Driving a Green Revolution in the Global Auto Industry

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Presentation on the key shifts which may drive a green revolution in the transportation sector. Delivered by Bill Russo at the Worldsteel-44 conference in Tokyo on October 5, 2010

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Driving a Green Revolution in the Global Auto Industry

  1. 1. Booz & Company Tokyo, Oct, 2010 Driving a Green Revolution in the Global Auto Industry Implications of New Automotive Trends for Steel Makers Bill Russo Senior Advisor, Booz & Company This document is confidential and is intended solely for the use and information of the client to whom it is addressed.
  2. 2. A Changing World Overview on the Steel and Automotive Markets Next Generation Automotive Transportation Implications for Steel Makers - A New Ecosystem for Collaboration Appendix Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 2
  3. 3. One can divide the world among mature and emerging countries Emerging and Mature markets Emerging Markets Mature Markets Source: Booz & Company Analyses Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 3
  4. 4. However, the distribution of global wealth is not resonant with the distribution of population Population distribution in GDP contribution by emerging emerging & mature markets and mature markets (2008) (2008) Emerging Mature markets markets 27% 30% Mature Emerging markets markets 70% 73% Total = 6,730 MM Total = $61 Tn Source: Global Insight Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 4
  5. 5. The world economy is experiencing a structural change, with the balance of economic power shifting from West to East In past three decades, Chinese as well Percentage of World GDP by PPP1) as Indian economies have been (last 500 years) growing dramatically and returning towards its historic share of world GDP 100% US: 22% 80% China: 12% 60% Western Europe: 21% 40% Latin America: 8% Japan: 7% India: 5% 20% All other countries: 25% 0% 1500 1550 1600 1650 1700 1750 1800 1850 1900 1950 2000 Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 5
  6. 6. The world has entered a new era since 2008, more than half of the population lives in urban areas Global Urban Population China’s Urban Population Mil. 2000-2050 Mil. 1980-2020 People Forecast People Forecast Rural Rural 70.0% Urban 58% Urban 47% 52% 49.5% 50.7% 36% 46.7% 26% 19% 2000 2007 2008 2050E 1980 1990 2000 2009 2015E 2020E   More than half of the global population live in urban   At start of reform era, more than 80% of China’s area since 2008 population was in rural areas   Majority of China’s population will reside in urban areas by 2015   Creation of urban middle class fuels demand for Source: National Bureau of Statistics, UN, Booz & Company personal mobility Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 6
  7. 7. A Changing World Overview on the Steel and Automotive Markets Next Generation Automotive Transportation Implications for Steel Makers - A New Ecosystem for Collaboration Appendix Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 7
  8. 8. Asian countries, in particular China, now take the largest chunk of global steel consumption Global Crude Steel Production Global Steel Consumption By Country (2009) 2007-2009 By M Ton Others -5% 1,351 1,329 Turkey 1% 1,220 48% China Italy 2% 2% Braizil 2% Russia 3% Germany S. Korea 56% 58% Japan 5% India 64% Asia US Global Steel Consumption By Sector (2009) Oil and gas Others Metal products 3% 3% 27% 26% 22% Europe Transport Vehicles 10% 9% North America 48% Construction 7% 7% 7% 8% Others 2007 2008 2009 24% Machinery Source: World Steel Association, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 8
  9. 9. Booming of construction, automotive, and machinery in Asia has dramatically shifted the global steel demand Others Construction Automotive Others Asia-pacific 31% Asia 37% Global Global North Construction America Vehicle Sales Spending (2009) (2008) US 25% 29% Europe, Western Europe Shipbuilding MMT Aerospace 100% China North 35% S. Korea America Global 71% Shipbuilding Boeing Orders Europe Production By Region (1997-2010) Japan (2000-2008) 26% Asia Others Others 1998 2000 2002 2004 2006 2008 2010 1960~1969 2000~2008 Source: Euromonitor, Global Insight, Clarkson Research, Boeing; Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 9
