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EXECUTIVE BUSINESS SIMULATION

MARKET RESEARCH

MARKET RESEARCH PACKAGE FOR THEEUROPEAN PASSENGER AUTOMOTIVE INDUSTRY

2009-2010

AprilTRAINING EXECUTIVE


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MARKET RESEARCH

MARKET RESEARCH PACKAGE FOR THE EUROPEAN CAR INDUSTRY

THE EUROPEAN CAR MARKET

The European motor industry is the world's largest car market, having exceeded the US market in total units

sold (excluding light trucks). It is also an extremely competitive arena. Some of the patterns to emergefrom this market over the last few years are listed below.

1. Sales Figures1

Historical and Current

The last strong rise in sales was in 1998 (14.3m), continuing into 1999, however, in 2000 sales fell by 2.2%(14.7m) and stayed at this level in 2001. In 2002 sales fell by 3%, 2003 saw an increase of nearly 5% but thiswas a result of an expanding marketplace, in reality there was another fall of 1% when comparing sales in thesame EU member countries. 2004 saw a genuine 2% increase in registrations, remained stable in 2005,showed a substantial 4% rise in 2006 but then the percentage increase dropped to 1% in 2007.

In 2008 European car sales figures were easily the worst for over a decade: 14.6m in extended Europe, 13.6min the core economies, a drop of 8.2% and 8.1% respectively over 2007 figures. Gloomy forecasts for 2009proved to be well founded with the whole market falling by a further 0.7% to 14.5m, however, the marketexcluding the new EU countries did show a 0.7% improvement to 13.7m. The worst hit regions were Centraland Eastern Europe (CEE) where the market fell by 28.1%. Russia, which is not included in the Europeanfigures, but is relevant as an emerging market, saw a massive 49% drop.

However, in general, the results were not as bad as expected, primarily as a result of the introduction ofgovernment scrapping incentive schemes in many European countries, including Germany, France, Austria,Spain, Italy and the UK. Manufacturer incentives also contributed to the relatively reasonable sales results giventhe economic crisis that prevailed in the region and in the UK the temporary lowering of VAT also had some

positive impact.

Within individual countries there was even some reason for hope as 2009 sales improved on 2008 figures inGermany (23.2%), France (12.3%), Austria (8.8%), Slovakia (6.7%) and Poland (0.1%). Results in Italy and theUK were also better than anticipated with the fall in sales limited to 0.1% and 6.4% respectively. These figuresclearly reflect the success of the various incentive initiatives that operated in the majority of these countries.

The first quarter of 2010 brought more optimism as 9.2% more cars were registered than in the same period in2009. Within individual markets in Western Europe, only Germany recorded negative results (-22.8%), whileFrance (+16.9%), Italy (+23.3%), the UK (+27.3%) and Spain (+44.5%) all posted growth. However, the CEEand Russia continued to experience severe falls, 12.4% in the former, with only the Czech Republic and Serbiarecording any improvement.

Most scrappage schemes ended by mid 2010 and the market is highly likely to weaken as a result. The figuresfor June have already shown a 6.4% year-on-year decrease and half year sales were down by 3.9% on 2009figures. July figures reinforced the danger signs with an 18.5% fall in European sales and individual countriesreporting heavy falls when compared to last year. Even in Russia where a scrappage scheme was put in placein March 2010, sales are expected to remain stagnant this year because of the administration involved and thelack of cheap credit.

Forecast

Ultimately, sales figures in 2010 will depend on European markets emerging from recession quickly so thatconsumer spending does not fall too sharply without the presence of incentives. With warnings that therecession could well return in a "double dip" environment does not bode particularly well for the industry.

1 Figures are approximate as they vary in different sources. In this document the majority are taken from the ACEA.All European figures are based on the EU countries + Iceland, Norway and Switzerland. They exclude Russia.


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It is predicted that it will be 2011 before there is any substantial revival in the car market.

2. Pricing structures

Selling prices in Europe continue to be under pressure as manufacturers try to cope with over supply, thedifficult economic climate and lack of consumer confidence. Tax differences and the expectation for pan-European price standardisation have also been blamed. Over the past two years there has been a general

trend to lower prices to attract the reduced number of buyers in the market. However, the UK market prices sawa sharp increase from some manufacturers in 2009, forced by a poor euro exchange rate with the pound.

Manufacturers are having to choose between profitability and sales volume. One strategy being employed tokeep prices at a sustainable level without jeopardising interest from consumers is to set official price lists at arealistic level rather than inflating prices to accommodate potential negotiation from individual customers.However, this may not be totally successful as many consumers will automatically still try to achieve a lowerpurchase price than that set by the manufacturer. Others are trying to plan for long-term cuts by implementingcost saving measures, e.g. Toyota is planning to reduce prices by 30% by 2013.

3. Mergers, takeovers, joint ventures and strategic alliances

After a very difficult economic period, most companies were back in profit by 1998/9 but the pressure of over

supply created a series of mergers and takeovers, a move that had proved to be successful for PSA, the longstanding partnership that was created in 1975 between Peugeot and Citroen.

The biggest ever merger took place in 1998 between Daimler Benz and Chrysler. It had mixed fortunes butfinally ended, following poor sales performance by Chrysler, with its sale to a private equity group in 2007, forone fifth of the price originally paid, Overall the company saw profits rise but only because of the growth withinDaimler Benz. Post-sale, the companies were known as the Daimler Group and Chrysler Holding LLC. Daimlerstill held 19.9% of Chrysler which, in October 2008, it declared to have zero value. Chrysler is now owned byFiat and Daimler is in the process of entering a strategic alliance with Renault-Nissan.

Fiat stepped in to rescue Chrysler from bankruptcy in 2009. It took a large stake in the company, alongside US

and Canadian government support and that of the automobile unions of US and Canada. The US private equityfund Cerberus Capital Management, who bought Chrysler from Daimler lost out in a major way with thebankruptcy of Chrysler. It is expected that Fiat will increase its stake in Chrysler to 35% within the next twoyears.

It is speculated that Fiat may also be thinking long-term about a merger with PSA. In early 2010, talks betweenthe French company and Mitsubishi about a potential stake swap were abandoned but should PSA still belooking for a financial agreement with another manufacturer then many believe that a merger with Fiat would bea perfect combination.

The plan for the Renault-Nissan/Daimler venture is that the former will take a 3.1% stake in Daimler and theGerman manufacturer an identical stake in Renault-Nissan. Daimler will benefit from stronger competitiveness

in the small and compact market and Renault-Nissan will gain expertise from the luxury market, both view thealliance as creating lasting value for the companies. All parties insist that brand identity will remain totally intact.

The alliance between Renault and Nissan began in 1999 when Renault took an initial 36.8% stake in the loss-making Nissan, increasing this to 44.4% in 2001 after profits had soared, at this time Nissan also strengthenedthe tie by investing 15% in Renault. Ironically in recent times it has been Nissan that has helped Renaultthrough a difficult period. Despite Renault's sale of its 17.88% stake in the Nissan Diesel Motor Co. Ltd, therelationship continues to be strong and has been reinforced by their joint link with Daimler.

Ford bought Volvo in 1999 and Land Rover from BMW in 2000, to add to the Jaguar and Aston Martin marquesthey already owned. However, the struggle to maintain profitability resulted in the company selling Aston Martinin March 2007 and then Jaguar and Land Rover to Tata Motors in 2008. It was also decided to sell Volvo in

2008 but it has taken until 2010 to find a buyer, a deal to sell the brand to the parent of Chinese motormanufacturer Geely Automobile is expected to be completed in the third quarter of 2010.


