Europe s Affection for Brands A Shield Against Asian Competition?

Europe s Affection for Brands A Shield Against Asian Competition? Featuring European Consumers Reactions to High Oil Prices Nigel E. Griffiths Director International Automotive Industry Research Detroit, 6 October 2005 EVOLVING CONSUMER PREFERENCES Challenging Opportunities

Chinese Target European Consumers Many European consumers need "cars to simply go from point A to point B. That's exactly what the Chinese cars arriving in Europe offer," - China Business Daily -14 Sept 05 Chinese cars snatch spotlight at Frankfurt auto show USA Today 18 Sept Some German Opel dealers will sell Chinese cars- Automotive News Europe 8-Aug 2005 In times of economic recessions, many a customer will think twice if he can refuse a deal 30 to 50 percent less just because of the "Made in China Deutsche Welle 8-7-05 Sophisticated Europeans, passionate about cars, are very much aware of the symbolism of brands. Some models may well be made in China, but consumers will not desert the names they know and trust for many decades to come, if ever. Editorial ANE 19 th Sept 2005 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 2

Outline Market and Production Outlook Consumers Reactions to Higher Oil Prices Importance of the Brand in European car buyers decision making Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 3

Car Sales (m) Trend Level of European Market More Prolonged Than in Previous Cycles Reflecting Huge Market Support 15 Late 80s Boom Time 12 9 6 70s Oil Shock Early 80s Recession Oil Price hampers sales recovery '93 Recession 3 0 60 64 W.E. Car Market still below long-term trend BUT current weakness does not indicate real trend break 68 72 76 80 84 88 92 96 '00 '04 '08 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 4

Car Sales (m) Although YTD Sales in Western Europe are Flat on 2004 Concern Comes from 5 of the Last 8 Months Below the 14 Million Unit Rate and an Increasing Dependence on the Final Month Each Quarter 16 15 Seasonally Adjusted Annual Running Rate (SAAR) Stress marketing in the closing month of each quarter Big Tactical Discounts Italian Transport Strike 14 13 (Sales Data to April 2005) Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 5

Specific Market Impacts For Balance of 2005 For 2006 Euro 3 run out Euro 4 starts, Any payback? Oil price impact Effective raw material costs still climbing Production Costs (Raw Materials) 1,200 Today 1,000 In $ Diesel filter shortages 800 600 400 200 In Euro Assumes average 12m lag on spot prices before impacting effective contract prices 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 6

Trend Car Production has Stabilised Recently, Running at Around 14.5 Million Units, But Monthly Rates Are Volatile 16,000 Western European Car Production Trend (value in 000's) 14,000 12,000 So far this year falling output in Spain and Italy have not been compensated by good performance at German Plants Last Actual Data Point August 2005 10,000 Aug-95 Feb-96 Aug-96 Feb-97 Aug-97 Feb-98 Aug-98 Feb-99 Aug-99 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 7

Recent Production Rates Starting to Converge on Last Year Millions 15.0 14.9 14.8 14.7 14.6 14.5 14.4 14.3 14.2 14.1 Temporary distortions in May 2005 But Euro-4 changeover could be disruptive 2003 2004 2005 Italy Transport strike, Multiple Model Changes and VW Stamping plant down Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Seasonally Adjusted Annual Running Rate WE Car Production Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 8

West European 26 Markets & Local Production Prospects Under Attack From Imports 1,400 (Thousands of unit imports by source region, all light vehicles) 1,200 1,000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Japan Other Asia EE-NonEU N.A. S.A. Africa Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 9

How Oil Price Assumptions Have Changed in Just One Year $70 $60 $50 $40 $30 $20 (U.S. dollars per barrel, quarterly data) Current Base Case Forecast assumptions in 2nd quarter Forecast assumptions from first quarter $10 2000 2001 2002 2003 2004 2005 2006 2007 2008 WTI (Nominal) Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 10

Simulation: Average Monthly Spending to Refill a Car in Germany Exchange Rate (US$/Euro) 0.9 1 1.1 1.2 1.3 1.4 Oil Price (Brent, US$/Barrel) $20 $30 $40 $50 $60 $70 111 129 148 167 185 204 107 124 141 157 174 191 104 119 134 150 165 180 101 115 129 143 157 171 99 112 125 138 151 164 97 109 121 133 145 157 $100 260 241 226 213 203 193 Based on 18,000 km/year and a 7.5l/100km average fuel consumption Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 11

Simulation: Average Monthly Spending to Refill a Car in Germany Exchange Rate (US$/Euro) 0.9 1 1.1 1.2 1.3 1.4 Oil Price (Brent, US$/Barrel) $20 $30 $40 $50 $60 $70 111 129 2000 148 167 185 204 107 124 141 157 174 191 104 119 134 150 165 180 Hard 80 2003 101 115 129 143 157 2004 99 97 112 109 125 121 05 H1 2008 Base Case 149 138 133 151 145 171 164 157 $100 260 241 226 213 203 193 Based on 18,000 km/year and a 7.5l/100km average fuel consumption Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 12

