Logistics and Supply Chain Management in the Auto Parts Manufacturing Sector

Logistics and Supply Chain Management in the Auto Parts Manufacturing Sector January 29, 2016 Alabang, Philippines

Agenda Auto Parts Manufacturing: Demand and Key Trends Spotlight on the US Auto Parts Aftermarket Leveraging Supply Chain Management Best Practices to Effectively Serve Tier 1/2 Manufacturers, Distributors, and OEMs Case Study 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 2

Auto Parts Manufacturing: Demand and Key Trends Spotlight on the US Auto Parts Aftermarket Leveraging Supply Chain Management Best Practices to Effectively Serve Tier 1/2 Manufacturers, Distributors, and OEMs Case Study 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 3

Strong Growth in New Car Sales Globally The Auto Industry Has Been Enjoying Relatively Robust Growth International Car Sales Outlook (millions of units) Global car sales expected United States 2015 2016f Y-o-Y % Change 17.39 17.70 1.78 Germany 3.21 3.30 2.8 China 19.75 21.13 6.99 India 2.00 2.14 7 Source: Scotiabank to strengthen in 2016, up 3% overall New purchases buoyed by low gas prices, improving labor markets, stronger economic growth, low interest rates, average age of vehicles 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 4

US, China, Germany and India Spotlights Strong labor market Healthiest household balance sheets in almost a decade Rising replacement demand, 40% of vehicles at least 12 years old Lowest unemployment rate Rising household income Low interest rates VW scandal United States Germany China Sales tax reduction from 10% to 5% through December for new vehicles with engine capacity of less than 1.6 liters License plate restrictions in Tier 1 and 2 cities India Strong consumer confidence Strong GDP growth Growth in consumer spending 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 5

ASEAN Spotlight Motor Vehicle Registrations (2015-2018f) ( 000 Units) 2015f 2018f % Change Indonesia 1,525 2,150 40.98 Thailand 1,250 1,700 36 Philippines 330 395 19.7 Malaysia 680 800 17.65 Source: The Economist Intelligence Unit Motor Vehicle Production (Jan Nov Only) ( 000 Units) Source: ASEAN Automotive Federation 2014 2015 Y-0-Y % Change Philippines 84 93 10.7 Malaysia 546 569 4.4 Thailand 1,726 1,760 2 Indonesia 1,210 1,028-15 ASEAN will continue to grow rapidly as a consumer market for vehicles Overall ASEAN will gain in importance as an OEM production base AEC not expected to significantly alter existing production networks but new auto demand is expected to increase new production and assembling activities Some projects will produce specific parts for export, while others will supply domestic customers 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 6

Key Industry Trends Increasing Consumer Demand for Electronics and Software Content Waning product differentiation due to general increase in vehicle quality across the industry convergence of mass market with luxury Consumers demanding more sophisticated infotainment systems at a low price, and more highend features to be standard Electronic systems contribute >90% of innovations and new features The cost of electronics and software was <20% of the total cost a decade ago today it is as much as 35% Infotainment provides a new way for suppliers to differentiate their products with OEMs and for OEMs to retain customers and increase margins Source: Strategy& Automotive Perspective 2015 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 7

Key Industry Trends Expanding Regulatory Requirements to Reduce Vehicle Emissions Regulations to reduce vehicle emissions are increasing OEM production costs, requiring higher volume to amortize costs E.g. US CAFE standards projected to add US$1,000 to the production cost of a vehicle Only a minority of auto buyers are willing to pay for more environmentally friendly choices so cost pressure falls largely on OEMs Some OEMs reducing weight by substituting lighter materials which increases raw material costs Product mix changes to meet new rules provides an opportunity for suppliers to differentiate their products with OEMs so that OEMs can control costs while meeting new regulatory requirements Source: Strategy& Automotive Perspective 2015 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 8

Key Industry Trends Creating Redundancies to Ensure Supply Chain Resilience Natural disasters and other severe environmental conditions in ASEAN countries e.g. floods in Thailand, smog in Indonesia require OEMs to engage in supply chain continuity planning, creating need for suppliers and distributors in multiple locations Some OEMs are setting up parallel supply chains to create redundancies and supply chain resilience This business strategy creates opportunities for suppliers in the Philippines to serve OEMs in new ways Source: ERIA Automobile and Auto Components Industries in ASEAN: Current State and Issues 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 9

Spotlight on the US Auto Parts Aftermarket Aftermarket Parts Sales Are Expected to Grow Faster Than New Car Sales Source: 2014 AAIA Factbook and IHS 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 11

Spotlight on the US Auto Parts Aftermarket Online Sales of Auto Parts and Accessories Growing Rapidly Sales Growth (2013 vs. 2012) Online Sales Growth +15.5% Brick and Mortar Sales Growth <2% Source: 2014 Hedges & Company 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 12

