Introduction p1 / Markets p3 / Brands p9 / Production p13 / Suppliers p17 / Corporate sustainability p22 / Let’s continue the conversation p26 How to be No. 1 Facing future challenges in the automotive industry

www.pwc.com/auto Introduction

The automotive industry is a growth industry. It has broken record after record in recent years. Sales and production in China are booming. On the other side of the globe, North America’s strong recovery continues to surpass expectations. 2013 marked the US’s fourth straight year of sales increases of over 1 million units.1 Europe hasn’t come back as quickly – but even here some manufacturers have posted record profits, and it looks like the region may have turned the corner in 2013. By 2020, annual global light vehicle assembly is expected to increase by another 25 million units. The 100 million unit mark will be crossed even sooner – by 2017. In fact, by 2020 light vehicle assembly should top 107 million units.2

But along with record growth, the industry is also facing unprecedented challenges. Consumer expectations are transforming. New technologies are dramatically changing vehicles, from the advent of the ‘connected car’ and enhanced driver support to better fuel efficiency and new or improved powertrains. Automotive manufacturers and suppliers are confronted with ever greater complexity as a result of increasing numbers of products and options, shorter technology cycles, increasing pressure to innovate and global supply networks. And at the same time they need to balance the needs and demands of customers, investors, regulators, non-governmental organisations (NGOs) and even the general public.

But without pressure, there would be no diamonds. That’s not just true in geology – the automotive industry shows that challenges can also spur progress in business too. Tough competition makes efficiency, inventiveness, flexibility and decisiveness mandatory. What are some of the keys to success in this fast-moving environment?

1 Automotive News 2 PwC Autofacts 2014 Q2 Data Release Know your markets. Europe has faced tough times, but may have turned the corner. The BRICs are still vital, but while China is booming, Brazil, Russia and India have slowed down. And North America continues to regain the ground it lost during the crisis. While these are some highlights of the automotive markets, we think it’s critical to go deeper. There are significant variations in the health of European markets, for example, and while China is booming, some Tier 1 cities are challenged by congested highways and environmental concerns. Automotive executives should pay close attention to market dynamics and position their companies to take advantage of them.

Build the brand. For most consumers, the decision to buy a car is made at both a rational and an emotional level. For manufacturers, developing strong products is the essential starting point. But enhancing service is important too – and remembering that every contact with the customer is a chance to build a relationship. And brands need to resonate with car-buyers who choose with their heart as well as their mind. Emotional marketing isn’t just a fad; it’s an important trend that automotive producers should embrace.

Adapt production strategies. Even companies that have been successful should keep transforming their business – standing still means falling behind. That means moving to the markets that are growing, like China and South East Asia, Brazil, Russia, India – all will be increasingly important. The industry’s regional footprint should change substantially – a process that’s already begun. Automotive companies should be able to cope with complexity. For executives, that means fully understanding the true direct and indirect costs of complexity, but also its benefits, so they can make better decisions.

Set the right priorities. The automotive marketplace is transforming, and so is the relationship between OEMs and suppliers. Some suppliers are becoming important partners in innovation; others are making big strides in efficiency. And many are joining automotive producers as they move to growth markets. Every supplier should carve out its own position in an extremely complex global network. That means managing relationships and building on your strengths.

Take a long-term view. Automotive producers are facing increased pressure from regulators and consumers to improve the environmental performance of their products. They’re already making significant progress, and they’re also improving their own environmental performance. But that’s only the beginning of developing a truly sustainable business. Economic and social factors are important too. Better transparency across the whole supply network will help automotive producers understand their true impact on the environment, economy and society. It can help reduce business risk too. Corporate sustainability isn’t just ‘nice to have’ – it’s a prerequisite for future success.

Those leaders responsible for driving automotive companies have important decisions to make. They should create a coherent strategy, define goals and find ways and the right people to meet them. This report doesn’t have all the answers, but we hope it provides some useful starting points for further thought and discussion. We’re looking forward to continuing the conversation with you.

Sincerely,

Rick Hanna Felix Kuhnert Global & US Automotive Leader European & German Automotive Leader

Note: this report draws upon selected chapters of a longer study published in September 2013 by the PwC Automotive Advisory practice in Germany, written with input from gravity GmbH. It also includes updated figures and additional examples from other regions. Automotive production & assembly forecasts are based on PwC Autofacts analysis unless otherwise stated. The longer study, ‘How to stay No.1 - Impulse fuer die zentralen Herausforderungen in der Automobilindustrie’ is available (in German) for download at www.pwc.de/auto. Markets Looking for the new equilibrium

Taken globally, the automotive others. What strategies have they industry has expanded significantly used? And what factors are decisive in recent years, driven largely by for success over the middle and long strong sales in the BRIC nations and a term in the global marketplace? solid post-crisis recovery in the US. The European Union has shown We think the answers lie in reading another picture, though. With a more the dynamics of the market as difficult economic situation, new car accurately as possible, and then registrations have declined for six positioning your company to take straight years.3 And developed advantage of them. markets in the Asia Pacific region have faced tough times too, especially Europe – on the road to in Japan, where the aging of the recovery population is having an impact. Government debt, rescue plans, reforms, recession: the challenging By the end of 2013, there were some situation in Europe has held many indications that the worst may be customers back when it comes to over in Europe. Improvement in the purchasing a new car. That’s not a big Eurozone continued in the first hardship for most. Particularly in quarter of 2014, although it’s still too Western Europe there is a broad soon to say for sure how sustainable segment of the population that the trend is.4 What we do know for already owns a vehicle. And when certain is that the automotive money gets tight, many consumers industry’s center of gravity is moving. simply keep driving it a bit longer. New customers, especially in Asia, Since the historic peak in 2007, when are already driving strong sales in Europe (EU27 + EFTA) more than today, and that will be true tomorrow 18 million new vehicles were too. Many OEMs are following a registered, new registrations have “build where you sell strategy” and been declining.5 moving additional production and development investments to markets The long slowdown in one of the where sales are growing – and world’s most important automotive increasingly, so are suppliers. markets has taken its toll on many OEMs. One French producer booked In short, the automotive industry is losses in the hundred millions in transforming. Even in the regions 2012. But another European OEM where times have been toughest, posted record profits that same year. some companies have weathered the Why such a disparity? recent economic storms better than

3 European Automotive Manufacturers Association data; http://www.acea.be/statistics 4 Markit, “Eurozone recovery prospects brighten as France returns to growth”, 24 March 2014, http://www.markit.com/ assets/en/docs/commentary/markit-economics/2014/mar/EZ_Composite_ENG_1404_FLASH.pdf See also European Commission economic databases and indicators, http://ec.europa.eu/economy_finance/db_indicators/surveys/time_series/ index_en.htm 5 European Automotive Manufacturers Association data; http://www.acea.be/statistics

