Industry Overview GABELLI & COMPANY AUTOMOTIVE AFTERMARKET - PowerPoint PPT Presentation

Industry Overview GABELLI & COMPANY AUTOMOTIVE AFTERMARKET SYMPOSIUM NOVEMBER 2016

Agenda Topic Presenter • What is MEMA Steve Handschuh • Why Suppliers Matter President and CEO, MEMA • Cross-Industry Mega-Trends Paul McCarthy Senior Vice President, MEMA Strategy, Planning & Information Services • Mobility Technology and What it Brian Daugherty Means to the Aftermarket Chief Technology Officer, MEMA • Aftermarket: Where Are We Now Bill Long and Where Do We Go From Here President and COO, AASA • Q&A All

What is MEMA? 3

Suppliers drive innovation in the mobility industry MEMA and its four specialized divisions are transforming mobility and vehicle safety by developing, manufacturing, and remanufacturing components, technologies, and systems for use in passenger cars and heavy trucks. Motor & Equipment Manufacturers Association Automotive Aftermarket Heavy Duty Original Equipment Motor & Equipment Suppliers Association Manufacturers Association Suppliers Association Remanufacturers Association 4

Why suppliers are a key player President’s Overview Key drivers of R&D and innovation Largest sector of manufacturing jobs in the country 871,000 direct jobs and 4.3m total jobs 5 Sources: IHS, MEMA Industry Impact Study 2016

Agenda Topic Presenter • What is MEMA Steve Handschuh • Why Suppliers Matter President and CEO, MEMA • Cross-Industry Mega-Trends Paul McCarthy Senior Vice President, MEMA Strategy, Planning & Information Services • Mobility Technology and What it Brian Daugherty Means to the Aftermarket Chief Technology Officer, MEMA • Aftermarket: Where Are We Now Bill Long and Where Do We Go From Here President and COO, AASA • Q&A All

We’ve come a long way – questions from 2014 Gabelli conference seem … dated Themes of questions from 2014 • Auto had peaked and we were facing a long decline Megatrends create We had a • Millennials don’t want cars new rationales counter and appeal for • Mobility inevitably means argument vehicle usage we’ve passed peak auto • ADAS / automation – what’s that? • When and how fast should we run from auto? 7

Industry convergence creating new value opportunities President’s Overview “Convergence: Automotive and Tech are now inseparable” “Revolution in the auto industry “Software: the new auto … is part of the larger ‘fourth battleground” industrial revolution’ ”/ “Industry 4.0” “Tech companies will become car companies and car companies will have to become tech companies” – VC Beat “The car is the ultimate mobile device” “We believe the future of mobility will be automated, connected, and electrified” The convergence of automotive and IoT 8

Industry consistent on mega-trends – and they are game-changers • Driving automation / ADAS / crash mitigation to crash avoidance Safe • Cybersecurity • CAFE / fuel economy / emissions reduction Green • Electrification / decarbonization • Regulatory mega-trends • Internet of Things (IoT), cybersecurity (again), V2X, Infotainment as key customer value prop, fourth industrial revolution, etc. Connected • Becoming a technology industry: mechanical → software/electronics • Changing ownership/usage patterns, value propositions, and business models; big data / data analytics Mobility • Changing customers, competitors, partners 9

Millennials do buy cars – and Gen Z loves them “Everything we thought about “Millennials are buying cars Millennials not buying cars was after all” wrong” 2014 DOT study: economy explains >100% of Millennials’ lower car purchasing versus previous generations “ 97% of Gen Z [post-millennial “ Why Millennials are buying cars generation] plan to get a driver’s in big numbers” license” 10

“We will see more change in the auto industry in the next 5-10 years than we have seen in the last 50.” – Mary Barra, GM 11

Changes in what is the value in a vehicle What a vehicle is has changed over time Past Current Future Mechanical Electronic Software device device with device with mechanical electronic & enablers mechanical enablers 12

Industry trends fundamentally changing • Brand attributes • What customers want and will pay for • Who are the buyers / owners • Who and how vehicles are maintained • Changes for mobility companies • Sources of competitive advantage • Investment needs • Pace of change / level of uncertainty • People and culture “What we do and how we do it as an industry will dramatically change.” 13

