Fast 2030 Future Automotive Industry Structure Until 2030 the Impact of Current Trends on Value Creation and Their Implications

FAST 2030 FUTURE AUTOMOTIVE INDUSTRY STRUCTURE UNTIL 2030 THE IMPACT OF CURRENT TRENDS ON VALUE CREATION AND THEIR IMPLICATIONS

8 NOVEMBER, 2018

Alejandro Gaffner Johannes Berking

Prepared for: Cluster de Automoción de Navarra

Alejandro Gaffner Johannes Berking Partner Principal Energy & Transportation Practices Automotive Practice Madrid Hamburg

• Over 30 years of consulting • Over 12 years consulting experience in the Energy and in the automotive industry Transportation sectors • Oliver Wyman Global • Large experience on corporate Supplier Team and business strategy, marketing • Focus on strategy development, and sales, operational operations improvement improvement and organizational and transformations transformation • Author of various • Extensive international work in the Oliver Wyman studies Americas, Europe and Middle (e.g. FAST 2025, Value East and Cost Migration, • Focus on initiatives and studies E-Mobility 2035) regarding the future of Mobility

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Management, economic and brand Risk and reinsurance Talent, health, retirement Insurance broker and strategy consulting specialist and investment consulting risk advisor • Strategy • Reinsurance and risk • Personnel strategy • Risk management, • Organization management • HR systems consulting, and transfer • Operations • Contract management, claims • Compensation handling, and fiduciary • Financial solutions • Risk management accounting • Incentive systems and insurance • Transformation management • Communication program management services

• 1984 year founded • 1922 year founded • 1937 year founded • 1871 year founded • 2,300 colleagues • 22,600 colleagues • 32,700 colleagues • 4,700 colleagues • 50+ offices worldwide • 170+ offices worldwide • 500 offices worldwide • 60+ offices worldwide • $1.2 BN 2017 revenue • $4.5 BN 2017 revenue • $6.4 BN 2017 revenue • $1.9 BN 2017 revenue

Broad industry coverage

Business Distribution & Health & Life Public Surface Automotive Energy Services Wholesale Sciences Sector Transportation

Aviation, Comms., Retail & Financial Industrial Travel & Aerospace & Media & Education Products Consumer Leisure Defense Technology Services Products LIPPINCOTT Brand NERA Strategy Economic and Design Consulting Consulting

Corporate Finance and Advisory Digital, Technology and Analytics Operations Organizational Effectiveness Pricing, Sales and Marketing Sustainability Center

© Oliver Wyman 5 Oliver Wyman’s Global Automotive Practice Oliver Wyman is working for the world´s leading car manufacturers and suppliers on a broad range of topics Excerpt from client list Automotive manufacturers Automotive suppliers (passenger cars, commercial vehicles)

• Extensive project experience at • More than 200 projects since leading global OEMs 2004 and more than 80 active clients: – BMW – Nine of the top 20 companies – Daimler – Medium-sized & family – Volkswagen Group companies – Peugeot/Citroën • Very good relations with top – GM management and owners – Ford • Broad coverage of topics and – Renault modules: – … – Strategy, market analyses & • Intensive contacts with top market entry, footprint management optimization, product portfolio, • Broad coverage of topics: M&A, brand management, sourcing, operational – Sourcing / product costs excellence, reorganization & – R&D strategy / core restructuring, performance competences improvement, product cost – Assembly processes reductions, supply chain – Risk management optimization, benchmarking, ... – Customer satisfaction – Engine, transmission, chassis, – Distribution network interior, body, exterior, electrical systems/ electronics, – Marketing engineering services, ... – Brand management – Service strategy – Financial services Source: Oliver Wyman – …

Research & Sales & After Sales, Development, Purchasing Production Marketing Services Product and Brand

• Brand strategy and • Parts, components • Footprint evaluation • Sales • Financial services management and systems • Manufacturing • Wholesales, retail • Service and parts • Product portfolio • Material technology and • Distribution and product investment strategy • Fleet strategy • Production • Marketing equipment • Production • Other services • Innovation planning management • Supply chain • Shop floor management optimization and • R&D • Sourcing strategies indirect functions • Product • Launch and ramp- development up management process • Growth strategies and programs • Quality management • Customer satisfaction and customer loyalty

Cross-functional topics Corporate strategy, Product costs, Quality and warranty, make or buy, core competencies, organizational redesign, partnerships / M&A, task forces

Source: Oliver Wyman

• Harbour Report® basics

• Guide to competitive analysis in manufacturing performance based on ~ 400 plants globally. Providing insights per shop, function and sourcing type by company, plant and product • Benchmarking data enables participants to focus improvement activities in numerous areas with highest potential for savings (cost, product design, manufacturing performance, etc.) • Over 30 years of proven methodology ensures comparability – Detailed definitions – Adjustments for sourcing • The Harbour Report® team as a trusted source of information and as a common platform for Automotive manufactures

Source: Oliver Wyman

© Oliver Wyman 8 Proprietary Intellectual Capital Oliver Wyman develops and applies innovative, leading-edge intellectual capital, especially in the area of value growth strategies Excerpt from publication Periodicals Studies and Industry Reports

Automotive Perspectives on Digital Industry Mobility 2040 Visibility and Control FAST 2030 Manager 2017 Manufacturing industries 2017

Point of View

Digitization of Robotics and Industrial E-Mobility 2035 Making money with car Manufacturing Sales Automation Systems service platforms Market Study

