Changing lanes 2015–16 The automotive C-suite’s agenda

Executive summary Views from across the value chain Automaker executives Auto companies need to strengthen preparedness, execution and resource alignment • Securing talent and deploying data management and analytics top their agenda >50% • Less than 20% are confident of their organizations’ implementation and of respondents are impacted by deployment capabilities currency fluctuations, but only 15% feel well-prepared Auto retail executives • Aim to strengthen data management and customer analytics capabilities 2/3 75% • Lack of preparedness for cost control and availability of both consumer and corporate of suppliers feel well-prepared to of respondents cited positive credit support automakers for localization, impact from demand for but more than half of them are connectivity, not focused not prepared for developing local on online/digital channels Supplier executives networks in emerging markets • Well-prepared to tackle platform consolidation, fuel efficiency and weight reduction targets • Concerned about executing market expansion 70% The 2015-16 study finds that those 70% and securing talent of automakers feel in the C-suite are optimistic about of respondents believe that well-prepared to benefit from their strategic initiatives but innovative HR strategies to Captive finance executives increasing demand for used cars, but are concerned about: attract and retain talent will drive lack integrating used car initiatives • Preparedness to respond to market volatility competitive advantage, but only • Expect regulatory environment to be with dealers • Challenges with efficiently implementing key 50% of them feel well-prepared challenging, but appear well-prepared operational and technological initiatives • Are challenged by securing talent and • Securing resources, particularly talent articulating effective product/service strategy For EY’s third annual automotive “ Based on our survey fi ndings and analysis, my message to executives • Accelerate the adoption and use of analytics and data management for the year ahead is to: tools to drive operational effi ciencies – from manufacturing footprint survey, 125 global executives were • Be prepared to respond to continued volatility, with some emerging optimization to supply chain visibility markets facing potential recessions that could cascade to other regions • Develop a talent agenda to secure and deliver a competitive advantage.” interviewed to find out what’s on and change overall sector growth the C-suite’s agenda for 2015-16. • Move faster to leverage the convergence of connectivity, mobility Randall J. Miller and IT security Global Automotive and Transportation Sector Leader, EY • Refresh the dealer and sales experience to drive brand loyalty 2 | Changing lanes 2015-16 | The automotive C-suite’s agenda

C-suite priorities for the next 18 months Overall impact, strategies and preparedness to execute Navigating volatility Navigating Securing access to resources 1 operating 5 environment forces The automotive C-suite expects unfavorable volatility to While the C-suite believes critical resources offer a competitive continue, with emerging markets demand and political advantage, they also see them as necessary for business instability topping the list of concerns. Most feel their continuity. Talent topped the list of critical resources, followed organizations are unprepared to respond effectively. by infrastructure and technology. Securing these resources, however, continues to be a challenge for most of the industry. 63% expect unfavorable only 20% feel well-prepared Sustaining Managing 63% Only 17% impact from volatility to respond to volatility competitive internal believe securing feel well-prepared to advantage operations critical resources offer secure critical resources competitive advantage 2 Enhancing value proposition 3 Gaining competitive advantage 4 Improving operational effi ciency There is consensus across the industry on the value of features Market penetration/expansion, owning innovation and having There is a strong focus on data management and analytics and functionality to drive loyalty, and a greater recognition of an effective corporate strategy development process top the initiatives to drive operational effi ciency, however, few are the critical role of digital in improving the customer experience. list of strategic initiatives for C-suites to drive competitive confi dent in their organization’s ability to execute. 71% 29% advantage. 84% believe changing consumer feel well-prepared to 71% 27% believe profi tability (rather only 16% feel demands support their meet changing consumer believe enhancing value feel well prepared to than revenue growth) is well-prepared to implement value proposition demands proposition can give a implement strategic initiatives the driver for operational key operational effi ciency competitive advantage to gain competitive advantage effi ciency initiatives initiatives Changing laneChanging lanes 2015-16 | s 2015-16 | TThe authe automotivomotive Ce C-suit-suitee’’s agenda s agenda || 33

