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Presentation to IIC conference Japan, December 2004 Automotive value chain chance and challenge for suppliers McKinsey & Company, Inc. 3

AGENDA Future automotive value chain Challenges for integrators 4 040511_ZWG424_V9_S_English

HAWK PROJECT APPROACH Issues What impact are innovations having on the value chain architecture in the automotive industry? What individual strategic approach will secure a company s longterm success? Approach Global empirical study Deep and broad insights gained in 250 interviews 5,000 end customer surveys Quantitative simulation model used Conducted by /TU Darmstadt End products Industry perspective Technology roadmap Best-practice cost structures Value chain architecture and bestpractice competences Strategies for success Company perspective Performance improvement Growth options 5 Source: 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey

OVERVIEW OF RESPONDENTS By industry position Total = 251 By segment Number By region Total = 251 Experts 28 (11%) Interior Engine 61 (40%) 44 (29%) Asia 41 (16%) OEMs 71 (28%) 152 (61%) Suppliers Chassis 30 (20%) North America 45 (18%) 165 (66%) Europe Body 17 (11%) Respondents from the commercial vehicles sector: 22% 6 Source: 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey

DIFFERENT TYPES OF SYNERGIES Local synergies Example: front module Local synergies through assembly advantage of neighboring, functionally independent components such as radiator, fender and headlamps Functional synergies Example: steering column Mainly function-related synergies through Instantaneous transmission Crash functionality Horizontal and vertical adjustment Theft protection Knowledge-based synergies Example: brake system Mainly concerning Dynamics of vehicle movement Noise and brake behavior Connection with ABS, ESP and engine control 7 Source: 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey

INNOVATION ROADMAP IN THE COMPACT CLASS Interior Engine Chassis Body 8 High-pressure supercharged diesel Piezo injectors DI** gasoline engine Electrically assisted steering 2002 2005 2010 2015 * Adaptive cruise control ** Direct injection Source: 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey Electrical radiator and ventilation/cooling control Particle filter Shift-by-wire CVT Electric double clutch Tire pressure control New materials (high-tensile steels, aluminum) Pneumatic suspension Hydroforming Aluminum Steel space frame Metal foam Bonding technology Plastic add-on parts Bonded materials Laser welding Color Matching Electrohybrid propulsion Electrohydraulic brakes Starter generator Active suspension Sandwich structure Colors with Lotus effect SELECTION Technology changes value chain architecture Smart airbags Pedestrian LED front lighting LED back lighting protection sensors CO 2 air conditioning Adhesives technology Pre-crash Fully variable interiors External networking sensor system Head-up display Night vision ACC* Active lighting Object recognition Electronic 42V power supply bus systems Smart power Infotainment (e.g., distribution navigation system) Fuel cells as Auxiliary Power Unit Ribbon cable Optical bus systems Thermal management Electronics included in all segments Electric parking brake Electric overlay steering Electromechanical valve mechanism Fuel cell Electromech. brake (brake-by-wire) Electromech. steering (steer-by-wire) Friction coeffic. recog. Product differentiation of identical chassis comp. by software MARCH 12, 2003_2.1

INNOVATIONS FOR ELECTRIC OVERLAY STEERING Innovation roadmap Fahrwerk Ausstattung Antrieb Karosserie Technologie verändert die Wertschöpfungsarchitektur Smart-Airbags Fußgängerschutzsensorik CO 2 -Klimaanlage LED-Frontlampen LED-Hecklampen Klebetechnologie Pre-Crash- Vollvariable Innenräume Externe Vernetzung Sensorik Head-up-Display Nachtsicht ACC* Aktive Beleuchtung Objekterkennung Elektronische 42V-Bordnetz Bussysteme Smart Power Infotainment (z.b. Distribution Navigationssystem) Brennstoffzelle als Auxiliary Power Unit Flachbandkabel Optische Bussysteme Hochaufladung Diesel Luftregelung/Kühlung Elektrohybridantrieb Elektrischer Kühler und Elek- Wärme- Partikelfilter manage- ment CVT Brennstoffzelltronikanteile Shift-by-W ire Zylinderabschaltung Elektromechanischer Ventiltrieb Piezoinjektoren in allen Benzindirekteinspritzer Elektr. Schaltgetriebe mit Doppelkupplung Starter-Generator Segmenten Neue Werkstoffe (hochfeste Elektromech. Bremse enthalten Elektrisch unterstützte Luftfederung Elektromech. Lenkung Stähle, Aluminium) (Brake-by-W ire) Lenkung Elektrische (Steer-by-W ire) Parkbremse Elektrische Überlagerungslenkung Bremse Produktdifferenzierung Elektrohydraulische Reibwerterkennung Reifendruckkontrolle ident. Fahrwerkskomponenten durch Aktives Fahrwerk Softw. Hydroforming Stahl-Spaceframe Klebetechnologie Aluminium Metallschäume Anbauteile aus Kunststoff Verbundwerkstoffe Laserschweißen Color Matching Sandwichstruktur Lotus-Farben 2002 2005 2010 2015 STAND 12.03.2003_2.0 Description of electric overlay steering Electric overlay steering enables the vehicle to actively intervene in the steering without the driver noticing. The steering angle of the wheels can be changed independently of the turning motion of the steering wheel. Steering locks can be increased, decreased or ignored according to the situation. The physical connection between steering wheel and front wheel is not interrupted, so the failure of one or more components does not impact on safety Value to the customer Intervenes in critical situations in conjunction with ABS and ESP. Example: no need to counter-steer when putting brakes full on on different surfaces (γ-split braking) Stops the vehicle swerving at high speeds Reduces steering locks considerably when parking Adjusts the steering properties from direct though to indirect in line with driver s wishes (carting) New components Steering angle sensors Actuators Angle sensor actuator Technical feasibility Middle class: 2003 Compact class: 2008 Overlay gearbox Control unit... 9 Source: 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey, interviews with experts, OEM interviews, automotive suppliers, trade journals