  10. 10. China’s auto market has been experiencing explosive growth, in 2009 China exceeds US to become the world largest auto market Top Five Auto Market in the World(1) Total China Auto Sales 2008 - 2009, in Million Units 2005 - 2010, in Million Units 66.0 63.6 +23% Others 9.03 Jan Feb Brazil Mar 5% 4% Germany Apr Japan 1.44 May 1.42 Jun 16% US 20% 2005 2006 2007 2008 2009 2010 1st Quarter 20% China 13% Vehicle sales in the first 6 months of 2010 in China rose 48% from the same period last year to over 9 million 2008 2009 1) : Data does not include heavy truck Source: Global insight, CAAM auto market press release, Literature research, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 10
  11. 11. In terms of passenger vehicle market, China has become the most important country in the world CAGR Size and Growth of Global Passenger Vehicle(1) Market 2001-2009, % (Major Countries) China Ma r k et Em erging Iran Turkey India Argentina Saudi Arabia Indonesia Brazil Thailand Russia Germany CAGR of Global Market =1.6% France Korea UK Japan Italy US Spain 2009 Market Size (Million Units) Bubble size: 2009 market size (1) Includes segment of A, B, C, D, E, F, MPV SUV Source: Global Insight Booz & Company analysis (million units) Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 11
  12. 12. China has only recently entered the accelerated growth phase typical of an emerging market Canada 600 Australia Discussion Germany The S- U.K.   A country’s threshold of 500 curve mobility lies near US U.S. $10,000 GDP per capita Poland (PPP), where Cars per 1,000 People 400 Malaysia automobile ownership accelerates Russia 300 Argentina   China is at the early Mexico taking-off stage of the S- Brazil curve 200 Turkey   Due to enormous Thailand growth potential, China 100 Iran is likely to be a “game- changer” for the global Indonesia auto industry China 0 India 1,000 10,000 100,000 China GDP Per Capita (Logarithmic Scale) Note: Each line of symbols represents a 19-year progression for one country, from 1990 through 2008, GDP Per Capita is in Purchasing Power Parity (PPP) Source: Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 12
  13. 13. It is likely that China’s strong economic performance will continue to stimulate car industry growth for the foreseeable future China Passenger Vehicle Installed Base (PARC) Key Drivers Forecast (2009-2030)  Car ownership in China is powered by the Increase in growing economy – the upside is High Forecast substantial Car Ownership Base Forecast Passenger Vehicle PARC (million units) Low Forecast 480  Government has been continuously guiding 410 Government’s and supporting the industry’s development Support to across manufacturing and distribution Auto Industry 330  China’s financial system is less exposed China and GDP growth is still very fixed Economy’s investment driven, thus is less vulnerable Resilience to recent financial turbulence impact  Highway network development provides Infrastructure foundation for more motor vehicle-based Development based transportation  China is investing in infrastructure to support alternative propulsion Note: Passenger vehicles contain sedans, MPVs and SUVs Source: Global Insight 2010, OPEC, DGS Report, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 13
  14. 14. With increasing pressure from air pollution, oil consumption and congestion, China is compelled to reinvent propulsion technologies China to Reinvent Propulsion Technologies   Air Pollution –  Bejing, Xi’an, Shenyang, Shanghai and Guangzhou have been listed among the Top 10 cities with the worst air pollution. The massive growth of the automotive market only adds to the problem –  The rapid growth of the automotive market worsens the problem. For example, Beijing’s automobile industry contributed 73% of the overall pollution problem in 2003   Energy Consumption –  China imports two-thirds of its oil, and its ever-increasing thirst has had a dramatic impact on global energy prices –  The gasoline and diesel consumption has accounted for half of the total consumption of petroleum products   Traffic Congestion –  In the light of the current rate of development and gas consumption level, China will have over 150 million vehicles and petroleum consumption will exceed 250 million tons in 2020 For alternative propulsion technologies such as clean diesel, hybrid and electric vehicles, China does not lead the technological development Source: Synergistics, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 14
  15. 15. As the leading automotive market, China has the opportunity to drive the standards and architecture for the global auto industry Shanghai: A Lean, Green Detroit … In acquiring a stake in BYD, Buffett broke a couple of his own rules. "I don't know a thing about cellphones or batteries," he admits. "And I don't know how cars work." But, he adds, "Charlie Munger and Dave Sokol are smart guys, and they do understand it. And there's no question that what's been accomplished since 1995 at BYD is extraordinary…” Source: Literature research Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 15
