THINK NEW! AUTOMOTIVE INSIGHTS ROLAND BERGER .COM ACT INDIA The secret of Maruti Suzuki's success

INTERVIEW Jim Farley,

SUPPLIERS The new rationale of tech deals BEYOND MAINSTREAM BEYOND 2 2016 2 2016

The we know today will have to be reinvented. THE VAN REINCARNATION OF AN URBAN WARRIOR ? WARRIOR URBAN AN OF REINCARNATION VAN THE PAGE 22 2 2016 2 2016

SERVING THE LAST MILE AUTOMOTIVE INSIGHTS AUTOMOTIVE

The van – Reincarnation

THINK ACT THINK of an urban warrior? 2

How can manufacturers leave their mark on the urban business?

Automotive Insights 2 | 2016 Editorial 3

All-rounders wanted!

They are supposed to be quiet and emission-free. Re- We discussed the matter with Jim Farley, president liable. Flexible. Fast, and with low maintenance of Ford of Europe, who spells out how changes on costs. Genuine all-rounders, essentially. The de- the last mile to the customer are affecting his busi- mands placed on delivery for the last mile ness and what innovations may be possible, particu- are spiraling – and confronting manufacturers with larly in the van segment. new challenges. LOOKING AT REGIONS, Mexico is currently moving AT THE SAME TIME, rapid growth in e-commerce center stage and experiencing a boom in invest- and the resultant steep rise in the number of deliv- ment. We examine what gaps in the value chain eries in urban areas is driving huge business poten- still need to be closed to ensure that this inflow of tial. And no OEM is keen to miss out on margins money translates into profits. We also take a close higher than those in the long-haul business. look at India. On the subcontinent, we explore the secret of Indian automaker Maruti Suzuki's suc- THE FUTURE GOALS of urban planners must like- cess: dovetailing the needs of a mass market with wise be factored in. The latter want to see livable, Japanese precision to create a sustainable manage- green inner cities with little traffic and low emis- ment model. sions. What's more, the deployment of new technol- ogies (such as drones) means that alternatives are AUTOMATED DRIVING, M&A activities in the supply now emerging for some aspects of fleet operators' industry, and the astonishing development of the business. Meanwhile, lucrative margins are also Jie Fang produced in China by FAW number arousing the interest of new competitors: Logistics among the other topics covered this time around. service providers (such as ) are copying the successful models they developed for passenger Enjoy your read! transport, and giants in adjacent markets (such as Marcus Berret Amazon) are converging on the transportation busi- ness. Some logistics groups are even building their own vehicles.

WITH SO MANY OPPORTUNITIES and challenges raising the stakes for OEMs, we have made "the last mile" the focus of our cover story for this edition.

Marcus Berret is Head of the Global Automotive Competence Center at Roland Berger and Head of the company's supervisory board.

Contact: [email protected] Phone: +49 711 3275-7419 Illustrations: Cover: Carlo Giovani, P.3: Ben Kirchner/Heart Agency Ben Kirchner/Heart P.3: Carlo Giovani, Cover: Illustrations:

Automotive Insights 2 | 2016 4

25 Jim Farley: "Urban environments play a fundamental role in the future of commercial vehicles" 81.5% will be the urban population of developed countries by 2030. What can the automotive industry offer to satisfy e-commerce cravings? 16 255 M&A took place in the worldwide supplier business in 2015. We look at tomorrow's hot prospects

Tech deals power ahead India: Maruti Suzuki has defined mobility 33 for Indian drivers since the 1980s 10 Photos: P.4: Claudia Janke, Farooq Khan/Picture-Alliance, Illustration: Carlo Giovani; P.5: Brent Winebrenner/GettyImages Brent P.5: Carlo Giovani; Illustration: Khan/Picture-Alliance, Farooq Janke, Claudia P.4: Photos:

Automotive Insights 2 | 2016 5

CONTENTS

PLACES 6 Feeding Mexico's auto boom Carlo Giovani How manufacturers and suppliers can make is an award-winning the most of their investments visual artist from São Paulo, Brazil. He created 10 Moving India the illustrations for our Maruti Suzuki became a successful blend of cover story using Japanese passion for detail and deep classical paper-folding understanding of the Indian mass market. techniques. [carlogiovani.com] PERSPECTIVES 14 New players on the last mile 81.5% How innovation is serving the needs of customers in the inner cities 16 The van – Reincarnation of an urban warrior? The delivery business in inner cities is dominated by streetfighting. How can automotive players grab their slice of the action? 25 "Make room for new thinking" We caught up with Ford of Europe CEO Jim Farley to talk about the future of commercial vehicles.

PLAYERS 30 Asia's big catch-up Our automated vehicle index shows where South Korea and China are gaining ground on the leading automotive nations. 32 Tech deals power ahead Knowhow – the new rationale behind M&A in the supplier segment

35 JieFang A symbol of China's industrialization

36 Food for thought What's on the menu for the automotive sector 6 and other industries? Automotive manufacturing in Mexico: 38 Automotive expertise@Roland Berger High hopes for premium OEMs but a Competencies, locations and experts shortage of supplier resources at a glance Photos: P.4: Claudia Janke, Farooq Khan/Picture-Alliance, Illustration: Carlo Giovani; P.5: Brent Winebrenner/GettyImages Brent P.5: Carlo Giovani; Illustration: Khan/Picture-Alliance, Farooq Janke, Claudia P.4: Photos:

Automotive Insights 2 | 2016 Feeding Mexico's auto boom

Assembly line in Puebla: Many components need to be imported.

This is the dawning of the new age of prosperity for the industry in Mexico. The difficulty is that local suppliers will struggle to satisfy OEM demands. How will manufacturers and suppliers make the most of their investments in the local market?

by Stephan Keese and Christian Böhler Dannemiller/Alamy P7: Keith Images; P6: Bloomberg/Getty Photos:

Automotive Insights 2 | 2016 Mexico's car manufacturers 7

udi has invested EUR 1.3 bn in a market will not endure. But the recent in- plant with a capacity of 150,000 vestment wave is more than a function of A units a year in San José Chiapa, sales prospects in traditional markets: Mexico. BMW just started to build a new While Mexico used to be known as a place plant in San Luis Potosí, in the center of the where mainly non-premium products and country, which is due to commence opera- comparably low-in-complexity parts were tions in 2019. These are few of the many manufactured, the share of premium ve- examples that prove how Mexico is taking hicle production is expected to grow about off as a location for automotive production. threefold by 2020. This is an increase in Seven large car manufacturers have an- absolute numbers from 127,000 to nounced new investment plans. More than 474,000, so premium vehicles would rep- USD 6 bn will flow into the Latin American resent 10% of the production mix in 2020 Port of Veracruz: Most vehicles are still country over the coming four years. Com- compared to 4% in 2015. exported to the NAFTA markets bined with projects that have already been Mexico's exports will no longer be limited kicked off, this will add up to USD 17 bn in to its traditional partners in the NAFTA re- new investments planned by all regional gion – the U.S. and Canada. Though they players. The new plants, spread across var- will still make up the biggest proportion in ious regional hubs, will boost production terms of total volumes, the largest share of capacity to 1.17 million vehicles. Auto ex- the new growth will go to other markets. ports represent about a quarter of Mexico's Exports to the rest of the world will in- total exports, with only one in five of the crease this year from 0.5 million units to the country manufactures staying 1.7 million units by 2020. Sales to the U.S. within its national borders. So the Mexican and Canada will rise 5%, up from 2.3 mil- economy as a whole is expected to benefit lion units to 2.4 million. Dynamics on the from the latest developments. home market will remain relatively stable. U.S. auto sales did slacken in the first Demand will increase by 0.1 million units months of 2016, adding to concerns that in the coming four years. Local producers last year's record sales pace in this key can deliver 80% of the electrical systems

LACKING SUPPLIER SUPPORT Manufacturers are increasingly relying on imported auto parts. This drives costs and bears risks for friction in the supply chain.