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GM has been involved in a number of takeovers and mergers. In 2000 the company bought the rest of SaabAutomotive (they already owned 50%). However, Saab continued to struggle and with the economic downturnof 2008, went in to a tail spin. Saab filed for "reorganisation" in Sweden (equivalent to Chapter 11 bankruptcy) inFebruary 2009, hoping for a Government rescue, which did not materialize. It was finally bought by Dutch luxurycar manufacturer Spyker with a Swedish Government backed loan, with GM retaining preferred shares worthUS$326m.

In 2002 GM purchased the bankrupt Daewoo and rebadged many models as Chevrolet in some markets, withsome success. GM and Fiat formed a partnership in 2000 but this was dissolved in 2005 when GM refused topurchase the remaining 50% of Fiat, an option that the latter was allowed to enforce under the terms of theoriginal agreement. GM argued that the clause had been invalidated by changes within the Italian company andafter heavy dispute Fiat secured $2billion as a result of the breakdown, which provided the capital needed tobuild a more profitable future. In 2008 GM's position deteriorated dramatically, along with some other US carmakers, notably Chrysler. Despite several attempts to arrange a deal for Magna, a Canadian autoparts maker,in conjunction with the Russian Sherbank and Gaz companies to purchase the GM European operations of Opeland Vauxhall, an about turn was announced by GM who withdrew from the discussions and opted to retainownership of these two brands.

Although mergers and takeovers of the big manufacturing companies has slowed considerably, the principal ofcompanies working in alliance is playing an increasing part in car manufacture as companies try to improve

profit margins and develop new markets. The approach is two-fold; the first one is where major manufacturerswork together on named projects, sharing research and some production facilities (e.g. shared platforms),mainly still in Europe. The second is the formulation of joint ventures with companies in Eastern Europe and theFar East which has benefits for all concerned : the major manufacturers can use the existing production facilitiesand distribution networks in these countries, enabling them to break into emerging markets, and the localcompanies profit from the investment made in their companies. The downside for European workers is that insome cases leading manufacturers have moved production of a model from the domestic plant to one in"Eastern" Europe where overheads are lower, resulting in redundancies in the "Western" European factories.

Examples of the two types of alliance are as follows.

3.1 Shared Research and Production Facilities

Since the end of the GM/Fiat partnership, the latter has been busy looking for project alliances with othercompanies. A joint venture has been signed with Tata for research and development and marketing, as well asfuture production and distribution of cars, and there are rumours of a possible alliance with Mercedes-Benz/Daimler. The company has also signed an agreement with China's Chery Automobile to jointlymanufacture engines and for assembly and distribution of the Fiat, Alfa Romeo and Chery brands.

Chrysler has also formed an alliance with Chery to develop, manufacture and distribute Chery-made small andsub-compact cars in North America, Europe and other major automotive markets under the Chrysler groupbrands.

PSA and BMW currently collaborate on small engine programmes but the two automakers could expand their

relationship to include platforms and parts sharing, most likely on the smaller models, including some BMWbadged vehicles. BMW and Mercedes also share some components in a bid to reduce costs and this couldeventually include engines and gearboxes. The former already collaborates with Daimler as a whole on anumber of projects, including car parts and research in the field of hybrid drive. PSA is in discussion withMitsubishi about the possibility of using the Japanese company's platform for small cars at it's new productionfacility in Thailand.

The recent alliance between Renault-Nissan and Daimler is based on the two companies working together onthe next generation of the Smart Fortwo and Renault Twingo, including electric versions, as well as onexpanding the range of the two models. Product design will be very different but the engineering will be on thebasis of jointly developed architecture. They will also share research and development of fuel-efficient dieseland gasoline engines, as well as adapting existing engines for each others car models.


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3.2 Alliances for Production and Distribution of Cars in Eastern Europe and East Asia

India is one of the fastest growing markets in the world and all the major companies are looking for routes intothe marketplace, forming an alliance with an Indian manufacturing company is seen as one of the most effectiveways of doing so. The very first alliance was between Suzuki and Maruti in the 1980s and others have sincefollowed. Honda Siel Cars India Ltd., (HSCI) was incorporated in December 1995 as a joint venture betweenHonda and the Indian company Siel Limited; the first manufacturing unit was opened in 1997 and a secondfacility was opened in 2008. Models produced comprise the Honda Jazz, City, Civic and Accord, the CR-V is

imported from Japan as a completely built unit. HSCI is also preparing to launch new small cars designedspecifically for the Indian market. Audi uses the Skoda Auto India company's production facilities to assemblethe A6 for distribution within India; Toyota Kirloskar Motor (TKM) is an 89/11 joint venture between Toyota MotorCorporation and the Kirloskar Group, scheduled to open its second production facility in December 2010. Aswell as making the Corolla Altis, Innova and Fortuner in India, TKM also imports the Camry, Prado, Land Cruiserand Prius fully assembled. In 2005 Renault Nissan entered the marketplace via a partnership with Mahindra &Mahindra, the partnership was restructured in 2010, leaving M&M responsible for the management of one modelin the Indian market. Renault will continue to support M&M and the product through a licence agreement andsupply of key components, including the engine and transmission. In 2008 Renault-Nissan also signed apartnership with Bajaj Auto to develop a low cost vehicle for the Indian market, scheduled for launch in 2011.Operating from their newly opened independent plants in Chennai, both Renault Nissan and Ford are using 85%Indian parts for the vehicles produced there. Fiat has an agreement with Tata that will provide the opportunity to

produce and distribute cars in India in the future.

[Volkswagen, General Motors, Daimler, BMW and Hyundai all have independent plants in India and Peugeothas invested in a feasibility study for a possible re-entry into the country.]

Alliances with companies in China include the joint venture between Toyota and Guangzhou Automobile Groupfor production and sales of the Yaris and the PSA agreements with the Dongfeng Motor Company and the HafeiAutomobile Group, set up in an attempt to boost global sales for the French company.

4. The Internet

The internet is an extremely effective medium for car promotion with a steadily increasing level of sales.

Although moving slowly, many industry observers still predict major changes in passenger car retailing becauseof the power and influence of the internet. Major companies continue to make changes in the structure ofdealerships in anticipation of further advances and the websites are becoming increasingly sophisticated,allowing potential customers to explore the marketplace from their own homes.

5. Introduction of new non-European products

The Japanese manufacturers have had a key presence for many years and in 2008 Japanese brands took14.3% of the European market share (14.6% in 2007, 14.2% in 2006 and 13.5% in 2005), selling 2.1m units.However, since 1998, the Korean car manufacturers have also made an increasingly important impact on themarketplace. Although sales levels stabilized between 2005 and 2008, the need for lower cost vehicles duringeconomic difficulties boosted their sales in 2009, aided by the very attractive financial offers made to the

consumer.

The Japanese and Koreans continue to increase their investment in Europe as they strive to continue improvingmarket share and the Chinese are also beginning to infiltrate the region. In 2005 Nanjing Automobile boughtMG Rover and in 2007 the company was sold to the Shanghai Automotive Industry Corporation who continuedto assemble cars under the MG name. The manufacturer Chery Automobile began exporting cars to EasternEurope in 2007, with the aim of having a European plant within five years and the Indian manufacturer Tata ispreparing to launch new models in Europe, strengthened by their ownership of Jaguar/Land Rover.

Despite complaints from some US and European manufacturers that the Asian companies keep prices low byartificial currency control, governments are unlikely to intervene because, unlike their European and Americancounterparts, the Asian companies are currently investing heavily in Europe, providing locally produced vehicles

and valuable sources of employment.

