2016Aftermarket Overview

Jay BurkhartVice President and Chief Strategy Officer

919-406-8846jburkhart@aasa.mema.org

AASA is the aftermarket division of the Motor & Equipment Manufacturers Association

2

State of the U.S. Aftermarket

3

US aftermarket represents a $246.7 billion industry with steady growthProjected growth rate expected to average + 3.6% annually

4

2016 AASA Joint Channel Forecast Model

-1.4%

3.7%

4.7%

3.5%3.1%

3.5%

4.4%4.1%

3.3% 3.4%3.6%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F

% C

hang

e Y

ear-

Ove

r-Y

ear

Mar

ket

Tot

al (

in b

illio

ns o

f do

llars

)

Light Vehicle Aftermarket Growth

Key driver of $ growth is value of parts

5

Wiper Blade$5 $19

Fuel Pump$45 $225

Wheel End$15 $185

Source: AASA Analysis

Examples

Improved OE quality / warranty has constrained parts replacement and unit volume…

6Source: DIFM Outlook 2025, IMR Inc., 2016 AASA Replacement Rates Report

This has been offset by the increased longevity of vehicles

7

9.69.7 9.7

9.8 9.89.9

10

10.3

10.6

10.911.1

11.311.4

11.5

9.5

10

10.5

11

11.5

12

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Average Age of Light Vehicles in Use (Years)

Source: IHS

There is currently a dip in number of vehicles in “sweet spot”By 2017, the “sweet spot” is expected to stabilize and rise again

8

103.1 102.3

98.5

93

88.6

80

85

90

95

100

105

2011 2012 2013 2014 2015

In m

illion

sAftermarket Sweet Spot (Vehicles 6 – 12 years old)

Source: Experian

2015 saw record New Car sales

9Source: NADA

16.616.2

13.2

10.4

11.6

12.8

14.5

15.6

16.5

17.5

8

9

10

11

12

13

14

15

16

17

18

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

In m

illion

sVehicles Sold

As we wrap-up 2016…

10

New Car sales have likely peaked - rate of increase beginning to slow

11

14%

5%

4%3%

6%

2%

6%

3%

10% 10%

6%

3%

0%

2%

4%

6%

8%

10%

12%

14%

16%New Car Sales (YOY Change)

Source: NADA

2015 By Month

Gas prices continue to be lowPump prices down 35% from two years ago

12

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00Average US Gas Price

Source: EIA

2015 By Month

Peak Price$4.10 in 2008

Miles driven continues to increaseSupported by low gas prices; important driver for aftermarket growth

13

2,000

2,200

2,400

2,600

2,800

3,000

3,200

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

In M

illion

Mile

s

Annual Vehicle-Distance Traveled

Source: DOT

Drop in unemployment rate is supporting miles driven

14

5.7

5.5 5.55.4

5.5

5.3 5.3

5.1 5.15.0 5.0 5.0

4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

5.8

6.0US Unemployment Rate

Source: BLS

Peak Unemployment10% in 2009

Weather in 2015 was unusually warm for most of the year and much of the U.S.

15

0

20

40

60

80

100

120

140

His

toric

al R

ank

National Average Temperature Rank

Source: NOAA

January 2016: drier conditions in Midwest and the first strong winter storm in the Northeast

16Source: NOAA

2016 - 2018Looking ahead:Challenges and Opportunities

17

18

Channel Trends

• At Consumer Level• DIFM growth

• Trade Level• Big 4 consolidation

A data-driven landscape

19

DIFM share growth

20

Key Shifts

• DIFM

• All the dollar growth• + 4 points market share

• DIY

• Share loser• Dollar volume flat

Independent• Remains largest• Dollar Growth

OES• Share winner• Dollar gains

26%

74%

2013

DIY DIFM

22%

78%

2025

Source: DIFM Outlook 2025

Aftermarket parts volume

21

• DIFM increases $14 B (+ 25%)• OES and Independent both grow

• DIY stays flat at $20 B value2013 2025 Growth

DIFM $56 B $70 B +14 B (25%)-Independent $43 B $52 B +9 B (21%)

-OES $13 B $18 B +5 B (38%)

DIY $20 B $20 B ---

Source: DIFM Outlook 2025

DIFM outlet share forecast

22

60% 55%

3%5%

6%6%

16% 18%

14% 16%

2013 2025F

DealersTire DealersProduct Repair SpecialistsIndependent ChainsIndependent Non Chains

Reduction of over 13,000 outlets

Source: DIFM Outlook 2025

Vehicle age and owner income greatly influence outlet choice

23

61% 51%38%

18% 16% 6%

39% 49%62%

82% 84% 94%

0-3 3-6 6-9 9-12 12-15 15+

Yes No

Vehicle Age

79% 71% 66% 62% 63% 54% 47%

21% 29% 34% 38% 37% 46% 53%

Lessthan$25K

$25K -$50K

$50K -$75K

$75K -$100K

$100K -$150K

$150K -$200K

$200K+

Independent Dealer

Income

Did you go to the dealer the last time you needed vehicle repair or maintenance?

