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AUTOMOBILES Research Brief
Sustainable Industry Classification System™ (SICS™) # TR0101
Research Briefing Prepared by the
Sustainability Accounting Standards Board®
www.sasb.org Copyright 2014 SEPTEMBER 2014
AUTOMOBILES Research Brief SASB’s Industry Brief provides evidence for the material sustainability issues in the Automobiles industry. The brief
opens with a summary of the industry, including relevant legislative and regulatory trends and sustainability risks
and opportunities. Following this, evidence for each material sustainability issue (in the categories of Environment,
Social Capital, Human Capital, Business Model and Innovation, and Leadership and Governance) is presented.
SASB’s Industry Brief can be used to understand the data underlying SASB Sustainability Accounting Standards.
For accounting metrics and disclosure guidance, please see SASB’s Sustainability Accounting Standards. For
information about the legal basis for SASB and SASB’s standards development process, please see the Conceptual
Framework.
SASB identifies the minimum set of sustainability issues likely to be material for companies within a given industry.
However, the final determination of materiality is the onus of the company. Related Documents • Automobiles Sustainability Accounting Standards
• Industry Working Group Participants
• SASB Conceptual Framework
INDUSTRY LEAD Nashat Moin CONTRIBUTORS Andrew Collins Henrik Cotran Anton Gorodniuk Jerome Lavigne-Delville Himani Phadke Arturo Rodriguez Jean Rogers Gabriella Vozza SASB, Sustainability Accounting Standards Board, the SASB logo, SICS, Sustainable Industry Classification System,
Accounting for a Sustainable Future, and Materiality Map are trademarks and service marks of the Sustainability
Accounting Standards Board.
I N D U S T R Y B R I E F | A U T O M O B I L E S
INTRODUCTION
The automobile has become one of the most
popular solutions for personal mobility worldwide.
Vehicle ownership is a source of personal
independence and social status. Developed countries
like the United States, Australia, New Zealand, and
Luxembourg have high rates of vehicle ownership at
over 700 motor vehicles per 1,000 people.1 The rate
of vehicle ownership is much lower in developing
economies, but the rate is growing with GDP,
creating significant new markets for automakers. As
a producer of a high value-added goods, the
automotive industry is one of the most important
economic sectors. It is global in nature, with
sourcing and distribution spread across the world.
The industry employs over 2 million people and
produces almost 90 million vehicles annually.2
Vehicle ownership is rising globally, which is creating
new challenges for public infrastructure. It also
magnifies environmental externalities associated
with tail pipe emissions and end-of-life disposal.
Additionally, intensifying traffic worldwide increases
the risk of car accidents, which are among the
leading causes of accidents with unintentional
injuries. Moreover, materials intensive
manufacturing and constant innovation-driven fleet
upgrades exacerbate global resource constraint.
Within the Transportation sector, emission from
personal vehicles is one of the main contributors of
greenhouse gases. Therefore, the Automobile
industry is a target of global regulations establishing
fuel-efficiency and emission standards. While the
industry has made significant strides to improve fuel
efficiency of vehicles and lower emissions by
introducing hybrids and electric-powered cars,
increasing production and an evolving regulatory
environment indicate that companies will need to
continue to reduce environmental externalities.
Today, the traditional auto model is challenged by
quickly emerging companies, such as Tesla, that
provide high-quality products and help to limit
greenhouse gas emissions. Moreover, safety of
drivers and passengers is a paramount goal of
automobile manufacturers. Higher customer
expectations, as well as increasingly stringent safety
regulations, are driving the innovation to produce
safe and defect-free vehicles.
Therefore, management (or mismanagement) of
material sustainability issues has the potential to
affect company valuation through impacts on
profits, assets, liabilities, and cost of capital.
To ensure that investors are able to evaluate these
factors, automobile companies should report on the
material sustainability risks and opportunities that
are likely to affect value in the near and long term.
Enhanced reporting will provide investors with a
more holistic (and comparable) view of performance
that includes both positive and negative
externalities, and of the non-financial forms of
Sustainability Disclosure Topics
Environment
• Materials Efficiency & Recycling
Social Capital
• Product Safety
Human Capital
• Labor Relations
Business Model and Innovation
• Fuel Economy & Use-phase Emissions
Leadership and Governance
• Materials Sourcing
I N D U S T R Y B R I E F | A U T O M O B I L E S | 1
capital that firms in this industry rely on to create
long term value.
Specifically, performance on the following
sustainability issues will drive competitiveness within
the Automobiles industry:
• Improving materials efficiency through
managing manufacturing waste and end-of-
life vehicles;
• Ensuring the highest standards of automobile
safety;
• Managing labor relations and ensuring fair
employee treatment;
• Minimizing the environmental footprint of
vehicles by improving fleet fuel efficiency; and
• Sourcing of key inputs that reduce
externalities while lowering risks to company
value.
INDUSTRY SUMMARY
The Automobiles industry includes companies that
manufacture passenger vehicles, light trucks, and
motorcycles.I Industry players design, build, and sell
automobiles that run on a range of traditional and
alternative fuels. Auto makers sell vehicles to dealers
for consumer retail sales and directly to fleet
customers, including car rental and leasing
companies, commercial fleet customers, and
governments. Both retail and fleet customers can
obtain a wide range of aftersales services through
the dealer network, including, but not limited to,
maintenance, collision repairs, and extended service
warranties. While companies in the industry do not
sell cars directly to retail consumers, they are
involved in the marketing and advertising of their
products. Companies also provide automotive
financing services to and through dealerships. The
financial arm of automobile companies provides
I Industry composition is based on the mapping of the Sustainable Industry Classification System (SICSTM) to the Bloomberg Industry Classification System (BICS). A list of representative companies appears in Appendix I.
various options for new and used vehicles purchased
by retail and fleet consumers. The financing function
is key to maintaining sales of vehicles, as the typical
borrower is unable to obtain financing from more
traditional sources.
Automobile, light truck, and motorcycle
manufacturers are known as the original equipment
manufacturers (OEMs). They buy parts from many
suppliers to assemble a final product for sale under
their brand. Tier 1 suppliers are those that supply
parts directly to OEMs, and therefore are most
closely connected to the OEMs. Tier 2 suppliers are
those that provide inputs for Tier 1 suppliers, Tier 3
suppliers usually provide inputs to Tier 2, and so on.
A number of Tier 1 suppliers, also known as captive
suppliers, are owned and operated by OEMs. These
suppliers include engine and stamping facilities,
although some of the largest are now independent
again (e.g., Delphi Automotive, Denso Corporation,
and Visteon Corporation).
The global automobiles manufacturing market is
valued at about $2 trillion in revenues.3 Companies
listed on the U.S. exchanges generate over $680
billion from the industry. According to Bloomberg, in
2013, the global sales of automobiles were about
76.3 million units. The largest market was Asia-
Pacific, accounting for 47.6 percent of unit sales.
China accounted for 60 percent of Asia-Pacific sales.
The U.S. accounted for approximately 20 percent of
the global vehicle sales.4
Due to the global nature of this industry, nearly all
market players have manufacturing facilities,
assembly plants, and service locations in several
countries across the world. Political pressure in
countries with domestic car manufacturers has
forced industry players to locate final assembly
plants in these countries rather than export
assembled cars.5 For cars produced in the U.S.
(excluding SUVsII and light trucks), 52.6 percent are
exported to Canada, Germany, China, and Saudi
II Sport Utility Vehicles
I N D U S T R Y B R I E F | A U T O M O B I L E S | 2
Arabia. The rest is sold domestically and split
somewhat equally between dealerships (14.2
percent of total sales by revenue), wholesalers (12.6
percent), rental companies (12.1 percent), and the
government (8.5 percent).6 For SUVs and light
trucks, the demand is lower abroad with exports
only representing 18.8 percent of industry revenue.
A majority of SUVs (61 percent) is sold through
wholesalers and dealerships. The remaining 20.2
percent is sold to government and leasing
companies.7
The Automobiles industry is oligopolistic, with a few
large manufacturers and a large number of auto
parts manufacturers feeding the supply chain. In
2013, there were only six car manufacturers and one
motorcycle manufacturer listed on U.S. exchanges. It
is a mature industry with slow revenue growth and
generally low profit margins. In 2013, the median
operating margin for companies traded in the U.S,
including those traded primarily over-the-counter,
was 5.6 percent. Meanwhile, the median net income
margin was 4.9 percent, which has been relatively
flat compared to the year before.8
The 2008 financial crisis had a significant impact on
the Automobiles industry in the U.S. Sales plunged,
and balance sheets loaded with liabilities put some
companies on a line of bankruptcy. According to a
report by the World Bank, “[h]uge debt loads, high
fixed-capital costs, high labor costs, and immense
pension and health care commitments to retirees
added to the immediacy of the damage.”9 The
impact was felt along the value chain among both
dealerships and suppliers. In the U.S., already
declining dealership numbers fell more drastically,
from 20,770 in 2008 to 17,635 in 2013, a 15
percent decrease.10 While the recession had a
dramatic effect on parts imports, which declined at
an average annual rate of 20.2 percent from 2008
to 2009, the impact on U.S. auto parts plants was
even more severe.11
As the automation of automobile manufacturing
process increases, the industry becomes more capital
intensive, while labor intensive components are
outsourced and purchased in modules.12 Mostly,
automobile manufacturers are involved in the design
and assembly of the final product and source
components from suppliers. Purchases of auto parts
and raw materials are the largest cost component, at
78.1 percent of revenue for cars and 72.8 percent
for SUVs and light trucks. Wages, the second largest
expense, accounted for just over six percent of
revenue. Notably, marketing costs for cars, SUVs,
and light trucks are around four percent of
revenue.13 14 Lower passenger car densities in China
(34 vehicles per 1,000 inhabitants as of 2013) and
India (15 vehicles per 1,000 inhabitants) compared
to developed markets demonstrate the growth
potential in emerging markets.15 According to
Goldman Sachs, BRIC markets (Brazil, Russia, India,
and China) are expected to account for three-
quarters of growth in automotive sales between
2011 and 2020.16 At the same time, the market is
reaching saturation in developed economies.
According to the World Bank, the U.S. and Australia
had 797 and 695 vehicles per 1,000 people in 2010,
respectively.17
Due to growing demand from emerging markets
and increasing fuel prices, the market is shifting
towards smaller, lighter, more fuel-efficient vehicles.
Therefore, consumer preference and environmental
regulations are driving demand for alternative fuel
and high-efficiency vehicles. From 2012 to 2013, the
U.S. sales of electric vehicles increased by 228
percent, and sales of plug-in hybrids increased by
almost 27 percent—for sales of 46,148 and 48,951
cars respectively.18
Moreover, the amount of electronic content in
vehicles is increasing. Automobile manufacturers
invest in research and development of ‘smarter’
vehicles that are also safer to drive. At the same
time, it exposes companies in the industry to the
risks associated with reliance on critical and conflict
I N D U S T R Y B R I E F | A U T O M O B I L E S | 3
materials that are used to a greater extent in
automobile manufacturing.