How to be No. 1 3 existing series and highlight the New models are helping to company’s innovativeness, enhancing the overall brand image. gain ground in tough markets Capacity: looking for the right balance Factory utilisation is another key part of the answer. In Europe over-capacity is a serious structural problem. A PwC Autofacts Analysis from 2012 showed that 13 different European automobile factories with a minimum capacity of 100,000 vehicles per Europe were 7 Where’s your market? nearly 20%. That has helped keep operating below 50% utilisation – far their momentum going, despite the One answer lies in regional lower than the normal profitability tough situation in Europe. differences. From 2007 to 2012, new threshold of 75-80%.10 That represents car registrations decreased almost approximately two million units of uniformly across Europe with only a Success through variety excess capacity and significantly very few exceptions – but there were Another success factor was certainly negatively impacted the cost structure big differences in the order of expanding and updating the product of the affected automotive producers. magnitude. Germany declined portfolio. A closer look at the European around 2% of 3.1 million units. new vehicle registrations in 2012 The number of factories operating at Contrast that with a drop of 80% in shows that while many brands lost below 50% utilisation went down to 9 Greece and 53% in Portugal. Spain ground compared to 2011, volume in 2013. And while the names on the plunged 57% too, while Italy dropped producers were generally much harder list changed, some plants have been 44%. And while the French drop of hit than premium producers. German facing issues for years. And even if 8% was modest in comparison, the and other premium brands were able pent-up demand pushes healthy sales total decline in these three markets to distance themselves from the in the future, there’s no escaping the was 2.1 million unit sales, compared competition, despite a shrinking fact that Europe – especially Western to Germany’s drop of around 60,000 market. Europe – is a saturated market. units.6 European production capacity should Certain manufacturers benefited from be adjusted accordingly. These regional differences over the strength in the growing segments, like past several years are one of the SUVs, A-segment mini cars and Some European automotive producers primary reasons for OEM’s differing minivans. But even more importantly, have pushed through factory closures levels of resiliency to the crisis. success was due to attractive and – with expected reactions from Italian and French automakers have innovative products as well as a employees and unions. Another suffered more from the sharp drops consistent expansion of their product strategy is actually shifting some in their home markets than their palette into even the smallest market production back to Europe. While that German competitors have. A further niches. From 2007 to 2012 alone, may seem counter-intuitive, it’s disadvantage has been their reduced German OEMs increased the number nothing other than the classic ‘build engagement in the two biggest of vehicles produced in Europe by 18 where you sell’ strategy. Measures like growth markets of the past several completely new model series.8 these should have an impact. PwC years – the US and China. Autofacts expects that by the end of the The results suggest the strategy is decade capacity in the remaining German OEMs have profited from a working – their European market share European automotive factories are more globalised approach and a focus increased by 6% points in the same expected to again reach the 80% level. on key growth markets. In China, time period.9 That’s a trend we expect The current over-capacity of around German premium producers to see continue. New models don’t just 5.5 million units in 2012 will diminish increased sales in 2012 by 40% over offer customers new choices – they also 35% by 2020. 2011, and in the US sales were up emphasise the attractiveness of

6 European Automotive Manufacturers Association data; http://www.acea.be/statistics 7 Automotive News; FOURIN’s Monthly Report on the Chinese Automotive Industry 8 PwC Autofacts 2014 Q2 Data Release 9 European Automotive Manufacturers Association data; http://www.acea.be/statistics 10 PwC Autofacts 2014 Q2 Data Release

4 How to be No. 1 16-17 million units realistic long-term sales level for European Union (EU) + EFTA

Europe has turned the corner Still, a strong 2014 for the EU is by no means certain. Government austerity Against the odds, 2013 turned out to programmes designed to fight high be a better year than expected for the debt levels could slow down growth. European Union. Overall, EU+EFTA Additionally, the crisis in the Ukraine new car registrations for the full year and sanctions against Russia could fell to 12.3 million units.11 But car also have a dampening effect on registrations began to show signs of growth. And it could take some time growth early on in the second half of to see unemployment fall too, Utilisation is still the year. The pace of recovery was particularly in countries with impressive, with registrations growing structural problems. So vehicle a major issue in at a rate of 2.6% in Q3 and ~5.8% in demand won’t improve radically Q4. Continued growth will depend on Europe, but the overnight, and only when car buyers the overall economic situation in the affected countries have more situation should continuing to improve. There are a disposable income. number of indices and surveys that improve by 2020. suggest that the situation in the Eurozone has improved. How many cars does Europe need? Overall, an improvement in sales of For example new cars and light commercial of cars per resident. Added to that are vehicles to the level of 16-17 million cultural factors that are encouraging The European Commission’s units seems realistic. Additional younger consumers, particularly those monthly Business Climate Index growth over the record high levels of living in cities, to forego (or at least suggests that the downturn has the past isn’t likely. That will be true postpone) purchasing a vehicle in already hit its nadir. But there’s even over the longer term. Most new favour of other mobility options. And still a gap between estimates of car buyers, at least in Western demographic changes can be a factor improved consumer sentiment Europe, are replacing vehicles out of too. In some countries like Germany and the actual purchase of the existing parc which in some and Poland, a shrinking population can big-ticket items like cars. If countries has reached the limits of have an impact on sales. We foresee a current forecasts prove accurate traffic and parking infrastructure. ‘new normal’ sales level in Europe and the economic situation in Like the US and Japan, Western that’s higher than the current level of 2014 continues to improve, Europe already has a high sales – but probably won’t return to the automotive demand will follow. In ‘motorisation density’, or proportion pre-crisis high point. Europe, there’s significant pent-up demand that could help fuel sales. And stricter European Carbon Dioxide (CO2) emission regulations will also encourage fleet updates.

11 European Automotive Manufacturers Association data; http://www.acea.be/statistics

How to be No. 1 5 +53% anticipated growth in Chinese vehicle production, 2013-2020

China: engine of global automotive assembly

After a slight increase in 2011 and healthy 7.1% growth in 2012 to 15.5 million units, China’s new car sales roared ahead into the double-digits in 2013, with annual growth over 15%.12 The rest of the BRICs slow when growth does come, much of it That’s due in part to the re-entry of down, but long-term prospects may be in Ultra-Low-Cost-Autos Japanese brands into the market after are still strong segments. The challenge for automakers should be to maintain a the territorial dispute in the second The other BRIC countries have sufficient tactical presence that can half of 2012, and to the continued contributed to the industry’s growth be scaled up if demand growth and growth of the working middle class. in the past decade too, but while purchasing power takes off. PwC Autofacts expects continued China surpassed expectations in growth for the next five to seven years, 2013, Brazil, Russia and India all Brazil showed strong vehicle sales albeit at increasingly moderate experienced drops in sales. growth during the crisis years – from single-digit levels. That’s despite 2005 to 2012 the market for new cars saturation and license plate Like China, India has a huge and light commercial vehicles restrictions in Tier 1 cities. China’s Tier population – and it’s younger and increased by 1.6 million units to 3.6 2 and Tier 3 cities still offer highly growing faster than China’s. But the million units. But in 2013, after a promising markets. Even if these don’t country is having trouble maintaining decade of rapid expansion and grow as quickly as the government the strong economic growth rates of growth, that number leveled off, plans, automotive revenues should still the 2000’s. New light vehicle sales down slightly to around 3.5 million increase in China – albeit at a slower were down 7.6% to 3.0 million units, units.14 Many of the same factors rate. Given the market’s impressive despite attempts to jumpstart the were at work here too, including high size, even lower levels of growth will market with all-new models, early interest rates and increased still translate into significant unit sales. product refreshes, and generous transaction prices. A stagnant incentives. High financing rates, macroeconomic environment and Vehicle assembly should see a similar rising fuel prices, price hikes due to social unrest have also discouraged story. PwC Autofacts anticipates the devalued Rupee, and an consumer spending, particularly on growth of 53% from 2013 through increased overall cost of ownership big ticket purchases. 2020 to 29.6 million light vehicles – can be discouraging factors for that equates to 10.3 million additional potential buyers. That has caused Though the political, social, and units.13 That magnitude of growth capacity issues for local production. economic volatility are cause for will only be possible in China, with its short term concern, over the mid- huge population of potential first-time While we expect India to return to term we still expect to see growth in car buyers. Chinese automotive growth, the country’s lower per- both sales and assembly. Marquee producers will benefit from some of capital GDP levels mean the volume events like the World Cup in 2014 the growth, but so will Japanese and gains seen in China aren’t likely. And Korean OEMs, as well as European and US-based OEMs.