Source: Oliver Wyman © Oliver Wyman 9 Section 1 Excerpt from FAST 2030 study for ACAN FAST 2030 Study outline

Outline Sources • The automotive industry remains on track for This is the third edition of the FAST study, created success – in continuation of the recent years. every five years in collaboration between Oliver After the crisis years 2008–10, both OEMs and Wyman and the German Automotive Association suppliers have experienced a phase of prosperity (VDA) • However, this might turn out to be a short-lived • More than 100 expert interviews with global top chapter in light of the “Mighty Seven Industry managers in the automotive industry as well as Trends” – a perfect storm of transformative further external industry specialists technologies and changing customer behavior – • Triangulation of a vast set of market which challenge the core business pillars the publications, industry reports, and other industry is built on external sources to gather additional both • As a consequence, the shape of automotive value quantitative and qualitative insights on current and creation is expected to simultaneously shift in future developments three dimensions until 2030 – horizontally between • Insights from Oliver Wyman’s global internal vehicle systems, vertically between industry players, expert network, knowledge repository and and regionally recent intellectual proprietary on industry • Nine new business models are emerging for auto dynamics and transformative trends (amongst suppliers creating a need to re-define their role others, “E-Mobility 2035 study”, “Mobility 2040 and operating model in order to retain study”, “HMI point of view”) competitiveness • In parallel, both suppliers and vehicle manufacturers will have to foster holistic performance improvements to offset the needed investments and absorb other looming externalities.

1. Status: Current status of the automotive industry

2. Trends: Current and emerging trends changing the automotive industry

3. Value: Automotive value creation development until 2030

4. Impact: Areas of impact and strategic business model options for automotive suppliers

© Oliver Wyman 12 1 STATUS: Current status of the automotive industry Current status of the automotive industry – Overview Overall, the automotive industry remains strong and continues to grow; suppliers are well positioned, but the road ahead is challenging

Strong global Regional value Pressure both Healthy profit …but 1 growth of the 2 shifts in 3 from need for 4 margins for 5 increasing automotive key markets increased suppliers challenges for industry customer value suppliers and on prices emerge

Light vehicle Emerging markets Concurrently, Despite the tension, Disconnect between production has have been the key products have suppliers have growth, new tech, grown to ~95 mn growth drivers with become more shown sound and organizational vehicles in 2017 China leading at… complex at financial readiness manifests unchanged price performance in multiple issues levels such as quality

RECALL QUOTA 7% x3 2011-2015 x7 EBIT MARGIN +3% +15% x1.6 (average, 2015) CAGR (2010-2017) CAGR (2005-2017) # PATENTS (2008-2016)

Source: Oliver Wyman analysis

© Oliver Wyman 14 The automotive industry – Historic trajectory 1 Despite some crises, the auto industry has been on a strong growth path for over 100 years with an especially strong recovery after the financial crisis...

Global light vehicle production development Comments In MM units, light vehicles, 1900–2017 CAGR • Since 2012, the publish date of the FAST 2025 study, 100 (2010–17) market growth has persisted + 3% 90 • In total, global light vehicle (LV) production grew steadily with a CAGR of 3% between 2010 and 2017 80 • Largest LV producers are China, the United States, 70 Japan, and Germany, accounting for 59% of total Financial vehicle production crisis 60 • Passenger cars account for approx. 75% of LV production, commercial vehicles for the remaining 25% 50 • The momentum of automotive industry growth is 40 Oil crisis expected to continue over the next years I and II 30

20 World war II

0 2017 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Light vehicles incl. vehicles under 7t Source: OICA, Ward's: World Motor Vehicle Data, LMC automotive, Oliver Wyman analysis

World light vehicle production In MM vehicles

Europe (incl. Russia) China

+0.7% +14.9%

North America India S. Korea and Japan

20.4 20.5 22.1 27.4 +1.0% +10.0% 17.1 −0.4% 5.2 2005 2011 2017 2005 2011 2017

15.7 17.6 4.4 14.1 12.6 13.4 13.1 3.6 1.4

2005 2011 2017 2005 2011 2017 2005 2011 2017

South America Africa Rest of Asia RoW1

+0.9% +5.9% +5.3% +0.6%

4.3 1.0 4.6 2.0 2.8 3.1 0.5 0.6 2.6 3.1 1.4 1.5 2005 2011 2017 2005 2011 2017 2005 2011 2017 2005 2011 2017

1. RoW includes Australia and Iran (amongst others) X.X% Established markets Emerging markets Other CAGR (Compound Annual Growth Rate) Source: LMCA Q2/2017 and Q1/2012

© Oliver Wyman 16 Example Regional development – OEM production plants expansion in China 2 In China, the number of OEM production plants increased by more than a third since 2012, raising production capacity by about 50%

Overview of OEM production plants in China Northeast zone [10%] # production plants by region, 2012 vs. 2017 19 16 Central south [13%] The number of OEM production plants in Northeast China increased only slightly since 2012 (<20%), accounting for 10% of 2 (2012) total Chinese vehicle production in 2017 Central south remains important 5 2017) 22 production location, although the region Heilongjiang experienced relative low growth in new 16 OEM plants compared to other regions Bohai zone [15%] Jilin Southwest zone [21% ] Inner Liaoning Xinjiang Mongolia Beijing Tianjin Hebei Bohai zone in North China with limited Ningxia Shanxi Shandong number OEM production plants – often Qinghai 56 with rather large volumes; More than 50% With more than 15 individual car Gansu of the industrial clusters’ plants are directly manufacturers located in in Southwest Shaanxi Henan Jiangsu 45 located either in Beijing or Tanjin industrial zone, the cluster is in pole Tibet Anhui position in terms of production output Hubei Sichuan Zhejiang Jiangxi Yangtse delta [19%] Pearl River delta [11%] Guizhou Hunan 24 Fujian 17 Yunnan Guangxi Guangdong

