Competing in the Global Truck Industry

KPMG INTERNATIONAL Competing in the Global Truck Industry Emerging Markets Spotlight Challenges and future winning strategies September 2011 kpmg.com

ii Competing in the Global Truck Industry Emerging Markets Spotlight Acknowledgements We would like to express our special thanks to the Institut für Automobilwirtschaft (Institute for Automotive Research) under the lead of Prof. Dr. Willi Diez for its longstanding cooperation and valuable contribution to this study. Prof. Dr. Willi Diez Director Institut für Automobilwirtschaft (IfA) [Institute for Automotive Research] willi.diez@ifa-info.de www.ifa-info.de We would also like to thank deeply the following senior executives who participated in in-depth interviews to provide further insight: (Listed alphabetically by organization name) Shen Yang Senior Director of Strategy and Development Beiqi Foton Motor Co., Ltd. (China) Andreas Renschler Member of the Board and Head of Daimler Trucks Division Daimler AG (Germany) Ashot Aroutunyan Director of Marketing and Advertising KAMAZ OAO (Russia) Prof. Dr.-Ing. Heinz Junker Chairman of the Management Board MAHLE Group (Germany) Dee Kapur President of the Truck Group Navistar International Corporation (USA) Jack Allen President of the North American Truck Group Navistar International Corporation (USA) George Kapitelli Vice President SAIC GM Wuling Automobile Co., Ltd. (SGMW) (China) Ravi Pisharody President (Commercial Vehicle Business Unit) Tata Motors Ltd. (India)

Competing in the Global Truck Industry Emerging Markets Spotlight iii Editorial Commercial vehicle sales are spurred on by economic growth going in hand with the rising demand for the transport of goods. Of course, this is common knowledge but just perfectly describes the ups and downs in the truck industry over the last couple of years. When we published our first KPMG Truck Study in 2006 ( The European Commercial Vehicle Industry in the Age of Globalization ) we certainly expected a rapid increase of commercial vehicles sales in the world s emerging economies. But what we have seen until today, especially in China and India, surpassed all prospects: In terms of units sold we are already talking about Chinese manufacturers taking the global lead in certain segments and this by almost only offering their trucks in their home market. This impressively shows the enormous strength and significance of the emerging markets for the future of the global truck industry. Of course there are still considerable differences between the Triad (North America excl. Mexico, Western Europe and Japan) and emerging truck market spheres in terms of customer requirements, the importance of total cost of ownership and addedvalue services. But knowing that the developments in recent years by far exceeded the most optimistic expectations how can we foresee the potentials and importance of issues arising in five or ten years time? One thing is for sure: the markets will converge not today, but early enough to start thinking about which winning strategies could guide the way to a profitable and sustainable global truck business model for tomorrow. With this study KPMG hopes to make a stimulating contribution to the dialogue within the industry to address the forthcoming challenges with winning strategies for a better competitive positioning in the race for leadership in the global truck market place. Enjoy the read! Dieter Becker Global Head of Automotive

Definitions FOR ALL INFORMATION CONTAINED IN THIS REPORT PLEASE NOTE: Gross vehicle weight (GVW) is the maximum allowable total weight of a fully loaded commercial vehicle. This includes the actual vehicle weight as well as passengers, cargo and fuel. Light commercial vehicles (LCV) are goods and carriage vehicles with a gross vehicle weight (GVW) that varies from one region to another. In order to ensure international comparability, all LCVs referred to in this report have a GVW below 6 tons (t). Heavy commercial vehicles (HCV) are commercial vehicles carrying goods with a gross vehicle weight (GVW) greater than 6 tons (t). A Full-Line Manufacturer (FLM) is a truck manufacturer producing and selling commercial vehicles in both the LCV and the HCV segment. The Triad markets are the mature vehicle markets of North America (excluding Mexico), Western Europe and Japan. The Next 11 countries refers to Egypt, Bangladesh, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam. All vehicle registration/ production data provided in this report is sourced from IHS Automotive (IHS Inc.) and is derived from official national data sources as of March 2011.

Contents Acknowledgements Editorial II III Executive Summary 2 1 Developments in the global commercial vehicle market 4 2 Challenges for commercial vehicle manufacturers 8 2.1 Demand shift to growth regions 9 2.2 Continuous market cyclicality 14 2.3 Suitable business models and brand strategies 17 2.4 Overcoming the environmental challenge 19 2.5 Pressure on total cost of ownership 21 3 Winning strategies for a successful future 22 3.1 Regionalized technology and product management 23 3.2 Realization of economies of scale 24 3.3 Flexible capacity management 24 3.4 Multi-branding 25 3.5 Green fleet 26 3.6 Expansion of the value chain 30 4 Focus on emerging truck markets 36 4.1 China 37 4.2 India 48 4.3 Russia 58 4.4 Prospects of convergence between emerging and mature markets 68 Insight: Passenger and commercial vehicle business why they are different and what they can learn from each other 72

2 Competing in the Global Truck Industry Emerging Markets Spotlight Executive Summary

Competing in the Global Truck Industry Emerging Markets Spotlight 3 Market Development The world market share of Western Europe and North America will continue to decline relative to sharply rising demand in the emerging markets. The worldwide distribution of power in the commercial vehicle market has shifted since 2006. Asian manufacturers have secured a stronger position at the expense of Triad truck makers. With the formation of a large commercial vehicle group under VW s roof (MAN, Scania, VW CV) more consolidation in the Triad is very unlikely. India and Russia have already reached a considerable level while in China consolidation is far from over. Challenges & Winning Strategies Global Truck makers have to be aware of the growth trends in the emerging markets, and at the same time stay alert to the continuous market cyclicality in the mature markets. Emerging markets are also prone to market cycles in the commercial vehicle market, but unlike in the Triad, the overall growth trend is upwards. Global truck OEMs have to evolve regionally adjusted business models and brand strategies in order to respond to differences in terms of market peculiarities, customer preferences and brand recognition. Complying with environmental standards and requirements will entail costly technologies, which truck operators may be unwilling to pay the price. Over the long term Full-Line Manufacturers, represented in all truck segments, will have better chances to compete on a global level. Emerging Markets Spotlight Accessing any one of the emerging markets will require a highly-specific markettailored strategy. Over the medium to long term, it is likely that the TCO model in emerging markets will develop along similar lines to mature markets. The intervals for the introduction of environmental restrictions are increasingly shortening in the emerging markets, although there still is a time lag compared to leading Triad markets. From 2006 to 2010 the domestic production of China and India constantly exceeded the domestic sales volumes. Russia in contrast had to rely on a significant portion of foreign truck supply. A complete convergence of the emerging with the mature markets cannot be expected within a typical planning horizon of 10 to15 years. Nevertheless, in China and Russia there exists more potential for convergence than in India. Car Business vs. Truck Business While passenger and commercial vehicles have been designed for completely different customer domains, there are several areas for the exchange of know-how. The passenger car business can transfer know-how from Western truck makers regarding multi-branding approaches in emerging markets. As the car market is not immune to market cyclicality either, OEMs can benefit from flexible capacity management best practices already implemented in the truck business. With the declining importance of vehicle ownership within the passenger car market, service and TCO-oriented business models from the truck business can be a major benefit for car OEMs. The main opportunities for the truck OEMs to gain knowledge from the car OEMs are the realization of scales and synergies via platform strategies and the adoption or co-development of environmental friendly drive trains.

4 Competing in the Global Truck Industry Emerging Markets Spotlight 1 Developments in the global commercial vehicle market Cost saving programs enabled Western manufacturers to gain profits even with reduced sales volume. The world market share of Western Europe and North America will continue to decline relative to sharply rising demand in emerging markets. The global commercial vehicle market is growing, particularly in emerging markets Due to the rapid economic recovery, in 2010 most commercial vehicle markets revived from the sales decrease they suffered in 2008 and 2009. Nevertheless, commercial vehicle sales still remain below their pre-crisis volume in most markets. Although, the enormous sales reductions have resulted in some painful lessons, extensive cost saving programs allow a majority of manufacturers to achieve respectable profits. However, particularly OEMs from the established markets continue to face a number of challenges to maintain or grow their market position in their home markets. These include increasingly stringent regulations, rising gas prices and largely saturated markets. On the other hand, economic growth in emerging markets continues to offer great potential, with the associated rise in consumer demand predicted to have a positive medium and longterm impact. Industry experts also expect that the legal framework and commodity prices will continue to play a minor role for the time being. The balance of power in the global commercial vehicle market has changed decisively over the past five years. In 2006, Western Europe accounted for about 10 percent of all commercial vehicle sales worldwide. In 2010, the figure had fallen to around 7 percent. The fall was even greater in North America, where the share of worldwide commercial vehicle registrations fell from about 50 percent in 2006 to around 32 percent in 2010. Market share losses of the saturated markets contrast with strong market share gains in the emerging markets. In particular, China sharply increased its global market share in 2009 by about 10 percent to 28 percent, replacing the US as the largest commercial vehicle market, due largely to governmental support initiatives. By 2010, Chinese global market share had already grown to 30 percent. India enjoyed similar although less spectacular growth. Asia is now by far the largest region for commercial vehicle sales, accounting for nearly one in two commercial vehicles sold worldwide.

Competing in the Global Truck Industry Emerging Markets Spotlight 5 Development of the commercial vehicle market (across all segments) * 25,976 21,934 759 928 933 2,268 22,694 837 1,048 1,185 2,383 20,351 864 1,001 1,276 18,642 763 541 22,729 865 642 1,462 1,655 24,235 952 781 1,548 1,870 1,062 833 1,645 2,012 10,650 10,265 2,137 7,974 1,166 1,505 6,266 7,369 8,093 8,725 From a truly global perspective, the truck market is a growth market rising up to 33 million units by 2015 if current trends continue. 10,737 10,991 11,700 6,395 6,975 7,098 8,401 2006 2007 2008 2009 2010 2011f 2012f Asia North America West Europe South America East Europe RoW Source: IHS Automotive, KPMG International *Light commercial vehicles up to six tons + heavy commercial vehicles over six tons f = forecasted

6 Competing in the Global Truck Industry Emerging Markets Spotlight

Competing in the Global Truck Industry Emerging Markets Spotlight 7 Positive economic developments will ensure further market growth over the coming years, including a fundamental rebalancing of the global market. The truck market is expected to grow by around 14 percent between 2010 and 2012, rising up to 33 million units by 2015 if current trends continue. In addition to the BRIC countries, the so called Next 11 states, such as Indonesia, South Korea, Vietnam and the Philippines, will contribute significantly to this growth as well. The BRIC and Next 11 states will spur market demand in the future. Sales ranking of manufacturers of heavy commercial vehicles (GVW > 6 tons) The worldwide distribution of power within the commercial vehicle industry has shifted since 2006. Asian manufacturers have secured a stronger position at the expense of manufacturers from the Triad, such as Daimler, Volvo Trucks and Paccar, which previously dominated the heavy duty market. 2006 2007 2008 2009 2010 n 1 DONGFENG n 2 DAIMLER AG n 3 FAW 1 n 4 PACCAR CNHTC 2 Sales Ranking n 5 n 6 n 7 NAVISTAR TATA MOTORS VOLVO TRUCKS TORCH n 8 BAIC 3 n 9 FORD MAN n 10 TOYOTA ASHOK LEYLAND 1 First Automotive Works 2 China National Heavy Duty Truck Corp. 3 Beijing Automotive Industry Corp. Emerging markets manufacturer Source: IHS Automotive, KPMG International

8 Competing in the Global Truck Industry Emerging Markets Spotlight 2 Challenges for commercial vehicle manufacturers Global truck manufacturers are faced with a number of challenges. They have to be aware of the growth trends in emerging markets, and at the same time stay alert to the continuous market cyclicality in the Triad. A consistent worldwide business model will not be sufficient. Regional needs have to be reflected, and innovations will be needed to address technological challenges and the rising importance of total cost of ownership (TCO). Global truck manufacturers face a number of challenges Truck OEMs have to be aware of the growth trends. One thing is for sure: regional adaptability will determine global success. Rising importance of total cost of ownership. However, the reduction of TCO from the manufacturer s side is not easy. Pressure on total cost of ownership Demand shift to growth regions Continuous market cyclicality Truck OEMs have to stay alert to the continuous market cyclicality in the Triad and in the emerging markets. Costly innovations will be needed to address technological challenges, which truck operators may be unwilling to pay the price. Overcoming the environmental challenge Suitable business models and brand strategies Truck OEMs have to find suitable business models and brand strategies to compete globally. Source: KPMG International

Competing in the Global Truck Industry Emerging Markets Spotlight 9 In terms of sales volume, manufacturers from China and India have already surpassed most of their mature market competitors. 2.1 Demand shift to growth regions Shifts in demand and consolidation will reshape the global commercial vehicle industry Already in today s market, a considerable proportion of trucks are sold by manufacturers from emerging markets, such as Dongfeng Motor, FAW and CNHTC (all China) and Tata Motors (India). Of course, these companies sell most of their vehicles in their respective home markets. Nevertheless, even Daimler Trucks, for years the biggest seller in the heavy duty vehicle segment, was outperformed in 2010 for the first time by the Chinese Dongfeng Group. This underlines the dynamics of the emerging markets and their potential to determine the success of commercial vehicle manufacturers with global aspirations. International key players in heavy commercial vehicle in 2010 (GVW > 6 tons) WORLDWIDE DONGFENG DAIMLER TRUCKS FAW CNHTC TATA MOTORS VOLVO GLOBAL TRUCKS TORCH BAIC MAN (VW) ASHOK LEYLAND PACCAR TOYOTA NAVISTAR ISUZU FORD ANHUI JIANGHUAI IVECO (FIAT) SCANIA (VW) 1 2 3 4 Units Sold (in thousands) 125.8 113.2 109.4 103.8 80.0 79.1 77.4 76.6 71.5 64.8 62.8 51.9 48.6 199.9 194.9 Market Share Worldwide (in percent) 300.1 10.3% 280.7 9.7% 274.3 9.5% 6.9% 6.7% 4.3% 3.9% 3.8% 3.6% 2.8% 2.7% 2.7% 2.6% 2.5% 2.2% 2.2% 1.8% 1.7% 1 First Automotive Works 2 China National Heavy Duty Truck Corp. 3 Volvo, Renault Trucks, Mack 4 Beijing Automotive Industry Corp. (Auman, EuroV, Beiqi Foton) Source: IHS Automotive, KPMG International Naturally, global market dominance does not arise from sales volume alone it remains to be seen, if emerging players will be able to compete on a global scale in terms of quality, reliability and brand reputation any time soon. Daimler Trucks, for instance, will most probably regain its leading position in the heavy trucks sector within two years through its intensified activities in China and India. Nevertheless, global sales figures indicate that well-known manufacturers from saturated markets, such as Volvo and MAN/VW, will sell fewer vehicles than Chinese and Indian manufacturers in the future. Even if one treats MAN and Scania as one group, it would still lag behind the new Asian commercial vehicle giants.

10 Competing in the Global Truck Industry Emerging Markets Spotlight Development of the world market share by market clusters 11% 11% TRIAD 1 7% 20% World Market Share 2006 62% 8% World Market Share 2012f 43% BRIC 2 N-11 3 38% RoW 4 1 North America (excl. Mexico), Western Europe, Japan 2 Brazil, Russia, India, China 3 Next -11 (No data available for Nigeria, Bangladesh) 4 RoW = Rest of World f = forecasted Source: IHS Automotive, KPMG International

Competing in the Global Truck Industry Emerging Markets Spotlight 11 Consolidation has almost come to an end in mature markets Mature commercial vehicle markets in Western Europe and North America have largely consolidated, particularly in medium and heavy trucks, with six, respectively five, manufacturers sharing more than 90 percent of the market. With the formation of a large commercial vehicle group (MAN, Scania, VW Nutzfahrzeuge) under the leadership of the VW Group, more consolidation is unlikely, especially given antitrust laws. While India and Russia have already reached a considerable level of consolidation, it is far from over in China. The top five manufacturers in China Dongfeng, FAW, CNHTC, Torch and Beijing Automotive command almost 70 percent of truck sales, but several small and mid-sized manufacturers continue to compete against each other. The number of regional providers (and those focusing on particular segments) could be replaced by a smaller number of global cross-segment manufacturers. This ongoing pressure for global consolidation is illustrated by numerous cooperation agreements in the industry. These range from specific technical collaborations (such as Mahindra and Navistar) 1 to capital integration (such as Daimler & KAMAZ) 2, often a preliminary stage for mergers. It cannot be ruled out that players from emerging markets will become pivotal to this consolidation process as well. Overview of Chinese commercial vehicle manufacturer groups LCV (< 6t) HCV (> 6t) FULL-LINE (LCV + HCV) 24 companies 18 companies 16 companies Brilliance-Jinbei Changan Chery Dongan Heibao Feidie Auto Fujian Auto Great Wall Guangzhou Auto Guilin Bus Guizhou Yuantong Aeronautic Auto Hebei Changzheng Hebei Zhongxing Hubei Sanhuan Hubei Sanjiang Hunan Zoomlion Axle Works Jianghuai Jiangling Jiangxi Fire Engine Liaoning Lingyuan Auto Shaanxi Automotive Shandong Auto Shandong Kaima Shandong Tangjun Ouling Auto Sichuan Yinhale Machinery Source: IHS Automotive, KPMG International Anhui Ankai Anhui Jianghuai Chengdu Dayun Sichuan Highway Machinery Chengdu Wangpai CNHTC Fujian Xinfuda Guangzhou Bus Hanyang Auto Henan Shaolin Hualing Hunan Axle Works Nanjing Chunlan/Xugong Norinco North Benz Shandong Wuzheng Shitong Special Vehicle Torch Zhejiang Youngman BAIC Chengdu Xindadi China First Tractor Dongfeng FAW Fujian Longma Jinggong Zhenjiang King Long Lifan Group Nanjing Automotive SAIC Shandong Huayuan Kama Shuguang Group Sichuan Nanjun Yaxing Zhengzhou Yutong Coach Bold = more than 50.000 units sold in 2010 1 Joint venture (51:49) Mahindra Navistar Engines produces diesel engines for medium and heavy commercial trucks and buses in India 2 Daimler Trucks had bought a 10 percent stake in KAMAZ in 2008, bought another 1 percent in June 2011

12 Competing in the Global Truck Industry Emerging Markets Spotlight Leading players in key regions and markets in 2010 (GVW > 6 tons) WEST EUROPE Units Sold (in thousands) Market Share (in percent) 46.7 DAIMLER TRUCKS 3 42.2 VOLVO GLOBAL TRUCKS 31.3 MAN 23.3% 21.0% 15.6% PACCAR 27.5 13.7% IVECO (FIAT) 26.0 13.0% SCANIA (VW) 10.2% 20.5 NORTH AMERICA Units Sold (in thousands) Market Share (in percent) DAIMLER TRUCKS 73.5 27.4% NAVISTAR 72.2 26.9% PACCAR 15.8% 42.6 FORD 12.4% 33.4 3 VOLVO GLOBAL TRUCKS 8.5% 22.8 SOUTH AMERICA Units Sold (in thousands) Market Share (in percent) DAIMLER TRUCKS 70.9 60.2 MAN 31.3 FORD 26.1% 22.1% 11.5% IVECO (FIAT) 20.6 7.6% VOLVO GLOBAL TRUCKS3 19.7 7.3% Source: IHS Automotive, KPMG International

