1. sgh
April 2013
AUTOMOTIVE
REPORT:
ON THE RIGHT
TRACK

2. CONTENTS
Editor’s Comment PAGE 01
A Supply Issue PAGE 02
The Competition PAGE 03
Customer Credit Regulation Changes PAGE 04
Products and Services Segmentation PAGE 05
Biofuels Update PAGE 06
M&A Outlook PAGE 07
BRICS of the trade PAGE 08
Research and Development PAGE 10
Focus Formula One PAGE 11
Points Don’t Mean Prizes PAGE 12

3. EDITOR’S
COMMENT
Spring has finally sprung...
Despite the media’s superstitious approach to the 2013 plate, new However, even with these opportunities the future of the industry
registration figures are on the rise - positive news for an industry is not guaranteed. Significant challenges ahead include meeting
which has been going through some tough times. emission regulations and increasing competition from low-cost
producing countries such as China.
There has been an overall fall in production since the recession
arising from government austerity, increasing fuel prices and falling
demand for major export markets. PSA, Opel and Ford have taken
steps to reduce manufacturing whilst Daimler, VW and BMW have Ben Thornber
Partner and Head of Automotive
announced an intention to reduce costs.
Although the European economy will continue to be fragile, the outlook
Major Companies (market share 2012)
is much more positive with revenue growth forecast for 2014 as
confidence improves and demand rises.
Manufacturers in the strongest position are those able to exploit global
brands, develop new products such as hybrid and electric vehicles
and enter new markets including India and other developing nations.
01

4. A SUPPLY
ISSUE
The global economy continues to have an impact on the number of units
sold and produced throughout Europe and other markets. The impact is
not just felt on the manufacturer, but on the entire supply chain. How can
suppliers and OEMs protect their position?
Ensuring that contracts are commercially strong will help protect suppliers Although this may appear supplier biased, OEMs need to take note and
and OEMs alike when demand for parts decreases. appreciate that in certain jurisdictions suppliers may be able to treat their
business relationship as terminated if there is a fall in sales. This may
By adopting the following methods when negotiating contracts, suppliers and give rise to compensation. It is important for both parties to pay particular
OEMs can improve their legal position during the negotiations: attention to the legal implications of their commercial agreements and
ensure that, where possible, appropriate volume provisions are built into the
• during the request for quotation (RFQ)-process for a new project, or
agreements they enter into.
during the annual price negotiations for existing projects,
suppliers can make prices or productivity rebates subject to certain
minimum purchase volumes Motor vehicle production
• where raw materials represent a significant share of the production
costs of a specific part, an effective ‘raw material early termination’
agreement may provide protection if purchase volumes decrease and
raw material prices go up
• termination rights for the supplier – particularly relating to the
price arrangements - with reasonable notice periods
allow suppliers to negotiate new prices that take into account *estimate
decreased purchase volumes
02

5. THE
COMPETITION
The last 24 months have seen increasing activity from competition
authorities.
The US, Canada, Europe and receiving prison sentences within Regulatory investigations and co-operating with competitors on
more recently Japan have seen the US, while the Japanese Fair the possibility of receiving fines product development, entering into
increasing numbers of dawn raids Trade Commission ordered Yazaki, for anti-competitive behaviour joint production arrangements or
with Japan’s Fair Trade Commission Sumitomo and Fujikura to pay a fine can have a serious impact on a creating joint ventures. Co-operation
recently conducting raids at various of $168m (Yazaki: $125 m) for their company’s finances and reputation agreements should be structured
headlamp manufacturers. Although mis-conduct in the wire harness within the marketplace. It is to comply with competition law, a
cartel investigations in the car sector. therefore vital that suppliers and process which is greatly assisted
parts industry used to be rare, the OEM’s educate their sales staff if the parties involved do not hold
number of dawn raids in the sector Be competitive – not anti- and ensure that potentially market strong market positions.
has risen since 2010, with a number competition sensitive information is not shared
of global investigations conducted with competitors. Experience has The European Commission has
simultaneously with assistance As the automotive market continues shown that most employees have published so-called block-exemption
from corresponding agencies across to come to terms with the current an insufficient understanding of the regulations for joint R&D, joint
the world. Evidence obtained in challenging trading conditions, there competition rules. Conversations production and specialisation
one jurisdiction has led to further has been a strong incentive for around pricing, product margins, agreements which will not be
investigations by corresponding companies engaged in the supply current ongoing or intended considered anti-competitive as long
agencies – for example, evidence chain to enter into discussions with bid processes or volumes of as they are entered into between
obtained in the US has led to their competitors in an attempt to orders could all be considered competitors whose combined
prosecutions in Canada and Europe. discover each other’s strategies for to contravene competition laws market share for the products which
managing the decline in volumes. and may be the subject of anti- form the basis of the cooperation
Most recent investigations in the US However, competitors should competitive investigation. does not exceed 25% (for R&D
and Japan have seen the imposition be aware of the significant risks agreements) or 20% (for joint
of record fines in the industry. This involved in such discussions which Parts suppliers, in order to production and specialisation
includes Furukawa agreeing to pay could attract fines from regulators remain competitive, should seek agreements) and which do not
$200m for its role in price-fixing, if they contravene strict competition to identify new ways in which to contain any onerous restrictions on
along with three executives each rules. reduce costs. This may involve competition.
03