  16. 16. Three key shifts are driving a green revolution and ushering a new era of collaborative partnership Emerging Market Growth An Increasingly Urbanized Environmental and Economic Forces Global Redistribution World Challenges the Sustainability Drive Green of Assets Established Transportation Car Innovations Paradigm Revolutionary Changes Require a New “Eco-system” of Collaborative Partnerships Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 16
  17. 17. A Changing World Overview on the Steel and Automotive Markets Next Generation Automotive Transportation Implications for Steel Makers - A New Ecosystem for Collaboration Appendix Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 17
  18. 18. Vehicle powertrain technologies are moving towards alternative energies ILLUSTRATIVE Passenger Vehicles Sales Projection by Powertrain Technology 2000 - 2050, Unit Mn   In next decades, automotive propulsion systems are increasing powered by alternative energies   Among them, electricity driven powertrain is the most significant trend   By 2050, EV and Hybrid EV may account for almost 50% of the total market Source: International Energy Agency; Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 18
  19. 19. Transition of propulsion technology is typically accompanied by innovation in auto design Evolution from Horse Power to Electric Power Example of an Electric Powered Skateboard Mechanical Electrical power power power Horse Source: Reinventing the Automobile, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 19
  20. 20. Future electric vehicles will be both internally and externally different from current ICE vehicles Internal External ICE Vehicle Electric Vehicle  Power-trains of electric vehicles are completely different  Future electric vehicles will have smaller size and from that of ICE vehicles lighter weight Source: Reinventing the Automobile, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 20
  21. 21. Different electric-drive vehicles will meet different transportation needs Characters of Electric-drive systems Electric-drive Vehicles for Different Transportation Needs Battery- Extended- Fuel-cell High load electric range electric electric vehicle vehicle vehicle Vehicle size ≤Small ≤Compact ≤Family Hours Refueling time Hours (battery Minutes Duty cycle charging) Range 100+ 300+ 300-400 (miles) Vehicle 0~40 miles 0 0 emissions daily Diverse/ Diverse/ Diverse/ Energy source Petroleum with Light load petroleum free petroleum free range extender Already Already Refueling available at Must be available at infrastructure home and deployed home City Intra-urban Highway-cycle Highway station Stop and Go Drive cycle Continuous Source: Reinventing the Automobile, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 21
  22. 22. A Changing World Overview on the Steel and Automotive Markets Next Generation Automotive Transportation Implications for Steel Makers - A New Ecosystem for Collaboration Appendix Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 22
  23. 23. For steel makers, “green transportation” optimization problems lie in the balance of the cost, weight and function Key Drivers New features/functions Safety Customer Requirements Fuel efficiency Cost Price Performance/durability Safety Regulatory Emissions control Requirements Re-cycling Material Noise control Selection Optimization Competitive performance Triangle OEM/Supplier Manufacturing costs Weight Function Requirements Manufacturing criteria(1) Investment Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 23
  24. 24. Solutions for the “green transportation” require a new “eco- system” of collaborative partnerships 3 Dimensions of the New Eco-system Regulatory Innovation Frontier (Government)  New policies (including subsidy policy) to support the commercialization of green auto technologies Technical Innovation Frontier Business Innovation Frontier (Industry) (Cross Industry/Value Chain)  Partnerships among steel  Partnerships between steel makers to deliver deep, makers and auto makers/ scalable solutions for future suppliers to develop new green cars, e.g. FSV business model for future green cars Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 24
