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2012 U.S. Automotive Industry
Survey and Confidence Index
“A Return to Optimism”
2 Booz & Company
Automotive Practice Contacts:
Chicago
Brian Collie
Partner
+1-312-578-4637
brian.collie@booz.com
New York
Scott Corwin
Partner
+1-212-551-6578
scott.corwin@booz.com
Media Contact:
New York
Margaret Kashmir
+1-973-879-7213
margaret.kashmir@booz.com
3 Booz & Company
EXECUTIVE
SUMMARY
A Return to Fundamentals
The global economic crisis, the collapse of automotive sales in
2008–'09, and the rise of emerging markets such as China and India
have combined to force the U.S. auto industry to revolutionize. The
industry is rallying around a novel view of what a new-car sale should
be: less frequent and more profitable.
According to Booz & Company’s 2012 U.S. Automotive Industry
Survey and Confidence Index, the mood among auto executives is
buoyant—with more than 90 percent of respondents describing the
current state of the industry as either somewhat better or much better
than last year. The survey was completed in early March, and the in-
dustry’s consensus at that time was that U.S. auto sales will reach 13.7
million in 2012—a nearly double-digit improvement over last year’s
sales, but also lower than recently revised industry forecasts.
There’s a telling paradox here. Auto
execs are expressing optimism even
though projected sales are way off
from the roughly 17 million vehicles
automakers were selling per year
during the last decade. So what's
driving this return to optimism?
We believe the survey results illustrate the potential this industry has
to be a profit engine when it is able to more closely align supply with
demand—i.e., when it returns to the fundamentals. Many major auto
manufacturers and suppliers have undertaken significant efforts in the
past few years to clean balance sheets, remove excess capacity, and
restructure costs—effectively hitting the “reset” button to make more
efficient use of production capacity and make a profit at far lower
volumes. Now as volume rebounds, driven in large part by pent-up
Continued on page 4
4 Booz & Company
demand, easier credit, and greater consumer confidence, executives are
beginning to see their efforts pay off, with many companies reporting
record profitability over the past few quarters.
It remains to be seen whether
the industry has made a historic
adjustment to a “new normal.”
Nevertheless, early signs are promising.
The industry clearly has expressed a very sober collective
understanding that it needs to grow smartly—namely, not let capacity
grow faster than natural market demand. Gone, for now, is the
reflexive pursuit of greater market share, with OEMs focused on
serving and delighting motivated consumers rather than trying to find
buyers for an overabundance of vehicles—i.e., making more profit on
fewer sales. Of the OEM executives who responded to our survey, 92
percent say they are either producing just enough or too few vehicles to
satisfy demand. And 77 percent say their companies are reducing or at
least holding the line on price incentives.
The U.S. auto recovery demonstrates that with stronger balance sheets,
legacy liabilities shed, debt reduction, and product/capital investment,
this industry can return to consistent levels of profitability at lower
annual sales volumes.
Detroit Versus the World
Last year was a good one for the Detroit 3 as they saw their share of
the overall U.S. automobile market grow at the same time that the
market grew. And the vast majority of respondents—86 percent of
suppliers and 72 percent of OEMs—believe that the Detroit brands
will either boost their market share further or hold on to the share
they already have in 2012. Longer term, however, with the exception
of Ford—which an impressive 90 percent of respondents believe will
maintain or grow market share—respondents are less bullish on the
future growth prospects of the Detroit 3.
Executives were much more bullish on long-term market-share
prospects for Hyundai/Kia and Volkswagen/Audi, with 88 percent and
72 percent of respondents respectively citing these two OEMs as likely
to grow share over the next five years. Similarly, respondents were also
relatively bullish on prospects for Chinese OEMs. Chinese automakers
hardly have a toehold in the U.S. now—their market share is less than
1 percent, and that stems from Geely’s acquisition of Volvo. However,
53 percent of our survey respondents expect Chinese automakers to
reach or exceed a 4 percent share of the market by 2020, with Geely,
Continued on page 5
5 Booz & Company
SAIC, and Chery cited most often as the Chinese OEM likely to have
the leading share position in 2020. But perceptions may not match the
reality, as industry leaders are suggesting a rate of penetration much
faster than historical precedents—specifically the Japanese and Korean
manufacturers’ growth in the U.S.
Are the Chinese really poised to
quickly and effectively grow market
share in the U.S. market?
Booz & Company’s China team thinks the emergence of Chinese
manufacturers is real, but not likely to occur as fast as the survey
results suggest. The actual performance and capabilities of the leading
Chinese vehicle manufacturers—as well as their readiness to compete
in developed markets such as the U.S.—is overestimated for several
reasons. First, the size and scale of these companies are fairly small,
especially if the sales volumes of their Western joint-venture partners
are not included. In most cases, the joint venture itself far overshadows
the relatively young Chinese brand. In addition, the domestic market
in China is geared to first-time buyers in hypercompetitive entry-
level segments, where margins are difficult to sustain, so their overall
profitability is typically quite low. That reduces the resources these
companies have to expand overseas. Furthermore, none of the leading
Chinese manufacturers has yet achieved a major product or process
breakthrough that could give it a significant competitive advantage.
This is in sharp contrast to companies like Toyota, which built its
initial position in the U.S. through its famed Toyota Production
System, a new and superior operating model.
To crack global markets, Chinese
automakers will need to develop
world-class global supply chains
and supplier partnerships, offer
competitive financing products,
and deploy the talents of a global
human resources pool.
That won’t happen overnight. It will also take some time for Chinese
carmakers to learn to compete in markets where they don’t have the
benefit of a low-paid labor force, management team, and supplier
Continued on page 6
6 Booz & Company
base or the favorable subsidy policies of the central and local Chinese
government. Finally, they need to build a retail network and brand in
the U.S., which is a substantial investment. Nevertheless, many Chinese
automotive executives aspire to capture a meaningful share of the U.S.
market. Eventually, the U.S. market will see more new competitors
emerging from China who will likely offer well-equipped models at
very low prices, putting significant pressure on incumbent players.
Alternative Powertrains
Though a tiny fraction of the market, vehicles that run on alternative
powertrains are here to stay, say our survey respondents. The case for
full-hybrid cars seems strongest; 70 percent of respondents say they are
more confident in that category than they were a year ago. Auto execs
are more skeptical of fuel-cell or battery electric cars—with 75 and 71
percent of respondents respectively saying they are less confident in
these two powertrains compared to last year.
But most car execs say the future
of alternative powertrains is
highly dependent on continued
government support.
If government support continues, 58 percent believe, non-gas cars
could achieve a market share of 10 percent or more. In the absence
of government support, however, this figure drops to 30 percent, a
stark contrast indeed. Moreover, greater adoption of this automobile
segment will depend not just on continued support but on the right
kind of support. Truly disruptive technologies such as plug-in vehicles
will require a more balanced approach to government assistance,
such as infrastructure support for a national grid of rapid-cycle
charging stations.
Consumer Digitization
Over the coming years the digitization of the vehicle will continue
to accelerate, and do so across all facets of the vehicle, including
vehicle systems, safety, and in-vehicle connectivity and entertainment.
Presently OEMs are considering a wide range of alternatives for inte-
grating consumer digitization into the vehicle. Thirty-eight percent of
OEM respondents say they intend to create their own digitization and
consumer connectivity platform. This may run counter to consumer
preferences. While OEMs should maintain relatively closed systems
around vehicle systems, customers want the “plug and play” flexibility
offered via their smartphones, not automaker-controlled internet
Continued on page 7
7 Booz & Company
connectivity, social media, entertainment, telephone, and navigation. This
disconnect, coupled with new “distracted driver” regulations, means
OEMs will likely need to rethink
their approach to in-vehicle
connectivity and entertainment.
“Black Swan” Preparedness
The 2011 Tohoku earthquake was a major source of disruption for
automakers last year. Of OEM respondents, 55 percent say their
companies faced “some” or “significant” impact from the event.
A significant number of suppliers, 42 percent, were also hurt. And
these numbers would likely have been substantially higher if OEMs
and suppliers had not had safety stock and redundancies in place to
mitigate the impact of this momentous event. The upheaval has forced
the auto industry to confront a fundamental weakness in lean manu-
facturing. Though the idea of “just-in-time” delivery has helped boost
the industry’s fortunes over the past three decades, it proved to be a
major impediment for automakers, particularly those in Japan that
were trying to recover quickly from the disaster.
How automakers should best prepare for the next major disruption
in their production remains unclear. Auto executives are seeking ways
to better prepare—92 percent of OEM executive respondents and 85
percent of supplier executive respondents say so. For now, nobody is
considering simply boosting inventories. The steps respondents say
they’ve taken include “identifying risks,” sorting out “contingency
plans” with suppliers, “localizing their supply base,” and, in the case
of nearly a third of respondents, increasing the use of “dual sourcing.”
This move to build new organizational
capabilities clearly signals that the
industry was not prepared for a
major disaster of this magnitude.
Continued on page 8
8 Booz & Company
Four Forces to Shape the Industry
In summary, the results of this year’s survey tell an important story of
four forces likely to shape the new automotive industry.
	
Reemergence of Fundamentals: The U.S. auto recovery demonstrates
that with stronger balance sheets, legacy liabilities shed, debt
reduction, and better product, this industry can return to consistent
levels of profitability at lower annual sales volumes. The industry
clearly has expressed a very sober collective understanding that it
needs to grow smartly—specifically, to not let capacity grow faster
than natural market demand. This has been a product-led renaissance
and there is strong confidence in the attractiveness of current vehicle
offerings and product portfolio. Similarly, suppliers are unwilling to
cede leverage in their relationship with OEMs and are working to
stretch existing production capacity further, postponing new capacity.
A new normal is emerging with an
emphasis on building brand equity
with consumers, improving the
experience, continuing to improve the
cost position, and competing globally.
Shifting Demand Centers: The U.S. remains the most profitable
automotive market in the world, and the place where all global
manufacturers need to succeed. Over the long term, though, emerging
markets have much stronger growth prospects. This shift requires
automakers to preserve their competitive position in developed, mature
markets while also funding the investment necessary for longer-
term growth elsewhere. To that end automakers must gain a greater
understanding of the requirements, dynamics, and needs of emerging
markets, and they must assess how best to compete in markets with
fundamentally different economics, consumers, and competitors.
Powertrain and Technology Uncertainty: There remains a strong view
that improvements in internal combustion engines are still possible
and can generate meaningful increases in fuel efficiency. Confidence is
stronger in full and mild hybrids, while skepticism remains about the
potential of full-electric and fuel-cell vehicles. The adoption rate of
alternative powertrains is highly dependent upon government
support, fuel prices and availability, and OEM/supplier willingness
to make investments.
Beyond alternative powertrains, the industry is on the cusp of
significant technological changes that could result in breakthrough,
Continued on page 9
9 Booz & Company
paradigm-shifting innovation, especially in vehicle connectivity that
could result in creating real innovation in personal mobility. Whether
a company is a leader or a follower, playing in these new markets will
require a significant investment in both financial and human capital.
As such, companies should be very selective with where they place
their bets and do so only after they have confidence that they have the
difference making capabilities necessary to win and that such bets are
coherent with their broader strategy.
Interconnected Supply Chain: The unfortunate events of the Japanese
tsunami and floods in Thailand brought home the limitations of a lean
global supply chain to “Black Swan” events. Actions taken in response
seem highly appropriate given what happened: assess the damage,
weigh future events and probabilities, work with suppliers to be better
prepared, and build new organizational capabilities. Overall, though,
we wonder though whether the industry is sufficiently prepared for the
next “Black Swan” event, or whether these actions were a one-time
response to a discrete occurrence. These measures are expensive and,
in a brutally competitive sector, they eat into margins. Accordingly,
companies in the industry must determine an appropriate level of
investment in risk mitigation—low enough to be cost-effective,
and high enough to ease the risk of being surprised by the next
supply-chain disruption.
Conclusion
The executives of the auto industry’s leading companies have many
reasons to feel proud this year. They haven’t coasted on bailouts;
they have learned some hard lessons and built a stable platform for
profitable growth. They now face several external risks, ranging from
changes in government regulation to potential fuel disruptions from
the Middle East and continued economic woes in Europe. Yet if history
is any guide, the greater risk could be from becoming overoptimistic
about the market and expanding to meet demand that does not
incrementally grow as quickly.
Here’s another scenario, though: If the U.S. industry can stay
disciplined and preserve the efficiencies it fought so hard to implement,
it will remain cost competitive with the most efficient car markets in
the world. It will be smaller than in the artificially inflated boom years
of the past, but with a far greater focus on fundamentals. And it will
sell higher-quality cars at greater profits. Which path the industry
takes lies within its own control, provided it can avoid repeating the
mistakes of the past.
