Global automotive supplier study 2010 - Roland Berger

Revenues in the global auto supplier industry are almost back at precrisislevels – Profitability may reach an all-time high of ~6% in 2010Key supplier performance indicators 2000-2010e (n = ~530 suppliers)Revenue growth [2000=100] EBIT margin 1) [%] ROCE 2) [%]102100159 ~1110.61529.8~1501468.89.18.4 8.4~67.41345.75.3 5.3 5.146 4.6 47 4.71244.15.31263.11121071.2 1.42009 positively impacted byreporting period of Japanesesuppliers (ended March 31, 2010)2.1 2.22000 20022004200620082010e2000 20022004200620082010e200020022004200620082010e1) EBIT after restructuring items 2) EBIT after restructuring items/capital employedSource: Roland Berger/Lazard3

Main drivers of the volume recovery are ongoing growth in emergingmarkets as well as a "back to normal" product mixSupplier revenue development 2007-2010Average supplier revenues [2007=100]COMMENTS100Revenues2007~-20~80~4~2~3Crisis Revenues Growth Growth in Recoveryimpact 2009 in China India/ in NAFTAS. America~3Segmentmix~395OEM car Revenuesstock 2010increase> Growth in China: Ongoingdemand growth fueled by overalleconomic development (sales+17% vs. 2009)> Growth in Brazil/India:Continued rise in demand (sales+14% vs. 2009)> Recovery in NAFTA: Fastrecovery after market collapse in2009 (sales +12% vs. 2009)> Segment mix: Gradual demandshift back to premium vehiclesdriven by fleet and corporatecustomers> Increase in vehicle stock:Refilling distribution channelsSource: Roland Berger/Lazard4

Looking back: The automotive supplier industry has undergone themost severe crisis in its historyEUR 200 bn:Cumulative decline in revenues 2008/2009 compared to pre-crisis levelEUR 75 bn:Cumulative reduction of EBIT in 2008and 2009 compared to pre-crisis levelEUR 15 bn:Restructuring costs booked in2008/2009EUR 15 bn:Total equity erosion, 2009 vs. 2007350: Number of automotive ti suppliers that twent bankrupt in the crisisBUT:Positive free cash flow in the industry in2009 due to massive counter-measuresSource: Roland Berger/Lazard5

SUPPLIER REVENUESRevenues in the global auto supply base collapsed by approx. 20%during the crisisSupplier revenue developmentAverage supplier revenues [2007=100]Loss of revenues 2009 vs. 2007 [% of all suppliers]> Overall economic downturn> Counter-effect of ~2.5 m unit salesdue to scrapping schemes~7 ~-1527100~-5> Temporary shift tolower-segment vehicles> Impact on supplierheavily dependent oncustomer portfolio~-7131410803575646Revenues2007Growthin ChinaDownturnin triadSegmentmixOEM carstockreductionRevenues2009< -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% >Source: Roland Berger/Lazard6

SUPPLIER PROFITSAround EUR 75 bn in EBIT was "lost" during 2008 and 2009compared to 2007Supplier profitability 2000-2009EBIT margin 1) [%] – Global and EuropeEBIT 1) [EUR bn] – Global5.35.23.84.14.64.45.95.36.35.16.34.76.65.7~46∑ = ~-75-37 -383.13.02.0World1.21.4~9~8-1.120002001200220032004200520062007200820092007200820091) EBIT after restructuring itemsSource: Roland Berger/Lazard7

SUPPLIER PROFITSTriad suppliers suffered most – By contrast, suppliers from emergingmarkets performed extremely well, even during the crisisSupplier EBIT profitability by region 2009 vs. 2007Europe NAFTA Japan China Korea Rest of Asia WORLDChange 2009 vs.2007 [%-pts.]EBITmargin 1)[%]6.6-7.7 -3.93.2-3.8 +0.495 9.5 99 9.96.12.3 2)+1.4 +1.4 -4.311.197 9.77.25.85.71.4-1.12007 2009-0.72007 2009 2007 2009 2007 2009 2007 2009 2007 20092007 2009EBIT 1)gain/decline2008-2009 vs.2007 [EUR bn]~ -29 ~ -13 ~ -35 ~+/-0 ~ +1 ~ +1 ~ -751) EBIT after restructuring items 2) 2009 positively impacted by reporting period of Japanese suppliers (ended March 31, 2010)Source: Roland Berger/Lazard8

