capturing opportunity: an assessment of supply chain

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED SMMT, the ‘S’ symbol and the ‘Driving the motor

industry’ brandline are trademarks of SMMT Ltd

Capturing Opportunity: An assessment of supply

chain opportunities in the UK automotive sector

John Leech, UK Head of Automotive Sector, KPMG

18 October 2012

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 2

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John Leech

UK Head of Automotive Sector

KPMG

4 © 2012 KPMG LLP, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International

Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Your presenter today

• John Leech, UK Head of Automotive Sector, KPMG

• 21 years experience of advising automotive companies

on financial matters

• Includes strategic reviews, M&A, financial turnaround,

operational excellence.

• Secondment to DTI Automotive Unit in 2001 to project

manage the Automotive Innovation and Growth Team

• Clients include OEMs, tier 1 and 2 suppliers, retailers

and their investors

Tel: +44 121 232 3035

Email:

[email protected]

mailto:[email protected]



The SMMT commissioned an independent review of the benefits of locating in the UK by international automotive suppliers.

The report is to form part of an ongoing effort to attract investment into the UK from overseas suppliers and its timing was

influenced by the recent significant investments by OEMs including JLR, BMW and Nissan which has given UK car plants the

strongest forecast growth since the 1980s.

The report is aimed at a wide audience and includes suppliers based in both the emerging and established automotive

markets. This report is intended to compliment the recent studies commissioned by the Automotive Council and the SMMT

and seeks to draw together the key arguments for investment into the UK.

The objective of the report

Our objective

Govt and

BIS

KPMG Study

Meetings with

Tier 1 suppliers

Auto

Council

Meetings with

OEM heads

of

procurement

SMMT

Data

analysis

and

forecast

Investment support: key players and approaches



Our approach and issues covered

July August September

w/c 2nd w/c 9th w/c 16th w/c 23rd w/c 30th w/c 6th w/c 13th w/c 20th w/c 27th w/c 3rd w/c 10th w/c 17th

Media launch

Reviews

Write up

Infill analysis and iBank interviews

OEM , Tier 1/2 and other interviews

Forecast of production and procurement

Analysis and major findings

Desk research

Themes discussed Themes discussed

Our interviews covered a wide range of themes which can be broadly

grouped into three themes

■ Why now? What has changed that make the UK an automotive

success story and are recent investments indicative of a longer term

opportunity?

■ What is the size of the opportunity? What is the value of opportunities

currently available? For what products? What are UK OEMs looking

for?

■ How attractive is the UK as a location for investment? What is the

fiscal climate? What are the main cost considerations? How does the

UK compare to alternative locations in terms of productivity, skills and

flexibility? What incentives are available to support R&D investment?

Interviews conducted

We have conducted a wide range of interviews with participants across

the supply chain

■ OEMs including GM, Ford, Nissan, Toyota and JLR

■ Tier 1 and Tier 2 suppliers including GKN, IAC, Magna. Denso,

Southco, Kostal, Bosch, and TR Fastenings

■ Government and investors UKTI, BIS, Automotive Council,

AutoAnalysis and RBS

Launch

The publication was launched by Michael Fallon (Minister for Business) at

the Paris Motor Show and attracted widespread comment in the

broadsheet and trade press



The last 18 months has seen unprecedented investments by UK car plants.

Notwithstanding the Eurozone demand weakness, all major UK car plants have

long-term development plans in place.

JLR has created more than 5,500 new jobs since the start of 2011 (4,000 manufacturing posts plus 1,500

engineers).

A £355 million investment by Jaguar Land Rover into a new facility in the Midlands to manufacture low emission

engines.

Plans to open a China facility in 2014 are a further opportunity for the UK supply chain.

A series of investments by BMW of just under £1 billion are transforming the Oxford, Swindon and Hams Hall

facilities for next generation MINI production from 2014

Honda has announced a £267 million investment to support new models and engines at its Swindon plant.

£420 million investment in Sunderland for the production of the Nissan Leaf from 2013 and for a new stand-

alone facility to produce lithium-ion batteries for Renault and Nissan vehicles from 2012.

A £192 million investment to design, engineer and build the new Qashqai in the UK with a jump up to 43% UK

sourced parts.

The production of the Nissan Invitation in Sunderland. In addition to vehicle assembly, Sunderland will carry out

axle production, cylinder head casting, camshaft machining and engine assembly, representing an overall

investment of £125 million.

Toyota has announced a £100 million investment in its Burnaston manufacturing facility to produce the new

generation Auris hatchback.