Competing in the Global Truck Industry Emerging Markets Spotlight 13 EAST EUROPE (incl. Russia) Units Sold (in thousands) Market Share (in percent) 28.9 KAMAZ 23.9 GAZ GROUP 3 VOLVO GLOBAL TRUCKS 25.4% 20.9% 8.5 7.5% MAZ 7.7 6.8% MAN 7.6 6.6% CHINA Units Sold (in thousands) Market Share (in percent) 299 DONGFENG FAW1 273 CNHTC2 200 TORCH 4 BAIC 20.6% 18.8% 13.7% 113 7.8% 109 7.5% INDIA Units Sold (in thousands) Market Share (in percent) 189 TATA MOTORS 80 ASHOK LEYLAND 59.3% 25.0% EICHER MOTORS 28 8.9% SWARAJ MAZDA 7 2.2% ASIA MOTOR WORKS 6 1.9% 1 First Automotive Works China National Heavy Duty Truck Corp. Volvo, Renault Trucks, Mack 4 Beijing Automotive Industry Corp. (Auman, EuroV, Beiqi Foton) 2 3

14 Competing in the Global Truck Industry Emerging Markets Spotlight Dependency on overall economic development: Commercial vehicle sales usually trail behind changes in GDP. 2.2 Continuous market cyclicality Market cyclicality dominates the commercial vehicle business also in emerging markets The commercial vehicle business will continue to be strongly cyclical, especially in the mature markets of the Triad, where swings of between 15 and 25 percent are considered normal. This cyclicality is caused by a dependency on overall economic development. Declines in gross domestic product (GDP) lead to a fall in the transportation of goods, and surplus trucks are temporarily decommissioned. When demand rises again, companies reactivate these trucks before buying new ones, leading to a time-lag between the rise in GDP and the demand for trucks. This is illustrated by the quarterly development of GDP in the US between 2006 and 2010 and light commercial vehicle sales for the same period. Time lag illustrated using the example of the US market for light commercial vehicles (LCV) Connection between commercial vehicle demand and GDP Observation Period 1 Observation Period 2 Observation Period 1: While GDP rose substantially in Q3 2006 going into the following quarter, commercial vehicle sales continued to decline as a response to the previously fallen GDP. Thus, a high point of the GDP, together with a low point in commercial vehicle sales, was observed in the fourth quarter of 2006. Commercial vehicle sales rose once again in the first quarter of 2007 despite falling GDP in that quarter. Observation Period 2: It is also very clearly visible from the 4th quarter of 2009 to the 2 nd quarter of 2010 that the peak of GDP shows a time lag of two quarters in relation to the peak of commercial vehicle sales. Q2/06 Q3/06 Q4/06 Q1/07 Q2/07 Q3/07 Q4/07 Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 % Growth in Truck Sales % Growth in GDP Source: IHS Automotive, US Department of Commerce (2011), Institut für Automobilwirtschaft [Institute for Automotive Research]

Competing in the Global Truck Industry Emerging Markets Spotlight 15 Emerging markets are also prone to cycles in the commercial vehicle market, but unlike in Triad markets, the overall growth trend is upwards. Manufacturers in emerging markets must therefore prepare for continuous growth in capacity and align this with their strategies. Development trends in commercial vehicle demand in China, India and Russia Light commercial vehicle demand (on a basis of accumulation) AVERAGE SALES (2001 2009) Russia = 296,000 units China = 2,900,000 units India = 333,000 units trend 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: VDA, KPMG International

16 Competing in the Global Truck Industry Emerging Markets Spotlight DAIMLER AG Interview with Andreas Renschler, Member of the Board and Head of Daimler Trucks Division at Daimler AG (Germany) Andreas Renschler, Head of Daimler Trucks, expects a fairly steady recovery of the global commercial vehicle industry after two almost catastrophic years. Although strong cyclicality has always played a pivotal role in the commercial vehicle industry, the 2008/2009 market turmoil went far beyond anything we could have expected, says Renschler. The market is now growing again, but of course there are regional differences, he adds. Renschler sees the mature markets of North America and Europe still being some way off their pre-crisis levels. In contrast, India and Russia are showing rapid signs of recovery, not to mention the Chinese market, where the demand for trucks was largely unaffected by the global economic woes. He is convinced that the best way to gain a sense of future market potential is to look at GDP. A growing economy always goes hand-in-hand with increasing freight transport volumes boosting the demand for trucks, he explains. Winning strategies for a global player In terms of business strategies for global truck manufacturers, Renschler says it s not all about quantitative market development, as qualitative differences among emerging and mature markets will remain a limiting factor for some time. In China or India, we re talking about an average sales price of 30,000, compared to Europe with prices from 80,000 to 100,000. As long as global markets remain as diverged as they are today, a world truck approach is not a viable option, he says. In line with this, Renschler is sure that there is not the one universally applicable concept to access foreign markets. It always depends on the specific regulatory environment and market specialties. To successfully address price and cost-sensitive emerging market customers, a multi-brand strategy is an important aspect for Renschler. For a full-line manufacturer like Mercedes-Benz, which is predominantly known for its high-quality and relatively costly premium cars, the differentiation between its various product segments is an absolute necessity, he says. With its Fuso brand, an important pillar for Daimler s success in Asia, and the recently introduced BharatBenz, especially focused on the Indian domestic market, Renschler believes Daimler is on the right track. In more mature markets, he sees an ongoing trend towards a more differentiated view on the total cost of ownership for trucks: After all, the number one purchase reason in mature markets is the total cost per kilometer, not in contrast to emerging markets the initial price of a truck. That s why Daimler increasingly pursues value added services around the truck itself to open up further revenue potentials. Renschler especially sees huge potential for value added services around preventive maintenance, since Daimler has a widely spread service network all over the world.

Competing in the Global Truck Industry Emerging Markets Spotlight 17 2.3 Suitable business models and brand strategies The business model of full-line multi-brand manufacturers is growing in importance Over the long-term, full-line manufacturers (FLM) such as Daimler, Volvo, or Tata, represented in all truck segments with their own products, will have better chances to compete on a global level. In contrast, specialists active solely in the heavy truck segment will struggle to defend their status in the global market, because they may have greater trouble realizing synergies or differentiating their products on a global scale. A regionally adjusted brand strategy therefore also plays a crucial role for truck manufacturers. Using a multi-brand strategy, manufacturers can respond to regional differences in terms of penetration and brand recognition. For example, the Daimler Group s BharatBenz brand, recently introduced specifically for the Indian market, illustrates the emergence of regionally-tailored products. A multi-brand strategy enables regional factors to be taken into account. Global 65 60 55 50 45 40 35 30 25 20 15 10 5 0 Local Markets served in CY 10 Selected business models and brand strategies in the global truck market Single brand 1 VOLVO MAN GLOBAL TRUCKS 1 2 VW 1 (MAN/SCANIA/VW) (+VW TRUCKS) average=33.8 VW (VWN/SCANIA) 1 PACCAR DAIMLER AG 1 3 DONGFENG 1 ISUZU1 4 Source: IHS Automotive, KPMG International TATA 1 average= 0.6 KPMG s BPI Brand portfolio index = [0;1] BEIJING AUTOMOTIVE 1 1 Full Line Manufacturer 0.2 0.4 0.6 0.8 1.0 hypothetical Multi brand Analysis of the business models and brand strategies of selected commercial vehicle manufacturers Vertical axis: Shows in how many markets manufacturers were represented in 2010 with their respective brands and models. Horizontal axis: The Brand Portfolio Index (BPI) shows the respective intensity of the manufacturers brand strategies. The index sets the respective number of brands in the manufacturer portfolio against the manufacturer with the most individual brands in the portfolio (in this case Daimler). By analyzing the global market presence and brand portfolios of selected manufacturers, we see the current commercial vehicle business split into four dimensions: 1. Manufacturers of a few brands with global market presence 2. Multi-brand manufacturers with global market presence 3. Manufacturers of a few brands with multiregional market presence 4. Multi-brand manufacturers with multiregional market presence

18 Competing in the Global Truck Industry Emerging Markets Spotlight It is interesting to see that global manufacturers from mature markets are consolidating different segments under a single corporate entity. There are a number of reasons for this: 1. A full-line multi-brand manufacturer is better able to cope with increasing pressure to realize economies of scale at all value creation levels. In particular, the growing price pressure from emerging markets makes it ever more important to leverage cost cutting opportunities to stay globally competitive. 2. An FLM can better benefit from potential synergies between light and heavy trucks, particularly in green diesel engine technology and electronic vehicle architecture (such as assistance systems) to comply with globally rising environmental standards. Emerging players will have to engage multi-branding from bottom up to succeed in more sophisticated foreign markets. 3. Lastly, the strong growth of emerging markets will increasingly require a more diversified global footprint, with market-tailored product, brand and pricing strategies. Offering a full line of trucks under several brands especially benefits mature market OEMs The rising Chinese Dongfeng Group and the well-established Daimler Trucks Group, number one and two in terms of heavy duty truck sales in 2010, demonstrate two contrasting approaches, perhaps owing to their geographic origin. Daimler introduced or acquired various brands and sells its trucks in over 50 countries. By catering to a full range of truck segments, Daimler can offer a greater variety of trucks tailored to specific markets and local customer preferences without blurring its worldwide brand reputation or value propositions. In contrast Dongfeng, almost solely active in its Chinese home market with low-cost products, does not differentiate its products or segments through a multi-brand approach. Looking at these and other examples, one can assume that using a multi-branding approach correlates with the number of markets served and therefore with the global aspirations of the respective manufacturers. Globally active specialists like MAN and Paccar, operating in more than 30 markets, also tend to have several brands in their portfolio. Volkswagen s plans to merge heavy commercial vehicle specialists MAN and Scania, with its light commercial vehicle branch, clearly indicate the increasing trend of consolidating several commercial vehicle segments and global brands under one roof. This newly aligned VW truck group will certainly have an important position in the global market as it will offer a full line of commercial vehicles with several renowned brands. For emerging players like Dongfeng and Tata, it remains to be seen how they will approach globalization in the years to come. Differentiating their products in more sophisticated foreign markets via multi-branding could be a viable option. In contrast to the top-to-bottom approach of their mature market peers, they will have to differentiate their products from the bottom up. Consequently, the introduction of a premium brand could be of crucial importance, to separate their global products from their product s low-cost reputation in their home markets.

Competing in the Global Truck Industry Emerging Markets Spotlight 19 2.4 Overcoming the environmental challenge The Triad markets are taking a pioneering role on environmental restrictions Pollution restrictions in mature markets have risen steeply in recent years. Manufacturers have responded by substantially cutting particle and nitrogen oxide emissions, as well as fuel consumption and thus CO 2. Measures within the engine have included particle filters, Selective Catalytic Reduction (SCR) and aerodynamic optimization. Technological innovations are constantly reducing truck emissions. Development of commercial vehicle emissions per ton-kilometer 1.2 Projection 1.0 0.8 0.6 0.4 0.2 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 CO 2 /tkm No x /tkm Particle/tkm Source: TREMOD/VDA (2010) Ever stricter limits will be introduced, with the Triad countries taking the lead; in particular the United States with its EPA limits. Under EPA 10, for example, nitrogen oxide limits were drastically reduced in the US by nearly 80 percent to 0.27 g/kwh. EURO VI also calls for a further reduction of nitrogen oxide and particle emissions, although a little less stringent compared to the US limits. Generally, implementing these requirements will entail costly technologies. It remains to be seen if truck operators will be willing to pay the price. Environmental demands in emerging markets are tightening, but they are not inevitable Emission limits in emerging markets are not yet at the level of the Triad markets. This is partly because low transport costs are vital for economic growth. Also, there is a desire to give local manufacturers time to develop more environmentallyfriendly vehicles. Nevertheless, it is apparent that environmental demands are also rising in emerging markets, as seen with the local equivalent of Euro IV already introduced in China, India and Russia. Interestingly, China, India and Russia all introduced Euro I to III at around the same time. However, India s pace now seems to have slowed, as the most stringent limits of Bharat Stage IV (equivalent to Euro IV) only apply to the national capital region of Delhi and another eleven cities. Hence, they can be easily circumvented by registering vehicles outside large cities. In particular large metropolitan regions, such as Beijing and Delhi, strongly regulate exhaust limits rural areas are still less affected by governmental regulations.

20 Competing in the Global Truck Industry Emerging Markets Spotlight The time lag between the introduction of exhaust limits between mature and emerging markets narrowed significantly. Looking at the pace at which environmental legislation for trucks is being introduced in emerging markets, the time lag with the West has shortened significantly. It may be assumed, therefore, that the pace of introducing environmental standards is linked with the rapid sales increases in those markets. When it introduced Euro III equivalent exhaust limits in 2008, for example, China was six years behind the EU schedule. However, the time lag between the introduction of the next stage equivalents (Euro IV and V) narrowed to only three years. Logically, more stringent limits lead to a greater need for technological sophistication - in both emerging markets and developed markets. It will be interesting to see how domestic players from the emerging markets will approach the challenge of increasing requirements.

Competing in the Global Truck Industry Emerging Markets Spotlight 21 2.5 Pressure on total cost of ownership Fuel costs dominate the total cost of ownership in mature markets in emerging markets however, it is the purchase price that matters The commercial vehicle business has always been characterized by an emphasis on total cost of ownership (TCO). As an investment asset, the acquisition and operating costs of a commercial vehicle naturally have a direct influence on the profit margins of truck operators. The typical TCO in a mature commercial vehicle market differ substantially from an emerging market. In the emerging markets of Asia in particular, the acquisition price still plays a dominant role in the TCO over the lifetime of a truck. Acquisition costs are therefore at the forefront in investment decisions, either because the subsequent costs are comparatively low or because repairs and service are typically performed by owner-drivers themselves. Over the medium to long term, however, it is likely that the TCO model in emerging markets will develop along similar lines to mature markets, particularly with regard to rising fuel costs, as well as growing demand for service and repair. Frequently, diesel fuel is subsidized or taxed at a substantially lower rate than gasoline in emerging markets, but sensitivity to fuel prices will increase with rising crude oil prices. Similarly, with the increasing technical complexity of commercial vehicles, it is likely that only qualified specialists will be able to perform service and repairs in the future. The reduction of the TCO by commercial vehicle manufacturers is crucial since it is virtually impossible for hauliers to pass a rising TCO on to freight prices due to the intense competitive pressure. The largest TCO component that can be influenced in mature markets such as Western Europe is fuel costs (30 percent). Advances in engine technology, such as optimized diesels engines and alternative fuels, provide a number of sales angles for manufacturers. Other possibilities on the manufacturer s side include depreciation (which can be indirectly influenced by the purchase price), service and maintenance costs and at least in part insurance costs. However, the reduction of TCO from the manufacturer s side is not easy, as the most influential components of TCO are to do with the regulatory environment (ecological requirements, taxes and tolls), particularly in mature markets and increasingly in emerging markets as well. It is likely that these external factors will continue to grow in importance, weakening the ability of manufacturers to influence the TCO for the benefit of their customers. Overview of the TCO in trucks in Western Europe Tires 1% Interest 2% Road Tax 2% Repair & Maintenance 5% Vehicle Insurance 6% 10% Source: Commercial Vehicles and CO 2, ACEA/Iveco, 2011 30% 40-ton Tractor Semitrailer Combination 18% 26% Fuel Wages Overhead Depreciation Fuel costs, service and repair are becoming increasingly important in emerging markets. We ve addressed things like fuel economy, weight, and driver environment. Next, we ll see technologies such as collision avoidance systems, stability systems anything which can reduce their [the operator s] overall costs further. Dee Kapur, President of the Truck Group, Navistar International Corporation

22 Competing in the Global Truck Industry Emerging Markets Spotlight 3 Winning strategies for a successful future Commercial vehicle manufacturers with global ambitions face considerable challenges in both emerging and mature markets. To survive, they will have to adopt winning strategies to respond to shifting global demand, market cyclicality, environmental issues and the growing pressure on the total cost of ownership (TCO). Moreover, they must tailor their business models and brand strategies to address the specific characteristics of different markets. Challenges & suitable winning strategies in the global commercial vehicle industry Regionalized technology and product management Realization of economies of scale Multi-branding Demand shift to growth regions Green fleet Expansion of the value chain Pressure on total cost of ownership Continuous market cyclicality Flexible capacity management Expansion of the value chain Realization of economies of scale Green fleet Overcoming the environmental challenge Suitable business models and brand strategies Regionalized technology and product management Multi-branding Expansion of the value chain Source: KPMG International

Competing in the Global Truck Industry Emerging Markets Spotlight 23 3.1 Regionalized technology and product management Global market leadership will be determined by the regional adaptability of multinational OEMs Vehicle concepts geared toward the demands of Western customers will make little impression in emerging markets. Gearing vehicle designs to local customer demands will be essential. This will mean reducing product complexity and using local resources and suppliers. A World Truck concept is not promising. Different concepts must be developed for the mature and emerging markets. Regionalized technology and product management at BharatBenz Vehicles must be adapted to the needs of the local market. In India, for example, the design must be suitable for poorly constructed roads and overloads. For this reason, BharatBenz reduces its electronics only to the absolute essentials. In addition, it is necessary to stabilize the axles and adapt the frame and suspension. The engine capacity has to be adapted to low average speeds and the gear ratio to torque that triggers early. It is power, not RPMs, that counts in order to get frequently-overloaded trucks in motion. Transmissions must be designed in a correspondingly robust manner. The BharatBenz is pinning its hopes on the modular principle in India and integrating elements such as frames or drive trains of various Fuso models, specifically with newly developed components, into the Modified Indian Truck. Starting in July 2012, it will compete with local low-cost brands such as Tata, Mahindra & Mahindra and Ashok Leyland. Source: AutomotiveNow, Spring 2011, KPMG International Besides low-cost technologies, mature market OEMs will need to establish national servicing and spare parts networks to gain a foothold in strategically important Asian markets. Entering an emerging market with local partners (mandatory in China) therefore has numerous advantages. These include using local know-how, brand recognition and existing service networks. Disadvantages include internal management resistance, delays in modernizing products and production, and inflexibility of brand positioning. Possible conflicts arising from the parallel establishment of a company s own brand, to occupy the premium niche, can be more difficult to resolve within a cooperation agreement. Overlaps can arise with respect to target groups and market segments, particularly if the local partner itself wants to become active in the premium segment. For global OEMs operating fully-owned subsidiaries in emerging markets, correctly integrating regional control structures into the overall company s strategy is vital. Since the emerging markets of China, India and Russia have many differences, a regionally-adjusted approach is essential. In China, for instance, a globally-operating German OEM decided to keep its Chinese affiliate as close as possible to its parent company s CFO instead of indirectly managing it through its Asia Pacific sales bureau. There is no patented solution for market development with or without local partners.

24 Competing in the Global Truck Industry Emerging Markets Spotlight 3.2 Realization of economies of scale Modular systems with a high percentage of non-variable parts are necessary As a result of market specifics and divergent customer demands, real economies of scale in the commercial vehicle industry can only be realized at the aggregate level. The largest leverage effect is the standardization of the drive train and the electronics architecture, to which depending on market specification a total of 60 to 70 percent of the added value of a truck is attributable. We definitely put a lot of effort into developing standardized cross-segment components for our trucks. In the end, we have to account to very specific end user requirements across all markets and these set very tight limits to standardization. Just take our Wörth plant for our heavy trucks in Germany: Not even two out of the 120,000 units we produce there every year are identical. Of course, such a high degree of differentiation is not necessary in the emerging markets. Andreas Renschler, Member of the Board and Head of Daimler Trucks Division, Daimler AG (Germany) As many non-variable parts as possible, as many individualized technologies as necessary. This requires the development of a modular system that makes it possible to use the same aggregates and components in different production series true to the principle of as many non-variable parts as possible, as many individualized technologies as necessary. The cost-relevant aggregates and components (engine, axles, transmissions, and electronics) are at the forefront in this regard. Only in this way can the necessary product differentiation be presented at the customer level. Scania is viewed as a benchmark for this kind of modular system. Daimler Trucks is striving to increase the percentage of non-variable parts from its current level of 50 percent to 70 percent. 3.3 Flexible capacity management Flexibility is necessary to master market cyclicality Market cyclicality occurs in both mature and emerging markets. To manage the up and downs, OEMs have to be flexible. Manufacturers in mature markets already have established processes and measures to increase flexibility. Nevertheless, especially for the capital-intensive manufacturing industry, market cyclicality still presents huge challenges for only internally-focused strategies like flexible employment relationships, variability of fixed costs or fractal factory concepts.

