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© 2017 IHS Markit© 2017 IHS Markit. All Rights Reserved.

Sourcing disruption and riskDealing with unexpected turns

AUTOMOTIVE

Mark Fulthorpe, Director Light Vehicle Production Forecast, +44 203 159 3474, [email protected]

8 March 2017 | Plymouth, Michigan

Contents

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Trading nationsWhat is the risk?

Global outlookRegional development

New phase of consolidationCoincidence or inspired timing?

Summary

Presentation Name / Month 2016

2

Contents

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3

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Only the United States shows a significant import increase

4

Trade balance (export-import) of top-10 production countries in 2010–16

Outlook and sourcing in context 2017 Spring automotive conference | 8 March 2017

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Structural factors constrain exports and fuel imports

Key markets North America spotlight on Mexico

5

Imports

Fueling imports• Mexico grows as production

footprint in NAFTA.• Stronger US dollar encourages

Japan /EU/Korea exports• OEMs hesitate to invest in United

States owing to lower potentialgrowth.

• Detroit 3 have competing focus ontrucks.

Exports CanadaMexico

ChinaEU

Middle EastAfrica

Others

Constraining exports

• Detroit 3 distance from globaldemand.

• Pickups much less opportunitybeyond NAFTA.

• Detroit 3 enhance localization inChina to avoid tariffs.

• Middle East/Africa demandstagnates owing to lower oil price.

Demand-supply balance in the United States in 2010–16(annual average in million units)

Produced in the US

2017 Spring automotive conference | 8 March 2017

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Detroit and VW most exposed to “big tax”

Production mix in Mexico

6


2016 share of Mexican build exported to US 2024 share of Mexican build exported to US

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Passenger cars become most exposed to “big tax”

A-segment

1% B-segment

19%

C-segment

26%D-

segment22%

E-segment

1%

Full-frame31%

B-segment

16%

C-segment

48%

D-segment

20%

Full-frame16%

Production mix in Mexico

7


2016 share of Mexican build exported to US 2024 share of Mexican build exported to US

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Expect all OEMs to review export strategies and reduce exposure to US marketD-3 under greatest pressure:

• Ford pulls out of USD1.6-billion San Luis Potosi investment, among other changes

• GM and FCA truck build can offset risk owing to margin and investing in United States/Canada

High-margin vehicles and brands best insulated from any new tax/tariffs

Production of small vehicles—46% of current build and forecast to reach 64%—faces margin/price pressure, most at risk from tax/tariff changes and possible sourcing switch

Asian OEMs could move small cars out and backfill with higher-margin CUVs; accelerating removal of weak-performing programs

VW highly exposed to Mexican production, but strong exports beyond NAFTA; expected to focus BEV output in Chattanooga

Mexican summary

8


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Withdraw and redraw

9

Trans-Pacific Partnership members

© 2017 IHS Markit. All rights reserved. Provided “as is”, without any warranty. This map is not to be reproduced or disseminated and is not to be used nor cited as evidence in connection with any territorial claim. IHS Markit is impartial and not an authority on international boundaries, which might be subject to unresolved claims by multiple jurisdictions.


• Public disapproval

• United States withdraws (January 2017)

• TPP in current form cannot proceed

• Members to continue talking trade

TPP status

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United States rejoins Continue without United States Cancel

• Very unlikely

• Ratification not until February 2018, member withdrawal still possible

• Loss of credibility for TPP

• Other members may raise US reliability concerns

• More negotiation

• US could pressure new terms

• Trump presidency impact on member attitudes

• Protests/opposition continues

• China participation less likely

• Possible

• 11 remaining members

• New agreement

• Key US-Japan link gone

• China involvement, potential to increase tensions with UnitedStates

• Delays, more negotiation to update terms without United States

• Increased pressure to recruit other members (Thailand, China)

• Lost value (US 65% of TPP)

• Protests/opposition continues

• US access incentive gone

• Most likely

• More focus on bilateral agreements (US-Japan)

• FTAs more likely than EPAs, focus on trade, less on labor, environment, etc.

• Less opposition/protests

• Simpler, less bureaucracy

• Negotiate individually

• Smaller markets may miss out

• Local laws unchanged (TPP requirement)

• Barriers remain in Pacific Rim

• TPP as a template

10

2017 Spring automotive conference | 8 March 2017TPP possible scenarios

TPP not dead, but future uncertain

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Losers• High-cost TPP member production could suffer as

production moves to low-cost members

• Thailand (nonmember) could suffer as production moves to low-cost TPP members

Winners• Low-cost TPP member production to

benefit a lot (lower cost/barriers, volumes increase)

Canada?