Source: DIFM Outlook 2025

OE Dealer recovery

24

• Outlets and share declines have bottomed out from the recession era

• Dealer closings over; + 200 locations in 2014

• 2014 product increase *first time in 7 years

• OES service occasions increasing along with car sales

• Consumer visits• Warranty / Diagnostics

*Source: Lang Marketing and NADA

Big 4 channel players continue to increase their share of the aftermarket

25

28% 28% 29% 31% 34% 35% 36% 37% 39% 41% 42%

72% 72% 71% 69% 66% 65% 64% 63% 61% 59% 58%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AAPAZOGPCORLY

Source: DIFM Outlook 2025 and AASA analysis

26

“Online” Impact on Aftermarket

• E-Tailing

• Price Transparency

• Consumer Expectations & Maintenance Behavior

• New Digital Business Models

e-Tailing market: ~5% of overall market

27

Source: DIFM Outlook 2025

3

13

0.4

1.7

3.4

14.7

2013 2025

e-Tailing Growth

DIY DIFM

+13%

Internet is driving transparency

28

• E-tailing will grow share of DIY

• Much faster growth of consumer search online

• Internet driving price transparency and new business models

… and consumer expectations are growing

29

Source: DIFM Outlook 2025

New online business models

30

• Open Bay Repair

• Auto MD

• Maintenance Apps

31

Vehicle Connectivity Impact on the Aftermarket

New vehicle “connectivity” and “autonomous” impact on the aftermarket

32

• Telematics to date in existing vehicles have not had a dramatic impact on repair behavior

• The coming “connected car” and autonomous vehicle technologies will begin to roll into vehicle parc

Vehicle Technology Stages

Source: MEMA

Telematics – ADAS – Connected – Autonomous

Deep-dive on a key opportunity: Advanced Driver Assistance (ADAS)

33

Ground-breaking new study released

Our key findings on advanced driver assistance systems (ADAS)

34

Advanced driver assistance systems (ADAS) that are available today could potentially reduce cost by around 30% and reduces fatalities by one-third

Penetration of key technologies only 7% or less in 2015 model year

BCG analyses show that ADAS features have a cumulative safety benefit to society of around $16,000 per car

To help reduce the societal harm of vehicle crashes, all stakeholders will need to take action

Motor vehicle crashes cost the United States $910B or $4,000 per vehicle each year

Source: BCG/MEMA study “A Roadmap to Safer Driving”

New era: recent Consumer Electronics Show (CES) had 917 automotive exhibitors!

35

Automotive Electronics

464

Audio 748

Robotics 233

Sensors 493

Telecom 324

Wearables 761

Auto Accessories

453

Performance Audio 534

Source: IHS

CES trends show some of the complexity around coming connectivity

36

Cyber-Security• Connected cars are vulnerable to outside attacks (either directly or via

cloud back-end access)• Risks: Theft, espionage, deception, privacy, damage or destruction• Solution: Iterative design of SW security on top of HW security

Apple CarPlay & Android Auto• Sales of CarPlay [OR] Android Auto: ~500K (2015) 45M+ (2022)

Software Over-The-Air (OTA)• Value >$35 billion by 2022 (savings, updates, royalties, bandwidth)• OEMs cannot build software OTA platforms fast enough• Driving M&A activity among automotive suppliers and IT firms• OTA and cyber-security must be deployed together

Source: IHS

A more connected car could lead to an increase in key business drivers for the aftermarket

37

Increased awareness of: - failure, replacement rates & location information for better demand forecasting- prognostics that alert motorists, service providers, distributors and suppliers of pending failure. - more end consumer awareness would allow for suppliers to benefit from the increased maintenance performed on vehicles.

Regulations & government policy must protect access for Independent Aftermarket

38

• Member of the Aftermarket Telematics Task Force, working collaboratively with all industry stakeholders

• Drafting “model-language” legislation bringing clarity to our wants and needs

• Working with ISO and SAE, promoting a technical solution (Vehicle-station Gateway) for safe aftermarket access to the vehicle

• Educating regulators and policy makers of the “unintended” impact of rulemaking related to data-privacy and cybersecurity

• Legislative Summit and Ride & Drive: Used this platform to regulate and educate policy makers on aftermarket issues

39

KEY TAKEAWAYSIndustry Growth

• 5 year forecast of steady annual growth for Aftermarket Industry• Increased dollar value of replacement parts a key driver

• Aftermarket benefits from very old cars still on road (11.5 avg age)• Record miles driven supported by low gas prices• Offsets impact of lower overall replacement rates

• Record New Car sales in 2015 indicate peak annual volumes• Repair “sweet spot” group reduced near term

Will continue to monitor and report on these trends

40

KEY TAKEAWAYSChannel Trends

• DIFM continues to grow vs. DIY• OES growing again but constrained• Independents still dominant and favored by consumers

• Big 4 Channel Players continue to grow share of market

• 2017 white papers to update changes within DIFM channel• New M&A reports available

41

KEY TAKEAWAYS“Connected” Technology

• Consumer expectations from digital lifestyles to impact maintenance behavior

• On-line will drive innovation in new tools and business models

• OE adaptive safety systems (ADAS) and autonomous vehicles coming

• Government policy integral to how technology will impact Aftermarket

• Legislative Summit and Ride & Drive

“Connected Aftermarket” communications outline impact on aftermarket from the new technologies