Global Automotive Supplier Study 2019 After Years of Excellent Growth, the Market Environment Is Getting Difficult

Global Automotive Supplier Study 2019 After years of excellent growth, the market environment is getting difficult

August 2019 Contents

A B C D The The The The status future strategies contacts Increasingly The transfor- Suppliers have Roland Berger difficult environ- mation of the different and Lazard ment after record automotive opportunities to Automotive profits until last industry is well prepare for the teams year underway future

> After record years, the automotive industry is facing a difficult time with multiple market uncertainties and a global production volume decline by -5% in H1/2019 vs. H1/2018 > Especially the slowdown in the world's largest market, China, since H2/2018 is causing problems for the global suppliers > As a result – 2019 will not be a year of recovery, but rather stay challenging for automotive suppliers. The average industry margin is expected to fall below 7% for the first time in the last seven years driving sector valuations below 10-year average > Amidst a weakening market environment some structural changes have taken place:  Profitability of China/NAFTA-based suppliers is shrinking. However, it is still better than that of European peers. Although Japanese suppliers improved in comparison with previous years, they remain well below other regions  Tire and chassis suppliers are leading in margins. Interior players remain at the bottom of the automotive suppliers field  Profitability of product innovators came down to 7.3% EBIT margin in the last year, reducing their relative advantage in comparison with process specialists > Digitization appears to be one of the most important near-term topics for suppliers as it touches multiple dimensions: the potential to create new business models, offer new products and services, and improve the efficiency of operational and administrative processes > In the long term the mobility landscape of today will change – especially as new market entrants possess a non- automotive mindset and capture parts of the future automotive business

Source: Roland Berger/Lazard 3 Executive Summary (2/2)

> For traditional automotive suppliers the risks in the market are high: on the one hand, they could potentially miss out on new revenue opportunities, and on the other hand, they face increasing price pressure from the OEM side, who have to deal with increasing capital requirements and declining profit pools themselves > For traditional suppliers, access to capital may become tougher. Equity investors favor other industries whereas financing banks are becoming more cautious about cyclicality and long-term threats, especially for many small traditional suppliers. In addition, M&A activities in the sector have gone down recently, with Chinese investors, representing an important buyer group, becoming less active > While many small traditional players will face difficult times, new global entrants and technology system integrators are generally well-positioned for tomorrow's changes. Performance-improvement programs, accelerated capacity adjustments and pro-active portfolio management are recommended countermeasures for most suppliers

Source: Roland Berger/Lazard 4 Contents

Recent developments in the automotive industry

H1/18 vs. H1/19 [m units]1) Automotive headlines

-5% "Again a Schaeffler profit "Lear 2Q Profit Falls Amid "Nissan to Cut 12,500 Jobs 48.4 warning" Global Vehicle Production as Its Profit Plunges" 46.0 Others 6.0 Handelsblatt Online – 07/19 Decline" Dow Jones Newswires Chinese – 5.6 Dow Jones Institutional News – 07/19 "Insolvency of Eisenmann 07/19 Japan/ 6.6 Group – Next large "Ford's Shrinking China South Korea 6.5 automotive supplier failed" "Weak automotive economy Business Is Hurting Its South America 1.7 Global Ambitions" 1.7 Wirtschaftswoche Online – 07/19 starting to badger Hella" Reuters – 07/19 Dow Jones Institutional News – NAFTA 8.7 "Bosch sees car production 07/19 8.6 falling 5% in 2019" "Michelin margins hit by auto "There is a storm brewing" ReutersNews – 07/19 slump despite price hikes" AUTOMOBIL PRODUKTION – ReutersNews – 07/19 07/19 Europe2) 11.9 "Goodyear Tire & Rubber's 11.2 Profit, Revenue Miss "Slackness in sales – "Due to weakening Estimates" Automotive economy in the automotive markets press Dow Jones Institutional News – downturn" supplier Schuler cuts 500 07/19 Handelsblatt Online – 07/19 jobs" China3) 13.5 12.4 Handelsblatt – 07/19 "U.S. auto sales seen "Renault Profit Drops, Hit by slipping in July" Lower Sales, Nissan Payout" H1/2018 H1/2019 ReutersNews – 07/19 Dow Jones Institutional News – 07/19 1) Global light vehicle production volume 2) Excluding CIS and Turkey 3) Greater China

Source: IHS May/June 2019, Automotive, Roland Berger/Lazard 6 2018 production was lower than 2017, driven by weakness in Triad market in H2/2018 – Further decline expected in 2019

Global light vehicle production volume1) by region, 2014-2019e [m units]

NAFTA Europe3) China4) -7% CAGR2): -0.1% CAGR2): 2.3% CAGR2): 1.7% -2% -2% 27.4 28.0 26.9 23.0 24.0 25.0 17.0 17.5 17.8 17.1 17.0 16.7 16.9 18.1 18.7 18.9 18.6 18.1

2014 2015 2016 2017 2018 2019e 2014 2015 2016 2017 2018 2019e 2014 2015 2016 2017 2018 2019e

South America World Japan/Korea -3% CAGR2): -2.8% CAGR2): 1.9% CAGR2): -0.9% -1% 87.4 88.8 93.1 95.1 94.2 91.4 +4%

Most recent expectations announced 13.7 13.2 12.9 13.2 13.2 13.1 by many large suppliers as part of their 3.8 3.1 2.7 3.3 3.4 3.6 H1/2019 earnings even -5%. 2014 2015 2016 2017 2018 2019e 2014 2015 2016 2017 2018 2019e 2014 2015 2016 2017 2018 2019e

1) Incl. light commercial vehicles; 2) CAGR 2014-2018; 3) Excluding CIS and Turkey; 4) Greater China

Source: IHS May/June 2019, Roland Berger/Lazard 7 Growth and profit of previous years come to an end – Average 2019 EBIT margin likely <7% for the first time in the last seven years

Key supplier performance indicators, 2012-2019e (n=~600 suppliers)

Revenue growth EBIT margin [%]

Indexed [2012=100] 127 7.3 123 126 ~120–125 7.2 7.1 7.1 7.2 7.2 120 6.8 113 107 100 ~6.0–6.3

YoY [%]

5 7 6 6 2 3 1

-5 2012 2013 2014 2015 2016 2017 2018 2019e 2012 2013 2014 2015 2016 2017 2018 2019e

Source: Company information, analyst forecasts, Lazard/Roland Berger supplier database 8 The overall sentiment is also reflected in supplier valuation levels that trade below their long-term average

Evolution of automotive supplier valuations

EV/EBITDA NTM1) > Valuation multiples of publicly traded 11x automotive suppliers are below their long-term average values, driven by the weakening market environment Impacted by the and the existing uncertainties in the 9x economic crisis changing automotive industry, paired with investors' cyclical concerns > Recent multiple uplift in early summer 7x 10-y-Ø = 6.2x2) 2019 also driven by reduced earnings 6,0x forecasts 10-y-Ø = 6.0x2) 5x 5,1x > Many suppliers are currently facing 10-y-Ø = 4.4x2) deteriorating free cashflows, given comparably high working capital and 3,5x capex requirements in addition to the 3x shrinking operating profits > Japanese companies continue to trade at a discount to European and 1x North American suppliers, reflecting

the stagnation in their home market

Aug09 Aug10 Aug11 Aug12 Aug13 Aug14 Aug15 Aug16 Aug17 Aug18 Aug19

Japanese suppliers3) European suppliers4) North American suppliers5) 1) NTM = Next twelve months; 2) Excluding the distorting impact of the economic crisis (Aug–Dec 2009 multiples); 3) Aisin Seiki, Bridgestone, Denso, Exedy, JTEKT, Keihin, Koito, NHK Spring, NSK, Stanley Electric, Showa, Sumitomo Riko, Tokai Rika, Toyoda Gosei, Toyota Boshoku and TS Tech; 4) Autoliv, Autoneum, Brembo, CIE, Continental, ElringKlinger, Faurecia, Georg Fischer, Haldex, Hella, Leoni, Norma, Plastic Omnium, PWO, SHW, SKF, Stabilus and Valeo; 5) American Axle, BorgWarner, Cummins, Dana, Delphi, Iochpe-Maxion, Lear, Magna, Martinrea, Meritor, Tenneco, Tower and Visteon