Very high growth in OEM production 56 Due to its favorable location at the Yellow plants (almost 60%% since 2012) given and East Chinese Sea, East China is one highly beneficial infrastructural location at Hainan 36 of the leading regions in terms of number the South China Sea Others [11%] of OEM production plants and output

% of total Chinese vehicle production 2017 x Concentration and main expansion of OEM production plants in x # of OEM production plants 2012 (inner circle) vs. 2017 (outer circle) Source: Automobil Produktion, LMCA Q1/2018, Oliver Wyman analysis regional clusters along the coastline

Share of annual income spent on vehicle purchases Increase mainly driven by a 1 higher penetration rate of 2011–2015 , avg. income per household in local currency vehicles/households (0.04 vs. 0.06 vehicles sold/household between 2011 vs. 2015) United States Germany China2

95% 95% 95% 94% 95% 97% 97% 97% 97% 97% 85% 85% 82% 81% 81%

Ø 5% Ø 3% Ø 17% 5% 5% 5% 6% 5% 3% 3% 3% 3% 3% 15% 15% 18% 19% 19%

2011 2012 2013 2014 2015 2010 2011 2012 2014 2015 2011 2012 2013 2014 2015 Remaining average income Amount of income spent on vehicle purchases

Despite increasing value of cars due to new technologies and functionalities as well as advanced electronics, households’ spending behaviour for vehicle purchases has remained unchanged

1. Most recent data available per country 2. Total = amount of income spent on transport and communication Source: Bureau of Labor Statistics, Statistisches Bundesamt, China Statistical Yearbook, LMCA Q2/2017, OECD, Oliver Wyman analysis

PROFIT AND LOSS STATEMENT BALANCE SHEET CASH FLOW

REVENUE EBITDA EQUITY INVENTORY GROWTH MARGIN RATIO TURNOVER

4.9% 11.9% 38.9x 12.6x

EBIT NET DEBT/ CASH MARGIN EBITDA CREATION1 7.2% 1.1x 0.05x

ROCE

20.7%

1. Change in Net Cash (average liquid minus financial debt) in relation to working capital at period end Note: Suppliers with KPI variance greater than three standard deviations from mean have been omitted Development from 2010 to 2016 Source: Oliver Wyman Supplier Benchmarking Database, company reports, Oliver Wyman analysis

© Oliver Wyman 19 Illustrative First struggles of the automotive industry 5 Given strong business growth, many suppliers were slow at adapting their organizational model simultaneously risking system and efficiency problems

Organizational complexity Insight

Degree of organizational complexity • Most suppliers were “born” by (approximated by company revenues and number of business units (BUs) creating a single product or having a single business line Maturity insufficient €10–35 BN • Along with organic growth or 5–10 BUs to manage complexity  via M&A, suppliers developed in several different domains by expanding their portfolios €5 BN and OEM applications, 3–4 BUs  growing their client lists, moving from low-end to high-tech products, and going <€800 MM global 1–2 BUs  • Consequently, complexity has risen dramatically in many organizations

<€250 MM Many of the suppliers were 1–2 BUs Maturity sufficient hesitant to perform fast and to manage bold enough modifications in complexity their organizational structure Degree of organizational maturity needed to efficiently manage new types of challenges   System and efficiency risk Source: Oliver Wyman Supplier Best Practice Benchmarking

© Oliver Wyman 20 2 TRENDS: Current and emerging trends changing the automotive industry The Mighty Seven – Automotive industry trends until 2030 Seven fundamental trends drive the automotive industry until 2030, enabled and accelerated by Digitalization, AI and Machine Learning

CONNECTED VEHICLE HUMAN-MACHINE-INTERFACE Additional safety and (services) revenues New and digitized control concepts for driver/car through increasing connectedness interaction Artificial Intelligence

AUTONOMOUS VEHICLES CHANGING CUSTOMER STRUCTURE Progression of today’s partially AUTO Partial replacement of individual vehicle automated driving into fully INDUSTRY buyers by large fleet or group buying driven driver-less vehicles by mobility-on-demand services TRENDS 2030

Digitalization/Machine Learning

E-MOBILITY CREATION NEW DISTRIBUTION CHANNEL PAY-PER-USE Increasing electrification of Provision of selected vehicle features as powertrains, resulting in decreasing pay-per-use for certain target groups of vehicle penetration of ICEs owners

4.0 DIGITAL INDUSTRY Increasing digitization of processes through predictive and adaptive data capability

Source: Oliver Wyman analysis

TREND TREND REALIZATION IMPACT ON VALUE CREATION

Mobility spend for passenger transport Value creation per vehicle module (2017)

• Increasing shift from 2015 vs. 2040 by mode; total vs. 2015 100% vehicle ownership to 2015 usership (“mobility on 80% demand”) 2040 +95%2 60% • New mobility fleet 2015 operators enter the 40% market and increasingly 2040 +114% replace individual 20% vehicle buyers 2015 0% Chassis ICE/aux. Interior Assembly 2040 Drive train systems Exterior Electric/ +358% Electric drive Bodystructure Electronics systems Other modes of transport Key potential impact on: Smart Bus Air mobility • Overall vehicle design to be more services robust/low-maintenance, and less Private Train safe (for AD vehicles only) car DRIVERS • Vehicle interior to be more Individual mobility services functional to meet customer

