Sourcing disruption and risk Dealing with unexpected turns

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1 AUTOMOTIVE Sourcing disruption and risk Dealing with unexpected turns 8 March 2017 Plymouth, Michigan Mark Fulthorpe, Director Light Vehicle Production Forecast, , mark.fulthorpe@ihs.com. All Rights Reserved.

2 Presentation Name / Month 2016 Contents Trading nations What is the risk? Global outlook Regional development New phase of consolidation Coincidence or inspired timing? Summary 2

3 Presentation Name / Month 2016 Contents 3

4 Outlook and sourcing in context Only the United States shows a significant import increase Trade balance (export-import) of top-10 production countries in

5 Key markets North America spotlight on Mexico Structural factors constrain exports and fuel imports Demand-supply balance in the United States in (annual average in million units) Constraining exports Imports Fueling imports Mexico grows as production footprint in NAFTA. Stronger US dollar encourages Japan /EU/Korea exports OEMs hesitate to invest in United States owing to lower potential growth. Detroit 3 have competing focus on trucks. Produced in the US Detroit 3 distance from global demand. Pickups much less opportunity beyond NAFTA. Detroit 3 enhance localization in China to avoid tariffs. Middle East/Africa demand stagnates owing to lower oil price. Others Middle East Africa Mexico China Exports EU Canada 5

6 Production mix in Mexico Detroit and VW most exposed to big tax 2016 share of Mexican build exported to US 2024 share of Mexican build exported to US 6

7 Production mix in Mexico Passenger cars become most exposed to big tax 2016 share of Mexican build exported to US 2024 share of Mexican build exported to US Full-frame 31% A- segment 1% B- segment 19% Full-frame 16% B- segment 16% E- segment 1% D- segment 22% C- segment 26% D- segment 20% C- segment 48% 7

8 Mexican summary Expect all OEMs to review export strategies and reduce exposure to US market D-3 under greatest pressure: Ford pulls out of USD1.6-billion San Luis Potosi investment, among other changes GM and FCA truck build can offset risk owing to margin and investing in United States/Canada High-margin vehicles and brands best insulated from any new tax/tariffs Production of small vehicles 46% of current build and forecast to reach 64% faces margin/price pressure, most at risk from tax/tariff changes and possible sourcing switch Asian OEMs could move small cars out and backfill with higher-margin CUVs; accelerating removal of weak-performing programs VW highly exposed to Mexican production, but strong exports beyond NAFTA; expected to focus BEV output in Chattanooga 8

9 TPP status Withdraw and redraw Trans-Pacific Partnership members Public disapproval United States withdraws (January 2017) TPP in current form cannot proceed. All rights reserved. Provided as is, without any warranty. This map is not to be reproduced or disseminated and is not to be used nor cited as evidence in connection with any territorial claim. IHS Markit is impartial and not an authority on international boundaries, which might be subject to unresolved claims by multiple jurisdictions. Members to continue talking trade 9

10 TPP possible scenarios TPP not dead, but future uncertain United States rejoins Continue without United States Cancel Very unlikely Ratification not until February 2018, member withdrawal still possible Loss of credibility for TPP Other members may raise US reliability concerns More negotiation US could pressure new terms Trump presidency impact on member attitudes Protests/opposition continues China participation less likely Possible 11 remaining members New agreement Key US-Japan link gone China involvement, potential to increase tensions with United States Delays, more negotiation to update terms without United States Increased pressure to recruit other members (Thailand, China) Lost value (US 65% of TPP) Protests/opposition continues US access incentive gone Most likely More focus on bilateral agreements (US-Japan) FTAs more likely than EPAs, focus on trade, less on labor, environment, etc. Less opposition/protests Simpler, less bureaucracy Negotiate individually Smaller markets may miss out Local laws unchanged (TPP requirement) Barriers remain in Pacific Rim TPP as a template 10

