European Auto OEMs. Figure 1: Ratings summary

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1 Europe Equity Research Automobile Manufacturers Research Analysts Alexander Haissl Fei Teng Specialist Sales: Andrew Bell European Auto OEMs INITIATION Initiating with a cautious view China and Europe key downside risks Cautious sector view we prefer FCA and Renault: We initiate coverage of the European OEM sector with a cautious view, as China and Europe provide downside risk. We view Fiat Chrysler and Renault as best positioned (both Outperform), with FCA our top pick due to its market exposure and Ferrari upside potential. China risk (structural) for VW and BMW is too high for us to be more constructive at this stage; therefore, we rate both Underperform. We view Daimler (Neutral) as best positioned among the German OEMs. PSA (Neutral) offers a solid equity story, but we see limited incremental upside potential from already high expectations. China risks differentiation key: The market in China is undergoing structural changes, with local OEMs gaining meaningful market share (strong model momentum, regional growth trends). In our view, the situation for VW and BMW is unlikely to improve meaningfully, given a lack of SUV model launches. We see Daimler as best positioned among German OEMs, given the launch of its GLA compact SUV. We estimate that China accounts for >40% of German OEMs' earnings, with VW and BMW having the highest risk. We see meaningful upside potential for FCA (Jeep model launches) and PSA (better mix and improved cost efficiencies). Europe we prefer Italy/France exposure to Germany/UK/Spain: We expect growth trends in Europe to show material divergence in the next months. Germany and the UK are likely to decelerate significantly due to slowing commercial fleet activities (>50% of the market). Italy and France screen best in terms of growth from here, driven by increased private consumption. Spain is at risk post government subsidies, and FCA has the best regional exposure in Europe. The regional mix of German OEMs appears weak in this context. We think the outlook for PSA and Renault is relatively solid. Self-help/China differentiation/regional mix: We believe the key drivers of relative outperformance are solid self-help stories combined with low China risks (Renault) and favourable regional mix (FCA). We expect the German OEMs to be held back by their China/Europe exposure. Figure 1: Ratings summary Company CS Rating CS TP Price Up/downside MC m Free float P/E (16E) FCA O % 16, % 7.4x Renault O % 26, % 6.9x Daimler N % 88, % 10.1x Peugeot N % 14, % 11.3x BMW U % 61, % 9.7x VW U % 97, % 8.1x Priced as of 9 July 2015; Source: Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Key charts: China Figure 2: German OEMs earnings and FCF exposure by company (2015E) 100% 90% 29% 80% 70% 48% 64% 64% 59% 54% 60% 73% 79% 18% 50% 40% 16% 22% 30% 20% 53% 26% 20% 32% 20% 36% 10% 21% 21% 23% 0% 7% 0% 10% 4% DAI EPS DAI FCF BMW EPS BMW FCF VW EPS VW FCF Total EPS Total FCF JV Import Group ex China Royalties are captured in imports Figure 4: SUVs driving growth excluding SUVs, growth expected to be down in 2015E 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% Figure 3: German OEMs impact on earnings and FCF assuming normalised China margins (JV/imports; 2015E) -30.0% -26% -25.0% -21% -20.0% -17% -18% -15.0% -13% -12% -10% -10.0% -8% -5.0% 0.0% DAI EPS DAI FCF BMW EPS BMW FCF VW EPS VW FCF Total EPS Total FCF Figure 5: FCA has strongest SUV ramp-up momentum Mercedes also decent (SUV as % of total local production) 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 0.0% -10.0% SUV growth Market growth Market ex SUV 10.0% 0.0% Volkswagen Mercedes BMW FCA PSA Source: LMC, Credit Suisse research Figure 6: Quality gaps narrow between Chinese local branded cars and foreign branded vehicles 400 Problems per 100 vehicles in first 2-6 months Source: LMC, Credit Suisse research, data reflects local production Figure 7: Pricing & demand under pressure Dealer gross margin dropping sharply 10% New car gross margin - all cars 8% 6% % 2% 0% 4.6% 3.2% 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 Difference Foreign brands Local brands Zhongsheng Baoxin Yongda Zhengtong Average Source: JD Power Source: Company data European Auto OEMs 2

3 2014 Germany UK France Italy Spain Other 2015 Germany UK France Italy Spain Other 2016 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 15 July 2015 Key charts: Europe Figure 8: Europe Market dominated by commercial business >50% in particular Germany and UK (2014) 100% Figure 9: Germany Leasing growth rates slowing; expectations of further deceleration 20.0% 90% 80% 70% 60% 66% 53% 44% 38% 45% 52% 15.0% 10.0% 5.0% 50% 40% Commercial Private 0.0% 30% 20% 10% 0% 62% 56% 55% 48% 48% 34% Germany UK France Italy Spain EU-5-5.0% -10.0% -15.0% Leasing investments YoY Car sales Source: Industry bodies, Credit Suisse estimates Figure 10: Germany Registrations of dealers and OEMs (without customers) outperformed the market in 1H15 25% 20% 15% 10% 5% 0% -5% -10% -15% YoY% change in registrations Dealer & OEM "selfregistrations" outperform Source: BDL, Credit Suisse research Figure 11: UK Commercial used fleet prices on downwards trend % 10.0% 5.0% 0.0% -5.0% -10.0% Manufacturers & dealers Market Average selling prices in YoY Change Source: Dataforce, Credit Suisse research Figure 12: Europe country mix by OEM Mix of German names subdued versus FCA/PSA/Renault (2014) 100% Source: National Association of Motor Auctions (NAMA), Credit Suisse research Figure 13: Growth in Europe expected to slow Italy and France to show strongest growth % 80% 70% 60% 50% 40% 30% 20% Other Europe Spain Italy France UK Germany % % % % VW BMW Daimler FCA Renault PSA Source: Industry bodies, Credit Suisse research Note: In units thousands; growth rate for EU-28 Source: Industry bodies, Credit Suisse estimates European Auto OEMs 3

4 Table of contents Executive summary 5 Stock calls 8 Ratings and target price summary 11 Credit Suisse global car sales forecasts 16 CS global OEM valuation table 17 Europe: Key markets likely to decelerate 18 China: Understanding the dynamics 38 Model launch schedule 76 Trucks 78 Fiat Chrysler Automobile (FCHA.MI) 80 Renault (RENA.PA) 98 PSA Peugeot Citroen (PEUP.PA) 116 Volkswagen (VOWG_p.DE) 127 Daimler (DAIGn.DE) 148 BMW (BMWG.DE) 159 Appendix sales data 170 European Auto OEMs 4

5 Executive summary Background and analysis This note focuses on two major themes, which in our view, will drive equities in the next months: Structural challenges in China and deteriorating growth in Europe. First, we provide a detailed analysis of the Chinese market and its structural challenges for European JVs. Performance divergence among the JVs is likely to widen meaningfully, as model momentum (SUVs) is key. VW and BMW look structurally challenged, given lack of new model launches. On the other hand, China still provides decent growth prospects for Daimler, FCA or PSA. Second, we analyse growth drivers for the European market. We think it is essential to understand the market structure (commercial fleet versus private sales), as growth among the countries is likely to show material divergence in coming years. We expect growth in Germany and the UK to lag behind Italy and France, as we expect commercial fleet activities to slow; on the other hand, private consumption in Italy and France looks solid. Spain offers the largest downside risk after the potential phase-out of subsidies in 1Q16. China summary Challenges and opportunities Structural changes SUVs driving growth: Growth in China is trending towards lower tier/income cities with relatively low car density. First-time buyers in this market typically prefer local brands for cost reasons. Government subsidies as well as anti-corruption measures support this trend towards local brands and away from JVs. A key driver for market share gains of local brands is the ongoing shift towards SUVs with local players showing strong model momentum versus foreign JVs (quality gaps also materially narrowed). These changes in market dynamics are also reflected in the relationship between dealers and OEMs, with negotiating power increasingly shifting towards dealers. Model mix Daimler/FCA best positioned, VW/BMW challenged: Differentiation between the OEMs is key, as SUVs are likely to gain market share in coming years. Among the German OEMs, Daimler is best positioned owing to its new model launches, which enables it to outpace its German peers. From here, we see the biggest incremental upside potential for FCA in China given the ramp-up of Jeep models. We are cautious on VW's and BMW's JVs as both companies lack new SUV model launches in the next months. The outlook for PSA is likely also solid in this market environment, given new SUV model launches. German OEMs overly dependent on China: We estimate that China accounts for c.41% of profits and c.46% of industrial free cash flow for German OEMs. Volkswagen has the highest risk both on earnings and free cash flow, with China accounting for 52% of net income and 71% of free cash flow (largely JV). Daimler looks most resilient, both on earnings and free cash flow, with 27% and 21%, respectively from China. For BMW, the risk is significant, with China representing c.36% of earnings and cash flow. Assuming that margins in China normalize in coming years, we estimate that this would reduce aggregated earnings by 17% (VW -21%, BMW -12%, Daimler -8%). We estimate the impact on sector FCF would be -18%. Opportunities for FCA and PSA in China: Changing trends in China do not necessarily mean there is no upside potential. In contrast to VW and BMW, for FCA, we see meaningful upside given new Jeep model launches. Strong volume growth combined with improved mix should result in significant contributions from its JV. We also see upside potential for PSA in China as improved mix combined with cost efficiencies provide selfhelp in China, which should allow some margin expansion in a slowing environment. The risk for PSA is via its Faurecia stake, which makes up the vast majority of China sales (consolidated). European Auto OEMs 5