  25. 25. T The FSV project is a good example of the partnership among steel makers to develop advanced solutions for future green cars FutureSteelVehicle Project Objective   Phase I: Engineering Study To deliver safe, lightweight Advanced High-Strength   Phase II: Concept Designs Steel (AHSS) body structures that address radically different requirements for advanced powertrains and –  Styling & aerodynamic reduce GHG emissions over the entire life cycle –  Linear-Static Topology Optimization –  Non-Linear Dynamic Topology Optimization –  Sub-System Topography Optimization –  Detail Design/Design Confirmation –  Gauge Optimization   Phase III: Demonstration and Implementation Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 25
  26. 26. T The success of UltraLight Steel family of projects was also achieved though collaborations among steel makers UltraLight Steel Family of Projects UltraLight Steel Auto Body - UltraLight Steel Auto UltraLight Steel Auto UltraLight Steel Auto Advanced Vehicle Technology Body (ULSAB, 1998) Closures (ULSAC, 2000) Suspensions (ULSAS, 2001) (ULSAB-AVC, 2002)  Reduce the weight of steel auto  Produce lightweight, structurally  Develop optimized, cost-effective,  Develop steel applications for Objectives body structures at no additional sound steel automotive closures environmentally-friendly and vehicles for year 2004 and that are manufacturable in high lightweight steel-intensive beyond; A holistic design cost, while maintaining or volume and affordable suspension solutions considered the complete vehicle improving performance Consortium  35 steel companies  31 steel companies  35 steel companies  32 steel companies The application of these research findings is seen globally in nearly every car on the road today -- achieving higher Impact crash and structural performance with less vehicle weight while maintaining affordable manufacturing costs Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 26
  27. 27. B Development of EV industry requires partnership across value chain; steel makers should actively get involved Key Stakeholders of the EV Industry After-Market R&D Sourcing Assembly Distribution Retail Services Auto Part OEM R&D VM Distributor Dealership Consumer Battery OEM 1 2 Product Flow Cooperation or Battery Leasing & Contract Utility Recharging   Government may have more active engagement over the value chain –  Enact relevant industry policies Government –  May take the initiative to invest in the construction of EV infrastructure, i.e. charge stations Steelmakers should proactively seek new opportunities and partnerships with emerging players to drive the green revolution Source: Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 27
  28. 28. B Suppliers have become major automotive steel consumers as their share in production continues to increase Automotive Production Outlook China Automobile Use Steel Production Supplier Share in Production by Component (%) China Vehicle Sales, 2010 1H 2002 2015 – ‘000 units – Chassis Powertrain Engine & auxiliary systems Body Estimated Steel Consumption, 2010 1H structure – ‘000 Tons – Body 2010 full year forecast for auto industry (exterior) 36 Million tons Interior Electrical systems/ electronics Steelmakers can seize partnership opportunities as automakers increasingly depend on suppliers to deliver advanced vehicle technologies Source: CAAM 2010 1H report, www.mysteel.com Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 28
  29. 29. B Baoshan ventured out of the “supplier role” and partners with OEMs in product development to create win-win situation Chinese OEMs lacks Both Baoshan and Baoshan collaborates leading-edge Chinese OEM’s with OEMs in product technologies in fuel competitive positioning development… efficiency will be strengthened  Pollution reduction and fuel  Baoshan partners with  Baoshan secured its efficiency are top national Chinese OEMs such as market share against priorities Geely, Chery, Dongfeng, global leaders  The most significant and Chongqing Chang’An  Chinese OEMs get the internal capability gap in a 500 mn RMB project to technology to possibly between Chinese and develop stronger and reduce vehicle weight by global OEMs is in lighter materials 10% and fuel consumption advanced propulsion of 6-8% technology Partnerships in product development breed strong relationship with OEMs, which in turn ensure steelmakers’ market and profit share in the future auto market Source: Bloomberg BusinessWeek “Baoshan Steel, Geely Seek to Cut Chinese Auto Weight” September 16, 2010, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 29
