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The battle is getting harder Traditional
automotive business models need to be adapted
Marcus Berret, Roland Berger Strategy Consultants
Gothenburg, November 27, 2007
2
Content
A. Industry environment B. Some facts
about the global automotive supplier
industry C. The recipe for success D.
Summary
This document was created for the exclusive use
of our clients. It is not complete unless
supported by the underlying detailed analyses and
oral presentation. It must not be passed on to
third parties except with the explicit prior
consent of Rothschild and Roland Berger Strategy
Consultants.
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A. Industry environment
4
The automotive power play Suppliers are in a
"sandwich" position

• Stagnation of demand in triad markets
• Increasing price sensitivity and focus on total
  cost of ownership
• Growing awareness for environmental issues

END USERS

• Proliferation of product portfolio
• Growing attention to low cost car concepts
• Strive for technology innovations in the
  Powertrain to reduce vehicle emissions
• Further reduction of vertical integration, also
  in product engineering
• Shift of investment focus to emerging markets
  (esp. Russia and India)
• Attempts to reduce structural overcapacities
  (e.g. through increased manufacturing plant
  flexibility)

OEMs
Ongoing intense pressure on margins
SUPPLIERS

• Ongoing raw material price increases
• High bargaining power driven by consolidation
  (e.g. steel aluminum)

RAW MATERIAL PROVIDERS
Source Roland Berger/Rothschild
5
Financial distress has become more apparent
Selected suppliers with financial distress
Large suppliers
Medium/Small suppliers
5
Source SEC filings Automotive News press
research Roland Berger/Rothschild analysis
6
The market is widely expected to become even
tougher
Market conditions for suppliers
Main challenges affecting automotive suppliers
Pressure from OEMs to reduce price
91
71
Raw material price rises
Pressure from OEMs to improve quality
7
51
Harder
Shift in demand towards low tech and low cost
parts
49
Change vs. previous year -pts.
Weak production volumes in North America
-15
49
Pressure from OEMs to increase level of innovation
8
42
Weak production volumes in Europe
-17
37
Same
Weak production volumes in Asia
17
Easier
"Very important" issues or "extremely important"
issues of all respondents
Source Roland Berger/SupplierBusiness.com
supplier executives survey
7
B. Some facts about the global automotive
supplier industry
8
Despite a challenging environment, global
supplier profitability has stabilized at high
level
11.5
Profitability of automotive suppliers 2000-2007e

EBIT margin
Return on capital employed (ROCE)
12.5
6.1
11.5
11.5
5.5-6.0
11.1
10.9
10.9
5.6
5.3
5.3
5.0
5.0
7.7
3.9
2000
2001
2002
2003
2004
2005
2006
2007e
2000
2001
2005
2006
2002
2004
2003
Basis Revenue-weighted average of
performance-rated suppliers
Source Roland Berger/Rothschild Supplier
Database 2007 FactSet
9
Automotive suppliers even outperform average OEM
profitability
5.0
Profitability of automotive suppliers 2000-2007e

EBIT margin
Return on capital employed (ROCE)
12.5
6.1
11.5
11.5
11.1
10.9
10.9
5.6
5.3
5.3
5.0
5.0
Suppliers
7.7
3.9
Suppliers
5.1
4.0
3.9
3.8
3.8
3.6
6.4
6.2
6.1
5.6
2.9
5.4
5.4
OEMs
4.1
OEMs1)
2000
2001
2002
2003
2004
2005
2006
2000
2001
2002
2003
2004
2005
2006
Basis Revenue-weighted average of
performance-rated suppliers 1) Excl. General
Motors for 2005/2006 due to negative capital
employed
Source Roland Berger/Rothschild Supplier
Database 2007
10
Scandinavian suppliers profitability is
significantly above global average
11.5
Profitability of automotive suppliers 2000-2007e