Source: Factset, Roland Berger/Lazard 9 The gap between the valuation of automotive OEMs and suppliers has narrowed since the beginning of 2018, driven by suppliers' multiple de-rating

Evolution of automotive OEM and supplier valuations

P/E NTM1) > Supplier valuation multiples 29x have historically outperformed 27x Impacted by the OEMs, with OEMs' valuations 25x economic crisis appearing to have reflected 23x risks from disruptive trends 21x to a larger extent 19x 17x > However, the valuation 15x spread has narrowed in 13x 2018 and 2019 2) 11x 10-y-Ø = 11.0x 10-y-Ø = 9.0x2) > Investors seem to increasingly 9x 8.2x factor in the headwinds and 7x 6.8x cost of disruption in their 5x supplier valuations, being at 3x the same time more cautious 1x about the cost and payback

of growth areas for the

Aug09 Aug10 Aug11 Aug12 Aug13 Aug14 Aug15 Aug16 Aug17 Aug18 Aug19 supplier sector Selected automotive OEMs3) Selected automotive suppliers4)

1) NTM = Next twelve months; 2) Excluding the distorting impact of the economic crisis (Aug–Dec 2009 multiples); 3) BMW, Daimler, Ford, General Motors, Honda, Toyota and Volkswagen; 4) American Axle, Autoliv, BorgWarner, Brembo, Continental, Dana, Delphi, Faurecia, Hella, Magna, Norma and Valeo

Source: Factset, Lazard/Roland Berger 10 Financial performance of suppliers varies greatly depending on region, company size, product focus and business model

Profitability trends in the global automotive supplier industry 2018

Region 1 Company size 2 Product focus 3 Business model 4

> Chinese-based suppliers achieved > Mid-size suppliers (EUR 1.0 to 2.5 > Tire suppliers benefit from their > Process specialists are able to the highest EBIT margins with bn revenues) could realize the aftermarket business and continue catch up to product innovators in ~9.0% in 2018 highest EBIT margins with ~8.7% to realize high EBIT margins of terms of EBIT margins > NAFTA-based suppliers profit from > Large suppliers with >EUR 10 bn ~11.3% > The systematic "lean" focus of the their previous restructuring efforts revenues achieved above average > Chassis suppliers also last years pays off with 6.6% EBIT reaching ~8.4% EBIT margins EBIT margins of ~7.3% outperform the market and reach margins > However, in both regions EBIT margins of ~8.1% driven by deterioration expected for 2019 recent technology trends

> Japanese suppliers have > Very large suppliers (EUR 5.0 bn > Powertrain suppliers lost ground > Product innovators are growing improved but remain at a low level to 10.0 bn revenues) fall behind and achieved below-average strongly but have difficulties of ~5.8% EBIT margins with an EBIT margin of 6.5% margins translating this further into above- > Globally, suppliers expected to > Small suppliers (EUR 0.5 bn to > Interior suppliers still trail their average EBIT margins face margin declines in 2019 1.0 bn revenues) fail in terms of peers, with recently increasing translating above-average growth margins but still waiting for future into profitability improvements customization trends to realize

Source: Company information, Roland Berger/Lazard, Roland Berger/Lazard supplier database 11 1 Region Automotive suppliers globally have to deal with declining margins – NAFTA- and China-based suppliers still above average

Key supplier performance indicators by region 2018 [%]

Revenue ~10.7% ~1.9% ~4.9% ~3.5% ~4.3% > China-based suppliers defended their CAGR far-above-average margins; however, 2012–2018 they are expected to suffer from the slowdown in the domestic market since 9.0 H2/18 8.4 > NAFTA-based suppliers can defend their excellent position from previous 7.1 years and are still outperforming 2018 = Ø 7.2 6.6 6.2 European players, but will also see further declines due to the negative market development in H2/18 and 2019 EBIT margin 2018 > Europe based suppliers fall behind in terms of margin development; 2018 and beginning of 2019 were difficult due to volume declines and output issues in conjunction with the new WLTP process > As in previous years, South Korea– based suppliers' margins are below average China NAFTA Europe South Korea Japan > Japan-based suppliers proceeded with their recovery in terms of profitability but are still far behind the other regions

Source: Company information, Roland Berger/Lazard, Roland Berger/Lazard supplier database 12 2 Company size Financially strong multinational suppliers as well as mostly technology-focused mid-size suppliers achieve the highest margins

Key supplier performance indicators by company size (EUR bn sales) 2018 [%]

Revenue ~4.3% ~6.5% ~3.4% ~1.2% ~5.3% ~4.6% > Large multinational suppliers (above CAGR EUR 10 bn revenues) can leverage 2012–2018 scale effects and benefit from additional business potentials due to new 8.7 technologies or digital business models > Very large suppliers (EUR 5 bn to 10 7.3 bn revenues) are in a sandwich position 2018 = 7.2 7.0 7.0 6.5 between OEM price pressure and high capital requirements for new 5.7 technologies and further growth EBIT margin > Large suppliers (EUR 2.5 bn to 5 bn 2018 revenues) achieve industry-average values for revenue growth and margins > Mid-size suppliers (EUR 1.0 bn to 2.5 bn revenues) achieve above-average profitability, mostly on the back of a very focused and technology-enabled product portfolio > Small suppliers (EUR 0.5 bn to 1.0 bn) <0.5 0.5-1.0 1.0-2.5 2.5-5.0 5.0-10.0 >10.0 seem to have difficulties translating growth into margin improvement

Source: Company information, Roland Berger/Lazard, Roland Berger/Lazard supplier database 13 3 Product focus Tire suppliers benefit from favorable raw material costs & business model – Chassis suppliers well positioned for future technologies

Key supplier performance indicators by product focus 2018 [%]

Revenue ~0.4% ~2.7% ~4.5% ~5.4% ~3.3% ~3.6% > Tire suppliers can benefit from their CAGR aftermarket business; favorable raw 2012–2018 materials price developments in the past helped to achieve far-above-average 11.3 margins 8.1 > Chassis suppliers achieve above- 7.4 average margins due to advanced 2018 = 7.2 6.9 driver assistance and active safety 6.4 > Powertrain margins further pressurized 5.6 by intensified competition, the cost of (multiple) innovations and the rise of electric vehicles EBIT margin > Exterior suppliers have been growing 2018 strongly. Margins benefited from raw materials price developments and increasing importance of light weight with high-quality material > Electrics/infotainment suppliers still below average although importance of Tires Chassis Power- Exterior Electrics/ Interior components is increasing – intensified train Infotainm. competition > Interior suppliers don't see a recovery

Source: Company information, Roland Berger/Lazard, Roland Berger/Lazard supplier database 14 4 Business model Product innovators have not kept the high margin levels of the previous years and have to focus on process efficiency in the future

Key supplier performance indicators by business model 2018 [%]

Revenue ~5.4% ~3.8% > On average, innovative products feature CAGR higher differentiation potential and 2012–2018 greater OEM willingness to pay higher prices 7.3 > But overall profit margins of product 6.6 innovators came under pressure due to increasing OEM price pressure and intensified competition > Efficiency improvements, e.g. subsequent to Industry 4.0 opportunities EBIT margin and lean approaches seem to pay off 2018 for process specialists > Gap between process specialists and product innovators reduced over the last years; reason to be seen in the MADE3) trends and the resulting financial/operational challenges, especially for product innovators