DETERMINATION OF TIME OF MARKET ENTRY ELECTRIC OVERLAY STEERING EXAMPLE Determination of costs at component level EUR Market entry for electric overlay steering EUR, manufacturing costs Cost of steering system 2002 220 Streamlining of components New components Cost of electric overlay steering 2002 55 260 425 Premiums chargeable for electric overlay steering EUR Compact car 175 Cost projection by differentiated CIPs at component level Cost/ normed cost 425 220 Premium price adjustment Cost curve for electric overlay steering Cost curve for traditional steering system Middle class 650 2000 2005 2008 Time Upper class 1,500* 5,000 end customers surveyed Forecasted market entry 10 * No statistically significant subset < 20 Source: 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey

REGIONAL DIFFERENCES COMPACT CLASS AUTO 1 3 Innovation drivers, Japan/ Innovation drivers, NAFTA Asia Legal requirements Comfort features Cost reduction potential 1 2 3 Individual satisfaction of customer requirements Suppliers continue to be component specialists, rarely system integrators 2 Innovation drivers, Europe Safety Comfort Prestige Environment-friendliness Individually tailored solutions for customers lead to new innovations Standardized interfaces will determine the industry Product innovations are the key to profitable growth 11 Source: 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey

SELECTION ROADMAP OF INNOVATION USA (COMPACT CLASS) Technology changes value chain architecture Interior Smart airbags LED back lighting Pedestrian protection LED front lighting sensors CO 2 air conditioning Pre-crash Fully variable interiors External networking sensor system Head-up display Night vision ACC* Active lighting Object recognition Electronic bus systems Ribbon cable 42V power supply Engine Chassis Body Electronics included in all segments CVT DI** gasoline engine Tire pressure monitoring Smart power distribution Electrical radiator and ventilation/cooling control Electrohybrid propulsion Shift-by-wire Cylinder deactivation Electric double clutch Electrically aided steering Substitution of steel with new materials (e.g., magnesium wheel suspension) Starter generator Air suspension Electric overlag steering Active suspension Fuel cell as Auxiliary Power Unit Optical bus systems Electrohydraulic brakes Friction coefficient recognition Electromechanical valve mechanism Hydroforming Aluminum Metal foam Adhesives technology Plastic add-on parts Sandwich structure Composite materials Colors with Lotus effect Laser welding Color Matching Fuel cell Electromech. brake (brake-by-wire) Electromech. steering (steer-by-wire) Product differentiation identical chassis component by software 12 2002 2005 2010 * Adaptive cruise control ** Direct injection Source: 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey 2015