Continued on page 10
10 Booz & Company
Key Data Highlights
• Relative to last year, industry executives are significantly more bullish on the
state of the automotive industry, with 94 percent of OEMs and 92 percent of
suppliers describing it as either “somewhat” or “much better” than last year
• Approximately 52 percent of OEM respondents are forecasting revenue
growth in excess of 11 percent for 2012, compared to just 32 percent of
supplier respondents
• 34 percent of suppliers and 55 percent of OEMs say cuts in capacity have
left them constrained
• 77 percent of OEM respondents claim to be either holding the line on
incentives or significantly reducing them
• Automotive executives cite Hyundai/Kia (88 percent) and Volkswagen/Audi
(72 percent) as the OEMs most likely to grow market share over the
next five years
• 53 percent of respondents project a U.S. market share of 4 percent or more
for Chinese OEMs by 2020
• With continued government support, 58 percent of respondents believe,
alternative powertrains will command more than 10 percent of the market
by 2020. However, without continued government support, this figure drops
to 30 percent
• Relative to 2011, respondents are significantly more confident in the
long term prospects of full-hybrid (70 percent of respondents described
themselves as more confident than last year) and mild-hybrid powertrains
(65 percent), but less confident in the long-term prospects for battery electric
and fuel-cell electric powertrains (~70 percent of respondents described
themselves as less confident)
• 55 percent of OEMs and 42 percent of suppliers say they were impacted
by the 2011 Japanese earthquake and tsunami (a figure which would have
been higher if not for risk mitigation steps that had already been taken),
demonstrating how global the U.S. auto supply chain is today
• 92 percent of OEM executive respondents and 85 percent of supplier
executive respondents say they are seeking ways to better prepare for future
“Black Swan” events
11 Booz  Company
detailed data
analysis
A Return to Optimism
Perceived State of the Industry Compared to January 2011
1%0%
63%
66%
6% 7%
1%0% 0% 0%
Much
Worse
Somewhat
Worse
About the
Same
31%
26%
Somewhat
Better
Much
Better
Over the next five yea
industry market to se
annual GDP growth
Five Year Outlook for the U
3
Much
Worse
Som
W
Key Drivers of Strong 2011 Industry Performance
Percentage of respondents that ranked a driver in their top 3
OEMs
The improvement in the industry’s performance was driven in
large part by the industry restructuring and pent-up demand
22%
Availability
of Credit
30%
Pricing
Discipline
34%
Better
Product
46%
Improved
Customer
Confidence
48%
Production
Discipline/
Tight
Inventory
58%
Pent-Up
Demand
62%
Industry
Restructuring
Suppliers
16%
Pricing
Discipline
22%
Availability
of Credit
Respondents forecast U.S. sales in 2012 to approach 14M
Average U.S. Light Vehicle Sales Forecasts
2012-2016
OEM
Supplier
OEM
Supplier
Perceived State of the
from 2011 U.S. Auto Indus
y Compared to January 2011
0% 0%1%0%
63%
66%
6% 7%
About the
Same
31%
26%
Somewhat
Better
Much
Better
47%
63%
50%
34%
2%3%
Much
Worse
Somewhat
Worse
About the
Same
Somewhat
Better
Much
Better
dustry Performance
ed a driver in their top 3
ustry’s performance was driven in
structuring and pent-up demand
46% 48%
58%
62%
Suppliers
58%
68%
72%
OEM
Supplier
Perceived State of the Industry January 2011 Compared to January 2009
from 2011 U.S. Auto Industry Survey
• Relative to last year, industry executives are significantly more bullish
on the current state of the automotive industry, with 94 percent of
OEM respondents and 92 percent of supplier respondents describing
the industry as somewhat or much better than last year
Continued on page 12
12 Booz  Company
A Return to Optimism (Continued)
Continued on page 13
• This is a stark contrast from last year’s study, where 53 percent of
OEMs and 37 percent of suppliers said the industry was about the
same as or worse than January 2009
Vehicle manufacturers and suppliers
are increasingly profitable, and many
industry executives are now far more
bullish about their own prospects,
and those of the industry at large,
than they have been in recent years.
It’s a success story that would have
seemed implausible back in 2009.
Yet the industry’s current strength
stems from a combination of internal
and external factors that has resulted
in a far better alignment between
supply and demand.
13 Booz  Company
More Closely Aligned Supply and Demand
• This return to optimism is driven in large part by a much better
alignment between supply and demand
Continued on page 14
1%0%
6% 7%
1%0% 0% 0%
Much
Worse
Somewhat
Worse
About the
Same
Somewhat
Better
Much
Better
Over the next five yea
industry market to se
annual GDP growth
Five Year Outlook for the U
4%6%
Little to no growth
3
Much
Worse
Som
W
Key Drivers of Strong 2011 Industry Performance
Percentage of respondents that ranked a driver in their top 3
OEMs
The improvement in the industry’s performance was driven in
large part by the industry restructuring and pent-up demand
22%
Availability
of Credit
30%
Pricing
Discipline
34%
Better
Product
46%
Improved
Customer
Confidence
48%
Production
Discipline/
Tight
Inventory
58%
Pent-Up
Demand
62%
Industry
Restructuring
Suppliers
16%
Pricing
Discipline
22%
Availability
of Credit
Respondents forecast U.S. sales in 2012 to approach 14M
Average U.S. Light Vehicle Sales Forecasts
2012-2016
16.0
Units(Millions)
15.0
14.0
11.6
12.8
13.7
14.6
15.4
13.0
12.0
0.0
2010 2011 2012 2013 2014 2015 2016
OEM
Supplier
y Compared to January 2011
0% 0%1%0%
63%
66%
6% 7%
About the
Same
31%
26%
Somewhat
Better
Much
Better
Over the next five years executives expect the U.S. automotive
industry market to see steady growth - at levels consistent with
annual GDP growth
Five Year Outlook for the U.S. Auto Industry
86% 86%
47%
63%
50%
34%
2%3%
Much
Worse
Somewhat
Worse
About the
Same
Somewhat
Better
Much
Better
dustry Performance
ed a driver in their top 3
ustry’s performance was driven in
structuring and pent-up demand
46%
Improved
Customer
Confidence
48%
Production
Discipline/
Tight
Inventory
58%
Pent-Up
Demand
62%
Industry
Restructuring
Suppliers
16%
Pricing
Discipline
22%
Availability
of Credit
30%
Better
Product
34%
Production
Discipline/
Tight
Inventory
58%
Improved
Customer
Confidence
68%
Pent-Up
Demand
72%
Industry
Restructuring
ales in 2012 to approach 14M
casts
15.4
OEM
Supplier
OEM
Supplier
Perceived State of the Industry January 2011 Compared to January 2009
from 2011 U.S. Auto Industry Survey
14 Booz  Company
More Closely Aligned Supply and Demand (Continued)
Continued on page 15
• To the supply side, over 70 percent of respondents cited industry
restructuring as being one of top three drivers of strong 2011
industry performance—reflecting the great (and rewarding) lengths
taken to clean balance sheets, remove excess capacity, and restructure
costs, in essence significantly lowering the break-even costs for
many companies
• This restructuring, combined with the strong rebound in sales, driven
in large part by pent-up demand, is driving record profitability for
many companies
15 Booz  Company
Strong Growth
• Specific to their own companies, both OEMs and suppliers alike are
“very confident” of profitable revenue growth in 2012, with OEMs
slightly more so than suppliers
• 52 percent of OEMs and 32 percent of suppliers forecast growth in
excess of 11 percent
Continued on page 16
Specific to their own companies, both OEMs and Suppliers are
confident of profitable revenue growth in 2012, with OEMs
slightly more so than Suppliers
Confidence in Profitable Revenue Growth over Next 12 Months
42%
35%
51%
41%
4%5%
Less Confident
2%0%
Not Confident Confident
2%
18%
Neutral Very Confident
Planned Growth in 2012 U.S. Revenue
OEM
Supplier
OEM
Supplier
27%
40%
24%
2%
0%
2%
0%
Negative
Growth
No Growth 1%-5%
29%
18%
6%-10% 11%-15%
23%
14%
Greater
than 15%
How will this growth
Expected 2012 Revenue
OEM
Supplier
6%
2% 1% 0%
Don’t
Know
Muc
Slow
21%
OEMs credit their current product portfolio and pipeline as the reason for their positive outl
Important Internal Factors Contributing to Positive 2012 Future Outlook – OEMs
Percentage of respondents that ranked a factor in their top 3
Specific to their own companies, both OEMs and Suppliers are
confident of profitable revenue growth in 2012, with OEMs
slightly more so than Suppliers
Confidence in Profitable Revenue Growth over Next 12 Months
42%
35%
51%
41%
4%5%
Less Confident
2%0%
Not Confident Confident
2%
18%
Neutral Very Confident
Planned Growth in 2012 U.S. Revenue
OEM
Supplier
OEM
Supplier
27%
40%
24%
2%
0%
2%
0%
Negative
Growth
No Growth 1%-5%
29%
18%
6%-10% 11%-15%
23%
14%
Greater
than 15%
How will this growth
Expected 2012 Revenue
OEM
Supplier
6%
2% 1% 0%
Don’t
Know
Muc
Slow
21%
60%
OEMs credit their current product portfolio and pipeline as the reason for their positive outl
Important Internal Factors Contributing to Positive 2012 Future Outlook – OEMs
Percentage of respondents that ranked a factor in their top 3
“Other” includes internal
process execution, leadership,
and strategic vision
16 Booz  Company
Behind the Growth Predictions
2%
0%
2%
0%
Negative
Growth
No Growth 1%-5% 6%-10% 11%-15% Greater
than 15%
6%
2% 1% 0%
Don’t
Know
Much
Slower
Slower About
Equal
Faster
10%
Engineering/
RD
10%
Other
16%
Sales
18%
Ability to
Innovate
18%
Customer
Experience/
Relationship
20%
Cost
Position
25%
Marketing
25%
Retail
Network/
Footprint
29%
Product
Pipeline
60%
Financial
Position
OEMs credit their current product portfolio and pipeline as the reason for their positive outlook in 2012
Important Internal Factors Contributing to Positive 2012 Future Outlook – OEMs
Percentage of respondents that ranked a factor in their top 3
Current
Product
Portfolio
69%
“Other” includes internal
process execution, leadership,
and strategic vision
5%
Other
7%
Marketing
19%
Sales Financial
Position
27%
20%
Engineering/
RD
Cost
Position
Product
Pipeline
43%
38%
28%
Current
Product
Portfolio
55%
Customer
Base and
Relationships
58%
Ability to
Innovate
For Suppliers, though product is important, customer mix, and to a lesser extent cost position,
play a key role in shaping outlook
Important Internal Factors Contributing to Positive 2012 Outlook – Suppliers
Percentage of suppliers that ranked a factor in their top 3
OEMs and 34% of Supplier respondents say
e presently capacity constrained
Of the OEM executives who responded to our survey, 92% say they
are either producing just enough or too few vehicles to satisfy demand
“Other” includes internal
process execution, leadership,
and strategic vision
Continued on page 17
17 Booz  Company
Behind the Growth Predictions (Continued)
• OEMs credit their current product portfolio (69 percent) and
pipeline (60 percent) as the reason for their optimism in 2012.
This has created a wealth of attractive new vehicle choices for
customers—whether it be more stylish exteriors, comfortable
interiors, performance, fuel efficiency, or consumer-friendly technol-
ogy, customer have some of the best choices in years
• Suppliers are more nuanced in their response. While they view
product as important, customer mix (i.e., will they reward innova-
tion, will they pay for value created) and, to a lesser extent, cost are
viewed as key drivers of a positive 2012 outlook
• This response from suppliers illustrates two key insights:
 First, not all customers are attractive partners, as some are more
likely to reward innovation and pay for value created than others
 Secondly, unless a supplier is in a position to create end-user pull,
drive demonstrable reductions in OE costs, improve fuel effi-
ciency, or be a trusted solutions provider for an OEM’s problems,
it is hard not to have the competition resorting to meeting basic
requirements at the lowest cost—and in such situations, having the
low-cost position on the supply curve is paramount
Continued on page 18
18 Booz  Company
Bullish Forecasting
Over the next five yea
industry market to se
annual GDP growth
Five Year Outlook for the U
4%6%
Little to no growth
Availability
of Credit
Pricing
Discipline
Better
Product
Improved
Customer
Confidence
Production
Discipline/
Tight
Inventory
Pent-Up
Demand
Industry
Restructuring
Pricing
Discipline
Availability
of Credit
Respondents forecast U.S. sales in 2012 to approach 14M
Average U.S. Light Vehicle Sales Forecasts
2012-2016
16.0Units(Millions)
15.0
14.0
11.6
12.8
13.7
14.6
15.4
13.0
12.0
0.0
2010 2011 2012 2013 2014 2015 2016
OEM
Supplier
Over the next five years executives expect the U.S. automotive
industry market to see steady growth - at levels consistent with
annual GDP growth
Five Year Outlook for the U.S. Auto Industry
8%
10%
86% 86%
4%6%
Little to no growth Steady growth consistent
with GDP
Strong growth
and prosperity
dustry Performance
ed a driver in their top 3
ustry’s performance was driven in
structuring and pent-up demand
46%
Improved
Customer
Confidence
48%
Production
Discipline/
Tight
Inventory
58%
Pent-Up
Demand
62%
Industry
Restructuring
Suppliers
16%
Pricing
Discipline
22%
Availability
of Credit
30%
Better
Product
34%
Production
Discipline/
Tight
Inventory
58%
Improved
Customer
Confidence
68%
Pent-Up
Demand
72%
Industry
Restructuring
ales in 2012 to approach 14M
casts
14.6
15.4
2013 2014 2015 2016
OEM
Supplier
Continued on page 19
• Auto executives forecast sales of passenger vehicles will approach
14 million in 2012—a number slightly below SAAR figures from Q1
2012 but nevertheless a strong improvement over 2011
19 Booz  Company
Bullish Forecasting (Continued)
Continued on page 20
• Mid-term, respondents forecast that U.S. sales will settle into a level
more consistent with historical growth, in line with the GDP, and
reach 15.4 million in 2016
Externally, several factors are
turning in the industry’s favor.
Consumer confidence is rising,
and credit is more widely available.
Rising fuel prices are making new,
more fuel-efficient models more
attractive. Pent-up demand is also
spurring sales. The average U.S. car
is currently more than 10 years old
and has logged more than 100,000
miles; both numbers are far above
historical averages. Many consumers
who put off purchasing a new car
during the dark years of the recession
have fewer reasons to do so much
longer, and rising gas prices are also
prompting some buyers to upgrade
to more fuel-efficient models.