1.Navigating volatility The automotive C-suite expects unfavorable volatility to continue, with emerging markets demand and political instability topping the list of concerns. Most feel their organizations are unprepared to respond effectively. Demand volatility – misfi ring engines of growth Cost volatility – business as usual Political, economic and regulatory volatility Slowdown in BRICS Currency and raw Political uncertainties (assuming this includes material price and product regulations South Africa), emerging 58% fl uctuations are 58% around the globe are the 72% markets, and concerns expected to have biggest concerns, but the expect unfavorable political, around Eurozone expect unfavorable negative impact, but expect unfavorable C-suites feel signifi cantly economic and regulatory outweigh the positive demand volatility considered more of an cost volatility under-prepared for the volatility outlook of the C-suite for operational issue. former. North America. Only Only 19% Only 18% 25% feel well-prepared for feel well-prepared for feel well-prepared for demand volatility cost volatility political, economic and regulatory volatility 50% of respondents selected demand from 52% of respondents selected currency 43% of manufacturers selected product- BRICS and emerging markets exchange rates related regulations 56% of them cited negative impact, up from 20% a 67% of them cited negative impact, down from 78% 58% of them cited negative impact, while year ago a year ago preparedness has improved 50% of them also facing headwinds from Eurozone of respondents selected raw material 34% prices, 2/3 stated negative impact 50% of automakers selected political 1/3 of suppliers identifi ed forecasting disputes and economic sanctions accuracy of automakers None of them are well-prepared 83% of them cited negative impact, up from 55% a year ago 4 | Changing lanes 2015-16 | The automotive C-suite’s agenda

Market indicators 0.4%–0.5% Annual GDP incremental increase with the $20 decline in oil prices Bridging the gap — 46% Share of US and China in 2014 light what can the C-suite do? vehicle sales globally • Stress the need for fl exibility to navigate through 50% emerging markets, cost and political volatility. • Achieve an optimum capacity-demand balance at a Depreciation of Russian ruble against the US dollar during Jan-Dec 2014 regional level as a natural hedge to exchange rate volatility. 30% • Focus on agility to capitalize on the upside potential of North America and China, and availability of Expected increase in car prices corporate credit. in India after implementation of mandatory safety features 19% Standard deviation in iron ore price volatility during 2014, as compared to 11% in 2013 Sources: LMC Automotive, Global Light Vehicles 2014 review; Oanda.com, Historical exchange rates; Oxford Economics; Metal Bulletin, via Thomson Datastream; LMC Automotive, Global Car and Truck Forecast, 4Q14; EY analysis. Changing lanes 2015-16 | The automotive C-suite’s agenda | 5

2.Enhancing value proposition There is consensus across the industry on the value of features and functionality to drive loyalty, and a greater recognition of the critical role of digital in improving the customer experience. In-vehicle features and functions Digital experience and transactions Demand evolution - mobility and Demand evolution - automakers’ vehicle types preferences impacting suppliers The C-suite The C-suite considers The C-suite is divided Those in the believes demand 77% delivering seamless 71% on the benefi ts 73% supplier C-suite 59% for connectivity, expect demand for digital/in-store expect demand for of incentives and expect demand for believe changes in of suppliers expect fuel effi ciency and in-vehicle features/ experiences, and digital experience to competitive pricing, mobility services and automakers’ sourcing automakers’ demands mandated features functions to support leveraging online support their value but strongly agree on vehicle types to support strategy is likely to to support their value (including driver their value proposition resources to proposition the need to have used their value proposition be disruptive to their proposition assistance) offer infl uence choice, Only vehicle, corporate value proposition. the most signifi cant to be critical to car sharing and However, they are opportunity to 39% win and retain 13% fl eet management 26% more optimistic and be relevant to customers. feel well-prepared solutions. feel well-prepared prepared for platform 30% customers. feel well-prepared to to meet the digital to offer relevant consolidation, growing feel well-prepared to offer relevant in-vehicle experience and mobility services and collaboration (among meet automakers’ features/functions transaction needs of vehicle types automakers) and light- needs effectively customers weighting targets. 74%of respondents selected 31%of respondents selected role 54%of respondents selected of supplier respondents lower emissions and higher of digital/online in infl uencing demand for new products and 72%selected changes in sourcing effi ciency and safety, up from 60% a customer choices, up from only 7% a services including used cars, corporate strategy of OEMs year ago year ago car sharing, fl eet management and multi- 73% cited conducive impact modal solutions 2/3 cited disruptive impact, with less More than 80% cited conducive impact than 12% well-prepared 44%of respondents selected of captive fi nance companies of supplier respondents connectivity/infotainment and 2/3identifi ed incentives and 62%selected platform consolidation smartphone compatibility, up from 28% pricing, with signifi cant majority agreeing by automakers a year ago it supported their value proposition, 72% cited positive impact, 40% are Only 1 in 4 are well-prepared contrasting sharply with 65% automakers citing incentives and competitive pricing well-prepared as disruptive 6 | Changing lanes 2015-16 | The automotive C-suite’s agenda

