car automotive briefings 2011

7575 Fulton Street East, Ada, MI 49355

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 [email protected]


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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