12 OICA, http://www.oica.net/category/sales-statistics/ 13 PwC Autofacts 2014 Q2 Data Release 14 ANFAVEA (Associação Nacional dos Fabricantes de Veículos Automotores)

6 How to be No. 1 and the Summer Olympics in 2016 Asia Pac’s other growth story But developed Asia Pac is should require critical investments in The dominant future role of the Asia slowing down infrastructure, which should improve Pacific region in the global Asia’s developed industrial nations with Brazil’s overall economic automotive market won’t only be local assembly of light vehicles – environment and spread to other driven by China. Some of the Australia, South Korea and Japan – regional markets. Over the mid-term, Association of Southeast Asian could lose 5.4% of their production we anticipate strong growth Nations (ASEAN)17 states in South from 2013 to 2020.20 Especially in happening in South America, with East Asia are becoming important Japan, some of the same issues as in the assembly forecast to grow 41% from markets in their own right. Sales in EU are at play here – a high motorisation 2013 to about 6.5 million light Indonesia and Thailand in particular density and an aging population. Nearly vehicles in 2020.15 are accelerating. From 2007 to 2012, one in every four Japanese consumers is Russia’s automotive sales have been annual new vehicle sales in Indonesia over 65. And with the baby boom impacted by slow economic more than doubled, to around 1.1 generation about to retire, fewer development, which is translating million units, although that number consumers should need to buy a new into consumer uncertainty and stayed steady in 2013. And in car for the daily commute to work. hesitations. And while it will continue Thailand new car registrations Further, the strength of the Yen made to be an important market, we expect increased by a factor of 4 to around Japanese exports expensive for several sales to slightly decrease in 2014. 700,000 units, with sales in years, leading many Japanese Assembly looks likely to fall below commercial vehicles up too, to producers to shift productions overseas 2million units in 2014 – a decrease of around 750,000 units. That to where vehicles are sold. That trend 3.9% in comparison to 2013. impressive growth slowed down has temporarily slowed though, in Nevertheless, Russia is expected to be slightly in 2013, but combined car response to the Yen’s drop in value one of the longterm growth markets. and commercial vehicles sales still 18 beginning in 2013. Japanese producers The 2.1 million light vehicles ‘made topped 1.3 million units. are now looking to maintain production in Russia’ in 2012 could grow to 2.9 And there’s still a lot room for of high-volume models back home, until million by 2020. That will be growth. Demographics and economic overseas sales expand sufficiently to supported by growing sales in other growth factors look positive, and the warrant localising production. countries in Eastern Europe, in market still has a very low particular Turkey.16 From 2013-2020 motorisation density. We anticipate we anticipate total growth of over these markets together hit well over 4 40% to 5.0 million assembled units million units by the end of for assembly in the region. the decade.

That’s true for production too. It grew By the end of the from 2.2 to 3.9 million units from -6.5% 2007 to 2012 – and many of these anticipated decline in Japanese decade ASEAN additional vehicles are being light vehicle assembly, exported within the region.19 2013-2020 nations will Production is dominated by Japanese manufacturers, who profit from an play a big role in agreement with the ASEAN nations to developing Asia’s encourage commercial cooperation. Looking over the mid-term, we see growth story. the ASEAN nations playing a bigger role in developing Asia’s growth story than India.

15 PwC Autofacts 2014 Q2 Data Release 16 PwC Autofacts 2014 Q2 Data Release 17 ASEAN: Association of Southeast Asian Nations includes Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Burma, Cambodia, Laos, Vietnam 18 AAF (ASEAN Automotive Federation) 19 PwC Autofacts 2014 Q2 Data Release 20 PwC Autofacts 2014 Q2 Data Release

How to be No. 1 7 While North America has sped That’s partly because of the aging When it comes to assembly, the back up fleet on US’s streets. With the average picture in North America looks car 11-12 years old, it has reached a bright for the US and Mexico. OEMs The sales environment in North historic high point. And inexpensive are looking to take advantage of the America continues to be a positive financing is helping too, although growing US market and some are story with a solid 2013 in the books there are signs that rates may go up using it as an export base too. and a positive 2014 forecasted for soon. Sales of pick-up trucks are Momentum is shifting away from the region. helped by two additional factors. One Canada, despite a decline in the Sales continue to be driven by the US is fuel prices, which are starting to fall Canadian dollar against the US automotive market, which is back again. The other is improvement in dollar. OEMs have shown restraint with a vengeance. In 2009, sales of real estate construction which could when it comes to expanding their new cars and light commercial help sales. assembly footprint in the regions. vehicles plunged down to 10.4 million The result is that even with There are a few reasons for caution. units.21 Two major domestic additional plants being added to the The end of 2013 saw an increase in manufacturers declared bankruptcy region, PwC Autofacts forecasts an the number of vehicles on dealer lots, and many factories closed their doors. extremely healthy average utilisation which could tempt automakers to use 23 But by 2012, sales were back up to rate of 90%. more incentives. And fleet sales 14.4 million units. And in 2013, they continue to be a significant source of gained another million, up to 15.4 sales volume. In our view, OEMs million units. With the US economy should be careful not to use fleet sales finally expected to grow above a 3% too aggressively, or they may risk pace, the major lingering issue over damaging residual values. the sales recovery should ease, resulting in a forecasted sales topline of 16.2 million light vehicles for the US.22

Figure 1: Share of production growth by region 2013-2020

Eastern Europe 6.1% European Union 12.9%

North America 10.3% Developing Asia-Pacific 60.7% Middle East & Africa South America Developed 7.5% 5.4% Asia-Pacific -2.9%

Source: PwC Autofacts 2014 Q2 Data Release

21 Automotive News 22 PwC Autofacts Analysis 23 PwC Autofacts 2014 Q2 Data Release

8 How to be No. 1 Brands Marketing from the heart

There’s no shortage of competition in the automotive industry. And product differentiation keeps getting more difficult, with the differences between premium and volume segments and between producers shrinking. So brands make the difference. They’re the focal point for creating an emotional bond with consumers and the surest way to stand out from the competition.

Appealing to the heart and developments. We discuss the the mind cooperation between OEMs and Automakers suppliers in more detail later in this The choice of a new vehicle includes paper. Innovations that aren’t driven looking to succeed many factors. Some appeal to reason by OEMs in-house spread across the – comparable features, available entire market far more quickly. That with a broad options, test results, crash statistics. blurs the boundaries between the product portfolio But emotional considerations are premium and volume segments and important too, from how the vehicle makes it more difficult to differentiate should tailor makes a prospective buyer feel to its a vehicle on the basis of image. Vehicle makers should engage superior technology. their approaches both the heart and the mind of their customers – and that’s not always So how can premium automakers to find just the easy. What makes a particular vehicle defend and enhance their market right customers distinctive? How do you create an position? And what can volume emotional connection with producers learn from their strategies? for each niche, potential buyers? In recent years premium producers rather than Automotive OEMs are facing new have increased revenues by selling market conditions. While premium more vehicles to new customers in overwhelming automakers used to set their vehicles global growth markets. But they’re consumers with apart with technical innovation that finding new ways to appeal to justified higher prices, that gap has customers in saturated developed too many closed significantly in recent years. markets too. For every niche, there’s a Suppliers have become important customised product – a goal that isn’t different options. innovation partners – they’re now just filled on the factory floor. responsible for replace by over 60% of the value added from technical

