Auto industry marketing upheaval

Upheaval in the Auto IndustryUpheaval in the Auto IndustryAutoThink 2009, Birmingham

Casesa Shapiro Group

April 23, 2009 prepared for


Agendag

Ab t fi About our firm

Upheaval in the auto industry

The US market today The US market today

Changes ahead

April 23, 2009 2



I d d t d i fi i li i i th t i d t

Profile of Our Firm

Independent advisory firm specializing in the auto industry

Combine strategic thinking and financial perspective

Scope is global and comprehends entire value chain

OEMs , suppliers, dealers, aftermarket, green technology and more

Retained by major corporations, investors and governments

Advise on strategy and transactions

Assist clients in achieving specific business objectives

April 23, 2009 3


Upheaval in the Auto Industry

April 23, 2009 4


Root Causes: Success Spoiled Detroit p

“When you get too big a majority, you’re immediately in trouble”

Consolidation in 1930’s resulted in

– Sam Rayburn

Consolidation in 1930 s resulted in concentration of power in GM and Ford

Abusive practices against labor and

National Labor Relations Act (1935)

dealers resulted in protective legislation, creating barriers to change

Generations of financially drivenState franchise laws (1937) and Automobile Dealers’ Generations of financially‐driven

management accepted creating calcified Detroit culture

S C Sh i G

and Automobile Dealers Day in Court Act (1956)

April 23, 2009 5

Source: Casesa Shapiro Group


Results: Five Decades of Falling MarginsBig Three Operating Margin, 1961‐2008E

16.0

%16

.1%

5.0%

15.4

%16%

19%12

.8% 15 1

12.7

%9.

8%12

.5%

10.5

%

10.2

%10

.8%

9.8%

9.2%

9.3%

8.2%

%

8.5% 9.

8%7.

5% 8.6% 9.

2%7.

9% 9.0%

7.6%

2% 6.9%

2% 7.6%

%

10%

13%

16%

rgin

4.8%

4.0% 4.

7% 5.2%

0.4%

2.6%

4.9%

1.7%

1.8%

3.9%

6.2 6

6.2

5.6%

0.2%

2.9% 3.

7% 4.2%

1%

4%

7%

Ope

ratin

g M

a

-3.4

%

-3.2

%

-0.8

%-2

.0%

-1.1

%

-8%

-5%

-2%

O

Detroit Three Operating Margin

S M d ’ C R t C Sh i G ti t f 2007 d 2008 Ch l lt

-8.5

%

-11%

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

April 23, 2009 6

Source: Moody’s, Company Reports; Casesa Shapiro Group estimates for 2007 and 2008 Chrysler results


Results: Depleted Balance SheetsNon‐Financial Debt per Unit Produced, 2008

$4,859 $5,000

$5,000

$3,000

$4,000 $3,544

$3,000

$4,000

$1,000

$2,000

$1,000

$2,000

S C Sh i G C R t

$119 $-

,

Ford Honda

$119 $-

GM Honda

April 23, 2009 7

Source: Casesa Shapiro Group, Company Reports


Results: Underinvestment in Product

25%

30%

25%

21%

18%20%

25%

nt Rate, 1998‐2008

15% 15%

11%

15%

Volume Re

placem

en

5%

10%

Average An

nual V

0%

Korean Japanese European Chrysler GM Ford

S M ill L h

April 23, 2009 8

Source: Merrill Lynch


Parallels: Other US Industries Have Been Transformed

1990’s1980’s 2000’sSteelTextiles Airlines

ResizeNew

Business Model

Restructure ReinvestLegacyBusinessModel

S C Sh i G

April 23, 2009 9



Transformation Underway, but Much More to Doy,

WE ARE HEREWE ARE HERE

ResizeLegacyBusinessModel

New Business Model

Restructure Reinvest

Reduce CapacityReduce Employment

Recapitalize Balance Sheets Secure Auto Financing Sources

Strengthen Product Pipeline Fund R&D for New Technology

S C Sh i G

p yReduce Dealer CountDivest Non‐Core Assets

gRedefine Labor Relationship Rationalize Brand Portfolios

gyIntegrate Global Operations Pursue Growth Markets

April 23, 2009 10



Consequences of Upheaval

Crisis occurring on a global scale, although most acute in the US

Downturn is Catalyst for Massive Change

g g , g

Restructuring across all links in value chain almost a foregone conclusion given excess capacity among OEMs, suppliers and dealers

Consolidation will be both opportunistic (strong companies as acquirers) and pp ( g p q )unintentional (business failures)

Emerging competitors are buyers of depreciated legacy assets; Chinese especially ambitious

Widespread government intervention around the world will impact nature and speed of restructuring

