Automotive Industry Forecast

Automotive Industry Forecast Sean P. McAlinden, Ph.D. Executive Vice President, Chief Economist Center for Automotive Research Steel Manufacturers Association Ypsilanti, Michigan March 25, 2014

The Center for Automotive Research conducts leadingedge research that impacts the future of the global automotive industry. Automotive industry contract research and service organization CAR is a standalone Non-Profit 501(c)3 since 2003 Based in Ann Arbor, MI 30+ Employees CAR forecasts industry trends, advises on public policy, and sponsors multi-stakeholder communication forums

CAR s Automotive Industry Affiliates

GDP Outlook Through 2015 U.S., China, NAFTA, and Rest of World (In 2005 $Billions, constant PPPs) 40,000 U.S. China NAFTA excl. U.S. ROW 35,000 30,000 25,000 GDP Growth Rate: ROW: 3.3% 20,000 15,000 10,000 5,000 - U.S.: 2.6% China: 7.7% NAFTA excl. U.S.: 2.7% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: OECD Economic Outlook, No 94 November 2013 - OECD Annual Projections, Gross domestic product, volume, at 2005 PPP, USD.

Vehicles Per 1,000 Population Vehicle Density and GDP Per Capita, 2003-2012 BRA RUS MEX USA JPN DEU KOR 1,000 100 CHN IND 10 100 1,000 10,000 100,000 GDP Per Capita, PPP Current $ Source: Ward s World Motor Vehicle Data; The World Bank

Millions Millions Motor Vehicle Sales in Units 1978 2013 20 18 16 14 12 10 8 6 4 2 0 15.0 13.8 12.1 11.2 10.6 10.4 S. Korea 16.0 15.4 14.9 14.2 15.4 15.0 14.5 14.7 15.0 15.1 15.4 13.9 13.9 12.8 12.3 Canada Germany 17.2 16.8 17.0 16.8 16.6 16.9 16.9 16.5 Japan 7.2 5.8 5.1 4.4 3.2 1.31.61.4 1.82.0 2.3 China 16.2 13.2 8.8 9.4 U.S. 19.3 15.5 18.1 18.5 14.5 11.6 13.7 10.4 1978 1983 1988 1993 1998 2003 2008 2013 12.8 22.0 25 20 15 10 5 0 Source: Automotive News; Ward s Auto Yearbook; CAAM; JAMA

Millions Motor Vehicle Production By Regions 1997-2013 25 East Asia China Europe N.A. 20 18.3 18.4 19.3 22.1 15 10 5-13.6 7.6 8.9 9.2 1.6 1.6 1.8 2.1 2.3 3.3 4.5 5.1 5.7 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 East Asia: Japan and S. Korea; Europe: Germany, Spain, France, UK, Czech Rep., Slovakia, Italy, Poland, Belgium, and Romania; N.A.: Canada, USA, and Mexico.

U.S. Light Vehicle Sales Percent Change YTD Through February: 2014 vs. 2013 Total 2,203,668-32,404 100% -1.4% Light Trucks + 50,009 1,130,004 51.3% 4.6% Passenger Cars -7.1% 1,073,664-82,413 48.7% Source: Automotive News; CAR Research

Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Monthly Sales (Millions) Monthly SAAR 1.8 1.6 1.4 1.2 1.0 U.S. Light Vehicle Monthly Sales and SAAR February 2012 February 2014 SALES SAAR 15.1 14.4 14.5 14.9 15.6 15.5 15.4 15.2 15.8 16.1 15.3 15.3 15.2 15.3 14.4 14.1 14.1 14.3 15.9 13.8 1.5 1.5 1.4 1.4 1.4 1.3 1.4 1.4 1.3 1.3 1.3 1.3 1.2 1.1 1.2 1.2 1.2 1.1 1.1 1.2 1.2 1.2 1.1 1.0 1.0 15.2 16.4 15.4 15.2 15.4 16 14 12 10 8 0.8 0.6 0.4 0.2 6 4 2 0 Source: Automotive News; CAR Research

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Billion $ (2005 dollar) Million Units Are Sales Back? 1995-2013 In Spending (Billion of 2009 $) In Units 500 17.2 479.9 18 450 400 16 15.53 14 350 300 Spending back to 2006 level Vehicle sales at mid-90s 12 10 250 8 Source: BEA