Vehicles Auto parts Indexed growth of light +35 % +39 % USD 25 bn vehicles vs. auto parts +32 % production [2016 = 100%] gap in the supply chain that has to be compensated by imports in 2020 +20 %

9 % +4 % +5 % +2 % +3 %

1 %

100% Compared: Compound annual growth 2016 2017 2018 2019 2020 rate over the next five years

Photos: P6: Bloomberg/Getty Images; P7: Keith Dannemiller/Alamy P7: Keith Images; P6: Bloomberg/Getty Photos: Sources: IHS, Roland Berger

Automotive Insights 2 | 2016 8 Mexico's car manufacturers

and 65% of the interiors needed. But this less advanced. Suppliers lack high-tech well-established tier 1 supplier base is standards and require major financial and Countryside Mexico: more than 80% large global companies. technological support. Mexico's manufac- Most suppliers are concentrated Other parts of the car come mainly from turing facilities have a shortage of process- in the north. abroad. 70% of all body parts have to be ing on technologies like aluminum die imported, as well as 65% of all powertrain casting, hot forming, laser cutting and high parts. Mexico's car manufacturers have al- gloss painted parts. Suitable products for ways relied heavily on imports – and they premium production are not available on a will do so to an even greater degree in the large scale in the tier 1 layer. Only a few tier future. They have to be aware that translat- 2/3 players with an international back- ing the boom into profits is anything but a ground have a presence in the market so foregone conclusion. far, because premium car manufacturers never focused on building reliable relation- BOTTLENECK PREMIUM SEGMENT ships. Setting up a full-fledged local manu- Particularly for the premium segment, facturing base for parts that meet all the there are many issues to be resolved. Take requirements of a high-end digital technol- advanced processes for car manufacturing: ogy world takes time. In the short term, Over two thirds of the technologies are im- competition for these resources will in- ported and not suitable for the premium crease even more, which drives prices. Ad- segment. Supplier manufacturing is even ditionally, there are structural risks: Prod-

CONSTRAINTS FOR PREMIUM MANUFACTURING IN MEXICO To secure a reliable value chain and reduce risks, players on the Mexican market have to fill many of the most critical gaps in their supplier network. While the development level is highest for mass-market cars in assembly capabilities, resources for advanced manufacturing processes are not sufficient for premium production.

OEM base Low Mid High Non premium Premium

Assembly capabilities

Advanced manufacturing processes

Supplier base Low Mid High Non premium Premium

Tier 1 presence

Tier 1 product coverage

Tier 2/3 presence

Manufacturing technology

High: level is comparable to manufacturing in developed country Ready for mass-market production Not ready for mass-market production

Source: Roland Berger

Automotive Insights 2 | 2016 Mexico's car manufacturers 9

uct and process supply base offerings vary regionally, with a high concentration of suppliers in the north and a lack of critical products in some regions. Also, inbound and outbound logistics capacity is too lim- ited to meet the dynamics within the sec- tor. This may result in a logistics bottle- neck, hampering just-in-time production. Manufacturers will have to spend more on inventory handling. At least in the short term, manufacturers can hedge these downsides by increasing their share of im- ported parts. On the financial side, this move causes a currency risk owing to the volatile peso.

HOW TO SUPPORT SUPPLIERS Setting up an integrated supply chain is critical for making efficient use of produc- tion capacity in Mexico. OEMs should keep in mind that labor costs in Mexico are ex- pected to rise long term. It is crucial to identify high-priority parts, where local availability is most limited and import is too expensive in the long run. Set up a strategy and appropriate process- es for how to fill these gaps in your supply chain. Try partnering up with the right suppliers and providing subsequent alignment support. Examples would be technical workshops to facilitate integra- tion and technology transfer, assistance programs for financing for smaller tier 2s, or workshops to integrate quality culture and value systems between partners. From a supplier investment perspective, Mexico is an opportunity to expand local manufacturing footprint beyond the tra- ditional product scope. Large and truly global suppliers have the financial abilities, technological know- how and manpower to enter or penetrate the Mexican automotive market. Overall, setting up a fully local and well-integrated supply chain will take years and require concerted action from all players, but companies that act now have a real chance of benefitting the most from these inter- esting growth opportunities.

Learn more about the topic in our

Photo: Joel Rogers/Corbis via GettyImages Rogers/Corbis Joel Photo: full study: http://bit.ly/rb_mexico_2016

Automotive Insights 2 | 2016 Srinagar: In Northern India, a driver in a Maruti Suzuki car is performing stunts on a rickety wooden wall. Photo: Farooq Khan/Picture-Alliance Farooq Photo: 11 Moving India

Maruti Suzuki is a local hero. The company succeeded in merging the strengths of two very different cultures in one common identity. Their approach became a role model for India's fast growing automotive market.

by Wilfried Aulbur

ndia's extremely low vehicle density and profits against transaction risks posed by ex- anese carmaker remains as dominant as promising young demographics make it change rate fluctuations. Local production ever. By balancing the right degree of fuel I a structural bull-market case for manu- of India-adequate vehicles only makes sense efficiency, engine power, space, styling and facturers in the medium to long term. Its if a significant potential volume can be interior at competitive prices, it became a domestic vehicle market grew at a healthy tapped. Hence, the vehicles of choice are role model for India's fast growing automo- clip between 2005 and 2012. While the over- small cars, a sizeable but also extremely tive market. With a market share that re- all market subsequently stagnated at around competitive slice of the market. Typically, mains close to its historic highs, Maruti 2.8 million vehicles, growth resumed in the current volumes in that segment attain- Suzuki has defined mobility for Indians 2015 due to a change in government and im- able for new entrants are insufficient by since the 1980s. Its relentless pursuit of a proved consumer sentiment. Going forward, themselves to justify the effort. This is why "volume up, cost down" strategy has creat- the market for passenger cars and light vehi- export opportunities need to be tapped in ed a virtuous cycle that continues to create cles is forecast to expand to roughly 5.7 mil- order to improve the overall business case. sustainable competitive advantages. The lion units in 2022. This would firmly place automotive manufacturer is poised to prof- India at the top of the industry in terms of INDIAN CHAMPIONS it from the growth in demand for passen- growth (see chart on page 13). Clearly, India A number of companies have developed op- ger cars like no other company in India. is too large a market for any car manufactur- erating models that enable profitable growth Virtually every second new automobile reg- er to ignore. Cracking the Indian auto mar- in India. Many of these have done exceed- istered in India is sold by Maruti Suzuki; no ket has however proven extremely challeng- ingly well. Maruti Suzuki is one of the major car market anywhere in the world is ing, as players have to develop brands that have established much more so singularly controlled by one brand. market-adequate vehicles. Pricing pressure than a bridgehead on the subcontinent. When its closest rival Hyundai is included, mandates deep localization levels both for For years domestic and foreign rivals have only about a third of the market is left, over development and procurement in order to tried to chip away at the market share of which more than a dozen car brands com-

Photo: Farooq Khan/Picture-Alliance Farooq Photo: reach demanding price points and to defend local hero Maruti Suzuki, but the Indo-Jap- pete. The company’s beginning can be

