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New Normal for the Automotive Industry Tracking Developments of the Strategic Implications of the Crisis – Oct Update

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New Normal for the Automotive Industry Tracking Developments of the Strategic Implications of the Crisis – Oct Update New Normal for the automotive industry Tracking developments of the strategic implications of the crisis – Oct update October 21, 2020 Existing industry pressures, shocks from the crisis, and the ensuing changes in policy, society and the economy will drive the New Normal Status quo COVID-19 crisis New Normal 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Global light vehicle sales [million vehicles] 94.3 92.2 93.7 Significant uncertainty 88.3 89.5 remains over the potential recovery ? Automotive companies were feeling pressure from The pandemic has Changes in policy, consumer behavior and the economy ongoing structural changes impacted all facets of life will affect the industry long after the crisis > Declining global volumes and margins falling by 1-2% pts on average > Industry shutdown > The pace of economic recovery will drive global volumes > Overcapacities in the market and increasing price pressure > Global recession > Stimulus and incentives will influence the market and the sales mix > Upfront investments for electrification, autonomy and digitalization > Stimulus spending > Trade policy will alter global supply chains and capital investment > Tightening emissions requirements and "Dieselgate" fallout > Political fallout > Political outcomes will steer environmental regulations > Changing customer behavior and expectations > Societal changes > Consumer preferences and social norms will be altered Source: IHS Markit; Capital IQ; Roland Berger 2 There are two main dimensions of uncertainty: the speed and nature of economic recovery and the general direction of government policy Roland Berger post-COVID-19 scenarios Economic recovery U-Shape recovery L-Shape recovery Gradual recovery starting in 2020 Profound recession brought on by Government policy with successful containment a prolonged pandemic Progressive > Acceleration of change > Increased regulation > More government spending > Focus on public welfare and environment > Preservation of status quo > Decreased climate regulation > Less government spending Conservative > Focus on local manufacturing Source: Roland Berger 3 1 Economic recovery Chinese LV sales have had consistent YoY growth since May, and Europe and the US show signs of recovery – Long term outlooks still uncertain GDP and Light Vehicle sales forecast by region GDP forecast1) [USD tr] U-Shape Light Vehicle sales forecast2) [Vehicles m] Strong, but not full 24 30 recovery by 2021 22 Definite 25 20 Likely 18 Some indication 16 20 Uncertain 14 Some 15 indication 0 0 2019 2020 2021 2022 2023 2024 2025 Likely 2019 2020 2021 2022 2023 2024 2025 > As of October 2020, Oxford Economics projects all three regions to > Early containment has allowed China to hit its trough in March and follow a similar recovery path through 2025, with China experiencing Definite register positive year on year growth every month since May the quickest short term recovery > The US market has underwent a bumpy recovery since April lows, > In Q2, the US and Eurozone saw GDP fall by 9.1% and 12.1% when L-Shape with monthly sales figures up YoY for the first time in September compared to the same period last year while China grew by 3.2%, Profound, prolonged > Widespread incentives allowed Europe to also show positive YoY and all three regions are expected to have seen positive growth in Q3 recession growth in September, although the resurgence of the virus casts uncertainty over future growth prospects USA Europe China USA (January forecast) Europe (January forecast) China (January forecast) Certainty of recovery shape 1) From Oxford Economics as of October 2020; Real GDP in 2015 prices; Europe numbers for Eurozone; 2) From IHS Markit as of September 2020; Europe numbers for West and Central Europe Source: Desk research; IHS Markit; Oxford Economics; IMF; Roland Berger 4 1 Economic recovery A significant rebound in COVID-19 cases through the winter months will hurt European LV sales recovery and, to lesser degree, recovery in the US Impact of COVID-19 on year-to-date LV sales by region United States Europe1) China YoY change in 2.0 20 YTD LV sales [%] 1 5 & monthly COVID 0 1.5 NA2) cases [millions] -7 -7 -10 -12 -16 -13 -20 -21 -19 -20 -20 -23 -24 -22 -22 -26 -26 1.0 -32 -34 -40 -39 -39 -34 -43 -43 -44 -60 0.5 -80 0.0 -100 Jan Feb Mar Apr May Jun Jul Aug Sep Jan Feb Mar Apr May Jun Jul Aug Sep Jan Feb Mar Apr May Jun Jul Aug Sep Resurgence risk Considerations > LV sales hold a weaker correlation to COVID in > Europe was most impacted by the pandemic due > China has remained on a steady recovery path the US due to weakly enforced lockdowns to strictly enforced lockdowns