Automotive 4.0. Automotive 4.0. A disruption and new reality in the US? Automotive 3.0. Automotive 2.0

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1 Beyond Mainstream A disruption and new reality in the US? Automotive 3.0 Automotive 2.0 Automotive 1.0 Since Henry Ford introduced mass production, the automotive industry developed in an evolutionary way into how we know today With new technology, new players and new consumer needs, we might be on the verge of a revolution! February 2015

2 THE BIG The convergence of connected, shared, automated vehicles will result in a new reality that is more about how people are moved than what moves them p ,000 units Annual US sales could grow by 760,000 units to support Mobility-on-Demand services, even as the parc drops by 49 m p. 21 USD 192 bn Traditional OEM addressable markets will shrink, but new revenue pools of USD 113 bn from Mobility-on-Demand services and USD 79 bn from low cost pod manufacturing present large opportunities p. 28 Automotive 4.0 at a glance p. 13 2

3 The automotive industry is buzzing with innovative technologies and business models Is this the usual marketing buzz or are we on the verge of an industry disruption? The news is full of transformative technology innovations and business models like advanced connectivity systems, innovative shared mobility concepts, and of course, self-driving cars being showcased and introduced around the world. Certainly the automotive industry plays a big role, but tech companies and new entrants are increasingly becoming the driving forces behind these developments. It's interesting to observe that most of the innovations surrounding future vehicles and mobility experiences are now premiered at CES in Las Vegas, instead of at NAIAS in Detroit. The incumbent manufacturers use Detroit to demonstrate the "here and now," but when it comes to painting a picture of the next generation, they're showcasing their concepts in Las Vegas and sharing the spotlight with everyone from tech companies to start-ups. Is this the first evidence of a major shift in the industry? We've seen this type of fundamental change recently in industries including brick and mortar retailing, cell phone manufacturing and computer manufacturing. Once new players enter the value chain with innovative business models and game-changing technologies, the ensuing shake-up can leave prominent incumbents irrelevant and facing consolidation or bankruptcy. The numerous trends impacting the automotive industry, everything from powertrain electrification to retail concepts without dealerships, require the industry to respond but it's the confluence of connectivity, shared mobility and automated driving that we believe will truly put the industry as it's known today to test. The combination of these trends will enable the breakthrough of a new form of personal transportation that provides "Mobility-on-Demand" to consumers; where the click of an app on a smartphone summons a shared, automated vehicle. These technologies are already bringing new players including tech giants, telecoms and start-ups into the automotive industry. Given their competencies and business models, this is already shifting the balance of power throughout the new automotive value chain. Even though new entrants seem to be driving the change in the industry, the incumbent players are by far not as complacent as many people believe. OEMs offer innovative connected services and are amongst the leaders in new mobility services including car sharing. They've also been developing automated technology for over a decade already, focusing on driving the technology to market readiness in terms of reliability and system costs instead of highly visible showcases. With changes to how consumers will buy and use vehicles, new technologies being introduced and strong new entrants making large investments into the market there are big questions regarding what this all means for the incumbent industry players. How big is the change? How do profit pools shift? Who will win and who will lose? This paper outlines the Roland Berger perspective on the future state of personal transportation and quantifies the impact on profit pools and the Automotive OEMs. 3

4 1 Evolution of Three major evolutionary stages have classified the industry's primary structure and technologies as it developed from its founding to today will start the next chapter Automotive 2.0 Automotive 1.0 Industry: Major automotive suppliers are formed Technology: Faster and better automobiles Industry: Vertically integrated OEMs Technology: Mass produced, low technology 1900 Global vehicle output Source: Roland Berger 4

5 Automotive 3.0 Industry: Convergence of automotive, tech and telecom Technology: Automated driving, connectivity and shared mobility Industry: Globalization of OEMs and suppliers Technology: System electrification, improved safety and efficiency advancement

6 It happened before Other industries have faced disruption, and players either adapted to survive or perished History is ripe with references of industries impacted by new technologies and business models that allowed the entry of disruptive players. When this happened, some incumbents adapted and thrived, while others perished. Brick and mortar retailers were disrupted by online retailers like Amazon. Specialized retailers such as book stores were hit with both online retailing and technology such as e-readers. The music industry was hit by Apple's itunes. Many cell phone and PC manufacturers lost their markets to new, more complex ecosystems inclusive of contract manufacturers, operating system developers and exclusive application and content distribution platforms. The list goes on from there. The pattern of events that occurred in each of these industries is relatively consistent. First, there were advancements in technologies that enabled the entry of disruptive players with new business models that were better aligned with new consumer needs. Then, margins began to fall for the incumbents with heavy baggage that were unable to adapt to the changes or unable to restructure to better focus on their core competencies. Finally, the "old" industry was hit with bankruptcies and consolidation. One of the most prominent examples of an affected player is Kodak, which was unable to adapt after spending billions of dollars trying to transform itself, but was without a clear view of how to leverage its core competencies and new customer needs. We've seen it before In each industry illustrated in the table below, "the writing was on the wall." The incumbents were big, old and complacent, A leaving them susceptible to A We've seen it before... and it's happening again PC manufacturing B&M retailing Cell phone manufacturing Automotive Technology change (product/process) > > MS-DOS > > Reverse eng. of BIOS > > E-Commerce > > Smartphone > > Connected vehicle > > Automated driving Entry of new, disruptive players > > Acer > > Dell > > Amazon > > Apple > > Samsung > > Google, Uber, etc. > > Tesla Large incumbents with baggage > > Hewlett-Packard > > IBM > > K-mart > > Borders > > Nokia > > Motorola > > Multiple OEMs, suppliers and dealers New customer needs Source: Roland Berger > > Integrated service/ usage support > > Integrated reviews > > Ease of shopping > > Larger availability > > Integrated digital platform > > Digital consumer 6