Regulatory push and consumer pull for sustainability will continue to drive innovation in auto technology

Electrification of the car an increasingly possible disruptive development

S C Sh i G

April 23, 2009 11



The US Market Today

April 23, 2009 12


US LV Sales vs. Consumer Confidence

19 1.2Consumer Confidence, LTM TrendU.S. Light Vehicle Sales, LTMTrend

15

17

0 9

1.1

ales (m

ils)

idence

U.S. Light Vehicle Sales, LTM Trend

13

15

0.8

0.9

ht Vehicle Sa

nsum

er Con

f

March = .573

11 0.6U.S. Ligh

Con

9 0.5

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

S U f Mi hi S R h

April 23, 2009 13

Source: U. of Michigan Survey Research


Demand Contraction Greatest in Postwar EraUS Light Vehicle Sales, 1950‐2020E

18,000,000

14,000,000

15,000,000

16,000,000

17,000,000

10,000,000

11,000,000

12,000,000

13,000,000

1973‐ 1978‐

1986‐1991‐23%

Gulf War

6,000,000

7,000,000

8,000,000

9,000,000 1975‐23%OPEC I

19781982‐31%

OPEC II

2000‐2009E ‐42%

S W d’ A t I f b k CS ti t

4,000,000

5,000,000

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10E

12E

14E

16E

18E

20E

April 23, 2009 14

Source: Ward’s AutoInfobank, CS estimates.