Note: Forecast volumes are possible trends only

United States

ThailandMalaysia

0M

2M

4M

6M

8M

10M

12M

14M

'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Automotive Production

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Vietnam

Mexico

Japan

0M

2M

4M

6M

8M

10M

'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20© 2017 IHS

Automotive Production

TPP (or similar) automotive production

Accelerated move to low-cost locations

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What did he say?

Brexit still looms

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UK industry remains at risk

13

Very low

Very low

Very low

Very low

Low

Medium

Medium

Medium

High

JLR Halewood

JLR Castle Bromwich

JLR Solihull

BMW Oxford

Nissan Sunderland

GM Ellesmere Port

Toyota Burnaston

Honda Swindon

GM Luton

191,000

66,000

295,000

210,000

507,000

118,000

180,000

139,000

74,000

Unlikely

Unlikely

Partial

Partial

PartialPossible total—

NA exports?Possible total

Possible total—NA exports?Possible total

Risk Plant output 2016 Destination marketsSourcing

alternativesMajor

investment timingsLatest Next

Key markets Europe constraints in the face of Brexit

Europe UK Rest of world


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Risk increases with geopolitical shocks

Implications for global auto industry

14

Risk of broad retreat from globalization

Trump, Mexico, NAFTA,Brexit, Eurozone, TPP

Counter-synchronization of auto sales cycles across world regions continues, with emerging markets and developed markets on opposite

waves. Wave amplitude will likely dissipate in time.

Increased risk of new disruptive business models “breaking the forecast”

Risk of longer-term planning volatilities

uncertainty hurts long term planning


Contents

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Summary


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85

90

95

100

105

110

2014 2016 2018 2020 2022 2024

Mill

ions Q1 '17

Q4 '16

2016 2017 2018 2019 2020 2021 2022 2023 2024Total Light Vehicle 1,834,343 1,954,954 1,202,891 462,228 376,357 99,837 -128,537 -93,819 -187,897Europe 66,396 9,728 -36,688 -67,802 -65,094 -87,992 -229,247 -232,906 -327,176Greater China 1,570,608 2,024,428 1,298,602 1,203,368 755,262 466,355 441,046 416,625 612,244Japan/Korea 117,230 51,445 -100,436 -317,399 -155,041 -134,306 -112,390 -88,097 -104,410Middle East/Africa -36,160 42,519 127,904 81,407 132,701 55,023 32,892 -63,690 -55,163North America -60,795 -389,227 -231,657 -317,142 -165,136 -70,570 -121,219 -60,683 -207,086South America 40,719 275,915 186,188 40,323 42,693 4,694 -25,892 -6,962 -27,878South Asia 136,345 -59,854 -41,022 -160,527 -169,028 -133,367 -113,727 -58,106 -78,428

Global production outlook changes

16


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Close to the peak and changing the mix

16.5

17.0

17.5

18.0

18.5

19.0

2014 2016 2018 2020 2022 2024

Mill

ions

Q1 2017 Forecast

Q4 2016 Forecast

• Trends

America first

• 2016–18 US sales expected to fall 1% in

2017, then recover in 2018 US car/truck mix evolves further

toward trucks; expect 63% by 2018

Strategic move to lower overall volume but higher profitability

• Long-term

Wildcards: EPA/CARB emissions rulings and trade policy

North America production outlook changes

17


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Short term “rollercoaster,” less excitement to follow

• Trends

Overall growth still moderates

• 2016–18 Small car tax changed from 5.0%

to 7.5% Pull-ahead in late 2016 but still

expected to have a positive effect in 2017—strong fundamentals may have been masked

• Long-term

Lower GDP trend level

Replacement demand becomes more important

Greater China production outlook changes

18


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Recovery quickly gives way to saturation

• Trends

Uncertainty within EU about further destabilization

• 2016–18 Recovery cycle in domestic sales

passes the peak Exports become crucial to support

overall growth

• Long-term

Localization will remain a competing trend to exports; trade dependencies may accelerate

Central European operations become expansion point

Europe excluding CIS* production outlook changes

19


* CIS = Commonwealth of Independent States: Russia, Ukraine, Belarus, Kazakhstan, Uzbekistan

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An old story that does not change much

• Trends

Significant impact from external policy developments

• 2016–18 Japanese consumption-tax

increase deferred to 2019 Korea restores consumption tax

mid-2016

• Long-term

Despite volatility, localization will remain a competing trend to exports; trade dependencies may accelerate

Japan/Korea production outlook changes

20


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Growth returning and stabilizing

Key emerging-market production outlook changes

22


South America ASEAN/India

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New order could emerge as growth slows and search for scale intensifies

Top OEMs by volume 2016

24


Million units

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Top-20 subject to potential consolidation driven by new collaboration

Top OEMs by volume 2024

25


Toyota + Suzuki + Mazda

+ Fuji

VW +

TATA

R/N +

Mits.