7 missing consumer and technology trends. In each instance there were also new consumer needs, often consistent with their changing expectations driven by new technologies. and it's happening again We already see the emergence of a new paradigm with automotive interest and ownership steadily waning amongst younger consumers in developed markets. Even the traditional ownership experience is being revolutionized by the new digital experience. Some major automotive OEMs are proactively preparing for industry change by developing advanced technologies and acquiring innovative start-ups, whereas others are watching and waiting. New players, including major telecoms, tech giants, tech start-ups and even start-up OEMs have been rushing into the automotive industry pursuing new profit pools. The entry of these players is enabled by the introduction of new technologies including connected cars, automated cars, new propulsion systems and new materials. Winners adapt, survive and thrive Although incumbent players often have baggage in the form of legacy business models, assets and technologies that have become obsolete, they can B still be in the best position to be leaders in industries experiencing disruptive changes. Incumbents are the players with existing brand recognition, market knowledge and assets that can be leveraged alongside innovative business models and technologies to offer their customers better solutions. In the past, successful incumbents have re-focused their operations around particular core competencies, or have undergone complete transformations to focus exclusively on new business models. Each industry disruption and each player involved is unique, so the formula for survival varies heavily. However, in all cases survivors closely monitored consumer and technology trends, planned the best course of action well in advance, and then took action. We already see some automotive OEMs leading the pack and investing heavily in new technologies and business models. This select group of OEMs may be better positioned to survive, but what should all other OEMs do to also be prepared for the coming changes? B Results of industry disruptions Amazon Apple IBM Winners 1 Changing value chain and new business models 2 Falling margins of most players in the "old" industry > > Companies reinvented themselves, adapting to the new competitve environment > > Reduced participation in the "old" industry > > Gained market share in the "new" and profitable industry 3 Bankruptcy and consolid- > > Consolidated relevant players ation within the industry > > Maintained or increased margins > > Companies did not adapt/kept investing in the "old" industry > > Increased participation in the less profitable and shrinking "old" industry > > Filed for bankruptcy > > Were acquired by new leaders Losers Nokia Borders Gateway Source: Roland Berger 7

8 Over a dozen major trends will impact the future of the automotive industry But only a few have the potential to reshape it completely There are over a dozen major trends currently developing in the automotive industry. While some of them might change just a small portion of the automotive value chain, others (alone or together) could have a much broader impact. We identified fourteen of the most prominent trends surrounding the industry. However, there are only three that have the necessary characteristics to cause disruption... C D Shift to Asia The largest automotive market in the world is still growing rapidly Shared mobility Car sharing and ride sharing capturing young, urban consumers Start-up OEMs Entrepreneurial, tech-focused OEMs can build highly-competitive vehicles Alternative fuels Natural gas, ethanol, biodiesel usage have geopolitical effects Fuel cells Large investments target sustainable, commercially feasible powertrains New retail Direct-to-consumer sales, home deliveries, flagship stores, brand boutiques Source: Roland Berger Light-weighting Composites and new metals change supply chains, production and maintenance 8

9 C Major trends are already having a large impact throughout the industry Technology changes throughout the vehicle, new experiences, new players, new business models and geographical shifts Non-traditional entrants Major tech and telecom Low cost brands companies are investing in Dedicated emerging market advanced automotive solutions brands and models such as Renault-Nissan's Datsun Connectivity V2V and V2X changes vehicle usage and transportation systems Powertrain electrification xevs are required to meet future emissions and economy regulations Digital experience New customer touchpoints enabled by technology Automated driving ADAS developing to full automation; new paradigm in driving and transportation Combustion engine advancements Downsizing, thermal efficiency, etc. improve viability of engines 9