Competing in the Global Truck Industry Emerging Markets Spotlight 25 In order to achieve additional flexibility, it is necessary to look outside the company itself. Inter-company cooperation, strategic alliances, flexible networks or virtual organizations can all help companies to become more flexible. The in- and outsourcing of various processes can provide access to the resources, information and skills of external partners. This in turn, may help a company react more quickly to market changes, rather than relying on internal resources alone. A virtual organization, for example, has the advantage that although it is perceived as one company, it actually comprises a group of companies. Similar concepts like virtual factories also offer opportunities to build flexible networks that can cope with varying production volumes. Partnering with external parties can increase flexibility. However, few of these concepts will work in the emerging markets. OEMs therefore need to implement processes that have previously been successful in the mature markets. Current growth rates in emerging markets mean there is little urgency for OEMs to implement comprehensive strategies, but growth cannot keep up its extraordinary pace forever. Also, manufacturers should not neglect the supply chain, helping all parties to be more aware of demand changes and to react appropriately. In addition, for both markets, manufacturers need to be able to accurately forecast and comprehensively analyze market trends and demand changes. 3.4 Multi-branding In global competition, the brand offers regional differentiation potential Above all, different business models will be needed to handle mature and developing commercial vehicle markets. The business model for commercial vehicle manufacturers in Triad markets is based on a product-service bundle with technically high-quality, high-value vehicles, as well as complementary services (such as spare parts logistics, financial services and fleet management). The USP (unique sales proposition) is ultimately a minimization of the TCO, while simultaneously ensuring reliable readiness of the vehicles for use. In contrast, a successful business model for emerging markets must place the low-cost truck at the forefront. At the same time, the subsequent costs must be kept low through ease of repair. In this context, brands emphasize different points in the commercial sector than the consumer sector, but they should not be neglected. This applies primarily to the trust function of the brand, namely the respective customer promise that the brand makes. There are many arguments in favor of pursuing a multi-brand strategy in the commercial vehicle sector. However, it must be remembered that brand attributes for commercial vehicles are heavily focused on rational values such as quality, reliability and economic benefit, rather than more emotional messages typical of consumer brands. The use of multiple brands makes it possible to address regional peculiarities through different brands. Two full-line manufacturers that operate worldwide, Daimler Trucks and Volvo Trucks, are active in European markets with traditional premium brands characterized by high customer and environmental demands. In the North American market, conversely, the two companies use traditional US brands. Gaps in the brand portfolios are supplemented by European premium brands. In turn, the growing Latin American market is handled using brands from the European region. In Asian markets, known and new local brands are used, or activities are carried out through joint ventures with local manufacturers. BUSINESS MODELS Triad: Product-service bundle with technically and qualitatively high-value vehicles. Emerging markets: Low-cost trucks with low follow-up costs. The brands of global manufacturers vary in Europe, North America, India and China.

26 Competing in the Global Truck Industry Emerging Markets Spotlight Comparison of the brand portfolios of Daimler Trucks and Volvo Trucks Heavy Duty Europe North America South America Asia Daimler Volvo Daimler Volvo Daimler Volvo Daimler Volvo Mercedes-Benz Actros Zetros Unimog Volvo FH-model FM(X)-model Renault Magnum Premium Kerax Freightliner Cascadia Century Class ST Columbia Coronado Classic (XL) FLD Western Star Stratosphere 4900 6900 LowMax Mack Titan Pinnacle Granite Volvo VN-model VHD-model Nissan Diesel UD Mercedes- Benz Actros Linha Tradicional Volvo FH-model FM(X)-model Renault Premium Kerax Mitsubishi Fuso FP/FV Beiqi Foton Motor Co. (CN) JV with Foton Auman Mercedes- Benz Actros BharatBenz (I) Volvo FM-model Renault Premium Kerax Nissan Diesel (J) Condor Quon Jinan Huawo Truck Co. (CN) JV with CNHTC VECV Ltd. (I) JV with Eicher Middle Duty Mercedes-Benz Axor Econic Volvo FL-model FE-model Renault Midlum Access Freightliner Business Class M2 Mitsubishi Fuso FK/FM Mack Terrapro Mercedes- Benz Axor Volvo VM-model Renault Midlum Mitsubishi Fuso FK/FM BharatBenz (I) Beiqi Foton Motor Co. (CN) JV with Foton Auman Nissan Diesel (J) Condor Renault Midlum VECV Ltd. (I) JV with Eicher Light Duty Mercedes-Benz Atego Mitsubishi Fuso Canter Renault Mascott Maxity Master Trafic Mitsubishi Fuso FE/FG Mercedes- Benz Atego Accelo Mitsubishi Fuso Canter FE/FG Beiqi Foton Motor Co. (CN) JV with Foton Aumark Ollin Lovol Forland Nissan Diesel (J) Condor Renault Maxity Master VECV Ltd. (I) JV with Eicher J = Japan, CN = China, I = India, JV = Joint Venture Source: IHS Automotive, Institut für Automobilwirtschaft [Institute for Automotive Research] The prerequisite to successful multi-branding is systematic brand control, balancing additional costs with additional revenues. To be successful, different OEM brands cannot become competitors. If there are excessive overlaps regarding customer segments and markets, the brand portfolio may need to be adjusted. 3.5 Green fleet The optimization of diesel engines offers the best long-term cost-benefit ratio The road map of engine concepts shows that diesel engines will be the number one propulsion system for trucks in the long term (approx. 15 years). Even further consumption reductions will be achieved, for example, by cutting emissions or by more efficient exhaust treatment systems, such as selective catalytic reduction (SCR). Established American and European manufacturers in particular have a competitive advantage in this area, because of decades of diesel technology knowhow. The truck renewal potential in the medium and heavy-duty truck sector is particularly weak, as current alternative technologies do not offer convincing benefits for cost-sensitive truck operators.

Competing in the Global Truck Industry Emerging Markets Spotlight 27 In the medium and heavy-duty truck segment, simply optimizing conventional diesel engines can still deliver efficiency gains of five to eight percent. Prof. Dr.-Ing. Heinz Junker, Chairman of the Management Board, MAHLE Group Road map of engine concepts: Status quo and potential Already available in serial production Short-term (approx. 5 years) Mid-term (approx. 10 years) Long-term (approx. 15 years) Increasing environmental benefits through fuel savings and emission reduction Optimized/downsized internal combustion engines Micro-hybrids Gas engines (LPG/LNG) Mild-hybrids Full-hybrids Alternative fuels (biomass-to-liquid, methanol, ethanol, bio fuels) Electric engines Hydrogen/ fuel cells The optimization of diesel engines offers the best long-term cost-benefit ratio for commercial vehicles Automatic start-stop and brake energy recuperation systems are available today and already used in light to medium commercial vehicles Natural gas engines already reached maturity, but offer lower efficiency gains compared to optimized diesel engines Several OEMs already offer mild-hybrids in the light commercial vehicle segment (e.g. Daimler) Depending on the production process, alternative fuels already offer up to 40% greenhouse gas reduction potential Savings up to 8% can be achieved; a substitution with alternative drive systems is most likely in the light commercial vehicle segment Savings up to 20% can be achieved; significant advantages in urban stopand-go traffic Savings up to 25% can be achieved, further reduction potential through bio gas; but low market penetration Savings up to 20%, prototypes in operation in the medium and heavy truck segments Small series production in the light and medium commercial vehicle segments; savings up to 30% (40% with plug-in solutions) Comprehensively deployable in all vehicle classes Demonstration vehicles and small series production in the light commercial vehicle segment Comprehensively deployable in all vehicle classes Low potential for long-distance traffic, but favorable for shortdistance urban transport Further technical improvements and cost reductions will allow competitive positioning in inner city traffic First prototypes in operation in the class above 12 tons In the mid-term bio diesel will be the most important biogenic alternative fuel Emission saving potential between 30% and 100% depending on the underlying energy mix Several prototypes already in operation, until 2030 reasonable market share possible in the light commercial vehicle segment In particular in the heavy duty segment no alternative to internal combustion engines evident Plug-in hybrids will most probably not be used in long-distance and heavy duty transport Sustainable second generation bio fuels still in development First prototypes in operation in the medium duty segment, use of electric engines not foreseeable in the heavy duty segment yet Reduction potential up to 100% provided that hydrogen is produced from renewable energy Source: Shell, VDA et al., Institut für Automobilwirtschaft [Institute for Automotive Research]

28 Competing in the Global Truck Industry Emerging Markets Spotlight Despite the advantages of optimized diesel engines, concepts like micro-hybrids are already being introduced across many vehicle classes as the first expansion stage of electrically-supported engines. They have already been offered, for ten years in some cases, by leading market providers, including in the heavy class. Micro-hybrid technologies usually encompass an automatic start-stop system and mechanisms for recuperation (brake energy recovery). By their nature, these systems are particularly suitable for vehicles in frequent stop-and-go traffic (such as delivery and municipal vehicles) and can lead to fuel savings of up to 20 percent. Natural and liquified petroleum gas engines are already in use as sophisticated alternative engines, primarily in vans and light trucks. Due to their lower energy density and smaller range, however, this technology is rarely used in long-distance and heavy-duty traffic. Initial prototypes of full-hybrid systems are being tested in classes over 12 tons. The willingness to pay a price for eco-innovations is much lower for commercial vehicles than passenger cars. The trolley truck combines the concept of individual traffic with that of an electric bus. More heavily hybridized engines (mild/full) are infrequently used in commercial vehicles. Daimler offers three trucks (the Mercedes-Benz Atego, the Freightliner Business Class M2 and the FUSO Canter) that are equipped with a parallel hybrid system (mild-hybrid). This makes it possible to operate the diesel engine alone or with the support of an electric engine. The electric engine automatically switches on, depending on the driving situation. Such systems help substantially reduce consumption. A full-hybrid system promises even stronger savings, enabling a vehicle to be propelled for a certain stretch of distance purely electrically. The first prototypes for this technology are being tested by commercial vehicle manufacturers including in classes over 12 tons. Alternative fuels today are already reducing greenhouse gases. Depending on the manufacturing process, up to 40 percent of environmentally-harmful gases can be avoided. Alternative fuel systems are suitable for all vehicle classes. In the case of biofuels, however, their negative impact on rainforests and their reduction of land for food production is a disadvantage. More sustainable second-generation biofuels are only in the laboratory phase and might offset some of these disadvantages in the longer-term. Only chargeable batteries or hydrogen/fuel cell drives offer the potential for 100 percent reduction in consumption and emissions. The reduction potential depends on the electricity mix in a given area or, as the case may be, the manner of hydrogen production. Despite these first prototypes, development and deployment costs remain high. Broad deployment of these technologies should not be expected in the short-term. In the commercial vehicle segment in particular, there is a special focus on the economic efficiency of an alternative engine concept. Buyers are less willing to pay a price for eco-innovations in commercial vehicles than passenger cars. Therefore, commercial vehicle manufacturers must seek new ways to substantially reduce costs for hybrid systems, either by developing co-operation agreements, or by increasing their acceptance among customers. Electrification offers additional potential for reducing fuel consumption and emissions. One idea for electrifying heavy trucks is the concept of the trolley truck, for which the industry is currently conducting feasibility studies. Trucks would be equipped with a two-rod electricity collector (similar to an electric bus) and draw the electricity needed from a two-pole direct-current line stretched above the road. The truck would be able to drive purely electrically on the freeway, charge the onboard batteries if needed, and after leaving the freeway, drive for a certain range on electricity before the conventional diesel engine takes over. If up to 12 percent in CO 2 could be saved in the case of the hybrid engine, the amount could be 20 to 50 percent in the case of the trolley truck, depending on the electricity mix on which the electricity generation is based.

Competing in the Global Truck Industry Emerging Markets Spotlight 29 MAHLE Interview with Prof. Dr.-Ing. Heinz Junker, Chairman of the Management Board at MAHLE Group Environmental challenges for suppliers within a global commercial vehicle industry When it comes to power trains, emerging and mature markets are already converging, according to Professor Heinz Junker, chairman of the MAHLE Group, one of the 30 largest companies worldwide in the automotive supply industry. The convergence is mainly driven by worldwide efforts to implement the latest environmental regulations, says Junker. However, he acknowledges that the regulatory environment and customer requirements in emerging markets will still diverge significantly for some years to come. For example, although China is closing the gap, there is a time-lag of some years in adopting European vehicle standards. Global suppliers therefore need to be able to adapt to differences between market spheres and respond to regional or country-specific requirements. Junker says that even between emerging markets significant differences can be observed: In China, for instance, domestic truck manufacturers are increasingly demanding Western state-of-the-art technologies. In India, on the other hand, the focus is still firmly on low-cost components. Alternative drive train technologies for trucks are particularly relevant for an engine specialist like MAHLE, he says. He adds, though, that the main focus for hybridization for the foreseeable future will be light commercial vehicles operating in urban stop-and-go traffic areas.

30 Competing in the Global Truck Industry Emerging Markets Spotlight 3.6 Expansion of the value chain Downstream services can substantially contribute to increased revenues. Additional services are booming, with growing potential also in emerging markets Stronger service offerings have been used in recent decades to add value for OEMs downstream from production and distribution. There are already commercial vehicle manufacturers earning up to a fifth of their sales revenue from services and this share may double by 2030. In light of sustained price pressures, the importance of downstream activities will further increase in the commercial vehicle business. Added-value services in the commercial vehicle industry Global Cross-border-financing Eco-/driver safety trainings Buy-back-obligation Fleet management Regionalization Financing Insurance Toll management Special equipment Damage management Tire replacement Maintenance contract Leasing Project management Telematics services Maintenance & repair Local Truck, superstructure and retrofitting Used truck trade-in Breakdown service Warranty Contract hire/ short-term rental Serial-/special fittings Owner-Driver Company size Large fleet Source: Institut für Automobilwirtschaft [Institute for Automotive Research] 3.6.1 After-sales market The after-sales market, with its sub-segments of spare parts and accessories, service and repair, as well as vehicle bodies and retrofitting, represents serious earnings potential for truck manufacturers. This is due to the rising complexity of trucks, as well as technology upgrades to comply with stricter emissions standards and retrofits to meet new safety requirements. In the commercial vehicle market in particular, prompt spare parts supply is of great importance. With a strong market presence, OEMs can achieve a competitive advantage and increase customer loyalty by ensuring low vehicle downtimes. This, of course, has long been standard practice for commercial vehicle manufacturers. Exterior and structural parts (e.g. tires) dominate the after-sales market. The medium- and heavy-duty after-sales market is led by exterior and structural components like tires, windows, mirrors, bumpers, truck roof, side fairings and trailer doors. In mature markets, these usually account for up to half of total after-sales revenue. Taking revenue potential into account, tires are exchanged most frequently, while all other parts in this category are probably only replaced after accidents.

Competing in the Global Truck Industry Emerging Markets Spotlight 31 Another huge truck after-sales market category (around one-third of a mature market) is mechanical parts, including engine, chassis, powertrain and suspension parts. Nevertheless, long service lives for many of these components limit their revenue potential. Lastly, electrical and electronic parts have increased in importance over the last couple of years, as the electrical content of a typical truck has risen. This is mostly due to stronger emissions controls in mature markets and in several metropolitan areas of the emerging markets. 3 Truck OEMs could further leverage the serious after-sales potential of captive online platforms to promote their services and parts. According to a 2010 automotive online aftermarket study carried out by Google in cooperation with Compete, only a small proportion (one percent) of spare parts are ordered directly from the manufacturer, whether online or offline. The majority of the business is conducted by after-sales retailers, accounting for 44 percent of offline and 52 percent online orders. This certainly offers serious space for OEMs to grow their after-sales business. OEMs can tap new revenue sources via online after-sales platforms. Although the rate of online parts purchasing and direct shipment is increasing, four out of five customers are still buying automotive parts in person at a traditional store. Nevertheless, according to the study s quantitative research, providing better information on specifications can enable OEMs to win new business, as the average online to offline purchase conversion rate for automotive parts can be as high as 85 percent for several components (e.g. batteries, brake parts). Preferences of after-sales parts purchasers Purchased Parts Online Purchased Parts Offline Aftermarket automotive retailer website 52% 44% Aftermarket automotive retailer 19% Local independent automotive shop Online independent seller 19% 17% Retailer Online retailer website 10% 7% Dealership Dealership website Direct from manufacturer website 5% 3% 6% 1% Oil change service shop Direct from manufacturer Source: The 2010 Automotive Aftermarket Study, Google & Compete 3 Medium- & Heavy-Duty Truck Aftermarket, Freedonia Market Research

32 Competing in the Global Truck Industry Emerging Markets Spotlight 3.6.2 Financial services Whereas vehicles including commercial vehicles were predominantly purchased for cash decades ago, the majority of today s vehicles are financed or leased in mature markets. It is more important than ever for companies to ensure their liquidity. Therefore, financing alternatives such as credit or leasing can be used both as a sales tool and to ensure additional income. In a mature market such as Germany, only 13 percent of newly sold trucks are paid for in cash. New trucks are financed or leased at more or less equal share of 42 and 45 percent, respectively. Penetration rates of financing for commercial vehicles in Germany 43% New vehicles Auto Truck 13% 21% 36% 42% 45% 51% Used vehicles Auto Truck 2% 10% 23% 47% 67% 0 10 20 30 40 50 60 70 80 Financing form Financing Leasing Cash Purchase Source: puls Marktforschung (2010) In the used truck market, two-thirds of vehicles are purchased for cash. A different picture emerges for used vehicles. In this area, two-thirds of commercial vehicles are purchased for cash; only ten percent of vehicles are leased, and 23 percent of trucks are financed. It is apparent that the rate of financed used passenger cars is substantially higher than the one of used trucks. This opens up opportunities even in a saturated market like Germany to generate qualitative growth, and thus additional earning potential, by means of used commercial vehicle financing. Truck manufacturers offering financial services compete with banks, insurance companies and providers from other service sectors. Although the majority (62 percent) of lease contracts are concluded through OEM captive finance providers, non-captive providers still have the upper hand with close to 51 percent in the case of financing. A comparison with the passenger car percentages shows that the captives have a much stronger positioning in this area, with close to 70 percent. In the vehicle financing sector in particular, commercial manufacturers can tap into additional potential with attractive financing packages.