Car Car Ride usage patterns (e.g. robust sharing rental hailing materials, self-cleaning systems)

Source: Oliver Wyman study “Mobility 2040”, Oliver Wyman analysis

© Oliver Wyman 23 Changing customer structure – Automotive value chain under attack Meanwhile, new mobility players are pushing into the automotive value chain and continuously replacing more individual vehicle buyers

Changing customer needs lead to disruptions in the mobility ecosystem… …and the emergence of new mobility providers CHANGE IN CUSTOMER NEEDS DEVELOPING THE CAR AS… Mobility players enter the market End-consumers Mobility solutions at the customer interface …part of the connected life and host for digital Digital software platform provider activity and consumption PLATFORM A SPECIALIST

…connected device and valuable data generator Individually owned Large fleet ASSET-LIGHT Marketing, sales and distribution B INTEGRATOR

Development and Design …shared good and key part of mobility INTEGRATED VEHICLE Car manufacturing C MANUFACTURER OEMs increasingly investing in mobility services Car legacy Tech Software to find new usage models for cars: hardware hardware • Daimler (2017): Invest in Via (ride-hailing) and Development, production Turo (peer-to-peer car sharing) …a digitally purchased Development, production and supply of systems, • Volkswagen (2016): Foundation of MOIA to and maintained good and supply of vehicles components and software offer own mobility services (ride-hailing) OEM Supplier • GM (2016): Invest in Lyft (ride-hailing) • BMW (2016): Invest in Scoop (carpool platform) Source: Oliver Wyman analysis

TREND TREND REALIZATION IMPACT ON VALUE CREATION

Potential development pay-per-use Value creation per vehicle module (2017)

• Customers ask for 100% individualized, 2017 selective, on-demand 80% mobility and service solutions, captured by Pay-per-use functions/services are 60% pay-per-use business technically feasible and envisioned models 40% • These business 2030 20% opportunities occur in a variety of vehicle 0% Chassis ICE/aux. Interior Assembly modules, opening up Drive train systems Exterior Electric/ Electric drive Bodystructure Electronics new revenue Pay-per-use will be implemented in systems generation models specific, best suitable (sub-)modules Key potential impact on:

2060 • Interior functions, e.g. massage, Near-vehicle pay-per-use park assistant and 3D sound services (e.g. + streets, ? infrastructure, etc.) • Performance features, e.g. add. DRIVERS HP/kW and battery range extension Pay-per-use functions/services become more the rule than exception • Exterior functions, e.g. infrared/laser light, rain sensor

Source: Oliver Wyman analysis

© Oliver Wyman 25 Illustrative New distribution channel pay-per-use The interplay of increasing pay-per-use penetration and thus, component requirements, will significantly affect suppliers’ cash flows

Potential development of pay-per-use and value creation impact Comments Exemplary cost and revenues for one pay -per-use feature • By incorporating components that ADDITIONAL AVG. Revenues from allow pay-per-use features, total COST PER VEHICLE pay-per-use features may cost per vehicle would increase, lack behind while no revenues are generated at implementation vehicle sale unless negotiated as depending on higher fixed prices to the OEM customers’ upfront adoption rate • With increasing penetration in new vehicles sales, cost per component could decrease through economies of scale/standardization/lower REVENUES FROM variability PAY-PER-USE FEATURES • However, revenues and finally penetration rate in total vehicle production profits from pay-per-use are highly dependent on customer Cash flows for pay-per-use features vs. traditionally built-in components acceptance, the consequent Cash flow per vehicle over vehicle lifecycle adoption rate and OEMs willingness to pass-through pay-per-use revenues • Additionally, cash flows would differ significantly compared to Per-per-use today as revenues are generated Today only when customers are time Source: Oliver Wyman analysis using features

TREND TREND REALIZATION IMPACT ON VALUE CREATION

Development of the industrial era “Digital industry” potential in 2030 1 • Digitization of processes Margin impact through predictive and adaptive data capability: 4.0 100% • Digitization and Idea-to-produce optimization of core 3.0 processes to support 75% target customer 2.0 experience 50% • Build up of superior data 1.0 analytics, machine Sales-to-delivery learning and “big data” competencies to deliver 25% one holistic Operations and 1800 1900 2000 2100 services customer-centric 0% experience Usage of water- and steam-power for 1.0 mechanical manufacturing Electrically-powered mass production Average impact relative to 2.0 based on the division of labor 5% industry revenue in 2030 DRIVERS Leverage of electronics and IT to achieve 3.0 further automation of manufacturing Cyber-Physical Systems to integrate 4.0 production systems as well as product and production process

1. Gross effect not including downside, basic production efficiency and pricing effects as well as specific business case considerations (i.e. investments); Value spaces were estimated based on industry-specific cost structures and were applied on approximated global value creation in 2030 (GDP growth assumed); Source: Oliver Wyman “Digital Industry” study

Changing customer Digital automotive industry Technical enablers preferences 0101 Product 10 Idea-to Sales-to- Operations 0 Data availability individualization produce delivery and services Permanent Declining connectivity technology costs C COST Mechanical Personalization development through Big Data progress

