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Battery Electric Vehicles:Auto Supplier Disruption on the Horizon

Moore’s Law in Action

November 2017

Investment Bank for the Manufacturing Sector ℠

William Doepke, Managing Director [email protected]+1 312.698.6906

Stephen Baine, Senior Advisor [email protected]+1 614.441.6631

http://www.ioadvisors.com/

mailto:[email protected]

Battery Electric Vehicles:

Auto Supplier Disruption on the Horizon

ii November 2017

*Please note – data quoted in this report are from multiple sources and, in each case, InterOcean has used the most current information available. However, certain

content is no more recent than 2014. Recipients of this document must conduct their own appraisal and due diligence procedures before acting or refraining from

acting on the content of this document.

This is not an offer to sell securities or the solicitation of an offer to purchase securities. Any offers of securities may only be made pursuant to a written offering

memorandum.

Highlights in a Nutshell:

Electric Vehicles will drive big changes for suppliers and consumers

Executive Summary: Exponential Battery Electric Vehicle growth; gradual impact due to market and fleet size…………................1

Drivers of Change: Battery technology advances, superior EV economics, public policy; tipping point near.....................................3

Powertrains Comparison: Fewer moving parts, lower EV costs vs. internal combustion engine……………..............................……….7

EV Pace of Growth: 20-50%, but off low base………………………………………………………….............................................................................................................8

OEM plans: All current Original Equipment Manufacturers and some new introducing EVs by 2020

Perceived Limitations to growth: Battery performance, charging issues, sedans vs. light trucks

Consumer Benefits: Big savings opportunity – fuel, maintenance, and life-expectancy

Timing of Impact on Suppliers: Rapid change, but time to adapt...........................................................................................................................13

Supplier Valuations: Some already responding, opportunities remain…………………………………….…….....................................................................14

Strategic Options Available: Final thoughts............................................................................................................................................................................17

Source Listing………………………………………………………………………..……………………………………………………………………………………………………………………………….………….…..........19

InterOcean Advisors Firm Overview……………………………………………….…………..……………………………………………..……………………………………..………………………….21

Legal Disclaimer…………………………………………………………………………………………………….…………………………………..……………………………………………………….…………………….…22

Disruptive technologies and business models driving change at a pace near Moore’s law* will lead to thegreatest restructuring of the transportation industry since the replacement of horses by the automobile over100 years ago. Although pace of change is exponential, there is time for vehicle suppliers to adapt theirbusiness strategies and product mix for the significant transition that will play out over a decade.

Much has been written about rapid advances occurring in battery storage, solar technologies, artificialintelligence, and ride sharing business models, all driving the emergence of full battery electric vehicles (EVs).More recently many governments are backing the EV trend with mileage efficiency requirements or bybanning internal combustion engine (ICE) autos at specified future dates. Our report distills key technical andmarket developments we can expect and analyzes the rate at which these changes will impact automotiveOriginal Equipment Manufacturers (OEMs), suppliers and adjacent businesses.

1

› The automobile industry will be flooded with new EV models over the next three years, with the U.S.market for such vehicles growing at double digit rates (20% to 50%) according to most forecasts

‒ These models will be introduced by all major auto makers, plus some new ones in U.S. and China

‒ The long-term impact on OEMs, suppliers and dealers will be profound, but the rate of change willvary by market segment and geography

› China and Europe are forecasted to grow fastest, due to high fuel costs and aggressiveregulatory pressures favoring non-ICE technologies

› The U.S. market with lower fuel costs, less regulatory pressure (ex. California), and longerdriving distances will change more slowly

› Battery technology advances and cost reductions will be the drivers of the growth rate for mass-market EVautos (critical barrier: greater than 200-mile range and a unit cost under $35k)

‒ Battery suppliers and some OEMs are making significant investments in battery technology andproduction, in an effort to achieve competitive positions in the potentially rewarding EV market

› While EV developments will be profound and the level of market attention is significant, the impact oncurrent suppliers and dealers in the U.S. will be gradual over the next five years

‒ Emerging from a current low base (less than 1% of U.S. sales), even allowing for aggressive growthprojections (45%), EV sales may only account for 8-9% of total U.S. OEM sales in five years

‒ With approximately 230 million autos on the road in the U.S., it could require more than five yearsto achieve even 1-2% penetration, limiting the medium-term effect on after-market parts suppliers