6. CONSUMER CREDIT
REGULATION CHANGES
In March 2013 the UK Government published a consultation document
setting out its intention to transfer, under the Financial Services and
Markets Act (FCA), responsibilty for consumer credit regulation to the
Financial Conduct Authority (FCA).
We would encourage oranisations to get involved in the consultation process FCA by way of an interim regime
in order to ensure that any concerns are properly considered.
• 2016 - full regime expected to come into effect
The timetable is expected to take the following form:
The proposed changes are significant. For instance, the FCA is expected
• May 2013 - end of consultation period to have greater authority to impose (currently limited) fines for breaches
of the Consumer Credit Act. This is expected to include the ability to
• Summer 2013 - approval from impose retrospective fines. In addition it is expected than a more rigerous
Houses of Parliament authorisation progress, a more proactive
regulatory process and possible criminal
• Autumn 2013 - proposals
sanctions for breaches under the FSMA will also
for the implementation of
be introduced as part of the new regime.
the new regime are
expected from the FCA Whilst businesses currently offering consumer
credit products and services are expected to be
• April 2014 - responsibility for
given a two-year window in which to apply for FCA
consumer credit regulation
authorisation they nevertheless need to be aware of
is expected to transfer to the
the impact and begin preperations.
04

7. PRODUCTS & SERVICES
VEHICLE MARKET SEGMENTATION
41% Petrol cars: 1.5 litres and above
About 75% of cars manufactured
17.3% Diesel cars: 1.5 to 2.5 litres
domestically are exported to countries
including the US where petrol remains
the most popular type of fuel
10.5% Engines: including rebuilding
7.7% Petrol cars: less than 1.5 litres
7.4% Commercial vehicles
6.5% Diesel cars: up to 1.5 litres
5.7% Diesel cars: 2.5 and above
3.9% Special purpose & all
other vehicles
05

8. BIO-FUEL
UPDATE
Fuel quality has long been a focus of the European
Commission...
The Fuel Quality Directive 2009 amended blending of biofuels and fossil fuels. It was amended again in December
Directive 98/70/EC with regards to the 2011 to impose a mandatory sustainability criteria from the Renewable
specification of petrol, diesel and gas- Energy Directive and the Fuel Quality Directive 2011. The RTFO is
oil and introduced a mechanism to divided into ‘obligation periods,’ which run from 15 April to 14 April
monitor and reduce greenhouse gas the following year, and require suppliers of fossil fuels to supply a
emissions. certain amount of biofuel within those periods. Each year the target
increases until it reaches 5% of total road transport fuel supplied by
The 2007 Renewable volume for the period 2013-2014. The Department for Transport, as the
Transport Fuel regulator, issues renewable transport fuel certificates that show that
Obligation ‘RTFO’ the fuel supplied complies with the obligations of the RTFO, including
was amended in the sustainability requirements. The 2011 amendment also introduced
2009 to close increased rewards for some fuel types, including those made from
a loophole waste materials such as used cooking oil, and a requirement to have
on the data on the carbon and sustainability performance of fuels to be
independently verified before renewable transport fuel certificates are
awarded. It is anticipated that legislation will come into force in April
2013 to expand the scope of the RTFO to include biofuels used in non-
road mobile machinery.
06