Product as Accelerating a service innovation cycles

Hassle-free New production solutions techniques

Willingness to Changing share data R&D patterns

Source: Oliver Wyman analysis

TREND TREND REALIZATION SCENARIOS IMPACT ON VALUE CREATION

Ramp-up new EV sales 2015–2030 (%) Value creation per vehicle module (2017)

• Electrified vehicles 100% are emerging as 100 90 alternative powertrains 80% to the internal 80 combustion engine 70 60% 60 40% 50

40 20% 30 20 0% Chassis ICE/aux. Interior Assembly 10 Drive train systems Exterior Electric/ Electric drive Bodystructure Electronics 0 systems 2015 2020 2025 2030 Main impact on:

Strong legislation (full ICE ban) • Complete powertrain, replacing combustion engine with fuel tank Urban legislation (bans) and and exhaust system by battery with incentives DRIVERS electric infrastructure Focus on incentives for urban areas • Electrics/electronics systems related to E-Mobility (e.g. BMS and No further legislation or incentives battery wiring)

Source: Oliver Wyman analysis

LEGISLATIONS/ COMPETITORS REGULATIONS • Brand and innovation strategy • Legislation and incentives • Product and service • Environmental concerns offerings • Fuel independence DRIVING FORCES FOR • Costs and investments • Sustainable mobility E-DRIVETRAIN ADOPTION needed

INFRASTRUCTURE CONSUMERS • Energy availability • B2B: Business strategy and long-term cost reduction • Charging infrastructure • B2C: Environmental awareness • Technological TECHNOLOGY/COST and preference for “green” modes compatibility • Energy storage capabilities of transportation • User friendliness and fuel economy • Sharing economy • Performance and cost • Fleet management of new technologies • Connection to Smart Home

Source: Oliver Wyman analysis

© Oliver Wyman 30 E-Mobility – Legislation and regulation Regulatory interventions intensify and clearly reveal a three-stage agenda towards a comprehensive powertrain electrification within the next decades

2020 2025 2030

Electric powertrain Electric powertrain Electric powertrain market activation market penetration market solidification

Make BEVs 50% E-cars to attractive 53 changes in 9 states take over Carlifornia NEMMP with Guideline in 30% emission comply with Paris incentive system ZEV-rules; Goal 3.3 million goal 400.000 Maharashtra with reduction in 2030 climate goals by in 2017 electrified vehicles by 2025 electric vehicles goal 0.5mio compared to 2035 by 2020 EV-production by 2020/21 2023 Exemption of EVs from „Zeo-tax“ for licence plate „zero- emissio lottery and n“ regulation EV production ICE sales ban 15% emission registration Specification of quota in from 2040 Beschluss über reduction in 2025 fees subsidy standards – discussion neue „leise Make ICEs compared to only BEV with Autos“ Vorschrift 2020/21 chinese battery unattractive Complete ban ICE by 2030

Reduction of Complete important duties for ban ICE EVs New Bharat ab 2040 Option driving ban for Complete ban Stage VI Introduction Country wide diesel cars in big cities Implemen- ICE from 2025 Cancellation of standard from Euro introduction Non-binding gal without approval of tation „10 hour 2020 IV- Stan- China VI (a) from 100% sales of „Bund“ WLTP charging rule“ dard 2020, (b) from EVs by 2030 Eliminate 2023 ICEs

Decided In discussion 1. Statement„Climate Action Tracker Report“ with impact on all member states of Paris climate agreement Source: ICCT; diesel.net; Press; Oliver Wyman analysis

Forecast development of key technological parameters for E-mobility Comments

Energy density More than double Average Trend • Range increase – as one (battery) the range range key purchasing criteria for consumers – is Wh/kg 450 km technological focal area for OEM and battery 360 manufacturers 295 • Current developments 250 promise 50–100% increase 440 of energy density 380 • Additional long-term 300 potential through new 195 technologies post 2025 likely (e.g. solid-state, LiAir) • In parallel, battery cost 2015 2020 2025 2030 will decrease continuously battery density range through new materials, processes and process Battery costs automations along with €/kWh new/lighter cell designs and 190–210 120–140 80–100 50–70 higher production volumes (“economies of scale”) Source: Merrill Lynch; Oliver Wyman analysis

Different adoption paths for different vehicle classes over time

Executive Expected to be bridging PHEV REEV technologies only

REEV Midsize 1 ICE/HEV BEV

Compact

ICE = Internal Combustion Engine; HEV = Hybrid Electric Vehicle; PHEV = Plug-in Hybrid Electric Vehicle; REEV = Range-Extended Electric Vehicle; BEV = Battery Electric Vehicle; FCEV = Fuel-Cell Electric Vehicle 1. Including micro and mild-hybrid Source: Oliver Wyman analysis

Forecast of new EV -sales 2015–2035 Illustrative %

Archetype 1: Strong legislation 100 Complete ban of ICE at specific point in time 90 Most optimistic Archetype 2: Urban legislation 2035 market forecast 80 and incentives City bans or tolls for ICEs + other 70 incentives for urban areas

60 Archetype 3: Focus on incentives Archetype 4: No further legislation Focus on different market incentives 50 or incentives to influence customer behaviour No further incentives and legislative support 40

Percentage of new vehicle sales 2015 – of sales new vehicle Percentage Most conservative 10 market forecast

0 2015 2020 2025 2030 2035

Source: Oliver Wyman “E-Mobility 2035” study

TREND TREND REALIZATION IMPACT ON VALUE CREATION

New autonomous vehicle sales (# LV)1 Value creation per vehicle module (2017)

