north america light vehicle outlook · confidential. © 2019 ihs markit. tm. all rights reserved....

Confidential. © 2019 IHS MarkitTM. All Rights Reserved.Confidential. © 2019 IHS MarkitTM. All Rights Reserved.

North America Light Vehicle OutlookChallenges amid transformation

8th Annual SC Automotive SummitFebruary 21, 2019

Joe Langley, Associate DirectorNorth America Light Vehicle Production Forecasting & Analysis+1 248 465 [email protected]

Confidential. © 2019 IHS MarkitTM. All Rights Reserved.

United States automotive frameworkEconomic and sales outlook

2


Boosted by tax cuts and additional federal spending, real GDP will expand 2.9% in 2018 and 2.6% in 2019. Real GDP growth will slow to 2.0% in 2020 and 1.6% in 2021 owing to labor-supply constraints, tightening policies, and rising interest rates.

Tariffs imposed to date will have a small adverse impact on GDP. The tariff rate on $200 billion of goods imports from China is now expected to remain at 10%, rather than rising to 25% in January 2019.

Consumer spending will be supported by solid growth in employment, real disposable incomes, and asset values.

Business fixed investment will benefit from sustained growth in global markets, along with an improving tax and regulatory environment. Higher inventory accumulation in the final two quarters of 2018 leads to weaker real GDP growth in the first two quarters of 2019.

The Fed will gradually raise the federal funds rate to a high near 3.50% in 2020; it later retreats to a long-run equilibrium of 2.75%. Federal Reserve interest rate hikes occur more gradually. The new forecast has two rate increases in 2019 and two more in 2020.

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Bottom line for the US economyChallenges ahead


US light vehicle salesMarket perspective

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Source: IHS Markit

US light vehicle sales cycles

© 2019 IHS Markit

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1991 Cycle 2009 Cycle

US sales cycles Previous protracted sale environment 1991 to 2007 cycle

Vehicles sold = 266M units Real GDP = $8.95T to $14.87T Driving Population = 181M to 209M Legacy costs pushed volume Supported by incentives

2009 to 2025 cycle Vehicle sold = 268M units Real GDP = $14.42T to $19.86T Driving Population = 224M to 253M Focus on quality volume Vehicle pricing

2009

1991

2018 2025

2007

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 5

Higher Interest Rates – monthly payments increase; forces shift to lower cost vehicles.

High Transaction Prices – Rising faster than consumers’ incomes; a high perch to fall from in the next down cycle.

Oil Prices Rising – Higher ownership costs hits spending and confidence, consumer behavior and vehicle preferences impacted.

Government Regulations – OEM efforts to meet EPA standards likely to impact vehicle pricing.

Recovery Phase Changing – Household formation/Housing growth rates slow, less job creation –particularly in Midwest and Northeast.

Weaker OEM Margins – Higher material costs, higher borrowing cost; incentive support. Market more competitive – loyalty importance rising.

Urban Mobility Changes – ride sharing/technology/social media all impacting the need and desire for vehicle ownership.

Consumer headwindsWeaker buying conditions, higher ownership costs slow market


Regional Value Content for light vehicles to increase from 62.5% to 75% by 2023 or 3 years after agreement ratified, whichever comes later.

Regional Value Content for Core and Principal parts to increase from 62.5% to 75% by 2023 or 3 years after agreement ratified, whichever comes later.

70% of steel and aluminum sourced from North America. No action on removing Canada or Mexico from US Section 232 steel and aluminum tariffs.

Labor Value Content to increase to 40% for passenger cars by 2023 and 45% for light trucks by 2027. Wages must be at least $16USD/hour but include breakdowns for manufacturing, information technology and research and development. Incudes protections for worker rights.

16 year lifespan with option to renew for additional 16 years. After ratification, parties will conduct a joint review after 6 years to determine if the deal will be extended. If extended, another joint review within 6 years, if not, review annual through first 16 year term.

Canada and Mexico effectively exempt if US does impose Section 232 tariffs on automotive sector. Passenger vehicle quota set at 2.6m units, pickup trucks exempt completely and parts value far exceeds current export levels.

