Industry Overview GABELLI & COMPANY AUTOMOTIVE AFTERMARKET - - PowerPoint PPT Presentation

Industry Overview

GABELLI & COMPANY AUTOMOTIVE AFTERMARKET SYMPOSIUM NOVEMBER 2016

Agenda

Topic Presenter

• What is MEMA
• Why Suppliers Matter

Steve Handschuh

President and CEO, MEMA

• Cross-Industry Mega-Trends

Paul McCarthy

Senior Vice President, MEMA Strategy, Planning & Information Services

• Mobility Technology and What it

Means to the Aftermarket

Brian Daugherty

Chief Technology Officer, MEMA

• Aftermarket: Where Are We Now

and Where Do We Go From Here

Bill Long

President and COO, AASA

• Q&A

All

What is MEMA?

Suppliers drive innovation in the mobility industry

4

Automotive Aftermarket Suppliers Association Heavy Duty Manufacturers Association Original Equipment Suppliers Association Motor & Equipment Manufacturers Association Motor & Equipment Remanufacturers Association

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.

President’s Overview

Why suppliers are a key player

Largest sector of manufacturing jobs in the country 871,000 direct jobs and 4.3m total jobs

Key drivers of R&D and innovation

5

Agenda

Topic Presenter

• What is MEMA
• Why Suppliers Matter

Steve Handschuh

President and CEO, MEMA

• Cross-Industry Mega-Trends

Paul McCarthy

Senior Vice President, MEMA Strategy, Planning & Information Services

• Mobility Technology and What it

Means to the Aftermarket

Brian Daugherty

Chief Technology Officer, MEMA

• Aftermarket: Where Are We Now

and Where Do We Go From Here

Bill Long

President and COO, AASA

• Q&A

All

We’ve come a long way – questions from 2014 Gabelli conference seem … dated

7

Themes of questions from 2014

• Auto had peaked and we

were facing a long decline

• Millennials don’t want cars
• Mobility inevitably means

we’ve passed peak auto

• ADAS / automation –

what’s that?

• When and how fast should

we run from auto?

We had a counter argument

Megatrends create new rationales and appeal for vehicle usage

President’s Overview

“Convergence: Automotive and Tech are now inseparable” “Tech companies will become car companies and car companies will have to become tech companies” – VC Beat “Revolution in the auto industry … is part of the larger ‘fourth industrial revolution’”/ “Industry 4.0” The convergence of automotive and IoT

Industry convergence creating new value opportunities

“The car is the ultimate mobile device” “We believe the future of mobility will be automated, connected, and electrified”

“Software: the new auto battleground”

8

Industry consistent on mega-trends – and they are game-changers

• Driving automation / ADAS / crash mitigation to crash avoidance
• Cybersecurity
• CAFE / fuel economy / emissions reduction
• Electrification / decarbonization
• Regulatory mega-trends
• Internet of Things (IoT), cybersecurity (again), V2X, Infotainment as key

customer value prop, fourth industrial revolution, etc.

• Becoming a technology industry: mechanical → software/electronics
• Changing ownership/usage patterns, value propositions, and business

models; big data / data analytics

• Changing customers, competitors, partners

Safe Green Connected

9

Mobility

Millennials do buy cars – and Gen Z loves them

“Everything we thought about Millennials not buying cars was wrong” “Why Millennials are buying cars in big numbers”

2014 DOT study: economy explains >100% of Millennials’ lower car purchasing versus previous generations

“97% of Gen Z [post-millennial generation] plan to get a driver’s license” “Millennials are buying cars after all”

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

Past Mechanical device Current Electronic device with mechanical enablers Future Software device with electronic & mechanical enablers

What a vehicle is has changed over time

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 –

• f these shifts

14

Though we are at the top of the “hype cycle”

Autonomous Vehicles

15

Near-term also offers unprecedented drivers of supplier innovation and change

16

Regulatory shifts – fuel economy, safety, emissions, cybersecurity – will leave no ‘widget’ on the vehicle untouched

Automation changes everything – but might bring more opportunity than obsolescence risk

Change = opportunities for profit

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Change is good

Without change, there is no profit

• Competitive advantage – the

source of profits – “is a disequilibrium phenomenon that is a consequence of change”

• In the long run, markets and

competition mean we shouldn’t make any profit – unless there is change

• “Any external change creates
• pportunities for profit”

Change = winners and losers

• “The more turbulent an

industry’s environment … the greater the dispersion of profitability within the industry”

• Competitive advantage

“depends on firms’ ability to respond to change”

1. Ability to anticipate changes 2. How well you respond to change

Change = opportunities for profit

18

Mobility & automated mega-trends mean miles driven / auto use may explode

1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

1950 - 2050 Vehicle and Passenger Miles for all travel

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Global growth

>100

million

Vehicles produced each year by 2020

>1

billion

Vehicles in operation as of 2013

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The mobility opportunity expands the market

2.3 5.4

$0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 Market Size

Mobility Opportunity According to Ford

Auto Industry Mobility Industry

Trillion $

“People keep talking about how the auto industry is going to be disrupted by the tech companies; we’re going to disrupt

• urselves.”

