drive train to supply chain 2

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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 16 January 2018 Europe/United Kingdom Equity Research Materials Drive Train to Supply Chain 2 The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients. Research Analysts Mathew Hampshire-Waugh 44 20 7888 0194 [email protected] Chris Counihan 44 20 7883 7618 [email protected] Samuel Perry, CFA 44 20 7888 1583 [email protected] Daniel Schwarz, CFA 44 20 7883 5994 [email protected] Vincent Gilles 44 20 7888 1926 [email protected] Bin Wang 852 2101 6702 [email protected] Achal Sultania 44 20 7883 6884 [email protected] John W. Pitzer 212 538 4610 [email protected] David Hewitt 416 352 4583 [email protected] Christopher S. Parkinson 212 538 6286 [email protected] Mika Nishimura 81 3 4550 7369 [email protected] Jatin Chawla 91 22 6777 3719 [email protected] Michael Sohn 82 2 3707 3739 [email protected] Masahiro Akita 81 3 4550 7361 [email protected] Joseph Barnet-Lamb 44 20 7883 3535 [email protected] Conor Rowley 44 20 7883 9156 [email protected] Specialist Sales: James Brady 44 20 7888 4267 [email protected] SUPPLY CHAIN RESEARCH E-Mobility: Still charging or overloaded? We reload our view on the global automotive supply chain ~2 years on from our first edition of this report published in April 2016. Mass market electric cars are poised to disrupt car production, supply chains and the energy industry to an extent not seen since 1913, when consumers first dismounted their horses and jumped behind the wheel of a Ford Model T. We use our proprietary integrated modelling to map the supply chain and screen for bottlenecks, technology risk and under/over-valued assets. We cut forecast battery costs by ~20% and double our long-term battery car penetration rates. Fully integrated analysis: Our model integrates all aspects of the auto supply chain from car production/engine mix to batteries, catalysts, materials, metals, tech, energy and recycling. We make forecasts based on output CO2 emissions, cost of ownership and supply chain/infrastructure constraints covering more than15 sectors and over 50 global analysts. Credit Suisse base case: We are bullish on electrification trends given; (i) the legislative push, where CO2 targets create a floor for electric car production (we estimate electric vehicle penetration of 4.5% by 2020 and 16% by 2030, avoiding $400bn in industry fines); (ii) scale-up and technology progress should drive battery prices to $130/kWh by 2025E and <$100 by 2040E; and (iii) supporting consumer pull, with electric car cost of ownership/performance exceeding combustion engines, we believe BEV/PHEV penetration will hit 33% by 2040. Potential winners & losers: We are structurally bullish on battery materials (supply shortage), batteries (returns ramping), semiconductors (rising content) and lithium/cobalt (tight markets). We turn more cautious on platinum group metals and keep an eye on the pace of gasoline substitution. Out on a limb self-driving cars work, fuel cell cars don’t: We are positive on vehicle automation trends, with driverless cars gaining traction post 2030. In our view, fuel cell vehicles are unlikely to take off. Stock calls: Outperforms: JMAT, BMW, VW, Infineon, ST Micro, AMS, KAZ, Panasonic, Hanon, Syrah, Analog Devices and Texas Instruments. Underperforms: Umicore, Autotrader and ON Semiconductor. Figure 1: Fully Integrated Automotive Supply Chain Model Source: Credit Suisse research Battery Vehicles Combustion Engine Supply Constraints Cost of Ownership CO2 targets Electricity demand & infrastructure Supply requirements & Recycling Technology & cost constraints Fuel consumption Capital investment & future value Automation & ride sharing

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Page 1: Drive Train to Supply Chain 2

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

16 January 2018 Europe/United Kingdom

Equity Research Materials

Drive Train to Supply Chain 2 The Credit Suisse Connections Series leverages our

exceptional breadth of macro and micro research to deliver

incisive cross-sector and cross-border thematic insights for

our clients.

Research Analysts

Mathew Hampshire-Waugh

44 20 7888 0194

[email protected]

Chris Counihan

44 20 7883 7618

[email protected]

Samuel Perry, CFA

44 20 7888 1583

[email protected]

Daniel Schwarz, CFA

44 20 7883 5994

[email protected]

Vincent Gilles

44 20 7888 1926

[email protected]

Bin Wang

852 2101 6702

[email protected]

Achal Sultania

44 20 7883 6884

[email protected]

John W. Pitzer

212 538 4610

[email protected]

David Hewitt

416 352 4583

[email protected]

Christopher S. Parkinson

212 538 6286

[email protected]

Mika Nishimura

81 3 4550 7369

[email protected]

Jatin Chawla

91 22 6777 3719

[email protected]

Michael Sohn

82 2 3707 3739

[email protected]

Masahiro Akita

81 3 4550 7361

[email protected]

Joseph Barnet-Lamb

44 20 7883 3535

[email protected]

Conor Rowley

44 20 7883 9156

[email protected]

Specialist Sales: James Brady

44 20 7888 4267

[email protected]

SUPPLY CHAIN RESEARCH

E-Mobility: Still charging or overloaded?

We reload our view on the global automotive supply chain ~2 years on from

our first edition of this report published in April 2016. Mass market electric cars

are poised to disrupt car production, supply chains and the energy industry to

an extent not seen since 1913, when consumers first dismounted their horses

and jumped behind the wheel of a Ford Model T. We use our proprietary

integrated modelling to map the supply chain and screen for bottlenecks,

technology risk and under/over-valued assets. We cut forecast battery costs by

~20% and double our long-term battery car penetration rates.

■ Fully integrated analysis: Our model integrates all aspects of the auto

supply chain from car production/engine mix to batteries, catalysts,

materials, metals, tech, energy and recycling. We make forecasts based on

output CO2 emissions, cost of ownership and supply chain/infrastructure

constraints covering more than15 sectors and over 50 global analysts.

■ Credit Suisse base case: We are bullish on electrification trends given; (i)

the legislative push, where CO2 targets create a floor for electric car

production (we estimate electric vehicle penetration of 4.5% by 2020 and

16% by 2030, avoiding $400bn in industry fines); (ii) scale-up and

technology progress should drive battery prices to $130/kWh by 2025E

and <$100 by 2040E; and (iii) supporting consumer pull, with electric car

cost of ownership/performance exceeding combustion engines, we believe

BEV/PHEV penetration will hit 33% by 2040.

■ Potential winners & losers: We are structurally bullish on battery materials

(supply shortage), batteries (returns ramping), semiconductors (rising

content) and lithium/cobalt (tight markets). We turn more cautious on

platinum group metals and keep an eye on the pace of gasoline substitution.

■ Out on a limb – self-driving cars work, fuel cell cars don’t: We are

positive on vehicle automation trends, with driverless cars gaining traction

post 2030. In our view, fuel cell vehicles are unlikely to take off.

■ Stock calls: Outperforms: JMAT, BMW, VW, Infineon, ST Micro, AMS,

KAZ, Panasonic, Hanon, Syrah, Analog Devices and Texas Instruments.

Underperforms: Umicore, Autotrader and ON Semiconductor.

Figure 1: Fully Integrated Automotive Supply Chain Model

Source: Credit Suisse research

Battery

Vehicles

Combustion

Engine

Supply Constraints

Cost of

Ownership

CO2

targets

Electricity

demand &

infrastructure

Supply

requirements

& Recycling

Technology

& cost

constraints

Fuel

consumption

Capital

investment &

future value

Automation

& ride

sharing

Page 2: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 2

Table of contents

Automotive supply chain overview – Credit Suisse outlook by sub-sector 4

Infographic - The automotive supply chain in 2040 5

Report contributors & contact information 6

Drive chain to supply chain: overview 7

Still charging or overloaded? Changes to potential winners & losers 8

Supply chain valuation by subsector 10

Global stock picks 11

Supply chain summary – growth forecasts 17

Supply chain summary – consumption forecasts 18

Supply chain summary – penetration rates 19

Credit Suisse HOLT® analysis 20

Global automotive supply chain 22

Carbon intensity & emissions 26

European automotive 30

US automotive 34

China automotive 36

Japan automotive 38

India automotive 40

Korea automotive 42

Global batteries 44

Battery materials – cathode technology 50

Battery materials – anode technology 52

Battery metals – lithium carbonate 54

Battery metals – cobalt, copper & nickel 56

Automotive catalysts 58

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16 January 2018

Drive Train to Supply Chain 2 3

Auto catalyst metals – platinum, palladium, ruthenium 60

Semiconductor content 62

Autonomous driving 68

Global utilities 74

Global energy 78

Battery recycling 80

Glossary 82

Further reading 83

Appendix 84

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Automotive supply chain overview – Credit Suisse outlook by sub-sector

Figure 2: Overview

Source: Credit Suisse estimates

Drive Chain to Supply Chain

ICE Car Catalyst Industry

We believe the average value of a car

catalyst will continue to rise until mid

2020's driven by more stringent

regulation, beyond which EV

penetration will reduce the $ value per

average vehicle.

We estimate revenues peak in 2030

beyond which EV penetration

accelerates and car production starts

to plateau with drive sharing.

We value this industry at $9-10bn

given the strong cash flows for the

next 10+ years.

Automotive IndustryWe forecast accelerating penetration of BEV/PHEV to

2030 to meet legislative targets. Beyond 2030 we

believe BEV will further gain share driven by favourable

economics and consumer pull.

China/Japan are leading the electric charge, Europe is

playing catch up with tightening legislation and the US

hangs in the balance given political sentiment.

Emissions Targets

We estimate 4-5% BEV/PHEV

penetration by 2020 and 16% by 2030

- this is required to avoid US/European

car industry paying >$400bn of CO2

fines.

BEV/PHEV Battery Metals

Lithium: We forecast flat/increasing operating rates and

higher prices over the next 4 years as demand from EV's

accelerate. We estimate 3m tonne lithium carbonate

demand by 2040 and reserves at 85% of current

estimates.

Nickel: We estimate adoption of EV to push demand

growth from 2% to >3% long term. Near term we forecast

more balanced market given new supply and high

inventories.

Cobalt: EV adoption should increase cobalt demand

growth from 2% to a sustainable 5-6% longer term (30%

demand from EV). Near term we forecast supply

constraints from the DRC. Long term new mines/recycling

should balance the market.

Copper: We forecast positive fundamental longer term as

supply costs increase. EV penetration is supportive but not

a material factor in demand.

Total Cost of OwnershipBEV: We estimate full battery vehicles are very close to cost parity with

gasoline vehicles in Europe and will be more economic for most drivers

in 5 years. Lower fuel prices in the US will make parity far harder to

reach and may slow down adoption.

PHEV make little economic sense but avoid consumer range anxiety.

We believe penetration of PHEV slows by 2030 as consumers gain

confidence in full electric performance and cost.

ICE Car Catalyst Metals

Platinum: We forecast balanced

platinum S/D as weakness from lower diesel demand is offset by uptake of GDI catalysts and growth in non catalysts.

Palladium: We forecast strong

demand near term as Asian legislation supports Palladium consumption. However, we estimate peak demand in 2024 as

EVs penetrate.

Rhodium: We forecast increased recycling levels will weigh on

operating rates near term and demand will peak in 2024.

Battery Materials

Cathode: We forecast ~30%

CAGR and 400kt demand for

lithium ion cathodes by 2020 with

likely shortages of high

energy/high performance

materials. We estimate market

revenues will peak in mid-2030 as

the technology starts to move to

next generation materials.

Anode: We forecast ~30% CAGR and 250kt demand for carbon anodes by 2020. We

estimate the market will move from carbon towards silicon/

carbon mix by 2030 -

supporting battery prices of $100/kWh.

Lithium Battery Market

We forecast 3.7TWh of battery demand

per year by 2040 - this will require

~100x Giga factories.

We forecast a battery price of

$159/kWh by 2020 (economy of scale),

$100/kWh by 2030 (cathode/anode

improvements) and $70/kWh by 2040

(solid state penetration).

We believe the industry will be cash flow

positive by mid 2030's and estimate an

NPV of $21bn

Energy Industry

We estimate 2025-30 is the peak

for global gasoline demand given

increasing energy efficiency of

combustion engines and

penetration of battery vehicles.

We estimate diesel markets will

continue to grow given the limited

transition to battery trucks and

consumption from aerospace &

shipping

EV Battery Recycling Market

Battery recycling becomes a

material opportunity beyond

2025. We estimate

$1,000/BEV metal value which

represents $300 residual value

post recycling costs.

Our analysis suggests that the

industry will require 18 world

class smelting facilities by 2040

to reclaim $23bn of

metal/annum.

We esimte an NPV for this

industry at $2bn.

Semiconductor Content

We estimate semiconductor content in

vehicles will rise from $400/car to

$1,100/car by 2040. This is driven by

PHEV/BEV penetration ($600-700/car)

and increased penetration of automation

(up to a further $860/car with full

automation).

We estimate all cars will have

highway/park assist by 2040 and ~15%

of vehicles produced will be fully

autonomous

Utilities

We forecast 1000TWh of electricity

demand from BEV/PHEV charging by

2040 this equates to 2.4% of current

global electricity demand.

We estimate 45m slow chargers and 3m

fast chargers will be required by 2040.

This requires $80bn cumulative capex -

only ~4months of global networks

capex.

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Infographic – The automotive supply chain in 2040

Figure 3: Key Credit Suisse forecasts for the automotive supply chain in 2040 based on our integrated supply chain model

Source: Credit Suisse estimates

42%

5%

20%

7%

26%

Production

Production

Gasoline

Diesel

Hybrid

PHEV

BEV

Production

53%

7%

17%

7%

16%

Production

Vehicle Fleet

136m/yr cars

produced of which 20mself-driving

1.7bn cars on the road

$2,900/yr all in cost

of buying and running a full battery car ~

cheaper or parity with gasoline

60gCO2/km average

new car emissions from

160gCO2/km today

3 Gt/yr CO2emissions from passenger cars

down 25%

280bn gal/yr motor

gasoline consumption

down 30%

1000TWh/yr electricity

demand to recharge

electric cars ~2.4% of demand & requiring

cumulative $80bn to

install charger network

6m tonnes/yrspent batteries

containing

$23bn metal

value

3.7 TWh/yrbattery demand

requiring ~100

Gigafactories

4m tonnes/yrcathode demand requiring >150

large scale

facilities

3m tonnes/yrlithium carbonate demand requiring

>100 large scale

mines

$1,000/carsemiconductor

content with ~14% cars self-driving

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Report contributors & contact information

Contributors Sector Coverage Region Report/Integrated Model Contribution Areas Email Tel.

Mathew Hampshire-Waugh Chemicals Europe [email protected] +44 20 7888 0194

Chris Counihan Chemicals Europe [email protected] +44 20 7883 7618

Sam Perry Chemicals Europe [email protected] +44 20 7888 1583

Daniel Schwarz Automotive Europe [email protected] +44 20 7883 5994

Sascha Gommel Autos Europe [email protected] +44 20 7888 0589

Vincent Gilles Utilties Europe Global Utilities [email protected] +44 20 7888 1926

Andre Kukhnin Cap Goods Europe [email protected] +44 20 7888 0350

Max Yates Cap Goods Europe [email protected] +44 20 7883 8501

Iris Zheng Cap Goods Europe [email protected] +44 20 7883 5298

Michael Shillaker Mining/Steel Europe [email protected] +34 91 791 58 78

James Gurry Mining/Steel Europe [email protected] +44 20 7883 7083

Conor Rowley Mining/Steel Europe [email protected] +44 20 7883 9156

Achal Sultania Technology Europe [email protected] +44 20 7883 6884

Jo Barnet-Lamb Internet Europe [email protected] +44 20 7883 3535

Quang Le Technology Europe [email protected] +44 20 7888 1799

Thembeka Stemela Insurance Europe Autonomous Driving [email protected] +44 20 7888 9228

Thomas Adolff Energy Europe Global Energy [email protected] +44 20 7888 9114

Vivienne Yang HOLT Europe HOLT [email protected] +44 20 7888 3910

David Hewitt Oil Macro US [email protected] +1 416 352 4583

Kristina Kazarian US Refiners US [email protected] +1 212 325 6256

William Featherston US Energy US [email protected] +1 212 325 6283

Michael Weinstein Utilities/Renewables US [email protected] +1 212 325 0897

Aric Li Utilities/Renewables US [email protected] +1 212 325 2679

Maheep Mandloi Renewables US [email protected] +1 212 325 2345

John Pitzer Technology US [email protected] +1 212 538 4610

Charles Kazarian Technology US [email protected] +1 212 538 4160

Farham Ahmad Technology US [email protected] +1 415 249 7929

Chris Parkinson Chemicals US [email protected] +1 212 538 6286

Graeme Welds Chemicals US [email protected] +1 212 538 8463

Kieren DeBrun Chemicals US [email protected] +1 212 538 3440

Bin Wang Automotive China China Automotive [email protected] +852 2101 6702

Dave Dai Utilities China Global Utilities [email protected] +852 2101 7358

Koji Takahashi Automotive Japan [email protected] +81 3 4550 7884

Masahiro Akita Automotive Japan [email protected] +81 3 4550 7361

Mika Nishimura Technology Japan Global Batteries [email protected] +81 3 4550 7369

Michael Sohn Automotive Korea Korea Automotive [email protected] +82 2 3707 3739

Keon Han Technology Korea [email protected] +82 2 3707 3740

Sanguk Kim Technology Korea [email protected] +82 2 3707 3795

Jatin Chawla Automotive India India Automotive [email protected] +91 22 6777 3719

Michael Slifirski Mining Australia [email protected] +61 3 9280 1845

Nick Herbert Mining Australia [email protected] +61 3 9280 1754

Global Energy, Carbon Intensity, Renewables Impact

Energy Storage Systems

Integrated model, Supply Chain Overview, Carbon Intensity &

Emissions, Cathode Materials, Anode Materials, Catalysts,

PGMs, Battery Recycling., Autonomous Cars, Fuel Consumption.

European Automotive and US Automotive

Cobalt, Nickel, Copper

Semiconductor Content & Autonomous driving

Global energy

Lithium

Global Batteries

Anode Materials

Semiconductor Content & Autonomous driving

Japan Automotive / Autonomous Driving

Page 7: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 7

Drive chain to supply chain: overview We reload our view on the global automotive supply chain nearly two years on from our

first edition of this report (April 2016). Since April 2016, electrification of vehicles has

become a dominant market theme with exposed equity plays and physical assets

increasing significantly in value. The purpose of this report is to provide an update on

industry progress over the past two years, further build out the integrated model and to

screen for hidden value and overvalued assets in the space.

Mass market electric cars are poised to disrupt car production, supply chains and the

energy industry to an extent not seen since 1913, when consumers first dismounted their

horses and jumped behind the wheel of a Ford Model T.

Henry Ford managed to increase the production efficiency of automobiles by >8x and had

one car rolling off his production line every 15 mins. Division of labour was highly effective

for Ford, but it was the supply chain that proved the ultimate bottleneck. Limited supplies

of fast-drying paint forced every vehicle to be painted in Japan black, leading Ford to

famously declare:

"A customer can have a car painted in any colour he wants as long as it's black."

We use our unique integrated automotive modelling to map the future automotive supply

chain and screen for bottlenecks, technology disruption and under/over-valued assets. We

cut our forecast for battery costs by ~20% and double our long-term forecast for battery

car penetration rates.

Scope of the report:

■ Holistic view: We update our unique model which fully integrates all aspects of the

automotive supply chain from car production and engine mix to batteries, catalysts,

cathodes, anodes, new energy metals, PGMs, tech content, light-weighting, energy

and recycling. This allows us to make forecasts based on output CO2 emissions, cost

of ownership and supply chain/energy infrastructure constraints. We draw on resources

from more than 50 global analysts and over 15 sectors.

■ New analysis: We extend our analysis to the year 2040 and now include

semiconductor content, minor metals (e.g. cobalt), the impact of automation, battery

technology analysis, infrastructure and utility requirements.

■ Market value: We include a cash flow analysis for each part of the supply chain to

forecast industry net present value. We highlight FCF breakeven for growth industries

and peak returns for those industries being cannibalised.

Our unique model fully integrates all aspects of

the automotive supply chain.

This allows us to guide forecasts based on

output CO2 emissions, cost of ownership and

supply chain/energy infrastructure

constraints.

Page 8: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 8

Still charging or overloaded? Changes to potential winners & losers Changes to forecasts & key assumptions

We outline our key assumptions in the tables below. The main changes to our forecasts

since our April 2016 report are as follows:

■ Electric Vehicles: We make minor upgrades to our 2020 forecast penetration rates for

BEV/PHEV/Hybrid cars given the strong pipeline of product launches. We note that

battery electric vehicles (BEV) and plug-in hybrid vehicles (PHEV) have closely

followed our predicted trend, while hybrid penetration is lagging our forecasts. By 2025

we double (previously forecast) penetration rates for all electric vehicles given

extended legislation in Europe, firm targets at major auto OEMs and government

investment in China.

■ Battery Prices: Falling faster than expected. Commentary from major producers

suggests a current price above $200/kWh with the lowest-cost producers claiming

<$170/kWh (Tesla). We reduce forecast battery prices by an average of 20% as

economies of scale support price reductions in the near term and the technology

roadmap supports lower prices in the long term (High Energy Cathode>>Silicon

Anode>>Solid State>>Next Generation).

■ Diesel Market Share in Europe: Has declined more slowly than previously anticipated.

We reflect a slower decline, but still forecast the phase-out of diesel cars by 2040.

Figure 4: New Major Forecasts & Assumptions

Source: Credit Suisse estimates, IHS, Thomson Reuters

Figure 5: Previous Major Forecasts & Assumptions (from our April 2016 report)

Source: Credit Suisse estimates

Key Assumptions - Base Case 2015 2016 2017 2020E 2025E 2030E 2040E 2017-40E (CAGR)

Global Car Market (mn unit sales) 96 100 102 106 120 129 136 1%

European Diesel Market Share 52% 50% 46% 39% 26% 14% 0%

Global Hybrid/48V Market Share 2% 2% 2% 5% 10% 15% 20% 11%

Global PHEV 0% 0% 1% 2% 5% 7% 7% 11%

Global BEV Market Share 0% 1% 1% 2% 5% 9% 26% 17%

Technical Improvements to Fuel Efficiency 0% 3% 5% 11% 20% 28% 33% 9%

European CO2 Emissions (g/km, average of cars sold) 121 118 115 96 80 55 25 -6%

US Miles Per Gallon (average of cars sold) 26 26 27 32 38 44 56 3%Metals Prices Spot Spot Spot Spot Spot Spot Spot n/a

EV Battery Price ($/kWh) 300 272 244 159 130 100 70 -5%

Energy Prices Spot Spot Spot Spot Spot Spot Spot n/a

Previous Forecasts - April 2016 2015E 2016E 2017E 2020E 2025E

European Diesel Market Share 46% 43% 41% 33% 23%

Global Hybrid/48V Market Share 3% 3% 4% 5% 7%

Global PHEV 0% 1% 1% 2% 3%

Global BEV Market Share 0% 1% 1% 1% 2%

Technical Improvements to Fuel Efficiency 0% 3% 5% 11% 21%

European CO2 Emissions (g/km, average of cars sold) 121 118 115 105 92

US Miles Per Gallon (average of cars sold) 27 28 29 32 36

Metals Prices Spot Spot Spot Spot Spot

EV Battery Price ($/kWh) 325 306 286 228 185

Energy Prices Spot Spot Spot Spot Spot

By 2025 we double (previously forecast)

penetration rates for all electric vehicles given extended legislation in Europe, firm targets at major auto OEMs and

government investment in China.

We reduce forecast battery prices by an

average of 20% as economies of scale

support price reductions near term

and the technology roadmap supports

lower prices long term.

Page 9: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 9

Updating Our Structural View: Changes to potential Winners and Losers

We remain positive on electrification trends with a near-term push coming from CO2

legislation and scale/technology advances supporting consumer pull in the longer term.

We highlight changes to our structural view in the table below:

■ Change of View: We are more positive on traditional car companies as they adapt to

electrification trends using their strong brand presence. We believe platinum markets

are more balanced but we are nearing peak demand levels for palladium and rhodium

(2024, on our forecasts) given the shift to battery cars, thrifting of metals and increased

recycling.

■ New Forecasts: We include New Energy metals nickel and cobalt – where we are

positive on cobalt in the near term (supply constraints) and neutral on nickel. We are

bullish on semiconductor names exposed to electric/autonomous vehicle trends as

content per car rises.

■ Unchanged Positive: We remain structurally positive on electrification of cars, ramp-

up of battery production, lithium pricing and anode/cathode markets supply/demand.

We believe internal combustion engine (ICE car catalysts will grow strongly near term

through legislation-led value increases).

■ Unchanged Negative: We keep a watchful eye on gasoline demand given the risk

around substitution as electric vehicles penetrate the fleet and fuel efficiency of

combustion engines increase.

Figure 6: Summary of our Top-Down Views by Sub-Sector (Green = potential

winners, Orange = neutral, Red = potential losers)

Source: Credit Suisse estimates

Supply Chain Exposure April 2016 January 2018 Rationale

Electric Vehicle OEMS Legislation Push/Consumer Pull

Batteries Returns Ramping

Battery Materials (Anode/Cathode) Tight Supply/Demand by 2020

Lithium Tight markets to 2021

New Energy Metals (Ni,Co) n/a Bullish Cobalt, Muted Nickel

Battery Recycling n/a Uncertainty to Great

Traditional Automotive OEMS BEV&PHEV Entry/Brand Reputation

Catalysts Legislation / Cash Flows

Platinum China Catalyst Legislation

Palladium Peak demand 2024

Rhodium Peak demand 2024

Semiconductor Content n/a EV/Automation of Cars

Vehicle Efficiency/Lightweighting CO2 targets

Energy Industry into Autos Peak Demand Gasoline 2025-30

We are more positive on traditional car

companies as they adapt to electrification

trends using their strong brand presence.

We now include New Energy metals nickel

and cobalt – where we are positive on cobalt

in the near term

We remain structurally positive on

electrification of cars, ramp-up of battery

production and anode/cathode markets

supply/demand.

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Drive Train to Supply Chain 2 10

Supply chain valuation by subsector We estimate the net present value of major industries in the automotive supply chain

based on our explicit modelling and basic industry cash flow assumptions. Whilst we

highlight the high level of uncertainty and large number of variables/assumptions, we

believe this provides a reference point for current implied value by company or sub-sector.

Figure 7: Estimated Present Value of Major Markets in Autos Supply Chain

Source: Credit Suisse estimates

Internal Combustion Engine Car Market: We estimate the net present value at

$1,143bn based on NPV of cash flows to 2040. This is based on our explicit growth

forecasts, a $25k/car price, 0.9x Sales/Capital Employed, 10% EBITDA margin (per Credit

Suisse HOLT®) and a 7% discount rate. This compares with the current market cap of the

600 major global car makers of c$1,200bn (HOLT).

BEV/PHEV Car Market: We estimate the value at $265bn based on a 2.5% FCF yield in

2040 discounted back. This is based on our explicit growth forecasts, $35-25k/car price,

0.9x Sales/Capital Employed, 12% EBITDA margin (lower operating costs to ICE) and 7%

discount rate. This compares to Tesla's current market cap of $56bn (implies 20% share)

Battery Makers: We estimate the value at $21bn based on 2.5% FCF yield in 2040

discounted back. This is based on explicit growth forecasts, c$80-150K/GWh capital

intensity (based on scale-up costs for Tesla's 'gigafactory'), 10% ROCE (based on tech

hardware returns) and a 7% discount rate.

Car Catalysts: We estimate the value at $9-10bn based on forecast discounted FCF to

2040. This is based on our explicit growth forecasts, 1.3x Sales/CE, 14% EBIT margin

(based on UMI/JMAT) and 7% discount rate. This compares with our SOTP EV for

JMAT/BASF and UMI car catalysts of $10bn (aggregate they have 90% market share).

Cathode Materials: We estimate the value at $5.5bn based on 2.5% FCF yield in 2040

discounted back. This is based on our explicit growth forecasts, $6k/tonne capital intensity,

12% ROCE (based on Umicore data) and 7% discount rate. This compares with the

market price implied EV for Umicore batteries business of $3-4bn.

Anode Materials: We estimate the value at $1.7bn based on 2.5% FCF yield in 2040

discounted back. This is based on our explicit growth forecasts, $1.4-2.6k/tonne capital

intensity (based on Syrah resources data), 12% ROCE and 7% discount rate.