How to be No. 1 9 When you look across the whole The new pragmatism The product has to be a solid industry, though, there’s a danger The last five years have left their mark starting point that consumers may become on consumers. Real-estate, financial, overwhelmed by too many choices. Cars still have their own special debt, economic, and currency crises Based on the current plans of fascination. That has its roots in a – the exception has become the norm in automotive OEMs, PwC Autofacts quality product. In conversations with many parts of the world. When you anticipates that in Europe alone, 230 consumers in Germany, the US and speak to consumers about their different models will be on the China, leather was frequently perceptions of premium and personal market by 2019. In 2012 that number mentioned as part of their perception luxury, a new tone is apparent. was just 190.24 But research has of a premium experience. But is it Wasteful luxury is passé. Instead, shown that customers see increased really just leather they mean? The words like value, quality and substance variety as making their purchasing natural material stands in as symbol fill the conversation. Customers want decisions more difficult. In the for consumers’ desire for high-quality to buy performance and value. automotive industry, that’s especially craftsmanship, a rich tactile Premium isn’t just the same thing, but true for respondents with higher experience, and a feeling of treating more expensive. A new down-to-earth levels of disposable income, where themselves. The sensory experience perspective is apparent and customers the range of choices is far greater. has to work as soon as someone sits are only willing to accept a higher down in the vehicle. It’s an almost margin for products they deem to be instinctive reaction to good design and worth the money. Rather than asking an experience of quality that lingers Consumers’ choices are themselves, “Can I afford it?” premium long after the ride is over. customers are now more likely to say expanding rapidly: “Do I think it’s worth the money?”. Good design can help volume That’s true even in China, the country producers improve the driver and where D-segment premium limousines passenger experience too. Less models have had their strongest sales.25 Bigger expensive materials can still provide 190 for and more expensive is no longer an overall impression of comfort or sale in automatically viewed as better. luxury, if they’re well-used. Europe The golden age of marketing, where stylish ads are enough to invoke a in 2012 desire for the product and ensure high margins, seems to be at an end. Premium customers are searching for models authenticity and real value – be it for rational or emotional. Their 230 expectations are high. They want a sale in great total experience – that’s based on Europe the product, supported by service, and in 2019 starts with living the brand.

24 PwC Autofacts 2014 Q2 Data Release 25 FOURIN’s Monthly Report on the Chinese Automotive Industry

10 How to be No. 1 Outstanding service and strong But it’s not easy to achieve service often happened outside of the norm. brands are equally essential excellence. It needs to be ‘produced’ Its real root is in the quality of your again and again, every day, during people, who should have an extra The product is always the starting every customer interaction and portion of empathy and take a point. But to truly stand out from the without sign of fatigue. And OEMs that creative approach. competition, strong service offerings rely on their dealer network for service and a brand that resonates with may have trouble making sure that That doesn’t mean you should trust consumers are also essential. Most service is delivered with real passion. everything to the instincts of your consumers describe their own Dealers are under increasing pressure, staff. Strong internal processes and experience of ‘premium’ as being particularly in established markets, clear structures create the framework perfectly understood and their needs with sales margins for new vehicles for good service. And a savvy use of anticipated. And with consumer-to- slim to non-existent. So there’s not new technology can help bring the consumer communication becoming much room to design a premium ‘wow’ factor. In this digital age, new increasingly more important, personal service experience. But with such a technology and a clever use of data anecdotes about stellar service are critical connection to profitability, can enhance customer interactions worth their weight in gold. Often OEMs should drive a service and help deliver good service above they’re based on small gestures that orientation. That’s particularly and beyond the people factor. show the customer is viewed as an important in the premium segment, In the future, service design in all its individual, and valued. Such but the same principles apply to aspects can need as much attention as interactions with customers can’t just volume producers too. be bought – they’re based on the product design. And each OEM can instincts and emotional intelligence of And even when OEMs succeed in need its own vision of how to create the staff who deliver the experience. partnering effectively with their dealer an unmistakable experience. And network, another challenge is lurking: while that may be especially true for Lu works in marketing for an it’s difficult to scale service. Too many premium automakers, the same automotive company in Peking. She processes and procedures can actually principals apply in volume shared her personal experience of hinder outstanding service, which segments too. outstanding service at a 5-star hotel in Hawaii. On the morning she arrived, she had a blueberry muffin and coffee for breakfast. The day of her departure she needed to leave very early. She heard a knock at the door and found a hotel employee had brought her coffee to achieving and a blueberry muffin. Lu’s muffin is a great example of how sensitivity and service excellence: empathy can lead to a small surprise 3 that makes a big impression. high-quality people with an extra portion of The automotive industry has already established a high level of service – but empathy and a creative approach often it’s the vehicle and not its owner that’s the focus. So how can companies make a positive impression on strong internal process and clear structures customers during the service process? Good quality repairs and maintenance don’t exactly sound like the stuff that consumer dreams are made of. And yet a savvy use of new technology – every contact with the customer is another chance to build a relationship. The service business can move from a solid revenue stream to a brand building factor.

How to be No. 1 11 Making the brand an My brand experience – a matter Brands tell stories – their own emotional experience of interpretation and that of their buyers

Premium automakers should ‘produce’ Some premium customers are so What do premium customers value in a strong product and outstanding experienced with brands, products and premium brands? Or for that matter, service – but that’s still not enough to consumption in general that they take what do any customers value in the establish a clear position in the active steps to create their own brand brands they buy? Why are they segment. The brand itself is the critical experience. For example, Alexander, a so important? final element. That means giving luxury watch salesman and customers a feeling of making the best entrepreneur in San Francisco says Products are more than just a bundling choice of coming home. Options and that for some products, he’d go directly of functional features. They’re part of features can support the connection – to New York City, where some premium our self-experience and external for example, by letting the headlights brands have flagship stores. And while presentation, of our identity. They tell stay on for a few extra seconds after flying to another city may be an a story about us. For premium the car is locked, to help light the way extreme example, most consumers automakers, it’s important to find new, to the front door. But how can brands create things like origins, heritage and exciting ways to tell their own story say ‘premium’? Sensitivity and authenticity in their interactions with with excitement, emotion, surprise and empathy are key. brands. Personal interpretations of a delight. No-one wants to be the hero of brand make the difference in how it a boring story. And in a world filled And that’s not just true for premium emotionally resonates with consumers. with dry lists of pros and cons, genuine OEMs. Volume producers can also emotion and courage gestures can benefit from a consistent brand In the automotive world, flagship make the difference. Certainly better positioning. But beware of trying too stores and museums are booming. fuel efficiency or a larger trunk can be hard. Consumers are skilled at These give consumers the opportunity persuasive arguments for a particular detecting overkill. Many are also to interact with the brand above and vehicle. But so can a particular experienced at reading and taking beyond a vehicle purchase or service lifestyle. The courage to feel is leading apart advertisements and marketing transaction. Each OEM should consider to a new era of emotional marketing, materials – but luckily playing around how to use these kinds of tools to where brands resonate strongly with clichés can be a fun part of the emotionally charge their brand, without any concrete reference to the brand experience too. whether that’s the chance for overseas product or its particular features. buyers to pick up their new car in That’s especially important now, with Germany and drive it through the Alps, technical differences between different Good taste takes time the opportunity to tour the factory OEMs becoming increasingly slimmer. where their car was built, or a visit to a The biggest automotive market in jazz concert or family-friendly event at And again, that emotional connection the world, China, is just beginning the brand’s flagship location. These isn’t just important in the premium to develop a relationship with experiences connect emotions – segment. Consumers face a wide range brands. More customers are first excitement, enthusiasm, curiosity, of choices in the volume segment too. purchasers, and most brands surprise, delight – with the brand at a So while volume producers may want haven’t yet been around long visceral level. The idea isn’t new to the to tell a somewhat different story with enough to become a family automotive industry – retailers and their brand, they should create a bond tradition or part of a regional even film studios have long been with customers too. creating brand ‘experiences’ too, with identity. Consumers are more That points to some important lessons notable success. spontaneous and less loyal to for an up-to-date brand strategy. individual brands; but here, too, a Premium consumers are both disciplined emphasis on rationally and emotionally demanding. communicating the brand and Automakers should offer both ensuring a quality experience will reasonable arguments and emotional pay off in the long run. And connections to build their brands. automakers can learn from other Products, services and brands all need companies offering a premium to work together to support experience in the region, be it purchase decisions. consumer products or luxury hotel chains.