20 Booz  Company
Detroit Three Expected to Remain Strong in 2012
Lose Share Maintain Share Gain Share
Mercedes Nissan/
Infiniti
Honda/
Acura
GM Chrysler/
Dodge/Fiat
BMW/
Mini
Ford VW/AudiToyota/
Lexus
Respondents are optimistic that the Detroit 3 will be able to build
on 2011 success and maintain or grow market share in 2012
Expected Detroit 3 Market Share Performance in 2012
30% 29%
42%
57%
14%
28%
Lose Market Share Maintain Market Share Grow Market Share
Geely
SAIC
Chery
BYD
FAW
Dongfeng
4%Greatwall
3%JAC
2%ChangAn
1%GAC
Executives see a bright future for Chinese OEMs, forecasting a rate
of U.S. market penetration more rapid than historical precedent
Forecasted Chinese OEM U.S. Share in 2020
Chinese OEMs wi
U.S. Share throug
47%
0%-4%
32%
4%-8%
11%
8%-12%
10%
12%+
U.S. Market Share of
Korean OEMs was 5%
as recently as 2008
Forecast Share %
OEM
Supplier
Continued on page 21
• Respondents are optimistic that the Detroit 3 will be able to build on
2011 success and maintain or grow market share in 2012
• The Detroit 3 have made great strides in improving distribution,
quality of vehicles, and the overall sales experience
• Their biggest future risk likely stems from the remaining gap between
their fully burdened labor rates relative to foreign transplants
21 Booz  Company
Forecasted Change in Market Share Over the Next Five Years
Lose Share Maintain Share Gain Share
7%
66%
27%
Mercedes
13%
47%
40%
Nissan/
Infiniti
16%
53%
31%
Honda/
Acura
20%
46%
34%
GM
28%
40%
32%
Chrysler/
Dodge/Fiat
28%
46%
26%
BMW/
Mini
31%
59%
10%
Ford
38%
52%
10%
VW/Audi
72%
24%
4%
Hyundai/
Kia
100%
88%
10%
Toyota/
Lexus
Respondents are optimistic that the Detroit 3 will be able to build
on 2011 success and maintain or grow market share in 2012
Expected Detroit 3 Market Share Performance in 2012
Over the next 5 years, executives believe Hyundai/Kia and Volkswagon/Audi
are the OEMs most likely to gain market share
Expected U.S. Market Share Changes in Next 5 Years
30% 29%
42%
57%
14%
28%
Lose Market Share Maintain Market Share Grow Market Share
Executives see a bright future for Chinese OEMs, forecasting a rate
of U.S. market penetration more rapid than historical precedent
Forecasted Chinese OEM U.S. Share in 2020
Chinese OEMs with Greatest Potential to Capture
U.S. Share through 2020
2%
OEM
Supplier
• In terms of vehicle sales, executives collectively cite Hyundai/Kia (88
percent) and Volkswagen/Audi (72 percent) as the OEMs most likely
to grow market share over the next five years
• It is important to note, though, that in the current growth environment,
relative market share may not be as significant as it was five years ago
• In a rising market, now that all manufacturers have effectively
lowered their cost base to become profitable at lower volumes, they
can enjoy the benefit of annual increases in market volumes where
they sell more vehicles profitably. They do not need to obsess over
slivers of share to the degree that they did in the past because of the
zero sum dynamics of competing in an industry operating annually at
historic peak volumes year in and year out
Continued on page 22
The battle for market share is no longer as relevant as
it was five years ago. This shift will enable OEMs to
maintain a better balance between supply and demand,
and focus on medium- and long-term profitability.
22 Booz  Company
Chinese OEMs and the U.S. Market
Lose Market Share Maintain Market Share Grow Market Share
Geely
SAIC
Chery
BYD
FAW
Dongfeng
4%Greatwall
3%JAC
2%ChangAn
1%GAC
Executives see a bright future for Chinese OEMs, forecasting a rate
of U.S. market penetration more rapid than historical precedent
Forecasted Chinese OEM U.S. Share in 2020
Chinese OEMs wi
U.S. Share throug
47%
0%-4%
32%
4%-8%
11%
8%-12%
10%
12%+
U.S. Market Share of
Korean OEMs was 5%
as recently as 2008
Forecast Share %
Gain Share
the Detroit 3 will be able to build
r grow market share in 2012
ance in 2012
30% 29%
42%
57%
n Market Share Grow Market Share
24%Geely
21%SAIC
19%Chery
11%BYD
9%FAW
6%Dongfeng
4%Greatwall
3%JAC
2%ChangAn
1%GAC
or Chinese OEMs, forecasting a rate
e rapid than historical precedent
hare in 2020
Chinese OEMs with Greatest Potential to Capture
U.S. Share through 2020
11%
8%-12%
10%
12%+
U.S. Market Share of
Korean OEMs was 5%
as recently as 2008
cast Share %
Continued on page 23
• More than half of all respondents project that Chinese OEMs will
have a U.S. market share of 4 percent or more by 2020, just two
product cycles from now
• 21 percent predict the Chinese will achieve a market share of more
than 8 percent, suggesting a rate of penetration much faster than
historical precedents—specifically the Japanese and Korean manufac-
turers' growth in the U.S.
23 Booz  Company
Chinese OEMs and the U.S. Market (Continued)
Continued on page 24
• Booz  Company’s China team thinks the emergence of Chinese
manufacturers is real, but not likely to occur as fast as the survey
results suggest. These manufacturers currently represent less than 1
percent of the U.S. market, and even in the most optimistic case are
unlikely to reach 4 percent by 2020
• Geely (24 percent), SAIC (21 percent), and Chery (19 percent) were
cited most frequently by respondents as the Chinese OEM likely to
capture the greatest share of the U.S. market by 2020
The U.S. remains the most profitable
automotive market in the world, and
the place where all global manufacturers
need to succeed. But over the long
term, emerging markets have much
stronger growth prospects. This shift
requires auto makers to preserve their
competitive position in developed,
mature markets, while also funding
the investment necessary for longer-
term growth elsewhere. To that end,
automakers must gain a greater
understanding of the requirements,
dynamics, and needs of emerging
markets, and they must assess how
best to compete in markets with
fundamentally different economics,
consumers, and competitors.
24 Booz  Company
Alternative Powertrains:
All Bets Are Off Without Continued Government Support
Electric Electric Hybrid
Alternative powertrains will gain share – however, adoption rates
are seen as being extremely sensitive to government support
Expected U.S. Market Share of Alternative Powertrains by 2020
Continued Government Support
29%
13% 14% 14%
0%-5% 5%-10%
%ofResponses
10%-15% 15%-20%
No Government Sup
18%
5%
7%
20%-25% 25%-30% 30%+
20
50%
0%-5% 5%-1
%ofResponses
2020
5%
12%
Plug-In
Hybrid
39% 40%
42%
14%
Mild Hybrid Full Hybrid
n share – however, adoption rates
nsitive to government support
ternative Powertrains by 2020
14%
5%-20%
No Government Support
18%
5%
7%
20%-25% 25%-30% 30%+
12%
20%
50%
0%-5% 5%-10%
%ofResponses
10%-15%
4%
15%-20%
13%
0%1%
20%-25% 25%-30% 30%+
Continued on page 25
• Alternative powertrains will gain share; however, adoption rates are
seen as extremely reliant on government support
• Without government assistance, half of all respondents to the survey
believe this segment will remain limited to 5 percent or less of the
U.S. market by 2020
• Alternatively, close to 60 percent respondents see penetration of
alternative powertrains approaching 10 percent or more of the U.S.
market by 2020 with continued government support
25 Booz  Company
Alternative Powertrains:
All Bets Are Off Without Continued Government Support (Continued)
Continued on page 26
• Moreover, greater adoption of this automobile segment will depend
not just on continued support but on the right kind of support. Truly
disruptive technologies such as plug-in vehicles will require a more
balanced approach to government assistance, such as infrastructure
support for a national grid of rapid-cycle charging stations
• The future level of government subsidies for consumers who buy
these cars, along with support for companies working to advance
battery technology, may have an uncertain future in the current
fiscal environment
Even with government support,
adoption rates of alternative-
powertrain vehicles have fallen
short of expectations thus far,
because the inherent cost differentials
have proven too expensive to
be recovered in traditional duty
cycles and without a sizeable and
sustained increase in fuel prices.
26 Booz  Company
Most Executives Are Bullish on Hybrids, Skeptical on Pure Electric
Of the various powertrain choices, respondents are most confident
about the long-term prospects of full hybrid and mild hybrid
Current Confidence in Long-Term Prospects of Alternative Powertrains vs. 2011
Expected Leading Alternative Powertrain in 2020
OEM
Supplier
Less Confident More Confident
25%
12%12%
2%
4%
10%
Fuel Cell
Electric
Battery
Electric
Plug-In
Hybrid
70%30%Full Hybrid
65%35%Mild Hybrid
45%55%Plug-In Hybrid
29%71%Battery Electric
25%75%Fuel Cell Electric
39% 40%
42%
14%
Mild Hybrid Full Hybrid
Alternative powertrains will gain share – however, adoption rates
are seen as being extremely sensitive to government support
No Government Sup
Of the various powertrain choices, respondents are most confident
about the long-term prospects of full hybrid and mild hybrid
Current Confidence in Long-Term Prospects of Alternative Powertrains vs. 2011
Expected Leading Alternative Powertrain in 2020
OEM
Supplier
Less Confident More Confident
25%
12%12%
2%
4%
10%
Fuel Cell
Electric
Battery
Electric
Plug-In
Hybrid
70%30%Full Hybrid
65%35%Mild Hybrid
45%55%Plug-In Hybrid
29%71%Battery Electric
25%75%Fuel Cell Electric
39% 40%
42%
14%
Mild Hybrid Full Hybrid
Alternative powertrains will gain share – however, adoption rates
are seen as being extremely sensitive to government support
Expected U.S. Market Share of Alternative Powertrains by 2020
Continued Government Support
29%
13% 14% 14%
%ofResponses
No Government Sup
18%
7%
20%
50%
%ofResponses
Continued on page 27
• Of the various powertrain choices, respondents are most confident in
the long-term prospects of full hybrid and mild hybrid and less sure
about the future prospects for plug-in, fuel-cell and battery-electric autos
• 40 percent of OEMs and suppliers believe full hybrids will be the
leading alternative to the conventional gas internal combustion
engine in 2020
• Outside of full hybrids:
 Suppliers were significantly more bullish on mild hybrids
relative to OEMs
 OEMs were more mixed in their response, with significant
numbers continuing to see a future for plug-in and electric vehicles
27 Booz  Company
Capacity Constraints
• 34 percent of suppliers and 55 percent of OEMs say cuts in capacity
have left them constrained
• Instead of ramping up to match the highest rate of recovery—the
equivalent of recalibrating to the high-water mark—vehicle manu-
facturers are maintaining a highly disciplined stance thus far. Some
manufacturers are operating with very low inventories; some report
as little as 15 to 20 days' sales outstanding (DSO), which is far lower
than peak levels of 100 DSOs experienced a few years ago
Continued on page 28
Position RD Position PipInnovate
55% of OEMs and 34% of Supplier respondents say
they are presently capacity constrained
Current Capacity Situation
Of the OEM executi
are either producing
Current Production Situat
41%
Leaving opportuni
on the table
OEM
Supplier
55%
34%
36%
51%
15%
9%
Still have more capacity
than market demands
Comfortable with
current capacity
Capacity
constrained
3%
Aggressively using
pricing to win busines
In light of more advantageous supply-demand dynamics, OEMs and
Suppliers describe themselves as being disciplined about pricing
Current Pricing Approach – OEMs
Current Pricing Approach
19%
53%
24%
Significantly
reducing use
of incentives
Holding
the line on
incentives
Opportunistically
increasing
incentives
4%
Significantly
increasing use
of incentives
These results suggest a
dramatic departure from
pre-recession behavior
where filling the factory w
the norm for many suppl
7%
arketing
19%
Sales Financial
Position
27%
20%
Engineering/
RD
Cost
Position
Product
Pipeline
43%
38%
28%
Current
Product
Portfolio
55%
Customer
Base and
Relationships
58%
Ability to
Innovate
, though product is important, customer mix, and to a lesser extent cost position,
e in shaping outlook
nal Factors Contributing to Positive 2012 Outlook – Suppliers
pliers that ranked a factor in their top 3
plier respondents say
nstrained
Of the OEM executives who responded to our survey, 92% say they
are either producing just enough or too few vehicles to satisfy demand
Current Production Situation - OEMs
41%
Leaving opportunities
on the table
51%
Production in line with
market demand
8%
Producing
too much
55%
34%
36%
51%
omfortable with
urrent capacity
Capacity
constrained
39%
58%
supply-demand dynamics, OEMs and
as being disciplined about pricing
Current Pricing Approach – Suppliers
These results suggest a
dramatic departure from
pre-recession behavior
where filling the factory was
nternal
n, leadership,
on
28 Booz  Company
Capacity Constraints (Continued)
Continued on page 29
• Similarly, suppliers have managed to regain some leverage over man-
ufacturers, and they are loath to surrender that leverage. As overall
volume and orders rise, many suppliers are choosing to postpone
investing in new fixed assets, opting instead to add overtime shifts
and other incremental approaches to optimize existing capacity. A
survey by the Original Equipment Suppliers Association found that
76 percent planned to run overtime shifts in the first quarter of 2012,
and more than half of our respondents said they were constrained
by capacity
The industry clearly has expressed a
very sober, collective understanding
that it needs to grow smartly, by
not letting capacity grow faster
than natural market demand.
29 Booz  Company
Capacity Constraints (Continued)
Continued on page 30
• Maintaining tighter production discipline and lower inventories is a
key aim for OEMs
• 84 percent of OEMs cite simplifying build combinations as one of
the three most effective strategies of maintaining tighter production
and lower inventories
• Manufacturing flexibility is a close second at 73 percent
22%
2%
Other Increased use
of regional
warehouses
27%
Centralized
production
orders based on
aggregate data
Improved
communication
with dealers on
local demand
45% 47%
Improved
demand
forecasting
capabilities
Simplification
of build
combinations
84%
73%
Manufacturing
flexibility
Maintaining tighter production discipline and lower inventories is a key aim for OEMs,
and many are achieving this through simplification of build combinations
Effective Strategies for Maintaining Tighter Production and Lower Inventories – OEMs
Percentage of OEMs that ranked a strategy in their top 3
Approximately 60% of Supplier Respondents say they are
actively looking at acquisitions – with expansion into new
regions or segments the primary aim
Pursuing Acquisitions or Divestitures – Suppliers
28%
59%
Acquisitions Divestitures
Primary Driver for Pursuing Acquisition(s)
As demand rebounds, suppliers are working hard to
stretch current capacity further and postpone committing
to major capital investment until absolutely necessary—
a tightrope act indeed, for getting this wrong could mean
shutting down vehicle production.