Product innovator1) Process specialist2)

Note: Analysis excludes tire suppliers. 1) Business model based on innovative products with differentiation potential; 2) Business model based on process expertise (while product differentiation potential is limited) 3) M = Mobility A = Autonomous D = Digitization E = Electrification Source: Company information, Roland Berger/Lazard, Roland Berger/Lazard supplier database 15 4 Business model However, the top performers in terms of average margins are still among the product innovators

Key performance indicators of top vs. low-performing suppliers1)

14 > Product innovators outperform

2018 13 process specialists in terms of – 12 average profitability 11 > Top process specialists, though, 10 Top process achieve average revenue growth 9 specialists that is above the top product 8 innovators 7 Top product > Top process specialist growth Revenues Revenues CAGR 2012 innovators is also accelerated by M&A 6 activities of several players 5 Ø 4.6% > Large difference in growth rates 4 Low product between top and low-performing 3 innovators process specialists indicates the 2 Low process relevance of scale economies 1 specialists Ø 7.2% 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Avg. EBIT2) margin 2018

1) Top (low) performance based on above-average (below-average) revenue growth 2012–2018, ROCE 2012–2018 and ROCE 2018; 2) EBIT after restructuring items

Source: Company information, Roland Berger/Lazard, Roland Berger/Lazard supplier database 16 Contents

MADE temperature check 2017 vs. today 2017 2019

Mobility Ride-hailing firms Ride-hailing players scaling up. OEMs become technology The future of moving people & goods trying to figure out drivers. Key role their role. as future clients. Autonomous driving Autonomous mobility First players within is the matter of the autonomous mobility Replacing drivers to improve safety, cost & efficiency day. Key topic for established. Hype has suppliers & OEMs. calmed down.

Digitization Digitization & Digitization of business connectivity in models fully underway. Big Data analytics, connectivity & AI discussion. Focus New sales chan- e.g. on Industry 4.0. nels and products.

Electrification OEMs and suppliers More and more car models heavily investing in on the road. Suppliers need Hybrid or electric powertrains, batteries, and electric actuation electrified mobility to decide if they intensify as a future market their activities as well.

Source: Roland Berger/Lazard 18 The change in the automotive industry is gaining speed, affecting the market landscape, product portfolios and required employee skills

Current developments within the automotive industry 1 Prerequisites for electric vehicles constantly getting better, e.g. further Market trends emission regulations and ICE city bans, decreasing battery costs or improving infrastructure 2 Beside new forms of mobility also the mobility mix itself is changing 3 Uncertainty remains over technical development path and legal framework for autonomous driving 4 Data-based and digital business models enable new business potential Impacts 5 Sales potential for certain products likely to fall dramatically 6 Customers continue to push suppliers for cost reductions 7 New players enter the automotive business across the entire value chain 8 Required employee skill-set is changing dramatically 9 Access to capital is expected to become tougher given a shrinking relative attractiveness of the automotive sector

Source: Roland Berger/Lazard 19 1 Prerequisites for electric vehicles constantly getting better Sales numbers for electrified cars still low – But, despite the automotive market cool-down in H2/2018, all markets saw growth for xEV

EV/PHEV/FCEV sales in 2018 [% of total vehicle sales] 2018

29 28 1,166 61 14 363 53 72 33 52 13 10 <1 <1 2 <1 <1

7.1

5.3 4.3

2.2 2.2 2.1 Average = 2.0 2.0 1.9 1.8 1.0 0.9 0.5 0.3 0.1 0.0 0.0 0.0

Change since 01/2018 2017

xx Sold units in thousands

Source: EV volumes, IHS, Roland Berger/Lazard 20 1 Prerequisites for electric vehicles constantly getting better The charging infrastructure for electrified cars is gradually getting better – But still many countries have a long way to go

Infrastructure: Charging infrastructure [charging stations per 100 km roadways] Jul -17 / Jul -19

41 0.2 401 8 0 38 26 9 16 2 2 4 22 5 1 0 0

29,3

24,4

21,0

17,5

8,8 8,2 7,0 5,7 5,1 4,3 2,9 2,9 2,9 2,9 2,3 1,3 2,5 2,3 2,3 1,9 0,4 0,9 1,3 1,3 1,6 1,1 1,1 1,0 1,4 1,0 0,6 0,6 0,9 0,3 0,5 0,3 0,3 0,3 0,1 Netherlands Dubai China South Singapore Japan France UK Germany Belgium Sweden Italy USA Spain Russia India Bahrain Korea July 2017 July 2018 July 2019

xx : # charging stations ('000)

Source: EV Volumes, Desk research, Roland Berger/Lazard 21 2 Beside new forms of mobility also the mobility mix itself is changing Especially in Asia the majority of people already have the opportunity to decide between different mobility modes – Limitations in EU/US

Multimodal mobility – Offer in terms of transportation modes On all the trips you took, how often did you have the choice for a different mode of travel?

40% 40% 50% 50% 50% 60% 60% 60% 65% 70% 70% 70% 75% 80% 80% 80%

60% 60% 50% 50% 50% 40% 40% 40% 35% 30% 30% 30% 25% 20% 20% 20%

Choice of mode in less than 40% of trips Choice of mode in more than 40% of trips

Source: RB online survey Jan 2019: 16,180 participants - Participants by country: Belgium 1,004; China 1,006; France 1,006; Germany 1,004; India 1,008; Italy 1,012; Japan 1,060; Netherlands 1,001; Russia 1,011; Singapore 1,004; South Korea 1,009; Spain 1,009; Sweden 1,001; UAE 1,009; UK 1,036; USA 1,01; Lazard 22 3 Uncertainty remains over technical development path The legislative framework for autonomous mobility gets better – However, L5 blanket coverage still has a long way to go

Evolution of approval process for autonomous driving levels L4 & L5

Edition 1 (Jan 17) Edition 5 (Jan 19) > Legislation still a limiting factor for Step 1 Step 2 Step 3 Step 4 Step 5 Step 1 Step 2 Step 3 Step 4 Step 5 automated driving > UK with the biggest development step United States United States during the last 2 years UK UK > USA the only country Netherlands Netherlands globally without Singapore Singapore limitations for type France France approval process, Japan Japan hence most leading China China players for automated Germany Germany mobility out of the US Italy Italy South Korea South Korea > Ethical discussions Spain NA Spain often hampering the Russia NA Russia legislation process Sweden NA Sweden > In addition, increasing Dubai NA Dubai awareness of massive India NA India capital requirements Bahrain NA Bahrain with uncertain payback Changes since January 2017 Belgium NA Belgium periods to achieve L5

Indicator Rating: Progress regarding type approval progress for No Initial Basic regulatory Regulation Regulation in No limitation autonomous vehicles discussion discussions set in progress decision phase for approval Source: Roland Berger Automotive Disruption Radar, Lazard 23 4 Data-based and digital business models enable new business potential The digitization of the industry is well underway, but only technology system integrators or new players can fully leverage the potential

Digitization steps in the automotive industry Digitization of business Digitization of products Digitization of entire 1 processes 2 and services 3 business models > Workflow automation and RPA to > Capturing of product and customer > Introduction of disruptive business digitize inter- and intracompany data for additional services, e.g. models, e.g. mobility-as-a-service business processes (e.g. P2P, PEP) telematics and predictive service > Cloud-based service offerings and standardized tasks offerings > Innovative applications, e.g. > Industry 4.0 solutions for shop floor > Introduction of smart products, mobility apps, eCar wallets automation (e.g. predictive traceability and mobility solutions, or > Digitization of sales channels maintenance, testing) infotainment features > Use of blockchain technology for > Car connectivity and V2I (vehicle to e.g. IoT, smart contracts, fleet infrastructure) communication management

