Q2 2012 Auto Industry Analysis presented by BBVA Research

1. U.S. Automotive Industry
April2012

2. Index
1 Automotive Demand
2 U.S. Dealerships
2

3. Auto Demand: Key Messages
• Manufacturers are l ki abroad for sales growth: i 2009 China became the world’s
M f t looking b df l th in 2009, Chi b th ld’
largest auto market. In the U.S., auto sales will increase gradually over the next four-five
years
• Auto sales are linked to growth of real p
g per-capita disposable income. Growth here
p p
requires expansion in real wages and/or more workers, but full employment will not
return until after 2014. There is currently a glut of automobiles relative to
employment, and working age population growth is slowing
• Consumers are d l
C de-leveraging and reducing their debt burdens: particularly in the
i d d i th i d bt b d ti l l i th
mortgage market. Outstanding auto debt is no longer declining, and delinquency rates
appear to have stabilized. Autos remain essential for transportation to/from work in
most areas of the country
• The U.S. still remains the largest market defined by total expenditure and total amount
financed. High per-capita wealth supports higher unit prices of autos, and the U.S.
financial system allows all types of buyers to finance a car within their budget
• Leasing is attractive f many buyers : lower down payments, attractive lease deals put
L i i tt ti for b l d t tt ti l d l t
consumers in a new car for a low monthly payment. Leases are significant among
luxury autos 3

4. Autos: A Global Market
Global auto manufacturers will focus on emerging markets during this decade as
households move up the income ladder
Automobiles Production Global Auto Penetration
Millions of Units
600
Italy Germany
70 France Switzerland
500 England Japan
USA
als
g
Belgium
Vehicles per 1000 individua
60 Slovenia Norway
N
Spain Mature markets:
50 400 CzechPortugal
Republic Higher auto spending per-
Latvia
40 capita and access to credit
300 Poland
30
p Slovakia
20 200 South Korea Markets with high growth
10 Brazil rates, potential for credit
Mexico
0 100 South Africa expansion, and rising
Turkey
household incomes
2007
2010
China
0 India
Resto of the
Rest del Mundo BRICS
BRICS 0 10,000 20,000 30,000 40,000
world
Income per capita, USD
Source: BBVA Research & PWC Source: BBVA Research & VDA 4

5. Autos: China and Brazil
In China, a growing middle class has created the world’s largest auto market.
A tightening labor market in Brazil supports new demand
China: Housing Prices and Auto Sales Brazil
Prices, yoy % change (left); Autos, millions, annualized (right) Unemployment Rate & Auto Sales (Annual units)
14 25 10.0 2.6
Home Prices (left)
12 Auto Sales (right) 2.5
9.5
10 20
2.4
9.0
8 2.3
15 8.5
6 2.2
8.0
4 2.1
10 7.5
75
2 2.0
7.0
0 Unemployment rate (lhs) 1.9
5
6.5 1.8
-2 Auto Sales (millions of units, rhs)
-4 0 6.0 1.7
05 06 07 08 09 10 07 08 09 10
Source: Bloomberg Source: Bloomberg 5

6. U.S. Market Size
Sales of new vehicles declined precipitously during the recession; however, the U.S.
remains the world’s largest market by sales value and finance opportunities
world s
Size of Finance Market for New Vehicles, $Bn
Annual New and Used Vehicle Sales (1990-2010)
(Sales of new vehicles x average amt. financed x 90%)
(Left scale, thousands of vehicles)
450
70 400
Used New 350
60 300
250
50 200
150
40
100
90 92 94 96 98 00 02 04 06 08 10 12 14
30 Source: Federal Reserve / Haver Analytics and BBVA Research
New:
20 90%
Financed
Average
Market
Amount
Finance
Bank %
Leased
Annual
2014
10
Sales
Total
Bank
Pool
Pct.
Pct.
0 New 15M $25,500 ~$380B
$380B 70% 20% 45% ~$120B
$120B
90 92 94 96 98 00 02 04 06 08 10
Source: Bureau of Transp. Statistics / Bloomberg Used-Retail 12M $16,600 ~$200B 70%* n/a 33% ~$50B
2010 - Estimate (Dealers)
Used -Other 6
28M n/a $100-$160B
* Assumption based on new car financing