  30. 30. B Nationwide electric vehicle charging station construction will generate incremental demand for steel By end of 2010, State Grid will build 75 charging stations and more than 6000 fast charging piles; From 2011 through 2016, China will build 400 electric car charging stations to form electric car charging network China Electric Vehicle Charging Network Major Investor State Grid incl. regional grid Wholly owned power supply Local government JV or wholly owned Fast Charger Pile Full Charge Station Fast Charge Station Supermarket, Mall, Building and Real-estate/ Residential/Apartment/Office Highway/Oil station roadside property management Short Distance Long Distance Medium Distance JV or Wholly owned Charging service Charging service Fleet buyers Individual buyers Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 30
  31. 31. R Meanwhile, steel maker should be aware of regulatory trends and influence the development of government policies Recent Policies and Strategies on NEV Development Expected 2009 Apr. 2010 May Jun Jul.~   Plans from Ministry of   New Energy Automobile   Government pilot   More Finance & the NDRC to… Manufacturer Alliance program to subsidize ambitious –  Promote pilot use and plans to… purchase of plug-in plan national expansion –  Increase number of hybrids and electric expected to –  Support development of pure electric vehicles vehicles in five cities1 be released energy-saving technology –  Promote popularity of in late 2010 in public domain electric technology or 2011 –  Deploy 60,000 energy –  Increase proportion of saving vehicles in China by hybrid vehicles 2012 –  Advance technology for NEV and key components –  Drop average new car fuel consumption to reach international levels 1) Five cities are Shanghai, Changchun, Shenzhen, Hangzhou and Hefei, which are corporate homes of six domestic automakers Source: Synergistics, Synergistics Limited analysis, China Association of Automobile Manufactures, Literature Search Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 31
  32. 32. Conclusions: An auto revolution requires a new eco-system Trends Implications for Steel Makers   To get prepared, steel makers need to establish   The global economic center of gravity is a new “eco-system” of collaborative partnerships shifting to the East, in particular China –  Technical frontier: partner among steel makers to deliver deep, scalable solutions for   Population, environmental, and green cars economical problems are urging “Green –  Business frontier: partner across value chain Car” innovations, which will dramatically among steel makers, OEMs, and auto change the auto industry suppliers to develop new business model –  Regulatory frontier: cooperate with   China, with desire for a sustainable government to develop policies for green cars growth and strong government support,   Be fully aware of China’s leadership in the future will probably lead this auto revolution auto industry and find opportunities to get involved in its new EV eco-system development To avoid being left behind in the upcoming auto revolution, immediate actions are needed for steel makers to establish a new “eco-system” of collaborative partnerships Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 32
  33. 33. A Changing World Overview on the Steel and Automotive Markets Next Generation Automotive Transportation Implications for Steel Makers - A New Ecosystem for Collaboration Appendix Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 33
  34. 34. R Meanwhile, steel maker should be aware of regulatory trends and influence the development of government policies Recent Policies and Strategies on NEV Development Expected 2009 Apr. 2010 May Jun Jul.~  Prof. Wan Gang announced an ambitious  New Energy Automobile  Ministry of Industry & Information  An ambitious plan plan in cooperation with the Ministry of Manufacturer Alliance (formed by Technology, Ministry of Science will be submitted Finance & the NDRC top 10 Chinese auto makers, & Technology, Ministry of to the State – Promote the use of NEVs initially coordinated by China Association Finance, and NDRC jointly Council in Jul. targeting 13 pilot cities, expanding of Automobile Manufactures) released a pilot program to and is expected to 20 pilot cities in 2010 announced its plan subsidize the sale of plug-in to be released in – Support the development of – Number of pure electric hybrids and electric vehicles in late 2010 or energy-saving technology for use vehicles to reach 500,000 by five cities 2011 in government fleets, including 2015 – Purchasers of plug-in hybrids buses, postal, and sanitation – Electric technology to be widely will receive up to RMB 50,000  If approved, it will vehicles. used in conventional cars ($7,321) be the biggest – Deploy 60,000 energy saving – hybrid vehicles to account for – Purchasers of pure electric ever vehicles in China by 2012 30% of annual production vehicles will receive up to development – whole vehicle and key RMB 60,000 ($8,785) plan for energy component production for new – Five cities are Shanghai, saving and new energy automobiles to reach a Changchun, Shenzhen, energy world advanced level Hangzhou and Hefei, which automobiles – New car average fuel are corporate homes of six consumption to drop by 30%, domestic automakers reaching international levels Source: Synergistics, Synergistics Limited analysis, China Association of Automobile Manufactures, Literature Search Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 34