11 TPP (or similar) automotive production Accelerated move to low-cost locations Losers High-cost TPP member production could suffer as production moves to low-cost members Thailand (nonmember) could suffer as production moves to low-cost TPP members Automotive Production Winners Low-cost TPP member production to benefit a lot (lower cost/barriers, volumes increase) Automotive Production 14M 12M 10M United States 10M 8M Japan 8M 6M Canada? 6M 4M Mexico 4M 2M 0M Malaysia Thailand '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 ' IHS Note: Forecast volumes are possible trends only 2M 0M Vietnam '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 ' IHS 11

12 Brexit still looms What did he say? 12

13 Key markets Europe constraints in the face of Brexit UK industry remains at risk Risk Plant output 2016 Destination markets Europe UK Rest of world Sourcing alternatives Major investment timings Latest Next Very low JLR Halewood 191,000 Unlikely Very low JLR Castle Bromwich 66,000 Unlikely Very low JLR Solihull 295,000 Partial Very low BMW Oxford 210,000 Partial Low Medium Nissan Sunderland GM Ellesmere Port 507, ,000 Partial Possible total NA exports? Medium Toyota Burnaston 180,000 Possible total Medium Honda Swindon 139,000 Possible total NA exports? High GM Luton 74,000 Possible total 13

14 Implications for global auto industry Risk increases with geopolitical shocks Counter-synchronization of auto sales cycles across world regions continues, with emerging markets and developed markets on opposite waves. Wave amplitude will likely dissipate in time. Increased risk of new disruptive business models breaking the forecast Risk of broad retreat from globalization Trump, Mexico, NAFTA,Brexit, Eurozone, TPP Risk of longer-term planning volatilities uncertainty hurts long term planning 14

15 Presentation Name / Month 2016 Contents Trading nations What is the risk? Global outlook Regional development New phase of consolidation Coincidence or inspired timing? Summary 15

16 Global production outlook changes Millions Q1 '17 Q4 ' Total Light Vehicle 1,834,343 1,954,954 1,202, , ,357 99, ,537-93, ,897 Europe 66,396 9,728-36,688-67,802-65,094-87, , , ,176 Greater China 1,570,608 2,024,428 1,298,602 1,203, , , , , ,244 Japan/Korea 117,230 51, , , , , ,390-88, ,410 Middle East/Africa -36,160 42, ,904 81, ,701 55,023 32,892-63,690-55,163 North America -60, , , , ,136-70, ,219-60, ,086 South America 40, , ,188 40,323 42,693 4,694-25,892-6,962-27,878 South Asia 136,345-59,854-41, , , , ,727-58,106-78,428 16

17 North America production outlook changes Close to the peak and changing the mix Millions Q Forecast Q Forecast Trends America first US sales expected to fall 1% in 2017, then recover in 2018 US car/truck mix evolves further toward trucks; expect 63% by 2018 Strategic move to lower overall volume but higher profitability Long-term Wildcards: EPA/CARB emissions rulings and trade policy 17

18 Greater China production outlook changes Short term rollercoaster, less excitement to follow Trends Overall growth still moderates Small car tax changed from 5.0% to 7.5% Pull-ahead in late 2016 but still expected to have a positive effect in 2017 strong fundamentals may have been masked Long-term Lower GDP trend level Replacement demand becomes more important 18

19 Europe excluding CIS* production outlook changes Recovery quickly gives way to saturation * CIS = Commonwealth of Independent States: Russia, Ukraine, Belarus, Kazakhstan, Uzbekistan Trends Uncertainty within EU about further destabilization Recovery cycle in domestic sales passes the peak Exports become crucial to support overall growth Long-term Localization will remain a competing trend to exports; trade dependencies may accelerate Central European operations become expansion point 19

20 Japan/Korea production outlook changes An old story that does not change much Trends Significant impact from external policy developments Japanese consumption-tax increase deferred to 2019 Korea restores consumption tax mid-2016 Long-term Despite volatility, localization will remain a competing trend to exports; trade dependencies may accelerate 20

21 Mixed and likely to remain volatile Commonwealth of Independent States Middle East/Africa 21

22 Key emerging-market production outlook changes Growth returning and stabilizing South America ASEAN/India 22

23 Presentation Name / Month 2016 Contents Trading nations What is the risk? Global outlook Regional development New phase of consolidation Coincidence or inspired timing? Summary 23