9. M&A
OUTLOOK
The M&A outlook in the global automotive industry is slowly improving since the low-point
of 2009. There are now signs of recovery in certain markets. However, 2012 global M&A
automotive results reveal that this progress has suffered a set-back.
Transactions have decreased of both acquiring and target next 12 to 18 months. Poor likely to increase technology up SMEs who specialize
for four consecutive quarters. companies. Automobile profitability is likely to lead to focused acquisitions. in advanced technology.
The 120 announced deals production in the European increased consolidation, with This was perhaps best
in the second quarter of marketplace is not expected European suppliers as most There are new signs demonstrated by the recent
2012 have decreased 29% to reach pre-recession likely targets. pointing to an industry $16.9 million acquisition
when compared to the 169 levels until 2016. The current revival sparking interest and by Green Automotive Co
deals announced during the financial crisis and ensuing In stark contrast to the possible new investment. Inc of Liberty Electric Cars
same period in 2011. The austerity measures have situation in Europe, the North After peaking in 2009, Limited, an Oxford based
low volume of automotive significantly impacted on American automotive market bankruptcy filings have manufacturer, designer
transactions reflects the the industry with new car is attracting investment due steadily declined and are at and developer of electric
industry’s current trend registrations declining by to the restructuring, which the lowest point in recent vehicles, which specialise
of pursuing partnerships 6.3% through the first half of took place in 2008-2009. history. Recent restructuring in converting existing high-
and alliances in an attempt 2012. Similarly, the Asian market has helped create a smaller, performance petrol powered
to increase scale and has increased in activity, leaner contingent of vehicles into electric cars.
enhance profitability, whilst These challenges have though this was partly down automotive companies ready
consistently avoiding the rendered European assets, as to internal acquisitions and to participate in profitable Overall the M&A market
costs and risks involved well as automotive companies restructuring. The BRIC growth. By 2017 global has made progress since
in full-scale mergers or with significant exposure to countries continue to make automotive production is the lows of 2009. Although
acquisitions. Europe, more risky. great strides. As automotive expected to rise by 40% the ongoing Euro crisis
companies look to acquire and automotive companies has halted recovery in this
Much of this decline in M&A However, this is also likely to assets that will support of all sizes are showing region the general picture for
activity can be attributed to translate into more favourable building higher quality a willingness to embrace the global M&A automotive
the ongoing debt crisis in valuations and an increase in and more technologically technology. industry is one of increased
Europe which has historically inbound M&A activity geared advanced vehicles for activity and opportunity.
been the most active region towards acquiring technology domestic and global This has led to a trend in
in automotive M&A in terms and market access over the consumption they are more larger companies buying
07
05

10. BRICS of
the trade
The rapid growth of BRIC countries
Brazil, Russia, India and China has opened
up potential markets for automotive
manufacturers implementing their global
strategy.
However, with each of these countries having its own IP law, all four have • identify the merits of obtaining such protection compared to
been recognised as raising particular challenges for companies trying to relying on trade secrets and laws of confidence
protect and enforce their IP rights.
• seek specialist advice on IP law in each country
Companies should think seriously about developing an IP protection and
commercialisation strategy before introducing technology into new markets. IP in focus: China
The best approach is to apply to register your trade mark before entering the
The main issue with brand protection in China is its ‘first to file’ trade mark
global market – spending a few hundred pounds early on can save thousands
regime. This means that the first party to file for a trade mark (without
later. Not only that, but dealing with IP as an afterthought can damage
having to prove an intention to use the mark) will obtain registration, so
competitiveness and profitability.
preventing others from using it.
Other recommendations include:
This has caused issues for many companies who enter the Chinese market
• undertake detailed due diligence on foreign partners only to discover that a third party has already registered their trade mark and
is now seeking to enforce this against them. Trying to claw back trade marks
• obtain effective non-disclosure agreements in these circumstances can be very costly and time consuming. The amount
of patents being filed in China has hugely increased in the last couple of
• asses what registered protection is available (e.g. patents and years and competitors will be quick to snap up patents for parts/goods that
designs) are not sufficiently protected.
08