Competing in the Global Truck Industry Emerging Markets Spotlight 33 Market shares of captive financing companies for commercial vehicles in Germany Auto 69% 31% Financing Truck 49% 51% Leasing Truck 62% 38% 0 10 20 30 40 50 60 70 80 90 100 Captive Non Captive Source: puls Marktforschung (2010) In the emerging markets, on the other hand, there is a great need to catch up with respect to financial services. In China, for instance, vehicle financing for both corporate and private customers is quite a new concept. Around 90 percent of all vehicles purchased in China are paid for in cash; financing accounts for the remaining 10 percent, as vehicle leasing is almost non-existent. Of course, this is largely because of cultural issues, but also due to the low level of awareness and consumer education regarding financing the Chinese government did not allow non state-owned companies to offer vehicle financing until 2004. In India, the local Mahindra & Mahindra Group already offers financial services, but their focus, beyond simple vehicle financing, is on life insurance contracts, financing business equipment or rural house construction. Financial services are almost non-existent in the emerging markets although today efforts are intensifying. Financial services do not only bear additional earning potential for local manufacturers. Manufacturers from mature markets entering such growth markets could leverage their existing know-how as a distinct competitive advantage. However, appropriate structures must first be established by both local and foreign commercial vehicle manufacturers. Recent examples show intensified efforts by established OEMs to cater to the rising demand for financial services. For instance, Volvo Trucks started to operate a financial services arm in India in November 2010. With its Indian partner, Sri Equipment Finance Pvt Limited, a leading infrastructure and construction equipment financing company, Volvo Financial Services India leverages its partner s market expertise to offer a wide range of financial programs for its commercial trucks. Likewise, Daimler recently announced that it will be establishing a subsidiary of Daimler Financial Services in India.

34 Competing in the Global Truck Industry Emerging Markets Spotlight 3.6.3 Contract hire/short-term rental Mobility solutions will become increasingly popular in the commercial vehicle market. Innovative mobility solutions in the form of contract hire/short-term rental are also playing an increasingly important role. For example, commercial vehicle providers in Europe and the US offer individually structured mobility packages for commercial vehicle operators. For instance, Mercedes Benz CharterWay, the international commercial vehicle financial services, contract hire and fleet management arm of Daimler AG, combines leasing or financing arrangements with a variety of addedvalue services in a single package based payment. CharterWay was founded in 1992 and has offered contract hire and rental services for commercial vehicles since 1998. Essentially, such packages occur in three variants: Firstly, commercial vehicles can be offered for short- to medium-term rental. This enables road hauliers to flexibly increase their transport capacities for peak periods on an ad hoc basis, without capital commitment or risk. In a more service-oriented approach, hauliers can furthermore combine a needs-based bundle of services, sometimes including maintenance and repair services. If necessary, this can include a replacement vehicle by the service provider. In a third variant, such a short- to medium-term mobility package can be expanded to a full-service contract including fuel cards, insurance and fleet monitoring. 3.6.4 Used vehicle trade Just like the used passenger car business, which is in many cases professionally operated by car manufacturers, the used commercial vehicle market opens up further revenue potentials for truck OEMs. The used vehicle trade in the commercial vehicle sector has developed as an attractive business model. Many commercial vehicle OEMs already operate professional online commercial vehicle exchange platforms, in which customers can search for suitable vehicles worldwide according to price classes, vehicle age and kilometer reading, as well as body and payload. For some manufacturers, the business involving used commercial vehicles is operated similarly to the passenger car business under a special used vehicle brand with a comprehensive concept. 3.6.5 Fleet management solutions and telematics services With fleet management solutions (FMS) and telematics services, large vehicle fleets can be better controlled with respect to the economic efficiency and optimization of logistical, informational and organizational processes. Technological advances in communication and information technology are favoring the further development of FMS because they have lowered the costs of implementing systems, providing real-time control and information. To benefit from fleet management services, network infrastructure has to be implemented on a wide scale. FMS in developing markets trail behind due to lower technology level and road density. In emerging markets many of these new services cannot be offered on a large enough scale due to bad network coverage. Besides the lack of efficient IT systems, the sheer size of China, India and Russia limits the implementation of professional fleet management services. However, demand will increase as road infrastructure improves, customer expectations rise and more sophisticated IT networks develop. Today, one of the first global players engaging in fleet management services in the emerging markets is General Motors. GM introduced its Onstar in-vehicle security, communications, and diagnostics system for its passenger vehicles in China, and will most probably expand its services to the commercial vehicle domain.

Competing in the Global Truck Industry Emerging Markets Spotlight 35 The service portfolios of the various manufacturers generally include the following: Services relating to vehicle management include, for example, deployment analyses with driving style evaluation, trip recording, service plans and condition inspections. Reporting tools which offer the possibility of clearly laying out the extensive telematics data for the addressee (management, vehicle fleet manager or drivers). Service management, including sending online data from the vehicle to the service shop, for planning service schedules. Transport management, such as tour planning and monitoring, shipment tracking, order management, navigation, barcode scanners or digital signatures. Other tools support, for example, commercial vehicle operators in complying with legal requirements, such as logging drivers work and driving hours, or temperature monitoring for cold goods. In addition, some companies also offer training for vehicle fleet managers, administrators and drivers. In particular, sharply rising total costs of ownership are expected to boost demand for these services in the years to come. Fleet management solutions, for instance, offer vast opportunities to increase fleet fuel economy through telematics and vehicle management (e.g. avoiding traffic congestion, efficient tour planning). In addition, companies can use telematics to enhance driver productivity or maximize cargo space by efficiently allocating fleet vehicles. To counteract rising repair and maintenance costs, vehicle diagnostics and preventive maintenance tools can also avoid engine and other core component failures, which can lead to significant downtime and profit losses.

36 Competing in the Global Truck Industry Emerging Markets Spotlight 4 Focus on emerging truck markets All emerging markets are distinct Although commercial vehicle markets in Russia, India and China are all growing, there are key differences. All three emerging markets have distinct characteristics which make them unique. Just to mention a few, China distinguishes itself through its sharply fragmented company environment; the Indian market, on the other hand, is largely consolidated among three very dominant local manufacturers. The Russian market, meanwhile, is fairly Europeanized due to its relative proximity to the European market. Accessing any one of these markets will therefore require a highly-specific and market-tailored strategy. In the course of this chapter all markets will be analyzed according to the following key market elements: market structure & development competitive environment market characteristics globalization strategies. Characteristics of different market elements in the emerging truck markets MARKET STRUCTURE & DEVELOPMENT COMPETITIVE ENVIRONMENT MARKET CHARACTERISTICS GLOBALIZATION STRATEGIES Role of domestic manufacturers in the commercial vehicle market Impact of market cyclicality on domestic truck market sales and production Degree of market consolidation Competitive abilities of domestic vs. foreign truck manufacturers Customer demand for more sophisticated commercial vehicles Influence of Total Cost of Ownership on truck customer s purchase decision Demand for added-value services (e.g. car maintenance, repair services) Importance of fleet management solutions and telematics services Interest of global OEMs entering the domestic market Competitive abilities of emerging OEMs to succeed on the global truck market EMERGING MARKETS CHINA INDIA RUSSIA Key: no impact very low/weak low/weak high/strong very high/strong Source: KPMG International

China 37 4.1 China 4.1.1 Market structure & development China s commercial vehicle market achieves consistently high growth with less sophisticated trucks China the largest commercial vehicle market in the world since 2009 is still characterized by trucks with a relatively low level of technical maturity. It is dominated by a few large state-owned and some very small local manufacturers, accounting for around 98 percent of both domestic sales and production, with very slow consolidation. Until today the opportunities for global foreign truck manufacturers were mostly in a few highly-specialized niches, because competing with domestic manufacturers in the low-cost segment remains challenging. Technical standards and prices are still relatively low, since low transport costs are one of the most important drivers of the Chinese economy. The Chinese market has experienced consistently high growth in recent years. The strong growth of the overall economy in the last decade acted as the primary engine. In particular, the market for light commercial vehicles was not negatively affected by the worldwide financial and economic crisis or by the slight decline of GDP in 2008/2009. Instead, it posted an outright increase from around 2.9 million units to around 4.3 million units almost a 50 percent increase within 12 months. Of course, the government s stimulus package for the truck industry helped maintain growth during these years of crisis. Overall, new registrations of light commercial vehicles have approximately doubled within three years (2007 to 2010). The demand for light and cost-effective commercial vehicles for inner city delivery traffic and public transport should be another catalyst for continued growth in this segment. Although there was a slight decline in 2008, Chinese sales of heavy trucks (over 6 tons) suffered only slightly from the global downturn compared to the Triad markets and other emerging markets such as India and Russia. Even then, the market recovered briskly. In 2010 commercial vehicles sales passed the one million mark for the first time, thanks not least to the booming Chinese construction sector. Since 2006 the domestic truck production has constantly exceeded the domestic sales volume Interestingly, China s domestic production volumes consistently exceeded commercial vehicle sales between 2006-2010. Forecasts show that this will remain the case for the next few years, too. Furthermore, current export volumes of domestic Chinese manufacturers are negligible. Dongfeng, for instance, exported as few as 2,000 of the 300,000 heavy trucks it produced in 2010. It is clear that any further increase in production capacity could actually lead to overcapacity if current growth patterns cannot be maintained. Domestic vs. foreign sales and production Sales 2010 97.9% 2.1% 98.2% 1.8% Production 2010 Source: IHS Automotive, KPMG International Domestic Foreign Domestic Foreign Light commercial vehicles dominate the Chinese truck market and are posting steady growth.

38 Competing in the Global Truck Industry Emerging Markets Spotlight Sales and production in the Chinese commercial vehicle market (2006 2011) (in thousands) 8,000 Sales vs. GDP growth 16% 8,000 Production vs. GDP growth 16% 7,000 6,816 6,934 14% 7,000 6,921 6,933 14% 6,000 5,000 5,296 988 1,452 1,381 12% 10% 6,000 5,000 5,444 1,033 1,460 1,374 12% 10% 4,000 3,000 2,000 1,000 2,991 611 2,381 3,510 831 2,679 3,707 820 2,887 4,307 5,364 5,553 8% 6% 4% 2% 4,000 3,000 2,000 1,000 3,006 605 2,401 3,534 834 2,701 3,763 857 2,906 4,411 5,460 5,559 8% 6% 4% 2% 0 2006 2007 2008 2009 2010 2011f 0% 0 2006 2007 2008 2009 2010 2011f 0% LCV (< 6t) HCV (> 6t) GDP growth (real) LCV (< 6t) HCV (> 6t) GDP growth (real) Source: IHS Automotive, Deutsche Bank Research, KPMG International 4.1.2 Competitive Environment State-owned manufacturers clearly lead the Chinese commercial vehicle market. State-owned manufacturers are in intense competition with one another The largest commercial vehicle group in the Chinese market is the state-owned Chang an Automobile Group. Interestingly, in contrast to its competitors, Chang an is only active in the market for light commercial vehicles. It is closely followed by the full-line manufacturer Shanghai Automotive Industry Corporation (SAIC). Both sold more than one million commercial vehicles in 2010. The Dongfeng Motor Corporation, Beijing Automotive Industry Corporation (BAIC) and First Automobile Works (FAW) sold over half a million vehicles in the same year. Brilliance China Automotive, Anhui Jianghuai and Jiangling Motors are also among the top 10, but only represented in the market for light commercial vehicles. On the other hand, the China National Heavy Duty Truck Company (CNHTC) and the Torch Automotive Group, whose heavy trucks are distributed under the name Shaanxi Automotive, specialize in heavy trucks.

China 39 The growth rates of most of these manufacturers (15 to 60 percent in the last year alone) are extremely high compared to worldwide growth levels. In particular, CNHTC and Torch saw sales increase by more than 70 percent in 2010. Even the larger commercial vehicle groups were able to impressively increase their sales between 2009 to 2010, with growth rates generally exceeding 10 percent. In terms of branding strategies, the leading Chinese full-line manufacturers SAIC, BAIC and FAW increasingly rely on separate brands for each segment they serve. Accordingly, the Beijing Automotive Industry Corporation is present with Auman and EuroV in the heavy segment, while it serves the light segment with its Foton brand. In contrast, companies solely active in one commercial vehicle segment such as Torch, CNHTC (both HCV) or Jianghuai and Jiangling (both LCV) do not have multiple brands in their portfolios. Market share and market growth of the 10 largest commercial vehicle groups* 20% 18% 16% SAIC 1,2,3 1.187 CHANGAN 2,3,4 1.191 1 Full-line manufacturer 2 Multi-brand manufacturer 3 Domestic manufacturer 4 LCV manufacturer 5 HCV manufacturer Market Share CY 2010 14% 12% 10% 8% BAIC 1,2,3 728 FAW 1,2,3 531 DONGFENG 1,3 905 6% 4% 2% JIANGHUAI 3,4 195 BRILLIANCE-JINBEI 3,4 263 CNHTC 3,5 200 JIANGLING 3,4 124 TORCH 3,5 113 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% * Light commercial vehicles up to six tons + heavy commercial vehicles over six tons Source: IHS Automotive, KPMG International Growth CY09 vs. CY10 Bubble size = sales volume CY10 (in thousands) CY = calendar year

40 Competing in the Global Truck Industry Emerging Markets Spotlight The market for light commercial vehicles is particularly strong The market for commercial vehicles weighing less than six tons is dominated by four brands with a combined market share of close to 60 percent. With its Wuling brand, SGMW (Shanghai General Motors Wuling), a joint enterprise of General Motors and the SAIC Group, is the undisputed market leader, with a market share of over 20 percent. This is largely attributable to its minibuses and mini-pickups. Its largest competitor, Chang an, holds a 17 percent market share. A further 20 percent of the market is split among a number of other manufacturers with relatively small market shares. Top 10: New light commercial vehicle sales by brands (in thousands) Brand (Group) 2006 2007 2008 2009 2010 Wuling (SGMW/SAIC/GM) 420 520 610 1,005 1,150 Chang an 344 363 383 705 899 Dongfeng 200 245 301 427 605 Foton (BAIC) 302 335 343 500 562 Jinbei (Brilliance-Jinbei) 113 138 146 169 263 Jianghuai 111 125 117 148 195 Hafei (Chang an) 166 164 145 211 193 FAW 132 126 142 195 190 Jiangling 59 64 66 79 124 Yuejin (Nanjing Automotive) 51 45 41 55 107 YoY increase YoY decrease Source: IHS Automotive Dongfeng and FAW are competing head-to-head for market dominance in heavy commercial vehicles In heavy commercial vehicles, the two state-owned manufacturers, Dongfeng Motor (market share of around 21 percent) and FAW (market share around 19 percent), are the market leaders. Growth in this sector has been strong, particularly in 2010. Two other competing makes, CNHTC and Auman, have made particular progress in recent years. CNHTC nearly quadrupled its unit sales between 2006 and 2010. Similarly, Auman, a medium and heavy truck brand belonging to Beiqi Foton Motor (which in turn belongs to BAIC), increased its unit sales by approximately threefold over the same period. Top 10: New heavy commercial vehicle sales by brands (in thousands) Brand (Group) 2006 2007 2008 2009 2010 Dongfeng 145 180 175 193 299 FAW 130 164 157 181 273 CNHTC 54 85 96 116 200 Shaanxi Automotive (Torch) 43 68 55 62 113 Auman (Foton/BAIC) 36 63 60 85 104 Anhui Jianghuai 27 33 29 48 62 North Benz 10 15 23 26 46 Sichuan Nanjun 0 17 20 26 35 Chongqing Hongyan (SAIC) 18 24 22 20 33 King Long 10 13 15 22 31 YoY increase YoY decrease Source: IHS Automotive

China 41 BEIQI FOTON Interview with Shen Yang, Senior Director of Strategy and Development at Beiqi Foton Motor Co., Ltd. (China) Chinese brands will be successful The Chinese auto industry will reach maturity over the coming decades, according to Shen Yang, senior director of strategy and development at Beiqi Foton Motor Company. Moreover, he believes the affordability of locally-produced trucks will keep the domestic market healthy. In the commercial sector, buyers are interested in value for money, and generally Chinese brands cost one-third to one-half as much as foreign makes, says Shen. Foreign truck manufacturers, he notes, are hindered with larger R&D and manufacturing expenses, as well as rigid cost structures. Because of these higher costs, I don t think foreign OEMs will be able to take much market share from domestic manufacturers, says Shen. The commercial market is where Shen sees Foton continuing to prosper. We have a very powerful brand in commercial vehicles, he says. But that doesn t necessarily translate to passenger vehicles, where we lack a recognized image. Shen remains skeptical about the prospects of further government aid to strengthen the position of domestic manufacturers. Market demand will continue to drive the industry and value-for-money will continue to drive market demand. Chinese trucks are designed to cope with overload capability, allowing businesses to transport more goods per journey than regulations allow which has a positive economic impact for the customer. It s this understanding of local needs that give domestic OEMs an advantage over foreign developers. Emissions levels will become increasingly relevant because of their link to vehicle efficiency and fuel economy, but Shen sees no prospects for hybrid power train systems in the truck sector. Safety features will also continue to occupy a low place on the priority list, mirroring their minimal influence in the passenger vehicle sector. Shen is optimistic about Foton s ability to penetrate foreign markets. Last year, the company unveiled its 5+3+1 strategy: localize manufacturing in 5 fast-growing countries - India, Brazil, Mexico, Russia, and Thailand; launch business in 3 developed regions - Europe, North America, and Japan; with the 1 symbolizing a plan to crack the domestic passenger vehicle market by the middle of the decade. In terms of financial and technical capability, Shen believes Foton is more than ready to embark on these ambitious plans. Foton entered Mexico years ago by partnering with a local distributor. This contrasts with similar failed attempts by rival manufacturers. Certain manufacturers are shortsighted, says Shen. Entering a new market successfully is a long term strategy. You must make calculations not for one year, but for five or ten years. Companies can only do this if they are able to combine an entrepreneurial spirit with serious commitment.

