IT S WHAT S INSIDE. Automotive Industry Outlook: Navigating the Waters of Investment, Trade and Execution. Presented by

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1 IT S WHAT S INSIDE Automotive Industry Outlook: Navigating the Waters of Investment, Trade and Execution Mike Wall Executive Director, Automotive Analysis mike.wall@ihsmarkit.com Direct Mobile

2 BIG PICTURE: GLOBAL AUTO OUTLOOK IMPLICATIONS FOR THE GLOBAL AUTOMOTIVE INDUSTRY Counter-synchronization of auto sales cycles across world regions continues with emerging markets and developed markets on opposite waves; wave amplitude likely to dissipate in time Risk of broad retreat from globalization Trump, Mexico, China Brexit, Eurozone Increased risk of new disruptive business models breaking the forecast Risk of longer-term planning volatilities uncertainties hurt longterm planning

3 GLOBAL ECONOMIC GROWTH GLOBAL ECONOMIC GROWTH IS PEAKING AND VULNERABLE; TRADE TENSIONS COULD DAMPEN OUTLOOK Annual Real GDP Growth (in percent) World Average 2018 = 3.2% -6.0 World Source: IHS Markit Data Insight United States Japan Eurozone Brazil Russia India China

4 HOW DO EXPANSIONS TYPICALLY END? Bubbles build and burst Supply/commodity price shocks Financial minefield/meltdown Policy mistakes Central banks tighten too little at first and then too aggressively or too fast or impose credit controls Ill-timed fiscal stimulus or austerity External shocks (e.g., China) Geopolitics Low-probability, high-impact events Interdependent risks Overlay multiple causes

5 GLOBAL LIGHT VEHICLE SALES MARKET TO APPROACH 100 MILLION BY 2021; MOBILITY DYNAMICS DRIVE SLOWER GROWTH LONG TERM Annual light vehicle sales (millions) Average growth 3.3% Growth rate peaks - downhill from here % 4.0% 3.0% 2.0% 1.0% Annual growth (%) % Source: IHS Markit Light Vehicle Sales Forecasts

6 THE CHANGING AUTOMOTIVE WORLD EMERGING MARKETS OUTLOOK IS KEY TO GROWTH; LIMITED POTENTIAL IN MATURE MARKETS Mature Markets China Emerging Markets Annual Light Vehicle Sale (in millions) Market Growth 2011-' ' '25 Mature 13% 9% -3% China 31% 21% 20% Emerging 3% -3% 48% Note: Mature Markets = US, Canada, Japan, S Korea, Australia, New Zealand, Western Europe Source: IHS Markit Light Vehicle Sales Forecast

7 GLOBAL LIGHT VEHICLE PRODUCTION GROWTH SLOWS AS SOUTH ASIA AND SOUTH AMERICA IS OFFSET BY WEAKNESS IN EUROPE AND CHINA , ,000 74,000 7,000 7,000-47, ,000 Production (millions) million 95.2 million +0.7% 95.9 million South Asia South America ME/ Africa Europe Greater China North America Japan/ Korea 2018 Source: IHS Markit Light Vehicle Production Forecast

8 GLOBAL PRODUCTION GROWTH TRANSITION FROM MATURE MARKETS TO EMERGING MARKETS INTENSIFIES million 110 Millions Greater China South Asia 4.7 Millions Europe South America million North America Middle East/Africa Japan/Korea Source: IHS Markit Light Vehicle Production Forecast

