What Sales-Weighted Prices Tell You About the Success of an Automaker

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1 April 2014 What Sales-Weighted Prices Tell You About the Success of an Automaker Most auto industry watchers concentrate on monthly sales figures to determine if a particular brand is being successful or not. And while that is a good spot- pulse method, it fails to get to the core health of an automaker. What if there were a way to avoid hours of pouring over government filings, annual reports and public pronouncements to get a decent if not necessarily 100 percent accurate health reading? WEIGHTED PRICE Let s break it down. Sales: While the number of units is important, there are missing components such as each vehicle s margin, discount volumes and comparative corporate pricing structure vs. average sale price. That may seem a bit too nerdy. Put another way, to determine if a car company is on the right success track it needs to have sufficient margins on each product and fit within an overall pricing structure that enhances its overall corporate profit goals. HYUNDAI STILL LAGS Put in practical terms, Hyundai some years back decided it wanted to move its product line and image further upscale. The goal was to attract more affluent and somewhat older consumers to the brand. Instead of concentrating on the Accent and other low- priced models, it introduced the Genesis with prices that could hit the $50,000 mark compared to under $20,000 for volume leader Elantra. On a straight average basis, Hyundai products carried a $25,600 price point including the high- priced Genesis. And here is the key: On a sales weighted basis, the Hyundai family of products came in at $22,900 or 10.4 percent less than the unweighted average. Using Ford as a counterpoint, the Dearborn automaker has by any measure been quite successful in sales, profits and customer satisfaction. It s unweighted average product- portfolio price is Average Price Weighted Average Price Straight Acura $41,301 $39, % Audi $48,739 $75, % BMW $57,140 $69, % Buick $35,683 $34, % Cadillac $55,676 $65, % Chevrolet $32,947 $35, % Chrysler $32,940 $32, % Dodge $30,594 $39, % Fiat $20,986 $21, % Ford $32,651 $29, % GMC $44,615 $48, % Honda $25,970 $25, % Hyundai $22,932 $25, % Jaguar $108,322 $120, % Jeep $26,078 $25, % Kia $23,445 $23, % Lexus $45,785 $52, % Lincoln $39,927 $44, % Mazda $24,501 $23, % MercBenz $126,751 $131, % Mitsubishi $25,986 $25, % Nissan $24,789 $34, % Porsche $132,849 $111, % Scion $17,597 $17, % Smart $18,550 $21, % Subaru $25,195 $25, % Toyota $26,889 $33, % Volkswagen $25,717 $32, % Volvo $39,760 $40, % $29,813 (using March s data) with a 9.5 percent HIGHER weighted average of $32,651. Others with a higher weighted average include Honda, Jeep, Mazda, Porsche, Buick and Chrysler. All of those brands show some marketplace

2 2 resiliency in terms of sales volume. On the opposite side of the field, brands like Volkswagen have suffered of late and a measure of that weakness can be seen in the 21 percent lower weighted price average compared to unweighted. Part 2: Adding Sales Percentile But weighted vs. unweighted isn t the entire story. No surprise, equally important is selling the vehicles at a price that can generate a healthy profit margin. CNW for the past decade has been tracking the Price Percentile of vehicles and with this latest data set we ve begun doing so on a model- by- model basis. How it Works Each vehicle has a base and maximum price. That is, the lowest price a customer can buy a car or truck for and the maximum price the vehicle would sell for with all of the factory installed accessories and options. For example, if a vehicle has a base price of $10,000 and a maximum price of $20,000, someone who pay $15,000 has bought the vehicle at its 50 th Percentile (halfway between lowest and highest prices). This data is a reflection of the vehicle s appeal overall, the customer s economic