2016/12

Three key trends in

普华永道思略特管理咨询（上海）有限公司 PwC Strategy& Three key trends in automotive will fundamentally transform automotive industry

Digitalization

Electrification

Changing mobility

Source: Strategy& analysis

Strategy& | PwC 1 “互联网+”顶层设计 “Internet +” high level design Digitalization will disrupt the whole value chain from R&D and production to sales

Value chain of traditional auto industry Value chain changes Marketing R&D Sourcing Mfg. Dealership & service • Linear value chain • Focus on products/hardware • Vehicle as a means of transportation • Multi-level distribution structure Value chain of digital auto industry • Mainly finished products

R&D • Multi-dimensional connectivity in value chain

Mkt & Mfg. • Focus on service/software service Real time • Vehicle as a consumption scenario connecti • Client relationship without vity intermediary • Customized products/services in Supply Product small scale chain

Source: literature research; Strategy& analysis

Strategy& | PwC Daimler, as a pioneer, optimized its value chain via digital innovation

Smart R&D： • Various Apps, infotainment, automation and battery techs have been developed by 150 digital engineers as well as prototype designers in the R&D center in Silicon Valley

Smart marketing service: Smart manufacturing： • Restructured the marketing • Global unified component department, with the steering R&D standard and system framework, committee at HQ consisting of as well as auto control module sales, technicians for in-car info • The standard module is applied and entertainment systems and IT into all new robots and staff production processes. And Marketing/ • Define customer habits and Mfg. digital simulation can be applied lifestyle & mobility drivers with big service into the whole process from data mining stamping to final assembly

Supply Digital auto products： Product • The current intelligent connectivity chain Intelligent supply chain： includes lifestyle service, infotainment and • Daimler piloted auto transportation safety service system in Hungary, which transferred • Self-driving concept car is to be launched pre-sorting components boxes to by CES in 2016 production line

Source: literature research; Strategy& analysis

Strategy& | PwC 互联网研发平台 Digitalization applied in R&D

Influence of digitalization R&D in Value of digitalization in R&D industry chain

• Reduced cost • New products • New value chain/system • Shortened time line Improved Change/adapt in design • Portfolio management efficiency of production combination • The pressure form R&D constant technical evolvement Fire-new digital business • Virtual mode • Fast verification prototype Minimized R&D Curtail publicity • … The digitalization of products design risk & service process • Platform Digitalization & integration of • Joint R&D value chain • Cross-functional R&D • Fast prototype design team • Digital analog(DIAN) Strengthened • IT security • --- engineering Digital capability capability • Interface, etc.

What contributions R&D can made for digital transformation (in culture, partnership…)?

Source: literature research; Strategy& analysis

Strategy& | PwC Open R&D system pushed by digitalization will change the R&D mode essentially, involving every stakeholders in the process

Quality • Test specification • Tool design • Packaging / labeling specifications • Consumer goods specifications Suppliers Distributed manufacturing

manufacturing Purchasing • Operational training requirement • Qualified supplier • Manufacturing path • Selected components • Work instruction • Process configuration R&D • Manufacturing feedback Engineering Analysis • Compliance specifications • BOM specifications Corporation • Compliance reporting • BOM specifications Products development Supervision • Design specifications Model & platform • Service parts catalogue • Model • Service manual • Draft • Training manual • Simulation • Serve BOM Service • Event reporting Product • Design feedback management Marketing • Products concept • Proposal • Products requirement • Customers’ demands • Products cost • Market demands Design partnership Customers • Revolution demands Source: literature research; Strategy& analysis • Manual and data sheet

Strategy& | PwC Digitalization changed the interactive mode of information & material flow on both enterprises and the whole value chain

