AGEFI Luxembourg18Février 2012

Economie/Finance

With China slated to be the worl-d’s biggest market for autosales and exports by 2025,

and demand for electric vehiclesexpected to be the highest in emer-ging markets, global auto playersshould have a clearer vision of theway forward on issues critical tothe industry. But it appears theydon’t just yet, according to KPMGInternational’s 13th annual GlobalAutomotive Executive Survey.“Compared to previous years’ results,the findings this year tell us thatauto experts have no clear ideaof the direction the industry isheading,” said MathieuMeyer, KPMG’s Head ofAutomotive for Europe. “Onething is certain, electromobility is themost critical trend for the industry—howand when fully-electric cars will be a reali-ty is dependent on a variety of complexand interrelated factors.”

While the industry continues to weigh the relativeadvantages of various electrified fuel technologies, it isclear that ownership of the e-components space (bat-tery management and chemistry, power electronics, e-motors, battery cells and packs, etc.) will draw intensecompetition among original equipment manufactu-rers (OEMs) and suppliers. Fifty-four percent ofrespondents said that electric component supplierswill gain a bigger role by 2025 and 40 percent ofrespondents predict that OEMs will lead in that area inaddition to traditional power train technologies.

Electromobility predicted to evolveout of Asia, but which technology?

Despite the fact that 76 percent globally said that fuelefficiency is still the most important factor affecting

consumer-buying decisions, two-thirdsdon’t expect electric vehicles to

exceed 15 percent of annual globalsales within the next 15 years. Thislast point is clear for those living inthe US or in Europe” says LouisThomas (picture), head of auto-

motive for KPMG Luxembourg.“But that does not seem to be thecase in China, Japan as well as

other high-growth markets whereelectromobility is expected to take

hold sooner,” according to the surveyfindings.

Respondents in Asia, China andJapan in particular, predict a

higher penetration of fully elec-tric vehicles than the globalaverage by 2025; well over 50

percent of respondents fromChina expect that upwards of 11

to 25 percent (or 4 to 9 millionvehicles) will be new car registra-

tions for e-cars, while 46 percent of respondentsfrom Japan predict that e-car registrations will exceed25 percent. That is in contrast to the US, where nearly50 percent believe new e-car registrations will accountfor only 6 to 10 percent by 2025.

Chief among the issues manufacturers and suppliersseem uncertain about is which fuel technology willemerge as the optimal and predominant method topower the electric car by 2025. Globally, hybridvehicles are expected to lead the market and attract themost investment in the interim with full hybrids andplug-in versions expected to be the favored technolo-gies, and fuel-cell vehicles coming in third. This year’ssurvey found that respondents see an improvement inbattery and fuel cell technologies, and “there are signsthat fuel cells may be viewed as the preferred option”,said Louis Thomas.

This scenario is expected to play out differently inChina and Japan where 33 percent and 46 percent ofrespondents, respectively, said that battery-electrifiedvehicles will be the most popular followed by fuel-cellvehicles. “The industry faces a tough decision on whe-

ther to place more trust and resources in fuel-cell or bat-tery vehicle concepts in the long-term,” commentedMr. Meyer. “Hybrids may be more popular in theinterim than pure, battery-powered cars, but the hid-den champion that could emerge will be fuel-cellvehicles,” added Louis Thomas.

Interestingly, nearly two-thirds of respondents global-ly said that optimization of the internal combustionengine (ICE) currently offers greater efficiency and themost potential for carbon emission reduction than thecurrent electromobility technologies over the next 5years. Those findings are compelling when viewedalongside the survey results showing that Asian andEuropean OEMs are most likely to gain hugely in mar-ket share over the next 5 years, with seven out of the 10fastest growing auto manufacturers expected to befrom Asia. Moreover, a majority of respondents belie-ve that China will lead in both sales and exports ofvehicles by 2017 followed by the US, and Brazil in aclose tie for third with India.