Leverage e-commerce to Sell Direct to US Consumers Key Insights from the UPS s What s Driving the Automotive Parts Online Shopper Study Cost plays an important role in the purchasing decision, with product price and shipping costs as key factors Consumers know what they want, searching until they find the right item Shoppers value convenience, with delivery service options that provide greater visibility Online shoppers are becoming more self-reliant when it comes to replacement parts, installing parts themselves 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 13

Panel Discussion Bo Evangelista Marketing Manager Elizabeth Cardoza Business Development Manager Tessa Santos Operations Manager Cromwell Yumang Enterprise Account Manager Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of Customer, unless expressly authorized by UPS. 2013 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved.

Common Supply Chain Pain Points for Tier 2/3 Auto Parts Manufacturers Time-in-Transit and High Costs are Major Challenges JIT System In order to control inventory, many OEMs use JIT for production OEMs need frequent deliveries of parts with very short lead times Logistics service providers (LSPs) may not be able to guarantee on-time delivery, affecting OEM s production schedule LSPs may not have tracking capabilities to help OEMs plan for contingencies Supply Chain Costs Logistics costs account for about 4-5% of OEM total revenue Auto parts manufacturers need cost-effective solutions to help OEMs improve profitability Integrated Solutions Integrated LSP solutions can help manufacturers provide OEMs with better service, manage risk, and reduce costs Efficient Customs Clearance Customs documents need to be handled properly as any processing delay may affect OEM s production schedule 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 16

Supply Chain Management Best Practices That Can Add Value Specific Problem Areas On Time Heavyweight Shipments Challenges ensuring reliable and on time deliveries for palletized packages Manual Order Processing Shipping and accounting errors often occur when orders are processed and manual processing limits ability to scale up No Shipment Visibility Inability to manage inventory, ensure on-time delivery, and plan for contingencies Importation Challenges Most customs clearance delays are due to incorrect information on commercial invoices and supporting documentation Solutions Utilizing Express Freight Automated Order Processing Shipment Visibility Tools Enhance Import Process 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 17

Case Study: Philippine Iino Corporation Challenges Solutions Results Difficulties in delivering parts consistently on-time to customers. Delivery delays affect customers production schedules. Customers did not have shipment visibility and struggled to plan for contingencies. UPS deployed UPS Worldwide Express Freight and UPS Air Freight Consolidated for deliveries to Japan, China, the US and Indonesia. UPS Quantum View provided accurate, real-time information on shipment tracking. Ability to pinpoint potential sources of delay and make contingency plans to meet contractual agreements, reducing unexpected expenses and costs. 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved.

Thank you DISCLAIMER OF ALL WARRANTIES. This assessment is based upon certain statements, estimates, projections, and information provided by you to UPS. This assessment reflects various assumptions concerning potential results. THOSE ASSUMPTIONS MAY OR MAY NOT BE CORRECT AND THE POTENTIAL RESULTS SUGGESTED HEREIN ARE NOT GUARANTEED. ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE PROVIDED BY THIS ASSESSMENT. Moreover, any written or oral statements made in connection with this assessment, do not create any binding or legal relationship between you and UPS. NOTHING CONTAINED IN THIS ASSESSMENT IS, OR SHALL BE CONSIDERED OR RELIED UPON AS A PROMISE, GUARANTEE, REPRESENTATION, OR WARRANTY, EXPRESS OR IMPLIED. All UPS services are provided pursuant to the UPS Tariff/Terms and Conditions of Service. 2011 United Parcel Service of America, Inc. UPS, the UPS brand mark and the color brown are registered trademarks of United Parcel Service of America, Inc. All rights reserved.

Spotlight on the US Auto Parts Aftermarket While New Car Sales Recover, Average Vehicle Age Continues to Grow Source: IHS, 2014 Polk and 2014 AAIA Factbook 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 21

Spotlight on the US Auto Parts Aftermarket The Automotive Distributor Market is a Large Opportunity Source: 2013 IBIS World Industry Reports Automotive Distributor Market: US$159.5 billion 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 22

Spotlight on the US Auto Parts Aftermarket Automotive Aftermarket Parts Distributor Revenue Continues to Grow Source: 2014 AAIA Factbook and 2013 IBIS World Industry Reports 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 23

Spotlight on the US Auto Parts Aftermarket Trends Traditional channels are consolidating; online is expanding Customers expect faster delivery, making fulfillment, returns and customer service more critical than ever Parts are being produced and sourced globally More manufacturers are going direct-to-retailer, causing distributors to expand their customer base through online sales and faster direct-to-consumer delivery of their own 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 24