30 Booz  Company
Holding the Line on Incentives and Pricing
on the tablethan market demands current capacity constrained
3%
Aggressively using
pricing to win busines
In light of more advantageous supply-demand dynamics, OEMs and
Suppliers describe themselves as being disciplined about pricing
Current Pricing Approach – OEMs
Current Pricing Approach
19%
53%
24%
Significantly
reducing use
of incentives
Holding
the line on
incentives
Opportunistically
increasing
incentives
4%
Significantly
increasing use
of incentives
These results suggest a
dramatic departure from
pre-recession behavior
where filling the factory w
the norm for many suppl
Continued on page 31
• 77 percent of OEM respondents claim to be either holding the line
on incentives or significantly reducing them. According to Edmunds.
com, sales incentives for March were down more than 3 percent
from the prior month, and nearly 10 percent from March 2011,
putting them at their lowest level for any March since 2002
31 Booz  Company
Holding the Line on Incentives and Pricing (Continued)
Continued on page 32
3%
Aggressively using
pricing to win business
39%
Opportunistically
using pricing as a lever
to win program
58%
Maintaining strong
pricing discipline
supply-demand dynamics, OEMs and
as being disciplined about pricing
Current Pricing Approach – Suppliers
19%
n
s
Opportunistically
increasing
incentives
4%
Significantly
increasing use
of incentives
These results suggest a
dramatic departure from
pre-recession behavior
where filling the factory was
the norm for many suppliers
• 58 percent of supplier respondents claim to be maintaining strong
pricing discipline – providing evidence to suggest that the days of
suppliers providing big price markdowns may be over. In interviews,
suppliers who had complained for years about “taking it on the
nose” now say the crisis has shifted the balance of power. There is
no longer excess capacity on the supplier side; instead, suppliers
have more pricing power. Those who are truly differentiated—in
terms of technology, manufacturing, or branding—report that
they have more leverage now over manufacturers than they can
remember having before
Given more advantageous supply/
demand dynamics, both vehicle
manufacturers and suppliers say
they are being more disciplined
about pricing.
32 Booz  Company
Industry Consolidation
2%
Other Increased use
of regional
warehouses
Centralized
production
orders based on
aggregate data
Improved
communication
with dealers on
local demand
Improved
demand
forecasting
capabilities
S
co
Manufacturing
flexibility
Approximately 60% of Supplier Respondents say they are
actively looking at acquisitions – with expansion into new
regions or segments the primary aim
Pursuing Acquisitions or Divestitures – Suppliers
28%
59%
Acquisitions Divestitures
Primary Driver for Pursuing Acquisition(s)
22%
16%
5%
Other Achieve greater
scale/reduce costs
Enhance
capabilities
57%
Facilitate expansion
into new regions
or segments
Continued on page 33
• Over half of supplier respondents claim to be actively
pursuing acquisitions
• 57 percent of supplier respondents are looking at acqui-
sitions as a means to facilitate expansion into
new regions and segments
Approximately 60% of Supplier Respondents say they are
actively looking at acquisitions – with expansion into new
regions or segments the primary aim
Pursuing Acquisitions or Divestitures – Suppliers
28%
59%
Acquisitions Divestitures
Primary Driver for Pursuing Acquisition(s)
22%
16%
5%
Other Achieve greater
scale/reduce costs
Enhance
capabilities
57%
Facilitate expansion
into new regions
or segments
33 Booz  Company
Relative Competitive Positioning
Very Poor
Performance
Poor Performance Strong PerformancePerformance Matches
Competitors
Good Performance
Very Poor
Performance
Poor Performance Strong PerformancePerformance Matches
Competitors
Good Performance
100%
Compared to competitors, OEMs view cost position, customer experience,
and financial position as their most significant areas of weakness
Perceived Performance Relative to Key Competitors – OEMs
Customer
Experience/
Relationship
Cost
Position
9%
24%
41%
11%
23%
32%
100%
Suppliers meanwhile cite their sales / marketing capabilities and cost position
as their most significant areas of weakness
Perceived Performance Relative to Key Competitors – Suppliers
Marketing Cost
Position
Sales
How effective is your company at translating customer
needs into product features? (Supplier only)
24%
2%
4%
11%
54%
26%
5%
Customer
Base and
Relationship
14%
47%
33%
Current
Product
Portfolio
8%
55%
31%
6% 6%
6%
27%
44%
21%
Engineering/
RD
11%
38%
41%
10%
Ability to
Innovate
23%
35%
30%
12%
Product
Pipeline
11%
49%
30%
10%
36%
48%
13%
2%2%
Financial
Position
27%
33%
28%
10%
2%
Engineering/
RD
17%
52%
29%
2%4%
Sales
6%
42%
43%
9%
Marketing
11%
50%
30%
9%
Current
Product
Portfolio
17%
44%
28%
2%
9%
Product
Pipeline
15%
48%
26%
2%
9%
Retail
Network/
Footprint
9%
39%
37%
15%
Ability to
Innovate
8%
50%
31%
2%
9%
Financial
Position
31%
29%
21%
2%
17%
30%
2%
Continued on page 34
• OEMs feel very strongly about their product position, as
demonstrated by the very strong scores on engineering/RD,
product pipeline, current product portfolio, and ability to innovate
• OEMs believe that they still need to do significant work on customer
experience and improving the retail network footprint. One way
several manufacturers—including GM, Audi, and VW—may be
addressing this disconnect is through the appointment of very
senior executives to be responsible for the customer experience and
to ensure a real alignment of the brand experience with customer
interactions
34 Booz  Company
Relative Competitive Positioning (Continued)
Very Poor
Performance
Poor Performance Strong PerformancePerformance Matches
Competitors
Good Performance
Very Poor
Performance
Poor Performance Strong PerformancePerformance Matches
Competitors
Good Performance
Customer
Experience/
Relationship
Cost
Position
9%11%
100%
Suppliers meanwhile cite their sales / marketing capabilities and cost position
as their most significant areas of weakness
Perceived Performance Relative to Key Competitors – Suppliers
Marketing Cost
Position
Sales
How effective is your company at translating customer
needs into product features? (Supplier only)
Effective at Translating Customer Needs Into Product Features
56%
21%
2%
Not Effective Minimally Effective Effective
22%
Industry Leader
4%
11%
54%
26%
5%
Customer
Base and
Relationship
14%
47%
33%
Current
Product
Portfolio
8%
55%
31%
6% 6%
6%
27%
44%
21%
Engineering/
RD
11%
38%
41%
10%
Ability to
Innovate
23%
35%
30%
12%
Product
Pipeline
11%
49%
30%
10%
36%
48%
13%
2%2%
Financial
Position
27%
33%
28%
10%
2%
Engineering/
RD
Sales
6%
Marketing
11%
Current
Product
Portfolio
Product
Pipeline
Retail
Network/
Footprint
9%
Ability to
Innovate
8%
Financial
Position
2%
Continued on page 35
• Historically suppliers have not successfully communicated their value
proposition to customers. Not surprisingly they view their marketing,
cost position, and sales capabilities as the most significant areas of
weakness
• Achieving the low-cost position is key for comparable products, and
about a third of OEMs and a quarter of suppliers say they fall short
35 Booz  Company
Relative Competitive Positioning (Continued)
Continued on page 36
Respondents have a relatively favorable opinion in terms
of how they see their companies stacking up against key
competitors. Whether these responses are reflective
of reality or overly optimistic will likely be tested,
especially as the industry reaches its new normal. If
companies are too bullish about their positions, it could
lead to a return of excess capacity across the industry.
36 Booz  Company
New Technologies
38% of OEM respondents say they intend to create their
own platform for integrating digitization and connectivity
Plans for Integrating Digitization/Connectivity – OEMs
17%
14%
7%
Outsource to
consumer
electronics
players
Establish
a flexible
platform in a
consortium
Allow consumers/
external system
to plug into car
24%
Allow suppliers
to develop
platform
Respondents cite In-Vehicle Connectivity and Entertainment
as the technology most likely to see widespread adoption
over the next 5 years
Technologies Most Likely to See Widespread Adoption
in the Next Five Years
Percentage of respondents that ranked a technology in their top 3
20%
42%
48%
52% 52%
85%
Other “Green”
Material
Usage
Active
Safety
Systems
Composite/
Light(er)-
weight
materials
LED
Lighting
Passive
Safety
Systems
In-Vehicle
Connectivity
and
Entertainment
1%
38%
Create own
platform
2011 will sadly be remembered for the devastating earthquake and tsunami in Japan,
an event which impacted 55% of OEMs
Production Impact of the Japanese Earthquake and Tsunami
34% 35%
26%
21%
8%
13%
26%
21%
7%
“Other”
higher
as a res
shortag
needing
vehicle
OEM
Supplier
38% of OEM respondents say they intend to create their
own platform for integrating digitization and connectivity
Plans for Integrating Digitization/Connectivity – OEMs
17%
14%
7%
Outsource to
consumer
electronics
players
Establish
a flexible
platform in a
consortium
Allow consumers/
external system
to plug into car
24%
Allow suppliers
to develop
platform
Respondents cite In-Vehicle Connectivity and Entertainment
as the technology most likely to see widespread adoption
over the next 5 years
Technologies Most Likely to See Widespread Adoption
in the Next Five Years
Percentage of respondents that ranked a technology in their top 3
20%
42%
48%
52% 52%
85%
Other “Green”
Material
Usage
Active
Safety
Systems
Composite/
Light(er)-
weight
materials
LED
Lighting
Passive
Safety
Systems
In-Vehicle
Connectivity
and
Entertainment
1%
38%
Create own
platform
2011 will sadly be remembered for the devastating earthquake and tsunami in Japan,
an event which impacted 55% of OEMs
Production Impact of the Japanese Earthquake and Tsunami
35% “Other”
OEM
Supplier
Continued on page 37
• Respondents cite in-vehicle connectivity and entertainment as the tech-
nology most likely to see widespread adoption over the next five years
• Presently, OEMs are considering a wide range of alternatives for
integrating consumer digitization to the vehicle—38 percent of
OEM respondents say they intend to create their own digitization
and consumer connectivity platform. This may be a potentially
risky strategy, given that personal technology devices have far
shorter product cycles than automobiles—witness the ubiquity of
GPS systems on mobile phones—and that a single family may have
multiple drivers who share multiple cars
37 Booz  Company
Japanese Tsunami Impact
Outsource to
consumer
electronics
players
Establish
a flexible
platform in a
consortium
Allow consumers/
external system
to plug into car
Allow suppliers
to develop
platform
Create own
platform
2011 will sadly be remembered for the devastating earthquake and tsunami in Japan,
an event which impacted 55% of OEMs
Production Impact of the Japanese Earthquake and Tsunami
34% 35%
26%
21%
2%
8%
13%
26%
No impact -
supply chain
not affected
No impact - had
safety stock
4% 3%
21%
7%
Significant
impact
OtherNo impact - avoided
interruptions through
redundancies
Some
impact
“Other” includes
higher margins
as a result of
shortages and
needing to retrofit
vehicles after sale
OEM
Supplier
• The unfortunate events of the Japanese tsunami and floods in
Thailand brought home the limitations of a lean global supply
chain when faced with “Black Swan” events
• Of OEM respondents, 55 percent say their companies faced
“some” or “significant” impact from the event. A significant
number of suppliers, 42 percent, were also hurt. And these
numbers would likely have been substantially higher were it not
for OEMs and suppliers having safety stock and redundancies in
place to mitigate the impact of this momentous event
Continued on page 38
38 Booz  Company
Preparing For the Next “Black Swan”
16%15%
8%
0%
6%
Other No action
taken
Built
redundancies
into sourcing
Created new
organizational
structure for risk
management
Moved to
increase the
use of dual
sourcing
26%
Moved to
localize
supply base
Identified risks
and developed
contingency
plants
Worked with
suppliers on
contingency
planning
Contingency planning is viewed as the most important action for preparing for
such “Black Swan” events, but to date, action has lagged
Important Preparatory Steps for “Black Swan” Events and Steps Actually Taken by Respondents
19%19%
12%
15%
3% 4%
Other No action
taken
Created new
org. structure for
risk management
45%
Built
redundancy
into sourcing
Moved to
increase the
use of dual
sourcing
52%
29%
Moved to
localize
supply base
26%
59%
42%
Identified risks
and developed
contingency
plants
68%
51%
Worked with
suppliers on
contingency
planning
32% 31%
Company Position in Value Chain
Location of Company Headquarters Primary Function of Respondent
Position of Respondent
“Other” predominantly represents Dealers
“Other” includes market research, manufacturing
strategy, risk management, and regional BU heads
Manager
Corporate
Strategy
Other
OEM
1%
Finance Company/
Auto Leasing
North America
Europe
Asia
0%
South America
EVP
2%
Other
C-Level
VP
Director
Supply
Chain
Supplier
34%
Sales and
Marketing
24%
17%
7%
75%
13%
12%
32%
60%
11%
12%
14%10%
13%
24%
8%
2%
Dealer Development
2% IT
Engineering/PD14%
Finance
Manufacturing
8%
6%
Other
Business
Development
In Top 3 Important Measures
Action Taken
Continued on page 39
• Respondents say they are seeking ways to better prepare for future
“Black Swan” events
• Actions taken to date seem highly appropriate given what happened.
Both suppliers and manufacturers took steps to assess the damage,
weigh future events and probabilities, and work with suppliers to be
better prepared
39 Booz  Company
Preparing For the Next “Black Swan” (Continued)
Overall, we wonder though whether
the industry is sufficiently prepared
for the next “Black Swan” event,
or whether these actions were a
one-time response to a discrete
event. Risk prevention measures
are expensive and, in brutally
competitive sectors, they eat into tight
margins. Accordingly, companies
in the industry must determine an
appropriate level of investment in
risk-mitigation—low enough to be
cost effective, and high enough to
ease the risk of being surprised by
the next supply-chain disruption.
40 Booz  Company
Demographics
and
Methodology
Booz  Company conducted its U.S. Automotive Industry Survey and
Confidence Index—an annual study examining the current state of the
U.S. automotive industry, the key challenges facing it, the attitudes
of its executives, and what companies are doing in response—over a
four-week period during February and March 2012.