LEGISLATIVE AND REGULATORY TRENDS IN THE AUTOMOBILES INDUSTRY
In the U.S., the Automobiles industry is subject to
multiple federal regulatory standards, including
those related to safety, fuel economy, emissions
control, use of substances of concern, vehicle
damage, and theft prevention. In addition, the
industry must comply with local regulations related
to the use and disposal of end-of-life vehicles (ELV).
The following section provides a brief summary of
key regulations and legislative efforts related to this
industry.III
On the environmental side, the industry is subject to
a number of regulations and standards including
fuel efficiency, use of chemicals, waste
management, and end-of-life management. The
large and growing number of vehicles on roads is
creating environmental and social concerns.
Regulatory responses to these concerns may affect
long-term sales of automobiles, particularly those
with low fuel efficiency or higher emissions. For
example, cities like London, Singapore, Oslo, and
Stockholm are imposing congestion charges and
other measures to limit the number of vehicles on
city roads.19
Regulations on car emissions and fuel efficiency are
growing more stringent across the globe. For
example, in October 2013, the governors of eight
states pledged to work together to create charging
stations and fueling infrastructure to facilitate
getting 3.3 million vehicles on the roads by 2025.20
In the U.S., a sales-weighted average fuel economy
of 54.5 miles per gallon (mpg) is mandated by the
III This section does not purport to contain a comprehensive review of all regulations related to this industry, but is intended to highlight some ways in which regulatory trends are impacting the industry.
2025.21 In California, 4.5 percent of manufacturers’
state sales in 2018 must be zero emission vehicles
(ZEV), or a mixture of ZEV and plug-in hybrid.22 Auto
OEMs, and to a lesser extent particular auto parts
manufacturers, have an important role to play in
increasing the uptake of alternative vehicles through
investments in infrastructure (such as stations to
charge plug-in electric vehicles) that support these
new technologies.
E.U. regulations are more rigorous and based on tail
pipe emissions. By 2020, vehicles sold in the region
will be allowed to emit no more than 95 grams of
carbon dioxide per kilometer (g CO2/km), using a
sliding scale based on vehicle weight. IV Non-E.U.
countries like Canada, Mexico, and many countries
in Asia-Pacific are adopting fuel economy and
emissions standards with specific regulations around
disclosure of vehicle fuel economy at point of sale.
In addition, many countries have introduced
incentives to support the commercialization of
electric vehicles (EV) through subsidies, tax rebates
and fee waivers. The U.S. offers a fixed amount
federal tax rebate for electric and hybrid
vehicles.23, 24 In the U.K., a subsidy is available as a
percentage of the cost of the vehicle: 20 to 25
percent off the cost of plug-in cars and vans.25
China, the world’s largest automobile market, is
encouraging development and sales of alternative
fuel vehicles as a means of reducing pollution and
dependence on foreign oil. At least 30 percent of
government vehicle purchases must be electric cars
by 2016. Additionally, there is an exemption on
purchase tax for new energy vehicles from
September 2014 until the end of 2017.26
The E.U. End-of-life Vehicles Directive is built on the
concept of extended producer responsibility. It is
designed to encourage auto manufacturers to “limit
the use of hazardous substances in their new
vehicles; design and produce vehicles which facilitate
re-use and recycling; [and] develop the integration
IV 95 g/km is roughly equivalent to 57 mpg.
I N D U S T R Y B R I E F | A U T O M O B I L E S | 4
of recycled materials.”27 According to the directive,
95 percent of a vehicle by weight must be
recoverable, and 85 percent recyclable by 2015.
Since July 2003, the E.U. has banned the use of
mercury, hexavalent chromium, cadmium, and lead
in the components of vehicles placed on the
market.28
The industry is also subject to regulations that aim to
limit social externalities. Motor vehicle safety is
regulated by the U.S. National Traffic and Motor
Vehicle Safety Act of 1966. Vehicles must be
recalled if any safety standard is not met. Meeting
safety standards can conflict with emissions and fuel
economy standards, since additional safety measures
can add weight to a vehicle and reduce its fuel
economy.29 Countries have safety regulations that
are likely to become more stringent in the future,
specifically in the E.U., where the focus has been on
active features, such as stability control and
automatic brake assistance.30
The National Highway Traffic Safety Administration
(NHTSA) is a federal agency and a part of the
Department of Transportation. NHTSA was
established to carry out safety programs under the
National Traffic and Motor Vehicle Safety Act of
1966 and the Highway Safety Act of 1966. The goal
of these programs is to reduce deaths, injuries, and
economic losses resulting from motor vehicle
crashes. The NHTSA sets and enforces safety
performance standards for motor vehicles and motor
vehicle equipment.31 It has the authority to order the
recall of automobiles and automotive products,
including tires that have safety-related defects.
Vehicles must be recalled if any safety standard is
not met. The Transportation Recall Enhancement,
Accountability, and Documentation Act, or TREAD
Act, enacted on November 1, 2000, imposes
numerous requirements on OEMs and auto parts
manufacturers with respect to early-warning
reporting of warranty claims, property damage
claims, and bodily injury and fatality claims.32 To
provide consumers with information about the crash
protection and rollover safety of new vehicles
beyond what is required by Federal law, in 1978 the
NHTSA created the first New Car Assessment
Program (NCAP) - 5-Star Safety Ratings. The safest
cars are ranked with five stars.33 In Europe, the
NCAP was founded in 1997.34
Furthermore, companies in the industry are
specifically impacted by the Dodd-Frank Act of 2010
and subsequent rules adopted by the U.S. Securities
and Exchange Commission (SEC). Under the Dodd-
Frank Act companies are required to publicly disclose
their use of “conflict minerals” if those materials are
“necessary to the functionality or production of a
product” that the company manufactures, or
contracts to be manufactured. These minerals
include tantalum, tin, gold, or tungsten originating
in the Democratic Republic of Congo or neighboring
countries.35
SUSTAINABILITY-RELATED RISKS AND OPPORTUNITIES
Industry drivers and recent regulations suggest that
traditional value drivers will continue to impact
financial performance. However, intangible assets
such as social, human, and environmental capitals,
company leadership and governance, and the
company’s ability to innovate to address these issues
are likely to increasingly contribute to financial and
business value.
Broad industry trends and characteristics are driving
the importance of sustainability performance in the
Automobiles industry:
• Use-phase environmental and social
externalities: The most significant
environmental and social impacts of OEMs
occurs at the use-phase of automobile rather
than during assembly. Design decisions and
other innovation can significantly reduce the
lifecycle environmental impacts of
I N D U S T R Y B R I E F | A U T O M O B I L E S | 5
automobiles, while allowing companies to
meet growing market demand for more
energy efficient and clean vehicles. Similarly,
the Automobiles industry faces increasingly
stringent regulations on passenger safety,
creating incentives to constantly improve car
safety features.
• End-of-life management. The large and
growing number of vehicles on roads is
putting pressure on OEMs to manage
environmental externalities at end-of-life of
vehicles. They can do this by improving
recyclability and recycling of vehicles, as well
as minimizing the use of hazardous
substance.
• Resource scarcity: Car manufacturing is a
material-intensive process that is impacted by
growing resource scarcity and increasing
prices on critical materials.
As described above, the regulatory and legislative
environment surrounding the Automobiles industry
emphasizes the importance of sustainability
management and performance. Specifically, recent
trends suggest a regulatory emphasis on reduction
of environmental impacts and high safety standards,
which will serve to align the interests of society with
those of investors.
The following section provides a brief description of
each sustainability issue that is likely to have
material implications for companies in the
Automobiles industry. This includes an explanation
of how the issue could impact valuation and
evidence of actual financial impact. Further
information on the nature of the value impact,
based on SASB’s research and analysis, is provided in
Appendix IIA and IIB. Appendix IIA also provides a
summary of the evidence of investor interest in the
issues. This is based on a systematic analysis of
companies’ 10-K and 20-F filings, shareholder
resolutions, and other public documents. It is also
based on the results of consultation with experts
participating in an industry-working group convened
by SASB.
A summary of the recommended disclosure
framework and accounting metrics appears in
Appendix III. The complete SASB standards for the
industry, including technical protocols, can be
downloaded from www.sasb.org. Finally, Appendix
IV provides an analysis of the quality of current
disclosure on these issues in SEC filings by the
leading companies in the industry.
ENVIRONMENT
The environmental dimension of sustainability
includes corporate impacts on the environment. This
could be through the use of natural resources as
inputs to the factors of production (e.g., water,
minerals, ecosystems, and biodiversity) or
environmental externalities and harmful releases in
the environment, such as air and water pollution,
waste disposal, and greenhouse gas (GHG)
emissions.
In the Automobiles industry, advances in
manufacturing process can serve to reduce the
lifecycle environmental impacts of automobiles.
From an economic standpoint, reducing
manufacturing waste improves operational efficiency
as the costs of inputs tend to increase over time.
Management of end-of-life vehicles provides auto
manufacturers with a reliable source of cheaper
materials while significantly reducing the amount of
landfilled waste.
Most of the GHG emissions generated during a
lifecycle of a vehicle occur at its use-phase. Use-
phase emissions and fuel efficiency are discussed in
the “Business Model and Innovation” section of the
brief.
I N D U S T R Y B R I E F | A U T O M O B I L E S | 6
Materials Efficiency & Recycling
The lifecycle environmental impacts of automobiles
include impacts during the manufacturing process,
the use-phase, and the end-of-life phase.
Automobile companies can use design innovation as
well as process and technological improvements to
mitigate these impacts, and achieve material
financial benefits. The automobile manufacturing
process involves the use of significant amounts of
materials, (including steel, iron, aluminum, and
plastics among others) and can generate substantial
amounts of solid waste (including scrap metal, paint
sludge or shipping materials).
In addition, every year, millions of vehicles reach the
end of their useful lives globally. At the same time,
the rate of vehicle ownership is expanding globally,
and leading to higher numbers of end-of-life
vehicles (ELV).36 Recycling rates and amounts
recovered per vehicle vary by country; in the U.S.,
about 95 percent of vehicles that reached end-of-life
were disassembled for recycling.37 Industry efforts
have led to roughly 80 percent of a vehicle by
weight being recovered and recycled in the U.S.
Manufacturers strive to recover and recycle the most
valuable materials, such as aluminum, which
represents less than 10 percent of weight, but
accounts for almost a half of a vehicles’ value as a
scrap.38 The remaining 20 percent, known as auto
shredder residue (ASR), which includes plastics,
rubber, wood, paper, fabric, glass, and metal parts,
is usually landfilled.39 Landfilled waste generated
during manufacturing processes, as well as from
ELV, can contain harmful substances that affect
human health and the environment.