Yet we are at the classic forecast fallacy stage Observers – inside and outside the industry – are exhibiting the classic forecast fallacy: Over-estimating the near-term impact – and underestimating the long-term impact – of these shifts 14

Though we are at the top of the “hype cycle” Autonomous Vehicles 15 Source: Gartner

Near-term also offers unprecedented drivers of supplier innovation and change Source: ICCT, 9/2016 Regulatory shifts – fuel economy, safety, emissions, cybersecurity – will leave no ‘widget’ on the vehicle untouched 16

Automation changes everything – but might bring more opportunity than obsolescence risk Change = opportunities for profit 17

Change is good Without change, Change = there is no profit winners and losers • Competitive advantage – the • “The more turbulent an source of profits – “is a industry’s environment … the disequilibrium phenomenon that greater the dispersion of is a consequence of change” profitability within the industry” • In the long run, markets and • Competitive advantage competition mean we shouldn’t “depends on firms’ ability to make any profit – unless there respond to change” is change 1. Ability to anticipate changes • “Any external change creates 2. How well you respond to change opportunities for profit” Change = opportunities for profit 18 18 Source: Grant, Contemporary Strategic Analysis

Mobility & automated mega-trends mean miles driven / auto use may explode 1950 - 2050 Vehicle and Passenger Miles 8,000,000 for all travel AOR = 0.95 7,000,000 6,000,000 AOR = 1.2 5,000,000 AOR = 1.67 4,000,000 Historical PMT Historical VMT Number of miles in millions AOR = 2.0 3,000,000 2,000,000 1,000,000 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Historical total VMT Historical Total PMT Forecasted VMT 1 (AOR = 1.2) Forecasted PMT (population growth) Forecasted VMT 2 (AOR = 0.95) Forecasted PMT (from whitepaper) 19 Source: KPMG

Global growth > 100 > 1 million billion Vehicles produced each year Vehicles in operation by 2020 as of 2013 20 Source: IHS Markit, MEMA Analysis

The mobility opportunity expands the market “People keep Mobility Opportunity talking about According to Ford how the auto 5.4 $6.0 Trillion $ industry is going $5.0 to be disrupted $4.0 by the tech 2.3 $3.0 companies; $2.0 we’re going to $1.0 disrupt $0.0 ourselves.” Market Size – Mark Fields Auto Industry Mobility Industry Source: “Ford’s Top Execs on the Future of the Company;” interview with Bill Ford and Mark Shields, Car Magazine (UK) 21

Suppliers creating value – a different industry Consensus WACC 9% 22 Source: Alix Partners

Conclusion: Structural long- and short-term sources of opportunity 23

Agenda Topic Presenter • What is MEMA Steve Handschuh • Why Suppliers Matter President and CEO, MEMA • Cross-Industry Mega-Trends Paul McCarthy Senior Vice President, MEMA Strategy, Planning & Information Services • Mobility Technology and What it Brian Daugherty Means to the Aftermarket Chief Technology Officer, MEMA • Aftermarket: Where Are We Now Bill Long and Where Do We Go From Here President and COO, AASA • Q&A All

Agenda • The Role of MEMA’s CTO • The Impact of Fuel Economy Standards • Automated and Autonomous Vehicle Technology • Vehicle-to-Vehicle (V2V) Communications • The Importance of Cybersecurity for Automated and Connected Vehicles • Summary 25

The role of MEMA’s CTO • My background • Advanced technology resource for all MEMA divisions • Understand technology issues of member companies • Act as a technology interface with OEMs and federal government on issues affecting our industry (or at least several member companies) • Regulatory issues (USDOT, NHTSA, EPA, FMCSA, NTSB); guide rulemaking, help members understand impact • Legislative issues (Congress) – stay abreast of current activities, help propose legislation 26

What is CAFE? …and why you should care 27

CAFE requirements are rising dramatically Source: NHTSA 28

What does this mean for suppliers? • Generally positive • Greatly increased focus on light-weighting • Increased sales of high-tech components, especially those for direct fuel economy improvements • The low-hanging fruit has largely been picked, so the next round will be much more difficult for OEMs • More engineering will be required for new technologies, materials, and joining processes 29