Two hundred and eight automotive executives from more than 75
automotive vehicle manufacturers and suppliers participated in the
online survey. Thirty-two percent of the respondents were employees of
OEMs, and 68 percent work for auto parts suppliers. Three-quarters
of the executives were from U.S.-based firms. More than 50 percent of
respondents were VP level or above.
Due to rounding, percentages used in all questions may not total 100
percent. Where cited in the charts, certain questions were only asked of
OEM respondents and others just of suppliers.
Booz  Company is a leading global management consulting firm
focused on serving and shaping the senior agenda of the world’s
leading institutions. Our founder, Edwin Booz, launched the profession
when he established the first management consulting firm in Chicago in
1914. Today, we operate globally with more than 3,000 people in 60
offices around the world.
We believe passionately that essential advantage lies within and that a few
differentiating capabilities drive any organization’s identity and success.
We work with our clients to discover and build those strengths and
capture the market opportunities where they can earn the right to win.
We are a firm of practical strategists known for our functional expertise,
industry foresight, and “sleeves rolled up” approach to working with
our clients. To learn more about Booz  Company or to access its
thought leadership, visit booz.com. Our award-winning management
magazine, strategy+business, is available at strategy-business.com.
© 2012 Booz  Company Inc.
Booz  Company is a leading global management consulting
firm, helping the world’s top businesses, governments, and
organizations. Our founder, Edwin Booz, defined the profession
when he established the first management consulting firm in 1914.
Today, with more than 3,300 people in 59 offices around the
world, we bring foresight and knowledge, deep functional
expertise, and a practical approach to building capabilities and
delivering real impact. We work closely with our clients to create
and deliver essential advantage.
For our management magazine strategy+business,
visit www.strategy-business.com.
Visit www.booz.com to learn more about
Booz  Company.

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Booz co: 2012-us-automotive-industry-survey-and-confidence-index

  • 1. 2012 U.S. Automotive Industry Survey and Confidence Index “A Return to Optimism”
  • 2. 2 Booz & Company Automotive Practice Contacts: Chicago Brian Collie Partner +1-312-578-4637 brian.collie@booz.com New York Scott Corwin Partner +1-212-551-6578 scott.corwin@booz.com Media Contact: New York Margaret Kashmir +1-973-879-7213 margaret.kashmir@booz.com
  • 3. 3 Booz & Company EXECUTIVE SUMMARY A Return to Fundamentals The global economic crisis, the collapse of automotive sales in 2008–'09, and the rise of emerging markets such as China and India have combined to force the U.S. auto industry to revolutionize. The industry is rallying around a novel view of what a new-car sale should be: less frequent and more profitable. According to Booz & Company’s 2012 U.S. Automotive Industry Survey and Confidence Index, the mood among auto executives is buoyant—with more than 90 percent of respondents describing the current state of the industry as either somewhat better or much better than last year. The survey was completed in early March, and the in- dustry’s consensus at that time was that U.S. auto sales will reach 13.7 million in 2012—a nearly double-digit improvement over last year’s sales, but also lower than recently revised industry forecasts. There’s a telling paradox here. Auto execs are expressing optimism even though projected sales are way off from the roughly 17 million vehicles automakers were selling per year during the last decade. So what's driving this return to optimism? We believe the survey results illustrate the potential this industry has to be a profit engine when it is able to more closely align supply with demand—i.e., when it returns to the fundamentals. Many major auto manufacturers and suppliers have undertaken significant efforts in the past few years to clean balance sheets, remove excess capacity, and restructure costs—effectively hitting the “reset” button to make more efficient use of production capacity and make a profit at far lower volumes. Now as volume rebounds, driven in large part by pent-up Continued on page 4
  • 4. 4 Booz & Company demand, easier credit, and greater consumer confidence, executives are beginning to see their efforts pay off, with many companies reporting record profitability over the past few quarters. It remains to be seen whether the industry has made a historic adjustment to a “new normal.” Nevertheless, early signs are promising. The industry clearly has expressed a very sober collective understanding that it needs to grow smartly—namely, not let capacity grow faster than natural market demand. Gone, for now, is the reflexive pursuit of greater market share, with OEMs focused on serving and delighting motivated consumers rather than trying to find buyers for an overabundance of vehicles—i.e., making more profit on fewer sales. Of the OEM executives who responded to our survey, 92 percent say they are either producing just enough or too few vehicles to satisfy demand. And 77 percent say their companies are reducing or at least holding the line on price incentives. The U.S. auto recovery demonstrates that with stronger balance sheets, legacy liabilities shed, debt reduction, and product/capital investment, this industry can return to consistent levels of profitability at lower annual sales volumes. Detroit Versus the World Last year was a good one for the Detroit 3 as they saw their share of the overall U.S. automobile market grow at the same time that the market grew. And the vast majority of respondents—86 percent of suppliers and 72 percent of OEMs—believe that the Detroit brands will either boost their market share further or hold on to the share they already have in 2012. Longer term, however, with the exception of Ford—which an impressive 90 percent of respondents believe will maintain or grow market share—respondents are less bullish on the future growth prospects of the Detroit 3. Executives were much more bullish on long-term market-share prospects for Hyundai/Kia and Volkswagen/Audi, with 88 percent and 72 percent of respondents respectively citing these two OEMs as likely to grow share over the next five years. Similarly, respondents were also relatively bullish on prospects for Chinese OEMs. Chinese automakers hardly have a toehold in the U.S. now—their market share is less than 1 percent, and that stems from Geely’s acquisition of Volvo. However, 53 percent of our survey respondents expect Chinese automakers to reach or exceed a 4 percent share of the market by 2020, with Geely, Continued on page 5
  • 5. 5 Booz & Company SAIC, and Chery cited most often as the Chinese OEM likely to have the leading share position in 2020. But perceptions may not match the reality, as industry leaders are suggesting a rate of penetration much faster than historical precedents—specifically the Japanese and Korean manufacturers’ growth in the U.S. Are the Chinese really poised to quickly and effectively grow market share in the U.S. market? Booz & Company’s China team thinks the emergence of Chinese manufacturers is real, but not likely to occur as fast as the survey results suggest. The actual performance and capabilities of the leading Chinese vehicle manufacturers—as well as their readiness to compete in developed markets such as the U.S.—is overestimated for several reasons. First, the size and scale of these companies are fairly small, especially if the sales volumes of their Western joint-venture partners are not included. In most cases, the joint venture itself far overshadows the relatively young Chinese brand. In addition, the domestic market in China is geared to first-time buyers in hypercompetitive entry- level segments, where margins are difficult to sustain, so their overall profitability is typically quite low. That reduces the resources these companies have to expand overseas. Furthermore, none of the leading Chinese manufacturers has yet achieved a major product or process breakthrough that could give it a significant competitive advantage. This is in sharp contrast to companies like Toyota, which built its initial position in the U.S. through its famed Toyota Production System, a new and superior operating model. To crack global markets, Chinese automakers will need to develop world-class global supply chains and supplier partnerships, offer competitive financing products, and deploy the talents of a global human resources pool. That won’t happen overnight. It will also take some time for Chinese carmakers to learn to compete in markets where they don’t have the benefit of a low-paid labor force, management team, and supplier Continued on page 6
  • 6. 6 Booz & Company base or the favorable subsidy policies of the central and local Chinese government. Finally, they need to build a retail network and brand in the U.S., which is a substantial investment. Nevertheless, many Chinese automotive executives aspire to capture a meaningful share of the U.S. market. Eventually, the U.S. market will see more new competitors emerging from China who will likely offer well-equipped models at very low prices, putting significant pressure on incumbent players. Alternative Powertrains Though a tiny fraction of the market, vehicles that run on alternative powertrains are here to stay, say our survey respondents. The case for full-hybrid cars seems strongest; 70 percent of respondents say they are more confident in that category than they were a year ago. Auto execs are more skeptical of fuel-cell or battery electric cars—with 75 and 71 percent of respondents respectively saying they are less confident in these two powertrains compared to last year. But most car execs say the future of alternative powertrains is highly dependent on continued government support. If government support continues, 58 percent believe, non-gas cars could achieve a market share of 10 percent or more. In the absence of government support, however, this figure drops to 30 percent, a stark contrast indeed. Moreover, greater adoption of this automobile segment will depend not just on continued support but on the right kind of support. Truly disruptive technologies such as plug-in vehicles will require a more balanced approach to government assistance, such as infrastructure support for a national grid of rapid-cycle charging stations. Consumer Digitization Over the coming years the digitization of the vehicle will continue to accelerate, and do so across all facets of the vehicle, including vehicle systems, safety, and in-vehicle connectivity and entertainment. Presently OEMs are considering a wide range of alternatives for inte- grating consumer digitization into the vehicle. Thirty-eight percent of OEM respondents say they intend to create their own digitization and consumer connectivity platform. This may run counter to consumer preferences. While OEMs should maintain relatively closed systems around vehicle systems, customers want the “plug and play” flexibility offered via their smartphones, not automaker-controlled internet Continued on page 7
  • 7. 7 Booz & Company connectivity, social media, entertainment, telephone, and navigation. This disconnect, coupled with new “distracted driver” regulations, means OEMs will likely need to rethink their approach to in-vehicle connectivity and entertainment. “Black Swan” Preparedness The 2011 Tohoku earthquake was a major source of disruption for automakers last year. Of OEM respondents, 55 percent say their companies faced “some” or “significant” impact from the event. A significant number of suppliers, 42 percent, were also hurt. And these numbers would likely have been substantially higher if OEMs and suppliers had not had safety stock and redundancies in place to mitigate the impact of this momentous event. The upheaval has forced the auto industry to confront a fundamental weakness in lean manu- facturing. Though the idea of “just-in-time” delivery has helped boost the industry’s fortunes over the past three decades, it proved to be a major impediment for automakers, particularly those in Japan that were trying to recover quickly from the disaster. How automakers should best prepare for the next major disruption in their production remains unclear. Auto executives are seeking ways to better prepare—92 percent of OEM executive respondents and 85 percent of supplier executive respondents say so. For now, nobody is considering simply boosting inventories. The steps respondents say they’ve taken include “identifying risks,” sorting out “contingency plans” with suppliers, “localizing their supply base,” and, in the case of nearly a third of respondents, increasing the use of “dual sourcing.” This move to build new organizational capabilities clearly signals that the industry was not prepared for a major disaster of this magnitude. Continued on page 8
  • 8. 8 Booz & Company Four Forces to Shape the Industry In summary, the results of this year’s survey tell an important story of four forces likely to shape the new automotive industry. Reemergence of Fundamentals: The U.S. auto recovery demonstrates that with stronger balance sheets, legacy liabilities shed, debt reduction, and better product, this industry can return to consistent levels of profitability at lower annual sales volumes. The industry clearly has expressed a very sober collective understanding that it needs to grow smartly—specifically, to not let capacity grow faster than natural market demand. This has been a product-led renaissance and there is strong confidence in the attractiveness of current vehicle offerings and product portfolio. Similarly, suppliers are unwilling to cede leverage in their relationship with OEMs and are working to stretch existing production capacity further, postponing new capacity. A new normal is emerging with an emphasis on building brand equity with consumers, improving the experience, continuing to improve the cost position, and competing globally. Shifting Demand Centers: The U.S. remains the most profitable automotive market in the world, and the place where all global manufacturers need to succeed. Over the long term, though, emerging markets have much stronger growth prospects. This shift requires automakers to preserve their competitive position in developed, mature markets while also funding the investment necessary for longer- term growth elsewhere. To that end automakers must gain a greater understanding of the requirements, dynamics, and needs of emerging markets, and they must assess how best to compete in markets with fundamentally different economics, consumers, and competitors. Powertrain and Technology Uncertainty: There remains a strong view that improvements in internal combustion engines are still possible and can generate meaningful increases in fuel efficiency. Confidence is stronger in full and mild hybrids, while skepticism remains about the potential of full-electric and fuel-cell vehicles. The adoption rate of alternative powertrains is highly dependent upon government support, fuel prices and availability, and OEM/supplier willingness to make investments. Beyond alternative powertrains, the industry is on the cusp of significant technological changes that could result in breakthrough, Continued on page 9
  • 9. 9 Booz & Company paradigm-shifting innovation, especially in vehicle connectivity that could result in creating real innovation in personal mobility. Whether a company is a leader or a follower, playing in these new markets will require a significant investment in both financial and human capital. As such, companies should be very selective with where they place their bets and do so only after they have confidence that they have the difference making capabilities necessary to win and that such bets are coherent with their broader strategy. Interconnected Supply Chain: The unfortunate events of the Japanese tsunami and floods in Thailand brought home the limitations of a lean global supply chain to “Black Swan” events. Actions taken in response seem highly appropriate given what happened: assess the damage, weigh future events and probabilities, work with suppliers to be better prepared, and build new organizational capabilities. Overall, though, we wonder though whether the industry is sufficiently prepared for the next “Black Swan” event, or whether these actions were a one-time response to a discrete occurrence. These measures are expensive and, in a brutally competitive sector, they eat into margins. Accordingly, companies in the industry must determine an appropriate level of investment in risk mitigation—low enough to be cost-effective, and high enough to ease the risk of being surprised by the next supply-chain disruption. Conclusion The executives of the auto industry’s leading companies have many reasons to feel proud this year. They haven’t coasted on bailouts; they have learned some hard lessons and built a stable platform for profitable growth. They now face several external risks, ranging from changes in government regulation to potential fuel disruptions from the Middle East and continued economic woes in Europe. Yet if history is any guide, the greater risk could be from becoming overoptimistic about the market and expanding to meet demand that does not incrementally grow as quickly. Here’s another scenario, though: If the U.S. industry can stay disciplined and preserve the efficiencies it fought so hard to implement, it will remain cost competitive with the most efficient car markets in the world. It will be smaller than in the artificially inflated boom years of the past, but with a far greater focus on fundamentals. And it will sell higher-quality cars at greater profits. Which path the industry takes lies within its own control, provided it can avoid repeating the mistakes of the past. Continued on page 10
  • 10. 10 Booz & Company Key Data Highlights • Relative to last year, industry executives are significantly more bullish on the state of the automotive industry, with 94 percent of OEMs and 92 percent of suppliers describing it as either “somewhat” or “much better” than last year • Approximately 52 percent of OEM respondents are forecasting revenue growth in excess of 11 percent for 2012, compared to just 32 percent of supplier respondents • 34 percent of suppliers and 55 percent of OEMs say cuts in capacity have left them constrained • 77 percent of OEM respondents claim to be either holding the line on incentives or significantly reducing them • Automotive executives cite Hyundai/Kia (88 percent) and Volkswagen/Audi (72 percent) as the OEMs most likely to grow market share over the next five years • 53 percent of respondents project a U.S. market share of 4 percent or more for Chinese OEMs by 2020 • With continued government support, 58 percent of respondents believe, alternative powertrains will command more than 10 percent of the market by 2020. However, without continued government support, this figure drops to 30 percent • Relative to 2011, respondents are significantly more confident in the long term prospects of full-hybrid (70 percent of respondents described themselves as more confident than last year) and mild-hybrid powertrains (65 percent), but less confident in the long-term prospects for battery electric and fuel-cell electric powertrains (~70 percent of respondents described themselves as less confident) • 55 percent of OEMs and 42 percent of suppliers say they were impacted by the 2011 Japanese earthquake and tsunami (a figure which would have been higher if not for risk mitigation steps that had already been taken), demonstrating how global the U.S. auto supply chain is today • 92 percent of OEM executive respondents and 85 percent of supplier executive respondents say they are seeking ways to better prepare for future “Black Swan” events
  • 11. 11 Booz Company detailed data analysis A Return to Optimism Perceived State of the Industry Compared to January 2011 1%0% 63% 66% 6% 7% 1%0% 0% 0% Much Worse Somewhat Worse About the Same 31% 26% Somewhat Better Much Better Over the next five yea industry market to se annual GDP growth Five Year Outlook for the U 3 Much Worse Som W Key Drivers of Strong 2011 Industry Performance Percentage of respondents that ranked a driver in their top 3 OEMs The improvement in the industry’s performance was driven in large part by the industry restructuring and pent-up demand 22% Availability of Credit 30% Pricing Discipline 34% Better Product 46% Improved Customer Confidence 48% Production Discipline/ Tight Inventory 58% Pent-Up Demand 62% Industry Restructuring Suppliers 16% Pricing Discipline 22% Availability of Credit Respondents forecast U.S. sales in 2012 to approach 14M Average U.S. Light Vehicle Sales Forecasts 2012-2016 OEM Supplier OEM Supplier Perceived State of the from 2011 U.S. Auto Indus y Compared to January 2011 0% 0%1%0% 63% 66% 6% 7% About the Same 31% 26% Somewhat Better Much Better 47% 63% 50% 34% 2%3% Much Worse Somewhat Worse About the Same Somewhat Better Much Better dustry Performance ed a driver in their top 3 ustry’s performance was driven in structuring and pent-up demand 46% 48% 58% 62% Suppliers 58% 68% 72% OEM Supplier Perceived State of the Industry January 2011 Compared to January 2009 from 2011 U.S. Auto Industry Survey • Relative to last year, industry executives are significantly more bullish on the current state of the automotive industry, with 94 percent of OEM respondents and 92 percent of supplier respondents describing the industry as somewhat or much better than last year Continued on page 12
  • 12. 12 Booz Company A Return to Optimism (Continued) Continued on page 13 • This is a stark contrast from last year’s study, where 53 percent of OEMs and 37 percent of suppliers said the industry was about the same as or worse than January 2009 Vehicle manufacturers and suppliers are increasingly profitable, and many industry executives are now far more bullish about their own prospects, and those of the industry at large, than they have been in recent years. It’s a success story that would have seemed implausible back in 2009. Yet the industry’s current strength stems from a combination of internal and external factors that has resulted in a far better alignment between supply and demand.