9 TRADE DISRUPTIONS Section 232 Steel/Aluminum Tariffs Steel and aluminum prices have risen due to higher import costs and real inflation by domestic producers Higher prices are expected to extend into early 2019 upon resolution of various trade agreements Importer of record bears the tariff suppliers need to beware Section 232 Auto Parts and Light Vehicle Tariffs Possible announcement by late 2018 with implementation depending upon the state of various trade deals (will likely stretch into 2019) Parts/vehicle tariffs could range from 15-25% depending on subsystem and country source Little ability to make short/medium-term course corrections all players are exposed NAFTA Renegotiation (USMCA) Mexican election resolution allowed for continued negotiations/acceleration Complete resolution and ratification of USMCA by three countries not expected until 2019 due to US midterm elections/mexican party control China Tariffs (Section 301) Initial $34B China molds & check fixtures (not dies) are impacted by a 25% tariff which started in early July; additional $16B was imposed Recently announced $200B tariffs capture the balance of auto parts OEM and Tier 1 customers may not modify POs to compensate for additional costs Impact 232 Steel/Aluminum Auto manufacturing PPI rose to a rate of 3% before Can/Mex Steel/Alum tariffs Steel PPI up 16% since March 1 expected to rise further 232 Parts/Vehicle Tariffs Average US-made vehicle: +~$1,800 Average all mass market brands: +~3,300 Average all premium brands: +~5,800 Possible loss of 1.4 to 2.0+ million vehicles on an annualized basis depending on the extent of tariff actions

10 US LIGHT VEHICLE SALES SCENARIOS SALES TO FALL DRAMATICALLY IF SECTION 232 IS FULLY IMPLEMENTED Sales (millions) United States Light Vehicle Sales by Scenario Source: IHS Markit Base EU only World excl. NAFTA World incl. NAFTA 2018 IHS Markit Deviation from base 0.0% -5.0% -10.0% Sales Deviation from Base % Source: IHS Markit EU only World excl. NAFTA World incl. NAFTA 2018 IHS Markit

11 MEET THE NEW NAFTA KEY CHANGES TO THE AUTO SECTOR UNDER THE USMCA Regional Value Content for light vehicles to increase from 62.5% to 75% by 2023 or 3 years after agreement ratified, whichever comes later Regional Value Content for Core parts to increase from 62.5% to 75% by 2023 or 3 years after agreement ratified, whichever comes later. (Lithium-ion batteries exempt from three year phase-in) Canada and Mexico effectively exempt if US does impose Section 232 tariffs on the automotive sector. Passenger vehicle quota set at 2.6 million units for each country, pickup trucks are exempt completely and parts value far exceeds current export levels. Labor Value Content to increase to 40% for passenger cars by 2023 (45% for light trucks). Wages must be at least $16/hour but include breakdowns for manufacturing, information technology and research and development. Incudes protections for worker rights. 16 year lifespan with option to renew for additional 16 years. After ratification, parties will conduct a joint review after 6 years to determine if the deal will be extended. If extended, another joint review within 6 years, if not, review annually through first 16 year term. 70% of steel and aluminum sourced from North America. No action on removing Canada or Mexico from US Section 232 steel and aluminum tariffs.

12 CHINA 301 TARIFFS LIMITED EXPOSURE TO NEW VEHICLE MARKET, MORE MATERIAL FOR AFTERMARKET The United States has imposed tariffs on $250 billion of Chinese imports in response to Chinese policies that coerce US companies into transferring their intellectual property to domestic Chinese enterprises. First round: $50 billion at 25% on industries such as automotive, aerospace, information and communication technology, and machinery. Second round: $200 billion at 10% on broad range of consumer and industrial categories. Tariffs rise to 25% on 1 January Third round (potential): $ billion on all remaining China imports. Chinese retaliation of 25% tariff on $110 billion of US imports including soybeans, automobiles, chemicals, and aircraft. US manufacturers now face a 40% effective tariff exporting to China.

13 CHINA 301 TARIFFS APPLIED TO 145 AUTOMOTIVE HARMONIZED TARIFF SCHEDULE CATEGORIES INCLUDING CORE, PRINCIPAL AND COMPLEMENTARY PARTS Principal Components by Country Vietnam India United Kingdom Italy Taiwan France Others Thailand Mexico USD33.97 South Korea USD5.95 Germany USD7.05 Japan USD10.58 China USD20.07 Canada USD12.16 Source: IHS Markit 2018 IHS Markit

14 US: LIGHT VEHICLE SALES OUTLOOK GAUGING THE HEALTH OF THE MARKET Consumer confidence Tax reform Economic growth Job growth Credit availability Vehicle fleet age/ composition Wage growth Incentives vs. average transaction prices: can the discipline be maintained? Scrap rate/vehicle density Tariff/trade tension Fed action/ interest rates Risk of policy mistakes Lease returns/ used vehicle pricing/residuals Vehicle affordability pressures