GM/SAIC- Opel H

yund

ai

Ford

Hon

da

FCAPSA

+ Opel D

aim

ler

BM

W Geely +

Proton

BA

IC

Cha

ngan

Gre

at W

all

Million units

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Adjusting global focus

• Singular focus though One Ford subject to greater regional modification

• Continues to compete in Europe

• Lincoln struggles to establish premium branding beyond NA

• Accelerated push for electrification and seeks to demonstrate lead in autonomous vehicles

• Hybrid, PHEV, and BEV viabilities changing in view of planning priorities

• Realignment of Mexican operations reflecting passenger car challenge

• Loud overtures to GM silenced for now in favor of partner for selected passenger car opportunities

• Switching to trucks, eases margin and compliance pressure on US market; Dart and Chrysler 200 dropped, major effect on midterm volumes

• Focus likely to be reflected in China as regional strategy is revisited

• Conserving cash, canceling, deferring program investments

• Relaunch Alfa and fine-tune European compact/subcompact sectors

North American OEMs

26


• Divesting European operations

• Focus on North America and China

• Core-4: Buick, Chevrolet, Cadillac, and GMC

• Commitment to invest in Cadillac to improve competitiveness

• Truck lightweighting being accelerated

• Expect platform strategy to be revisited to reflect restructuring

• Bolt/Ampra-e forms basis of electrification strategy further derivatives to follow

General Motors Ford FCA

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The Big 3 being formed as new collaborations grow

• Further extend the alliance with the addition of Mitsubishi since mid-2016

• Nissan-Mitsubishi: Mitsubishi SUVs will be developed under the Renault Nissan CMF-C/D platform; C-segment BEVs also integrated

• Nissan will also assume lead on K-car development

• The RNPO will integrate key elements of Mitsubishi supply chain.

• Mitsubishi focus on ASEAN operations under the alliance

• Honda a question mark—high risk in continuing to operate as a standalone?

• Faces the same challenges as other Japanese OEMs: Mexico, Europe uncertainties, slowing domestic backdrop

• Recently announced joint venture with GM to develop a fuel-cell system in the United States is distant and marginal technology

• Improved performance in China could provide support, but political tension never far away

Japanese OEMs

27


• Already closely aligned with Fuji Heavy through shareholding and wholly owned control of Daihatsu

• Toyota-Mazda: Mazda will supply the Mazda 2/Toyota Yaris in Mexico, Mazda will develop BEV supported by Toyota

• We expect Toyota and Suzuki should move together in India; enhances Toyota’s ability to be cost-effective in the market if gains access to the Suzuki supply chain

• Suzuki expected to gain powertrain technology in return

Toyota + Renault-Nissan, plus Mitsubishi Honda

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New dynamics emerging

• Strong recovery from diesel crisis; China growth major compensation

• Financial headwinds still loom and will affect longer-term investment

• Aggressive push into electrification

• Looks to build collaboration with Tata to primarily address low-cost needs

• Developing dedicated brand for China

• Platform flexibility allows variation in mature regions; efforts to make better offer in US market

• BMW selected collaborations: Toyota, Daimler purchasing i NEXT to introduce next steps in electrification and autonomy

• Daimler threatening wave of electric vehicle launches on a par with VW Group; Renault-Nissan partnership could offer more, despite MFA issues

• JLR product proliferation at Land Rover trying to boost Jaguar with electrification

• Volvo enjoying financial support from Geely and opportunity to build scale with the Lynk&Co brand

European OEMs

28


• Recent restructuring paying dividends: profitability in Europe, growth in China, plus simplification of engineering efforts

• Take Opel/Vauxhall assets from GM—builds scale in Europe

• Look to enhance export/regional capabilities

• In the running for Proton

• Restructuring inevitable—UK operations at greatest risk

• Considering return to North America in some form: sales, services before any plan to build

Groupe PSA PremiumsVolkswagen Group

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Summary

29

The case of L860

A subcompact SUV to be built in India and exported globally

Investment postponed as Tata/Jaguar-Land Roverfocuses resources on Slovakia as a hedge against Brexit

Expected to revise evaluation plans for a plant in the United States to reduce risk of potential change to import duties

This could become widespread


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