  • 13. 13 Booz Company More Closely Aligned Supply and Demand • This return to optimism is driven in large part by a much better alignment between supply and demand Continued on page 14 1%0% 6% 7% 1%0% 0% 0% Much Worse Somewhat Worse About the Same Somewhat Better Much Better Over the next five yea industry market to se annual GDP growth Five Year Outlook for the U 4%6% Little to no growth 3 Much Worse Som W Key Drivers of Strong 2011 Industry Performance Percentage of respondents that ranked a driver in their top 3 OEMs The improvement in the industry’s performance was driven in large part by the industry restructuring and pent-up demand 22% Availability of Credit 30% Pricing Discipline 34% Better Product 46% Improved Customer Confidence 48% Production Discipline/ Tight Inventory 58% Pent-Up Demand 62% Industry Restructuring Suppliers 16% Pricing Discipline 22% Availability of Credit Respondents forecast U.S. sales in 2012 to approach 14M Average U.S. Light Vehicle Sales Forecasts 2012-2016 16.0 Units(Millions) 15.0 14.0 11.6 12.8 13.7 14.6 15.4 13.0 12.0 0.0 2010 2011 2012 2013 2014 2015 2016 OEM Supplier y Compared to January 2011 0% 0%1%0% 63% 66% 6% 7% About the Same 31% 26% Somewhat Better Much Better Over the next five years executives expect the U.S. automotive industry market to see steady growth - at levels consistent with annual GDP growth Five Year Outlook for the U.S. Auto Industry 86% 86% 47% 63% 50% 34% 2%3% Much Worse Somewhat Worse About the Same Somewhat Better Much Better dustry Performance ed a driver in their top 3 ustry’s performance was driven in structuring and pent-up demand 46% Improved Customer Confidence 48% Production Discipline/ Tight Inventory 58% Pent-Up Demand 62% Industry Restructuring Suppliers 16% Pricing Discipline 22% Availability of Credit 30% Better Product 34% Production Discipline/ Tight Inventory 58% Improved Customer Confidence 68% Pent-Up Demand 72% Industry Restructuring ales in 2012 to approach 14M casts 15.4 OEM Supplier OEM Supplier Perceived State of the Industry January 2011 Compared to January 2009 from 2011 U.S. Auto Industry Survey
  • 14. 14 Booz Company More Closely Aligned Supply and Demand (Continued) Continued on page 15 • To the supply side, over 70 percent of respondents cited industry restructuring as being one of top three drivers of strong 2011 industry performance—reflecting the great (and rewarding) lengths taken to clean balance sheets, remove excess capacity, and restructure costs, in essence significantly lowering the break-even costs for many companies • This restructuring, combined with the strong rebound in sales, driven in large part by pent-up demand, is driving record profitability for many companies
  • 15. 15 Booz Company Strong Growth • Specific to their own companies, both OEMs and suppliers alike are “very confident” of profitable revenue growth in 2012, with OEMs slightly more so than suppliers • 52 percent of OEMs and 32 percent of suppliers forecast growth in excess of 11 percent Continued on page 16 Specific to their own companies, both OEMs and Suppliers are confident of profitable revenue growth in 2012, with OEMs slightly more so than Suppliers Confidence in Profitable Revenue Growth over Next 12 Months 42% 35% 51% 41% 4%5% Less Confident 2%0% Not Confident Confident 2% 18% Neutral Very Confident Planned Growth in 2012 U.S. Revenue OEM Supplier OEM Supplier 27% 40% 24% 2% 0% 2% 0% Negative Growth No Growth 1%-5% 29% 18% 6%-10% 11%-15% 23% 14% Greater than 15% How will this growth Expected 2012 Revenue OEM Supplier 6% 2% 1% 0% Don’t Know Muc Slow 21% OEMs credit their current product portfolio and pipeline as the reason for their positive outl Important Internal Factors Contributing to Positive 2012 Future Outlook – OEMs Percentage of respondents that ranked a factor in their top 3 Specific to their own companies, both OEMs and Suppliers are confident of profitable revenue growth in 2012, with OEMs slightly more so than Suppliers Confidence in Profitable Revenue Growth over Next 12 Months 42% 35% 51% 41% 4%5% Less Confident 2%0% Not Confident Confident 2% 18% Neutral Very Confident Planned Growth in 2012 U.S. Revenue OEM Supplier OEM Supplier 27% 40% 24% 2% 0% 2% 0% Negative Growth No Growth 1%-5% 29% 18% 6%-10% 11%-15% 23% 14% Greater than 15% How will this growth Expected 2012 Revenue OEM Supplier 6% 2% 1% 0% Don’t Know Muc Slow 21% 60% OEMs credit their current product portfolio and pipeline as the reason for their positive outl Important Internal Factors Contributing to Positive 2012 Future Outlook – OEMs Percentage of respondents that ranked a factor in their top 3 “Other” includes internal process execution, leadership, and strategic vision
  • 16. 16 Booz Company Behind the Growth Predictions 2% 0% 2% 0% Negative Growth No Growth 1%-5% 6%-10% 11%-15% Greater than 15% 6% 2% 1% 0% Don’t Know Much Slower Slower About Equal Faster 10% Engineering/ RD 10% Other 16% Sales 18% Ability to Innovate 18% Customer Experience/ Relationship 20% Cost Position 25% Marketing 25% Retail Network/ Footprint 29% Product Pipeline 60% Financial Position OEMs credit their current product portfolio and pipeline as the reason for their positive outlook in 2012 Important Internal Factors Contributing to Positive 2012 Future Outlook – OEMs Percentage of respondents that ranked a factor in their top 3 Current Product Portfolio 69% “Other” includes internal process execution, leadership, and strategic vision 5% Other 7% Marketing 19% Sales Financial Position 27% 20% Engineering/ RD Cost Position Product Pipeline 43% 38% 28% Current Product Portfolio 55% Customer Base and Relationships 58% Ability to Innovate For Suppliers, though product is important, customer mix, and to a lesser extent cost position, play a key role in shaping outlook Important Internal Factors Contributing to Positive 2012 Outlook – Suppliers Percentage of suppliers that ranked a factor in their top 3 OEMs and 34% of Supplier respondents say e presently capacity constrained Of the OEM executives who responded to our survey, 92% say they are either producing just enough or too few vehicles to satisfy demand “Other” includes internal process execution, leadership, and strategic vision Continued on page 17
  • 17. 17 Booz Company Behind the Growth Predictions (Continued) • OEMs credit their current product portfolio (69 percent) and pipeline (60 percent) as the reason for their optimism in 2012. This has created a wealth of attractive new vehicle choices for customers—whether it be more stylish exteriors, comfortable interiors, performance, fuel efficiency, or consumer-friendly technol- ogy, customer have some of the best choices in years • Suppliers are more nuanced in their response. While they view product as important, customer mix (i.e., will they reward innova- tion, will they pay for value created) and, to a lesser extent, cost are viewed as key drivers of a positive 2012 outlook • This response from suppliers illustrates two key insights:  First, not all customers are attractive partners, as some are more likely to reward innovation and pay for value created than others  Secondly, unless a supplier is in a position to create end-user pull, drive demonstrable reductions in OE costs, improve fuel effi- ciency, or be a trusted solutions provider for an OEM’s problems, it is hard not to have the competition resorting to meeting basic requirements at the lowest cost—and in such situations, having the low-cost position on the supply curve is paramount Continued on page 18
  • 18. 18 Booz Company Bullish Forecasting Over the next five yea industry market to se annual GDP growth Five Year Outlook for the U 4%6% Little to no growth Availability of Credit Pricing Discipline Better Product Improved Customer Confidence Production Discipline/ Tight Inventory Pent-Up Demand Industry Restructuring Pricing Discipline Availability of Credit Respondents forecast U.S. sales in 2012 to approach 14M Average U.S. Light Vehicle Sales Forecasts 2012-2016 16.0Units(Millions) 15.0 14.0 11.6 12.8 13.7 14.6 15.4 13.0 12.0 0.0 2010 2011 2012 2013 2014 2015 2016 OEM Supplier Over the next five years executives expect the U.S. automotive industry market to see steady growth - at levels consistent with annual GDP growth Five Year Outlook for the U.S. Auto Industry 8% 10% 86% 86% 4%6% Little to no growth Steady growth consistent with GDP Strong growth and prosperity dustry Performance ed a driver in their top 3 ustry’s performance was driven in structuring and pent-up demand 46% Improved Customer Confidence 48% Production Discipline/ Tight Inventory 58% Pent-Up Demand 62% Industry Restructuring Suppliers 16% Pricing Discipline 22% Availability of Credit 30% Better Product 34% Production Discipline/ Tight Inventory 58% Improved Customer Confidence 68% Pent-Up Demand 72% Industry Restructuring ales in 2012 to approach 14M casts 14.6 15.4 2013 2014 2015 2016 OEM Supplier Continued on page 19 • Auto executives forecast sales of passenger vehicles will approach 14 million in 2012—a number slightly below SAAR figures from Q1 2012 but nevertheless a strong improvement over 2011
  • 19. 19 Booz Company Bullish Forecasting (Continued) Continued on page 20 • Mid-term, respondents forecast that U.S. sales will settle into a level more consistent with historical growth, in line with the GDP, and reach 15.4 million in 2016 Externally, several factors are turning in the industry’s favor. Consumer confidence is rising, and credit is more widely available. Rising fuel prices are making new, more fuel-efficient models more attractive. Pent-up demand is also spurring sales. The average U.S. car is currently more than 10 years old and has logged more than 100,000 miles; both numbers are far above historical averages. Many consumers who put off purchasing a new car during the dark years of the recession have fewer reasons to do so much longer, and rising gas prices are also prompting some buyers to upgrade to more fuel-efficient models.