1 2 Supply and demand plan of E2E Management & communication of supply chain • Leverage cloud-based planning platform to realize system- • Centralized supply chain and performance management based plan and vertical corporation of E2E • Analysis, predictions and business principles driven by data • Real-time planning, execution, optimization, Scenario have been optimized Planning • Socialized supply chain, communication and customer interaction 6 3 Supply network of digitalization Effective order management Supply chain eco-system • Systematic supplier inventory • Real-time order confirmation Vertical & comprehensiv e planning platform management/autonomous by self-owned supply chain replenishment network • Remote order process • Remote order process • Comprehensive R&D Logistics & Warehouse • Fully real order exposure • Joint order management Supplier Production Customer s • Repertory visualization Planning Supplier network Customer network • 3D printing (spare parts ) Purchase order Internal demand Consumer order 4 • Purchasing platform Intelligent warehouse • Classification and selection, 5 automatic packaging • Logistic system connecting Logistics visualization of E2E to warehouse • Logistic I&E records and tracking capability of the Internet of things • Cross warehouse • Supply chain visualization and event processing platform, “Single source of truth ” visualization and • Detection and identification of initial risks and event processing tool optimization

Source: literature research; Strategy& analysis

Strategy& | PwC Smart supply chain Convert functional silo into E2E supply chain network though horizontal integration

Traditional value chain Integrated value chain

Customer Distributor Plan Plan Plan

Supply chain supplier Production logistics Customer Control center

Order & Order & Order & OEM Confirmatio Confirmatio Confirmatio Supplier n n n

Transparency Limited visualization of supply chain Complete supply chain panorama

Delayed effect of information in supply chain Simultaneous information for all members in Synchronism members the supply chain

Extendibility Limited visualization impedes meaningful Deepened cooperation contributes to more /cooperativity cooperation internal value of supply chain

Customer in the end should be contorted when Quick supervision on the requirement Flexibility the information is needed in logistics changes of customer in the end Real-time response in the process of planning Delays by different planning cycle and response Response and implementing(response of requirement by different layers changes from different levels)

Strategy& | PwC 互联网+产品 Integrate consumer electronics in vehicles, promoting their digital experience

The mix of digitalization and automation

Reduced/optimized Lifestyle & fashion travel time

Individual’s demandDevice & display Ownership/financing lease/renting/sharing Comfortable feature Shopping Communication

Internal/external Family Entertainment/ sensor/arrester infotainment

Mobile device Customers’ digital Intelligent and Integration of smart grid experience connected vehicle Tourism & activity Driving Food & healthy experience Mobility cost Customers w ant the personalized digital experience OEMs w ant to be closer to can be applied in vehicles via end customers, especially the easiest w ay (like the via digital channel CarPlay by Android)

Source: literature research; Strategy& analysis

Strategy& | PwC 互联网+产品 Software, hardware and services will experience revolution with the development of vehicle digitalization

In-car Outside the car

Camera Limousine and vehicle Sensor Radar Lidar Vehicle diagnostic services Image processing communication service

Storage and support External Image processing software Customer service service of customer and management (Sensortech.) vehicle data

Analytic engine Central chassis Communication Engine control control unit module module

Electric Electric Engine for Data aggregation service Electric steering throttle Internet of (application server) Engine bay Engine parking brake

systems control vehicles (control (control tech.)

Data communication module service device Wireless OEM’s global service (GPS, transportation, traffic Interconnectivity police, toll station) External provider of Multimedia infotainment and service Head-up display Dash board windshield unit Global service

Dash Dash board External and internal Human–Machine Interaction softw are supplier (Input/feedback) （ haptic feedback, sound, Gesture control ）

In-car hardware In-car software Software and service outside the car Service department of the 3rd Wireless device party Strategy& | PwC Three key trends in automotive will fundamentally transform automotive industry

Digitalization

Electrification

Changing mobility

Source: Strategy& analysis

Strategy& | PwC 1 With the prevailing of EV, great changes are taking place along the whole value chain of China’s NEV industry

Status quo and future of China’s NEV industry Battery & Charging infrastructure Production & Sale of components operation & battery 1 2 finished automobile 3 manufacturing recycling • China’s battery and motor industry • Local brands have had large presence in • Current existing public charging facilities is is developed enough w ith the NEV already w ith diversified business not reasonable w ith low use rate and simple supply chain and capacity needed models, e.g. e-commerce, leasing, etc. sources of investment. for mass production Situati- • Now international brands have limited • The government policies encourage on • Despite the technological gap w ith market share in NEV segmentation of charging facilities global peers, Chinese companies investment to solve practical issues. • Non-traditional OEMs and social capital are developing fast w ith scale effect are entering NEV market • Along w ith the w idespread use of NEV, around the corner for leading demands of dealing and recycling w aste players battery are urgent.