• Advanced driver 100% assistance systems 90

are already reality and 80 80% allow the owner to hand 70 over “driving” to the 60% 60 vehicle in certain situations 50 40% 40 • Partially automated (L2) 20% driving will progress into 30 fully automated (L5) in 20 0% Chassis ICE/aux. Interior Assembly the long run 10 Drive train systems Exterior Electric/ Electric drive Bodystructure Electronics 0 systems 2015 2020 2025 2030 Main impact on electric/electronics systems: Base case: Automation Level 2/Level 4 • Sensors (incl. camera, radar etc.) • and DRIVERS Information communication Best case: Automation Level 2/Level 4 (maps/V2X communication) • Actuation Worst case: Automation / Level 2 Level 4 • Control unit (“Intelligence”)

1. Level 2 = Partial automation, where drivers still have to monitor the system at all times but systems takes over control in specific use cases; Level 4 = High automation, i.e. driver is not required during defined use case; Source: a16z. NHTSA, SAE, Oliver Wyman analysis

MONITORED DRIVING NON-MONITORED DRIVING

NOW NOW NOW/NEAR ~ 2020 ~ 2025 2025/30

Driver is Driver is Driver has to monitor Driver does not have Driver is not required continuously continuously the system at all to monitor the during defined use exercising exercising times system at all times. case longitudinal and longitudinal or lateral Must always be in a lateral control control position to resume control

System has lateral and longitudinal control in a specific use case. System recognizes the performance System can cope limits and requests with all situations Lateral or System has lateral driver to resume System can cope longitudinal control is and longitudinal with all situations automatically during control within a the entire journey. accomplished by the control in a specific sufficient time automatically in a system use case margin. defined use case No driver required

Level 0 Level 1 Level 2 Level 3 Level 4 Level 5 Partial Conditional Driver Only Assisted High Automation Full Automation Automation Automation

Source: NHTSA, SAE, Oliver Wyman analysis

Tech-companies with deep pockets are pushing for fully …while traditional automakers focus on a evolutionary automated vehicles… step-by-step approach with partly less ambitious targets

Company Market introduction Main partners Origin Company Market introduction Main partners Origin value in value in € BN1 Level 3 Level 4/5 € BN1 Level 3 Level 4/5

417 – ~2020 Fiat, Chrysler 92 ~2018 – NASA

5 29 ~2018 ~2020 Nvidia Intel, Conti 129 ~2021 ~2021 Mobileye, Nvidia 2 Foxconn, 201 – ~20203 Harmony 6 178 ~2019 ~2025 Nvidia

536 – ~20214 – LG, Quanergy, 152 ~2020 ~2025 Bosch 49 ~2018 ~2021 Unconfirmed Several 287 ~2020 – Universities, – – ~2021 Volvo Microsoft

1. Thomson Reuters on 30th of August , 2016 – exchange rates of same day; 2. New start-up under the name Future Mobility; 3. Only for restricted cities and highways; 4. Unconfirmed activity 5. BMW iNext promises level 3 and level 5 autonomy option. The former will be more likely; 6 Including Audi with introduction of A8 with level 3 autonomy beginning of 2019 Source: Thomson Reuters, Faktiva, Forbes, Company websites, Oliver Wyman analysis

TREND TREND REALIZATION IMPACT ON VALUE CREATION

Automotive HMI market, Value creation per vehicle module (2017) 2017 vs. 2030 (in € BN) • Technological 100% advancements and +4% consumer pull for CAGR 35.8 80% convenience and 20.7 comfort will further drive 60% the shift from analog to more intuitive and 40% 2017 2030 augmented HMI Proximity/gesture recognition Center stack display 20% technology Speech Instrument cluster HUD MuFu buttons, controllers, touchpads Steering wheel controls 0% Chassis ICE/aux. Interior Assembly Proximity/gesture/voice Drive train systems Exterior Electric/ +19% Electric drive Bodystructure Electronics recognition Fast growing, but systems CAGR smallest HMI market Head-up displays (HUD) Main impact on cockpit through +15% Fast growing segment, becoming ongoing digitalization: CAGR the fourth largest HMI market by • (Central stack) displays 2030 • Multifunctional controls DRIVERS Center stack display Moderately growing, becoming the • Digital instrument cluster +5% largest HMI market by 2030 CAGR • HUDs (joint pole position with instrument cluster category) • …

Source: Oliver Wyman analysis

© Oliver Wyman 38 HMI – Increasing demand for comfort and connectedness Currently emerging technologies are expected to reach > 50% penetration already before 2030; ongoing digitalization of controls and instruments

Penetration rate of HMI technologies Comments In % of total vehicles, 2017–2030 • The future cockpit will 2017 2030 deliver an increasingly Center stack hardkeys & buttons intuitive, innovative and personalized user MuFu controller experiences Touchpads • This next-generation Digital IC HMI is expected to Digital/analog IC prevail until 2030, Analog IC smartly combining voice control, touchscreens Non-touch CSD and conventional Touch CSD controls depending on Steering wheel controls application and passengers Windscreen HUD Combiner HUD • Development will be fueled by ongoing Augmented reality vehicle automation, Speech recognition and – predominantly – Proximity/gesture recognition the achievement of critical mass together 0 25 50 75 100 0 25 50 75 100 with increasing Penetration (%) Penetration (%) functions/components integration Note: MuFu = Multi-Function, CSD = Center stack display, IC = Instrument cluster, HUD = Head-up display Source: Oliver Wyman HMI Point of view

