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Mike Hawes, Chief Executive, SMMT John Leech, Partner, KPMG

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SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 1 SMMT Member Survey – The Results

Mike Hawes, SMMT

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED SMMT, the ‘S’ symbol and the ‘Driving the motor industry’ brandline are trademarks of SMMT Ltd UK Automotive: diverse, significant, successful

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SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 3 An export-led industry ...

In 2013, 77.3% The EU of vehicles built in the UK were accounted for exported 49.2% of UK- built vehicle exports in 2013

Top 10 export destinations outside the EU China 10.0% Russia 9.5% US 9.2% Norway 3.4% South Africa 2.3% Switzerland 1.6% Japan 1.3% Australia 1.2% Israel 1.2%

... relevant to the debate on Europe

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 4 SMMT member survey – a broad industry view

• 130 full responses to voluntary on-line survey (of 438 full members) • Respondents reported £68bn turnover and employ 150,000 • Weighting - one response per company/group

Type of respondent

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 5 Being in the EU is positive for members’ businesses

• 69% said EU membership was positive or very positive • Key attributes were 1) access to single market, 2) movement of people and 3) having common standards/regulations on vehicles/components

What is the current impact of UK membership of the EU on your business?

Very negative, 2.1% Don't know, 3.5% Negative, 6.9% Very positive, No 19.4% impact, 18.8% Positive, 49.3%

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 6 Automotive business would want UK to stay in the EU

92% of automotive companies said it was more beneficial for their business for the UK to stay in EU, the majority with reform

If there were a referendum on the UK's continued membership of the EU tomorrow, what result would be best for your business?

Don't know, Leave, 4.6% 3.1%

Stay in, 33.8%

Stay in with reform, 58.5%

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 7 Impact of leaving the EU would be negative

• 45% said negative in short term • Rising to 70% in medium/long term • Perception on their business of leaving also negative

If the UK left the EU, what would be....

very positive positive no impact negative very negative don't know

The immediate impact on your business

The medium to longer term impact on your business

The perception of your business by suppliers, customers and others

0% 20% 40% 60% 80% 100%

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 8 Impact of leaving the EU on investment

• 44% said no impact on their UK investment, but 41% negative • On investment elsewhere in the EU, 43% no impact, 20% negative

If the UK left the EU, what would be impact on investment opportunities for your business...

very positive positive no impact negative very negative no answer/don't know

Impact on UK investment decisions

Allocation of new investment to sites elsewhere in the EU

0% 20% 40% 60% 80% 100%

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 9 Impact of leaving the EU on UK auto sector

• Most negative responses were around access to single market and size and diversity of foreign investment. • Whilst most positive attributes cited around competitiveness of UK market and access to non-EU markets

If left the EU, what do you believe would be the impact on auto sector in UK for…..

very positive positive no impact negative very negative don't know

The size and diversity of foreign investment in UK businesses

Ease of access to EU automotive markets to sell and source products and services

Ability to access EU-wide private and public funding

Access to skilled workforce

The competitiveness of the automotive sector in the UK

Ability to influence industry-wide standards and regulations

Ease of access to non-EU markets to sell and source products and services

0% 20% 40% 60% 80% 100%

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 10 Priorities for reform

• Overall all respondents said better consistency of applying rules across MSs, budget reform and a stable and successful Eurozone important • VMs and component suppliers also said better regulation • Vehicle distributors/retailers also said balance industrial/environmental policy important

On a reform agenda, what do you believe should be the government’s policy priorities? very important important neutral not imporant don't know

Better consistency in the application of EU rules by all member states

Financial reforms for a stable Eurozone

Reform of the EU budget

More efficient and cost-effective EU governance and institutions

More emphasis on free trade and global market access

Lead on global harmonisation of vehicle standards and testing regimes

Better balance between EU industrial and environmental policies

Better regulation agenda

Completion of the Single European Market for all products and services

0% 25% 50% 75% 100%

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 11 The UK Automotive Industry and the EU

