CAR Automotive Briefings 2011

August 2011

Dear customers and friends,

The Center for Automotive Research (CAR) again organized and sponsored its annual
Management Briefings in Traverse City during the first week of August.  The theme this
year was “Prosperity Amid Uncertainty” and once again there was significant focus on
the key global business issues facing the automotive industry today.

Keynote speakers included Sergio Marchionne, CEO, Chrysler Group LLC & Fiat; Jim
Farley, Group Vice President, Sales & Marketing, Ford Motor; Mark Reuss, President
North America, General Motors; Bob King, President, UAW, and others. Their
summarized remarks are included in this brief.

Also presented here is the Fulton automotive perspective and our thoughts about the
state of the industry.  We acknowledge the complexity of the business and the challenge
of the current economic surroundings facing our OEM and supplier customers today.
Please note our point of view and we welcome your comments and feedback.

Phil Biggs, Fulton Innovation
phil.biggs@fultoninnovation.com

7575 Fulton Street East, Ada, MI 49355

The Fulton Automotive Perspective…

Our belief is that what is driving the future success of all automakers is their ability to
balance the complexity of the North American market as it splinters into two main
segments: the baby boomers, with their huge purchasing power and intense demand for
content, safety, and infotainment, and the echo boomers, with their desire for constant
mass customization inside the vehicle, their drive for connectivity, and their fickle tastes.
This market splintering continues to force serious proliferation of models off common
architectures, constant retooling of content, and continued focus on a design business
model over a low‐cost manufacturing model.

Fulton believes that worldwide alliances are the key to sustaining success as the industry
continues to redefine its labor relationships, consolidate its distribution network, and
rationalize its brand portfolios. Going forward, we believe the industry will continue to
invest in advanced technologies to differentiate their offerings, pursue growth markets
around the globe, and leverage key relationships with dealers, suppliers, and labor.
New organic suppliers will emerge – in the previously undeveloped segments such as
Electric Vehicle (EV), Business‐to‐Grid (B2G), V2V (Vehicle‐to‐vehicle) and V2I (Vehicle‐
to‐infrastructure), and other alternative powertrain and EV ecosystem segments.

Among critical supplier issues is the need to optimize volume of vehicle content while
containing build‐to‐operate costs as the pressure to innovate increases.  Availability and
higher costs of key raw materials and trying to create down‐line supply chain in
emerging markets will be enormous concerns throughout the industry during the
decade.  Determining location of new assembly plants, the status of tariff and non‐tariff
policies by region, and matching those and other business decisions with global
technology investments will be vital.

Fulton recognizes that linking consumer technology demands with the evolution in
personal mobility is already upon us – and the growth and adoption of wireless power
will play a significant role in vehicle connectivity.  With Facebook, Nokia, and Bluetooth
executives taking prominent roles at automotive conferences like MBS, it is clear that
the industry truly has become technology‐driven. And, as in‐car innovation expands,
Fulton hopes to create and commercialize the kinds of technology solutions that meet
the stringent requirements of suppliers and manufacturers as well as the aspirational
needs of car buyers worldwide.


The following are summaries from keynote address presentations at the 2011 Management
Briefings sponsored by CAR, held August 1 – 4 in Traverse City, MI

CHRYSLER (Sergio Marchionne, President & CEO)

Keynote speech highlights:
“Ignore China at your own peril. They have grown tremendously and have some of
the most updated current technology.”
“There will be a Chrysler after me.” Marchionne’s successor will likely be drawn
from the 22‐member Group Executive Council that will manage Chrysler and Fiat
beginning September 1st.
“For multinational companies, it becomes almost impossible to find the right mix of
labor representation to effectively stand in for the labor force across the group.”
Marchionne is no supporter of labor unions having a board seat.
“The new 54.5 mpg Federal fuel economy standard for 2025 is very doable.”
“An IPO is not likely until after 2012, but it would allow the UAW retiree health care
fund to convert from Chrysler stock to cash.”
“Company boards have an obligation to maintain a level of equilibrium in pay levels
between executives and workers – the gap between executive and worker pay
causes indignation here in the U.S. and globally.”