“Our survey also revealed that 75 percent believe thatmature and emerging markets are converging whichwill mean that the opportunities and the challengeswill be the same for both,” said Chang Soo Lee,KPMG’s Head of Automotive for Asia and based inSouth Korea. “This has big implications for OEMsfrom mature markets; they will have a wealth of newopportunities, but they can expect fierce competitionfrom players in the BRIC countries for traditional andnew technologies in their domestic markets.”

Converging markets, new technologyincrease growing threat of overcapacity

As with KPMG’s 2010 global auto survey, LouisThomas stresses that this year’s survey shows thatovercapacity and excess production remain criticalissues, with over half of respondents expecting Chinato be the most overbuilt by 2016. Yet, the survey’s fin-dings reveal that still no real solutions have been iden-tified. Eighty percent of respondents see overcapacityas a serious threat in the BRIC (Brazil, Russia, India andChina) markets, confirming the available industry datathat indicates that unutilized capacity is a real threat inthese regions and is rapidly increasing.

Urban mobility and the connected car

Other issues that players striving to control the valuechain should be tuning into are urbanized mobilityservices , ‘connected-car’ solutions and seeking newalliances and partnerships to tap into innovation andunique competencies. Urban mobility is a rapidlyemerging issue especially in the US and Japan whereover 60 percent of respondents believe urban plan-ning will influence vehicle design and usage. InGermany, surprisingly, only 38 percent hold that view.Brazil is expected be a leading market for mobility ser-vices with 42 percent of respondents predicting morethan 25 percent of the country’s urban inhabitants willuse those services by 2026; overall, China has the grea-test potential to lead the market for mobility serviceswith an expected 90 million potential customers.

As younger urban drivers grow more interested in carsharing than in full ownership, OEMs have an oppor-tunity to dominate the space but respondents fromaround the world had mixed views about who wouldcontrol this growing new mobility services market.Full, integrated vehicle connectivity is long overduesaid over 60 percent of survey respondents. While tra-ditionally controlled by OEMs, the very lucrative mar-ket for in-car connectivity seems to be open for thetaking. “Given the increasing dominance of intelligentplug-in connectivity solutions, with IT companies thedriving force behind them, it is doubtful that OEMswill continue to own the revenue stream down theroad,” Mr. Meyer said. “

The KPMG Global Automotive Executive Survey 2012: Managinggrowth while navigating uncharted routes,www.kpmg.com/LU/en/IssuesAndInsights/Articlespublications/Pages/KPMGsGlobalAutomotiveExecutiveSurvey2012.aspx, is based on a sur-vey of 200 automotive executives, over half of whom are business unitheads or higher. The respondents come from all parts of the automotivevalue chain including vehicle manufacturers, tier 1, 2 and 3 suppliers, dea-lers as well as financial service companies and for the first time mobilityservices providers. A total of 47.5 percent of the executives are based acrossEurope, Middle East and Africa, 31 percent in the Asia-Pacific region and21.5 percent in the Americas. Ninety-seven point five percent of the par-ticipants represent companies with annual revenues greater thanUSD100 million and more than a fifth work for firms with revenuesgreater than USD10 billion. The respondent interviews, which were heldby phone, took place in August, September and October 2011.

For further information, please contact: Louis Thomas, Partner,Luxembourg Head of Automotive, louis.thomas@kpmg.lu

KPMG’s Global Automotive Executive Survey 2012

Global automotive players lack clear view of the future, but seemcertain about electromobility and the ‘urbanized’ car by 2025

KPMG’s report, Global MetalsOutlook: ManufacturingResilience, is a vital resource for

metals stakeholders that explore the keyissues and trends impacting the industry.Written in collaboration with theEconomist Intelligence Unit, this report isbased on a survey of 220 senior executivesfrom leading global manufacturing com-panies. Featuring executive interviewsand insights from KPMG experts, thereport sheds light on key sector trends aswell as the innovative strategies metalsplayers are increasingly adopting.

