U.S. Automotive Industry

April2012April2012

Index

1 Automotive Demand

2 U.S. Dealerships

2

Auto Demand: Key MessagesM f t l ki b d f l th i 2009 Chi b th ld’• Manufacturers are looking abroad for sales growth: in 2009, China became the world’s largest auto market. In the U.S., auto sales will increase gradually over the next four-five years

• Auto sales are linked to growth of real per-capita disposable income. Growth here g p p prequires expansion in real wages and/or more workers, but full employment will not return until after 2014. There is currently a glut of automobiles relative to employment, and working age population growth is slowing

C d l i d d i th i d bt b d ti l l i th• Consumers are de-leveraging and reducing their debt burdens: particularly in the mortgage market. Outstanding auto debt is no longer declining, and delinquency rates appear to have stabilized. Autos remain essential for transportation to/from work in most areas of the country

• The U.S. still remains the largest market defined by total expenditure and total amount financed. High per-capita wealth supports higher unit prices of autos, and the U.S. financial system allows all types of buyers to finance a car within their budget

L i i tt ti f b l d t tt ti l d l t

3

• Leasing is attractive for many buyers : lower down payments, attractive lease deals put consumers in a new car for a low monthly payment. Leases are significant among luxury autos

Autos: A Global MarketGlobal auto manufacturers will focus on emerging markets during this decade as

Global Auto PenetrationAutomobiles ProductionMillions of Units

households move up the income ladder

60

70

Slovenia

ItalyFrance

BelgiumEngland

N

Germany

JapanSwitzerlandUSA

500

600

als

30

40

50

60

Slovakia

Poland

Latvia

Czech Republic

Portugal

SloveniaSpain

gNorway

300

400

per

100

0 in

div

idu

a

Mature markets:Higher auto spending per-capita and access to credit

0

10

20

2007

2010

IndiaChina

TurkeySouth Africa

MexicoBrazil

South Korea

0

100

200

Veh

icle

s p

Markets with high growth rates, potential for credit

expansion, and rising household incomes

4Source: BBVA Research & PWC Source: BBVA Research & VDA

Resto del Mundo BRICSRest of the world

BRICSIndia0

0 10,000 20,000 30,000 40,000

Income per capita, USD

Autos: China and BrazilIn China, a growing middle class has created the world’s largest auto market.

2514

BrazilUnemployment Rate & Auto Sales (Annual units)

China: Housing Prices and Auto SalesPrices, yoy % change (left); Autos, millions, annualized (right)

A tightening labor market in Brazil supports new demand

20

25

10

12

14Home Prices (left)

Auto Sales (right)

2.4

2.5

2.6

9.0

9.5

10.0

10

15

4

6

8

2.1

2.2

2.3

7 5

8.0

8.5

5

10

-2

0

2

1.8

1.9

2.0

6.5

7.0

7.5

Unemployment rate (lhs)

Auto Sales (millions of units, rhs)

5

0-405 06 07 08 09 10

1.76.007 08 09 10

Source: Bloomberg Source: Bloomberg

U.S. Market SizeSales of new vehicles declined precipitously during the recession; however, the U.S.

remains the world’s largest market by sales value and finance opportunitiesremains the world s largest market by sales value and finance opportunities

Annual New and Used Vehicle Sales (1990-2010)(Left scale, thousands of vehicles)

400450

Size of Finance Market for New Vehicles, $Bn(Sales of new vehicles x average amt. financed x 90%)

50

60

70Used New

200250300350400

30

40100150

200

90 92 94 96 98 00 02 04 06 08 10 12 14Source: Federal Reserve / Haver Analytics and BBVA Research

New:

Mar

ket

2014

An

nu

al

Sale

s

Ave

rag

eF

inan

ce

Am

ou

nt

To

tal

Pct

. F

inan

ced

Pct

. L

ease

d

Ban

k%

Ban

k P

oo

l

New 15M $25,500 ~$380B 70% 20% 45% ~$120B0

10

20

90 92 94 96 98 00 02 04 06 08 10

90%

6

15M $25,500 $380B 70% 20% 45% $120B

Used-Retail(Dealers)