UAW (Bob King, President)
Discussion of new partnerships with automaker companies

UAW is embracing culture change
Helping to innovate, rededicating to quality
Focus on environmental and CAFÉ standards
Change in Washington is critical
“We must restore the American middle class…”
Anti‐union efforts are “immoral and socially irresponsible”
UAW has a vision of “global justice”
UAW is embracing collaboration and cooperation to achieve our core values
UAW has adopted co‐determination in its Principles of Fair Elections & Organization,
in its efforts to attract new member companies in the 21st century
Foreign Initiatives
UAW looking at working with international labor groups to expand its membership
Globally, Chrysler is demonstrating higher productivity and better quality
UAW Value Proposition
The ability for shop floor workers to speak openly about quality issues or business
processes as a “represented organization” sets the UAW apart from non‐union
workers


TOYOTA (Ray Tanguay, Sr. Vice President)
Overcoming the challenges of the past few years…

Looking back at “triple‐witching” natural and financial disasters
2008‐2010 Recession
Recurring recalls
Earthquake/Tsunami, March 2011

Lessons learned…
Improve decision‐making process from corporate to field
Communicate more openly, collaborate more globally
Strengthen risk management (regional alignment)

Enriching Lives around the World
$500 million of philanthropic support
$23 billion of investment in North America
2,000 more jobs added in Mississippi, 35,000 American jobs total
Connect to technology and Smart Grid via Entune
Entune enables voice‐activated technologies and cloud computing

Existing Vehicle Assessments / New Vehicle Launches
6 new hybrids to be introduced by 2012
Safety dominates – even ahead of quality and design
$50 million to safety institute at Tech Center in Ann Arbor
Re‐committed to quality and eco‐friendly solutions (zero landfill impact in Japan‐
based plants)
3 million Prius vehicles sold globally, 1 million in North America
Prius constitutes 50% of all hybrid vehicle sales

NOKIA (Chris Weber, President)
In‐Car Connectivity

The Mobile Society
NavTech maps (owned by Nokia)
GPS will be in all mobile devices by 2014
Nokia seeks to create seamless in‐car consumer technology experiences
Car Connectivity Consortium (including auto OEMs Hyundai, Toyota, VW, Daimler, GM,
Honda) as well as handset OEMs
Seamless Smartphone Integration available via USB, Bluetooth, WLAN
Car‐Optimized Experience
Driver distraction controlled through technical protocols and specifications
Integration of key infotainment applications via touch screen interface
New business models and revenue streams will be created as this consumer queue
is developed


FORD MOTOR (Jim Farley, Group Vice President, Global Sales & Marketing)
Designing for Technology

Millennial customer market overview:
Link social media initiatives to branding efforts
Social media can provide entertaining methods to educate
Must demonstrate technological features in very brief time (15‐30 seconds)
Then, the discovery step provides the “essence of the brand”

Impact of societal change
Detroit is the epicenter of automotive design and R&D
We are witnessing the evolution of vehicle product as society changes rapidly
There is a wide chasm between the Baby Boomer/Gen X segment and the Millennial
segment, where content demands are vastly different at times and yet very similar

How can the auto industry inform its customers?
Dealer involvement i.e. Sync My Ride training sessions
Individual transportation solution / perpetual subscription / contract renewals /
utility upgrades / other services
My Ford Touch one‐on‐one coaching sessions
Create a user community i.e. Apple users and the Apple Genius Bar

GENERAL MOTORS (Mark Reuss, President)

Customer experience is paramount…
Chevy Volt customers setting new customer experience standards
2011 Q2 – $2.35 billion in earnings
GM reports sales gains in top 5 global markets, up 16% gain overall
By 2012 40% of car‐buying public will be the Millennial segment (18 to 30)
GM has formed media partnership with Scratch (MTV)
$117 million investment in Oshawa plant for new Cadillac XTS
$190 million investment in Lansing plant for new C‐category ATS concept


TOYOTA (Paul Williamsen, National Manager, Lexus College)
Future Mobility Trends

What will impact the future of personal mobility?
Light rail options
Geographic distribution of jobs
Commutes are becoming more suburb‐to‐suburb versus suburb‐to‐city
Short‐medium‐long distance commuting needs require different vehicles
Extended‐range vehicles required for personal, non‐urban travel needs
What are the challenges to rapid hybrid growth?
Extension of cruising range
Battery costs
Durability
Consistent high and low temperature performance
Develop retail hydrogen stations for re‐fueling @10,000 psi within two minutes
Southern California hydrogen station roll‐out 2011‐2012, continues until 2015
What’s next in the combined driving‐personal mobility experience?
Sync with transit schedules
Park & ride for mass transit
Carpool / Rideshare / Rental
App‐driven information available (Pandora, Bing, etc.) through via Smartphone

