gain market share

Expected U.S. Market Share Changes in Next 5 Years

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13% 16% 20%28% 28% 31%

38%

72%

88%66%

47%53% 46%

40%46%

59%52%

24%

10%27%

40%31% 34% 32%

26%

10% 10%

7%

Hyundai/Kia

2%

VW/Audi

4%

FordBMW/MiniToyota/ Lexus

Chrysler/ Dodge/Fiat

GMHonda/ Acura

Nissan/InfinitiMercedes

100%

Gain ShareMaintain ShareLose Share

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Executives see a bright future for Chinese OEMs -- forecasting a rate of U.S. market penetration more rapid than historical precedent

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Forecasted Chinese OEM U.S. Share in 2020Chinese OEMs with Greatest Potential to

Capture U.S. Share through 2020

U.S. Market Share of Korean OEMs

was 5% as recently as 2008

1%

2%

3%

4%

6%

9%

11%

19%

22%

24%

GAC

ChangAn

JAC

Greatwall

Dongfeng

FAW

BYD

Chery

SAIC

Geely

10%11%

32%

47%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

12%+8%-12%4-8%0%-4%

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Alternative powertrains will gain share -- however, adoption rates are seen as being extremely sensitive to government support

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Expected U.S. Market Share of Alternative Powertrains by 2020

No Government Support

11

Continued Government Support

18%

5%

7%

14%14%

29%

13%15%

25%

5%

% of Responses

30%

20%

10%

0%%

30

% +

25

%-3

0%

20

%-2

5%

15

%-2

0%

10

%-1

5%

5%

-10

%

0%

-5%

13%

0%1%4%

12%

20%

50%

5%

45%

15%

35%

25%

% of Responses

50%

40%

30%

20%

10%

0%%

30

% +

25

%-3

0%

20

%-2

5%

15

%-2

0%

10

%-1

5%

5%

-10

%

0%

-5%

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Of the various powertrain choices, respondents are most confident about the long-term prospects of full hybrid & mild hybrid

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Current Confidence in Long-TermProspects of Alternative Powertrains vs. 2011

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Expected Leading Alterative Powertrain in 2020

70%

65%

45%

29%

25%

Less Confident More Confident

Fuel Cell Electric 75%

Battery Electric 71%

Plug-In Hybrid 55%

Mild Hybrid 35%

Full Hybrid 30%39%

14%

25%

12%10%

40%42%

12%

2%4%

Full HybridMild Hybrid

Plug-In Hybrid

Battery Electric

Fuel Cell Electric

Supplier

OEM

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Specific to their own companies, both OEMs and suppliers alike are forecasting strong revenue growth for 2012, however, capacity may be an issue

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Current Capacity Situation

55%

36%

9%

34%

51%

15%

Comfortable with current capacity

Capacity constrained

Still have more capacity than

market demands

Planned Growth in 2012 U.S. Revenue

23%

29%27%

21%

0%0%

14%

18%

40%

24%

2%2%

6%-10% Greater than 15%

11%-15%

Negative Growth

No Growth

1%-5%

OEM

Supplier

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In light of more advantageous supply-demand dynamics, OEMs & Suppliers describe themselves as being disciplined about pricing

April 8, 2023

Current Pricing Approach – OEMs

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Current Pricing Approach – Suppliers

Will OEMs maintain this discipline if

market dynamics and supply greatly

exceeds demand?

4%

19%

53%

24%

Significantly increasing use of incentives

Opportunistically increasing incentives

Holding the line on incentives

Significantly reducing use of incentives

58%

39%

3%

Maintaining strong pricing

discipline

Opportunistically using pricing as a lever to win

program

Aggressively using price to win business

These results suggest a dramatic departure from recent behavior

where filling the factory was the norm

for many suppliers

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31%

9%17% 15% 17%

23% 24%

29%

39%50%

44% 48%

42%

50%52%

32%41%

21%37%

31% 28% 26%43%

29%30%24%

17% 15% 9% 9% 9% 9% 9%

11%8%9%11%

30%

2%2%2% 100%

Engineering/ R&D

2%

MarketingSales

6%

Product Pipeline

Current Product Portfolio

Ability to Innovate

Retail Network/ Footprint

Financial Position

2%

Customer Experience/ Relationship

2%

Cost Position

4%

Compared to competitors, OEMs view cost position, customer experience, and financial position as their most significant areas of weakness

Perceived Performance Relative to Key Competitors – OEMs

Strong Performance 

Good Performance

Performance Matches Competitors

Poor Performance  

Very Poor Performance 

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23% 27%14%11%

27% 35%

35% 33%

49%38%

55% 47%54%

44%48%

30% 28% 30%41%

31% 33%26%

21%13% 12% 10% 10% 10% 6%

8%11%11%6%

6%2% 100%

Customer Base and

Relationship

Current Product Portfolio

Engineering/ R&D

Product Pipeline

Financial Position

Ability to Innovate

Sales

2%

2%

Cost Position

2%

Marketing

4%

5%

Suppliers meanwhile cite their sales / marketing capabilities and cost position as their most significant areas of weakness