  • 20. 20 Booz Company Detroit Three Expected to Remain Strong in 2012 Lose Share Maintain Share Gain Share Mercedes Nissan/ Infiniti Honda/ Acura GM Chrysler/ Dodge/Fiat BMW/ Mini Ford VW/AudiToyota/ Lexus Respondents are optimistic that the Detroit 3 will be able to build on 2011 success and maintain or grow market share in 2012 Expected Detroit 3 Market Share Performance in 2012 30% 29% 42% 57% 14% 28% Lose Market Share Maintain Market Share Grow Market Share Geely SAIC Chery BYD FAW Dongfeng 4%Greatwall 3%JAC 2%ChangAn 1%GAC Executives see a bright future for Chinese OEMs, forecasting a rate of U.S. market penetration more rapid than historical precedent Forecasted Chinese OEM U.S. Share in 2020 Chinese OEMs wi U.S. Share throug 47% 0%-4% 32% 4%-8% 11% 8%-12% 10% 12%+ U.S. Market Share of Korean OEMs was 5% as recently as 2008 Forecast Share % OEM Supplier Continued on page 21 • Respondents are optimistic that the Detroit 3 will be able to build on 2011 success and maintain or grow market share in 2012 • The Detroit 3 have made great strides in improving distribution, quality of vehicles, and the overall sales experience • Their biggest future risk likely stems from the remaining gap between their fully burdened labor rates relative to foreign transplants
  • 21. 21 Booz Company Forecasted Change in Market Share Over the Next Five Years Lose Share Maintain Share Gain Share 7% 66% 27% Mercedes 13% 47% 40% Nissan/ Infiniti 16% 53% 31% Honda/ Acura 20% 46% 34% GM 28% 40% 32% Chrysler/ Dodge/Fiat 28% 46% 26% BMW/ Mini 31% 59% 10% Ford 38% 52% 10% VW/Audi 72% 24% 4% Hyundai/ Kia 100% 88% 10% Toyota/ Lexus Respondents are optimistic that the Detroit 3 will be able to build on 2011 success and maintain or grow market share in 2012 Expected Detroit 3 Market Share Performance in 2012 Over the next 5 years, executives believe Hyundai/Kia and Volkswagon/Audi are the OEMs most likely to gain market share Expected U.S. Market Share Changes in Next 5 Years 30% 29% 42% 57% 14% 28% Lose Market Share Maintain Market Share Grow Market Share Executives see a bright future for Chinese OEMs, forecasting a rate of U.S. market penetration more rapid than historical precedent Forecasted Chinese OEM U.S. Share in 2020 Chinese OEMs with Greatest Potential to Capture U.S. Share through 2020 2% OEM Supplier • In terms of vehicle sales, executives collectively cite Hyundai/Kia (88 percent) and Volkswagen/Audi (72 percent) as the OEMs most likely to grow market share over the next five years • It is important to note, though, that in the current growth environment, relative market share may not be as significant as it was five years ago • In a rising market, now that all manufacturers have effectively lowered their cost base to become profitable at lower volumes, they can enjoy the benefit of annual increases in market volumes where they sell more vehicles profitably. They do not need to obsess over slivers of share to the degree that they did in the past because of the zero sum dynamics of competing in an industry operating annually at historic peak volumes year in and year out Continued on page 22 The battle for market share is no longer as relevant as it was five years ago. This shift will enable OEMs to maintain a better balance between supply and demand, and focus on medium- and long-term profitability.
  • 22. 22 Booz Company Chinese OEMs and the U.S. Market Lose Market Share Maintain Market Share Grow Market Share Geely SAIC Chery BYD FAW Dongfeng 4%Greatwall 3%JAC 2%ChangAn 1%GAC Executives see a bright future for Chinese OEMs, forecasting a rate of U.S. market penetration more rapid than historical precedent Forecasted Chinese OEM U.S. Share in 2020 Chinese OEMs wi U.S. Share throug 47% 0%-4% 32% 4%-8% 11% 8%-12% 10% 12%+ U.S. Market Share of Korean OEMs was 5% as recently as 2008 Forecast Share % Gain Share the Detroit 3 will be able to build r grow market share in 2012 ance in 2012 30% 29% 42% 57% n Market Share Grow Market Share 24%Geely 21%SAIC 19%Chery 11%BYD 9%FAW 6%Dongfeng 4%Greatwall 3%JAC 2%ChangAn 1%GAC or Chinese OEMs, forecasting a rate e rapid than historical precedent hare in 2020 Chinese OEMs with Greatest Potential to Capture U.S. Share through 2020 11% 8%-12% 10% 12%+ U.S. Market Share of Korean OEMs was 5% as recently as 2008 cast Share % Continued on page 23 • More than half of all respondents project that Chinese OEMs will have a U.S. market share of 4 percent or more by 2020, just two product cycles from now • 21 percent predict the Chinese will achieve a market share of more than 8 percent, suggesting a rate of penetration much faster than historical precedents—specifically the Japanese and Korean manufac- turers' growth in the U.S.
  • 23. 23 Booz Company Chinese OEMs and the U.S. Market (Continued) Continued on page 24 • Booz Company’s China team thinks the emergence of Chinese manufacturers is real, but not likely to occur as fast as the survey results suggest. These manufacturers currently represent less than 1 percent of the U.S. market, and even in the most optimistic case are unlikely to reach 4 percent by 2020 • Geely (24 percent), SAIC (21 percent), and Chery (19 percent) were cited most frequently by respondents as the Chinese OEM likely to capture the greatest share of the U.S. market by 2020 The U.S. remains the most profitable automotive market in the world, and the place where all global manufacturers need to succeed. But over the long term, emerging markets have much stronger growth prospects. This shift requires auto makers to preserve their competitive position in developed, mature markets, while also funding the investment necessary for longer- term growth elsewhere. To that end, automakers must gain a greater understanding of the requirements, dynamics, and needs of emerging markets, and they must assess how best to compete in markets with fundamentally different economics, consumers, and competitors.
  • 24. 24 Booz Company Alternative Powertrains: All Bets Are Off Without Continued Government Support Electric Electric Hybrid Alternative powertrains will gain share – however, adoption rates are seen as being extremely sensitive to government support Expected U.S. Market Share of Alternative Powertrains by 2020 Continued Government Support 29% 13% 14% 14% 0%-5% 5%-10% %ofResponses 10%-15% 15%-20% No Government Sup 18% 5% 7% 20%-25% 25%-30% 30%+ 20 50% 0%-5% 5%-1 %ofResponses 2020 5% 12% Plug-In Hybrid 39% 40% 42% 14% Mild Hybrid Full Hybrid n share – however, adoption rates nsitive to government support ternative Powertrains by 2020 14% 5%-20% No Government Support 18% 5% 7% 20%-25% 25%-30% 30%+ 12% 20% 50% 0%-5% 5%-10% %ofResponses 10%-15% 4% 15%-20% 13% 0%1% 20%-25% 25%-30% 30%+ Continued on page 25 • Alternative powertrains will gain share; however, adoption rates are seen as extremely reliant on government support • Without government assistance, half of all respondents to the survey believe this segment will remain limited to 5 percent or less of the U.S. market by 2020 • Alternatively, close to 60 percent respondents see penetration of alternative powertrains approaching 10 percent or more of the U.S. market by 2020 with continued government support
  • 25. 25 Booz Company Alternative Powertrains: All Bets Are Off Without Continued Government Support (Continued) Continued on page 26 • Moreover, greater adoption of this automobile segment will depend not just on continued support but on the right kind of support. Truly disruptive technologies such as plug-in vehicles will require a more balanced approach to government assistance, such as infrastructure support for a national grid of rapid-cycle charging stations • The future level of government subsidies for consumers who buy these cars, along with support for companies working to advance battery technology, may have an uncertain future in the current fiscal environment Even with government support, adoption rates of alternative- powertrain vehicles have fallen short of expectations thus far, because the inherent cost differentials have proven too expensive to be recovered in traditional duty cycles and without a sizeable and sustained increase in fuel prices.
  • 26. 26 Booz Company Most Executives Are Bullish on Hybrids, Skeptical on Pure Electric Of the various powertrain choices, respondents are most confident about the long-term prospects of full hybrid and mild hybrid Current Confidence in Long-Term Prospects of Alternative Powertrains vs. 2011 Expected Leading Alternative Powertrain in 2020 OEM Supplier Less Confident More Confident 25% 12%12% 2% 4% 10% Fuel Cell Electric Battery Electric Plug-In Hybrid 70%30%Full Hybrid 65%35%Mild Hybrid 45%55%Plug-In Hybrid 29%71%Battery Electric 25%75%Fuel Cell Electric 39% 40% 42% 14% Mild Hybrid Full Hybrid Alternative powertrains will gain share – however, adoption rates are seen as being extremely sensitive to government support No Government Sup Of the various powertrain choices, respondents are most confident about the long-term prospects of full hybrid and mild hybrid Current Confidence in Long-Term Prospects of Alternative Powertrains vs. 2011 Expected Leading Alternative Powertrain in 2020 OEM Supplier Less Confident More Confident 25% 12%12% 2% 4% 10% Fuel Cell Electric Battery Electric Plug-In Hybrid 70%30%Full Hybrid 65%35%Mild Hybrid 45%55%Plug-In Hybrid 29%71%Battery Electric 25%75%Fuel Cell Electric 39% 40% 42% 14% Mild Hybrid Full Hybrid Alternative powertrains will gain share – however, adoption rates are seen as being extremely sensitive to government support Expected U.S. Market Share of Alternative Powertrains by 2020 Continued Government Support 29% 13% 14% 14% %ofResponses No Government Sup 18% 7% 20% 50% %ofResponses Continued on page 27 • Of the various powertrain choices, respondents are most confident in the long-term prospects of full hybrid and mild hybrid and less sure about the future prospects for plug-in, fuel-cell and battery-electric autos • 40 percent of OEMs and suppliers believe full hybrids will be the leading alternative to the conventional gas internal combustion engine in 2020 • Outside of full hybrids:  Suppliers were significantly more bullish on mild hybrids relative to OEMs  OEMs were more mixed in their response, with significant numbers continuing to see a future for plug-in and electric vehicles
  • 27. 27 Booz Company Capacity Constraints • 34 percent of suppliers and 55 percent of OEMs say cuts in capacity have left them constrained • Instead of ramping up to match the highest rate of recovery—the equivalent of recalibrating to the high-water mark—vehicle manu- facturers are maintaining a highly disciplined stance thus far. Some manufacturers are operating with very low inventories; some report as little as 15 to 20 days' sales outstanding (DSO), which is far lower than peak levels of 100 DSOs experienced a few years ago Continued on page 28 Position RD Position PipInnovate 55% of OEMs and 34% of Supplier respondents say they are presently capacity constrained Current Capacity Situation Of the OEM executi are either producing Current Production Situat 41% Leaving opportuni on the table OEM Supplier 55% 34% 36% 51% 15% 9% Still have more capacity than market demands Comfortable with current capacity Capacity constrained 3% Aggressively using pricing to win busines In light of more advantageous supply-demand dynamics, OEMs and Suppliers describe themselves as being disciplined about pricing Current Pricing Approach – OEMs Current Pricing Approach 19% 53% 24% Significantly reducing use of incentives Holding the line on incentives Opportunistically increasing incentives 4% Significantly increasing use of incentives These results suggest a dramatic departure from pre-recession behavior where filling the factory w the norm for many suppl 7% arketing 19% Sales Financial Position 27% 20% Engineering/ RD Cost Position Product Pipeline 43% 38% 28% Current Product Portfolio 55% Customer Base and Relationships 58% Ability to Innovate , though product is important, customer mix, and to a lesser extent cost position, e in shaping outlook nal Factors Contributing to Positive 2012 Outlook – Suppliers pliers that ranked a factor in their top 3 plier respondents say nstrained Of the OEM executives who responded to our survey, 92% say they are either producing just enough or too few vehicles to satisfy demand Current Production Situation - OEMs 41% Leaving opportunities on the table 51% Production in line with market demand 8% Producing too much 55% 34% 36% 51% omfortable with urrent capacity Capacity constrained 39% 58% supply-demand dynamics, OEMs and as being disciplined about pricing Current Pricing Approach – Suppliers These results suggest a dramatic departure from pre-recession behavior where filling the factory was nternal n, leadership, on
  • 28. 28 Booz Company Capacity Constraints (Continued) Continued on page 29 • Similarly, suppliers have managed to regain some leverage over man- ufacturers, and they are loath to surrender that leverage. As overall volume and orders rise, many suppliers are choosing to postpone investing in new fixed assets, opting instead to add overtime shifts and other incremental approaches to optimize existing capacity. A survey by the Original Equipment Suppliers Association found that 76 percent planned to run overtime shifts in the first quarter of 2012, and more than half of our respondents said they were constrained by capacity The industry clearly has expressed a very sober, collective understanding that it needs to grow smartly, by not letting capacity grow faster than natural market demand.
  • 29. 29 Booz Company Capacity Constraints (Continued) Continued on page 30 • Maintaining tighter production discipline and lower inventories is a key aim for OEMs • 84 percent of OEMs cite simplifying build combinations as one of the three most effective strategies of maintaining tighter production and lower inventories • Manufacturing flexibility is a close second at 73 percent 22% 2% Other Increased use of regional warehouses 27% Centralized production orders based on aggregate data Improved communication with dealers on local demand 45% 47% Improved demand forecasting capabilities Simplification of build combinations 84% 73% Manufacturing flexibility Maintaining tighter production discipline and lower inventories is a key aim for OEMs, and many are achieving this through simplification of build combinations Effective Strategies for Maintaining Tighter Production and Lower Inventories – OEMs Percentage of OEMs that ranked a strategy in their top 3 Approximately 60% of Supplier Respondents say they are actively looking at acquisitions – with expansion into new regions or segments the primary aim Pursuing Acquisitions or Divestitures – Suppliers 28% 59% Acquisitions Divestitures Primary Driver for Pursuing Acquisition(s) As demand rebounds, suppliers are working hard to stretch current capacity further and postpone committing to major capital investment until absolutely necessary— a tightrope act indeed, for getting this wrong could mean shutting down vehicle production.