– Mark Fields 21

Suppliers creating value – a different industry

Consensus WACC 9%

22

Conclusion:

Structural long- and short-term sources of opportunity

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Agenda

Topic Presenter

• What is MEMA
• Why Suppliers Matter

Steve Handschuh

President and CEO, MEMA

• Cross-Industry Mega-Trends

Paul McCarthy

Senior Vice President, MEMA Strategy, Planning & Information Services

• Mobility Technology and What it

Means to the Aftermarket

Brian Daugherty

Chief Technology Officer, MEMA

• Aftermarket: Where Are We Now

and Where Do We Go From Here

Bill Long

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

26

• 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

What is CAFE?

…and why you should care

27

CAFE requirements are rising dramatically

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

What about the aftermarket?

• Many new technologies are coming into the market

for the first time that will require replacement parts

• Light-weighting will result in increased numbers of

newly designed parts

• Many existing replacement parts will need to be

redesigned

• More complexity – both in part design and materials
• Adhesive bonding
• The trend toward more complex processes for

vehicle repairs will accelerate

30

Vehicle-to-Vehicle (V2V) communications

• 5.9 GHz two-way radio and GPS based technology
• Dedicated Short Range Communications (DSRC)
• Allows a vehicle to “see” other vehicles beyond the range of

radar, cameras, and other sensors

• Low cost system
• Enhances existing Advanced Driver Assistance Systems (ADAS)
• Allows low cost vehicles to have ADAS features
• Projected by NHTSA to help in 80% of non-impaired crashes
• Great potential for aftermarket V2V systems - overall value

improves dramatically as market penetration increases

31

Autonomous vs. Automated vehicles

… and why you should care

32

Autonomous versus Automated

• Two very different approaches
• Moonshot approach – jump straight to driverless vehicles
• Google, nuTonomy, and Uber in limited, geographically controlled

trials with back-up drivers (Silicon Valley, Singapore, Pittsburgh, and others)

• Eliminates the problem of transitioning control back to the driver
• Progressively add layers of safety and automated capability
• Otto (Uber), large tier 1s, and most traditional OEMs
• High potential for distraction during automated mode
• Up to 10 seconds to regain situational awareness
• A really difficult problem – media hype vs. reality

33

Impact on the aftermarket

• Fully autonomous vehicles are a long way off

except in controlled environments

• Advanced ADAS and automated systems are very

complex and will be difficult to repair

• Radar and vision sensor alignment
• Accuracy requirements are high
• Specialized test targets
• Many different sensors and therefore targets
• Several companies are focusing on aftermarket

automation systems that will work on multiple vehicles

34

Connected-car cybersecurity

… and why you should care

35

Cybersecurity’s impact

• n the aftermarket
• The big issue: How do we keep new vehicles cyber-

secure without locking out the aftermarket?

• Potential to restrict access to OBD-II type

vehicle data

• Potential to lock-out aftermarket parts
• Encrypted communications
• Module IDs and handshakes
• Aftermarket parts and OTA updates

36

Summary

• CAFE will impact the entire supply base:
• More technology at every level
• Lightweighting
• Advanced ADAS and automated vehicle technology

is available today and will continue to improve the safety and efficiency of transportation

• Fully autonomous vehicles are a noble goal, but are

much further in the future than commonly thought

• except in controlled environments

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• V2V technology has tremendous potential to usher

in the next wave of safety improvements as well as improving transportation efficiency

• Don’t let the hype surrounding autonomous

technology distract us from implementing near- term ADAS, automated safety systems, and V2V communications

• Automotive cybersecurity is critical and one of the

biggest issues facing our industry… and MEMA has a seat at the table representing members as a strategic partner with the Auto-ISAC

38

Summary (continued)

Agenda

Topic Presenter

• What is MEMA
• Why Suppliers Matter

Steve Handschuh

President and CEO, MEMA

• Cross-Industry Mega-Trends

Paul McCarthy

Senior Vice President, MEMA Strategy, Planning & Information Services

• Mobility Technology and What it

Means to the Aftermarket

Brian Daugherty

Chief Technology Officer, MEMA

• Aftermarket: Where Are We Now

and Where Do We Go From Here

Bill Long

President and COO, AASA

• Q&A

All

Where are we now? Where do we go from here? and

Automotive Aftermarket

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Automotive Aftermarket

…but first a brief history

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U.S. Aftermarket

A huge industry with steady growth

Historical Light Vehicle Aftermarket Growth

+3.8%

42

Steady growth... …despite new cars sales

180 190 200 210 220 230 240 250 260 2 4 6 8 10 12 14 16 18 20

New car sales Aftermarket Sales

Light Vehicle Aftermarket Growth

43

Key Takeaways

Where are we now?

