The future of the vehicle Exploring the future of mobility and implications for the aftermarket

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1 The future of the vehicle Exploring the future of mobility and implications for the aftermarket Neal Ganguli Automotive Supplier Consulting Leader Deloitte Consulting LLP

Our journey today What does the Future of Mobility means for vehicles and content?

4 Disruptive consumer, economic, and technological trends create new mobility norms Sustainability - Alternative powertrains - Renewables - Smart energy storage Sharing economy - Car sharing - Ride-hailing - Peer-to-peer marketplaces Demographic shifts - Gen Y - Baby Boomers - Urbanization - Imp. of material wealth Payments - Wireless / contactless - Blockchain - Pay-per-use model Advanced technology - Autonomous vehicles - Additive manufacturing (3D printing) - Virtual reality Mobility today Regulatory - Autonomous vehicles - Environmental - Privacy & data - Strength of IP laws Source: Deloitte The future of mobility: what s next?, Sept 14, 2016 (Deloitte analysis published by the Center for the Long View). $$ Consumer behavior - Reduced brand loyalty - Digital channels in customer journey - Desire for tailored solutions Data - Big data - Advanced analytics - New sources - Storage Connectivity - Telematics & V2X - Cloud - Telecom. grid Economic shifts - Buying vs. leasing - Cost of capital - Corporate valuations - Data monetization - Place of production Key implications Exponential technology/software content value growth in vehicles as Autonomous, Connected and Electric penetrate Increased vehicle utilization as shared usage models proliferate. New types of vehicles on the road (e.g. autonomous pods, highly customized personal vehicles). New population segments becoming mobile. Fewer new cars sold as a result of ride-sharing and autonomous vehicles. Copyright 2017 Deloitte Consulting LLP. All rights reserved. 3 car-/ More fleets in operation and new business models emerging to serve them. Increasingly interconnected people, cars, and infrastructure.

5 The rise of shared and autonomous will drive down cost-per-mile economics Future states of mobility Key insights Extent to which autonomous vehicle technologies become pervasive: Depends upon several key factors as catalysts or deterrents e.g. technology, regulation, social acceptance. Vehicle technologies will increasingly become "smart ; the human-machine interface shifts toward greater machine control. Vehicle control Autonomous Assisted Driver Personally-owned autonomous Shared autonomous 3 4 Low Cost per mile: ~$0.46 Cost per mile: ~$0.97 Asset efficiency Cost per mile: ~$0.31 Cost per mile: ~$0.63 Personally-owned Shared 1 driver-driven 2 driver-driven High These future states represent the main ways individuals will travel for personal mobility needs. The four states will coexist and companies need to plan to compete in some or all of them. Cost per mile economics and growth of consumption economies will be a driving force behind adoption. Cost per mile could fall by as much as 2/3 due to increased utilization, reduced fuel consumption, and other factors. Personal Vehicle ownership Extent to which vehicles are personally owned or shared: Depends upon personal preferences and economics. Higher degree of shared ownership increases system-wide asset efficiency. Note: Fully autonomous drive means that the vehicle s central processing unit has full responsibility for controlling its operation and is inherently different from the most advanced form of driver assist. It is demarcated in the figure above with a clear dividing line (an equator ). Source: Future of Mobility, Deloitte Insights, 2015 Copyright 2017 Deloitte Consulting LLP. All rights reserved. 4 Shared

Our forecasts estimate an increase in total miles traveled, and a decline in overall vehicle sales, with faster shifts toward AVs and shared vehicles in urban centers Annual miles driven in millions

6 Our forecasts estimate an increase in total miles traveled, and a decline in overall vehicle sales, with faster shifts toward AVs and shared vehicles in urban centers Annual miles driven in millions 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 People miles driven by future state 2040: Passenger miles driven increases by 25% Annual vehicle sales in thousands 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Vehicle sales by future state Introduction of shared (2020) and personally-owned (2022) autonomous vehicles 40% decline in total US vehicle sales Percent of annual miles driven, in millions 100% 80% 60% 40% 20% 0% Adoption by geography Urban Suburban Rural 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% Personally owned driver-driven Shared driver-driven Personally owned autonomous Shared autonomous Source: What s next? The future of mobility, Deloitte Insights 2016 Copyright 2017 Deloitte Consulting LLP. All rights reserved. NOTE: ANALYSIS IS FOR US MARKET ONLY 5