7. U.S. Auto Demand
Strains from the financial crisis and slowing growth of the working age population
imply a moderate recovery of sales
Total Vehicles in Use and Registrations Per-Capita Summary of Projections
(Left scale, millions of vehicles) (M = millions of units)
300 0.85
Ne Additions
orking Age
Pop. Growth
280 0.80
Used Sales
rappage
Ne Sales
Per Year
260 0.75
Rate
ew
ar
240
Yea
et
Scr
Wo
0.70
220
0.65 1990- 1.2% 4.5M 5.6% 41M 15.9M
200 2007 (93-07) 12M
0.60
180 2011- 0.54% 2.4M 5% 38- 13-
0.55
0 55 2015 12M-13M
12M 13M 40M 16M
160
Registrations (L) 0.50 2015- 0.48% 3.1M 5-6% 40M+ 16M+
140 Proj. Registrations 2020 13-14M
120 Registrations Per Capita (R) 0.45
Proj. Regis. Per Capita
100 0.40
0 40
70 75 80 85 90 95 00 05 10 15 20
Sources: BBVA Research Dept. of Motor Vehicles, Census
7

8. U.S. Auto Demand
Furthermore, there is currently a glut of capacity relative to employment. A low labor
participation rate implies a lower need for new autos
Auto registrations of passenger cars and light
trucks per civilian employee Non-Agricultural Employment
1970-2009 Thousands
1.8 150
145
140 7 yrs
1.7
4 yrs
135
1.6 130
A normalization of 125
credit markets and
1.5 lending standards will 120
help bring down this
ratio to around 1.65
115
3 yrs
1.4 110 Employment Forecast
105
1.3
13 100
70 74 78 82 86 90 94 98 02 06 90 94 98 02 06 10 14
Source: BBVA Research Source: BBVA Research
8

9. U.S. Auto Demand
A de-leverage process hampers credit growth, and savings rates are near 5%. However, auto
loan delinquency rates have peaked below other forms of debt and newly delinquent auto
loan balances are declining
Homeowner Financial Obligations Ratio Loan Delinquencies
Financial obligations payments to disposable personal income, SA Percent of Loans 90+ Days Delinquent
12 10
9
11
8 Autos
10
7 All: Mortgage, HELOC and
All M t d
9 Cons. Credit
6
8 5
Mortgage Consumer
4
7
3
6
Approaching a stable 2
5 level; however,
mortgage-related debt 1
strains budgets
4 0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 99 01 03 05 07 09 11
Source: Federal Reserve / Haver Analytics Source: Federal Reserve Bank of New York / Haver Analytics
9

10. U.S. Auto Demand
Autos remain affordable buoyed by lower rates and longer terms. A lower average principal
and debt-to-income ratio posit sustainable financing for consumers
debt to income
Implied payments for new and used vehicles and
debt-to-income ratio Terms of New Car Loans (Banks vs. Finance Co.)
Debt-to-income (%)
Interest Rate (Left), Months to Maturity (Right)
Payment calculated from average finance amount and current rate
10 $550 14 66
Bank (48 Mo.)
Finance Co. 64
9 12
$500 Finance Co. Term (R)
62
10
8
$450 60
8
7 58
Debt/Income (Left) 6
$400
Implied Mo. Payment (New) 56
6 Implied Mo. Payment (Used)
4
54
$350
5
2 52
4 $300 0 50
99 00 01 02 03 04 05 06 07 08 09 10
90 92 94 96 98 00 02 04 06 08 10
Source: BBVA Research Source: Federal Reserve / Haver Analytics
10

11. U.S. Auto Demand
Total outstanding auto loan balances are up 1.4% on the year in 1Q11. Attractive terms and
labor market uncertainty are boosting new vehicle leasing
Auto Loans, Accounts and New Installment Loans Percentage of New Cars Leased
Total Outstanding, $Bn; Accounts, Millions; New Loans, $Bn %
900 140 30 Trending upward
once again. Nearly
800 130 28 50% of entry-level
luxury cars are leased
700 120 26
110 24
600
100 22
500
90 20
400
80 18
300
Total Auto Loans
70 16
200 60 14
Accounts with Balances
100 (Right) 12
Auto Loan Issuance (Right) 50
0 40 10
99 00 01 02 03 04 05 06 07 08 09 10 05 06 07 08 09 10 11
Source: Federal Reserve Bank of New York / Haver Analytics Source: Edmunds.com / Bloomberg
11

12. U.S. New Vehicle Market
• Rising home prices and net worth combined with easy credit and home equity extraction to
explain the upward shift in sales between 2003-2007: approximately 1-2 million additional
vehicles purchased above trend per year
• The additional vehicles purchased in these years help to explain the sharp fall in sales in 2009,
as declines in equity and housing prices erased over $10 trillion from household balance sheets
• We do not envision a scenario of pent up demand boosting new car sales rapidly, as the de
pent-up de-
leveraging process continues and consumers are saving more and keeping cars longer
• The median age of vehicles Median Age of Vehicles in Use
in use continues trending upward, Years
and is now over 9.4 years
y 10
• Sustained high oil prices pose a 2008
9
favorable outlook for fuel-efficient
Upward Trend
vehicles. The used market reflects 8
expectations of continued oil price
increases as prices of compact
i i f 7
vehicles are rising, while those of
6
larger vehicles are declining
• Entry-level luxury brands will remain 5
attractive for leasing
4
70 74 78 82 86 90 94 98 02 06
Source: Bureau of Transportation Statistics / Haver Analytics
12