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Key drivers remain strong

L

• w g a s pric e s

“De c lining ” une mplo yme nt

$1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90 $3.10

Average U.S. Gas Price

5.4 5.5 5.3 5.3 5.1 5.1 5.0 5.0 5.0 4.9 4.9 5.0 4.0 4.5 5.0 5.5 6.0 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16

U.S. Unemployment Rate

45

Average age continues to climb

9.6 9.7 9.7 9.8 9.8 9.9 10 10.3 10.6 10.9 11.1 11.3 11.4 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)

46

6% 14% 14% 6% 6% 6% 8% 6% 6% 11% 17% 0% 3%

Compared to the same quarter last year, your quarterly net sales of automotive aftermarket products in North America are:

Quarter Average Growth 2014 Q1 +5.8% 2014 Q2 +4.8% 2014 Q3 +1.9% 2014 Q4 +5.3% 2015 Q1 +2.8% 2015 Q2 +4.8% 2015 Q3 +3.5% 2015 Q4 +2.4% 2016 Q1 +3.0% 2016 Q2 +2.4% 2016 Q3 +2.3%

Supplier results mixed

…IAM sales averaged 2.3% over Q3 2015.

47

O.E. service slowed

…sales up 1.0% versus Q3 2015

6% 0% 21% 3% 9% 0% 38% 0% 3% 3% 12% 3% 3%

Compared to the same quarter last year, your quarterly net sales of OE Service (OES) products in North America are:

Quarter Average Growth 2014 Q1 +2.8% 2014 Q2 +2.2% 2014 Q3 +2.0% 2014 Q4 +3.4% 2015 Q1 +2.2% 2015 Q2 +1.9% 2015 Q3 +2.0% 2015 Q4 +1.9% 2016 Q1 +1.4% 2016 Q2 +1.2% 2016 Q3 +1.0%

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Where are we now? Where do we go from here? and

Automotive Aftermarket

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Respondents view the biggest opportunity with new vehicle technologies to be telematics and tapping into unperformed maintenance.

What is the aftermarket’s biggest

• pportunity with new

vehicle technologies?

50

A more connected car could lead to an aftermarket growth

Increased awareness of:

• failure, replacement rates &

location information

• prognostics that alert

motorists, service providers of pending failure

• more end consumer awareness

would allow for increased maintenance performed on vehicles

51

The good news…suppliers are leading the way in innovation

52

How automated driving will increase miles driven

KPMG: “Miles driven will soar by one trillion more miles per year by 2050 due to autonomous vehicles and mobility services”

• Older can still be

driven

• Freedom of

mobility for youth

• Fewer
• ccupants per

vehicle

• The top of their

3 scenarios has miles driven increasing 3-4 trillion miles/yr!

53

Who will do the repairs? Opportunity? Or threat?

DIFM represents 74% of all aftermarket product volume

+4 points market share, up $14B

• OES up $9B
• Independents up $5B

DIY 26% DIFM 74% DIY 22% DIFM 78%

2013 2025

DIY 22%

DIY will lose share

dollar volume flat

54

OEMs seeking a bigger piece of the pie

• Since the

recession, dealer locations had declined but now stabilized; service volume is growing again

• Dealer growth is

bounded by bay capacity and locations

46.1% 3.2% 10.4% 12.2% 28.1%

Number of Service Bays by Outlet Type

Independent Non-Chains Independent Chains Product Repair Specialists Tire Dealers Dealers

Car Dealers Independents > 70%

55

Internet growth…

• E-tailing will grow
• Much faster growth of

consumer search online

• Internet driving price

transparency and new business models

3 13 0.4 1.7 2013 2025

DIY DIFM

e-Tailing Growth 2013 - 2015

+13%

TOTAL 3.4 14.7 TOTAL

56

New online business models

• Open Bay Repair
• Auto MD
• ShiftMobility
• Maintenance Apps

57

Key takeaways

• Large and stable industry with new channels of distribution

and new markets that offer new opportunities

• Technology is going to change the road ahead for the

automotive industry at large

• Online lifestyle and digital business models and tools are

here and will impact aftermarket

• Independents will not be eliminated…
• DIY will lose share and the battleground for commercial

will intensify

• Telematics and the connected vehicle bring new kinds of
• pportunities for suppliers on the road ahead

58

GABELLI CONFERENCE AAPEX, NOVEMBER 2016

Q&A