15 US: LIGHT VEHICLE SALES OUTLOOK MARKET SHIFTING TO DECLINING PLATEAU ; MOBILITY DYNAMICS FACTOR IN LONGER TERM Annual Sales, millions Post market peak: weaker buying conditions, slower job creation, affordability driven by higher interest rates, legislated content and urbanization slows momentum US Light Vehicle Sales Forecast Car 17.6m 17.5m 17.2m 16.5m 11.9m Light Truck 5.2m m Source: IHS Markit Light Vehicle Sales Forecast

16 US: LIGHT VEHICLE SALES OUTLOOK PLANNING FOR ALTERNATIVE SCENARIOS Positives Consumer confidence Economic growth Housing recovery Job growth Credit Availability Negatives New & used vehicle pricing Off lease returns Incentives Longer loan terms Interest rate outlook Uncertainty Mill. of units, annual rate Light Vehicle Sales (Quarterly SAAR) Baseline (60%) Pessimistic (25%) Optimistic (15%) Source: IHS Markit

17 NORTH AMERICA VEHICLE PRODUCTION MODEST DECLINES AHEAD BEFORE RETURN TO GROWTH Millions North America Production Production volume Source: IHS Markit 2018 IHS Markit Short-term pain, long-term gain Finding balance Incentives Fleet Inventory Production planning Quality versus quantity Growth due to localization and portfolio expansion 2019 = 850,000 units of total 2020 = 906,000 units of total 2021 = 1.1 million units of total Off-shoring Cancellations Backfilling

18 NORTH AMERICA VEHICLE PRODUCTION LIGHT VEHICLE PRODUCTION BY COUNTRY 20 Mexico Canada US Change 50% % Output (millions) % 20% 10% 0% -10% -20% -30% -40% Y-O-Y % Change +412,000 CAGR = 1.3% -425,000 CAGR = -2.7% +734,000 CAGR = 0.8% Source: IHS Markit Light Vehicle Production Forecast

19 NORTH AMERICA VEHICLE PRODUCTION CUSTOMER MIX IS CHANGING; OPPORTUNITY TARGETING IS MORE CRITICAL THAN EVER! North American Production Share 170% CTG NA LV Production (millions) Others 8% Germ 3 10% 2% 18% 3% Asian 4 36% 77% 2000 Det 3 46% % 90% 50% 10% -30% -70% 111% 42% 0% -53% CTG = Contribution to Growth Detroit 3 Asian 4 German 3 Others Asian, German and Other OEM production accelerates with continued localization and new white space products. Detroit 3 production declines due to plant rationalization, competitive intensity and vehicle production sourcing decisions. Source: IHS Markit Light Vehicle Production Forecast

20 NORTH AMERICA VEHICLE PRODUCTION VEHICLE MIX CONTINUES TO CHANGE; SEGMENT TARGETING IS NECESSARY Millions Car Utilities Pickup Cars Struggle; SUVs Soar

21 SUMMARY Multi-speed world creates opportunities and threats Emerging markets help offset the lackluster growth presented by mature markets but volatility is a concern near-term; Brexit impact on Europe and peak vs. plateau for US remain in focus. Trade tensions pose a material risk in the near-term, reinforcing the need for ongoing planning around a variety of scenarios. Influx of new product offerings creates margin pressure for weaker players competition will only intensify, yet opportunity targeting is critical! Technology serves as a key differentiator for automakers and suppliers Opportunities exist in areas of ADAS, Infotainment, Powertrain and Lightweighting, among others. Sustainable profit paths are even more vital in a hyper-competitive and volatile marketplace Increased activity around both strategic acquisitions and divestitures resulting in more focused business. Aftermarket remains a compelling profit path and a further differentiator.

22 Get Ready for AAPEX 2018 THANK YOU! Mike Wall Executive Director, Automotive Analysis Direct Mobile F O R M O R E I N F O R M A T I O N a a p e x s h o w. c o m