12 How to be No. 1 Production Complex, flexible, networked

Volatile markets and customers with changing requirements are driving an increase in tailor made vehicles. Tomorrow’s market leaders will need to manage complexity well. Flexible structures and new production paradigms are showing the way to a networked future.

Build where you sell. That’s been the industries. So will China become the It’s notoriously difficult to adjust strategic direction of automotive new global production hub for the capacity quickly, and utilisation often companies in recent years, as they’ve automotive industry? depends on external factors outside of moved parts of production to growth automakers, control. We see volatility markets or built up large-scale capacity Not necessarily. Foreign OEMs are in a few key markets becoming a in growth markets, and suppliers have hesitant about exporting from China, long-term challenge for production followed. With AsiaPacific continuing and Chinese producers have a way to networks. Supply chain flexibility is to dominate growth there’s no likely go to match global standards. But the becoming a key success factor. One end to the trend in sight. Of the 102 massive capacity investments in China strategy involves using temporary new factories planned from 2013 to may increase pressure to export at workers as part of the workforce. That 2020, 67 will be located in Asia.26 least some of production over the next can help companies increase or five to ten years. One option might be decrease the workforce by 20-30%, as Finding the right producing individual power train needed.28 In some higher wage assembly location modules in China as a regional hub for countries, workforce flexibility can get assembly elsewhere in Asia. New production capacity isn’t always quite complicated, with overtime, going to satisfy just the domestic Talent constraints will also limit the temporary contracts, flex time market. For example, India’s extent to which ‘best cost countries’ accounts and flexible working hours automotive exports have increased can take over production. Some also playing a role. To maintain significantly between 2008 and 2012, companies are even sending flexibility, it’s important to have an to around 2 million units. But 1.5 production back to sales markets, accurate picture of which costs are million of these were exported to especially Europe – still on the “build variable and can be scaled and how OECD countries.27 That reflects a trend where you sell” principle. Rising different utilisation levels will towards locating assembly in ‘best cost transportation costs and the possibility impact profitability. countries’ and using them as an export of stricter emissions regulation will It’s important to keep a close watch on base for neighbors – and sometimes have an impact on future production market forecasts too. When these even further afield. One US-based decisions too. But the most important change, plans may need to be OEM has already announced plans to factor will be developing strategies to updated accordingly. expand capacity in India and China for improve capacity utilisation while export to Europe, among other places. remaining flexible enough to react It’s already happened in other quickly to shifts in demand levels.

26 PwC Autofacts 2014 Q2 Data Release 27 UN Comtrade Database, PwC Analysis 28 Industry expert estimate

How to be No. 1 13 Customisation: customers’ The level of complexity varies widely While Chinese consumers are delight, production’s bane by market and vehicle type. For currently content to buy a car fully example, a typical German mid-class loaded, or at least choose bundled Automotive producers are offering model offers customers 400 trillion packages of options, there are varying more ways to customise your vehicle. possible variations, while just 1500 opinions on how their tastes may They want to give consumer the variants are offered for comparable develop. Some observers expect to see feeling of having a custom-tailored vehicle models in the Chinese market. the level of complexity increase there product, rather than a mass-produced For premium vehicles, the possible too. Automakers should keep a sharp one. And different standard options combinations are exponentially higher eye on local customer expectations in for different markets also increase in both markets. order to anticipate possible impacts complexity. From a sales point of on production. view, the ability to customise options Reductions in complexity aren’t likely. and features is a clear advantage. But Companies should master it, and that’s for product and supply chains it especially true for premium producers. creates significantly challenges.

Figure 2: The level of complexity varies widely by market and vehicle type A typical German mid-class model offers customers 400 trillion possible variations, such as a heated steering wheel, while just 1,500 variants are offered for comparable vehicle models in the Chinese market

Germany China 400 Trillion 1,500

Source: PwC Analysis

14 How to be No. 1 Greater complexity = Most cost analysis systems aren’t yet Planning for tomorrow today higher costs able to analyse and show all of these factors with sufficient transparency. With demand for different models Production complexity can mean That’s why many automotive and variants continually changing, variations in which components are companies need to go one step further. automakers need flexible suppliers included, where they’re produced, A sophisticated model for cost analysis who are able to deliver the required and what tools are used. And beyond should categorise the extent to which modules or components reliably and that, it’s necessary to design the entire individual costs are sensitive to on-time. And the OEMs need to be process so that a customised vehicle fluctuations in volumes or variants. able to install the right parts and can be assembled using a standard That can help automakers get a better produce their own customised rigid process. Complexity can add handle on how expanding their versions where necessary. That both indirect costs resulting from offerings and/or shifting locations means flexible assembly lines, ideally lower productivity and direct costs would impact their cost structure. those that can produce vehicles when procurement costs go up. For across different segments. example, if tools need to be switched frequently, that can slow down the In addition, shorter production production line. Parts that are only cycles create other challenges, like purchased in small volumes generally increasing the need to modify cost more. Offering more options may production processes. That means it’s mean using a larger number of important to plan ahead for future suppliers, which also adds costs. vehicle generations and work to Warehousing space may need to integrate a high level of increase. And it reduces the accuracy standardisation into platforms and of production forecasting too. vehicle architecture.

Shorter production cycles are increasing the need to plan ahead for future vehicle generations

How to be No. 1 15 Building blocks for everything? Weaving the right network together for the entire product portfolio can also help drive It’s possible to cope with demand Nets are elastic and flexible by functional strategy decisions, like volatility and shorter product nature. Production networks need to what type of innovation to invest in lifecycles by looking at both product be too. That means seeing production and whether/where additional and production systems. That means as an open process that can weave production is needed. designing for easier production as together very different influences. well as using consistent vehicle The entire value chain needs to Keys to success architectures. That can reduce the combine the production network need to re-vamp production facilities with information – ideally in real - Successful companies already have a when models are shifted or when time – from the sales process until strong sales and production presence updates and modifications are final delivery and ideally service and in growth markets and have made planned. The ultimate goal is to after-market. major strides towards developing balance the individual product design flexible and efficient production with standardised components and Understanding unit costs that reflect strategies. It’s clear that fully modules. For premium producers, product and factory specific factors mastering the supply chain from there’s a delicate balance. Customers like labour costs, unit production beginning to end could play a paying for exclusive high-end features levels, final assembly processes and decisive role in automakers future may resent seeing parts of their product complexity is the starting growth. Companies that are able to premium vehicles showing up in point. That helps create a realistic master the complex web of products, volume platforms. picture of total costs for a particular innovation, production, location and vehicle in different factories around sales, stay flexible in the face of Standards increase flexibility the globe and compared to the volatility, and understand and competition and helps answer control costs, without losing sight of It may seem paradoxical, but defining questions about whether assembling customer expectations, will be consistent production standards can in a high-wage or low-wage region tomorrow’s winners. actually increase flexibility. That’s makes more sense. And additional because factories which share factors like regional customer common standards can produce preferences, costs and infrastructure different models or variants as need to be taken into account too. needed, reducing the amount of down-time. To manage complexity, Companies need to model all of these it’s also important to develop a factors across a vehicle’s life cycle thorough sales and operations and with all the relevant revenue and planning process that can show profit information. Reviewing these models, the modules and components they include, and plan their production accordingly. That can then be used to plan the production network. Not all industry players are to achieving consistently implementing it though. In the future, many of the executives production excellence: we spoke with believe that producers 3 should improve their IT capabilities, integrate suppliers more fully into the information flow, and better comprehensive understanding of unit costs at coordinate the various value chain the factory specific level elements as well as components of a vehicle. analysis of regional customer preferences, costs and infrastructure

sound modelling across the vehicle life-cycle

16 How to be No. 1 Streamlined, global or innovative? Key strategic decisions for suppliers

Huge new markets are attracting production. Big new themes are dictating research directions. The partnership between OEMs and suppliers is in a process of transformation. Tomorrow’s winners will define a clear profile and build their own position in the new landscape.