SUPPLIER PROFITSSuppliers of tires managed to keep profitability at a reasonable leveldue to their relatively stable aftermarket businessSupplier EBIT profitability by domain 2009 vs. 2007Electric/info. Powertrain Chassis Exterior Tires Interior ALLChange 2009 vs.2007 [%-pts.]-4.9 -4.8-4.4 -3.8-3.4 -3.3 -4.3EBITmargin 1)[%]5.40.56.96.521 2.1 21 2.15.06.85.74.63.41.2 1.3 1.42007 2009 2007 2009 2007 2009 2007 2009 2007 2009 2007 2009 2007 2009EBIT 1)gain/decline2008-2009 vs.2007 [EUR bn]~ -5 ~ -25 ~ -10 ~-15 ~ -5 ~ -15 ~ -751) EBIT after restructuring itemsSource: Roland Berger/Lazard9

SUPPLIER INSOLVENCIESAs a result of the crisis, around 350 suppliers went bankrupt globallyin 2008 and 2009Insolvencies in the supply industry 2007-2009~25~45~100REGIONAL TRENDS> In the US, numerous majorsuppliers have been hit hard sincethe beginning of 2008 (main reason:extremely one-sided dependency onthe Detroit 3)> In Europe, the wave ofinsolvencies began in the final~552007 20082009quarter of 2008 and peaked in the~40~70middle of 2009, affecting primarily~20small and medium-sized businesses(main reason: major dependency on~25 ~25the premium segment)2007 20082009> In Japan it is particularly the very200720082009small and small suppliers that havebeen hit hard> Only a very low number ofinsolvencies have been seen innewly industrializing countriesSource: Roland Berger12

CASHFLOWBig surprise: Due to massive countermeasures, the global supplierindustry achieved a positive free cash flow in 2009Supplier free cashflows 2000-2009Free cashflow 1) [% of revenues]Free cashflow 1) [EUR bn]35 3.53.12.507 0.708 0.822 2.24.224 2)> Tremendous capex cuts> Substantial net working capital reduction> Lower tax expenses> Positive impact from Japanese suppliers 3)2.4> Revenue decrease inQ4/2008> Operating costs and1.2capex still at peak level0.41832720002001200220032004200520062007200820092007200820091) EBITDA after restructuring items ./. tax ./. change in net working capital ./. capex ; investments other than capex (e.g. acquisitions) not considered2) Adjusted for net working capital increase 3) Positive impact from reporting period (ended March 31, 2010)Source: Roland Berger/Lazard Global Automotive Supplier Database 201013

CASHFLOWOut of the ~EUR 75 bn decline in profitability, only one quarter hasbeen turned into a "loss" of cash compared to pre-crisis levelsComparison of EBIT vs. free cashflow decline 2008-2009 vs. 2007 [EUR bn]-191416-6213-7513EBIT 1)decline2008/09Add- back ofhigher deprecia-tion/amortization2)EBITDA 1)decline2008/09Reduction oftax expensesReduction of networking capitalReduction ofcapital expenditureFree cashflowdecline2008/091) After restructuring items 2) Not cash-relevantSource: Roland Berger/Lazard Global Automotive Supplier Database 201014

Looking ahead: The global market for automotive OE 1) componentswill grow by approx. EUR 160 bn from 2008 to 2020Major drivers for development of automotive component market [EUR bn]VOLUME PRODUCT MIX 2) PRICE∑ = ~175∑ = ~701205085658530 BRI55C25~665~505Revenuepool 2008Triad 3)BRICRoWAdditions of"winning"componentsDecline in"losing"componentsPrice reductionfor hardwareRevenuepool 20201) Original equipment 2) Includes price reductions of electronics-related content 2) Partly due to crisis recovery effectSource: Roland Berger automotive components market model15

But: the EUR 160 bn is mainly created in the powertrain domain andin the BRIC markets – Most other product segments will stagnateAdditional auto component revenue pool 2020 vs. 2008 by domain/region [EUR bn]TriadBRICOtherRoWPowertrain22.220.10.525.09.85.3Chassis1.62.40.76.23.01.9Exterior3.85.6-1.312.47.14.6Interior19 1.919 1.9-1.6 1611.063 6.337 3.7Infotainment0.50.9-1.41.10.50.5Bubble size represents the revenue pool delta 2020-2008 exceeds EUR 10 bn Shrinking marketsSource: Roland Berger automotive components market model16

Some more bad news for suppliers will come from the generalautomotive industry environmentTrends shaping the supplier industry in the futureCar buyersOEMsSUPPLIERSRaw material markets1Regional shiftPi Price sensitivityReduced price levelLegislation2CO 2 reductionEmission reductionSafety regulations3Additional cost savingmeasuresLocalization ofproduction (to salesmarkets)Overcapacity/restructuring (triad)Increased technologicalcomplexityFurtherincreasedmargin pressureand risingcapital needs4Provider consolidationRising i demand d(from other industries)Increasing pricesCapital markets5Liquidity shortages(equity and debt)Loss of confidenceof investorsAdditional costIncreased pressureIncreasing capital costs= increased importance over the past two yearsSource: Roland Berger/Lazard17