• According to current new energy • Foreign players’ increasing investment • More private capital and OEM joined the regulations, the BEV w ith in in China’s NEV market w ill accelerate investment of facilities, construction, and comparable technical functions w ill the localization of EV product, resulting operation. The infrastructure netw orks of still be priced 20%+ higher than in fiercer competition connectivity and w in-win cooperation traditional cars, supposing established w ith existing gas stations and Trend electricity cost is 30%-40% low er in • Under the overheated competition and other facilities introduced more business 2020. It w ill take 5+yrs to break investment, the new entrants might models and technology innovations. even for a NEV ow ner, w hich have to exit w ith their underestimation • With more strict rules and policies, attentions seems lackluster if w ithout of the complexity and investment in tow ards battery recycling are increased. OEM, subsidies auto manufacturing battery companies and professional enterprises of battery recycling w ill have rapid grow th.

Source: literature research; Strategy& analysis

Strategy& | PwC 1 Inevitable price fall-The price of Cell and Pack will decrease ~50% by 2020, which will pose great threat for battery industry

Current Price Situation Target Price Cell Pack Price of Pack Year Co. Customer Yuan/Wh Yuan/Wh (Yuan/Wh)

2.2-2.4 2016 1250 1850 Pride（CATL） BAIC C10 （2.6-2.7） GuoXuan High- BAIC M307 1.6 Tech 2017 1200 1800 Tenpower BAIC M307 1.1 2018 1100 1600 Zhuoneng BAIC M307 1.1-1.2

Wina Foton PX/2T 2.0 2019 950 1300 EVE Huatai 1.8

Coslight Yogomo 2 2020 850 1100

Wanxiang Haima 2.1 2021 750 950 Guoneng/Tianjin Tongjia 1.8

Source: literature research; Strategy& analysis

Strategy& | PwC 1 More frequent integration of industry chain-battery company also cooperates with OEMs in Pack field to target customers

Types Company Integration of industry chain From raw materials such as lithium, battery, motor, electronic Aggregation BYD PACK Supplier control, pow er assembly to the vehicle Vehicle- 10 lithium battery production line have been built with a investment of Lifan battery 1.548b RMB. Power battery production volume id 6GWh annually • Self-ow ned BMS and PACK team CATL 电池企业Battery Company • JV w ith BAIC called Pride in PACK field 20% • New PACK in Shanghai w ith SAIC A123 整车厂OEM Battery-pack 20% 60% Sunw oda • Qida(JV) PACK in Wuhu w ith Specific third party Lishen/Opti • Self-ow ned PACK site 专业第三方PACK CompanyPACK公司 mumnano • 300m RMB share of BAIC accounting for 3.76% • Joint effort on R&D center in Silicon Valley • Joint establishment of a 10b AH pow er battery plant in Laixi, Battery-up & Guoxuan Qingdao dow nstream High-Tech • Partnership leasing and charging business w ith 3rd party Specific third party PACK Company • Self-built positive electrode and separator plant w ith an investment of 5b RMB Partnership of B. & 电池-整车企业联合 Wanxiang • M&A Fisker (An American EV company) and plan to reproduce OEM Battery- A123 Karma vehicle 10% De-Fluoride Invested 150m RMB in Hongxing Auto, acquiring a share of 72.5% 专注动力及储能的第三 In addition to negative electrode material business, raise funds into The third party PACK Shanshan 50% pow er battery, electronic control and other fields 40% 方PACK厂 • Deep footprints in Lithium resources, lithium salt, precursor Raw material materials, cathode materials and other fields 小电池转做动力的PACK Co. from small Zhonghe -Battery • Provide NCA / NCM materials through their ow ned Shenzhen PACKbattery公司 to power Tianjiao Citic Guoan Launch battery plants

Source: literature research; Strategy& analysis Data source: EVTANK/ companies’ public data Strategy& | PwC 1 OEMs continue to deepen control of the PACK and batteries

