CAR OF THE FUTURE v3.0 Mobility 2030 Citi GPS: Global Perspectives & Solutions November 2016 Citi is one of the world’s largest fi nancial institutions, operating in all major established and emerging markets. Across these world markets, our employees conduct an ongoing multi-disciplinary global conversation – accessing information, analyzing data, developing insights, and formulating advice for our clients. As our premier thought-leadership product, Citi GPS is designed to help our clients navigate the global economy’s most demanding challenges, identify future themes and trends, and help our clients profi t in a fast-changing and interconnected world. Citi GPS accesses the best elements of our global conversation and harvests the thought leadership of a wide range of senior professionals across our fi rm. This is not a research report and does not constitute advice on investments or a solicitation to buy or sell any fi nancial instrument. For more information on Citi GPS, please visit our website at www.citi.com/citigps. Itay Michaeli is a Director at Citi Research covering the U.S. Autos & Auto Parts sector, having joined the firm in 2001. Itay also heads the Global Auto Pod for Citi Research. In recent years Itay has ranked Runner-up in the Institutional Investor All-America Research Survey. In 2012, Business Insider named Itay as one of “The 36 Best Analysts on Wall Street”. In 2016 Itay was ranked #1 for stock picking accuracy in the Thompson Reuters Analyst Awards, after also achieving a #1 ranking in the 2014 Starmine awards. Itay earned a Bachelor of Science degree in Finance & Accounting from New York University. +1-212-816-4557 | [email protected] Trent Allen Justin Barell Australia Metals & Mining Analyst U.S. Auto& Auto Parts Team +61-2-8225-4862 | [email protected] +1-212-816-4235 | [email protected] Antonella Bianchessi Jamshed Dadabhoy Head of European Utilities Research Asian Auto & Transportation Analyst Team +65-6657-1146 | [email protected] +44-207-986-4371 | [email protected] Kota Ezawa Paul Gong Japan Industrial, Consumer Electronics China Auto Analyst & Electric Components Analyst +852-2501-2787 | [email protected] +81-3-6270-4804 | [email protected] Manabu Hagiwara Ethan Kim Japan Auto Parts & Trucks Analyst Korea Auto & Auto Parts Analyst +81-3-6270-4805 | [email protected] +82-2-3705-0747 | [email protected] Jim Suva, CPA Michael J Tyndall U.S. IT Hardware & Tech Supply Chain European Auto Analyst Analyst +44-20-7986-3949 | [email protected] +1-415-951-1703 | [email protected] Clarke Wilkins Arifumi Yoshida Australia Metals & Mining Analyst Japan Autos, Tires & Rubber Analyst +61-2-8225-4858 | [email protected] +81-3-6270-4725 | [email protected] © 2016 Citigroup 3 CAR OF THE FUTURE v3.0 Mobility 2030 Throughout the years, the Car of the Future investment process was mostly defined as themes surrounding the addition of new content into the car, and usually because of regulatory elements. Think of turbochargers, stop-start systems or electrified vehicles helping automakers meet emission standards, or ADAS components and associated electronics helping automakers meet safety regulations. This process often meant that auto suppliers gained profitable content while automakers…well not so much. This investment approach has and remains fairly straightforward. Seek out auto suppliers providing the necessary components that automakers will be forced to add no matter what happens at the macro level — and if those components also happen to improve the value proposition of the car— you could find suppliers with profitable growth profiles in excess of global auto production. Indeed, our Auto Technology Investing Framework has focused mainly on identifying such stories — and to be sure — this theme remains alive and well and addressed in this report. Regulatory driven stories remain powerful and consistent. Yet the theme is also evolving in a major way. We believe the next Car of the Future chapter expands from a content-into-the-car theme into a new-economics-of-the-car- itself theme. Fully autonomous cars, driverless on-demand ridesharing networks and eventually integrated mobile networks, connectivity, over-the-air and big data aren’t necessarily verticals that automakers are being forced to pursue. Rather, they’re being pursued because of potentially game-changing business model economics. It’s no coincidence that several prominent technology companies are entering or are reported to be considering entering the mobility space, just as it’s no coincidence that the Consumer Electronics Show (CES) has become something of an auto show. And it’s not hard to see why this is happening. Even after tremendous technological advances in recent decades, the car as we know it today