For automobile companies, there are both risks and
opportunities associated with materials efficiency
and recycling. Cost of purchases, which includes the
cost of auto parts as well as raw materials, is a
significant expense item for auto manufacturers. In a
resource-constrained world, prices on materials with
limited a supply, such as aluminum, are likely to
increase going forward. Therefore, process
innovation aimed at improving resource efficiency,
both in manufacturing and in utilizing ELV, is likely
to help OEM companies reduce their operating
expenses. It will also help OEM companies protect
themselves from price or supply volatility for virgin
input materials.
Several countries, including E.U. countries, Japan,
and South Korea, have regulations in place requiring
a certain percentage of vehicles by weight to be
recyclable and reusable. These laws also set targets
for the proportion of each vehicle that must be
recycled, and require companies to take back cars,
often at no cost to the consumer. These regulations
pose increasing compliance costs for companies, but
are also an added incentive to recover and recycle
materials that can then be monetized through sales
or reduced manufacturing costs. ELV regulations are
also prompt innovation to recycle ASR, which is
typically sent to landfills, as it is difficult to recycle.
They also require a significant percentage of a
vehicle to be recycled.40
Companies innovating and continuing to improve
materials efficiency—including reducing waste,
reusing or recycling of waste and scrapped vehicles
in their production processes through vehicle take-
back and recycling programs—can contribute to
lowering the lifecycle environmental impacts of
vehicles. They can also reduce the strain on natural
resources from the production of new materials.
Furthermore, they can achieve cost savings, generate
additional revenues, and protect themselves from
regulatory risk and materials supply risks.
Therefore, company performance in this area can be
analyzed in a cost-beneficial way internally and
externally through the following direct or indirect
performance metrics (see Appendix III for metrics
with their full detail):
• Amount of total waste from manufacturing,
percentage recycled;
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• Weight of end-of-life material recovered,
percentage recycled; and
• Average recyclability of vehicles sold, by
weight.
Evidence As mentioned in the Industry Summary, cost of
purchases, which includes auto parts and raw
materials inputs, accounts for a majority of costs for
the industry, at 80 percent of revenue. Automobiles
contain significant amounts of ferrous metals, base
metals, and plastics. Steel represents almost half of
vehicle composition by weight, followed by iron.41
However, aluminum continues to gain popularity
among car manufacturers due to its lightweight
qualities. With the industry trend towards improving
fuel efficiency of vehicles, aluminum content in
vehicles is currently growing at about five percent a
year, and the growth is expected to accelerate in the
next decade.
Sourcing virgin materials, particularly aluminum, can
create supply risks for auto manufacturers. Morgan
Stanley estimates a 29 percent increase in aluminum
prices by 2018 as demand from the industry is likely
to outstrip supply.42 Therefore, automobile
manufacturers able to retract, remanufacture, and
recycle materials (both from the waste generated in
their manufacturing processes and also from end-of-
life vehicles) will better protect themselves from
increasing materials prices, as well as ensure their
supply. At the same time, such recycling can provide
significant environmental benefits. Recycling
aluminum requires 95 percent less energy than
making it from scratch.43
Diverting waste from landfills, recycling, and reuse
of materials also present an area of opportunity for
the Automobiles industry. In the U.S., industrial
facilities, such as those used by auto manufacturers,
generate and dispose of 7.6 billion tons of
nonhazardous industrial waste annually.44 Between
2007 and 2010, GM generated $2.5 billion in
revenue by selling reprocessed byproducts from its
facilities.45 The company also uses byproducts from
manufacturing operations in components for new
vehicles.46 Byproduct recycling and reuse generated
about $1 billion in revenue for the company in 2012
alone.47
GM has 111 landfill-free facilities, including 83
landfill-free manufacturing facilities, and the
company recycles or reuses 84 percent of its global
manufacturing waste. The company recycled 2.2
million tons of waste in 2013. These efforts helped
to reduce total waste generated per vehicle by 10
percent, or more than 45 kg/vehicle, from 2010 to
2013.48 In its 10-K Form for the fiscal year 2013, GM
stated the following: “our landfill-free program and
total waste reduction commitments generate
revenue from the sale of production byproducts,
reduce our energy costs, and help to reduce the risks
and financial liabilities associated with waste
disposal.”49 Ford also recognizes opportunities
related to materials reuse and recycling. In 2012, the
company recycled 568,000 tons of scrap metal from
manufacturing worth $225 million.50
Subaru’s Indiana plant pioneered the concept of
“zero landfill” car manufacturing facilities by
recycling 99 percent of waste from the plant and
producing electricity from the remaining 1 percent.
In 2006, the plant recycled 11,000 tons of steel.
While some processes like the paint solvent recovery
system were more expensive than others, the
company expects the systems to take at most seven
years to payback.51
Several other automakers are moving towards zero-
waste-to-landfill goals attracted by the cost-saving
and revenue generating opportunities, including
Toyota with its European facilities. In its Form 20-F
for FY 2013, the company states that it expects to
“improve profitability and enhance operating
efficiency by continuing to pursue aggressive cost
reduction programs.” This includes activity aimed at
the elimination of waste in all processes from design
to production. Moreover, the company identifies
I N D U S T R Y B R I E F | A U T O M O B I L E S | 8
regional environmental regulations with which it
must comply, and risks associated with failing to do
so.52
The U.S. automotive industry generates over 75
million pounds of paint sludge annually.53 Leading
companies in the industry are investing in improving
the efficiency of paint application, thereby reducing
paint sludge. Honda invested in a new paint line that
reduces paint sludge by about 25 percent.54 Chrysler
Group uses an exterior basecoat application process
at several of its paint shops that deposits 85 percent
of paint on the vehicle surface (compared to 55
percent using a conventional paint-gun system). In
addition to reducing paint waste, this method saved
Chrysler nearly $900,000 annually.55 By utilizing
paint recycling systems, companies are able to turn
waste into useful inputs and ultimately save costs.
Apart from recycling waste generated in
manufacturing, auto companies can also benefit
from taking back and recycling vehicles when they
reach the end of their useful lives. According to the
EPA, each year, nearly 27 million cars worldwide
reach the end of their useful lives and most are
recovered for recycling. Nevertheless, the EPA
reports that five million tons of ASR are disposed of
in landfills every year.56 If diverted from landfills,
much of the material from vehicles can be recycled
or repurposed for use, enabling cost savings and
revenue generation opportunities. At the same time,
new regulations related to vehicle end-of-life could
create regulatory compliance costs or lead to
penalties for auto companies.
To reduce environmental externalities related to the
limited availability of landfill space, the E.U. created
the ELV Directive, which established a minimum of
95 percent of ELVs (by weight) must be reused or
recovered. It also established that 85 percent be
reused and recycled by January 1, 2015.
Furthermore, under the E.U. ELV Directive, car
manufacturers and ELV treatment facilities are
required to take back vehicles free of charge.
However, public authorities or car manufacturers
have the option to cover the cost of free take-back
programs through an additional charge on the sale
of new cars. 57 Nonetheless, such a charge, if
significant, could impact sales of automobiles. In
Japan, individual vehicle owners pay a recycling fee
in advance; however, car manufacturers are
physically and financially responsible for auto-
shredder residues, ozone-depleting
chlorofluorocarbons (CFCs), and airbags.
Companies that are able to implement effective and
efficient take-back and recycling programs can
therefore lower the impacts on their costs or sales
from such laws compared to their peers, and even
make profits on the recycling and reuse of materials.
In 2006, the first year that Japan’s ELV directive
went into effect, Toyota, Mazda, and Mitsubishi
reported combined losses of ¥79.5 million as their
spending for recycling exceeded receipts from fee
deposits, while Honda and Nissan reported a
combined profit of ¥255.9 million from the recovery
and recycling activities.58
Some companies not only meet the local ELV laws,
but also substantially exceed required recovery and
recycling rates, often due to the cost savings that
can be achieved. In 2013, Nissan achieved a recovery
ratio of 97.2 percent by recovering 112,507.2 tons
of ASR from 533,836 vehicles in Japan. The
company also recovered over 1.6 million airbag-
related products from almost 450,000 vehicles, by
which it significantly surpassed the required
recycling ratio. Overall, the Nissan recycling
initiatives helped the company to save more than
$29 million, or $5 per vehicle, throughout the 2004
to 2013 period.59 Moreover, the company works
closely with business partners to collect and recycle
aluminum wheel rims. In 2013, Nissan recovered
2,700 tons of wheel rims.60
Nissan carries out experimental studies to optimize
processing and improve the recovery rate for ELVs.
Feedback from the studies helped the company to
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improve its dismantling techniques. It also helped
gear the designing process towards the use of
suitable materials and vehicle design that is easy to
dismantle. According to the company, the
recoverability rate for its ELVs in Japan has been at
least 95 percent since 2006 and 99.5 percent in
2013.61
To ensure that most of their vehicles are recycled,
auto manufacturers may have to establish
relationships with third parties for take-back
programs. In their SEC filings, the top companies in
the industry link the existence of such relationships
to increased recycling rates. For example, by
coordinating with “relevant parties,” Toyota
established a vehicle take-back and recycling system
throughout Japan, which helped the company to
achieve a recycling rate of 96 percent.62 Tesla has an
agreement with a third party battery recycling
company to recycle its battery packs. Moreover, if a
customer wishes to dispose of a battery pack from a
Tesla vehicle, the company will accept it for no cost
to the customer.63
Value Impact Companies that are able to limit the waste of metals
and plastics used in production and recycle the
waste generated can achieve significant savings in
operating costs. This is particularly important as
prices of certain raw materials, such as aluminum,
are expected to increase in the future. Through
investments (including R&D) in materials efficiency
and recycling, companies can improve operational
efficiency and can lower their cost structure over
time, and they will be better positioned to mitigate
the impacts of scarcity and price increases of raw
materials. Selling by-products from the
manufacturing process can also be a source of
revenue for auto manufacturers.
Stricter regulations around end-of-life management
require higher recyclability rates of manufactured
vehicles as well as actual recycling rates of disposed
cars. These regulations can increase compliance
costs for companies, and in some cases could lower
sales if costs of recycling are passed on to
consumers. Noncompliance with regulations may
lead to civil penalties, resulting in extraordinary
expenses. Conversely, car manufacturers can achieve
significant cost savings by remanufacturing ELVs,
and can protect themselves from input price
increases or volatility.
The percentage of waste recycled, together with
amount of recycled materials used in the
manufacturing process, indicates how well the
company is maximizing resource efficiency in the
face of resource scarcity.
SOCIAL CAPITAL
Social capital relates to the perceived role of
business in society, or the expectation of business
contribution to society in return for its license to
operate. It addresses the management of
relationships with key outside stakeholders, such as
customers, local communities, the public, and the
government.