12M $16,600 ~$200B 70%* n/a 33% ~$50B

Used -Other 28M n/a $100-$160B

90 92 94 96 98 00 02 04 06 08 10

Source: Bureau of Transp. Statistics / Bloomberg

* Assumption based on new car financing

2010 - Estimate

U.S. Auto DemandStrains from the financial crisis and slowing growth of the working age population

imply a moderate recovery of sales

Summary of Projections(M = millions of units)

Total Vehicles in Use and Registrations Per-Capita(Left scale, millions of vehicles)

imply a moderate recovery of sales

0.75

0.80

0.85

240

260

280

300

ar ork

ing

Ag

e p

. G

row

th

et A

dd

itio

ns

r Ye

ar

rap

pag

ete ed

Sal

es

ew S

ales

0 55

0.60

0.65

0.70

180

200

220

240

Yea

Wo

Po

Ne

Pe

Scr

Ra

Us

Ne

1990-2007

1.2% 4.5M(93-07)

5.6%12M

41M 15.9M

2011-2015

0.54% 2.4M 5%12M 13M

38-40M

13-16M

0 40

0.45

0.50

0.55

100

120

140

160Registrations (L)Proj. RegistrationsRegistrations Per Capita (R)Proj. Regis. Per Capita

2015 12M-13M 40M 16M

2015-2020

0.48% 3.1M 5-6%13-14M

40M+ 16M+

7

0.4010070 75 80 85 90 95 00 05 10 15 20

Sources: BBVA Research Dept. of Motor Vehicles, Census

U.S. Auto DemandFurthermore, there is currently a glut of capacity relative to employment. A low labor

participation rate implies a lower need for new autos

Non-Agricultural EmploymentThousands

Auto registrations of passenger cars and light trucks per civilian employee

1970-2009

participation rate implies a lower need for new autos

1.7

1.8

135

140

145

150

4 yrs

7 yrs

1.5

1.6

A normalization of credit markets and lending standards will 120

125

130

135

1 3

1.4

help bring down this ratio to around 1.65

100

105

110

115Employment Forecast

3 yrs

8

1.370 74 78 82 86 90 94 98 02 06

Source: BBVA Research

10090 94 98 02 06 10 14

Source: BBVA Research

U.S. Auto DemandA de-leverage process hampers credit growth, and savings rates are near 5%. However, auto

loan delinquency rates have peaked below other forms of debt and newly delinquent auto

Loan DelinquenciesPercent of Loans 90+ Days Delinquent

Homeowner Financial Obligations Ratio

loan delinquency rates have peaked below other forms of debt and newly delinquent auto loan balances are declining

Financial obligations payments to disposable personal income, SA

10

11

12

7

8

9

10

Autos

All M t HELOC d

7

8

9

Mortgage Consumer4

5

6

7 All: Mortgage, HELOC and Cons. Credit

4

5

6

0

1

2

3

Approaching a stable level; however,

mortgage-related debt strains budgets

9

480 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Source: Federal Reserve / Haver Analytics

099 01 03 05 07 09 11

Source: Federal Reserve Bank of New York / Haver Analytics

U.S. Auto DemandAutos remain affordable buoyed by lower rates and longer terms. A lower average principal

and debt-to-income ratio posit sustainable financing for consumers

Terms of New Car Loans (Banks vs. Finance Co.)Interest Rate (Left), Months to Maturity (Right)

Implied payments for new and used vehicles and debt-to-income ratio

Debt-to-income (%)

Payment calculated from average finance amount and current rate

and debt to income ratio posit sustainable financing for consumers

$55010

62

64

66

10

12

14Bank (48 Mo.)

Finance Co.