  35. 35. Steel China has been a leading steel producing country for years and is still in a relatively fast growing trajectory China Annual Steal Output 2008 Global Top Steel Producing Countries Million Tons +15% In 2008, steel production output in China was bigger than the next 7 largest 119 countries combined! 92 69 55 54 46 2004 2005 2006 2007 2008 Total Japan US Russia India South Germany Ukraine Korea Source: IISI report, China bureau of statistics, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 35
  36. 36. Steel Concerned about internal problems, the government introduced strategic industry development policies in 2005 Overview of 2005 China Steel Industry Development Policy Steel Industry Internal Problems Policy Targets Timeline Technology & Product  Adjust product portfolio by  By 2010 dramatically Quality Improvement introducing advanced increase product quality to   Low technology technologies satisfy the needs of capability resulting in different downstream inferior product quality industries Industry Restructuring  Increase industry concentration  By 2010, top 10 market   Unreasonable industry by encouraging major share should reach 50%; corporations to execute M&A,  By 2020, top 10 market geographical distribution reorganization activities share should reach > 70% with repeated build up of Rationalization of Industry  Adjust distribution according to  By 2010, improve current small-sized capacities Geographical Distribution raw material supply, conditions transportation, end market and  By 2020, a comparatively environment reasonable distribution   Energy consumption & should have been formed severe pollution and Energy Saving & Pollution  Implement sustainable &  Per ton comprehensive environmental problems Control recycling economy concept energy consumption; comparative energy consumption; water usage   … targets: –  2005: 0.76t; 0.70t; 12t –  2010: 0.73t; 0.685t; 8t –  2020: 0.7t; 0.64t; 6t Source: NDRC, Literature research, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 36
  37. 37. Emerging markets has seen an explosion in population in recent years World Population Trends (1-2007AD) World Density Map China India Population (Million) 0 <50 50-500 500-1000 >1000 000s per grid cell US Mexico UK 0 2008 Note: Mature markets are countries with GDP/head > $10,000 Source: Global Insight, The World Economy: Historical Statistics; EIU, United Nations Educational, Scientific and Cultural Organization; BAH Analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 37
  38. 38. Out of the ten biggest steel makers, eight are from Asia and four from China Global Crude Steel Production 10 Largest Steel Companies (2008) (2008) Total Crude steel 1, 329 M Ton Company Country output (Mil. Ton) 3% 1 ArcelorMittal Luxembourg 102 3% 2 Nippon Steel Japan 38 2% 2% 3 Baosteel China 35 2% 2% 4 Hebei Steel China 33 2% 2% 2% 5 JFE Steel Japan 32 6 POSCO South Korea 32 7 Wuhan Steel China 28 Others 8 Tata Steel India 24 9 Shandong Steel China 24 10 US Steel USA 23 Source: IISI, Deutsche Bank, Baosteel, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 38
  39. 39. The global auto market is expected to regain a positive growth in the coming years and Asia will become the largest growth region Global Light Vehicle1) Sales Volume (1998-2015F, By Mil. Unit) 90.1 +6% North 22% -4% America CAGR +2% 66.2 66.0 (1998~2009) 63.6 61.4 56.2 56.7 24% -2.9% 24% Europe 29% 20% 51.6 32% 35% 34% 34% 29% -0.2% 32% 32% 33% 33% 40% Asia 36% 35% 30% 38% 28% 26% 7.9% 20% 22% 24% 11% 14% 13% 13% Others 9% 8% 8% 9% 1998 2000 2002 2004 2006 2008 2009 2015F 1) Vehicle weight < 6 tons Source: Global Insight; Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 39