Limited: Low: High: Few can, Diversified and Technological Many do, players with new tech players sophistication all should traditional portfolio only handicapped

Accessibility for automotive suppliers

Source: Roland Berger/Lazard 24 5 Sales potential for certain products likely to fall dramatically Since 2015 more than EUR 60 bn of venture capital has been invested into new automotive technologies and players

Invest in venture capital1): Mobility and artificial intelligence [USD m]

Total VC invest – Total VC invest – > VC funding of new 2) automotive Mobility Artificial intelligence technologies is extremely high 21,427 > While investments in mobility themes have been high for a few years, artificial intelligence is becoming the hot topic 12,977 in terms of technology recently 10,210 x10 9,328 > With external financing, new players can catch 6,537 up with large established players in 3,432 the market 1,558 652

2015 2016 20173) 2018 2015 2016 2017 2018

1) Analysis on disclosed amounts 2) Including investments in smart cars, AI in transportation and autonomous vehicle technologies, and AI infrastructures (natural language processing, computer vision, etc.) 3) Fueled by several large funding rounds (e.g. Didi, Lift, Grab, et al.)

Source: Tracxn, Roland Berger/Lazard 25 6 Customers continue to push suppliers for cost reductions Traditional OEMs are facing pressure from many sides, not only in new expansion areas but also in their core business

Pressure on traditional OEMs Electric mobility New New mobility > High pressure on MaaS OEM margins from 2025 business concepts 2025 e-mobility and new- mobility concepts More intensive competition New Maas business slower > In addition, further due to new entrants with advan- than expected to ramp up pressure from tages over established players emission regulations Fierce competition due to and potential fines Falling margins due to electri- new entrants with advantages fied vehicles either because of over established players > OEMs will try to, at simplified (BEV) or more cost Tradi- least partially, pass intensive (HEV) powertrain tional Late to follow-up: negative effects on core Traditionally leading OEMs in their earnings to their Lower EBIT due to rising business follower position supply base costs and portfolio shifts Strong need for investment High investments in into automated driving and powertrain electrification and artificial intelligence and to new technologies scale up High costs associated with Decreasing brand loyalty personnel transformation and design relevance OEM/OES business 2019

Positive impact on business Negative impact on business Neutral

Source: Roland Berger/Lazard 26 6 Customers continue to push suppliers for cost reductions Coherently, OEMs have announced large cost-saving programs, which all have a major material-cost-reduction component

Recent efficiency programs of major OEMs (illustrative selection)

> Cost-saving programs OEM Examples of levers are one of the most promising measures for General Motors USD bn > More efficient production OEMs to handle their cost reduction current challenges 4.5 by 2020 > Leaner product portfolio > Reduction of material costs > Nearly all large cost- cutting programs have a material-cost- Porsche EUR bn > More efficient production reduction element, op. result 6.0 by 2025 > Digital business models thus are targeting the > Reduction of material costs supply base > Suppliers have to Mercedes-Benz EUR bn > More efficient production define measures to Improvementtargets op. result defend themselves 4.0 by 2025 > Quicker introduction of new products against cost-saving > Reduction of material costs programs and to handle their financing Jaguar/ GBP bn > Layoffs requirements in parallel Land Rover cash flow 2.5 by mid-2020 > Reduction of non-product investments > Reduction of material costs

Source: Handelsblatt; Wirtschaftswoche; Reuters; General Motors; Daimler; Jaguar/Land Rover; Porsche, Roland Berger/Lazard 27 7 New players enter the automotive business across the entire value chain Successful new market entrants leverage a non-automotive mindset and technological innovations to capture parts of the future business

OEMs' path toward a mobility ecosystem scenario 2030+ Example Old Candidates New MSP1) Pure MSP MSP Railway companies

Ride-hailing Traditional OEMs with providers OEMs Integrated MSP mobility service offerings CaaS Established premium/sports- New xEV OEMs lifestyle brand car OEMs Device Traditional Consumer New OEMs suppliers and electronics manufacturer OEM volume OEMs manufacturers Selected Ø out of traditional OES business suppliers and OEMs Service enabler/ Technology Semi-conductor Component suppliers or battery New OES manufacturer OES manufacturers 2019 2030 New mobility ecosystem 2030+ 1) MSP = Mobility Service Providers

Source: Roland Berger/Lazard 28 7 New players enter the automotive business across the entire value chain Players like Amazon enter different areas of the market and win on scale, coverage or pricing, and even offer better user experience

Focus trend: E-commerce players' positioning in automotive aftermarket in the USA

Large portfolio Cost-efficient Fast delivery (still gap) > Amazon sales in the Wholesale automotive aftermarket 100,000 Number of SKUs offered (500–1,200) bps Stocker already passed the by regional aftermarket USD 1 bn milestone retailers across their ∑ = 20–32% network Last mile > Amazon not only offers Number of SKUs delivery offered by national parts for Do-It-Yourself 2,000 15% Amazon aftermarket Fulfillment but also services for retailers or WDs Op Margin Tgt ∑ = center Do-It-For-Me across Number 15–20% Admin costs > Pressure on speed of delivery: Same day their of SKUs 4–6% > Amazon leverages its network 3% Customer in certain cities, 1–2 days in most cities Amazon and aiming for delivery within 1 hour by 2–4% service sales channels for B2C 1,000 auto 2025 2–3% after- 10–15% Local platform > Economies of scope and scale across as well as for B2B market Regional product categories to move parts from has 5–10% > Except body parts and platform warehouses to fulfillment centers near access customers software, the portfolio Supernational to 6–11% 6–8% already covers the

0 platform Orders/day for each SKU each for Orders/day 0 175,000 400,000 3 m 6 m Traditional Amazon Amazon, 482% whole aftermarket Number of SKUs ranked by customer demand bandwidth > Differentiation factor is Stock price a better service ex- [USD]1) O’Reilly , 96% perience for the clients AutoZone, 76% S&P 500, 42% (delivery time, all out of AAP, -9% one hand, etc.) 01.15 01.16 01.17 01.18 01.19 GPC, -14% 1) Stock price information as of Aug 9, 2019

Source: Roland Berger/Lazard 29 8 Required employee skill-set is changing dramatically The changing influence on the supplier business models through new technologies are also reflected in required employee skill-sets

Importance of necessary skill-sets and change in job vacancies

Change in job 2000 2018 2025ff vacancies1)

Mechanical Mechanical engineer engineering 2017 2018 -21% Software engineering > Milestones in mechan- > Mechanical parts start to > Mechanical parts and ical engineering offer limited or less engine performance Software engineer > Electronics limited to potential for further have become 2017 2018 improvement commodities simpler, not +56% differentiating > Advanced driving > Fully integrated applications assistants implemented software solutions > Unique characteristics with scattered software offer unique driving for differentiation mainly solutions experiences, including in the domains of > Unique characteristics autonomous driving IT specialist handling and engine for differentiation split > Differentiation by 2017 2018 performance across the domains of comfort, autonomy eco-friendliness, and additional services +14% individualization and infotainment 1) Based on engineering jobs in Germany

Source: Roland Berger/Lazard, Verband Deutscher Ingenieure, absolventa, karriere.de 30 9 Access to capital is expected to become tougher The relative sentiment of the automotive sector vs. other industries has been deteriorating in the last decade