42 Competing in the Global Truck Industry Emerging Markets Spotlight 4.1.3 Market characteristics CUSTOMER REQUIREMENTS TOTAL COST OF OWNERSHIP The government generally follows a cautious approach to keep fuel prices low level in favor of domestic consumers, but it will have to raise fuel prices to contain inflation. ADDED-VALUE SERVICES Main challenge for foreign manufacturers is the Chinese customer s low-cost focus The Chinese market is characterized by less sophisticated vehicle technology and compared to Western standards considerably lower customer expectations. Chinese customer demands for commercial vehicles focus mainly on functionality and purchase costs. Quality and safety standards are of little importance compared to Western Europe, for instance. Nevertheless, a slow shift towards appreciating total cost of ownership is looming, since not even China can avoid the global rise in fuel costs and wages. For cost and benefit reasons, the demand for alternative fuel technologies in China is still relatively low. Only larger metropolitan areas such as Beijing or Shanghai provide tax subsidies for purchasing environmentally-friendly commercial vehicles. One specific customer demand that has to be considered, however, is the tendency of Chinese commercial vehicle operators to drastically overload their trucks. Foreign commercial vehicle manufacturers must therefore take into account that their vehicles will have to bear a higher payload than originally intended. The initial purchase price is still prioritized over the lifecycle costs of a truck Until now, investment decisions of Chinese truck buyers have been only marginally influenced by the follow-up costs of truck purchases. For a long time, operating costs such as fuel, insurance, maintenance and wages had almost no impact on the economic decisions of Chinese truck owners. However, experts predict this will change in the future, as additional costs for trucks increase due to the enormous growth of the Chinese industry itself. For instance, recent demands for wage hikes are unlikely to be a short term phenomenon, and wages are likely to rise more rapidly in the years to come. According to the National Bureau of Statistics of China, the average wage of employed people has already experienced a compound annual growth rate of almost 15 percent in the first decade of this millennium. In metropolitan areas like Beijing or Shanghai, wages are almost twice as high as the national average. With this and state-set diesel prices at a record high due to rising global oil prices, truck operators profits are consistently shrinking. Considering the total lifetime costs of a truck will therefore become more important for Chinese truck buyers. Chinese truck customers will increasingly demand an extensive service network as the road infrastructure is rapidly developing In terms of traffic in tons per kilometer, road freight transport has seen enormous growth over the last 10 years, mostly because the Chinese government has been strongly committed to road construction. Between 2000 and 2010 the length of national highways grew by an impressive 2.5 million kilometers. The current four million kilometers is therefore certain to expand further. By 2020, the expressways primarily for inner- and inter-city traffic will also grow from 55,000 km to 85,000 km. Additionally, the Chinese government recently eliminated tolls for secondary highways. These and similar developments will help to achieve continuously strong growth in the road transport of goods. In contrast, the share of freight transport by rail declined dramatically over the last decade. In 2000, the transport of goods via train accounted for as much as 70 percent of total freight traffic. By 2010 it had dropped to less than 40 percent. In absolute terms, rail freight still grew by more than one billion tons per km, but it was overshadowed by the phenomenal growth in road freight, which exploded from

China 43 Freight traffic in China Traffic in million tons km 2000 2004 2005 2006 2007 2008 2009 2010 Transport of Goods by Road 612,940 784,090 869,320 975,425 1,135,469 3,286,819 3,718,882 4,300,543 Total share 30.7% 28.8% 29.5% 30.7% 32.2% 56.6% 59.5% 60.7% Transport of Goods by Railway 1,377,050 1,928,880 2,072,600 2,195,441 2,379,700 2,510,628 2,523,917 2,764,413 Total share 69.0% 70.9% 70.3% 69.0% 67.5% 43.2% 40.3% 39.0% Transport of Goods by Air 5,027 7,180 7,890 9,428 11,639 11,960 12,623 17,660 Total Traffic 1,995,017 2,720,150 2,949,810 3,180,294 3,526,808 5,809,407 6,255,422 7,082,616 Source: BRICS Joint Statistical Publication 2011, National Bureau of Statistics of China YoY increase YoY decrease 612 million tons per km to more than four billion in 2010. Although China s 12 th Five-Year Plan details an extension of the nationwide railway operational mileage to roughly 120,000 kilometers, a Chinese commercial vehicle market expert believes that rail will most likely only be a serious alternative for medium and heavy commercial vehicles on the densely populated east coast: In terms of commercial vehicle segments, the rail network, especially on the east coast, is a viable alternative to medium and heavy trucks. But LCVs predominantly used to serve rural areas with smaller goods will not be affected too much. George Kapitelli, Vice President, SAIC GM Wuling Automobile Co., Ltd. (SGMW) (China) In the end, improving roads will ultimately lead to longer freight transport distances. An extensive network of servicing stations for repairs and maintenance will therefore become increasingly important for the success of commercial vehicle manufacturers in China. Fleet management services are largely restricted to metropolitan areas and business hubs such as Beijing and Shanghai Since the 2008 Olympic Games and the World Expo in 2010, commercial vehicle customers in international business hubs like Beijing and Shanghai have become increasingly interested in fleet management services and GPS-enabled network logistics systems. Rural areas are unlikely to see much growth in this respect, because the critical mass of commercial vehicles needed to operate profitably will not be reached in the foreseeable future. Over recent years, since the majority of their global clients have investments in China, an increasing number of international players have begun offering fleet management solutions in China. One of the biggest auto-leasing companies in Europe, ALD Automotive, is already operating a Shanghai-based joint venture with China s leading steelmaker, Baosteel Group. The venture is aiming for a fleet of 10,000 vehicles by 2014. 4 An extensive servicing network will be a critical success factor for truck manufacturers in China. FLEET MANAGEMENT 4 SocGen, Baosteel forms China auto-leasing venture, Reuters, 2009

44 Competing in the Global Truck Industry Emerging Markets Spotlight 4.1.4 Globalization strategies MARKET ENTRY STRATEGIES FOR GLOBAL OEMs Market entry for global manufacturers is only possible through highly regulated joint ventures Market entry for foreign commercial vehicle manufacturers is substantially more difficult than in the passenger car sector, where prestigious Western brands can achieve a significant price premium over domestic vehicles. Foreign OEMs are limited to two joint ventures in the passenger and commercial vehicle sector in China, with a maximum of a 50 percent share in a joint venture. The joint venture must involve the establishment of a research and development institution in the country for a minimum of 500 million Yuan. The 50 percent share can be increased if a production site is constructed in China for a minimum of two billion Yuan. However, if the joint venture operates more than one brand and 30 sales offices, the Chinese joint venture partner remains the controlling partner. Interestingly, joint ventures are not required for companies solely focusing on exports. For setting up a purely export-oriented venture on Chinese soil, foreign companies only need obtain a State Council approval. In the domestic truck market, the Chinese government is not expected to strengthen current barriers to entry, since local manufacturers already dominate the market. Nevertheless, the tariff-based barriers to entry are substantially higher than in India or Russia. The commercial vehicle business in China is clearly dominated by local manufacturers, so it s not like they need additional support. George Kapitelli, Vice President, SAIC GM Wuling Automobile Co., Ltd. (SGMW) (China) Market entrants must comply with the rigorous requirements of the Chinese regulatory environment. Volvo, Daimler, MAN and GM maintain commercial vehicle joint ventures in China. The Chinese government is attempting to increase local content A company must comply with rigid local content provisions to operate in China. A maximum of 60 percent of the key parts of a vehicle produced in China can be imported; the remainder must be procured from local suppliers. If the foreign portion exceeds 60 percent, a customs duty is imposed at the rate for imported parts, substantially higher than the rate for motor vehicle parts. After joining the WTO, the Chinese government reduced import customs duties on vehicles from 80 percent in 2001 to 25 percent by 2006 (motor vehicle parts: 10 percent), and all import quotas were abolished in 2005. In addition, every company registered as a foreign vehicle producer automatically receives an import license. Western commercial vehicle manufacturers are investing heavily in joint ventures A large number of commercial vehicle manufacturers in China have formed joint ventures. In 2000, for example, Volvo formed a joint venture with China National Heavy Duty Truck Corporation (CNHTC), producing trucks under the name of Jinan Huawo Truck Corporation. Daimler agreed to enter into a joint venture with BAIC s subsidiary Beiqi Foton in 2008. In 2009, German-based MAN invested in the Chinese state-owned enterprise Sinotruk. MAN holds an equity interest of 25 percent plus one share in the CNHTC Group affiliate, a manufacturer of heavy trucks in China. The two partners will jointly

China 45 develop a new truck series based on MAN technology. Sinotruk will distribute the trucks in China, while MAN will receive the exclusive distribution rights for export. GM has operated in the commercial vehicle sector since 2002. The joint venture with Chinese partners Shanghai Automotive Industry Corporation (SAIC) and Liuzhou Wuling Motors is called SGMW (SAIC General Motors Wuling). Whereas Daimler, MAN and Volvo are focused on medium to heavy commercial vehicles, SGMW has focused with great success on light commercial vehicles, such as small vans and buses. With the exception of SGMW, which is a market leader in light commercial vehicles, none of the foreign OEM s joint enterprises have been able to develop a significant market position to date. In fact, few co-operation efforts will lead to significant output, as long as Chinese customers remain unwilling to pay a substantial price premium for a Chinese truck equipped with a Western engine. It is not only Western manufacturers who are showing an increased interest in producing commercial vehicles in China. The South Korean Hyundai Motor Group recently announced its plan to create a 50:50 commercial vehicle joint venture with Sichuan Nanjun, a Chinese company which produces mainly trucks, buses and auto parts. The joint venture, Sichuan Hyundai Motor Company, is aiming for an annual production capacity of 160,000 commercial vehicles (150,000 trucks and 10,000 buses) by 2013. Foreign manufacturers only fill the market niche for highly-specialized trucks but competing in the low-cost segment will ultimately determine future success In the heavy truck segment, Chinese manufacturers are unable to fully meet customer demands. Therefore, foreign OEMs identify considerable potential in specialized areas, such as the transport of hazardous goods or construction, where reliability and stability are crucial. Conversely, in the low-cost segment, it is extremely difficult for Western brands to compete on price, even with established non-chinese manufacturers such as Hino (a Toyota brand) from Japan. These manufacturers already have a well-developed market position and their products serve a premium segment at substantially lower prices. A premium segment at Western levels will probably develop in major Chinese metropolitan centers with large professional fleet operators, and in the light commercial vehicle segment. Western manufacturers must cut costs and offer substantially cheaper trucks to succeed in the Chinese low-cost segment. Buyers are interested in value for money, and generally Chinese brands cost one-third to one-half as much as foreign makes. A Mercedes-Benz Actros, for example, can be three-times as expensive as a Foton Auman truck. From a total cost of ownership point of view, there is no reason for ordinary Chinese customers to buy a Western truck. Shen Yang, Senior Director of Strategy and Development, Beiqi Foton Motor Co., Ltd. (China)

46 Competing in the Global Truck Industry Emerging Markets Spotlight GLOBALIZATION EFFORTS BY EMERGING OEMs Preferred export regions include Brazil, Mexico, India, Russia, Southeast Asia and African countries. Chinese commercial vehicle manufacturers plan to expand their export activities Chinese manufacturers have shown relatively little interest in exports, largely because domestic demand has exceeded production for many years. Recently, however, several companies have set their sights on world markets. Until 2015 it is predicted that one in every five trucks manufactured in China is made for export. Based on today s production volumes, this would mean an overwhelming export volume of more than 1 million units per year by then. Earlier attempts by Chinese manufacturers to act alone in foreign markets have met with little success, even within similarly developing markets. Preferred export nations currently include Brazil, India, Mexico and Russia, as well as Southeast Asia and several countries in Africa. Exported unit figures remain extremely low. For example, Beiqi Foton sold only around 10,000 units in South America (Columbia, Peru), North Africa (Egypt), the Middle East and neighboring Asian countries in 2010. Establishing service networks and adapting to differing national needs have so far proved insurmountable hurdles. In addition to partnerships with established players, Chinese OEMs must rely on extremely competitive prices, because they cannot yet compete in terms of modern diesel technology, safety and quality standards. Firstly, we will try to compete on price in foreign markets. In a second step, we also intend to improve our service quality. Compared to quality or safety improvements, for instance, better service can be implemented quite quickly at relatively low cost but with very high value for customers. Shen Yang, Senior Director of Strategy and Development, Beiqi Foton Motor Co., Ltd. (China) It could take one or two cycles for them to compete fully, but we should not underestimate them [Chinese OEMs] in any way. Dee Kapur, President of the Truck Group, Navistar International Corporation (USA) Chinese truck manufacturer First Automobile Works (FAW) attempt to crack the Mexican market is a prominent example of a less successful globalization attempt. In 2007, FAW signed a joint venture with Mexican Grupo Salinas, initially to import Chinese trucks. Later, the construction of the joint venture s own plant in Southern Mexico was planned, which would also have served Latin America. Mexico s membership of NAFTA would also have eased entry into the US market. However, the joint venture faltered because the demands on foreign OEMs (investment in a factory of at least $100m, with an output of at least 50,000 vehicles annually) were unrealistic given an expected sales volume of only 5,000 units. Conversely, FAW s Chinese competitor, Foton, launched an investment in Mexico in mid-2010 and announced the construction of a factory with a volume of at least 50,000 units. The primary plan is to produce light commercial vehicles for the local, US and South American market. For Foton, this project triggers a broad globalization program including planned plants in Brazil, India, Thailand and Russia with the goal of becoming the world s largest commercial vehicle manufacturer by 2020. As a next step, Foton recently signed a memorandum of understanding to build an assembly plant in Maharashtra, India. The company plans to build trucks, buses, pickups, SUVs and minivans. 5 5 Chinese commercial vehicle maker plans India plant, Automotive News China, 2011

China 47 SGMW Interview with George Kapitelli, Vice President at SAIC GM Wuling Automobile Co., Ltd. (SGMW) (China) Successful strategies for entering foreign markets The Chinese truck industry is at a turning point, driven by growing domestic affluence, the rise of environmental issues, and foreign partnerships. That s the view of SGMW vice president George Kapitelli. As the country s economy continues to grow, more Chinese truck manufacturers are exploring foreign markets. Recognizing the potential of these expanding horizons, the Chinese government is supporting consolidation, encouraging firms to develop economies of scale, generate synergies and grow their capabilities. Commenting on his company s partnership with General Motors, Kapitelli says the benefits of the joint venture (JV) have been significant. When the JV was formed in 2002, SGMW was a small Mini Commercial Vehicle (MCV) manufacturer and predominately a regional player selling close to 150,000 units with a market share of 18.8 percent. If you look at 2010, the MCV share was at 40 percent and sales exceeded 1.2 million vehicles. That s significant growth. The JV structure added value in terms of technology, management strategy, staff development and operational processes. Kapitelli says tactical JVs can also ease access into foreign markets for domestic Chinese manufacturers. Under GM s widely-recognized Chevrolet banner, SGMW has already begun distributing its vehicles to new markets such as South America, North Africa, and the Middle East. Kapitelli believes Chinese manufacturers will become significant global players within 10 to 15 years, emulating their Korean and Japanese counterparts in the 1970s and 1980s. Attractiveness of the passenger car market for a light commercial vehicle producer The low cost of locally-manufactured commercial vehicles means the domestic industry can still hold its own against foreign imports, accounting for more than 90 percent of the market. In contrast, private passenger vehicles in China are being increasingly squeezed by international rivals, with local manufacturers only claiming one-third of sales. On the environmental side, Kapitelli says the government is dedicated to raising the emissions standards of Chinese vehicles to match Western levels. At the same time, Chinese consumers are becoming more environmentally aware, and now have greater expectations of auto manufacturers. The demand for greener vehicles was further boosted in 2010 with the introduction of a new grant for buyers of fuel-efficient vehicles, which can reduce the net purchase price by 5 10 percent for a low-end passenger car. The passenger vehicle market is one SGMW plans to target aggressively. Its forthcoming Baojun 630 sedan is set to complement the company s current Lechi mini-car, and additional releases are expected across the passenger car range. Kapitelli believes SGMW s experience in the commercial market has set a solid foundation to exploit the passenger sector. He expects shared knowledge, in terms of production skills and sales strategies will help stimulate both sides of the business. A trend towards diversification of this kind is already emerging. Chery, for example, hit the headlines when it launched a series of minivans and pickups under the Karry brand.

48 Competing in the Global Truck Industry Emerging Markets Spotlight 4.2 India Domestic vs. foreign sales and production 9.2% 8.0% Sales 2010 90.8% Production 2010 92.0% Source: IHS Automotive, KPMG International Domestic Foreign Domestic Foreign Five Indian manufacturers share 90 percent of the Indian truck market. 4.2.1 Market structure & development The Indian truck market, dominated by local manufacturers, is still developing its product offerings from a technology standpoint As in China, low-cost trucks dominate the Indian market. However, India has been subject to slightly stronger fluctuations in terms of commercial vehicle development. One peculiarity of the Indian market structure is the high percentage of light trucks, which visibly dominate the streetscapes of major Indian cities. The Indian market is already largely consolidated, with a 90 percent market share split between only a few local manufacturers. This results in an extremely small selection of potential cooperation partners for Western manufacturers. Nevertheless, foreign manufacturers produce just under 10 percent of the commercial vehicles on Indian soil. As in China, the Indian segment for heavy trucks was more heavily affected by the financial crisis than light commercial vehicles, with declines posted in 2008 and 2009 on both the sales and production side. Since this decline, during which GDP growth fell to around six percent, India s economy has rallied, with economic growth of about nine percent. Recovery in the construction and agricultural sectors has further increased the demand for heavy trucks. Since the service sector also posted a particularly strong growth, due to an increasingly organized retail sector and higher spending, the demand for light commercial vehicles rose to an all-time high in 2010. From 2007 to 2010, the market in India for medium and heavy trucks increased by more than 15 percent, with light commercial vehicles up 57 percent. Bus demand has also soared as the most popular means of transportation in large inner cities, as opposed to the train and subway connections for China s metropolitan commuters. Looking at recent sales and production volumes, India is as prone to overcapacity as China. In fact, India s commercial vehicle production exceeded domestic sales between 2006 2010 and is expected to continue to do so between 2011 2012. Sales and production in the Indian commercial vehicle market (2006 2011) (in thousands) Sales vs. GDP growth Production vs. GDP growth 1,400 1,200 1,000 800 600 400 200 641 267 374 704 273 431 669 225 445 728 202 526 994 318 676 1,173 383 790 12% 10% 8% 6% 4% 2% 1,400 1,200 1,000 800 600 400 200 700 283 416 786 295 491 714 247 467 741 203 538 1,073 341 732 1,264 419 844 12% 10% 8% 6% 4% 2% 0 2006 2007 2008 2009 2010 2011f 0% 0 2006 2007 2008 2009 2010 2011f 0% LCV (< 6t) HCV (> 6t) GDP growth (real) LCV (< 6t) HCV (> 6t) GDP growth (real) Source: IHS Automotive, Deutsche Bank Research, KPMG International

India 49 4.2.2 Competitive environment Tata Motors tops the market for both light and heavy commercial vehicles With a market share of nearly 50 percent, Tata Motors underscored its top position in 2010 as the largest provider and market leader across all commercial vehicle segments. Tata sold over 12.000 units more in the light truck segment than the Mahindra & Mahindra Group and more than three times as many trucks over 6 tons as its closest heavy duty segment competitor, Ashok Leyland. Tata gained renown in Europe after its acquisition of Jaguar and Land Rover in 2008, as well as the production of the ultra-low-cost Tata Nano car. Apart from Tata Motors and Mahindra, the substantially smaller manufacturer groups Eicher Motors (market share: ~4 percent) and Force Motors (market share: ~3 percent) also offer both light and heavy commercial vehicles domestically. Tata Motors is trailed by some distance by Mahindra in the LCV segment and Ashok Leyland in the HCV segment. Market share and market growth of the 10 largest commercial vehicle groups* 60% 50% TATA MOTORS 1,3 472,709 1 Full-line manufacturer 2 Multi-brand manufacturer 3 Domestic manufacturer 4 LCV manufacturer 5 HCV manufacturer Market Share CY 2010 40% 30% MAHINDRA & MAHINDRA 1,3 271,878 20% ASHOK LEYLAND 3,5 79,696 PIAGGIO 4 9,553 10% TOYOTA 1,2 51,324 GM 1,2 18,449 SWARAJ MAZDA 3,5 7,142 FORCE MOTORS 1,3 29,970 EICHER MOTORS 1,3 35,464 ASIA MOTOR WORKS 3,5 6,074-10% 10% 30% 50% 70% 90% 110% 130% Growth CY09 vs. CY10 *Light commercial vehicles up to six tons + heavy commercial vehicles over six tons Source: IHS Automotive, KPMG International Bubble size = sales volume CY10 CY = calender year