Battery Recycling: We estimate the value at $2bn based on 2.5% FCF yield in 2040

discounted back. This is based on our explicit growth forecasts, $1k/tonne capital intensity

(based on Umicore), ~$120/tonne EBIT, 50% recycling rate and 7% discount rate. This

compares with the market implied EV for Umicore's battery recycling business of $1-2bn.

Semiconductors into Cars: We estimate the value at $5-6bn based on 2.5% FCF yield in

2040 discounted back. This is based on our explicit growth forecasts, 0.4x sales/CE

(based on HOLT semis average), 30% EBITDA margins (HOLT semis average) and 7%

discount rate.

NPV ($bn)Cash Positive

From Year…

Implied

ROCEValuation Method

ICE Car Market 1,143 Now 10% NPV Cash Flows to 2040

PHEV/BEV Car Market 265 2039 4% NPV 2040 cash flow on 2.5% yield

Battery Makers 21 2037 10% NPV 2040 cash flow on 2.5% yield

Car Catalysts 9.5 Now 18% NPV Cash Flows to 2040

Cathode Materials 5.5 2032 12% NPV 2040 cash flow on 2.5% yield

Anode Materials 1.7 2032 12% NPV 2040 cash flow on 2.5% yield

Battery Recycling 2.0 2035 19% NPV 2040 cash flow on 2.5% yield

Semiconductors into Cars 5.4 2026 6% NPV 2040 cash flow on 2.5% yield

We estimate the NPV of New Energy Transport

Industry to be in excess of $300bn

We estimate the NPV of Internal Combustion

Engine and Supply Chain in excess of

$1.2bn

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16 January 2018

Drive Train to Supply Chain 2 11

Global stock picks Using our structural view on the supply chain and estimated industry value, we believe the

following stocks are under/overvalued:

Outperform-rated stock picks

Johnson Matthey (Outperform, TP £39 – European Focus List stock)

Undervalued Car Catalysts Business & Battery Materials Opportunity

Exposure: Car Catalysts, Cathode Materials, Metal Recycling

European Chemicals; Analyst: Mathew Hampshire-Waugh

We believe Johnson Matthey is poised for double-digit growth in car catalysts as

legislation and market share gains accelerate growth in the mid-term. Longer term we

believe scale-up of their eLNO cathode material for electric car batteries will position the

business for the changing supply chain. We estimate underlying value for JMAT at £37/sh

and we add £2/sh option value for eLNO. We note the company is trading on 15x PE

2018E, a 40% discount to chemicals (20x P/E) and a 55% discount to key peer Umicore

(32x P/E). See our report JMAT vs UMI – The charge towards battery materials, published

16 January 2018.

BMW (Outperform, TP €126)

Exposure: Automotive OEMs

Sector: European Autos; Analyst: Daniel Schwarz

We believe that BMW is among the technologically leading OEMs in EVs. BMW has sold

more EVs than its peers, produced on both dedicated as well as flexible platforms. BMW

has produced more batteries than Daimler and VW combined. EVs are less complex to

produce, resulting in a decline in the value added at the OEM level. We believe this

transition should be easier for BMW than for peers as BMW is already producing cars with

a low degree of vertical integration, e.g. transmissions are not produced in-house. The

BMW investment case should become increasingly interesting in 2018 as negative market

sentiment (it is the least liked European auto OEM by sell-side analysts and among the

most shorted automotive stocks in Europe) should meet an improving product cycle, high

ROCE and high cash conversion rates. See The future is bright (and asset light),

published 18 October 2017.

VW (Outperform, TP €227)

Exposure: Automotive OEMs

Sector: European Autos; Analyst: Daniel Schwarz

VW is not a pioneer in EVs. However, the company invests significantly and it benefits

from economies of scale. The new Modular Electrification Toolkit (MEB) should be the

biggest EV architecture globally, leveraged across brands and regions. The diesel

emissions scandal clearly accelerated this process; VW now has the most aggressive

targets (among Auto OEMs) regarding electrification and the ‘Futurepact’ (improvement

program) reflects the need to adjust vertical integration in the long term. We believe that

following the sale of Porsche SE shares from Ferdinand Piech to his brother Hans-Michel

Piech (financed with debt) and the implementation of a new incentive scheme for

management, the interests of all stakeholders are much more aligned than in the past.

See The future is bright (and asset light), 18 October 2017.

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Panasonic (Outperform, TP ¥2,200)

Nearing the inflection point for batteries

Exposure: Automotive Batteries

Sector: Japanese Technology; Analyst: Mika Nishimura

We expect Panasonic to see continued profit growth not only in batteries but also in

infotainment, sensors, and other automotive products. Panasonic is our top pick in the

Japanese consumer electronics sector. We forecast strong FY3/19 profit growth in

appliances, where sales are on the rise in developing countries, and connected solutions

amid strong performance in FA solutions. We reiterate our Outperform rating with a target

price of ¥2,200. Our TP is based on our FY3/19 EPS estimate of ¥120 and a fair-value P/E

of 18x. (See 6752: Panasonic - Better visibility on profit growth outlook, 29 November 2017.)

Syrah Resources (Outperform, TP A$6.60)

The standout Global Graphite Play

Exposure: Anode Materials

Australian Mining; Analyst: Michael Slifirski

Syrah is the leading global producer of natural graphite. The company's product has

proven to be highly amenable to use in battery anodes, displacing higher-cost synthetic

graphite, hence we view Syrah Resources as uniquely positioned to capitalize on the

growth in global EV and battery capacity. Syrah Resources' products are superior to its

peers by almost every measure (based on company data) and for this reason we expect it

to become the dominant supplier of natural flake and spherical graphite to anode

producers globally. (See SepQ: Graphite Concentrate Produced, 31 October 2017.)

Infineon (Outperform, TP €26)

Increasing Semis Content Drives Growth

Exposure: Semiconductor content in EV and Autonomous Vehicles

European Technology; Analyst: Achal Sultania

With 40% sales exposures to autos, we see Infineon as a clear beneficiary of auto semis

growth. Specifically, the company has exposures to Advanced Driver Assistance Systems

(ADAS) and battery cars (xEV) (which together account for a low-teens percentage of ATV

sales). ADAS and xEV grew 60-80% in FY17 and management expects them to grow

another ~40% in FY18. We rate the shares Outperform with a TP of €26 as we believe IFX is

positioned for robust sales growth at the group level with gradual EBIT margin expansion

STMicroelectronics (Outperform, TP €24.5)

Powertrain Efficiency Opportunity

Exposure: Semiconductor content in EV and Autonomous Vehicles

European Technology; Analyst: Achal Sultania

STM is a company with ~35-40% sales exposure (incl. some SiC, MCU, Sensors) to the

automotive industry, which positions it well to growth areas. Its management expects SiC-

related revenues to show significant growth in 2018. The company is on track to deliver

9% growth in its overall auto-related business. (Building blocks in place, solid growth

ahead, 11 January 2018)

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16 January 2018

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AMS (Outperform, TP SFr125)

Beneficiary from Autonomous Driving

Exposure: Semiconductor content in EV and Autonomous Vehicles

European Technology; Analyst: Achal Sultania

AMS has 10-15% revenue exposure to autos. The company has proved to be a

meaningful player in the 3D sensing market, after its design win in Apple’s newest flagship

smartphone model, the iPhone X. Although we like AMS for its traction in the consumer &

communication segment, we acknowledge that its 3D sensing solution has potential use

case in LIDAR for autonomous driving in the future. We believe that AMS can deliver sales

of €1.38bn/€1.80bn/€1.95bn in 2018/19/20, with 25% additional upside potential from

back-end 3D in future high-end iPhone, VCSEL (laser) and ANC (audio) by 2020. As such,

we reiterate our Outperform rating and TP of SFr125.

Hanon Systems (Outperform, TP W15,000)

Battery Management Systems Accelerating

Exposure: automotive thermal management system, HVAC (heating / ventilation / AC)

Sector: Korean autos; Analyst: Michael Sohn

Hanon Systems (Hanon) is one of only two global automotive thermal management

system providers. The company currently supplies E-compressors for Tesla, BMW i-

series, and Hyundai Motor Group (HMG) NEV. As of 3Q17, Hanon has secured US$7.8bn

of backlog (vs. 2015's US$4.6bn) of which NEV parts account for 28% – including E-

compressors, battery thermal management systems, coolant heaters, cooling fan motors,

etc. As such, we forecast Hanon's 2017E-20E NEV parts sales CAGR of 32%, with 2020E

sales and operating profit contribution to rise to 13% (vs 5% in 2016) and 11% (vs 1% in

2016), respectively. As the backlog typically becomes revenue after two years, Hanon's sales

growth is likely to accelerate from 2018E and after. We forecast Hanon to post 2017E-20E

sales/EPS CAGRs of 6%/15%, respectively (see Secured backlog to lead growth recovery,

25 September 2017).

KAZ Minerals Plc (Outperform, TP GBP9.5)

Exposure: Copper mining

Sector: European Metals & Mining; Analyst: Conor Rowley

KAZ has come through a period of high capex and financial stress but has delivered

significant growth and earned a track record of delivering on projects. The company has

recently approved a new project that should see further growth come online in 2022, when

the impact from EV integration on the copper market should be more pronounced. We

believe this should help KAZ continue to outperform, given copper growth is becoming

harder to find and its peers are largely seeing volumes go in the other direction. Net debt

in the company remains high, but with its operations being low-cost and 1st quartile, cost

and leverage metrics are rapidly reducing and should remain at reduced levels despite the

funding of this new expansion and the reintroduction of the group dividend that we expect

at the upcoming results (22/02/2018). At 5x spot EBITDA, KAZ remains attractively valued

and trades at a discount to its base metal peers.

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Analog Devices (Outperform, TP $100)

Leverage to EV Should Drive Outsized Auto Growth

Exposure: EV/HEV, ADAS, Infotainment, Powertrain

Sector: US Semiconductors; Analyst: John Pitzer

ADI is poised to outgrow Semi Auto Rev over the next several years driven by a

reacceleration in battery management systems (BMS) in China electric vehicles, where

ADI has 50%+ share. On the back of an increasing government push towards

electrification, ADI's BMS Rev could grow 50%+ y/y in CY18 with an acceleration into

CY19 vs. our current model of ~20% y/y. We expect ADI's SAM for EV to increase from

$1.5bn to $3bn+ by 2022 – with the company's EV/BMS Rev to increase at a 20%+ CAGR

as ADI gains 2x content from HEV to EV. ADI trades in line with peers and at a 15%

discount to the SPX despite a FCF margin within the top 5% of the SPX. We continue to

see upside to LT EPS/FCFPS from OpM expansion, better than historical share gains, and

deleveraging – FCFPS of $7+ by FY22 supports our TP of $100.

Texas Instruments (Outperform, TP $110)

Don't Mess with Texas

Exposure: Infotainment, Passive Safety, ADAS, Body & lighting, and Hybrid/EV &

powertrain

Sector: US Semiconductors; Analyst: John Pitzer

TXN’s Auto business experienced strong double-digit growth YTD in CY17 following 23%

y/y growth in CY16 and >20% growth in CY15. Note Autos represents 18% of TXN’s Rev

at ~$2.8bn annualized, itself larger than most peers’ total Rev. TXN’s 3YR/5YR Auto Rev

CAGR through 2016 of 18%/14% is above peers – with broad-based growth across TXN’s

five auto sub-segments of Infotainment, Passive Safety, ADAS, Body electronics &

lighting, and hybrid/EV and powertrain. Over the past three years relative to the SPX, TXN

has exhibited faster Rev, Net Income, EPS, FCF and dividend growth with better yield. We

continue to view TXN as the closest thing to a Compounder in Semis – we see FCFPS

approaching $5+ at target OpM, driving ~35% FCF margin or an implied FCF yield of

~6.5%. TXN is trading at 19x CY18 FCF PF for tax reform, a 15% discount to the SPX.

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Drive Train to Supply Chain 2 15

Underperform-rated stock picks

Umicore (Underperform, TP €30)

Leader in Battery Materials but Valuation Overextended & Competition Increasing

Exposure: Car Catalysts, Cathode Materials, Metal Recycling

Sector: European Chemicals; Analyst: Mathew Hampshire-Waugh

We continue to believe Umicore is best-positioned globally to capture growth in battery

materials, with leading technology and first mover advantage. However, we believe the

valuation is overextended and market share losses in the Catalysis division will weigh on

growth post-2017. We are above the top end of management guidance for 2017 (CS

€394m EBIT vs management €385m EBIT) but forecast more muted 1-5% EBIT growth

thereafter. Umicore is trading on 32x PE and 17.5x EBITDA for 2018E. See our report

JMAT vs UMI – The charge towards battery materials, published 16 January 2018.

AutoTrader (Underperform, TP 330p)

Cyclicality biting short term; automation a threat long term

Exposure: Autonomous ride sharing

Sector: European Media, Analyst: Jo Barnet-Lamb

We are negative on AUTOa for three key reasons: 1) We believe that AUTOa’s business

model is inherently more cyclical than euro-classified peers (due to stock-based pricing)

and that the industry is more cyclically exposed. UK New Car transactions have been

consistently negative since May 2017 (Q4 2017 was -12.6%), Used Car transactions even

went negative in Q3 2017 and we believe that high supply coupled with declining demand

will lead to falling used car pricing. All three of these points should reduce retailer

profitability and we believe will force some smaller marginal retailers out of the industry,

thus lowering AUTOa retailer numbers. 2) In recent years, AutoTrader’s average revenue

per retailer (ARPR) has increasingly been driven by underlying price (which is finite) and

stock (which is cyclical), with product (debatably sustainable) being a dwindling proportion.

With cyclical pressures rising, we believe that underlying price-driven ARPR increases will

become harder to obtain. 3) We believe the advent of Autonomous Driving will alter the

economic rationale of personal car ownership. With c70% of AUTOa’s valuation in its

terminal value, we believe the market is overoptimistic on long-term profitability. AUTOa

trades on 15x 2018e EV/EBITDA for just +8% 2017-20 profit CAGR. See AutoTrader -

Cycle set to bite - shifting down a gear (10 March 2017) and AutoTrader - UK Residual

pricing in reverse (27 October 2017).

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ON Semiconductor (Underperform, TP $17)

Outsized Auto Exposure but Valuation Overextended

Exposure: Image Sensors, Power Management, IGBT and Silicon Carbide

Sector: US Semiconductors; Analyst: John Pitzer

ON has experienced strong growth in Autos (30% of Rev, growing at a 3-year CAGR of

10%) and the company maintains it can grow its Auto Rev by high-single digits y/y in a flat

SAAR environment. ON’s 2020 target model includes Autos growing 7-9% from 30% to

37% of Rev – stronger than expected content growth could offset slowing unit growth and

provide further tailwinds to Rev growth and GM. While we remain structural bulls on all of

Semis, we continue to argue for some cyclical defense and given ON’s historic “early-

cycle” leverage and our relative rating structure – we continue to find better risk/reward

elsewhere in the group. Against ON’s CY20 FCFPS target of ~$2.15, the stock is trading

at 12x EV/FCF vs. ADI at 12x based on our LT FCFPS of $7.

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Supply chain summary – growth forecasts The table below highlights the key output growth rates, peak demand year and forecast

rationale from our fully integrated automotive supply chain model:

Figure 8: Estimated Growth Rates by Market – Credit Suisse Integrated Automotive Supply Chain Model

Source: Credit Suisse estimates, Company Data, HIS, EEA, EPA, Avicenne, Copper Association, Core Consultants, US Geological Association, Argonne National Laboratories, IPCC, ICCT, NEDC, Quadaque advisors, European Commission, LMCA, Science Direct, Battery University, RSC,

Market Area 2005-2010 2010-2015 2015-2020 2020-2025E 2025-2040E Peak Year Forecast Rationale

Global Autos (Unit Sales) 3% 5% 2% 3% 1% 2040 Autonomous Vehicles from mid-2030

Global Diesel Auto (Unit Sales) 3% 5% -4% -4% -3% 2015 VW Scandal / NOX emissions

Global Gasoline (unit sales) 2% 0% -7% -2% -6% 2013 Move to fuel efficient GDI

Global Gasoline GDI (unit sales) 70% 43% 16% 2% -1% 2030 Share loss to electric

Global Hybrid/48V Unit Sales 25% 13% 30% 17% 5% n/a Improving TCO & Legislation

Global Hybrid Plug-In Unit Sales 211% 58% 21% 4% n/a Improving TCO & Legislation

Global BEV (Unit Sales) 152% 54% 20% 12% n/a Improving TCO & Legislation

European CO2 Efficiency (ave. g/CO2) -4% -3% -5% -4% -7% n/a Continuous Improvement

US average MPG 3% 1% 5% 3% 3% n/a Continuous Improvement

Global CO2 Emmissions from Cars (mn tonnes) 2% 1% 0% -2% 2020 EV/Efficiency driven

Gasoline ($k/year) -0.7% -0.3% -0.2% n/a Improvements to fuel efficiency minus cost of technology

Diesel ($k/year) -0.5% -0.2% -0.1% n/a Improvements to fuel efficiency minus cost of technology

Hybrid ($k/year) -0.5% -0.2% -0.1% n/a Improvements to fuel efficiency minus cost of technology

PHEV ($k/year) -0.7% -0.1% -0.1% n/a Improvement in fuel efficiency/Reduction in Battery Cost

BEV ($k/year) -2.8% -0.5% -0.2% n/a Reduction in Battery Cost

Battery Demand (GWh) 23% 30% 20% 13% n/a Improving TCO & Legislation

Battery Cell Market Revenue ($ mn) 10% 16% 13% 13% 6% n/a Cell price declines with technology

Automotive Battery Cost ($/kWh) -16% -12% -4% -4% n/a Technology and scaling overheads

Automotive Battery Cell Cost ($/kWh) -5% -12% -12% -3% -5% n/a Move to silicon anode,solid state and Next Gen

Lithium Cathode Demand (k tonne) 16% 22% 28% 19% 11% n/a Assumes Li based battery throughout

Lithium Cathode Market Revenue ($ mn) 23% 22% 16% 5% n/a Price downs then move to solid state and Next Gen

Anode Demand (k tonne) 17% 23% 30% 20% 11% n/a Carbon based then move to silicon

Anode Market Revenue ($ mn) 14% 20% 16% n/a Anode moves to higher performance/cost

Lithium Carbonate Demand (k tonne) 5% 9% 14% 14% 11% n/a Assumes Li based battery throughout

Cobalt Demand (kt) 7% 6% 4% n/a NMC/NCA move to less cobalt

Nickel Demand (kt) 5% 3% 4% n/a Main cathode until solid state

Copper Demand (kt) 2% 2% 3% n/a Not a major impact from EV battery

EV battery recycling material available (k tonne) 35% 116% 26% n/a 8-10 year delay on production

EV battery recycling metal value ($mn) 47% 121% 25% n/a Volume, content and price driven

Semiconductor Content in Vehicles ($bn) 9% 9% 5% n/a Move to Electric then move to autonomous

Semiconductor Content per Vehicles ($/car) 7% 6% 4% n/a Move to Electric then move to autonomous

Light Duty Autocatalyst Revenue ($mn) 8% 5% 4% 0% 2031 Legislation driven then EV force decline

Light Duty Autocatalyst Value ($/vehicle) 5% 3% 1% 0% 2028 EVs start to reduce average value

Platinum Demand (k oz) -2% 2% -3% 5% 1% n/a Near term diesel impact / LT other growth options

Palladium Demand (k oz) 1% -3% 7% 1% -2% 2024 Near term Legislation benefit / Long term EVs impact

Rhodium Demand (k oz) -5% 1% -3% 3% -3% 2024 Near term Recycling impact / Long term EVs impact

Global Gasoline Consumption 1% 2% 1% 0% -2% 2025-2030 EV/Efficiency driven

Global Diesel Consumption 2% 2% 1% 1% n/a Trucks, Rail and Planes use grow

Electricity for EV as % Total (period ave) 0.0% 0.0% 0.1% 0.3% 1.4% n/a

Number of Public Chargers 115% 58% 30% 13% Start to saturate roads by 2030

Output Growth rates - CAGR Growth Per Year %

Batt

ery

Recycling

Fuel C

onsum

ption

Batt

ery

Mate

rials

Batt

ery

Meta

ls

ICE

cata

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Auto

motive

Batt

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Em

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Sem

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Cars

Tota

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Ow

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Cata

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Supply chain summary – consumption forecasts

The table below highlights the key output of physical consumption/production and forecast

rationale from our fully integrated automotive supply chain model:

Figure 9: Estimated Production/Consumption– Credit Suisse Integrated Automotive Supply Chain Model

Source: Credit Suisse estimates, Company Data, HIS, EEA, EPA, Avicenne, Copper Association, Core Consultants, US Geological Association, Argonne National Laboratories, IPCC, ICCT, NEDC, Quadaque advisors, European Commission, LMCA, Science Direct, Battery University, RSC,

Market Area 2005 2010 2017 2020E 2030E 2040E Forecast Rationale

Global Autos Production (mn) 64 74 102 106 129 136 Autonomous Vehicles from mid-2030

Global Diesel (mn) 11 13 16 14 10 7 VW Scandal / NOX emissions

Global Gasoline (mn) 52 56 53 39 30 15 Move to fuel efficient GDI

Global GDI (mn) 0 3 30 43 50 41 Share loss to electric

Global Hybrid/48V (mn) 0 1 2 6 20 27 Improving TCO & Legislation

Global Hybrid Plug-In (mn) 0 0 1 2 9 10 Improving TCO & Legislation

Global BEV (mn) 0 0 1 3 11 35 Improving TCO & Legislation

European Cars Produced CO2 Efficiency (g/CO2) 170 140 115 96 55 25 Continuous Improvement

US average car produced MPG 21 25 27 32 44 56 Continuous Improvement

Global CO2 Emmissions from Cars (bn tonnes) 3.37 3.59 4.08 4.20 3.91 3.09 EV/Efficiency driven

Gasoline ($/year) 3,128 3,067 2,997 2,917 Improvements to fuel efficiency minus cost of technology

Diesel ($/year) 3,287 3,237 3,190 3,128 Improvements to fuel efficiency minus cost of technology

Hybrid ($/year) 3,230 3,180 3,140 3,090 Improvements to fuel efficiency minus cost of technology

PHEV ($/year) 3,350 3,280 3,254 3,229 Improvement in fuel efficiency/Reduction in Battery Cost

BEV ($/year) 3,447 3,162 3,012 2,940 Reduction in Battery Cost

Battery Demand (GWh) 11 24 104 251 1,085 3,678 Improving TCO & Legislation

Battery Cell Market Revenue ($ bn) 5 8 21 32 72 148 Cell price declines with technology

Automotive Battery Cost ($/kWh) 550 244 159 100 70 Technology and scaling overheads

Automotive Battery Cell Cost ($/kWh) 330 157 103 62 39 Move to silicon anode,solid state and Next Gen

Lithium Cathode Demand (k tonne) 20 43 178 404 1,676 4,329 Assumes Li based battery throughout

Lithium Cathode Market Revenue ($ bn) 3.7 8.1 27 34 Price downs then move to solid state

Anode Demand (k tonne) 11 24 104 251 1,085 2,851 Carbon based then move to silicon

Anode Market Revenue ($ bn) 0.8 1.3 7 29 Anode moves to higher performance/cost

Lithium Carbonate Demand (k tonne) 88 112 212 344 1,060 3,201 Assumes Li based battery throughout

Cobalt Demand (kt) 89 113 178 255 NMC/NCA move to less cobalt

Nickel Demand (kt) 2,119 2,335 3,108 4,125 Main cathode until solid state

Copper Demand (kt) 23,065 24,425 31,058 37,895 Not a major impact from EV battery

EV battery recycling material available (k tonne) 0 0 2 7 1,962 6,209 8-10 year delay on production

EV battery recycling metal value ($bn) 0.01 0.03 8 24 Volume, content and price driven

Semiconductor Content in Vehicles ($bn) 36 45 99 150 Move to Electric then move to autonomous

Semiconductor Content per Vehicles ($/car) 353 428 768 1,103 Move to Electric then move to autonomous

Light Duty Autocatalyst Revenue ($bn) 7.3 8.2 10.7 10.4 Legislation driven then EV force decline

Light Duty Autocatalyst Value ($/vehicle) 71.6 77.1 83.2 76.5 EVs start to reduce average value

Platinum Demand (k oz) Net Recycling 6,695 6,075 5,709 5,624 7,763 8,740 Near term diesel impact / LT other growth options

Palladium Demand (k oz) Net Recycling 7,355 7,885 7,433 9,350 9,568 7,449 Near term Legislation benefit / Long term EVs impact

Rhodium Demand (k oz) Net Recycling 827 646 701 570 606 394 Near term Recycling impact / Long term EVs impact

BEV Units in Fleet (mn) 0.0 0.0 2.0 8 76 272

PHEV Units in Fleet (mn) 0.0 0.0 1.4 6 64 122

Global Gasoline Consumption by Cars (bn gal) 333 357 405 415 380 283 EV/Efficiency driven

Global Diesel Consumption (bn gal) 275 320 335 374 410 Trucks, Rail and Planes use grow

Electricity used for EV (TWh) 0 0.0 8 35 346 1,021

Number of Public Chargers (mn) 0.0 0.5 2 16 44 3m Fast Chargers = one every 14 miles road

Cumulative Cost of Fast/Slow Public Chargers ($mn) 0.0 5.6 14 39 74 Fast Charger $15-30k/charger point

Output Per Year

Auto

motive

Pro

duction

Em

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Batt

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Batt

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Mate

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Fuel C

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Batt

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Batt

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Recycling

Sem

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Cars

ICE

cata

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Cata

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Meta

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Supply chain summary – penetration rates

The table below highlights the key output penetration rates, metrics and ratios from our

fully integrated automotive supply chain model:

Figure 10: Estimated Ratios by Market – Credit Suisse Integrated Automotive Supply Chain Model

Source: Credit Suisse estimates, Company Data, HIS, EEA, EPA, Avicenne, Copper Association, Core Consultants, US Geological Association, Argonne National Laboratories, IPCC, ICCT, NEDC, Quadaque advisors, European Commission, LMCA, Science Direct, Battery University, RSC,

Market Area 2005 2010 2017 2020E 2030E 2040E Forecast Rationale

Autonomous Vehicles from mid-2030

Global Diesel (% of total production) 18% 18% 15% 13% 7% 5% VW Scandal / NOX emissions

Global Gasoline (% of total production) 81% 76% 52% 37% 23% 11% Move to fuel efficient GDI

Global GDI (% of total production) 0% 5% 30% 40% 39% 30% Share loss to electric

Global Hybrid/48V (% of total production) 0% 1% 2% 5% 15% 20% Improving TCO & Legislation

Global Hybrid Plug-In (% of total production) 0% 0% 1% 2% 7% 7% Improving TCO & Legislation

Global BEV (% of total production) 0% 0% 1% 2% 9% 26% Improving TCO & Legislation

European Efficiency vs Target (+ve = beating target) 14% 15% 25% Continuous Improvement

US average MPG vs Target (+ve = beating target) -8% -1% Continuous Improvement

Global CO2 Emmissions from Cars as % Current Total Emissions 3% -4% -24% EV/Efficiency driven

Improvements to fuel efficiency minus cost of technology

Diesel ($/year) vs Gasoline 5% 6% 6% 7% Improvements to fuel efficiency minus cost of technology

Hybrid ($/year) vs Gasoline 3% 4% 5% 6% Improvements to fuel efficiency minus cost of technology

PHEV ($/year) vs Gasoline 7% 7% 9% 11% Improvement in fuel efficiency/Reduction in Battery Cost

BEV ($/year) vs Gasoline 10% 3% 0% 1% Reduction in Battery Cost

Battery Demand in 35GWh GigaPlants 0.3x 0.7x 3x 7x 31x 105x Improving TCO & Legislation

Automotive Battery Cost ($/kWh) as % of Average Car Price 92% 41% 27% 17% 12% Technology and scaling overheads

Lithium Cathode Demand in 25kt plants 0.8x 1.7x 7.1x 16x 67x 173x Assumes Li based battery throughout

Anode Demand in 20kt plants 0.5x 1x 4.2x 10.1x 43.4x 114x Carbon based then move to silicon

Lithium Carbonate Demand in 25kt Mines 8.5x 14x 42x 128x Assumes Li based battery throughout

Cobalt Demand in 10kt mines 8.9x 11.3x 18x 25x NMC/NCA move to less cobalt

Nickel Demand in 20kt mines 106x 117x 155x 206x Main cathode until solid state

Copper Demand (kt) in 100kt mines 231x 244x 311x 379x Not a major impact from EV battery

EV battery recycling material available in 350kt smelters 0x 0x 6x 18x 8-10 year delay on production

EV battery recycling metal value USD per Car (Hybrid/PHEV/BEV) 21.49 59.27 520 667 Volume, content and price driven

Platinum Demand Net Recycling in 100k troy oz mines 57x 56x 78x 87x Near term diesel impact / LT other growth options

Palladium Demand Net Recycling in 100k troy oz mines 74x 94x 96x 74x Near term Legislation benefit / Long term EVs impact

Rhodium Demand Net Recycling in 50k troy oz mines 7x 6x 6x 4x Near term Recycling impact / Long term EVs impact

BEV as % Fleet 0.0% 0.0% 0.2% 0.6% 5.0% 16%

PHEV as % Fleet 0.0% 0.0% 0.1% 0.5% 4.2% 7%

Global Gasoline Consumption per capita per year (gallon) 51 58 59 48 31 EV/Efficiency driven

Global Diesel Consumption per capita per year (gallon) 39 46 48 47 46 Trucks, Rail and Planes use grow

Electricity for EV in 500MW plants 2x 8x 79x 233x

Slow Chargers Per Mile Road 0.00 0.01 0.04 0.37 1.04

Fast Chargers Per Mile Road 0.00 0.00 0.01 0.03 0.07

Daily Use of each Fast Charger (ave Hours) 0.23 0.31 0.50 1.60 2.04 1 hour to charge 50kWh, 10% Jouneys Fast Charge

Ratios

Auto

motive

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ls

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ery

Recycling

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Drive Train to Supply Chain 2 20

Credit Suisse HOLT® analysis The charts below show listed companies in the supply chain based on HOLT CFROI®

(cash flow return on investment) and HOLT Price to Book value. We note:

■ Lithium plays are trading at highest valuation and P/B has doubled over the last ~2

years;

■ Traditional Autos & PGM miners have the lowest relative valuation, little changed over

the last ~2 years; and

■ Electric car driven OEMs have de-rated – driven by Tesla P/B declines.