Evolution of sector P/E valuations in equity capital markets

P/E NTM1) > Equity capital markets valuation 23x levels of the automotive sector have been close to other 21x industries a decade ago Technology 19x > However, over the past years, the gap has widened – equity 17x Chemicals Industrials investors have increasingly 15x been willing to pay higher prices for other sectors 13x > Whereas other industries 11x benefited from the generally Auto Components positive macroeconomic and 9x capital markets environment, Automobiles automotive companies saw 7x rising concerns on their 5x industry

Aug13 Aug18 Aug10 Aug11 Aug12 Aug14 Aug15 Aug16 Aug17 Aug19

1) NTM = Next twelve months

Source: Bloomberg, Roland Berger/Lazard 31 9 Access to capital is expected to become tougher Automotive M&A activity has slowed down substantially – Especially Chinese acquirers as important buyer group have become less active

# of automotive supplier M&A transactions Share of Chinese M&A activity in the supplier space

252 20% 232 17% 183 178 13% 12% 11%

2015 2016 2017 2018 H1 2019 2015 2016 2017 2018 H1 2019

Environment becomes more difficult – especially for smaller suppliers looking for a sale or merger

Note: Transactions considered: announced/completed, >75% stake, automotive suppliers, worldwide

Source: Dealogic, Roland Berger/Lazard 32 9 Access to capital is expected to become tougher Especially smaller suppliers are faced with comparably limited access to private equity capital and rising cautiousness on the credit side

Share of private equity buyers in mid-cap M&A transactions (2018)1) Selected debt capital and rating views

"We expect a further increase in receivable risk in the automotive 24% industry, especially driven by vanishing liquidity levels of small and mid-size automotive suppliers. The current level of risk is the highest since the financial crisis and we expect an increasing number of insolvencies and payment defaults (increase of up to 30%) in the automotive supplier industry in the medium term." 19% ATRADIUS – APR-20192) 16% "New technologies require automotive suppliers to make a substantial investment resulting in an additional need for financing. 1) 13% However, simultaneously banks are becoming more cautious with regards to traditional lending in the automotive sector, as the industry and corresponding rating recently have come under pressure. Some banks even indicated their general reluctance to increase the exposure in the automotive sector."

DR. WIESELHUBER & PARTNER – APR-20192)

"Weakening demand for cars and trucks has pushed credit rating company Moody's to cut its outlook for the auto industry from stable to negative. Slowing economic growth, a better-than-expected end to 2018 and a host of potential political pitfalls are all expected to dampen global auto sales in 2019, Moody's said in a research note Monday." Automotive Chemicals Healthcare Industrials CNBC – MAR-2019 suppliers (ex. auto) Note: Transactions considered: announced/completed, >75% stake, worldwide with disclosed deal value Source: Dealogic, Roland Berger/Lazard, Press 1) Deal value between EUR 100 m and EUR 500 m; i.e. 13% of buyers were private equity buyers, while 87% were strategic acquirers 2) Translated 33 9 Access to capital is expected to become tougher In 2018 many suppliers have streamlined their portfolios or invested in further growth through M&A – Lower activity in 2019 so far

Selected automotive supplier acquisitions, 2014–2019 (YTD) 2014 2015 2016 2017 2018 2019

Amtek/ AVIC Automotive/ American Axle/ BorgWarner/ Asahi Kasei/ Autokiniton/ Kaiser Henniges Metaldyne Sevcon Sage Automotive Interiors Tower International Amtek/ BorgWarner/ CIE Automotive/ CIE Automotive/ Calsonic Kansei/ Bridgestone/ TomTom Kuepper Group Remy International Grupo Amaya Telleria Newcor Magneti Marelli Telematics business AUNDE/ China National Tire/ Freudenberg/ Fountain West/Bosch CIE Automotive/Inteva CIE Automotive/Maquinados Fehrer Pirelli TBVC Mahle Turbo Chargers Products (Roof systems) de Precisión de México AVIC/ Continental/ Illinois Tool Works/ Fuxin Dare Automotive/ Continental/Cooper Standard Hitachi Automotive/Chassis Hilite Elektrobit TRW Auto. Elec. & Comp. Carcoustics (AVS business) Brakes International AVIC/ Delphi/ Mecaplast/ Genuine Parts/ Dana/ Meritor/ KOKI Technik HellermannTyton Key Plastics Alliance Automotive Oerlikon Drive Systems AxleTech Bosch / Grupo Antolin/ Megatech/ Intel/ Faurecia / Michelin / ZF Lenksysteme Magna interior business Boshoku Europe Mobileye Clarion Multistrada Delphi/ Harman/ Musashi Seimitsu/ KSS/ Hanon Systems/Magna Fluid Nidec/Omron automotive Unwired Technology Symphony Teleca/Redbend Hay Takata Pressure & Controls business electronics business Federal-Mogul/ Johnson Electric/ Ningbo Joyson/ Lear/Grupo Antolin LG Electronics/ ZF/ TRW valves business Stackpole KSS (Seating & Metal Business) ZKW Group WABCO Lear/ Linamar/ Plastic Omnium/ Luxshare/ Magna/ Eagle Ottawa Montupet Faurecia exterior bus. ZF Body Controls Olsa MAHLE/ Magna/ Samsung/ Motherson Sumi Methode Electronics/ Letrika Getrag Harman Systems/PKC Group Grakon Sensata/ MAHLE/ Valeo/ Superior Industries/ MinebeaMitsumi/ Schrader Delphi thermal business FTE Automotive Uniwheels U-Shin Shanghai Prime Mann+Hummel/ Valeo/ TE Connectivity/ Motherson Sumi Machinery/ Nedschroef Affinia Ichikoh Hirschmann Car Comm. Systems/Reydel Automotive FR Visteon/ NGK Spark Plug/ VBP Group/ WABCO/ Ningbo Jifeng/ JCI auto. electronics bus. Wells Vehicle Electronics Mobile Climate Ctrl. Group RH Sheppard Grammer ZF/ Valeo/ Yinyi Group/ ZMJ/CRCI/ Tenneco/ TRW Peiker Acustic Punch Powertrain Bosch SMG Federal-Mogul

Key: Acquirer/Target Note: Excluding financial sponsor–led transactions. Some 2019 transactions are signed, but not yet closed.

Source: Dealogic, Merger Market, press research, Roland Berger/Lazard 34 In the medium term, focus is shifting toward challenges like digital business models, required R&D financing and availability of talent

Mid-term supplier CEO radar screen

Competition Supply base

OEMs Outsourcing of non- Technology/ Market differentiating parts Reduced consolidation Availability of Smart products & legislation importance of skilled workforce New components high end variant New market New car entrants Growing importance of concepts Price pressure Digital software and electronics on suppliers business models Increasing quality/ durability requirements High capital Capital Reduced Car Stagnation/potential requirements markets/ ICE share Type approval for R&D buyers decline of volumes New process financing Digital business customers models Light- Attractiveness Secure financing to New mobility weight of equity story master disruption Customization concepts of interior Trade wars

Mobility Autonomous Digitization Electrification

Source: Roland Berger/Lazard 35 Contents

Current situation for automotive suppliers The automotive industry is at the edge – 1 Projected changes are becoming reality at high speed The changes affect the clients, the products, the 2 employees and the legislative framework The time to act and to prepare for the future 3 is running out quickly All suppliers have to deal with the same market 4 situation but need to find individual answers Automotive suppliers have to identify 5 which market changes are most relevant for them

Source: Roland Berger/Lazard 37 We identified four basic criteria as a framework for the development of individual strategies of how to cope with the changing industry

Basic parameters for strategy development

Company size – Revenues/sales Financial strength – Margin/financing

Size of the company predetermines: Financial strength takes into consideration: > Market power/shares > Growth, margin and free CF generation > Resource availability > Net debt and leverage > Brand recognition > Access to large credit lines/debt capital > Boundaries and flexibility markets or additional equity Mega-player or start-up? Benchmark or restructuring case?