Auto Expenditures % of GDPp

6%

Average = 4.1%

4.5%4.3% 4.1%

3 3%

4.7%4.5%

4.0% 4.0%

4.2%

4%

5%

% of G

DP

e age %

3.3%3.1% 3.4%

2.0%2%

3%

Expe

nditures %

Consumer

1%

Auto

BusinessGovernment

S D t f C B f E i A l i

0%

1967

‐IV

1969

‐II

1970

‐IV

1972

‐II

1973

‐IV

1975

‐II

1976

‐IV

1978

‐II

1979

‐IV

1981

‐II

1982

‐IV

1984

‐II

1985

‐IV

1987

‐II

1988

‐IV

1990

‐II

1991

‐IV

1993

‐II

1994

‐IV

1996

‐II

1997

‐IV

1999

‐II

2000

‐IV

2002

‐II

2003

‐IV

2005

‐II

2006

‐IV

2008

‐II

April 23, 2009 15

Source: Dept. of Commerce, Bureau of Economic Analysis


YOY % Change in Volume g

2%

0%

10%

‐15%‐12%

‐9%

18%

‐7%

‐20%

‐10%

‐22%

‐29%‐28%

‐19%

‐32%‐35%

‐19%

‐33%

‐27%

‐18% ‐19%

‐31%

36%

‐25%‐30%

20%

35%‐37%

‐49%

‐36%

‐50%

‐40%

S W d’ A t I f b k

April 23, 2009 16

Source: Ward’s AutoInfobank


US Market Share Trends

40%

45%

GM Ford Chrysler Korean European Toyota Honda

25%

30%

35%

15%

20%

0%

5%

10%

5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8


1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

YTD 200

9

April 23, 2009 17



US Market Share Trends

18.7%

16 3%

10.5%GM

Ford

Chrysler40 9%

5.4%6.2%

3.6%

14.1%

8.2%

16.3% Chrysler

Other Japanese

Korean

European

Toyota

40.9%

12.0%

9.8%

1985 YTD 2009

11.2%

13.6%

7.5%Toyota

Honda22.1%


1985 YTD 2009

April 23, 2009 18



Segment Shifts in the US Light Vehicle Market

14.7% 16.6% 18.4% 14.8% 13.6%90%

100%

g g

10.4%

4.7%

9.1% 18 3% 21 7%

1.8%

6.7%

17.2%

8.8% 8.1%

3.4%9.5% 10.3%

6.4% 6.4%

60%

70%

80%

Pickup

Van

39.8%

29 4%

6.3%

3.6% 3.5% 3.4%

9.1%

8.7% 7.8% 7.8%

3.1%

18.3% 21.7%17.2%

40%

50%

60% Van

SUV

CUV

Luxury & Sports Cars

25 1% 22 4%

29.4%

23.5%21.3% 20.2%

20%

30%Large Car

Middle Car

Small Car

25.1% 22.4%15.2% 19.1% 18.7%

0%

10%

1980 1990 2000 2008 2009 YTDS W d’ A t I f b k

April 23, 2009 19



Small Car Demand vs. Gasoline Prices

$3 30 $3.5022%

19.1%18.7%$2.57

$2.84

$3.30

$2.50

$3.00

20%

22%

Small Car Share Annual Retail gas price per gallon

15.8%

18.7%

$1.14$1.48 $1.42 $1.56

$1.85

$2.27

$1.94

$1.50

$2.00

16%

18%

12.6%13.0%

15.2% 15.1%14.7%

14.2%13.6%

14.2%

15.3%

$1.03

$1.34

$0.50

$1.00

14%

16%

S W d’ A t I f b k EIA

%

$0.0012%

April 23, 2009 20

Source: Ward’s AutoInfobank, EIA


Luxury % of Light Vehicle Market

11 7% 11 8%12.2%

14%

y g

9.6%

11.7% 11.8%

10%

12%

4.8%6%

8%

4.8%

2%

4%

0%

1980 1990 2000 2008 2009 YTD


April 23, 2009 21



Luxury % of Light Vehicle Market vs. Dow Jones Industrials

14,000

16%

10,000

12,000

12%

14%Luxury % of US LV Market

DJIA

6,000

8,000

8%

10%

2,000

4,000

6%

S W d’ A t I f b k G l Fi

04%

1/19

8011

/198

09/19

817/19

825/19

833/19

841/19

8511

/198

59/19

867/19

875/19

883/19

891/19

9011

/199

09/19

917/19

925/19

933/19

941/19

9511

/199

59/19

967/19

975/19

983/19

991/20

0011

/200

09/20

017/20

025/20

033/20

041/20

0511

/200

59/20

067/20

075/20

083/20

09

April 23, 2009 22

Source: Ward’s AutoInfobank, Google Finance


US Luxury Market by Brandy y

12.6%8.6%

14.9% 15.9% 16.6%

2.5% 1.0% 1.6% 1.8% 2.0%

90%

100%

0.7%18.3% 17.4%

15.4% 25.4% 14.0% 7.6% 7.9%

16.6%

70%

80% Porsche

Mercedes‐Benz

Lincoln

50.0%28 3% 13 7%

11.4% 9.8%

2.6%

5.7%8.0% 8.5%

2.1%3.2%

1.0% 1.1%0.5%

2.0% 2.1% 2.4%

7.0% 15.0%

40%

50%

60% Lexus

Land Rover

Jaguar

Infiniti

2.3%5 8% 6 2% 6 5%8.7%

7.0% 13.7% 17.6% 17.6%

28.3% 13.7%9.8%

20%

30%

Infiniti

Cadillac

BMW

Audi

A


15.2%10.4% 10.2% 10.1%10.0%

5.8% 6.2% 6.5%

0%

10%

1980 1990 2000 2008 2009 YTD

Acura

April 23, 2009 23



Sales Volume Replacement Rates, 2009‐2012p ,

80%Ni

72%74%

80%

HondaKoreanNissan

70%70%71%

EuropeanGM

Toyota

51%66%67%

ChryslerFord

Industry

S M ill L h

5 %

0% 20% 40% 60% 80% 100%

y

April 23, 2009 24

Source: Merrill Lynch


Dealership Economicsp

Store size and profitability are highly correlated

Health of distribution network integral to

Unit Sales per Dealership

Brand 2007 2002 % ChangeToyota Division 1,869 1,267 48%Honda Division 1,343 1,079 24%Nissan Division 880 609 44% Health of distribution network integral to

health of brand

Declining sales per dealership (‘throughput’) forcing rapid store and brand consolidation

Nissan Division 880 609 44%BMW 869 683 27%Industry Average 758 785 ‐3%Hyundai 605 636 ‐5%Ford Division 570 762 ‐25%Chevrolet 559 628 ‐11%Saturn 553 637 ‐13%Mazda 438 365 20%VW Division 390 558 ‐30%Dodge 378 420 ‐10%Subaru 312 307 2%

31.2%30%

35%

Estimated Pretax ROE by Store Size

GMC 219 244 ‐10%Suzuki 201 155 30%Chrysler Division 193 167 16%Jeep 174 163 7%Cadillac 147 134 10%

10.6%

19.3%

24.3%

10%

15%

20%

25%

S NADA W d C Sh i G

Pontiac 130 184 ‐29%Lincoln 99 107 ‐7%Mercury 88 129 ‐32%Buick 68 156 ‐56%

0%

5%

Very Small Small Midsize Large

S A i

April 23, 2009 25

Source: NADA, Wards, Casesa Shapiro Group Source: Automotive News


US Market Observations

GM ward of the state and will shrink dramatically – in or out of bankruptcy

Chrysler/Fiat combination has conceptual appeal but high execution risky / p pp g

Brands at risk represent 14.7% of the US market (Buick, GMC, Pontiac, Hummer, Saturn, Saab, Chrysler and Dodge), suggesting substantial conquest opportunity for stronger OEMs

Hyundai, Kia and Subaru achieving extraordinary performance in terrible market

Hyundai (#7) close to passing Nissan, and should Chrysler fail, could move to #5 behind Hondabehind Honda

Accelerating consolidation of franchise network will eventually make for a healthier industry structure

New entrants may sense opportunity for traditional distribution (Saturn?)