3 OEMSAfter some concessions during the crisis, OEMs have dramaticallyincreased pressure on their suppliers againExamples of selected recent OEM requests made to suppliers (not representative)OEMs"Pay to play": request for immediate reduction of prices by up to 10% on entire existingbusiness (despite contracted higher price levels) to avoid being "blacklisted" for 2010Verbally agreed contracts are awarded to competitorOutstanding and approved invoices are simply not being paidSignificant ifi extension of warranty periods within existing i contracts, e.g. from 24 to 36monthsExpenses for R&D services or for investments taken by the supplier are not beingreimbursed despite different (earlier) agreementsPayments are being delayed by not confirming that pre-agreed quality gates in joint R&Dprojects have been met (even though parts are already in series production)Elements of running contracts are simply being changed by the OEMs (in favor of theOEM), e.g. calculation of raw material cost compensationSUPPLIERSSource: Roland Berger/Lazard18

3 OEMSOEMs' dilemma: From an individual perspective, they have to squeezesuppliers – But this also creates the "problems of tomorrow"OEMs' dilemmaGlobalovercapacityOEM pressureon suppliersSuppliersUnhealthyh OEMs don'tfight for their industrycure the unhealthysurvivalstructures structures> Car markets arebuyers' markets> Strong and furtherincreasing consumerprice pressure> In a highly competitiveenvironment,profitability of theindividual OEMs mustbe the key ypriority> OEMs need to avoidcreating positiveexternal effects forother OEMs via "tooattractive pricing" forsuppliers> Only limitation:potential quality anddelivery problems> Most suppliers try todefend theirbusiness via veryaggressive pricing> Shutting downplants or reducingcapacity is mostlynot considered as areal option (alsogiven the high exitcosts)> Many productsegments have astructurally low profitmargin (especiallyprocess-focusedsegments)> These segments aremostly alsocharacterized by highfragmentation – andan above-averagenumber of suppliersare in poor shape> Legal issues (anti-trust)prevent OEMs from drivingactive consolidation> OEMs don't want to create"reference cases" forother weak suppliers byresolving critical situations> OEMs have very differentexposure and objectivesin specific segments> OEMs don't want to injecttheir own cash into thesupplier businessSource: Roland Berger/Lazard19

As a consequence of these trends, we expect supplier profitability todecline and capex to increase after 2010Profitability and investment requirements of the supplier industry in the futureEBIT margin 1) [%]Investment requirements 2010-2015 [% of revenues]5.7~6 64 6.45.6~4-5In addition: HigherR&D expenses4.46-6.51.21.42007 2008 2009 2010 2011-15e2007 2008 2009 2010-2015e1) EBIT after restructuring itemsSource: Roland Berger/Lazard20

The situation will become particularly challenging for a large groupof structural underperformers, which represent ~20% of the industrySupplier assessment 2009 based on performance and stability [% of all suppliers]PERFORM MANCEAboveaverageAverage10%8%9%5%TOP performer19%8%PERFORMANCE> Revenue growth 2000-2009 vs. industryaverage [2.6%]> Average ROCE 2000-2009 vs. industryaverage [7.2%]> ROCE 2009 vs. industry average [2.2%]LOW performerSTABILITYBelowaverage19%Belowaverage11%Average11%AboveaverageSTABILITY> Leverage 2009 vs. industry average [1.6x]> Equity ratio 2009 vs. industry average[36.7%]Source: Roland Berger/Lazard21

Most of the process-focused segments are still far too fragmented,resulting in overcapacity and price warsCompetitor structure in selected process-based segments [market share, %]#1#2#3#4#5Other12%4%3% 3%75%3%11%9%9%8%8%13%11%9%4% 8%12%11%8%8%8%55% 55% 53%16%12%10%10%9%16%14%12%10%7%16%14%14%9%9%43% 41% 38%20%18%13%12%8%29%50% of theglobalmarketAluminumalloy castingsCast-ironcyl. blocksFriction discsCold formingNVH1)Pipe systems2)Sealingcomponents 2)Acoustics/insulation1) Noise, vibration, harshness 2) European market shareSource: Roland Berger22

Suppliers and OEMs need to switch to a more collaborativeapproach in order to solve the structural problems of the industryNeed for actionSUPPLIERS' NEED FOR ACTIONOEMS' NEED FOR ACTION> Further improve operational efficiency> Establish strategic partnershipsalong the entire value chainwith selected suppliers> Increase discipline on pricing side andrefuse unprofitable business> Select growth opportunities (regions,products) very carefully> Look for additional sources of financing> Collectively reduce pressuretowards supply base (e.g. "pay toplay")> Actively support consolidationprocess, especially in unhealthy(process- focused) segmentsSource: Roland Berger/Lazard23