Market indicators US$60b Global market size for smartphone connecting technologies by 2018 (up from US$18 billion in 2012) Bridging the gap — 72% what can the C-suite do? Of online car research sessions are multi-channel, including third-party, automaker and dealer websites • Align functional organizations to support the mobility and connectivity value proposition to capitalize on demand. 27.8m • Accelerate the transformation of distribution channels Incremental mobile search queries to give customers a seamless online and dealer store as compared to desktop queries experience. by 2016 2.3m Worldwide car sharing membership in 2013, up from 1.8 million in 2012 Sources: GSMA, The global association of wireless service providers; Kelsey Report, 2012; Carsharing Programs, Navigant Research; EY analysis. Changing lanes 2015-16 | The automotive C-suite’s agenda | 7

3.Gaining competitive advantage Market penetration/expansion, owning innovation and having an effective corporate strategy development process top the list of strategic initiatives for the C-suite to drive competitive advantage. Market penetration/expansion strategies Product/service innovations and collaborations Marketing and sales initiatives Presence/success in new Owning innovation and Digital marketing and emerging markets and in collaborations (within sales strategy are seen regional niche segments/ 67% and outside the auto 77% as critical, followed by 66% bodystyles continue believe market penetration/ industry) are perceived believe product/service the need to invest in believe marketing and sales to be a top priority expansion strategies to offer signifi cant innovations and collaborations customer analytics. initiatives enhance value on the C-suite growth enhance value proposition competitive advantage. enhance value proposition Interestingly, innovative proposition agenda. For suppliers, However, business model/ fi nancing and retail in particular, supporting commercial collaboration strategy for alternate automakers’ localization opportunities with non- powertrain vehicles were efforts by expanding into 28% auto companies are yet 26% at the bottom of the list. 26% key markets enhances feel well-prepared to to be fully exploited. their value proposition. implement market feel well-prepared to feel well-prepared to penetration/expansion implement product/service implement key marketing initiatives strategies and collaborative and sales initiatives initiatives of respondents selected presence and success 39% of automakers identifi ed leveraging online, 49% in high-growth markets and segments 42% of respondents selected technology or digital and social media for marketing 69% are doing it to enhance value proposition business model collaborations and sales suppliers selected ownership of innovation Only 56% of Asia-Pacifi c respondents are doing it to 80% and R&D 12% are well prepared differentiate from competition Only 44% of them are focused on hiring talent for 45% of captive fi nance companies selected innovation access to intelligence and data analytics 57% of suppliers selected global presence to around customers support automakers for localization of captive fi nance companies selected 80% are doing it to differentiate from competition European suppliers are better prepared, as compared to 45% residual value management US and Asian suppliers 8 | Changing lanes 2015-16 | The automotive C-suite’s agenda

Market indicators 7 Of the top 10 automakers reported a decline in share of emerging market sales during 2013-14 as compared to 2012 Bridging the gap — 3rd what can the C-suite do? Rank of auto industry in patent issuance, with a 13% share behind • First movers will need to make the most of a shorter computing and telecom window to capitalize on differentiation, whether from 6 of the top 10 automakers market/segment expansion or innovative marketing are from Asia strategies, as there is consensus around strategic options US$168b being considered by peer groups. • Establish a network of technology and business model Capex investments by automakers partners within and outside the auto industry to improve in 2014 (8% of sales), as compared to US$159 billion in 2013 agility of innovation process and focus on systematically harvesting synergies. 51% • Leverage marketing effectiveness monitoring and Automotive executives plan to pursue customer analytics tools to optimize digital strategies. acquisitions in the next 12 months (up from 29% a year ago) 40 New additions to Open Automotive Alliance in 2014, including automakers and electronics manufacturers Sources: Financials, S&P Capital IQ; Press Room, Open Automotive Alliance; Automotive Capital Confi dence Barometer, EY, October 2014; EY analysis Changing lanes 2015-16 | The automotive C-suite’s agenda | 9