Substantial commodity price volatility will be a fact oflife for metals manufacturers for years to come. Tomanage risks and capitalize on the opportunities ari-sing from these uncertain market conditions, metalscompanies are pursuing strategies that reflect the cha-

racteristics of the segment in which they operate, theirfinancial strength and their tolerance for risk.

More than one-half (51%) of metals companies sur-veyed for this report see price volatility for key inputcosts as one of their biggest challenges over the next12-24 months. One strategy available to metalsbuyers is the use of financial instruments to hedgeexposures. As noted in the survey, this approachhas yet to be widely adopted across the industry notas only 21% of metals companies polled planned toincrease their use of new classes of derivatives andcommodity hedging techniques over the next yearor two.

Nearly seven in ten (68%) metals producers say costoptimization will be a top priority in the coming 12-24 months. Keeping operational costs lean will be ahallmark of the metals industry. Barely half (52%) ofnon-metal industry manufacturers say the same.Many of the adjustments that metals companiesmade to their production levels during the globalfinancial crisis, which were originally thought to be

temporary, have now become fixed at those levels asdemand is unlikely to justify a reversal to pre-crisisvolumes in certain mature economies, at least in theforeseeable future. Nearly one-third of metals com-panies expect to expand through M&A in the next 12-24 months, compared with less than one-fifth ofmanufacturing companies generally. Metals compa-nies are looking to acquire self-sufficiency andexpand via mergers and acquisitions (M&A), fre-quently to gain control of raw materials.

Eric Damotte, KPMG’s Global Head of Metals, saysthat “Global metals companies have adapted defen-sive strategies to guard against price volatility andwill continue to move towards a more self-sufficientbusiness model. Interestingly, in this move towardsself-supplying, some players have looked to acquirea significant presence within the mining industry,and in some cases are now considering selling theirexcess raw assets on the open market. Ultimately,this is a time of restriction for the industry, whereachieving cost efficiencies remains the chief concern.Of course, metals companies look to establish or

expand their presence in growth economies and fur-ther retrench from markets where there is lessmedium to long-term potential. However, this is alsoa moment of opportunity as metals players that fine-tune their business models and position themselvesfor the future will see their bets pay off once growthreturns to the industry.“

More than one-half (53%) of respondents from metalscompanies say their organizations are consideringlocalizing or customizing operations to improve theefficiency of their supply chain, compared with 43%of manufacturing companies more widely.Companies are looking to locate assets closer to cus-tomers or suppliers; given the size and bulk of theirproducts, shipping costs are a major concern. Somecompanies look mainly to secure strategic raw mate-rials; others are also looking to expand downstreaminto new product segments in both developed anddeveloping markets.

A copy of the study can be downloaded from www.kpmg.lu.

Metals companies adapting new strategies to hedge against uncertainty

No economic growth withoutart!» - This statement still scarespeople off even if artists and

leading representatives of the businesscommunity have been following newparadigms. And that's exactly the wed-ding of opposites that Kurt Salmon explo-red in two studies: one of the studies wasbased on the cultural investments beha-viors around the world(1), whilst the otherfocused on the challenges of creative andcultural enterprises in Belgium(2).

Culture has changed in the last 10 years. It is not abubble anymore which stands alone. The creativeeconomy, encompassing industries ranging fromperforming arts to videogames, is becoming globaland digital. Between 2002 and 2008, Europe was thebiggest player in terms of export of creative and cul-tural products. In 2008, 8.5 million people were wor-king in creative and cultural industries (CCI) and4,5% of EU GDP.