Simulation: Change to Monthly Fuel Refill Bills Compared to 2003 base and $30 oil Exchange Rate (US$/Euro) 0.9 1 1.1 1.2 1.3 1.4 Oil Price (Brent, US$/Barrel) $20 $30 $40 $50 $60 $70-8 +10 2000 +29 +48 +66 +85-12 +5 +22 +38 +55 +72-15 0 +15 +31 +46 +61 Hard 80 2003-18 -4 +10 +24 +38 2004-20 -22-7 -10 +6 +2 05 H1 2008 Base Case +30 +19 +14 +32 +26 +52 +45 +38 $100 +141 +122 +107 +94 +84 +74 Based on 18,000 km/year and a 7.5l/100km average fuel consumption Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 13

Possible Oil Price Scenarios 90 80 70 60 50 40 30 20 10 0 (Brent oil in U.S. dollars per barrel) Hard 80 2001 2002 2003 2004 2005 2006 2007 2008 Brent (Sept 05) Solid 60 Hard 80 Thristy 30 Solid 60 Base Case Thirsty 30 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 14

Western Europe: Theoretical New Car Sales Under Different Oil Price Trajectory Scenarios Car Sales in 000 s 15,200 15,000 14,800 14,600 14,400 14,200 14,000 13,800 13,600 13,400 Thirsty 30 Base Solid 60 Hard 80 2002 2003 2004 2005 2006 2007 2008 2009 2010 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 15

Which Brands Will Benefit From High Oil Price Environment? (Consumers citing good fuel consumption as part of their purchase decision) Average Mazda Volvo Peugeot Hyundai Ford Renault Nissan Opel VW Citroen Skoda Toyota Honda Fiat Daihatsu Smart Source: Collection of Consumer Surveys in Key European Markets Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 16

U.K. Has Had Pump Prices Above US$5 Gallon Every Year Since 1999 and Yet U.K. research indicates (private) car-buyers pay little attention to mpg in their decision making process Many car-buyers: Cannot confidently estimate their fuel costs Assume that there is little difference in mpg between cars within a vehicle-class (eg: within diesels, super-minis, etc.) Consider mpg as an aspect of car design that can only be achieved by compromising performance and safety Do not trust test-cycle results undermining confidence in reported fuel economy Consider fuel costs as part of the household budget Will endure significant price increases before considering switching to low CO 2 rated vehicles Source : Department for Transport Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 17

Motorists Will Endure Significant Additional Costs Before Switching to an Alternative Vehicle Survey Evidence From the U.K. Average amount of endurance for drivers Before behaviour change = 1,100 Urban consumers most likely to switch 3000 2500 2000 Company car drivers are most immune to cost increase As witnessed by the hybrid sales-boom in London only 1500 1000 500 0 Total Company Cars Private Cars City Centre Edge of Town Rural Grin and bear it Switch to smaller engine Switch to different fuel system Switch to smaller car Source : Department for Transport Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 18

West European Diesel Market 9,000,000 Market expected to peak in 2009/2010 8,000,000 58% 7,000,000 6,000,000 5,000,000 Total Diesel Growth 1985-2010 +505% 4,000,000 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3,000,000 2,000,000 1,000,000 Euro 1 Euro 2 Euro 3 Euro 4 Euro 5 0 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 19

Relative Benefit from Diesel Depends on Oil Price Range and Divergent Distillate Price Trends Relative to Petrol 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% (Marginal percent change in fuel efficiency benefit of diesel) Diesel Prices increase relative to Petrol Possible Future Scenario All calculations relative to $30 oil 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 Oil Price Bent in $ (base year mid 2003 at $30) Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 20

Possible Policy Reactions to High Oil Prices European governments could lower tax on motor fuels Poland did in July. NL has put off planned increases in 2006 Other governments so far resisted France has suggested imposing a new lower top speed limit But has not received much support for the Idea Accelerate the implementation of tax structure based on CO 2 Portugal planning phased introduction from mid 2007 France new scheme for Jan 2006 Fuel economy labelling Encourage BioFuel, and LPG development Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 21

Monthly Segment Penetration Rates in Europe Since 1998: Some Changes, But Is it Due to Higher Oil Prices? (Segment penetration rate, monthly data) 35% 30% 25% 20% 15% 10% 5% (U.S. dollars per barrel, monthly data, nominal) $70 $60 $50 $40 $30 $20 $10 0% 1998 1999 2000 2001 2002 2003 2004 2005 $0 A and B C D and E SUV MPV-B/C/D WTI Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 22

Importance of Fuel Economy in the Purchase Decision Has Actually Been Sliding 12 (Percent of buyers citing fuel economy as one of the reasons for purchase) 10 8 6 4 2 0 2000 2002 2004 Source: Collection of Consumer Surveys in Key European Markets Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 23

Can Brand Affinity Defend Europe? EVOLVING CONSUMER PREFERENCES Challenging Opportunities

