See Disclosure Appendix of this report for important Disclosures and Analyst Certifications
Automotive News Congress 2018, Turin
All time record profits! So why are investors so worried about
the auto industry?
Max Warburton
Head of Global Automotive Research
+44-207-170-0544
June 6, 2018
GLOBAL AUTOS | 3
You’ve never had it so good!
The historic perception
▪ The auto sector is historically low margin, incredibly capital intense, value destructive
▪ State influence, family influence, poor investment decisions, cyclical and volatile
▪ Most long standing investors have had bad historic experiences and lost money in these stocks
▪ ‘Early cycle’ stocks – buy them when in financial distress, ahead of upturn - then sell quickly
The reality this decade
▪ One of the longest periods of economic expansion in history (9 years and counting)
▪ US industry restructured in 2008-09 – reset pricing; European industry also subtly reshaped
▪ China: like finding another planet on which to sell cars, totally transformed many OEMs’ economics
▪ OEMs far more focused, more capital disciplined
The result
▪ Almost a decade of profit expansion – total OEM industry earnings now over $120bn p.a.
▪ Vast premium segment earnings, NAFTA profits at record, European margins highest in 30 years
▪ Supplier margins the highest in modern history
▪ Huge cashflows, many being returned to shareholders
▪ But stock valuations imply investors believe it simply won’t last much longer
GLOBAL AUTOS | 4
Let the good times roll: 9 years of global expansion
-8%-6%-4%-2%0%2%4%6%8%10%12%14%
0
10
20
30
40
50
60
70
80
90
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018E
Mil
lio
n U
nit
s
Global Passenger Car Unit Sales(2006-2018E)
Global PV Unit Sales Growth % YoY
Source: IHS Markit and Bernstein analy sis
8
10
12
14
16
18
20
Jan-0
6
Sep
-06
May
-07
Jan-0
8
Sep
-08
May
-09
Jan-1
0
Sep
-10
May
-11
Jan-1
2
Sep
-12
May
-13
Jan-1
4
Sep
-14
May
-15
Jan-1
6
Sep
-16
May
-17
Jan-1
8
SA
AR
(M
n U
nit
s)
US Light Vehicle Sales Seasonally Adjusted Annual Rate (2006-present)
Source: Autodata and Bernstein analy sis
10,000
11,000
12,000
13,000
14,000
15,000
16,000
200
6
200
7
200
8
200
9
201
0
201
1
20
12
20
13
201
4
201
5
201
6
201
7
201
8
Un
its (000)
Western Europe: Passenger Car Market SAAR (2006-present)
Western Europe SAAR Rolling 6m Average
Source: LMC and Bernstein analy sis
0
5
10
15
20
25
30
Sale
s V
olu
me (M
n U
nit
s)
China Domestic Passenger Vehicle Sales(2006-2018E)
Source: CAAM and Bernstein analy sis
GLOBAL AUTOS | 5
China has been hugely transformative: profitability under-reported
10%
15%
20%
25%
30%
35%
40%
2012 2013 2014 2015 2016 2017
% o
f to
tal u
nit
sale
s
China unit sales as % of total(2012-2017)
Mercedes
VW Group
BMW
Source: Company reports and Bernstein analy sis
0
10
20
30
40
50
60
70
2013 2014 2015 2016 2017
€k
BMW Global vs China ARPU(2013-2017)
BMW China ARPU BMW Global ex China ARPU
Source: Company reports and Bernstein analy sis and estimates
20%
30%
40%
50%
60%
70%
80%
2013 2014 2015 2016 2017
China as % of Net Income*(2013-2017)
VW Group BMW Mercedes Audi
* assuming 30% tax rate
Source: Company reports and Bernstein estimates and analy sis
10
12
14
16
18
20
22
24
26
28
Jan-1
0
Jul-
10
Jan-1
1
Jul-
11
Jan-1
2
Jul-
12
Jan-1
3
Jul-
13
Jan-1
4
Jul-
14
Jan-1
5
Jul-
15
Jan-1
6
Jul-
16
Jan-1
7
Jul-
17
Jan-1
8
SA
AR
(m
n u
nit
s)
China passenger vehicle SAAR(2010-present)
Source: CAAM, Bernstein estimates and analy sis
GLOBAL AUTOS | 6
Global pricing: significant discipline, at last
1.2%
1.5%
2.0%
0.6%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2014 2015 2016 2017
Peugeot (PCD): pricing effect to Auto revenue growth
(2014-2017)
Price growth
Source: Company reports and Bernstein analy sis
0.8%
2.1%
3.9%
1.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2014 2015 2016 2017
Renault: pricing effect to Auto revenue growth
(2014-2017)
Price growth
Source: Company reports and Bernstein analy sis
$24,000
$26,000
$28,000
$30,000
$32,000
Ford North America - ARPU(2010-2017)
ARPU ($m)
Source: Company reports and Bernstein analy sis
€15,000
€17,500
€20,000
€22,500
€25,000
VW brand - ARPU(2010-2017)
ARPU (€m)
Source: Company reports and Bernstein analy sis
GLOBAL AUTOS | 7
Global mix: everyone wants to drive an SUV (heading to 100% share?)