Finance Co. Term (R)$500

$550

8

9

10

56

58

60

6

8

$400

$450

6

7

8

Debt/Income (Left)Implied Mo. Payment (New)

50

52

54

0

2

4

$300

$350

4

5

6 Implied Mo. Payment (Used)

10

50090 92 94 96 98 00 02 04 06 08 10

Source: Federal Reserve / Haver Analytics

$300 499 00 01 02 03 04 05 06 07 08 09 10

Source: BBVA Research

U.S. Auto DemandTotal outstanding auto loan balances are up 1.4% on the year in 1Q11. Attractive terms and

labor market uncertainty are boosting new vehicle leasing

Percentage of New Cars Leased%

Auto Loans, Accounts and New Installment LoansTotal Outstanding, $Bn; Accounts, Millions; New Loans, $Bn

labor market uncertainty are boosting new vehicle leasing

24

26

28

30 Trending upward once again. Nearly 50% of entry-level luxury cars are leased

110

120

130

140

700

800

900

18

20

22

24

80

90

100

110

300

400

500

600

10

12

14

16

40

50

60

70

0

100

200

300Total Auto Loans

Accounts with Balances (Right)Auto Loan Issuance (Right)

11

1005 06 07 08 09 10 11

Source: Edmunds.com / Bloomberg

40099 00 01 02 03 04 05 06 07 08 09 10

Source: Federal Reserve Bank of New York / Haver Analytics

U.S. New Vehicle Market• Rising home prices and net worth combined with easy credit and home equity extraction to

explain the upward shift in sales between 2003-2007: approximately 1-2 million additionalexplain the upward shift in sales between 2003-2007: approximately 1-2 million additional vehicles purchased above trend per year

• The additional vehicles purchased in these years help to explain the sharp fall in sales in 2009, as declines in equity and housing prices erased over $10 trillion from household balance sheets

• We do not envision a scenario of pent-up demand boosting new car sales rapidly, as the de-We do not envision a scenario of pent up demand boosting new car sales rapidly, as the deleveraging process continues and consumers are saving more and keeping cars longer

10

• The median age of vehicles in use continues trending upward, and is now over 9.4 years

Median Age of Vehicles in UseYears

7

8

9

10y

• Sustained high oil prices pose a favorable outlook for fuel-efficient vehicles. The used market reflects expectations of continued oil price i i f

Upward Trend

2008

5

6

7increases as prices of compact vehicles are rising, while those of larger vehicles are declining

• Entry-level luxury brands will remain attractive for leasing

12

470 74 78 82 86 90 94 98 02 06

Source: Bureau of Transportation Statistics / Haver Analytics

attractive for leasing

U.S. New Auto Sales ForecastThe series average of approximately 15 million units per year,

should return in 2014 Population growth will drive sales above 16 million units in the lattershould return in 2014. Population growth will drive sales above 16 million units in the latter half of the decade

New Auto Sales

222011 2012 2013 2014 2015

12 6 13 3 14 2 15 0 15 7

New vehicles: millions of annual sales

• Attractive financing offers continue to support sales – for those who are employed18

19202122

Jan. 1999-Dec. 2007:Average 16.8 mn units•Tight labor market•Equity extraction•Low finance rates

12.6 13.3 14.2 15.0 15.7

• Key to higher than average sales lies with job creation and income generation

• Consumer de-leveraging is restraining sales growth14

151617

• Consumers are financing lower amounts for longer terms

• Popularity of leasing is growing

• Temporary drop in sales due to effects f J ’ th k9

10111213

Auto SalesForecast

13

of Japan’s earthquake990 92 94 96 98 00 02 04 06 08 10 12 14Source: Census / Haver Analytics

U.S. Used Auto MarketCurrently experiencing a surge in value related to labor market uncertainty and supply

shocks to new auto production

Behind the rise in values

shocks to new auto production

Value of used vehicles vs new auto inventoryThousands of Autos (left), Index (right)

Behind the rise in values

• Fuel efficient, late model years are in high demand

• High unemployment, historically low120

125

130

1 400

1,600

1,800

2,000

High unemployment, historically low new auto inventories, and low financing rates are supporting values

• We expect prices to appreciate in the near term as inventories of new vehicles

105

110

115

800

1,000

1,200

1,400

remain tight, but they should begin to moderate as production and inventories are restored