11. The Chinese patent system is broken down into three different types of advantage. The current figures suggest, however, that foreign companies are
patents: taking full advantage of Utility Model patents to protect their products. When
considering IP strategy in China, UK automotive companies should consider
• An Invention Patent – this can protect new products, processes and applying for a combination of the different types of patents to sufficiently
improvements protect their parts/goods.
• A Utility Model – a ‘mini patent’ that can protect products but not It is also a good idea to keep detailed records of your design/invention
methods processes with dates on all documents. This is particularly important if you
ever need to enforce your IP rights in China as there is a high threshold for
• A Design Patent – akin to a UK registered design
what will pass as court-admissible evidence. Therefore, it is always good to
An Invention Patent usually takes three to five years to be granted as it is plan ahead.
the only type of patent that undergoes a substantive examination. Current
The increase in manufacturing costs in China (largely due to increased
reports suggest only a small number of the Invention Patents filed in China
labour costs) may also lead companies to look elsewhere (e.g. Vietnam) for
are successfully registered.
cheap manufacturing. While China poses its challenges in relation to IP, the
Utility Model patents are extremely popular with Chinese companies as there law has developed and improved rapidly over the years and corresponds
is no substantive examination and they are usually granted within several substantially to IP laws in Europe. Therefore, companies will need to bear
months rather than years. They are a quicker way of gaining protection and in mind that moving their manufacturing to other countries, where IP law
can be valuable in fencing off key technologies and gaining a competitive is likely to be even less developed, will raise a whole new spectrum of
challenges.
09

12. RESEARCH & DEVELOPMENT:
TAX RELIEF
It is a common misconception that a tough economic climate reduces
capacity for research and development. However, cost reduction itself
usually requires innovative thinking, as companies seek to ride out the
longest global recession in living memory.
WHAT’S NEW? MANUFACTURING AND SUPPLY CHAIN COMPANIES
The UK Government continues to buck the cost cutting trend when it comes Despite disappointing headlines, such as the loss of nearly 1,000 jobs at
to incentivising R&D by improving rather than reducing its R&D tax incentives. Honda’s Swindon plant, we are still hearing about developments in electric
From 1 April 2013, many companies will be able to claim a cash credit of up to cars, hybrids and even robotic cars, showing that innovation remains
10% of their R&D expenditure. This does away with previous restrictions that absolutely key to the industry.
meant many loss making companies could not benefit immediately. The new
credit should also be more visible to internal and external stakeholders, which The automotive industry cannot afford to stand still as it comes under pressure
is a deliberate attempt to encourage companies to use the money they obtain to from both customers and regulatory bodies to adapt. In the shorter term, the
reinvest in R&D. industry has little choice but to invest in developing technology to reduce
carbon emissions, as petrol and diesel engines will be subject to ever more
This major change to the tax treatment of R&D expenditure sends a clear stringent regulation. Many companies do not realise that regulatory projects
message that the UK Government sees innovation as absolutely essential to can qualify for R&D relief; the driver for the project is regulation, but it is the
the UK and a key way to support and grow our manufacturing industries. It is technological solution developed that matters.
important to note that the tax incentives for R&D are not just for brand new
inventions, but are designed to support commercial development activities Many companies are considering collaborative R&D in order to manage this
and therefore their scope is very often underestimated by companies. In many future transition, but they should still ensure that they are claiming what they
cases, companies unnecessarily disregard activities they see as essential to are eligible for in terms of relief for their input.
their survival, such as cost reduction, process improvement and regulatory
projects, and therefore fail to maximise the relief they could be claiming.
10