13. U.S. New Auto Sales Forecast
The series average of approximately 15 million units per year,
should return in 2014 Population growth will drive sales above 16 million units in the latter
2014.
half of the decade
New vehicles: millions of annual sales
New Auto Sales
2011 2012 2013 2014 2015
22 12.6
12 6 13.3
13 3 14.2
14 2 15.0
15 0 15.7
15 7
21 Jan. 1999-Dec. 2007:
Average 16.8 mn units
20 •Tight labor market • Attractive financing offers continue to
19 •Equity extraction support sales – for those who are
18 •Low finance rates
employed
17 • Key to higher than average sales lies
16 with job creation and income generation
15 • Consumer de-leveraging is restraining
14 sales growth
13 • Consumers are financing lower amounts
12 for longer terms
11
Auto Sales
• Popularity of leasing is growing
10 Forecast • Temporary drop in sales due to effects
9 of Japan’s earthquake
fJ ’ th k
90 92 94 96 98 00 02 04 06 08 10 12 14
Source: Census / Haver Analytics
13

14. U.S. Used Auto Market
Currently experiencing a surge in value related to labor market uncertainty and supply
shocks to new auto production
Value of used vehicles vs new auto inventory
Thousands of Autos (left), Index (right)
2,000 130
Behind the rise in values
1,800 125 • Fuel efficient, late model years are in
1,600 high demand
120
1,400
1 400 • High unemployment, historically low
115 new auto inventories, and low financing
1,200 rates are supporting values
1,000 110 • We expect prices to appreciate in the
800 near term as inventories of new vehicles
105 remain tight, but they should begin to
600 moderate as production and inventories
100
400 are restored
Inventories of New Autos 95 • In any case, elevated uncertainty will
200
Manheim Index (1995=100) keep values and demand above average
0 90
• These transitory supply factors have
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
boosted dealer profit margins over the
Source: BEA, Manheim / Haver Analytics 14
prior year

15. Index
1 Automotive Demand
2 U.S. Dealerships
15

16. Auto Dealers: Main Messages
• U.S. auto dealer profit margins are highest for parts and services. Used vehicles often
entail higher margins than new vehicles
• Higher operating margins have returned due to transitory supply disruptions,
historically low inventories of new vehicles, fervent demand for used vehicles, and a
greater intensity of service work per dealer due to the reduction of franchised
dealerships
• In the last few years the number of dealerships have plummeted along with sales of
years,
new cars. Currently, large public automotive groups are adding store locations to
gain market share
• In the near-term, dealers will enjoy higher margins with less competition and
experience further ownership consolidation by large dealership groups
• Ultimately, the U.S. dealer model is positioned to survive due to high entry barriers and
franchise agreements that the manufacturers control
16

17. U.S. Dealerships: Market Size
New car dealers comprise the bulk of industry revenue due to the higher unit sales prices
of new vehicles Revenue at parts and auto stores should continue at a strong pace as
vehicles.
consumers are holding onto cars longer and need maintenance
Retail Sales Total Industry Revenue, 2011
Motor vehicles and parts ($bn) % of total
900
850
~$80Bn
800
12%
750
700
650
600
Parts and Tire Stores
550
Used ~ $575 Bn
500 New car 88%
New dealerships
450
400 Used
U d car
00 01 02 03 04 05 06 07 08 09 10 11 dealerships
Sources: First Research and Census
17

18. U.S. Dealerships: Business Model
New and Used Car Dealerships
•New car dealers have franchise agreements to sell cars, parts and services within a specified market area
•Dealers acquire new vehicles from manufacturers through an allocation system based on historical sales
•Dealers have limited influence over the colors and features
Used Car Dealerships
•Companies buy used vehicles from trade-ins, auctions, other dealers, leasing companies, and rental
companies
•Used dealers consider a car's age, mileage, and condition to set each vehicle’s price
•Used vehicles generally require reconditioning prior to sale; vehicles unfit for retail resale are generally
sold through wholesale auctions.
•Some manufacturers allow dealers to sell certified pre-owned (CPO) vehicles with extended warranties
Services and Parts at the Dealership
•Service and parts operations may offer repair maintenance body work and warranty services
repair, maintenance, work,
•A typical service department has 18 service bays and handles over 13,000 repair orders annually
Source: First Research 18