Figure 11: HOLT Price to Book by Sub-Sector of the Supply Chain & Change since April 2016

Source: Credit Suisse HOLT®. HOLT’s P/B is calculated as the sum of the market values of debt and equity dividend by the inflation adjusted net assets and the market value of investments. CFROI is HOLT’s proprietary measure of a firm’s economic return over its operating assets. It is a cash flow based, internal rate of return that removes accounting distortions.

Figure 12: HOLT P/B vs HOLT CFROI

Source: Credit Suisse HOLT®. HOLT’s P/B is calculated as the sum of the market values of debt and equity dividend by the inflation adjusted net assets and the market value of investments. CFROI is HOLT’s proprietary measure of a firm’s economic return over its operating assets. It is a cash flow based, internal rate of return that removes accounting distortions.

0

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ASAHI KASEI

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HITACHI CHEMICALS

JMAT

L&F

MITSUBISHI CHEMICALS

SHANSHAN

SOULBRAIN

SUMITOMO

SYRAH

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CGS YUASA

JOHNSON CONTROLS

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NEC

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Battery Materials Battery Lithum Autos (EVs) Battery Metals Auto parts Semis PGM Miners Autos

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Drive Train to Supply Chain 2 21

Figure 13: HOLT P/B by company & Change to HOLT P/B since April 2016

Source: Credit Suisse HOLT®. HOLT’s P/B is calculated as the sum of the market values of debt and equity dividend by the inflation adjusted net assets and the market value of investments. CFROI is HOLT’s proprietary measure of a firm’s economic return over its operating assets. It is a cash flow based, internal rate of return that removes accounting distortions.

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Drive Train to Supply Chain 2 22

Global automotive supply chain

Figure 14: Fully Integrated Automotive Supply Chain Modelling

Source: Company data, Credit Suisse estimates, IHS, EEA,

0

20

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120

140

0

20

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60

80

100

120

140

Un

its (

mn

)

Global Automotive Sales

Basic Gasoline Gasoline Direct Injection Diesel Hybrid & 48V Plugin Hybrid BEV

We forecast 2% growth short term and flat longer term as ride

sharing/autonomous cars offsets Emerging market growth

0%

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50%

60%

70%

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90%

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Pe

rce

nta

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Global Automotive Sales Mix

Basic Gasoline Gasoline Direct Injection Diesel

Hybrid & 48V Plugin Hybrid BEV

We forecast PHEV/BEV penetration of 4.5% in 2020, 16% in 2030 and 33%

in 2040 based on TCO, Targets and Supply Chain Constraints

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16 January 2018

Drive Train to Supply Chain 2 23

Global automotive supply chain

We use our fully integrated supply chain model to derive the following guiding factors for

the entire automotive supply chain:

■ Fuel Efficiency Targets: We calculate average fuel efficiency and CO2 emissions by

region to estimate the minimum levels of electric car penetration and ICE engine

technology required to avoid car industry fines to 2030.

■ Total Cost of Ownership: We estimate depreciation, maintenance and running costs

by vehicle type (Gasoline, Diesel, Hybrid, PHEV, BEV) including all associated costs

including battery depreciation, charging station cost, new tech content and fuel/energy

efficiency. We use this to forecast consumer choices by region in the longer term.

■ Supply Chain Limitations: We estimate demand requirements along the entire supply

chain to understand limitations in terms of sourcing, cost and technology changes

required to achieve our forecast mix of automotive drive-chain production. This serves

to stress test our near-term (target-led) and long-term (consumer-led) forecasts and

provide insight on industry bottlenecks as well as the risk of oversupply.

Industry Outcome

Based on bottom-up regional modelling by sector which is integrated into our global supply

chain model, we forecast:

■ Legislation pushes near term: We believe government legislation, targets, fines and

infrastructure investment will be the biggest driving factors for BEV/PHEV adoption in

the near term. We believe Europe and China will experience the greatest penetration

increases for battery car production due to tight legislation in Europe and government

investment/incentives in China. We forecast slower adoption in the US due to lower

fuel costs and less stringent targets. Japanese new vehicle penetration is already high

and there is little incentive in the near term to ramp up penetration. Electric cars should

be favourable in India; however, infrastructure investment will slow progress. Adding

this up, we estimate global BEV/PHEV penetration of 4-5% by 2020 and 16% by 2030.

This will avoid $400bn of car industry fines (assuming no change to mix) mostly

centered on European manufacturers (and partially US).

■ Scaling & technology supports cost: Battery prices currently sit around $200/kWh.

We believe the largest near-term efficiency gains will come from economies of scale

(materials account for just one-third of the cost) which should take the price down to

$130/kWh by 2025, on our forecasts. To reduce costs below $100/kWh will require

improvements to the anode (shift from carbon to silicon), which could occur by 2030, in

our view. By 2040 we estimate an average battery price of $70/kWh, which is based on

growing penetration of solid state and new generation battery materials.

■ Consumer pull long term: Based on spot energy prices, we estimate total cost of

ownership will be lower for fully electric vehicles (vs ICE) by 2022 in high-cost fuel

regions (e.g. Europe). However, the cost competitiveness of BEV vs ICE will remain

challenging in low-cost fuel areas (e.g. the US) if oil prices remain at current levels. As

such, we forecast slower long-term adoption in the US and faster adoption in

Europe/China. We believe PHEV will remain uncompetitive (cost of both combustion

engine and electric drive chain); however, it will act as a transition vehicle over the next

10 years to overcome consumer range anxiety and re-fueling habits. We estimate

~$80bn cumulative spend on charging infrastructure to 2040 (equivalent to four months

global utilities networks capex) is enough to put one fast charger for every fourteen

miles of road, which will be used for an average of about two to three hours/day.

Contributors: Mathew Hampshire-Waugh Chris Counihan Sam Perry

Legislation pushes near

term: We believe government legislation,

targets, fines and infrastructure

investment will be the biggest driving factors

for BEV/PHEV adoption near term.

Scaling & Technology Supports Cost: Battery

prices currently sit around $200/kWh. We

believe the largest near-term gains will

come from economies of scale, which should

take prices down to $130/kWh by 2025E.

Consumer pull long term: We estimate total cost of ownership will

be lower for fully electric vehicles (vs

ICE) by 2022 in high-cost fuel regions.

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16 January 2018

Drive Train to Supply Chain 2 24

Key risks to our forecasts

We believe the key risks to our forecasts are 1) major changes in legislation (particularly

US given policy review under Trump administration), and 2) cash burn for electric car

supply chain industries – large capex requirements to fund rapid growth over the next ~20

years mean most new industries will not turn cash positive until late 2020/early 2030s.

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Drive Train to Supply Chain 2 26

Carbon intensity & emissions

Figure 15: Carbon Intensity & Emissions forecasts based on our integrated model

Source: Company data, Credit Suisse estimates, EPA, European Commission, UK registration Data, IPCC

Global CO2 Intensity by Vehicle

Carbon intensity of gasoline 231.4 g Co2/mile

Carbon intensity of diesel 213.1 g Co2/mile

Carbon intensity of EV (global Grid) 146.6 g Co2/mile

Carbon Intensity of Fuel Cell Vehicles (H2 from Methane) 249.5 g Co2/mile

Natural Gas Vehicles 214.8 g Co2/mile

.. And if 100% renewable electricity powered

EV Electricity Consumption per Mile 0.29 kWh/mile

Fuel Cell Electricity Consumption per Mile (water splitting) 0.82 kWh/mile

Car Efficiency from Stored Energy to MotionEnergy Use per

Mile (MJ)

Theoretical

Energy Use per

Mile (MJ)

Efficiency

Internal Combustion Engine 3.3 0.8 25%

Electric Vehicle 1.0 0.8 79%

Fuel Cell Vehicle 1.9 0.8 43%

2,700

2,900

3,100

3,300

3,500

3,700

3,900

4,100

4,300

4,500

CO

2 em

issio

ns

(mn t

onnes/annum

)

CO2 Emissions from Cars

Total CO2 Emmissions from Cars inc Electricity Generation (mn tonnes/year) RHS

No Change to Grid Total CO2 Emmissions from Cars inc Electricity Generation (mn tonnes/year) RHS

Country Gasoline Diesel Hybrid PHEVBEV

(Tesla)

Fuel Cell

(H2 reforming, Toyota Mirai)

NGV

(Honda Civic GX)

Paraguay 215 186 150 64 0 249 215

Iceland 215 186 150 65 0 249 215

Sweden 215 186 151 66 3 249 215

France 215 186 153 71 10 249 215

Canada 215 186 164 96 44 249 215

Brazil 215 186 165 98 48 249 215

Spain 215 186 175 122 83 249 215

Italy 215 186 181 136 102 249 215

Russian Federation 215 186 184 143 112 249 215

United Kingdom 215 186 189 155 129 249 215

Mexico 215 186 192 162 139 249 215

Germany 215 186 194 165 144 249 215

Turkey 215 186 200 180 165 249 215

United States 215 186 196 170 150 249 215

Japan 215 186 201 183 170 249 215

Indonesia 215 186 216 216 217 249 215

Australia 215 186 213 210 207 249 215

China 215 186 214 214 213 249 215

India 215 186 231 252 267 249 215

South Africa 215 186 233 257 276 249 215

CO2 Intensity (gCo2/mile) based on new vehicles and local grid

We estimate improvements to fuel efficiency and penetration of electric

cars can reduce global CO2 emissions by >1GT/annum by

2040.

We estimate battery vehicles are less carbon intensive than ICE

vehicles in most regions. China and India require further expansion of

renewable power generation to reduce intensity.

Fuel Cell Vehicles and Natural Gas Cars provide little CO2 benefit vs

new ICE cars.

Even if FCV used renewable hydrogen the efficiency is 3x worse

than a battery car equivalent.

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16 January 2018

Drive Train to Supply Chain 2 27

Carbon intensity & emissions

The following sections of this report run through sub-sector forecasts which combine to

form our global automotive supply chain model. We outline industry forecasts, market

overviews, stock picks and key risks.

We prelude these sections with a brief introduction on carbon emissions in order to frame

our discussions and address the following: 1) what is driving the transition to low carbon

transportation, and 2) why we focus solely on battery vehicles as a route to low emissions

vehicles.

Climate Change: Transport in Context

■ Transportation is a key industry for emissions: Current Global CO2 emissions are

around 50 GtCO2/annum. Transportation accounts for 7Gt of this and its contribution

has more than doubled since the 1970's. Transportation has been the fastest-growing

carbon emitting sector over the past 50 years, driven by globalization and increasing

wealth. Without a rapid overhaul of fuel efficiency or drive train changes, the

transportation sector will likely add more CO2 to the environment than any other part of

the economy.

■ Emissions reductions of 50% by 2050 to prevent run-away warming: A consensus

of 97% of scientists now believe that climate change is happening and is a result of

human activities. The international panel for climate change (IPCC) estimates that to

keep global warming to below a safe (but not disruptive) +2°C increase, emissions will

need to be halved by 2050 and lowered to one-fifth of current levels by 2100.

■ On our estimates, this is feasible for passenger cars: Based on our integrated

model, we estimate that penetration of battery vehicles and improvements to fuel

efficiency in combustion engines will cap rising CO2 emissions from passenger

vehicles by 2020 at 4.1Gt/annum and reduce overall emissions by 25% (1.1Gt/annum)

by 2040 – broadly on track to reach half the current levels by the year 2050.

Battery Vehicles: A Credible Solution

Battery vehicles, which include hybrid (regenerative braking charges battery), PHEV (mid-

sized plug-in charge battery and combustion engine) and BEV (full large battery power

only) provide a very credible route to lower emissions, in our view, due to:

■ Zero tailpipe emissions & energy storage – Helping to improve air quality in urban

areas, a route away from fossil fuel powered transport and help to provide partial

storage solution for fluctuating renewable energy generation.

■ Lower CO2 intensity vs combustion engines under most regions – Well-to-wheel

CO2 emissions of global gasoline and diesel new cars are around 200g/mile. Based on

the carbon intensity of the global electricity grid, we estimate 150g/mile grid-to-wheel

emissions for fully electric vehicles (which improves towards zero as the grid transitions

to renewables).

Hurdles to adoption are covered in this report in detail but include: 1) cost competitiveness

(reducing battery cost), 2) charging infrastructure, 3) consumer acceptance of charging a

car (like a mobile phone) rather than filling up at the gas station, and 4) increasing the

range/charge time of new vehicles to overcome range anxiety (running out of battery).

Contributors: Mathew Hampshire-Waugh Chris Counihan Sam Perry Michael Weinstein Aric Li Maheep Mandloi

Current Global CO2 emissions are around

50 GtCO2/annum. Transportation

accounts for 7Gt and has more than doubled

since the 1970's.

To prevent run-away global warming

emissions will need to be halved by 2050 and

less than 1/5 of current levels by 2100

Based on our integrated model, we

estimate that penetration of battery

vehicles and improvements to fuel

efficiency in combustion engines

will move towards these targets for

passenger vehicles

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16 January 2018

Drive Train to Supply Chain 2 28

Why we believe battery is best

This report focuses on mix of combustion engines and penetration of battery vehicles. We

do not model penetration of fuel cell or natural gas vehicles as we believe adoption will not

become material, given:

■ Fuel Cell Vehicles (FCV): Use hydrogen gas to power an electric motor using a fuel

cell. There are a couple of commercialized models (e.g. Toyota Mirai) but the

technology has never taken off due to high production costs and lack of hydrogen

infrastructure. However, more fundamentally, we believe FCV emit more CO2 than

diesel (and similar levels to gasoline cars) when using hydrogen derived from natural

gas (current route). Additionally, even if hydrogen could be produced at mass from

renewable sources, we estimate FCV consume 3x more electricity per mile than

battery-powered cars. This is due to the inefficiencies involved in transforming

renewable electricity into hydrogen and back to electricity then into motion of the

vehicle. The benefit of fuel cell cars vs battery cars is that re-fueling would work like

combustion engine cars.

■ Natural Gas Vehicles (NGV): Use compressed natural gas to power a combustion

engine. However, based on the commercial Honda Civic GX we estimate kg CO2/mile

at a similar level to average diesel cars. We believe efficiency improvements to

gas/diesel offer a better route to lower CO2 emissions than mass commercialization of

NGV.

FCV emit more CO2 than diesel when using hydrogen derived from

natural gas

FCV consume 3x more electricity per mile than

a battery car

We believe efficiency improvements to

gas/diesel and battery cars offer a better route to lower CO2 emissions

than mass commercialization of

NGV or FCV

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European automotive

Figure 16: European Automotive forecasts based on our integrated model

Source: Company data, Credit Suisse estimates, IHS, EEA, European Commission

Europe CO2 Roadmap

2014 CO2/km Fleet Average 125

Materials & Engine Technology -12.7

Change in Diesel Share 0.6

Move to Gasoline Direct Injection -0.3

Penetration of Hybrid -8.3

Penetration of Plug-in Hybrid -5.1

Penetration of EV -2.7

2020 CO2/km Fleet Average 96

New Testing Regime/Other 6.8

Change in Diesel Share 0.7

Move to Gasoline Direct Injection 0.1

Penetration of Hybrid -8.4

Penetration of Plug-in Hybrid -5.8

Penetration of EV -9.6

2025 CO2/km Fleet Average 80

161616

151514

1716161616

1717

1818

1919

2021

2122 2222 23 23 22

22

0

5

10

15

20

25

0

5

10

15

20

25

2005 2008 2011 2014 2017E 2020E 2023E 2026E 2029E 2032E 2035E 2038E

Un

its (

mn

)

European Automotive Sales

Basic Gasoline Gasoline Direct Injection Diesel

Hybrid & 48V Plugin Hybrid BEV

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2008 2011 2014 2017E 2020E 2023E 2026E 2029E 2032E 2035E 2038E

Pe

rce

nta

ge

European Automotive Sales Mix

Basic Gasoline Gasoline Direct Injection Diesel Hybrid & 48V Plugin Hybrid BEV

0

20

40

60

80

100

120

140

160

180

2005 2008 2011 2014 2017E 2020E 2023E 2026E 2029E 2032E 2035E 2038E

gra

ms C

O2/km

European Auto Sales - Average CO2/km Emissions

European New Car Average

European Target

European Average CO2/km inc Super Credit/Benchmark

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Europe petrol Europe GDI Europe diesel Europe Hybrid Europe Plug-in

Hybrid

Europe PEV

US

D/Y

ear

European Total Cost of Ownership 2017

Added Technology Depreciation (low CO2 & automation)

Car Servicing + Charger, Battery depreciation & replacement

Fuel Cost

Depreciation ex Battery

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Europe petrol Europe GDI Europe diesel Europe Hybrid Europe Plug-

in Hybrid

Europe PEV

US

D/Y

ear

European Total Cost of Ownership 2030

Added Technology Depreciation (low CO2 & automation)

Car Servicing + Charger, Battery depreciation & replacement

Fuel Cost

Depreciation ex Battery

We forecast peak production by c2030 as vehicle automation

increases the use of ride sharing and ride hailing

We believe diesel share declines to 14% by 2030 as cost of emissions

compliance rises. We forecast 40%hybrid, 20% PHEV and 20% BEV

by 2030 in order to comply with strict CO2 targets

Under our base scenario European car makers stay

within CO2/km targets and avoid EUR250bn fines

Our modelling assumes improving

fuel efficiency of ICE and

penetration of electric cars to

reach target levels of CO2

We estimate that declining battery costs will make BEV cost

competitive by 2022 and the cheapest vehicle option by 2030

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16 January 2018

Drive Train to Supply Chain 2 31

European automotive

Industry Forecasts

We are expecting a significant shift in the powertrain sales mix in coming years, driven by

regulation, product offerings, cost of ownership and charging infrastructure. We believe

regulatory changes will replace smaller diesel cars with gasoline-48V systems, where the

incremental cost for 48V is now below that for making smaller diesel cars compliant with

the EURO 6 standard. In 2020 we forecast 13% hybrid/48V, 6% PHEV and 2% BEV,

increasing to 40/20/20%, respectively, by 2030. We estimate diesel market share goes

from 46% in 2017 to 14% by 2030 and 0% by 2040.

CO2 targets push

A major driver of battery vehicles production will be more stringent CO2 legislation in

Europe. The average new car produced in Europe in 2017 had ~115gCO2/km efficiency,

the target for 2020 is 95g with €95/car fines for every gram any car maker is over this

level. Increasing the penetration of Hybrids (60gCO2/km), PHEV (44gCO2/km) and BEV

(0gCO2/km) is a key route to meeting this standard, which is reinforced by super credits

for vehicles below 50gCO2/km. Based on our modelling and assuming continued

efficiency gains in ICE cars, we estimate a minimum PHEV/BEV penetration of 4% in 2020

to avoid industry fines. Legislation is currently being extended to 2030 and initial proposals

suggest a target of 67gCO2/km (-30% from 2020) in 2030 under a more strict testing

regime will effectively mean ~40% reductions from 2020 levels by 2030. If we run a

scenario where penetration rates for battery cars do not change from current levels, we

estimate ~€250bn industry fines (or two-thirds of European Autos market cap) – making

compliance a necessity.

Scale-up & Technology road map supports Consumer Pull

We estimate current battery costs are around $215/kWh, falling to $130/kWh by 2025 as

economies of scale and improved cathode technology cut costs and improve energy

density. We estimate longer-term battery costs can fall below $100/kWh; however, this will

require technology changes to the anode (silicon), electrolyte (solid state) or next-

generation batteries.

We estimate the total cost of ownership in Europe for an average gasoline car (VW Golf) is

$3,400/annum, falling to $3,100/annum as fuel efficiency is improved (includes the new

technology cost). We estimate a 140 mile range or 35kWh equivalent battery vehicle

(Electric Ford Focus) total cost of ownership is currently around $3,600/annum, but should

reach parity with gasoline cars by 2022 as battery prices decline. We believe cost

competitiveness combined with increased availability of full electric cars will secure

adoption in the longer term.

The pipeline of new battery car models is significantly broadening post 2020 as Daimler

rolls out the EQ model range, VW the I.D. range and BMW the iNEXT, while Renault

launches several new EVs in 2019-2021. These are a mix of BEV and PHEV – we assume

PHEV provide a route to consumer adoption to 2030 for those consumers unwilling to risk

a flat battery (i.e. range anxiety). However, we note that the total cost of ownership of

PHEV is significantly worse than a gasoline-powered vehicle or BEV due to the added

capital cost of having both a combustion engine and a large battery. Beyond 2030 we

believe PHEV penetration growth slows and full BEV dominate.

Key Risks to Forecasts

Regulation is still uncertain and we only know the proposal by the EU Commission so far.

In coming months, this will be going through the EU Council and EU Parliament, with

political uncertainties throughout the legislative process.

Contributors: Daniel Schwarz Sascha Gommel

The average new car produced in Europe

2017 has ~115gCO2/km efficiency; the target for 2020 is 95g with

€95/car fines for every gram any car maker is

over

Legislation is currently being extended to 2030

and initial proposals suggest a target of

67gCO2/km (-30% from 2020) in 2030 under a

more strict testing regime

If we run a scenario where penetration rates

for battery cars do not change from current

levels, we estimate ~€250bn industry fines

(or two-thirds of European Autos market

cap)

BEV should reach parity with gasoline

cars by 2022 as battery prices decline.

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16 January 2018

Drive Train to Supply Chain 2 32

Demand is the other big unknown: we assume consumers will buy EVs when OEMs offer

attractive vehicles and charging infrastructure improves. However, concerns about

residual values or different driving characteristics might be underestimated – consumers

might just continue to prefer ICEs and we note a risk that mass market EVs could lose the

Tesla-like appeal.

Structural Investment View

The market is pricing in electrification as a positive for suppliers and a negative for OEMs

(our interpretation of the record-high valuation discount of OEMs vs. suppliers). We

believe the opposite could play out: suppliers might increase the content per car in an EV

compared to an ICE; however, the competitive environment for this extra content might be

very different compared with today’s, with new players finding their way onto the supplier

lists of OEMs and battery cells being the entry ticket into the car. OEMs, will in any case

reduce the degree of vertical integration massively. Producing cars will at some point

become a much more asset-light business model, with structurally higher ROCEs. On the

other hand, we believe that manufacturing expertise, financial services, dealer networks

and brand loyalty are significant barriers to entry.

Key stocks

Our top picks in the sector are VW (and Porsche SE as a means to gain discounted

exposure to VW) and BMW – both rated Outperform. Both look well positioned when it

comes to electrification. We believe that BMW is among the technologically leading OEMs

in EVs. BMW has sold more EVs than peers, it produces on dedicated platforms as well as

flexible platforms and it has produced more batteries than Daimler and VW combined. EVs

are less complex to produce and hence the value-added at the OEM level declines. We

believe this transition should be easier for BMW than for its peers, as BMW is already

producing cars with a relatively low degree of vertical integration (e.g. transmissions are

not produced in-house).

VW is not a pioneer in EVs. However, VW invests massively and it benefits from scale.

The new Modular Electrification Toolkit (MEB) platform should be the biggest EV

architecture globally, leveraged across brands and regions. The diesel emissions scandal

clearly accelerated this process. VW now has the most aggressive targets regarding

electrification and the ‘Futurepact’ (improvement program) reflects the need to adjust

vertical integration in the long term.

The market is pricing in electrification as a

positive for suppliers and a negative for

OEMs. We believe the opposite could play

out.

OEMs will reduce the degree of vertical

integration and producing cars will

become a much more asset light business

model, with structurally higher ROCEs

Our top picks in the sector are VW and

BMW.

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US automotive

Figure 17: US Automotive forecasts based on our integrated model

Source: Company data, Credit Suisse estimates, IHS, EEA, EPA, CAFE

1918

18

15

12

13

14

16

17

1818

21212020

2021212222

2223 23 23 23 22

0

5

10

15

20

25

0

5

10

15

20

25

2005 2008 2011 2014 2017E 2020E 2023E 2026E 2029E 2032E 2035E 2038E

Un

its (

mn

)

North America Automotive Sales

Basic Gasoline Gasoline Direct Injection Diesel

Hybrid & 48V Plugin Hybrid BEV

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2008 2011 2014 2017E 2020E 2023E 2026E 2029E 2032E 2035E 2038E

Pe

rce

nta

ge

North America Automotive Sales Mix

Basic Gasoline Gasoline Direct Injection Diesel

Hybrid & 48V Plugin Hybrid BEV

20

25

30

35

40

45

50

55

60

65

70

2005 2008 2011 2014 2017E 2020E 2023E 2026E 2029E 2032E 2035E 2038E

miles per

gallon (C

AFE based calc

ula

tion)

US Auto Sales - Average MPG

US New Car Average MPG (CAFE mpg equivalent) CAFE target

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

US petrol US GDI US diesel US Hybrid US Plug-in

Hybrid

US PEV

US

D/Y

ear

US Total Cost of Ownership 2017

Added Technology Depreciation (low CO2 & automation)

Car Servicing + Charger, Battery depreciation & replacement

Fuel Cost

Depreciation ex Battery

0

500

1,000

1,500

2,000

2,500

3,000

3,500

US petrol US GDI US diesel US Hybrid US Plug-in

Hybrid

US PEV

US

D/Y

ear

US Total Cost of Ownership 2030

Added Technology Depreciation (low CO2 & automation)

Car Servicing + Charger, Battery depreciation & replacement

Fuel Cost

Depreciation ex Battery

We forecast peak production by c2030 as vehicle automation

increases the use of ride sharing and ride hailing

We forecast 9% hybrid, 5% PHEV and 10% BEV by 2030 as

companies move towards tighter CAFE stardards

Under our base scenario US car makers fall short

of current MPG targets as we see risk to targets

being relaxed.

Our modelling assumes

improving fuel efficiency of ICE

and penetration of efficient GDI

and electric cars improve MPG

We estimate that declining battery costs will make BEV cost

competitive by ~2030s at spot oil.

US MPG Roadmap

2014 MPG Fleet Average 25

Materials & Engine Technology 1.6

Change in Diesel Share -0.2

Move to Gasoline Direct Injection 0.8

Penetration of Hybrid 0.7

Penetration of Plug-in Hybrid 1.7

Penetration of EV 2.7

2020 MPG Fleet Average 32

Other -0.6

Change in Diesel Share 0.0

Move to Gasoline Direct Injection 0.1

Penetration of Hybrid 1.3

Penetration of Plug-in Hybrid 1.4

Penetration of EV 3.6

2025 MPG Fleet Average 38

Page 35: Drive Train to Supply Chain 2

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Drive Train to Supply Chain 2 35

US automotive

Industry forecasts

We expect a slower shift to BEV and PHEV in the US compared with Europe. This is

mostly a reflection of lower gasoline prices; i.e. in terms of total cost of ownership,

consumers are less incentivized to switch from internal combustion engines to electric

cars. Additionally, the share of light trucks is higher, which implies more weight per vehicle

and reduces the range of BEVs.