US car makers are now also exporting to Europe in their bid for growth against a struggling home market.Chrysler has already had success overseas with the 300 series.


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MANUFACTURERS' SALES DETAILS

Most manufacturers experienced a dramatic fall in sales in Europe in 2008 and although some saw a slightimprovement in 2009, figures were on the whole still well below 2007 levels.

The only companies to see improvement in real terms and negate the falls of 2008 were :

CompanyIncrease in 2009 sales

compared to 2008

Increase in 2009 sales

compared to 2007Renault Nissan 5.8% 1.3%

Fiat 6.2% 0.3%Korean marques(combination of Daewoo, Hyundai & Kia)

18.2% 4.4%

All three had experienced falling sales in 2008 over 2007 but were able to restore the status quo and even makeprogress in 2009. In 2008 Renault Nissan sales were down 4.2% (7.6% increase in 2007 following a 3-yearincreasing slide of 2.5% in 2004, 4.9% in 2005 and 10.6% in 2006); Fiat sales fell by 5.6% but this came after aremarkable company turnaround involving an 11.7% improvement in sales in 2007 and a 17.9% increase in2006 after several years of dropping figures; and, finally, the Korean marques fell by 11.7% in 2008 after a 5.6%rise in 2007.

In 2009, the top selling company, Volkswagen, recovered by 0.9% on 2008 figures but sales were still down by3.2% on 2007, this was in sharp contrast to the company's continuing sales improvement in previous years(6.5% increase in 2006, 8.4% increase in 2007). PSA, Ford and Suzuki also recovered by 1.2%, 3.3% and0.2% respectively over 2008 figures but were still down 8%, 12.1% and 12.9% on 2007 sales. In 2007 PSA hadexperienced a year on year sales increase (5.5%) for the first time in five years, Ford reported an 8.3% increasefollowing a small 0.2% rise in 2006 and Suzuki had its best performance in 2007 with an exceptional salesincrease of 31.7%.

BMW, GM, Toyota, Daimler, Honda and Mitsubishi continued to have falling sales figures in 2009. BMW salesfell by a further 13.7% following a drop of 3.5% in 2008 (8.5% increase in 2007); GM sales dropped by 9.1% ontop of the 14.4% fall seen in 2008 (9.8% rise in 2007, 1.5% fall in 2006); Toyota sold 6.7% fewer cars in 2009

than in 2008 and 17.2% less in 2008 than 2007 (figures rose by 10.9% in 2007 and 11.6% in 2006 when itreplaced GM as the top global car maker in terms of sales, a position GM had held for 81 years); Daimler'sfortunes continued to spiral with a 13.3% fall in sales, following drops of 4.6% and10.3% in 2008 and 2007respectively; Honda's sales fell by 7.8%, better than the 15% fall experienced in 2008 but negating theimpressive 22.5% growth experienced in 2007; Mitsubishi also had disastrous sales figures, experiencing a fallof 17% in 2009 on top of the 15.1% fall of 2008 (14.3% increase in 2007).

Mazda was an exception in 2008 in that sales actually increased by 1.8% but this could not be sustained andsales decreased by 13.7% in 2009, giving an overall drop of 12.1% over 2007 figures.

As in the previous 3 years, VW was the top selling European car maker in 2009, followed by PSA and RenaultNissan, with Ford in fourth place.

The unprecedented falls in sales can be attributed to the surge in fuel prices early in 2008 followed by thecollapse of financial markets and general economic crisis. Some companies fared better than others but in sucha turbulent environment sales alone are not an easy measure. Honda for instance shut down its factories untilJune 2009 but retained much of their workforce, albeit on reduced pay, rather than sell cars at massivediscounts, while others maintained sales at painfully low prices and by offering expensive promotional offers.

Any recovery in 2009 was attributed to Government scrappage schemes involving the provision of a cash sumto customers who traded in cars of a certain age for a new vehicle. The schemes were successful but now thatthey have ended in all countries except Russia, sales are once again going to be under severe pressure. (Seepage 1 for more details.)

Prior to the crisis, the European car market had experienced a period of strong growth with companieslaunching a large number of new models with the aim of enticing consumers into purchasing new vehicles. Ithas to be hoped that this can be repeated, this time possibly relying on buyers wishing to move to more fuelefficient vehicles given current high fuel prices and increased taxation on larger cars. Much will depend on thetiming of economic recovery and the ensuing revival in consumer confidence.


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PROFIT MARGINS

Despite growth in sales for the majority, during the first five years of the decade nearly all companies havesuffered from decreasing profits. 2005 began a turnaround for a few companies that continued into 2006 and2007 but most crashed heavily in 2008/2009.

The Fiat Automobile Division (excluding Maserati and Ferrari) had a remarkable turnaround of fortunes in 2006when it achieved a EUR291m profit, following a loss of EUR281m in 2005. Phenomenal growth was

experienced in 2007 when profits rose to EUR803m but performance could not be sustained in the unstableyears of 2008 and 2009 and profits fell to EUR691m and EUR470m respectively. However, these were stillimpressive figures given the troubles experienced at the beginning of the decade and in comparison to theperformance of other major automakers during the same period, proving that effective leadership and goodorganisation can have a dramatic effect. The acquisition of Chrysler will prove to be a challenge, although halfyear revenues for the division were up by 6.4%, however this was mainly due to increased sales at Maserati andFerrari, which are not included in the profit figures given above. Fiat has announced that it expects sales of themainstream business to fall this year in line with the general trend in the industry.

A surge in popularity of models also gave BMW its most successful year ever in 2006, with net profits rising by28%, providing relief after the company suffered from falling profits in 2005. Despite a downturn in 2007 whensome market share was lost to Mercedes-Benz the company still managed to increase profit to EUR3.1bn

(EUR2.9bn in 2006). However, 2008 saw an incredible fall of nearly 90% in profits to EUR330m, although partlyas a result of several exceptional items recorded in quarter 4. The company made some strategic changes butfortunes did not improve in 2009 when the net profit dropped to EUR210m, a further 36.4% fall on 2008 results.Optimism for 2010 seems to be justified as half year results show a profit of EUR1.158bn, a swing from a loss ofEUR31m in the same period in 2009. This remarkable turnaround for both BMW and the luxury market ingeneral are chiefly a result of sales growth in China.

2007 was a record year for the Volkswagen Group, improved productivity and rising demand in Asia and EasternEurope boosted operating profits by 40% to EUR6.15bn. Cost cutting and capital gains in earlier years alsocontributed to the large profits. Against the backdrop of serious decline in the industry, success continued in2008 as 2007's results were surpassed with a 3% increase in operating profits to EUR6.3bn, a 15% increase innet profit and a 4.5% rise in sales. However, the recession hit hard in 2009 and profits fell to EUR1.86bn with

85% of that being contributed by the Audi brand (EUR1.6bn). However, the fact that the Group ended the yearin profit was an achievement as 2009 began with large quarterly losses. There is still cause for concern aswithout Audi, it is thought that the Group could be in financial difficulty and there is a view that the company isnow too big with the VW, Skoda and Seat marques competing against each other. The recent purchase of 20%of Suzuki may also prove to be unwise, time will tell.

Regarding individual brands within the VW Group, Audi could be considered the most successful automaker in2009 but profits were still down 42% on the EUR2.77bn made in 2008 and sales revenues were down fromEUR34.2bn to EUR29.8bn. However, it should be noted that 2008 had seen record sales and revenues for Audiwith a 4.1% increase in sales and a 1.7% improvement in profits when compared to 2007. With higher salespredicted for Audi in 2010 as it launches a myriad of new models, including the subcompact A1, it is forecastthat both revenues and profits will improve. Of note is that Audi made its very respectable profit of EUR1.6bn on

sales of 950,000 cars whilst the VW arm delivered 3.9m vehicles but only achieved a profit of EUR561m.