condition, and the automaker s margin of potential profit. Budget Car Comparison Using the vehicles in the Budget Car Segment as an example, we see (table at top, right) that customers in March who bought the Kia Rio added features and options that brought that car to the 81.7 th percentile. On the other hand, those who purchased a Mazda 2 ignored some of the add- ons and acquired the Mazda at the 77.7 th percentile. How Important is the Difference? Based on the average weighted prices and discounts, that four percent variance cost Mazda and its dealers nearly $1,200 in potential profit compared to the Kia Rio. The more expensive the vehicle, the greater the potential losses for each percentile. Ford s F- series could be said to hold onto its number 1 ranking in terms of pickups sales by selling more lower percentile models. And that would be true. The F Series has an 83 rd Percentile sales base while the Toyota Tundra is at the 87 th percentile. Part Three: The Analysis Interpreting those numbers is critical. Tundra, for example, has not done well in the contractor, rancher or farmer or RV towing categories. Buyers are concentrated in the personal- use segment of the pickup market. Since personal- use buyers tend to outfit a vehicle with a lot of the bells and whistles, it s not odd at all that Tundra has such a high percentile. The F- Series, on the other hand, sells quite a few units to contractors who tend to buy lower- mid- level models and outfit the vehicle for a specific Budget Cars Percentile b Chevrolet Sonic 79.67% b Hyundai Accent 80.96% b Kia Rio 81.70% b Mazda Mazda % b Mitsubishi Mirage 79.00% b Toyota Yaris 80.44% FS Pickup Percentile fspu Chevrolet Silverado 84.74% fspu Dodge Ram 85.51% fspu Ford F Series 83.11% fspu GMC Sierra 84.67% fspu Nissan Titan 84.45% fspu Toyota Tundra 87.78% Near Luxury Percentile nl Acura TL 91.33% nl Audi A4/S % nl BMW 3 Series 92.22% nl Cadillac CTS 90.12% nl Lexus ES 88.93% nl Lexus IS 90.18% nl Lincoln MKS 91.93% nl Lincoln MKZ 89.91% nl Volvo 60 series 92.71% nl Volvo 60 series 90.99% Cross Overs Percentile pcuv BMW X % pcuv Buick Enclave 93.56% pcuv Lexus RX 88.25% use or trade. A Final Component Incentives At this point, the data clearly points to some of the brands that are winning and some that are losing. Add incentive levels and the final piece of the puzzle falls into place. As the table on the next page shows, among Premium Cross Over Utility Vehicles

3 3 from BMW, Buick and Lexus, the Lexus has the highest level of incentives of MSRP at 6.4 percent. BMW s incentive level vs. MSRP is only 4.7 percent. While these incentive levels are well below the industry average of percent (sales weighted), all can be said to be a positive mark on their respective automaker s bottom line. Within the context of PCUVs, however, Lexus clearly has some ground to make up in both the incentive and Percentile categories. It could even be Incent. % MSRP pcuv BMW X5 4.69% pcuv Buick Enclave 5.76% pcuv Lexus RX 6.43% projected that the RX is waning and doesn t have the consumer underpinnings to be a long- term survivor in its current iteration even though the deliveries show 10,000 sales in March compared to Enclave s 5,900 and X5 s 3,900. Put another way, Lexus has to discount deeper and sell to less discriminating (lower demo) buyers to maintain its sales volume. That s the profile of a brand or model that s getting tired. CONTEXT: The sales- incentives document is hardly the be- all, end- all of determining a brand s success or failure or trendline. BUT it s another arrow in the quiver. The document released every couple of months and eventually monthly will contain all of this info plus a great deal more by brand, market segment and other breaks. For analysts, a deep look at the data might be worthwhile. For casual auto industry watchers, just a look at Percentiles and Average Prices (weighted v. unweighted) will provide a glimpse into a brand s condition. WHY