Product portfolio – Product variety Market environment

Reflects the technological basis: Reflects pressure level in home/new markets > Portfolio commoditization > Attractiveness for other players to attack the > Manufacturing and R&D skill-set same market/domain > Digital vs. physical products > Current price levels > Single parts vs. components/assemblies > Growing market vs. shrinking market Focused or diversified portfolio? Competition or co-existence?

Source: Roland Berger/Lazard 38 To point out differences in strategy approaches we have clustered suppliers by size, financial strength, portfolio and market environment

Supplier archetype1) categorization – Methodology

Archetype assessment criteria Company represents a larger commodity player, Company Small Large e.g. a die-casting supplier size or a body-parts supplier with sales of more than EUR 1 bn p.a., which is Financial Weak Strong fully focused on traditional strength ICE automotive business

Product Focus on one Diversified portfolio commodity portfolio

Market Shrinking/ Strong growth environment threatened segment segment

Cluster Company Financial Product Market size strength portfolio environment Large Weak/under- Commod- Shrinking/ company financed itized threatened 1) Archetypes are not all-encompassing, attribution can be ambiguous Source: Roland Berger/Lazard 39 Six supplier archetypes represent the most common players within the automotive supplier industry

Supplier archetypes Global Small traditional Aftermarket commodity Global new Traditional di- Technology sys- player player leader entrant versified player tem integrator

Company size / / /

Financial strength /

Product

portfolio Assessment criteria Assessment Market environment General > Portfolio of single > Broad portfolio of > Portfolio of > Portfolio focus > Broad portfolio, > Large integrators characteristics parts or simple single parts and complex parts on innovation/ also for growing with broad components components or modules new technologies segments portfolio > Commoditized > OEM customers > Commoditized > Technology > High capital > System-relevant portfolio as well as direct portfolio leader/disruptor requirements for as of today > Business model sales > Among the > Limited OEM new tech- > Attacked from under pressure > Market consoli- market leaders access nologies multiple sides > Limited ability to dation ongoing > Sizes allows for > Agile > Financially strong leverage scales scale effects organizations Strategic How to survive How to position in a How to secure How to enter/disrupt How to identify the How to participate questions despite strong consolidating and profitability in an the automotive right innovations for in future growth headwinds? digitizing market? adverse market? market? the future? segments?

Small/weak/threatened Large/strong/growing Source: Roland Berger/Lazard 40 Exemplary strategic mission statements for the archetypes show that suppliers should adjust strategies to their specific situations

Top challenges per supplier archetype

Archetype Selected top challenges Strategic mission statement Small > Price pressure > Secure long-term funding Survival of the fittest – Cost traditional player > Potential volume decline > Scale effects & Industry 4.0 optimization throughout the entire > Electrification and digitization > Attracting talent organization is key Aftermarket > Electric vehicles > Client structure (end client, Eat or be eaten – Compensate for player > Market consolidation OEM, mobility provider) negative business implications from > Low-cost competitors > Upcoming digital products e-mobility trend Global > Price pressure > Industry 4.0 Defend current positioning – Process commodity leader > Potential volume decline > Capital requirements excellence is the basis to generate > Electrification and digitization > Platform projects capital and to ensure long-term success Global new > Automotive standards > R&D expenses If you can think it, you can do it – entrant > Customer access > Workforce availability Leverage existing know-how to generate > Established competitors > Technology acceptance new business within automotive industry Traditional > Price pressure > Internal cultural change Offense is the best defense – Focus on diversified player > R&D expense allocation > Increasing competition cost-efficiency or proactive portfolio > Portfolio commoditization for growth segments transition to future growth segments Technology > Electrification and digitization > Increasing competition Remain system-relevant – Make the system integrator > Autonomous driving > Financing needs company irreplaceable for OEMs and > Breaking up of systems > Internal cultural change leverage positioning into new fields

Source: Roland Berger/Lazard 41 The business models of many automotive suppliers appear to be at risk

MADE1) impacts by supplier archetype

Small traditional Aftermarket Global commod- Global new Traditional di- Technology sys- Impact2) for most suppliers 1 player 2 player 3 ity leader 4 entrant 5 versified player 6 tem integrator Car Digital business models – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + buyers Stagnation/decline of volumes – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Economic downturn – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + New mobility concepts – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Trade wars/Brexit – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + OEMs New car concepts – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Reduced importance of high-end variants – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Price pressure on suppliers – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Reduced ICE share – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + New customers – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Compe- New market entrants – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + tition Market consolidation – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Supply Outsourcing of non-differentiating parts – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + base Availability of skilled workforce – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Technol- Smart products/new components – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + ogy/Leg- Higher importance of software/electronics 0 0 0 0 0 0 islation – – + + – – + + – – + + – – + + – – + + – – + + Light weight – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Increasing quality/durability requirements – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Type approval process autonomous driving – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Capital High capital requirements – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + markets Investors/creditors view on automotive – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + Summary Overall impact – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + + – – 0 + +

– – 0 + + Impact on supplier business: (strongly) negative, no impact, (strongly) positive 1) M = Mobility A = Autonomous D = Digitization E = Electrification 2) Relative to each other Source: Roland Berger/Lazard 42 1 Small traditional player Small traditional players have to find answers for the increasing price pressure and potential volume downturns

Top challenges and rationales for most small traditional players

Price pressure, > Major OEMs have issued performance-improvement programs missing scale > High capital requirements on OEM side to finance R&D expenses or Need effects and potential fines for exceeded emission limits > Low manufacturing volumes, small client base and sometimes limited global for action Industry 4.0 presence aggravate realization of scale effects > Digitization and automation in operations required to maximize performance > Industry 4.0 solutions require substantial investments

Declining > Possible economic downturn in the short term/mid term volumes > Higher car utilization ratio due to shared mobility concepts and autonomous Low High driving in the long term

Electrification > Changing car concepts require a different product portfolio from suppliers and digitization > Increasing importance of lightweight solutions to increase EV range > Car-as-a-service trend causes shift away from lucrative high-end variants as not-owned cars become less of a status symbol

Securing long- > Creditors more cautious with long-term commitments especially for small term funding suppliers in domains at risk > Difficult to find equity investors at the same time How to survive despite strong Attracting > Small companies struggle to attract the right talent due to limited brand talent recognition or unfavorable location headwinds?

Source: Roland Berger/Lazard 43 1 Small traditional player A promising way for most small traditional suppliers is to fully focus on performance improvement

Strategic direction of most small traditional players Favorable actions Adverse actions Set up a holistic performance excellence/improve- ✓ Do nothing, because changes seem to be ✗ ment program for overhead, operations and R&D far away Free up cash with efficiency program Develop portfolio toward non-automotive, Outsource non-core competencies if time-/resource-intensive or experience is missing Re-think/adjust geographical footprint Focus on product portfolio diversification, if it is time-/capital-intensive Program to automate shop-floor processes Develop capital-intense growth areas where no Secure long-term funding flexibility and sufficient expertise is in-house equity ratio Build-up FTE in traditional functions and worsen Actively consider merger/disposal options cost structures Strategic mission statement Survival of the fittest – Cost optimization throughout the entire organization is key

Source: Roland Berger/Lazard 44 2 Aftermarket player Most aftermarket players have to deal with strong market consolidation and electric cars as a threat to their business in the long run

Top challenges and rationales for most aftermarket players

Electric > Electric vehicles consist of far fewer parts than traditional ICE vehicles vehicles > Durability of electric powertrain components considered higher than that of Need ICE components > Risk of obsolete production capacities for aftermarket part manufacturers in for action the long term