Skoda achieved a 1.4% increase in sales but both profits and revenue were down on 2008 figures. Seatreported a loss of EUR339m compared to EUR78m in 2008 and a profit of EUR8m in 2007 (-EUR5m in 2006).Revenue fell by 12.2%. Bentley also went into a loss-making position turning the EUR10m profit of 2008 into aEUR194m loss in 2009 as sales revenue fell 47.3% from EUR1084m to EUR571m.

First half figures for the VW Group in 2010 are positive with sales, revenue and operating profit increasing whencompared to the same period in 2009. However, this may not be sustained in the second half of the year as theoperating environment becomes more difficult.

Toyota posted record pre-tax profits in 2007 but this turned to a loss in 2008/2009, the first fall in fortunes in nine

years. The downturn was blamed on the recession, a stronger yen, slow sales in the US, rising costs and asuffering credit market. Thanks to cost reduction efforts, 2009/2010 showed better results with the Japanesecompany overall showing a small profit and the European operation reducing its losses, despite a fall in sales.


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In 2007 Renault's operating margin increased by 27.4% to EUR1.354bn. This figure fell dramatically in 2008 toEUR212m but the company was still in profit by EUR599m, however, this could not be sustained and 2009resulted in severe losses of EUR3.07bn and an operating margin of EUR396m. There are some encouragingsigns in 2010 as first half figures show a positive operating margin of EUR780m compared to a negative ofEUR620m in the same period in 2009 but it must be remembered that incentives were still in place for much ofthis period and only the results for the whole year will show the real picture.

PSA 's margin increased from 2% to 2.9% in 2007 and the company made a profit of EUR826m. Unfortunatelythe success was short lived as losses plummeted to EUR520m in 2008 and EUR1.274bn in 2009. In alignmentwith other manufacturers, the first half of 2010 has shown a substantial improvement with a first half operatingincome of EUR1.137bn compared to a loss of EUR826m a year ago on revenue up just over 20%.

In 2007 Daimler reaped the benefit of selling Chrysler by achieving a rise of 74% in EBIT (earnings beforeinterest and tax), however, the net profit rose by just 5% and revenue was actually flat. 2008 saw a fall in netprofits from EUR3.985bn to EUR 1.414bn and 2009 ended with a EUR2.644bn loss. Following the generaltrend, sales have improved in 2010 and a profit of EUR1.924bn was achieved for the first half year compared toa EUR2.348bn loss in the same period in 2009.

The automotive division of Ford Europe also showed a marked improvement in 2007, almost doubling the pre-tax profits achieved in 2006. In 2008 the pre-tax profits increased again, albeit by only 5-6% (US$997m to

US$1.052bn) but 2008 saw a predictable fall to US$86m, however, it is notable that the division remained inprofit. Half year figures for 2010 are encouraging showing a US$429m profit compared to a US$528m loss forthe same period in 2009.

Overall, the trend in the European automotive marketplace is increased profits in 2007, a fall in fortunes in 2008and then financial fallout in 2009, with small signs of recovery in 2010. However, in all instances it was in thesecond half of 2009 that sales and profits showed marked improvement, continuing into the first half of 2010.This coincides with the introduction of the government scrappage schemes and it is forecast that sales will dropagain in the second half of 2010. It is widely predicted that the EU marketplace will shrink by 10-15% in 2010.

It is also of note that increased sales in many cases are due to the growth of the Chinese and Asianmarketplaces rather than expansion/stability in Europe.

Some of the measures taken by manufacturers to reduce losses/improve profits have included reducingproduction, closing plants, both permanently and temporarily, squeezing suppliers, job cuts and the search fornew sources of revenue through downstream activities such as finance divisions. Production has been loweredby many of the major companies to reduce a stock problem and in some cases to avoid redundancies byintroducing shorter working weeks. Some major players, namely Ford, VW and GM have asked employees toaccept long-term wage freezes and in GM's case to impose longer working hours. VW was forced to put amajor redundancy programme into effect in 2009 and Nissan made redundancies in Spain, BMW hasthreatened job cuts and Ford sold Jaguar and Land Rover. These measures are likely to continue until abalance of supply and demand is restored.

INDIVIDUAL MARKET SIZES

The biggest change in European markets over recent years was the rapid growth of the Russian new carmarket, which broke through the 2m unit barrier for the first time in 2007. With 2.35m new cars registered itbecame the fourth largest market in Europe and by mid 2008 it was actually poised to replace Germany as thelargest single market in Europe. However, the recession hit very hard, late that year sales fell dramatically andfinally Germany retained its dominant position with Russia climbing to a position of second biggest market with2.7m sales. The decline in the Russian market continued in 2009 when sales were down to 1.4m and it fell tofifth position in terms of market size, behind Germany (3.8m), France (2.3m), Italy (2.2m) and the UK (just under2m).

Germany has consistently had the largest market over the years and 2009 was no exception, showing a 23.2%increase on 2008 figures, the 3.8m figure equalling the success of 2000 and far surpassing any sales since

then. In fact it followed a period of decreasing sales between 2006 and 2008 (2007 saw a 9.2% drop on 2006sales and there was a 1.8% fall between 2007 and 2008).


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The only other countries to see an increase in sales in 2009 were France (+12.3%), Austria (+8.8%), Slovakia(+6.7%) and Poland (+0.1%).

In most countries sales fell severely with Central and Eastern Europe being hit very hard as many of itsmembers experienced falls of well over 40%, the only exceptions being in the Czech Republic where the fall waslimited to 8.1%, Slovenia (-19%) and, as already mentioned, Slovakia where there was actually an increase insales. Western Europe certainly did not escape lightly either. Iceland had experienced falling sales since 2005and the 43% drop in 2008 was the largest in Europe but this was nothing compared to the 76.6% fallexperienced a year later. Also notable were the falls in Ireland (-62.1%), Finland (-36.7%), Denmark (-25.3%),Portugal (-24.5%) and the Netherlands (-22.6%). Elsewhere, sales figures fell by 17.9% in Spain, 17.8% inGreece, 16% in Sweden, 11.1% in Belgium, 10.8% in, Norway, 9.7% in Luxembourg, 7.8% in Switzerland, 6.4%in the UK and a small 0.1% in Italy.

With economic uncertainty still prevalent in Europe, manufacturers are now looking outside of the continent forgrowth, especially as the Eastern European and Russian markets, which were seen as the main areas forexpansion for much of the decade, appear to be collapsing. China and, to a lesser extent, India are now the keytarget growth areas, with the Chinese market being particularly successful for the luxury market sector.

MARKET SECTORS

Market sectors are broken down into four main categories : City, Medium, Large and Luxury.

The growth in the city class did appear to be slowing until recently and prices did fall, in contrast to the generaltrend of increasing prices. However, with increasing fuel and taxation costs, sales of city cars are increasingagain, with some of the middle sector age groups replacing large and medium-sized models with smaller ones,particularly as many of the new models produced are larger than their older model equivalents, e.g. the Clio,Corsa and Peugeot 207 have considerably more room inside than the previous models. Fiat has taken thisconcept one step further with the launch of an SUV version of the Panda, priced very competitively, it will beinteresting to follow sales levels - if successful other manufacturers may follow with similar designs. Anothernotable trend has been the recent growth of vehicles with engine sizes under 1 litre, and those with electric andhybrid engines.