In the Automobiles industry, social capital issues
revolve around the safety of vehicles manufactured
and social externalities that may result from a failure
to ensure driver and passenger safety. The ability of
companies to manage product quality and safety is
critical to protecting their reputation and license to
operate, and therefore their brand value.
Product Safety
Driving is a risky activity, as distracted driving,
speeding, drunk driving, dangerous weather
conditions, and sometimes vehicle defects, among
other factors, can lead to accidents exposing drivers,
passengers and bystanders to possible injuries and
deaths. The Center for Disease Control and
Prevention (CDC) cites motor vehicle crashes as one
of the leading causes of death in the U.S. According
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to the World Health Organization, traffic injuries are
the leading cause of death worldwide for those
between ages 10 and 24.64 The total number of road
traffic deaths is 1.24 million per year globally.65
Public safety policies and regulations around the
world are driving innovations in automobile design
and production, including the use of information
technology to continuously improve the safety of
passenger vehicles. While safety features such as
seat belts, air bags, and crumple zones have
improved occupant safety in the event of a crash,
technologies are now being applied towards
prevention of accidents. Furthermore, in low-income
countries, pedestrians constitute the greatest
percentage of road traffic deaths.66 Vehicle design
can reduce the risk and severity of pedestrian
impact.
Defective vehicles can also cause accidents. Failure
to detect these defects before the vehicles are sold
can have significant financial repercussions for auto
manufacturers. For example, vehicles sold in the U.S.
must meet safety requirements or else they must be
recalled and the feature repaired or replaced at the
manufacturer’s cost. In addition, manufacturers
must provide warranties to insure customers against
the risk of purchasing a defective vehicle. Growing
automobile ownership in developing countries like
China and India has led to increased traffic
accidents. Vehicle safety regulations in these
countries are becoming more stringent, creating
potential liabilities for companies with defective
products.67
Automobiles that meet safety regulatory
requirements, as well as those automobiles that
feature crash avoidance technologies, are likely to be
in greater demand from consumers. Companies that
fail to produce defect-free vehicles may open
themselves to lawsuits leading to significant
compensations.
Company performance in this area can be analyzed
internally and externally through the following direct
or indirect performance metrics (see Appendix III for
metrics with their full detail):
• Percentage of models rated by NCAP
programs with overall 5-star safety rating, by
region;
• Number of safety-related defect complaints,
percentage investigated; and
• Number of vehicles recalled.
Evidence Ensuring vehicle safety and responding in a timely
manner when defects are identified can protect
companies from regulatory action or customer
lawsuits, which can affect company profitability
through one-time costs and contingent liabilities.
Through effective management of the issue,
companies can enhance reputation and brand value
and drive higher sales over the long term.
In addition to the federal laws mentioned earlier
regarding recalls and warranties, all U.S. states have
some form of “lemon law,” which protects
customers who purchase products that repeatedly
fail to meet quality and performance standards. For
example, under the Song-Beverly Consumer
Warranty Act, cars purchased or leased in California
that are under warranty and have been taken to an
authorized dealer for addressing the same problem
four times or more are entitled to benefits.
Customers can choose either a refund or a
replacement vehicle at the manufacturer’s cost.
Product recalls represent a significant cost for
companies and have a negative impact on brand
value. From 1990 through September 2013, there
were 3,303 recalls in the U.S. that affected nearly
385 million vehicles. The U.S. “Detroit 3” (General
Motors (GM), Ford, and Chrysler) alone accounted
for 1,530 recalls and 260 million recalled vehicles.
Fuel systems and service brakes were the most
common reasons accounting for 290 and 315 recalls
respectively, followed by airbags and seatbelts, with
267 and 252 recalls respectively. According to data
from the National Highway Traffic Safety
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Administration (NHTSA), the number of light-vehicle
recalls has doubled in the last 20 years. In the period
from 2012 to 2013, there was an average of one
recall every two to three days. This shows the
potential for significant safety improvements in
automobiles. Seventy-eight percent of the 3,303
recalls were initiated by manufacturers.68
Automobile manufacturers able to recognize safety
issues in their vehicles in a timely manner and
initiate voluntary recalls may minimize costs. They
can minimize costs by avoiding regulatory
intervention and potential penalties, as well as
contingent liabilities for failure to promptly address
safety issues. In 2012, Volvo agreed to settle a case
wherein the company was allegedly delaying seven
recalls related to incorrect tire pressure labeling. The
payment amounted to $1.5 million and was to be
paid to the federal government. NHTSA may fine a
single automaker up to $17.35 million. In 2010, the
agency fined Toyota $16.4 million for failure to
promptly initiate correction of sticky accelerator
pedals on 2.3 million vehicles.69
Costs associated with recalling vehicles are
significant and are likely to have a negative impact
on a company’s financial results and market
valuation. In 2014, a four-year criminal investigation
into Toyota’s reporting of problems related to
unintended acceleration resulted in a record $1.2
billion settlement with the U.S. government.70
According to the Department of Justice, “individual
employees not only made misleading public
statements to Toyota’s customers, but also
concealed from Toyota’s regulator one safety-related
issue and minimized the scope of another.”71 A
month after the settlement, Toyota announced the
second-largest recall in its history, recalling
approximately 6.5 million cars for five different
faults involving parts ranging from steering to seats.
The recall is likely to cost the company about ¥60 to
¥70 billion, or ¥10,000 (around $100) per vehicle.
The market responded to the announcement with a
3.1 percent drop in Toyota’s share price.72
In addition to recall-related costs, companies may
also have to pay compensation to parties affected by
the defects. In 2014, GM initiated recalls that
affected more than 30 million automobiles
worldwide.73 Defective ignition switches in GM cars
were linked to 54 crashes and 13 deaths from 2003
through 2011.74 Recall-related costs and
compensation to families of the victims amounted to
$2.5 billion, which led to an 80 percent drop in the
automaker’s net profit in the second quarter of
2014. The company’s shares fell 4.5 percent after
the quarterly results were announced.75
Companies in the industry recognize the material
impacts of recalls on their operations in their SEC
filings. In its Form 10-K for FY 2012, GM states that
it has accrued $7.39 million in contractual
obligations for policy, product warranty, and recall
campaigns liability from 2013 onwards.76 In its FY
2012 filings, Ford reported that it recorded
$2.25 million for warranty cost accruals. These are
estimated future costs for basic warranty coverage
and field service actions (e.g., product recalls and
owner notification programs) on products sold,77
based on historical warranty claim experience. While
these amounts are relatively small compared to
other expenses, they are recurring, and product
safety-related incidents can quickly rise to significant
amounts. In the form 20-F filed with the SEC, Toyota
states its “Liabilities for recalls and other safety
measures” for the year ending March 31, 2014 were
at ¥680,475 million (approx. $6.34 billion). That is a
rise from ¥566,406 million the year before, a 20
percent increase.78 Between 2009 and 2012, Harley-
Davidson initiated 12 voluntary recalls, which cost
the company a total of $17.2 million.79
In extreme cases, OEMs may be required to buy back
vehicles that do not meet safety requirements. For
example, American electric vehicle producer ZAP
reported a $2.1 million increase in accrued recall
expenditure in 2012 due to estimated recall costs for
the Model-Year 2008 XEBRA sedan.80 The U.S.
Department of Transportation ordered ZAP to buy
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back the vehicles that did not meet braking
requirements for instances when the vehicles are
operating at maximum speed.
In addition to expensive fines, product liability
lawsuits by consumers can be a significant expense.
The 2012 Dykema Automotive Survey reaffirmed the
importance of this issue. In the survey of 100 OEMs
and automotive suppliers, 22 percent of the
respondents reported an increase in class-action
lawsuits. Additionally, 78.6 percent of OEM
respondents identified ‘product liability’ as the single
type of class action that is the biggest threat to their
company.81
With technology advances, vehicles feature
increasing amount of electronics. Many of the
features are aimed at reducing risks of crashes.
According to the NHTSA Crash Causation Survey,
distractive driving is the main cause of car
accidents.82 The NHTSA further estimates that
electronic stability control (ESC), a computerized
technology that detects and reduces loss of traction
and improves a vehicle’s stability, saved 1,144 lives
of passenger car and light truck occupants. The
number of lives saved has been increasing since
2008, since more cars being manufactured are
equipped with ESC. In 2012, 100 percent of light
trucks and passenger cars manufactured included
ESC.83
In 2013, the Insurance Institute for Highway Safety
(IIHS) issued a rating to help consumers decide
which safety features to consider when choosing a
vehicle. The IIHS initiative should also encourage
automobile manufacturers to develop and adopt
new safety technologies. Such technologies as
autobrake and forward collision warning helped
several models, including the Cadillac ATS sedan,
Mercedes-Benz C-Class sedan, and Subaru Legacy,
to earn the highest rating.84
Companies continue to innovate. GM is working
with NHTSA to develop vehicle-to-vehicle
communication protocols, a collision warning
system. Such technology would enable vehicles to
warn drivers of traffic hazards, thus improving road
safety. In 2016, GM is planning to release a Cadillac
model that would “[f]eature ‘Super Cruise’
technology that takes control of steering,
acceleration and braking at highway speeds of 70
miles per hour or in stop-and-go congested
traffic.”85
Value Impact Inherent safety of vehicles can be a driver of
competitiveness and can therefore impact market
share and revenue. Longer-term, performance on
safety—either positive or negative—is an important
factor in OEMs’ brand value and long-term revenue
growth prospects.
Major safety incidents may occur with low
probability, but they have high-magnitude impacts
on company value, increasing operational risks and
ultimately the cost of capital. More frequent but
smaller incidents may lead to a higher cost structure,
including through warranty costs. Safety concerns or
incidents can also lead to voluntary or mandated
recalls with material impact on a company’s
profitability and its liabilities. Recall expenses can be
significant and can include business interruption,
product disposal costs, costs of supplying
replacements, customer payments, transportation
costs, investigation costs, regulatory fees, and fines.
The period of a recall is likely to be characterized by
lower sales and increased extraordinary expenses.
Recalls can also cause consumers to question the
safety and reliability of products, leading to
reputational damage and loss of brand value, with
long-term loss of market share and impact on
revenue growth.
The percent of vehicles sold that have a high safety
rating is an indicator of how well auto makers are
responding to increasing consumer demand for safe
vehicles and safety features that help prevent
accidents. The number of safety complaints and
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percentage of those that are investigated provide a
sense of actual safety performance beyond model
safety rating, and indicate companies’ proactive
approach to safety management for their existing
fleet. The number of vehicles recalled provides a
measure of past performance on vehicle safety
beyond high-publicity events, as well as an
indication of the probability and magnitude of
safety-related incidents. Percentage of recalls
voluntarily issued also provides indication of a
company’s proactive approach to managing safety in
existing fleets.