More than 60% of the value added in a Resilient – thanks to exports and (see Figure 3). One exception was vehicle is generated by the research innovation Europe, where suppliers grew 3.6% and products of suppliers, which are despite a slowdown in local sales. delivered as individual parts, When automotive producers have a That strong result was largely components or entire systems at the heavy weight to carry, it’s often powered by a strong showing from right time and in the right suppliers who end up with a slipped German suppliers, whose revenues configuration – be it in Germany, disk. Our analysis of the Global 100 grew a healthy 12.3% in comparison Russia, China or the US.29 Suppliers are suppliers shows that revenues were up to the previous year. The only major becoming true engines of innovation, in 2012 – but just barely (1%).30 In player with a stronger result was too. But how resilient are they, if many regions, including powerhouse South Korea, where suppliers’ another economic crisis hits? Japan, supplier revenues were down revenues grew an impressive 19.7%.

Figure 3: Sales and EBITDA performance of auto suppliers by region

Sales** EBITDA** EBITDA EBITDA Total Total Total Total Avg. as % of as % of 2011 2012 Avg. 2011 2012 2012 Sales Sales ($B) ($B) ∆% Count 2012 ($B) ($B) ∆% ($B) 2011 2012 Global 100* 661 668 1.0% 83 8 70 69 -0.6% 0.8 10.6% 10.4% Brazil 4 4 -7.3% 8 0.4 0 0 -28.5% 0 12.7% 9.8% China 32 31 -3.6% 56 0.5 4 3 -19.3% 0.1 12.1% 10.1% Europe 297 307 3.6% 69 4.5 34 34 -0.2% 0.5 11.6% 11.2% India 22 24 5.7% 44 0.5 2 3 5.0% 0.1 10.7% 10.6% Japan 208 196 -5.6% 34 5.8 20 19 -5.3% 0.6 9.7% 9.8% North 236 238 0.9% 71 3.4 25 25 0.9% 0.4 10.5% 10.5% America S. Korea 51 61 19.7% 46 1.3 5 7 22.9% 0.1 10.4% 10.7%

*Global 100 Companies Also Counted in Regional Numbers **Financial figures include revenue resulting from automotive sales only

Source: CapIQ, Publicly available financial data, PwC Analysis

29 PwC Analysis 30 PwC, Consolidation in the global automotive supply industry, 2013.

How to be No. 1 17 Suppliers are already leading innovation in key areas like driver assistance systems

We attribute South Korea’s strong The market potential is there, for those their own capacity accordingly. Only numbers to a major manufacturer’s ready to use it. Many suppliers have suppliers who can serve global success in marketing its vehicles already shown their innovative customers or deliver truly globally and bringing suppliers along strength. Energy recovery systems and innovative solutions will be able to with it. But what about German new production techniques have been continue to grow. suppliers? What factors are driving developed mostly by creative suppliers. their success? And they’re also leading the trend Suppliers should cope with OEMs towards more and better driver looking to consolidate purchases Certainly the strong performance of assistance systems. across platforms, rather than series. German OEMs overseas has helped And those platforms are suppliers develop strength in exports. Capacity should better significantly more diverse than While German suppliers have also match sales before, and being built in more started to build locally in other locations. That creates major regions, they’re still focused more on But there are challenges looming too, challenges for suppliers. So should growth at home. But exports from like products, processes and markets they really focus on innovation? Germany and Europe more generally that change faster and more drastically Wouldn’t it make better strategic have climbed in recent years. than expected. Some analysts believe sense to focus on improving the that the automotive industry as a product palette and cost structure? The other is the need for novelty. whole will change more in the next ten In the short term, the answer may Automotive producers have expanded years than it has in the previous 100. be yes. But there’s a serious danger their use of higher-end components in And increasing volatility is making it of missing the next important volume segments. That’s created difficult to plan revenues and results. technological advance and significant pressure to keep innovating, sacrificing tomorrow’s revenues in European suppliers also need to cope particularly for premium producers. favor of today’s. Higher expectations around safety, with lower sales levels in Europe for environmental impact, and fuel the foreseeable future. While they’ve efficiency are driving new research been able to compensate through too. And that’s good news for suppliers. increased exports, it’s not clear how Our forecasts suggest that German long that trend can be sustained. As suppliers alone will supply 160 billion OEMs move towards more local euros in components in 2019.31 That’s production, suppliers should adjust an increase of 37 billion euros over 2012.

31 PwC, “How to stay No.1! – Impulse fuer die zentralen Herausforderungen in der Automobilindustrie”, 2013. Note: Effects of inflation, increased value of products as well as decreases in raw material cost and other impacts are considered proportionally.

18 How to be No. 1 So what’s the right strategy? The answer to the second question isn’t by suppliers in areas that are still always clear-cut. Certainly OEMs will mostly seen as OEM core competencies To answer, suppliers should start by continue looking to suppliers for – the body-in-white and powertrain. asking themselves three key innovation. Many of the classic vehicle Producers are likely to concentrate questions. What’s my position in the elements like the chassis, interior and more on integrating the overall global supply network and how are electronics and electronic components vehicle, developing mobility services my competitors placed? How much are already predominantly designed and enhancing their brand. Still, while value added is the OEM providing in and produced by suppliers (see Figure the balance along the value chain will my segment and how will the 4). As complexity increases, the greater shift, the change will be gradual, at producer market it? Which products number of models and variations will least when it comes to vehicles with can I offer competitively and how can probably lead to greater participation traditional combustion engines. I differentiate them?

The answer to the first question now FigureXxx 4: Division of value added by OEMS and suppliers often involves a more open approach to cooperation with other Tier 1 and Division by by segment segment IncreaseIncrease ofof external share share Tier 2 suppliers. In the past, supplier (in(in percentagepercentage points)points) networks were often organised hierarchically. But managing global large scale order and the challenges 2012 58% 42% posed by a highly integrated and 2019 45% 55% +13% global functioning supply chain Engine & Drivetrain mean re-thinking. In the future, OEMs and the larger suppliers will 2012 18% 82% look to networks of specialised, +2% focused technology experts. Many 2019 16% 84% suppliers have already started Chassis & Suspension working together in these types of fully-integrated networks. That’s not 2012 15% 85% to say that every supplier is 2019 15% 85% 0%

positioned equally – certainly the Electronics amount of value-added, customer portfolio, market presence and 2012 83% 17% technological strength makes a difference too. 2019 71% 29% +11% Bodywork

2012 41% 59% +7%

Exterior 2019 34% 66%

2012 17% 83% +1% Interior 2019 16% 84%

Internal value added External value added

Source: PwC Xxxxxxxx Source: PwC Component Market Model

How to be No. 1 19 The battle for Exploring new technologies tomorrow’s powertrain There’s still one more question to To avoid being When you take a look at tomorrow’s answer – what products can I use to innovated out electric vehicles, though, the shift in position myself in tomorrow’s the division of responsibility for value marketplace? Disruptive innovations of relevance, creation is likely to be far more nearly always begin as niche products dramatic. The more electronics are for a relatively small circle of suppliers integrated into a vehicle, the greater customers. Think of the typewriter or should look portion of its value-add is coming the electric lamp. As they gain from areas outside the core acceptance, these niche products can ahead to future competence of automotive producers. completely displace the older That means electric mobility will solutions of major players. In many developments in need to be bought, or OEMs will need cases, such disruptive innovations areas like new to build new areas of competence. For have radically re-written the history electric vehicles, batteries and related of their sectors. powertrains, new systems take on the importance of today’s engines, and electronic To avoid being innovated out of materials and components add to the potential relevance, all suppliers – even those new vehicle threat facing OEMs. currently leading their markets – need to continually look ahead to concepts The electrification of the powertrain future developments. New could radically disrupt the traditional powertrains, new materials, new or architecture automotive value chain – and that’s vehicle concepts or architectures – all without the potential entry of new of these trends are already changing players from other industries like IT the structure of the supplier industry. or telecommunications. That’s a big opportunity for suppliers –, but a risk too. New market So suppliers need to start looking entrants could threaten growth. The ahead. While it may take 15-20 years innovation playing field in before the classic combustion engine automotive has gotten bigger than gets displaced, first movers may have ever – and suppliers need to find their a significant advantage once the shift place on it. takes place. Take the automotive chassis. There will certainly be one, no matter which type of powertrain takes the lead – but the shape, material, and even the method of construction may change dramatically. With fuel efficiency standards looming, light-weighting will certainly continue to be of major importance.