6 Industry utilisation rates to fall: Capacity growth in China is expected to slow, but additions still outpace demand growth, which implies that overall utilisation rates are set to decline from here. The impact is expected to be most severe in lower-growth segments (eg, sedan). Slower volume growth for certain segments combined with further capacity additions are expected to keep pricing under pressure. Europe exposure prefer Italy/France to Germany/UK/Spain Germany and the UK are the main drivers of a slowdown in growth: We expect growth momentum in Europe to slow meaningfully in the coming months, driven largely by slowing momentum in Germany and the UK. Both countries are heavily skewed towards commercial fleet business (>50%), which is closely linked to leasing activities and fleet buying. The first signs of slowing growth in Germany (slowing leasing market and increased dealer/oem self-registrations) and the UK (weaker pricing) are already visible. Solid development of private consumption in Italy and France are unlikely to compensate for slowing German and UK markets. Germany few signs of lower growth visible: The German market is dominated by commercial fleet business, accounting for two-thirds of the total size. Growth in Germany is driven entirely by commercial as private sales continue to decline. Recovery in the commercial activities are a function of a turnaround in the leasing market that started in 4Q13 (leasing penetration rate 37%). After recording 6% growth in 2014, the leasing market's growth is expected to decelerate to 3-4% in 2015, according to BDL. Dealer and OEMs' "self-registrations" are materially outgrowing the market in 2015, which implies that underlying demand is weaker than headline figures suggest. UK fleet pricing started to deteriorate: The UK market has experienced impressive growth since 2011, mainly due to a sharp recovery in the UK leasing market, which recorded 10% CAGR for the period Sales growth in January to June 2015 has been driven largely by commercial fleet business (53% of total) as private growth has slowed to around 2% versus 7% growth for overall market. Interestingly, fleet prices (used vehicles at auctions) have been weak since February with three out of four months showing negative YoY price development. France private consumption could provide tailwinds: The French car market is still dominated by private consumption, accounting for 56% of total. The higher market share of private versus commercial is the main reason for the French market's underperformance versus Germany and the UK. Our analysis shows that French private consumption recorded negative growth rates in 2014, but has started to recover in The old installed car fleet, with average age close to 9 years, should provide support for private consumption. We expect French car sales growth of 5.6% in 2016E, outperforming Germany and the UK. Italy leasing turnaround and rental replacement main drivers: From a fundamental perspective, the Italian car market is the most interesting, in our view. Contrary to Germany and the UK, the Italian leasing market has just started its recovery (2013 leasing market still 45% below the 2009 level). First, leasing for business use started to recover in 2014 (up 13% YoY) and accelerated its growth in the first half of the 2015 (up 17% YoY). Private leasing also meaningfully accelerated in 1H15 (up 19% YoY). Second, we see upside potential for the rental market (20% of the total market), given underinvestment over the past few years which is now likely to trigger a replacement cycle. Spain downside post subsidies (PIVE): Growth in Spain has been driven almost entirely by government subsidies (PIVE). Implemented in October 2012, the PIVE programme was extended several times and Phase 8 was recently approved by the government. We estimate that the government spent around 1.12bn to scrap 1.2m cars, which represents 43% of total sales since PIVE 8 would provide 225m for 300,000 cars to provide support for the market into 1Q16, but we believe the risk of a market setback thereafter is high. We forecast -6% in 2016E after +19% in 2015E. European Auto OEMs 6

7 FCA best regional mix in Europe mix of German OEMs subdued: FCA's regional mix screens most attractive given its exposure to Italy, and also France. The regional mix of German OEMs looks poor, given high exposure to Germany and the UK. We believe the biggest downside risk from a slowing commercial fleet market in Europe is for VW, as its share in this market is disproportionately high versus its peers. The major regional risk for Renault (Dacia) is Spain, as the company has been the main beneficiary of government incentives since European Auto OEMs 7

8 Stock calls FCA Outperform, 18.3 target price More than just Ferrari upside potential We initiate coverage of FCA with an Outperform rating and 18.3 target price, as we think the market likely underestimates the value of Ferrari. In our sum-of-the parts for FCA, we calculate a DCF valuation for Ferrari of 10.5bn (or 6.3/share of our FCA target price). This is roughly in line with CEO Sergio Marchionne's recent remarks of "at least" 10bn (Bloomberg, 3 July 2015) but well above the market expectations of bn the company cited in a Ferrari presentation in May Although we use a DCF to value Ferrari within our FCA SOTP, given that it is not geared to the automotive cycle and has extraordinary pricing power, with strong cash conversion and brand value, we think it could also be valued in line with the top end of luxury goods companies. In our scenario analysis, we apply a multiple near the top end of the luxury goods sector (above 20x EV/EBIT), which also indicates a valuation above 10bn. In addition to the potential upside from Ferrari, we see FCA better positioned versus peers in key markets such as Europe, NAFTA and China in terms of incremental earnings growth from here. For the NAFTA region, we expect margins to gradually improve, driven by better volumes and some upside for mix and pricing. However, we do not expect the gap versus GM and Ford to be closed entirely, given its different cost structure. A merger of FCA with GM or Ford looks rather unlikely at this stage, given the lack of sufficient realizable cost synergies, in our view. A result of strong market dynamics (currently) in the US combined with other associated risks, provides another hurdle for near-term consolidation. Longer-term it remains a possibility, as the industrial logic is evident. We view FCA's China market position as strong with the ramp up of new Jeep models, which eventually should likely result in positive equity contributions from the JV. Based on our SOTP model, more than 80% of the EV is captured by Ferrari, the NAFTA business and Maserati. Renault Outperform, 116 target price Defensive way to invest in European recovery potential We initiate coverage with an Outperform rating and 116 target price, as Renault offers a defensive way to invest in Europe without having any meaningful risk coming from China. While we see the environment for Dacia becoming structurally more challenging in the coming years, there is still some near-term upside potential with regards to market share gains in certain countries and segments. Credible cost savings and synergies with Nissan provide another lever for profit growth. We estimate that Dacia's low cost production footprint combined with effective pricing strategy likely implies operating margins above 10%. The low hanging fruit for the business model has likely been achieved, but we see upside for market share gains in countries like Italy or the UK in which the brand is unrepresented. Volume upside could also come from expansion into the fleet business, which could compensate for limited upside in countries like France, Germany or Spain. Spain provides downside risk following the end of the incentive programme, as Dacia was the main beneficiary in the country (market share doubled). The improved volume outlook for the Renault brand combined with cost savings and synergies are expected to drive operational improvements of the Renault brand in coming years. Actions taken by the company have already started to pay off, but we see more upside potential versus market expectations. European Auto OEMs 8

9 Daimler Neutral, 86 target price Resilient to China, but trucks and mix in Europe provide downside risk We initiate coverage of Daimler with a Neutral rating and 86 target price. Moreover, Daimler is also our most preferred name among the German OEMs. The main reason for our relative preference over VW and BMW is Daimler's better position in China. The company has strong model momentum in the region with the ramp-up of new models. Product mix in China is skewed towards the fast-growing SUV segment, which enables meaningful outperformance versus German peers. Earnings and FCF in China are materially lower at 27% and 21%, respectively. We estimate that normalised margins in China could have a negative earnings impact of c.8%, which is manageable. Our main reason for not being more constructive at this stage is a slowing NAFTA truck market and slowing growth in key car markets in Europe (Germany and the UK). The US truck tonnage index (ATA) has shown deterioration since the beginning of 2015, reaching a 9-month low in April. Our more cautious view on Europe and trucks puts our forecast c.7% below consensus for 2016E. Given our expectation of an earnings downgrade cycle, a further re-rating is unlikely, in our view. We expect its valuation premium compared to VW and BMW to widen further, once the market starts to price a more realistic China scenario for the sector. PSA Neutral, 19.1 target price Decent equity story, but well understood We initiate coverage of PSA with a Neutral rating and 19.1 target price, as incremental upside surprise versus market expectations seems limited. The relative re-rating versus the sector over the past few months was justified, given strong management execution which improved the fundamental outlook for the company meaningfully. The majority of "Back in the Race" savings could be derived from lower R&D costs and European fixed costs. Personnel cost reductions are also significant in E but could diminish in E owing to higher production volumes. Overall, we see cumulative gains of 2.6% of sales between E, which would by drive the automotive margin above PSA's 2% target, excluding any positive impact from price/mix. This implies some buffer in PSA's targets. In our view, gains from working capital reduction are limited from here. In China, we see margin upside potential for PSA driven by improved mix and cost efficiencies. We would not call these savings low hanging fruits, but given strong execution in Europe, upside potential looks more than realistic. The solid capital structure of its Dongfeng JV allows a material step-up in dividend payments, which bodes well for PSA's cash flow generation. Cooperation with Santander for PSA's financial services business is likely to create meaningful value, as the structure of the JV likely accelerates earnings growth. Moreover, the JV offers better margins for the automotive business and results in high cash inflow of 1.5bn, which would more than cover PSA's restructuring costs. European Auto OEMs 9

10 BMW Underperform, 94 target price Headwinds from several directions We initiate coverage of BMW with an Underperform rating and 94 target price, as we see material earnings downside risk from China, but also from slowing core markets in Europe. The China story is better understood, but likely still underestimated by the market. Model momentum in China looks set to remain weak with no meaningful ramp-up in the fast growing SUV segment. We estimate that c.36% of our 2015E EPS forecast is coming from BMW's activities in China with 26% coming from imports. The potential impact on cash flow is similar. Among the German OEMs, BMW faces the highest risk from imports. Assuming a normalisation of margins in China (imports and JV) would reduce our 2015E base-case EPS by around 12%. In addition to China, we see earnings downside risk from slowing momentum in European core markets. More than 25% of volumes are sold in Germany and the UK, which are the markets we expect to slow down meaningfully, thereby underperforming overall European growth. Outside Europe, we expect lower growth of the US market, which represents >20% of total sales, to limit a more meaningful recovery. We think the stock is unlikely to re-rate from here, given slowing earnings momentum and earnings downside risk associated with China. Our scenario EPS on normalised China contributions stands at 8.61, which implies a P/E above 11x already. Volkswagen Underperform, 200 target price China and Europe provide structural challenges We initiate coverage of VW with an Underperform rating and 200 target price, as we see significant fundamental challenges ahead in China but also Europe. While the departure of former Chairman Piech is seen as an incremental positive by the financial community, we do not expect a more meaningful change in strategy that could create shareholder value. VW likely faces structural problems in China, as the local model mix is poor. Market share in the fast growing SUV segment declined by 400 basis points to 9% in 2015 and is unlikely to improve before 2017 with new model launches. Higher planned investments at JVs combined with lower earnings growth limit pay-outs of JV dividends. Among the German OEMs, China earnings and cash flow risk at VW is the highest (52% of earnings and 71% of FCF). We also think the positive effect of MQB (Modular Toolkit) on profitability is questionable. The margin target >6% for the VW brand by 2018 looks a stretch without meaningful volume growth acceleration in coming years. A deceleration in VW's core markets (Germany, UK) combined with a high share of commercial fleet business likely dampen margin progression. VW's valuation discount to BMW and DAI appears justified, given the overly high dependence on China. Moreover, the market likely overestimates the value of Porsche given its relatively subdued FCF generation and conversion. We estimate Porsche's EV at 20.2bn versus the general market expectation of > 30bn. European Auto OEMs 10