Percent Change in Sales of Light Vehicles Per OEM: YTD Through February: 2014 vs. 2013 TOTAL -1.4% Nissan 14.0% Fiat-Chrysler 9.9% Hyundai-Kia -1.5% Honda -4.8% Toyota -7% GM -6.1% Ford -6.7% -10% -5% 0% 5% 10% 15% 20% 2,203,688-32,384 100% 205,830 + 25,275 9.3% 282,049 + 25,303 12.8% 171,237-2,594 7.8% 192,036-9,577 8.7% 305,649-18,453 13.9% 393,590-25,423 17.9% 336,843-24,330 15.3% Source: Automotive News; CAR Research

N.A. Light Vehicle Production Percent Change YTD Through February: 2014 vs. 2013 TOTAL Fiat-Chrysler Nissan GM Hyundai-Kia Honda Toyota Ford -4.8% -9.4% -9.7% -13.4% 1.0% 4.6% 18.3% 32.4% 2,726,796 + 25,905 100% 491,626 + 120,360 18.0% 279,108 + 43,217 10.2% 570,225 + 24,835 20.9% 126,923-6,364 4.7% 283,730-29,561 10.4% 265,437-28,486 9.7% 445,770-68,799 16.3% -20% -10% 0% 10% 20% 30% 40% Source: Automotive News; CAR Research

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Total Big 7 Days in Inventory Big 7 Inventory in Days 700 (Jan 2013-Mar 2014) 600 500 400 300 200 100 0 62 61 73 80 87 91 85 Toyota Nissan Hyundai-Kia Honda GM Ford Chrysler Month-Year Source: Automotive News

2013 Per Vehicle Profits*, North America 3,000 $2,844 2,500 $2,307 2,000 1,500 $1,323 $1,254 $1,225 1,000 500 0 GM Ford Chrysler Honda Toyota *EBIT or automotive operating income per vehicle sold. Global average for Chrysler figure. Honda also excludes motorcycle, finance, and power products.

Now We re Talking... North American Automotive Revenue Per Vehicle 2006 2013 $34,000 GM Ford Chrysler $32,000 $30,000 $28,000 $26,000 $24,000 $22,000 $24,267 $22,604 $21,969 $24,900 $24,348 $22,839 $24,154 $24,176 $22,896 $25,798 $22,793 $21,845 $31,632 $27,669 $26,700 $30,859 $29,639 $27,931 $31,333 $29,991 $30,000 $29,406 $28,700 $28,789 $20,000 2006 2007 2008 2009 2010 2011 2012 2013 Source: CAR Research based on companies financial reports.

Per Vehicle Profits*, North America 2006-2013 $3,000 $2,000 $1,000 $1,391 $1,094 $2,275 $1,921 $2,058 $2,226 $1,543 $1,237 $995 $975 $3,000 $2,000 $1,000 $- $(306) $452 $- $(1,000) $(1,416) $(1,054) Detroit Three Toyota and Honda $(1,000) $(2,000) $(2,000) $(3,000) $(3,308) $(3,229) $(3,000) $(4,000) 2006 2007 2008 2009 2010 2011 2012 2013 *EBIT or automotive operating income per vehicle sold. Global average for Chrysler figure. Honda excludes motorcycle, finance, and power products. $(4,000)

Market Share: Segment Breakdown U.S. LV Sales February YTD 2014 Middle CUV Middle Car Small Car 18.9% 18.7% 21.1% Pickup 13.3% Luxury Car SUV Van Small CUV Large CUV Large Car 7.4% 6.3% 5.0% 3.5% 3.3% 2.5% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Source: Ward s Automotive Reports

Segment Breakdown - U.S. LV Sales Percent Change February YTD 2014 vs. February YTD 2013 Total Large Car Small CUV Middle CUV Van Luxury Car Pickup SUV Large CUV Small Car Middle Car -15.4% -1.5% -2.3% -3.9% -4.3% -5.5% 3.7% 1.9% 10.7% 24.9% 38.7% -25.0% -15.0% -5.0% 5.0% 15.0% 25.0% 35.0% 45.0% Source: Ward s Automotive Reports

2014 U.S. Sales Forecasts (Units in Millions) 16.2 (3/14) 16.2 16.4 (3/14) (12/13) 16.3 (3/14) 16.0 16.4 (1/14) (3/14) 16.0 (1/14) Sources: Various 16.4 16.5 16.5 (1/14) (1/14)