An economic assessment of the interaction of the UK’s Automotive Industry with the European Union

Summary of findings 22 April 2014

John Leech, Partner, KPMG

Introduction Objectives of the study and approach

Objectives Approach

This report is an independent Our fieldwork comprised the following: study commissioned by the ■ Twenty interviews with UK and global management of automotive manufacturers and SMMT their suppliers. The primary objective is to ■ Desktop research and analysis of: evaluate how the UK automotive industry currently – Publicly available information relevant to the objective of the study, operates within EU and the – Non-public information including vehicle sales and production forecasts and benefits and challenges that information received from SMMT, certain automotive manufacturers and suppliers. EU membership presents ■ Review of the results of a SMMT member survey. ■ For clarity, this study is based on the current market structure and does not include The following companies were interviewed: considerations or projections of scenarios of the UK exiting 1. BMW Group UK 9. MIRA or staying in the EU. 2. Bosch UK 10. Nissan UK 3. Ford of Britain 11. Roadlink International Ltd 4. GKN plc 12. Rubery Owen Holdings Ltd 5. General Motors UK Limited 13. Schaeffler (UK) Ltd 6. Honda Motor Europe Ltd 14. Toyota Motors Europe 7. Jaguar Land Rover 15. Unipart 8. McLaren 16. Volkswagen AG

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 13 Report structure The report is a concise, fact based report underpinned by a diverse mix of case studies, quotes and industry examples

Introduction by UK Automotive Access to the International trade Mike Hawes (SMMT) industry snap shot EU market

EU regulatory Driving innovation Free movement Closing remarks by developments change of people and skills John Leech (KPMG)

The automotive industry is highly globalised and integrated within the EU

■ Large, global volume car manufacturers have organised their R&D and production networks to serve their major markets. ■ For example, Nissan manufactured over 500,000 cars at its Sunderland plant in 2013. 19% of this was sold domestically in the UK, 71% of these were exported to the rest of Europe (including Russia) and 10% exported to rest of the world.

Nissan’s Investment Decision Framework

Plants within the Renault Nissan Alliance compete for new model allocation based on efficiency and cost competitiveness.

• Nissan’s Sunderland plant competes with other Renault plants in France and Spain as well as other Nissan facilities in order to secure “We build cars for Europe in the UK.” future model allocation. Chief Planning Officer, Nissan • The final allocation decision is based on economic grounds.

Suppliers follow OEM investment decisions which effectively define the supply chain geography ■ For example. suppliers have increased capacity following JLR’s announcement to set up a new engine factory in Wolverhampton. ■ One of such suppliers is BorgWarner, who is setting up a plant in Bradford to produce turbochargers that will be supplied to JLR’s engine factory.

GKN Driveline - Illustration of an integrated supply chain

A typical driveline system produced by GKN incorporates specialist parts largely from the rest of the EU GKN sources specialist forged parts from Spain, Italy, France and Germany which are then assembled at GKN Driveline’s factory in the UK and supplied to UK and EU OEMs.

Forging Inner Forging Tripod Forging Inner Forging Tripod Race Cage Joint Race Cage Joint

Joint Forging Joint Joint Joint

Ball bearing Tripod Tripod

Pan European Ford Stage Location EcoBoost engine development process EcoBoost engine • R&D, engine design and development. design • Inward/outward flow of engineering Ford’s operations in the UK are part and development Dunton, UK expertise largely between UK and EU.

of an interconnected and interdependent supply chain • Engineering for engine installation into network across Europe and the vehicles. world Vehicle engineering Cologne, DE • Inward/outward flow of engineering • Ford in the UK manufactures expertise largely between UK and EU. approximately 1.5 million engines, with Dagenham supplying Diesel engines for all of Ford in Europe. Bridgend, UK Cologne, DE Engine • EcoBoost engine manufacture.

manufacture • Components sourced mainly from EU. “We see Europe as a Single Market and we

spread our capabilities across the region.” Valencia, ESP Craiova, RO Ford

• Engines are supplied to all of Ford’s Vehicle Valencia, ESP Cologne, DE Craiova, RO production vehicle assembly plants in Europe and also exported to rest of the world.

