Industry Overview GABELLI & COMPANY AUTOMOTIVE AFTERMARKET SYMPOSIUM NOVEMBER 2016

Transcription

1 Industry Overview GABELLI & COMPANY AUTOMOTIVE AFTERMARKET SYMPOSIUM NOVEMBER 2016

2 Agenda Topic What is MEMA Why Suppliers Matter Presenter 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 Aftermarket: Where Are We Now and Where Do We Go From Here Brian Daugherty Chief Technology Officer, MEMA Bill Long President and COO, AASA Q&A All

3 What is MEMA? 3

4 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 Suppliers Association Heavy Duty Manufacturers Association Original Equipment Suppliers Association Motor & Equipment Remanufacturers Association 4

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

6 Agenda Topic What is MEMA Why Suppliers Matter Presenter 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 Aftermarket: Where Are We Now and Where Do We Go From Here Brian Daugherty Chief Technology Officer, MEMA Bill Long President and COO, AASA Q&A All

7 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

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

9 Industry consistent on mega-trends and they are game-changers Safe Driving automation / ADAS / crash mitigation to crash avoidance Cybersecurity Green Connected Mobility 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 9

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

11 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

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

13 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

14 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

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

16 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

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

18 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 opportunities 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 Source: Grant, Contemporary Strategic Analysis 18

19 Mobility & automated mega-trends mean miles driven / auto use may explode 8,000,000 7,000, Vehicle and Passenger Miles for all travel AOR = ,000,000 AOR = 1.2 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 Number of miles in millions Historical PMT Historical VMT AOR = 1.67 AOR = 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) Source: KPMG

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

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

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

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

24 Agenda Topic What is MEMA Why Suppliers Matter Presenter 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 Aftermarket: Where Are We Now and Where Do We Go From Here Brian Daugherty Chief Technology Officer, MEMA Bill Long President and COO, AASA Q&A All

25 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

26 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

27 What is CAFE? and why you should care 27

28 CAFE requirements are rising dramatically 28 Source: NHTSA

29 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

30 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

31 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

32 Autonomous vs. Automated vehicles and why you should care 32

33 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

34 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

35 Connected-car cybersecurity and why you should care 35

36 Cybersecurity s impact on the aftermarket The big issue: How do we keep new vehicles cybersecure 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

37 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 37

38 Summary (continued) 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 nearterm 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

39 Agenda Topic What is MEMA Why Suppliers Matter Presenter 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 Aftermarket: Where Are We Now and Where Do We Go From Here Brian Daugherty Chief Technology Officer, MEMA Bill Long President and COO, AASA Q&A All

40 Automotive Aftermarket Where are we now? and Where do we go from here? 40

41 Automotive Aftermarket but first a brief history 41

42 U.S. Aftermarket A huge industry with steady growth Historical Light Vehicle Aftermarket Growth +3.8% 42

43 Steady growth... despite new cars sales Market Total (Billions of Dollars) Light Vehicle Aftermarket Growth 300, , , , ,000 50,000 0 CA GR +4.7 % CA GR +3.6 % CA GR +2.2 % CA GR +3.8 % OE Car Sales Units (MM) New car sales Aftermarket Sales Aftermarket Sales ($B) Source: Joint Channel Forecast 43

44 Where are we now? Key Takeaways 44

45 Key drivers remain strong Low gas prices Declining unemployment $3.10 $2.90 $2.70 $2.50 $2.30 $2.10 $1.90 $1.70 $1.50 Average U.S. Gas Price U.S. Unemployment Rate Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 45

46 Average age continues to climb 12 Average Age of Light Vehicles in Use (Years) Source: IHS Automotive 46

47 Supplier results mixed IAM sales averaged 2.3% over Q Up >20% Up 10% to 20% Up 5% to 10% Up 3% to 5% Up 1% to 3% Up <1% No change Down <1% Down 1% to 3% Down 3% to 5% Down 5% to 10% Down 10% to 20% Down >20% Compared to the same quarter last year, your quarterly net sales of automotive aftermarket products in North America are: 0% 3% 6% 6% 6% 6% 6% 6% Source: AASA s Barometer study Q (Interim Data Set) 47 8% 11% 14% 14% 17% 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%

48 O.E. service slowed sales up 1.0% versus Q Up >20% Up 10% to 20% Up 5% to 10% Up 3% to 5% Up 1% to 3% Up <1% No change Down <1% Down 1% to 3% Down 3% to 5% Down 5% to 10% Compared to the same quarter last year, your quarterly net sales of OE Service (OES) products in North America are: 0% 0% 0% 3% 3% 3% 6% 9% 12% 21% 38% 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% Down 10% to 20% Down >20% 3% 3% Source: AASA s Barometer study Q (Interim Data Set) 48

49 Automotive Aftermarket Where are we now? and Where do we go from here? 49

50 Respondents view the biggest opportunity with new vehicle technologies to be telematics and tapping into unperformed maintenance. What is the aftermarket s biggest opportunity with new vehicle technologies? 50

51 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

52 The good news suppliers are leading the way in innovation 52

53 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 occupants per vehicle - The top of their 3 scenarios has miles driven increasing 3-4 trillion miles/yr! 53

54 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 will lose share dollar volume flat 54 DIFM 74% DIY 26% Source: AASA s DIFM Outlook 2025 DIFM 78% 78% DIY DIY 22% 22%

55 OEMs seeking a bigger piece of the pie Since the recession, dealer locations had declined but now stabilized; service volume is growing again Car Dealers Number of Service Bays by Outlet Type 28.1% 12.2% 10.4% 46.1% Independents > 70% Dealer growth is bounded by bay capacity and locations 3.2% Independent Non-Chains Independent Chains Product Repair Specialists Tire Dealers Dealers Source: AASA s DIFM Outlook

56 Internet growth E-tailing will grow Much faster growth of consumer search online e-tailing Growth % 14.7 TOTAL 1.7 Internet driving price transparency and new business models TOTAL DIY DIFM

57 New online business models Open Bay Repair Auto MD ShiftMobility Maintenance Apps 57

58 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 opportunities for suppliers on the road ahead 58

59 Q&A GABELLI CONFERENCE AAPEX, NOVEMBER