10 D The Three Disruptive trends Most major trends, even though they would impact the industry, aren't disruptive. Mapping the potential impact of these trends along technology and value chain axes highlights those with disruptive potential. The new retail trend, while using today's commonplace technologies such as the internet, will have a profound impact on the value chain as it introduces new internet players and threatens to change retail and distribution networks. Alternatively, even though fuel cells cause large, disruptive technology changes, they are on track to be executed mainly by incumbent players. However, shared mobility, automated driving and connectivity are trends that change both technology and the value chain dramatically. Together, they have the power to reshape the entire automotive industry and the concepts of automotive ownership and mobility as we know them today. Although the extent to which these trends would impact the industry is still unknown, the massive investment by incumbent players and new entrants in each of these areas, as well as the regulatory attention are indicators of their disruptive power. Disruptive IMPACT ON THE VALUE CHAIN Shared mobility Nontraditional entrants New retail Connectivity Automated driving (levels 3-5) 1) limited IMPACT ON THE VALUE CHAIN Shift to Asia Digital experience Low cost brands Start-up OEMs Electrification Alternative fuels Combustion engine advancement Lightweighting Fuel cells Automated driving (levels 0-2) 1) iterative TECHNOLOGY CHANGE disruptive TECHNOLOGY CHANGE Disruptive change in an expanded value chain Evolutionary change within incumbent value chain Disruptive change 1) SAE automated driving classifications Source: Roland Berger 10

11 Predicting the future is impossible But scenario planning helps to envision scenarios for possible future "worlds" Obviously we cannot predict the future. But our robust Roland Berger Scenario Planning Methodology enables us to manage uncertainties. In our methodology, we identify key industry trends that could have the highest impact on the future states of the world and select highly uncertain drivers. These trends are then consolidated as axes to define unique and meaningful future worlds each of the worlds is a possible reality for which players in the industry must prepare. When applying our scenario planning technique to the future of the automotive industry, automated driving, shared mobility and connectivity came out as the most impactful industry trends. Wide-scale connectivity is already a reality for many premium and some volume brands in developed markets, and every major telecom service provider in the US is actively pursuing this market. Therefore, there is low uncertainty that most vehicles in the US and other developed markets will be connected to high-speed and more reliable networks in the foreseeable future. High uncertainty trends high uncertainty still remains around rate of adoption and usage of Mobility-on-Demand services. Automated driving While experts are also certain that fully-automated vehicles will eventually be available, the penetration of the technology is highly uncertain. The longer-term, steady state adoption level depends upon reduction in the cost of this technology, change in consumer mindsets and development of necessary regulations. Once regulations allow for autonomy, Roland Berger expects there to be a long-term penetration level based on cost and consumer acceptance. In an even longer-term scenario that may define yet another industry chapter, it's likely that autonomy will be federally mandated in certain driving situations or locations due to safety considerations. However, federally mandated automated technology is not considered in this study. Shared mobility and automated driving are used as the fundamental drivers shaping four potential future worlds, while connectivity acts as an enabler for progression. Shared mobility Industry experts are certain that the shared mobility market will continue to grow in the foreseeable future. This trend will be greatly accelerated through automated driving as it removes the driver, thereby dramatically reducing the cost of using shared mobility. Yet, 11

12 Potential future worlds We believe that each of these four worlds are possible realities, but that Today's World with limited penetration of shared mobility and automated driving is only likely to remain in the short-term. The Shared World and Automated World are alternative potential midterm states that are likely to exist based on the developments of the uncertain aspects of the technologies and business models. However, the long-term reality is most likely to be, resulting from the convergence of high penetration and technological sophistication of both shared mobility and automated driving, all enabled by wide-scale connectivity E. The next page takes a closer look at what we envision to look like. E The path to Using the high impact, high uncertainty trends as axes identifies a potential "Shared World" or an "Automated World" that might exist in the mid-term prior to the long-term state of Shared mobility High Shared world > > Sharing proliferates throughout urban and some suburban areas with high acceptance of car/ride sharing services such as Uber and Lyft > > Autonomy remains constrained by regulation, cost, technology development and/or consumer acceptance > > The convergence of high levels of shared mobility and automated driving introduces a new industry paradigm Low > > Shared mobility confined to early adopters in dense urban areas > > Automated driving penetration primarily in flagship premium models CONNECTIVITY High > > Sharing remains constrained by geography and/or consumer preferences > > Autonomy achieves high penetration, even in volume vehicle segments which are primarily individually owned Automated driving Today's world Automated world Low Short-term Today to 2020 Mid-term Long-term Post 2030 Source: Roland Berger 12

13 at a glance The long-term future state of will see the rise of shared and automated pods that deliver Mobility-on-Demand. However, individually owned vehicles are still likely to lead in sales during the next chapter of the industry. The impact on industry, major players and consumers will be wide reaching. Shared > > Mobility-on-Demand pods shared by communities Automated > > Driverless vehicles > > Mobility services delivered based on demand prediction Connected > > Wide-scale delivery of content and services to vehicles > > V2V and V2X communication Mobility-on-Demand pods > > Represents a small but significant share > > Urban and longer distance commuters > > Lower cost > > Shared and automated Individually owned vehicles > > Retain majority of sales > > Multi-purpose vehicles > > More premium features and brands > > Automated or driver operated Economic impact > > Value chain revenue shift > > New profit pools > > Increase in vehicle sales > > Decrease in vehicle parc New consumer experience > > Ultra-convenient mobility services delivered ondemand > > Fully-connected throughout mobility experience Value chain impact > > New requirements to deploy automated driving and mobility-related technologies > > New players offering connected services > > New large-scale fleet management requirements Source: Roland Berger 13