Kocaeli, TUR Saarlouis, DE

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 17 Chapter 3 – International Trade Benefits from the EU’s scale in trade negotiations

Significant trade opportunities with non-EU markets

■ UK exports vehicles to over 100 countries (50% to non-EU markets). ■ Many of UK-built premium and luxury vehicles are exported to emerging markets.

However, growth is impeded by protectionism and trade barriers ■ Emerging markets have introduced barriers to promote investment in their home countries. ■ 154 new tariffs and restrictive measures were identified by the ACEA in the year to June 2013. – For example, Brazil’s 35% import tariff and subsequent Inovar-Auto programme. This reduced EU car exports to Brazil by 11% in 2013. – Similarly China and India also impose high import tariffs for vehicle imports. For example, the Range Rover Evoque (Diesel, 2,200cc) would currently attract a total of 51% import tariffs, sales and consumption taxes in China and a 125% import tariff in India. ■ The UK does not have the critical mass to negotiate on a global basis. “Non-tariff barriers such as different The EU acts on behalf of its member states to negotiate FTAs on a global basis regulations and standards add over 20% to the cost of trading between the ■ 30 free trade agreements have been successfully negotiated by the EU. EU and US. A successful TTIP would ■ Advanced discussions with a number of key countries including USA, Brazil and India. significantly reduce this.” ■ The ongoing Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations with the USA Executive Director, Government Affairs if successfully concluded would reduce tariffs and create mutual recognition of standards. Ford, Europe ■ This could boost UK vehicle production by 7% and significantly reduce the cost of trading.

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 18 Chapter 4 – EU Regulatory Developments Importance of common EU regulation to the UK industry

Common regulation and standards are important for manufacturers to compete across a single EU market ■ Harmonisation of regulations and standards removes cost and complexity of conformance. ■ The EU will remain the most important single market for vehicles manufactured in the UK for the foreseeable future and the rules and regulations that apply to companies selling in the EU have a substantial impact. The UK, therefore, needs the ability to influence regulations to be appropriate for structure of the UK industry ■ The following are good examples of where the UK has been able to influence the regulation that is appropriate to the unique structure of the UK automotive industry.

CO2 • The UK played a key role in shaping the EU CO2 regulations to ensure it was appropriate for niche and small volume manufacturers, without compromising the environmental objectives of the legislation. “If we do not participate, then the EC SSTA • The UK was able to influence the EU to ensure Swiss authorities accepted standards are all set in Small Series Type Approval (EC SSTA) vehicles without additional tests, ensuring extra costs were not placed on low volume manufacturers. Europe...Europe has a voice on the global stage and it is incredibly Electro- • The UK has driven the process in creating awareness and achieving important to be engaged in Europe Magnetic necessary temporary derogations that balance the policy’s health and Field safety objectives with the cost of compliance for companies. and amplify what is important to the Directive UK automotive sector.” Working • The UK negotiated flexibility in the application of this directive which has Chief Executive, GKN Time enabled flexibility and efficiency for manufacturers and employees. Directive • The individual opt out is an integral part of the UK’s flexible labour market.

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 19 Chapter 4 – EU Regulatory Developments Influencing EU and global standards to benefit UK industry

The EU can be used as a platform to amplify issues that the UK consider to be important for its industry

■ Automotive standards vary globally with most large automotive manufacturing regions having their own national bodies. ■ The EU has the scale and through the UNECE and its World Forum for Harmonization of Vehicle Regulations (WP29) can influence future direction of automotive standards.