11 Ratings and target price summary Full details to be found in the company sections Our target price methodology for the German OEMs is based on an equally weighted, two-step approach: Multiple-based value on 2016E earnings: For our multiple-based valuation approach we take average P/E ratios from 2010 to-date based on our 2016 earnings forecast. The un-weighted average multiple is 9.0x, with Daimler at 10.1x, BMW at 9.0x and Volkswagen at 8.0x. Relative to the sector and the broader market, we expect the derating to continue. DCF: Our DCF model is based on a five-year forecast period. Our free cash flow assumptions for terminal values are based on our scenario cash flows taking normalised contributions from China. Valuation for FCA, Renault and PSA FCA: We believe the best way to value FCA is through an SOTP analysis; our model yields a fair value of Renault: Our target price for Renault is based on an SOTP and multiple valuation (8.5x 2016E P/E), equally weighted. PSA: Our PSA target price is based on an SOTP valuation and an 8.5x 2016E P/E ratio (equally weighted). Figure 14: Valuation summary and target price methodology FCA Renault Peugeot Daimler Volkswagen BMW Rating Outperform Outperform Neutral Neutral Underperform Underperform Target price Methodology SOTP SOTP and P/E SOTP and P/E P/E and DCF P/E and DCF P/E and DCF Source: Credit Suisse estimates Figure 15: Currency assumptions Euro 1.00 Russia Brazil 3.37 China 7.00 US 1.13 UK 0.74 Japan Canada 1.37 Mexico Indonesia India Source: Thomson Reuters, Credit Suisse research European Auto OEMs 11

12 Key sector and company risks Sector Key upside risks include: Strong-than-expected development of sales growth in China Implementation of incentives in Europe in the event of growth slowing significantly Currency movements meaningful weakness in the euro versus major currencies Key downside risks include: China earnings reaching mean-reversion faster than expected A stronger euro versus major currencies An earlier-than-expected European market slowdown FCA (Outperform; TP 18.3) Key upside risks include: Higher fair value for Ferrari Stronger performance of core markets, the US and LatAm in particular Potential consolidation Key downside risks include: Risks associated with Ferrari IPO valuation A meaningful deceleration, particularly in the US, could put pressure on earnings/fcf Ongoing high capex in a potentially slowing environment Renault (Outperform; TP 116) Key upside risks include: Higher cost savings and synergies from co-operations Market share gains (e.g., in Italy or the UK for Dacia) Expansion of Dacia into the commercial fleet market Key downside risks include: Increased competition in emerging markets Cost inflation and negative currency development (BRL) Material declining volumes in Spain post its subsidy programme European Auto OEMs 12

13 PSA (Neutral; TP 19.1) Key upside risks include: Higher-than-expected savings from "Back in the Race" Better-than-expected pricing environment More meaningful margin progression in China Key downside risks include: Material deterioration of key end markets Worse-than-expected pricing Lower-than-expected savings from "Back in the Race" Daimler (Neutral; TP 86) Key upside risks include: Stronger-than-expected truck cycle in the US Streamlining of dealerships Stronger-than-expected Mercedes model cycle Key downside risks include Faster slowdown in key regions, particularly Germany, the UK and the US Faster slowdown in truck cycle in the US Weaker development of imports into China European Auto OEMs 13

14 Volkswagen (Underperform; TP 200) Key upside risks include: Portfolio optimisation (divestments) Stronger-than-expected development in China (JVs and imports) Higher-than-expected cost savings (MQB) Key downside risks include: A more pronounced slowdown in China (JVs and imports) Any value-destructive M&A A turnaround in the US taking longer than expected BMW (Underperform; TP 94) Key upside risks include: Better model momentum that translates into higher margins China imports holding up better than expected Stronger performance of core markets, such as Germany, the UK or the US Key downside risks include: Higher pressure on Chinese imports Worse-than-expected model cycle Market share losses European Auto OEMs 14

15 Credit Suisse versus consensus Figure 16: Credit Suisse estimates vs IBES consensus m except EPS ( ) Sales EBITDA EBIT EPS E 2016E 2017E E 2016E 2017E E 2016E 2017E E 2016E 2017E BMW - CS 80,401 89,320 90,917 92,357 13,441 14,611 14,688 14,650 9,118 10,045 10,045 9, BMW - IBES 86,807 90,577 94,467 14,703 15,503 16,544 9,179 9,658 9, CS vs. IBES +2.9% +0.4% -2.2% -0.6% -5.3% -11.5% +9.4% +4.0% -0.3% +2.5% -5.4% -10.3% Daimler - CS 129, , , ,638 14,387 17,717 18,521 18,296 9,388 12,276 12,979 12, Daimler - IBES 142, , ,850 18,267 20,078 20,784 12,268 13,709 14, CS vs. IBES +2.0% -0.5% -2.7% -3.0% -7.8% -12.0% +0.1% -5.3% -13.8% -1.2% -6.5% -15.2% FCA - CS 96, , , ,703 8,548 10,478 11,681 12,714 3,651 4,798 5,805 6, FCA - IBES 109, , ,004 9,691 11,062 12,258 4,369 5,149 6, CS vs. IBES +0.8% -1.0% -2.7% +8.1% +5.6% +3.7% +9.8% +12.8% +9.2% +19.9% +26.9% +21.9% Peugeot - CS 53,607 55,531 57,413 59,217 3,435 4,463 5,188 5, ,973 2,619 2, Peugeot - IBES 55,832 57,678 59,355 4,152 4,649 5,099 1,758 2,157 2, CS vs. IBES -0.5% -0.5% -0.2% +7.5% +11.6% +6.1% +12.3% +21.4% +13.5% -18.7% -4.7% -14.9% Renault - CS 41,055 43,864 44,431 45,801 4,320 5,548 6,229 6,611 1,609 2,596 3,238 3, Renault - IBES 43,673 46,738 49,503 4,797 5,490 5,594 2,157 2,626 3, CS vs. IBES +0.4% -4.9% -7.5% +15.7% +13.5% +18.2% +20.4% +23.3% +10.1% +9.8% +9.4% +4.1% Volkswagen - CS 202, , , ,994 29,488 32,390 33,732 34,912 12,697 14,305 15,189 15, Volkswagen - IBES 211, , ,485 28,044 30,890 33,732 13,716 15,624 17, CS vs. IBES +0.8% -0.9% -3.2% +15.5% +9.2% +3.5% +4.3% -2.8% -9.4% +1.4% -7.0% -12.9% Source: Thomson Reuters, Credit Suisse estimates European Auto OEMs 15

16 Credit Suisse global car sales forecasts Figure 17: Credit Suisse global car sales forecasts Unit sales (m) YoY% E E 2016E 2017E E 2016E 2017E CAGR CAGR China % 5.8% 4.1% 4.0% 14.5% 4.6% Japan % -4.0% -0.2% -0.2% 9.7% -1.5% India % 5.0% 10.0% 10.0% -1.7% 8.3% Korea % 1.0% 1.0% 1.0% 1.3% 1.0% Core Asia % 3.5% 3.5% 3.5% 11.1% 3.5% Canada % 2.3% 2.0% 0.5% 3.5% 1.6% US % 1.9% -1.8% 0.5% 8.9% 0.2% Mexico % 2.3% 2.0% 0.5% 7.5% 1.6% N. America % 2.0% -1.5% 0.5% 8.6% 0.3% Brazil % -15.0% -5.0% 5.0% -1.0% -5.4% Argentina % -15.0% -5.0% 5.0% -10.6% -5.4% Core LatAm % -15.0% -5.0% 5.0% -3.2% -5.4% France % 6.4% 5.6% 3.9% -6.6% 5.3% Germany % 3.2% 1.1% 1.6% -1.5% 2.0% Italy % 10.7% 7.3% 5.4% -8.0% 7.8% Spain % 19.0% -6.0% -6.5% 1.9% 1.5% UK % 2.3% 0.5% 1.3% 8.5% 1.4% W. Europe (EU-15 + EFTA) % 5.9% 2.2% 2.0% -1.9% 3.3% EU-12 new members % 6.1% 6.4% 5.0% 4.7% 5.8% Total Europe (EU-28 + EFTA) % 5.9% 2.5% 2.2% -1.5% 3.5% Russia % -35.0% 10.0% 5.0% -2.0% -9.1% Other % 4.9% 4.9% 3.2% 3.3% 4.3% Grand Total % 1.7% 2.2% 2.6% 5.6% 2.2% Source: Industry bodies, Credit Suisse estimates European Auto OEMs 16

17 CS global OEM valuation table Figure 18: Credit Suisse global OEM valuation Price MC Rating CS TP m European OEMs Industrial EV/EBITDA (x) Industrial EV/EBIT (x) P/E (x) E 2016E 2017E E 2016E 2017E E 2016E 2017E BMW ,568 U Daimler ,699 N FCA ,588 O Peugeot ,909 N NM Renault ,970 O Volkswagen ,889 U Average US OEMs $ $ Industrial EV/EBITDA (x) Industrial EV/EBIT (x) P/E (x) E 2017E E 2017E E 2017E Ford ,520 N GM ,168 U Average Japan OEMs Industrial EV/EBITDA (x) Industrial EV/EBIT (x) P/E (x) FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E Daihatsu 1, ,269 U 1, Fuji Heavy 4, ,212 O 5, Honda 3, ,632 N 4, Mazda 2, ,453 O 3, Mitsubishi 1, ,291 O 1, Nissan 1, ,180 N 1, Suzuki 4, ,372 N 3, Toyota 7, ,610 O 10, Average Korea OEMs EV/EBITDA (x) EV/EBIT (x) P/E (x) E 2016E 2017E E 2016E 2017E E 2016E 2017E Hyundai 124,000 26,080 N 150, Kia 40,800 13,103 N 48, Average China OEMs HK$ HK$ EV/EBITDA (x) EV/EBIT (X) P/E (X) E 2016E 2017E E 2016E 2017E E 2016E 2017E Brilliance ,628 N 12.4 NM NM NM NM NM NM NM NM BYD ,197 O Changan C ,909 O C NM Dongfeng ,502 N GAC ,610 N NM Geely ,639 O Great Wall ,918 N JAC C ,185 U C SAIC Motor C ,496 N C Average European Auto OEMs 17

18 Europe: Key markets likely to decelerate Commercial fleet and leasing driving growth To get a better understanding of what is driving growth in the European market, it is important to know the main growth drivers and split the market into commercial (fleet business) and private sales. We estimate that some 52% of the total European market volumes are from the commercial business and only 48% are private. The commercial business can be split further into 'true' fleet business, dealerships, OE registrations and rental businesses. According to Dataforce, the true fleet market represents c.25% of the total market or roughly half of the commercial fleet market. The remaining 27% is represented by dealers, OE registrations and rental companies. The two largest markets in Europe Germany and the UK are traditional commercial fleet markets with a share of 66% and 53%, respectively. As shown in Figure 21, these two markets are already at or close to pre-crisis levels. One key element of this growth in both markets, particularly for the UK, is increased leasing activities for the commercial fleet business. Figure 19: Estimated split of private and commercial sales by country 2015E 100% Figure 20: EU5 market split We estimate true fleet business accounts for c.25% 90% 80% 70% 60% 66% 53% 44% 38% 45% 52% True fleet 50% 40% 30% 20% 10% 34% 48% 56% 62% 55% 48% Commercial Private Other Commercial (dealer,rental) Private 0% Germany UK France Italy Spain EU-5 Source: Industry bodies, Credit Suisse estimates Figure 21: Markets driven by commercial businesses back to pre-crisis level (UK and Germany) Source: Industry bodies, Credit Suisse estimates Figure 22: German market split private sales account for 34% (2014) EU 5 11% UK Spain Italy 2014 vs % 34% Privat Car fleet market Manufacturers Dealerships Germany 11% Car rental France 23% -50.0% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% Source: Industry bodies, Credit Suisse estimates Source: Dataforce, Credit Suisse research European Auto OEMs 18

