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The New Supplier Business Model
Why INOVAR is Important …
Shou Osako
Director, East Asia,
IHS Automotive Consulting
IHS Automotive Conference
22 October 2013 | Tokyo
IHS has acquired RL Polk including Polk and CARFAX
Presentation Outline
• Changing Industry Dynamics
• INOVAR – How Suppliers Became Part of The Solution
• The New Supplier Business Model
• Summary
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North American Vehicle Market Outlook
An Industry Adapting to the Global Reality
Risk
Regulatory/
Technology
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Cadence
Reduction
Light Vehicle Global Growth
60%
80
60
40%
40
20%
20
0
0%
120
Global Capacity Utilization
100
85%
80
60
80%
40
20
0
75%
2010
Developed
Emerging
Emerging %
Mil
Global Segmentation
12
2012
2014
2016
Nominal Capacity
Mid-Size
Large
Production
Small
2010
8
6
4
2
2000
0
0%
20%
40%
60%
80%
2018
2020
Production
Global OEM Volume : 2020
10
2020
90%
100%
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Utilization Rates %
Mil
100
Production
140
80%
Global LV Output
Global Capacity
120
Emerging Share
Mil
No Shortage of Challenges
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Program Cadence
2010
2012
2014
2016
2018
2020
60%
40%
20%
2000
151
Launch Event Count
160
140
120
100
117
130
2020
2020
5.0%
136
125
107
101
2010
Global Hybrid Electrification Penetration
Global Launch Events
134
Multi-Region Platforms
80%
Multi Region Share
Weighted Cadence (Years)
Faster, Technologically Demanding and
Globally Integrated
112
2018
85
2016
80
60
2014
40
20
2012
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2.5%
0%
2%
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4%
6%
Massive Structural Change Through 2025
Vehicle design cycles
starting in 2013 have
less than two cycles
to comply with the 2025
standards which each
country targets from
2015 levels.
Vehicle Cycle 1
Development
Production
Aftermarket
Vehicle Cycle 2
Development
EU - FE stiffen by 36%
Production
Aftermarket
CO2 95 to 68-78g/km?
A ‘compliance gap’ emerges mid
next decade. Vehicles starting
production after 2020 will need
to be on a glide path to comply
with the 2025 regulations.
US - FE standards stiffen by 45%
2013
JPN - FE stiffen by 21%
TBD
CHI - FE stiffen by 38%
TBD
2016
2021
2026
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Mass Distribution and System Pressures
Today’s Vehicle by Mass - Sector
Body/Structure
Interior
Electrical
Fluids
Powerteam
Chassis/Suspension
21%
25%
35%
57%
17%
14%
Source = Audi
Mass Decrease - Sector (next decade)
5%
5%
Demands for safety
and ride improvement
have focused mass
reduction attention on
Chassis/Suspension
Shift towards safer
and taller vehicles has
placed pressure on
Body/Structure
•Pressure for weight reduction is slated to focus on body and structure first as
aluminum, advanced high strength steels and lighter forgings begin to penetrate
the body and structure. Plastics, CFRP vary by region.
•Second focal point will be chassis/suspension with a material shift towards New
steel forming processes, aluminum and new drive designs.
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Appendix: Material Trend in US
• What can help the auto industry meet the aggressive targets for reduced
fuel consumption and tailpipe CO2 emissions
Evolution of materials content – Typical passenger car
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Vehicle Optimization is Critical
A Multi-Material/Multi-Powertrain Environment
• Each OEM has its own requirements,
Multi-Material
infrastructure, supplier affiliations and
technology suite
• Material usage and powertrain
technology will depend upon:
• Duty cycle
• Cycle time
Source: Volvo
• Cost considerations
• Upstream capacity
• Portfolio considerations
Multi-Powertrain
• Safety
• Material interaction/ joining
• Customer preferences
• Capital infrastructure
Source: General Motors
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Shifting Priorities – Enhanced Globalization
• Consumer shifts, capacity imbalances and the stiffening
regulatory environment drives a new supplier reality
• Global OEMs have less than two vehicles cycles to meet the
looming emissions standards – rush to new materials, bonding
and associated solutions are at the forefront
• Frantic pace of vehicle launches with tighter cadence strains the
supply base both upstream and downstream
• Lack of a real shift towards electrification through the balance of
the decade shuffles the fuel economy deck
• Opportunity and risk – do suppliers expand capacity – where
and how?
Copyright © 2013 IHS Inc. All Rights Reserved.
IHS has acquired RL Polk including Polk and CARFAX
Presentation Outline
• Changing Industry Dynamics
• INOVAR – How Suppliers Became Part of The Solution
• The New Supplier Business Model
• Summary
Copyright © 2013 IHS Inc. All Rights Reserved.
IHS has acquired RL Polk including Polk and CARFAX
INOVAR - Objectives
• Brazil was at a crossroads - out of the box thinking was required to
concurrently drive increase fuel efficiency (lower emissions) and
strategically grow the automotive industry foot print in Brazil
• Main goals of the legislation:
• Strengthen the local supply chain and increase the regional content (value)
of vehicles produced in Brazil.
• Increase the fuel efficiency and lower emissions in order to allow Brazil to be
competitive on a global scale from a technology perspective.
• Ensure investments in R & D (innovation) beyond the current levels
(essentially “Made in Brazil” solutions).
• Increase the expenditures in engineering activities and supplier
development.