14 The world won't suddenly appear everywhere It will hinge upon market maturity, demographics and population density A key element of the future world is the adoption of Mobility-on-Demand. But it will not happen everywhere to the same extent and at the same time. The level of market maturity and unique consumer preferences of a market, along with its demographics and population density within each geographical area will result in varying penetration levels of Mobility-on-Demand. In developed markets such as the US, even before the onslaught of automated driving technologies, signs of change are already impacting vehicle ownership as consumers are meeting their transportation needs with services including Uber, Lyft and Zipcar. When this trend is accelerated with automated driving, we expect the end of the American two car household in many areas, as the "second car" might be partially substituted by Mobility-on-Demand services. Developed vs. emerging markets In its initial stages, Mobility-on-Demand will require a mature automotive market with advanced levels of automated driving and connected vehicle technologies, regulations and consumer acceptance. Core users of Mobility-on-Demand also have to be willing to forego individual vehicle ownership and take part in the "sharing economy." In emerging markets such as India and Brazil, consumers are still realizing the benefits of vehicle ownership which not only provide transportation, but also function as a sign of social status. Although we believe emerging markets will eventually migrate to Mobilityon-Demand services, perhaps mandated by govern- ments, this adoption process will be delayed compared to developed markets. China has demonstrated strong interest in embracing new technologies for a societal benefit. Recently, it has mandated that at least 30% of government vehicles be electric by 2016 to combat pollution and reduce energy usage. Moreover, surveys have shown the positive response and strong interest in automated driving technology in China, even when compared to the US and Europe. Therefore, China could be one of the leading markets for. Demographics Even though Mobility-on-Demand promises lower operating costs compared to that of taxis today (as no driver is required), our estimates indicate it would still remain more expensive than public transit. This relatively higher cost would prohibit certain population segments from actively participating in Mobilityon-Demand. With time, as the society at large reaps the initial benefits from Mobility-on-Demand, economies of scale would further lower the cost, thereby increasing the share of the population that can participate in Mobility-on-Demand. Population density Another important factor determining penetration of Mobility-on-Demand pods and services in a region is population density. The efficient usage of Mobilityon-Demand requires convenient access and instant availability of shared mobility, which can only be feasibly implemented in areas with high population density 14

15 such as dense and sparse urban areas. Rural areas (and suburban to a lesser extent) have an intrinsic barrier to shared mobility as a result of greater distances between locations and users, causing longer wait times and farther unoccupied trips for the pods. Taking the US as an example, the following definitions are used to classify geographies. Dense urban areas, limited to large cities with high population densities. This includes NY, Chicago, Washington DC and San Francisco. Currently, only 7% of the US population lives in dense urban areas. Sparse urban areas, defined as large cities that are more spread out. This includes LA, Philadelphia, Houston, and Milwaukee. Over 26% of the US population lives in sparse urban areas. Suburban areas, with lower population densities, that comprise approximately 50% of the US population. Rural areas, which account for 84% of land area in the US, but with very low population densities, only comprise 17% of the US population. Expected shifts in vehicle ownership The impact of would vary based on the geographic region F. In dense urban areas, we expect some consumers to abdicate vehicle ownership and slowly migrate to Mobility-on-Demand, reducing congestion from parked vehicles and searching for parking. Corroborating this fact, a few major cities are already developing legislation to control vehicle ownership. In sparse urban areas, we expect consumers to own fewer personal vehicles as they supplement their individually owned vehicles with Mobility-on-Demand to meet their transportation needs. In suburban areas, we expect consumers to use Mobility-on-Demand only in specific situations where it's feasible. Therefore, we expect the decline in vehicle ownership to be less dramatic. In rural areas, we expect the majority of vehicles to remain individually owned in as shared mobility cannot be efficiently deployed considering the low population density. F Vehicle usage in for representative households Vehicle ownership and usage varies by geographic region Dense urban Sparse urban Suburban Rural Automotive 3.0 Changes in vehicle ownership stem from increasing usage of Mobility-on-Demand, but existing public transit infrastructure enables its continued low-cost usage Large changes in vehicle ownership as many consumers eliminate their second car and heavily use Mobilityon-Demand to alleviate congestion and ease travel Reduction in individual vehicle ownership as some consumers are able to supplement their travel needs with Mobility-on- Demand usage High levels of individual ownership are likely to remain Illustrative individually owned vehicles per household Source: Roland Berger 15

16 Assuming the world will become reality, certain key questions are on the minds of executives within the industry How are the key industry metrics impacted: number of drivers, sales, vehicle parc and vehicle ownership? What will happen to today's vehicle portfolio? Where are the risks and opportunities across the value chain? Who can win in the Mobilityon-Demand space? What are the major implications for OEMs? 16