Executive Summary

Observations from our research

November 2017

*Moore's law is the observation that the number of transistors in a dense integrated circuit doubles approximately every two years. This illustratesthe pace of technology improvement in the electronics industry, which has begun to impact the auto business.



https://en.wikipedia.org/wiki/Transistor

https://en.wikipedia.org/wiki/Integrated_circuit

2

› The automobile market and supplier structure will experience considerable change

‒ We estimate that at least 20% of auto suppliers will be materially impacted by the replacement oftraditional powertrain-equipped automobiles with battery electric vehicles (S&P, 2017)

› Many more may be indirectly impacted

‒ Technology companies, such as Alphabet Inc. and LG Electronics Inc, formerly not significantsuppliers to the auto industry, will assume an important share of the supplier market

‒ New auto-manufacturer entrants and their unique business models (e.g., Tesla, Farraday Future,Lucid Motors and Dyson) are currently impacting the market, or poised to do so, and have thepotential to further disrupt the current supplier (Tier 1, 2) and dealer networks

› The assembly of EV’s with far fewer moving parts and dependence on new technology couldshift dependence away from many traditional suppliers and dealer networks

‒ Fleet buyer dominance could grow as the economics of EVs and ride-sharing and self-drivingtechnology enhance the attractiveness of transportation as a service and reduce the appeal ofindividual owned vehicles and future new car sales

› In turn, this could shift the balance of power away from manufacturers and dealers,benefiting consumer subscribers of ride-sharing alternatives

Observations from our research (continued)

When changes in the business environment genuinely pose a major threat to the statusquo, plans need to change. We believe now is one of those moments for many autosuppliers. Strategic restructuring, repositioning, acquisitions, divestitures and other actionsare already taking place across the auto industry

November 2017Battery Electric Vehicles:


3

The forces of change will have a significant impact on all players in the industry, especially suppliers andeventually even dealerships. This report addresses questions that should be of particular interest to thosecompanies primarily serving the U.S. market.

The factors driving this potential disruption were initially highlighted and popularized by thought leader Mr.Tony Seba of Stanford University over three years ago, and his insights and initial forecasts are provingdirectionally correct:

› “Energy storage price/performance annual gains of 20% derived from improving battery technology since2010 will continue, if not improve exponentially” and advances in solar will amplify the benefits of energystorage

› The EV value proposition will advance sharply, making it fully competitive with the ICE within 2-3 years

› The tipping point for transition to EVs will be 2020 and by 2030 EVs will dominate market share

Drivers of Change

Tesla estimates that its recently opened Giga factory will reduce total battery costs by approximately 30% andenable it to price the Model 3 at about $35,000 (Thompson, 2016).

› According to Tesla, “To achieve its planned production rate of 500,000 cars per year by 2018, Tesla alonewill require today’s entire worldwide supply of lithium-ion batteries. The Tesla Giga factory was born out ofnecessity and will supply enough batteries to support Tesla’s projected vehicle demand” (Tesla, 2017)

‒ In April of 2017, Elon Musk stated in a TED interview that Telsa “will announce locations forsomewhere between two and four Giga factories later this year” (Musk, 2017)

› Worldwide, there are proposals for the construction of at least ten Giga factories (Deign, 2017)

› McKinsey & Company research is supportive, indicating that stationary energy storage costs are fallingrapidly and could be half the 2016 level by 2020 and another 25% less by 2025 (McKinsey, 2016)

Energy storage/batteries



> 2012 High Technology Battery Case Source; Wood Mackenzie, 2017> GM and Tesla indicated manufacturer actual and projected costs obtained from Lambert, 2017, January 30; Lambert, February 18; Voelker, 2017> Battery cost threshold as generally accepted by auto industry analysts

The actual speed of improvement in battery technology has far exceeded projections made in 2012. The$100/KWh threshold target cost to manufacture batteries could be realized soon and ultimately propel newEV sales above current projections. At this threshold cost, it is generally accepted that EVs can effectivelycompete with ICEs on production cost and price, without taking into account lower cost of ownership factors(Exhibit 1). Actual and projected battery pack costs are not broadly and openly shared by batterymanufacturers and OEMs. Thus, there are only a few points of disclosure offering insight to costs and theirrespective trends. However, the path of significant improvement is unquestioned by analysts.