This puts the creative industry in the same league asthe automobile industry or electrical engineering inGermany for instance. In Germany, the sector couldgrow by an average of roughly 2.5% every year up to2020 with about EUR 175 bn of revenues. This gro-wing and innovative sector could create more jobsthan the finance services sector with 1.3 millionpeople by 2013 in the UK according to a recent report

from the UK's leading business group. Even thoughcultural budgets are under constraints, a better sup-port to the purple economy might be one of the ans-wers against the crisis. For instance, in Belgium, 75%of the creative entrepreneurs (micro-firms mostly)think that CCI are a high potential sector for the futu-re. However, only 51% of the Belgian CI owners belie-ve that Belgium is a very good country to start a com-pany in this sector. This paradox is obvious in mostEuropean countries. Therefore the improvement ofthe framework conditions impacting the creative eco-system has to be further developed.

A better creative education including basics mana-gerial, law and communications skills and a better co-ordination of the public action across the policies (cul-ture, tourism, education, economy, research …) areneeded. Trans-disciplinary platforms could bringtogether the extreme diversity of creative industries.The IP protection remains a problem for the sustai-nability of those industries. The support and promo-tion of the CCI abroad, especially in emerging mar-kets, has to be adapted to CCI and strengthened.

Access to financing: a key challenge for companies in the purple economy

Across Europe 85% of CI entrepreneurs have diffi-culties to access private or public funds. According tothe Kurt Salmon survey, 76% of Belgian creativeenterprises say that they are first and foremost finan-ced by the owners’ capital, should they be from per-sonal saving accounts or «FFF» («friends, family

and… fools»). The application to public subsidiesinvolves for CCI micro-firms owners considerableand complex red tape, whereas the allocation of sub-sidies is considered as rather un-transparent and insi-gnificant. Publicly funded support reaches only partsof the sector. The CI business owners have difficultyto access to the capital market: bank loans, venturecapital , sponsoring, crowdfunding,… Only a fewincentive measures are tailored to the specific needsof CCI.

The principal hindering factors that block businessesin creative sectors from accessing financial resources:small credit volumes for micro-firms or longer amor-tization periods, dependence on IP and intangibleassets, difficulty of gauging future income flows andassessing the risk of an investment, no third partiesvaluation. The lack of a common language and loadsof clichés from both the investors side and the creati-ve leaders side has proven to be an important obs-tacle. Private investors think that CCI are risky busi-nesses or unable to honor their commitments… eventhough it was proven in the UK, that the survivalrate of CCI enterprises, after 5 years, is even higherthan other companies (49.7% against 46.6%).

New financial facilities to overcome the barriers of investing in cultural and creative industries

Now, decision-makers have a responsibility to explo-re and encourage innovative funding options as avalidation of creative business models. For instance,

crowd-funding platforms need more recognition as asource of early stage financing, for CCI businessessupporting pre proof of concept and early marketvalidation. Guaranteed funds, with third party suc-cess forecasting for CCI businesses, offering access tomore significant bank loans have to be reinforced. Amore attractive philanthropy tax deduction for theindividuals and companies can leverage funds forculture in many European countries. Innovation vou-chers and dedicated training for CCI owners (e.g.Gateway2Investment training, in London, on how toconvince investors) are inspiring schemes.

Public intervention allowed a more democraticaccess to culture. If private support/funding is stillseen as evil for the liberty of the creator, public inter-vention doesn’t prevent interventionism on thecontent nor guarantee quality/avant-garde. Thanksto the tools, know how, contacts at internationallevel… the private sector and citizens can also bepartners for CCI. Regarding the growth potential ofCCI, the challenge today is not to transfer the chargeto the private sector but to multiply the means andthe funding sources. Creative industries are impac-ting positively the economy. Let’s imagine the eco-nomic conditions and facilities to help CCI flourish.

Anne MAGNUSCulture & Public Sector, Kurt Salmon

1) Kurt Salmon Study 1: “Investment and undertaking in culture:from intuition to decision-making”, presented at the Forum of Avignon,November 20112) Kurt Salmon Study 2: “Stakes and opportunities of cultural and crea-tive enterprises in Belgium”, January 2012

Culture & Economy: the marriage of the opposites?«