24 Top OEMs by volume 2016 New order could emerge as growth slows and search for scale intensifies Million units 24

25 Top OEMs by volume 2024 Top-20 subject to potential consolidation driven by new collaboration Million units Toyota + Suzuki + Mazda + Fuji VW + TATA R/N + Mits. GM/ SAIC - Opel Hyundai Ford PSA + Opel Honda FCA Daimler BMW Geely + Proton BAIC Changan Great Wall 25

26 North American OEMs Adjusting global focus General Motors Ford FCA Divesting European operations Focus on North America and China Core-4: Buick, Chevrolet, Cadillac, and GMC Commitment to invest in Cadillac to improve competitiveness Truck lightweighting being accelerated Expect platform strategy to be revisited to reflect restructuring Bolt/Ampra-e forms basis of electrification strategy further derivatives to follow Singular focus though One Ford subject to greater regional modification Continues to compete in Europe Lincoln struggles to establish premium branding beyond NA Accelerated push for electrification and seeks to demonstrate lead in autonomous vehicles Hybrid, PHEV, and BEV viabilities changing in view of planning priorities Realignment of Mexican operations reflecting passenger car challenge Loud overtures to GM silenced for now in favor of partner for selected passenger car opportunities Switching to trucks, eases margin and compliance pressure on US market; Dart and Chrysler 200 dropped, major effect on midterm volumes Focus likely to be reflected in China as regional strategy is revisited Conserving cash, canceling, deferring program investments Relaunch Alfa and fine-tune European compact/subcompact sectors 26

27 Japanese OEMs The Big 3 being formed as new collaborations grow Toyota + Renault-Nissan, plus Mitsubishi Honda Already closely aligned with Fuji Heavy through shareholding and wholly owned control of Daihatsu Toyota-Mazda: Mazda will supply the Mazda 2/Toyota Yaris in Mexico, Mazda will develop BEV supported by Toyota We expect Toyota and Suzuki should move together in India; enhances Toyota s ability to be cost-effective in the market if gains access to the Suzuki supply chain Suzuki expected to gain powertrain technology in return Further extend the alliance with the addition of Mitsubishi since mid-2016 Nissan-Mitsubishi: Mitsubishi SUVs will be developed under the Renault Nissan CMF-C/D platform; C- segment BEVs also integrated Nissan will also assume lead on K-car development The RNPO will integrate key elements of Mitsubishi supply chain. Mitsubishi focus on ASEAN operations under the alliance Honda a question mark high risk in continuing to operate as a standalone? Faces the same challenges as other Japanese OEMs: Mexico, Europe uncertainties, slowing domestic backdrop Recently announced joint venture with GM to develop a fuel-cell system in the United States is distant and marginal technology Improved performance in China could provide support, but political tension never far away 27

28 European OEMs New dynamics emerging Groupe PSA Recent restructuring paying dividends: profitability in Europe, growth in China, plus simplification of engineering efforts Take Opel/Vauxhall assets from GM builds scale in Europe Look to enhance export/regional capabilities In the running for Proton Restructuring inevitable UK operations at greatest risk Considering return to North America in some form: sales, services before any plan to build Volkswagen Group Strong recovery from diesel crisis; China growth major compensation Financial headwinds still loom and will affect longer-term investment Aggressive push into electrification Looks to build collaboration with Tata to primarily address low-cost needs Developing dedicated brand for China Platform flexibility allows variation in mature regions; efforts to make better offer in US market Premiums BMW selected collaborations: Toyota, Daimler purchasing i NEXT to introduce next steps in electrification and autonomy Daimler threatening wave of electric vehicle launches on a par with VW Group; Renault-Nissan partnership could offer more, despite MFA issues JLR product proliferation at Land Rover trying to boost Jaguar with electrification Volvo enjoying financial support from Geely and opportunity to build scale with the Lynk&Co brand 28

29 Summary The case of L860 A subcompact SUV to be built in India and exported globally Investment postponed as Tata/Jaguar-Land Rover focuses resources on Slovakia as a hedge against Brexit Expected to revise evaluation plans for a plant in the United States to reduce risk of potential change to import duties This could become widespread 29

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