Exhibit 1: 2012 Battery Pack Cost Projections vs. Actual Outcomes and Current Forecasts

4 November 2017

Energy storage/battery advances



$0

$100

$200

$300

$400

2016 2018 2020 2022

Co

st (

$/K

Wh

)

2012 High Technology Battery Case GM Telsa

The battery is the most significant and highest cost component in an EV. Thus, improvements in battery andsupporting system costs are key to overall economic competitiveness. For example, as estimated by UBSGlobal Research, the cost of a Chevy Bolt battery pack is approximately $11,500, contributing materially to atotal powertrain cost of almost $15,000 (Exhibit 2). This battery cost is estimated by UBS to decline to about$8,000 by 2025 (UBS, 2017). While improving 30%, we believe further cost reduction will be necessary for EVpowertrain costs to be fully on a par with ICE vehicles. At the current pace of battery technologyadvancements, such cost reductions are attainable but the exact timing is unclear.

Exhibit 2: Chevy Bolt Electric Powertrain Cost Analysis

> Source: UBS, 2017

5

Energy storage/battery advances (continued)



Component Cost Today Cost 2025E % Change Function

Lithium ion battery

cell 8,700$ 5,400$ -38% Stores up to 60kWh of electric power, $145/kW

Battery management

system 150 200 33%

Monitors the voltage output of each cell group and

temperature of the pack

Battery thermal

management 100 90 -10%

Heats and cools battery in order to keep operating

temperature within desired range; glycol/water

based

All other content 2,550 2,310 -9%

Module frames, internal wiring, cooling plates, steel

pack case, plastics cover, emergency switch, safety

relays, pack assembly

Total lithium ion

battery pack costs 11,500$ 8,000$ -30%

Entire battery pack including housing, thermal

control, internal wiring, emergency switch and

battery management system

Remaining EV

powertrain costs 3,449 3,029 -12%

Includes: thermal management, power distribution

module, inverter / converter, electric drive module,

DC/DC converter, electric vehicle communication

controller, vehicle interface control module, high

voltage cables, on board charger, and charging

cord

Total Chevy Bolt

Electric Powertrain

Costs 14,949$ 11,029$ -26%

Mr. Seba asserts that the tipping point for transition to EVs will be 2020, and by 2030, EVs will dominate thevehicle market (Seba, 2014). He clearly views EV development as a force that eventually will roil the autoindustry, especially suppliers and later even dealerships. Others say the changes will take much longer. UBS’sbase case estimates that EVs would account for 14% of global sales and only 5% of U.S. sales by 2025. Theselevels of sales imply 38% and 23% growth rates, respectively, from a current 1% share in both markets (UBS,2017). In evaluating these differing points of view, we have identified a host of U.S. factors deservingconsideration in the remainder of this document.

6

Electric vehicles value proposition

Greater performance/less cost has advanced sharply over recent years and will make the EV fully competitive(combined price and cost of ownership) with the ICE within 2-3 years. The economic advances are based onseveral basic factors:

› Battery technology advances have resulted in declining costs, improved power/density (faster acceleration),and better battery degradation performance than expected

› EVs have fewer moving parts and longer life expectancy, leading to lower maintenance costs for owners

› Electricity has 90% power efficiency vs. 17-21% for fossil fuel, and electricity is cheaper to transport thanfossil fuel (Seba, 2014)

› With respect to the total emissions footprint, utilities share of solar and wind, while small, is growingrapidly, displacing coal and oil

‒ In 2016, solar contributed to 1.5% of global electricity (The Guardian, 2017)

‒ Solar also ranked as the number one new source of new electric generating capacity additions in2016 and accounted for 39% of incremental capacity additions across all fuel types (Munsell, 2017)

‒ U.S. solar capacity’s expected to continue growing rapidly, tripling by 2022 (Hill, 2017)

Tipping point



Powertrain Comparison: EV vs. ICE

The differences are material› EVs have far fewer moving parts

‒ After disassembling a General Motors Chevrolet Bolt vehicle, UBS Group concluded it requiredalmost no maintenance

› The electric motor has just three moving parts, compared with 133 in a four-cylinder internalcombustion engine (UBS, 2017)

‒ According to the consulting firm AlixPartners, electric powertrains, including batteries, require 40%less manufacturing labor than a hybrid, and 10% less than an ICE (Malan, 2017)

‒ EV vehicle composition will eliminate many ICE components*

‒ Fewer moving parts leads to less servicing requirements and repair parts

› No engine oil, transmission fluid, filter, and radiator fluid changes and less frequent brakereplacement

‒ The battery is the most significant and highest cost component in an EV

› Thus, advances in battery cost are key to overall economic competitiveness

› EVs incorporate new/additional components

‒ More technology and software, including AI, sensors, computer chips, battery power management,electric/electronic monitoring systems, and active safety equipment