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Perceived Performance Relative to Key Competitors – Suppliers

16

Strong Performance 

Good Performance

Performance Matches Competitors

Weak Performance

Very Poor Performance

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Respondents cite In-Vehicle Connectivity & Entertainment as the technology most likely to see widespread adoption over the next five years

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Technologies Most Likely to See Widespread Adoption in the Next Five YearsPercentage of respondents that ranked a technology in their top 3

17

85%

52%52%48%

42%

20%

1%

In-Vehicle Connectivity and

Entertainment

Passive Safety Systems

LED LightingComposite/Light(er)-weight

materials

Active Safety Systems

"Green" Material Usage

Other

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38% of OEM respondents say they intend to create theirown platform for integrating digitization and connectivity Plans for Integrating

Consumer Digitization / Connectivity

38%

24%

17%14%

7%

Outsure to consumer electronics players

Create own platformAllow suppliers to develop platform

Allow consumers/ external system to plug into car

Establish a flexible platform in a consortium

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This may be a potentiallyrisky strategy, given that personal technology devices have far shorter product cycles than

automobiles -- witness the ubiquity ofGPS systems on mobile phones -- and that a single family may have multiple drivers who

share multiple cars

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2011 will sadly be remembered for the devastating earthquake & tsunami in Japan, an event which impacted ~55% of OEMs

April 8, 2023

Production Impact of the Japanese Earthquake and Tsunami

“Other” includes higher margins as a result of

shortages and needing to retrofit vehicles after sale

19

4%

21%

34%

26%

2%

13%

3%

7%

35%

21%

8%

26%

OtherSignificant ImpactSome impactNo Impact- avoided interruptions through

redundancies

No impact- had safety stock

No impact- supply chain not affected

Supplier

OEM

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Contingency planning is viewed as the most important action for preparing for such “Black Swan” events, but to date, action has lagged

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68%

59%

52%

45%

32%

26%

15%

3%

51%

42%

29%31%

19%19%

12%

4%

Worked with suppliers on contingency

planning

Identified risks and developed

contingency plants

Moved to localize

supply base

Moved to increase the use of dual

sourcing

Built redundancy into sourcing

Created new org. structure

for risk management 

No action taken

Other

Action Taken

In Top 3 Important Measures

Important Preparatory Steps for “Black Swan” Events and Steps Actually Taken by Respondents

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In summary, these results suggest a few forces coming together to help shape the industry in the coming years …

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Shifting Demand Centers

Re-Emergence of Fundamentals

US remains the most profitable automotive market in the world, but growth is occurring more rapidly in emerging markets

Requires automakers to preserve their competitive position in developed markets while also funding the investments necessary for longer term growth

Increases the importance of gaining a much greater understanding of the unique requirements, dynamics, and needs of emerging markets and positioning your company to be able to compete with fundamentally different economics and possibly against different competitors

The US auto recovery demonstrates that with stronger balance sheets, legacy liabilities shed, debt reduction, product/capital investment, this industry can return to consistent levels of profitability at lower annual sales volumes

The industry clearly has expressed a very sober, collective understanding that it needs to grow smartly -- namely not let capacity grow faster than natural market demand

This has been a product led renaissance and there is strong confidence in the portfolio Similarly suppliers are unwilling to cede leverage in their relationship with OEMs and are

working to stretch existing production capacity further, postponing new capacity A new normal is emerging with an emphasis on building brand equity with consumers,

improving the experience, continuing to improve the cost position, and competing globally

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Powertrain and Technology Uncertainty

… forces continued

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The unfortunate events of the Japanese tsunami and floods in Thailand brought home the limitations of a lean global supply chain to Black Swan events

Actions taken in response seem highly appropriate given what happened – assess the damage, weigh future events and probabilities, work with suppliers to be better prepared, build new organizational capabilities, etc.

We wonder though if the industry is really prepared for the next Black Swan event or were these actions “once and done” and will this be less prominent of an issue as time goes by?

There is also a strong view that improvements in internal combustion engines are still possible and can generate meaningful increases in fuel efficiency

The adoption rate of alternative powertrains is highly dependent upon government support, fuel prices and availability, and OEM/supplier willingness to make investments– Led by full and mild hybrids

– Still skeptical about the potential of full electric and fuel cell vehicles The industry is on the cusp of very significant technological changes, especially in vehicle

connectivity that could result in creating real innovation in personal mobility These will require significant incremental investments and making “bets”

Inter-Connected Supply Chain

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Q&A

Booz & Company 24April 8, 2023

SCOTT L. CORWINVice President

Booz & Company (N.A.) Inc.101 Park AvenueNew York, NY 10178Tel +1 212 551 6578Fax +1 212 551 6732Mobile +1 917 853 3735scott.corwin@booz.comwww.booz.com

BRIAN E. COLLIEVice President

Booz & Company (N.A.) Inc.225 West Wacker DriveSuite 2270Chicago, IL 60606-1228Tel +1 312 578 4637Fax +1 312 578 4668Mobile +1 312 498 2704brian.collie@booz.comwww.booz.com