50 Competing in the Global Truck Industry Emerging Markets Spotlight Heavy duty specialist Ashok Leyland will also be able to cover the light commercial segment by the end of this year. The Chennai-based OEM agreed to build its first light commercial vehicle, the Ashok Leyland DOST, in a 50:50 joint venture with the Japanese Nissan Motor Company. The start of production in Ashok Leyland s Hosur manufacturing plant is planned for the second quarter of FY 2011-2012. 6 Only three foreign manufacturers (Toyota, GM and Piaggio) are in the top 10 in India. Although the Indian market is largely locally dominated, unlike China there are at least a few foreign manufacturers, such as Toyota, GM and Piaggio, which have been able to claim a place among the country s ten largest commercial vehicle manufacturers. 7 Since the Indian market opened up in the early 1990s, the most successful foreign manufacturer has been Toyota. The Japanese global market leader has already achieved third place in the market for light commercial vehicles (including MPVs); however, in the market for heavy trucks, Toyota is only represented in extremely small unit quantities with its Hino brand. Growth rates are high among almost all manufacturers from 2009 to 2010, with some well in excess of 20 percent. With a percentage growth of nearly 90 percent, Ashok Leyland, specializing in heavy-load vehicles, made the largest jump. Only the European Piaggio Group, a manufacturer of predominantly three-wheeled light commercial vehicles, faced a decline, falling five percent after a relatively successful market entry in 2007. Despite the continuing low-cost focus, this can be blamed on a slight sophistication of the commercial vehicle market in India which should continue over the next few years. Few commercial vehicle manufacturers in India follow multi-brand strategies Because of the low-level of development within the Indian market, local truck manufacturers avoid using different brand names. Compared to China, where several leading manufacturers have already introduced multiple brands, even fullline manufacturers Tata, Eicher and Force Motors, despite their activities in both market segments, choose not to differentiate their products in terms of brand strategy. Only Toyota is represented in the heavy truck segment with its own global brand, Hino. With the introduction of its own Indian brand, BharatBenz, Daimler is treading a new path in this market and plans to significantly increase its market share with its localized brand. Top 10: New light commercial vehicle sales by brands Brand (Group) 2006 2007 2008 2009 2010 Tata Motors 164,024 181,567 205,497 220,243 284,049 Mahindra & Mahindra 121,179 151,078 141,969 215,414 271,631 Toyota 40,184 46,527 44,069 42,003 51,304 Force Motors 11,058 10,950 15,118 14,100 23,949 Chevrolet (GM) 21,297 21,866 15,617 13,321 18,449 Piaggio - 2,575 9,599 10,008 9,553 Eicher Motors 6,860 6,219 4,032 4,696 7,243 Maruti (Suzuki) 3,443 3,037 6,102 4,867 5,697 Premier - - - - 3,093 Sonalika 4,425 7,195 2,888 1,398 707 Source: IHS Automotive YoY increase YoY decrease 6 Ashok Leyland-Nissan JV unveil first LCV model, BharatAutos.com, 2011 7 Please note: Indian LCV sales figures in this report also include Medium Passenger Vehicles (MPVs), General Motors and Toyota largely sell MPVs in India, which are primarily passenger vehicles, but can also be used for commercial purposes and are therefore included

India 51 Top10: New heavy commercial vehicle sales by brands Brand (Group) 2006 2007 2008 2009 2010 Tata Motors 164,873 165,892 134,158 128,101 188,660 Ashok Leyland 72,874 72,924 61,512 42,529 79,696 Eicher Motors 18,036 21,870 16,082 16,903 28,221 Swaraj Mazda 10,315 10,951 8,189 4,954 7,142 Asia Motor Works - - 1,959 3,319 6,074 Force Motors - - - 4,268 6,021 Volvo Trucks 858 1,031 1,270 1,444 1,663 Mahindra & Mahindra - - - - 247 Mercedes-Benz (Daimler) - - 205 230 165 Scania (VW) - - 135 112 165 Source: IHS Automotive YoY increase YoY decrease The Indian market will continue to show strong growth in the coming years Two factors assure rising demand for commercial vehicles and, in particular, for heavy trucks in India. The construction sector will continue to experience dynamic growth, and the road network will be substantially improved. Already, the Indian government has introduced a state program for upgrading and building roads and strengthening harbor connections. National highways, which comprise only about 2 percent of the road network but carry 40 percent of the traffic, will be particularly important. By connecting more rural areas to the road network, the need for commercial vehicles outside large metropolitan areas will rise. A booming construction sector and large-scale infrastructure programs promise great growth potential. 4.2.3 Market characteristics Stricter emission standards will lead to a slight increase in technological sophistication Just like in China and Russia, technological demands in India will slowly rise to meet a tightening of environmental legislation. However, in contrast to its emerging markets peers India s plans to restrict emissions are not as advanced, while China and Russia plan to implement nationwide Euro V equivalent norms until 2012 and 2014 respectively. Despite the introduction of Euro IV equivalent measures in the National Capital Region of Delhi and other 11 metropolitan areas, India has not announced any further nationwide measures above Bharat Stage III (Euro III) until today (see p. 20). To keep up with technically more experienced foreign manufacturers, local manufacturers will increasingly have to offer vehicles compliant with Euro IV-equivalent emissions limits - at least in the National Capital Region and other metropolitan areas like Chennai, Mumbai and Kolkata. This slightly increasing regulatory stringency will slowly but steady force the technological development of Indian manufacturers. CUSTOMER REQUIREMENTS

52 Competing in the Global Truck Industry Emerging Markets Spotlight In 2010, we saw many cities moving from Euro III to Euro IV and the rest of the country going from Euro II to Euro III. Emissions standards are an area where we clearly have to advance and be better prepared. Ravi Pisharody, President (Commercial Vehicle Business Unit), Tata Motors Ltd. (India) TOTAL COST OF OWNERSHIP ADDED-VALUE SERVICES Market leader Tata is already experimenting with a series of hybrid buses in Delhi and Mumbai. Without considerable subsidies from the Indian government, however, such field tests as in the Western markets will not initially find wider acceptance. Although India is clearly a low-cost truck market, some customer segments already think about follow-up costs Indian customers are gradually coming into contact with technologically more sophisticated products from foreign OEMs. A shift in customer demand towards greater quality, safety and reliability therefore seems likely in certain segments over the coming years. The main drivers for increased sophistication are large fleet operators and state-owned bus companies, which already expect a higher level of reliability and quality at a reasonable lifecycle cost. Additionally, economic indicators show previously neglected aspects of TCO for Indian customers, such as fuel cost, will gain in importance over the coming years: Fuel price is a highly political issue in India. Fuel reforms enacted in June 2010 linking petrol prices in India to the market were controversially discussed. By freeing up petrol prices, the government hiked the cost of other fuels such as diesel, primarily used for commercial vehicles. For instance, from 2000 to 2010, the price for one liter of diesel in India s capital Delhi soared by almost 170 percent. Poor road conditions in India make robust, easy-to-fix trucks essential India s road network density with 0.79 km of highway per square kilometer of land is much greater than China s (0.42) or Russia s (0.04). 8 Although most highways are narrow and congested with poor surface quality, roads have always been the dominant mode of transport in India, accounting for around 60% of the total freight transport volume. Just like in China, freight traffic by air is almost negligible. Freight traffic in India Traffic in million tons km 2004 2005 2006 2007 2008 2009 2010 Transport of Goods by Road 646,000 658,900 766,200 820,217 873,736 929,689 1,016,151 Total share 61.1% 61.5% 61.3% 60.9% 60.5% 60.1% 60.1% Transport of Goods by Railway 411,300 411,800 483,400 526,488 570,686 616,962 673,195 Total share 38.9% 38.4% 38.7% 39.1% 39.5% 39.9% 39.8% Transport of Goods by Air 547 548 580 769 871 860 1,076 Total Traffic 1,057,847 1,071,248 1,250,180 1,347,474 1,445,293 1,547,511 1,690,422 Source: Datamonitor, Freight Transport in India, 2011 YoY increase YoY decrease 8 BRICS Joint Statistical Publication 2011, National Bureau of Statistics of China

India 53 Due to the long-standing history of poor quality roads and low customer expectations, Indian trucks are technically unsophisticated and are mainly operated by owner-drivers who typically take care of their truck s maintenance and repair themselves. Value-added services around truck repair and maintenance are therefore of low priority. However, the increasing awareness of TCO could push reliability and maintenance costs more into focus. High share of owner-drivers narrows the potential for fleet management solutions in India Because of Indian fleet ownership patterns, the truck market has been highly fragmented. According to the Indian Foundation of Transport Research and Training (IFTRT), 80 percent of truck operators are small, owning less than 10 trucks. Among these small operators, a large number of owner-drivers transport goods with a single truck. Unusually, the Indian transport industry is mostly organized by transport middlemen or goods booking agents. Those companies are largely nonfleet owning in nature, and hire truck capacity from the smaller truck operators or owner-drivers. Economic fleet management services require a critical mass of operated trucks, so offering these services in India is reasonably challenging. Because of the ownership patterns described above, wide-scale fleet management solutions are unlikely in India. Only 10 percent of Indian truck operators own a fleet greater than 25 trucks, and only 1-2 percent own between 200-1,000 trucks. 9 Furthermore, high operating costs, and a poor communication infrastructure outside metropolitan areas, restricts fleet management opportunities. Nevertheless, Indian market leader Tata Motors has launched a commercial fleet management system called TRAKit for their range of commercial vehicles. TRAKit is a low-cost solution tailored to Indian truck market conditions and fleet ownership patterns, with which vehicle and fleet operators can stay connected to their vehicles, while they are in transit. FLEET MANAGEMENT The market in India is still quite fragmented, but in the medium and heavy commercial vehicles sector there are more fleets emerging, and these larger customers will become the important ones. Ravi Pisharody, President (Commercial Vehicle Business Unit), Tata Motors Ltd. (India) 9 Indian Foundation of Transport Research and Training (IFTRT), 2010

54 Competing in the Global Truck Industry Emerging Markets Spotlight 4.2.4 Globalization strategies MARKET ENTRY STRATEGIES FOR GLOBAL OEMs Simple import regulations, low customs duties and the absence of local content regulations substantially ease market entry for foreign manufacturers. GLOBALIZATION EFFORTS BY EMERGING OEMs With the acquisition of Daewoo, Tata is also attempting to establish itself on the global market. Constantly declining state regulation is making India increasingly attractive for global manufacturers With the conversion from a planned to a market economy, India has been gradually reducing protectionist measures since the early 1990s. The automobile industry has completely opened up to foreign investments. Import regulations and customs duties no longer constitute a true barrier for CKD and CBU 10 production. Daimler is one international commercial vehicle manufacturer making a market entry into India. The company terminated its previous joint venture with Indian manufacturer Hero. Instead, Daimler has formed a subsidiary, Daimler India Commercial Vehicles, and recently announced its own brand for the Indian market BharatBenz. Volvo Trucks is taking a different path. Under its VE Commercial Vehicles joint venture with Eicher Motors in 2008, Volvo s heavy-class trucks will be offered in India in addition to trucks and buses already provided by Eicher. The decades of isolation of the Indian market, which led to local manufacturers establishing a well-structured dealer and service network, presents a challenge for foreign manufacturers. New brands must compete with household names such as Tata, Mahindra, Ashok Leyland, Eicher and Force. Manufacturers entering the country must first of all familiarize themselves with the complex rules and state structures. The globalization activities of Indian manufacturers have been modest to date The fast-growing local market offers minimal incentive for Indian OEMs to turn their attentions overseas. Their focus is now on developing individual niche products that might generate a certain level of demand in foreign markets. Southeast Asia has been the focus of all export activities to date. In recent years, however, there has been a growing trend of Indian manufacturers attempting to expand further afield. This has been spearheaded by the two market leaders, Tata Motors and Mahindra & Mahindra, who are focusing on markets which have trends in common with India. Nevertheless, Tata Motors is already the fourth-largest heavy duty truck manufacturer in the world today. The company operates in Europe, Southeast Asia, the Middle East, South America and Africa. However, Tata Motors employs differing strategies for each. In the European automobile sector, it operates almost exclusively through its two premium brands, Jaguar and Land Rover, which it acquired in 2008. The focus throughout the rest of the world is on commercial vehicles. Tata Motors already maintains joint ventures on the African continent (Kenya, Senegal and South Africa), and also in Russia and Ukraine. In addition to India and China, the focus in Asia is on South Korea (the commercial vehicle arm of Daewoo was acquired in 2005), Thailand and Bangladesh. Consequently, the Tata brand has increased its global recognition in recent years via a series of successful business activities. Conversely, globalization attempts by other Indian manufacturers have failed, mainly due to the small product portfolio and lack of financing. It will take quite some time before brands from Asia will reach the technology standards and especially the quality image to have a breakthrough in Western markets. Ravi Pisharody, President (Commercial Vehicle Business Unit), Tata Motors Ltd. (India) 10 CKD completely knocked down; CBU completely built up

India 55 TATA MOTORS Interview with Ravi Pisharody, President (Commercial Vehicle Business Unit) at Tata Motors Ltd. (India) A promising outlook for the Indian truck market Ravi Pisharody, president (commercial vehicle business unit) of Tata Motors Ltd, is predicting an exciting year for the truck business globally in 2011, particularly in India. The industry in India has already witnessed 25 percent growth in 2010, and this trend is expected to continue over the next four to five years, in the region of 15 to 20 percent annually. Similarly hopeful estimates were being made in 2008, just before the global recession hit. However, the rate of recovery in the Indian truck market has surprised many observers, and the upward trajectory is expected to be maintained. Pisharody says this is good news for other large developing markets. Brazil, Latin America and China are following similar patterns, and competition in these markets will be tough, he says. In contrast, recovery in Europe and North America is slower and might take another two or three years to come back fully. Tata is positioning itself to capitalize on this growth. It plans to keep its truck range as diverse as possible, using its high profile in the domestic market to further stimulate sales. It has also invested heavily in the passenger vehicle side of its business. In India, Pisharody expects few government interventions to safeguard domestic manufacturers, such as trade barriers or import regulations. This is despite a constant trickle of foreign OEMs, such as Daimler Trucks, investing in India. Indian government policies are fairly open, says Pisharody. We re going to see a lot of global players coming between 2011 and 2013. He believes Indian manufacturers have had ample warning about this influx of foreign rivals, and in many cases local firms are already developing, manufacturing and marketing products closer to global specifications. Strong customer links in India, sometimes stretching back generations, will help protect domestic firms ultimately motivating them to raise their standards further. A unique factor in India is the preoccupation with low price, he says. However, customers are becoming more educated about the total cost of ownership things like reliability and repair costs. This sort of thinking will shape the future. In a world still recovering from economic collapse, Pisharody expects this cost-conscious concept will enable more Indian producers to get a foothold in global markets. Already Tata is expanding overseas, with operations in the Middle East and Africa, among others. Latin America presents another opportunity and Pisharody believes there are significant synergies with the company s current product range. But the overseas expansion of Indian OEMs is expected to be slow and steady, rather than a stampede. If you look at Europe, not even American brands sell many vehicles there, so it ll be some time yet before brands from Asia acquire the technology and image to enter those markets strongly, he says.

56 Competing in the Global Truck Industry Emerging Markets Spotlight Insight Trucks in As mentioned in previous chapters, Africa plays an interesting role in the expansion strategies of truck OEMs from emerging markets like China and India. Largely because the market environment and customer preferences are similar to their respective home markets, these OEMs are trying to enter the African continent, either to produce vehicles for the market itself, or to establish a hub for further expansion into regions such as Europe. Market structure & development After a period of growth, the African truck market faced strong declines in 2008 and 2009, like the rest of the world. For instance, South Africa, the continent s largest truck market, was hit by a decline of over 40 percent between 2007 and 2009. Since 2010, the African truck industry is recovering from the crisis and besides being extensively covered by mature market OEMs increasingly becoming a promising testing ground for emerging OEMs from China and India. Besides South Africa, Northern African states such as Egypt, Morocco, Tunisia and Algeria are offering interesting opportunities for OEMs to leverage a low-cost base for production, bolstering their global commercial vehicle sales. Market characteristics Political and historical conflicts continue to influence the development of many African countries. Therefore, the African continent is only partially developed. In vast parts of the continent, the economy and the road infrastructure are very rudimentary. Even in South Africa, which can be considered the most developed country, road infrastructure is still scarce. In Africa, truck manufacturers generally sell their trucks and aftermarket parts to independent local distribution networks or single dealers. However, trucks are essentially custom products, with dealers commonly ordering to end-user specifications. Typical African end-users are small fleet and ownerdriver operators; they are relatively price sensitive and always seeking ways to

Competing in the Global Truck Industry Emerging Markets Spotlight 57 Africa cut costs under the continent s tough economic conditions. The resulting price competition within the African truck market places increasing pressure on European and American manufacturers, because Chinese, Indian and Russian manufacturers can sell their trucks at much lower prices. On the other side African truck customers still have a preference for reliable and long lasting used trucks. Used trucks are of special importance because small and medium sized companies traditionally replace their old truck fleets with secondhand vehicles. This offers greater potential for Western OEMs, which enjoy a better reputation among African customers compared to their emerging markets competitors. Reliable used trucks from Europe stand a good chance of spending another lifecycle on African roads. Market entry strategies Many Western OEMs entered the African continent at the end of the last century. Consequently, global OEMs from the Triad markets account for the main share of trucks sold. For instance, to directly cater to the continent s truck markets, Volvo Trucks operates plants in Morocco, Tunisia, and South Africa. Daimler Trucks is also engaged in South Africa, where it operates plants for complete truck assembly, manufacturing truck components, as well producing chassis for Mercedes- Benz busses. Interestingly, the global German supplier ZF Friedrichshafen formed a joint venture with the SNVI (Société Nationale des Véhicules Industriels) in Algeria in 2004. Since then, the company ZF Algérie has leveraged the low-cost base in the North African country and produces vehicle transmissions for commercial vehicles. Chinese and Indian manufacturers increasingly aim to expand their exports to Africa. The main features of their trucks (such as the ability to handle heavy road conditions and overload) fit African demands extremely well. Besides selling trucks in the region, emerging OEMs also see Africa as an ideal testing ground for the expansion of their global production footprint. Tata Motors, for example, not only sells its trucks in eleven African countries, but has also operated a bus body assembly plant in South Africa since September 2010, and plans to start producing small and medium sized trucks in the country for 2011. Another example is China s Beiqi Foton, which recently began constructing a North Africa production base in Kenya. Assembly is planned to start in 2012, with an annual production capacity of about 10,000 units.

58 Competing in the Global Truck Industry Emerging Markets Spotlight 4.3 Russia 4.3.1 Market structure & development Domestic vs. foreign sales and production Russia s commercial vehicle market is heavily influenced by Europe but still largely defined by low technical standards Due to its geographical proximity, the Russian market more closely resembles the European models than Indian and Chinese models. In general, this means there should be greater opportunities for premium trucks. Although technically-simple trucks continue to dominate, in 2010 close to 30 percent of domestic truck demand was attributable to foreign providers. The heavy political influence, however, means local manufacturers still account for over 80 percent of domestic truck production. The reluctance of foreign manufacturers to produce vehicles in Russia means that, traditionally, Russia is the only one of the three emerging countries in this report to meet its excess demand with imported Western trucks and is not likely to face serious overcapacity any time soon. 28.2% 16.2% Sales 2010 Production 2010 71.8% 83.8% Source: IHS Automotive, KPMG International Around 30 percent of internal demand is attributable to foreign manufacturers. Domestic Foreign Domestic Foreign In 3 years imported trucks will most probably make up 40 50 percent of the Russian truck market. Premium trucks will primarily come from Europe, while the lowcost segment will be dominated by Chinese manufacturers. Ashot Aroutunyan, Director of Marketing and Advertising, KAMAZ OAO (Russia) The Russian commercial vehicle market suffered dramatic losses due to the global downturn As a result of the financial and economic crisis, the Russian market suffered more than other emerging commercial vehicle markets. Before the crisis, the market for light commercial vehicles was growing. By 2008 this growth was slowing, and in 2009 the market totally collapsed, losing more than 50 percent of its pre-2008 volume. Sales were growing again by 2010, but even with growth rates of around 28 percent, the market for light commercial vehicles is still far from its pre-crisis level. The market for heavy commercial vehicles suffered a similar fall. Pre-crisis, the market increased by 50 percent between 2006 and 2008, profiting from the boom in the construction sector and rising domestic consumption. From 2009, however, the market contracted by around 70 percent within 12 months. Although growth is returning, the market for medium and heavy trucks over six tons is expected to take longer to recover than the LCV market.