‒ Technology already represents 30% of auto cost and will be over 35% by 2020 (Statista, 2017)

‒ Autonomous features will lead to fewer accidents requiring less repairs

› Many traditional ICE powertrain parts are naturally replaced, reducing mechanical complexity and futuremaintenance requirements and eventually impacting the auto parts aftermarket and dealer servicing

‒ Parts being eliminated include but are not limited to; internal combustion engine, multi-gearautomatic transmissions, exhaust systems, pollution reducing systems, fuel systems, fuel tanks, airintake systems, turbo-chargers, spark plugs, and gauges monitoring systems

7

*Remaining as key components to the vehicle regardless of powertrain include but not limited to: exterior surfaces, suspensions/ride controls,chassis parts, tires, electronic braking and steering systems, car interiors, windows, seating, infotainment, and lighting.



OEMs plan to introduce 22 new EV models by 2020

EV Pace of Growth

8

> Source: ev tide, 2017

Exhibit 3: Planned OEM EV Platforms

November 2017

Make Model

Release

Year

Range

(miles) Manufacturer Additional Comments

Tesla Model 3 2017 200 - 310$35K price before incentives. 400K pre-orders will double the size of

the EV market in the U.S. by 2018

Cheverolet Bolt 2017 238$37.5K price. Availible nationwide. Biggest contender in the race to

mass adoption of long-range electric cars

Hyundai Ioniq EV 2017 124 $29.5K before incentives

Ford Focus 2017 110 $30K price and Ford's only fully electric vehicle

Fisker eMotion 2017 400 $129K price. Ultra-luxury sedan

Renault ZOE 2017 186 $24.5K price range. Best-selling EV in Europe

Volkswagen e-Golf 2017 125 $40K or less price

Faraday Future FF91 2017 360 The same price range as a Tesla. A crossover SUV

Nissan Leaf 2017 100 $30K price

Audi SUV 2018 310 Inspired by Audi’s e-tron quattro concept

Aston Martin Rapid e 2018 200 $200K price

Nissan LEAF (Upgrade) 2018 200 Price TBD

BMW i3 (Upgrade) 2018 200 Price TBD

Jaguar I-Pace 2018 220 Announced electric drive-train in every car by 2020

Hyundai Kona 2018 310 $45K price

Lucid Motors Air 2018 400 $52.5K to $100K price range

Mercedes Benz SUV 2019 300 Price TBD. Will offer electric version of all models by 2022

Volvo XC40 2019 250 $45.6K price

Audi A9 e-tron 2019 300Audi with have three EVs in l ine-up by 2020 and plan to have 25% of

Audi cars powered by batteries

Porsche Mission e 2020 240To invest $1.09 bill ion in new facilities to begin production of its

first all-electric car

Dyson NA 2020 NA Will invest $1.34 bill ion to develop electric car by 2020

Volkswagen I.D. 2020 240$40K or less price range; unveiled plans to develop 30 new electric

cars and sell 2-3 mill ion annually by 2025



› High prices, combined with uncertain economics and battery performance, limit consumer confidence

‒ Large % of U.S. consumers cannot afford the current $35,000 EV price tag

‒ Owners typically drive distances for work and vacation that undermine the attractiveness of EVswith 300 mile or less ranges

‒ Current battery degradation claims are varied and difficult to validate and of concern

‒ The basis of mileage claims is not standardized and performance appears to decline based onactual/realistic driving characteristics and conditions

› Charging station accessibility

‒ Deemed to be a critical limiting factor for consumers

‒ Locations generally viewed to be too sparse

‒ Charging speeds to slow

› Battery production capacity may fail to keep pace with demand

‒ By 2025, 14 equivalent size Tesla Giga factories would be required for EVs to penetrate 14% of theglobal new car sales market (UBS, 2017)

› Amounts to $64 billion in capital expenditures

› The forecasted demand for EV batteries leaves much upside for leading batterymanufacturers such as Panasonic, LG Chem, BYD, Automotive Energy Supply Corporation,Contemporary Amperex Technology Co., Ltd., and Samsung

› Expected battery demand is an opportunity for new entrants to the EV battery market

‒ No known battery capacity is under construction in Europe which is of concern to local OEMs

› The composition of new U.S. vehicle sales consists of 67% SUVs and pickup trucks (MarketLine, 2017)