• In any case, elevated uncertainty will keep values and demand above average

95

100

105

200

400

600

Inventories of New Autos

Manheim Index (1995=100)

14

keep values and demand above average

• These transitory supply factors have boosted dealer profit margins over the prior year

90095 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Manheim Index (1995=100)

Source: BEA, Manheim / Haver Analytics

Index

1 Automotive Demand

2 U.S. Dealerships

15

Auto Dealers: Main Messages

• U.S. auto dealer profit margins are highest for parts and services. Used vehicles often entail higher margins than new vehicles

• Higher operating margins have returned due to transitory supply disruptions, historically low inventories of new vehicles, fervent demand for used vehicles, and a greater intensity of service work per dealer due to the reduction of franchised dealerships

• In the last few years the number of dealerships have plummeted along with sales of• In the last few years, the number of dealerships have plummeted along with sales of new cars. Currently, large public automotive groups are adding store locations to gain market share

• In the near-term, dealers will enjoy higher margins with less competition and experience further ownership consolidation by large dealership groups

• Ultimately, the U.S. dealer model is positioned to survive due to high entry barriers and franchise agreements that the manufacturers control

16

U.S. Dealerships: Market SizeNew car dealers comprise the bulk of industry revenue due to the higher unit sales prices

of new vehicles Revenue at parts and auto stores should continue at a strong pace as

Total Industry Revenue, 2011% of total

Retail SalesMotor vehicles and parts ($bn)

of new vehicles. Revenue at parts and auto stores should continue at a strong pace as consumers are holding onto cars longer and need maintenance

750

800

850

900

~$80Bn 12%

600

650

700

750

450

500

550Parts and Tire Stores

Used

New

~ $575 Bn88%New car

dealerships

U d

17

40000 01 02 03 04 05 06 07 08 09 10 11

Used car dealerships

Sources: First Research and Census

U.S. Dealerships: Business ModelNew and Used Car Dealerships•New car dealers have franchise agreements to sell cars, parts and services within a specified market area

•Dealers acquire new vehicles from manufacturers through an allocation system based on historical sales

•Dealers have limited influence over the colors and features

Used Car Dealerships•Companies buy used vehicles from trade-ins, auctions, other dealers, leasing companies, and rental companies

•Used dealers consider a car's age, mileage, and condition to set each vehicle’s price

•Used vehicles generally require reconditioning prior to sale; vehicles unfit for retail resale are generally sold through wholesale auctions.

•Some manufacturers allow dealers to sell certified pre-owned (CPO) vehicles with extended warranties

Services and Parts at the Dealership•Service and parts operations may offer repair maintenance body work and warranty services

18

•Service and parts operations may offer repair, maintenance, body work, and warranty services

•A typical service department has 18 service bays and handles over 13,000 repair orders annually

Source: First Research

Dealer Revenue SegmentationWhile the bulk of revenue for franchised new car dealers stems from new auto sales,

profitability is maintained through after purchase service

4%

New Car Dealers: 17,700 establishmentsShare of Total Industry Revenue

Used Car Dealers: 37,500 establishmentsShare of Total Industry Revenue

profitability is maintained through after purchase service

6% Passenger cars (retail)

Passenger cars23.7%

3.9%

3.8%3.1%

5.0%

New vans & trucks (retail)

New passenger cars (retail)

Used passenger cars ( )

56%

22%

Passenger cars (wholesale)

Vans, minivans, trucks, & buses (retail)

Vans, minivans, t k & b

8.4%

7.3%(retail)

All nonmerchandise receipts

Used vans, minivans, trucks, & buses (retail)

13%trucks, & buses (wholesale)Other21.7%

12 5%

10.6%

Vans, trucks & cars (leased)

Used passenger cars (wholesale)

Automotive tires tubes

19

12.5% Automotive tires, tubes, batteries, parts, accessoriesAutomotive parts, new and rebuilt, including wheelsSource: Economic Census, 2007

Profitability: New Car DealersParts and services contribute nearly 50% of profit due to high margins. Revenue from

Gross Profit% of total profit

finance and insurance business helps to stabilize profits over the business cycle