Meet the new deal, the same (almost) as the old dealKey changes to automotive sector under USMCA


Light vehicle reviewSales and production outlook

7


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2005 2010 2015 2020 2025

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Middle East/Africa South America Japan/Korea South AsiaNorth America Europe Greater China

Source: IHS Markit

Global production

© 2019 IHS Markit

Global outlookProduction by region

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Source: IHS Markit

Global production growth: 2018-2025

© 2019 IHS Markit

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Japan/Korea

North America

Middle East/Africa

South America

Europe

South Asia

Greater China

Millions

Volume Change (units)

108M94M


17.917.3

14.7

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%∆ Y/Y Base (65%) Optimistic (15%) Pessimistic (20%)Source: IHS Markit

US light vehicle sales

© 2019 IHS Markit

US light vehicle salesReaching a saturation point

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Economic issues Despite economic growth, auto

market has been slowing since 2016 US consumer outlook to remain

broadly supportive Sales mix increasingly attractive but

riskier and more competitive Pressure on OEMs to manage plateau Opportunities to find right customer

based on vehicle age and scrappage Launches to accelerate, mix

increasingly attractive Vehicle development costs rising Market attractive from consumer

perspective, risk shifting to lenders


Source: IHS Markit

US light vehicle inventory

© 2019 IHS Markit

US light vehicle salesInventory correction in progress

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-60%

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Inventory/Sales Index US Inventory US Inventory (SA)

Inventory issues 2018 inventory correction year Inventory off from 13 year high; 4.2M

units in 2017 Mix issues between cars and trucks Sudden draw down following natural

disasters in 4Q 2017 Inventory adjustments improving

Jan. 2019 = 3.95M units Up 145,000 units from Dec. 2018 Up 3.2% or 121,000 units from Jan.

2017

250- to 400,000 units of excess inventory

Continuing pullback on car production Minimal under supply of vehicles

13 Year high


17.5 17.817.1 17.0 16.8 16.4 16.6 16.9 17.0 17.2 17.2

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Production VolumeSource: IHS Markit

North America light vehicle production

© 2019 IHS Markit

North AmericaFlat and stable production environment

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Short-term 2015 – Last year of pent-up demand 2016 – Required increased incentives

and fleeting activity 2017 – Inventory and mix issues

between car and truck 2018 – Correction; shift focus towards

quality volume and address mix issues

Long-term On- and off-shoring Capacity expansion Continued shift to trucks and utilities Policy and regulatory uncertainty Export growth outside of NA


North AmericaTransplants driving growth

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Source: IHS Markit


© 2019 IHS Markit

9.3 9.2 8.6 8.6 8.2 7.8 7.8 7.9 7.9 8.0 8.0

8.1 8.58.4 8.1 8.2 8.3 8.3 8.5 8.6 8.7 8.8

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US Three New Mobility Transplants

Divergent trajectories – 2018 to 2025 Domestics

-607K units or -7.0% Offshoring to China Increasing shift to trucks More closely tied to US sales Build where you sell

Transplants +693K units or +8.6% Localization Capacity expansion Increasing exports Global sourcing

New Mobility +201K units or +79.1% Tesla largest component


North AmericaIntra-regional production shifts

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Source: IHS Markit


© 2019 IHS Markit

11.8 12.011.0 11.0 10.8 10.8 11.1 11.2 11.2 11.3 11.2

2.3 2.42.2 2.0 2.0 1.7 1.7 1.8 1.8 1.9 1.9

3.4 3.53.9 3.9 4.1 3.9 3.8 3.8 4.0 4.0 4.2

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USA Canada Mexico

Mexico: 2018 – 2025 5.6% growth 221,000 units to 4.2M Flat lines at 24% of regional output New plants:

Kia-Monterrey (2016) Audi-San Jose Chiapa (2016) COMPAS-Aguascalientes (2017) BMW-San Luis Potosi (2019) Toyota-Guanajuato (2019)

USMCA implications Resourcing risks

Plants Products

Exchange rates


North AmericaUS production migration

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Source: IHS Markit

US light vehicle production by BEA region

© 2019 IHS Markit

52%45%

24% 40%

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2000 2005 2010 2015 2020 2025Forecast Far West Great Lakes MideastPlains Southeast Southwest