7 The disruptive nature of this transformation results in massive shifts in economic value across a broad mobility ecosystem Decrease in personally-owned vehicle sales and profound mix shifts. Value shifts to managing end-to-end mobility experience. Shared mobility funding rises but may not offset lower levels of personal loans and leasing. Increased consumption of multimedia/ information and value derived from curating holistic intransit experience. Bandwidth greatly expands to meet increased demand for connectivity and reliability. More efficient last mile delivery lowers costs and accelerates shift away from physical stores. Lower energy consumed due to rise of electric vehicles. Automotive Finance Media Telecom Retail Energy Insurance Transport Public sector Technology Medical & legal Shifts from personal liability to catastrophic systemsfailure insurance. Source: Deloitte Analysis. Rise of seamless intermodal transportation and significant increases in efficiency of LH trucking/cargo delivery. Erosion of tax revenues related to sales / registration and fuel taxes, parking and traffic citations, and shift to dynamic pricing models. Significant reduction in EMS and legal costs as accidents plummet. Rapid growth of autonomous driving operating system and mobility management technology & services providers. Copyright 2017 Deloitte Consulting LLP. All rights reserved. 6

8 Future states will demand new types of vehicles with different content profiles 3 Personally-owned autonomous Luxury, highly customized Individual / family autonomous mobility. Premium and luxury segments. More customization possibilities to give rise to new aftermarket segments and offerings. Emphasis on using space for productivity, entertainment, and rest. Low-cost electric pods Large fleets of no-frill, personal pods. Safety and security are table stakes. Aftermarket focus on configuring vehicles for special purposes (e.g. AV retail). Reduced demand for critical repair and high performance parts. Integration with infrastructure & consumer technology. Shared autonomous 4 Mix shift toward niche product Continuation of incremental product development for today s typical vehicles. Over time, mix shifts toward specialpurpose vehicles (e.g. utility, adventure, sport, collectable). Need for high-performance parts limited to this future state. 1 Personally-owned, driver-driven Managed fleets with broad mix Need for consistent rider experience. Asset owner desire for lowest cost repairs. Better economics for EVs encourage their adoption. Increased use increases wear and tear and heightens demand for maintenance parts or creates willingness to pay for durability. Shared, driver-driven 2 Source: Deloitte Analysis. Copyright 2017 Deloitte Consulting LLP. All rights reserved. 7

9 The industry is at an inflection point and 3 key forces could significantly disrupt the industry in the near and longer term Volume headwinds Vehicles Sales (millions) AP EUR MEA NA SA Several OEMs forecast lower global demand Growth in mature markets is expected to plateau; however, mix is expected to be richer While APAC demand is expected to grow 3-5% annually, significant excess capacity exists Mix complexity expected to increase radically due to customized content and changing technologies Shareholder value creation* $ 900B $ 800B $ 700B $ 600B $ 500B $ 400B $574B $ 300B $ 200B $ 100B $ B Vehicle content & technology disruption ADAS & Sensors Axles Body Battery/Fuel Cell Brakes Climate Control Electric Drivetrain Electronics Exhaust System Frame Fuel System ICE Infotainment & Communication Interior Seats Steering Suspension Transmission Wheels & Tires High Medium Differentiation Low Growth Certain segments are at risk of commoditization while others are more attractive for differentiation Value creation opportunities are expected to shift to data & service-driven offerings Traditional value chain being disrupted Alibaba Cisco Baidu Microsoft $0.9T Cash $3.5T Market cap Amazon Apple, Inc. Lyft Uber Intel Google NVIDIA Tencent Samsung Copyright 2017 Deloitte Consulting LLP. All rights reserved. 8

10 In mapping out the uncertainties, the study analyzed 4 alternative future scenarios that are likely to occur in the next years Future scenarios Flat volume Volume impact (10yrs) Volume decrease 1 3 Drag on Volume trends flatten out; while disruptive trends continue to be a hot topic at conferences, they fail to take meaningful share of the market Companies continue to position for future innovation, deliver great returns to investors Low shared, High macro, Low FOM/EV, Low cost Downturn Macro-economy stalls, commodity prices rise; disruptive trends fail to materialize in medium-term, fail to take meaningful share of the market Companies go back to batten down the hatches and look for roll-up opportunities High shared, Low macro, Low FOM/EV, Flat cost Repositioned 2 Disruption finally take share, transforming car content; new technology attracts millennials, offsetting volume declines from disruption Companies position in new ecosystems and business models, as favorable volume creates opportunities Low shared, High macro, High FOM/EV, Low cost Disruption pressure 4 Shared driving makes a large dent in car volume; car content significantly different than today highlyconnected, shared, partly/some fully autonomous Certain current segments under significant pressure; at the same time, new opportunities abound High shared, Low macro, High FOM/EV, Flat cost Incremental change Strategic disruption impact (10yrs) Highly disruptive Copyright 2017 Deloitte Consulting LLP. All rights reserved. 9