In terms of popularity, five of the top ten best selling models in Europe in 2008 were from the city car categoryand four were from the medium sector. The restyled VW Golf regained its first position and was the only modelto increase in sales in 2008. The city sector Renault Clio and Ford Fiesta/Fusion both rose in position in the 'topten', demoting the medium-sized Opel/Vauxhall Astra to seventh place. One explanation for the decline in salesof the latter is that GM cut its production in favour of the Corsa when it was relaunched, a move which initiallyproved successful as sales of the Corsa increased by 41.7% in 2007; however, as the new model settled intothe marketplace the surge in sales slowed and there was a drop of 10.4% in 2008, although it maintained itsplace as fourth most popular car in Europe. As in the last few years, the only large car to feature in the tablewas the VW Passat. See the following page for more details of the 'top ten' and their sales figures.

Financial pressures amongst buyers, and market sentiment, are likely to result in a further shift in purchasingpattern, with people moving from large cars to the medium, or city sector.

The large car market continues to struggle, with the diesel and business sector the only areas to be maintainingsales, albeit with falling margins. The VW Passat remained in top ten best selling list but sales dropped 9.4%between 2006 and 2007, and a further 15.5% in 2008, surely a sign of things to come given the economicclimate. The SUV and MPV models still dominate the large car sector as sales and consequently production ofthe traditional saloons such as the Renault Laguna, Ford Mondeo and Peugeot 407 drop rapidly. However,companies are investing a considerable amount in re-launching cars in this sector to increase their appeal:Renault has redesigned the Laguna, Ford launched a new Mondeo and VW/Audi produced a new TT,Mercedes has boosted sales with the new-look C-Class and the relative success of the Volvo V50, driven byclever marketing, has made a significant contribution

BMW continued its 2007 achievement of outselling Mercedes-Benz in terms of sales in 2006, but much of this

success was due to sales of the 3-series (medium sector) and the mini (city sector). Mercedes did close thegap with the success of the new S-class launched in September 2005 and improved the situation further withrecord sales in 2007, undoubtedly helped by the launch of the new C-Class in September 2006. VW did not seesuccess with the relaunched Phaeton luxury sedan.


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It is notable that the price gap between the prestige and volume car makers has narrowed over the last10 years, widening its pool of potential customers and resulting in the market share of the volumemanufacturers, e.g. Ford, Renault, Vauxhall, reducing by 12% and that of the prestige marques, BMW,Mercedes, Audi, increasing by 9%. The decline in the sale of luxury and premium large vehicles is likely to be aresult of rising fuel and taxation prices, the general economic climate and on a more positive note the fact thatthe smaller cars are now being built to a standard that was previously only available in more expensive models.

For the purpose of this market segmentation the definitions of the car groupings, based primarily on dimensionsand average price, are as follows (all price ranges are approximate and can overlap).

City : supermini, minis and small; prices up to 14,500, e.g. Ford Fiesta, Nissan Micra, Peugeot 107.

Medium : price range 12,000 to 21,000, e.g. Vauxhall Astra, Renault Scenic, VW Golf, Mercedes B-Class.

Large : upper medium + multi-purpose vehicles; price range 15,000 to 45,000, e.g. Ford Mondeo, AlfaRomeo 159, Land Rover Discovery, Jaguar X-Series, BMW 5-Series, Porsche Boxster.

Luxury : luxury saloons + specialist sports cars + dual-purpose vehicles (e.g. 4WD); price range 40,000 to100,000+, e.g. BMW 6 & 7-Series and X5, X6, Jaguar XJ and XF series, the perennial Range Rover, MercedesS-Class, Porsche 911 etc.

The following table quantifies the results of a market study made in 2008 on the division of car sales in Europe.Car categories are shown on the horizontal axis and buyers' ages on the vertical axis. Values are given aspercentages (error level +/- 20%).

% of Total Market (total market in year 1 : 14.5 million)

City Medium Large Luxury

Under 25 11.25 6.50 1.90 0.22

25 to 40 9.55 13.00 5.95 1.48

41 to 55 7.55 11.00 5.75 1.58

Over 55 7.75 9.50 5.50 1.52

Total (%) 36.10 40.00 19.10 4.80

TOP TEN BEST SELLING CARS IN EUROPE 2009

Variation on Year from2008Model 2009 Sales

Sales position

2010 UK Price Range()*

1. Volkswagen Golf 571,838 +24.8% 1 15,000 30,000

2. Ford Fiesta 472,091 +44.2% 6 9,995 15,000

3. Peugeot 207 367,160 -9.6% 2 10,995 19,800

4. Opel/Vauxhall Corsa 351,807 -2.4% 4 9,995 18,000

5. Fiat Punto 323,536 Not in Top Ten in 2008 11,000 16,500

6.. Renault Clio 312,925 -6.7% 5 11,000 18,000

7. Ford Focus 309,134 -15.2% 3 15,000 26,000

8. Fiat Panda 298,914 Not in Top Ten in 2008 7,665 13,000

9. Volkswagen Polo 282,780 +2.5% 8 9,800 15,740

10. Vauxhall/Opel Astra 275,638 -14.1% 7 13,995 23,500

* Figures are rounded. The higher end prices are usually for sports versions and, where applicable, convertibles.


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NEW REGISTRATION OF PASSENGER CARSIN THE TOP TEN MARKETS IN EUROPE (,000s)

2003 2004 2005 2006 2007 2008 2009

Germany 3236 3267 3319 3468 3148 3090 3807

France 2009 2014 2068 2001 2065 2050 2302

Italy 2251 2264 2237 2326 2493 2162 2160

UK 2579 2567 2440 2345 2404 2132 1995

Spain 1383 1517 1529 1635 1615 1161 953

Belgium 502 485 480 526 525 536 476

Netherlands 489 484 465 484 506 500 387

Poland 320

Austria 301 311 308 309 298 294 319

Switzerland 270 269 265 270 285 276 266

MARKET STATISTICS

The European market share (2002-2009) for each of the top 14 car manufacturers is given below.

9

11

13

15

17

19

21

2002 2003 2004 2005 2006 2007 2008 2009

%M

arketShare VW

General Motors

Peugeot/Citroen

0

1

2

3

4

5

6

7

2002 2003 2004 2005 2006 2007 2008 2009

%M

arketShare

BMW

Daimler (figures for 02-07include Chrysler)Toyota

5

6

7

8

9

10

11

12

13

14

2002 2003 2004 2005 2006 2007 2008 2009

%M

arketShare

Fiat

Ford (figures 02-07 includeJaguar, Land Rover & Volvo.08comprise Ford & Volvo only)

Renault-Nissan


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0

0.5

1

1.5

2

2.5

3

3.5

4

2002 2003 2004 2005 2006 2007 2008 2009

%M

arketShare

Honda

Mazda

Mitsubishi

Korean

COMMENTARY

The European marketplace has changed rapidly over the last decade.

The Volkswagen Group, owner of the Seat, Skoda, Audi, Volkswagen, Bentley, Bugatti and Lamborghini brands,consistently maintained the largest market share throughout the 1990s. Sales are given in the chart over leaf.VAG now holds the largest percentage of the market share in Europe at just under 21%. Despite its continuous

number one position, and partly because of its dash for growth, VAG's profitability has come under pressure,influenced by its high cost base, currency fluctuations and the fall in the Eastern European market. Its broadmarket coverage, including the USA, Asia and South America, and ability to launch impressive new models, hasenabled profitability to be maintained for the moment, although management are stating that the company willnot be able to survive long-term without job losses and changes in pay structures and working conditions. Therecent expansion of the Porsche share in VAG signaled a share battle which led to the paper takeover of VW byPorsche, followed by a complete reversal of fortunes. In August 2009, Porsche SE and VolkswagenAG reached an agreement that the two companies would merge in 2011, to form an "Integrated AutomotiveGroup".