FACEBOOK (Doug Frisbie, Marketing Director)

Social Design & Connecting the Vehicle
Social graphing and mapping to share ideas and experiences
Web is being built around people – browse / search / discover
Shift from what to who in regard to prioritizing applications
Social by design – build from the ground up / put people at the center / make it
scale and scalable
Make it simple to use, take out complexity, make connections easy to leverage
Commercial adoption:
Gaming industry provides an excellent example of simple to use applications that
have complex and advanced graphics
Shared experience versus singular experience is the norm
Rapid scale can be achieved due to adaptable electronic functions


ONSTAR (Linda Marshall, President)

Connectivity perspectives:
Merging and convergence of of telecommunication OEMs and vehicle OEMs
1.1 billion smart phones by 2013
Product development cycles: automotive – 3.5 years / wireless communications – 18
months
130,000 customers using the RemoteLink application with 3.6 million interactions
MyLink (Chevy) / IntelliLink (Buick, Cadillac) / GMC Link
FamilyLink (9‐month pilot to test vehicle location, speed, directions, and safety)
OnStar FMV (For My Vehicle) to connect with 90 million Gm and non‐GM vehicles
OnStar highlights:
Launched 1996, 15 years / 45 services / 4 brands / 50 models
380 million service interactions to‐date
Call center located in Warren, MI
Subscribers – over 6 million (U.S.) / 500,000 (China)

COVISINT (David Miller, Chief Security Officer)

Vehicle information security perspectives:
OEM now wishes to control the application delivered to the end‐user car buyer
How can unauthorized intrusion be prevented when inviting app users into the
vehicle information space?  Avoid provisioning complications
How will the industry invite third‐party content/app providers to write apps?
Securing vehicle app integration will be crucial, must secure platform network
Automatic de‐provisioning process will protect consumer in a crash situation
without violating HIPPA laws
To connect vehicle users, owners and vehicles – operating requirements i.e. radio
pre‐sets, interactive electronics all are stipulated in advance and access can be
limited or approved

BLUETOOTH SIG (Mike Foley, Executive Director)

Connectivity perspectives:
Special interest group (SIG) includes smartphones, tablets, auto (90% by 2016),
health and wellness
Growth jumped dramatically in 2006, as a demanded in‐vehicle feature
Transforming data into real‐time information – new developments: Key fob
enhancement, diagnostic tools and sensors i.e. drowsiness indicator or heartbeat
monitor, ignition status, seatbelt status, tire pressure status, mobile phone
applications, seat occupancy, other identification information from the “car hub”
Other interconnected “hubs” – smart home devices, health / wellness / sports /
fitness solutions, television hub and connectivity, vehicle (beyond hands‐free)
Automotive Bluetooth Ecosystem Team (BET): Ford, GM, Honda, RIM, Apple, Continental


PARKING CARMA (Rick Warner, CEO)

Parking integration perspectives:
Mobile applications are available
Key MSAs are Chicago, San Diego, NYC, Boston
Connected driver / parking benefits: convenience, security, needs‐based demand
Link incentives to parking network managers to identify supply by city
Wireless devices growing at 15+% per year
Opportunity to improve parking experience – pay more (such as Starbuck’s) for
better service
Key links to special events, gas station locations, public light rail transportation,
towing, parking facilities
Provide advertising and coupon interface for instant reservations, special discounts
Voice interactive smart parking service

TOYOTA (Justin Ward, VP of Advanced Technology)