after an initial COVID surge in Q1 > A Democrat victory in the November general > A quickly accelerating second wave casts > A proven disease management track record elections may reverse this trend uncertainty over an LV sales recovery suggests that China is at low-risk for a COVID resurgence Year-on-year change in year-to-date LV sales New monthly COVID cases 1) Europe figures for 26 countries with available data in West and Central Europe; 2) Country level September LV sales not yet available for all European countries, but positive monthly growth is expected Source: Desk research; Marklines; Our World In Data; Roland Berger 5 1 Economic recovery Furthermore, the latest IHME forecasts indicate significant tail risk for Europe and the US if social distancing mandates are left unchecked Worst and best case forecasts of COVID-19 infections by region1) [millions] United States Europe2) China 60 55 50 45 40 35 Accelerating cases will likely lead to strict -54 The outcome of the elections will 30 lockdowns in Europe through the Winter determine the degree of social distancing 25 mandates employed by the United States 20 China may see a resurgence in late winter if pandemic controls relax 15 -17 significantly, but the risk is minimal 10 5 -1 0 Oct Nov Dec Jan Oct Nov Dec Jan Oct Nov Dec Jan Worst case forecast Best case forecast xx Difference in January case numbers 1) Worst case forecast assumes continued easing of mandates; best case assumes universal mask adoption and re-imposing of mandates as necessary; 2) Europe figures for 26 countries with available data in West and Central Europe Source: IHME; Roland Berger 6 2 Government policy Political developments are highlighted by a universal shift towards protectionism as well as progressive emission policies in Europe and China Policy developments by region Strong Strong progressive conservative Progressive indications No net shift indications Conservative > Candidate Biden announces a $2 tr climate plan to reduce emissions > Targeting Huawei, Dept. of Comm. announces chip export bans > Court of appeals overturns Trump's rollback of fuel efficiency penalties > US restricts work visas, including H-1B, and green card issuance > California passes mandate requiring all new trucks to be zero emissions Emission regulation > Trump targets ByteDance and Chinese internet companies in EO vehicles by 2045 and approves $437 m EV charging program > Trump threatens tariffs on companies that leave the United States to Fiscal policy > California signs order to ban sale of new gasoline vehicles by 2035 create jobs overseas > US agrees to tariff deal with EU, reducing tariffs on an average trade Trade policy > Candidate Biden expresses hardline stance on China trade policy, and value of $160 m a year is expected to keep America on path of protectionism if elected > France expands $8.8 bn in aid for auto industry, including consumer > Economy Minister of Italy says FCA has to avoid delocalizing plants incentives for electric and hybrid vehicles as 200,00 vehicles have outside of Italy to apply for a state backed loan already been taken by the allocation by the end of July Emission regulation > UK MPs create plans to restrict foreign investment, targeting China > 20 members out of the 27 EU members (and the UK) introduced > Tensions rise between the EU and China, as Chinese Foreign Minister purchase incentives for EVs; 21 countries with tax benefits Fiscal policy threatens Czech Senate President for visiting Taiwan, and Germany > The EU lifts tariff on US lobsters as part of broader tariff agreement and France voice criticism over the threats > ECB President Lagarde indicates potential for follow-on stimulus as Trade policy > The UK is unable to reach Brexit deal with the EU before self-imposed coronavirus cases resurge in Europe October 15 deadline > Revised NEV OEM industry access regulation by MIIT to set lower > Shortly after US chip export controls are announced, China invests entry barriers for new entrants $2.7 bn in SMIC via its state investors, with hopes to establish self- > NEV subsidies and tax exemption extended by 2 years to 2022 Emission regulation sufficiency in chip manufacturing > ¥ 10 bn injection into battery charging infrastructure > The Chinese government sends messages to state-owned firms to halt > Gasoline-electric hybrids reclassified to ease restrictions on OEMs Fiscal policy purchase of US soybeans, though actual purchase has not totally suspended > China pledges to achieve net zero emissions by 2060 and criticizes the Trade policy US's climate policy efforts Apparent policy indications Source: Desk research; Roland Berger 7 3 Industry developments The key implications of COVID-19 have developed according to the range of long-term expectations based on scenarios from the New Normal study Significant Pre-crisis Significant Latest Industry topics Key implications Decrease expectations Increase trend
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