IAM1) Industry > In the independent aftermarket, strong industry consolidation is underway consolidation > Small aftermarket companies might be swallowed by industry giants > Market already partly dominated by large, multinational parts distribution groups Low High

New > Aftermarket is attractive for either low-cost suppliers, especially from Asia competitors or global online marketplaces, due to relatively low entry barriers for commodities > Overall very price-sensitive client base due to higher vehicle age – risk of being substituted because of lower client loyalty How to Client > Very different client groups (end customers vs. OEMs) to be handled structure > New client groups evolving, e.g. global mobility providers position in a consolidating Online sales > Increasing importance of online sales channel and upcoming > New online players evolving and digitizing digital products > Service-focused and customer-oriented business models gain importance market? 1) IAM = independent aftermarket

Source: Roland Berger/Lazard 45 2 Aftermarket player Aftermarket players have to determine their strategy in view of significant consolidation activities within the market

Strategic direction of most aftermarket players Favorable actions Adverse actions Approach new and/or emerging clients ✓ Ignore trend of market consolidation on distribution ✗ side Develop digital sales channels Stick to traditional aftermarket business only, since M&A activities or co-operations volume will decline in the long term Ignore new or emerging players and miss Review and clean up product portfolio co-operation or future business opportunities Optimize level of vertical integration (as part Underestimate the disruptive impact of manufacturer) digital giants and face a declining relevance of today's sales channels Working capital reduction program Focus on hardware products only and miss software and/or digital business opportunities Strategic mission statement Eat or be eaten – Compensate for negative business implications from e-mobility trend

Source: Roland Berger/Lazard 46 3 Global commodity leader Most global commodity leaders need to optimize their cost structures and adjust their portfolio for future requirements in parallel

Top challenges for most global commodity leaders

Price pressure > Major OEMs have all issued performance-improvement programs > High capital requirements on OEM side to finance R&D expenses or Need potential fines for exceeded emission limits for action Potential > Possible economic downturn in the short term/mid term volume decline > Higher car utilization ratio due to shared mobility concepts and autonomous driving in the long term

Electrification > Changing car concepts require different product portfolio from suppliers and digitization > Increasing importance of lightweight solutions to increase EV range Low High > Car-as-a-service trend causes shift away from lucrative high-end variants as not-owned cars become less of a status symbol

Industry 4.0 > Industry 4.0 requires substantial investments > Digitization and automation in operations required to maximize performance

Capital > R&D spending for lightweight solutions and advanced engineering due to requirements new car concepts How to secure > Transformation process within operations needs to be financed profitability in an Platform > Purchasing co-operations on OEM side as well as further efforts to leverage adverse projects scale effects based on car platforms > Losing platform projects can become a serious issue for a supplier market?

Source: Roland Berger/Lazard 47 3 Global commodity leader Leveraging process and shop-floor digitization potentials as basis for a sustainable profit improvement is key for global commodity leaders

Strategic direction of most global commodity leaders Favorable actions Adverse actions Adjust product portfolio for future requirements ✓ Seek potentials solely outside automotive to avoid ✗ Maximize product standardization and adjustment to get bogged down in unknown areas of product specifications Software/electronics as portfolio add-ons since Secure long-term funding/financial flexibility (still in catching up to established suppliers might be too good times) difficult Consider add-on acquisitions to cement leading Make product intelligence the focus topic within role R&D if current products aren't really allowing that Automation and process-optimization program Try to enter highly competitive service-/data- oriented business models as growth opportunities, Improve efficiency of overhead and of organization since advantage of existing players is too large Development of new clients on OEM side Underestimate future market changes Strategic mission statement Defend current positioning – Process excellence is the basis for generating capital and ensuring long-term success

Source: Roland Berger/Lazard 48 3 Global commodity leader For global commodity leaders, holistic performance-improvement programs are a suitable way to prepare the company for the future

Example: Global commodity leader performance-improvement program

Initial situation Program bandwidth in the project Achievements > Decreasing course margins > 4% absolute EBIT > Partly loss-making One Multiple Company-wide improvement over business focus plant focus plants focus plants 3 years > Increasing capital Starting point Program extension Full-scale program > More than EUR 100 m requirements Plants/ 1 > 5 > 50 of working capital > Declining equity locations improvement ratio Regional Country Region Global > More than 2,000 > Commoditized focus individual portfolio Content  Shop floor  Shop floor  Shop floor improvement > Portfolio adaption focus  Ind. material  Ind. material  Ind. material measures and growth  Overhead  Overhead  Overhead strategy failed  Sales > Sustainable  Central overhead turnaround  Direct material

Specialist Local team, Central team, Central and local support dedicated dedicated team with multiple resources resources resources

Source: Roland Berger/Lazard 49 4 Global new entrant Despite a leading-edge product, global new entrants have to deal with technological constraints and missing access to OEMs

Top challenges for most global new entrants

Automotive > No familiarity with safety and traceability requirements standards > Product life cycles and business understanding differ significantly between Need automotive and other industries for action Customer > No access to OEM purchasing or R&D organization access > RFQs are only sent out to established suppliers > In terms of digital players, automotive OEMs are not only potential clients but also potential competitors

Competition > Certain fields, e.g. battery or electronics, are attacked by multiple suppliers Low High > Many new entrants with strong financial background

R&D > New technologies require companies to invest heavily in R&D during a time expenses of an uncertain automotive future > Besides R&D expenses, lobbying also partially required

Workforce > Fierce competition for talent especially in software development availability > Automotive hubs and new-technology hubs differ significantly How to enter/disrupt Technology > Mistrust of end customers especially with regard to automated technologies acceptance or data security the automotive > Data privacy scandals and fraud are a burden for new technologies > Legal framework is more often than not the limiting factor market?

Source: Roland Berger/Lazard 50 4 Global new entrant For global new entrants it is key to leverage their non-automotive innovations within automotive and to keep their innovation speed

Strategic direction of most global new entrants Favorable actions Adverse actions Hire automotive-experienced staff ✓ Slow down R&D efforts and innovation speed and ✗ ("buy teams") lose the technological advance as a consequence

Co-operate with automotive OEMs M&A to acquire established automotive players to avoid adapting to traditional, long-cycle automotive Bring the product technology on the road by processes (losing "can-do/let's-try" attitude) outpacing traditional automotive players Build up presence in today's automotive hubs Transform into a traditional automotive supplier and become slower Leverage non-automotive innovation for automotive applications

Strategic mission statement If you can think it, you can do it – Leverage existing know-how to generate new business within automotive industry

Source: Roland Berger/Lazard 51 5 Traditional diversified player Top challenges for traditional diversified players are the ongoing commoditization of parts of their portfolios and high R&D expenses

Top challenges for most traditional diversified players

Price > Major OEMs have all started performance-improvement programs pressure > OEMs pass on reduced margins as well as increasing capital requirements Need to their suppliers > OEMs will further use platform concepts to increase volumes for purchased for action parts and to leverage scale effects

R&D > New technologies require heavy investment in R&D expenses > Transformation within manufacturing processes needs to be financed (Industry 4.0 potentials) Low High > Autonomous driving and car-as-a-service will decrease importance of Portfolio com- traditional car characteristics – hardware might become pure commodity moditization > Car becomes less of a status symbol, hence shift away from lucrative variants Cultural > Employees are used to success of the past years change > Future changes and negative implications seem to be far off How to identify Increasing > Many suppliers try to enter the same growth segments, e.g. for battery the right competition thermal management or interior functions innovations for growth > Established suppliers are being attacked by new entrants sector for the future?