ROADMAP OF INNOVATION JAPAN (COMPACT CLASS) Interior Smart airbags Pedestrian protection sensors LED back lighting LED front lighting CO 2 air conditioning Adhesives technology Fully variable interiors External networking ACC* Head-up display Night vision Pre-crash sensor system Active lighting Object recognition Engine Electrical radiator and ventilation/cooling control CVT Fuel cell Shift-by-wire Cylinder deactivation Electromechanical DI** gasoline engine Aluminum valve mechanism Piezo injectors Electrohybrid propulsion Electric double clutch Starter generator Chassis Substitution of steel with new Electromech. brake materials (e.g., magnesium (brake-by-wire) Electrically wheel suspension) Electromech. steering aided Electric AWD (steer-by-wire) steering Electrohydraulic brakes Friction coefficient Air suspension recognition Tire pressure control Product differentiation Electric overlay steering identical chassis component by Active suspension software Body Electrical Electronic bus systems Hydroforming Aluminum Steel space frame Metal foam Adhesives technology Plastic add-on parts Composite materials Laser welding Color Matching Smart power distribution Ribbon cable Sandwich structure Colors with Lotus effect Fuel cell as Auxiliary Power Unit SELECTION Technology changes faster in Japan 42V power supply Optical bus systems 13 2002 2005 2010 * Adaptive cruise control ** Direct injection Source: 040511_ZWG424_V9_S_English McKinsey/PTW-HAWK-Survey 2015

COST STRUCTURE OF COMPACT CLASS AUTOS IN EUROPE EUR/unit, not adjusted for inflation 15,000 11,000 4,000 1,500 1.500 12,000-20% CAGR: 2.4% Passenger auto 2002 Electrics/ electronics share: 20% Added cost of innovations Passenger auto 2015 Operational excellence Synergy through value chain optimization Passenger auto 2015, best practice Electrics/ electronics share : 40% 14 Source: 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey

PRODUCTIVITY IMPROVEMENT LEVERS Operational excellence Real labor productivity in Germany Index 1999 = 100 Synergies through use of shared competence in safety systems EUR EXAMPLE 110 90 70 0 86 100 1992 92 93 94 95 96 97 98 1999 CIP rates are leveling off in Germany 43 Airbag 10 Belt tightener 53 Synergies 13% 46 Total costs for joint development and production CAGR 2.8 1.5 1992-96* 1996-99* Airbag and belt tightener use the same motive agent Synergies through use of joint competences for pyrotechnics and purchasing 15 * Years: 1992, 1996 and 1999 interpolated Source: 040511_ZWG424_V9_S_English INSEE, German Statistical Office, MGI

CHASSIS COST STRUCTURE EUR Cost of chassis for compact class auto 1,141 529 2002 Innovations Share of electronics 20% Active chassis Electrically aided steering Tire pressure recognition... 285 59 1,670 140 217 Steering 2015 Operational Synergies excellence ECU -21% 1,313 2015 Best Practice Share of electronics 35% 16 * Years: 1992, 1996 and 1999 interpolated Source: 040511_ZWG424_V9_S_English McKinsey, German Statistical Office, MGI 76 Actuators Steering wheel sensor 23 and force feedback Mechanics for. steering wheel Steering

SYNERGY POTENTIAL FOR EACH COMPONENT EUR Synergies 217 60 44 Brake system Axles/wheels Development Use of competences in development of control electronics Synergies through transfer of actuators from other areas of application Joint software development with other chassis systems 49 Springs/shock absorbers 64 Production Combination of precision engineering with electric sub-systems Use of scale effects through re-use of identical components (e.g., actuators) Chassis Steering Transaction Realization of scale effects in purchasing 17 Source: 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey

COST STRUCTURE IN THE COMPACT CLASS Percent Segment cost Key changes Share of electrics/ electronics 100% Interior 35 44 13 24 New interior comfort features drive up share of electrics/electronics and total cost Engine Chassis Body 28 24 4 9 12 1 13 5 25 19 2 2 2002 2015 Economies of scale can be tapped with a cross-oem engine. End customer differentiation is ensured by software X-by-wire technologies will drive down costs Traditional mechanical components will be under very severe cost pressure 18 Source:McKinsey/PTW 040511_ZWG424_V9_S_English HAWK Survey

DEVELOPMENT OF OEMs VERTICAL INTEGRATION 2002 2015* OEMs share of value added Percent 35 25 29% Increasing outsourcing of Integration work for total systems/modules to suppliers Development of systems with increasing need for specific know-how Segment Interior Engine Chassis Body OEMs share of value added Percent of manuf. cost 9 12 13 17 24 31 66 72 Examples of modules outsourced by OEMs System integration** of interior Integration** of inside door system Development and integration** of air conditioning system Development and integration* of in-board network Engine assembly Engine development (on cross-oem platform) Manufacture of prefab engine block Manufacture of prefab cylinder head Integration** of steering system, springs/shock absorbers and axle/wheel suspension Axle manufacture Integration** of front end Manufacture of aluminum and plastic add-on pieces 19 * Model forecast ** Interface management, assembly, inspection, and warranty Source:Interviews, 040511_ZWG424_V9_S_English McKinsey/PTW HAWK Survey