Russia 59 Sales and production in the Russian commercial vehicle market (2006 2011) 450 Sales vs. GDP growth 10% 450 Production vs. GDP growth 10% 400 350 300 250 200 150 100 50 0 389 382 332 150 103 155 290 221 114 160 77 229 239 227 49 176 144 111 2006 2007 2008 2009 2010 2011f 8% 6% 400 350 4% 300 2% 250 0% 200-2% 150-4% -6% 100-8% 50-10% 0 344 305 301 111 87 255 108 194 109 68 217 233 119 193 43 125 146 76 2006 2007 2008 2009 2010 2011f 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% LCV (< 6t) HCV (> 6t) GDP growth (real) LCV (< 6t) HCV (> 6t) GDP growth (real) Source: IHS Automotive, Deutsche Bank Research, KPMG International 4.3.2 Competitive environment Local commercial vehicle manufacturers dominate the Russian market, despite many established market participants from Triad countries The three largest providers of trucks in Russia, measured by unit quantities, are all local. The leader is the Gorkovsky Avtomobilny Zavod (GAZ) Group, which is active in both light and heavy commercial vehicles. Despite losing more than half its market volume between 2007 and 2009, GAZ is the clear market leader, with a market share of more than 40 percent. With over 90,000 units, GAZ sold about three times as many vehicles as its two largest Russian competitors in 2010. The two main competitors are KAMAZ (HCV) and UAZ (LCV), each of which specializes in one market segment. Together, they account for an additional 25 percent of the overall market. UAZ (Ulyanovsky Avtomobilny Zavod) is a subsidiary of Automobil-Holding Sollers (formerly SewerstalAwto), while KAMAZ is majority-controlled by a state-owned conglomerate. German group Daimler AG also holds an 11 percent equity interest. The rest of the market comprises manufacturers from Europe, the US and Asia. One exception is the MAZ Group, from Minsk in Belorussia, which has been manufacturing heavy trucks jointly with the German MAN Group since 1997. GAZ, KAMAZ and UAZ dominate the Russian market with a combined share of 67 percent.

60 Competing in the Global Truck Industry Emerging Markets Spotlight Market share and market growth of the 10 largest commercial vehicle groups* 60% 50% 1 Full-line manufacturer 2 Multi-brand manufacturer 3 Domestic manufacturer 4 LCV manufacturer 5 HCV manufacturer Market Share CY 2010 40% 30% 20% KAMAZ 3,5 28,259 UAZ 3,4 25,801 GAZ GROUP 1,2,3 94,264 10% FIAT GROUP 1,2 15,101 VW GROUP 1,2 8,244 HYUNDAI 1,2 5,727 PSA 2,4 8,143 MAZ 5 7,158 FORD 1,2 5,150 MITSUBISHI 4 3,700-40% -20% 0% 20% 40% 60% 80% 100% 120% Growth CY09 vs. CY10 * Light commercial vehicles up to six tons + heavy commercial vehicles over six tons Bubble size = sales volume CY10 Source: IHS Automotive, KPMG International CY = calendar year The European OEMs VW, Fiat, and PSA posted strong sales growth in Russia in 2010. Among the foreign manufacturers, the Fiat Group (market share: ~7 percent) and the VW Group (market share: ~4 percent) have the best foundations for further growth, with their modern trucks comparing well with Russian providers. The fastest growing European provider in Russia in 2010 was the French PSA Group. Showing growth of over 100 percent, unit sales more than doubled. The only loser in the top ten is the American Ford Group, which has lost over half its market volume since 2008. However, Ford has recently signed an agreement with the Russian Sollers automobile group for the joint production and marketing of automobiles and light commercial vehicles, so in the medium term Ford should be able to turn around this decline. Light commercial vehicles are dominated by local manufacturers, but foreign OEMs are encroaching Even in the pre-crisis years of 2006 to 2007, market leader GAZ posted a substantial decline in new registrations. Foreign brands such as Fiat, Peugeot and Volkswagen profited from this, gaining sales at the expense of GAZ. Fiat, in particular, achieved

Russia 61 excellent growth and increased its commercial vehicles unit sales from 63 LCVs to more than 13,000 in 2010, half as many as UAZ, the second-largest Russian provider. The PSA Group is likewise developing successfully, primarily via the Peugeot brand. Unit sales of French commercial vehicles have increased despite the crisis. Volkswagen and Mitsubishi, conversely, both suffered substantial losses in terms of unit sales as a result of the crisis, but were already showing growth trends again by 2010. Increases at Fiat, Peugeot, and Volkswagen are coming at the expense of local industry leader GAZ. These developments clearly indicate that customer demand was already shifting towards more technically and environmentally advanced foreign vehicles, even before the crisis. This trend is expected to intensify further as the Russian economy recovers. Top 10: New light commercial vehicle sales by brands Brand (Group) 2006 2007 2008 2009 2010 GAZ 156,969 150,057 121,336 49,884 70,825 UAZ 29,909 32,269 33,272 18,459 25,801 Fiat 63 309 6,847 9,141 13,310 Peugeot (PSA) 903 1,282 2,741 3,058 6,299 VW 2,074 3,697 8,089 4,727 5,931 Ford 5,108 9,649 12,638 7,766 5,113 Mitsubishi 1,954 6,077 7,690 3,239 3,700 Mercedes-Benz (Daimler) 1,770 2,675 3,063 1,385 2,123 Citroen (PSA) 611 614 485 912 1,844 Nissan 775 2,109 3,291 1,787 1,836 Source: IHS Automotive YoY increase YoY decrease The market for heavy trucks must overcome enormous sales declines by all manufacturers Market leader KAMAZ had to withstand a unit sales decline of over 40 percent in 2009. In contrast to GAZ in the light commercial vehicle segment, however, KAMAZ did not sacrifice unit sales to foreign rivals. KAMAZ and the GAZ Group, with its two brands GAZ and Ural, continue to dominate the local market for heavy trucks, with a combined market share of almost 70 percent. With two exceptions, Isuzu and Zil, domestic as well as foreign players benefited from the recovery of the Russian construction economy in 2010. Nevertheless, all market participants are still far from their pre-crisis sales volumes. Three foreign brands in particular Hyundai, MAN and Volvo suffered dramatic declines in sales volumes between 2008 to 2009, after having achieved respectable market positions pre-2008. The most startling example is Munich-based truck manufacturer MAN, whose sales in Russia dropped from 9,000 units in 2008 to just 347 the following year. With the upturn of the Russian economy, foreign manufacturers in the heavy duty sector, with their more modern product portfolios, are expected to gain market share and put local manufacturers under increasing pressure. However, a complete recovery to pre-crisis levels is not expected earlier than 2012. MAN s sales plummeted from 9,000 units in 2008 to 347 in 2009.

62 Competing in the Global Truck Industry Emerging Markets Spotlight Top 10: New heavy commercial vehicle sales by brands Brand (Group) 2006 2007 2008 2009 2010 KAMAZ 32,327 39,206 39,309 22,966 28,259 GAZ 26,787 27,743 24,484 6,473 11,957 Ural (GAZ) 9,704 15,731 15,164 6,855 11,162 MAZ 11,807 10,805 12,249 3,251 7,158 Hyundai 3,073 4,847 5,481 550 4,050 MAN 1,549 4,313 9,242 347 2,721 Scania (VW) 2,754 5,078 3,787 185 2,302 Isuzu 59 2,132 10,025 3,871 1,838 Volvo Trucks 2,691 4,629 7,009 449 1,826 Zil 7,127 10,272 5,163 2,448 1,259 Source: IHS Automotive YoY increase YoY decrease 4.3.3 Market characteristics CUSTOMER REQUIREMENTS Replacing commercial vehicle inventories will strengthen the position of foreign manufacturers with more sophisticated products With nascent growth in the Russian economy, there is greater potential for foreign manufacturers to conquer a larger market share. The demand for more sophisticated foreign trucks in particular will grow, because long distance freight transporters and those in the construction business need highly reliable and capable trucks. Two reasons suggest this: Firstly, these industries are recovering the fastest following the collapse of the Russian economy. Secondly, the transport of goods by road is increasingly attractive, compared with expensive air transport, limited shipping possibilities and an already strained rail network. Freight traffic in Russia Traffic in million tons km 2000 2004 2005 2006 2007 2008 2009 2010 Transport of Goods by Road 152,735 182,141 193,597 198,766 205,849 216,276 180,136 199,341 Total share 9.8% 9.1% 9.4% 9.2% 8.9% 9.4% 8.7% 9.0% Transport of Goods by Railway 1,373,178 1,801,601 1,858,093 1,950,830 2,090,337 2,116,240 1,865,305 2,011,308 Total share 88.1% 90.2% 90.2% 90.3% 90.5% 92.0% 90.2% 90.8% Transport of Goods by Air 2,515 3,003 2,830 2,927 3,424 3,692 3,558 4,711 Total Traffic 1,557,834 1,998,201 2,059,689 2,159,606 2,310,037 2,300,068 2,068,204 2,215,360 Source: Federal State Statistics Service of the Russian Federation YoY increase YoY decrease

Russia 63 Ultimately, however, the primary driver of the Russian commercial vehicle market will continue to be the political system. For example, emission standards are scheduled to be gradually tightened to Euro IV and later Euro V, leading to a greater focus on green issues. With stricter environmental standards foreign manufacturers will benefit as a result of their technological advantages over Russian manufacturers. Purchase price is the number one criteria because total lifecycle costs will remain low In a mature market, the cost of fuel makes up a huge part of the total operating cost of a truck (e.g. 30 percent in Western Europe). In Russia, fuel prices are not directly controlled by the government but rather by state-owned oil companies, which occupy a monopoly position in many Russian regions. According to the Federal State Statistics Service of the Russian Federation (ROSSTAT), diesel prices have risen by ten times since 1998. Therefore, they will increasingly impact the decisionmaking of truck operators and owners. Other follow-up costs such as commercial vehicle taxes, tolls or insurance fees, do not greatly influence the purchase decision of Russian truck manufacturers. According to the ROSSTAT, the monthly salaries of people working in the transportation industry in Russia rose at a compound annual growth rate of 29 percent from 1995 to 2009. But coming from a very low base, this also increased affluence plays a minor role, and still leaves the initial purchase price as the main criteria for truck operators in Russia. Service demand will only slightly increase over coming years The Russian truck market is primarily characterized by low technical standards. Most owners take care of their own maintenance needs. However, the increasing demand for high quality trucks, as well as the ongoing exchange of existing trucks, will lead to a greater need for professional services. Russian industry specialists believe an extensive service network, along with innovative distribution models, could substantially increase the demand for new and used commercial vehicles from abroad. For example, Volvo already offers comprehensive service contracts in Russia, including all service and repair work, making it far easier for owners to calculate service and maintenance costs. However, given the sheer size of Russia, establishing a service network and distribution chain will be one of the primary challenges for foreign OEMs. Co-operating with local partners is therefore the most promising option. TOTAL COST OF OWNERSHIP ADDED-VALUE SERVICES Establishing a service network and distribution chain will probably be one of the primary challenges for foreign OEMs. It sounds like a banality, but Russia is an enormously huge country. How can we establish a nearly comprehensive service network at a reasonable cost? At this point, a joint approach with KAMAZ generates real benefits and advantages. Andreas Renschler, Member of the Board and Head of Daimler Trucks Division, Daimler AG (Germany)

64 Competing in the Global Truck Industry Emerging Markets Spotlight FLEET MANAGEMENT Fleet management services are low on management agendas The number of forwarding companies in Russia is officially not known. The association of Russian forwarding companies, Assoziazija Ekspeditorow Rossii (AER), assumes that approximately 1,500 to 2,000 companies are active in the market. In Soviet times, all trade and transit of goods was conducted via three governmental contractors, Sojuswneschtrans, Sojustransit and Techwneschtrans. Nowadays, these strict structures have dissolved and the number of forwarding companies is increasing, and will continue to rise in the years to come. Nevertheless, fleet management is still a big challenge in Russia. Covering an area of more than 17 million square kilometers, Russia is the biggest country in the world. It is almost twice the size of China and more than five times bigger than India. Fleet management services require an extensive road, information and telecommunication network. Owing to the very low road density with less than 0.04 kilometer of public roads per square kilometer of land, fleet management services are on the agenda of neither fleet operators nor fleet management providers. Road density derived from territory size (sq. km) and length of highway networks (km) 18000 16000 14000 12000 17,098 0.9 0.8 0.7 0.6 10000 8000 8,515 9,600 0.5 0.4 6000 4000 2000 0 233 3,984 3,287 2,600 146 1,736 125 647 Russia 2 Brazil 3 China 1 India 3 Territory ('000 sq. km) Highways ('000 km) Road density 0.3 0.2 0.1 0.0 1 Data from 2010 2 Public roads in operation (2009) 3 Data from 2008 Source: BRICS Joint Statistical Publication 2011, National Bureau of Statistics of China

Russia 65 KAMAZ Interview with Ashot Aroutunyan, Director of Marketing and Advertising at KAMAZ OAO (Russia) Succeeding in the Russian market is difficult without global partners Ashot Aroutunyan, director of marketing and advertising at Russia s leading heavy truck manufacturer KAMAZ, expects the market to recover to its 2008 level by 2013 at latest, possibly even earlier. Looking at the first two months of 2011, I am optimistic that 2012 is definitely possible, he says. With the economic crisis, Aroutunyan says the structure of clients and industries served changed dramatically for KAMAZ. In the construction industry, for example, demand dropped considerably and he does not expect it to recover for another two years. In contrast, demand for agricultural vehicles has already returned to its 2008 level. The same is true for the oil industry, where the market recovered rapidly. Another driver for KAMAZ is the commercial transport sector. Although 2009 was still very tough, this area is gaining significant strength due to the demand for longhaul and flatbed trucks, says Aroutunyan. There are 1.5m trucks in Russia, but state records show that only 750,000 of these are actually in operation. Moreover, 600,000 out of those 1.5m Russian trucks are older than 20 years. This clearly has a significant impact on low efficiency levels, high breakdown rates and environmental pollution. Aroutunyan also emphasizes, that the Russian commercial vehicle fleet is due for renewal. Accordingly, the Russian government is currently developing a dedicated program aiming to achieve substantial truck modernization. The most significant obstacle to achieving this modernization is the low capacity of Russian manufacturers, although he is sure that, the capacity deficit of Russian manufacturers can be compensated by foreign manufacturers, mostly from Europe and China, but supporting foreign producers is certainly not the Russian government s intention. KAMAZ engages in partnerships for automotive components manufacturing with leading suppliers like ZF and Cummins. It also partners with global OEMs like Daimler to manufacture complete trucks in Russia, and this is another area of planned growth for KAMAZ. We plan to extend our partnerships, especially in AWD trucks, special trucks and long-haul trucks manufacturing, Aroutunyan says. KAMAZ is planning to extend its own international market coverage, too, to capitalize on the growth of the global truck market. Our share in Russia is already high. It is hard to get more that s why we should be a global company, he says. To this end, the company has launched a joint venture with Indian manufacturer Tatra Vectra which, according to Aroutunyan, should enable KAMAZ to sell 10,000-15,000 trucks per year in India within five years. Although the company has no official plans for partnerships in the Chinese market, he estimates that KAMAZ could also be selling about 15,000-20,000 units in China within the next five years.

66 Competing in the Global Truck Industry Emerging Markets Spotlight 4.3.4 Globalization strategies MARKET ENTRY STRATEGIES FOR GLOBAL OEMs More emphasis will be placed on the localization of production in Russia. GLOBALIZATION EFFORTS BY EMERGING OEMs KAMAZ is the only Russian manufacturer active on a truly international scale. Cooperation agreements with Russian manufacturers are preferable to solo ventures The Russian market is highly consolidated, with relatively few national manufacturers. The Russian government emphasizes localization of production. To date, no further statutory rules have been published, but a tightening of import regulations and the granting of benefits for locally produced commercial vehicles is expected. In recent years, the Russian government has pushed to increase domestic value creation, particularly for the passenger car market. For example, Decree 166 regulates the conditions for automobile manufacturers and suppliers concerning local assembly in Russia. Currently, truck providers receive benefits if they maintain at least one CKD production unit in Russia with a 30 percent local content share and annual output of 25,000 vehicles. Co-operation with local players is an appropriate way to enter the market. One example is Daimler s deal with KAMAZ, the Russian market leader for heavy trucks. Daimler currently holds an 11 percent stake in KAMAZ. The companies have already formed two joint ventures with each other, in which each party holds 50 percent of the shares. FUSO KAMAZ Trucks Rus is responsible for the import, production and distribution of FUSO trucks and began producing and distributing the Canter light truck in the first quarter of 2010. Mercedes-Benz Trucks Vostok initially began production of Actros and Axor models of the Mercedes-Benz brand. The distribution of Mercedes-Benz trucks started on January 1, 2010. The SKD production facilities for FUSO and Mercedes-Benz are both in Naberezhnye Chelny, the production headquarters for KAMAZ. In exchange, KAMAZ receives technology and distribution know-how from Daimler. There are other approaches. For example, Volvo Trucks has been active in Russia for more than 30 years. Initially, it imported its vehicles. In 2009, it opened an SKD truck plant in Kaluga, where it produces trucks with independent subsidiary Volvo Trucks Russia. Manufacturers of light trucks, such as Hyundai, Fiat and Isuzu, have also been active in Russia with their own production or distribution operations for some time. This perhaps explains why these have long been the most successful foreign OEMs in Russia, in terms of market share. Globalization of Russian commercial vehicle manufacturers is unlikely Russian truck brands have an international presence dating back to the times of the Soviet Union and COMECON, but due to lack of competitiveness it is not being further expanded. The only provider from Russia active on a truly international scale is KAMAZ. However, its main foreign markets (Kazakhstan and Ukraine) are former sister states of the Soviet Union, lacking their own vehicle production. KAMAZ has a UAE-domiciled distribution enterprise called KAMAZ International Trading for the Middle East and Northern African markets. Worldwide exports make up almost one-quarter of KAMAZ s production. In India, the company operates a joint venture with the Vectra Group, called KAMAZ Vectra Motors, to distribute its own trucks. However, only eight-wheel heavy-duty trucks are currently being sold. The joint venture was launched in 2009. It sold an estimated 1,300 units in India in 2010, representing a market share of about 0.4 percent. Additionally, individual KAMAZ trucks find their way into some Central and South American countries, such as Cuba and Venezuela, and in Southern African countries, such as Burkina Faso and the Ivory Coast.

Russia 67 Before KAMAZ engages in further globalization activities, it aims to strengthen its market position in neighboring former Soviet countries and its presence in current Middle East and Africa markets, as well as its joint venture in India. The company s other strategic priority is to improve its labor productivity. In Europe, for instance, employee effectiveness is three times higher. This means a MAN employee assembles three trucks per year on average, while a KAMAZ employee assembles only one truck in the same time. The two other largest Russian manufacturers, GAZ and UAZ, do not undertake any significant international activities and are not expected to do so in the foreseeable future.

68 Competing in the Global Truck Industry Emerging Markets Spotlight 4.4 Prospects of convergence between emerging and mature markets There will continue to be serious structural differences between Triad and emerging truck markets. The alignment of emerging markets with mature Triad markets is strategically important for manufacturers everywhere. Future developments will show how quickly existing differences can be balanced. Therefore two key questions emerge: Can established commercial vehicle manufacturers service the growing demand for trucks in emerging markets with their current technical concepts tailored to the European or North American market? Can providers from emerging markets conquer a significant market share in Triad markets with their low-cost trucks? The reasons for the different market focuses lie in differing customer demands, the infrastructure, and the level of state regulation in the respective countries. Comparison: Triad vs. emerging truck markets TRIAD vs. EMERGING MARKETS High degree of saturation/strongly cyclical High share of heavy trucks Well-developed infrastructure Professional customers with strong TCO orientation Consistent compliance with statutory requirements Driver orientation High logistical demands Highly consolidated markets with trend toward full-line manufacturers Low level of vertical integration High statutory requirements with respect to the environment, safety and worker protection Source: Institut für Automobilwirtschaft [Institute for Automotive Research] MARKET INFRASTRUCTURE CUSTOMERS COMPETITION STATUTORY REGULATION Cycles along growth trend High share of medium and light trucks Infrastructure defective, above all for heavy trucks Fragmented customer structure with many owner-drivers Focus on low acquisition costs Overload-bearing capacity Low logistical demands Quite fragmented locally dominated markets High level of vertical integration Increasing statutory requirements, but fragmented enforcement State regulations, customer requirements, and infrastructure will determine the convergence. Greater potential for convergence exists in China and Russia than in India Triad markets are united by three key factors: comprehensive statutory regulations, high customer requirements and a well-developed infrastructure. Transposing these factors into the Chinese, Indian and Russian markets, it is clear that, despite their differences, there is considerable convergence potential in all three.