11 Threats and opportunities As a result, while 15-20% of current segment revenues are at risk, significant new growth opportunities of $700B+ will be available for industry players 600 B 500 B 400 B 300 B 200 B 100 B -100 B -200 B Incremental risks & opportunities Global automotive volume and content opportunity ($B USD) B Risk $700B Afermarket/ Service Traditional content/ Volume AEV content/ Volume $375B Infotainment & communication Electronics Interior Battery / Fuel cell ADAS & sensors Transmission Seats Electric drivetrain Wheels & tires Frame Axles Exhaust system Brakes Steering Climate control Suspension Fuel system Content mix by revenue Projected segment market size ($B USD) Body ICE $242 $249 Market size in 2017 Market size in 2030 $105 $104 $143 $38 $20 $138 $83 $13 $49 $46 $42 $51 $35 $32 $24 $26 $17 $230 $199 $141 $135 $133 $133 $132 $102 $93 $69 $52 $41 $40 $37 $34 $27 $25 $25 $12 % Change -5% -20% 34% 29% -6% 254% 551% -26% 12% 415% 4% -11% -5% -27% -4% -15% 5% -3% -27% Total segment revenue expected to grow from Copyright 2017 Deloitte Consulting LLP. All rights reserved. Total segment revenue expected to shrink from

12 Overall attractiveness varies across product segments, with several facing significant risk of commoditization/decline 4.6 Infotainment & communication ADAS & sensors Observations Growth potential Suspension Median growth score Axles Risky Climate control Frame Exhaust system Battery / Fuel Cell Brakes Steering Fuel system Seats Interior Electric drivetrain Body ICE Transmission Median differentiation Score Electronics Wheels & tires Attractive Ability to differentiate Suppliers, OEMs as well as non-traditional suppliers and high tech players vying for competitive position in attractive segments Attractive segments traditional value chain is being challenged, as the technology disruption occurs e.g., tier leapfrogging may challenge the traditional linear model Suppliers with product portfolio in middleground segments are shifting focus to more profitable segments and enhanced value propositions Players in segments with higher risk and asset intensity may begin to consolidate further and/or become potential acquisition targets Copyright 2017 Deloitte Consulting LLP. All rights reserved. 11

13 While 15-20% of current segment revenues are at risk, significant new growth opportunities of $700B+ will be available for industry players 700 B 600 B 500 B 400 B 300 B 200 B 100 B 1,200 B* B -100 B -200 B Incremental risks & opportunities Global automotive volume and content opportunity ($B USD) $ B Risk Traditional content/ Volume *2017 supplier market size projected to be $1,200 B AEV content/ Volume Aftermarket/ Service $375B Exhaust system Climate control Suspension Fuel system $105 $104 $143 $38 $20 $138 $83 $13 $49 $46 $42 $51 $35 $32 $24 $26 $17 Total segment revenue expected to shrink from (Risk) Copyright 2017 Deloitte Consulting LLP. All rights reserved. 12 Body ICE Infotainment & communication Electronics Interior Battery / Fuel cell ADAS & sensors Transmission Seats Electric drivetrain Wheels & tires Frame Axles Brakes Steering Content mix by revenue Projected segment market size ($B USD) $242 $249 Market size in 2017 Market size in 2030 % Change $230 $199 $141 $135 $133 $133 $132 $102 $93 $69 $52 $41 $40 $37 $34 $27 $25 $25 $12 Total segment revenue expected to grow from (AEV content/volume) -5% -20% 34% 29% -6% 254% 551% -26% 12% 415% 4% -11% -5% -27% -4% -15% 5% -3% -27% Total segment revenue expected to grow from (Traditional content/volume)