‒ New EV introductions are predominantly sedans, sportier small cars and a few crossover SUVs

‒ No recognized plans to introduce mass marketed battery powered large SUVs and pickup trucks

› Gasoline prices combined with ICE engine efficiency improvements could undermine EV competitiveness

‒ Important advances in ICE 4-cylinder engine technology are still possible

‒ Advanced transmissions have been developed, improving mileage and reducing emissions

‒ If predicted oil/gas consumption declines on the heels of EV expansion, lower gas prices may result,lending support to the competitiveness of traditional powertrain automobiles

› U.S. government incentives and directives are generally more muted than exist in other countries

‒ Federal EV tax credits of $7,500 will begin to decline and eventually expire as OEM sales totals reachestablished government thresholds, undermining an important buyer incentive

‒ Renewal or extensions of the program is not currently expected

Perceived limitations to growth

9 November 2017Battery Electric Vehicles:


10

Exhibit 4: Selected Charging Station Companies

> Sources: S&P Capital IQ, 2017; Electrify America, LLC, 2017; Blink Charging Co., 2017: Chargepoint, LLC, 2017; EVgo Services, LLC, 2017

Perceived limitations to growth being addressed

November 2017

Business Name Business Description Location

Electrify America LLC

Will invest $2 bill ion over the next 10 years in Zero Emission Vehicle (ZEV)

infrastructure and education programs in the U.S. Its vision is to establish a

premier ZEV charging network that is comprehensive, technically advanced and

customer-centric -- to drive ZEV adoption by reducing charging anxiety and

increasing convenience. Created by Volkswagen

Reston,

Virginia

Blink Charging Co. (OTCPK:CCGI)

Provides electric vehicle (EV) charging equipment and networked EV charging

services. Offers residential and commercial EV charging equipment that enable EV

drivers to recharge at various location types

Hollywood,

Florida

ChargePoint, Inc.

ChargePoint, Inc. operates an open electric vehicle charging network. Notable

investors include Daimler AG and BMW Ventures. Uses a franchising business

model

Campbell,

California

NRG EV Services LLC

Mission is to build the nation’s largest EV charging network. Operates the largest

publicly available Fast Charging network in the nation. Covers 31 major

metropolitan areas across the country with charging stations . Using a franchise

business model

Houston,

Texas

› EV production volumes demonstrate OEM confidence in creating and meeting rising consumer demand

‒ Tesla is producing the Model 3 and X to fill approximately 600,000 existing reservations

‒ GM only recently has Bolt vehicles available to consumers at Chevy dealerships nationwide

‒ Nearly all the major auto makers have announced new EV platforms, together representing capacityto build millions of EVs in 2020-2022, which would be more than 10X current levels

› Consumer acceptance is evolving rapidly in favor of the EV

‒ Acknowledge the beneficial economics, combined with convenience, safety, and comparable orbetter performance

‒ Welcome an opportunity to contribute to a greener environment

‒ Accept and embrace new EV technology based on demonstrated acceptance of early consumersand favorable reports

› Range will increase significantly

‒ Battery technology continues to improve, with billions of incremental investment planned

‒ All auto manufacturers claim to have the capability to achieve 200+ mile range by 2018 (Exhibit 3)

› Charging stations will become widespread

‒ Increasing availability of rapid charging (Exhibit 4) and wide-spread sites will also favorably influenceconsumer satisfaction with the EV mileage ranges



› EVs will produce far lower cost per mile and total cost of ownership

‒ No or limited fuel cost

‒ Lower maintenance requirements

‒ Longer vehicle lifespan

› Tesloop, a rideshare business based in Los Angeles, uses a fleet of autonomous-featured Tesla S vehicles

‒ After operating a fleet vehicle for 300K miles and tracking performance closely, it claims that:

› Battery degradation was less than 10% after 300k miles (Tesloop acknowledged it can varybased on frequency and nature of recharging)

› Maintenance costs were significantly below comparable ICE vehicles

› The after purchase mileage cost is $0.07 to $0.10 per mile (including maintenance costs)compared to $0.29 per mile for an Mercedes Benz S Class

› Vehicle life expectancy is estimated to be at least 500K miles

Exhibit 5: Vehicle Cost Analysis: 300,000 Miles of Usage

> Source: Tesloop, 2017> Tesla Model S cost information is based on actual 300,000 miles of operational use. Mercedes Benz and Lincoln costs

are estimated over the same 300,000 miles of operational use

11

Consumer benefits: Big savings opportunity

November 2017

$10,492

$52,000

$28,000 $12,872

$36,000

$42,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

Tesla Mercedes Benz S Class Lincoln Town Car

Co

st

Maint. Cost Charge / Fuel Cost



The total cost of ownership of electric and gas-fueled vehicles will likely reach parity soonest for sharedmobility fleets and high mileage drivers, according to Bloomberg New Energy Finance.