HUMAN CAPITAL
Human capital addresses the management of a
company’s human resources (employees and
individual contractors), as a key asset to delivering
long-term value. It includes factors that affect the
productivity of employees, such as employee
engagement, diversity, and incentives and
compensation, as well as the attraction and
retention of employees in highly competitive or
constrained markets for specific talent, skills, or
education. It also addresses the management of
labor relations in industries that rely on economies
of scale and compete on the price of products and
services. Lastly, it includes the management of the
health and safety of employees and the ability to
create a safety culture for companies that operate in
dangerous working environments.
In the Automobiles industry, human capital issues
revolve around the dependence on a large number
of factory workers who are often unionized and
have a strong bargaining power. Even though
manufacturing processes have become increasingly
automated over time, automakers still employ a
large number of employees from management
executives and engineers to factory workers.
Moreover, American auto companies have greater
burdens from legacy pensions than some of their
foreign counterparts who started production in the
U.S. more recently. Therefore, ensuring reliable and
low-cost manufacturing requires an active
management of labor relations with assembly and
other factory workers.
Labor Relations Labor relations play an important role in the
Automobiles industry, in which wages account for
the second largest expense item. Many auto workers
belong to unions with strong bargaining powers.
Labor unions are prevalent in industries where there
are complete labor contracts, in which the
conditions of the contract are explicitly stated when
it is signed. For example, complete contracts exist in
assembly line manufacturing—either a worker keeps
up with the line or not. Under incomplete labor
contracts, higher performance can be reciprocated
with higher wages. In contrast, such characteristics
are not present in complete labor contracts and so
wages tend to be low. Therefore, unions play an
important role in protecting worker rights and
negotiating higher wages.86
In countries with strong labor laws or union
representation, wages tend to be higher than in
countries without strong worker laws and
enforcement, representing, to an extent, better
protection of worker rights. In the U.S., automobile
factory workers have historically been well paid, with
generous pensions and other benefits.87
Nonetheless, costs of poor labor relations and
unsatisfactory treatment of workers can be higher in
such countries. Poor labor management can affect
companies’ ability to negotiate with unions and can
lead to expensive work stoppages. At the same time,
without early engagement, unions may limit the
ability of companies to quickly adjust labor expenses
and the size of their workforce in response to
competitive pressures or adverse economic
conditions. When faced with bankruptcy and
potential mass layoffs during the 2008-09 financial
crisis, partly due to untenable pension liabilities and
competition from foreign auto makers, management
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of U.S. auto companies and labor unions agreed to
renegotiate contracts and curtail benefits as a way
to reduce costs and liabilities.88
Companies with newer operations in the U.S. have
lower unionization rates and pension liabilities. For
companies with low unionization rates in an industry
characterized by otherwise high union participation,
a short-term view on worker compensation, contract
terms, and working conditions could create a
potential for disruption if workers begin to demand
better standards through increasing unionization or
other actions.
Due to the global nature of the industry, auto
companies may also operate in countries where
worker rights are not adequately protected. In the
absence of clear rules or enforcement of labor rights
in such countries, auto makers, in their efforts to
reduce costs, may find themselves failing to meet
basic worker rights or, in extreme cases, exploiting
workers. This can disrupt operations or affect
company reputation. In this context, auto makers
have an interest in protecting their workers’ rights
and preventing off-shored facilities from violating
labor standards applicable in their home country.
Ultimately, the nuances of both domestic and
international worker concerns make management of
labor relations critical for automobile companies.
Proper management of, and communication around,
issues such as worker pay and working conditions
can prevent conflicts with workers that could lead to
extended periods of strikes, which can slow or shut
down operations and create reputational risk. Auto
companies need a long-term perspective on
managing workers, including their pay and benefits,
in a way that protects worker rights and enhances
their productivity while ensuring the financial
sustainability of a company’s operations.
Company performance in this area can therefore be
analyzed, internally and externally, through the
following direct or indirect performance metrics (see
Appendix III for metrics with their full detail):
• Percentage of workers covered under
collective-bargaining agreements; and
• Number and duration of strikes and lockouts.
Evidence Labor unions play a critical role in the global
Automobiles industry. Nearly one-fifth of all workers
in the “motor vehicles and motor vehicle equipment
manufacturing” industry in the U.S. are unionized:
in 2013, 18.2 percent of workers were union
members and 19.4 percent were covered by
collective bargaining agreements.89 Some
automobile companies traded over the counter in
the U.S., such as Peugeot and Fiat, report extremely
high rates of unionization, with rates of around 90
percent.90 In contrast, only 7.5 percent of all U.S.
private sector workers were covered by unions in
2013. The average for “durable goods
manufacturing,” a traditional union stronghold, fell
from 32.1 percent in 1983 to 10.9 percent in
2013.91 An analysis of annual SEC filings reveals that
OEMs are unionized to some degree, both at their
U.S. and international operations.
Globally, wages are 6.3 percent of revenue for
automobile manufacturers,92 however pension
liabilities are high for more established companies.
Managing worker benefits with a long-term
perspective, in a way that protects worker rights and
enhances their productivity but does not jeopardize
company operations, becomes important in this
context. For example, all three major American car
manufacturers, Ford, General Motors, and Chrysler,
have greater pension liabilities than their foreign
counterparts that have plants in the U.S. These “big
three” auto manufacturers have more retirees than
active employees. In their respective 10-Ks, all three
reported that their defined benefit pension plans are
currently underfunded. Ford, for instance, states that
its U.S. and worldwide defined benefit pension plans
were underfunded by a total of $9.7 billion and
$18.7 billion, respectively.93
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Companies with more recent operations in the U.S.
do not have the same pension liabilities as their
predecessors. When Japanese automakers first
opened plants in the U.S., they offered matched
wages to those of union workers to avoid
unionization.94 Three decades later, new entrant
Tesla reports in its 10-K filings that none of its
employees are “currently represented by labor
unions or are covered by a collective bargaining
agreement with respect to their employment.” The
company adds, “To date, we have not experienced
any work stoppages, and we consider our
relationship with our employees to be good.”95
Companies with such low or nonexistent
unionization levels will need to ensure that workers
are well compensated, worker rights are well
protected, and communication lines between
workers and management are open. If labor
relations are hampered, the risk of work stoppages
in the future due to increasing worker unionization
or other actions to ensure fair pay and working
conditions could have a material impact on
companies.
Poor labor relations can result in work stoppages
that can affect company cash flows and profitability.
In cases of unionized labor, unions have more
bargaining power to demand better wages and
working conditions; therefore, in such cases, costs of
labor disputes could be higher. In their annual
filings, several auto makers cite the high percentage
of unionized workers and labor disputes as having a
material impact on their operations. In its 2012 Form
10-K, Ford Motor Company states that all of its
hourly workers around the globe are represented by
unions.96 The company cites both work stoppages as
a result of labor disputes and limitations on the
company’s ability to close plants and divest
businesses as material risk factors resulting from
employing unionized workers.97 Similarly, TATA
Motors, an Indian auto manufacturer, cites in its
2012 20-F filing that it is vulnerable to labor unrest
due to most of its employees being union
members.98 In 2014, GM workers in Kentucky voted
to allow strikes if necessary. Workers say they have
been concerned about safety issues, alleging a high
number of “near misses” that could have serious
implications for assembly line workers. The two sides
are hoping to resolve their differences without a
worker walk-out.99
Often, such votes may result in actual strikes with
significant cost implications. Hyundai, a Korean
automaker, has experienced union strikes in all but
four years since 1987.100 Union representation at
Hyundai is powerful and job assignments have to be
pre-approved by the union. It is estimated that
worker strikes at Hyundai plants in 2012 resulted in
a seven percent shortfall in production, with
estimated lost sales of 2.7 trillion won.101 Workers
have been trying to improve working hours, and in
2005, after the company agreed in principle to
eliminate night shifts, unions demanded an end to
the round-the-clock shift system that had been in
place since 1967. The 2012 labor union negotiations
resulted in shortening two 10-hour night shifts to
eight- and nine-hour shifts ending by one o’clock
AM. The union also wanted permanent positions for
13,000 contract workers; Hyundai countered,
promising positions for 3,000 by 2015.102 More
recently, Reuters reported that Hyundai lost
$1.1 billion of its market value in the week following
the collapse of wage talks with unions on August 6,
2013.103 These examples emphasize the importance
of a company’s management recognizing and
addressing worker concerns in a timely manner and
maintaining good communication with employees.
Value Impact Labor-intensive industries with well-defined
occupations are prone to high rates of unionization,
as employees with similar skills and compensation
have an incentive to resort to collective bargaining in
their negotiations with management. The bargaining
power that comes with unionization leads to higher
wages and other compensation costs, including
pensions. It can also lead to labor disputes and
production disruptions, with short-term impact on
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revenue and longer-term impact on market share.
New entrants or disruptors in highly unionized
industries often have a short-term competitive
advantage from low unionization rates and lack of
pension liabilities. However, these companies incur
the risk of a medium-term shift in cost structure as
growth tapers and cost-cutting initiatives drive
employees to collective bargaining. The number of
work stoppages provides a measure of past
performance on labor practices, while the
percentage of employees unionized provides an
indication of companies’ exposure to wage cost
increase and possible future labor disputes.
BUSINESS MODEL AND INNOVATION
This dimension of sustainability is concerned with
the impact of environmental and social factors on
innovation and business models. It addresses the
integration of environmental and social factors in
the value creation process of companies, including
resource efficiency and other innovation in the
production process. It also includes product
innovation, efficiency, and responsibility in the
design, use-phase, and disposal of products. It
includes management of environmental and social
impacts on tangible and financial assets—either a
company’s own or those it manages as the fiduciary
for others.
In the Automobiles industry, advances in business
models and innovation can serve to reduce the
lifecycle environmental impacts of automobiles.
From an economic standpoint, such innovation
directly impacts the total cost of ownership of a
vehicle, which takes into account the purchase price,
taxes, insurance, operating costs (fuel, maintenance,
or repair), and resale value. Fuel efficiency and use
of alternative energy may reduce owners’ operating
costs. The longevity of a vehicle can also reduce
costs by delaying purchase of replacement vehicles,
lowering maintenance costs, and improving resale
value. Such innovation therefore becomes attractive
to consumers of auto companies, while lowering the
industry’s lifecycle environmental impacts.
Emerging environmental and social trends are
creating new innovation and business opportunities
for companies. These trends include changing
customer preferences, higher regulatory
requirements, and heightened scrutiny for the
Automobiles industry. Those companies that are able
to harness intellectual capital to address significant
environmental and social challenges will also be able
to improve operational and financial performance.
Fuel Economy & Use-phase Emissions
Transportation accounts for a significant share of
global GHG emissions. The cumulative use of motor
vehicles through combustion of petroleum-based
fuels generates significant, direct GHG emissions
and contributes to global climate change.