We expect diesel to remain a small fraction of the market with just 2% market share – the

diesel emissions scandal has contributed to making this a niche technology in the US. The

already small diesel share is also why we see less potential for 48V systems (in Europe

such systems are required to compensate for the negative effect on CO2 emissions from

declining diesel penetration rates). In addition, US regulations put less emphasis on

greenhouse gas emissions compared with toxic emissions.

CO2 targets push, but less demanding than in Europe

The average new car produced in the US in 2017 has ~28mpg fuel efficiency (directly

relates to CO2 emissions). The Corporate Average Fuel Economy (CAFE) target requires

the car industry to move towards an average of 54.5mpg for cars and 35 for light trucks by

2025. Fines are levied at a rate of $55 per car for every 1mpg under the target.

Penetration of Hybrids (50mpg), PHEV (70mpg) and BEV(>100mpg) are a key route to

meeting this standard. Based on our modelling and assuming continued efficiency gains in

ICE cars, we estimate a minimum PHEV/BEV penetration of 4-5% in 2020 to avoid

industry fines. If we run a scenario where penetration rates for battery cars do not change

from current levels, we estimate ~$100bn industry fines between now and 2030. Under

our base case we assume that the US falls slightly short of the current MPG standard as

political sentiment is looking to relax the targets.

Scale-up & technology road map supports consumer pull

We estimate the total cost of ownership in US for an average gasoline car (VW Golf) is

$2,800/annum, falling to $2,700/annum as fuel efficiency is improved (includes the new

technology cost). We estimate a 140 mile range or 35kWh equivalent battery vehicle

(Electric Ford Focus) total cost of ownership is currently around $3,400/annum and falls to

$2,800 by 2040 – near gasoline parity. Given the weaker economics of full battery cars in

the US we believe long-term adoption will be slower than in higher-cost fuel areas like

Europe (unless oil prices rise).

Key risks to forecasts

The regulatory environment is clearly an uncertainty in the US. Under federal CAFE

standards, automakers must meet mile-per-gallon targets for their fleets and within vehicle

categories. The Obama administration issued a version of the rules in 2012 that aimed at

reducing emissions by around six billion tons by 2025. Now the Environmental Protection

Agency (EPA) is under new leadership and President Trump seems to support a less strict

CO2 target. The Trump administration reopened the standards for vehicles that will be

produced in 2021-2025.

Since President Trump took office, the role of the National Highway Traffic Safety

Administration (NHTSA) has strengthened and the role of the EPA has weakened – this

might hint to potentially less strict CAFE standards. This could significantly influence future

demand and supply. Our forecast is based on the current CAFE rules.

Contributors: Daniel Schwarz Sascha Gommel Mathew Hampshire-Waugh

We expect a slower shift to BEV and PHEV in the US compared to

Europe

If we run a scenario where penetration rates

for battery cars do not change from current

levels, we estimate ~$100bn industry fines between now and 2030

unless targets are relaxed.

Since President Trump took office, the role of

the NHTSA has strengthened and the

role of the EPA has weakened – this might hint at the potential for

less strict CAFE standards

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Drive Train to Supply Chain 2 36

China automotive

Figure 18: China Automotive forecasts based on our integrated model

Source: Company data, Credit Suisse estimates, IHS, EEA

34

5 6

8

11

19 19

2223

25

2829

28 28 2829

3031

3233

3435

3637

38 39 40 40 41 42 42 43 43 44 44

0

5

10

15

20

25

30

35

40

45

50

2005 2008 2011 2014 2017E 2020E 2023E 2026E 2029E 2032E 2035E 2038E

Un

its (

mn

)

China Automotive Sales

Basic Gasoline Gasoline Direct Injection Diesel Hybrid & 48V Plugin Hybrid BEV

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2008 2011 2014 2017E 2020E 2023E 2026E 2029E 2032E 2035E 2038E

Pe

rce

nta

ge

China Automotive Sales Mix

Basic Gasoline Gasoline Direct Injection Diesel Hybrid & 48V Plugin Hybrid BEV

(Rmb / unit) Orignal New Change Chang %

R < 100 km - - -

100 km ≤ R < 150 km 20,000 - (20,000) -100%

150 km ≤ R < 200 km 36,000 20,000 (16,000) -44%

200 km ≤ R < 250 km 36,000 28,000 (8,000) -22%

250 km ≤ R < 300 km 44,000 40,000 (4,000) -9%

300 km ≤ R < 350 km 44,000 45,000 1,000 2%

R ≥ 350 km 44,000 50,000 6,000 14%

-100%

-50%

0%

50%

100%

150%

200%

0

20

40

60

80

100

120

140

Jan-16

Mar-16

May-16

Jul-16

Sep-16

Nov-16

Jan-17

Mar-17

May-17

Jul-17

Sep-17

Nov-17

000 Unit

New energy vehicle total sales YoY

67%57%

38%

324%

343%

53%32% 31% 30%

20%

0%

50%

100%

150%

200%

250%

300%

350%

400%

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e

unit

Total new energy vehicle YoY growth

We forecast lower car production short term followed by 3% growth

to 2030 and 1% thereafter.

We forecast gradual increases to battery vehicle penetration given the

risk around moving away from a subsify led market. Beyond 2030 we

believe compelling economics will drive faster adoption.

There is risk around battery vehicle

subsify changes between now and

2021.

Sales remain volatile given changes to subsidies

Despite short term risks, a move to better air quality should drive continued growth in electric vehicles. OEMs are incentivised to produce

NEV and production can be suspended if they miss targets.

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16 January 2018

Drive Train to Supply Chain 2 37

China new energy vehicle – from a subsidy-driven to

regulation-pull market

Key outcomes

We forecast China's new energy vehicle (NEV) segment will expand at a four-year CAGR

of 39% from 507k units in 2015 to 1.37m units in 2020. We believe the NEV segment

should benefit from market share gains in China given current low penetration. In 2017,

the Chinese government's NEV penetration estimate was 2.3%, although this was a

significant increase from 2016's 1.8%. We expect the NEV penetration to increase steadily

to 5% by 2020, driven by: 1) a government policy push, 2) accelerated charging facility

construction, and 3) declining battery cost.

Base case scenario

Although we are bullish on the China NEV sales outlook, we highlight the market is shifting

from being subsidy-driven to regulation-driven during 2017.

In the past, Chinese government bodies, both central and local, have pushed for adoption

of NEVs with strong policy support owing to worsening air pollution and traffic conditions,

as well as tightening petroleum resources. However, due to the rising financial burden

from big-ticket cash subsidies, the government reduced cash subsidies by 20% starting

from 2017 and plans to reduce them by an additional 20% from 2019 before removing

them entirely from 2021. Meanwhile, according to a report in China Automotive News

(Nov 2017) there is a risk of further subsidy cuts in 2018. Compared with the original 2018

NEV subsidy program (which leaves the subsidy unchanged vs 2017), this potential

adjusted plan could lower the short distance (i.e. below 300 km driving distance) subsidy

by 9-100%. For example, for a pure EV with 160 km drive distance, the central

government subsidy for 2018 would be cut by 44% (or Rmb16,000).

On the other hand, the government will implement NEV credits policy, which will require

automakers to fulfil 10%/12% credits share target in 2019 / 2020. Below we summarize the

key components of the NEV Credits plan:

Requirement: 10% in 2019, 12% in 2020, to be confirmed at a later date.

How to earn credits: A carmaker generates NEV score credits if its actual NEV score is

greater than its target NEV score. It will face an NEV score deficit if its actual NEV score

falls short of its target.

How to calculate credits: NEV score is calculated by summing up the products of the

annual manufacturing volume of each NEV type and per-vehicle NEV scores. Per-vehicle

score varies by technology and electric driving range. Two scores per plug-in hybrid

vehicle with >80 km, and a formula (0.012× drive distance+0.8) for pure EV vehicles.

How to trade credits: Credits can be traded among auto companies, but cannot be

carried forward to next year (except from 2019 to 2020). And a car maker can also use its

2020 score credits to offset the 2019 NEV score deficit.

Penalties/Consequences of non-compliance: Failure to meet NEV credit targets will

lead to suspension of production of certain existing high-fuel-consumption models

Contributor: Bin Wang

Our confidence on the NEV increase stems from: 1) government

policy push, 2) accelerated charging

facility construction and 3) declining battery cost.

However, due to the rising financial burden

the government reduced cash subsidies by 20%

in 2017 and plans to reduce them by another

20% from 2019, before removing them

completely from 2021

Failure to meet NEV credit target will lead to

suspension of production of certain

existing high-fuel-consumption models

Page 38: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 38

Japan automotive

Figure 19: Japan Automotive forecasts based on our integrated model

Source: Company data, Credit Suisse estimates, IHS, EEA,

5.95.7

5.45.1

4.6

5.0

4.2

5.45.4

5.05.3

5.65.4 5.3 5.2 5.1 5.0

4.9 4.9 4.9

0

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7

2005 2008 2011 2014 2017E 2020E 2023E 2026E 2029E 2032E 2035E 2038E

Un

its (

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Basic Gasoline Gasoline Direct Injection Diesel Hybrid & 48V Plugin Hybrid BEV

0%

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2005 2008 2011 2014 2017E 2020E 2023E 2026E 2029E 2032E 2035E 2038E

Pe

rce

nta

ge

Japan Automotive Sales Mix

Basic Gasoline Gasoline Direct Injection Diesel Hybrid & 48V Plugin Hybrid BEV

We forecast broadly flat car production in Japan until 2040 We believe hybrid/48V vehicles will

dominate the Japanese market given

their already high market share and future efficiency targets which have

already been met.

The Japanese supply chain is diversifying into hybrid, PHEV and

BEV.

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16 January 2018

Drive Train to Supply Chain 2 39

Japan Automotive

Spotlight on HEV in the Japanese auto electrification market

Among developed nations, the Japanese auto market probably boasts the best fleet

average CO2 emission levels at present, which we attribute to an exceptionally high ratio

of mini-vehicles and hybrid electric vehicles (HEV) in the Japanese market. Another factor

contributing to Japan’s favorable fleet average CO2 emissions is the prevalence of mild

hybrids among mini-vehicles, where we see a notably high use of ISG systems running on

12V. Japan’s fleet average CO2 emissions, derived from the fuel efficiency in each

passenger vehicle category (weighted average CO2 emissions for the entire vehicle sales

volume) is estimated at around 109g/km. However, Japan’s CO2 target was 137g/km in

2015 and is set to increase to 114g/km for 2020. We think targets at this level, which

appear rather lax compared with those in the EU, can be easily met with the model mix

currently available in the market. Thus, while Japan continues to see a high ratio of mini-

vehicles and HEVs, there appears to be little incentive for it to pursue extreme levels of

auto electrification. We estimate that the proportion of electrified vehicles in Japan will rise

to 49% in 2030, but expect HEVs including mild hybrids using legacy 12V ISG systems to

account for a full 42% of the total.

Further electrification will provide core Japanese suppliers to gain opportunities

While we expect HEV to remain dominant in the Japanese market, the Japanese OEMs

are still likely to further diversify their electrification line-up in order to cope with stricter

regulations in each of their exposed overseas markets. Hence, not limiting to HEV,

involvement in PHEV, BEV, and FCEV is expected to accelerate from Japanese OEMs.

While different architectures exist in electrified vehicles, one clear direction from the trend

is that automobiles will be equipped with higher-voltage energy sources, enabling

conventional components to translate into more electrified components. Not limiting to the

core electrified powertrain units in main drive motors, inverters, and batteries, components

that are traditionally relying on engine output can be transformed to motor-electrified

components. Further electrification in autos should accelerate the usage of motors in cars

and add more value to electrified components and high-performance semiconductors.

Core suppliers involved in batteries, electrified components, motors, and semiconductors

are likely to have further opportunities to gain benefits from the electrification trends.

Contributors: Masahiro Akita Koji Takahashi

Weighted average CO2 emission for the entire

vehicle sales volume is estimated at around 109g/km. However,

Japan’s CO2 target was 137g/km in 2015 and is

set to 114g/km for 2020.

There appears to be little incentive for it to pursue extreme levels of auto electrification

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16 January 2018

Drive Train to Supply Chain 2 40

India automotive

Figure 20: India Automotive forecasts based on our integrated model (mn units vehicles unless specified)

Source: Credit Suisse estimates, Company Data, IHS, EEA,

2.52.8

2.6 2.62.8

3.0

3.3

4.2

4.7

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5.8

6.16.3

6.7

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7.57.8

8.08.3

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2011 2013 2015 2017E 2019E 2021E 2023E 2025E 2027E 2029E 2031E 2033E 2035E 2037E 2039E

Un

its (

mn

)

India Automotive Sales

Basic Gasoline Gasoline Direct Injection Diesel Hybrid & 48V Plugin Hybrid BEV

2020 will be an inflection point in India

as it moves straight from Euro 4 to Euro 6 norms

0%

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2011 2013 2015 2017E 2019E 2021E 2023E 2025E 2027E 2029E 2031E 2033E 2035E 2037E 2039E

Perc

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tag

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India Automotive Sales Mix

Basic Gasoline Gasoline Direct Injection Diesel Hybrid & 48V Plugin Hybrid BEV

We expect diesel to lose out in the transition to

Euro 6 norms

0%

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Total PV sales % share of EVs

-15% -14%

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36%

16%

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2W Cars 3W Fleet Bus

2017 2021 2025

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0%

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80%

Cars (inc fleet) 2W 3W Buses

Share of EVs in 2025 Penetration

Page 41: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 41

India automotive

We expect India to be the only large car market to consistently post double-digit growth

going forward. We expect a 13% CAGR in volumes till 2025 which will make it the third

largest car market in the world. The cost economics for electric vehicles is likely to be very

favorable in India but the lack of charging infrastructure means that BEVs are likely to be

~15% of overall volumes by 2030e.

Aggressive target on car electrification: Driven by concerns on pollution and import

dependence of fuel, India has set itself a very ambitious target to sell only electric

vehicles post 2030. This is clearly a stretch target and unlikely to be achieved.

Nevertheless, it clearly shows the direction in which the government wants to go. We

believe the biggest bottleneck will be lack of infrastructure. Unlike other countries,

India has just started investing in charging infrastructure and the government is

waiting for private sector investment to support its efforts. We expect the regulatory

environment to become more stringent going forward.

The Indian market is more than just cars: We believe the transition towards electric

vehicles in India will be driven by segments where the bottleneck of charging

infrastructure is limited and hence two-wheelers, buses and three-wheelers will be the

first segments to move towards EVs. On two-wheelers, we believe the carry-on

battery model whereby a small battery is carried by the consumer to his home/office

for charging will become prevalent. For buses, charging infrastructure can be easily

setup at bus depots. For cars, we expect the penetration to reach around 15% by

2030 in our base case scenario. For both buses and three-wheelers, 100% of sales in

cities by 2030 is likely to be EVs. We expect ~40% of total two-wheelers sold to be

electric by 2030.

Hybrids not relevant in India: The Indian government recently removed all

incentives on hybrids and now offers incentives only on pure battery operated

vehicles. The level of incentives on BEVs in India is fairly significant at ~30% of

vehicle price and comparable to other large car markets. The policy push in India is

thus directly towards BEVs rather than hybrids.

Emission norms change in 2020 will result in push towards EVs: In its attempts to

reduce pollution in its choked cities, India decided to directly move from Bharat Stage

IV (Euro 4 equivalent) to BS VI (Euro 6 equivalent) norms. This will result in a

significant increase in both gasoline and diesel vehicle prices across categories

(greater catalyst value content). Combined with a reduction in battery prices, this will

make the cost equation more favorable for electric cars from 2020.

Total cost of ownership: India has one of the highest fuel prices amongst large auto

markets and residential electricity tariffs are amongst the lowest. This combination

means that the TCO in India is attractive. On public transport vehicles, given the long

distances covered per day, the TCO is already very close to breakeven. By 2025, we

expect the TCO on electric vehicles used in public transportation to be >20% better

than ICE vehicles and hence expect a large scale shift towards electric vehicles. On

private vehicles, the TCO will take time to catchup and by 2025 should be ~10%

better. But given the range anxiety and lack of charging infrastructure, that might not

be sufficient to sway the consumer.

Contributors: Jatin Chawla

On two-wheelers, we believe the carry-on

battery model whereby a small battery is

carried by the consumer to his home/office for

charging will become prevalent

The Indian government recently removed all

incentives on hybrids and now offers

incentives only on pure battery operated

vehicles

India has one of the highest fuel prices

amongst large auto markets and residential

electricity tariffs are amongst the lowest.

This combination means that the TCO in

India is attractive

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16 January 2018

Drive Train to Supply Chain 2 42

Korea automotive

Figure 21: Korean government targets aggressive

expansion of domestic NEV sales by 2020…

Figure 22: … with NEV market share of 20% of total

car registrations by 2020 in Korea

Source: MoTIE, Credit Suisse research; "E" is government targets Source: MoTIE, Credit Suisse research; "E" is government targets

Figure 23: Hyundai Motor Group (HMG) plans to

launch 31 NEV models by 2020…

Figure 24: …and we forecast HMG's NEV parts sales

CAGR of 33% over 2017E-20E

Source: Company data, Credit Suisse research; "E" is government targets Source: Company data, Credit Suisse estimates

Figure 25: Rising HMG NEV sales…

Figure 26: Hanon Systems supplies various NEV

parts for HMG…

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

62

108

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(%)

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('000 units)

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EV System Plug-in PV Hybrid PV Heat pumpHanon System's ASP for HMG's NEV parts

(USD)

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16 January 2018

Drive Train to Supply Chain 2 43

Korea automotive

Expecting Korea's NEV market growth CAGR of 53% in 2016-2020E. We estimate that

the Korean BEV/PHEV and hybrid market will record 2016-2020E CAGR of 53%. This is

supported by government targets (20% of registrations by 2020), R&D investments

(W150bn to 2020) and infrastructure investments. In December 2015, the Korean

government (Ministry of Trade, Industry and Energy) announced its major roadmap to

bolster the expansion of NEVs (new energy vehicles) to keep up with the shifting focus of

the global automotive industry towards an eco-friendly driving environment. To achieve

this target, the regulators have set out a series of supportive measures to boost its NEV

initiatives, such as R&D investments of W150bn over the next five years, expanding the

infrastructure for NEVs throughout the country (1,400 battery charging stations for EV and

80 hydrogen fueling stations for FCEV by 2020E) and continuation/increase of NEV

purchase subsidies and price discounts.

HMG plans aggressive NEV line-up expansion. To meet Korean government's

aggressive NEV expansion plan and to meet the regulatory standards globally, Hyundai

Motor Group (HMG) has already set 'Vision 2020' to expand NEV sales by launching 31

NEVs, including hybrid (HEV), plug-in hybrid (PHEV), EV, fuel-cell EV (FCEV), by 2020

from 2016's 13 NEV models (8 at the end of 2015). These projects will likely require

different combinations of solutions by adopting new technologies, supported by various

auto parts makers. HMG's 'Vision 2020' indicates not only the expansion of NEV model

line-ups, but also the improvement of powertrain efficiency through the adoption of smaller

engines with turbochargers, developing new transmissions, and applying light weight

material and products. We think it is time for the market to focus on supplier value chains

that could benefit from tightening regulations.

Hyundai Mobis is HMG's in-house NEV parts supplier. We believe Hyundai Mobis will

be the beneficiary of HMG's 'Vision 2020' as HMG's in-house supplier of converters,

inverters, motors and battery packs for Hyundai Motor and Kia. The company has guided

for W645bn (up 61% YoY) for 2016 NEV parts sales and we forecast Mobis to post NEV

part sales growth CAGR of 32% in 2016-2020E.

Shining Hanon Systems' NEV parts focused strategy with diversified sales channels.

Early penetration of the NEV market has been the key investment theses for Hanon and

growing NEV parts sales have been the valuation premium factor over peers. Hanon is

HMG's exclusive supplier for various NEV parts including E-compressor, HVAC (heating

ventilation and air conditioning), battery chiller, electric water coolant pump/valve, and fluid

transport. As of 1H17, 27% of the new business backlog orders were NEV parts, including

electric compressor, up from 21% in 2016. Based on the current backlog, we forecast

2017E-20E NEV parts sales CAGR of 32% and its 2020E sales and OP contribution to

rise to 13% (vs. 5% in 2016), and 11% (vs. 1% in 2016), respectively. In addition, while

HMG's sluggish sales have raised growth concerns for HMG-dependent parts suppliers,

Hanon's growing non-HMG/Ford sales will lead to differentiated growth, in our view. As of

1H17, 59% of new business backlog orders came from non-HMG/Ford, which include GM,

VW, BMW, Jaguar Land Rover, Geely/Volvo and a North American EV maker. As such,

the recent sales volume slowdown of HMG, especially in China, should be partially

defended by growing non-HMG sales.

Contributors: Michael Sohn

Korean government set NEV expansion target

HMC plans aggressive NEV line-up expansion

Mobis is HMG's in-house NEV parts

supplier

Hanon is the leading E-compressor supplier

with thermal management systems

for global OEMs.

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16 January 2018

Drive Train to Supply Chain 2 44

Global batteries

Figure 27: Global battery forecasts based on our integrated model

Source: Credit Suisse estimates, Company Data, Avicenne, Argonne National Laboratories, Science Direct, Battery University, RSC, OREBA, PWC

0

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Hybrid/48V PHEV BEV Weighted Average

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Electric Vehicles Large Electric Vehicles (buses)

Portable Electronics E-Bikes

Power Tools and other portable Energy Storage

0

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n

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Portable Electronics (Prismatic) E-Bikes

Power Tools and other portable Energy Storage

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$/kW

hAutomotive Battery Cell Cost

Cell Maker margin Non Material Costs Cathode Anode

Seperator Electrolyte Cu Foil Al Foil

We believe battery costs will be driven down by 1) economy of scale, 2) cathode improvements, 3) Anode improvement, 4) Solid state or Next Generation Technology.

To reach $40/kWh cells and $70/kWh battery prices by 2040.

0

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$/kW

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Cells Battery Management System Other Labour Logistics

We estimate battery demand will grow at

c20% CAGR driven by 1) uptake of hybrids, PHEV and BEV, then 2) post 2030

acceleration of large battery BEV penetration and energy storage using battery technology.

We estimate battery revenues will grow at ~

15% CAGR. 20% demand growth is offset by 5% price decline to increase consumer

adoption of BEV.

We estimate battery prices will decline at

c5% per annum on average. This is led by economy of scale over the next 10 years,

followed by technology breakthroughs post 2025.

Scale CathodeAnode Solid State

We forecast average battery

requirements of 1kWh for Hybrid, 11kWh for PHEV and full BEV increasing from

40kWh to 75kWh as the cost of batteries

is driven down.

Page 45: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 45

Global batteries

Assumptions

Based on our electric vehicle, energy storage and consumer electronics forecasts, we

expect battery demand to grow at ~20% CAGR. We forecast annual consumption to grow

from 100GWh per year in 2017 to 250GWh in 2020,1.1 TWh in 2030 and 3.7 TWh in 2040.

This will require >100x Gigafactories by 2040 and produce enough capacity for ~40m

electric cars, 400k electric buses, 700GW energy storage alongside consumer electronics,

e-bikes, scooters and power tools.

We forecast battery prices to fall from $244/kWh average in 2018 to $160/kWh by 2020,

$100/kWh in 2030 and <$100/kWh by 2040. This reduces the battery cost as % of an

average vehicle from c40% to 10% by 2040 – supporting improving total cost of ownership

and increased consumer uptake of battery cars.

Based on ~20% volume growth and ~5% price declines, we forecast global battery

revenue growth of ~15% CAGR to 2030. We forecast total market revenue growing from

$20bn (2017) to $30bn in 2020, $70bn in 2030 and $150bn per year in 2040.

■ GWh Demand: We expect volume growth in battery demand to be driven in two stages.

Stage 1) is from the initial uptake of electric vehicles including hybrid, PHEV and BEV

vehicles to 2030 this should support 20-30% CAGR growth rates. Stage 2) Supports a

second acceleration post 2030 as we expect significant upgrades to battery technology

at lower the cost which will accelerate the uptake of large battery BEV and energy

storage systems (see Battery Energy Storage – Charging Ahead).

■ Price: We base our battery price forecasts on the following technology roadmap:

− 2017: Current state-of-the art technology deployed in battery vehicles uses Li-ion

batteries based on NMC111 to NMC532 or NCA cathode, carbon electrode and

liquid electrolyte – we estimate an average ~$200/kWh cost with the lowest cost

producers claiming <$170/kWh (eg Tesla).

− 2020/25 (Economy of Scale & Cathode Improvements): We expect average

prices to reach $160/kWh by 2020 and $130/kWh by 2025 driven by a move to high

energy cathodes (eg NMC622 to 811/eLNO) and economies of scale. We estimate,

at current spot commodity prices, raw material content is c$40/kWh with the

remainder of costs going into production labour, R&D, overheads, depreciation and

supplier margin. Vertical integration, scale-up and automation will create the largest

incremental cost saves to battery production over the next 10 years.

− 2030 (Anode Improvements): We forecast $100/kWh in 2030. This will be driven

by advances to the battery anode with a move from carbon to carbon/silicon

materials. Silicon/carbon composites allow for greater lithium ion storage in the

battery anode. This could increase the anode specific energy by >5x (energy per

kg) and energy density by 10x (energy per volume) resulting in batteries which

could be 50% smaller and lighter which would serve to scale down manufacturing

costs and improve vehicle performance. The greatest issue facing

commercialization of these composites is swelling of the material (to 300% starting

size) which breaks the battery cell. Routes to overcome this include nano-

structuring or coating the material. Tesla has hinted it is including small amounts of

silicon in its anode already.

− 2040 (Solid State or Next Generation Penetration): We forecast $70/kWh by

2040. This is premised upon penetration of solid state or next generation

technologies. Solid State batteries would replace the liquid electrolyte with a solid

matrix. The benefit of this would be to reduce the weight/volume of the electrolyte

by 10x. This creates the opportunity to further scale down the weight and size of the

battery by another 30% - providing another route to cheaper and better performing

Contributors: Mathew Hampshire-Waugh Chris Counihan Sam Perry Andre Kukhnin Max Yates Iris Zheng Keon Han Sanguk Kim Mika Nishimura

Annual consumption will likely grow to 3.7

TWh in 2040. This will require >100x

Gigafactories and produce enough

capacity for ~40m electric cars, 400k

electric buses, 700GW energy storage

alongside consumer electronics, e-bikes, scooters and power

tools.

We forecast battery prices to fall from

$244/kWh average now to $160/kWh by 2020

$100/kWh in 2030 and <$100/kWh by 2040.

This reduces the battery cost as % of an

average vehicle from c40% now to 10% by

2040

Page 46: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 46

battery vehicles. Anode and cathode components would remain unchanged using

solid state technology. Next Generation technology includes a range of options

which instead of using intercalation technology (where lithium sits inside the

cathode/anode) they would use conversion alloys or similar (where the lithium is

part of the material). This could include options like Lithium-Sulphur and Lithium-

Air. These technology routes have the potential to reduce weight/volume >70%

from today's battery technology; however, significant technology hurdles remain.

These technologies would not require conventional anode/cathode materials.

■ Costs: Lithium is the smallest and lightest atom which can carry a single charge and

therefore will likely remain the technology of choice for batteries. The ultimate

limitations of battery cost is the cost of lithium which, at spot prices, is $8/kWh. The

amount of Lithium required does not change regardless of technology used (the

number of lithium atoms directly relates to the amount of energy stored). Our $70/kWh

battery cost by 2040 assumes solid state/next generation technology. Under these

assumptions, we estimate the cost of raw materials would drop to $25/kWh (from

$40/kWh now) leaving $45/kWh for production, R&D, depreciation and supplier margin

(from $160/kWh now). The key will be scale and the ability to store 3-4x as much

energy in every battery cell produced. We believe this transition is ultimately plausible

given recent technology advances and an underlying assumption that gross margin

(price minus raw material cost) for batteries goes from 80% to 65% - still a high level

for a large commoditized industry.

Market Overview

Panasonic (Japan) is the world's largest battery maker with c40% of the global market,

followed by AESC (China PE), LG Chem (South Korea) and Samsung SDI (South Korea).