Great Lakes: 2018 – 2025 -3.0% growth -95,000 units to 5.0M Retrenching and retooling capacity

Southeast: 2018 – 2025 10.4% growth 423,000 units to 4.5M Capacity maximization opportunities New plants/expansions:

Daimler-Charleston (2018) Volvo-Ridgeville (2018) Mazda Toyota-Huntsville (2021) Volkswagen-Chattanooga (2022)


North AmericaCapacity opportunities – build where you sell model

15

US import sales: 2018 – 2025 BMW = 67% to 57% Daimler = 63% to 61% Honda = 7% to 11% Hyundai-Kia = 50% to 46% Jaguar Land Rover = 100%

US = 20% of global sales

Mazda = 85% to 71% US = 20% of global sales

Nissan = 31% to 33% Subaru = 51% to 46% Toyota = 29% to 25% Volkswagen = 36% to 50% Volvo = 100% to 69%

US = 15% of global sales


Global ArchitecturesRegionalization represents next phase

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Vehicle

Segment

Market

Global Super Sets One to many relationship

Economies of scale and scope Flexibility; Vehicle and Sourcing

Increased development centralization and efficiency

Bigger, but fewer opportunities Double edged sword:

Reduced costs, increased scale Easier to shift sourcing Increased exposure to defects Continuous development

Regional opportunities: Development Sourcing Purchasing


China slowdownSlowing growth rates to impact North America sourcing

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Greater China light vehicle sales

© 2018 IHS MarkitSource: IHS Markit

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% Growth Sales

China brand sales growth rates (y/y)


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BMW Cadillac Jeep Mercedes-Benz


China offshoringLost volume and opportunities

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North American production resourced to China


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Multi-Sourced Offshored

Issues Increasing competition

Product – volume consolidation, proven demand

Pricing – 25% import tariff Costs – labor, logistics, risk Regulations – sourcing, partnerships

Trade policies Profitability concerns surrounding

B- and C-segment vehicles Lower capacity utilization in China Sourcing Risks

GM – Cadillac, Buick, BEV Ford – Cars, xUVs, Lincoln, BEV FCA – Jeep BMW – X-Series


US Three ManufacturersOffshoring takes a toll

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Source: IHS Markit

North America production

© 2019 IHS Markit

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Y/Y %∆ GM Ford FCA

Positive Trucks and utilities; margins Retail focus Capacity footprint

Negative Launches Global luxury Offshoring Portfolio diversification

OEM Notables GM: CUVs, Trucks, New Mobility Ford: Product cadence, Volkswagen FCA: Ram, Jeep, post Sergio


-6.0%

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Y/Y %∆ Toyota Honda Nissan HyundaiSource: IHS Markit


© 2019 IHS Markit

Asian Four ManufacturersOn-shoring and capacity expansion drive growth

20

Positive Retail focus Flexibility Exports

Negative Trucks Portfolio expansion Global luxury

OEM Notables Toyota: Portfolio mix, Mazda JV Honda: Portfolio expansion, BEV Nissan: Restructuring, holding pattern Hyundai: Reset and restructuring


Source: IHS Markit


© 2019 IHS Markit

German Three ManufacturersGrowth at the crossroads

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Y/Y %∆ VW BMW Daimler

Positive Global scale and luxury Localization Image

Negative Offshoring Aggressive targets Over proliferation Distractions

OEM Notables VW: CUVs and BEVs BMW: Capacity expansion, sourcing Daimler: CUVs and BEVs


Other ManufacturersRisk versus reward

22

Source: IHS Markit


© 2019 IHS Markit

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Y/Y %∆ Subaru Tesla Mazda Volvo

Positive Localization Niche

Negative Conquest dependent Size and scale Financial risk Technology risk

OEM Notables Subaru: Measured growth, constraints Tesla: Scaling business, China Mazda: JV with Toyota, CUVs Volvo: Long-term focus, trade


TEA timeTrends for Trucks, Electrification and Autonomous Vehicles

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North America electrificationBEV growth measured