LEASE A NEW CAR OR TRUCK cy95 cy00 cy05 cy10 cy13 Lower mo. payment 52.7% 36.4% 39.2% 45.6% 41.6% Drive nicer car 23.2% 18.3% 19.8% 9.7% 16.6% Better use of money 4.7% 15.1% 10.3% 11.4% 9.4% No trade-in hassle 3.6% 0.7% 1.1% 1.0% 1.2% Tax considerations 1.6% 2.8% 4.0% 2.6% 3.7% No/low downpymnt 14.2% 26.7% 25.6% 29.7% 27.5% 100.0% 100.0% 100.0% 100.0% 100.0% How to read above: In 1981, 1.8% of households had more registered vehicles than actual number of licensed drivers in that household. How to read below: Among 12 to 16 year olds, 11.62% changed their address in cy2000. How to read right: Of those people who bought a new car in 1990, 52.6% had a trade in. Among used buyers, 22.6% had a trade. % Trade % Trade Doc 920 New Used cy % 22.6% cy % 27.7% cy % 25.1% cy % 23.7% cy % 29.4% cy % 30.1% cy % 32.8% cy % 38.6% cy % 37.7% cy % 35.9% cy % 33.1% cy % 29.2% cy % 30.5% cy % 32.4% cy % 28.8% cy % 27.4% cy % 26.54% cy % 24.79% cy % 22.91% cy % 22.36% cy % 19.63% cy % 20.75% cy % 21.79% cy % 21.92% yr yr yr yr yr yr yr yr yr yr yr Per Yr % 12.46% 19.83% 15.24% 10.41% 9.86% 7.19% 4.83% 4.37% 4.19% 2.44% Per Yr % 14.21% 22.38% 19.46% 18.41% 16.58% 13.87% 14.29% 14.16% 12.21% 10.93% Per Yr % 18.74% 26.39% 25.32% 22.86% 20.44% 16.57% 15.91% 15.63% 14.87% 13.46% Per Yr % 23.11% 29.72% 28.53% 22.91% 22.74% 17.09% 16.68% 16.83% 16.91% 15.22% Per Yr % 28.40% 32.37% 28.90% 22.95% 21.15% 16.72% 16.59% 17.04% 17.34% 16.67%

4 4 Economy Slows; Auto Sales Don t While the U.S. economy slowed to 0.1 percent in the first quarter of 2014, it appears the auto industry will continue to hum through the Spring. Jitters Index Eases Americans are still worried about much of their home- centric economic condition, but there was a slight easing of those concerns vs. both a year ago and last month. Both showed an identical 0.7 percent decline. Hardly upbeat, at least it s a move in the right direction. To put it into historical perspective, though, the March Index registered a In January, 2007 it was at For most of the 1990s, the Index hovered between 4 and 5. Floor Traffic, Share Retail A break in the weather has brought the potential buyers out of hibernation and into dealerships. New floor traffic was up 3 percent vs. a year ago while closing ratios nudged up a bit by 0.71 percent. We ve also seen a growth in Retail Share of total sales indicating consumers are back in the market. In April, the share of deliveries that were retail effectively hit 60 percent. Same Stores Doing Well Those dealerships that were in business a year ago at the same location without extensive remodeling saw a 4.15 percent increase in sales. Leases continue to show growth jumping to 29.4 percent of April deliveries. That 10.5 percent higher than a year ago. making a new- car acquisition. It s lower than last year as some of those delayers finally came to market. (See Back Page.) More important for automakers is the shrinking time- frame between delay and anticipated return to market. (See Back Page.) In April of last year, those who were postponing a new- car purchase said they would not return to market for 3.5 months. The April delay was 2.9 months. All in all, the industry could see a 7 percent sales increase in April vs Pent Up Demand We ve seen Pent Up Demand contract somewhat vs. a year ago. In April, it appears there are 100,500 consumers who are on the verge of