20 How to be No. 1 It’s hard to build light Figure 5: Cost-benefit analysis in lightweight construction

Sustainable light-weighting will Index: Steel = 100 require a holistic look at materials, construction and production Mass needed techniques. Conflicting goals for for identical Application in comfort and economy should be functionality Cost automotive construction considered, and innovative Structural elements that approaches developed to create require high structural improved solutions. Suppliers should strength and good partner with OEMs to develop Conventional formability, e.g. side solutions that work across a wide steel 100 100 bumpers range of niche models and use External and internal flexible construction techniques – for components that don’t example, taking a modular approach require high resistance, can help reduce complexity. Plastic 75 100 e.g. instrument panel Structural elements that Suppliers should be able to balance Hot-formed require higher structural costs, volume, weight and steel 75 115 strength, e.g. B-pillars functionality to offer the best Structural and functional solution for OEMs. And with global elements, e.g. various platforms ever more the norm, they’ll Aluminium 60 beams, frame need to be able to deliver consistent 130 quality around the globe too. Structural and functional elements, e.g. tailgate, Playing to your strengths Magnesium 50 360 gear casing Structural elements that There’s a lot of buzz around the use Carbon-fibre require extremely high of new materials in the automotive reinforced resistance, e.g. tailgate, industry. Aluminium, magnesium, plastics 30 570 engine hood, chassis plastic, carbon fibre, hybrids – they’re all under discussion. And some are Source: PwC Analysis, VW Group, Bavarian Academy of Sciences and Humanities already being used – albeit primarily in niche vehicles or particular regions. That means some suppliers and OEMs are already gathering valuable experience in working with the new materials, sometimes using efficient production techniques and It’s not enough to pick the most new processing technologies like continual improvement to increase attractive option. Each strategy plays bonding, hydroforming or laser productivity even in high wager to different skills, so you need to make welding. The new experts countries. Specialists place their bets sure your organisation can back up are coming. on technical innovation, where your choices. For specialists who rely up-front investments can lead to on their ability to develop new Opportunities abound, but new longer-term competitive advantage. technologies a strong R&D function is solutions and innovation will be the And global players need to invest not mandatory. Cost leaders need to be name of the game. That leaves just just money, but also human resources outstanding in other operational areas. one last question: what to do first? To and management capacity to build the answer that question, you need to right locations in the right markets and That’s not to say that there are only really understand your company’s keep up with tax, customs and other single answers. Certainly it’s possible strengths and play to them. regulations. That means a strong to stress more than one element of this trinity. Tomorrow’s suppliers should Cost leaders are streamlined, flexible, controlling function and a willingness develop their own individual strategy and invest more than peers in to adjust strategy as necessary. along this matrix.

How to be No. 1 21 Corporate sustainability Global, green, good

Huge new markets are attracting production. Big new themes are dictating research directions. The partnership between OEMs and suppliers is in a process of transformation. Tomorrow’s winners will define a clear profile and build their own position in the new landscape.

“I can’t change things by myself” says The automotive industry is percentages may vary elsewhere, the Alin, a hairdresser who commutes resource-intensive importance of considering natural around 50 km each day from Tegernsee resource use across a vehicle’s total life to Munich. That sums up what makes There’s no disputing that cars use cycle does not. sustainability so complex. Sustainable natural resources. But production solutions are most effective when they plays a far more important role than Currently, fuel efficiency dominates become mass phenomenon with is often acknowledged. For example, much of the public discussion. And everyone on the same page. The entire before an average German mid-sized reducing fuel usage is important. But automotive industry from OEMs to vehicle has been driven its first production and the value chain need to suppliers should work together to meet kilometer on the road, 86% of the come much more sharply into focus the expectations of different total resources it will use during its too. OEMs and suppliers alike should external stakeholders. lifetime have already gone into its work together to reduce this production.31 Extracting and/or environmental footprint. Light- Consumers wield significant influence processing the raw materials used in weighting and innovating around through their purchasing decisions – a car make up by far the biggest efficiency deserve a permanent place money talks. That’s the same reason chunk of its environmental on the industry’s agenda. that investors and lenders can make footprint. While the exact their wishes heard easily. And since changes that require significant financial investments and additional costs don’t always happen through self-regulation, non-governmental Split of total vehicle resource organisations (NGOs) and regulators use for an average German are also playing a major role. All these stakeholders are looking in the same mid-sized vehicle: direction – a more sustainable future. That’s going to stay on the industry’s agenda. But why is sustainability so important for the industry? 86% 14% during the production process during use (including fuel) (including extraction and processing of raw materials)

Source: PwC Analysis, Wuppertal Institute for Climate, Environment and Energy

31 PwC Analysis. In order to estimate the actual resource usage (TMR=total material requirement) over an average vehicle’s entire life cycle, we took the materials listed in the automotive producers’ environmental certifications and analysed these according to the standard material input factors calculated by the Wuppertal Institute for Climate, Environment and Energy.

22 How to be No. 1 Responsibility and profits dioxide emissions and raw materials aren’t mutually exclusive usage in production are setting the We expect to see consumers path. But is sustainability really demand more assurance that Consumers and industry insiders becoming an integral part of the companies are operating in an alike are developing a greater sense industry’s value system? And are there environmentally sustainably of responsibility. Today’s consumers areas where companies need to pay way and adhering to human can’t avoid thinking greener. But closer attention? rights standards. Automotive they’re placing their emphasis on sustainability rather than simply Sustainable premium shouldn’t companies need to be prepared protecting the environment. It’s an be a contradiction in terms to respond. That’s a moral important distinction. Re-thinking obligation – but it’s just as much the entire system to create a more In the EU, ambitious CO2 emission economic necessity. sustainable one that can continue to targets are posing a big challenge for produce tomorrow is an entirely automotive producers. Those that don’t meet them may eventually have different starting point than trying to Supply chain on the radar avoid specific actions to reduce a to pay hefty fines. At about 7,500 euros negative impact. And it may lead to a vehicle starting in 2025, they could Do good and talk about it. To get the much greater efficiencies, too. threaten even today’s most profitable most benefit from progress your 32 premium producers. That’s because organisation makes in improving The word sustainability conveys an while premium carmakers are strong sustainability you need to effectively openness to economic interests and at developing innovation, their spread the word about your success. technological progress as drivers of a product palette is bigger and heavier That’s as true for the automotive secure future. And while than it ideally would be. Premium is industry as it is for any other sector. environmental aspects like oil usage currently synonymous with a fast, Just documenting emissions per or carbon dioxide (CO2) emissions luxury body and a bigger engine. So is kilometer or the environmental impact may be used interchangeable with premium a barrier to leading on of your own factories isn’t enough. sustainability in common sustainability? Balancing the results of Cars are complex products that are conversation, they’re only one pillar premium nameplates with other co-created by OEMs and suppliers – so of a sustainable business. A truly vehicles, encouraging strong sales of only documenting your own part of the future-safe system conserves all smaller vehicles and actively building value chain isn’t sufficient. To resources, so it can continue to the electric fleet can help in the persuasively argue the sustainability function. So other issues like the short-term – but in the long run, quotient of a vehicle, you should make ethical context of rare earth minerals premium producers should develop a sure the entire supply chain is or the working conditions at suppliers clear strategy. transparent and the impact can be become more important too. Certainly a look at other segments documented and audited. Corporate sustainability means suggests that premium customers are Sustainability reporting creates new operating responsibly on an in fact exactly the consumers who are challenges for the industry each year economic, environmental and social most concerned about sustainability. and has become an agent for change in level. Many automotive companies Many are willing to pay more for its own right, especially when it comes are already committed. Concrete regionally grown produce, to the supply chain. While many goals to reduce fuel usage, carbon for example. standards are still voluntary, they can