13. FOCUS
FORMULA 1
With eight out of eleven F1 teams based in the UK, Britain really is the home of
F1 racing. The F1 season continues to attract huge audiences globally, despite
tough times in the global economy. Crucially, the F1 ruling body, the FIA, has
demonstrated a clear desire in recent years to increase competition between
the teams and to place more emphasis on driver ability. It has done this by
limiting development budgets, testing time and standardising some elements
of the vehicle technology.
Rather than reducing R&D in the sector, this restriction on development has With the FIA changing regulations
forced the teams to be ever more innovative in the technology they develop
and the way that they deploy it. R&D is absolutely central to the premise of F1 each season, F1 teams constantly
and it is well known that the technology developed for the track filters down
to the consumer car market, and it therefore has a much wider impact than
need to reconsider the boundary
F1 alone. In fact, the impact of F1 R&D is not restricted to the automotive
industry, with companies such as McLaren Applied Technologies looking at
between R&D activities and
the wider application of the technology developed for the track. A case in point
is the McLaren TT cycling helmet, which draws on extensive expertise in
racing activities
aerodynamics and computational fluid dynamics.
Given how R&D intensive the F1 sector is, it may be tempting to assume that
taking advantage of the R&D tax incentives available would be a no-brainer.
However, with the FIA changing regulations each season, F1 teams constantly
need to reconsider the boundary between R&D activities and racing activities,
as this is the key distinction which determines the amount of relief they can
claim. The line between racing and testing blurs with every reduction in testing
kilometres, meaning the race weekend itself starts to become a test session for
new parts and vehicle set ups.
11

14. POINTS DON’T
MEAN PRIZES
In considering ways to improve driving standards, it appears that the world of
A comparison of
incidents notes the Formula 1 is to receive a points based penalty system. The introduction is being
inconsistency that arises heralded as an improvement. However, irrespective of the penalty imposed,
from race to race and
season to season. the consistency of their application needs to be considered alongside the
manner in which they are imposed.
During the 2011 Hungary GP,
Lewis Hamilton received a drive
through penalty when his car
In 2009 Jean Todt reduced the process. During the 2012 season a Raikkonen and Fernando Alonso
span in front of Paul di Resta.
number and type of people total of 60 penalties were awarded reveals all three incidents had
who could be eligible to be against 22 of the 25 drivers similar outcomes. Yet differing
stewards at various races. competing. penalties were handed down or, in
Technology has been the case of Raikkonen, no penalty
In Singapore, Adrian Sutil received a ‘slap introduced in an attempt However, consistency is at all.
on the wrist’ for a similar incident and at to assist stewards in questionable, with different
a following race a $20,000 penalty for reaching a decision penalties being awarded against Fans, teams and members of the
spinning into Nick Heidfield. together with different drivers for what appear to racing community have offered
improving be similar racing incidents. different opinions as to how the
consistency in inconsistencies could be tackled.
the decision A further comparison of similar One option that has been proposed
making incidents between Romain is to reduce the number of
During qualifying in Japan, Vergne received a three place Grosjean and Mark Webber, Bruno stewards at each race. This could
penalty for impeding Kovalainen under Article 31.7, whereas Senna and Nico Rosberg, Kimi
Vettel received a reprimand for impeding Alonso in a similar
manner but his penalty was imposed under Article 16.1.
12

15. work where there is only one steward Introducing a points system will
per race or, in the extreme, one improve credability. However,
steward per season. when acting in a judicial capacity
the stewards should adhere to
The stewards’ room is designed precedents.
to operate like a court; there are
claimants, defendants, witnesses and Until then the inconsistencies
judges. will continue and any
penelty points system
If the stewards have a greater regard introduced may not work.
to precedents established from similar
racing incidents, their ability to impose
a more consistent and ‘fair’ penalty
could be improved.
13

16. Disclaimer:
The content of this report is a guide only. For legal information on any of the subjects mentioned,
please contact Ben Thornber on 0800 763 1662, ben.thornber@sghmartineau.com or Gareth Brewerton
on 0800 763 1393, gareth.brewerton@sghmartineau.com
For further advice or information on R&D tax relief please contact Jennifer Tragner on 07944 227 298,
jtragner@almacg.com or Gavin Gardner on 07984 773130, ggardner@almacg.com