11%14%
16%18%
21%23%
26%
30%
33%
0%
5%
10%
15%
20%
25%
30%
35%
SU
V %
of P
C s
ale
s
Western Europe: SUV % of pass. car sales(2010-2018E)
Source: IHS Global Insight and Bernstein analy sis
10%12%
14%
17%
21%
28%
34%
38%39%
0%
5%
10%
15%
20%
25%
30%
35%
40%
SU
V %
of s
ale
s
China: SUV % of sales(2010-2018E)
Source: IHS Global Insight and Bernstein analy sis
44% 46% 44% 46% 48%51%
55%59% 60%
0%
10%
20%
30%
40%
50%
60%
70%
SU
V &
PU
P %
of s
ale
s
US: SUV and Pickup % of LV sales(2010-2018E)
SUV PUP
Source: IHS Global Insight and Bernstein analy sis
6%8% 7% 8%
9%
12%
15%
19%20%
0%
5%
10%
15%
20%
25%
SU
V %
of s
ale
s
Brazil: SUV % of sales(2010-2018E)
Source: IHS Global Insight and Bernstein analy sis
GLOBAL AUTOS | 8
All time record profits – in nearly every region
0
25,000
50,000
75,000
100,000
125,000
2010 2011 2012 2013 2014 2015 2016 2017$m
Global Auto EBIT(2010-2017)
European American Chinese Japanese Korean
Source: Company reports, Bloomberg and Bernstein analy sis
0%
2%
4%
6%
8%
10%
12%
0.0
3.0
6.0
9.0
12.0
15.0
Ford GM FCA
Op
era
ing
marg
in
EB
BIT
($m
)
North America earnings by OEM(2017)
EBIT Operating margin
Source: Company reports and Bernstein analy sis
0
4,000
8,000
12,000
16,000
20,000
€m
Auto EBIT for European OEMs(2017)
Auto EBIT (€m)
Source: Company reports and Bernstein analy sis
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Kia Hyundai Toyota Nissan Honda
$m
Auto EBIT for Japanese/Korean OEMs(2016)
Auto EBIT ($m)
Source: Company reports and Bernstein analy sis
GLOBAL AUTOS | 9
Capital discipline: spending control is evident in the core businesses
5.2%
5.4%
5.6%
5.8%
6.0%
6.2%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2012 2013 2014 2015 2016 2017
Cap
ex a
s %
of s
ale
s
To
tal c
ap
ex s
pen
d (€m
)
Combined capex spend of European OEMs(2012-2017)
Capex Capex as % of sales
Source: Company reports and Bernstein analy sis
3%
4%
5%
6%
7%
8%
BMW Daimler FCA PSA Renault Volkswagen
Capex as % of sales by group(2012-2017)
2012 2013 2014 2015 2016 2017
Source: Company reports and Bernstein analy sis
GLOBAL AUTOS | 10
Awash with cash: flush after a decade of recovery – but what will it be spent on? Cyclical
protection? Restructuring? Technology?