• Impact vehicles sold between 2013 and 2017 – jumpstarting a
transformation process
Other countries have developed portions of the INOVAR solution – this
the first attempt at an all encompassing solution
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All Rights Reserved.
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Brazil’s New Framework: 2013-17
• New IPI (Industrial Tax) structure adopted as of implementation –
raising all rates then discounting for various levels of compliance
• How to reduce IPI tax levels?
• Regional Content of Auto Parts and Tools: Reduction of up to 30
percentage points of IPI (Industrial Tax) calculated based on net local
purchases of parts for car assembly and tools (various activities).
• Innovation: Additional reduction of up to 2 percentage points in IPI for
OEMs that meet investment goals in R & D and engineering.
• Vehicle Labeling: Compliance of labeling rules allows for potential IPI
reduction
• Fuel Efficiency: Additional reduction of up to 2 percentage points for
companies that reach beyond the fuel efficiency targets in 2016/2017.
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INOVAR Summary
Criteria
2013
2017
Manufacturing Steps
8 out of 12 discreet steps
10 out of 12 steps
R&D – Innovation
At least 0.15% of gross
operating revenues
0.5% of gross
operating revenues
Engineering/Supplier
Development
At least 0.5% of gross
operating revenues
1.0% of gross
operating revenues
Vehicle Labeling
At least 36% of the
produced vehicles
100% of the produced vehicles
Fuel Efficiency
Levels of 12% to 18% fuel economy improvement –
incentivized at the higher levels to reduce IPI by 2017
Note: Full incentives reached when manufacturing more than 35,000 units per annum
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The Carrot and the Stick
The INOVAR Process
Use of the “carrot” incentive method
allows an industry to proactively seek
innovative solutions – rewarding positive
behaviors
(1) Does the OEM
meet the fuel
economy target?
(2) Does the OEM
meet the minimum
number of
manufacturing
activities for 80% of
their LV production?
Use of the “stick” drives the
industry to conform to rules to
not be penalized – distorting
behaviors
(3) Are 2/3rds of
other requirements
met?
OEM is now
able to claim
up to 30% IPI
tax credits
Research & Development
If 1, 2 or 3 are not
satisfied, no IPI
credits are
possible
Investment in engineering,
supplier capacity and
manufacturing technology
Vehicle Labeling System
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Further incentives
allow for 1-2
percentage points of
reduction for
overachievement by
2016/17
Technology is Incentived
• INOVAR is structured to drive supplier innovation and R&D to
Brazil
• Impacting OEMs through IPI tax credits (potentially lower consumer prices)
• Impacting suppliers through increased business has tangible value to the
OEM
• OEMs now seek to include technology to improve fuel economy
• Low rolling resistance tires
• Charging technologies
• Lightweighting
• Reduced parasitic losses
• Improved Aerodynamics
IHS has engaged with
OEMs and suppliers to
enable enhanced
understanding of the
boundaries, threats and
opportunities of INOVAR
Copyright © 2013 IHS Inc. All Rights Reserved.
IHS has acquired RL Polk including Polk and CARFAX
Presentation Outline
• Changing Industry Dynamics
• INOVAR – How Suppliers Became Part of The Solution
• The New Supplier Business Model
• Summary
Copyright © 2013 IHS Inc. All Rights Reserved.
IHS has acquired RL Polk including Polk and CARFAX
Business Approaches Change
• A new dynamic has emerged …
• Proactive design, technology and engagement support
• Numerous technology paths are possible – require optimization by
OEM
• Unsettled regulation, material/process costs and effectiveness
underscores the need for several alternatives/options
• Global design, multiple location PPAP, tooling/machine sourcing,
manufacturing and launch support demands coordination
• Faster cadence, recent launch readiness and the need to reduce risk
propels suppliers to integrate outside analysis on a real-time basis
Copyright © 2013 IHS Inc. All Rights Reserved.
IHS has acquired RL Polk including Polk and CARFAX
Geographic footprint of Japanese OEM
• Continuous localization and/or market development are required to
protect Japanese initiatives
• European and North American OEMs with partner and local suppliers
have been catching up J-OEMs even in NA and Asian markets
Light Vehicle Production in major regions by OEM origin : 2013 vs 2020
2020
2013
J OEMs Need
Challenging
>40% mostly
from Suzuki
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Near 80% share
Successful Suppliers Have Common Traits
• In a recent IHS/Deloitte Total Shareholder Return study
several winning themes were the basis of supplier success ….
Revenue
• Portfolio Management
• Market-Focused Innovation
Capital
Cost
• Diversification
• Capacity/Demand Alignment
• Cost/Asset Efficiency
Successful suppliers
require a capability in
every area though
usually excels at 2 or 3
“themes” as a
performance separator
versus their peers
• Capital Structure
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IHS has acquired RL Polk including Polk and CARFAX
Summary
• A globally integrated industry driven by regulatory and consumer-
based challenges requires a new approach
• Lightweighting is not a ‘next cycle’ consideration. Quick progress is
mandatory and will determine winners and losers
• INOVAR is designed to incentive activities to further build Brazil’s
industry – towards a lower CO2 global reality. Yet Chances lie ahead.
• Successful suppliers are closely managing their portfolio, customer-
focused resources, geographic footprint and technology integration
Copyright © 2013 IHS Inc. All Rights Reserved.
IHS has acquired RL Polk including Polk and CARFAX
Thank you for participating!
Shou Osako
Director, East Asia,
IHS Automotive Consulting
IHS Automotive Conference
22 October 2013 | Tokyo
IHS has acquired RL Polk including Polk and CARFAX