EU standards are often adopted by other non-EU countries thus highlighting EU influence on a global level

■ China, which is the world’s largest vehicle market, has adopted EU emission standards since 2000. ■ The UK can play a key role in influencing regulations and standards to ensure issues important to the UK industry are adequately recognised at EU level and globally.

There is a clear call for further simplification and reduction of the regulatory burden

■ There are issues highlighted by the industry around the complexity and volume of regulation and compliance requirements. ■ The UK is not a lone voice in pushing for reforms. ■ Smart regulation is a key deliverable of two successive EU initiatives – CARS 21 and CARS 2020.

EU regulation does have a significant cost on business “The EU does need to become more business ■ BIS estimates the cost of EU regulation for UK business is £9.4 billion per year. focussed in how it regulates. However, it is far ■ However, UK-built cars sold in the EU would still need to comply with EU product specific regulations. better for the UK to be involved and influencing ■ Also, it is likely that any replacement regulation would retain many of the same the conditions for the world's largest free trade zone elements and therefore it may not be possible to avoid a large proportion of the than not at all.” associated costs. Jaguar Land Rover

Some of the regulatory burden and cost is self-imposed by UK-only policies which are additional to EU directive requirements “It’s not the EU that causes the issue. It’s our ■ Industry members highlighted energy costs as an example. application of the rules. Often the regulators are ■ In addition to EU requirements (under EU Emissions Trading System), seeking purity rather than pragmatism.” UK applies Carbon Floor Price, Climate Change Agreements and Climate Change Chief Executive, UK Tier 1 Supplier Levy, Carbon Reduction Commitment and mandatory Greenhouse Gas reporting,

Common regulations create a large enough market New Powertrain Technologies – Industry Roadmap

that can commercially sustain innovation EU fleet average 130 95 TBD CO2 targets (g/km) ■ Common EU standards across 28 countries makes the EU creates a large market for viable implementation of new Demonstrators Fuel Cell Vehicle technologies. H2 Infrastructure ■ For example, stricter EU emission standards have accelerated innovation and development of new power train and fuel Niche EVs Mass Market EV Technology efficiency technologies, especially in the UK given its leading Charging Energy Storage capability in this area. Infrastructure Breakthrough Demonstrators Plug-In Hybrid ■ This has driven investment with several OEMs already building or having plans to build hybrid and Ultra Low Emission Vehicle Energy Storage (“ULEV”) cars in the UK. Breakthrough Full Hybrid ■ This is best demonstrated by Nissan’s decision to site the European production of its LEAF in the UK in 2010, including a brand new battery plant. Micro/Mild Hybrid

– As at January 2014, 100,000 Nissan LEAFs had been sold IC Engine and Transmission innovations globally, making it the best selling electric car globally. (gasoline/diesel/gas/renewables ■ Toyota has also sited the production of its Auris Hybrid, the first Vehicle Weight and Drag Reduction full mass-produced hybrid in EU, in the UK. 2000 2010 2020 2030 2040

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 22 Chapter 5 – Driving innovation change Access to EU funding is benefiting UK businesses

Collaboration with EU counterparts and access to EU funding will be key enablers in the UK’s leadership of the low emission vehicle industry

■ In total £3.5 billion has been awarded to UK businesses and universities across all sectors. ■ Three recent automotive examples include: – The University of Warwick, is part of a consortium that has received funding (€10 million) from the FP7 for research into lightweight technology for application in structural vehicle parts of future volume electric vehicles. – Ricardo plc, received funding during 2012/2013 as part of a EU wide consortium for SmartBatt. €3.3 million received from FP7 for the project. – European Thermodynamics Limited, received €2.3 million between 2012 and 2014 for a thermo-electric power generation system powered by exhaust waste thermal energy. ■ Despite this success, UK automotive companies lag behind UK universities and companies in other sectors, such as aerospace, in engaging with EU funding. “EU funding allows us to increase our research capacity aligned to our corporate strategy and technology The opportunity is global as reducing emissions is a focus of governments roadmaps as well as gain access to worldwide. expertise from a range of disciplines and organisations.” ■ China for example has enacted a target of160 g/km by 2015 and a proposed target of 117 g/km Commercial Manager, MIRA (for gasoline vehicles) by 2020. ■ If the UK is able to capitalise on its strengths then there is a significant global opportunity.