Automotive Insights 2 | 2016 12 Moving India

traced back to 1981 when Dr. V. Krish- ing things. We were impressed with the synonymous with the Indian market. Until namurthy founded Maruti Udyog Ltd. to minute detail orientation of the Japa- it was replaced it was one of the best sell- achieve two goals. The first was to develop nese," said Rahul Bharti, Vice President, ing models in the country’s history. India's technological and manufacturing Corporate Planning. "Their way of observ- know-how in automobiles and the second ing customers in detail, identifying their THE BEST OF BOTH WORLDS was to develop an indigenous, small and needs and then aligning the whole value What initially began as a cooperation of fuel-efficient car that could adequately pro- chain to deliver this need at an appropri- unequal partners ended up merging the vide affordable mobility to India's masses. ate value was impressive." strengths of two very different cultures into India at the time already had a trio of lead- one common identity. Maruti Suzuki has a ing carmakers, including Hindustan Mo- PROCESSES REVISITED detailed market understanding that is driv- tors and Premier Automobiles, famous for Osamu also challenged the entire work- en by its own insights, cooperation with the Ambassador and Padmini, respectively. force to identify cost savings to the tune of dealers and the desire to be intellectually All three had operated for decades under at least one yen as well as weight improve- honest, i.e., to do a rigorous analysis of India’s era of a centrally planned economy ments of at least one gram under the one’s own performance in the market and symbolized by the License Raj. Since they "1 component, 1 gram, 1 yen" initiative. that of one’s competitors to derive the nec- were not subject to the competitive forces Constant focus on the most minute de- essary actions. Maruti understands that in of a free market, the quality of cars running tails, from resource consumption to recy- the automotive business, it is the right off assembly lines at the time were unsur- cling steel scrap, created a culture of frugal product, the company's commitment to prisingly poor. engineering at all levels of the company live up to its promises on service, and total that helped Maruti offer more value for cost of ownership that make all the differ- A UNIQUE PARTNERSHIP consumer purchasing power than all other ence. Focusing on key parameters such as Knowing he needed an ally to provide manufacturers in India. The end product leadership in customer service satisfaction know-how, Krishnamurthy was able to was the Maruti 800, a car that became has driven positive word of mouth for the convince Suzuki Motor Corporation to brand and enabled sustained sales suc- bring to India the quality-obsessed car cul- cess. More remarkable is Maruti’s ability to ture so prevalent in Japan. Unfazed by the maintain its share throughout the years. challenges that the country had to offer, Typically, after a market achieves a critical patriarch Osamu Suzuki set to work incul- Maruti Suzuki at a glance mass, foreign carmakers set up full-scale cating Japanese manufacturing principles manufacturing plants and local supply net- such as Kanban and Kaizen at a very early Car manufacturer headquartered works to better compete on prices. By then stage. Employees had to take an oath that in New Delhi, India it’s usually only a matter of time before a they would not accept or pass on poor Formerly known as Maruti market leader sees its advantage gradually quality parts. Hundreds of Indian workers Udyog Limited erode as consumers look to differentiate were sent to Japanese factories to learn Japan’s Suzuki Motor Corporation themselves from the crowd. That did not first hand how to eliminate inefficiencies holds the majority of shares prove to be the case in India, however. while Japanese expats came to India to su- Operates two manufacturing pervise production processes. This strict plants in Gurgaon and Manesar KNOWING THE INDIAN CUSTOMER regime of quality control cascaded down (Haryana State) near New Delhi, One reason is that few have succeeded in to the manufacturer’s supplier base. To will begin additionally sourcing so thoroughly driving costs out of their pro- ensure parts met with minimum stan- Baleno from Suzuki’s cesses, making it nearly impossible to dards, Maruti Suzuki took a direct equity fully-owned Indian plant in Gujarat match the cost-driven culture at Maruti. stake in 18 suppliers. Additionally, Osamu early next year But a low price alone is not the answer. The instilled a sense of joint responsibility for Market share of about 50% of the company also knows Indian car buyers are the company by introducing things like Indian passenger car market (cars among the most demanding and expect open offices and a common canteen where and vehicles), revenue USD 8.4 bn unbeatable value for their money. Pushing a managing director might lunch next to in 2015/2016 cheap cars would ultimately fail as a strate- the janitor. In the 1980s, these concepts Models: Alto, Swift, Wagon R, gy. "You have to have an offering at every were revolutionary in India even for pri- Celerio, Dzire, Baleno and Ciaz INR 25,000-30,000 to cover all relevant cus- vate companies, let alone a partially na- Sold its ten millionth vehicle in tomer segments in the market," said tionalized carmaker like Maruti Suzuki. India in February 2012 Bharti. "If we find a gap somewhere, we try "From day one we had a very successful to identify a product to fill it with a - blend of Indian and Japanese ways of do- mum of 50,000 units that has maximum

Automotive Insights 2 | 2016 Moving India 13

communization with other products." In- tryside. The recipe is simple: thousands Both sides, however, are undoubtedly novation at Maruti doesn’t stop there. The of local villagers are nominated to be happy about the performance of the company pioneered a growing movement "resident dealer sales executives". Facto- Indian business. Maruti accounted for a towards "clutchless" or automated manual ry visits for villagers form part of an out- third of Suzuki’s automotive revenue and transmissions (AMT) ever since it first dis- reach program together with support for more than half of its operating profit in played the inexpensive technology in 2014 rural sporting events and trade fairs. In fiscal 2015. With new models like the in a Celerio . Marrying an intelli- fiscal 2008, rural sales amounted to just Ciaz and Xcross and a premium show- gent hydraulic actuator with a manual 3.5% of Maruti Suzuki's total turnover. room concept to boot, Maruti is trying to gearbox allows Indian consumers to have Seven years later that share had risen ten- shift its model portfolio upmarket. The the experience of driving automatic at a fold, prompting other brands like transition from a value to a lifestyle- much lower price. Given the congestion on and Honda to copy its approach. oriented brand has been difficult for Su- city streets, demand for AMTs in India is Today the company builds 1.5 million zuki globally. Thanks to Maruti, India now taking off. cars annually. Thanks to the favorable may just be the market in which it development of Maruti’s stock compared succeeds. EMBRACING THE DEALERS to Suziki's, the subsidiary enjoys a mate- Maruti Suzuki also blazed new trails in rially higher market capitalization than Excerpt from the book: Riding the Tiger, distribution by pushing into the coun­ the parent, Suzuki Motor in mid-2016. Random House India, appears 11/2016

INDIA'S CAR MARKET IS THE GROWTH STAR OF THE BRIC COUNTRIES Thanks to a rapid economic expansion under reformist Prime Minister Narendra Modi, India replaced Brazil 2015 as the 5th largest light vehicle market in the world. In total India sold 3.4 million passenger cars and light trucks in 2016.

Forecast of light vehicles and passenger cars sales [Index 2014=100] Russia Brazil China India

+95 %

+81 %

+69 %

+58 %

+45 % +36 % +30 % +32 % +27 % +22 % +15 % +16 % +11 % +13 % +7 % +6 % 100% -6 % -9 % -7 % -16 % -21 % -26 % -29 % -29 % -36 % -36 % -39 % -42 % -44 %-43 % -45 % -44 %

2014 2015 2016 2017 2018 2019 2020 2021 2022

Sources: IHS, Roland Berger

Automotive Insights 2 | 2016 NEW PLAYERS ON THE LAST MILE

A living system: Our journey through the inner-city delivery microcosm shows innovations in various stages, from pilot phase to test-market application.

by Jan-Philipp Hasenberg and Tobias Schönberg

3 Illustration: Sasan Pix Illustration:

Automotive Insights 2 | 2016 Blindtext 15 70 m

2. Airbnb for sending goods 1. Delivery by drones Peer-to-peer service that con- Packages up to 2.3 kg can be nects people who need to send delivered in 30 minutes or less. something from one place to The drones fly under 120 m and another with people going that weigh less than 25 kg. Distances way anyway. Operates via mobile of 16 km or more. phone to pick up and deliver. Example: Amazon Prime Air Example: Nimber, Norway, U.S. 1

3. Multifunctional vehicles 35 m New ideas for specific delivery vehicles for the last mile: Electric pickups, small trucks or mini- buses. Manufacturing of small batches via smart platform strategies or process innovation. Examples: DHL Streetscooter, Tesla

4. Car drop-off service Customers order online, a TAN is generated, delivery staff gets the car's position via GPS data. The 2 TAN in combination with a special 4 device in the car turns it into a 0 m mobile drop-off facility. Examples: DHL/Daimler, Audi/Amazon

5. Distribution via subway tunnel System links consolidation cen- ters to strategically placed nodal 5 points in town using modular -20 m pipelines laid alongside or under existing or realigned transport corridors. Palletized or bulk freight is moved in purpose-built capsules by magnetic propulsion. Example: Mole Solutions, UK

6. Distribution via freight tunnel system Comprehensive automated logis- 6 tics system located 50 m under ground. Unmanned electric vehi- cles are cruising with constant Illustration: Sasan Pix Illustration: -50 m speed (30km/h). Example: Cargo sous terrain, Switzerland

Automotive Insights 2 | 2016 Illustration: Carlo Giovani 17 The van Reincarnation of an urban warrior?