19 A closer look at the leasing markets Leasing driving growth in the UK and Germany According to Leaseurope (which represents 44 member associations in 32 countries and covers an estimated 92% of the European leasing market), total new leasing volumes in 2013 were worth 251.9bn. Within Europe, the UK with volumes of 49bn and Germany at 47bn are the largest markets, followed by France at 38bn, Italy with 17bn and Russia with 19bn (all data 2013). Although final data are not yet available for 2014, it is likely that the market saw further meaningful growth in The Leaseurope Index, which is a survey of 17 European lessors on a quarterly basis, indicates that total new business volumes grew 7.3% in We believe this number can be taken as a good proxy for the entire industry. Of the total leasing market, passenger cars represent c45%, with commercial vehicles at 18%. In total, vehicles make up some 70% of the lease market in Europe. Figure 23: Leasing market size by region ( bn, 2013) Figure 24: Leasing market split by asset category (2013) Greece,Spain,Portugal Nordic&Baltic countries 5% CEE Austria,Benelux&Switzerland Russia Italy France 32% 45% Passenger cars Commercial Vehicles Equipment Real estate UK Germany 18% Source: Leaseurope, Credit Suisse research Source: Leaseurope, Credit Suisse research Figure 25: Leasing market regional development ( bn) 300 Greece,Spain,Portugal 250 Nordic&Baltic countries Figure 26: Strong car sales growth in the UK a reflection of strong lease growth (leasing market CAGR) 15.0% 10.0% 200 Nordic&Baltic countries 5.0% 150 CEE Austria,Benelux&Switzerland 0.0% Germany UK France Italy Total 100 Russia -5.0% Italy France Germany -10.0% -15.0% CAGR Source: Leaseurope, Credit Suisse research Source: Leaseurope, Credit Suisse research European Auto OEMs 19

20 Leasing penetration rates on the rise New leasing growth continued to outperform sales growth in the overall automotive market, which led to increased penetration rates. The latest published data by Leaseurope indicate a leasing penetration rate of 22% in 2013 for equipment and vehicles, up from 18.8% in Figure 27: Leasing vehicle growth rates by region 20% Figure 28: Leasing penetration rates on the rise 23.0% 15% 22.0% 10% 5% Germany 21.0% 0% -5% UK France Italy 20.0% 19.0% -10% Total 18.0% -15% -20% 17.0% % Penetration rate (equipment and vehicles) Source: Leaseurope, Credit Suisse research Source: Leaseurope, Credit Suisse research European Auto OEMs 20

21 Germany: Slowing growth in leasing could dampen commercial fleet activities Germany and the UK are the main markets for the commercial fleet business, making up more than 50% of all purchases. According to Dataforce, the private share accounted for 36% of the total market, true car fleet for 24%, manufacturers for 10%, dealerships for 20% and the rental business for the remaining 10% (2014). The main source of growth can be found in the commercial fleet business (which is linked to the leasing activities), which has increased its market share significantly over the past few years. Private sales accounted for 43% in 2010 before gradually declining to c36% in 2014 and c35% for the first four months of this year. Figure 29: Germany market split (2014) 10.4% 36.2% 20.0% 9.8% 23.6% Private Car fleet market Manufacturers Dealerships Car rental Figure 30: Germany private share continues to decline 65.0% 62.7% 60.0% 55.0% 50.0% 47.4% 45.0% 38.1% 40.2% 42.6% 40.1% 40.0% 38.2% 37.9% 36.2% 34.8% 35.0% 30.0% 25.0% 20.0% FY-06 FY-07 FY-08 FY-09 FY-10 FY-11 FY-12 FY-13 FY-14 YtD Private as % of total Source: Dataforce, Kraftfahrt-Bundesamt (KBA), Credit Suisse research Source: Kraftfahrt-Bundesamt (KBA), Credit Suisse research Leasing driven by the commercial business strong growth in 2014 According to BDL (Bundesverband Deutscher Leasing Unternehmen), the penetration rate of leasing is around 37%, with the majority (75%) going into commercial fleet leasing. Assuming that 25% of total leasing is for private consumption, we estimate that the share of leasing as a percentage of total private sales is c25%. Figure 31: Germany leasing penetration rate: 37% with a large part going into commercial business (2014) Figure 32: Germany leasing market split by asset category (2013) 9% 63.0% 27.8% 9.3% 8% Leasing commercial 13% Leasing private Other 54% 16% Passenger cars Commercial Vehicles Production Machinery Office & IT equipment Other Source: BDL, Credit Suisse estimates Source: BDL (Bundesverband Deutscher Leasing Unternehmen), Credit Suisse research European Auto OEMs 21

22 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 15 July 2015 Figure 33: Germany leasing sales growth versus car sales growth 14.0% 12.0% 10.0% 8.0% Figure 34: Germany new leasing equipment sales growth versus car sales growth 20.0% 15.0% 10.0% 6.0% 4.0% 2.0% 5.0% 0.0% 0.0% -2.0% -4.0% -6.0% % -10.0% -15.0% Leasing growth Car sales growth Leasing investments YoY Car sales Source: BDL, KBA, Credit Suisse research Source: BDL, KBA, Credit Suisse research The total value of goods and services financed by leasing came to 50.2bn in 2014, which represents 6.2% growth YoY. The market value of equipment (excluding real estate) stood at 48.7bn, up 6.1% YoY marked the first year of growth since 2011 after the market for equipment declined by 0.4% and 0.6% in 2012 and 2013, respectively. Furthermore, Sixt, a German listed company with business activities in rental and leasing, reported sales leasing revenue growth in 2014, up 6.2% YoY. The main question mark clearly remains on the sustainability of the strong growth in leasing activities. In its latest update on the Investment Indicator (source Ifo institute and BDL), which is seen as a leading indicator of industry expectations, is that growth is decelerating or would level off by the end of the year before declining moderately (Figure 34). Overall leasing penetration rates for equipment leasing stood at 22.7% in 2014, up from 20.6% in Car vehicle penetration was c36% in According to BDL c80% of all commercial, registered cars are leasing cars. Figure 35: Germany the leasing market saw meaningful acceleration in 2014 ( m) Figure 36: Germany the leased equipment market was up 6.1% in 2014 after two years of declines ( m) % % 5.0% % % % -15.0% % % OE independent OE Equipment YoY growth Source: BDL (Bundesverband Deutscher Leasing Unternehmen), Credit Suisse research Source: BDL (Bundesverband Deutscher Leasing Unternehmen), Credit Suisse research European Auto OEMs 22

23 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 15 July 2015 Figure 37: Germany leasing penetration rates in the equipment sector 25.00% 24.00% 23.00% 22.00% Figure 38: Germany investment indicator growth in equipment investments % 20.00% 19.00% % Leasing penetration rates Indicator for the Trend-Cycle Component Cycle Trend Component of Investments Investments Source: BDL (Bundesverband Deutscher Leasing Unternehmen), Credit Suisse research Source: BDL, Ifo Business Survey of the Services sector, Federal Office of Statistics, Ifo Institute, calculations June 2015 The Investment Indicator jointly drawn up by the Ifo Institute and the German Leasing Association (BDL) is based on leasing companies assessments of their current business situations and their prospects for the next six months. European Auto OEMs 23

24 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May July 2015 Germany private sales down; commercial business dominated by VW The German market recorded sales growth of 5.2% in the first half of 2015, driven entirely by the commercial business at +8.6%, while private sales were down 0.9%. We estimate that the share of private sales as a percentage of the total market dropped to 34.8% in the first half, down from 36.2% in The share of private sales in Germany has shown a gradual decline since 2010 from 42.6% in 2010 to 40.1% in 2011 and 38.2% in Volkswagen (press release 7 May 2015) reported that the VW group in total delivered 51,851 vehicles to German commercial fleet customers, which represents 20.5% YoY growth (market growth for the segment at 10.7% according to Dataforce). Within Volkswagen, growth was the strongest at the VW brand with +29%, Audi at +9.8%, Skoda +8% and Seat at +16.5%. Figure 39: Germany private sales negative YTD 20.0% 15.0% 10.0% Figure 40: Germany structural growth shift continues % Car rental Dealerships 0.0% -5.0% Manufacturers Car fleet market Private -10.0% % 0 German car sales Private Commercial Source: KBA, Credit Suisse research Source: Dataforce, Credit Suisse research Figure 41: Germany private sales also declining in absolute terms (CAGR ) Figure 42: Germany absolute private volumes declining over the past couple of years 3,000,000 Commercial 2,500,000 2,000,000 Privat 1,500,000 1,000,000 Market -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 500,000 0 FY-07 FY-08 FY-09 FY-10 FY-11 FY-12 FY-13 FY-14 Privat Source: KBA, Credit Suisse research Source: KBA, Credit Suisse research European Auto OEMs 24

25 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun July 2015 UK Fleet growth likely to decelerate pricing has already deteriorated The development of the leasing market in the UK is key to understanding the strong growth of car sales over the past few years (above the 2007 level). The leasing market grew from 33bn in 2009 to 48.5bn in 2013, which implies a CAGR of 9.9%. In terms of size, the UK market overtook even the German market (based on latest available data from 2013). Given continued strong growth in 2014 in car sales, it is likely that the market has surpassed the 50bn mark. The UK market is dominated by the fleet business, with private sales accounting for less than 50%. Contrary to the German market, UK growth since 2010 has been driven by both the private and the commercial businesses. From 2010 to 2014, UK car sales recorded a CAGR of 5.1% with private at 5.3% vs. the market at 5.1%. However, since the beginning of 2015, private sector growth has slowed to just 2.3% versus the market at 7.0%. Figure 43: UK private share stable since % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: SMMT, Credit Suisse research Business Fleet Private Figure 44: UK strong leasing growth already reflected in car sales growth ( bn) 60 CAGR of 9.9% UK leasing market Source: Leaseurope, Credit Suisse research Figure 45: UK private car sales slowing since % 15.0% 10.0% 5.0% Figure 46: UK car sales growth versus leasing growth 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Jan-Jun % -5.0% Private Fleet Business Total Leasing growth -10.0% -10.0% -15.0% -15.0% -20.0% -20.0% Private Fleet Business Total Source: SMMT, Credit Suisse research Source: SMMT, Credit Suisse research European Auto OEMs 25