Fuel Cell Vehicle (FCV) Development
Hydrogen fuel cells expected in U.S. market by 2015 with sedan type vehicles
Fuel cell sources: Natural gas reformation / waste water into hydrogen
Zero CO2 emissions
Higher (500 km) driving range, better start‐ups, broader feedstock options
Vehicle efficiency of 60%, overall efficiency of 36% including factors such as
charging, fueling, practical cruising range, system cost, etc.
Polymer electrolyte fuel cell structure includes catalyst, separator, stacking cells and
FC stack
FCV and hybrid system components include integrated: power control unit / motor /
battery
Performance metrics: 86 MPGe / top speed 95 MPH
Cold weather driving range – 431 miles
FC stack durability is an issue, need to eliminate the departure between
performance and cost, need to increase power density, and reduce platinum loads
(comparable to conventional vehicles) by increasing core shell technology
Total vehicle cost is high (vehicles are hand‐built), reduce costs via mass production,
overcoming technical challenges
In Japan, 100 FCV stations to be deployed (2015), 1000 stations (2025), 5000
stations (2030) / In U.S. 20 FCV stations in California (2013), 15 stations in New York
City (2015)


CHRYSLER (Dan Knott, SVP of Purchasing & Supplier Quality)
Discussion of guiding principles – supplier development

Culture change
Transparency & collaboration
Urgency & advocacy
Long‐term relationships
Capacity management
Prepare for increased volumes
Can OEMs deliver new volumes accurately?
Collaborating on innovation
Ideas / supplier innovation team review / executive review / engineering innovation
team / adoption
Supplier retains IP or shared with OEM with OEM having access
Cost management
Detailed quote processes will be routine
Supplier/OEM must be able to hedge raw materials costs
Supplier/OEM cost‐sharing in conjunction with annual productivity commitments
Performance management
Warranty
Delivery
Partnerships including diversity and sustainability
Quality
Cost
Chrysler commitment
$90 billion annual spend combined Chrysler‐Fiat
Currently very little to no product overlap
24 new models, 19 major product interventions planned
20‐quarter plan includes internal process improvement, meritocracy for selecting
supplier awards (not solely cost‐driven), better communication field to HDQ


Key Supplier Issues
Where will assembly plants be located?
Status of tariff and non‐tariff policies in key markets
Recognition of industry as a technology‐based segment
Trying to create down‐line supply chain in emerging markets
Availability and higher costs of certain raw materials
Increased legislation and regulation in certain markets
North America sales growth will outpace Europe and Latin America, slower than
Asia‐Pacific
Need for flexible and sustainable vehicle and business platforms
Supplier consolidation will continue / pressure to innovate will increase
Sourcing process / RFQ feedback needs to improve


MCKINSEY & CO. (Hans-Werner Kaas)
Surprising financial results
Auto suppliers as a segment have outperformed the S&P 500 since 2006
Average cost of components/materials used in an average vehicle provided to OEM:
$13,400
50% of productivity give‐backs has been recaptured by suppliers via new product
content / new content of $1500 per vehicle as MSRP declined

4 industry mega‐trends
Cost volatility / materials costs remain uncertain
Vehicle content, regulatory impact as powertrain requirements shift
Competitive intensity
BRIC market growth

Survey findings
Price‐cost drivers: emissions / fuel economy / regulation / new content / safety
OEMs must match content design requirements with cost pressures
60% of supplier executives polled believe that the next decade will be “tougher.”
than the past decade (not pessimistic, just more challenging)
Selecting the right segments or OEM platforms will be the key strategic choice by
suppliers, those that are growing profitably

What’s Next?
Reduction in value delivery is more likely as we move to 2020 (more difficult to
create customer value ahead)
What to do?  Continued product innovation, smart consolidation, continued cost
improvement, explore adjacent (non‐automotive) industries, smart divesting

Achieving long‐term value creation requires addressing to 2 questions:
Where to play?
How to play?
Suppliers and OEMs must select the right mix of strategic / execution choices

Advanced Propulsion Technologies
Current and future market overview:
Influencers include: cost‐competitiveness / market demand / product solution
adoption glide path / choices and flexibility / % gains and efficiencies
Internal combustion (IC) technology will continue as range extender
Hydraulic and mechanical power management solutions will be integrated into the
hybrid segments
Diesel and clean diesel technology development is behind based on low market
demand in U.S., and higher total cost of ownership (TCO), longer payback equation
compared to improved gasoline pricing and clean gas accessibility
Customer utility (towing, commercial use, high torque) will continue in U.S. truck
markets


CAR Automotive Briefings 2011

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CAR Automotive Briefings 2011