17 To answers these questions, we selected the US market as an example and built a comprehensive model to estimate the quantitative impact Considering the complexity of the automotive industry, we made assumptions in order to focus the quantification on the impact of just the three disruptive trends. These assumptions were made around the market in focus, trends, timing and varying views of the future. Focus The US provides a focal point for the analysis as it's amongst the world's largest vehicle markets and is home to some of the world's largest tech companies entering automotive, innovative automotive OEMs and mobility start-ups, making it one of the first locations mobility will change and an indicator for the future of the industry globally. On the other hand, it has a high reliance on individually owned vehicles, as well as a wide-range of geographic regions making it an interesting test market for the impact of. Trends The model calculates the impact of the three disruptive trends: connectivity, shared mobility and automated driving. These trends have been identified to have the biggest impact throughout the automotive value chain. To analyze the true impact of just these disruptive trends, we held all other trends constant. Timing Predicting the exact timing of is not only a guessing game, but its development is going to be a gradual process that is highly dependent upon technological development, demographics, geographies, socio-economic conditions and regulations. Without de- claring a specific timeframe in which this state of the industry will exist, we're studying the point in time when shared mobility and automated driving are widely accepted and available, although not mandated by law. The model also holds constant any changes outside of the major trends, and is therefore calculated based on the current demographics, population densities and urbanization levels in the US as of Value chain quantification The model analyzes the entire automotive value chain including component and material supply, vehicle production, vehicle distribution, vehicle financing, maintenance, usage, insurance, mobility and connectivity. However, only component and material supply, production, distribution and mobility are discussed in this paper. Three scenarios Considering the high degrees of uncertainty surrounding the disruptive trends, we have considered three different scenarios in our model. Each scenario varies in a number of underlying assumptions. As an example, the "conservative scenario" assumes high technology prices for automated driving systems, resulting in low adoption. Alternatively, the "progressive scenario" assumes much more affordable prices, leading to higher adoption. The key assumptions in the three different scenarios are outlined in the figure on the next page G. For the remainder of this document we use the progressive scenario of to analyze the impact on the automotive industry. 17

18 G Three scenarios Assumptions change in each of the scenarios Assumption Conservative Mid-range Progressive 1 % of users of shared mobility vs. individual ownership Low Medium High 2 Number of users served by each shared mobility vehicle Low Medium High 3 % of people migrating from public transit to shared mobility Low Medium High 4 % of people that become "drivers" due to the benefits of autonomy (e.g., youth, elderly, disabled) Low Medium High 5 % of individually owned vehicles equipped with automated driving technology Low Medium High 6 Average increase in vehicle lifetime miles from accelerated accumulation of miles and efficient driving Low Medium High 7 Cost of automated driving technology High Medium Low 8 Base price of shared mobility pod High Medium Low 9 Cost of shared mobility High Medium Low Source: Roland Berger Quantifying the impacts of To quantify the impacts of within the automotive industry's value chain, we used geographical characteristics, population demographics, sales volumes and profitability of different OEM groups and vehicle segments as inputs. We then identified the areas where the disruptive trends would have primary impacts on how future vehicles and services are used and who uses them. This includes phenomenon such as substitution from public transit and short-to-medium distance rail and air travel into Mobility-on-Demand services, new "drivers" such as the youth and elderly that have previously been unable to operate vehicles and a decrease in overall vehicle ownership from consumers choosing Mobilityon-Demand over individual ownership. Each of the primary impacts to vehicle usage identified would result in secondary impacts on markets and industry indicators throughout the automotive value chain. These include reduced insurance premiums from safer automated vehicles, increased average fuel economy from more efficient operation and increased average vehicle renewal rates from the more rapid mileage accumulation of shared vehicles than individually owned ones. Finally, we calculated the ultimate impacts of these disruptions on key industry metrics such as sales volumes, revenues and profits for the different players throughout major sectors of the value chain. The figure on the next page H illustrates the model and the development of selected primary, secondary and ultimate impacts on the industry. 18

19 H Calculating Quantifying the primary, secondary and ultimate impact of the three major trends on the US automotive industry US population demographics Substitution from public transit Subsitution from short-tomedium distance rail and air travel "Drivers" increase from youth, senior citizens, disabled, etc. Car owners sell; choose Mobility-on-Demand Car owners choose automated option US geographical characteristics Car sharing replacement rate increases Average lifetime miles increase Drop in car parc Scale affects automated technology costs Scale affects Mobility-on- Demand network; reduces fleet management costs and improves service availability Individually owned market becomes more premium Average renewal rate increases Fuel economy increases Insurance premiums drop Increase in total vehicle production OEM groups (Premium, Volume/Premium, VOlume, Low cost) Mobility-on-Demand shifts segments to M-o-D pods Drop in average vehicle price Vehicle segments (Mobility-on-Demand pods and INDIVIDUALLY owned vehicles) Primary impact Secondary impact Ultimate impact Source: Roland Berger 19