26 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May July 2015 Deterioration in fleet pricing Background of fleet pricing: 1.5 million vehicles are sold at auctions every year, which is 43% of the total UK wholesale market Major fleet and leasing companies sell 75% of their returning stock through auctions Franchise dealers source 30% of their retail stock from auctions Independent dealers source 65% of their retail stock from auctions According to the National Association of Motor Auctions (NAMA), the average value of used cars sold at auction across the board decreased to 5,400 in May from 5,420 a year ago. The price decline is driven largely Late & Low vehicles (fleets between years). This decline follows a c5.7% fall in March with average prices down 5.7% YoY. Since February three out of four months showed negative YoY price development. First-time conversion rates continued to decrease from 350 in May 2014 to 275 in May Figure 47: Fleet pricing average values for used cars and YoY changes % % % % % % Figure 48: First-time conversion rates on a downward trend since the beginning of the year Average selling prices in Source: NAMA, Credit Suisse research YoY Change First time conversion rates Source: NAMA, Credit Suisse research European Auto OEMs 26

27 Rental fleet seems relatively young Moreover, we are cautious on the sales volumes going into the rental market (roughly 10% of the overall market in the UK). When comparing the fleet purchases made by short-term rental companies versus its fleet size, it becomes clear that purchases materially outperformed the fleet size. The ratio peaked at 2x in 2010 and averaged 1.5x for the period which compares with around 1.0x for Europe ex UK. Figure 49: UK short-term rental purchases versus fleet size (number of vehicles) Figure 50: UK rental unlikely to grow more meaningfully Fleet purchases Fleet size Fleet purchases to fleet size Source: Leaseurope, Credit Suisse research Source: Leaseurope, Credit Suisse research European Auto OEMs 27

28 France: Commercial solid, private has started to recover The French car market in 2014 was still c. 13% below the 2007 level in terms of volume, which compares with -3.5% for Germany and +3.1% for the UK. The main reason for the underperformance versus Germany is the higher share of private consumption in France and hence its lower commercial business. We estimate that the private business accounts for c.56% of the overall market versus Germany at 34%. The French leasing market grew from 33bn in 2009 to 37.5bn in 2013, implying a CAGR of 2.9%. Given its lower exposure to the commercial business, the leasing penetration rate is also lower according to CCFA, leasing with a purchasing option accounted for 19.6% in 2014 versus Germany at 37%. However, we estimate that the German private sales penetration rate is c. 25%. Leasing penetration rates in France are already above precrisis levels in 2007 the ratio stood at 18.6%. The average age of the car fleet in France is high at 8.6 years in Post-2005 the average age moved above 7 years with gradual increases since. The ratio of used car registration to new registration was at 3.0x in According to Dataforce, the French fleet market grew 6.1% in 2014, which implies negative growth for private sales. While the fleet business continued to outperform in the first quarter of this year at +9.7% vs. +9.0% for the market, it seems that private consumption has also started to turn positive. Figure 51: France leasing as a % of total above 2007 levels 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 52: France private sales >50% of the total market (2014) Fleet Private Car loan Personal loan Lease financing with purchase option Source: CCFA, Credit Suisse research Source: CCFA, Credit Suisse research European Auto OEMs 28

29 Figure 53: Lower leasing penetration rate a reflection of lower commercial business 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% France Germany Source: CCFA, Credit Suisse research Figure 54: France average fleet age looks high vs history Average age Source: CCFA, Credit Suisse research Figure 55: France cars older than 5 years at high levels 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 56: France ratio of used car sales to new car sales Cars less than 5 years Cars more than 5 years Ratio used to new cars Source: CCFA, Credit Suisse research Source: CCFA, Credit Suisse research European Auto OEMs 29

30 Italy: Improved leasing and rental indicate potential upside The value of the leasing market in Italy stood at 16.5bn in 2013, down 45% since The market saw a material drop in 2012, down 33% YoY. In our view the Italian market is an interesting one, as leasing penetration is still quite low. According to the Italian industry association, private owners accounted for 61% of the total market with 1.5% private leasing. Business is 16.2% with business leasing another 1.7%. Thus, total leasing is around 3.2% of the market which compares with the European average of above 20% and Germany at 36%. Clearly, one main difference to Germany and the UK is the higher share of private business versus commercial business. After a prolonged period of declining leasing activities, the market for business car leasing started to turn around in 2014 with 13.3% YoY growth. Private leasing started to grow strongly in the first half of 2015, up 19%, and business leasing up 17%. Another key trend can be seen in Italy's rental market, which accounted for 19% of the total market in After recording 13% growth in 2014, business activities have accelerated meaningfully since the beginning of the year. In our view, this growth is a function of material underinvestment of rental companies in Italy (i.e. ageing fleet). When analysing data provided by Leaseurope for the European short-term rental market, it becomes clear why rental activities in Italy have picked up materially. Since 2009 purchases of short-term rental companies versus the fleet size have remained at a ratio below 1x, which indicates an ageing fleet. On average for Europe the ratio stands at 1.2x for Figure 57: Italy leasing market down 45% since 2010 ( bn) 35 Figure 58: Italy leasing below 4% of the market (2014) % 19.4% 60.8% Private owner Private leasing Business Business leasing Rental Other Total Leasing market Italy 1.5% Source: Leaseurope, Credit Suisse research Source: ANFIA, Credit Suisse research European Auto OEMs 30

31 Figure 59: Italy leasing activities have started to pick up Figure 60: Italy Rental growing >20% 30.0% 60.0% 25.0% 50.0% 20.0% 40.0% 15.0% 30.0% 10.0% 20.0% 5.0% 10.0% 0.0% -5.0% 2014 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 YTD 0.0% -10.0% 2014 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 YTD -10.0% -20.0% Private leasing Business leasing Private owner Business Rental Total Source: ANFIA, Credit Suisse research Source: ANFIA, Credit Suisse research Figure 61: Italy replacement cycle at rental companies (number of vehicles) Figure 62: Italy ageing fleet at rental companies Fleet purchases Fleet size Fleet purchases to fleet size Source: Leaseurope, Credit Suisse research Source: Leaseurope, Credit Suisse research European Auto OEMs 31

32 Spain: Meaningful risk after PIVE We estimate that c. 55% of the Spanish market is private, with the rest being commercial business. Strong car sales in Spain over since October 2012 were driven entirely by government subsidies. Under the scheme (known as PIVE), owners who scrap their cars and buy new ones get 2,000, half from the government and half from the automotive manufacturer. The programme has been extended several times and, in May, PIVE 8 was approved by the government. We estimate that the government spent around 890m on PIVE 1 to 7 with an estimated 890,000 vehicles scrapped. PIVE 8 is the biggest phase with 225m, though the subsidy amount has been reduced to 1,500 per car ( 750 from the government). Thus, the total volume impact is around 300,000 units. In total, we estimate that PIVE 1 to 8 will cost the government 1.12bn for a total of 1.2m vehicles. Figure 63: Spain the PIVE scheme contributed to >1m units Phase Budget million Estimated units (vehicles) Total Source: Credit Suisse estimates based on data from Thomson Reuters, WardsAuto PIVE impact To gauge the impact of the incentive programme on the overall market, we take total sales since October 2012 and compare them with the impact of the scheme. Between October 2012 and April 2015, car sales in Spain amounted to 2.08m, of which 890,000 were covered by the PIVE programmes (43%). After recording 41% growth in March this year, growth dropped to just 3.2% in April as the latest phase of the subsidy ended at the beginning of April. In the first quarter of 2015, Spain was the only market among the Top 5 in which private sales outgrew commercial, up 37.1% versus 30.5% for commercial (according to Dataforce). Over the past couple of years, the leasing market has declined significantly. Leaseurope estimates that for Spain/Portugal and Greece, the total value of the market was 9bn in 2013, down from 17bn in Of this 9bn, we estimate that Spain is around 4.1bn. Figure 64: Spain: PIVE has covered c.43% of sales since the beginning of 2012 Sales Oct 2012 to April PIVE PIVE as % of total 43.0% Source: ANFAC, Credit Suisse estimates based on news reports European Auto OEMs 32

33 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 15 July 2015 Figure 65: Southern Europe leasing market appears to have bottomed 18 Figure 66: Spain leasing growth rates for moving goods (Mobiliario) 60.00% CAGR of -12.4% 50.00% 40.00% % % 10.00% 0.00% % % % Spain,Greece,Portugal Source: Leaseurope, Credit Suisse research Number of contracts Source: AEL (Asociacion Espanola De Leasing Y Renting (AEL), Credit Suisse research European Auto OEMs 33

34 VW the market leader in the European fleet business According to Dataforce (February press release), VW is the market share leader in Europe with its VW Golf and VW Passat models. Of the top 10 fleet models, 5 are from VW group. In addition to the VW Golf and VW Passat, the Skoda Octavia, Audi A3 and A4 are popular models. Within the top 10, we also note the Renault Clio, Peugeot 308 and 208, the Opel Astra and Mercedes C-Class. We estimate that in Germany c80% of the true fleet business is constituted by VW, Audi, BMW, Ford, Mercedes and Opel. Figure 67: Volkswagen dominating the fleet market in Europe Top 10 models EU-5 True Fleet Market February Source: Dataforce, Credit Suisse research 1 VW Golf 2 VW Passat 3 Renault Clio 4 Peugeot Mercedes C Class 6 Skoda Octavia 7 Opel Astra 8 Audi A3 9 Audi A4 10 Peugeot 208 According to Volkswagen, the share of "fleet customers" (a narrower definition than Dataforce) in Germany accounted for 13.3% in 2014, up from 11.4% in VW's share of this customer segment amounted to 48.4% in Germany, up from 45.9% in VW states that its European market share was 29% in Figure 68: VW sales skewed towards the fleet business in Germany 14.00% 49.00% Figure 69: Share of fleet business on the rise for Volkswagen 30.00% 12.00% 10.00% 48.50% 48.00% 47.50% 29.00% 28.00% 8.00% 6.00% 47.00% 46.50% 27.00% 4.00% 2.00% 46.00% 45.50% 45.00% 26.00% 25.00% 0.00% % 24.00% Germany fleet customers VW share Germany (rhs) VW share Europe Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research European Auto OEMs 34

35 Figure 70: Volkswagen development commercial fleet business in Germany 1Q Seat Skoda Audi VW Brand Figure 71: Volkswagen continues to gain market share in the German commercial fleet business 35.0% 29.0% 30.0% 25.0% 20.5% 20.0% 16.5% 15.0% 9.8% 10.7% 10.0% 8.0% 5.0% % VW Brand Audi Skoda Seat VW Group Overall market 0 1Q14 1Q15 1Q15 YoY growth Source: Company data, Dataforce, Credit Suisse research Source: Company data, Dataforce, Credit Suisse research European Auto OEMs 35