Gross Margins 2006-2011 Average, %

Penske

Parts and services

New vehicles6.9

8.2New Vehicles Retail

Penske Group

AutoNation Group

45.3% 44.8%

New vehicles

Finance and insurance 10.3

7.9Used Vehicles Retail

Penske Group

AutoNation21.2%

19.7%

26.3%

14.8%

Used vehicles

Oth43.6

Parts and Services12.5% 13.3% 56.8

20

Other

Source: Bloomberg

0 20 40 60Source: Bloomberg

1.3% 0.69%

*Auto Nation and Penske Group were selected as they are public companies that own 568 dealerships across the U.S.

U.S. Dealerships: ConsolidationA highly fragmented industry that has recently undergone a wave of consolidation: the prospect of

bankruptcy and government bailouts enabled manufacturers to slash the number of franchised

Dealer Operating Margin and Store OwnershipTrailing 12M % (left); Number of Stores (right)

Franchised New Car Dealers in the U.S.(Thousands)

bankruptcy and government bailouts enabled manufacturers to slash the number of franchised dealerships. Large auto groups are buying weak or failed dealerships to expand their footprint

24

25

26

27For every 10 dealership

establishments, 250

300

350

6

7

8

9

21

22

23

24 there are 9 firms

100

150

200

3

4

5

6

17

18

19

20

0

50

100

0

1

2

05 06 07 08 09 10

21

1781 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

Source: NADA, Carmax, CensusSource: Bloomberg, BBVA Research (Penske interpolation)

Operating Margin (left) AutoNationSonic Group 1Asbury Penske

Entry Barriers: High• Significant initial investment

s

• Capital intensive industry

• Franchise agreements

• Exclusive market areas

• Further consolidation

eale

rs

Buyer Bargaining Power: Strong

• Switching costs of buyers among dealers are minimal

Bargaining Power of Manufacturers: High

C t l f hi

Further consolidation

ar D

e among dealers are minimal in new car market

• Most buyers are unlikely to become frequent clients of particular dealership

S l d

• Control franchise agreements and incentives

• Dictate inventory

• Set wholesale price

Provide floorplan financing

Competition:

quality of service

Competition: Intense

Dealers must compete on

quality of service

w C

a • Sensitive to quality and reputation rankings of manufacturer

• Desire “a good deal” and want incentives

• Provide floorplan financing

• Offer consumer financing

Threat to Profitability of

quality of servicequality of service

Ne Threat to Profitability of

Substitutes: Medium• Retail outlets such as oil change centers, tire

stores and independent service shops compete with dealers’ service options

22Source: First Research and BBVA Research

• Consolidation of dealerships implies more service work per dealership

• Customers choose service work due to imperfect information in auto repair market

SWOT: Auto DealersStrengths Weaknesses

• Volatile demand due to economic conditions• Exclusivity agreements to cover specific areas

• Parts and services represent a stable source of income

• Marketing and financing provided by

• Volatile demand due to economic conditions and energy prices

• Interest rates affect both sales volumes and dealer costs

• Complete dependency on car manufacturersmanufacturers

• Accounts receivable are absorbed by third-party institutions, reducing liquidity problems

Complete dependency on car manufacturers

• Lack of customer loyalty to dealers: more loyalty towards brands

• Subject to supply disruptions

OpportunitiesThreats• Extend service hours

• Expand services and complementary products such as accessories financing and insurance

• Growing competition in the services segment

• Greater efficiencies in manufacturing, transportsuch as accessories, financing and insurance

• Intensify the sale of certified pre-owned cars

• Nontraditional sales techniques like websites that allow to track inventories, negotiate and get financing online

Greater efficiencies in manufacturing, transport and inventory management allow manufacturers to sell directly, transforming local dealerships into distribution and service locations

23

g

• Leverage environmental concerns by promoting hybrid vehicles and improving the environmental friendliness of the vehicles that they sell

• Aging population that reduces car usage

• Weak job creation and an anemic housing market that curtail new auto sales

U.S. Automotive Industry

April2012April2012