OEM NEV strategy Battery supplier With PACK business or not BYD / • Self-production • Self-production Planned annual production and • Wuxi Fullsave/Tianjin Jeve/Shanghai • Confirmed cooperation DF sales of 300,000 cars in 2020 Aerospace Power/CATL between CATL and Lishen Planned annual production and • Samsung SDI/SK • Establish Pride with CATL BAIC sales of 500,000 cars in 2020 • CATL/Coslight/Boston • Establish BESK with SK Planned annual production and • Samsung SDI JAC • Deep cooperation with Huating sales of 200,000 cars in 2020 • Lishen/Guoxuan High-tech Planned annual production and • LGC • Establish Shanghai Jiexin with SAIC sales: 200k by own, 400k by JV • Wanxiang A123/Shanghai Jiexin/ CATL Wanxiang A123

• BAK Planned annual production and Zotye • Tianneng /Wanxiang A123/Weineng • N/A sales of 500,000 cars in 2018 /First/Sounddon/Lishen/Boston/ Do-Fluoride Planned annual production and • Establish Wuhu Qida with Chery • Wanxiang A123/Tianjin Jieneng sales of 200,000 cars in 2020 Sunwoda Planned annual production and • N/A, but control planning on its Jiangling • Optimum /Sinopoly sales of 60k-70k cars in 2020 own Planned annual production and • Coslight/Boston/Do-Fluoride • N/A sales of 1,000,000 cars in 2020 Planned annual production and • N/A, but control planning on its Chang’an • Wanxiang A123/LGC sales of 400,000 cars in 2020 own Planned annual production and • BAK • N/A, but control planning on its Lifan sales of 500,000 cars in 2020 • Shandong Hengyu/Cham/ National Power own

Strategy& | PwC 2 According to the medium-term(till 2020) and medium-and- long-term(till 2025) analysis, China’s NEV market will maintain a high-speed development in next decade

Prediction of China 's NEV market sales, • By 2020, driven by the policy will thousand vehicles, 2015– 2025E the CAGR will be maintained at nearly 50% +21.60% • Central and local governments’ Energy- subsidies policies for consumption 4,600 saving and will continue to support the NEV Tech development of NEV industry Roadmap − Since 2015 H2, the government has launched intensive +54.96% 3,900 charging-facilities-related baseline CAFC policies to support the target development of charge-related inverse ancillary industries and 1,730 the consumer charging experience median 1,110 of five • During 2020-2025, affected by forecast the decline in subsidies, NEV 720 market will maintain nearly 22% 460 ing 190 300 agency of the CAGR − With the gradual introduction of government subsidy policies, 2015 2016E 2017E 2018E 2019E 2020E 2025E the market driver will transformed from policies to Proportio product identities n of NEV 1.3% 1.9% 2.8% 4.3% 6.4% 15.0%

Source: literature research; Strategy& analysis

Strategy& | PwC 2 Therefore, we see a great number of new entrants

EV manufacturer Company name background Founders from • Kaiyun, WM, Yudo, Xpeng, Dearcc, NEVS auto industry

• Parts company: Changjiang, Wanxiang, Minth, Loncin, Do-Fluoride、Jiangte Auto parts and

design company • Design company：CH Auto(), Eastone Traditional Traditional

Manufacturer Other traditional • Youxia, Gree, Hanergy, Western Resources, Fangda Special Steel company

Internet Co. in • NextEV, Chehejia auto verticals

Corp. between related - internet and • Hexie & Tencent & , Chery & Pateo & Yidao auto

Crossover

Internet • Letv, Singulato, Baidu driverless car Internet Co. Auto-related background W/o Auto-related background Source: literature research; Strategy& analysis

Strategy& | PwC 3 China government aims to have 4.8Mn charging posts and 120K charging stations in place by 2020

Number of charging posts in China, 2015 vs. 2020 In unit

4,800,000 CAGR：+98% 500,000 Public

159,000 49,000 4,300,000 Private Guidance for Development of EV Charging 110,000 Infrastructure (2015-2020)

2015 Plan 2020

Source: literature research; Strategy& analysis

Strategy& | PwC 3 Private charging post (PRCP): with regulations relating to the PRCP construction, a 1: 1 ratio of BEVs and slow PRCPs is expected in future

Vision of PRCPs in 2020 Charging post installation rate of BEV owners With charging posts W/o charging posts