36 Europe: Further data points Figure 72: Europe: Short-term rental fleet purchases (number of vehicles) Figure 73: Europe: Short-term rental fleet size (number of vehicles) Other Other Italy France UK Italy France UK Source: Leaseurope, Credit Suisse research Source: Leaseurope, Credit Suisse research Figure 74: Europe: Fleet purchases to fleet size Figure 75: Europe: Average ratio of fleet purchases to fleet size UK France Italy Other Total UK France Italy Other Total Source: Leaseurope, Credit Suisse research Source: Leaseurope, Credit Suisse estimates Figure 76: EU5 fleet versus market growth Figure 77: German fleet versus market growth 16.0% 14.0% 12.0% 10.0% 8.0% 12.2% 9.6% 7.8% 11.0% 10.2% 14.0% 10.8% 9.7% 7.5% 15.0% 10.0% 5.0% 9.3% 9.4% 9.7% 6.6% 2.9% 2.6% 12.4% 9.0% 6.9% 3.7% 6.0% 4.0% 5.5% 3.0% 0.0% FY-14 Jan February March May Jan-May 2.0% 0.0% 0.7% FY-14 Jan February March May Jan-May -5.0% -10.0% -4.8% -6.7% EU5 - fleet EU5 - total Germany fleet Germany total Source: Dataforce, Industry Bodies, Credit Suisse research Source: Dataforce, Industry Bodies, Credit Suisse research European Auto OEMs 36

37 Figure 78: France fleet versus market growth 25.0% 20.8% 20.0% 15.0% 9.3% 10.0% 7.3% 6.1% 5.9% 5.2% 5.0% 4.1% 3.7% 2.7% 0.4% 0.0% FY-14 Jan February March -0.4% May Jan-May -5.0% -4.0% -10.0% France fleet France total Source: Dataforce, Industry Bodies, Credit Suisse research Figure 79: UK fleet versus market growth 16.0% 14.2% 14.0% 12.0% 12.0% 10.0% 9.3% 8.8% 8.0% 6.7% 6.7% 6.0% 4.7% 6.0% 6.3% 5.7% 4.0% 2.4% 2.0% 1.1% 0.0% FY-14 Jan February March May Jan-May UK fleet UK total Source: Dataforce, Industry Bodies, Credit Suisse research Figure 80: Italy fleet versus market growth 30.0% 24.4% 25.0% 25.0% 20.0% 18.8% 17.2% 15.5% 14.8% 15.0% 13.7% 11.5% 10.8% 10.0% 18.7% 15.1% Figure 81: Spain fleet versus market growth private outgrowing the overall market 45.0% 40.5% 40.0% 33.4% 34.5% 35.0% 29.9% 30.9% 30.0% 27.5% 27.5% 26.1% 24.3% 25.0% 21.7% 20.0% 18.3% 14.0% 15.0% 5.0% 4.6% 10.0% 5.0% 0.0% FY-14 Jan February March May Jan-May 0.0% FY-14 Jan February March May Jan-May Italy fleet Italy total Spain fleet Spain total Source: Dataforce, Industry Bodies, Credit Suisse research Source: Dataforce, Industry Bodies, Credit Suisse research European Auto OEMs 37

38 China: Understanding the dynamics SUVs a key growth driver To understand the performance of JVs, it is important to understand the dynamics in China. The share of SUVs (using LMC Automotive's Global Body Style definition) as a percentage of the total market increased from 11% in 2012 to 18% in 2014, based on LMC figures. When splitting market growth into SUV and others, it can be seen that SUVs comprise the whole of the volume growth. Taking LMC production growth of 5.4% for 2015, SUV growth stands at 35.8%, with the remaining down 1.4%. While we expect the pace of SUV growth to slow somewhat, it seems highly likely that the trend of market share gains would continue. We the share of SUVs to increase from 18% in 2014 to 29.5% in Figure 82: China: SUV driving the entire growth 60.0% Figure 83: China: Share of SUV to increase further 30.0% 50.0% 40.0% 30.0% 25.0% 20.0% 15.0% 20.0% 10.0% 10.0% 0.0% -10.0% SUV growth Market growth Market ex SUV 5.0% 0.0% SUV share Source: LMC, Credit Suisse research VW has lost market share since 2012 in the SUV segment Source: LMC, Credit Suisse research The Chinese SUV market has seen significant changes in market shares over the past few years, with Chinese brands gaining share. Great Wall is the market leader, with a share of 13% in the SUV market in Volkswagen's market share declined from 13% in 2012 to 9% in Market share losses continued into 2015 with VW SUV volume growth continuing to underperform the overall market. The Chinese SUV market grew 43% in the first six months of the year, with subdued growth in the segment at VW its total volumes are down 5.0% YTD, with Tiguan up 3.0%, and Audi Q3 and Q5 down 25% and -1.0%, respectively. European Auto OEMs 38

39 Figure 84: China: SUV market development meaningful volume ramp-up likely 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000, BMW Daimler Changan BAIC Ford GM Great Wall Motor Honda Hyundai PSA Renault-Nissan Toyota VW Other Source: LMC, Credit Suisse research Figure 86: China SUV market: VW market share unlikely to increase before % 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Figure 85: China SUV market: local brands gaining market share and VW losing share since % 90% 80% 47.0% 50.1% 70% 58.9% 64.0% 67.0% 65.8% 60% 50% 14.1% 14.0% 40% 10.1% 9.2% 30% 8.0% 6.6% 5.4% 6.1% 6.2% 5.2% 13.8% 4.9% 5.3% 20% 14.0% 12.6% 13.0% 11.7% 10.2% 10% 12.8% 11.8% 11.3% 8.8% 7.6% 9.9% 0% BMW Daimler VW Great Wall Motor Honda Hyundai Other Source: LMC, Credit Suisse research Figure 87: China SUV market: Daimler gaining market share due to new model ramp-up 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Source: LMC, Credit Suisse research VW BMW Source: LMC, Credit Suisse research Daimler Figure 88: China: SUV growth rates Jan-June 2015 Market growth Total VW Skoda Yeti Audi Q3 Audi Q5 Figure 89: China SUV: Monthly growth rates of VW's SUV models 400.0% 350.0% 300.0% 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% Tiguan -60.0% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% -50.0% % Tiguan Audi Q5 Audi Q3 Source: China Automarket, Credit Suisse research Source: China Automarket, Credit Suisse research European Auto OEMs 39

40 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr July 2015 Mercedes and FCA have the best model momentum The performance of the German JVs has shown varying trends this year, which is largely a reflection of model mix and new model launches. Mercedes (BBAC) showed impressive 49% growth in the first six months of the year, driven by the launch of the GLA. Volkswagen China (total) is down 5.6%, with VW-FAW down 11% and VW Shanghai down 0.2%. BMW Brilliance is down 0.3%. Volkswagen share of SUVs likely to stay low until 2017: Based on LMC data (SUV definition according to Global Body Style), we estimate that SUVs account for c.13% of VW's portfolio in 2014, which is mainly the Tiguan, Audi Q3, Audi Q5 and the Skoda Yeti. Until 2017 the share of SUVs in the portfolio is unlikely to increase more meaningfully, before the ramp-up of a Skoda and VW compact SUV planned to be launched. Moreover, according to LMC, production of the VW CrossBlue is expected to start in Mercedes strong SUV momentum: Driven by the GLA ramp-up, Mercedes has seen strong volume growth so far this year. The share of SUVs was c39% in 2014 and should increase to 42% in 2016 according to our estimates. BMW low share of locally produced SUVs: Currently the BMW X1 is the only SUV being locally produced, accounting for around 16% of total BMW Brilliance production. The share of SUVs is unlikely to change more meaningfully until the ramp-up of the BMW X3 in Including imports to China, mix is more favourable for BMW with c25% of deliveries in China coming from SUVs (see Figure 94). FCA strong position with the Jeep ramp-up: The outlook for FCA's JV (GAC) looks solid owing to the ramp-up of locally produced Jeeps. The Jeep Cherokee is starting production in 2015, with the Compact and Renegade to follow in PSA SUV share looks set to increase: According to LMC, the share of SUVs for PSA's Dongfeng JV is at 31.5% and is expected to rise to 38% by We believe it is unlikely that the growth would be more significant than this. The Changan JV is still in the ramp-up phase according to LMC, the share of SUVs is above 50% of the total production. Figure 90: China: SUVs gaining meaningful market share Figure 91: China: JV growth rates January to June % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 21% 22% 22% 23% 23% 22% 24% 24% 25% 25% 25% 26% 29% 9% 9% 9% 9% 11% 11% 4% 11% 4% 4% 12% 11% 12% 13% 4% 4% 4% 13% 3% 4% 4% 12% 4% 4% 4% 4% 42% 41% 41% 40% 39% 40% 38% 37% 37% 38% 37% 37% 35% 11% 11% 11% 11% 11% 11% 10% 11% 11% 10% 10% 10% 9% Mini sedan (A00) Small sedan (A0) Medium sedan (A) Large sedan (B) Luxury sedan (C) MPV SUV 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -5.6% -0.2% -11.3% 49% VW China VW SAIC VW-FAW Mercedes (BBAC) -0.3% BMW Brilliance 3.6% PSA Source: China Automarket, Credit Suisse research Source: Company data, Credit research European Auto OEMs 40

41 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr July 2015 Figure 92: Volkswagen: Share of SUVs could be relatively low until 2017 (units lhs; share of total rhs) Audi Q1 Audi Q3 Audi Q5 Skoda Compact SUV Skoda Yeti VW Taigun VW Tiguan VW CrossBlue VW Sub-Compact SUV as % of total Source: LMC, Credit Suisse research 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Figure 93: Mercedes: High share of SUV sales in China driven by the GLA ramp-up (units lhs, share of total rhs) % % % % 25.0% % % % % 0 0.0% GLA GLK/GLC A Class B Class C Class E Class CLA SUV as % of total Source: LMC, Credit Suisse research Figure 94: BMW: Share likely to rise with the X3 ramp-up in 2018 (local production), (units lhs; share of total rhs) 500, % 450, , % 350, % 300, , % 200, , % 100, % 50, % BMW X1 BMW X3 Zinoro 1E BMW 1 Series BMW 2 Series AT BMW 3 Series BMW 5 Series SUV as % of total Source: LMC, Credit Suisse research Figure 95: SUV share: VW and BMW lag Mercedes materially (local production) 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Volkswagen Mercedes BMW Source: LMC, Credit Suisse research Figure 96: BMW and Volkswagen underperforming the market in China 80% Figure 97: Daimler's strong model momentum enables market outperformance (local production) 60% Growth outperformance vs market 60% 40% 20% 0% 40% 20% 0% -20% -20% Total China market Total VW Total Mercedes-Benz Total BMW Source: Company data, Credit Suisse research VW Mercedes-Benz BMW Source: Company data, Credit Suisse research European Auto OEMs 41