EBIT margin
Return on capital employed (ROCE)
17.8
17.3
17.1
9.3
9.2
8.8
8.1
14.5
Scandinavia
7.7
7.7
Scandinavia
13.7
13.1
12.5
6.5
11.5
11.5
11.5
6.1
5.5-6.0
10.9
10.9
11.1
5.6
5.3
5.3
5.0
5.0
7.7
3.9
2000
2001
2002
2003
2004
2005
2006
2007e
2000
2001
2005
2006
2002
2004
2003
Basis Revenue-weighted average of
performance-rated suppliers
Source Roland Berger/Rothschild Supplier
Database 2007 FactSet
11
However, profitability and growth rate strongly
varies across regions
10.6
Key performance indicators by region 2000-2006
Western Europe
Japan
China
North America
Scandinavia1)
Korea
Asia other
Basis Revenue-weighted average of
performance-rated suppliers
Source Roland Berger/Rothschild Supplier
Database 2007
11
12
Medium-sized and large suppliers are more
success-ful than small suppliers
10.3
Key performance indicators by company size ROCE
2006
ROCE change vs. 2000 -pts.
-4.2
-1.6
2.1
-0.1
-2.0
4.8
-0.1
16.3
11.5
11.1
10.3
10.2
8.7
8.3
500-1,000
1,000-2,500
5,000-10,000
gt10,000
2,500-5,000
lt250
250-500
Revenue EUR m
Basis Revenue-weighted average of
performance-rated suppliers
Source Roland Berger/Rothschild Supplier
Database 2007
13
We have defined groups of 50 top and 50 low
performers across the industry
Key performance indicators by supplier 2000-2006
Ø 10.7
TOP performers
Revenue growth 2000-2006 CAGR
Ø 6.7
LOW performers
Average ROCE 2000-20061)
Top performer
Low performer
Basis Revenue-weighted average of
performance-rated suppliers 1) Additional
criteria above-average ROCE in 2006
Source Roland Berger/Rothschild Supplier
Database 2007
14
Suppliers based in emerging markets already
account for one third of all top performers
10.6
Top performers by region 2006 vs. 2005
Western Europe
Japan
North America
Emerging markets
2005
2006
2005
2006
2005
2006
Korea
2005
2006
2005
2006
Source Roland Berger/Rothschild Supplier
Database 2007
14
15
The gap between top and low performers is
permanently widening
,
Key performance indicators by supplier 2000-2006
Revenue growth 2000100
Return on capital employed
18.3
17.9
17.8
16.7
16.7
TOP
15.9
TOP
14.3
160
1.8x
3.1x
133
8.8
8.7
8.6
7.2
LOW
LOW
6.1
5.8
4.9
2000
2001
2002
2003
2004
2005
2006
2000
2001
2002
2003
2004
2005
2006
Basis Revenue-weighted average of
performance-rated suppliers
Source Roland Berger/Rothschild Supplier
Database 2007
16
C. The recipe for success
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Suppliers need to adapt their business models
Selected areas for business model adaptation
REVENUE side
COST side
1
4

• Globalization of revenue struc-tures and
  Sales/Marketing approach
• Diversification of customer portfolio
• Penetration of growing seg-ments (especially Low
  cost cars)

• Globally efficient footprint structures
  (Manufacturing and Engineering)
• Optimized Engineering efficiency
• Aggressive Purchasing cost reduction approach
• Lean overhead cost structures

5
2
6
3
7
18
Top performers have diversified their customer
base globally
1
GLOBALIZATION
Revenue distribution by region of total
revenues 2006
Revenue in emerging markets1)
Revenue outside home region
lt10
10-20
20-30
30-40
40-50
gt50
Industry
TOP performer
LOW performer
TOP performer
LOW performer
Basis Median subset of 102 performance-rated
suppliers 1) CEE, South America, China,
India, Korea, Asia/Pacific (excl. Japan) triad
suppliers only
Source Roland Berger/Rothschild Supplier
Database 2007
19
The key challenge Enter Asian OEM customers
1
GLOBALIZATION
Global market shares 1990-2020 by OEM group
? 41 m
? 68 m
? 105 m
Sales by OEM m cars
Other OEMs
1990
2007
2020
Chinese OEMs
5
0
1
Korean OEMs
Others
6
5
7
Japanese OEMs
Chinese