As e-commerce continues to grow, the delivery business in inner-city areas is becoming a more fragmented and more challenging game. with unprecedented flexibility and connectivity can offer manufacturers the right provisions to win a substantial part of it.

by Norbert Dressler, Tobias Schönberg and Georg von Thaden

ities will always be places where expecting same-day delivery as the norm. Urban landscapes are changing as well. material goods are produced, dis- Meanwhile, transport infrastructure has Developed cities will see a return of the C tributed and consumed. Millenni- reached its natural limits, such as the elderly population as public transport is al consumers are infusing this status quo maximum number of vehicles per hour on made increasingly more accessible and now with a new dynamic: born into a any given stretch of road. individual vehicle use is restricted. More world of faster food, just-in-time produc- and more people want to benefit from tion and instant messaging, they are con- HOW CITIES WILL CHANGE short distances in their day-to-day life and stantly calling for more and faster deliv- In consequence, traffic jams, emissions urban infrastructures. Therefore, cities eries to fulfill their needs. The growth of and the collapse of urban infrastructure will be re-developed into "urban villages" e-commerce has become a generational are making living conditions worse in to prevent the urban sprawl typical of con- phenomenon with over half of millennials many cities. temporary cities. As a result, developed

The numbers game Ever increasing numbers of people in cities are doing more and more business online, overloading the transport infrastructure. 81.5% 10% 60% 70% 74% of the population in e-commerce increase p.a. in of value share is of German customers of French customers developed countries will live Europe, with this set to generated on would like to use a 1 hour would like to have free in cities by 2030 double by 2030 the "last mile" delivery service delivery

Illustration: Carlo Giovani Illustration: Sources: UN, eMarketer, Roland Berger

Automotive Insights 2 | 2016 18 Inner-city delivery business

countries will experience an explosion in the variety of mobility and transport solu- tions on offer.

THE LAST MILE: RICH PICKINGS FOR THE WHITE VAN It is not surprising that the last mile in the transport process – the delivery of goods from a hub to the end customer – is becoming the new battleground for the logistics business. Take France: it is esti- mated that 10 to 15% of all deliveries are currently made to private individuals in the Paris area. This figure might even jump to 20 to 30% after 2025. Not only volume shares but also margins are sig- nificantly higher on the last mile than on long hauls. So the last mile of the logistics chain will experience the greatest disrup- tion: There will be decentralized, partial- ly mobile depots; faster service; smaller vehicles provide zero emission delivery and make use of existing capacities by using sharing schemes; and platforms al- lowing for a higher number of operators distributing goods. In the long run, even autonomous delivery is conceivable. Meanwhile, lines between players in the logistics chain are becoming blurred, in- cumbents are increasingly falling prey to flank attacks by clever, more agile and – more often than not – more financially adept new players. Regardless of the busi- ness sector in question, barely a week goes by without a new operator muscling in on an established player’s territory. Uber- CARGO provides a van with available space plus a professional driver within minutes. The delivery can be tracked via smartphone. Peer-to-peer-services have also been introduced to the cargo seg- ment. The Norwegian start-up Nimber offers a network of private drivers that are able to transport goods. At the same time players from adjacent in- dustries, like e-commerce giant Am- azon has extended into the logistics value chain (see box right). It is fair to say that some of the maneuver- ing going on is typical of players keen to consolidate their position by of-

fering services at prices that are not sus- Carlo Giovani Illustration:

Automotive Insights 2 | 2016 Inner-city delivery business 19

in inner cities as much as possible: Singa- pore was the first city to implement an The Amazon approach – Delivery 4.0? electronic road pricing system, which Amazon has a wealth of innovative ideas supporting last-mile deliveries to helps control congestion, e.g. via higher retail customers around the world. The impact on both manufacturers and tariffs for users with high mileage and operators of light commercial vans will be significant. during peak times. Stockholm introduced a permanent congestion charge in order Technology: far the service is being tested in selected to reduce traffic during rush hour by 10 to Flex app: Amazon has taken the Uber U.S. and European cities. 15% and to enhance the quality of life in concept and applied it to the delivery the city center. Other models have even business. Amazon developed an app Infrastructure: bigger impact on the automotive busi- designed to enable individuals to deliver Amazon relocated distribution centers ness, ranging from no-drive zones for die- goods previously transported by from the outskirts and remote areas to the sel vehicles to complete city logistics professional services (e.g. DHL). city center to allow for faster delivery. schemes set up by the municipal govern- ment, e.g. those in Gothenburg or Amster- Operations: Further innovations: dam. With electric vehicles gaining Amazon Fresh: By expanding its huge Drones for delivery, e-scooters (for ground and limited parking available for offer of goods to include fresh groceries, circumventing urban traffic jams), Prime delivery vans, the question for the last the company is becoming a serious Now delivery (2h delivery, or 1h delivery for mile is how green and carbon-neutral fu- competitor to traditional retail chains. So an additional fee). ture transportation and logistics fleets will be. Electrically powered, these fleets will form part of an integrated inter-mod- al transport solution. Conventional trucks tainable in the long run in order to force will handle intercity delivery between new others out of the market over the short logistical hubs to be built beyond city lim- term. In this new world, network planning its, with electric vehicles supplying the and emissions efficiency will be replaced inner-city districts. In accordance with by speed and agility. Innovators count on the hop-on/hop-off principle, the vehicles small delivery modes like bikes, cars and will serve pre-determined routes, timeta- light commercial vehicles. This is why we bles and stops, where consumers or other see opportunities for the white van: It is authorized persons can load and unload one of the most flexible means of trans- freight. Consumers want green solutions port on the last mile. and are keen to demonstrate that their con- sumerism is environmentally acceptable. THREE TRENDS IN INNER-CITY Efficient.Efficiency remains the backbone TRANSPORT of any strategy that van operators and It is not clear yet who will set the pace manufacturers may carve out. That's why within the inner-city transport environ- It is not yet clear total cost of ownership is relevant for the ment of the future. The automotive indus- question of whether innovation in the lo- try has to stay agile and flexible to serve who will set gistics environment will generate future the needs that emerge. Such agility would profits and resilient business cases in the position them well for future inner-city the pace within future – customers are highly price sensi- logistics. But they have to innovate to stay tive. We already see fleets merging and the ahead of the curve. We believe that three the modern transport of people and goods beginning trends will influence the future of the van to converge. There is a much greater focus business: We call them "Green", "Effi- inner-city on the route planning with so-called "milk cient" and "Premium". runs" forming a standard delivery pattern. Green. Protecting the environment and transport The "efficient" trend is primarily driven preserving natural resources has become by telematics services providing instanta- a defining characteristic of modern life. environment. neous information on the transport vehi- For the automotive and transport industry cle market and storage capacity in the

Illustration: Carlo Giovani Illustration: this means avoiding traffic and emissions logistics hubs. However, the benefits of an

Automotive Insights 2 | 2016 20 Inner-city delivery business

inter-modal approach can be played out though the transport process is separated Because it picks its routes opportunisti- here too with the full range of transport from the logistical planning, it is imper- cally, it is not particularly fast; however, it options ranging from conventional ative for the sales and transport provider requires no planning and utilizes spare to drone and even to pedestrian. The use to operate in unison. This asset-light ap- capacity, making it remarkably efficient. of radio frequency identification (RFID) proach is provided by successful pioneers The most important pull factors here are broadcasting will make intelligent parcels in this field, such as the Hong Kong-based that sale and transport of goods are part a reality. Smart trucks using GPS and online logistics platforms GoGoVan and of one and the same process. Therefore, telematics data feature strongly in this Easyvan, with over 26,000 vehicles playing the delivery costs must be covered by the scenario. The vehicle location and the the role of key intermediary. These plat- purchase price. traffic situation are transmitted to the forms make use of intelligent parcels, Premium. A first-class offer can have dif- route planning system, which adjusts the equipped with RFID chips or similar tech- ferent characteristics – depending on the order of delivery depending on the vol- nology, they know where they have to go future needs of the customer. Premium is ume of traffic. Information received from and simply hitch a ride with the interme- whatever urban customers regard as ex- RFID tags attached to parcels can be con- diary, which guarantees delivery. Hitch- ceptional and for which they are willing stantly updated and the driver informed hiking, as the name suggests, is not de- to pay an above-average price. This trend if the wrong parcel has been loaded. Al- pendent on a specific delivery schedule. is driven by the maxim "you get what you

Automotive Insights 2 | 2016 Inner-city delivery business 21

AND THE WINNER IS … THE SMALL

While the van market as a whole is not expected to change significantly between 2016 and 2030, the small panel van is set to almost double in volume. The explanation is simple – this category of vehicle is best suited to a mix of goods and people transport thus offering the greatest flexibility (and efficiency) within the larger van segment.