4.Improving operational effi ciency There is a strong focus on data management and analytics initiatives to drive operational effi ciency; however, few are confi dent in their organizations abiity to execute. Data management and analytics initiatives Manufacturing-effi ciency-related initiatives Supply chain initiatives Deploying analytics The C-suite is focused The C-suite is prioritizing tools, and using real- on enhancing operating 86% optimizing low-cost time intelligence around 84% effi ciency of global country sourcing, 86% customers and the manufacturing and believe improving local-sourcing in believe improving supply chain to expedite believe improving enabling fl exible profi tability is the primary developed and emerging profi tability is the primary decision-making and profi tability is the primary production to adjust driver for implementing markets, and gaining driver for implementing devise new strategies, driver for implementing data to changing market initiatives related to greater visibility to supply chain initiatives but few appear to management and analytics realities. manufacturing operations ensure supply chain have the ability to initiatives security. Only execute. Standardizing/ Only optimizing IT process Only 12% and technology is also 16% feel well-prepared to a priority. 12% feel well-prepared to implement optimization feel well-prepared to implement manufacturing initiatives in their implement data effi ciency initiatives supply chain management and analytics initiatives of manufacturers selected optimizing of manufacturers selected low-cost selected data management and analytics 41% 25% country sourcing to improve profi tability 81% as key to improving operational effi ciency global manufacturing footprint to improve profi tability 1 in 3 of respondents selected Only 1 in 6 are well-prepared 20% of manufacturers selected localizing customer data analytics, supply chain in developed and emerging down from 56% a year ago of manufacturers selected fl exible markets to reduce logistics costs and 34% production systems to respond swiftly to benefi t from regional subsidies 63% of respondents selected IT and technology demand volatility process/platform optimization Suppliers are better prepared as compared to vehicle 1 in 7 are well-prepared Only manufacturers 10 | Changing lanes 2015-16 | The automotive C-suite’s agenda

Market indicators 21 Platforms with more than 1 million vehicles in production in 2021, as compared to 17 in 2014 and 11 in 2011 Bridging the gap — 45% what can the C-suite do? Auto M&A deals will be driven by cost reduction and margin • Spearhead data management and analytics capabilities improvement, followed by improvements in supply chain to drive agility of decision-making. This can deliver signifi cant operational effi ciencies and also refl ect on 92% fi nancial performance. Capacity utilization in the US, as • Flex global capacity to create a competitive advantage, compared to 50%-60% in BRICS; China’s especially in volatile operating scenarios. capacity utilization also dropped from 78% in 2011 to 62% in 2014 54% Of respondents selected IT security awareness and training as a high priority for their company in the next 12 months Sources: LMC Automotive, Global Automotive Production Forecast, 4Q14; Automotive Capital Confi dence Barometer, EY, October 2014; Global Information Security Survey, EY, 2014; EY analysis Changing lanes 2015-16 | The automotive C-suite’s agenda | 11

5.Securing access to resources While the C-suite believes critical resources offer a competitive advantage, they also see them as necessary for business continuity. Talent topped the list of critical resources, followed by infrastructure and technology. Securing these resources, however, continues to be a challenge for most of the industry. Talent Technology Capital Legal compliance The C-suite believes The C-suite believes The C-suite expects Establishing innovative HR the need for greater 84% expansion across new 64% processes for 44% practices offer 62% connectivity markets/segments proactive regulatory competitive believe securing and meeting fuel believe securing necessitates securing believe securing impact analysis interestingly, believe advantage, and talent offers effi ciency norms technology/ access to fi nancing, capital offers to ensure timely compliance and consistent talent competitive make it imperative intellectual property distribution and competitive interventions for reporting offers management advantage for the industry offers competitive supply chain. This is advantage minimizing fi nancial competitive advantage across geographies to secure access advantage essential to reduce impact, and to is necessary for to the requisite time to market and infl uence regulatory business continuity. technologies. maintain quality, decision making is In particular, they while increasing 26% also on the C-suite 32% believe efforts are localization. feel well-prepared to agenda. feel well-prepared for needed to attract, 10% 12% Only feel effective compliance retain and nurture Only feel well-prepared to secure capital and reporting human capital more well-prepared to secure technology effectively. secure talent resources 34%of automakers identifi ed 34%of respondents selected of respondents selected talent of respondents selected the expanding distribution network compliance and regulatory 50%for management functions 38%need to secure technology franchised, owned reporting (strategy, fi nance, marketing) for connected vehicles and alternate Only 1 in 4 of them selected local Only 1 in 3 of them are well-prepared powertrain, up from only 7% a year ago Only 1/3 of them are focusing on supplier network in emerging markets innovative HR strategies to attract and retain talent 29%of manufacturers selected fi nancing for R&D and capex 46%of suppliers selected talent to investments drive innovation Only 1 in 8 of them are well-prepared 12 | Changing lanes 2015-16 | The automotive C-suite’s agenda