42 Figure 98: FCA has strong model momentum with Jeep ramp-up Figure 99: FCA: share of SUVs to exceed 60% from Alfa Romeo 155/156/159/Giulia Dodge Caravan 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% Dodge Dart Fiat 500X 10.0% Fiat D-Sedan Jeep Compact SUV Jeep Cherokee Jeep Renegade 0.0% Source: LMC, Credit Suisse research Source: LMC, Credit Suisse research Figure 100: PSA: Dongfeng production growth by model Figure 101: PSA: Dongfeng share of SUVs to improve moderately 40.0% % 30.0% 25.0% 20.0% % Citroen C2 Citroen C4 Citroen C5 Citroen C-Elysee Citroen C3-XR Citroen Compact SUV (China) Peugeot 2008 Peugeot 206/207/208 Peugeot 3008 Peugeot 301 Peugeot 306/307/308 Peugeot % 5.0% 0.0% Source: LMC, Credit Suisse research Source: LMC, Credit Suisse research Figure 102: PSA: Changan still in ramp-up phase Figure 103: PSA: Changan share of SUVs >50% % 60.0% 50.0% 40.0% 30.0% 20.0% % DS DS4 DS DS5 DS DS9 DS DS6 WR 0.0% Source: LMC, Credit Suisse research Source: LMC, Credit Suisse research European Auto OEMs 42

43 Capacity utilisation likely to decline Key points: China utilisation likely to decline: According to LMC, capacity in China (total) grew by 12.3% in 2013 and 17.1% in While growth is expect to slow to 9.2% and 8.4% in 2015 and 2016, respectively, capacity expansion growth rates remain in the high single digits. Based on capacity data available, utilisation was c63% in 2014, which is expected to decline to around 60% in Volkswagen: Based on nominal capacity, we estimate that utilisation rates at FAW and SAIC were above 100% (extra shifts) in Given our sales forecast of -1.1% (-2.2% for VW-FAW and 0.1% of SAIC), we expect overall utilisation to decline by around 900bps in Based on our assumption of moderate growth of 3% and taking into consideration expansion plans with further ramp-up in 2016 at VW-FAW, we think utilisation rates could fall further. Mercedes (BBAC): Beijing Benz saw material capacity expansion in 2015 (new model launch) which doubled the nominal capacity versus Taking sales growth of 38% YoY, utilisation would be around 81%. However, this assumes full capacity is available for the entire time period, which dilutes the utilisation given the ramp-up phase. BMW (Brilliance): Utilisation in 2015 should improve moderately given no supply expansion this year. However, according to LMC data, Shenyang 2 is expected to expand by 100,000 units to 300,000. FCA (GAC): Capacity utilisation for Fiat (Changsha) and Jeep (Guangzhou) should improve in the coming years. Compared with the German OEMs, FCA is coming off a low base in China. Jeep utilisation is expected to exceed 100% by 2018 according to LMC. PSA (Dongfeng, Changan): Dongfeng utilisation rates are already strong, at just below 100%, according to LMC, which is unlikely to improve more meaningfully. Changan utilisation should improve gradually over the next few years given production ramp-up. Figure 104: China: Development of capacity and utilisation % 68.0% 66.0% 64.0% 62.0% 60.0% 58.0% 56.0% Figure 105: China: Capacity growth to decelerate but remain in the high single digits 18.0% 17.1% 16.0% 14.0% 12.3% 12.0% 10.0% 9.2% 8.4% 8.0% 6.0% 4.0% 2.0% 0.0% China capacity Source: LMC, Credit Suisse research Utilization China total capacity growth Source: LMC, Credit Suisse research European Auto OEMs 43

44 Figure 106: Volkswagen: Capacity development of VW-FAW and SAIC 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , Figure 107: Volkswagen: Development of VW-FAW and SAIC utilisation rates 115.0% 110.0% 105.0% 100.0% 95.0% 90.0% 85.0% 80.0% 75.0% 70.0% E 2016E 2017E VW-FAW Source: LMC, Credit Suisse research SAIC VW-FAW SAIC Total VW Source: LMC, Credit Suisse estimates for sales and utilisation rates Figure 108: Mercedes: BBAC capacity development (lhs) and utilisation (rhs) 350, % 300, % 250, % 200, % 150, % 100, % 50, % 0 0.0% Figure 109: BMW: Brilliance capacity development (lhs) and utilisation (rhs) 500, % 450, % 400, , % 300, % 250, , % 150, % 100, % 50, % BBAC capacity growth Utilization Capacity Utilization Source: LMC, Credit Suisse estimates for sales and utilisation rates Source: LMC, Credit Suisse estimates for sales and utilisation rates Figure 110: Mercedes has the strongest volume and model momentum in China 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% Figure 111: Development of utilisation rates 130.0% 120.0% 110.0% 100.0% 90.0% 80.0% 70.0% 5.0% 60.0% 0.0% -5.0% E 2016E 2017E 50.0% E 2016E 2017E VW (FAW,SAIC) Mercedes BMW VW (FAW,SAIC) Mercedes BMW Source: LMC, Credit Suisse estimates for sales and utilisation rates European Auto OEMs 44

45 Figure 112: FCA: GAC utilisation rates expected to improve (units production lhs; utilisation rhs) % Figure 113: PSA: Dongfeng utilisation rates unlikely to improve more meaningfully (units production lhs; utilisation rhs) % Changsha (Fiat) Guangzhou (Jeep) Changsha utilization Guangzhou utilization 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% % 80.0% 60.0% 40.0% 20.0% 0.0% Dongfeng Changan Dongfeng utilization Changan utilization Source: LMC, Credit Suisse research Source: LMC, Credit Suisse research European Auto OEMs 45

46 Continued Chinese dealership challenges Dealership structure overview Dealerships in China are independently owned, often by listed businesses. The OEMs and their JVs themselves have no direct stake in the dealers. Rather, they negotiate 'authorisation agreements' with each dealership on a 1-3-year rolling basis by specifying: Annual performance targets based on 1) sales volume, 2) customer satisfaction, and 3) store presentation incentive rebates are paid based on meeting these targets, with sales targets being most important. These targets can be adjusted from quarter to quarter and are non-binding, although missing out on incentive rebates has a significant impact on dealership profits. Targets are negotiated on a per-dealership basis and are often linked to sales of particular models. Rebates are usually paid quarterly, partly in cash and partly in future price discounts. Incentive rebates can make up more than half of dealers' new car gross profits. Sell-in prices to the dealers are determined by the OEMs, but sell-out prices are given only as a guide. The dealership maintains a degree of discretion on the final retail price by deciding incentives and promotions. Dealerships normally agree to sell a single brand and agree to operate in specific locations as decided by the carmaker. Further details such as store size, interior design, store layout, and store facilities are also influenced by the OEM. Rebate negotiations present increased profitability risk for foreign OEMs A sharp decline in gross margins and prices means increasing pressure from car dealers to seek better terms from their OEM suppliers. BMW's RMB 5.1bn agreement with its dealers announced in January 2015 already signalled some underlying dissatisfaction. To emphasise this pressure further, a union of 32 BMW dealer groups recently negotiated a 15% reduction in volume targets for 2Q15. Other dealers such as Porsche's, Volvo's, and JLR's went through similar negotiations with the OEMs and also managed to obtain materially improved terms on their contracts. On 9 July, it was further reported by Bloomberg that VW would subsidise its FAW JV's dealers by RMB 1bn. In deteriorating market conditions, OEMs are unlikely to risk straining dealer relationships further, and we would expect continued sales target adjustments or incentive rebates to be increased to support dealership profits, albeit perhaps less publicly. We think OEMs have little option to do otherwise or risk losing access to parts of the market as some dealers appear to have stopped ordering cars from OEMs due to slack demand. Parallel imports heighten pricing risk Since August 2014, some dealers operating from new Free Trade Zones have been able to sell cars at discounts of up to 20% compared with official imports by purchasing the cars cheaply abroad. It comes as part of a broad campaign by the government to reduce pricefixing practices. Since these imports focus primarily on high-end premium cars, brands which could see the most price pressure would likely include BMW, Mercedes, Audi. Dealers operating parallel-import schemes are generally not officially recognised and ship cars purchased in countries like the US into China. By opening the market to parallel imports, the government hopes to drive down prices which are seen as excessively high in the luxury segment. To support demand for parallel imports, equal warranty and aftersales rules will be imposed on these cars, which should reduce some of the risks previously associated with them. Carmakers themselves appear unfazed. BMW has said it does not expect a substantial impact, while Daimler has stated that currently it is not a concern, although it could pose a future risk. Audi has said it is well prepared for competition (Reuters, 4 February 2015). European Auto OEMs 46

47 Local dealers' gross margins have fallen sharply In the second half of 2014, dealer gross margin took a sharp downward turn as pricing discipline deteriorated. Across the four Hong Kong-listed dealers, new car gross margins fell by 140bps on average on a sequential basis even as revenues and unit sales grew. New car gross margins fell to the lowest in the past four years. This trend was particularly evident in luxury cars, which saw average new car gross margins decline 180bps sequentially (based on data reported by two dealers). Dealer group Zhengtong has already commented (FY14 results) that it expects new car gross margins to normalise to a lower level of 3-5%, and that 6-8% gross margins will be unlikely for the foreseeable future. Average revenues per unit also declined sharply for the dealers, as average prices trended downwards in 2H14. Across all cars in 2H14, average revenues declined 5% YoY, while in the luxury segment, prices fell 10% YoY. Figure 114: New car gross margins have declined continuously, with a sharp fall in 2H14 10% New car gross margin - all cars 8% Figure 115: Luxury car gross margins have fallen more steeply than the market 12% New car gross margin - luxury 10% 6% 8% 4% 4.6% 3.2% 6% 4% 5.7% 3.9% 2% 2% 0% 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 0% 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 Zhongsheng Baoxin Yongda Zhengtong Average Baoxin Zhengtong Average Source: Company data Source: Company data Figure 116: Average unit revenues stable across all sales, albeit declining in 2H14 450,000 ARPU - all cars Figure 117: Luxury unit revenues continue to slide downwards 600,000 ARPU - luxury cars 400, , , , , , , , ,000 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 350,000 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 Zhongsheng Baoxin Yongda Zhengtong Average Zhongsheng Baoxin Yongda Zhengtong Average Source: Company data Source: Company data European Auto OEMs 47