Van type Examples1 Mini van , Hijet Light van Fiat Doblo, Mercedes Vaneo Small panel van NV300, VW Transporter Large panel van Peugeot Boxer, Heavy van Mercedes Sprinter, Master

1 Depending on the vehicles' configuration, models can belong to different groups

2016 2030

30%

27% 29% 19% 13% 12% 10% 7%

26% 27%

∑ 7.3 Mio ∑ 8.5 Mio

Source:s IHS, Roland Berger

pay for." Besides special requests referring diverse transport mix serving the "effi- to treatment of the product itself (e.g. cient" category and the use of mobile de- cooling of perishable goods, safety of vices are all standard. With extraordinary valuable goods) the delivery itself be- precision, the moment an order comes in, comes part of the premium experience. the exact time of delivery down to the The most obvious dimension is time: minute is being communicated to the cus- same-day delivery options are down to tomer. Other customers might regard between 30 minutes and 2 hours. But pre- environmental sustainability, e.g. mium does not necessarily mean "fast." It emission -free or a package-free distribu- could also mean a delivery arriving pre- tion chain as premium, or the mode of cisely when the customer needs it to – transport – for example, by drone. even in the middle of the night. Here, too, telematics plays a central role in having WHICH VEHICLE IS GOING TO CONQUER all information at hand. Predictive de- THE LAST MILE … mand analysis (i.e. having the goods Vehicle manufacturers and operators have placed in the logistics hub before the or- recognized that their business model has der itself even comes in), self-driving just gone west (see interview on page 25).

Illustration: Carlo Giovani Illustration: "robovans," which are part of the same We see some parallels to the development

Automotive Insights 2 | 2016 22 Inner-city delivery business

in the passenger car segment, where a larly visible. Yet there is room for disrup- revolution is in full swing. The business tion (see exhibit on page 22): the delivery is experiencing its most extensive renewal vehicle of the future might also act as a of the last 100 years. Mobility service pro- mobile storage facility. For the transport viders are expected to take the front end provider the last-mile-market will enjoy to the customer. much greater diversity. Goods and people So van manufacturers too might have to do might be transported together with goods more than just build and sell vehicles in taking up unused passenger capacity the future. For a start, let's take a look at where available. Whoever is to serve these the product itself. The vision is of a four- future needs – notably vehicle manufac- tiered structure, comprising smaller inner- turers – will need to adapt the van we city delivery vans and larger long-haul know today. trucks as well as two new categories; The most relevant feature in the future "small" long-haul trucks connecting the will be the connectivity. Taking orders, new urban logistics hubs and delivery reporting status, communicating with trucks to feed the catchment areas around other vehicles, navigating the best route the logistics hubs. In terms of volume we and confirming delivery of goods are all expect the small panel vans (VW Transport- part of the new transparency demanded er and Nissan NV 300) to benefit the most Vehicles should by millennial customers. Telematics will from the shift in the delivery ecosystem play a greater role here with a much great- (see box p. 21). They offer enough room for become both er range of business management op- passenger comfort, while their cargo space tions, including so-called "drive-by order- is ideal for the smaller batches of custom- simpler in their ing". Predictive demand analysis will ized and fragmented inner-city freight. To enable the vehicle interior to be config- make the most of this development, vehi- construction and ured just-in-time to maximize the utility cles will become both simpler in terms of of the vehicle at any given moment. their construction and simultaneously more complex in Multifunctionality will be a central chal- more complex in their ability to undertake lenge of this new range of vehicles with a vast range of tasks. their ability to seemingly magical solutions. The secret of their success lies in the built-in flexibil- … AND WHAT WILL IT LOOK LIKE? undertake different ity of the passenger/load area configura- This is why the van we know today needs tions. Another relevant feature is engine to be reinvented. But in this part of the tasks. performance. Whereas it used to be a cen- commercial vehicles segment, spectacular tral defining factor of

innovation activities are still not particu- design and engineering, in the future it will Carlo Giovani Illustration:

Automotive Insights 2 | 2016 Inner-city delivery business 23

be highly tailored to the specific task of the day. Thanks to automation, driver input will change: While today it is linked to ap- vehicle. In urban terms, that translates to will be reduced to monitoring tasks and pearance and level of technology features, vehicles with a limited top speed, electri- manual override where required. This will it will be about endurance and reliability in fied powertrains and a smaller footprint. lead to a highly reduced instrument binna- the future. Technologies like "predictive Dynamic characteristics of the vehicles of cle and driver cabin. The same goes for com- maintenance" and "remote diagnostics" will the future will also be different, with a fo- fort with the maxim being simplicity and contribute to quality because they allow op- cus on generating predictable, low speed ease of access and exit for vehicles carrying erators to anticipate problems before they maneuvering ability paired with smart nav- both people and goods. Quality is a must- occur. The revolution in connectivity will igation. And regarding interior ergonom- have – today and even more so for the van come at lower costs. As total cost of owner- ics, simplification will be the order of the of the future. The understanding of quality ship will remain the single most significant

Performance and Quality Cost efficiency maneuverability

Van of today Van of the future Van of today Van of the future Van of today Van of the future speed appearance, tech. sophistication optimization of operating costs dynamics reliability, endurance sharability

Ergonomics Sustainability and comfort THE VAN'S FACELIFT The humble van is the central link in any logistics chain. So that this remains true in the future, many of the key design and engineering features will need to be reassessed.

Van of today Van of the future Relevance of features Van of today Van of the future (more layers=more relevant) ease of operation CO2 efficiency Changes in relevance of features level of convenience electrification

Multifunctionality Connectivity Design

Van of today Van of the future Van of today Van of the future Van of today Van of the future suitability for goods and services breadth of applications relevance of design in buying decision mutability of functions sophistication of applications function as a status symbol

Illustration: Carlo Giovani Illustration: Source: Roland Berger

Automotive Insights 2 | 2016 24 Inner-city delivery business

their own zero-emission vehicles tailored to the specific needs of delivery staff in an Automotive players urban environment. DHL for example de- cided to team up with RWTH Aachen to get its street scooter pilot on the road – and not with a traditional manufacturer. need to open their There will be other segments to serve: Where the delivery time is between one to four hours, margins are considerably low- er while customers are more willing to eyes to the parts of accept inconsistencies in projected deliv- ery times. At the same time mini fleets and one-man operations offer better cost-effectiveness, the delivery and flexibility, are able to respond in taxi- like fashion at extremely short notice, switch between transporting people and/ or goods and have vehicles available for business that might private use. BE AWARE OF DISRUPTION The future city environments with their various regulatory rules will be an import- be disrupted first. ant trigger to define the future require- ments in the van segment. End customers too will have a stronger influence over conditions within the market. Other play- ers like operators and logistics service providers are in a transition phase that factor for transport providers, 24/7 opera- longer managed by the manufacturer of has to be closely monitored. There might bility with trip planning and performance the product or service, but over a third- be much greater competition between lo- analysis provides them with the best party platform. The mix of transport fleets gistic fleet operations and private individ- means of managing and improving their might be reshuffled, smaller companies uals working for logistic platforms in a costs. and one-man enterprises fulfilling the freelance capacity. Fragmentation of cus- Future vans will have to be able to meet task. Regarding freight consolidation tomer needs might force vehicle manufac- the increasing requirements of emis- platforms they could be taken over by ma- turers to think about how to offer smaller sion-free zones within cities. We expect jor logistics service providers (LSP). They batch sizes of specific models at an afford- electrification to be the only way forward. could prevent smaller providers from able price. We also see a changing role of design, entering the intercity transport market, The transition phase makes the transport where "form follows function" might be ultimately serving all B2X businesses in logistics environment a challenging one the credo. The new vehicles will be mod- the long run. There is also room for C2X for automotive players. They need to dare ular and infinitely more robust, accumu- business in either inter- or intra-city to leave their beaten track. Opening their lating significantly greater mileage than operations. eyes to the parts of the business that is the norm today and for hugely In addition, the hierarchy of players might might be disrupted first, launching vari- diverse tasks. change, which has implications for van ous initiatives to address new customer manufacturers' portfolio of business part- groups and their needs and – most im- A SHAKE-UP IN THE LAST-MILE ners. As an innovation leader, Amazon is portant of all – having the willingness to DISTRIBUTION GAME? conquering the full range of the value innovate radically are the best recipes for We expect that the last-mile transport eco- chain, which will lead to a crowding out success. Those manufacturers and logis- system will run through various changes. of traditional operators – precisely the tics providers who think ahead today can In the first phase new intermediaries will traditional customers of van manufactur- become the leading players of the delivery enter the scene, with the order process no ers are also gaining an edge by developing world of tomorrow.