CAR Forecast Notes March 2014 2013 ended with 1.9% GDP growth, but corporate profitability reached to a new high. Good news for long term employment growth? Maybe not... Employment has grown back to near pre-recession level, despite record share for part-time jobs. However, majority of 2013 job creation was full-time. Bad weather slowed 1Q 2014 economic activities. Vehicle output was cut. But for the rest of 2014, vehicle demand will be strong, backing by a bullish employment outlook. Vehicle supply will be in shortage. Vehicle price will be even higher. Young people delay entering labor market. Unemployment rate will no longer be back to pre-recession level. 6% is the natural unemployment rate from now on. Without young generation entering labor market, labor participation rate will remain low. GDP growth will be hindered. Labor productivity won t grow forever. Household net worth growth rate was much higher than income growth rate. Interest rate was low. Good time to buy big-ticket items such as cars. Consumer confidence was marginally up from a year ago. Gas prices should be stable, credit very available. Housing starts are still low comparing to pre-recession levels. It is correlated to employment growth and vehicle sales. Operating vehicles still getting older but since over half are over 11 years old scrap should increase a lot soon...

8.6 8.8 8.8 8.9 8.9 9.0 9.1 They are Getting Old... U.S. Light Vehicle Age and Scrappage Rate Average Age Scrappage Rate (%) 9.4 9.5 9.7 9.8 10.0 10.3 10.6 10.9 11.2 11.4 6.78 6.74 6.40 6.19 5.88 5.76 5.50 5.21 4.90 4.80 5.70 4.76 4.35 5.03 5.24 5.66 4.12 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: R.L. Polk

Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Price Per Gallon Gasoline Prices (Nominal) Jan. 03 Jan. 14 $4.50 $4.00 $3.99 $3.90 $3.96 $3.50 $3.00 $2.86 $2.92 $3.12 $3.06 $2.60 $2.85 $3.36 $2.50 $2.00 $1.50 $1.95 $1.64 $1.62 $2.21 $1.00 Source: EIA

Light Vehicle Sales Household Net Worth in Trillions Household Net Worth and Vehicle Sales 1978-2013 Light Vehicle Sales Household Net Worth Net Worth (Real $) 18 90 16 14 80 70 12 10 8 6 4 2 0 1975 1980 1985 1990 1995 2000 2005 2010 60 50 40 30 20 10 0 Source: Federal Reserve Statistical Release, Z.1, Flow of Funds Accounts of the United States Real Household net worth is deflated by CPI.

Million U.S. Sales Forecast: 2014-2018 18 16 14 12 10 8 16.1 13.2 10.4 11.6 11.6% 12.8 10.4% 14.5 13.3% 15.6 7.6% 16.2 16.4 16.5 16.7 16.8 3.8% 6 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: CAR Research, March 2014 24

Million U.S. Production Forecast: 2014-2018 14 12 10 8 10.8 8.7 7.8 8.7 11.5% 10.4 19.5% 11.1 6.7% 11.7 11.9 11.9 12.0 12.2 5.4% 6 5.8 34.5% 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: CAR Research, March 2014 25

Million North American Production Forecast: 2014-2018 20 18 16 14 12 10 8 6 4 2 0 15.2 12.7 8.6 13.3 12.0 15.6 16.5 16.8 17.3 17.5 17.7 18.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: CAR Research, March 2014 10.8% 39.5% 5.8% 17.3% 1.8% 26

U.S. Light Vehicle Sales/Production in Million Units U.S. Light Vehicle Sales & Production Forecasts 2007 2013; 2014F-2020F 20 18 16 14 12 10 8 6 4 2 0 U.S. Sales U.S. Production 16.1 16.1 16.5 16.8 17.0 17.2 17.4 17.6 15.5 14.4 13.2 12.7 11.6 11.7 11.8 12.2 12.3 12.2 12.3 10.5 10.9 11.2 10.4 10.1 8.5 8.4 7.6 5.6 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: CAR Research; LMC Automotive.

N.A. Light Vehicle Sales/Production in Million Units 25.0 N.A. Sales N.A. Production 20.0 15.0 18.9 15.9 12.7 13.9 15.2 17.1 18.4 19.0 19.5 19.8 20.1 20.3 20.6 20.8 10.0 5.0 15.4 12.9 8.8 12.2 13.1 15.4 16.2 16.6 17.3 17.7 18.3 18.5 18.6 18.6 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: CAR Research; LMC Automotive.