In 1996 the Italian market recovered with the re-introduction of Government incentive schemes which resulted ina 20%+ rise in new car sales. This was followed by another increase to 39% in 1997, but then a small fall in

1998 of 1.6% as the schemes were withdrawn. In 1998 Fiat fell from the position of the third largest carcompany in Europe in terms of sales to fourth behind PSA (Peugeot-Citroen) and to sixth between 1999 and2005. A confident Fiat is now in 6th place, behind GM and Ford, but this is likely to change with their recentacquisition of Chrysler.

Fiat's higher sales in the mid 90's was aided by Government incentives and therefore must be viewed in context.Such schemes can distort markets with high sales being followed by sharp falls. There was a similar occurrencein France when the Government terminated the incentive programme early in 1996. In 2003 Fiat announced12,000 planned job losses and has seen a 50% drop in market sales since the end of the 1980's. 2004 was thecrisis point for the company, ending with the termination of the partnership with GM. However, a turnaroundplan, involving a new management team put into action in 2003 and the forging of new partnerships in 2004 and2005 has been successful, with profits being shown for the first time in five years towards the end of 2005.

Profitability continued through to 2008, 2009 and is even predicted for 2010, against world wide trends.

Mergers and strategic alliances have been seen by some manufacturers as the best way forward to ensureprofitability. The BMW chief executive has expressed the belief that such links only provide short-term benefitsbut the President of hugely successful Toyota has shown interest in forming an alliance with troubledautomakers. The evidence for both arguments is mixed (see pages 1 and 2 for details).

Increasing competition from the European-based operations of the major Japanese manufacturers continues tochange the European market. The Japanese have taken 25% of the US market, and Nissan, Toyota and Hondaare competing free of EC imposed quotas within Europe with their European built models. Against this trend thestrong appreciation of the Japanese currency in early 1990's caused a decline in their market share to 10.9%,the lowest level for five years. A sharp turnaround has been seen now that the currency rise has been reversed.

On the basis of Japanese production in the UK, it is expected that the country will return to being a net exporterof cars within the next five years, a status lost in the mid-70's.


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Productivity and quality, the key words of the mid-80's, have reduced in significance, only because ofconvergence by most manufacturers on the high standards set by the Japanese; in 2005 the EU car industrypledged to put technology and quality before profit. In recent times foreign companies have invested 10 timesmore per worker in modern machinery than their European counterparts and as a result most Europeanproducers still lag behind the 90+ cars per worker per year Japanese benchmark. However, they are gettingcloser (70-80% of the Japanese figures). Nissan's Sunderland UK plant has been the most productive plant inEurope for seven consecutive years, producing an average of 90 cars per hour (approximately99 cars/worker/year), Renault's Valladolid plant in Spain is not far behind with 89 cars/worker/year.

Prices are being kept in control partly at the cost of employment. In some instances workers are having toaccept lower wages or decreased benefits in an attempt to keep factories open and jobs safe as more and morecompanies move production to Eastern Europe, China and India where wages are low and, in the case of thelatter two, the car industry is growing rapidly.

Europe continues to be the most competitive and challenging automobile marketplace, boosted by factors suchas surplus US capacity, demand and capacity in Eastern Europe, the Japanese, Korean and possibly theChinese push. The economic recession of 2008/2009 may actually improve the future prospects by taking outsome excess capacity. The challenge to this industry is the need to reduce the environmental impact of themotor car, to levels acceptable to society, in the face of significant overcapacity, but with some growing marketsin Eastern Europe. If this battle is lost the Industry may well be facing terminal decline.

THE SPECIALIST MARKET

Overview

Worldwide sales of luxury vehicles fell 20% in 2008 but recovery is strong in 2010. During the recession of theearly 80's, when the volume producers were suffering heavy financial losses, the specialist producers remainedprofitable. By 1987 BMW, Porsche, Mercedes Benz, Rolls Royce, Jaguar, Saab and Volvo were all making aprofit. However, the situation changed rapidly in the late 80's and early 1990's when the US market weakened,Japanese competition intensified and recession returned. Despite the economic situation, BMW continued toincrease sales volume within Europe as a whole and in 1992 overtook Mercedes, a position subsequently lostwith the DaimlerChrysler merger. With its abandonment of the Rover Group but retention of the Mini, BMW

increased sales and profitability dramatically in 2001, a trend that continued until 2005 when the companyexperienced increased sales but a drop in profits; this trend continued in 2006 but reversed slightly in 2007 thenreverted again in 2008. Mercedes targeted growth with the Chrysler merger and has continued this push evenafter the disposal of Chrysler. Volkswagen strengthened its position in the luxury market with the purchase ofLamborghini, Rolls Royce and Bugatti. Porsche made record sales and profits in 2006 and 2007, driven bystrong sales of the redesigned Boxster, Cayman S coupe and 911 models. Its move into the SUV market withthe Cayenne was seen as a stimulus for future growth. Sales of the Cayenne began well in 2004/05 but theyslipped in 2006, then returned strongly in 2007 (up 50% in some markets). After a fall in 2008/9 a strongrecovery is projected for 2010. Although customers are beginning to turn away from large 4x4s, it wasPorsches belief that the niche luxury sector would not be affected but this was not the case. First the high fuelprices in 2008 dented sales and then the economic recession continued the stall, despite revised Cayennemodels. Fiat strengthened Ferrari's appeal to investors by separating the marque from the loss-making

Maserati and placing it in the Fiat Group as opposed to Fiat Auto.

The major features of the specialist marketplace over the last few years have been : 1) high fuel prices and therecession of 2008/2009 denting specialist car sales; 2) the growth of alternative market sectors; 3) thecontinual demand for sports cars. 4) an emerging new niche - the electric performance/sports car, pioneered bythe US maker TESLA.

1. High fuel prices and the recession of 2008/2009

The specialist sector has long been relatively resistant to economic downturns. But the surge in fuel prices in2008; quadrupling in some markets, took the industry by surprise and certainly made the buyers think hardabout fuel economy. This was quickly followed by the economic downturn which took out a lot of the new

monied buyers. In addition, it became socially undesirable to be driving extravagant cars as unemploymentrose and many people were losing homes, pensions and savings. Hollywood took to electric cars and politiciansfound a new excuse to tax larger cars. The impact is still being felt and it may be some time before its fullextentt is seen.


15/1813

2. Alternative Market Sectors

The alternative markets comprise, Multi Purpose Vehicles (MPVs), the traditional 4x4 off roaders and the SportsUtility Vehicles (SUVs), all of which have proved to be lucrative from the 1990's through into the early years ofthe 21st century. The trend now is towards smaller MPVs and SUVs rather than abandonment of the class.

The new categories of low emissions vehicles, hybrids and electric cars are fast growing sales in the UKdoubled in 2007,and more than doubled again in 2008 according to Honda. Toyota announced that 28% of

Lexus sales were the hybrid powered Prius. These are covered in more detail below under "New Technologies".

The Multi-Purpose Vehicle (MPV/Minivan) Market

The MPV market can be divided into three categories, the mini sector, e.g. the Nissan Note, Vauxhall MerivaFiat Sedici and Ford Fusion; the compact/midi sector, e.g. the Citroen Xsara / Picasso, Renault Scenic, Ford C-Max, Mercedes B-Class and the large sector, e.g. Ford S-Max, Renault Espace, Toyota Verso and VW Sharan.Overall, this market grew substantially from 1995 onwards, and by 2000 sales exceeded 600,000 units. Themarket continues to grow with a 22.8% increase in sales in 2004 compared to 2003 in the overall Europeanmarket and in the UK a 16.5% increase in 2007 over 2006. The market fell in 2008, as the recession hit, but isreturning in 2010.