Automotive Insights 2 | 2016 Interview 25

"Make room for new thinking."

The delivery van is an opportunity for the automotive industry to play a role in future transport logistics. We caught up with Ford of Europe CEO Jim Farley to talk about the future of commercial vehicles. The increasing importance of telematics and the opportunities to be had on the last mile of the delivery chain are reason enough for Farley to claim that the golden age of the delivery van is still to come.

Interview: Marcus Berret, Paul Entwistle Photos: Claudia Janke

Automotive Insights 2 | 2016

26 Interview

You’ve been with Ford since 2007 and be- came CEO Ford of Europe in January 2015. You’re a car guy through and through – are you a truck guy too? I learned to drive a truck when my family moved from Argentina to the U.S. It was a Ford F-150 pickup with "three on the tree" – basically a three-speed manual trans- mission with the gearshift lever mounted on the steering column. The first vehicle I owned was a Mustang that I restored my- self before I even had a driver's licence. It seems like it was only yesterday that my parents called me "Jimmy Car Car." What are you are expecting from the com- mercial vehicle market in the next 10 years? As manufacturers start to tap the profit pool for commercial vehicles, I see two big trends leading to considerable disrup- tion in our industry. The first is the tre- mendous amount of capital being allocat- ed to the light commercial segments. The second is the impact of new mobility, which as yet remains unclear. New mobil- ity is likely to be the most important de- velopment for future profit pools and the dramatic change of capital allocation to commercial industry will probably mani- fest itself in a lot of new products and that almost always means price compression and over capacity. So as vehicle manufac- turing experiences greater competition, the mobility side reveals more and more the first thing you notice is how different opportunities to get involved and thus Jim Farley they are from one another, with diverse will become an increasingly significant points of view, differing histories and part of our business. Jim Farley took over as CEO of Ford of their own unique problems – including of Automation and electrification are a given Europe on January 1, 2015 having joined course congestion at the highest level. A for the manufacturers. Are there blind in 2007 to oversee second blind spot is the regulatory im- spots? global marketing, servicing and sales, pact on manufacturers of all these cities One blind spot is the very nature of urban initially as Group Vice President, across Europe making individual deci- environments and their transportation eventually becoming Executive Vice sions on how they want to run transport. systems. They have a fundamental role to President. Previously he was employed With such unforeseen hurdles, our solu- play in the future of commercial vehicles by Toyota, which he joined in 1990 and tion as a manufacturer of commercial ve- – by which I explicitly do not mean long- where he became Group Vice President hicles has been to engage the city directly haul trucks – rather those vehicles that and General Manager of Lexus. He and to do this very thoughtfully and care- break the bulk down. National govern- attended Georgetown University in fully as to which cities you want to talk to ments do not run cities and transport sys- Washington D.C. where he earned a – is it an Istanbul, a Paris or a London? tems – although they have huge impact degree in economics and computer They are quite different from one another. on them (see Germany's congestion science and received an MBA in finance Have manufacturers of commercial vehi- zones). Talking to the professional man- from the UCLA Anderson School. cles registered the threat of disruption? agers responsible for transport infra- The automotive industry has focused 95% structure in cities like London or Paris, of its attention on passenger car innova-

Automotive Insights 2 | 2016

Interview 27

"The industry has not spent enough time on innovation in the van segment."

Jim Farley

tion and disruption. It has not spent they have an operating system for the sub- Are there business models out there that enough time on the highly profitable com- way and other transportation networks. could work? mercial vehicle business. We think some Some of the basics of that system like slot Cities are starting to look at monetizing of the trends will be similar, but most of booking will play out – I personally don’t their curbs to address congestion. Driving them could be unique. The key to change believe that disruptors for this space will into the city becomes a process of slot is how the so-called "last mile" of the deliv- be the same ones as we see on passenger booking like an airline landing pattern ery logistics process can be transformed. cars. Unpredictable logistics companies with a slot you have to pay for. As yet how- You can't bring a washing machine into such as Amazon using a new operating sys- ever, I don't really believe anyone has a the city on mass transportation. Moving tem can provide customers with better val- vision for solving this, but Transport for people requires very specific solutions, but ue. They may be people not indigenous to London and other transport systems are moving goods and especially irregular an Apple or a Google – they may be quite getting there. How it plays out could be goods or items being used by craftsmen is different – but they still have to get their very complicated, with more efficient pro- completely different from delivering a products delivered in big cities. They will cesses including telematics integrated package bought on the internet. be part of this solution and in a way for into city transport systems, such as ETA The last mile is currently owned by van them it is vertical integration, but I think and slot booking. manufacturers and fleet operators, but the artisan problem (the infamous "white One in four trucks on European roads has other Uber-like competitors are on the van") is far beyond Amazon. For smaller little or no cargo on board. How will con- horizon. Do you anticipate disruption? operations there may be a different solu- nectivity address this? Many of the cities are starting to develop tion. It may be a navigation system that is I don't believe there is one solution to the logistics systems, just in the same way able to expand their product base. smart logistics question yet. In the medi-

Automotive Insights 2 | 2016

28 Interview

um term, I see fleet telematics being the small vans have merged into one segment critical capability for any brand wanting with the most successful players being to be a leader in the commercial busi- the B-segment-based products, which ness. If you can't offer dynamic vehicle have the lowest cost base but are larger in routing, dispatching or diagnostics for size. Electrification limits payload and small businesses, then you're not going with automated driving, the package may to be competitive in Europe. What I can be very different from today. The same is say is that the end solution will see a lot true of the electrification itself – it may be of venture capital investment and disrup- Ford different from that of a passenger car with tors. I think in the case of the commercial ranges set at 250 miles. Vehicles will have vehicle business and getting goods in Ford is a global automotive the latest connectivity with software ser- and out of the city, what we really need is manufacturer employing 199,000 vices helping operators to make their an operating system, where people mov- employees at 67 plants worldwide. fleets more efficient, deal with the reali- ing goods have a predictable system of The company's core business ties of congestion and all the complicated data inputs using software that everyone includes designing, manufacturing, taxation resulting from it. Increasingly can adapt to. marketing, financing and servicing the software will treat an operator like an What can the automotive industry do to Ford cars, trucks, commercial individual on the subway or a bus using revolutionize the last mile? vehicles, SUVs and electrified city mapper-style smart apps and we will We have to think about what our products vehicles. Ford of Europe produces, want to sync data coming off the vehicle are going to look like. There is a question sells and services Ford-brand to be used by the transportation systems. whether the current small van is the right vehicles in 50 individual markets They are going to need that for their oper- format. But we should make room for employing 53,000 employees. ating system as input. So working with new thinking like Tesla has with high-end the cities again will be more important to electrified vehicles. The B- and C-sized make sure that we understand their ex- pectations regarding the data. The revolu- tion is going to happen in the software. Who will get ahead in this segment? It is a very competitive space. Ford is the No. 1 commercial vehicle seller in Eu- rope so we want to protect that position. There will be electrification, automation and great software, some of which is in- house and some outsourced. The wild- card here is if the form changes, if the transport business were to move from drones to something else. You could eas- ily have a fresh, new product in the space to really mix it up. However, the truck business has long been the bedrock of our company’s profitability. Now we are realizing, whether in China or elsewhere, that this can be a sustainable advantage for us and a differentiator for our brand. In traditional markets such as Western Europe, we see a lot more opportunity Discussion: (right to left) for Ford. Jim Farley, Let's take a look at the bigger picture – How Senior Partner are planners and municipal leaders making Marcus Berret, life in the cities easier? Editor You have the major cities such as Dubai Paul Entwistle and Singapore, which have been very pub- lic about their visions. Singapore is proba-

Automotive Insights 2 | 2016

Interview 29

"Urban environments play a fundamental role in the future of commercial vehicles."