The UK automotive industry benefits from the skills of both EU and global employees ■ The UK has benefitted from the investment and the skills that was brought by Japanese OEMs and more recently by German OEMs.

Skills are a critical global competitiveness issue for UK automotive ■ Long term prosperity requires a suitably skilled and experienced workforce and there is a shortage of qualified scientists, engineers and technologists (SET) in the UK. ■ An EU wide talent pool is important in maximising the ability to recruit specific, high quality talent.

Access to a flexible and moveable workforce is key for current and future growth

■ The automotive industry is highly integrated across the EU and highly skilled engineers frequently need move between plants or collaborate on research and development projects.

The process of employing or transferring Non-EU nationals is complex and costly making intra-EU transfers considerably easier for businesses ■ Strict eligibility criteria for granting work visas restricts mobility for non-EU nationals.

International experience is a pre-requisite for individual career progression ■ International experience is key for leadership roles. ■ Graduate programmes also place great importance on international mobility for progression.

BMW Group – Workforce mobility Vauxhall – Supporting new model rollout programmes

Mobility is critical to success during key phases of the Backfill production line staff operatives being able to launch process. with EU counterparts whilst move freely across the EU ● Flexibility and mobility are embedded in the culture of International leadership staff undergo training to meet these short term the company. development programmes. requirements, and allows • The introduction of new new vehicle production to be ● At any moment in time, ● All aspiring senior managers models into production often to commence in as efficient approximately 10% of the at BMW Group are expected brings with it fundamental a manner as possible. UK management to undertake international changes to production population is on an assignments. processes, techniques, and international assignment equipment. with up to 80% of the ● Participants in the BMW placements at BMW Group Group graduate • Currently, over 900 staff at locations across Europe. development programme Vauxhall’s Luton plant are are expected to complete undergoing training for the ● To ensure the successful two international next generation Vauxhall start of production of the assignments, each lasting Vivaro model. new MINI in December several months. 2013, over 140 staff from • Vauxhall has supplemented other parts of company’s the local team with qualified network were seconded to staff from its factory in MINI Plant Oxford and an Poland to ensure that equal number of UK production of the existing employees worked model continues smoothly. temporarily in Germany • This strategy relies on

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 25 Summary Membership of the EU is central to the long-term success of the UK automotive industry

 The UK automotive industry has seen an unprecedented wave of investment ■ A key factor in attracting this investment is that the UK is an excellent location to make vehicles for the EU market.

 The EU is the UK’s largest trading partner by far ■ Over 50% of UK vehicle exports are to the rest of the EU and over 40% of components are sourced from the rest of the EU.  Regulations define the shape of the EU market and UK’s ability to influence this is key

■ It is not just pure access to the EU market that is important. Within the EU, the UK has influenced regulations such as vehicle CO2 emissions to not disadvantage our industry.

 The EU’s bargaining power is a powerful force in trade negotiations ■ Some of the UK’s vehicle manufacturers that export worldwide face high trade barriers in emerging markets e.g. China and India.

 The automotive industry is globalised and UK manufacturers are dependent on their worldwide operations

■ R&D in particular requires access to expertise and the free movement of engineers within the EU is an asset to the UK industry.

 However, membership of the EU does pose challenges to the UK automotive industry

■ The cost of EU regulations to UK businesses is substantial – estimated at £9.4 billion per annum across al sectors ■ However, if the UK were to exit, it may not be possible to avoid a large proportion of these costs

© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 26 © 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (KPMG International). Questions and Answers

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SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 28