Miles per Gasoline Gallon normalized to CAFE Test Cycle Trends in Fuel Economy Standards for Select Countries and Regions, MPG, 2000-2025 65 60 Solid dots and lines: historical performance Solid dots and dashed lines: enacted targets Solid dots and dotted lines: proposed targets Hollow dots and dotted lines: target under study EU 2020: 60.6 55 Japan 2020: 55.1 50 45 40 Korea 2015: 39.3 China 2020 [1] : 50.1 US 2025 [2] : 49.1 US-LDV Canada-LDV 35 30 25 Mexico 2016: 35.1 Canada 2016: 34.5 EU Japan China S. Korea Australia 20 2000 2005 2010 2015 2020 2025 [1] China's target reflects gasoline vehicles only. The target may be higher after new energy vehicles are considered. [2] United States, Canada, and Mexico light-duty vehicles include light-commercial vehicles. Mexico Source: The World Bank Center for Automotive Research, March 2013 29

54.5 MPG Goodbye to the American Pickup? (38.0 MPG for All Trucks w/ AC/credits) Dodge Warren Truck Assembly, MI GM Powertrain Romulus, MI GM Flint Truck Assembly, MI GM Powertrain Toledo, OH GM Fort Wayne Truck, IN Ford Powertrain Windsor, ON Ford Dearborn, MI Truck Assembly Ford Powertrain, Romeo Michigan Ford Kansas City, MO Truck Assembly Chrysler Mack Ave. V8 Detroit, MI GM Arlington, TX Truck Assembly Ford Livonia/Sharonville, MI/OH Transmission Ford Kentucky Truck, Louisville, KY Chrysler Kokomo, IN Transmission

Lightweighting High Strength Steel, Aluminum & Composites Take on the Heavyweights

Why Light Weighting? Excess weight kills any self-propelled vehicle. There are a lot of fool ideas about weight Whenever anyone suggests to me that I might increase weight or add a part, I look into decreasing weight and eliminating a part! Henry Ford, 1922 Every automotive manufacturer is pursuing light weighting as a key strategy to reduce fuel consumption irrespective of the powertrain technology pathway. A 10% reduction in vehicle weight generates a 6-7% improvement in fuel consumption Center for Automotive Research, March 2013 32

Lightweighting Material Architectural Strategy All technology pathways anticipate lightweighting The monolithic car with one dominant material is: Easier to design, and Easier to manufacture, but Not optimum for reducing mass and cost Ford 2015 F-150 Aluminum body & bed Steel frame Future Steel Vehicle 35% reduction in body mass Aluminum Intensive 45% reduction in body mass Composite Car - 55% reduction in body mass Source: Center for Automotive Research

Key Material Trends (Next 10 years) Increased use of ultra high strength steel for structural components around the safety cage to prevent intrusion Aluminum use for chassis and exterior panels is increasing Fiber reinforced plastics (glass and carbon) for structural components are still several years away from high volume production Joining complexity: more laser welding, fasteners and adhesives Structural Adhesive

Pounds per N.A. Vehicle 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 Rise of Aluminum Hasn t Affected Total Steel Yet... 1985-2012 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500-56.0% 3,187 3,141 Total Weight Steel% Alum% % of Vehicle Weight 4,040 4,044 4,097 4,039 3,902 3,939 3,962 4,035 3,920 3,694 52.3% 9.3% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Year

Materials and Mass Reduction Expectations Material Material Replaced Mass Reduction % Magnesium Steel, Cast Iron 60 75% Carbon Fiber Composites Steel 50 60 Aluminum Matrix Composites Steel, Cast Iron 40 60 Aluminum Steel, Cast Iron 40 60 Titanium Alloy Steel 40 55 Glass Fiber Composites Steel 25 35 Advanced High Strength Steels Mild Steel, Carbon Steel 15 25 High Strength Steel Mild Steel 10 15 Source: US Department of Energy

Materials manufacturing challenges

Why Steel is Better (for now) Supply chain exists Manuf. Equipment/Tooling exists Cheaper Improving Repair aftermarket exists! More durable Easier recycling Easier to manufacture? -maybe not HSSs