20 Question #1 How are key industry metrics impacted: number of drivers, sales, vehicle parc and vehicle ownership? could allow 32 million additional people to become "drivers" I. This significant change will occur for two main reasons. First, has the ability to attract consumers from individual vehicle ownership, from public transportation and even from short-to-medium distance rail and air travel why spend four hours commuting, in airports and on airplanes to travel up to 300 miles when Mobilityon-Demand can pick you up and take you to your destination in the same time while you work or relax in a comfortable, private setting? Second, early teens and many others will be able to ride in vehicles without depending on licensed drivers why would parents carpool to Saturday morning soccer practice when teens can travel independently while being monitored for safety? could increase annual vehicle sales by 760,000, even as the car parc drops by 49 million units J. The fundamental concept behind the industry quantification is that vehicle sales are correlated to miles traveled in vehicles, not to who owns or operates the vehicle. Provided that Mobility-on-Demand is convenient enough that using shared vehicles won't reduce the miles consumers travel in vehicles, this is how the vehicle parc will shrink without negatively impacting sales. Additionally, due to the added "drivers" in and the ultraconvenience of the service, overall annual sales will need to grow to meet this added demand. The reduction in parc will likely have large consumer and municipal support, as there are already efforts underway to improve congestion on roads and highways, and to add more parks, walking areas and biking lanes in many urban areas. In addition to fewer parked cars that take up space while they are idle for most of the day, congestion will be improved by reducing traffic from searching for parking and from automated and V2V connectivity technologies. Improving public transit requires substantial public investment, whereas more efficient usage of existing roadways that dominate the landscape and more efficient usage of vehicles that are otherwise parked are destined to be a win-win for all parties. will reshape vehicle ownership in the US, although individually owned vehicles will still remain dominant K. The impacts of Mobility-on-Demand services will first be seen in affluent, dense urban and sparse urban areas, where people are more accustomed to shared vehicles, public transit and taxis. There will be a smaller impact in suburban and rural areas, where the lack of adequate population density makes Mobility -on-demand less feasible. In our progressive scenario, our model shows that nearly 28% of vehicle sales (in units) and 8% of the vehicle parc could be comprised of shared, automated pods, which would be concentrated in urban areas. However, it is important to note that even in areas ideal for Mobility-on-Demand adoption, many US consumers will opt for individually owned vehicles for reasons including privacy, comfort and status. We expect that up to 36% of individually owned vehicles will be automated to ease the burden on drivers, especially those dealing with congestion and longer commutes. 20

21 2 I J Impact on current vehicle volumes and drivers with Here is how the current market would look with high penetration of connectivity, automated driving and shared mobility Total "drivers" in the US by region [m] > > Greater participation across demographic 12.3 groups and 52.4 substitution from other modes of transportation add m new "drivers" Total "drivers" in the US by age group [m] > > Significantly greater participation of the 35.1 youth (early teens) and elderly (65+) Auto 3.0 Auto 4.0 Dense urban Suburban Sparse urban Rural Auto 3.0 Auto Annual sales volume in the US [m units] > > Increase in premium segment vehicles and sharp decline in volume segment > > New segment of Mobility-on-Demand pods would cater to shared mobility Vehicle parc in the US [m units] > > 49 m fewer vehicles in the parc > > Sharp decline in 42.5 volume segment > > Each shared vehicle would replace up to individually owned vehicles Auto 3.0 Auto 4.0 Auto 3.0 Auto 4.0 Premium Volume Mobility-on-Demand pods Premium Volume Mobility-on-Demand pods Source: Press articles, annual reports, US Census, NHTSA, FHWA, IHS, Automotive Fleet, Roland Berger 21

22 K Classification of geographic regions All counties are classified into dense urban, sparse urban, suburban and rural based on population density 3,531, % 1.2% 14.7% 84.1% 316,128, % 26.6% 48.9% 17.3% Area [sq. miles] Population Rural (0-100) [people per sq. miles] Suburban (100-1,200) [people per sq. miles] Sparse urban (1,200-5,000) [people per sq. miles] Dense urban (>5,000) [people per sq. miles] Mobility as a function of demographics US Sales volume across different geographic regions in [m units] US Vehicle parc across different geographic regions in [m units] Rural Suburban 2.2 Sparse urban Dense urban Rural Suburban Sparse urban Dense urban Shared Individually owned Source: Press articles, US Census, NHTSA, FHWA, IHS, Automotive Fleet, Roland Berger 22