19. Dealer Revenue Segmentation
While the bulk of revenue for franchised new car dealers stems from new auto sales,
profitability is maintained through after purchase service
New Car Dealers: 17,700 establishments Used Car Dealers: 37,500 establishments
Share of Total Industry Revenue Share of Total Industry Revenue
4%
New vans & trucks
3.1% (retail)
3.8% 5.0%
New passenger cars Passenger cars (retail)
3.9% (retail) 6%
23.7% Used passenger cars
(retail)
( ) Passenger cars
(wholesale)
7.3% All nonmerchandise
receipts 22% Vans, minivans,
trucks, & buses (retail)
Used vans, minivans,
8.4% trucks, & buses (retail) 56% Vans, minivans,
trucks, b
t k & buses
Vans, trucks & cars 13% (wholesale)
21.7% (leased) Other
10.6% Used passenger cars
(wholesale)
12.5%
12 5% Automotive tires, tubes,
tires tubes
batteries, parts,
accessories
Automotive parts, new
and rebuilt, including 19
Source: Economic Census, 2007
wheels

20. Profitability: New Car Dealers
Parts and services contribute nearly 50% of profit due to high margins. Revenue from
finance and insurance business helps to stabilize profits over the business cycle
Gross Profit Gross Margins
% of total profit 2006-2011 Average, %
Penske
AutoNation Group
Parts and services
45.3% 44.8% 8.2
New Vehicles Retail
6.9
New vehicles Penske Group
21.2% 26.3% AutoNation
7.9
Finance and insurance Used Vehicles Retail
19.7% 14.8% 10.3
Used vehicles
12.5% 13.3% 56.8
Parts and Services
43.6
Other
Oth
1.3% 0.69%
0 20 40 60
Source: Bloomberg Source: Bloomberg
20
*Auto Nation and Penske Group were selected as they are public companies that own 568 dealerships across the U.S.

21. U.S. Dealerships: Consolidation
A highly fragmented industry that has recently undergone a wave of consolidation: the prospect of
bankruptcy and government bailouts enabled manufacturers to slash the number of franchised
dealerships. Large auto groups are buying weak or failed dealerships to expand their footprint
Franchised New Car Dealers in the U.S. Dealer Operating Margin and Store Ownership
(Thousands) Trailing 12M % (left); Number of Stores (right)
27 9 350
26 For every 10 8
300
25
dealership 7
establishments, 250
24 6
there are 9 firms
23 5 200
22 4 150
21 3
100
20 2
50
19 1
18 0 0
05 06 07 08 09 10
17 Operating Margin (left) AutoNation
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Sonic Group 1
Asbury Penske
Source: NADA, Carmax, Census
Source: Bloomberg, BBVA Research (Penske interpolation)
21

22. Entry Barriers: High
• Significant initial investment
• Capital intensive industry
• Franchise agreements
• Exclusive market areas
ar ealers
s
• Further consolidation
Bargaining Power of Buyer Bargaining
Manufacturers: High Power: Strong
• Switching costs of buyers
New Ca De
•C t lf
Control franchise
hi among dealers are minimal
agreements and incentives
Competition: in new car market
Intense • Most buyers are unlikely to
• Dictate inventory
Dealers must become frequent clients of
• Set wholesale price compete on particular dealership
• Provide floorplan financing quality of service
•S
Sensitive to quality and
l d
• Offer consumer financing reputation rankings of
manufacturer
• Desire “a good deal” and
Threat to Profitability of want incentives
Substitutes: Medium
• Retail outlets such as oil change centers, tire
stores and independent service shops compete
with dealers’ service options
• Consolidation of dealerships implies more
service work per dealership
• Customers choose service work due to imperfect
Source: First Research and BBVA Research 22
information in auto repair market

23. SWOT: Auto Dealers
Strengths Weaknesses
• Volatile demand due to economic conditions
• Exclusivity agreements to cover specific areas
and energy prices
• Parts and services represent a stable source of
• Interest rates affect both sales volumes and
income
dealer costs
• Marketing and financing provided by
• Complete dependency on car manufacturers
manufacturers
• Lack of customer loyalty to dealers: more loyalty
• Accounts receivable are absorbed by third-party
towards brands
institutions, reducing liquidity problems
• Subject to supply disruptions
Opportunities
Threats
• Extend service hours
• Expand services and complementary products • Growing competition in the services segment
such as accessories, financing and insurance
accessories • Greater efficiencies in manufacturing, transport
• Intensify the sale of certified pre-owned cars and inventory management allow
manufacturers to sell directly, transforming local
• Nontraditional sales techniques like websites that
dealerships into distribution and service
allow to track inventories, negotiate and get
locations
financing online
g
• Aging population that reduces car usage
• Leverage environmental concerns by promoting
hybrid vehicles and improving the environmental • Weak job creation and an anemic housing
friendliness of the vehicles that they sell market that curtail new auto sales 23

24. U.S. Automotive Industry
April2012