Automobile usage is also associated with local air
pollutants that threaten human health and the
environment. In this context, vehicle emissions of
GHGs, nitrogen oxides, volatile organic compounds,
and particulate matter are increasingly a concern of
consumers and regulators. While these impacts are
further downstream from auto companies (most of
the emissions occur at the use-phase of vehicles
rather than during their manufacturing), regulations
are focusing on auto manufacturers to address some
of these issues: for example, by imposing fuel
economy standards.
Fuel types and efficiency of vehicles directly impact
GHG and other emissions. It also affects dependence
on oil (for internal combustion engines) and the total
cost of ownership. The regulations on fuel efficiency,
as well as customers’ demand for vehicles with
lower environmental impacts and lower total cost of
ownership, are driving auto manufacturers to lower
use-phase emissions.
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More stringent emissions standards around the
world are fueling rapidly expanding markets for
electric vehicles and hybrids, as well as conventional
vehicles high fuel efficiency. Moreover,
manufacturers are also designing vehicles with
lightweight materials to improve fuel efficiency by
reducing the weight of vehicles.
Companies that are able to meet current fuel
efficiency and emissions standards, and continue to
innovate in order to meet or exceed future
regulatory standards in different markets, are likely
to strengthen their competitive position and expand
market share. Meanwhile, they are also mitigating
the risk of lower demand for conventional products.
Company performance in this area can be analyzed
internally and externally through the following direct
or indirect performance metrics (see Appendix III for
metrics with their full detail):
• Sales-weighted average passenger fleet fuel
economy, consumption, or emissions, by
region; and
• Number of (1) zero emission vehicles (ZEV)
sold, (2) hybrid vehicles sold, and (3) plug-in
hybrid vehicles sold.
Evidence Transportation activities, which include “movement
of people and goods by cars, trucks, trains, ships,
airplanes, and other vehicles,” is a significant source
of greenhouse gases, accounting for 28 percent of
U.S. GHG emissions in 2011.104 According to the
International Energy Agency, global transportation
emitted 6.8 million metric tons of carbon dioxide
(CO2), or 22 percent of global CO2 emissions, from
fuel combustion in 2010.V Road transport alone
accounted for 74 percent of transport emissions.105
Furthermore, in 2013, researchers at the
Massachusetts Institute of Technology found that air
V Transportation covers emissions from all transport activity (in mobile engines), regardless of the economic sector to which it is contributing. Road includes the emissions arising from fuel use in road vehicles, including the use of agricultural vehicles on highways.
pollution causes about 200,000 early deaths in the
U.S. each year. Road transportation, the most
significant contributor, caused 53,000 premature
deaths, with California being the most affected
state.106 This highlights the magnitude of the impact
of air emissions from the use-phase of automobiles,
which is prompting regulators globally to take
action.
In order to reduce emissions from automobiles,
several countries have set emission and fuel
efficiency targets for vehicles sold within their
borders. They are also providing incentives to
consumers to buy low-emission vehicles, often
subsidizing the purchase cost.VI These actions are
affecting both the demand for and supply of
automobiles, with an impact on automobile
company revenues and costs. It explains the relative
success of electric vehicles for commercial and
industrial uses, with 2013 sales expected to exceed
$30 billion, compared to $28 billion in the consumer
segment.107
Vehicle emission standards continue to evolve and
become more stringent in various countries, i.e.
CAFÉ Standards in the U.S., which may help to
increase a market share of alternative fuel
vehicles.108 Non-compliance with emissions
standards in different regions and countries can lead
to significant regulatory penalties for auto
manufacturers in certain markets. For example, as of
2012, German automakers Daimler, Audi, and BMW
all had vehicles that fell short of the E.U.’s 2015
standards that set the average CO2 emissions from
new cars sold in Europe. If they are unable to meet
the required reductions in emissions by 2015, they
will face fines of 95 euros for every excess gram over
the target, multiplied by the total number of vehicles
sold.109
Markets with regulatory efforts to internalize the
price of carbon in fuel use are likely to experience
VI Refer to the Legislative and Regulatory Trends section for specific targets.
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increased demand for fuel-efficient or alternative
fuel vehicles. The cap-and-trade rules under
California’s Global Warming Solutions Act that went
into effect on January 1, 2013 currently apply to
large electric power plants and large industrial
plants. However, starting January 1, 2015, the
regulations will extend to cover distributors of
heating and transportation fuels. Under the
program, such companies will be required to buy
enough emission allowances to cover their
emissions.110 The price of an allowance, which
covers one ton of CO2 emissions, is currently around
$12, and is expected to remain at that level at the
beginning of 2015. At that price, the new rules are
expected to increase the marginal cost of selling
gasoline in California by 9 to 10 cents per gallon.
These higher costs are expected to be passed
through directly to consumers,111 and are likely to
increase customers’ demand for more fuel-efficient
or alternative fuel vehicles.
Similarly, regulatory incentives to promote fuel-
efficient and alternative energy vehicles will drive
demand and create new market opportunities for
automakers. Since 1990, the state of California
requires large automakers to sell zero-emission
vehicles (ZEV) in proportion to their sales in the
state. By 2025, California and nine other states will
require that plug-in hybrid electric vehicles (PHEVs),
battery electric vehicles (BEVs), or fuel cell vehicles
(FCVs) account for 15.4 percent of total sales in
those states.112 In the meantime, automakers can
comply with rising requirements directly or through
purchase of ZEV credits. While this requirement can
be expensive for companies lagging in sales of ZEV,
some companies like Tesla and Nissan have been
able to generate revenues from sales of their excess
ZEV credits. For example, during the first half of
2012, Tesla received $119 million, or 12 percent of
revenue, from ZEV credit sales.113 In July 2013,
Nissan-Renault announced that it sold its one
hundred thousandth zero-emissions car, putting it
ahead in EV sales of all other auto manufacturers
combined.114
China is the largest and fastest-growing automobile
market in the world, with 22 million new vehicles
sold, representing 29 percent of global automobiles
sales in 2013.115 Striving to reduce pollution, the
country set a goal of having 500,000 electric
vehicles on the road by 2015. However, as of August
2014, only 70,000 ZEVs were in use. To stimulate
demand, electric vehicles have been exempt from a
10 percent purchase tax through 2017.116 OEMs able
to satisfy the expected increase in demand for ZEVs
could improve their competitive positioning and
expand their market share in China.
In addition to regulatory drivers, cost considerations
are shifting consumer preferences to more fuel-
efficient and alternative fuel vehicles. The total cost
of ownership of an automobile, which affects use-
phase cost and resale value, is highly dependent on
fuel savings. A recent study found that among
vehicles with lifespans exceeding 120,000 miles,
mid-sized hybrids and EVs have a much cheaper
total cost of ownership than similar sized gas-
powered cars.117 GM has incorporated a new
technology in the 2014 Chevy Malibu, which
improves the car’s fuel economy by 12 percent for
an increase in price of $160 per vehicle. The
company estimates that the feature will pay for itself
within nine months, and will save over $2,000 over
the life of the vehicle, compared to the 2013 model
of the same car.118
In 2008, the DOE study estimated that by 2050 the
share of plug-in hybrid vehicle will reach 20 to 80
percent, based on a various penetration scenarios.119
Currently, the growing demand for fuel-efficient
vehicles indicates that manufacturers need to be
positioned to address this market. However, more
efficient vehicles may have higher up-front costs for
consumers, so the total cost of ownership over the
lifespan may be lower, especially in the environment
of increasing oil prices. Increasing fuel prices shift
customer preferences towards smaller, more
efficient cars.120
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Generally, automakers are responding to stringent
fuel efficiency regulations and changing consumer
demands by reducing fuel consumption and
emissions of vehicles. In 1997, Toyota introduced
the Prius hybrid model in Japan, and Audi
introduced the Audi duo, also a hybrid, to the
European market. In the following years, Honda,
GM, and Ford joined the electric vehicle market. The
popularity of alternative fuel vehicles is growing
steadily, although several infrastructure challenges,
such as charging stations for electric and plug-in
hybrid vehicles, remain.
Tesla Motors was established in 2003 with a focus
on high-performance all-electric vehicles. After 10
years of operation, the company had a market
capitalization of $20 billion.121 The company is
challenging the traditional large auto companies in
satisfying a growing demand for high-efficiency
vehicles. To be competitive, every major auto
manufacturer now offers hybrid vehicles (e.g.,
Nissan Leaf, Ford Focus Electric, BMW Electron, and
Chevrolet Spark EV) or has such models in the
pipeline.
One way automakers are improving fuel efficiency is
by reducing the weight of vehicles. According to
Bloomberg, the share of steel and iron as a percent
of the “curb weight” of a vehicle has been steadily
declining over the past seven years, while the share
of lighter materials such as aluminum and plastics
has steadily increased.122 In an average modern
vehicle, plastics account for about 50 percent of
materials by volume. Reducing the weight of a car
by one kilogram may result in a 20 kilograms
reduction of CO2 emissions over the lifecycle of the
vehicle.123 The new Ford F-150 truck’s body contains
95 percent aluminum-alloy, and 77 percent of its
frame is high-strength steel. These weight reduction
measures helped lower the weight of the vehicle by
700 pounds.124
Automakers’ investment in research and
development (R&D) further illustrates the importance
of innovation in the area of fuel efficiency and
emissions standards. According to the Boston
Consulting Group, nine out of the top 20 most
innovative companies are automakers. In 2013, the
industry spent $100 billion on R&D, which is a third
of the total R&D spending in the U.S.125 Innovation,
including in the area of fuel economy and alternative
fuel vehicles, is tied to industry leadership. For
example, in its Form 20-F, Toyota states that “its
long-term success depends on its ability to secure a
leadership position with respect to vehicle research
and development.” The company spent ¥910.5
billion on R&D in 2014, which is over ¥100 billion
more than a year before. The main areas of focus for
the company’s R&D efforts included improvements
in hybrid technologies and fuel efficiency of gasoline
engines, as well as development of alternative fuel
vehicles.126
Value Impact Strengthening regulations around GHG emissions,
local air quality, and fuel economy, together with
rising fuel costs, are driving demand for more fuel-
efficient or alternative fuel vehicles with lower air
emissions. The market for the Automobiles industry
is changing, and companies that invest in research
and development (R&D) to meet regulatory
requirements and evolving consumer demands are
likely to improve their revenue and market share. In
addition, companies that produce ZEVs over
regulatory quotas can generate additional revenue
and are likely to improve their reputation and brand
value, further contributing to long-term market
share and revenue growth. Conversely, regulations
can lead to sizable regulatory compliance costs as
well as loss of market share and revenue for those
manufacturers that fail to reach quotas. Laws and
regulations governing the fuel efficiency of vehicles
are likely to become stricter over time, which would
increase the probability and magnitude of financial
impact in the future.
Fleet fuel economy and the number of ZEV and
PZEVs sold provide an indication of how well
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automakers are positioned to serve increasing
consumer demand for fuel-efficient or alternative
fuel vehicles, as well as their ability to leverage or
mitigate the effect of regulatory quotas.