Russia 69 Prospects of convergence in selected emerging markets China India Russia Statutory regulation Limit values for emissions of harmful substances and noise heavily rising rising rising Safety standards rising rising rising Nationwide implementation low very low very low Logistical demands within the framework of industrial division of labor sharply rising rising rising Customers Orientation toward acquisition costs still high still very high still high Employee recruiting low relevance low relevance rising relevance Professionalism of commercial vehicle operations rising only weakly rising only weakly rising Importance of owner-drivers still high very high high Quality of road network sharply rising rising rising Infrastructure Road pricing increasing importance continued low importance continued low importance Telematics systems sharply rising importance importance rising importance rising Source: Institut für Automobilwirtschaft [Institute for Automotive Research] Nevertheless, a complete convergence of the markets cannot be expected within a typical planning horizon (10 to 15 years). Most likely three distinct market segments are expected to evolve in emerging markets: The low-cost segment, with technically simple and cheap trucks. The modern domestic segment, with further developed, robust and still extremely favorably-priced trucks. The premium segment, with technically high-quality and high-value trucks from European, North American and Japanese OEMs. The segment of modern domestic trucks will see the strongest growth in the medium-term. According to estimates from the Institute for Automotive Research, market convergence by 2020 will favor the modern domestic and premium segments in all three emerging markets, without completely suppressing the low-cost segment. The precise balance will most likely depend on the market s specific characteristics as described in previous chapters. Its proximity to Europe means that the Russian market is expected to evolve the most in relative terms. By 2020, the market share of premium trucks is estimated to double, while the share of modern domestic trucks will triple, leaving only a 20 percent share for low cost trucks (from 70 percent in 2010). Of course, from a global perspective absolute sales will remain considerably lower than in India and China.

70 Competing in the Global Truck Industry Emerging Markets Spotlight There will definitely be a rising demand for technically more sophisticated and higher value trucks in the emerging markets. But these European-style trucks will only represent a market niche for quite some time. Unified environmental standards alone will clearly not lead to a full convergence any time soon. Andreas Renschler, Member of the Board and Head of Daimler Trucks Division, Daimler AG (Germany) Significant structural changes are expected in China as well, albeit not as drastic as in Russia. Owing to the intense efforts of the Chinese government and the increasing number of joint ventures between emerging and established OEMs, both the modern domestic segment and the premium segment are expected to account for a considerable share of the market by 2020. India, on the other hand, is trailing behind. The Institute for Automotive Research believes that market segmentation will only change slightly by 2020. With a 75 percent share, the low cost segment is still expected to dominate the Indian market for a long time yet. Shift of the segment structure in the emerging markets 2 5 3 10 20 20 13 20 15 10 35 70 60 85 75 82 55 20 2010 2020 2010 2020 2010 2020 Russia Low Cost Trucks India Modern Domestic Trucks China Premium Trucks Source: Institut für Automobilwirtschaft [Institute for Automotive Research]

Competing in the Global Truck Industry Emerging Markets Spotlight 71 NAVISTAR Interview with Dee Kapur, President of the Truck Group and Jack Allen, President of the North American Truck Group at Navistar International Corporation (USA) Predicting sweeping changes to the global truck market Although demand for trucks is expected to remain high, new approaches will be necessary as OEMs adapt to worldwide changes triggered by technological, economic and regulatory shifts. Domestically, Dee Kapur, president of Navistar s Global Truck Group, believes road haulage will still be vital for transporting goods. Emerging markets such as China and Brazil are expected to share the US s healthy appetite for haulage. Like America, these are enormous, widely-populated countries with huge scope for mass road network developments. Transporting goods between the hinterland and the ports in China can mean journeys of thousands of miles, says Kapur. That s why we could see a movement there towards the kinds of commercial vehicles which currently ply US roads. A similar gravitation towards heavier trucks should emerge in India, he believes, but this might take longer because India s traffic levels make lower-displacement, lowerpowered engines more attractive. The industry is fully aware of its need to continue evolving. Jack Allen, president of Navistar s North American Truck Group, says that advancements in the commercial vehicle sector will be driven by both legislation and consumer demand. There is increased regulation on things like emissions and safety regulations, which means more cost, he says. Our customers expect us to offset these changes through innovation. We ve addressed things like fuel economy, weight, and driver environment. Next, we ll see technologies such as collision avoidance systems, stability systems anything which can reduce their overall costs further. In terms of competition with foreign OEMs, valuedriven models produced by manufacturers in emerging economies are already threatening the dominance of established global players. It could take one or two cycles for them to compete fully, says Kapur, but we should not underestimate them in any way. As Navistar has discovered, one tactic for branching out into emerging markets is to form local alliances, such as its own joint venture with Indian manufacturer Mahindra & Mahindra in 2005. Allen, meanwhile, notes that over the past two decades, the export market has been feast or famine, largely dictated by the strength of local currencies. Building vehicles in local markets should offer OEMs a lot more control. In China, the duty on built-up commercial vehicles is about 25 percent, says Kapur. Even components have a fairly significant tariff about 15 percent in India, for example. In response, Navistar is stepping-up its political lobbying for these limitations to be eased. If they are successful, the global prospects for the commercial vehicle industry will be even more enticing.

72 Competing in the Global Truck Industry Emerging Markets Spotlight Insight Passenger and commercial vehicle business why they are different and what they can learn from each other Traditionally, passenger vehicle businesses and commercial vehicle businesses were designed for different markets. They have different business models and usually cater to customer groups with differing preferences and characteristics. Nevertheless, there are several areas where commercial and passenger vehicle manufacturers can benefit from a mutual exchange of knowledge.

Competing in the Global Truck Industry Emerging Markets Spotlight 73 Strategic differences between passenger and commercial vehicle business PASSENGER CAR BUSINESS vs. COMMERCIAL VEHICLE BUSINESS Market development from top to bottom (brand transfer) Global brands (at least in premium segment) Immediate success for Western premium vehicles in emerging markets Market cyclicality can still be mostly absorbed by exporting to growth regions - Particularly in the premium segment, while much more difficult in other segments Services as product support Mobility service solutions, communities and full-service leasing gain importance for the passenger car business Globally uniform technologies and platforms World Car strategy feasible (particularly in the premium segment) Alternative drive train technologies are of high priority for OEMs and are heavily subsidized by governments Several mass-market hybrids and EVs are already available REGIONALIZED TECHNOLOGY & PRODUCT MANAGEMENT & MULTI-BRANDING FLEXIBLE CAPACITY MANAGEMENT EXPANSION OF THE VALUE CHAIN REALIZATION OF ECONOMIES OF SCALE GREEN TECHNOLOGIES Market development from bottom to top Localized brands Low-cost focus hampers success for Western premium trucks in emerging markets Strong dependency on GDP makes CV business extremely prone to market cyclicality (especially in the mature markets) Flexible capacity management is widely implemented Services as source of profitability and competitive advantage Full-service mobility solutions have long been implemented Regionally differentiated technological level World Truck not feasible due to hugely varying regional requirements Optimization of diesel engines still offers the best long-term cost-benefit ratio The willingness of hauliers to pay a price for eco-innovations is very low Source: Institut für Automobilwirtschaft [Institute for Automotive Research], KPMG International Looking at the winning strategies revealed in this study, the passenger business can certainly transfer know-how regarding multi-branding approaches of Western truck OEMs in the emerging markets. Furthermore, the global passenger vehicle market is not immune from market cyclicality either. It could therefore benefit from adopting flexible capacity management best practices that have already proven effective in the truck industry. Last but not least, the growing trend towards ondemand vehicle usage instead of vehicle ownership in the private automobile sector is opening up space for substantial knowledge transfer from the truck business. The truck business follows B2B logic, while the car business mainly follows B2C rules. Today, the commercial vehicle business generally follows the rules and logic of the B2B market, while the passenger car business mainly focuses on private customers (B2C). This is largely because commercial vehicles are investment assets, while passenger cars at least for private customers are consumer and lifestyle goods. But with the increasing move from car ownership to car usage, a new B2B customer interface will emerge for passenger vehicles. For mobility service and car-sharing providers, vehicles - especially fleets - will be investment assets, where rational purchase decisions will be the norm, as they already are in the truck business. Interestingly, the reverse seems to be true in emerging truck markets - at least for the time being. Here truck makers have to adapt their brand strategies and business models to follow B2C rules and logic, as they are mainly faced with owner-drivers. The purchase decisions of owner-drivers tend to be based more on emotions and social categories than on commercial facts, because buying a truck can be a lifetime investment and affiliates the owner to a certain user group or community. However, it can be assumed that once larger fleets are more common, economic considerations will play a larger role in the purchase decision. Emerging truck markets follow B2C rules, as the majority of truck operators are owner-drivers.

74 Competing in the Global Truck Industry Emerging Markets Spotlight The biggest issue is the distribution side; it s the consumer market against the business-to-business market, and that s a big leap. Jack Allen, President of the North American Truck Group, Navistar International Corporation (USA)

Competing in the Global Truck Industry Emerging Markets Spotlight 75 Localized brand strategies offer significant growth opportunities in emerging markets low-cost passenger vehicle segments With BharatBenz, Daimler Trucks introduced a localized brand for the Indian market, which on the one hand certainly benefits from the extraordinary reputation of the globally-known commercial vehicle brand Mercedes Benz. On the other hand, Daimler is able to offer a lower cost vehicle in the modern domestic segment, with regionally adjusted technology and quality standards, without blurring the premium claim of its Mercedes Benz products. The same approach could be taken by passenger vehicle manufacturers to generate significant growth in the low-cost segments of China and India. Today, the success of Western car OEMs in those countries is mainly based on offering Western standard premium vehicles to the increasingly affluent middle class. The low-cost segment instead is mostly catered to by domestic OEMs. To successfully settle in the low-cost segments of emerging markets, a localized brand or JV indigenous strategy could deliver increasing market share in the low-cost segment as well as maintaining the premium brand s integrity. Several OEMs have already taken the first steps. For example, General Motors, Nissan and Honda recently launched low-cost brands with their domestic partners. The German Volkswagen Group is also considering an entry-level brand with its partner SAIC explicitly for the Chinese low-cost car market. Passenger vehicle OEMs can learn from flexible capacity management best practices of truck OEMs The globalization of the automobile industry, as well as the strong demand in Asia, is currently leading to major growth for manufacturers in the Triad markets. However, this also increases the risk of unforeseen events affecting manufacturers. The commercial vehicle industry has set itself up to be extremely flexible as they have been prone to economic cyclicality. In the event of declining demand, the existing capacities have to be rapidly adapted and unnecessary costs avoided. Daimler, for example, succeeded during the crisis in becoming flexible enough to generate profits, even with declining sales figures. The passenger vehicle business can benefit from addedvalue services already implemented by the truck industry Today, the borders between the commercial vehicle business and the passenger car business models are constantly blurring. This is especially true with regard to the emergence of on-demand vehicle usage patterns, replacing the vehicle ownership that has dominated the private auto sector for decades. These newly emerging mobility patterns are increasingly transforming the consumer good passenger car into a mobility service investment asset. Besides financial service providers and auto rental companies, which have already treated passenger cars as investment assets, a rising number of so-called mobility service providers populate the market for passenger vehicles occupying the B2C interface. These commercially oriented service providers certainly have an increasing interest in solutions currently offered to fleet providers or operators in the commercial truck business. Almost 40 percent of the executives asked in the KPMG 2011 Automotive Executive Survey stated that mobility solutions will have considerable impact on future passenger business strategies. Particularly in the Triad markets and the megacities of the BRIC countries, such solutions will help overcome traffic jams and environmental pollution. Hence, already well-established best practices from the commercial vehicle domain can be of significant value in the passenger vehicle market as well. LESSONS THE PASSENGER CAR BUSINESS CAN LEARN FROM THE TRUCK BUSINESS Mobility solutions such as car-sharing can learn a lot from the commercial vehicle sector regarding TCO monitoring, maintenance, service, and fleet management.

76 Competing in the Global Truck Industry Emerging Markets Spotlight Reduction of standing time and lifetime improvement safes money. To be successful as mobility provider, an effective management of the fleet is necessary For instance, the truck business has already found suitable solutions for the following issues, mostly arising at the B2B interface: Total cost of ownership considerations are becoming increasingly important in the passenger car sector The KPMG 2011 Executive Survey revealed that 96 percent of experts see fuel efficiency as the primary criterion for a customer s purchasing decision. The rapid increase of gasoline prices means total cost of ownership monitoring for passenger car owner-drivers and fleet operators is becoming increasingly important. Vehicle taxation is another aspect of the TCO which will have a significant impact on the follow-up costs for cars in the future. Currently, for instance, German taxes on fuel efficiency are calculated according to the engine size and exhaust emissions, not the actual fuel consumption of the car. This imposes considerable costs for vehicle owners. Owner-drivers will therefore have to monitor the TCO of their cars in order to compare the monetary benefit of owning a car, versus car-sharing schemes or mobility service solutions. Since mobility solutions are usually charged by kilometers driven or usage time, customers will pay increasing attention to the total life cycle costs of their cars. Monitoring TCO is also essential for the profit margins of fleet operators such as mobility service providers. A vehicle with a low TCO increases the business owner s profit margin; on the other hand, high gasoline consumption has the reverse effect. Keeping the total operating costs low has always been top of the agenda for Western truck OEMs to attract commercial customers. The same is true for passenger vehicle OEMs catering to mobility service providers in the future. Intelligent maintenance and service solutions will be a necessity for mobility service providers The average standing time of a private passenger car in Germany is around 23 hours a day. By using car-sharing schemes or mobility solutions, this time will be shortened significantly for fleet vehicles. Of course, this will have a negative effect on the lifetime of a passenger car. Therefore, increasing the lifespan of a vehicle via maintenance and service offerings will become ever-more important. Ultimately, long service and maintenance times mean lost profits for the vehicle operator. In this regard, the truck industry s automated service management could bring major benefits for mobility service providers. Fleet management and network logistics approaches can be leveraged to guarantee full-coverage mobility solutions Car2Go, the short-term rental concept of Daimler AG, started its first pilot project in Ulm offering small cars on a rental basis. The rural environment in particular posed the problem of efficiently allocating the rental vehicles. The fact that Car2Go customers can drop off their rented cars wherever they prefer usually results in an unfavorable misallocation of vehicles. To guarantee a high quality of service and full-coverage, efficient fleet management determining potential travel routes is therefore vital.

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78 Competing in the Global Truck Industry Emerging Markets Spotlight Manufacturers of commercial vehicles have already been offering services to efficiently allocate vehicle fleets for years. They have gained extensive experience in this area. For example, the European commercial vehicle manufacturers Daimler, MAN, Scania, Volvo, Renault Trucks, DAF Trucks and IVECO teamed up under the so-called FMS (fleet management connection) standard as early as 2002. The telematics devices developed can be used independent of manufacturer and enable cross-fleet management. LESSONS THE TRUCK BUSINESS CAN LEARN FROM THE PASSENGER CAR BUSINESS A similar system for mobility providers could lead to a far more effective allocation of vehicles and could grant better coverage and quality of service. Such a system would therefore encourage customers to use more on-demand mobility services in the future. It is nearly impossible to imagine a future world without standardized platforms and electric drive trains even in the truck sector Opportunities for knowledge transfer from the passenger car to the commercial vehicle business can also be identified. For instance, regarding the realization of scales and synergies and the development of environmentally friendly propulsion systems, the passenger vehicle business offers a vast number of best practices that could be adopted by commercial vehicle manufacturers. In 2012, the Volkswagen Group will introduce the modular transverse matrix, which will represent the technical foundation for over 30 group models. This cross-brand modular strategy will enable VW to exploit new synergies and greater economies of scale. Volkswagen expects savings of approximately 20 percent in unit costs and one-off expenses thanks to the introduction of the modular transverse matrix. Global truck manufacturers should also have platform strategies similar to the ones in the passenger business on top of the management agenda to stay globally competitive. The same is true regarding electric drive train technologies. The technical advancements made by the passenger vehicle industry to introduce environmental drive train technologies to the mass-market could be transferred to the commercial vehicle domain as well. Several manufacturers producing cars and trucks under one roof are already proving the feasibility of sharing technologies among the passenger and the commercial vehicle domain, while integrating various electrical concepts (hybrids as well as fuel cells) into all kinds of their vehicles.

Competing in the Global Truck Industry Emerging Markets Spotlight 79 LESSONS THE PASSENGER CAR BUSINESS CAN LEARN FROM THE TRUCK BUSINESS REGIONALIZED TECHNOLOGY & PRODUCT MANAGEMENT & MULTI-BRANDING Low customer expectations in emerging markets regarding technological sophistication Strong competition with domestic low cost OEMs in emerging markets Introduction of localized brands in entry-level segments Gain market share without blurring premium brand reputation FLEXIBLE CAPACITY MANAGEMENT Strong market cyclicality also observable in the car business Worldwide impacts of regional economic instabilities and environmental catastrophes Global management of overcapacity Solutions for unforeseen demand collapses EXPANSION OF THE VALUE CHAIN (SERVICE-ORIENTED BUSINESS MODELS) Rising importance of TCO Declining importance of vehicle ownership Passenger vehicles transform to investment assets for B2B customers Cater to new B2B customers (mobility service providers) Focus on TCO as differentiating factor and competitive advantage LESSONS THE TRUCK BUSINESS CAN LEARN FROM THE PASSENGER CAR BUSINESS Adoption of platform strategies and modularization without sacrificing regional adjustments and specifications Intense global competition New competitors from emerging markets High cost pressure due to low cost OEMs from emerging markets REALIZATION OF ECONOMIES OF SCALE Adoption of alternative propulsion technologies Sharing R&D costs via cross-segment technologies Raising environmental pollution Tightening regulatory environment GREEN TECHNOLOGIES Source: KPMG International

kpmg.com/automotive Contact us Global Automotive contacts Dieter Becker Global Head of Automotive T: +49 711 9060 41720 E: dieterbecker@kpmg.com Simone Beutel Global Executive for Automotive KPMG in Germany T: +49 711 9060 41724 E: sbeutel@kpmg.com Regional Automotive contacts ASPAC Chang Soo Lee Samjong KPMG in Korea T: +82 (2) 2112 0600 E: changsoolee@kr.kpmg.com The Americas Gary Silberg KPMG in the US T: +1 312 665 1916 E: gsilberg@kpmg.com EMA Dieter Becker KPMG in Germany T: +49 711 9060 41720 E: dieterbecker@kpmg.com The views and opinions expressed herein are those of the survey respondents and do not necessarily represent the views and opinions of KPMG International or KPMG member firms. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2011 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Designed by Evalueserve. Publication name: Competing in the Global Truck Industry Emerging Markets Spotlight Publication number: 110604 Publication date: September 2011 Image on page 16 is used with kind permission of Daimler Trucks Division, Daimler AG