  • 30. 30 Booz Company Holding the Line on Incentives and Pricing on the tablethan market demands current capacity constrained 3% Aggressively using pricing to win busines In light of more advantageous supply-demand dynamics, OEMs and Suppliers describe themselves as being disciplined about pricing Current Pricing Approach – OEMs Current Pricing Approach 19% 53% 24% Significantly reducing use of incentives Holding the line on incentives Opportunistically increasing incentives 4% Significantly increasing use of incentives These results suggest a dramatic departure from pre-recession behavior where filling the factory w the norm for many suppl Continued on page 31 • 77 percent of OEM respondents claim to be either holding the line on incentives or significantly reducing them. According to Edmunds. com, sales incentives for March were down more than 3 percent from the prior month, and nearly 10 percent from March 2011, putting them at their lowest level for any March since 2002
  • 31. 31 Booz Company Holding the Line on Incentives and Pricing (Continued) Continued on page 32 3% Aggressively using pricing to win business 39% Opportunistically using pricing as a lever to win program 58% Maintaining strong pricing discipline supply-demand dynamics, OEMs and as being disciplined about pricing Current Pricing Approach – Suppliers 19% n s Opportunistically increasing incentives 4% Significantly increasing use of incentives These results suggest a dramatic departure from pre-recession behavior where filling the factory was the norm for many suppliers • 58 percent of supplier respondents claim to be maintaining strong pricing discipline – providing evidence to suggest that the days of suppliers providing big price markdowns may be over. In interviews, suppliers who had complained for years about “taking it on the nose” now say the crisis has shifted the balance of power. There is no longer excess capacity on the supplier side; instead, suppliers have more pricing power. Those who are truly differentiated—in terms of technology, manufacturing, or branding—report that they have more leverage now over manufacturers than they can remember having before Given more advantageous supply/ demand dynamics, both vehicle manufacturers and suppliers say they are being more disciplined about pricing.
  • 32. 32 Booz Company Industry Consolidation 2% Other Increased use of regional warehouses Centralized production orders based on aggregate data Improved communication with dealers on local demand Improved demand forecasting capabilities S co Manufacturing flexibility Approximately 60% of Supplier Respondents say they are actively looking at acquisitions – with expansion into new regions or segments the primary aim Pursuing Acquisitions or Divestitures – Suppliers 28% 59% Acquisitions Divestitures Primary Driver for Pursuing Acquisition(s) 22% 16% 5% Other Achieve greater scale/reduce costs Enhance capabilities 57% Facilitate expansion into new regions or segments Continued on page 33 • Over half of supplier respondents claim to be actively pursuing acquisitions • 57 percent of supplier respondents are looking at acqui- sitions as a means to facilitate expansion into new regions and segments Approximately 60% of Supplier Respondents say they are actively looking at acquisitions – with expansion into new regions or segments the primary aim Pursuing Acquisitions or Divestitures – Suppliers 28% 59% Acquisitions Divestitures Primary Driver for Pursuing Acquisition(s) 22% 16% 5% Other Achieve greater scale/reduce costs Enhance capabilities 57% Facilitate expansion into new regions or segments
  • 33. 33 Booz Company Relative Competitive Positioning Very Poor Performance Poor Performance Strong PerformancePerformance Matches Competitors Good Performance Very Poor Performance Poor Performance Strong PerformancePerformance Matches Competitors Good Performance 100% Compared to competitors, OEMs view cost position, customer experience, and financial position as their most significant areas of weakness Perceived Performance Relative to Key Competitors – OEMs Customer Experience/ Relationship Cost Position 9% 24% 41% 11% 23% 32% 100% Suppliers meanwhile cite their sales / marketing capabilities and cost position as their most significant areas of weakness Perceived Performance Relative to Key Competitors – Suppliers Marketing Cost Position Sales How effective is your company at translating customer needs into product features? (Supplier only) 24% 2% 4% 11% 54% 26% 5% Customer Base and Relationship 14% 47% 33% Current Product Portfolio 8% 55% 31% 6% 6% 6% 27% 44% 21% Engineering/ RD 11% 38% 41% 10% Ability to Innovate 23% 35% 30% 12% Product Pipeline 11% 49% 30% 10% 36% 48% 13% 2%2% Financial Position 27% 33% 28% 10% 2% Engineering/ RD 17% 52% 29% 2%4% Sales 6% 42% 43% 9% Marketing 11% 50% 30% 9% Current Product Portfolio 17% 44% 28% 2% 9% Product Pipeline 15% 48% 26% 2% 9% Retail Network/ Footprint 9% 39% 37% 15% Ability to Innovate 8% 50% 31% 2% 9% Financial Position 31% 29% 21% 2% 17% 30% 2% Continued on page 34 • OEMs feel very strongly about their product position, as demonstrated by the very strong scores on engineering/RD, product pipeline, current product portfolio, and ability to innovate • OEMs believe that they still need to do significant work on customer experience and improving the retail network footprint. One way several manufacturers—including GM, Audi, and VW—may be addressing this disconnect is through the appointment of very senior executives to be responsible for the customer experience and to ensure a real alignment of the brand experience with customer interactions
  • 34. 34 Booz Company Relative Competitive Positioning (Continued) Very Poor Performance Poor Performance Strong PerformancePerformance Matches Competitors Good Performance Very Poor Performance Poor Performance Strong PerformancePerformance Matches Competitors Good Performance Customer Experience/ Relationship Cost Position 9%11% 100% Suppliers meanwhile cite their sales / marketing capabilities and cost position as their most significant areas of weakness Perceived Performance Relative to Key Competitors – Suppliers Marketing Cost Position Sales How effective is your company at translating customer needs into product features? (Supplier only) Effective at Translating Customer Needs Into Product Features 56% 21% 2% Not Effective Minimally Effective Effective 22% Industry Leader 4% 11% 54% 26% 5% Customer Base and Relationship 14% 47% 33% Current Product Portfolio 8% 55% 31% 6% 6% 6% 27% 44% 21% Engineering/ RD 11% 38% 41% 10% Ability to Innovate 23% 35% 30% 12% Product Pipeline 11% 49% 30% 10% 36% 48% 13% 2%2% Financial Position 27% 33% 28% 10% 2% Engineering/ RD Sales 6% Marketing 11% Current Product Portfolio Product Pipeline Retail Network/ Footprint 9% Ability to Innovate 8% Financial Position 2% Continued on page 35 • Historically suppliers have not successfully communicated their value proposition to customers. Not surprisingly they view their marketing, cost position, and sales capabilities as the most significant areas of weakness • Achieving the low-cost position is key for comparable products, and about a third of OEMs and a quarter of suppliers say they fall short
  • 35. 35 Booz Company Relative Competitive Positioning (Continued) Continued on page 36 Respondents have a relatively favorable opinion in terms of how they see their companies stacking up against key competitors. Whether these responses are reflective of reality or overly optimistic will likely be tested, especially as the industry reaches its new normal. If companies are too bullish about their positions, it could lead to a return of excess capacity across the industry.
  • 36. 36 Booz Company New Technologies 38% of OEM respondents say they intend to create their own platform for integrating digitization and connectivity Plans for Integrating Digitization/Connectivity – OEMs 17% 14% 7% Outsource to consumer electronics players Establish a flexible platform in a consortium Allow consumers/ external system to plug into car 24% Allow suppliers to develop platform Respondents cite In-Vehicle Connectivity and Entertainment as the technology most likely to see widespread adoption over the next 5 years Technologies Most Likely to See Widespread Adoption in the Next Five Years Percentage of respondents that ranked a technology in their top 3 20% 42% 48% 52% 52% 85% Other “Green” Material Usage Active Safety Systems Composite/ Light(er)- weight materials LED Lighting Passive Safety Systems In-Vehicle Connectivity and Entertainment 1% 38% Create own platform 2011 will sadly be remembered for the devastating earthquake and tsunami in Japan, an event which impacted 55% of OEMs Production Impact of the Japanese Earthquake and Tsunami 34% 35% 26% 21% 8% 13% 26% 21% 7% “Other” higher as a res shortag needing vehicle OEM Supplier 38% of OEM respondents say they intend to create their own platform for integrating digitization and connectivity Plans for Integrating Digitization/Connectivity – OEMs 17% 14% 7% Outsource to consumer electronics players Establish a flexible platform in a consortium Allow consumers/ external system to plug into car 24% Allow suppliers to develop platform Respondents cite In-Vehicle Connectivity and Entertainment as the technology most likely to see widespread adoption over the next 5 years Technologies Most Likely to See Widespread Adoption in the Next Five Years Percentage of respondents that ranked a technology in their top 3 20% 42% 48% 52% 52% 85% Other “Green” Material Usage Active Safety Systems Composite/ Light(er)- weight materials LED Lighting Passive Safety Systems In-Vehicle Connectivity and Entertainment 1% 38% Create own platform 2011 will sadly be remembered for the devastating earthquake and tsunami in Japan, an event which impacted 55% of OEMs Production Impact of the Japanese Earthquake and Tsunami 35% “Other” OEM Supplier Continued on page 37 • Respondents cite in-vehicle connectivity and entertainment as the tech- nology most likely to see widespread adoption over the next five years • Presently, OEMs are considering a wide range of alternatives for integrating consumer digitization to the vehicle—38 percent of OEM respondents say they intend to create their own digitization and consumer connectivity platform. This may be a potentially risky strategy, given that personal technology devices have far shorter product cycles than automobiles—witness the ubiquity of GPS systems on mobile phones—and that a single family may have multiple drivers who share multiple cars
  • 37. 37 Booz Company Japanese Tsunami Impact Outsource to consumer electronics players Establish a flexible platform in a consortium Allow consumers/ external system to plug into car Allow suppliers to develop platform Create own platform 2011 will sadly be remembered for the devastating earthquake and tsunami in Japan, an event which impacted 55% of OEMs Production Impact of the Japanese Earthquake and Tsunami 34% 35% 26% 21% 2% 8% 13% 26% No impact - supply chain not affected No impact - had safety stock 4% 3% 21% 7% Significant impact OtherNo impact - avoided interruptions through redundancies Some impact “Other” includes higher margins as a result of shortages and needing to retrofit vehicles after sale OEM Supplier • The unfortunate events of the Japanese tsunami and floods in Thailand brought home the limitations of a lean global supply chain when faced with “Black Swan” events • Of OEM respondents, 55 percent say their companies faced “some” or “significant” impact from the event. A significant number of suppliers, 42 percent, were also hurt. And these numbers would likely have been substantially higher were it not for OEMs and suppliers having safety stock and redundancies in place to mitigate the impact of this momentous event Continued on page 38
  • 38. 38 Booz Company Preparing For the Next “Black Swan” 16%15% 8% 0% 6% Other No action taken Built redundancies into sourcing Created new organizational structure for risk management Moved to increase the use of dual sourcing 26% Moved to localize supply base Identified risks and developed contingency plants Worked with suppliers on contingency planning Contingency planning is viewed as the most important action for preparing for such “Black Swan” events, but to date, action has lagged Important Preparatory Steps for “Black Swan” Events and Steps Actually Taken by Respondents 19%19% 12% 15% 3% 4% Other No action taken Created new org. structure for risk management 45% Built redundancy into sourcing Moved to increase the use of dual sourcing 52% 29% Moved to localize supply base 26% 59% 42% Identified risks and developed contingency plants 68% 51% Worked with suppliers on contingency planning 32% 31% Company Position in Value Chain Location of Company Headquarters Primary Function of Respondent Position of Respondent “Other” predominantly represents Dealers “Other” includes market research, manufacturing strategy, risk management, and regional BU heads Manager Corporate Strategy Other OEM 1% Finance Company/ Auto Leasing North America Europe Asia 0% South America EVP 2% Other C-Level VP Director Supply Chain Supplier 34% Sales and Marketing 24% 17% 7% 75% 13% 12% 32% 60% 11% 12% 14%10% 13% 24% 8% 2% Dealer Development 2% IT Engineering/PD14% Finance Manufacturing 8% 6% Other Business Development In Top 3 Important Measures Action Taken Continued on page 39 • Respondents say they are seeking ways to better prepare for future “Black Swan” events • Actions taken to date seem highly appropriate given what happened. Both suppliers and manufacturers took steps to assess the damage, weigh future events and probabilities, and work with suppliers to be better prepared
  • 39. 39 Booz Company Preparing For the Next “Black Swan” (Continued) Overall, we wonder though whether the industry is sufficiently prepared for the next “Black Swan” event, or whether these actions were a one-time response to a discrete event. Risk prevention measures are expensive and, in brutally competitive sectors, they eat into tight margins. Accordingly, companies in the industry must determine an appropriate level of investment in risk-mitigation—low enough to be cost effective, and high enough to ease the risk of being surprised by the next supply-chain disruption.
  • 40. 40 Booz Company Demographics and Methodology Booz Company conducted its U.S. Automotive Industry Survey and Confidence Index—an annual study examining the current state of the U.S. automotive industry, the key challenges facing it, the attitudes of its executives, and what companies are doing in response—over a four-week period during February and March 2012. Two hundred and eight automotive executives from more than 75 automotive vehicle manufacturers and suppliers participated in the online survey. Thirty-two percent of the respondents were employees of OEMs, and 68 percent work for auto parts suppliers. Three-quarters of the executives were from U.S.-based firms. More than 50 percent of respondents were VP level or above. Due to rounding, percentages used in all questions may not total 100 percent. Where cited in the charts, certain questions were only asked of OEM respondents and others just of suppliers. Booz Company is a leading global management consulting firm focused on serving and shaping the senior agenda of the world’s leading institutions. Our founder, Edwin Booz, launched the profession when he established the first management consulting firm in Chicago in 1914. Today, we operate globally with more than 3,000 people in 60 offices around the world. We believe passionately that essential advantage lies within and that a few differentiating capabilities drive any organization’s identity and success. We work with our clients to discover and build those strengths and capture the market opportunities where they can earn the right to win. We are a firm of practical strategists known for our functional expertise, industry foresight, and “sleeves rolled up” approach to working with our clients. To learn more about Booz Company or to access its thought leadership, visit booz.com. Our award-winning management magazine, strategy+business, is available at strategy-business.com.
  • 41. © 2012 Booz Company Inc. Booz Company is a leading global management consulting firm, helping the world’s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914. Today, with more than 3,300 people in 59 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. For our management magazine strategy+business, visit www.strategy-business.com. Visit www.booz.com to learn more about Booz Company.