Jim Farley

bly the best example. The real thought on a par with smoking. Thus far regula- from "will Apple or Google have a car," to leader is London. Transport for London tions have focused on passenger cars. "what are the brands going to do with (TFL) is a unique organization. They face Now the regulators are looking to get vans commercial vehicles?" and "What are the off against the customer. They’re not re- with Euro 4/Euro 5 diesels off the road. cities going to do to accommodate moved from reality. They are practical Cities may well be faster than the EU in them?" This has had almost no debate or people. They have to deal with changing driving electrification requirements – discussion within the industry, but the political leadership – the former Mayor of Oslo is a good example. After opting for impact is fundamental. London Boris Johnson made transport electrification, businesses said fine, but What can you as a manufacturer contribute and pollution the focus of his campaign. asked how they were going to get goods to sustainability? His successor Sadiq Khan is making these into town. We are a 113-year-old company. We have plans happen. Transport for London has In addition, people will still want to eat in seen a lot of different politicians, and a long history of innovation. Now they are the city – food won’t be delivered via the a lot of consumer trends. This is an planning to get digital feed from bicycles. underground. Society is based on com- issue that our Executive Chairman, Bill That’s just the beginning though – goods muting – with Europe leading the world. Ford, personally feels very strongly about. are next on the agenda. Despite revenue I am concerned about the unintended It’s a family company – and like a few oth- constraints, they operate very well. As we social impacts of having goods restricted. ers in our industry, they think and act dif- start to engage in different cities in Eu- At a certain point people will realize that ferently. We have shareholders and stake- rope, I see cities like Dubai, Singapore they will have to buy an electric Transit holders like everyone else that are very and London as highly professional, van or a Focus just to get around. This important, but I have to say the way we forward-looking benchmarks. will change the scale of our industry. Fi- think about customers isn’t just about Society is increasingly anti-car. Does that nally however, electric is a just a small whether we will make money off them, worry you? part of the jigsaw. You have automation. but how we fit into society as a whole. My True, in London, I hear people saying You have software and when it comes to intuition tells me that our contribution things like "it’s so nice not to have cars." the vehicle moving goods in the next six will more likely come from commercial In emotional terms, traffic congestion is months to a year, this will quickly go rather than passenger vehicles.

Automotive Insights 2 | 2016 30 Players ASIA'S BIG CATCH-UP

The automated vehicles index1 reviews the evolution of market and technology. It shows how leading automotive nations compare in terms of market position and industry performance. An update in two dimensions.

by Wolfgang Bernhart and Thomas Schlick

AUTOMATED VEHICLES INDEX – Q3 2016

Industry: Industry Calculated based on development stage and competency level of 4 automated driving technologies developed and produced by manufacturers in each country, and number of research areas and Germany availability of functions. 3 USA

Market: Japan Sweden Calculated based on sales figures for models with advanced driver 2 France South assistance system (ADAS) Korea functions, market share in home Great Britain market and global market. Also China reflects the assessment of the Italy legal situation in the country in 1 relation to automation.

Learn more in our full study: Market http://bit.ly/rb_AV_Q32016 1 2 3 4

1 Index produced in cooperation with the Automotive Competence Center & Forschungsgesellschaft Kraftfahrwesen mbH Aachen, all dimensions were ranked on a five-point scale, visualized results of analysis do not include the "legal framework" indicator.

Automotive Insights 2 | 2016 Players 31 SMALL SWAPS RISING STARS

The top five countries producing cars with automated As established nations, Germany and the U.S. will see strong competition from functions show little change compared to 2015. The South Korea and China in the medium term. South Korea climbed from 9th to 6th U.S. and China stay champions here. Looking at place in the index in just one year. It made the biggest strides in the research and market share, countries ranked 5th to 9th reshuffle development stage and covers an increasing range of competencies. China's their positions – France being a surprising winner. automakers also gained ground. Both countries have already caught up with France. Sales figures for vehicles with ADAS South Korea 2015 2016 Availability of functions 1 1

2 2 Market Development share stage 3 3

4 4

5 5

6 6 Research areas 7 7 Sales figures 8 8

9 9 Competency level

Market share China 2015 2016 Availability of functions 1 1 Market Development 2 2 share stage 3 3

4 4

5 5

6 6 Research Sales figures areas 7 7

8 8

9 9 Competency level

Source: Roland Berger

Automotive Insights 2 | 2016 Close-up: Electric component for plug-in hybrid vehicles Photo: Fabian Kirchbauer/BMW Group Kirchbauer/BMW Fabian Photo: Tech deals 33 Tech deals power ahead

Suppliers' reasons for getting involved in the M&A market have evolved over the past four years. Now, consolidation is driven by the need to establish technology, material and process expertise.

by Felix Mogge and Thomas Schlick

or mergers and acquisitions in the the rapid development of automated driv- – to manage the transformation successful- automotive supply industry, 2015 ing and electric vehicles are setting right ly so far. EBIT margins in most of these F was a very good year. The total deal across the automobile production system. companies rose from below 6% to 8.2% volume, with five of the 255 transactions A recent Roland Berger analysis found that between 2007 and 2015, with the European announced or closed worldwide was worth a whole raft of components related to the firms seeing margins rise from 6.5% to 8%. more than one billion euros. The positive internal combustion engine, alongside trend continued into the early months of parts made of conventional steel and pure- CHINESE FIRMS ON A SHOPPING TRIP 2016, the M&A market becoming more nu- ly mechanical drivetrains will become less Strategic investors from China are no dif- anced now: The purely economic or finan- relevant as we approach the middle of the ferent to those of other origins in their de- cial logic aiming at creating larger players next decade – losing as much as 40% of sire to establish expertise. Where players is no longer the key motivation for firms their current revenue according to our esti- from the Middle Kingdom differ is in their seeking acquisition targets. mates (see table on page 34). They will be starting point. They are in a position where replaced by the kinds of components need- EBIT margins have been falling continually TECHNOLOGY DRIVES DEALS ed for alternative drives, electronic parts to – from over 10% in 2011 down to 7.4% in A trigger behind a growing number of deals facilitate connectivity, advanced driver as- 2015. With growth in the Chinese market is the desire to quickly get hold of relevant sistance systems (ADAS) and new light- set to be less dynamic than it has been over expertise – be it technology mastery, mate- weight materials. Innovation cycles being the previous decade, competition among rial know-how or process capability. This is shorter, suppliers will have to quickly se- autoparts suppliers has tightened dramati- because suppliers have long since been cure these new competencies in-house if cally. In a bid to get themselves in the best swept up in the great wave of transforma- they are to have any chance of keeping up possible position going forward, China's tion surging through the automobile sec- with the pace of evolution. The trouble is domestic players are increasingly looking tor. In June 2016, French supplier Valeo that many of these new areas have very lit- for acquisition targets in the U.S. and Eu- announced plans to purchase FTE automo- tle or nothing in common, technologically rope. Unlike the deals we have seen West- tive for more than EUR 800 million, the speaking, with the autoparts providers' ern supply firms make, the Chinese inves- German target operating not only as a sup- current business, making them practically tors are not not just automotive companies plier of clutch technology but also a spe- impossible to access through organic but technology enterprises too, firms that cialist in electromechanical components growth. Intense M&A activity is what has can strategically complement their own for automatic transmissions. This is a clear enabled some industry players – primarily business activities. These investors have

Photo: Fabian Kirchbauer/BMW Group Kirchbauer/BMW Fabian Photo: sign of the new priorities that trends like from the U.S., Canada, Mexico and Europe considerable financial clout. Their objec-

Automotive Insights 2 | 2016 34 Tech deals

WINNERS AND LOSERS IN THE COMPONENTS MARKET Comparing revenue development forecasts in the global automotive components market. We take a look at 2015 and 2025 to see how the market volume for different components is likely to change.