23 Question #2 What will happen to today's vehicle portfolio? Shared, automated pods will quickly become an important part of the market comprising up to 28% of annual units sold, driving a major shift in vehicle segments. The largest change will be an entirely new vehicle category comprised of Mobility-on-Demand pods. As technologies enable reductions in mobility expenses for consumers, they will be able to spend more money on the vehicles that they own, resulting in individually owned vehicles becoming more premium. Finally, connected services and automated driving promise a whole new travel experience which would have implications on features and interiors of today's vehicles. Pods for Mobility-on-Demand The majority of today's smallest modern vehicles used in developed markets still need to serve as the primary mobility mode for their owners, resulting in added size and features to address various usage needs. However, shared pods can be designed around specific applications. One such application could be one-to-two person short-distance trips with little-to-no utility required. This would enable greater optimization of the vehicle's form, features and cost. We've already seen how some players envision these pods in Chevy's EN-V 2.0, Toyota's i-road and Google's driverless car. Besides the shortdistance pods, larger pods would also exist designed for more comfortable medium-to-long distance travel or to provide service for larger groups. Although the majority of pods could belong to the low cost segment, a smaller segment of more premium pods could also exist. The pods in this premium segment would be more comfortable and have more features to meet the needs of a smaller group of more demanding customers. We envision that this segment will be providing services at a level that can be compared to today's "black cars," while the large majority of the pods can be compared to today's "yellow cabs." "Premiumization" For many consumers, Mobility-on-Demand services and automated technologies will reduce insurance and maintenance expenses. Many households will also change from two or three individually owned vehicles to just one, supplementing their needs with Mobilityon-Demand. In this scenario, families would have more money available for their fewer vehicles, which would allow them to increase the premium features and options they choose, or even trade-up to premium brands. Connected, automated experience Regardless of ownership status, connected and automated vehicles will enable a new transportation experience where consumers can work, be entertained, or even rest depending upon distraction regulations. This will drive interior changes including improved visual displays as big as the windshield, seats with footrests that fully recline and even large workspaces that unfold. Users could even see blinds to close over windows and seats that rotate 360 degrees for communal activities. Some leading companies already have concept vehicles that demonstrate these features, such as the Mercedes-Benz's F 015 Luxury in Motion. This new consumer mobility experience opens large new revenue streams for equipment manufacturers and service providers alike. 23

24 Question #3 What are the risks and opportunities across the value chain? Even with shrinking markets across the majority of the value chain, the industry shake-up creates opportunities for players active in all sectors to re-position themselves L. Major downside risk will be posed to the actual vehicle manufacturing and assembly market, which is estimated to shrink by over USD 33 bn. Even though volumes will increase to meet the demands of new "drivers," the drop in average vehicle price due to the share of purpose-built, lower priced pods will drive the overall reduction. Vehicle distribution is expected to shrink by USD 2 bn, primarily due to sales of Mobility-on-Demand pods that will be B2B, and are likely to have a lower margin than sales in the individually owned market. This is due to Mobility-on-Demand service providers having buyer power in negotiating the purchase of large quantities of vehicles, similar to today's rental car companies. Moreover, if the service providers are OEMs, vehicle sales and distribution outlets will not be necessary. In either case, OEMs might need to re-think and re-focus their sales and distribution strategies. Major upside opportunity in the core automotive value chain will be seen in components and materials which are estimated to grow by over USD 15 bn. Despite the lower component and material cost of pods (comprising nearly 28% of all vehicle sales volumes), the increase in market size stems from the new hardware and software required for automated vehicles (estimated to be around USD 26 bn). extends the value chain that OEMs can participate in by providing Mobility- on-demand services, which is expected to become a USD 113 bn opportunity. Therefore, the core value chain in the automotive industry could grow from USD 531 bn in Automotive 3.0 to USD 624 bn in. The mobility-related services market within the automotive industry is defined as transportation needs that are met with non-individually owned light vehicles. Today's mobility market, comprised of taxis, limos, rental cars and car sharing services, is likely to be substituted to a large extent with Mobility-on-Demand services. However, many of the capabilities required to deliver Mobility-on-Demand are the same or adjacent to today's mobility market. In addition to fleet management and member or customer fulfillment services, Mobility-on-Demand players require competencies in location-based, real-time demand prediction and services integration with customer data, preferences and other mobility modes. The overall mobility market is estimated to increase by USD 90 bn to become a USD 113 bn opportunity in M. 24

25 L Impact across the value chain Value-add by activity in the US value chain [USD bn] Core value chain New value chain Auto 3.0 Auto Mobility-on-Demand services Distribution Manufacturing & assembly 1) Component and material supply 1) Includes all OEM value-add; marketing, development, etc. Source: Press articles, annual reports, US Census, NHTSA, FHWA, IHS, AAA, NADA, Automotive Fleet, SBD, Roland Berger M The Mobility market could grow by USD 90 bn Value-add by elements of the US mobility market 1) [USD bn] Auto 3.0 Auto Taxi and limo 2) Rental car Car/ride sharing 3) Mobility-on-Demand services 1) Considers only value-add items; does not include fuel, depreciation, insurance, parking etc.; 2) Maintenance is not included; 3) Based on 2013 figures of Zipcar, Uber, Car2Go, DriveNow, Lyft, Sidecar, etc. Source: Press articles, annual reports, US Census, NHTSA, FHWA, IHS, AAA, NADA, Automotive Fleet, SBD, Roland Berger 25