Electric vehicles suggest possibility for new channels of distribution

April 23, 2009 26


Changes Ahead

April 23, 2009 27


20th Century Transformation

Technological Explosion

Cadillac offers first self starter in 1912

y

Cadillac offers first self starter in 1912

Ford assembly line begins at Highland Park in 1913

GM introduces fast drying Duco paint in 1924

Motorola invents car radio in 1924

Economic ExpansionUS GDP

$40

$60

$80

$100

$120

Billion

s

$0

$20

1912 1914 1916 1918 1920 1922 1924 1926 1928

S C Sh i G L i D J h t d S l H Willi "Wh t W th U S GDP Th ?“ 2008

April 23, 2009 28

Source: Casesa Shapiro Group, Louis D. Johnston and Samuel H. Williamson, "What Was the U.S. GDP Then?“, 2008


21st Century Transformation

Technological Explosion

Electric car commercialized with GM’s EV1

y

Electric car commercialized with GM’s EV1

Hybrid vehicle popularized by Toyota’s Prius

Low‐cost Tata Nano creates new product category

Battery breakthrough makes electric car practical?

Economic ExpansionBRIC Vehicle Sales

y g p

10 000

15,000

20,000

25,000

30,000

35,000

('000

Units) ??

0

5,000

10,000

2007 2008 2009 2010 2011 2012 2013 2018 2023

S C Sh i G JD P LMC 3Q 2008 F t

??

April 23, 2009 29

Source: Casesa Shapiro Group, JD Power LMC 3Q 2008 Forecast


Development of the Auto Industry?

Tier 3+ 10,000sTier 2 1 000s

Today

Suppliers

Tomorrow ?Tier 3+ 10,000sTier 2 1 000s1,000s

Tier 1 100s

pp

OEMsTraditional OEM

1,000sTier 1 100s

Traditional OEM New Manufacturers

Distribution20,000 Dealers Big Box Online Channel20,000Dealers

10,000?

Technology

ICE Hybrid ICE Hybrid ElectricPlug‐in

S C Sh i G

Energy Infrastructure

116,855 Gas Stations 116,855? Gas Stations 1,000,000s Charging Stations

April 23, 2009 30



Ten Long‐Term Expectations

1. Detroit, its dealers and suppliers, undergo radical surgery

2. Emerging automakers buy more legacy assets

g p

g g y g y

3. Consolidation is offset by new entrants

4. OEMs becomes less capital intensive as suppliers grow

5. Global tastes converge, but trend to build where you sell continues

6. Regulatory push and consumer pull for sustainability sustained

7. Profit potential drives new era of innovation in auto technology

8. Traditional reasons for purchase endure

9 El t ifi ti l b t th b t th t9. Electrification means less about the car, more about the system

10. Concept of personal mobility changes

S C Sh i G

April 23, 2009 31



John A. Casesa

Prior to co-founding Casesa Shapiro Group in 2006, John Casesa was one of Wall Street’s leading auto analysts, serving as Global Coordinator for Automotive Research and Managing Director at Merrill Lynch & Co. He was responsible for coordinating the efforts of the firm’s auto analysts in North America, Europe and Asia who produced research on OEMs, suppliers, tire manufacturers, parts retailers and wholesales, vehicle auctions and franchised auto dealers. Mr. Casesa was ranked as an All-Star analyst 11 times in Institutional Investor magazine’s influential annual survey.

Mr. Casesa joined Merrill Lynch in 1999. From 1989 to 1999, he built his reputation at the research-driven investment bank, Wertheim Schroder & Co., where he was a Managing Director and member of the Investment Committee. From 1986 to 1989, Mr. Casesa was a member of the Marketing and Product Planning Staff at General Motors Corporation in Detroit.

Mr. Casesa is a past member of the Financial Accounting Standards Board’s (FASB) User Advisor Council, the New York Stock Exchange’s (NYSE) Research Analyst Qualification Exam Committee, , g ( ) y Q ,and is a past president of the Automotive Analysts of New York (AANY).

He holds a B.S. from St. John’s University and an M.B.A. from the Amos Tuck School at Dartmouth College.

April 23, 2009 32

CS

Casesa Shapiro GroupCasesa Shapiro Group1230 Avenue of the Americas, New York, NY 10020

212.618.6373 Tel 212.618.6309 Fax www.casesashapiro.com

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Auto industry marketing upheaval