32 PwC Scenario calculation; European Parliament (http://www.europarl.europa.eu/meetdocs/2009_2014/documents/tran/ pa/924/924866/924866de.pdf)

How to be No. 1 23 The push for accountability and transparency is increasing steadily, be it voluntary, regulatory, or in be extremely time-consuming to meet. response to consumer expectations. The Carbon Disclosure Project now Understanding exactly where each part asks for the CO2 emissions of the entire supply chain. And that’s not just what comes from in your own product is an type of emissions, but the actual numbers and a confirmation of how immense challenge – but it’s one that they were verified. Teamwork across has to be mastered if a company wants the supply chain is also part of the questionnaire. to be sustainable. The Global Reporting Initiative (GRI) will publish its new, stricter G4 standards starting in 2015. These voluntary guidelines require The push for accountability and had to replace ship transport with air companies to monitor supply chain transparency is increasing steadily, be transport to keep the assembly lines partners across the categories it voluntary, regulatory, or in response running. That raised costs – and economics, environment and society. to consumer expectations. Consider emissions too. And companies should report on how that a single car is composed of their supply chain structure functions, 20,000–40,000 separate parts While natural catastrophes can’t be for example, where suppliers are (depending on how you define a single predicted in advance, the impact of located, how they’re selected, how part) that are purchased from such risks can be reduced when a relationships are developed, etc. thousands of suppliers. OEM suppliers company knows exactly where the Management also needs to report on purchase from Tier 1 suppliers who parts it uses are coming from. That how they monitor supplier purchase from Tier 2 suppliers who in may sound easy, but it’s far from it. By performance and what performance turn buy from Tier 3 suppliers. the time a new car makes it to the indicators and strategies they’re using Understanding exactly where each part dealership its parts have travelled to decrease risks and increase comes from in your own product is an around the world and may have been opportunities in the supply chain. immense challenge – but it’s one that produced by hundreds of different suppliers. Imagine what can happen on Making companies accountable has to be mastered if a company wants to be sustainable. this long journey if soldiers or In addition to concerns about the terrorists close off an important environment, social and human rights Knowledge can help reduce risk waterway, hackers manipulate a stock exchange or if a country decides to issues are coming more into focus. Environmental and social There’s now a greater emphasis on prohibit exports of needed materials. If considerations are far from the only automotive producers don’t understand understanding the impact that mineral reasons to take a close look at risk extraction and production processes where parts and components are management in the supply chain. In a coming from, production stoppages have on people. Sometimes that’s led to globalised world where countries, regulation. In the US, section 1502 of can be the logical result. And there are industries and companies are other risks too, like quality control, the Dodd-Frank Act requires all increasingly networked and SEC-listed companies to verify that logistical challenges, and lack of legal interdependent, risks that once seemed recourse if something goes wrong. So they’re not using certain minerals (also far-off and distant may now have an known as ‘conflict minerals’) that have it’s no wonder that stakeholders now impact at home. The earthquake and expect automotive producers to gather contributed directly or indirectly to reactor crisis at Fukushima in Japan financing weapons for groups in the comprehensive information about their upset the supply chain of hundreds of suppliers and to improve their supply Democratic Republic of Congo or companies. For example, some OEMs neighboring areas. Similar regulation chain performance. is under consideration in the EU as well.

24 How to be No. 1 chain, driving it and evaluating its organisation headquartered in the US, Are you performance, OEMs and suppliers is working on standards, guidelines alike are looking for new structures and training to help bring clarity to the and approaches. It’s not just about complexity in the supply chain and verifying publishing a persuasive report. Far address problems together. The AIAG more important is making the changes has developed an international that suppliers needed along the supply chain to materials data system, an extensive are complying secure strong, ethical future database to keep track of what performance. automotive parts and components are with your made of. These sorts of tools show that Staying strong together technical constraints are no longer a sustainability barrier to understanding the original In many industries, cooperation and of the raw materials used in a vehicle. standards? trade organisations have already made Together, companies can get it done. a big impact on topics like supplier management. While individual More than just ‘nice to have’ companies may be able to improve Transparency and control of the their own position, the true impact is Sustainability is becoming ever more supply chain will be the new only achieved when bigger groups important in the automotive prerequisite for success work together towards a common goal. ecosystem. While the industry’s That’s starting to happen in the textile complicated global supply networks It’s becoming standard for automotive industry. The Sustainable Apparel don’t make it easy to guarantee producers to ask their suppliers to Coalition (SAC), a cooperative effort sustainable operations along the entire document sustainability issues and between over 80 manufacturers, supply chain, it should be every include environmental issues within retailers and NGOs, is developing producer’s goal. Sustainability isn’t just their contracts. But most don’t take the international standards to evaluate nice to have, it’s becoming a decisive next step and systematically verify that textile and shoe production. Over the success favor. Sustainability themes suppliers are actually complying with long term they aim to reduce resource influence production, product such standards. And most don’t include use and improve the conditions for strategies and branding, research and any sanctions for non-compliance. And workers in production countries. It sales. They impact costs, are tracked by while many automotive producers have remains to be seen how big an impact the capital markets, and sometimes a process to uncover sustainability- the SAC will have. But it’s certain that drive regulation. related supply chain risks, a systematic the creation of these types of joint method to quantify and assess these efforts can help individual companies Securing future success without risks is much rarer. better address complicated challenges. operating more sustainably is quite simply unthinkable. Very few automotive producers report The automotive industry has already on their supply chain performance. gotten started. For example, the Given the mammoth nature of the task Automotive Industry Action Group of documenting the entire supply (AIAG), a globally active non­profit

How to be No. 1 25 Let’s continue the conversation

Rick Hanna Felix Kuhnert Global Automotive Leader European & German Automotive Leader +1 313 878 8754 +49 711 25034 3309 [email protected] [email protected]

About PwC’s Automotive Practice PwC’s global automotive practice leverages its extensive experience in the industry to help companies solve complex business challenges with efficiency and quality. One of PwC’s global automotive practice’s key competitive advantages is Autofacts®, a team of automotive industry specialists dedicated to ongoing analysis of sector trends. Autofacts provides our team of more than 4,800 automotive professionals and our clients with data and analysis to assess implications, make recommendations, and support decisions to compete in the global marketplace.

About Autofacts® Autofacts is a key strategic asset of PwC’s global automotive practice. Fully integrated with PwC’s more than 4,800 global automotive professionals, Autofacts provides ongoing auto industry analysis our clients use to shape business strategy, assess implications and support a variety of operational decisions. The Autofacts team also draws from the strengths of PwC’s marketing, sales and financial services groups to support other key areas of automotive companies’ functions. Since 1985, our market- tested approach, diverse service offerings and dedication to client service have made Autofacts a trusted advisor throughout the industry. For more information, visit www.autofacts.com.

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