Market indicators US$624b Net fi nancial debt in 2014, up from US$394b in 2011 (for top 10 automakers) Bridging the gap — 50% what can the C-suite do? Increase in China’s average yearly manufacturing wages during 2010-2013 • Focus on securing access to talent and ensuring 53% compliance for business continuity. • Extend the value chain to new industries to develop Organizations say lack of skilled technology and infrastructure for powertrain and resources is one of the main connectivity. obstacles that challenges their IT security • Devise innovative strategies to retain talent and utilize 57% infrastructure to create competitive advantage. Auto executives cited high level of confi dence in credit availability, up from 41% a year ago Sources: Financials, S&P Capital IQ; Automotive Capital Confi dence Barometer, EY, October 2014; Wages in China, Trading Economics; EY analysis. Changing lanes 2015-16 | The automotive C-suite’s agenda | 13

Mapping the diverse strategy preferences of the C-suite Analysis of the C-suite responses indicates three prominent strategic imperatives, which are not mutually exclusive but need balanced representation on the boards of automotive companies. Change Agents: driving innovation Opportunity Seekers: focus with a focus on R&D for the future on presence and success in These executives are aiming to improve high-growth geographies their preparedness on providing connectivity, leveraging digital/online These executives feel better prepared sales and enabling fl exibility in production to navigate emerging markets and are and IT processes. confi dent in their product portfolio, but • 90% well-prepared to provide features they may need talent for management driven by regulations functions. • 1 in 3 favorable towards demand for • 1 in 2 well-prepared to navigate through connectivity volatility from BRICs/emerging markets • >20% well-prepared to pull down silos • Over 80% well-prepared to leverage across the organization demand for higher fuel efficiency, safety • 1 in 2 well-prepared to secure talent to and lower emissions drive innovation • Only 1 in 3 focused on IT process • 1 in 3 devising innovative HR strategies flexibility and optimization Digital Enablers: focus on optimization and to attract and retain talent • Only 1 in 4 well-prepared to standardization of technology and IT platforms secure access to talent for management These executives are leveraging data to drive process functions effi ciency, business growth and supply chain visibility. • 40% well-prepared to drive IT flexibility in their organization • Only 25% well-prepared to drive customer analytics • Only 25% also focused on securing technology for connected vehicles • 1 in 3 aiming to optimize global manufacturing footprint 1414 | Changing lane| Changing lanes 2015-16 | s 2015-16 | TThe authe automotivomotive Ce C-suit-suitee’’s agendas agenda

Key considerations for C-suite Tax and regulatory • Develop a diversified tax strategy to achieve global tax efficiency Operating and performance • Incorporate international tax activities and transfer pricing • Implement global capacity management-sharing framework procedures into the daily tax agenda • Adopt customer life cycle approach to identify touch points to • Focus on technology and connectivity to devise new tax models cross- and up-sell • Develop interconnected competencies and business insight to • Leverage connectivity and captive finance to identify new manage broad tax issues and minimize tax risks revenue streams • Align assignment and tax policies in an increasingly regulated • Focus on flexible production systems and converting fixed and competitive environment costs into variable costs • Simplify processes and use technology to revamp governance, risk and compliance programs • Embed program risk management into product development and launch processes • Create an innovation platform to enhance collaboration within the business and with external partners • Build analytics capabilities to positively impact customer interactions, pricing and incentive strategies, supply chain efficiencies, and other key value chain processes • Align the organization’s business and talent strategies; and elevate the emphasis placed on talent through innovative strategies to engage, reward, and empower the workforce Investment and capital Compliance and reporting • Integrate government incentives, direct loans and guarantees • Introduce connected reporting to bridge internal and external reporting in capital raising strategies requirements • Assess investment opportunities and risks associated with new • Integrate data analytics to enhance compliance with corporate social segments and business models media policy • Build flexibility into emerging markets investments • Integrate big data and advanced forensic data analytics to reduce fraud • Use need-based and strategic alliances, JVs and acquisitions and corruption risks to gain technology and geographic coverage • Balance cost reduction with sustainable process change • Identify relevant accounting treatment and revenue recognition • Benchmark leading-class performance and pursue • Develop an integrity and compliance program to guide the organization’s targeted change decisions and meet regulatory requirements • Evaluate effectiveness of currency and raw material hedging strategies Changing lanes 2015-16 | The automotive C-suite’s agenda | 15

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