4
15
Korean
1
4
9
European OEMs
Japanese
8
16
24
European
11
19
29
"Big 3" (North American OEMs)
"Big 3"
17
20
21
43
68
105
TOTAL
1990
2007
2020
Source J.D. Power Roland Berger
20
Top performers generate their revenues with a
significantly broader customer base
2
CUSTOMER PORTFOLIO
Revenue distribution by customer
Top 3 customer share of total revenues, 20061)
Revenue share of top customer of all
suppliers, 20062)
gt25
20-25
15-20
lt15
Industry
TOP performer
LOW performer
TOP performer
LOW performer
1) Basis subset of 66 performance-rated
suppliers 2) Basis subset of 48
performance-rated suppliers
Source Roland Berger/Rothschild Supplier
Database 2007
21
Suppliers need to develop a clear strategy how to
address the low cost car segment
35
3
SEGMENTS
Low cost car segment
Development of Low cost car segment Examples
Development of A/B segment m units
gt4
A/B
18
QQ
Matiz
14
C/D
Brilliance BS6
ShuangHuan CEO
2006
2012
CAGR 2006-2012
22
Top performers have shifted their manufacturing
footprint to low cost countries more aggressively
35
4
FOOTPRINT
Manufacturing footprint of suppliers
Supplier footprint of all locations
Share of emerging markets1) of all locations
TREND
100
100
RoW
Asia other
China
S. America2)
CEE
Japan
Western Europe
USA/ Canada
2000
2006
2000
2006
TOP performer
LOW performer
2000
2006
Basis Revenue-weighted average of
performance-rated suppliers 1) Incl. Mexico
and Korea 2) Incl. Mexico
Source Roland Berger/Rothschild Supplier
Database 2007
23
Suppliers need to define a stringent footprint
strate-gy with clear definition of own value add
6.9
4
FOOTPRINT
Global supplier footprint
Source Roland Berger
24
Engineering efficiency has to be increased
6.9
5
ENGINEERING
RD benchmark1) expenses in of revenues
Levers to strengthen RD efficiency

• Introduce RD portfolio management methods by
  defining market to product and ensuring
  customer orientation
• Manage product complexity through right
  definition of product variants offered to
  customers
• Optimize level of vertical integration of
  activities through realignment of resources to
  core areas and effective knowledge management
• Establish monitoring systems through objective
  KPIs e.g. quantitative input-output relations and
  process indicators to measure engineering
  performance
• Allocate correct amount of resources by
  implementing standard project calculation
  procedures
• Delocalize selected activities/projects to low
  cost countries

Innovation BUSINESS
Commodity BUSINESS
1) Average target range might differ depending
on product area
Source Roland Berger
25
Material cost reduction targets of suppliers need
to become more aggressive
6.9
6
PURCHASING
Annual cost reduction of total material cost
Levers to reduce purchasing cost of total cost
reduction potential2)
High
Sourcing strategy
Design-to-cost
10-20
7-12
Organization/ processes
Potential cost savings1)
Commodity strategy
4-12
5-10
3-6
Negotiation management
Supplier management
2-5
Low
Project
Product phase
Series
Average
Benchmark
Weak
1) One-time effect 2) In relation to
purchasing volume addressed
Source Roland Berger
26
Overhead structures have to become leaner.
Objective 6 of revenues
6.9
7
OVERHEAD COST
Overhead cost1) ratios of revenues
Levers to strengthen overhead efficiency

• Increasing efficiency in services driven by
  increasing process efficiencies (e.g.
  standardization) and optimal organizational
  allocation of tasks and responsibilities
• Reduction of services driven by quality,
  frequency, complexity, response time, number of
  addressees
• Turning fixed costs into variable costs driven by
  outsourcing, cost sharing and make-or-buy
• Systematic checks are required upfront
• External/internal benchmarking along all
  dimensions (e.g. internal between
  regions/divisions, historic and as-is)
• Process and task mapping identifying drivers for
  differences in resource allocations
• Revision of underlying practices and procedures
  for indirect cost, e.g. site management, IT,
  security, training, etc.

Acceptable
Benchmark
Weak
1) Selling, general and administrative expenses
Source Bloomberg Roland Berger
27
D. Summary
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Summary
1. The pressure on automotive suppliers will
continue to further increase 2. On average,
supplier profitability has developed reasonably
well over the past years with strong
individual differences 3. Suppliers from emerging
markets are catching up and need to be watched
very carefully 4. Established suppliers need to
learn from global top performers and adapt their
business models both on the revenue and on the
cost side