© Oliver Wyman 39 Examples – non exhaustive HMI – Non-auto players enter the market Increasing importance of electronics and automated systems attracts non-auto technology experts – competition for traditional suppliers increases

Large established player Startups

Digital giants

Consumer electronics players

Technology specialists

1. Samsung, already involved in automotive through Renault Samsung Motors, is creating a new automotive components team specialized on infotainment and autonomous driving Source: Oliver Wyman HMI Point of view

TREND TREND REALIZATION IMPACT ON VALUE CREATION Penetration rates of embedded • Urbanization and the Value creation per vehicle module (2017) connectivity units in LV production demographic change 100% put “digital natives” in the ~80% driver seat 80% • Consumer expectations shift, making 61% 60% individualization and convenient device/service 40% integration key • Further, continuous smart 20% device and mobility 0% availability is fueled by the Chassis ICE/aux. Interior Assembly rate of change of Drive systems Exterior Electric/ train Bodystructure Electronics converging industries Electric drive systems 2017 2030 Main impact by creating add-on connected services, such as: • Telematics-enabled insurance services DRIVERS • Fleet management services • Safety and remote services

Source: Oliver Wyman analysis

Connected vehicle – Battlefield for revenues and customerS access Consequently, many players of the connected car ecosystem are getting into position with a focus on entering and monetizing (data based) services

Exemplary companies BATTLE FOR ADDITIONAL REVENUE STREAMS AND Services, CUSTOMER INTERFACE Billing/ (Platform) content and System Payment Aggregation apps Software integration Hardware Infrastructure

Automotive e.g. Daimler e.g. Daimler OEMs with PayCash with Moovel

Suppliers For some

Mobile device players (Operation) software players Network operators Web service companies Independent aftermarket players Fleet operators Bank, finance and insurance

Source: Oliver Wyman analysis Focus plays Expansion moves Not yet active

Diesel share of passenger vehicles Commentary In % of ICE vehicles, Jan 2015 – Sep 2018 by month Diesel • Sales of diesel driven vehicles have significantly declined scandal 70 across Europe and the US since the ‘Diesel-gate’ CAGR 65 • Continued negative press and bad public perception on 01/15–09/18 diesel emissions while in reality diesel total emission 60 balance (for mid-sized & larger) is better than for gasoline

55 • Public uncertainty about future usefulness of diesel engines in face of public discussion on diesel bans in 50 cities currently limits sales -4% 45 We definitely see massive decreases in the diesel share which puts a lot of pressure on the OEMs 40 for hybrids and BEVs to meet CO2 targets -15% 35 – Senior Manager, Tier-1 Supplier -13% 30 -14% For small PV we do not see any diesel engines anymore in the future. In the long-term we see 25 approx. 20% market share of diesel in Europe Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 – Senior Manager, Tier-1 Supplier

DE ES IT UK

Source: KBA, SMMT, ANFIA, ANFAC, Wikipedia, Financial Times, Bloomberg, Tagesspiegel, n-tv, expert interviews, Oliver Wyman analysis

Diesel share of passenger vehicles by segment 1 Commentary In % of ICE vehicles, 2015 vs 2018 • Already in 2015, Diesel has been the 100% primary energy source in the larger vehicle 90% segments 90% 2015 2018 to date 80% • Diesel shares have fallen significantly 80% 76% across all segments since 2015 in face of 70% 67% the diesel scandal 60% • Decline of diesel share in mini and small car 50% segments beneficial to overall emissions 50% 44% while decline in mid-sized to large segments 40% will increase total emissions and thus 69% pressure on OEMs to find alternative to 30% 53% 58% meet fleet emission targets by 2021 20% 13% 33% 25% 10% 22% 2% 5% 0% 1% Minis Small Compact Middle Upper Luxury Compact Full-Size class middle class SUVs SUVs class

Diesel typically less energy efficient than gasoline Diesel typically more energy efficient than gasoline Diesel and gasoline with similar energy efficiency

1. Segmentation according to KBA statistics Source: Expert interviews, KBA, Tagesspiegel

Fuel taxes for gasoline and diesel by country Commentary In EUR/liter

• Europe: Gasoline fuel taxes generally higher than for Netherlands 0.72 0.42 diesel 0.68 – Diesel favored by customers from TCO perspectives Great Britain 0.68 – Aim of governments to reduce CO emissions and fuel 0.67 2 Greece 0.41 consumption 0.66 – Strong standing of European automotive industry Germany 0.47 developing diesel technology 0.61 • US: No tax incentive for diesel, diesel purchases in the US France 0.43 driven by utility considerations 0.56 Italy 0.42 – No tax incentive and higher purchase prices – Use-case mainly for higher torque requirements/ towing Austria 0.48 0.40 capabilities 0.46 Luxemburg 0.32 0.43 Spain 0.33 0.36 Rumania 0.30

1 0.10 US 0.11 Petrol Diesel

1. Conversion rate: 1 USD = 0.81 EUR, 1 gallon = 3.79 l Source: EIA, Statista, expert interviews, Oliver Wyman analysis

Chinese light vehicle production 2018 and 2023 by forecast year First insights In mn. light vehicles

. Chinese OEMs Western OEMs Eastern OEMs Total Production • Compared to the forecast 2016 Q2, overall car production 2018 in China is estimated to be higher +3.1% • Western and Eastern OEMs 27.1 28.0 +7.6% did not participate at higher volumes, while Chinese OEMs