LEADERSHIP AND GOVERNANCE
As applied to sustainability, governance involves the
management of issues that are inherent to the
business model or common practice in the industry
and are in potential conflict with the interest of
broader stakeholder groups (government,
community, customers, and employees). They create
a potential liability, or worse, a limitation or removal
of license to operate. This includes regulatory
compliance, lobbying, and political contributions. It
also includes risk management, safety management,
supply chain and resource management, conflict of
interest, anti-competitive behavior, and corruption
and bribery.
Automobile companies rely on increasingly complex
and geographically diverse supply chains for critical
material inputs, magnifying the risks of supply
disruptions. Effective materials sourcing that is able
to mitigate supply risks will play an increasingly
important role on shareholder value in the industry
as the supply chain and regulatory environments are
constantly shifting.
Materials Sourcing
Automobile companies are exposed to risk of supply
chain disruptions, input price increases or volatility,
and damage to brand reputation. This is particularly
true when rare earth or “conflict” minerals and
metals are used in their products. The use of
minerals that originate from certain zones of conflict
also exposes automobiles companies to regulatory
risks associated with the Dodd-Frank Act.
Rare earth metals, also known as rare earth
elements (REEs), and other critical materials play a
crucial role in clean energy technologies. Electric and
hybrid vehicles use substantial amounts of critical
materials. With global regulations aimed at reducing
emissions and increasing fuel efficiency of vehicles,
the share of hybrids and ZEVs produced by the
Automobiles industry is likely to continue to increase
in the future. Furthermore, more electronic
components are being used in automobiles, and
these also can contain critical materials. These
factors make the sourcing of REEs important to the
Automobiles industry.
Despite the name, some rare earth elements are
actually abundant. However, they are difficult to
extract and refine because they tend to be lumped
together in rocks along with radioactive thorium and
uranium.127 There are material sourcing risks related
to rare earth minerals and metals due to a low
substitution ratio, concentration of deposits in only a
few countries, and geopolitical considerations.
Automobile companies also face competition from
increasing global demand for these minerals from
other sectors, including Technology, Renewable
Energy and Infrastructure, which, along with supply
constraints, can result in significant price increase
and supply chain risks.
Moreover, the industry also faces supply chain
challenges related to conflict minerals. Companies
face pressure to track and eliminate the use of
minerals responsible for conflict in the Democratic
Republic of Congo (DRC) from legislation, actions by
non-governmental organizations (NGOs), input price
risks, and leadership from peers. To the extent that
an auto manufacturer uses the aforementioned
minerals in their production processes, the company
is required to provide disclosures around the origin
of such minerals in accordance with the Conflict
Minerals provision of the Dodd-Frank Act (see
Regulatory Trends section above). This requires an
active monitoring of the supply chain.
Automobile companies with strong supply chain
standards and the ability to adapt to increasing
resource scarcity will be better positioned to protect
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shareholder value. Innovations at the design phase
to reduce dependence on some of these materials
also contributes to lower risk. Companies that are
able to limit the use of critical and conflict materials,
as well as secure their supply, would not only
minimize environmental and social externalities
related to extraction, but also protect themselves
from supply disruptions and volatile input prices.
Conflict minerals also represent reputational risks, so
OEMs need to ensure that their supply chain is
“conflict-free.”
Company performance in this area can be analyzed
in a cost-beneficial way internally and externally
through the following direct or indirect performance
metrics (see Appendix III for metrics with their full
detail):
• Percentage of materials costs for items
containing critical materials;
• Percentage of tungsten, tin, tantalum, and
gold smelters and refiners within the supply
chain that are verified conflict-free; and
• Discussion of the management of risks
associated with the use of critical materials
and conflict minerals
Evidence According to the U.S. Department of Energy (DOE),
electric vehicle (EV) technology is one of the most
dependent on the availability of rare earth metals.
Such materials as lanthanum, cerium,
praseodymium, neodymium, nickel, manganese,
cobalt, and lithium are used in the manufacturing of
EV batteries. A current-generation hybrid vehicle
battery contains several kilograms of rare earth
elements. The DOE study concluded that, over the
short and medium term (by 2025), dysprosium and
neodymium were the elements with the highest
importance to clean energy and the highest supply
risk.128
Automobile companies may face shortages of critical
materials used in the expanding EV segment of the
industry and in automobile electronics, not just due
to physical constraints of recovering materials, but
also due to the concentration of deposits in only a
few countries and their low substitution ratio.
Shortages of critical materials can also result in price
spikes. In 2011, China was producing 97 percent of
the world’s supply of REEs as a byproduct of the
country’s iron ore mining activities. Furthermore, the
British Geological Survey estimates that China is the
top producer of 27 out of 52 critical minerals and
metals.129 In 2010, China restricted the export of
rare earth elements supposedly due to
environmental concerns. This led to a five-fold
increase in the price of such materials, while Chinese
companies were able to obtain the same materials at
lower cost.130 As China increases development of its
own clean energy technologies, the country could
significantly limit exports of critical materials in the
future.131
Deposits in some other countries also create supply
risks. Lithium is one such material that may
experience supply shortages, as more than half of
the global reserves of lithium are found in Bolivia
alone. The country’s reserves of lithium amount to
73 million metric tons, which Bolivian President Evo
Morales claims to be nationalized. The political
situation in the country further exacerbates the risk
of sourcing the metal from Bolivia.132
The U.S. government recognizes supply risks and
price increases of REEs. In 2011, it announced that it
would allocate $30 million in grants towards the
development of alternatives that do not depend on
the environmentally hazardous and increasingly
costly minerals.133
A 2011 study by PricewaterhouseCoopers (PwC) also
demonstrated the materiality of mineral and metal
scarcity for the industry. The survey was conducted
with 69 senior executives from companies in
different sectors, including 11 companies in the
automotive sector. The survey found that 73 percent
of respondents in the automotive sector perceived
minerals and metal scarcity as a pressing issue for
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their companies. Moreover, among automotive
sector respondents, 73 percent thought that their
company may experience an unstable supply of
these inputs within the next five years, with 55
percent of respondents rating the severity as ‘high’
or ‘very high.’ The level of engagement and concern
for the issue in the automotive industry is further
reflected by 64 percent of respondents. These
respondents indicated that their companies were
already well prepared to mitigate the impact of
scarce minerals and metals.134
Companies in the industry can manage the risks of
supply shortages and price volatility of critical
materials through various strategies, including:
diversifying suppliers, improving materials efficiency
at the manufacturing stage, increasing recovery of
critical materials from ELVs, and investing in R&D to
minimize the need for these materials. In a
statement to the Congress Committee on Energy
and Natural Resources, Jennifer Thomas, the
Director of Federal Affairs of the Alliance of
Automobile Manufacturers, stated that
“[a]utomakers support the Department of Energy
(DOE) R&D programs… that would facilitate the
efficient production, use, and recycling of critical
minerals and identify and develop alternative
materials that can be used to reduce the demand for
critical minerals.”135
Some companies actively implement these strategies
to lower their dependence on critical materials. For
example, Toyota is a downstream user of REEs,
which, as discussed earlier, are an integral
component of the permanent magnets used in
electric motors and generators. In order to reduce
demand for rare earths, the company is investing in
R&D of induction motors that will not use REEs.136
Automobile manufacturers such as Tesla and BMW
do not use REEs in their Roadster and Mini-E EV
models.137
Moreover, Toyota is also striving to ensure a stable
supply of rare earth materials, and in recent years,
has made several strategic acquisitions. The
company established a joint venture with the state-
run Vietnamese Coal and Mineral Industries Group
(Vinacomin) to develop the Dong Pao rare earth
mine with an estimated production of 3,000 tons by
2015. Toyota also bought a company that owns an
Indian exporter of REEs with roughly 4,000 tons of
annual exports. Finally, the company has made a
long-term supply deal with the Great Western
Minerals Group subsidiary to provide alloys for
battery and magnet production.138
Ford is also taking a proactive approach to
understanding and minimizing the issues associated
with REEs in their vehicles. The company estimated
that a typical HEV sedan with a nickel-metal-hydride
battery uses approximately 4.5 kg of rare earth
metals. Additionally, HEVs with lithium-ion batteries
contain approximately 1 kg of the materials. Ford is
focused on reducing the amount of REEs used in electrified vehicle battery systems, and was able to
reduce the use of dysprosium in the electric machine
permanent motor magnets used in a hybrid system
by approximately 50 percent. Minimizing the use of
such an expensive element as dysprosium from
electric motor magnets helped the company to
lower the cost of hybrid systems by 30 percent.
Moreover, the new system is also 50 percent lighter
and 25 to 30 percent smaller than previous-
generation hybrid batteries, which improved the fuel
efficiency of Ford’s hybrids. Overall, the company
expects the innovation to save up to 500,000
pounds of rare earth metals annually.139
In certain regions of the world, such as the DRC, the
mining and sale of conflict minerals, such as
tantalum, tin, tungsten, and gold (3TG), provide
funding for armed conflicts. Also, their mining is
carried out under conditions that do not respect
human rights. Electronic components used in
modern automobiles use a substantial amount of tin,
tantalum, and tungsten, exposing automobile
companies not only to regulatory risk associated
with the Conflict Minerals rule of the Dodd-Frank
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Act, but also to input price volatility and reputational
risks.
The DRC accounts for six to eight percent of global
tin production, 15 to 20 percent (or 8.6 percent in
2009, according to the U.S. Geological Survey) of
tantalum, and two to four percent of the global
tungsten supply. Global input prices of 3TG have
shown high volatility, sometimes related to the
conflict in the DRC. A 31 percent increase in tin
prices in 2008 coincided with a rebel offensive
against the DRC’s primary tin trading center. 140
Tantalum is a rare metal used in the production of
automotive, medical, and aircraft equipment, as well
as semiconductors.141 It is also a conflict mineral. Its
price rose from $110 in 2011 to nearly $300 in 2012
due to supply constraints and rising demand.142 As
the use of electronic components becomes more
prevalent in automobiles, the industry may become
more exposed to the conflict minerals risk.
Compliance with the Conflict Minerals provision of
the Dodd-Frank Act is likely to be costly. The SEC
estimates that it will cost affected companies a total
of $3 to $4 billion in the first year and at least $200
million each year afterward to comply. This cost will
be spread across roughly 6,000 companies, including
companies in the aerospace and automotive
industries.143
Among auto manufacturers, there appears to be
consensus around the necessity to eliminate the use
of conflict minerals in the production of auto parts
and automobiles. According to a statement released
by the Automotive Industry Action Group (AIAG), an
industry group of major auto manufacturers, “(t)he
Automotive Industry fully supports this direction and
is investigating ways to ensure that the parts and
assemblies in our vehicles and products, regardless
of where they are assembled or sold, do not contain
Conflict Minerals, which have contributed to the
armed conflict in Central Africa.”