DEVELOPMENT OF VALUE CHAIN ARCHITECTURE COMPACT CLASS AUTO Supplier OEM Value chain architecture today Best practice value chain architecture 2015 Total vehicle/ segments Interior Engine Chassis Body Interior Engine Chassis Body OEM s vertical integration: 35% OEM s vertical integration: 25% Systems/ modules Individual components Value added share of segment Percent 35% 28% 12% 25% 44% 24% 13% 19% Functional Knowledge-based 20 Source: 040511_ZWG424_V9_S_English Interviews, McKinsey/PTW HAWK Survey

AGENDA Future automotive value chain Electronics challenges for integrators 21 040511_ZWG424_V9_S_English

The automotive electronics value chain becomes more dynamic due to the OEM's urge to handle exploding complexity DRIVERS OF VALUE CHAIN DYNAMICS JD Power IQS-Rating** 75 50 C-Class A4 constant number of defects per feature E-Class OEMs looking for ways to handle the increasing complexity New architecture needs time to implement and to practice Standardization is hard to implement and best done on an industry level Modularization disaggregates the problem but does not fix it on the module level 25 0 Camry ES 300 0 200 3er A6 Number of E/E-Features* * Interior and body features ** Defects per 100 vehicles, October 2003, sum of "Features and Controls", Sound System und HVAC Source: JD Power Supplier partners are to handle quality and cost problems Joint innovation in focus areas Development and production of integrated modules instead of isolated components High level integration in development networks (tier 0.5 model) Design-to-cost on a system level Rise of more active supplier roles creates high dynamics in most AE value chains 22 040511_ZWG424_V9_S_English

Even in the existing value chains there are a number of roles to choose DEFINITION OF ROLES ALONG VALUE CHAIN Role Core competency Examples OEM Develop and build cars, brand management DaimlerChrysler, BMW System integrator Complex Component Supplier Engineering Services Provider (ESP) Semicon Supplier Software Provider Electronics Manufacturing Supplier (EMS) Sources: McKinsey Specify and integrate complex system (passive restraint system, infotainment break system suspension, etc.) Manufacture and integrate complex components and modules (door module, side airbag, HVAC) Take over well-defined development tasks, support R&D and specification process Design-to-specification and manufacture of standard and non-standard semiconductors Develop complex software with a highly reliable process, assess feasibility and resource/time needs with high reliability Price-efficient manufacturing of electronic components designed by other players Autoliv, Bosch, Continental, S-VDO Brose, Delphi, Bosch, Denso PGAM, Rückert, Porsche Engineering Services, Bertrandt, Bosch Engineering IFX, Motorola, STM Wipro, AVL, EDS Flextronics, Solectron 23 040511_ZWG424_V9_S_English

Positioning as an integrator requires the answer to a set of key questions around technology and business model KEY QUESTIONS FOR AUTOMOTIVE SUPPLIER Global Competitors Suppliers (SW/HW) Skills Architecture Market offer 3 What capabilities, in particular software engineering, to develop? 2 What architec- 1 tural models to pursue? Which standards (open or proprietary) to push? How to balance between customized integration and standards? What do OEMs require/ accept from an integrator? Which application segment / SW layers to focus on? OEMs/ end customers 4 What type of business model to pursue? Sources: McKinsey 24 040511_ZWG424_V9_S_English

1 Suppliers should position themselves as competent supporters of the OEM's strategy SUPPLIER ROLES ON THE AUTOMOTIVE SOFTWARE GAMEBOARD Application segment Drive and ride management Safety Driver assistance, comfort External communication Entertainment SW layer Application Operating system A Help OEMs to develop brand defining applications B Provide best-inclass solution development Communication Source: McKinsey Driver C Support full abstraction in own development 25 040511_ZWG424_V9_S_English

1 OEMs will drive electronics innovations increasingly from a brand image view BRAND IMAGE COMPARED TO PEERS Quality and reliability Safety low Technology and Innovativeness Sportivity high Recommended AE strategy Focus on safety and drive & ride management applications, e.g., Collision avoidance E911 Remote engine diagnosis Provide basic professional feature sets instead of playful gadgets Design Comfort Serviceability Re-sale value Price Source: McKinsey Emphasize particular importance of reliability of electronics Ensure modular architecture to facilitate updates and keep re-sale value high Also for an integrator, understanding the end customers helps to develop the right specifications 26 040511_ZWG424_V9_S_English

2 AUTOSAR, as a first step, defines functional domains in which integration and standardization need to happen AUTOSAR BASIC ARCHITECTURE AUTOSAR functional domain structure Strategy "Divide and Conquer" Segment automotive electronics in manageable pieces with more focused requirements Tier 1 Chassis Powertrain Safety OEMs Learn from other industries how the specific complexities can be managed in the development process Build a development network with specialized players to develop and manage tailored best practices Multimedia/ Telematics Body/ Comfort Man- Machine- Interface Source: AutoSAR, McKinsey 27 040511_ZWG424_V9_S_English