Panasonic supplies Tesla, Mercedes and VW. AESC primarily supplies Nissan (formerly

part owned by Nissan & NEC but sold to Chinese private equity). LG Chem supplies Ford,

Hyundai, Renault and Volvo. Samsung supplies BMW, VW and Fiat.

We believe that scale is key for battery makers to successfully transition to a profitable

growth. We believe Panasonic's leading market share will support inflection to profitable

battery business in 2019. We remain more cautious on Samsung SDI given cost and scale

issues. We breakout our view on these two companies over the next two sections.

We estimate the global battery industry at a total value of $22bn NPV. This is premised

upon our explicit forecasts of battery demand and assumes capital intensity of $150k/GWh

falling to $70k/GWh by 2040E (based on Tesla Gigafactory). We assume 10% ROIC

based on the average of technology hardware in HOLT. We estimate $2.8bn FCF in

2040E and value this on a 2.5% yield discounted back at 7% WACC. We note FCF turns

positive in mid-2030s.

Key Risks to Forecasts

Near term: Risks to battery makers will be raw material prices including lithium, nickel,

and cobalt. There exists a mix of contracted pricing and indexation in the industry. The

significant raw material price increases over the last 18 months are creating short-term

headwinds. We understand the majority of contracts will contain indexation of raw material

prices going forward.

Mid term: Economy of scale is required to compete and therefore filling large facilities is

key. Profitable growth will require ties to major EV makers and successful penetration of

new vehicle models.

Long term: Technology risk is the greatest unknown. Breakthroughs in silicon

anodes/solid state or next generation conversion alloy technology would allow producers

to cut costs by >50%, sharply lowering the cost curve. Continued R&D or strategic M&A is

required to keep pace with technology breakthroughs.

We estimate at current spot commodity prices raw material content is c$40/kWh of $200/kWh

total with the remainder of costs going into production labour,

R&D, overheads, depreciation and supplier margin.

Vertical integration, scale-up and

automation will create the largest incremental

cost saves to battery production over the

next 10 years.

Technology risk is the greatest unknown.

Breakthroughs in silicon anodes / solid

state or next generation conversion alloy

technology would allow producers to cut costs

by >50%. Thus dramatically lowering

the cost curve

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16 January 2018

Drive Train to Supply Chain 2 47

Global batteries – Panasonic in focus

Panasonic is the world's largest supplier of automotive batteries. The company supplies

cylindrical cells to Tesla and oblong batteries to Ford, Volkswagen, Toyota, and Honda.

Rechargeable battery earnings outlook

For the rechargeable battery business, we forecast an inflection point in 2019 as operating

losses turn to a profit of ¥27.0bn in FY3/19 and ¥31.0bn in FY3/20 (based on slow Tesla

ramp). For the medium term, we expect profits to improve in earnest as the Tesla Model 3

production scales (Panasonic is the battery cell supplier) and sales of prismatic-type

batteries to non-Tesla customers expand. We expect rechargeable batteries to account for

30% of Panasonic’s overall profit growth in 2019.

Tesla business to step up earnings contribution from FY3/19

Commercial-scale production of the Tesla Model 3 is behind schedule, due mainly to

production process issues. Tesla had originally targeted a production rate of 5,000 units a

week for the Model 3 in 2017, but when it reported Jul–Sep results, the company pushed

the timeline for this target back to Jan–Mar 2018. We understand that problems are

related mainly to automated processes at the battery module assembly line. Tesla has

said that there are no major issues with the production structure itself (including the supply

chain), so we expect the company to gradually move towards a mass-production structure.

Prismatic-type automotive batteries; boosting production capacity

We understand that Panasonic is experiencing robust interest in its prismatic-type

automotive batteries. So far in FY3/18 the company has boosted production capacity at its

Dalian, China plant and its domestic plant in Sumoto. Panasonic intends to start producing

automotive batteries at its LCD panel plant in Himeji, and we expect a further boost to

capacity at the Dalian plant, although the company has not made any official

announcement. Thanks to the steady increases in production capacity, we look for

continued sales growth through FY3/20.

Cost increases being offset with reduced spending & price pass-through

Rises in prices of materials such as lithium and cobalt is a risk factor. However, we

understand Panasonic has offset these by reducing other costs and passing some of the

increases on to customers. We think the company needs to conclude contracts that limit

risk of materials price volatility when it accepts orders. We believe the company strives to

win orders mainly from customers that highly rate the reliability of its technology and its

volume production capabilities.

Focusing on developing advanced materials for higher performance

In leading-edge development efforts, Panasonic’s focus is developing cutting-edge battery

materials and refining its analysis/assessment technology for improving reliability.

Significant amounts of experimental data accumulated over more than 50 years is a key a

strength of Panasonic, in our view. The company notes that it can reduce the time required

for creating new materials by leveraging AI for analysis of a combination of experimental,

material, and theoretical data. For now, material development is centered on improving

current lithium-ion battery (LiB) performance, but development is also under way on solid

state batteries and new battery concepts. In term of production, Panasonic is working on

reducing design time and trial-related man hours by making processes more transparent

and utilizing numerical values, and on raising quality through real-time monitoring of

processes.

Contributors: Mika Nishimura

For the rechargeable battery business, we forecast an inflection

point in 2019 as operating losses turn

to a profit

Rises in prices of materials such as

lithium and cobalt is a risk factor. However,

we understand Panasonic has offset

these by reducing other costs and passing

some of the increases on to customers

For now, material development is

centered on improving current lithium-ion

battery (LiB) performance, but

development is also under way on solid

state batteries and new battery concepts

Page 48: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 48

Global batteries - Samsung SDI in focus

Profitable auto battery by 2019 remains challenging

Auto battery technology is not fully mature as it requires constant increase in R&D.

Capacity build-out drives yearly capex increases, further boosting depreciation costs.

About 65% of the battery pack cost is variable, which is not directly in control of any

battery maker. We conclude that despite the rapid acceleration in EV battery cell

shipments, Samsung SDI will continue face challenges in generating operating profits for a

few more years.

Direct raw material cost is rising

Core metal prices are seeing significant price increases that could impact future cost

targets. In some cases in previous xEV battery contracts, the ability to pass through costs

has reduced, although all new contracts are expected to contain pass-through clauses on

some material price increases.

Increasing scale remains critical

Last year Samsung SDI has ranked No.5 globally on EV battery volume shipments based

on company data. SDI's core customer focus currently is on BMW (40%), VW Group

(30%) and Fiat/Chrysler (10%). Even with about 8.5GWh of announced capacity, SDI's

scale is relatively small compared to some of its key global competitors. A second go at

entry into the Chinese EV market by 2021 and start of new plant operation in Hungary by

2Q18 are potential longer-term revenue catalysts.

Maintain NEUTRAL on Samsung SDI

We retain our NEUTRAL rating on Samsung SDI. Valuation is nearing its recent high at

1.24x P/B on 8.6% ROE in FY18E, with the majority of earnings driven by low quality

equity income contribution. While we also acknowledge that global xEV battery market

expansion is one of core long-term growth drivers for SDI, ongoing uncertainties on margin

improvement amid lack of scales and raw materials costs hikes could weigh on further

share price performance, in our view.

Figure 28: SDI—despite declining battery cell

costs… Figure 29: …breakeven still some way off

Source: Company data, Credit Suisse estimates (2018-2022) Source: Company data, Credit Suisse estimates

0

50

100

150

200

250

2017 2018 2019 2020 2021 2022

US$/kWh

SDI - battery cost

-140%

-120%

-100%

-80%

-60%

-40%

-20%

0%

0

100

200

300

400

500

600

700

3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E 1Q19E 3Q19E

xEV battery sales OPM (%, RHS)

Wbn

Normalized OPM excluding one-off write-off costs1Q16 actual OPM was -236%

Contributors: Keon Han Sanguk Kim

We conclude that despite the rapid

acceleration in EV battery cell shipments,

Samsung SDI will continue face challenges in

generating operating profits for a few more

years.

Page 49: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 49

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Page 50: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 50

Battery materials – cathode technology

Figure 30: Battery Materials – Cathode Technology Forecasts Based on Integrated Model

Source:, Credit Suisse estimates, Company Data, Avicenne, Copper Association, Science Direct, Battery University, RSC, OREBA

1,6272,723

3,6285,104

8,099

11,221

14,869

18,531

22,510

30,94932,135

30,14031,282

33,677

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

$m

n

Battery Cathode Market Revenue ($mn)

Electric Vehicles Large Electric Vehicles (buses)

Portable Electronics E-Bikes

Power Tools and other portable Energy Storage

...we forecast mid-teens revenue CAGR until 2030s given price declines required to lower battery

prices. We forecast peak revenues by mid-2030 due to penetration of alternative technology.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

To

nn

es '0

00

Lithium Cathode Demand by Application

Electric Vehicles Large Electric Vehicles (buses)

Portable Electronics E-Bikes

Power Tools and other portable Energy Storage

0

100

200

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400

500

600

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2012 2015 2018E 2021E 2024E 2027E 2030E 2033E 2036E 2039E

Lithium Cost in Battery Pack

Automotive Whole Battery Pack Cost ($/kWh)

Lithium as % of Cathode Cost

Lithium as % Battery Cost

... lithium costs around $8/kWh at spot prices and will represent a limiting part of the cost base for battery technology.

0%

10%

20%

30%

40%

50%

60%

70%

80%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2007 2009 2011 2013 2015 2017E 2019E 2021E 2023E 2025E 2027E 2029E

$/kW

h

Metal Value in Average Cathode

Lithium Cobalt

Iron Manganese

Nickel Aluminium

Metal Cost as % Cathode Cost

We note that metal costs are a significant % cost of cathode production. Reducing the content of high cost metals and scale will be key to maintaining profitable growth in cathode production....

0

500

1,000

1,500

2,000

2,500

3,000

3,500

kTonnes

Cathode Technology

Next Generation (eg Li Sulfur/Li Air) NCA NMC 811 / eLNO NMC 111 / 532 / 622 LMO LFP LCO

We believe the market will move to high

nickel cathode technology like NMC811 for performance cars, Tesla will continue

with NCA and LFP will find use in lower performance vehicles and energy storage. We believe next gen technology will begin

to penetrate from 2030

0

50

100

150

200

250

300

350

2012 2014 2016 2018E 2020E 2025E 2030E 2040E

$/kW

h

Automotive Battery Cell Cost

Cell Maker margin Non Material Costs Cathode Anode

Seperator Electrolyte Cu Foil Al Foil

... and to reducing overall battery cell costs. We estimate using current cathode materials cell costs can get to c$60/kWh. Below this requires solid state or next generation technology.....

We forecast 20-30% CAGR near term and

10-20% growth longer term for the cathode materials market. Supported by electric

vehicle penetration and energy storage longer term......

Page 51: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 51

Battery materials – cathode technology

Assumptions

Based on our electric vehicle forecasts and GWh battery requirements, we estimate that

the cathode materials market will reach 400k tonnes by 2020, 1,700k tonnes by 2030 and

4,000k tonnes by 2040:

■ We estimate shortages in high performance automotive grade cathode material by

2020 based on capacity expansion intentions by the major producers. We estimate

demand of c180kt for high energy materials (ex Tesla) and supply at 160-180kt.

■ We believe cathode technology will move toward high energy/ high nickel products by

early 2020 (NMC622 transition to NMC811 or eLNO etc). Solid state technology may

become a reality by 2030 but it still requires the same cathode technologies. Beyond

2030, we forecast penetration of next generation products eg lithium-sulphur or lithium-

air for certain applications which could limit growth of current cathode technology and

pressure pricing.

■ We forecast an average of 5% cathode price declines per annum to support reduction

in battery costs and mass adoption of electric cars. Cathode technology with limited

content of expensive metals and production with large economy of scale will be

required longer term to grow in this business profitably.

Market Overview

Cathode materials form one end of a battery cell which stores the lithium when the battery

is discharging. The cathode defines many of the key features of the battery including,

range, power, safety, lifetime and charge time. Sumitomo (Japan) is the largest supplier of

cathode materials (to Tesla, NCA technology) followed by Umicore (Belgium, NMC111 to

532), ShanShan (China, NMC 111 to 532) and Nichia (Japan, NMC111 to 532) plus

Samsung SDI and LG Chem have some small internal supply. The current state-of-the art

technology is NMC532 or NCA. The next round of tech improvements will come early 2020

with high nickel/low cobalt materials including NMC622, eLNO and NMC811.

We estimate total value for the cathode materials market at $5-6bn based on our explicit

demand forecasts, $6,000/tonne capital intensity (declining to $4,000 by 2040), 12%

ROCE (based on Umicore assumptions). We estimate industry cash flows of $700mn by

2040 and value these on a 2.5% yield discounted back at 7% WACC. Cathodes are cash

positive by the early 2030s.

Stock Recommendations

Our preferred exposure to the cathode materials theme is through Johnson Matthey (O/P,

TP£39, UK) which currently produces LFP material and is in the process of scaling up

eLNO technology which it claims has 5-10% better performance than NMC811 (best

possible NMC material yet to be commercialized). First sales of eLNO are planned for

2021. The stock is trading at a significant discount to peers due to concerns around its car

catalysts business and has no value implied for eLNO.

We have become more cautious on Umicore (TP€30, U/P, Belgium) given the large

implied value of its battery materials business and potential market share losses to

Johnson Matthey in catalysts. We estimate the implied value of battery materials and

battery recycling for Umicore is ~€5bn, while we estimate the markets are worth $7.5bn.

This implies Umicore will occupy >50% market share long term - seemingly unlikely.

Key Risks to Forecasts

Technology represents the key risk in cathode markets. Earlier-than-expected

development of next generation technologies at scale would compromise the inherent

value priced into the incumbents (eg Umicore). Further risk is around sufficient scaling of

production to offset price declines in the industry which we forecast as cash flow positive

by the early 2030s.

Contributors: Mathew Hampshire-Waugh Chris Counihan Sam Perry

We estimate likely shortages in high

performance automotive grade

cathode material by 2020

Cathode technology with limited content of expensive metals and production with large economy of scale will

be required longer term to grow in this

business profitably.

Our preferred exposure to the cathode

materials theme is through Johnson

Matthey (O/P, TP£39, UK) which currently

produces LFP material and is in the process of

scaling up eLNO technology which it

claims has 5-10% better performance than

NMC811

Page 52: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 52

Battery materials – anode technology

Figure 31: Battery Materials – Anode Technology Forecasts Based on

Integrated Model

Source: Credit Suisse estimates, Company Data, Avicenne, Copper Association, Science Direct, Battery University, RSC, OREBA

0

50

100

150

200

250

300

350

2012 2014 2016 2018E 2020E 2025E 2030E 2040E

$/kW

h

Automotive Battery Cell Cost

Cell Maker margin Non Material Costs Cathode Anode Seperator Electrolyte Cu Foil Al Foil

0

500

1,000

1,500

2,000

2,500

3,000

3,500

20

05

20

06

20

07

20

08

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20

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38

E

20

39

E

20

40

E

k t

onne

Anode Demand

Total Carbon/Carbon-Silicon Anode Production (k tonne) Total Next Generation Production (k tonne)

We forecast c20% CAGR in anode materials demand as penetration of electric vehicles and energy storage drive consumption

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

E

20

18

E

20

19

E

20

20

E

20

21

E

20

22

E

20

23

E

20

24

E

20

25

E

20

26

E

20

27

E

20

28

E

20

29

E

20

30

E

20

31

E

20

32

E

20

33

E

20

34

E

20

35

E

20

36

E

20

37

E

20

38

E

20

39

E

20

40

E

Anode Market Revenues

Anode Market Revenue ($ mn)

...we forecast 15-20% revenue

CAGR. We believe prices will hold relatively stable but there exists

some risk around alternate technologies including silicon and next generation materials.

Anode materials represent a very small cost

component of battery cells. We believe there is limited opportunity to cut raw material costs further. However a shift to silicon anodes (from carbon) would allow battery makers to halve the weight and volume of batteries and save on costs elsewhere.

Page 53: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 53

Battery materials – anode technology We forecast c20% CAGR growth in anode materials demand over the next 15 years. We

estimate demand of 250kt by 2020E, 1,100kt by 2030E and 2,800kt by 2040E. We

assume relatively stable pricing through the period which generates $8bn revenue by 2030

and $30bn by 2040E.

■ Our intensity assumption is 1kg of spherical graphite per 1kWh. Every 1kg of spherical

graphite requires 2-2.5kg of natural graphite. (we expect Syrah Resources at the lower

end, China producers at the higher end).

■ With respect to changing technology, we assume that the emerging, but not yet

commercial, silicon anode/next generation battery technology will begin to displace

graphite as the primary anode in l-ion batteries from 2025E, achieving >30% graphite

displacement by 2040E. Our estimates account for the extensive lead time associated

with development, life cycle testing, and assumed cost reduction to commercialize this

emerging cell chemistry to the extent it could warrant wide spread adoption needed to

displace incumbent graphite-based anode technology.

Market Overview

■ We are structurally bullish on those companies which have leading positions as

suppliers of critical raw materials used in the li-ion battery supply chain, and in this

respect anode materials and specifically graphite.

■ We estimate total value for the anode materials market at ~$2bn based on our explicit

demand forecasts, $2,500/tonne capital intensity (declining to $1,400 by 2040E), 12%

ROCE. We estimate industry cash flows of $200mn by 2040E and value these on a

2.5% yield discounted back at 7% WACC. Anodes are cash positive from early 2030s.

■ Technology is the key risk to this market. However, given the long lead time to

development and commercial adoption, we view this risk over a typical investment

horizon as low.

Syrah Resources (TPA$6.60/sh, O/P, Australia), the standout global graphite play

■ Syrah is the leading global producer of natural graphite whose product is proven to be

highly amenable to use in battery anodes, displacing higher cost synthetic graphite. We

view Syrah Resources as exceptionally well positioned to capitalize on the growth in

global EV and battery capacity. Syrah Resources is a market leader and we view it as

becoming the dominant supplier of natural flake and spherical graphite globally to

anode producers.

■ Syrah Resources' competitive advantages over its peers are many including; largest

graphite reserve globally; favourable graphite characteristics (optimal flake size for

conversion to battery specification spherical graphite, fully ordered crystalline structure,

low impurities, high degree of spherodisation) making its graphite highly suitable for

use in anodes; sector-leading (bottom quartile) cost producer and lowest capex

intensity for capacity expansions; first-mover advantage with plant commissioned and

production achieved whilst ex-China peer group remain unfunded and whose products

have not been exhaustively tested or endorsed by end users; and it offers anode

makers an alternative geographic (Mozambique) and political exposure to existing

natural graphite supply which is dominated by poor quality Chinese mines.

■ First production at Syrah Resources' Balama mine was achieved in November 2017

with first cash flows due early CY2018. Achieving production opens it to a larger

investment universe as investment mandates for many funds precluded them from

investing in development companies. This is one of many catalysts which could see the

stock re-rate higher, while the underlying economics are underpinned by rapid growth

in anode demand projections from which Syrah Resources should directly benefit as

the leading global supplier of graphite into anodes.

Contributors: Michael Slifirski Nick Herbert Mathew Hampshire-Waugh Chris Counihan Sam Perry

We forecast c20% CAGR growth in anode materials demand over

the next 15 years.

We are structurally bullish those

companies who have leading positions as

suppliers of critical raw materials used in the li-

ion battery supply chain, and in this

respect anode materials and

specifically graphite

Syrah is the leading global producer of

natural graphite whose product is proven to be highly amenable to use

in battery anodes displacing higher cost

synthetic graphite

Page 54: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 54

Battery metals – lithium carbonate

Figure 32: Battery Materials – Lithium Carbonate Forecasts Based on our Integrated Model

Source: Credit Suisse estimates, Company Data, Infomine, US Geological Association, Shanghai Metals Market

75%

80%

85%

90%

95%

100%

105%

115,000

120,000

125,000

130,000

135,000

140,000

145,000

150,000

155,000

Lith

ium

Car

bona

te k

tonn

es

Lithium Carbonate Reserves

Global Lithium Reserves (from 2008) Lithium Carbonate Reserves Remaining (since 2008)

Lithium reserves are more than sufficient to satisfy demand requirements

0

500

1,000

1,500

2,000

2,500

3,000

k to

nne

Lithium Carbonate Demand ex EV (tonnes) Lithium Carbonate Demand from EV

For lithium carbonate demand we forecast 15-20% CAGR to 2021 and 3mn tonnes demand by 2040

0%

20%

40%

60%

80%

100%

120%

0

50

100

150

200

250

300

350

400

450

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Lithium Carbonate Adjusted Capacity (k tonnes)

Lithium Carbonate Demand (k tonnes)

Global Operating Rate (RHS)

Markets should remain tight to 2021. Beyond

this there is risk around new capacity additions in China, Argentina, Australia and Canada

60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Lithium Carbonate Price ($/tonne)

Global Operating Rate (RHS)

We forecast further 7-12% price increases in 2018/19 as markets remain tight. 0

500

1,000

1,500

2,000

2,500

3,000

Lithium Carbonate Recycling Supply (k tonnes)

Lithium Carbonate Capacity (k tonnes)

Recycling could represent around 10% of lithium supply by 2040 if 50% of spent car batteries are recycled

Page 55: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 55

Battery metals – lithium carbonate

We continue to believe lithium markets will remain demand driven in 2018/19, fuelled by

rising EV penetration rates (albeit off of a low base) and energy storage, augmented by

GDP plus growth in industrial and consumer (eg, power tools) parallels. As a result, we

expect pricing to increase 7% to 12%, with hydroxide markets faring better than carbonate

on the back of above market growth driven by energy storage; these trends should remain

a key tailwind for FMC and ALB. In addition to EV penetration rate increases through the

balance of the decade, we stress specs for performance (as well as safety) are also on the

rise, which should bode well for producers of higher grade products.

In our view, 2018/19 has a clear runway for demand growth outpacing probable supply,

leaving the market fairly tight. We see 2020 onwards as the 'transitory years', as the

cadence of supply growth (eg, Chile, Argentina, Australia, Canada) becomes more integral

to the Supply/Demand balance. We also view the potential for M&A/industry consolidation

to play a role in the forward outlook, especially post the ~$5bln SQM stake sale by Nutrien

(NTR) over the next ~18 months; we continue to see a sale sooner rather than later due to

the presence of multiple suitors. However, we note that Chilean politics may still represent

a key risk..

In the long term, we see growth predicated on the balance of BEV, PHEV and HEV growth

driven by key auto OEMS. Most investor focus at present is on Tesla production rates (as

a proxy if nothing else), but we see substantial growth optionality over the next 3-7 years

among OEMs such as Toyota, VW, BMW (i-series), Nissan (Leaf) and GM (Volt, Bolt,).

Through the beginning of the next decade, we estimate lithium demand (LCE) from EV will

grow 3-4x, primarily from BEV. As a result, we forecast total lithium demand (LCE) of

~350kt to 375kt by 2020/21E, representing roughly a 15-20% CAGR over the next four

years.

During the next decade (2020-2030) we see grid storage as having the largest degree of

growth optionality (could also drive long-term bromine demand) along with EV markets,

but we stress supply discipline will become even more difficult if the long-term market

outlook improves from the already euphoric levels present in 2018. That said, capacity

increases have proven difficult in the last decade, recently evidenced by production

delays/issues in Orocobre (2016 at Olaroz), China (broadly), as well as the probable delay

at Nemaska's Whabouchi project in Canada. Over the next ~5 years we see ALB, FMC,

SQM, Tianqi and Ganfeng as the "needed" market leaders in supply discipline, followed by

Orocobre and Galaxy.

Contributors: Christopher Parkinson Graeme Welds Kieren Debrun

We expect pricing to increase 7% to 12%,

with hydroxide markets faring better than

carbonate

In the long term, we see growth predicated on

the balance of BEV, PHEV and HEV growth

driven by key auto OEMS. We forecast

total lithium demand (LCE) of ~350kt to

375kt by 2020/1, representing roughly a 15-20% CAGR over the

next four years.

During the next decade (2020-2030) we see grid

storage as having the largest degree of

growth optionality (could also drive LT

bromine demand) along with EV markets, but

we stress supply discipline will become

even more difficult

Page 56: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 56

Battery metals – cobalt, copper & nickel

Figure 33: Battery Materials – Co, Cu, Ni Forecasts Based on our Integrated Model

Source: Credit Suisse estimates, Company Data, Copper Association, Core Consultants, US Geological Association, Infomine

75%

80%

85%

90%

95%

100%

105%

19,000

20,000

21,000

22,000

23,000

24,000

25,000

26,000

2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037

k to

nnes

Cobalt Reserves

Total Global Reserves % Remaining Reserves

Cobalt reserves should be sufficient to provide enough battery materials to meet demand. Mine development is the key risk.

0

50

100

150

200

250

300Cobalt Supply & Demand

Capacity (k tonnes) Battery Recycling Supply (k tonnes) (at 70%)

Cobalt recycling supply should balance the market longer term.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500Nickel Demand

Demand ex EV (k tonnes) EV Demand (k Tonnes)

High Nickel battery materials are giving better performance EVs and should support >3% Nickel demand

0

50

100

150

200

250

300Cobalt Demand

Demand ex EV (k tonnes) EV Demand (k Tonnes)

Cobalt is a key material in battery

cathodes. We forecast 2% CAGR ex EV and 6% CAGR including electric cars

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000Copper Demand

Demand ex EV (k tonnes) EV Demand (k Tonnes)

Copper is an important material in batteries and electric motors for EV. However it will represent only a small fraction of demand.

50%

60%

70%

80%

90%

100%

110%

0

20

40

60

80

100

120

140

2010 2013 2016E 2019E

Pric

e $/

ounc

e

Cobalt Operating Rates & Price

Price ($/Oz) Global Operating Rate (RHS)

Cobalt pricing has risen as demand for batteries accelerates. Short term we expect continued upside risk from supply shortages

from the Democratic Republic of Congo

50%

60%

70%

80%

90%

100%

110%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2007 2010 2013 2016E 2019E

Pric

e $/

tonn

e

Nickel Operating Rates & Prices

Price ($/tonne) Global Operating Rate (RHS)

Despite EV penetration, operating

rates have fallen due to oversupply in the industry - we forecast gradual recovery

64%

66%

68%

70%

72%

74%

76%

78%

80%

82%

84%

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

9,000.0

10,000.0

2007 2010 2013 2016E 2019E

Pric

e ($

/tonn

e)

Copper Operating Rates & Prices

Price ($/tonne) Global Operating Rate (RHS)

We are constructive on copper due to more limited supply rather than EV contribution

Page 57: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 57

Battery metals – cobalt, copper & nickel

Environmental regulation and the push towards electric vehicles and energy storage will

have a large and growing impact on specific parts of the mining industry. Energy coal will

lose out while the winners will be the base metals cobalt, nickel and copper, key

commodities within battery materials and electric vehicles.

Cobalt

■ Assumptions: Excluding EVs we assume demand growing at ~2% to ~90kt in 2020E;

however, the addition of EVs has a major impact to global requirements. Assuming

0.12kg of cobalt per kwh would mean EVs increase annual demand growth to ~6%

over the next 10 years with EVs accounting for 30% of demand in 2025E (vs 5% today).

■ Market Overview: The cobalt market is small and therefore EV adoption could result in

a very significant short-term deficit with batteries accounting for ~50% of global cobalt

demand currently. Mine production is set to rise; however, 50% of today’s volumes

come from the DRC and most of the expected growth also comes from the region.

Social and governance concerns from some battery producers may restrict the use of

cobalt from this region which could support prices even further or sway the market

towards alternative less cobalt intensive technologies. Longer term recycling cycles

should ultimately keep the market balanced.

■ Stock recommendations: Glencore is one of the only listed companies with

meaningful exposure.

Nickel

■ Assumptions: Excluding EVs, we assume demand growing at ~3% out to 2020E

before falling to a long-term trend growth rate of 2%. On our estimates, a battery

requires ~0.5kg per kwh which could result in total demand growth rates remaining

above 3% with the adoption of EVs. We think EVs could account for ~5% of global

nickel demand by the end of the decade.

■ Market Overview: The bullish sentiment on the EV revolution has had a positive effect

on the price recently; however, this incremental demand is some years away and

current supply growth should keep the market close to balance near term. In early

2016, Indonesia banned the export of unprocessed minerals; however, it has since

been issuing permits which should result in material supply growth over the next 1-2

years. Global inventory also remains at a high level which should dampen material

upside in the price near term. Unlike cobalt where supply is less certain, the industry

has availability and no shortage of resources in known geographies like Canada,

Australia, Brazil and New Caledonia.

