2017 Outlook of Global Medium-Heavy Duty Truck Industry ―Truck as a Service‖ Business Model Creating Sustainable Revenue Opportunities and

Transforming Both Developed and Mature Markets

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February 2017

Automotive and Transportation Practice @ Frost & Sullivan

BRIEF

SUMMARY

VERSION

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Contents

Section Slide No

Executive Summary 3

Global MD-HD Truck Market Outlook—2017 10

Global MD-HD Powertrain Outlook 17

Global HD Platform Outlook 21

Global MD Truck Market Outlook 28

Global Connected Truck Outlook 35

Special Focus A—Select Emerging Markets Performance South America, Turkey, and Stan-Jan 40

Special Focus B—Autonomous Trucking and Platooning 44

Special Focus C—Health, Wellness, and Wellbeing Outlook in Trucking 55

Special Focus D—Digital Freight Brokering 60

Special Focus E—Start-ups Disrupting Global CV Industry 66

Special Focus F—Business Model Change: Truck as a Service 72

Conclusions and Outlook 77

Commercial Vehicle Research Titles 2017 82

3

Return to contents

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Executive Summary

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2016 Key Highlights Global Medium Duty (MD)-Heavy Duty (HD) truck sales recovered by 5% over 2015 levels driven by demand

recovery in China, India and Europe. VW’s equity stake in Navistar marked the group’s entry into North America

Source: Frost & Sullivan

1 Recovery In China, India Was Overshadowed by North America Weakness

Truck sales recovery in China, India and Europe propelled global truck sales by 5 percent; Truck demand hit historical

lows in South America as economic environment remains precarious in Brazil

2

Medium-duty Trucks and Mid-Market Products Gained Significant Demand

Medium-duty truck sales share increased by one percentage point to 38% of total MD-HD truck sales, while share of mid-

market value trucks increased from 17 percent to 19 percent in 2019. These two trends underscore the rising influence of

Next 11 countries and urbanization on truck sales.

3

VW’s Consolidation Brought About Synergies

Consolidation of MAN and Scania operations progressed through the year despite the emission compliance issue in VW’s

passenger car business. Synergies in shared product development, procurement and platformization is likely to provide

cost benefits. Equity investment in Navistar paved way for VW’s entry into the North American truck market in 2016.

4

Freight Industry Challenges Accelerated Digitization in Freight Transportation

Demands for greater transparency, speed, and truck capacity optimization ushered in a range of digital freight brokerage

solutions in both mature and emerging markets. Ageing driver population and shortage of skilled drivers in developed

markets and demand for greater visibility in freight movement creating market pull for digitization enabled services.

5 Engine Platformization Came to Forefront

After successfully adopting platform based truck production, global OEMs and engine manufactures started focusing on

powertrain platformization encompassing engine, drivetrain, transmission, turbo technologies.

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Potentially Disruptive Business Models Cited by Global Survey of CEOs Frost & Sullivan’s 2016 Global CEO Survey (300 Respondents) Covering Ten Industries and 6 Continents

Indicates Business Model Recalibration in Many Industries, These Are Especially Relevant to Trucking

Note: All figures are rounded. Source: Frost & Sullivan

Trucking industry globally is shifting focus from ”truck as a product “ to “truck as a service” based business model.

Moreover, rise of value trucks, platform based production ,and rise of connected truck enabled services is expediting

this shift. These changes are aligned to findings from Frost & Sullivan’s 2016 global CEO survey where CEOs of

leading organizations in ten industries rated business models that could potentially disrupt their organizations.

Base: All respondents (n=303)

Q17. Which new business models could potentially disrupt your organization?

(MAXIMUM 3 RESPONSES)

7%

13%

20%

22%

22%

25%

31%

32%

38%

41%

Other

Circular Economy

Co-Creation

eCommerce

Sharing Economy

Platform-based Production

Connectivity as a Key Enabler

Value for Many as Opposed to Value for Money

Personalization and Customization

Product as Service

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8 Transformational Shifts Shaping Future of Commercial Trucking Digital Transformation is the Driving Force Behind 4 of the 8 Transformational Shifts

Source: Frost & Sullivan Analysis

1

5

3

7

4

8

2

6

Digital

Transformation

Rise of Value

Trucks Platformization Autonomous

Trucking

Urban

Trucking

Rise of Asian

OEMs

Beyond

BRIC

Dealership

Evolution

Digitization-enabled

transformational shift

Emerging market

driven transformation

Core technology

transformation

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2016–2017 CV Industry Senior Management Top-of-Mind Issues Despite continued economic uncertainty and fuel price volatility, global commercial vehicle executive’s mind-

share and strategic focal points will be guided by digitization and electronics enabled business model changes

Source: Frost & Sullivan

CV Market: Senior Management Top-of-Mind Issues, Global, 2016-2017

Note: Data collected from 2015-2016 interviews and discussions with Senior

Managers to CEO-level executives of truck OEMs and tier-I suppliers in North

America, Europe, Asia-Pacific, China, India, Latin America, and other regions

Scale: 0 stands for limited focus, 5 stands for top focus

0

1

2

3

4

5

Next Frontiers of Globalization—Next 11 and Africa

Fuel Price Volatility andRise of Alternatives

Truck-as-a-Service

Driver Related CostImplications to TCO

Urban Logistics, Bricks-and-Clicks, and Multi-modality

Electronics Enabled BusinessModel Calibrations

Start-ups DisruptingGlobal Truck Market

Digital Freight Brokering

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2017 Global GDP and Commercial Truck Market Growth Outlook Global GDP Expected to Grow by 2.3-2.8 Percent Range Resulting in 3.2 Percent Growth in MD-HD Truck