5 5 Anticipated Apr Actual Apr % Chng YTD YTD % Chng Document 106m cy14 cy13 14 v 13 cy14 cy13 14 v 13 Franchised Dealer Sales 1,411,344 1,348, % 4,088,543 4,013, % Independent Dealer Sales 1,284,550 1,235, % 3,798,809 3,723, % Casual (Private) Sales 1,262,727 1,235, % 3,552,861 3,527, % Total Sales 3,958,621 3,819, % 11,440,213 11,263, % Franchised Independent Franchised Franchised Independent Independent Document 107m Asking Price Asking Price Trans Price % of Asking Trans Price % of Asking Jan-14 $11,429 $9,942 $10, % $9, % Feb '14 $11,221 $9,694 $10, % $9, % Mar '14 $11,396 $9,847 $10, % $9, % Apr 14 $11,372 $9,811 $10, % $9, % Apr '13 $11,716 $10,143 $11, % $9, % May '13 $11,682 $10,127 $11, % $9, % June '13 $11,597 $10,106 $10, % $9, % July '13 $11,563 $10,101 $11, % $9, % Aug '13 $11,592 $10,227 $11, % $9, % Sept '13 $11,729 $10,437 $11, % $9, % Oct '13 $11,482 $10,223 $10, % $9, % Nov. '13 $11,367 $10,205 $10, % $9, % Dec. 13 $11,419 $10,324 $10, % $9, % Mo. Vs. Yr Ago -2.94% -3.27% -1.01% 1.98% -0.64% 2.72% This Mo v Last Mo -0.21% -0.37% -0.14% 0.07% -0.22% 0.15% Retail Prices Remain Soft; 3.9 Million April Sales While wholesale prices have been rising (See Kontos Kommentary, Page 6), retail prices have lagged behind for all channels of the used- car industry. For franchised dealers, asking prices averaged $11,372 compared to $11,716 last year. Both franchised and independent dealers, however, were able to get actual transaction prices that were closer to their original asking price. Franchised dealers received 96 percent of asking prices vs. 94 percent a year ago. For Independent dealers, sale prices were 96.5 percent this April vs percent a year ago. inventory of available vehicles continues to contract, down 3.13 percent vs. a year ago. All channels will take part in the 3.7 percent overall used- car market increase. Franchised dealers should be up 4.7 percent, Independents up 3.9 percent and Private Party up 2.2 percent. Days Supply Shrinks With an estimated 3.9 million used- car sales in April, the

6 6 Kontos Kommentary Summary Wholesale prices strengthened in March - - above both seasonal and year- ago levels. Off- rental units, which were in greater abundance last March, were a driving factor in this March s results. Delayed off- rental supply translated into higher off- rental prices, which in turn contributed to higher overall average wholesale used vehicle prices. On top of that, retail used vehicle sales rebounded strongly in March, after being depressed by severe weather in January and February. Strong Demand The resulting strong demand also contributed to higher overall prices. To the extent off- rental volume was hindered by winter conditions and a late Easter, this volume should be forthcoming soon and, along with expected off- lease volume growth, will put downward pressure on prices as seen in previous months. Details According to ADESA Analytical Services monthly analysis of Wholesale Used Vehicle Prices by Vehicle Model Class1, wholesale used vehicle prices in March averaged $10, up 6.0% compared to February, and up 4.0% relative to March All segments except minivans registered month- over- month increases. Pickups and SUVs Wholesale Used Vehicle Price Trends Average Prices ($/Unit) Latest Month Versus: Mar-14 Feb-14 Mar-13 Prior Month Prior Year Total All Vehicles $10,429 $9,839 $10, % 4.0% Total Cars $9,337 $8,776 $9, % 1.6% Compact Car $7,410 $7,130 $7, % 4.9% Midsize Car $8,519 $8,140 $8, % 0.0% Fullsize Car $7,554 $6,889 $7, % -4.2% Luxury Car $12,422 $11,999 $12, % 3.0% Sporty Car $13,247 $12,002 $13, % 1.5% Total Trucks $10,843 $10,239 $9, % 11.2% Mini Van $7,486 $7,609 $6, % 8.0% Fullsize Van $10,927 $10,907 $9, % 9.5% Mini SUV $12,746 $11,988 $11, % 13.5% Midsize SUV $7,995 $7,324 $6, % 15.7% Fullsize SUV $11,320 $10,652 $10, % 6.3% Luxury SUV $19,788 $18,210 $18, % 9.1% Compact Pickup $7,558 $7,260 $7, % 0.1% Fullsize Pickup $13,274 $12,460 $11, % 12.6% Total Crossovers $13,300 $12,615 $13, % -2.0% Compact CUV $12,200 $11,480 $12, % 0.8% Mid/Fullsize CUV $14,473 $13,791 $15, % -4.1% experienced particularly strong year- over- year price increases. Prices for used vehicles remarketed by manufacturers were up 3.9% month- over- month and up 8.2% year- over- year, as manufacturers capitalized on strong demand for certifiable units and lower supply of off- rental program cars. Prices for fleet/lease consignors were up 8.8% sequentially and up 4.5% annually - - in part due to tight supplies and strong demand for off- rental risk units. Dealer consignors saw a 7.5% average price increase versus February, and a 4.5% uptick versus March 2013, indicating solid wholesale absorption of high trade- in volume from strong March new vehicle sales. Based on data from CNW Research, retail used vehicle sales were up almost 50% month- over- month, as severe weather conditions eased. Sales of certified pre- owned (CPO) vehicles in March were up 15.3% from the prior month and up 8.6% from the prior year, based on figures from Autodata. 