76.7% 23.3% ~90.0% ~10.0%

2016.8 2020E PRCP installation rate • As of August 2016, installation rate of PRCP (including residential and office space) is 77% • By 2020, the rate of installation of PRCP is expected by 90%~100% – After sales, OEM will install charging posts for owners for free – Gradual implementation of Guidelines in Accelerating Constructions of Charging Infrastructure for EV PRCP power • In 2016, the power is mainly at 3.3 kW, and by 2020, it will be updated to 7kW

Strategy& | PwC 3 Public charging post (PUCP): by 2020, the number of DC charging post will account for 50% of the public charging posts, and power can reach 60 ~ 120kW

Vision of PUCP in 2020 In unit 500,000 DC AC CAGR +35% 250,000

150,000 60,000 250,000 49,000 19,600 90,000 29,400

2015 2016E 2020 planned Ratio of DC and AC charging post • In 2016, the ratio of DC (including both-in-one) / AC charging post is 4:6 • By 2020, , the ratio of DC (including both-in-one) / AC charging post will be 5:5 – Since consumers are more willing to charge with DC posts, DC charging post is better than AC post in profitability – As the public DC charging post is more conducive to promoting the development of EV industry, the government tend to focus on its development DC and AC power • In 2016, semi-public DC post power is mainly at 30-45kW and in highway at 60-120kW; AC post power is mainly at 7kW • By 2020, semi-public DC post power will be at 60kW and in highway at 120kW; AC post power will remain at 7kW

Strategy& | PwC 3 For BEV with short mileage, 60kW charging posts can get 18% IRR per post and pay back in 8 years. Equipment and grid capacity expansion are mainly investment cost

Basic hypothesis After beginning investment（subsidy at 30%）: 121,500 yuan 60kW 30kWh DC (200KM) charging post Equipment cost 42,000 (35%) Grid expansion 58,500 (48%) serve 5.6 cars in average per 7,000 14,000 (6%) (12%) day Construction and installation cost Labor cost and other

10-year benefit Use Average annual EBIT IRR Payback Charge 24kWh one car per person in ratio revenue period average (30*80%) 13% RMB 39,245 42% 18% 8 years Earn 19.2 yuan per vehicle Earn 107.5 yuan one post per day

Strategy& | PwC 3 At same power level, with the rise of BEV mileage, the financial performance of existing charging posts will improve for higher use efficiency

Effect of 400KM long mileage EV penetration on benefits with 60kWh Charging posts

IRR（%) Payback period (year) Charging use rate Average single-charge duration (minutes)

8 51

45 44% 40 Continue operating existing charging 35 ✓ posts and increase 30 penetration through 25 long-mileage EV to improve use rate, 5 20% 18% which is more in line with operators’ interests 10% 4

0% 20% 40% 60% 80% 100% 400KM long-mileage car proportion (%)

Strategy& | PwC 21 Three key trends in automotive will fundamentally transform automotive industry

Digitalization

Electrification

Changing mobility

Source: Strategy& analysis

Strategy& | PwC 1 Fast growing economy and urbanization lead to growing mobility demand, yet also pose challenges to infrastructure & environment

Fast growing economy Traffic jam

Continuous urbanization Pollution

Insufficient infrastructure Traffic and license plate restriction

Source: Strategy& analysis

Strategy& | PwC More types of vehicles will be active in the future to meet mobility needs in different cities and of different travel scenarios

General public Compact public Personalized transport transport transport Private vehicles Sub-prime vehicle • Metro, bus, etc. • Minibus, car • Cab, e-hailing, car • Private vehicle • Bicycle, electric pooling sharing scooter/bicycle, etc.

Source: Strategy& analysis

Strategy& | PwC Firstly, different types of cities and their layout will influence mobility options

Illustrative: Future mobility options by city tier

Compact General public public Personalized Private Sub-prime transport transport transport vehicles transport • Cab, e-hailing, • Bike, e-bike / • Metro • Minibus, car car rental, car • Private Scooter • Bus, etc. pooling sharing vehicles

Mega-City (Central Urban) (High population density; high income)

Mega-City (Suburb) (Medium population density; high income)

Small cities (Medium population density; medium income)

Countryside (Low population density; low income)

Source: Strategy& analysis

Strategy& | PwC Secondly, mobility options are also influenced by different travel scenarios

Illustrative: mobility options (mega cities example) Mobility scenarios High Mobility frequency Low