Winners Losers Increase of revenue volume by: 10% 20% 30% 40% >40% Decrease of revenue volume by: -10% -20% -30% -40% >-40%

Powertrain Powertrain Starters/generators 48V Diesel – indirect injectors Battery cells Autom. transmissions (3/4 stage) Large e-motors Starters/generators

Chassis ADAS/highly automated driving Power pack (e-)hydraulic Electric parking brake Brake booster (passive) Coil springs – composite Leaf springs – conventional

Exterior Exterior A/B- – composite Longitudinal beam – steel Roof cross member – composite Rear lamps – conventional Tunnel – composite Trunk lid/hood – steel

Interior Interior AC compressor – electric Heating and ventilation xEV auxiliary heater Window lifter – mechanical Seat structure (lightweight) Air conditioning – conventional

Sources: Roland Berger, Lazard tive is to strengthen their expertise in state- an end is the phase of abundant opportu- make any rash takeover decisions just be- of-the-art technologies for the mass mar- nities at low cost, when economies of cause of the availability of cheap money on ket, to achieve an improvement in quality scale were easy to realize. the financial markets. Even if the strategic and to raise the efficiency of production technology position is the key driver be- processes at home. Case in point: the MANAGING THE SKILLS PORTFOLIO hind a deal, at the end of the day there still merger of Ningbo-based Chinese supplier Supplier valuations in Europe and the U.S. needs to be a workable business case in it. Joyson, a manufacturer of components for have risen dramatically, prices in the latest The smaller the pool of targets, the more climate control systems, electronics and round of strategic acquisitions being investors will need to compromise and the sensors, and U.S. safety experts Key Safety based on multiples as high as 9 times harder it will be, after the merger, to actu- Systems in a deal that will create a compa- EBITDA compared with 5 to 6 times earn- ally realize the desired level of operational ny with combined revenues estimated at ings as in past years. And the number of synergies. On the other hand, active port- EUR 2.7 bn. Born and bred in China, sup- supplier firms that can genuinely claim to folio management also means asking pliers like these will be competing with be leaders in the technologies of the future yourself which skills and competencies providers in established markets. Market is not that large, setting a natural limit to can still be expected to feature in the com- conditions will not serve to make mergers the size of the pool of attractive targets. Au- pany's core business of the future and pull- and acquisitions any easier in the years tomotive supply firms would be well ad- ing the plug on any unprofitable business ahead. System suppliers appear to have vised to take a more active approach to involvements that don't offer a future- reached the limits of OEM tolerance when managing their competencies given the proof outlook. it comes to the scale of market consolida- level of disruption coursing through the tion. Automakers do not want to be be- sector. What that means, first and fore- Learn more about the topic in our to any one mega-supplier. Also at most, is they should not be tempted to full study: http://bit.ly/rb_supplier_2016 Christian Davidsen Hans Photo:

Automotive Insights 2 | 2016 Famous trucks 35 JIEFANG China's first automobile, a multipurpose vehicle and a symbol of China's industrialization

he JieFang is the first ever automo- "liberation". This became true in the and U.S. giant established bile made by the Chinese. The first sense that the technology spillover effects a joint venture – encouraged by the Chi- T JieFang CA-10 – a with in the JieFang supply chain and assembly nese government – to produce a diversi- four-ton load capacity – was introduced in line are largely what facilitated industrial- fied portfolio of commercial vehicles. It 1956 by First Automobile Works (FAW), ization in China. Small wonder that the was a success: production and sales in- the oldest automaker in China. It is a truck was identified as a symbol of nation- creased rapidly, keeping step with the con- model that came about during the honey- al pride. Its image was even printed on a struction and logistics boom in China, moon period between China and the Sovi- renmimbi banknote. Some of its glamour and the demand for "good enough" trucks et Union after World War II. The Soviets was lost in the changing market environ- in threshold markets. Today, according to provided technology, including the entire ment of the 1980s, when JieFang produc- the World Brand Laboratory, JieFang is production line and technician support. tion suffered from overcapacity. The one of the top10 automotive brands on However, the brand name JieFang means JieFang bounced back in 2006, when FAW the Chinese market.

1,300,000 units JieFang CA-10 were produced by FAW in total 21% of China's domestic market is held by the JieFang. Photo: Hans Christian Davidsen Hans Photo:

Automotive Insights 2 | 2016 36

STUDIES Food for thought Take a deep dive and find out more about related knowledge, upcoming studies and magazines by Roland Berger authors.

MATERIALS Effect on costs and CO2 emissions [80kw B-segment vehicle] Emissions reduction activities: ICE optimization Materials Cars on a diet? 900 Add. cost [EUR] We analyze the stages of light-weighting in the automotive 750 industry. It is driven by regulatory requirements for CO reduction in 2 600 the main markets Europe, the 20 [EUR/g] U.S. and China. The internal combustion engine (ICE) provides 450 the most efficient lever to get cars lighter and to meet emis- 300 10 [EUR/g] sions targets in the future, while exchanging materials still causes significant costs. What are the 150 CO2 emmision implications for manufacturers reduction [g/km] and suppliers? 4 8 12 16 20 24 28

TECHNOLOGY OPERATIONS How to connect vehicles Future of procurement Connectivity is increasingly 2.4 We asked about 200 procure- shaping the mobility business. without internet ment leaders about future supply connection OEMs are working hard to pro- chain challenges in the automo- vide proprietary solutions. Those tive and in eight other key indus- still fall short in terms of time to tries like consumer goods, chemi- market and achieving a certain cals or utilities. Automotive critical mass within vehicle 3.2 seems comparably well prepared fleets. Third-party players have New car sales for the challenges to come. How- jumped in with wireless adapter- ever, finding the most innovative in 2015 based solutions ("dongles") to equipment for automated driving exploit this opportunity using the and electromobility will be the onboard diagnostic ports. Who- focus procurement experts have ever reaps network synergies to care about. At the same time first will win the race for the safeguarding costs and quality . 0.8 stays top of the agenda. with internet connection http://bit.ly/App-based-dongle http://bit.ly/rb_procurement_2016

Automotive Insights 2 | 2016 Food for thought 37

PROFIT POOLS Publisher

Robocabs ahead! Roland Berger GmbH How will traditional players in the Automotive Competence Center automotive industry earn money Sederanger 1 in the future? Based on an ex- 80538 Munich tensive simulation we estimate Germany 27.3 Kilometers driven the effect of different factors like +49 89 9230-0 by robocab changing customer behavior, www.rolandberger.com worldwide in % regulatory requirements and technology progress. In the end Person in charge according we are able to draw conclusions to German press law 0 on the question of who will cap- 2015 ture most of the future automo- Marcus Berret 2.3 2025 tive profit pool. Our picture of the future proposes new automotive Editorial Team 2030 archetypes and possibly a new Jan-Philipp Hasenberg pecking order within the value (Head of Marketing Automotive CC) chain. We look at their respective Dr. Cornelia Geißler business models and suggest (Editor-in-chief) how to adapt player strategies Dr. Katherine Nölling for the new setting. (Managing editor) http://bit.ly/rb_AutoTransition_2016 Johann von Georg

REGULATION RAILWAY MAINTENANCE Design Blasius Thätter Undesired side effects On the digital track (Art director) Greenhouse gas emissions in 2030 will have to be Maintenance represents a major Axel Springer SE Corporate Solutions 30% lower than in 2005. We take a look at the portion of costs for every rail com- (Design) implications, estimating what those goals will mean panies. What will digitization bring for the European economy. The result: Many jobs in to the business? We interviewed Printing the automotive industry are at risk – due to differ- senior railway industry executives. ent reasons. Their ideal vision is a secured data Pinsker Druck und Medien, network with open data exchange Munich Higher capital costs Higher material costs between operators, manufacturers Lower willingness to pay and other maintenance providers. Circulation (online/print) 5,500 19,000 34,000 Disclaimer 20% Opinions expressed in this magazine do not necessarily 134,000 potential for cost reduction in rail- jobs at risk way maintenance by digitization reflect the views of the publisher. Some of the content contained in the publication is 81,000 subject to third-party copyrights. http://bit.ly/rb_RailMaintenance_2016 The copyright of third parties is expressly indicated in the text where applicable.

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