0
2
4
6
8
10
12
14
16
Toy
ota
VW
For
d
GM
Honda
Daim
ler
FC
A
Nis
san
BM
W
SA
IC
Hyu
ndai
Suzu
ki
Renaul
t
PS
A
Kia
$b
n
FCF of top 15 OEMs(2018E)
FCF ($m)
Source: Company reports, Bloomberg L.P. and Bernstein analy sis
(10)
0
10
20
30
40
50
60
Toy
ota
VW
GM
BM
W
Daim
ler
SA
IC
Hyu
ndai
Nis
san
For
d
PS
A
Honda
Renaul
t
Kia
Suzu
ki
FC
A
$b
n
Net Industrial Cash of top 15 OEMs(2017)
Net Industrial Debt ($m)
Source: Company reports, Bloomberg L.P. and Bernstein analy sis
GLOBAL AUTOS | 11
So why are investors so worried?
45%
50%
55%
60%
65%
70%
75%
80%
85%
SXAP P/E rel to SXXP(2013-present)
SXAP P/E rel to SXXP
Source: Bloomberg L.P. and Bernstein analy sis
32
.5x
28
.7x
27
.0x
26
.6x
23
.3x
22
.3x
22
.1x
19.3
x
19.0
x
18
.2x
18
.2x
18
.1x
15
.1x
7.8
x9.4
x
8.8
x
7.4
x
7.1
x
6.9
x
6.7
x
6.2
x
6.0
x
5.5
x
4.6
x
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
35.0x
Nest
le
Fac
ebook
Mic
roso
ft
AB
InB
ev
Unile
ver
Exx
on M
obil
Johnso
n &
Johnso
n
Roya
l Dutc
h S
hell
Pro
cter &
Gam
ble
Walm
art
Apple
Genera
l Ele
ctric
Peugeot
Toy
ota
Sam
sung E
lectronic
s
Volk
swagen
Daim
ler
For
d
BM
W
Honda
Nis
san
Genera
l Moto
rs
Renaul
t
Current P/E ratio
Source: Bloomberg L.P. and Bernstein analy sis
GLOBAL AUTOS | 12
No. 1: Old fashioned cyclical fears
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Gro
wth
Yo
Y
(%)
Re
tail
vo
lum
e ('0
00
un
its)
China mass market retail volume & growth(Jan 2017 - present)
Mass retail vo lume Growth YoY
Source: C.A.D. and Bernstein analy sis
8%
9%
10%
11%
12%
13%
14%
0
10
20
30
40
50
60
70
H1
2015
H2
2015
H1
2016
H2
2016
H1
2017
H2
2017
Pre
-ta
x m
arg
in (%
)
Pre
-ta
x p
rofi
t (R
MB
bn
)
China international mass JV pre -tax profit & margin (2015-2017)
Aggregate pre-tax profit Aggregate pre-tax marg in
Source: Company reports, Bernstein estimates and analy sis
R² = 0.3431
8
10
12
14
16
18
20
0 5 10 15 20
US
lig
ht ve
hic
le s
ale
s S
AA
R (m
)
Effective Federal Funds Rate (%)
Interest rates vs US light vehicle sales SAAR*(1976-present)
*Excluding interest rates below 0.5%
Source: Federal Reserv e and Bernstein analy sis
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
0
5
10
15
20
2009
2010
2011
2012
2013
2014
2015
2016
2017
Mil
lio
n U
nit
s
US Passenger Vehicle Sales (2009-2017)
Unit Sales % Growth YoY
Source: IHS Markit and Bernstein analy sis
GLOBAL AUTOS | 13
No.2: Regulatory driven powertrain change enormously expensive
35%
40%
45%
50%
55%
Jan-1
5
Apr-
15
Jul-15
Oct-15
Jan-1
6
Apr-
16
Jul-16
Oct-16
Jan-1
7
Apr-
17
Jul-17
Oct-17
Jan-1
8
Apr-
18
W. Europe Diesel share of new car sales (%)(Jan'15 to present)
Diesel share of new car sales (%)
Rolling 12m average
Source: LMC and Bernstein analy sis
Source: Industry reports and Bernstein analysis
10% by 2019
12% by 2020
no post-2020 targets,
speculated 15%-20% by 2025
RMB108,000 subsidy
for EV with range >250km
EV / NEV
targets
Other rules
China electrification targets
0%
5%
10%
15%
20%
25%
30%
EU - % decrease in Fleet CO2 neededto meet 2021 target
Source: PA Consulting and Bernstein analy sis4.5
% 7.0
% 9.5
% 12.0
%
14.5
%
17.0
%
19.5
%
22.0
%
22.0
%0%
5%
10%
15%
20%
25%
30%
2018 2019 2020 2021 2022 2023 2024 2025 After2025
California electrification - ZEV credit targets (as % of sales)
min. ZEV max. TZEV
Source: Calif ornia Air Resources Board and Bernestein analy sis
GLOBAL AUTOS | 14
No. 3: Profound new technology, huge spending, uncertain impact
Intelligent co-operation: BMW / Intel / Mobileye
Source: Company website
Leagues ahead of core industry rivals?