48 Dealers gaining power in their relationships with unions As highlighted by Credit Suisse analyst Bin Wang in his report from 2 June 2015 (China Yongda Automobile Services - Discovering dealer union power, raising target price to HK$7.4), the Chinese luxury dealers are gaining meaningful negotiation power versus the OEMs. Luxury dealers in China have formed "dealers unions" to negotiate with OEMs for bigger rebates, incremental cash subsidies and lower sales targets thereby discovering the bargaining power of a united front. We have noticed a wave of dealer revolts among luxury brands since November 2014, ahead of the crucial end-of-year discussions about rebates and sales targets. The Volvo dealers' union was formed at end-2014 and had successfully gained a RMB3,500 per unit subsidy from Volvo Car China, along with the cancellation of binding sales between XC60 and S60L (in other words, Volvo dealers will no longer need to take the less popular S60L sedan when they want to sell the more popular XC60 SUV). The Porsche dealers' union, established in November 2014, successfully persuaded Porsche to lower its 2015 China sales target by more than 30% from 64,000 units to fewer than 50,000. Following that, the BMW dealers' union also gained RMB5.1bn in incremental rebates for 2014 from car makers in January BMW also announced that it would lower its 2Q15 China sales target by 15% in May 2015 to help dealer level destocking. Following the BMW dealer union's successful bargaining, the Land Rover dealers union was established in April 2015 to negotiate bigger rebates and lower sales targets. As a result, JLR China announced that it would lower its 2Q15 China sales target by 10-20%, speed up the rebate payment period from six months to one month and extend the interest-free rate credit period for inventory financing. To summarise these negotiations, dealers have tried to boost their margins in five ways: Incremental cash subsidies, such as the RMB5.1bn from BMW; Sales target cuts, such as BMW and JLR did for 2Q15; Official price cuts, as reported for BMW in June/July 2015; Financial cost cuts, such as speeding up the rebate payment period and extending the free-interest rate credit period for inventory financing; and Rebate rate hikes, such as the BMW import car rebate, which is up from 8% to 10%. European Auto OEMs 48

49 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar July 2015 Pricing continues to deteriorate, BMW suffering most Along with average revenue data from the dealers, incentives data from China indicate a similarly downbeat pricing environment. Average discounts on luxury cars have averaged 12.1% year-to-date, compared with 9.5% for the market as a whole. Since the start of the year, the average discount on premium cars has risen 40bps, while discounts in the overall market fell by 70bps. BMW discounts are the highest, averaging 14.4% year-to-date. The imported 7-series has been particularly badly hit, with discounts rising to 22.9% in April. VW has been the most disciplined of the German three, with discounts averaging 6.2% year-to-date. Figure 118: Discounts % of MSRP luxury vs market 15% Figure 119: BMW discounts % of MSRP 30% 25% 10% 20% 15% 10% 5% 5% 0% 0% -5% -10% Source: China Auto Market BMW/Merc/Audi Market 5-Series 3-Series 7-Series X5 BMW overall Source: China Auto Market Figure 120: Mercedes discounts % of MSRP 30% 25% 20% 15% 10% 5% 0% -5% Figure 121: VW discounts % of MSRP 30% 25% 20% 15% 10% 5% 0% -5% -10% -10% C-Class E-Class S-Class Mercedes overall Source: China Auto Market Santana Lavida Sagitar Audi A6 VW overall Source: China Auto Market European Auto OEMs 49

50 Car sales growth continues to shift to western China All three German OEMs emphasise the importance of moving business towards the west of China, where economic and income growth is faster than in the east. It normally takes one to two years for a single dealer to ramp up to operation at full capacity. Figure 122: Car ownership in the west is only 60% of the level in the north (inc. Beijing) 120 Car ownership per 1, Figure 123: VW dealerships are slightly more skewed towards western regions 100% 12% 15% 80% 23% 22% Southeast 60% 16% East 22% South 40% North 25% 20% West 20 20% 24% 21% 0 West South East Southeast North 0% VW BMW Source: Company data Source: Company data Figure 124: Average income growth is fastest in the west 3-yr CAGR as of 3Q14 14% Figure 125: Car sales growing fastest in west also 2013 data 25% 13% 20% 18.6% 19.4% 12% 11% 10% 10.0% 10.1% 10.4% 11.0% 11.9% 15% 10% 10.0% 11.4% 14.7% 9% 5% 8% North Southeast East South West 0% East North Southeast South West Source: NBS Source: NBS European Auto OEMs 50

51 Regulation benefiting local brands Tightening regulation towards energy-efficient vehicles largely benefits Chinese local brands. The Ministry of Industry & Information Technology's 10-year plan on the development of new energy vehicles contains some key targets: Volume target: Chinese local brands target new energy sales of more than 1m units by 2020 with market share >70%; the 2025 target is 3m units with >80% market share. Ranking target: At least one China local model would rank in the top 10 by 2020 and two local brands rank in the top 10 by 2025 with 10% exports. Supply chain target: China's key electric vehicle systems (e.g. power battery and driving motor technology) are catching up with global levels, with 80% market share in China by 2020; these key EV systems are to be exported in bulk by Vehicle information and intelligence target: Information exchange among vehicles and between vehicle and infrastructure by 2020, and intelligent Internet vehicles' pilot program to be launched by Overview: Subsidies for 'New Energy Vehicles' A new scheme for 'New Energy Vehicle' subsidies was announced in December 2014 to replace the current scheme, which ends in The government's target is 5m new energy vehicles on the road by 2020, and the government has announced that 30% of all government-purchased cars by 2016 will be new energy vehicles. Figure 126: Six main classifications of 'New Energy Vehicles' Hybrid electric vehicle Battery electric vehicle Plug-in hybrid electric vehicle Source: Credit Suisse research Fuel cell electric vehicle Hydrogen engine vehicles Natural gas vehicles Sales of new energy vehicles rose almost 4x YoY in 2014 to 60,000 according to CAAM, still behind the rate needed to achieve 5m vehicles by Infrastructure improvements alongside a subsidy push should continue to support growth, albeit off a low base. Hybrid and electric powertrain content is normally 2-3x the content in internal combustion engines, so growth in electric vehicles can disproportionately drive growth in electric powertrain components. However, in our view, volumes are too low for EV components to be profitable and we expect combustion engines to remain the primary powertrain technology for the foreseeable future. The renewed subsidy policy for offers: RMB55,000 subsidy for battery electric vehicles produced in China RMB30,000 subsidy for plug-in hybrid electric vehicles produced in China Expanded eligibility of buses with RMB500,000 subsidy Slower rate of subsidy decline: 5% cut in 2014 vs. the previously announced 10% cut; 10% cut in 2015 vs. the previously announced 20% cut, and 10% cuts in 2017 and 2019 Certain models are eligible for 10% sales tax exemptions until 2017 The push to improve infrastructure and availability also gathered pace during 2014: Beijing constructed 35,700 charging posts + 2 hydrogen stations 88 cities were eligible for electric vehicle subsidies from 25 in 2012 Infrastructure targeting 200k poles (1,800 stations) from 12,000 poles (352 stations) by 2020 European Auto OEMs 51

52 Licence plate restrictions promote use of electric/hybrid cars On top of subsidies and tax breaks for electric cars, licence plate restrictions in cities also encourage purchases of electric vehicles, which are usually exempt from licence plate caps or have priority over combustion-engine vehicles. Figure 127: Licence plate restrictions in Chinese cities City Since Quota Potential cities Shanghai ,000 Shijiazhuang Beijing ,000 Chengdu Guiyang ,000 + additional Chongqing Guangzhou ,000 Qingdao Tianjin ,000 Wuhan Hangzhou ,000 Shenzhen ,000 Source: Credit Suisse research, CAAM Quality gap improving The gap in quality between Chinese and foreign OEMs is a further contributor to a structural move away from the historically better-performing foreign brands. An annual Initial Quality Survey carried out by JD Power identifies the problem encountered per 100 vehicles within the first six months. It showed that in 2014, foreign branded cars had 95 problems, compared with 131 for local branded cars a difference of 36. Compared to 2011, this fell by 64%. Figure 128: Quality gaps narrows between Chinese local branded cars and foreign branded cars Problems per 100 vehicles in first 2-6 months Difference Foreign brands Local brands Source: JD Power European Auto OEMs 52

53 Overview of the Chinese auto market Figure 129: China automotive manufacturers' map (2014 unit sales) Foreign OEM JV Local OEM Other JVs Local brands VW 40% 50% FAW-VW 1.78m unit sales SVW 1.73m unit sales 60% 50% FAW SAIC 50% 50% 50.1% FAW-Toyota SGM SGMW 582k unit sales 1.72m unit sales 933k unit sales FAW-Car FAW-Xiali SAIC Motor 189k unit sales 72k unit sales 180k Independent OEMs without JV Great Wall Geely 612k 426k BMW 50% 50% BBA 279k Brilliance Brilliance Jinbei 48k BYD Yueda 438k 646k Daimler PSA 49% 51% BBAC 50% 50% 145k DPCA 704k CAPSA 23k 50% 50% BAIC Dongfeng Chang an 50% 50% 25% 50% 50% 50% 51% 51% BAIC-Hyundai 1.12m Dongfeng-Nissan 954k DF Yueda-Kia Dongfeng-Honda 646k 308k Chang an-ford 802k Chang an-mazda 95k Chang an-suzuki 165k Changhe-Suzuki 97k BAIC Motor DF Fengshen DF Future Chang an 223k 80k 241k 710k JAC Haima Lifan 196k 177k 88k FCA 50% 50% GAC-FCA 68k GAC 50% 50% 50% GAC-Honda GAC-Toyota GAC-Mitsubishi 480k 301k 63k Jiangling GAC Trumpchi GAC Gonow 59k 117k 11k Leopaard 18k Source: Company data, Credit Suisse research European Auto OEMs 53

54 Figure 130: Locations of JV facilities for each OEM Shenyang BMW-Brilliance 2 plants 360,000 (460,000 by 2016) Urumqi VW-SAIC 50,000 Beijing Daimler-BAIC 2 plants 250,000 (400,000 by 2018) Changchun VW-FAW 2 plants 900,000 Qingdao VW-FAW 300,000 by 2017 Yizheng VW-SAIC 300,000 Chengdu PSA-Dongfeng 300,000 by 2017 Chengdu VW-FAW 540,000 Wuhan PSA-Dongfeng 3 plants 750,000 Anting VW-SAIC 3 plants 800,000 Ningbo VW-SAIC 300,000 Nanjing VW-SAIC 300,000 Wuhan Renault-Dongfeng (150,000 by 2016) Changsha Fiat-GAC 300,000 Foshan VW-FAW 300,000 (600,000 by 2017) Guangzhou Fiat-GAC 210,000 by 2016 Changsha VW-SAIC (300,000 by 2015) Shenzhen PSA-Chang an 200,000 Source: Company data, LMC European Auto OEMs 54