› "Competitiveness very much depends on the utilization of the car," Laszlo Varro, chief economist at theInternational Energy Agency, said in an interview. The average Uber vehicle covers a third more distancethan the typical middle-class family car in Europe, amplifying the benefit of lower running costs to the pointthat "the oil price at which it makes sense to switch to electric is $30 per barrel lower" he said (Shankleman& Warren, 2017)

In London, Uber plans for its UberX service to be hybrid or fully electric by the end of 2019. Its rival Lyft aimsto provide at least 1 billion rides a year in autonomous EVs by 2025, saying they can be much more efficientlyoperated than gasoline-powered cars.

If EV platform is combined with self-driving features and a ride sharing business model, the consumer savingspotential can become much higher as the need for ownership comes into question. The timing of thisdevelopment is linked to the commercialization of self-driving features, which depends on technology andregulatory factors.

› As the current estimated 4% utilization of vehicles increases materially through the success of ride sharing,the fleet of U.S. automobiles will gradually decline, reflecting the need for fewer individually ownedvehicles

‒ This will greatly lower the capital investment, insurance premiums, and maintenance costs incurredby consumers (fewer cars or no car) without sacrificing access to convenient and cost effectivetransportation

‒ Fewer accidents, injuries, deaths, and collision repairs due to AI capability

› Steven Martin, chief digital officer and vice president of General Electric’s Energy Connections unit said thatthe combination of an effective alternative and lower costs would represent "the Uber model on steroids,"and "Once you have complete autonomous operation of a vehicle, then my desire to own one is going to godown and I’ll be more willing to sign up to a subscription service.“ (Shankleman & Warren, 2017)

› The net result is significant savings for the consumer and, if accurate, eventually materially fewerautomobiles being produced for and purchased by consumers

12

Consumer benefits (continued)

There is a wide range of views in terms of transition timing: 2-3 years to 10-15 years. Ourview is that there will be exponential growth of EV sales in the next five years based onboth consumer and fleet demand, and the impact on current suppliers and somemanufacturers will become more critical each successive year.



Using publicly available information and applying certain stated assumptions, we have modeled the potentialimpact of EVs on future new car sales. While commencing slowly, both our base and upside projectionsindicate very rapid growth commencing in 2023. We believe technology improvements and costs will evolvemore favorably than indicated in the conservative case. Announced capital commitments from OEMs anddemonstrated technological and cost progress drive the most aggressive growth estimate.

Exhibit 6: Electric Vehicle Penetration Scenarios (U.S.)

> Yearly New Vehicle Sales Assumption: 17.850 million units

› Upside: 25.2% market penetration by 2025 (45% CAGR)‒ Battery pack costs/price improvements occur faster than anticipated ($100/kW)‒ Autonomous and shared ride vehicle fleets begin to become the “new normal” of transportation‒ Auto manufacturers deliver fully electric SUVs and pickup trucks‒ Early acceptance of EVs by consumers and favorable reports lead to rapid adoption of EVs

› Base: 13.3% market penetration by 2025 (35% CAGR)‒ Battery pack costs/price improvements occur in line with manufacturer forecasts‒ Consumer long-run cost of ownership for an EV is on a track to surpass ICE vehicles ‒ Charge station infrastructure grows in conjunction with consumer demand‒ Auto and battery manufacturers deliver on growing EV consumer demand

› Conservative: 6.6% market penetration by 2025 (25% CAGR)‒ Current trend of cost reductions and performance of battery powertrains is not maintained‒ Improvements to traditional powertrain systems will continue to garner greater fuel efficiencies‒ Lower than expected consumer response to EVs – prices too high‒ EV manufacturers are unable to meet manufacturing quotas, and production delays impede growth

13

Timing of Impact on Suppliers

Scenario explanation

November 2017

13.3%

25.2%

6.6%

0%

4%

8%

12%

16%

20%

24%

28%

2016 2018 2020 2022 2024

% o

f N

ew C

ar S

ales

(U

.S.)