2 Establishing standards and platforms is key in development of mobile phones EVOLVEMENT OF MOBILE PHONE ARCHITECTURE MOBILE PHONE SYSTEM 1999 2003 DISGUISED NUMBERS Value creation in responsibility of semiconductor player of ODM/OEM Market trends Increased system and software complexity due to higher portion of value created in software Forward integration required by semiconductor players since OEMs focus on final system integration and branding Operating system Customized user interface Proprietary middleware Other applications Communication protocols Chipset and firmware Device drivers Reference user interface Operating system Customized user interface JAVA application JAVA platform MMS Application platform Communication protocols Chipset and firmware WAP browser Camera application Device drivers Sources: McKinsey Total lines of code* 0.3 mil. 1.6 mil. Max. team size 20 150 Effort (Man-years) 20 90 Locations 2 8 Third parties managed 5 28 040511_ZWG424_V9_S_English

2 To define the right integration focus, it is essentially to understand the principal challenge of automotive electronics REQUIREMENTS ON AUTOMOTIVE ELECTRONICS AE requirements Safety critical + Highly available + Feature-rich + Easily useable + Under high cost pressure High tech example Avionics Public switching Consumer electronics Mobile phones Personal computers The combination of complexities is unique and can't be solved by taking a standard approach from any other industry Source: McKinsey 29 040511_ZWG424_V9_S_English

3 Concerning process maturity the Automotive supplier industry is lacking 10 years behind the SW industry TESTIMONIALS FOR NEED OF MORE SOPHISTICATED SOFTWARE SKILLS "Regarding electronics problems in the development process, the share caused by SW increased Situation of process maturity CMM from 57% for the A2 to 75% for the level A4" Willibert Schleuter "Due to a software problem BMW had to call back 49,500 M3 models in the USA" Reuters 1.4 1.3 2.0 "The current quality issues will become CEO agenda" Jürgen Hubbert "About 80% of all black boxes that are replaced by service shops do not have any malfunctions." 2000 Automotive supplier industry 1990 2000 Software industry All European automotive OEMs are level 1 Source: Volkswagen, BMW, Audi, Mercedes-Benz, SEI, Interviews, McKinsey 30 040511_ZWG424_V9_S_English

3 In software development, OEMs suffer from lack of process maturity needed for distributed development ROLE OF PROCESS MATURITY IN MULTI-TIER DEVELOPMENT CMM level below 3 implies No stable management process for subcontractors No reliable traceability of requirements In case of level 1, even lack of formalized requirement management CMM level lower than subcontractors implies Inefficient work sharing Improper hand-down of requirements Wrong and/or inflexible architecture Bad project planning Source: Expert interview OEM Supplier Technical development (HW+SW) Centralized development (HW+SW) Off-shore SW development Increasing process maturity (CMM level) 3 3 2 High maturity software development is appreciated skill among system integrators 31 040511_ZWG424_V9_S_English

4 In general, the right OEM-supplier relationship model depends on application maturity TYPICAL COOPERATION MODELS Network Increasing supplier competence Decreasing customer differentiation Tier 0.5 Stabilization of interfaces Standardization Disintegration OEM shaping product and integrating SW suppliers Success factors for suppliers Prove integration capabilities to position yourself as future integrator Manage autonomous system specification and interfaces to diverse partners Source: McKinsey Dominant supplier taking over SW integration task Drive innovations with landmark proprietary technology Define interfaces and break-down specification to Tier-2 suppliers Product maturity Disaggregation of product into independent components, no value added by integration Develop industry standard for HW and SW components Focus on scale and process excellence to drive down cost curve in commodity markets 32 040511_ZWG424_V9_S_English

4 While integration itself is not paid for, more complex software development will move to a royalty-based revenue model SOFTWARE REVENUE MODELS Move from paid development hours to black box package responsibility Key arguments: Standardization and ease of testing Key benefit to supplier: Collecting reuse and learning curve benefits Move from package delivery to lifecycle support/update and independent variant management/architecture enhancement Key arguments towards integrator: Scalability and channel management (sales/services) Key benefit to supplier: Participation in volume upside Level 2: Turn key partner Level 3: Product supplier Level 1: Development specialist Revenue model Source: McKinsey Development contract (pay per hour worked) Product package (pay per output delivered) Royalty (pay per product sold) 33 040511_ZWG424_V9_S_English

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