The Renault Scenic has been the best selling model in the midi MPV class since its launch in 1997, well aheadof its nearest rivals the Vauxhall/Opel Zafira, Volkswagen Touran and the Citroen Picasso. However, the C4 andXsara Picasso from Peugeot Citroen finally eclipsed the Scenic in 2007, with overall sales of 320,000 units. Thesuccess of the sector has been at the expense of the traditional medium category models, although the latter didshow growth in 2004-2006 thanks to the launch of new models.

Sales of full size MPVs are slowing with a 10% decline in sales in 2004 compared to 2003. The growth of themini MPV looks set to continue, the only danger being that with more major manufacturers targeting this areathere could be over supply in the future. The Peugeot 307/308 and Honda's Jazz and Civic, smaller and farmore car-like than even the mini MPV, are also potential threats and the popularity of the sector has resulted inhigher than average prices rises, which could also slow down sales.In 2009/2010 the estate car seems to bereturning to the market, replacing and reducing sales of both compact and full scale MPVs.

4x4 Off Roaders (Leisure/Luxury Market)

The original Range Rover from Land Rover, previously owned by Rover then Ford but now under newownership by Tata of India, can be said to have virtually created the off road market in Europe, which nowexceeds 400,000 units per year, up from under 60,000 units in 1979. Range Rover has since moved into therealm of the luxury car, competing with the likes of BMW, Jaguar and Mercedes, and Cadillac in the USA..Competition resulted in a fall in Land Rover's sales in the early 2000s but made a strong recovery in 2005-2007,courtesy of the launch of the new Range Rover Sport and the Discovery III, the latter being a cross between theleisure 4x4 and an SUV. Land Rover, celebrated its 60th birthday in 2008 year, saw worldwide sales in 2007exceed 200,000 units for the first time ever, with UK sales exceeding 50,000 units, also for the first time. In thefirst half of 2010 the highest ever level of sales was achieved.

The M-Class has continued to be successful for Mercedes and for BMW the X-5, and now the super luxury X6.They have established excellent sales by virtue of both strong off and on road performance. Other competitorsin the class include Toyota's ever popular Land Cruiser, Nissans X-Trail and stylish Mureno, Volkswagen'sTouareg, the Volvo XC70 and 90 and the Land Rover Discovery.

Porsches Cayenne sales slowed in 2006 but resumed selling well with 2007 world sales nearly 50% up on2006, thanks in part to the introduction of a new model. A Cayenne electric hybrid has also been showcased.The Volkswagen Touareg, which shares its chassis with the Cayenne, has also been selling well in the UK,helped by very targeted advertising. The new, stylish Audi Q7 also looks good. These sectors were all hard hitin 2008/2009 but are recovering in 2010.


16/1814

The off-road market had been predicted to fall for several years but contrary to this, sales have grown steadily,increasing by nearly 65% over the 6 years to 2007. The marketplace finds these products desirable despiteconcerns about size, weight, fuel economy and emissions (which though higher than comparable modernsaloon cars are still much lower than the older cars). Range Rovers new fuel efficient turbo diesel V8demonstrates the manufacturer's response to market demands and stylish new designs from Audi, BMW with itsX-6, and new Volvos point to continued life in this sector. The fuel price increase of 2008 and subsequenteconomic recession has had a strongly negative impact. This market has been hit but is showing greatresilience.

Sport Utility Vehicles (SUVs)

The off-road market has come under threat from the introduction of the new generation of SUVs, which descendfrom passenger cars and have lightweight unibody frames and modern suspensions, they enjoy the high seatand four-wheel drive of the off roader combined with passenger car handling and comfort. The advantages ofthe lightweight SUVs over the traditional off roaders are nimbler handling, a peppy performance, quieter, morefuel efficient and, moreover, cheaper, posing a serious threat to the dinosaurs of the 4x4 market.

Land Rover responded to the new SUV market by introducing the smaller Freelander 4x4,which now competesvery favourably with the Honda CR-V and Toyota's RAV, all priced between 16,000 and 26,000 in UK. Thelaunch of the Freelander 2 in 2006 strengthened Land Rover's position in this sector, despite competition from

the luxury GL-Class SUV from Mercedes. Already successful in the US, the strong selling smaller BMW X-3,could be a competitor, although with a price range of 25,000 to 35,500 the latter will be a competitor for theDiscovery and the Mitsubishi Shogun rather than the SUV market. Fiats smaller 4x4 could also threaten.Sales figures show that there is definitely a market for both the large 4x4 models and the smaller and cheaperSUVs but the trend seems to be moving in favour of the latter. It is possible that SUVs will account for up to halfof Europe's prestige car sales in the near future as companies improve model specifications, offering higher-than-ever levels of high-tech, safety and 'infotainment' equipment, better fuel economy and even electricversions.

3. Sports Cars

Roadsters

Mazdas MX-5 initially led the growth in the market with the brilliant combination of MGB and Lotus Elan.European sales of the MX-5 slumped from 12,500 in 1991 to 4,900 in 1994 but the launch of a new model in1998 revived Mazda's popularity and the launch of yet another new model in 2005 assured continued salesgrowth in 2006 and 2007. Other impressive performers include the MGF (1995-2005), Lotus Elise, BMW Z3followed by the Z4, Alfa Romeo's Spider, Mercedes SLK, the Audi TT roadster, Porsche's Boxster and thepromised new sub 40k roadst6er from Jaguar. The MGF was bought by Nanjing and returned to the UK in2008, but only in small volumes.

Over the last ten years the convertible market has grown from 17,706 to 98,316 units. In 2001 new convertiblestook 2.4% of the UK new car market and by 2006 the share had climbed to 5.3%. Growth continues in 2010,thanks to the innovation of the hard top convertible.

The new coup convertibles (CCs), with their electrically folding metal roof, have driven the 2005-2010 surge inpopularity of the sports car and have helped spread sales more evenly throughout the year. The concept startedwith the Peugeot 206 and 307, now the 208 and 308. Mercedes followed suit with the SLK Class Roadster asdid Renault with the Mgane CC, Lexus with the SC and Vauxhall/Opel with the Tigra. All the volumemanufacturers are joining the party.

Approximately one quarter of the convertibles sold throughout Europe are purchased in the UK - despite theclimate! Only in Germany are sales figures greater but the percentage growth in the UK is far higher, 114%since 1999 compared to 32% in Germany. It is interesting that there is a notable increase in the number ofwomen over 60 buying expensive convertibles!


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Sports Coups

European sports coups saw a 32% increase in sales in the mid 1990s, bringing the sector up to 37,426. TheVauxhall Tigra had a particularly impressive dbut performance with sales of 6,787, ahead of the Ford Probe(6,576) and Vauxhall Calibra (4,920) but behind the then sector leader, the BMW 3-Series coup (9,751). Sincethen the market has continued to grow. The Audi TT and Mazda RX8 have sold well. The new 2007 Audi TTand the stunning Audi R-8 look continued this trend. New entries introduced in 2004 included the Nissan 350Z,the Chrysler Crossfire (discontinued Nov 2007), the BMW Z4 coup, the revised BMW 3-Series coupe and the

Porsche Cayman in 2006. VW delivered a stunning new Corrado in 2008, which sold well despite therecession. In 2010 they followed this with the new Scirocco which leads the market, alongside the new AlfaRomeo Guiletta, BMWs Series 1, Peugeots RCZ and even the hybrid Honda CR-Z

The upper end of the market is dominated by the BMW's M5 and M6-Series and the Mercedes SLK coupe withthe Audi R-8 and new Jaguar XKR trying to upset the status quo. Over 80,000 SLKs were built in 2004. Thelegendary Porsche 911 leads the sector in dynamic performance but sells in much smaller numbers, as does thenew Jaguar XKR which provides stunning but controversial looks with effortless performance.