Base Upside Conservative



We screened, analyzed, and categorized M&A transactions of automotive suppliers (Exhibit 7). Notsurprisingly, acquisitions of auto suppliers with EV capabilities are commanding much higher valuations thanothers.

› Eighteen acquired suppliers, which we identified as having a presence in EVs, had a median Total EnterpriseValue/EBTIDA M&A multiple of 14.2x

‒ This high multiple shows that suppliers in this category carry a significant premium

› Forty-three acquired suppliers, which we identified as having little or no negative exposure to EVdisruption, had a median Total Enterprise Value/EBITDA multiple of 8.7x

‒ This is a typical multiple of traditional M&A multiples in the automotive supplier industry

› Twenty acquired suppliers, deemed to be directly exposed to EV disruption, had a median multiple of 7.9x

‒ This multiple suggests that valuations in this category have had limited negative impact from thethreat of EV disruption to date

> Source: S&P Global Market Intelligence, 2017 > Transaction data from October 31, 2015 through October 31, 2017> Total number of transactions screened: 690> Selected transactions determined by available transaction data

Exhibit 7: Automobile Electrification M&A Transaction Summary

14

Supplier Valuations: Some Already Responding

November 2017

Target Category Metric

TEV/ Revenue TEV/ EBITDA

Group Mean 2.0x 19.2x

Group Median 1.2x 14.2x

Selected M&A Transactions 32 18







EV Capable

Product Nuetral to EV or ICE

Product Exposure to EV Disruption

Last Two Yrs.



Exhibit 8: Automobile Electrification - Supplier Market Data Summary

> Data as of November 8, 2017 (S&P Global Market Intelligence, 2017 )> Average of four data points from quarterly statements (Cash & ST. Invest., Total Debt, Preferred Equity, Total

Minority Int., Revenue)> All other averages have data from every trading day on the company's exchange

15

Supplier Valuations (continued)

The impact on publicly traded multiples is more difficult to discern, but there are indications the market isdifferentiating among suppliers relative to their exposure to the EV disruption (Exhibit 8)

› Suppliers not affected by the expected growth of EV market share have a current group Total EnterpriseValue/EBITDA median of 7.9x, exceeding the group’s 6-year average of 6.5x

› Suppliers producing components which have direct exposure to the transformation to EVs haveexperienced no multiple expansion or deterioration, but their median multiple of only 5.4x reflects thedisruption risk they face

› Surprisingly, suppliers with a clear presence with electronics and/or actively investing in electrification havedisplayed limited multiple expansion, perhaps burdened by the fact that there are few pure-playelectrification firms and the future impact of EV vehicles remains subject to question

November 2017

Supplier Category Metric

TEV /

EBITDA

TEV /

Revenue

TEV /

EBITDA

TEV /

Revenue

Group Mean 6.2x 1.1x 5.9x 1.1x

Group Median 6.4x 0.9x 6.2x 0.8x





LTM 6-Yr. Avg. (2011-2016)

Produces Electronic Products /

Investing in EV Transformation

Produces Products with no Direct

Exposure to EV Disruption

Produces Products with Exposure

to EV Disruption



Supplier Valuations (continued)

Not withstanding the foregoing analysis, we believe there will be an inflection point after which public andprivate supplier valuations will be materially impacted – favorably and negatively.

› Suppliers participating in the transition to EVs, and electrification in general, will eventually be rewarded butdependent upon the ability to transform related products into attractive growth and margins, whichremains to be seen

› Suppliers we deem to be minimally affected by electrification will continue to have enterprise valuesconsistent with the past and traditionally dependent upon expectations for vehicle production volumes

› Suppliers largely or solely producing traditional ICE powertrain components will, in time, become viewed asdeclining enterprises, challenged to evolve and maintain past levels of revenue and profits



1. Migrate to or acquire parts production to serve EV vehicles

Some companies already have the inside lane for this strategy, such as manufacturers of electric motors andcontrols, batteries, and auto-related software. Developing internally by leveraging current skills into a new setof products is ideal, if such skills exist. Acquiring such skills through acquisitions is a possible option.

› BorgWarner is an example of this approach, having made two significant acquisitions:

‒ Sevcon, Inc., which designs and sells motor controllers and operates Electronic Controls, Capacitors,and Battery Chargers segments in September of 2017 (S&P Global Market Intelligence, 2017)

‒ Remy International, Inc., which designs and manufactures, rotating electrical components forautomobiles and trucks in July of 2015 (S&P Global Market Intelligence, 2017)

› GM purchased Strobe, a lidar manufacturer in Oct of 2017 (S&P Global Market Intelligence, 2017)

2. Bet on slow EV evolution andmanage business for efficiency and savings

This approach could maximize total returns if the company’s product line will be displaced by the transition toEV powertrains and management sees the decline as very gradual and long-lasting.