Source: Roland Berger/Lazard 52 5 Traditional diversified player Most important task for traditional diversified players is the transformation of their product portfolios toward future growth segments

Strategic direction of most traditional diversified players Favorable actions Adverse actions Develop a long-term portfolio strategy ✓ Ignore the upcoming changes ✗ Holistic performance improvement project for Focus on traditional OEMs as clients only and miss overhead and operations chance with new players Spread resources across too many growth areas M&A activities to speed up portfolio transformation with acquisitions in promising areas Rely on current culture and skill-set only, since the right to play in automotive might change in future Divest areas without sufficient growth potential Consider starting margin declines as a temporary effect and not as indicator for the industry change Facilitate a cultural mindset change Focus solely on non-automotive as future growth Identify future core competencies and hire opportunity to avoid getting bogged down in employees with the right skill-set unknown areas Strategic mission statement Offense is the best defense – Focus on cost-efficiency or proactive portfolio transition to future growth segments

Source: Roland Berger/Lazard 53 6 Technology system integrator Technology system integrators will be facing new players as well as automotive OEMs defending their margin potentials

Top challenges for most technology system integrators

Electrification > Changing car concepts and changing mobility behavior require product and digitization portfolio adaptions Need > Increasing importance of lightweight solutions to increase EV range > Car-as-a-service trend causes shift away from lucrative high-end variants as for action car becomes less of a status symbol but also opens up new opportunities Autonomous > As the competition for future core technologies is in full force, auton- driving omous driving has the potential to re-shuffle the automotive value chain – however, there are large capex requirements, with uncertain payback Breaking up > OEMs defend their margin potential and may manufacture future key Low High of systems technologies in-house, stepping away from complete system outsourcing Increasing > New players, e.g. for automated driving or BEV1), push into the market competition > Digital players have identified automotive as a future growth segment Financing > Traditional and new technologies require R&D investments in parallel needs > Pre-financing of manufacturing equipment for new technologies > Financing of M&A activities (market shares and/or new technologies) How to participate in Internal > Software and electronics specialists become employee target group, cultural bringing a different cultural mindset into the company future growth change > Organizations need to become more flexible and agile > Employees expect an innovation-friendly environment segments? 1) BEV – Battery electric vehicle

Source: Roland Berger/Lazard 54 6 Technology system integrator The most promising strategy for technology system integrators is to defend their positioning by exploiting future technologies

Strategic direction of most technology system integrators Favorable actions Adverse actions Active portfolio management, incl. divestments ✓ Try to manage new opportunities solely on own ✗ and aggressive exploitation of new technologies efforts instead of involving new expertise M&A activities to acquire new products, new skills Ignoring of new players (as clients or competitors) and/or additional market shares Focus on electrified and autonomous mobility only Extend footprint into today's digital hubs to catch and miss other business opportunities up with digital players Focus on traditional technologies only and fall Consider own venture capital investments behind on new technologies Set up performance improvement actions Further guarantees of employment, keeping Consider JVs or partnerships with complementary employees with wrong skill-sets and thus worsen partners in areas with large capital requirements cost structures for the future

Strategic mission statement Remain system-relevant – Make the company irreplaceable for OEMs and leverage positioning into new fields

Source: Roland Berger/Lazard 55 5 / 6 Traditional diversified players/Technology system integrators Especially diversified players and system integrators can benefit from the right portfolio mix combining attractive profit levels and growth potential

Analysis of valuation drivers Traditional EV/EBITDA vs. Margin EV/EBITDA vs. Growth automotive In the traditional EV/EBITDA '19E R² = 0.48 EV/EBITDA '19E Limited relationship between growth and valuation supplier domains, supplier 8,0x 8,0x space1) R² = 0.08 investors consider operational 6,0x 6,0x excellence/

4,0x 4,0x margin levels more important EBITDA margin '19E Sales CAGR '19E–'21E 2,0x 2,0x than growth 8% 12% 16% 20% (2%) 0% 2% 4% 6% 8% expectations

EV/Sales vs.✓ Margin EV/Sales vs. Growth High-growth In the new high- automotive EV/Sales '19E Limited relationship between EV/Sales '19E R² = 0.87 2) profitability and valuation growth areas, space 4,0x 4,0x R² = 0.03 investors consider growth expectations/ 2,0x 2,0x potential more important than EBITDA margin '19E Sales CAGR '19E–'21E 0,0x 0,0x current margin 5% 10% 15% 20% 0% 30% 60% 90% levels 1) Illustrative peers: American Axle, Autoliv, BorgWarner, Brembo, Continental, Dana, Delphi, Hella, Magna,✓ Norma and Valeo 2) Illustrative peers: Akasol, Aumann, Tesla, Visteon and Voltabox

Source: Bloomberg, Roland Berger/Lazard 56 Suppliers have to act now in order to remain successful in the future

Key takeaways for automotive suppliers Suppliers should not ignore the current technological and economic changes in the market Performance programs are a must for basically all established suppliers – For small suppliers with commoditized portfolio they are vital Structural measures will be essential for suppliers to cope with the growing pressure on margins through 2025 Suppliers with a broad product portfolio are best positioned for upcoming challenges Suppliers should accelerate consolidation/capacity adjustments in the traditional domains and run those as "cash cows" Expensive cash acquisitions are primarily recommended for larger, financially strong suppliers – Smaller/weaker suppliers should actively consider a disposal, merger or equity raise Suppliers should proactively ensure mid-term/long-term financial flexibility In new, high-growth areas requiring massive R&D/upfront investments, established suppliers should consider adapting VC investments or co-operations/JVs to share the burden In the future, the right employee skill-set becomes one of the most important assets A universal "one-size-fits-all" strategy does not exist – but it is time to act now

Source: Roland Berger/Lazard 57 Contents

Authors of this study

Felix Mogge Ken Oliver Fritz Senior Partner Managing Director

+49 89 9230-8346 +49 69 170073-69 [email protected] [email protected]

Thomas Schlick Christof Söndermann Senior Partner Managing Director

+49 69 29924-6202 +49 69 170073-221 [email protected] [email protected]

Florian Daniel Principal

+49 89 9230-8374 [email protected]

Source: Roland Berger/Lazard 59 This presentation was prepared by Lazard & Co. GmbH ("Lazard") and Roland Berger GmbH ("RB") exclusively for the benefit and internal use of our clients and solely as a basis for discussion of certain topics related to the automotive supplier industry described herein. This presentation is strictly confidential and may not be reproduced, summarized or disclosed, in whole or in part, without the prior written authorization both of Lazard and RB, and by accepting this presentation you hereby agree to be bound by the restrictions contained herein.

This presentation is based on publicly available information that has not been independently verified by Lazard or RB. Any estimates and projections contained herein involve significant elements of subjective judgment and analysis, which may or may not be correct. Neither Lazard, nor any of its affiliates, nor any of its direct or indirect shareholders, nor any of its or their respective members, employees or agents, nor RB provides any guarantee or warranty (express or implied) or assumes any responsibility with respect to the authenticity, origin, validity, accuracy or completeness of the information and data contained herein or assumes any obligation for damages, losses or costs (including, without limitation, any direct or consequential losses) resulting from any errors or omissions in this presentation.

The economic estimates, projections and valuations contained in this presentation are necessarily based on current market conditions, which may change significantly over a short period of time. In addition, this presentation contains certain forward-looking statements regarding, among other things, the future financial performance of automotive suppliers, which may include projections based on growth strategies, business plans and trends in the automotive sector and global markets. These forward-looking statements are only predictions based on current expectations; the actual future results, levels of activity and/or financial performance of automotive suppliers may differ materially from the predictions contained in this presentation. Changes and events occurring after the date hereof may, therefore, affect the validity of the statements contained in this presentation, and neither Lazard nor RB assumes any obligation to update and/or revise this presentation or the information and data upon which it has been based.