14 Aftermarket and service revenue is projected to account for more than half of the projected opportunity, driven by volume growth and vehicle digitization Incremental risks & opportunities Global automotive volume and content opportunity ($B USD) Aftermarket & service revenue Projected incremental market size ($B USD) 700 B 600 B EV charging stations $ B 400 B $400B Cybersecurity $2 300 B 200 B 100 B $ B Aftermarket parts $186 1,200 B* B -100 B -200 B Risk Traditional content/ Volume *2017 supplier market size projected to be $1,200 B AEV content/ Volume Aftermarket/ Service Connected services $118 Diagnostic services $21 Connected Services includes M2M, OTA updates, and infotainment services such as apps, on-demand audio/video, & ads Copyright 2017 Deloitte Consulting LLP. All rights reserved. 13

16 What is the future of aftermarket? Five hypotheses for implications shaping aftermarket value chain and players Customer & Channel Structure Disruption 3 Emergence of new B2B and B2C channels to accommodate new customer groups, accompanied by convergence across channels 2 Higher vehicle utilization in shared mobility drives more frequent parts maintenance and replacement and vehicle service needs Higher Use Cycle Value Chain Leapfrogging 4 Increased access to end consumer triggered partnerships across value chains and OEM direct-toconsumer path 1 Transformation of invehicle content and service infrastructure as industry evolves towards electric, connected and autonomous drive Vehicle Content Evolution New Business Models Creation of new business models and revenue streams related to in-vehicle consumption (e.g. media, diagnostics) as well as infrastructure enabling (e.g. charging, mobility management) Copyright 2017 Deloitte Consulting LLP. All rights reserved. 15 5

17 Aftermarket value chain overview Technological and consumer shifts are directly affecting value chain players Manufacturer Distributor Parts / Service Provider Customers OE OE Distributor OEM Sales Unit OE Dealerships Licensed dealers 4 Direct to consumer aftermarket sales IAM Retailers Private Owners After Market Parts Manufacturers Distributors WDs Jobbers Retail Service Providers Fleet Maintenance Service Providers 3 Fleet Owners 3 Online Retailer Vehicle Content Evolution Higher Use Cycle Disruption Trends Customer & Channel Structure Disruption Value Chain Leapfrogging New Business Models Copyright 2017 Deloitte Consulting LLP. All rights reserved. 16

18 Implications on value chain players Aftermarket players are moving fast - rapid partnerships activities, start-ups, M&A and organic strategies targeted to create value and competitive advantage Parts Manufacturer OEM Parts and Services Provider Selected Key Trends Push to develop ecosystem and enable vehicle-generated data monetization Integrate connectivity features to allow V2V and V2X capabilities Direct-to-consumer interface for data aggregation and revenue channel Leveraging cloud processing for vehicle performance analysis and forecasts Utilize existing data networks to offer telematics and remote diagnostics/support Penetration through online channels for DIYs Consolidation of players Recent Industry Activities Automotive Asian technology supplier company Partnership on automation and connectivity Automotive supplier Data exchange platform from vehicle to service providers Automotive supplier & & & Autonomous software provider Web services/ retail provider Direct to supplier relationship, low-price offering and fast delivery feature Automotive OEM Opt-in data service, runs on tech company s cloud Automotive OEM Technology company Developed app with start-up tech company to enable online payment and commercial transaction Launched app, enable remote diagnostics and real-time maintenance On-demand auto repair services start-up operating in 700+ US cities Consolidated portfolio of auto repair companies Copyright 2017 Deloitte Consulting LLP. All rights reserved. 17 & & Tech start-up On-demand repair service Telecom company & On-demand repair service Repair/ aftermarket part retail consolidation

19 Transforming disruption into opportunities Executing the right strategies helps our clients mitigate risks and capture value from new opportunities Portfolio optimization and technology roadmap Portfolio strategy and analytics Scenario planning to optimize portfolio performance Product and technology strategy and roadmap Organization, talent, and operating model IP- and service-centric business models Partnership and contracting models Talent requirements Capability building M&A/Divestiture strategies and transaction execution Growth and/or consolidation strategies Capability identification and acquisition Due diligence and transaction advisory Integration execution Cost and Asset Efficiency Core business profitability Cost & asset efficiency and profitability transparency Material cost efficiency Digital supply chain Service offerings and new business models Innovation strategy and agenda Approach and process to new offering development Niche creation in new mobility ecosystem Copyright 2017 Deloitte Consulting LLP. All rights reserved. 18

20 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2017 Deloitte Development LLC. All rights reserved. 36 USC