Variations on the coup but targeted at the same market have been the hugely successful Subaru Impreza andMitsubishi Evo. These offer coup style with blistering performance, 4-door convenience and 4-wheel drivestability. They are often bought to participate in "track days" and sell at much lower prices than the

Porsche/Mercedes/Jaguar. It was predicted in 2007 that, overall, sports car sales in Europe will continue togrow over the next few years, however the recession of 2008/2009 brought an end to this with a fall ofapproximately 20% over this period. 2010 is showing signs of recovery.

DIESEL CAR SALES IN EUROPE

As the advantages of diesel over petrol, petrol-electric hybrid and LPG increased with improved technology, sothe market share of diesels grew from 22% in 1996 to 32% in 2000, 43% in 2003, 47% in 2004 and 49% in 2005and well over 50% in 2009/2010. It is predicted that this trend will continue with the percentage sale of petrolfuelled cars falling to 37.1% by 2015. There are a number of reasons for the growing popularity of diesel-fuelledcars:

They are superior to petrol-consuming models in terms of fuel efficiency, an advantage that wasconsolidated by the introduction of direct-injection car diesel engines and turbocharging and then takenforward by Common Rail technology when invented by Fiat in 1997 and licensed widely.

A diesel engine is 25% more efficient than an equivalent petrol engine, this directly translates intoreductions in carbon dioxide emissions, a very important factor as increasing global legislation demandslower vehicle and greenhouse gas emissions.

The world's liquid fossil fuel resources are diminishing; recent price rises act as a reminder.

Indirectly, improved efficiency means that fewer shiploads of petroleum need to be transported, resultingin less transportation linked pollution.

Politically, European governments see an advantage in encouraging development of diesel enginesbecause it keeps their car makers ahead of the US and Japanese competition - both nations are anti-diesel, in America people care little about saving fuel and in Japan they push for petrol-electric hybridsas most of their travelling is short-distance, in congested cities, and not least of all Toyota and Hondahave both invested in developing hybrid technology. However, both Toyota and Honda are launchingnew diesel models into Europe and the USA, suggesting recognition that this is the way forward, and theUS Environment Protection Agency has developed a diesel engine that will meet near zero emissionstandards as the country moves to becoming a net oil importer and sees the need to encourage the useof diesel instead of petrol.

As a result, all manufacturers are stepping up diesel engine development and offering it as an alternative for

more and more models. The biggest block is the limited availability of diesel fuel stations in the USA, though thisis slowly improving. So far the largest growth area for diesels has been the executive and medium car sectors,with diesels accounting for half the executive cars sold in some countries, and nearly 40% of the total UKmarket. However, as petrol costs have risen, the leading manufacturers are targeting the younger generationand are increasing the availability of diesel engines for smaller cars.


18/18

NEW TECHNOLOGY : ALTERNATIVE FUELS AND ELECTRIC CARS

Emerging competition for both diesel and petrol/gasoline fuels is in the form of renewables, ethanol or plant oilbased fuels. These can be blended with both diesel and petrol/gasoline but there are concerns over the overallenvironmental impact of these materials. New cleaner biofuels are predicted to be a significant growth area.

Prompted by concern about atmospheric pollution, global warming and a decrease in fuel sources,manufacturers have been researching alternative power systems for some time. A KPMG survey predicted that

for 84% of consumers, fuel efficiency will be a key factor in the next 5 years.

Alternative fuels, e.g. compressed natural gas, while lowering emission levels significantly give rise to vehiclesthat are more expensive than equivalent petrol powered counterparts, less powerful and have a much shorterrange than petrol or diesel powered vehicles. The fuel is cheaper but the cost of building a commercialrefuelling unit is almost twice that of a petrol refuelling unit due to high equipment costs. Liquid alternatives topetrol such as methanol and ethanol can be supplied using equipment similar to a petrol pump but have otherdrawbacks. Methanol, while having very low emissions, is corrosive, conducts electricity and very dangerous inaccidents and ethanol suffers as there is still a limited infrastructure to make or deliver it to the motorist andthere are increasing concerns about its overall environmental impact, particularly on food prices.

Liquefied petroleum gas is one readily available alternative fuel, with one million cars running on it worldwide. It

is cheaper than petrol/gasoline and has a relatively high energy content but only gives slightly loweredemissions so is seen as a compromise rather than a solution. Most cars can be converted to run on LPG, itsmain benefit is fuel efficiency and therefore is mostly used for vehicles with a high petrol consumption. In theUS in 2005, the number of vehicles running on alternative fuels was just over 8.3 million. A further 700,000 weresold in the first half of 2006 but the proportion of alternative fuel cars in the US is still under 4% of over 230mcars on the road. In the sunshine belt of the USA ethanol is blended with gasoline (10-15%) to reduce gasolineusage. It is not universally popular due to the increase in fuel consumption.

Electric cars are politically backed in many European countries and the US. Improvements in battery technologyis encouraging many more manufacturers to put electric cars into major production. At the end of 2005, theNorwegian company Think Nordic launched a new concept, a plastic-bodied electric vehicle called Think -primarily for use in cities. The concept has gone down well and expansion into several European cities is

ongoing, along with plans for manufacture in the US. It is the first electric car to seat four people and have areasonable amount of baggage space. It has a top speed of 30 mph (50 km/hr) and a range of 60 miles(100 km). The company aims to sell approximately 5,000 units annually. Another company, Tesla Inc. of theUSA, launched an electric car at the top end of the luxury sports car market. Based on a Lotus Elise chassisand selling at $100,000 it has done well, particularly with Hollywoods green celebrities. Their second model, a4 seater, is due out soon.

AUTOMATION

The use of robots in manufacturing industry has continued to grow steadily, driven more by the quality benefitsthan the original idea of manpower replacement for dirty and repetitive work. The following table gives abreakdown of the total number of installed industrial robots in the major industrial nations approximately 40% of

which are presently involved in automobile production.

First manufactured by Unimation in 1962 and based on an invention by George Devol, the use of industrialrobots initially spread quite slowly. The Stanford arm, invented in 1969, expanded use in automotive with thePUMA name being the best known unit of this genre. The Japanese took a strong interest in the late 70s andnow over two thirds of the world's industrial robots are made and used in Japan; where robotic applicationscontinue to expand in the manufacturing industries. This technology has spread in South East Asia and Koreain particular has a fast expanding robotics use. In the USA the growth rate has slowed and industrialists arelooking for significant improvements in the technological skills of robots. This is emerging, with new machinesnow capable of carrying out complex surgical procedures.

Advances in robot assembly lines continue to be evolutionary than revolutionary as smaller, nimbler robots

provide the flexibility required for a truly successful assembly line, the aluminium Audi A8 saloon car assemblyline being a case in point. It is estimated that it takes between two and three years to recoup the cost ofinstalling automation. The best results come from an integrated use of robots alongside humans, with robotsworking on the monotonous, strenuous and dangerous tasks, as well as some of the more intricate work onelectronic components. The number of robots in the industry will continue to grow, perhaps most significantly in

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