1 The analysis is based on over six million annual sales transactions from over 150 of the largest U.S. wholesale auto auctions, including those of ADEA as well as other auction companies. ADESA Analytical Services segregates these transactions to study trends by vehicle model class.the views and analysis provided herein relate to the vehicle remarketing industry as a whole and may not relate directly to KAR Auction Services, Inc. The views and analysis are not the views of KAR Auction Services, its management or its subsidiaries; and their accuracy is not warranted. The statements contained in this report and statements that the company may make orally in connection with this report that are not historical facts are forward-looking statements. Words such as should, may, will, anticipates, expects, intends, plans, believes, seeks, estimates, bode, promises, likely to and similar expressions identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected, expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include those matters disclosed in the company s Securities and Exchange Commission filings. The company does not undertake any obligation to update any forward-looking statements.

7 7 Jean Halliday s Ad Wrap Ford Wins Over Jimmy Fallon By now many of us probably know that Tonight Show host Jimmy Fallon is going to buy a 2015 Ford King Ranch pickup. The road to this decision has certainly been an interesting ride, but more importantly, a lesson in how smart marketers use social media. The late- night TV host stirred up a very public decision- making process when he announced on his show in early March that he wanted to buy a new pickup truck. Twitter Helped Decide Fallon, who often uses Twitter posts for skits on his show, asked his band and audience for help in deciding on a new pickup. A man in the audience was heard saying he drove a Ford F Within minutes, just minutes after midnight, someone from Ford Trucks' Twitter account Tweeted to Fallon We think you should get a 2015 F- 150 King Ranch. Ford was the first to throw its hat in the ring and ended up milking this opportunity for all it was worth. And it turns out that the someone who posted the Tweet just after midnight was Scott Monty, global digital communications chief at Ford. I happened to be up and watching the show, he told me. I made a judgment call, based on knowing that Jimmy and his team are social media- savvy and that it would buy our team some time to craft a more strategic plan the next day. So, there were no meetings, phone calls or corporate lawyers involved before Monty posted that Tweet. About 11 hours later, General Motors' Chevrolet brand tweeted Fallon about how good the Silverado would look in his driveway. Hail, Hail The Gang s All Here! Subsequently Chrysler Group's Dodge brand, then Nissan got into the act on Twitter, touting their full- size pickups, the Ram and Titan respectively. Dodge let Jimmy know it had a Ram outside his studio in Rockefeller Center in NYC for a test drive. Several weeks later, in late March, and after thousands of more Tweets and retweets, videos on YouTube and comments on Facebook, Fallon announced his decision during his show, holding up a glossy photo of the Ford King Ranch. You can't buy this kind of advertising, folks. Ad Agency Jumps In Before the announcement, Ford's ad agency - Team Detroit in Dearborn- worked with Ford's truck team and Fallon's NBC producers to develop a promotion. So, the same