Sales Amidst Increasing Decoupling of Truck Sales Volumes with GDP Growth Rates

Source: World Bank, Frost & Sullivan

CV Market: GDP and CV Growth Outlook Overview, Global, 2017

Region GDP Growth

Estimates: 2017 (%)

YoY MCV

Growth (%)

YoY HCV

Growth (%)

YoY Overall

CV Growth (%)

Market

Opportunity

North America 1.9-2.4 2.9 (10.2) (3.5) Low

South America 1.4–1.5 2.5 6.3 4.5 Moderate

Europe 1.6–1.7 (6.1) (1.5) (2.9) Low

China 6.2–6.7 5.9 4.2 4.7 Moderate

India 6.6-7.1 9.5 10.7 10.2 High

Russia (0.5)–(1.0) 2.1 2 2.2 Low

Next 11 5.5–6.5 6.9 4.9 6.1 High

RoW 4–5 5.0 5.2 5.1 High

Global 2.3–2.8 4.7 2.1 3.2 Moderate

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2017 Top 6 Predictions As sales increases by 90,000 units in 2017, industry will increasingly focus on offering

integrated service based solutions to fleets and owner-operators to maintain and grow margins

Source: Frost & Sullivan

1

Global Sales to Hit 2.87 Million as the World Economy Grows in the Range of 2.3–2.8% Growth from India, China and Rest of World (RoW) markets will increase global truck sales by 3%. North America is likely to contract by 3.5% reaching 485,000 units in 2017. South America to show meagre signs of recovery in truck sales in 2017 following multi year contraction.

2

Fuel Price Volatility to Continue to Impact Green Technologies Short-term headwinds from the fuel market are likely to impact the adoption of advanced powertrain technologies such as natural gas and hybrid electric. However, long-term opportunity remains strong, as vocation-based solutions will be built around these technologies in the medium-to-long term. Global natural gas adoption is expected to settle at 1.9% in 2017.

3

Autonomous Trucking and Platooning Investment Rising Rapidly Autonomous trucking and platooning technologies are quickly becoming a reality in the trucking industry. Most key original equipment manufacturers (OEMs) and Tier I suppliers are intensifying efforts to develop a functioning system and business model for platooning. (expected to be introduced in North America within 2017-2019 period) The next step in the process is to convince fleets to buy into the benefits of truck platooning.

4

Value Truck Platforms Attracting Maximum Traction Globally Over 60 percent of new platform development in the next 2-3 years is expected to be in the value truck segment. This is largely driven by a growing demand for value trucks from emerging markets, especially China and India. A majority of the trucks built on such platforms are expected to fall in the price range of $65,000 to $86,000

5

Stakeholders Shifting Focus from Products to Services Rise in interest and adoption of technologies such as telematics, platooning, freight aggregation, etc. clearly indicating a shift from product based growth strategies to service based growth models. Nikola’s truck leasing model is an early indication of impending paradigm shift is the trucking industry.

6

Truck OEMS to Increasingly Look Inside the Cabin for Innovations As the industry is changing focus from products to services, trucking industry innovations will shift focus from under the hood to inside the cabin. Health, wellness, and wellbeing, trucking apps, video safety, fleet management services, utilities, and digital freight brokering will emerge as major focal points for OEMs and tier-1s.

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Key Conclusions and 2017 Outlook

Source: Frost & Sullivan

Global MD-HD Truck Market: Key Conclusions and Future Outlook, Global, 2017

• Global MD-HD truck

demand to grow by

3.2% in 2017, with

HD truck sales

accounting for 60%

of total demand

• As global MD-HD

truck sales growth

rate remains muted,

market participants

will look at service

based business

models to enhance

margins

• Connected truck

technologies , digital

freight brokering, big

data/IoT, and HWW

technologies will

emerge as key

digitization

imperatives

• Stake-holders must

focus on developing

eco-system

partnerships as these

will drive economies

of scope and scale

• Diesel’s share of

total powertrain fuel

mix will increase to

94% while that of

natural gas will

decline to 1.9% in

2017

• Global engine

platforms and focus

on natural gas and

hybrid/electric

technologies will be

necessary to

future-proof for

2022 and beyond

• Service based

revenues to reach

$245-300 Billion by

2025 (driven by

technologies such

as Autonomous

driving, video safety,

telematics, digital

freight brokering,

HWW, etc.)

• Global service and

solution platforms

necessary for

sustainable revenue

streams

• Value truck sales

increasing at fastest

pace and expected

to reach reaching

21% of total sales,

offering margin and

service platform

opportunities

• Several innovative

start-ups and

trucking apps

creating unique

partnership

opportunities for

OEMs and tier-1s

Growth Powertrain Digitization Truck as a Service Priorities

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Market Engineering Methodology

Source: Frost & Sullivan

One of Frost & Sullivan’s core

deliverables is its Market

Engineering studies. They are

based our proprietary Market

Engineering Methodology. This

approach, developed across the

50 years of experience

assessing global markets,

applies engineering rigor to the

often nebulous art of market

forecasting and interpretation.

A detailed description of the

methodology can be found here.