  40. 40. 1 Outsourcing of Key Value Chain Multi-national companies are increasingly leveraging Asian’s growing capabilities as platform for global expansion Stage 1 Product Sales & Circa early R&D Sourcing Manufacturing Marketing Service Development Distribution to mid 1990s  Start a few, isolated production facilities Stage 2 Product Sales & Circa mid to R&D Sourcing Manufacturing Marketing Service Development Distribution late 90s  Began to use China as a  Began to integrate  Built brand for the local procurement source production facilities market and local sales & within China distribution Stage 3 Product Sales & Early 2000s R&D Sourcing Manufacturing Marketing Service Development Distribution  Integrate China into global  Integrate China into global  Transfer global best practice to sourcing network manufacturing network China Stage 4 Present to Product Sales & R&D Sourcing Manufacturing Marketing Service 5-10 years Development Distribution hence  Build R&D and PD centers in China  Integrate China into global value chain Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 40
  41. 41. 1 Outsourcing of Key Value Chain While GM is unloading underperforming assets to ensure survival , they are rapidly expanding their China business GM’s Sales in China Expansions of GM’s Corporate Operations (2005-2009, in Million Units) in China   Recently, GM announced a a plan to set up Shanghai +29% GMIO headquarters, managing the unified management of all overseas business, which indicates an the central role China plays in GM's global strategy   GM and SAIC also announced to set up a GM-SAIC Motor Investment Co. in Hong Kong with a $1 billion investment split equally between the two for use in purchasing 100 percent shares of General Motors India –  GM-SAIC India is expected to make small cars and 2005 2006 2007 2008 2009 commercial vehicles in India   GM’s mini-vehicle China JV (SAIC- GM-Wuling) will introduce the first   GM aims to sell 3 million vehicles a year there by 2015 own-brand car (Baojun, meaning as it adds new, more fuel-efficient models to meet demand treasured horse) to target the fast-   “ China GM’s largest single market worldwide and GM will growing low end market; The car model is Based on Buick Excelle and launch 25 new models in China in 2010 and 2011 in a bid is aiming to combine world-class to maintain its leading position” - Gan Wenwei, President quality with low ownership costs and General Manager of GM Source: Automotive News, Company profile, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 41
  42. 42. 3 Global Warming and Unsustainable Oil Consumption Comparing to mature markets, China appears ready to address the challenges in introducing electric vehicles Readiness for EV Key Forces in China 1 Mature Market China   Ample resources to achieve low cost production   More battery manufacturing experience with larger scale, i.e. lithium Technology battery for cell phone 2   Relatively short driving history makes it easier to cross over to new Consumer products Acceptance   Less stringent requirement on performance due to short community distance and crowd traffic 3   China faces much greater environmental pressure, there is huge need Infrastructure & to switch into cleaner energy Legacy   The Chinese government has been a strong driving force behind the development of industry technology and infrastructure   Local VMs are looking to leverage EV to get ahead in the automotive market, thus resistance from market incumbents is low Source: Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 42
  43. 43. Steel accounts for more than 50% of the weight of an average passenger car Materials in a Passenger Car Major Steel Applications in a Car (By % of total weight) Others Glass 8% Rubber 4% 3% Aluminium 6% Plastics 11% 56% Steel 12% Iron Source: SMMT, Corus, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 43
  44. 44. While alternative metal materials are increasingly used in cars to reduce weight, steel still has a considerable cost advantage Metal Materials - Potential Weight Saving vs. Cost % cost Title Steel Aluminum Magnesium % weight reduction increase (kg) (kg) (kg) Title (part) (vehicle) (part) Auto Maker Comments Body in 3.9%   Because aluminum is typically white 285 218 N/A 23.5% (example vehicle 250% mass of 1700kg) twice the cost of steel, and its (BIW) use means that costs for almost every other aspect of Bonnet 0.48% the car—from assembly to 14.8 8.3 N/A 44% (example vehicle 300% (assembly) mass of 1350kg) parts handling to service and repair—are significantly higher, “from an economic sense, it Door 0.4% doesn’t make sense to use 15.7 9.5 N/A 39% (example vehicle 275% (assembly) mass of 1550kg) one material (aluminum) --By Heinrich Timm Head of Audi’s Aluminum and IP Beam 0.33% (instrument 11.4 N/A 6.3 45% (example vehicle 350% Lightweight Design Center panel support) mass of 1550kg) Source: Corus, Car and Driver, Booz & Company analysis Booz & Company AutomotiveSteel_full_vf.ppt Prepared for WorldSteel -44 44

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