Daily life Vacation Road Commute （Shopping, Business trips Short Outing recreation, etc.） Trips

General public transport

Cab

e-hailing

Car Rental

Car sharing

Private vehicle

Sub-prime transport

Most popular among mobility options Least popular among mobility options Source: Strategy& analysis

Strategy& | PwC People have various mobility decision criteria – different mobility options have different advantage along the criteria

Experience Ratings

Mobility selection criteria Public Transport Car rental Car sharing Cab E-Hailing Private Vehicles

Time saving

Planning Flexibility

Cost saving

Comfort

Transfer convenience # of steps needed from A to B

Car use convenience Parking, return

Lower Higher Source: Strategy& analysis

Strategy& | PwC Diversified mobility needs will foster diversified business models which are improved and innovated by new technologies

Examples: technologies to improve & innovate mobility business model

Precise and Smart Navigation support VR/AR by VR/AR map and wearables

Autonomous driving as last mile Autonomous solution, e.g., pick-up and return rental Driving cars, valet parking

On-demand optimize routes of public transportation fleet; Dynamically improve operation and utilization Big data of shared cars

Automatically set mobility schedules and set AI vehicle environment according to estimated individual conditions …

Source: Strategy& analysis

Strategy& | PwC Business Model Example (1) – Car sharing’s feasibility is likely to improve

Scale economy under China context Profitability outlook of car sharing • China market and consumer characteristics may help scale up revenue • Car sharing has advantage in multi-lag, short lay over, mid to long distance trips (EV drive range to be solved), e.g., High Population Large City Area Low Vehicle High Ownership of business tour, sales visits, weekend Density Ownership Driver License but License Plate outing Restriction • At the same time, car sharing may take mobility shares from traditional car Population Density (‘000 people / 10 000 sqm) rental

22 • Big data technology may help improve car sharing utilizations, operations efficiency and control costs

9 9 • Non-OEM backed car sharing may profit earlier 4 4

Tianjin Shanghai Beijing Munich Berlin

Source: Strategy& analysis

Strategy& | PwC Business Model Example (2) – Sub-prime mobility vehicle is likely to spread fast in China to improve mobility efficiency

Sharing of sub-prime mobility vehicles Case: Ford foldable smart e-Bike

Travel Mobility distance Scenarios MoDe:Me：Personal Mobility Use • Can be folded to fit in • In Mega-cities: the trunk, brought to 1~3 km Supplementary subway. Max speed: Commuting; 25km/h Exercise & Entertainment

MoDe:Pro： • In Small cities: Commercial Mobility Full purpose Use 3~5 km and mainstream vehicles • Suitable for courier and cargo, max drive range: 35km Notebike

Source: Strategy& analysis

Strategy& | PwC Business Model Example (3) – Compact Public Transportation may be promoted to improve mobility efficiency and accessibility

Compact Public Transportation model Case: Panda Public Mobility Solutions

• Integrate big data from public transportation, taxi, e-hailing and infrastructure services, analyze and predict Overview population mobility demand • Leverage big data to dynamically design the routes of Ford Transit fleet as convenient and • Optimize fixed routes of public flexible public transportation means transportation vehicles Applied Scenarios • Open dynamic, real-time on-demand • Peak traffic time in mega cities compact public transportation services, • Low demand day time relieve traffic jams of mega cities and • Night time with insufficient city public improve accessibility in inter-city or other transport low demand areas

Source: Strategy& analysis

Strategy& | PwC Business Model Example (4) – Inter-modal transportation may be developed to improve mobility efficiency and lower cost

Example: bike sharing + car sharing Example: car sharing + subway Inter-modal transportation

• Multi-Modal mobility companies cooperate to design connection points and offer seamless transition across different Jintai Xizhao to South Chaobai River to Tuqiao mobility modes, thus improve Community of Hu Jia Lou metro station (1.3km/7min/RMB 2yuan) (16km/30min/RMB 23yuan) mobility efficiency and lower cost

South Community of Hu Jia Lou to Tuqiao metro station to Sihui Wangjing SOHO metro station (12km/30min/RMB 20yuan) (18km/30min/RMB 5yuan)

Source: Strategy& analysis

Strategy& | PwC Thank You!

• This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. • © 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see • www.pwc.com/structure for further details. Strategy& | PwC