Source: Company website
0
500
1,000
1,500
2,000
2,500
3,000
Conti Bosch Denso Autoliv Mobileye
€m
Supplier revenue from ADAS(2016 v 2020E)
2016 2020E
Source: Conti and Bernstein analy sis
338
339
343
362
370
380
402
439
516
958
Daimler
Volkswagen
Toyota
BMW
GM
Ford
Continental
Audi
Bosch
Number of autonomous driving patent filings (Jan 2010 - Jul 2017)
Source: IW Köln, WIPO and Bernstein analy sis
GLOBAL AUTOS | 15
No. 4: Outside of the core business, capital discipline now at risk
0
5,000
10,000
15,000
20,000
Capex U
S$m
VW's annual Gigafactory spend vs. Group Capex Targets (2018E - 2025E)
Estimated Gigafactory Spend Remaining Capex
Source: Company reports and Bernstein analy sis
Non-core, loss-making, management distraction
Source: Wikimedia commons
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2012 2013 2014 2015 2016 2017
$b
n
Tesla's capex on PPE(2012-2017)
Huge spending: Auto tech centres in CA
Source: IDG, Carmaker data and Bernstein analysis
GLOBAL AUTOS | 16
Modelling the impact
47.0%43.3%
19.3%
0%
10%
20%
30%
40%
50%
60%
Daimler BMW Tesla
Daimler / BMW real gross marginv Tesla gross margin
(2017)
Source: Company reports and Bernstein analy sis
$0
$1,000
$2,000
$3,000
$4,000
$5,000
Cost per unit for fuel saving technologies by manufacturer - Combined Fleet (2025)
Costs (2010$)
Source: EPA, Department of Transportation and Bernstein analy sis
10.0% 10.0%
9.6%
8.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
2015 2016 2017 2020E
Mercedes-Benz Cars EBIT margin(2015-2020E)
Source: Company reports and Bernstein estimates and anay sis
EV impact guidance
0
5
10
15
20
25
30
35
US
D $
k
Powertrain Cost Comparison for 80kWh(2012-2035E)
BEV ICE
Source: SNE Research, and Bernstein estimates and analy sis
GLOBAL AUTOS | 17
Winning investor confidence
The cycle may well prove extended
▪ Interest rate hikes likely modest, employments trends still strong, licensed driver numbers growing
▪ Financial services risk control firm, loss ratios modest, upside in EMs
Pricing and capital discipline remain within the industry’s control
▪ Industry has a record of damaging margins even with stable volumes – this time it’s different?
▪ Encouraging evidence from US market; consistent pricing discipline in EU, China uncertain
Managing powertrain shift and regulatory pressure
▪ Name any regulatory driven content that has ever helped margins?
▪ Diesel share shift surprising manageable so far; lobbying still effective, regulators pragmatic (even in China)
Demonstrating that EV technology is easily mastered; remaining in the race on AV
▪ Many investors worry traditional OEMs ‘don’t get it’ – new products will prove otherwise (but will hurt margins)
▪ OEMs assembling resources to pursue AV – JVs/consortiums, start-up investments (Aurora etc.)
Barriers to entry greater than understood, manufacturing as a ‘moat’
▪ Some concern about Chinese OEMs going global (Lynk & Co, GAC) and pushing tech (NIO, Byton etc.)
▪ But Tesla’s problems are resetting expectations about the complexities of this industry
▪ Average life of an S&P500 company now 19 years….many OEMs now 100 years old and still thriving
Source: Company reports and Bernstein analysis.