Copper

■ Assumptions: Excluding EVs we assume demand growing at ~2% to 24mt in 2020E

and the same growth rate thereafter. We then assume 1kg of copper per kwh which

when combined with non-battery related EV copper demand, could add ~1mt of

demand by 2025E.

■ Market Overview: Having been the laggard commodity through 2016, copper prices

recovered strongly in 2017 driven by a slowing of new project related growth and major

strike disruption in Q1. We now forecast a broadly balanced market in 2018 but further

strike action remains a possibility. Structurally the long-term fundamentals of the

copper market look positive; mines are getting harder to find, are lower in grade and

more expensive to build. EVs are positive for demand, but are long-dated and not huge

in size relative to the copper market.

■ Stock recommendations: Our preferred copper names are KAZ Minerals and

Glencore.

Contributors: Michael Shillaker James Gurry Conor Rowley Mathew Hampshire-Waugh

Cobalt: The market is small and therefore EV

adoption could result in a very significant short

term deficit with batteries accounting

for ~50% of global cobalt demand

currently. Longer term recycling cycles should

ultimately keep the market balanced.

Nickel: The bullish sentiment on the EV revolution has had a positive effect on the

price recently however this incremental

demand is some years away and current

supply growth should keep the market close

to balance near term

Copper: Structurally the long term

fundamentals of the copper market look positive; mines are

getting harder to find, lower in grade and more expensive to

build. EVs are positive for demand, but are long-dated and not

huge in size relative to the copper market.

Page 58: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 58

Automotive catalysts

Figure 34: Automotive Catalysts – Forecasts Based on Integrated Model

Source: Credit Suisse estimates, Company Data, Platinum Report, ICCT, Platinum Council, Science Direct

0

2,000

4,000

6,000

8,000

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12,000

2012 2015 2018E 2021E 2024E 2027E 2030E 2033E 2036E 2039E

$m

n

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Europe petrol Europe GDIEurope diesel US gasolineUS GDI US dieselAsia gasoline Asia GDI

-2%

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100%

2012 2014 2016 2018E 2020E 2022E 2024E 2026E 2028E 2030E 2032E 2034E 2036E 2038E 2040EP

erc

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tag

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Split of the Global LD Catalyst Market by Revenue

Europe petrol Europe GDI Europe dieselUS gasoline US GDI US dieselAsia gasoline Asia GDI Asia dieselGlobal Hybrid Global Plug-in Hybrid RoW

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90

95

100

Ca

taly

st

Va

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($

/c

ar)

Weighted Average Catalyst Value

Catalyst Value (ex BEV) Catalyst Value (inc BEV)

We forecast high single digit growth to

early 2020s driven by legislation led value increases to catalysts. We forecast low

single digit growth thereafter until

revenues peak around 2030

Near term declines in diesel car production

is offset by underlying value uplift from legislation. Longer term European diesel

declines offset value uplift in China/India

We estimate the underlying value of a catalyst will rise from $72/car to >$80/car by 2021 driven by legislation. Beyond 2028

penetration of BEV will erode the average

value despite increases in the underlying value per catalyst.

Catalysts sales should continue to grow

faster than underlying car production until early 2020's

0

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600

$/ve

hicl

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x P

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Autocatalyst (ex PM) & Cathode Revenue (ex metal) by Technology/Region

Catalyst Revenue per Car Cathode Revenue per Car

Page 59: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 59

Automotive catalysts

Assumptions

Based on our forecast mix of diesel, gasoline, GDI and battery cars we estimate that the

automotive catalysts market will grow at high single digits until mid-2020Es and low single

digit thereafter until market revenues peak at c$10bn by 2030E. This is premised upon:

■ Underlying Increases to catalyst value near term as 1) European diesel catalyst

value increase by 20% under 6b and another 25% under 6c legislation (to 2021), 2)

continued shift to fuel efficient gasoline direct injection technology (up to double value

of gasoline), and 3) continued penetration of higher value catalysts in China and India

as emissions targets are brought up to developed market levels (into 2020s). The

average value of a catalyst rises from $72/car to >$80/car by 2021E, on our estimates.

■ Slowing car production and BEV penetration long term; we forecast peak

revenues for the catalysts industry around 2030 as BEV (which contain no catalyst)

accelerate penetration levels in car production. We forecast flat production levels of

cars from 2030 given forecast penetration of autonomous vehicles leading to greater

levels of ride sharing.

Market Overview

Johnson Matthey (UK), Umicore (Belgium) and BASF (Germany) each occupy around 1/3

of the car catalyst market. Additionally Johnson Matthey has 2/3 of the truck catalyst

market. We forecast 10-20% market share gains for Johnson Matthey in diesel car

catalysts as tighter legislation and real world testing will focus future production on larger

vehicles only (which can accommodate the better NOx abatement technology to bring

NOx emissions in line with gasoline).

Car catalyst have a finite lifecycle in a market which is moving towards zero emissions and

away from fossil fuels. However, in the near term, growth should be strong – driven by

higher catalyst value to comply with upcoming legislation and longer term the industry

should continue to yield strong cash flows which we believe are underappreciated by the

market. We value the NPV of cash flows from car catalysts at c$9-10bn which we allocate

$4bn to JMAT, $3bn to Umicore and $3bn to BASF given expectations of future market

shares.

Stock Recommendations

Our preferred exposure to car catalysts and battery materials is Johnson Matthey (O/P, TP

£39, UK) – we forecast high single digit market growth near term with market share gains

in European Diesel catalysts. Furthermore we believe the market is underestimating

JMAT's opportunity in battery materials with the launch of eLNO.

We become more cautious on Umicore (U/P, €30, Belgium) given risk to market share in

European diesel catalysts and overvalued battery materials business at the current share

price.

Key Risks to Forecasts

The biggest risk to the future value of the car catalyst industry is the faster than expected

penetration of full electric vehicles which contain no catalyst (vs PHEV/Hybrid which have

at least an equivalent value catalyst to a basic gasoline car and potentially more

depending upon complexity). Other risks include upfront capital to shift production away

from diesel over the next 10 years.

Contributors: Mathew Hampshire-Waugh Chris Counihan Sam Perry

Based on our forecast mix of diesel, gasoline,

GDI and battery cars we estimate that the

automotive catalysts market will grow at

high single digits until early 2020s and low

single digit thereafter until market revenues

peak at c$10bn by 2030

We forecast 10-20% market share gains for

Johnson Matthey in diesel car catalysts as tighter legislation and real world testing will

focus future production on larger vehicles only

Page 60: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 60

Auto catalyst metals – platinum, palladium, ruthenium

Figure 35: Automotive Catalyst Metals – Forecasts Based on Integrated Model

Source: Credit Suisse estimates, Company Data, Platinum Report, ICCT, Platinum Council, Science Direct

827 844

529

631

713663

701

644

575627

654617 606

564555

498448

394

0

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700

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900

0

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500

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k o

z

Rhodium Demand

Net AutoCatalyst Chemical Electrical Glass Other

7,355

6,6056,675

7,885

6,175

6,9586,8107,433

8,9849,487

10,1159,9779,509 9,289

8,4027,829

7,449

0

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4,000

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8,000

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12,000

0

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k o

z

Palladium Demand

Net AutoCatalyst Chemical Dental

Electronics Jewellery Investment

0

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6,000

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0

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Palladium Supply Primary (k Troy oz)Palladium Supply Recycling (k Troy oz)Palladium Demand (k Troy oz)

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0

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0

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7,000

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10,000

Platinum Supply Primary (k Troy oz)Platinum Supply Recycling (k Troy oz)Platinum Demand (k Troy oz)

We forecast balanced platinum S/D as weakness from lower diesel car production is offset by uptake of Gasoline Direct Injection Particulate filters and small

growth in non-catalyst applications.

We forecast strong demand for palladium near term as rotation from diesel into gasoline cars should support consumption and China adopts Euro5/6. Longer term we forecast peak demand by 2024 as greater recycling and penetration of BEV lower demand.

6,6956,675

5,390

6,0356,5316,558

5,7095,632

6,211

6,8227,328

7,660 7,859

8,567 8,740

0

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k o

z

Platinum Demand

Net AutoCatalyst Jewellery Chemical

We forecast weaker operating rates near term as recycling increases and longer term we forecast peak demand in 2024 due to penetration of battery vehicles.

Page 61: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 61

Car catalyst metals

Platinum:

■ Near term, we expect relatively balanced markets as the move from diesel car

production in Europe (4g/car) to Gasoline vehicles (1.5g/car) is offset by a shift to fuel

efficient gasoline direct injection technology with particulate filters (from 1.5g/car no

filter to 3g/car with a filter by 2020). Timing of the shift and technology adoption in

China could create some temporary demand risk around 2019/20.

■ Longer term, we forecast low single digit growth driven by non-catalyst technologies

and stable recycling levels. Continued shift to GDI gasoline engines should offset the

negative mix impact from lower diesel car production.

Palladium:

■ Near term, we expect tighter markets for palladium given increased levels of

consumption as European gasoline/GDI (3.5g/car) gain share from diesel (<3g/car)

and a move to greater rhodium containing technology in China (Euro 5/6)

■ Longer term, we forecast peak demand by 2024 as reclaimed recycling supply

increases and penetration of electric vehicles cannibalize catalyst containing ICE

vehicles.

■ Recycling demand increases around 2020 as autocatalysts from the mid-2000s

become available for scrapping. These catalysts contained more Pd than earlier years.

Rhodium:

■ Near term, we expect weaker supply/demand in rhodium markets given increased

levels of recycling capacity by 2020 and relatively flat levels of consumption into

automotive catalysts.

■ Longer term, we forecast peak demand by 2024 as reclaimed recycling supply

increases and penetration of electric vehicles cannibalize catalyst containing ICE

vehicles.

■ Recycling demand increases around 2020 as autocatalysts from the mid-2000s

become available for scrapping. These catalysts contained more Rd than earlier years.

Figure 36: Relative demand forecasts by metal

Source: Credit Suisse estimates, Company Data, Platinum Report, ICCT, Platinum Council, Science Direct

40

60

80

100

120

140

Platinum Demand (k Troy oz) Palladium Demand (k Troy oz)

Rhodium Demand (k Troy oz)

Contributors: Mathew Hampshire-Waugh Chris Counihan Sam Perry

Platinum: Near term we expect relatively

balanced markets as the move from diesel

car production in Europe to Gasoline

vehicles is offset by a shift to fuel efficient

gasoline direct injection technology.

Longer term we forecast low single

digit growth

Near term we expect tighter markets for

palladium given increased levels of

consumption as European gasoline/GDI

(3.5g/car) gain share from diesel

Near term we expect weaker supply/demand

in rhodium markets given increased levels

of recycling capacity

Page 62: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 62

Semiconductor content

Figure 37: Global Semiconductor Content – Forecasts Based on Integrated Model

Source: Company data, Credit Suisse estimates, Infineon Data

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We estimate semi contentper car can rise to >$1,000.

Driven by electrification and automation

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Others Sensors Microcontrollers Power

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Semiconductor Revenue from Cars $bn

Level 4 Automation Level 3 Automation Level 2 Automation BEV

Hybrid & PHEV 48V & Mild Hybrid ICE

We estimate the autos semimarket will increase to $150bn

by 2040E

0%

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Pe

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Global Automotive Sales Mix

Basic Gasoline Gasoline Direct Injection

Diesel Hybrid & 48V

We forecast 34% of vehicle production will be PHEV or BEV in

2040

0%

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Share of Automation by Level in cars

Level 4/5 (Autonomous) Level 3 (Self Parking/Highway)

Level 2 (spacial sensing only) Level 1 (Limited Automation)

We estimate semis content risesfrom $350/car to $700/car with full

electrification

Automation adds a further $100-900/car semis content depending

on the level of automation

We forecast all vehicles produced in 2030 will contain

some form of automation from parking assist to full self drive.

Page 63: Drive Train to Supply Chain 2

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Drive Train to Supply Chain 2 63

Semiconductor content

Assumptions Overview

Automotive semiconductors account for 10% of global semis market and have grown at

7% CAGR over 2010-2016 vs. overall semis market at 2% over the same period. We

expect Auto semis to continue outgrowing the broader market given increased safety,

lower CO2 emissions requirements and improved connectivity.

In the long term, we believe semi content per car can increase to over $1,100 per car in

2040E from about $350 today. Within this, we believe the main drivers for content growth

include sensors, radars, cameras and power chips.

Increasing content per vehicle should grow revenues for the global semis market into

automotive at high single digits to 2040. We forecast the market to grow from $36bn today

to $100bn by 2030E and $150bn by 2040E.

Move from Units to Content

Growth in Semi Autos over the last 10 years has been skewed towards unit growth over

content growth – ~60% of Auto Semi Rev growth was driven by more cars while ~40%

was from higher content. While investors are focused on the impact of slowing unit growth

on Semi Auto Rev, we expect ~75% of Semi Auto Growth to be driven by content going

forward. Specifically we note:

■ Historically Content was Secondary Driver. Content growth has been an important

but secondary driver of Auto Semi Rev growth for two reasons: (1) design cycles in

autos are inherently long at c.5-7 years and (2) higher Semi content historically has

been focused on the high-end of the fleet and there has been a 3-5 year waterfall effect

for new applications to proliferate into the volume mid and low end of the fleet.

■ Closing the Silicon GAP between High and Low end. There is still a very large gap

between the silicon content in high-end vs. low-end automobiles. Specifically, luxury

cars have ~$1,500 of content, while mid-range cars have ~$350 of content and low-

end cars have closer to ~$100 of content.

Content Becomes Primary Driver Going Forward. We expect content to drive ~75% of

Semi Auto Rev in coming years owing to: (1) modestly shorter design cycles, (2) faster

“water-falling” of new features and (3) increased emphasis on safety and connectivity. As

such, over the next 10 years silicon content is likely to accelerate from what has been a

~2-3% CAGR to a ~5-7% CAGR – supporting a LT Auto Semi Rev CAGR of 8-10%.

■ Content increase from electrification (EV): Infineon estimates that average

semiconductor content due to electrification could rise from $355 in standard ICE to

$695 in Mild Hybrid Electric Vehicle (MHEV), Plug-in hybrid electric vehicle (PHEV),

and plug-in Battery Electric Vehicle (BEV). The main driver of the content increase is

drivetrain power semiconductor, which increases by a multiple of ~15x in xEV when

compared to ICE.

■ Content increase from Advanced Driver Assist Systems: While ADAS is the most

important concept relative to Semi Auto content, we would highlight that the next five

years are more likely to focus on driver assistance than actual automated driving – i.e.

making driving safer and easier. In 2019, 15% of automobiles produced will have some

form of ADAS, up from 6% in 2014, based on our estimates. Until now, ADAS has

been relatively confined to luxury vehicles or premium car packages. However,

government regulations will likely prove an essential growth driver as the safety

benefits of ADAS gain wider acceptance by regulators. In addition, the cost of CMOS

image sensors is declining, making ADAS more affordable. While Body Control

requires somewhere between 20 kbit/s to 1 Mbit/s, it has less than 50 nodes/car. In

contrast, ADAS requires 100 Mbit/s and has closer to 200 nodes/car.

Contributors: Achal Sultania John Pitzer Quang Le Charles Kazarian Farham Ahmad

In the long term, we believe semi content per car can increase to over $1,100 per car in 2040E from about $350 today

Increasing content per vehicle should grow

revenues for the global semis market into

automotive at high single digits to 2040. We

forecast the market to grow from $36bn today to $100bn by 2030 and

$150bn by 2040

Page 64: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 64

− In its ATV presentation in October 2017, Infineon, a semiconductor company with

40% of sales in autos, stated that as the level of automation in cars rises, the

number of sensors per car would increase accordingly. This should allow the value

of semiconductor content per car to rise to $860 at automation level 4/5 by 2030.

− While we acknowledge the sales of autonomous cars (level 2-5) are currently still

low (we estimate at low single digit as percentage of total cars sales), we see this

gradually increasing. With increased safety, lower CO2 emissions requirements

and improved connectivity demands from customers, the number of autonomous

cars should rise over time, slowly overtaking cars with no automation from next

decade or so.

− In terms of shares of autonomous cars by technology level, we believe that level 2

will dominate the autonomous car market in the next 10-15 years, after which its

share will start declining. We see sales of level 3 and 4/5 cars to ramp from 2030

onwards. Here we believe revenues from semiconductor content in ICE (internal

combustion engine) cars will start decreasing from 2025, while semi revenues from

BEV (battery electric vehicle) and Hybrid cars will still be increasing over time.

Memory Required for ADAS Under-Appreciated. With self-driving cars generating 4,000

GB of data per day vs. 1.5 GB for smartphones – the memory requirements will expand

substantially. Specifically, according to Gartner, the average car today contains ~0.5 GB of

DRAM versus ~2.5 GB in handsets, ~5.5 GB in PCs and ~78.0 GB in Servers. While there

is no consensus around the amount of DRAM required for ADAS, we define low-end as

the same content as PCs with ~5GB of DRAM and our high-end as similar content to

Servers with ~60-80 GB of DRAM. Our analysis suggests the Auto DRAM Bit TAM

generated by L4/L5 Cars would be ~2,450m GB or ~16% of Total CY18 DRAM bit

demand. A more robust scenario would suggest the Auto DRAM TAM at the endpoint of

AD (i.e. everything is AD) could be 4x larger than today's PC DRAM market and represent

~44% of Total CY18 DRAM bit demand.

Figure 38: Accelerating Content CAGR Figure 39: Driving ~75% of Semi Auto Rev Growth

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

1%

3%

5%

7%

$225

$325

$425

$525

CA

GR

(%

)

Co

nte

nt

per

Car

($

)

Semi Content/Car CAGR '13-'21 CAGR '03-'13

$320 $344 $340

$359 $400

$423 $448 $478

$513

$0

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TA

M (

$b

n)

$ C

on

ten

t p

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ar

Semi $ Content/Car Auto Semi TAM ($bn)

Our analysis suggests the Auto DRAM Bit TAM generated by

L4/L5 Cars would be ~2,450m GB or ~16% of

Total CY18 DRAM bit demand.

Page 65: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 65

Figure 40: ADAS & EV Driving Growth Figure 41: >60% of Semi BoM in ADAS and EV

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 42: ~0.5 GB of DRAM Per Car Today

Figure 43: ADAS DRAM Bit TAM for L4/L5 Cars as %

of CY18 Total DRAM Bit Demand

Source: Company data, Credit Suisse research, SIA Source: Company data, Credit Suisse research, SIA

20% 20%

11% 10%9%

9%8%

6% 6%5%

4%

8%

12%

16%

20%

Re

v C

AG

Rs:

20

13

-20

21

(%

)

$350

$1,760

$50 $60

$100 $100

$300 $150

$500 $150

$0

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Sem

ico

nd

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or

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($)

0.0%

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1999

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1

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Automotive as % of Total DRAM Demand

Automotive

40 50 60 70 80 90 100

5 1% 2% 2% 2% 3% 3% 3%

15 4% 5% 6% 7% 8% 9% 10%

25 7% 8% 10% 12% 13% 15% 17%

35 9% 12% 14% 16% 19% 21% 23%

45 12% 15% 18% 21% 24% 27% 30%

55 15% 18% 22% 26% 29% 33% 37%

65 17% 22% 26% 30% 35% 39% 44%

Global Auto Units (m)D

RA

M/C

ar (

GB

)

Page 66: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 66

Company exposures in US semis

Figure 44: Semiconductor End Market Exposure

Source: Company data, Credit Suisse estimates

Cypress Semiconductor (30% of Rev). Auto represented ~30% of Rev in C3Q17 and

was down ~1.5% q/q. CY hold the largest market share in automotive NOR, approximately

3x the #2 competitor, with major wins in advanced driver assistance systems, or ADAS. It

currently has a very strong and growing pipeline, with over 90 ADAS projects already

active, 80% of which are among the top 12 OEMs. As a reminder, CY does not have much

exposure to the China auto market and is primarily exposed to US and European markets.

CY outlined target growth markets that included ~7% growth in Infotainment, ~7% growth

in Instrument Clusters, ~9% growth in Body Electronics, ~14% growth in Connectivity, and

~17% growth in ADAS. Further, we would highlight that while CY expects Auto vehicle

production to grow at a ~3% CAGR from CY16-CY21, the company expects a ~8-12%

Auto Rev CAGR driven by content expansion.

ON Semiconductor (30% of Rev). ON has experienced strong growth in Autos (30% of

Rev, growing at a 3YR CAGR of 10%) and the company maintains it can grow its Auto

Rev by high-single digits y/y in a flat SAAR environment. ON’s 2020 target model includes

Autos growing 7-9% from 30% to 37% of Rev – stronger–than-expected content growth

could offset slowing unit growth and provide further tailwinds to Rev growth and GM.

Within its Image Sensor Group (ISG), ON is currently the market share leader with 50%

share in Autos CMOS image sensors (70% share in ADAS) and should benefit from an

increasing TAM as well as partnerships with NVDA and BIDU for its Apollo Autonomous

Driving Platform. Longer-term, ON should benefit from increasing CMOS image sensor,

power management, IGBT and Silicon Carbide content across ADAS, HEV, LED lighting

and Infotainment.

Maxim Integrated Products (20% of Rev): MXIM continues to provide evidence of LT

content drivers in BMS and ADAS, which should at least sustain its long-term target for

Auto Rev to grow low-teens – albeit we would note that Infotainment (potential for

commoditization) still comprises two-thirds of MXIM’s Auto Rev. With EV production

poised to grow at a 25% CAGR from 2017-22, MXIM should benefit as the company

continues to gain traction with an incremental $50+ in content as vehicles move from

internal combustion to battery electric. Furthermore, we believe MXIM will be able to

sustain healthy double-digit growth augmented by its partnership with NVDA in

infotainment and ADAS.

Texas Instruments (18% of Rev): TXN’s Auto business experienced strong double-digit

growth YTD in CY17 following 23% y/y growth in CY16 and >20% growth in CY15. Note

Autos represents 18% of TXN’s Rev at ~$2.8bn annualized, itself larger than most Peers’

total Rev. TXN’s 3YR/5YR Auto Rev CAGR through 2016 of 18%/14% is above peers –

End Markets Autos Consumer Computing IndustrialHandsets/

Mobile

Comms

InfraTOTAL

CY 30% 35% 4% 18% 1% 12% 100%

ON 30% 15% 12% 23% 15% 5% 100%

MCHP 25% 24% 9% 37% 3% 2% 100%

MXIM 21% 16% 4% 28% 10% 21% 100%

TXN 18% 16% 4% 33% 10% 19% 100%

ADI 18% 6% 1% 47% 10% 18% 100%

XLNX 9% 6% 6% 32% 0% 47% 100%

MU 3% 10% 62% 3% 11% 11% 100%

INTC 2% 0% 93% 1% 3% 1% 100%

AVGO 1% 18% 1% 4% 27% 49% 100%

MRVL 1% 4% 52% 0% 15% 28% 100%

AMD 0% 4% 96% 0% 0% 0% 100%

MLNX 0% 0% 100% 0% 0% 0% 100%

MEDIAN 9% 10% 9% 18% 10% 12% 100%

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16 January 2018

Drive Train to Supply Chain 2 67

with broad-based growth across TXN’s 5 auto sub-segments of Infotainment, Passive

Safety, ADAS, Body electronics & lighting, and hybrid/EV & powertrain – with products in

processing, signal change, sensing, and power. The Company has repeatedly highlighted

Autos as a LT growth driver over the next 10 yrs with the majority of growth driven by

content increases rather than growth in Auto units.

Analog Devices (15% of Rev): ADI is poised to out-grow Semi Auto Rev in over the next

several years driven by a reacceleration in battery management systems (BMS) in China

electric vehicles where ADI has 50%+ share. Specifically against Analog Semi Auto Rev

which we expect to grow at a 9% CAGR through CY20 (above overall Semi Auto Rev of

7%), we expect superior growth from EV/HEV (13%), ADAS (12%), Infotainment (11%)

and Powertrain (10%) – together, these sub-verticals comprise ~75% of ADI's Auto Rev.

On the back of an increasing government push towards electrification, ADI's BMS Rev

could grow 50%+ y/y in CY18 with an acceleration into CY19 vs. our current model of

~20% y/y. We expect ADI's SAM for EV to increase from $1.5bn to $3bn+ by 2022 – with

the Company's EV/BMS Rev to increase at a 20%+ CAGR as ADI gains 2x content from

HEV to EV.

Micron Technology (3% of Rev): While perhaps an unconventional way to play the

emerging Auto content story for Semiconductors – we view Memory as one of the most

under-appreciated content growth stories and believe Outperform-rated MU is an

interesting way to gain exposure to the content creation story in the Automotive Memory

market. Specifically, the average car today has ~0.5GB of DRAM and ~30GB of NAND

and recently GM, Daimler and Continental noted that a L4/L5 autonomous vehicle could

have 20 to 40 GB of DRAM and 1TB of NAND. While optically that step-up appears

ambitious, we would note that assuming a CY30 timeframe only implies DRAM and NAND

Auto Memory content grows at a 40% and 35% CAGR mostly in-line with the 10-year

historical CAGRs of 37% and 43% – i.e. those estimates actually appear overly

conservative as we expect the rate of Memory content growth to accelerate as we move

towards L4/L5 Autonomous Vehicles.

■ Sizing the Memory TAM: In order to size the potential CY30 DRAM Rev TAM, we

have flexed our analysis around four variables: (1) the size of the Global Auto market,

(2) the penetration rate of L4/L5 Autos, (3) the amount of Memory/car, and (4) the rate

of annual ASPs declines. At the midpoint of our analysis, we assume 100m auto units,

70% penetration for L4/L5 Autos, 50 GB of DRAM/car (47% CAGR) and 1.5TB of

NAND/car (45% CAGR), and 5/10% annual ASP erosion for DRAM/NAND. Relative to

DRAM – this implies a CY30 Auto DRAM TAM of ~$18bn versus our estimates of

~$400m in CY18 and implying Auto DRAM Rev grows at a 35-40% CAGR thru CY30.

Relative to NAND – this implies a CY30 Auto NAND TAM of ~$19bn versus ~$400 in

CY18 and implying Auto NAND Rev grows at a 35-40% CAGR through CY30.

Figure 45: CY30 Auto DRAM TAM of ~$18bn Figure 46: CY30 Auto NAND TAM of ~$19bn

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

40 50 60 70 80 90 100

$0.48 $5,359 $6,699 $8,039 $9,379 $10,719 $12,059 $13,399

$0.53 $6,765 $8,456 $10,148 $11,839 $13,530 $15,221 $16,913

$0.58 $8,331 $10,413 $12,496 $14,579 $16,661 $18,744 $20,827

$0.63 $10,056 $12,570 $15,085 $17,599 $20,113 $22,627 $25,141

$0.68 $11,942 $14,928 $17,913 $20,899 $23,884 $26,870 $29,855

$0.73 $13,988 $17,485 $20,981 $24,478 $27,975 $31,472 $34,969

$0.78 $16,193 $20,242 $24,290 $28,338 $32,387 $36,435 $40,483

Global Auto Units (m)

DR

AM

ASP

/ G

b (

$)

40 50 60 70 80 90 100

$0.08 $7,025 $8,782 $10,538 $12,294 $14,051 $15,807 $17,563

$0.09 $8,265 $10,331 $12,397 $14,463 $16,529 $18,596 $20,662

$0.10 $9,584 $11,980 $14,376 $16,772 $19,168 $21,564 $23,960

$0.11 $10,983 $13,729 $16,475 $19,221 $21,967 $24,713 $27,458

$0.12 $12,463 $15,578 $18,694 $21,810 $24,925 $28,041 $31,157

$0.13 $14,022 $17,528 $21,033 $24,539 $28,044 $31,550 $35,055

$0.14 $15,661 $19,577 $23,492 $27,407 $31,323 $35,238 $39,153

NA

ND

ASP

/ G

b (

$)

Global Auto Units (m)

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Drive Train to Supply Chain 2 68

Autonomous driving

Figure 47: Automation penetration forecasts from our automotive supply chain model

Source: Company data, Credit Suisse estimates

Assumptions

We estimate that by 2030 all vehicles produced will have some form of automation. We

estimate 75% will contain level 2 automation including parking assist, emergency braking,

blind spot monitoring and adaptive cruise control. We estimate 20%+ level 3 automation

which includes self-parking and highway driving. Beyond 2030, we believe fully

autonomous level 4 vehicles will become fully commercialized and account for 14% of

production in 2040.

The hardware content (radar/lidar/sensor/cameras) will add $100-200/car for level 2,

~$600/car for level 3 and ~$1,000/car for fully autonomous vehicles.