2018 -0.1% 12.7 13.7 -2.9% strongly increased production 10.0 10.0 4.4 4.2 • The trend of a shift to local OEMs is expected to FC 2016 FC 2018 FC 2016 FC 2018 FC 2016 FC 2018 FC 2016 FC 2018 accelerate until 2023 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 • A shift to local OEMs induces a major risk for Western automotive suppliers, which -1.3% spent substantial amounts of CAPEX in China, as expected 33.5 33.1 +10.2% production volumes with key clients may not realize -7.8% 2023 16.7 15.1 -17.2% • Participating at increased 12.7 11.7 volume of local OEMs might be 5.7 4.7 challenging due to a general preference of local suppliers FC 2016 FC 2018 FC 2016 FC 2018 FC 2016 FC 2018 FC 2016 FC 2018 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Source: LMC Automotive, Oliver Wyman Analyses

© Oliver Wyman 47 3 VALUE: Automotive value creation development until 2030 Total automotive value creation development until 2030 Despite multi-dimensional changes, automotive value creation is expected to only track car production growth at around 2% p.a.

Growth forecast of automotive market Comment

• The increase in value creation will mainly be driven by vehicle Vehicle production volume Value production, i.e. increasing number (in MM units) (in € BN, inflation corrected) of cars sold and higher value technologies build into cars (~2.3% p.a.) 2.1% 1,169 2.0% • R&D gains only slightly (0.4% p.a.) 123 as already today industry players are 897 investing heavily in the development of new technologies (e.g. vehicle 95 electrification and autonomous driving), which is expected to remain 2.3% Production stable or even decrease in future • Besides setting the right technological development focal areas, OEMs and suppliers need to continuously increase efficiency and subsequently decrease costs within their R&D 0.4% efforts R&D

2017 2030 2017 2030

Source: Oliver Wyman value creation model

Development of value creation by region/segment In € BN

North America −2.9p.p Europe −3.1p.p China +6.5p.p Korea and Japan −4.3p.p

+1% +4% 308 310 +1% 266 0% 222 161 196 178 160

2017 2030 2017 2030 2017 2030 2017 2030

South America +0.6p.p RoW +0.3p.p India +2.3p.p Rest of Asia (w/o India, China, +0.6p.p Korea, Japan)

+6% +4% +3% 64 +3% 33 45 20 19 28 28 29

2017 2030 2017 2030 2017 2030 2017 2030

X.X% CAGR (Compound annual growth rate) Change in share of total value creation 2017 vs. 2030

Source: Oliver Wyman value creation model

© Oliver Wyman 50 Horizontal shifts in automotive value creation until 2030 Value creation continues to grow along most steps of the value chain and modules with strong shift from value creation in ICE to electric drive systems

Development of value creation In % of total

2017 Σ = €897 BN 2030 Σ = €1,169 BN 100% 100% Chassis Chassis

Drivetrain 80% Drivetrain 80% ICE/aux. Systems

ICE/aux. Systems 60% 60% Electric Drive Systems Electric Drive Systems Body Structure Body Structure 40% Exterior 40% Exterior

Interior Interior 20% 20%

Electric/Electronics Electric/Electronics 0% 0% R&D Production Assembly R&D Production Assembly

Comment • E-drive gains significantly share (+14% ) • In contrast traditional ICE powertrain and auxiliary systems loose share continuously • Comparably high growth of E/E eased by today’s high level of R&D efforts to rapidly foster trend technologies • Body-in-white, chassis and interior expected to grow below market; But also in these categories growth pockets exist

Source: Oliver Wyman value creation model

© Oliver Wyman 51 Vertical shifts in automotive value creation until 2030 Outsourcing from OEMs to suppliers will continue but slow down; in E-Drive, OEMs will gradually build up own competence and rely for ADAS on suppliers

2012 (vs. 2002) 2017 2030 OEMs Suppliers OEMs Suppliers OEMs Suppliers

Chassis

Drivetrain

ICE/aux. Systems

E-Drive (incl. battery)

Body structure

Exterior

Interior

E/E1

1. Driven by advancement of ADAS and autonomous driving (AD) Source: Oliver Wyman value creation model

© Oliver Wyman 52 4 IMPACT: Areas of impact and strategic business model options for automotive suppliers BRAND, ENTERPRISE and MARKET VALUE Uncover opportunities, quantify Impact on suppliers: Many fronts value to the business, prioritize Development of new business/operating models and holistic performance improvement will be required for suppliers to remain competitive

GROWTH STRATEGY Sustainable company growth through globalization, market ORGANIZATIONAL EFFECTIVENESS and TALENT penetration and portfolio Flexible and agile organizational structures and effective downturn risk management expansion with a customer- and employee-centric and sustainable organization Launch Management RAPID R&D Accelerated, robust Strategy Process go-to-market acceleration in product development Organization and Governance

Engineering/ Sourcing Production Sales Aftersales G&A DIRECT CHANNEL INNO MGMT R&D Proactive aftersales channel Advanced and and and management directly to technology access Supply Chain Marketing Services consumers

RAPID EBITDA IMPROVMT Strategic cost-down, revenue-up Overarching performance improvement

DIGITALIZATION Industry 4.0

M&A/PMI M&A STRATEGY Management of partnerships, cooperation, and M&A

FINANCING BUSINESS SEPARATION Financial Financing and Restructuring Focused upgrade and/or sustainability controlled ramp-down of selected businesses

Source: VDA, Oliver Wyman analysis