26 Question #4 Who can win in the Mobility-on- Demand space? One of the major battles leading up to lies in which players, OEMs or third parties, are able to establish themselves as the primary providers and consumer-facing brands for Mobility-on-Demand services. This would have direct implications on the power balance in the value chain and on profit margins, possibly reducing some of the present OEMs to being contract manufacturers. Although two potential scenarios can be imagined depending on who dominates this Mobility-on-Demand battle, we believe that the end state will be a hybrid model where OEMs and third parties coexist and share the profits arising from N. Scenario 1 OEMs win The major investments being put forth mainly by Premium OEMs today will soon be followed by many other leading and Volume OEMs. As these players become increasingly active in new business models and technologies including car sharing, taxi apps, multimodal navigation systems, connected solutions, automated driving and other innovative mobility solutions, the likelihood that they can grab a share of the future mobility market improves. Further adding to their ability to capture this market is the strong association for consumers between vehicles and today's automotive brands. Therefore, they are well-positioned but need to act in order to provide for the changing needs of their customers, capture the next generation's imagination and extend their scope from vehicles to mobility. However, in this scenario OEMs would have to provide adequate coverage in key markets, and be able to deploy enough vehicles in the right place at the right time to meet customer's needs in real-time. This would not only be a challenge for premium brands that are leading the charge today, but also for volume brands in the future, potentially limiting their engagement to a few key areas or cities per market. Scenario 2 Third parties win As generations and consumer expectations change, many consumers will care more about the convenience and user experience of the app they use for Mobility-on-Demand than the vehicle brand that is providing the service. Surveys already show that many consumers have better brand experiences with Apple and Google than with OEM brands, and feel the tech companies can provide more reliable automated and mobility solutions than OEMs. Tech companies are already making inroads as mobility providers Google Maps route options already include driving, walking, public transit or an Uber. The door is open for third party players to get a foothold in mobility, and they are moving quickly. Besides tech companies, this scenario also holds opportunities for rental car companies to leverage their footprints and strengths in fleet management to be a successful part of the Mobility-on-Demand services ecosystem. If third parties win, which could be a complex combination of tech players, rental car companies, new mobility players and perhaps tele- 26

27 coms, they will have buying power to source vehicles from low cost vehicle manufacturers or to squeeze margins from volume vehicle suppliers. This will create a more dynamic industry that will require players to re-structure and re-position to be successful. Despite the rise of Mobility-on-Demand, the majority of vehicle sales would still remain to consumers who individually own their vehicles. Furthermore, the individually owned market is expected to become more premium owing to the gradual disappearance of the second car per household in many geographies and demographics. Therefore, OEMs have to make major strategic positioning decisions now on their product portfolio and extent of participation in the mobility market. The reality could also be a "co-existence" where both OEMs and third parties participate in Mobility-on-Demand Either as partners or competitors. N Two potential scenarios Implications for key players in each potential scenario 1. OEMs win 2. Third parties win > > OEMs strengthen and further perpetuate their position as the dominant players in the auto industry > > M-o-D becomes another platform to market, brand and test new vehicle concepts and features > > OEMs use customer data/ intelligence to target customer groups with specific vehicles > > Branding remains a key differentiator among OEMs CO-EXISTENCE > > Third parties promote and strengthen their own consumerfacing brands > > Consumers are less interested in which OEM manufactured the pod > > Scope for cross-selling and targeted advertising of products and services grows with tightly integrated mobility and consumer technology experiences > > Cost, convenience and low wait times becomes the key differentiators among service providers Source: Roland Berger 27

28 3 Question #5 What are the major implications for OEMs? Although the world will be different for many market players in, in this paper we focus on the effects for different OEMs types as they are the key focal point within the automotive industry. In this context, we segmented today's major OEMs into four types with unique strengths and challenges in. Premium OEMs Premium OEMs are players that focus exclusively on the premium class in each vehicle segment (e.g., Daimler, BMW). While these players have expanded their portfolios in recent years, they remain focused on the upper price range and technology innovation. Volume/Premium OEMs Volume/Premium players are the largest OEMs globally in scale and scope, with wide-portfolios encompassing the entire volume and premium segments (e.g., VW/Audi, Toyota/Lexus). These players are uniquely positioned due to the presence of both their major volume brands and their premium brands, which command substantial shares (greater than 10%) of their total US revenues. Volume OEMs Volume OEMs focus primarily on wide-scale mid-market portfolios, often with more than one brand in the volume segment (e.g., Ford, FCA). These OEMs often also have premium brands, but the key differentiator to the Volume/Premium OEMs is that their premium brands comprise less than 10% of their total US revenues. Low Cost OEMs Low Cost OEMs focus on achieving the lowest possible cost vehicles. This is because their capabilities and brands have developed to serve the more price sensitive markets that they compete in. These players are not currently active in most highly developed markets such as the US, but many of them are looking for opportunities to enter these markets. Mobility-on-Demand services Besides vehicle production, OEMs have the opportunity to enter or expand in Mobility-on-Demand services in. They may do so by developing their own Mobility-on-Demand services independently, through partnerships or through acquisitions. Entering this new market may be essential for the OEM types facing shrinking segments. However, becoming successful in delivery of technology-intensive consumer facing services will require transformative changes to the organizations, processes and mindsets of most OEMs. Figure O shows the revenue and profit pools from vehicle production and Mobility-on-Demand services in Automotive 3.0 and. Although the overall revenue and profit pools do not change dramatically, there are major shifts in the industry, leading to varying implications for each OEM type. Therefore, the remainder of the document is structured to study these implications vehicle production, Mobility-on-Demand and key strategic actions for each OEM type separately. 28