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Source: IHS Markit

North America BEV production

© 2019 IHS Markit

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North America production w/BEV North America production w/o BEVSource: IHS Markit

BEV production as percent of total

© 2019 IHS Markit

0%2%4%6%8%

10%12%14%16%18%20%

2017 2019 2021 2023 2025

Daimler Ford GMHonda Nissan VW

2018 to 2025 BEV CAGR = 13.7% Non-BEV CAGR = 0.3% 870,000 units or 5.0% of total


Paths to electrificationDifferent approaches to market and risk

25

Multi-energy platform BMW X3 Propulsion as option

ICE PHEV BEV = iX3

Risk hedge Flexibility based on propulsion demand High commonality

Compromises

Standard platform Mercedes-Benz GLC

Dedicated platform Mercedes-Benz EQC

Greater differentiation Greater risk Portfolio duplication Cross model cannibalization Two distinct architectures

Image sources: BMW USA, LLC, Mercedes-Benz USA, LLC


New MobilityThe cost of tomorrow today

New Revenue Streams

Development Issues Legacy profits fund new

mobility Impact of broad cost cutting

on core, legacy models Best positioned:

GM and Ford with trucks BMW, Daimler, Volkswagen

Group with luxury Middle market and lower

volume OEMs need partners

Capital patience

“In the beginning of the cycle we believe that we will have to face a significantly lower margin. For some vehicles half of the margin of the vehicles they replace,” – Frank Lindenberg, Vice President of Finance and Controlling at Mercedes-Benz Cars


Automated Driving EvolutionAutonomous Driving: When, Not If – But a Longer Term Proposition

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Global Autonomous Vehicle Sales

2005 2015 2025 2035

L4

L2L3

L1L0

Single Function Automation

Combined Function Automation

Limited Self-Driving Automation

Autonomous Mode with Driver ControlsL5 No Driver Controls

Worldwide Autonomous Vehicle Sales


34M

13M

4M1M


New Mobility Consumer participation models

28

Individual Unique design and features reflect owners

personality, values and beliefsCommunities Generic

Utilitarian appliances Cede ownership control

Private community Branded experience or subscription Ownership control

Issues Consumers need varied

Vehicle types based on function

Vehicle design and attributes tied to business model

Automotive versus retail apocalypse “A to B” brands and vehicles at greatest risk

Individual Community

Private Community


US light vehicle salesConsumer shift to continue

29

Source: IHS Markit

US light vehicle share by vehicle type

© 2019 IHS Markit

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1985 1990 1995 2000 2005 2010 2015 2020 2025Car Truck Utility

Re-inventing the car Strategy One: Acceptance

Embrace being a car Greater design freedom Focus on driving dynamics

Strategy Two: Futility Give in, increase utility Bodystyles; wagon, hatchback Limited success, lack of

authenticity Demographics at play Regulations favor trucks and utilities Freedom from ‘Volume Trap’ Recapture consumer’s imagination

2016 Pivot


• Demographics

• Consumers

• Regulations


Utility VehiclesFactors driving continued growth


Propulsion

Mass ReductionFootprint

Three Spheres to ComplianceHolistic approach to meeting regulations

Compliance strategy Vehicle footprint overlooked; wheelbase and track Combination strategy addressing each pillar needed Emphasis on vehicle classification; car vs. truck


Segment Issues Product re-scope Consumer shifts Regulatory factors Pricing pressure

Portfolio Risk Compact car Midsize car Non-global cars

OEM Notables GM: Reducing cars Ford: Exiting cars FCA: Exiting cars Nameplate consolidation Reduced outlook for leaders

32

Honda Fit Honda HR-V

21%2017 = 43.62025 = 61.1

40%2017 = 34.72025 = 48.2

39%Image sources: American Honda Motor Co., Inc.

Three Spheres to ComplianceFootprint

IHS Markit Customer [email protected]: +1 800 IHS CARE (+1 800 447 2273)Europe, Middle East, and Africa: +44 (0) 1344 328 300Asia and the Pacific Rim: +604 291 3600

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north america light vehicle outlook · confidential. © 2019 ihs markit. tm. all rights reserved....

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