night the host revealed his pickup choice, he announced a week- long, livestreaming contest with 10 Ford dealers from around the country vying to sell him the pickup. On the air, Fallon showed off this placard for the contest, dubbed Fingers on a 4X4. The dealers had to keep their fingers on the Ford F- 150 that was heaved up to the deck of the U.S.S. Intrepid in Manhattan. Yes. There's a video of that on YouTube. Old Idea is New Again The idea for keeping hands or fingers on a vehicle as part of a contest isn't a new idea. And Ford added insult to the Dodge brand with this promotion. Dodge had done a similar push, albeit digitally, just last fall, as part of the launch of the new Durango. The Hands on Ron Burgundy endurance contest challenged people to touch the movie character played by Will Ferrell, for as long as possible to try to win a new 2014 Durango. The seed for Dodge's promo stems from a 1997 documentary, Hands on a Hardbody, that follows an event in Texas top win a new Nissan pickup. Chrysler also used the idea for a Stand By Your Van promotion during the 2004 Chicago Auto Show to help celebrate 20 years of its Dodge and Chrysler minivans. Fallon No Stranger to Ford Other reports failed to mention this: Jimmy Fallon was hired by Ford in late 2012 to help create a :60 commercial for the Super Bowl in Fallon gave his millions of Twitter followers three days to Tweet their most outrageous road trips. Hudson Rouge in Manhattan, Lincoln's ad agency at the time, then combed through the 6,000- plus Tweets to create the spot. The automaker touted the spot as the first- ever commercial written entirely through social media with consumers participating on Twitter. In spite of all the hype, the commercial fell flat. What didn't fall flat was the reach Ford had on wooing Fallon with its F Monty told me he estimates high into the tens of millions for the number of impressions all the hoopla brought to Ford's pickup. Just on Twitter, there were 17,500 mentions of the #FingersOnA4X4 hashtag, translating to a potential reach of more than 150 million. The overall reach includes the live streamed video of the dealers' contest and unsolicited mentions of Ford Trucks from Fallon's guests on the show. While we won't know whether Fallon's earlier Super Bowl work with Ford helped in his decision to buy the King Ranch, we do know that Ford again showed how to execute a blockbuster social media blitz. It seems the whole affair isn't over. Fallon is asking via social media what name he should give his new pickup.

8 8 *Deliveries not sales April 1-15 April 1-15 % Chng Actual Sales April '14 Full Mo New Cars % cy2014 cy v 13 April '13 Sales Change Extension Detroit 3 210, , % 220, , % Asian 198, , % 360, , % European 54,773 51, % 86,364 92, % Ttl Pass. Cars 463, , % 667, , % New Trucks Detroit 3 253, , % 381, , % Asian 70,771 66, % 205, , % European 7,808 7, % 32,975 35, % Ttl Lt. Trucks 332, , % 620, , % Ttl Industry 795, , % 1,287,439 1,377, % April 1-15 Full April % Chng Prev Mo Prev Mo % Chng cy2014 cy v 13 cy2014 cy v 13 Lease Share 29.4% 26.6% 10.5% 28.9% 26.3% 9.9% Floor Traffic - New (105m) % % Floor Traffic - Used (105m) % % April 1-15 Prev Yr % Chng % Chng cy 14 Back Page cy2013 Pent Up Demand Units Same Mo '14 Prev Mo April est. '14 100,500 Avg. New MSRP (101m) $38,224 $37, % 0.20% April '13 106,500 Total Discounts $5,967 $5, % 1.37% % Change -5.6% Manufacturer Incentives $4,693 $4, % 1.70% Dealer Incentives $1,274 $1, % 0.15% Purchase Delay Core Transaction Price**** $32,257 $32, % -0.02% April est. ' % Mfg Incentive of MSRP 12.28% 11.05% 11.1% April ' Months % Ttl Discounts of MSRP 15.61% 14.42% 8.3% % Change -17.9% Fed Gas Child's Job Jitters Index Summary Day to Day Condition of Food Local Jitters Taxes Prices Edu* stability Needs**** Investments** Prices Taxes*** Index v Prev Mo -1.34% 1.03% -2.35% -2.36% -0.63% -1.89% 0.10% -0.10% -0.70% v Mo. ' % 4.38% 18.01% -3.70% 6.81% % 0.20% -0.10% -0.70%