falls well short of maximizing its potential in terms of efficiency (both operating cost/mile & resource sharing), safety, data collection and monetization, personalization, and updating. Not only does that make the car something of an untapped well of new revenue sources, but each inefficiency also brings with it an added cost — insurance, fuel, economic, societal, recall-related, time spent driving in situations where consumers would rather not drive (like traffic jams). And the degree of stakeholder alignment is perhaps unprecedented — autonomous electric cars promise to be safer and greener, while shared on-demand mobility promises to unclog congestion in major cities. Peak auto? Hardly, the profit potential of the car is more likely at its earlier stages, in our view. A year or two ago many of these new mobility themes were merely concepts. Now we have a number of industry players promising fully autonomous cars within five years! This means that the investment approach must also expand and evolve. Auto/Tech investing is no longer just about identifying which components go into car (though this is still a very important topic), but rather about who wins the driverless race & how, where and how will autonomous business models unfold, how will shifting industry forces impact various automakers/suppliers, and how will connectivity & data change the equation? So whereas the prior investing framework essentially entailed one stream, today we think it entails two broad streams: (1) The content-additions that will shape the Car of the Future; and (2) The mobility providers of the future and the resulting industry implications on various players. We note that the scope of our analysis is the next 10-15 years. Welcome to Car of the Future v 3.0. © 2016 Citigroup Transforming Mobility as We Know It The ‘race’ to driverless vehicles FOUR PROFOUND AUTO INDUSTRY CHANGES BETWEEN NOW AND 2030 1 2 3 4 On-demand Driverless cars The cost of Connected cars mobility will will enable new electric vehicles and big data infl ect with shared-ownership will reach parity will enable new driverless and business models with internal revenue and connected combustion effi ciency streams vehicles entering vehicles by 2025 throughout the the market over life of the car the next 4-6 years THREE MUST-WIN RACES TO GET TO THE DRIVERLESS TROPHY Now to 2021 2019 to 2025+ Post to 2023 Rideshare Build automated Validate, certify ‘robotaxi’ beyond capability, test and launch a geo-fenced it and start rideshare zone and entry validating it. ‘robotaxi’ in a of personal geo-fenced zone. driverless cars. © 2016 Citigroup WHAT STANDS IN THE WAY OF WINNING THE RACE? Obtaining Providing high regulatory quality vehicles 1. approval with telematics b. support services Best-in-class Matching autonomous supply and Establishing a. technology a. demand in a successful liquid network rideshare Real-world 2. networks validation on a large fl eet b. of vehicles Mapping capabilities to expand networks outside c. of geo-fenced zones WHO ARE THE MOBILITY PROVIDERS OF TOMORROW? Traditional consumer tech companies Established ridesharing companies Auto manufacturers Rental car companies 6 Contents The Evolving Investing Calculus of the Car of the Future 8 Summarizing Mobility 2030 8 Summarizing Technology Growth Profiles 10 Managing the All-Important Variable Cost Equation 11 …And It’s Also About Tracking Option Take-Rates & Mix 13 Transforming Mobility as We Know It 15 First, What’s this “Race” All About? 15 Racing towards driverless business models 15 So What’s Everyone Racing Towards? 18 1. Obtaining Driverless Regulatory Approval 18 2. Establishing Successful Rideshare Networks & Other Business Models 23 Three Phases to the Driverless Path 24 Phase #1: Build Capability, Test & Start Validating (<2021) 24 Phase #2: Validate, Certify & Launch Geo-Fenced Autonomous On-Demand Rideshare Networks (2019-2025+) 25 Phase #3: Expansion Beyond Geo-Fence, Entry of Personal Driverless Cars & Integrated Mobility Networks (>2023) 29 2030 Vehicle Mobility End Game: Integrated Network 31 Who are the Mobility Providers of Tomorrow? 34 So Traditional Automakers Have Three Options 36 Who are the Leaders & Laggards? 38 Pillar #1: Gauging Autonomous Capabilities 38 First, Let’s View Industry Autonomous Product Plans 38 Now, Let’s Delve Into Autonomous Technology & Data 51 Introducing Citi’s U.S. Autonomous Data Race Tracker 55 Pillar #2: Gauging Supply/Demand Capability 60 Pillar #3: Gauging Fleet Service & Hardware 62 2030: Whose Comes Out Ahead in the Race? 62 What Happens to U.S. Auto Sales? 64 SAAR 2030: Introducing Citi’s LT Auto Disruption Model 68 Car Sharing and Ride Hailing in China 70 Stagnated Taxi vs. Growing Mobile Internet 70 Saving Lives in the