The impact of fully autonomous vehicles on the car industry is a significant unknown. The

key issue will be the reduction in car ownership due to ride sharing/hailing becomes more

widespread/cheaper/reliable. Additionally, the lower accident rates and downloadable

upgrades may also extend average vehicle mileage (not life due to the higher utilization

rates of cars). We forecast broadly flat vehicle production from 2030 onwards as

penetration of autonomous vehicles offset growth in emerging markets.

Road Map to Automation

Stage 1) Increasing safety standards drives technology hardware: We are in a phase of

increasing regulation of safety of new vehicles that is driving increased adoption of

technology hardware like sensors and cameras to support emergency braking, collision

warning and blind spot assist. Autonomous vehicles are the ultimate extension of this as it

is estimated 90% of collisions are due to human error. Self-driving vehicles would increase

road safety, reduce congestion and free up time spent driving. The increased collaboration

of auto OEMs and tech suppliers is driving forward the hardware additions required for

fully autonomous cars. Status: technology hardware is largely ready and increased content

in vehicles continues.

Stage 2) Tech Disruptors Drive Software: Apple/Google/Uber are utilizing significant

advances in artificial intelligence and mapping software technology to build out a software

platform which can bridge the gap to fully autonomous vehicles. Status: autonomous miles

driven are increasing as testing continues. We note that Google has been operating

0

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ICE 48V/Mild

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PHEV/Hybrid BEV + Auto

Braking Add

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+ Fully

Automomous

Add on

US

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ar

Semiconductor Content by Vehicle Type

Others Sensors Microcontrollers Power

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Share of Automation by Level in cars

Level 2 (spacial sensing only) Level 3 (Self Parking/Highway) Level 4/5 (Autonomous)

The cost of additional hardware for

fully autonomous vehicles will be around $1,000/car.

We estimate all cars will have at least

basic automation functions by 2030 and that by 2040 fully autonomous

vehicles will represent 14% of production..

Contributors: Mathew Hampshire-Waugh Jo Barnet-Lamb Koji Takahashi Masahiro Akita Thembeka Stemela

We estimate that by 2030 all vehicles

produced will have some form of

automation

The increased collaboration of auto

OEMs and tech suppliers is driving

forward the hardware additions required for

fully autonomous cars

Page 69: Drive Train to Supply Chain 2

16 January 2018

Drive Train to Supply Chain 2 69

autonomous minivans on a 100 square mile area of public roads in Arizona without a

safety driver since mid-October.

Stage 3) Early Adoption: We believe early adopters of autonomous vehicles will be the

tech based rail hailing companies like Uber or ride sharing/service companies which can

further automate their service and drive efficiencies. Status: We note Uber has placed an

order for 24,000 Volvo XC90s between 2019 and 2021 which it is using as a design base

for its self-driving fleet.

Road Blocks to Automation

We see the following as key hurdles to self-driving cars:

1) Legal Status & Liability – most jurisdictions state that a vehicle must be

operated by a person and that person is liable for issues arising from the use of

the vehicle. When the driver lets go of the wheel and the car takes over the

question becomes who becomes liable. Is it the passengers, the car maker, the

software provider? Overcoming these issues will require a re-writing of key laws

but should be surmountable if the vehicles can be shown to significantly increase

safety.

2) Insurance – the second issue will become insurance given the uncertainty on

liability. This may require anyone who owns or uses a self-driving car to undertake

a basic driving test for emergency situations and the liable party for the vehicle

may have to take out 3rd

party insurance. Our insurance team estimates motor

premiums (which account for nearly 20% of current life/non-life insurance policies)

could halve, given the lower accident frequency and claims.

3) Consumer Acceptance – in our view the biggest hurdle will be consumer

acceptance. This will require not only acceptance from the owner/user of the

vehicles but will require consensus acceptance from pedestrians that could see

potential risks from driverless cars. Rigorous testing, consumer education and

political goodwill will be required to ensure mass adoption of self-driving cars.

Impact of automation

Whilst the implications of Autonomous Vehicles are a significant unknown for multiple

industries, we believe the impacts will likely be far reaching with ramifications within;

Insurance (impacted by lower accident rates) and average vehicle lifetime mileage (likely

to grow due to downloadable upgrades). However in this section of the report we focus on

the impact the industry's evolution could have on auto retailing and auto classified

advertising.

We believe that driverless cars could improve the economic viability of car sharing / ride

hailing and thus reduce the economic rationale of private car ownership. This in turn would

reduce car transaction volumes and as such we see the trend as a long term threat to

retailers and therefore AutoTrader. Whilst we expect this evolution to take place slowly,

given on our estimates 63% of AutoTrader’s enterprise value is derived from its terminal

value (post 2025), even with a terminal growth of +1.5%, this impact could have a

profound impact on the valuation of the group. We reiterate our Underperform rating on

AutoTrader where we have a 340p target price.

Car ownership often an inefficient use of resources…

According to the RAC foundation, the average UK car is driven for 4% of the day with it

remaining parked for the remaining 96% of the day. Whilst the average UK car is driven for

7,800 miles per annum (source: Gov.uk), 28% of vehicles are driven for fewer than 5k

miles per annum and 21% for fewer than 4k miles per annum. As such it can be argued

that personal car ownership is a deeply inefficient use of a car's resource.

Google have been operating autonomous

minivans on a 100 square mile area of

public roads in Arizona without a safety driver

since mid-October

We believe early adopters of

autonomous vehicles will be the tech based rail hailing companies

like Uber or ride sharing/service

companies which can further automate their

service and drive efficiencies

Uber has placed an order for 24,000 Volvo

XC90s between 2019 and 2021 which it is

using as a design base for its self-driving fleet.

We believe that driverless cars could

improve the economic viability of car sharing /

ride hailing and thus reduce the economic

rationale of private car ownership.

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16 January 2018

Drive Train to Supply Chain 2 70

Figure 48: 28% of UK cars are driven for fewer than 5k miles pa - Proportion of

cars (y-axis) vs average annual mileage (x-axis)

Source:gov.uk, Credit Suisse estimates

With this in mind, in recent years, we have seen a growth in car sharing (companies such

as Zipcar and BlaBlaCar) and app-based private hire companies (such as Uber). Note we

use Uber throughout this analysis as an illustrative example of an app-based private hire

company; clearly any eventual winner in this space (should one emerge) could be

different. To illustrate the rise of Uber we'd flag the group is now completing over 2 billion

rides per annum with the group said to be valued at $70bn (Source: The Telegraph).

… But consumers currently rarely have a viable economic alternative….

Both of the above alternative services (car sharing and ride hailing) have their own

drawbacks.

Services such as Uber are often very convenient, however, they are not cost effective at

present either for average car owners or even for infrequent/low-usage drivers. Car

sharing services such as Zipcar are relatively affordable for frequent short journeys but

less cost efficient for frequent longer distances (/multi-day usage) and with no guarantee

of a vehicle being available when required are impractical for frequent usage such as a

daily commute. We look at an illustrative example of an average UK car owner's transport

consumption in Figure 49, then replicating this consumption in Uber and Zipcar.

Figure 49: CS illustrative example for a "low-use" drivers average cost of owning a UK car vs alternative

travel options

Source: Association of British Insurers, fuel-economy.co.uk, petrolprices.com, gov.uk, Uber, Zipcar, Credit Suisse research. We assume 22 miles in 58 minutes per day across two journeys.

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0-0.5k 0.5k-1k 1-2k 2-3k 3-4k 4-5k 5-7k 7-9k 9-12k 12-15k 15-18k 18-22k 21-30k 30k+

Car Ownership Uber Zipcar

Average UK Insurance £485 Base journey charge £2.50 Annual membership cost

CSe annual tax charge £150 Cost per mile £1.25 Hourly rate £5.00

Average UK miles per litre 8.33 Cost per minute £0.15

Current UK petrol price (per litre) £1.23

Average annual running costs £1,817 Average annual cost:

in Base £1,825

Average UK used car price £12,873 In per mile £9,750

Amortised over 3 years £4,291 In per minute £3,145

Maintenance cost £1,073

Total average annual cost £7,181 Total average annual cost £14,720 Total average annual cost £3,640

Services such as Uber are often very

convenient, however, they are not cost

effective at present either for average car

owners or even for infrequent/low-usage

drivers.

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16 January 2018

Drive Train to Supply Chain 2 71

At present, these services are not more cost effective for the average consumer than car

ownership. However, these services do not have to be more cost effective for an average

consumer in order to disrupt the auto retail industry. As discussed previously, 28% of UK

vehicles are driven for fewer than 5k miles per annum. We run the same scenario analysis

as above but for a "low use" driver splitting the journeys between Uber (for shorter more

frequent journeys) and Zipcar (for longer less frequent journeys). As can be seen in the

analysis in Figure 50, the combined Uber/Zipcar options ends up still being more

expensive despite the inconvenience of having to rely of Zipcar for longer journeys, due

primarily to the cost of Uber.

Figure 50: CS illustrative example for a "low-use" drivers average cost of owning a UK car vs alternative

travel options

Source: Association of British Insurers, fuel-economy.co.uk, petrolprices.com, gov.uk, Uber, Zipcar, Credit Suisse research. For this individual, we assume 5,000 miles per annum, with 7 trips of 10 miles a week, with each trip taking 20 minutes. In addition, we assume 1 monthly (return) weekend trip of 57 miles taking 90 minutes each way. At present Uber is not currently available outside major cities so we use Zipcar for the longer monthly trips and Uber for the inner city movement.

… Autonomous Vehicles will likely change that

The majority of the costs associated with car ownership, as shown in the above analysis,

is the ownership of a sizeable asset that is used for a relatively small proportion of its life.

The marginal cost of an incremental mile or minute of personal car usage is minimal. So

the issue with car ownership is the burden of the fixed asset cost. Both car sharing and

ride hailing remove this issue with multiple consumers effectively able to share the fixed

asset cost.

The issue with car sharing (effectively rental) is the inconvenience or risk of not having a

car near you. Ride hailing removes this concerns as the car comes to you. The issue with

Uber however is cost with the majority of that cost, in our view, due to cost associated

with the Uber driver. A driverless Uber would remove this cost.

Figure 51: An estimate as to the potential cost of a "low use" drivers 'short

trips' in a driverless Uber

Source: Toyota, Credit Suisse research, Gov.uk, fuel-economy.co.uk, petrolprices.com.

Car Ownership Uber (short trips) Zipcar (long distance) Zipcar + Uber

Average UK Insurance £485 Base journey charge £2.50 Annual membership cost £0.00

CSe annual tax charge £150 Cost per mile £1.25 Two day rate £120.00

Average UK miles per litre 8.33 Cost per minute £0.15

Current UK petrol price (per litre) £1.23

Average annual running costs £1,172 Average annual cost:

in Base £910

Average UK used car price £12,873 In per mile £4,550

Amortised over 3 years £4,291 In per minute £1,092

Maintenance cost £1,073

Total annual cost £6,536 Total annual cost £6,552 Total annual cost £1,440 £7,992

Toyota Prius car cost £24,115 Source: Totyota, for Prius Active

Incremental driverless cost £746 Source: Credit Suisse Estimates

Total cost new car £24,861

Cse applicable car cost £2,486 Source: CSe we assume the car cost is divided between 10 "low use" users

Amortise car cost over 5 years £497

miles per year (short trips) 3640 Source: As per the "low use" example above

cost per mile £0.09 Source: 62.5mpg (Autocar "true MPG testers") & assuming £1.09 per litre (Petrol Prices)

Fuel cost for stated distance £325

Maintenance & upkeep charge £99 Source: CSe 20% of annual amortised cost

Tax and insurance £110 Source: CSe £1000 insurance & £100 tax per driverless car divided by 10 users

Cost subtotal £1,032

Uber pay-away & other £1,032 Source: Assume Uber payway is equal to cost subtotal

Total annual cost of short trips for "low use" driver £2,064

The issue with car sharing (effectively

rental) is the inconvenience or risk

of not having a car near you. Ride hailing

removes this concerns as the car comes to

you.

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16 January 2018

Drive Train to Supply Chain 2 72

The figure above shows estimates for how much a "low use" driver's 'short trips' could cost

in a driverless Uber. Clearly there are a number of assumptions that go into this analysis

given the lack of information in this nascent industry and as such it could prove inaccurate.

However, Figure 52then shows how using these assumptions from Figure 49, "low use"

drivers (remember these are designed to represent 28% of UK car owners) could be better

off no longer owning a car.

Figure 52: Illustrative scenario for a "low use" driver using driverless Uber as shown in Figure 51

Source: Toyota, Credit Suisse research, Gov.uk, fuel-economy.co.uk, petrolprices.com, Association of British Insurers, Zipcar.

Whilst no longer owning a personal car may not prove cost effective for the majority of car

owners, we do believe that for a significant minority it could, thus putting downward

pressure on car sales, car ownership and the UK car parc. Our Global Automotive

production chain model forecasts global car production flat lining from 2030 with rising

production in developing markets offset by declines in developed markets. Within that we

expect UK production levels to begin a structural decline from around 2030 falling c.1%

per annum from 2030 as autonomous vehicles comprise a greater proportion of the UK

Car Parc. Our model forecasts fully autonomous vehicles will enter global car production

from 2030 with these cars likely being disproportionately found in developed markets

(such as the UK) and owned by ride hailing companies (such as Uber).

Car Ownership Driverless Uber Zipcar (long distance) Zipcar + driverless Uber

Average UK Insurance £485 Annual membership cost £0.00

CSe annual tax charge £150 Two day rate £120.00

Average UK miles per litre 8.33 Analysis as per figure above

Current UK petrol price (per litre) £1.23

Average annual running costs £1,172

Average UK used car price £12,873

Amortised over 3 years £4,291

Maintenance cost £1,073

Total annual cost £6,536 Total annual cost £2,064 Total annual cost £1,440 £3,504

Whilst no longer owning a personal car

may not prove cost effective for the

majority of car owners, we do believe that for a

significant minority it could, thus putting

downward pressure on car sales, car

ownership and the UK car parc.

Our model forecasts fully autonomous vehicles will enter

global car production from 2030 with these

cars likely being disproportionately

found in developed markets (such as the

UK) and owned by ride hailing companies

(such as Uber).

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Drive Train to Supply Chain 2 73

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Global utilities

Figure 53: Global Utilities – Forecasts Based on Integrated Model

Source: Company data, Credit Suisse estimates IEA, CIA World Factbook

0.00%

0.50%

1.00%

1.50%

2.00%

2.50% EV as % Global Electricity Consumption

EV as % Global Electricity Consumption

Under this fleet assumption we estimate that charging EV batteries will consume 2.4% of global electricity demand by 2040

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The cumulative cost for installation of

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4months of world networks capex.

We forecast PHEV & BEV cars will

represent 23% of the overall fleet by 2040. BEV represent 2/3 of this total.

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placed on highways ~1-2 fast chargers for every mile highway

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Based on 10% of electric miles driven via fast charge, this would mean each fast charger would be occupied for only ~2-3 hour per day.

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Drive Train to Supply Chain 2 75

Global utilities

Overview

Based on explicit forecasting from our integrated automotive model, we estimate that:

■ The impact of EV on total power demand will be limited (2.4% of total in 2040E)

■ The impact on demand patterns and therefore load management may not be as strong

as is often assumed.

■ $3bn of capex will be needed each year to build the charging infrastructure needed but

unless a form of regulated tariffs is introduced, it is difficult to assume that utilities will

take the full financial risk.

We address these points in turn in the following paragraphs:

Impact on demand

Our work seems to confirm that the take up of EV will be slow but steady and, as a

consequence, the impact on power demand will remain limited for a period of time. In our

model, EV derived power demand only accounts for 1.6% of total power demand in 2035E

rising to 2.4% in 2040E. This is based on an assumption of total demand from EV of 641

TWH globally in 2035E and 1,021TWh in 2040E. As a way of comparison, total power

generation in the US was 4,080 TWh in 2016. In other words, demand from Electric

mobility worldwide in 2040 will only represent about a quarter of the 2016 US demand.

Also, if one takes into account the recent trend in energy efficiency (EE, between 1% and

1.5% pa in Europe over the last few years), one could even argue that EV-derived power

demand combined with EE may have virtually no impact on power demand. Regionally,

we would argue that demand growth could be stronger and ‘quicker’ in those countries

where the government will try to impose EV at the expense of IC engine-powered cars.

A couple of examples by country may help:

■ Sweden: If one assumes that, by 2020/25 20% of new cars were EV, the additional

consumption at the end of next decade would only amount to 15TWh pa or about 10%

of the total expected consumption

■ Germany: if one assumes that 6 to 10m EVs were to be sold over next decade, total

additional demand would amount to 20/30 TWh, a figure to be compared with total

demand of about 500/550 TWh pa in the country (<5% of consumption)

Impact on demand patterns

It is difficult to reach a definitive view given it is still very hard to know how and when future

EV drivers will decide to charge their cars. Very often, observers focus on the fact that EV

have batteries which are an efficient form of storing power before either using it directly or

selling it back into the market / grid. The widely-held view has been that car batteries will

be used like any other storage form (say a pumped storage facility), i.e. storing and

potentially releasing power at a profit. Our recent discussions with network users seem to

suggest that they believe this is less likely than previously. It appears that in their

discussions with potential EV users, users have expressed discomfort with the idea of

potentially not having a full control of their driving range (irrespective of the fact that most

drivers will need a small fraction of the battery potential on a daily basis).

Also, the distribution companies highlighted that they would find it cumbersome to sign a

contract with ‘thousands’ of battery owners (assuming that the reverse flow would not

gradually become part of a standard Distribution / Supply contract). This is why, as of now,

it seems that the most likely consumption pattern will be that of most domestic appliances

with 2 or 3 peaks during the day that could be smoothed by the grid operators (basically if

Contributors: Vincent Gilles Michael Weinstein Dave Dai Aric Li Mathew Hampshire-Waugh

The impact of EV on total power demand will

be 2.4% of total in 2040E

It seems reasonable to expect that at least

three-quarters of EV charges in the future

will be done ‘non-publicly’; i.e done at

home or in the office.

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Drive Train to Supply Chain 2 76

necessary cutting off the power delivery to an EV which is likely to go unnoticed by an

overnight charger). In short, the appealing idea that car batteries will become part of the

load management of local grids may not turn out to be true in the foreseeable future.

It seems reasonable to expect that at least 75% of EV charges in the future will be ‘non-

publicly’, i.e at home or in the office. We factor in $550/car (falling to $280 by 2040E into

our total cost of ownership calculations for battery vehicles.

Additionally, we note that publically available chargers will have to grow alongside the

global EV fleet.

We base our forecasts for public chargers on the ratios seen in 2016. Whereby we model

1 slow charger for every 10 battery cars through the forecast period. We forecast 1 fast

charger for every 20 battery cars dropping to 1 fast charger for every 140 battery cars by

2040E (we note countries like Norway which have high EV fleet penetration rates have

>100 cars per fast charger and ~15 cars to every slow charger).

To put this into perspective there is roughly ~40m miles of road globally therefore this

would equate to a fast charger for every 14 miles of road or if we place these fast chargers

on highways then this would be ~1-2 chargers for every mile. Cross checking this

calculation from a utilization perspective, if we assume that: fast charges are used for 10%

of total electric miles driven and that it takes 1 hour to charge to 50kWh on a fast charger –

then these fast chargers would be used for an average of ~2-3 hours per day.

We assume slow chargers cost $550/charge point (falling to $260 by 2040E) and fast

chargers cost $35k/charge point (falling to $14k/charge point by 2040E). We note that a

Tesla fast charging station costs $250k and has an average of 7 charge points but this

cost will decline as 20-30 charge points are used per charge station. This creates a cost of

$3bn/annum and a cumulative cost of $80bn by 2040E to upgrade public charging

infrastructure. This compares with total world capex in networks of €234bn in 2016.

What infrastructure?

We talked to a number of the major European utilities about how they see the need for

building infrastructure to serve EV in the future. Most companies were very cautious

regarding the total capex envelope and the timeframe. A number of questions are still

outstanding:

■ What type of chargers are needed? A form of consensus emerges around a greater

need for ‘smaller’ chargers for non-public usage (up to 50 kWh with the bulk between

3.7 kWh and 20 kWh meaning 5 hours to 100% load a current Tesla S). However, it is

very hard to anticipate how many chargers will be necessary.

■ What price structure? Based on our discussion, we believe that two price structures

will emerge. One with flat fee (where the consumer pays for access to the

infrastructure only) and one where the price mainly reflects the price of power rather

than the access to the charger.

■ How full will drivers want to have their battery? This is a non-obvious important

issue regarding the usage of chargers. First studies by utilities surprisingly suggest that

future consumers may not want to charge their battery to 100% which may in turn

reduce the number of public chargers (we think overnight charging at home is likely to

be to 100%)

We estimate the cost of installing public

chargers at $3bn/annum and a cumulative cost of

$80bn by 2040. This compares with total

world capex in networks of €234bn in

2016.

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16 January 2018

Drive Train to Supply Chain 2 77

Based on the above, we do not believe that utilities will take the financial risk to install a

full network of chargers without any form of financial guarantee. As a result, a form of

regulation (regulatory incentive / guaranteed tariff whatever) will be necessary to incentive

grid operators to go beyond the demonstration phase. True, a number of utilities have

announced ‘large’ charging projects in the recent past. Yet, it is clear that the capex

involved is very limited and that the goal is more to get to proof of concept rather than

short-term profitability. Typically, e.on announced in November 2017 the establishment of

180 ultra-fast (150 kWh) chargers in seven European countries enabling a direct EV

connection between Norway and Italy.

We do not believe that utilities will take the

financial risk to install a full network of chargers

without any form of financial guarantee

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Drive Train to Supply Chain 2 78

Global energy

Global energy

View from the Energy Team

What’s clear is that EVs are going to be a disruptor to refined oil product demand; the

question is when and to what degree. OPEC (albeit a commentator that one could assume

has a natural bias) recently forecast EVs would rise from a 0.1% share of the passenger

car fleet in 2016 to 12% in 2040 (with alternative fuel vehicles being 16%), arguing that

fleet growth would largely counterbalance the effect of EV penetration for refined product

demand. BP recently forecast EVs to rise to 6% of the global fleet by 2035, of which 75%

would be BEVs and the remainder Plug-in Hybrids. The energy sector recognizes the

importance of the EV theme, but isn’t at the point of capitulation.

There are some echoes of the introduction of diesel as an alternate to gasoline in Europe

in the 1980s/1990s. A triumvirate of events coincided to facilitate diesels substitution for

gasoline in the European market: first, government taxation policy which deliberately

increased diesel’s price attractiveness to users; second, a marked improvement in diesel

engine technology for passenger cars (critical to change the consumer perception of diesel

as ‘dirty’ and ‘noisy’) and finally the widespread availability of diesel in petrol stations

allowing genuine mobility. Once successful, European governments removed the tax

benefit for the consumer.

Oil companies (and oil majors in the main) still control the primary petrol station networks,

and for a reason, namely to ensure a pathway for refined products; hence those players

have a vested interest in optimizing their refinery investments and the pace of change of

fuels (or power sources) at the petrol station networks. That begs the question of whether

the BEV revolution will require the active participation of the downstream oil sector, or

whether it bypasses it with alternate multiple reach solutions.

To that end, two recent trials were of interest. In Norway, Alimentation Couche-Tard is

trialing several Circle K petrol stations that provide rapid (10 minute – 50-kilowatt charger)

recharging facilities and higher quality food options (for customers to use whilst waiting for

the recharge to complete). In November 2017, Shell announced a plan to introduce 80

recharging stations across Europe in a JV with IONITY (itself a JV of automakers). At this

stage, these downstream owners are trialing the concept, to understand the suitability and

challenges of using petrol station networks.

In the near term i.e. 2018 EVs don’t pose a material challenge to global oil demand. Credit

Suisse energy team (Energy in 2018, 18 Dec 2017) recently published its 2018 demand

forecast (1.41 million barrels a day) driven by robust global economic conditions.

Contributors: David Hewitt Thomas Adolff William Featherston Kristina Kazarian

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Battery recycling

Figure 54: Car Battery Recycling – Forecasts Based on our Integrated Model

Source: Company data, Credit Suisse estimates, Umicore

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

0

5,000

10,000

15,000

20,000

25,000

2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037

$/to

nne m

eta

l valu

e

$m

n o

r k t

on

ne

pe

r a

nn

um

EV Batteries - Recycling Market Opportunity

Total Recycling Value Available ($mn) (lhs)

Recycling Tonnage Available (k tonne) (lhs)

Metal Value per tonne of EV battery ($/tonne) (rhs)

0

100

200

300

400

500

600

700

800

900

1,000

Metal value of 35kWhBattery

Cost of Recycling Residual Value PerBattery

$/35kW

h B

att

ery

Lithium

3% Cobalt

4%Iron

2%Manganese

6%

Nickel

17%

Aluminium

34%

Phospherous

1%

Copper

33%

Average EV Battery Total Metal Content 3kg/kWh

Car batteries contain a number of relatively high value metals within the cathode and significant amount of coppoer and

aluminium within the electrodes and packaging

....based on cost of recycling each vehicle battery should yield roughly $300 residual value per 35kWh battery.

kg/kWh Lithium Cobalt Iron Manganese Nickel Aluminium Phospherous Titanium Sulphur Oxygen Total

LTS LiTiS2 2.5 11.7 3.81 0.10 15.60

LCO LiCoO2 1.8 10.1 63.7 73.80

LNO LiNiO2 1.8 9.9 12.35 22.28

LMO LiMn2O4 2.2 6.6 2.63 9.27

NMC111 LiNi0.33MN0.33Co0.33O2 1.7 9.7 20.5 0.64 4.02 34.82

NMC622 LiNi0.6MN0.2Co0.2O2 1.5 8.6 10.9 0.34 6.39 26.16

NMC811 LiNi0.8MN0.1Co0.1O2 1.2 7.0 4.4 0.14 6.94 18.49

NCA LiNi0.8Co0.15Al0.05O2 1.4 7.8 7.4 7.73 0.04 22.94

L2MO Li2MnO3 1.5 13.9 1.37 15.24

LFP LiFePO4 1.8 6.3 0.04 0.05 6.35

eLNO LiNiO2 + trace metals 1.1 6.5 8.04 14.51

LTO Li4Ti5O12 2.7 12.8 5.23 18.05

We estimate recycling of battery metals will become a material opportuinty from mid-2020's as availability of spent batteries becomes available. We estimate $23bn metal for recycling by 2040

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Drive Train to Supply Chain 2 81

Battery recycling

Assumptions

Based on our forecasts for car production, battery vehicle penetration and battery

technology mix, we estimate that by 2030 there will be 2mn tonnes of batteries available

with metal content of $8bn. By 2040, this will be 6mn tonnes available and $24bn of metal

value. This would require 18x world class smelters to process the batteries.

We estimate the average metal value per tonne of material is c$4,000 with the major value

coming from Lithium (27%), Cobalt (22%), Nickel (19%) and Copper (22%). This is based

on current spot market prices for the metals.

Umicore's current recycling costs (for e-scrap and catalysts) are around $1,800/tonne. We

assume battery recycling will be 30-50% higher due to the ultra-high operating

temperatures of the process. We estimate around $1,200/tonne net value which will be

split between the collectors, processors and recyclers. This equates to c$300 per 35kWh

BEV battery.

Market Overview

There is currently no market for car battery recycling as an ~8-year battery life means little

scrap hits the market until mid-2025. Umicore is the only company globally with a pilot

smelter for car batteries – it highlights that at current prices the economics of the pilot

smelter are close to breakeven.

There is currently a recycling market for electronic scrap (eg, mobile phones). Major

players include Umicore (CS est 50kt capacity), Boliden (CS est 120kt), Aurubis (CS est

60kt), Xtrata (CS est100kt) and smaller operations at Dowa, Mitsubishi, Blue oak

resources and Nyrstar. We would anticipate these players to be assessing the opportunity

in EV batteries recycling.

We estimate the NPV of the car battery recycling market at around $3bn based on a 2.5%

FCF yield in 2038 discounted at 7% WACC. We estimate capital costs at around

$1,000/tonne for recycling, 30% value share to the recycling operation, 50% of spent

batteries recycled rather than re-used or landfilled.

Stock Recommendations

Umicore is the only company with a pilot smelter for recycling spent car batteries and is

positioned for closed loop operations from battery production and battery recycling. We

estimate €5bn implied value for Umicore's battery materials and battery recycling

business. Given our total NPV estimates of battery materials ($5.5bn) and recycling ($2bn)

this implies Umicore will maintain >50% market share in both. Whilst we acknowledge

leading technology and first mover advantage this is going to be a highly fought over

space and believe this market share assumption is overly optimistic.