› Continental, A.G. mulled turning its powertrain business into a separate company. When asked by analystswhat prompted Continental to keep the business, the finance chief said: "Growth is still to be expected until2025. Only then do we expect the battery cell technology to be on a level that allows for bigger shares ofpure electric vehicles” (Continental, A.G., 2017)

Strategic Options and Final ThoughtsFor the most part, we have limited our discussion to the development of EVs and their expected impact oncurrent suppliers for traditional powertrain vehicles. These new developments will create exciting opportunitiesfor many, but will be a significant threat for incumbents beginning in earnest a few years from now.

Although a topic for another report, some analysts foresee substantial reductions in total vehicle demand,regardless of the powertrain. They anticipate that lower cost EV vehicles and transportation as a service willmaterially alter consumer attitudes in a very rapid fashion.

Taken together, the decade ahead will present a harsh environment for many suppliers and, potentially, dealers.Yet, current volumes and profitability will not diminish quickly (other than through an economic cycle). Thus,there is time and capital available to reposition businesses or exit on a reasonable basis. Mr. Seba’s forecast isthat a tipping point could begin as soon as 2020, and by 2030, the disruption complete and the auto industrymaterially changed. Our team believes that this assertion is essentially correct but will require more time.

We see four basic strategic directions for suppliers that deserve consideration



3. Seek investment opportunities outside of automotive, leveraging currentcapabilities where possible

This makes sense if management has a bearish view of auto-related opportunities for itself. Many successfulcompanies have evolved significantly over the long term. For example, some in the horse and buggy era wereable to move to fan belts and other auto manufacturing roles. Similarly, other companies evolved from makingpianos to organs to furniture making, and even to electronic parts manufacturing, and are successful eventoday. In some cases, acquisitions were a key component of such a directional shift.

4. Exit businesses impacted by the coming disruption

While difficult to accept, in some cases the best financial alternative may be to sell the company while marketsare still receptive and take advantage of the opportunity to be first out-best out and sell high. As discussedabove, market valuations are sound for many auto suppliers, even for those most exposed.

There are many examples of companies that should have had strategic alternatives defined and acted uponwhen the market was receptive, such as many airlines, department and grocery stores, and even Kodak!Recently, Delphi’s decision to spin-off its $4.5 billion Powertrain Systems Segment (Delphi Technologies)permits its remaining electrical/electronic architecture and electronics & safety businesses (Aptiv) to be valuedas a separate stand-alone company. This decision illustrates management’s view that these businesses will facefar different challenges. Honeywell has made a similar decision, announcing plans to spin off its transportationand turbo- charger business.

Strategic Options and Final Thoughts

Getting the big picture right and having differentiating insights/services is at the heart ofcommercial success. When the environment changes significantly, company plans need tochange. Now is one of those moments for all businesses in the auto industry.



Source Listing

19

Blink Charging Co. (2017). Retrieved October 2, 2017, from http://www.blinkcharging.com

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Continental, A.G. (2017, April, 25). Retrieved October 2, 2017, from https://www.continental-corporation.com/en/press/press-releases/powertrain-strategy-2020-30468

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Lambert, F. (2017, January 30). Electric vehicle battery cost dropped 80% in 6 years down to $227/kWh – Teslaclaims to be below $190/kWh. Retrieved September 30, 2017, fromhttps://electrek.co/2017/01/30/electric-vehicle-battery-cost-dropped-80-6-years-227kwh-tesla-190kwh

Lambert, F. (2017, February 18). Tesla is now claiming 35% battery cost reduction at ‘Gigafactory 1’ – hinting atbreakthrough cost below $125/kWh. Retrieved September 30, 2017, fromhttps://electrek.co/2017/02/18/tesla-battery-cost-gigafactory-model-3

Malan, A. (2017, September 24). Labor gain and strain loom from EV shift. Automotive News Europe. RetrievedOctober 6, 2017, from http://europe.autonews.com/article/20170924/BLOG15/170909815/

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2017, from https://www.greentechmedia.com/articles/read/us-solar-market-grows-95-in-2016-smashes-records#gs.u7oUm=o

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read/everyone-is-revising-electric-vehicle-forecasts-upward#gs.fDo2=jc



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