Value Impact Failure to effectively manage the sourcing of critical
materials can result in higher input costs and lost
revenue due to production disruptions. Companies
may also face regulatory compliance costs associated
with the sourcing of conflict minerals. If companies
do not verify or avoid the use of conflict minerals,
they may face significant reputational risk that could
result in lower sales. The increasing scarcity or
unavailability of certain key materials used by auto
parts companies, as well as the price volatility of
such materials, can increase companies’ risk profile
and cost of capital if these companies rely heavily on
such materials and are unable to source them
effectively. Increasing demand for EVs and use of
electronic components in automobiles, together with
an expanding demand-supply gap for critical
materials, suggests that the probability and
magnitude of these impacts will increase in the
future.
The percentage of a company’s products that
contain critical materials indicates a company’s
exposure to the risk of supply disruption and price
volatility for key components, as well as its ability to
use alternative materials. The percentage of
tungsten, tin, tantalum, and gold smelters within the
supply chain that are verified conflict-free indicates
the extent of a company’s exposure to conflict
minerals, in terms of both supply and regulatory risk.
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APPENDIX I FIVE REPRESENTATIVE AUTOMOBILE COMPANIESVII
VII This list includes five companies representative of the Automobiles industry and its activities. This includes only companies for which the Automobiles industry is the primary industry, companies that are U.S.-listed but are not primarily traded Over-the-Counter, and for which at least 20 percent of revenue is generated by activities in this industry, according to the latest information available on Bloomberg Professional Services. Retrieved on July 9, 2014.
COMPANY NAME (TICKER SYMBOL)
Ford Motor Company (F)
General Motors (GM)
Honda (HMC)
Tata Motors (TTM)
Toyota (TM)
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APPENDIX IIA EVIDENCE FOR SUSTAINABILITY DISCLOSURE TOPICS
HM: Heat Map, a score out of 100 indicating the relative importance of the topic among SASB’s initial list of 43 generic sustainability issues; asterisks indicate “top issues.” The score is based on the frequency of relevant keywords in documents (i.e., 10-Ks, shareholder resolutions, legal news, news articles, and corporate sustainability reports) that are available on the Bloomberg terminal for the industry’s publicly-listed companies; issues for which keyword frequency is in the top quartile are “top issues.”
IWGs: SASB Industry Working Groups
%: The percentage of IWG participants that found the disclosure topic to likely constitute material information for companies in the industry. (-) denotes that the issue was added after the IWG was convened.
Priority: Average ranking of the issue in terms of importance. One denotes the most important issue. (-) denotes that the issue was added after the IWG was convened.
EI: Evidence of Interest, a subjective assessment based on quantitative and qualitative findings.
EFI: Evidence of Financial Impact, a subjective assessment based on quantitative and qualitative findings.
FLI: Forward Looking Impact, a subjective assessment on the presence of a material forward-looking impact.
Sustainability Disclosure Topics
EVIDENCE OF INTEREST
EVIDENCE OF
FINANCIAL IMPACT
FORWARD-LOOKING IMPACT
HM (1-100)
IWGs EI
Revenues &
Costs
Assets & Liabilities
Cost of Capital
EFI
Probability & Magnitude
Exter- nalities
FLI
% Priority
Materials Efficiency & Recycling
73* 83 4 High • High No
Product Safety 77* 93 1 High • • • High No
Labor Relations 55* 81 5 Medium • • Medium No
Fuel Economy & Use-phase Emissions
98* 89 2 High • • High • • Yes
Materials Sourcing 50 89 3 Medium • • • High • Yes
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APPENDIX IIB EVIDENCE OF FINANCIAL IMPACT FOR SUSTAINABILITY DISCLOSURE TOPICS
MEDIUM IMPACT H IGH IMPACT
Evidence of
Financial Impact
REVENUE & EXPENSES
ASSETS & LIABILITIES
RISK PROFILE
Revenue
Operating Expenses
Non-operating
Expenses
Assets
Liabilities
Cost of Capital
Industry Divestment
Risk
Market Size
New Markets Pricing Power
COGS
R&D
CapEx
Extra- ordinary Expenses
Tangible Assets
Intangible
Assets
Contingent Liabilities & Provisions
Pension & Other
Liabilities
Materials Efficiency & Recycling
• • • •
Product Safety • • • • • •
Labor Relations • • •
Fuel Economy & Use-phase Emissions
• • • • •
Materials Sourcing • • • • •
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APPENDIX III SUSTAINABILITY ACCOUNTING METRICS – AUTOMOBILES
TOPIC
ACCOUNTING METRIC
CATEGORY
UNIT OF MEASURE
CODE
Materials Efficiency & Recycling
Amount of total waste from manufacturing, percentage recycled
Quantitative Metric tons (t), Percentage (%)
TR0101-01
Weight of end-of-life material recovered, percentage recycled
Quantitative Metric tons (t), Percentage (%)
TR0101-02
Average recyclability of vehicles sold, by weight8
Quantitative Percentage (%) by sales-weighted weight (metric tons)
TR0101-03
Product Safety Percentage of models rated by NCAP programs with overall 5-star safety rating, by region
Quantitative Percentage (%) of rated vehicles
TR0101-04
Number of safety-related defect complaints, percentage investigated
Quantitative Number, Percentage (%)
TR0101-05
Number of vehicles recalled9 Quantitative Number TR0101-06
Labor Relations Percentage of active workforce covered under collective-bargaining agreements, broken down by U.S. and foreign employees
Quantitative Percentage (%) TR0101-07
Number and duration of strikes and lockouts10 Quantitative Number, Days TR0101-08
Fuel Economy & Use-phase Emissions
Sales-weighted average passenger fleet fuel economy, consumption, or emissions, by region
Quantitative Mpg, L/km, gCO2/km, km/L
TR0101-09
Number of (1) zero emission vehicles (ZEV) sold, (2) hybrid vehicles sold, and (3) plug-in hybrid vehicles sold
Quantitative Vehicle units sold
TR0101-10
Materials Sourcing
Percentage of materials costs for items containing critical materials
Quantitative Percentage (%)
TR0101-11
Percentage of tungsten, tin, tantalum, and gold smelters and refiners within the supply chain that are verified conflict-free
Quantitative Percentage (%)
TR0101-12
Discussion of the management of risks associated with the use of critical materials and conflict minerals
Discussion and Analysis
n/a TR0101-13
8 Note to TR0101-03 - Disclosure shall include a discussion of the registrant’s approach to optimizing vehicle recycling and recovery rates, including participation in mandatory end-of-life of vehicle programs. 9 Note to TR0101-06 - Disclosure shall include a discussion of notable recalls, such as those that affected a significant number of vehicles of one model or those related to a serious injury or fatality. 10 Note to TR0101-08 - Disclosure shall include a description of the root cause of the stoppage, impact on production, and corrective actions taken.
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APPENDIX IV: Analysis of SEC Disclosures Automobiles
The following graph demonstrates an aggregate assessment of how the top ten U.S.-listed Automobiles companies by revenue are currently reporting on sustainability topics in the SEC Disclosures.
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References 1 "Motor Vehicles (per 1,000 People)." The World Bank. Accessed
September 2, 2014.
http://data.worldbank.org/indicator/IS.VEH.NVEH.P3.
2 Ruiz, Brandon. “Global Car & Automobile Manufacturing.” IBISWorld,
December 2013. Accessed September 12, 2014.
3 Data from Bloomberg Professional service accessed on August 25,
2014, using the BICS <GO> command. The data represents global
revenues of companies listed on global exchanges and traded over-the-
counter (OTC) from the Automobiles industry, using Level 3 of the
Bloomberg Industry Classification System.
4 Market Share. Data Library.BI AUTMG <GO> command. Bloomberg Professional service. Accessed on August 25, 2014.
5 Sturgeon, Timothy J. and Johannes Van Biesebroeck. “Effects of the
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6 Danova, Antonio. “Car & Automobile Manufacturing in the US.”
IBISWorld, January 2013.
7 Danova, Antonio. “SUV & Light Truck Manufacturing in the US.”
IBISWorld, April 2013.
8 Author’s calculation based on data from Bloomberg Professional
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listed companies (and those traded primarily OTC) generating at least 20
percent of revenue from the Automobiles segment.
9 Sturgeon, Timothy J. and Johannes Van Biesebroeck. “Effects of the
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11 Sturgeon, Timothy J. and Johannes Van Biesebroeck. “Effects of the
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12 Ruiz, Brandon. “Global Car & Automobile Manufacturing.” IBISWorld,
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13 Danova, Antonio. “Car & Automobile Manufacturing in the US.”
IBISWorld, January 2013.
14 Danova, Antonio. “SUV & Light Truck Manufacturing in the US.”
IBISWorld, April 2013.
15 Oekom. Industry Focus, Automobile. February 2013.
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l.
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28 “Restriction of the use of certain hazardous substances (RoHS).”
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31 The National Highway Traffic Safety Administration. “Who We Are and
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37 Five Winds International. “Product Stewardship Opportunities within
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38 U.S. Environmental Protection Agency. “Wastes - Resource
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I N D U S T R Y B R I E F | A U T O M O B I L E S | 31
58 Author’s calculation from Togawa, Kenichi. “Japan’s Automotive
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63 Tesla Motors Inc, FY2013 Form 10-K for the Fiscal Year Ending
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70 Wood, Robert W. “No Tax Deduction For Toyota's $1.2 Billion 'What
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72 Trudell, Craig and Yuki Hagiwara. “Toyota Recalls More Than 6 Million
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75 Bennett, Jeff and Joseph B. White. “GM's Profit, Hit by Recalls,
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76 General Motors Company, FY2012 Form 10-K for the Fiscal Year
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77 Ford Motor Company, FY2012 Form 10-K for the Fiscal Year Ending
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78 Toyota Motors, FY2013 Form 20-F for the Fiscal Year Ending March
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79 Harley-Davidson Inc., FY2012 Form 10-K for the Fiscal Year Ending
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80 ZAP, FY2012 Form 10-K for the Fiscal Year Ending December 31, 2012
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81 “2012 Automotive Institute Survey Results: State of the Automotive
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82 National Highway Traffic Safety Administration. “National Motor
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86 Sean Flynn, “Why Only Some Industries Unionize: Insights from
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90 Data on the percent of employees unionized is from Bloomberg
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91 Barry T. Hirsch and David A. Macpherson, Union data compilations
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92 “IBISWorld Industry Report: Global Car & Automobile Manufacturing,”
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93 Ford Motor Company, FY2012 Form 10-K for the Fiscal Year Ending
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94 Joann Muller, “UAW’s Loss and What it Means for Your Paycheck,”
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96 Ford Motor Company, FY2012 Form 10-K for the Fiscal Year Ending
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97 Ibid.
98 TATA Motors. FY2013 Form 20-F for the Fiscal Year Ending March 31,
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