Key Risks

Given there will be no real market for battery recycling until mid-2020s, the cash flows and

economics of recycling batteries are theoretical. We would highlight, however, that through

developing a closed loop manufacturing process, Umicore will effectively provide a hedge

to the potential volatility of minor metals like cobalt. So we believe this may well be a route

many battery materials/battery makers pursue either through building their own operations

or through alliances with existing recyclers.

Contributors: Mathew Hampshire-Waugh Chris Counihan Sam Perry

By 2040 there will be 6mn tonnes of scrap batteries containing

$24bn of metal value. This would require 18x world class smelters to

recycle.

There is currently no market for car battery

recycling as an ~8yr battery life means little

scrap hits the market until mid-2025. Umicore

are the only company globally with a pilot

smelter for car batteries

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Glossary

Figure 55: Glossary

Source: Credit Suisse Research

Glossary Description

ADAS Advanced Driving Assistance Systems - Car Automation from self park to highway drive to fully self driving cars

Advanced Valve Timing Engine tailors use of number of cylinders according to power requirements

Aero Drag Reduction Vehicle shape including skirts, aerodynamic mirrors, underbody covers

Al Foil Aluminium foil used to package a battery cell

Anode Positive electrode in a battery usually made from carbon material

Autonomous Vehicle Self Driving Car = Level 4/5 automation

Battery car Uses electrical energy to power the motion of the vehicle

Battery management System Electronics control system for a rechargeable electric vehicle battery

BEV Electric Vehicle which uses only battery power and is recharged from the grid (30-100kWh)

CAFÉ Emissions standards body in the US

Car Catalyst Unit fitted to exhaust stream to remove CO, NOX and particulate emissions

Cathode Negative electrode in a battery - based around metal technology

Cell Repeating power unit of a battery pack

CO Carbon Monoxide - toxic exhaust emission

CO2 Carbon Dioxide - non-toxic greenhouse gas

Combustion Engine Uses combustion of fuel like gasoline or diesel to power the vehicle

Cu Foil Copper Foil used to package a battery cell

Diesel Engine Internal Combustion Engine using higher octane diesel as fuel

DOC Direct Oxidation Catalyst - used in diesel vehicles to convert CO (to CO2) and other toxic emissions

E-Bikes Electronic bikes - from pedal bikes to motorbikes

Electric Power Steering Electric controlled steering - removes the need for a fuel consuming hydraulic pump

Electrolyte Lithium based solution which is contained at the centre of a battery cell

FCV Fuel Cell Vehicle - uses hydrogen as fuel to power the electric motor through conversion to electricity via a fuel cell

Gasoline Lower octane fuel used by internal combustion engines

GDI Gasoline Direct Injection - fuel injected straight into combustion chamber - allows same power on smaller more fuel efficient engine

GWh 1,000,000x kWh

HDD Heavy Duty Diesel - Trucks & Buses

Hybrid Combination of a small internal combustion engine and a small electric battery (1kWh) - battery is recharged through braking of the car

kW Unit to measure power output. Multiple kW x time to calculate stored energy

kWh Unit for measuring stored electrical energy - a 1 kWh battery can power a 1000W machine for 1 hour

LD Light Duty Vehicles - cars

Lightweighting Reducing the weight of a vehicle - typically through replacing metal with advanced plastics or composites

Lithium Carbonate The compound from which lithium is derived (18% of Lithium Carbonate weight is Lithium metal)

LNT Car Catalyst Lean Nox Trap - removes Nox from diesel engines using PGM catalyst, however requires fuel to function and removes less NOx vs SCR

Low Friction Lubricants Engine lubricant which reduce friction at a wider temperature range allowing less friction for cold engines

Low-rolling resistance Tyres Prevent deformation of tyres which can increase friction and energy use

MWh 1000x kWh

NEV New Electric Vehicle - refers to non-combustion engine vehicles

NGV Natural gas Vehicle - uses compressed natural gas to power the combustion engine

NOx Nitrous Oxide emissions - toxic emission from diesel engines which burn lean (with excess air in the mix)

Particulate Soot emissions from diesel and gasoline direct injection engines

Pd Palladium metal - used in the production of car catalysts

PGM Platinum Group Metals

PGM Recycling PGM recycling of scrap jewellery, autocatalysts and mining offtake.

Plug-in Hybrid Small combustion engine with a mid-sized battery (11kWh) - the battery is recharged by plugging the car into a charge point

Polysilicon Refined metal used in manufacture of solar panels

Pt Platinum metal - used in the production of car catalysts

Rd Rhodium metal - used in the production of car catalysts

SCR Car Catalyst Selective Catalytic Reduction - a type of catalyst used to remove NOx from diesel cars - uses a flow of ammonia from a tank not PGM

Separator Permeable membrane which seperates the cathode and anode but allows the flow of Lithium ions

Stop-start technology Automatcally stops and starts an internal combustion engine to reduce idling time and waste fuel consumption

Thrifting Process of reducing the PGM content in catalysts whilst maintaining performance - reduces the pass through cost to auto makers

Total Cost of Ownershiop Annual running cost of a vehicle, including depreciation, fuel, maintenance, insurance and tax.

Transmission Automoation Efficient use of gears to match driving condition and power requirements -increases fuel efficiency

Turbocharger Compresses air injected into the engine in order to create more power and allow smaller more fuel efficient engines

TWC Three Way Catalyst - removes CO, Nox and unburnt hydrocarbons in gasoline vehicles (non-lean burn, controlled air content)

TWh 1,000,000,000x kWh

VW Scandal VW rigged an engine management system to stop fuel injection into the LNT catalyst - increasing NOx emissions but decreasing fuel consumption

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Further reading Ideas Engine: Battery Energy Storage Charging Ahead (2017)

Automotive technology insights: Electrification, Automation, Informatization: Vol.4 Electrification update (2017) Automotive technology insights: Electrification, Automation, Informatization: Vol.3 Informatization (2016) Automotive technology insights: Electrification, Automation, Informatization: Vol.2 Automation (2015) Automotive technology insights: Electrification, Automation, Informatization: Vol.1 Electrification (2014) Drive Train to Supply Chain - Impacts from the changing autos industry (2016)

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Appendix

Figure 56: Global Energy – Sensitivity Forecasts for Gasoline and Diesel Based on our Integrated

Automotive Model

Source: Company data, Credit Suisse estimates, XOM, IEA

20

25

30

35

40

45

50

55

60

Miles P

er

Gallon

Gasoline Fuel Efficiency (inc Hybrid & PHEV)

MPG Conservative Case MPG - Progressive Case

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0

50

100

150

200

250

300

350

400

450

Glo

bal

Die

sel

Consum

pti

on

(bn g

allon/annum

)

Total Diesel Consumption

Growth p.a. (rhs)

Global Diesel Consumption (bn gallons per annum) (lhs)

However total diesel demand

may still grow as aerospace, shipping and trucking growth

continues.

Technology improvements alongside penetration of hybrid and PHEV cars will increase the fuel efficiency of gasoline

cars as BEV cannabilise sales....

220

270

320

370

420

Glo

bal

Moto

r G

asoline D

em

and (b

n g

al/

annum

) Motor Gasoline Demand

Gasoline Demand (bn Gal) - Conservative Case Gasoline Demand (bn Gal) - Progressive Case

We forecast peak demand for motor

gasoline between 2025 and 2030 as efficiency and BEV penetration offsets

increases in global fleet & miles driven.

35

37

39

41

43

45

47

49

Miles P

er

Gallon

Diesel Car Fuel Efficiency

MPG Conservative Case MPG - Progressive Case

Diesel car efficiency may improve with

lightweighting and added technology however low investment into R&D may

cause fuel efficiency to flat line

20

25

30

35

40

45

50

55

60

Glo

bal

Moto

r D

iesel

Dem

and (b

n g

al/

annum

) Motor Diesel Demand

Diesel Demand (bn Gal) - Progressive Case Diesel Demand (bn Gal) - Conservative Case

We estimate motor diesel consumption will peak in early 2020's as fleet growth in Asia is offset by declines in Europe.

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

-300

200

700

1,200

1,700

2,200

bn m

iles

Diesel Car Miles Driven

Growth Miles Driven (bn)

A shrinking European diesel

fleet will reduce global miles driven.

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Companies Mentioned (Price as of 11-Jan-2018) Aisin Seiki (7259.NG, ¥6,700) Aisin Seiki (7259.T, ¥6,650) Albemarle Corp. (ALB.N, $134.69) Alphabet (GOOGL.OQ, $1112.05) Alps Electric (6770.T, ¥3,280) Analog Devices Inc. (ADI.OQ, $91.19) Anglo American (AGLJ.J, R293.75) Anhui Jianghuai Automobile Group Co Ltd (600418.SS, Rmb9.23) Apple (AAPL.O, $175.28) Asahi Kasei (3407.T, ¥1,514) Aurubis (NAFG.F, €82.52) AutoTrader (AUTOA.L, 352.7p) BASF (BASFn.DE, €93.98) BMW (BMWG.DE, €88.69) BYD Co Ltd (002594.SZ, Rmb65.4) BYD Co Ltd (1211.HK, HK$68.8) Boliden (BOL.ST, Skr298.6) BorgWarner, Inc. (BWA.N, $55.91) Bosch Ltd. (BOSH.BO, Rs19932.65) Clarion (6796.T, ¥426) DOWA (5714.T, ¥4,710) Daimler (DAIGn.DE, €73.61) Delphi Automotive Plc (APTV.N, $92.06) Denso (6902.T, ¥7,060) E.ON (EONGn.DE, €8.9) Easpring (300073.SZ, Rmb25.33) FMC Corporation (FMC.N, $97.88) Faurecia (EPED.PA, €71.32) Fiat (FIATY.PK, $8.975) Ford Motor Company (F.N, $13.16) GS Yuasa Corp (6674.T, ¥610) Galaxy Resources Ltd (GXY.AX, A$3.98) Glencore (GLEN.L, 406.75p) HanOn Systems (018880.KS, W12,900) Hitachi (6501.T, ¥914) Hitachi Chemical (4217.T, ¥3,035) Honda Motor (7267.T, ¥4,026) Hyundai Motor Company (005380.KS, W155,000) Impala Platinum (IMPJ.J, R33.95) Infineon Technologies AG (IFXGn.DE, €24.0) Jabal Omar (4250.SE, SAR58.28) Johnson Matthey (JMAT.L, 3102.0p) KAZ Minerals Plc (KAZ.L, 951.4p) L&F (066970.KQ, W41,000) LG Chem Ltd. (051910.KS, W421,500) LG Electronics Inc (066570.KS, W110,500) LG Innotek (011070.KS, W150,500) Lonmin Plc (LONJ.J, R14.98) Magna International (MGA.N, $57.76) Mando Corp (204320.KS, W276,000) Mercedes-Benz (Unlisted) Micron Technology Inc. (MU.OQ, $42.82) MinebeaMitsumi (6479.T, ¥2,484) Mitsubishi Chemical (4188.T, ¥1,288) Mitsubishi Electric (6503.T, ¥2,012) Mitsubishi Heavy Industries (7011.T, ¥4,320) Mitsubishi Motors (7211.T, ¥883) Murata Manufacturing (6981.T, ¥15,595) NBSS (600884.SS, Rmb19.8) NEC (6701.T, ¥3,150) Nidec (6594.T, ¥16,730) Nissan Motor (7201.T, ¥1,158) Nyrstar (NYR.BR, €7.065) ON Semiconductor Corp. (ON.OQ, $23.08) Panasonic (6752.T, ¥1,728) ROHM (6963.T, ¥12,510) Renault (RENA.PA, €87.7) SK Innovation (096770.KS, W200,500) STMicroelectronics NV (STM.PA, €20.0) Samsung Electronics (005930.KS, W2,412,000) Samsung SDI (006400.KS, W214,500) Samsung SDS (018260.KS, W249,000) Schaeffler (SHA_p.DE, €15.42) Sichuan Tianqi Lithium Industries Inc (002466.SZ, Rmb55.46) Soquimich (SQM.N, $63.9) Soulbrain (036830.KQ, W62,100) Sumitomo Corp (8053.T, ¥2,020) Syrah Resources (SYR.AX, A$4.41) Tesla Motors Inc. (TSLA.OQ, $337.95) Texas Instruments Inc. (TXN.OQ, $110.67) Toyota Motor (7203.T, ¥7,629) Uber (Unlisted) Umicore (UMI.BR, €43.84) Volkswagen (VOWG_p.DE, €177.8) Volvo (VOLVY.PK, $11.685) Wacker Chemie (WCHG.DE, €167.45) ams AG (AMS.S, SFr89.38)

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Disclosure Appendix

Analyst Certification Mathew Hampshire-Waugh, Chris Counihan, Daniel Schwarz, CFA, Vincent Gilles, Andre Kukhnin, CFA, Max Yates, Michael Shillaker, James Gurry, Conor Rowley, Achal Sultania, Joseph Barnet-Lamb, Quang Tung Le, Thembeka Stemela, Kristina Kazarian, William Featherston, Michael Weinstein, ERP, Maheep Mandloi, Christopher S. Parkinson, Kieran de Brun, Koji Takahashi, Masahiro Akita, Michael Sohn, Keon Han, Jatin Chawla, James Gurry, Thomas Adolff, David Hewitt, Bin Wang, John W. Pitzer, Michael Slifirski, Sang Uk Kim and Mika Nishimura each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for HanOn Systems (018880.KS)

018880.KS Closing Price Target Price

Date (W) (W) Rating

13-Jun-16 11,850 8,000 U *

10-Aug-16 11,750 8,500

10-Nov-16 10,300 10,000 N

13-Feb-17 9,280 9,500

15-May-17 9,500 10,000

25-Sep-17 12,850 15,000 O

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

N EU T RA L

O U T PERFO RM

3-Year Price and Rating History for Hyundai Motor Company (005380.KS)

005380.KS Closing Price Target Price

Date (W) (W) Rating

03-Mar-15 166,500 NR

21-Apr-15 171,000 170,000 N *

10-Jun-15 134,500 150,000

14-Jul-15 125,500 137,000

08-Sep-15 156,500 150,000

27-Jan-16 137,000 145,000

29-Feb-16 147,500 190,000 O

18-Jul-16 132,000 175,000

05-Oct-16 140,000 168,000

25-Jan-17 142,000 163,000

23-Mar-17 165,000 200,000

10-Apr-17 146,000 185,000

26-Apr-17 151,000 190,000

07-Jul-17 151,500 155,000 N

27-Jul-17 146,500 145,000

06-Sep-17 136,000 140,000

27-Oct-17 158,500 160,000

04-Jan-18 146,500 150,000

* Asterisk signifies initiation or assumption of coverage.

N O T RA T ED

N EU T RA L

O U T PERFO RM

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Drive Train to Supply Chain 2 87

3-Year Price and Rating History for LG Chem Ltd. (051910.KS)

051910.KS Closing Price Target Price

Date (W) (W) Rating

27-Jan-15 199,000 260,000 O

20-Apr-15 283,500 320,000

20-Jul-15 259,500 330,000

17-Sep-15 257,000 R

17-Jun-16 259,000 NR

25-Sep-17 379,500 500,000 O *

08-Jan-18 424,500 500,000 *

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

REST RICT ED

N O T RA T ED

3-Year Price and Rating History for LG Electronics Inc (066570.KS)

066570.KS Closing Price Target Price

Date (W) (W) Rating

29-Jan-15 62,600 75,000 N

29-Apr-15 61,200 68,000

02-Jun-15 55,400 62,000

09-Jul-15 45,750 53,500

29-Jul-15 43,800 49,000

25-Aug-15 40,850 45,500

30-Oct-15 49,100 46,200

26-Jan-16 54,800 49,000

16-Mar-16 61,900 54,000

28-Apr-16 58,200 57,000

19-May-16 54,000 50,000

25-Jan-17 54,200 52,000

16-Mar-17 68,100 59,000

27-Apr-17 72,300 65,000

27-Jul-17 66,500 66,000

26-Oct-17 92,700 82,500

* Asterisk signifies initiation or assumption of coverage.

N EU T RAL

3-Year Price and Rating History for LG Innotek (011070.KS)

011070.KS Closing Price Target Price

Date (W) (W) Rating

04-Nov-16 77,300 105,000 O *

06-Jan-17 90,800 110,000

24-Jan-17 91,700 120,000

22-Feb-17 120,000 135,000

14-Apr-17 132,500 165,000

13-Jul-17 157,500 185,000

30-Oct-17 178,000 175,000 N

11-Jan-18 150,500 145,000

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

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3-Year Price and Rating History for Mando Corp (204320.KS)

204320.KS Closing Price Target Price

Date (W) (W) Rating

05-Feb-15 151,000 185,000 O

03-Mar-15 161,500 NR

21-Apr-15 159,000 149,000 N *

16-Jun-15 128,500 134,000

27-Jul-15 118,000 122,000

16-Oct-15 139,000 180,000 O

07-Dec-15 171,000 193,000

17-Mar-16 150,500 180,000

28-Apr-16 182,000 220,000

13-Jun-16 226,500 320,000

27-Sep-16 287,000 350,000

17-Apr-17 226,000 310,000

28-Apr-17 230,000 300,000

27-Jul-17 250,500 290,000

23-Oct-17 312,500 350,000

28-Oct-17 311,000 370,000

08-Jan-18 292,500 360,000

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N O T RA T ED

N EU T RA L

3-Year Price and Rating History for SK Innovation (096770.KS)

096770.KS Closing Price Target Price

Date (W) (W) Rating

28-Jan-15 95,400 120,000 O

04-May-15 119,000 144,000

24-Jul-15 97,700 141,000

14-Oct-15 109,000 139,000

26-Oct-15 115,000 156,000

14-Dec-15 122,000 165,000

04-Feb-16 145,000 170,000

25-Apr-16 163,500 205,000

17-Jun-16 142,500 NR

31-May-17 169,000 210,000 O *

28-Aug-17 183,500 220,000

10-Oct-17 204,500 240,000

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N O T RA T ED

3-Year Price and Rating History for Samsung Electronics (005930.KS)

005930.KS Closing Price Target Price

Date (W) (W) Rating

29-Jan-15 1,360,000 1,680,000 O

03-Sep-15 1,122,000 1,630,000

29-Oct-15 1,325,000 1,785,000

11-Jan-16 1,152,000 1,690,000

28-Jan-16 1,145,000 1,550,000

01-Jun-16 1,333,000 1,702,000

28-Jul-16 1,507,000 1,790,000

15-Dec-16 1,759,000 2,400,000

24-Jan-17 1,908,000 2,650,000

09-Mar-17 2,010,000 2,900,000

23-May-17 2,246,000 3,150,000

27-Jul-17 2,490,000 3,460,000

31-Oct-17 2,754,000 3,620,000

* Asterisk signifies initiation or assumption of coverage.

O UT PERFO RM

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3-Year Price and Rating History for Samsung SDI (006400.KS)

006400.KS Closing Price Target Price

Date (W) (W) Rating

20-Mar-15 142,500 142,000 N

28-Apr-15 126,000 132,000

30-Jul-15 94,600 105,000

31-Aug-15 84,500 88,000

02-Nov-15 111,000 91,000

26-Jan-17 116,000 99,000

27-Apr-17 136,000 115,000

28-Jul-17 166,000 144,000

25-Sep-17 216,000 200,000

* Asterisk signifies initiation or assumption of coverage.

N EU T RAL

3-Year Price and Rating History for Samsung SDS (018260.KS)

018260.KS Closing Price Target Price

Date (W) (W) Rating

27-Jan-15 242,000 270,000 N

01-May-15 256,000 220,000 U

29-Oct-15 275,000 200,000

22-Jan-16 259,500 180,000

28-Apr-16 168,000 130,000

06-Dec-16 127,500 125,000 N

23-Jan-17 132,000 120,000

28-Apr-17 137,500 120,000 U

21-Jul-17 190,500 150,000

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

U N D ERPERFO RM

3-Year Price and Rating History for Soulbrain (036830.KQ)

036830.KQ Closing Price Target Price

Date (W) (W) Rating

21-Jul-16 62,700 90,000 O *

14-Nov-16 61,000 87,000

03-Feb-17 53,300 72,000

28-Jun-17 72,100 82,500

23-Nov-17 70,000 70,000 N

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least at tractive investment opportunities. For Latin American and Asia stocks (excluding Japan and Australia), ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform wh ere an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that

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puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 46% (64% banking clients) Neutral/Hold* 39% (61% banking clients) Underperform/Sell* 13% (55% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see https://www.credit-suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf . See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): 7267.T, BASFn.DE, 6963.T, DAIGn.DE, RENA.PA, WCHG.DE, GOOGL.OQ, 005380.KS, 005930.KS, 6501.T, FMC.N, GLEN.L, IFXGn.DE, STM.PA, NAFG.F, EONGn.DE, 096770.KS, 011070.KS, 066570.KS, 6770.T, BOSH.BO, 6701.T, 6796.T, MU.OQ, 006400.KS, 018880.KS, 051910.KS, BMWG.DE, JMAT.L, SYR.AX, VOWG_p.DE, ADI.OQ, ON.OQ Credit Suisse provided investment banking services to the subject company (BASFn.DE, DAIGn.DE, WCHG.DE, GOOGL.OQ, 005380.KS, GLEN.L, 096770.KS, 011070.KS, 066570.KS, MU.OQ, 051910.KS, BMWG.DE, SYR.AX, VOWG_p.DE, ADI.OQ) within the past 12 months. Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, securities-related: 7267.T, GOOGL.OQ, 005380.KS, 005930.KS, 6501.T, GLEN.L, 096770.KS, 066570.KS, BOSH.BO, 006400.KS, 018260.KS, SYR.AX, VOWG_p.DE Credit Suisse has managed or co-managed a public offering of securities for the subject company (WCHG.DE, GLEN.L, BMWG.DE, SYR.AX, VOWG_p.DE) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): BASFn.DE, DAIGn.DE, WCHG.DE, GOOGL.OQ, 005380.KS, GLEN.L, 096770.KS, 011070.KS, 066570.KS, MU.OQ, 051910.KS, BMWG.DE, SYR.AX, VOWG_p.DE, ADI.OQ Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (7201.T, 7267.T, 7011.T, BASFn.DE, 6594.T, 6981.T, 6963.T, DAIGn.DE, RENA.PA, WCHG.DE, SQM.N, GOOGL.OQ, BOL.ST, 002594.SZ, 005380.KS, 005930.KS, 1211.HK, 6501.T, FMC.N, GLEN.L, IFXGn.DE, STM.PA, NAFG.F, EONGn.DE, 096770.KS, 011070.KS, 066570.KS, 6770.T, BOSH.BO, 6479.T,

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6503.T, 6701.T, 6796.T, MU.OQ, 006400.KS, 018880.KS, 051910.KS, 6752.T, 7203.T, BMWG.DE, JMAT.L, SYR.AX, UMI.BR, VOWG_p.DE, ADI.OQ, TXN.OQ, ON.OQ) within the next 3 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): 7267.T, GOOGL.OQ, 005380.KS, 005930.KS, 6501.T, GLEN.L, 096770.KS, 066570.KS, BOSH.BO, 006400.KS, 018260.KS, SYR.AX, VOWG_p.DE Credit Suisse acts as a market maker in the shares, depositary receipts, interests or units issued by, and/or any warrants or options on these shares, depositary receipts, interests or units of the following subject issuer(s): 1211.HK. Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): 7259.T, GOOGL.OQ, 6770.T, ADI.OQ, 600418.SS, NAFG.F, AUTOA.L, BASFn.DE, BMWG.DE, 002594.SZ, 1211.HK, BOL.ST, BOSH.BO, 6796.T, DAIGn.DE, 6902.T, EONGn.DE, FMC.N, 6674.T, GXY.AX, GLEN.L, 018880.KS, 6501.T, 7267.T, 005380.KS, IFXGn.DE, JMAT.L, KAZ.L, 051910.KS, 066570.KS, 011070.KS, 204320.KS, MU.OQ, 6479.T, 6503.T, 7011.T, 7211.T, 6981.T, 6701.T, 6594.T, 7201.T, ON.OQ, 6752.T, 6963.T, RENA.PA, 096770.KS, STM.PA, 005930.KS, 006400.KS, 018260.KS, SQM.N, 036830.KQ, SYR.AX, TXN.OQ, 7203.T, UMI.BR, VOWG_p.DE, WCHG.DE, AMS.S A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (7201.T, 7267.T, 6902.T, 7259.T, 6674.T, 7011.T, 6594.T, 6981.T, DAIGn.DE, RENA.PA, WCHG.DE, SQM.N, GOOGL.OQ, BOL.ST, 002594.SZ, 005380.KS, 005930.KS, 1211.HK, GLEN.L, IFXGn.DE, STM.PA, GXY.AX, NAFG.F, 036830.KQ, 096770.KS, 011070.KS, 066570.KS, 204320.KS, 6770.T, 6479.T, 6503.T, 6701.T, 6796.T, MU.OQ, 006400.KS, 018260.KS, 051910.KS, 6752.T, 7211.T, AUTOA.L, BMWG.DE, KAZ.L, SYR.AX, UMI.BR, VOWG_p.DE, ADI.OQ, TXN.OQ, ON.OQ) within the past 12 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (EONGn.DE, 6770.T, AUTOA.L, KAZ.L, SYR.AX). As of the end of the preceding month, Credit Suisse beneficially owned between 1% and 3% of the equity and related equity derivatives of (AMS.S). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (005380.KS, 005930.KS, GXY.AX, 096770.KS, 011070.KS, MU.OQ, 006400.KS, 018260.KS, 051910.KS, SYR.AX). Credit Suisse has a material conflict of interest with the subject company (6501.T) . Credit Suisse is acting as financial advisor to Hitachi Ltd. in relation to the announced sale of their stake of Hitachi Kokusai Electric Inc. to KKR Japan Ltd.

For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=339928&v=79l5epo56g3zmok3rjxfft0zb .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (Japan) Limited .................................................................................... Koji Takahashi ; Masahiro Akita ; Mika Nishimura Credit Suisse (Hong Kong) Limited ........................................................................................................................................................... Bin Wang Credit Suisse Securities (USA) LLCKristina Kazarian ; William Featherston ; Michael Weinstein, ERP ; Aric Li ; Maheep Mandloi ; Charles Kazarian ; Christopher S. Parkinson ; Graeme Welds ; Kieran de Brun ; John W. Pitzer Credit Suisse Securities (Europe) Limited, Seoul Branch ..................................................................... Michael Sohn ; Keon Han ; Sang Uk Kim Credit Suisse Securities (India) Private Limited .................................................................................................................................. Jatin Chawla Credit Suisse InternationalMathew Hampshire-Waugh ; Chris Counihan ; Samuel Perry, CFA ; Daniel Schwarz, CFA ; Sascha Gommel ; Vincent Gilles ; Andre Kukhnin, CFA ; Max Yates ; Iris Zheng ; James Gurry ; Conor Rowley ; Achal Sultania ; Joseph Barnet-Lamb ; Quang Tung Le ; Thembeka Stemela ; Thomas Adolff Credit Suisse Equities (Australia) Limited ....................................................................................................... Nick Herbert, CFA ; Michael Slifirski Credit Suisse Securities (Europe) Limited ..................................................................................................................................... Michael Shillaker Credit Suisse Securities (Canada), Inc. ................................................................................................................................................. David Hewitt To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited .................................................................................... Koji Takahashi ; Masahiro Akita ; Mika Nishimura Credit Suisse (Hong Kong) Limited ........................................................................................................................................................... Bin Wang Credit Suisse Securities (Europe) Limited, Seoul Branch ..................................................................... Michael Sohn ; Keon Han ; Sang Uk Kim Credit Suisse Securities (India) Private Limited .................................................................................................................................. Jatin Chawla Credit Suisse InternationalMathew Hampshire-Waugh ; Chris Counihan ; Samuel Perry, CFA ; Daniel Schwarz, CFA ; Sascha Gommel ; Vincent Gilles ; Andre Kukhnin, CFA ; Max Yates ; Iris Zheng ; James Gurry ; Conor Rowley ; Achal Sultania ; Joseph Barnet-Lamb ; Quang Tung Le ; Thembeka Stemela ; Thomas Adolff

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Credit Suisse Equities (Australia) Limited ....................................................................................................... Nick Herbert, CFA ; Michael Slifirski Credit Suisse Securities (Europe) Limited ..................................................................................................................................... Michael Shillaker Credit Suisse Securities (Canada), Inc. ................................................................................................................................................. David Hewitt

Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.

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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.