Why Focus on Brand Values Now? Market fragmentation combined with product proliferation has reduced differences in brand segment footprints The search for non-price competition in consumer market Success of premium brands is intensifying the search for a near premium or aspirational upper mass market brand position Recent spate of brand management actions and brand realignment strategies The search for non-price competition in the component pitch Determines the limits to OEM outsourcing Future directions in model strategy Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 25

Components Makers Have to Ride the Wave as Well Market Strategy: Model Proliferation Brand Realignment Growth Pole: Organic Growth M&A Fever Brand/Innovation Cost Strategy: Platform Consolidation & Cross Platform/Modules 1985 1990 1995 2000 2005+ Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 26

The Paradox of Brand Behaviour Branding has risen in profile...but brand loyalty in mass market has actually fallen over last decade Control of brand communications with customers may be reduced due to block exemption changes Leading to need for product to speak for itself, heightened need for differentiation to avoid commoditisation Plurality of increased individuality, but continued consumer desire to project self image Continued attempt to attract younger customer base for the brand, despite an ageing population New attempts to target post modern, progressive, trenddriven consumers despite adverse demographics Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 27

Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 28

Brand Values are Multi Dimensional Key Descriptive Brand Values of European Makes Irrational Desire fresh thinking flair responsive exclusivity futuristic reliable aspirational high quality classic spirited refined safety for sensuous life creativitydaring legendary genuine contemporary performance luxury authentic insightful exceptional functionality original Multi-dynamic technological sporty passion driving pleasure tasteful versatility visionary smart warm performance orientated dependable value progressive spirit stylish adventurous art of travel alternative alternative exclusivity elegant best in sector sensitive Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 29

Brand Image is Consistently One of the Most Important Reasons for Purchase in Europe Brand Reputation (Percent of buyers citing brand image as reason for purchase ) Or Recommendation 35 30 25 20 15 10 5 0 2000 2004 2005 Source: Collection of Consumer Surveys in Key European Markets Reported Brand Loyalty Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 30

But for Europeans, Price Alone Is Typically Less Important and at Least as Far as Consumer are Concerned its Significance Even Seams to Have Been Falling (Percent of buyers citing price as reason for purchase ) 16 14 12 10 8 6 4 2 0 2000 Source: Collection of Consumer Surveys in Key European Markets 2005 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 31

Importance of Price as a Selling Point by Brand Index Ranking Of Price as key purchase factor Ultra Budget 0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 Lada Daihatsu Kia Daewoo-GM Hyundai Skoda Suzuki Sales Growth 2004-2010 2010 Total Europe Budget Seat +9% Fiat Citroen Ford Mazda Nissan Opel Brand Image Mass Market Peugeot Renault +2% Toyota Honda VW Audi BMW Premium Mercedes +10% Collection of Recent Consumer Surveys in Key European Markets Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 32

Budget Sector Is About One in Five Car Sales 22% (Percent market share in the Western Europe passenger car market ) 20% 18% 16% 14% 12% 10% Do budget brands compete for the same customers? 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 33

Over the Next Six Years the Pool of Low Income (First Time and Base Model) Buyers Will Fall Significantly 20 15 10 5 0-5 -10-15 -20 (Change in number of people MN by income band 2003-2009) Low rank brands, utility models & pure functional segments will lose customer base Premium brands, stylebased models & up-market segments should flourish 10,000 20,000 30,000 50,000 75,000 100,000 $100,000 (Income per person $ at end 2003 rates) + Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 34

Sales Dynamics Within the Budget Sector 1,200 (Thousands of unit sales in the Western Europe passenger car market ) 1,000 800 600 400 200 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Korean Ultra Budget Skoda Fiat Citroen Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 35

Share Dynamics Within the Budget Sector 100% 90% (Percent of market share in the Western Europe passenger car market) Others 80% 70% 60% 50% 40% 30% 20% Fiat Citroen Skoda Korean 10% Ultra Budget 0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 36

Breaking Out of the Budget Class? Hard to achieve a bigger jump in Brand Image scores are needed than just reduced emphasis on price proposition Fiat s recent strategy is starting to show, but at the expense of a serious collapse in sales Seat has new brand strategy but could be moving too far from its traditional customer base too soon Main Japanese brands took 30 years to break into mainstream, some may not get there Korean makers working on a breakout brand strategy; Hyundai could be close by around 2010 (20 years), GM-Daewoo has clean slate with Chevy Brand Chinese makers: Could they keep up the progression and hit the spot in 10 15 years? On current evidence not likely Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 37

But the Door Is Open in Eastern Europe 1,800 1,500 1,200 900 600 300 (Thousands of unit sales in the Eastern Europe passenger car market ) 80% 70% 60% 50% 40% 30% 0 20% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Budget Ultra Budget Total Budget Share (RHS) Copyright 2005 Global Insight, Inc. 2005 GLOBAL AUTOMOTIVE CONFERENCE DETROIT 38

Nigel E Griffiths Director International Automotive Industry Research E-mail: nigel.griffiths@globalinsight.com Tel: +44 20 8544 7919 EVOLVING CONSUMER PREFERENCES Challenging Opportunities