General Motors have announced a £125 million investment to build the new Astra at its Ellesmere Port plant,

creating 700 new jobs. General Motors will also increase the local supply content for the Ellesmere Port-built

Astra to at least 25%



UK production is increasing steadily

Vehicle production in the

UK is expected to

increase at 9% per

annum to 2.2 million in

2016

Source: “European Car and Light Commercial Vehicle Production Outlook,” SMMT, July 2012

Production of vehicles, UK versus Europe, 2007 to 2016



The UK production mix is robust

Mix of UK production, number of vehicles in thousands, 2011

Source: LMCA Auto

La

nd

Rover

Compact Midsize Large/SUV Sports V-van Sub-compact

5

242

Nissa

n

481

180

301

6 Jag

uar

182

9

Vaux

hall

195

142

53

50

Other

s

33

1

11 45

Ford

28

Hond

a

97

23

26

15

Toyo

ta

128

57

71

MINI

191

48

Both the Qashqai and the Juke are high-growth crossover models

Includes Bentley, Aston Martin, Caterham and Lotus, Rolls Royce

and McLaren

JLR provides a strong fast growing base of premium manufacturing

The Mini operates in a high-growth niche area



The economic vulnerability of key export markets is limited when compared

with other EU countries

Source: UN Comtrade data, KPMG analysis

Final destination of exports, by value (Euros), 2011

Only around 45% of the UK’s exports

are to EU countries as opposed to

70% to 90% for other European

countries



There is a £3billion unfulfilled UK procurement opportunity. UK-based

procurement to exceed £20 billion by 2016

Forecast increase in UK OEM market opportunity, 2011 to 2016

2011 spend increased in-line with production forecasts

Total spend in the UK could

increase from around £11bn

in 2011 to £21.5bn in 2016

Around £11bn of

OEM spend is

currently spent with

UK suppliers

The near-term £3bn of Government

identified unfulfilled opportunity is

valued at 2011 spend levels



There are a wide range of components that OEMs wish to source from the UK

but are unable to do so

Engine castings

Steering systems

Trim (door cards, headlining, plastics etc.)

Harnesses

Seating

Tyres

Alloy wheels

Lighting

Electronics (ECU, ESP, ABS, PDC) Engine forgings

External plastics (bumpers, trim)

Entertainment/Navigation

Bearings

Instrument clusters

Glass

Hinges Hot Stampings

Welded assemblies

12V lead/acid battery

Cast aluminium sub-frames Brake callipers

Drive shafts & CVJ's

Engine accessories (alternator, starter, aircon)

Fuel tanks

HVAC assembly

Chassis Suspension Module

Misc assemblies (pedals, mirrors, roof rails, grilles etc.

Shock absorbers

Heat shields Oil pans

Small pressings Transmission components

Large/medium pressings

Steel wheels

Carpets

Suspension springs Switchgear

Analysis of the near-term

£3bn of unfulfilled UK

procurement opportunity



The attractiveness of the UK is underpinned by four key characteristics

A cost effective, productive labour force, able to flex in line with market demand Labour costs,

productivity and

flexibility

The UK is growing its skilled experience from which to draw resource Skills base

The support and capabilities with which to undertake R&D spend A focus on low-carbon

R&D capabilities and

support

A stable supportive economy Economic

environment



Among European peers, the UK has a favourable cost base ....

Euro per hour labour cost, automotive sector

0

5

10

15

20

25

30

35

40

45

50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany France Italy United Kingdom Spain Poland Slovenia Czech Republic Hungary

Euro

per

hour

Source: ”The economic situation of the automotive industry 2011” VDA

Driven by a favourable tax regime the UK has among

the lowest automotive labour costs in Western Europe

For a deeper analysis see also:

http://www.competitivealternatives.com/reports/2012_compalt_report_vol1_en.pdf





.... corporation tax levels are also a source of competitive advantage

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2015

United Kingdom Germany France Spain Italy Czech Republic Hungary Poland

Source: Oxford University Centre for Business Taxation 2012, OECD

European corporation tax rates, 2000 to 2012

The UK has the lowest

levels of corporation tax

in Western Europe



Addressing the skills shortage reported by the industry

Actual number of government funded apprentices by age group

The number of degree-level engineering

graduates increased to 23,907 in 2011 (a 16%

rise since 2007)

Starting salary of an engineering graduate is

over 10% greater than the average starting

salary of £24,953.

New policies relating to standards for

apprenticeship quality and loans to those who

are over 24 (effective from 2013).



Research and development is now joined-up between universities and the

industry

Internal

Combustion

Engines

£22m Grant

Portfolio

EPSRC

grant

funding

Energy

Storage and

Energy

Management

£18.5m Grant

Portfolio

Intelligent

Mobility

£34m Grant

Portfolio

Lightweight

Vehicle and

Powertrain

Structures

£10.5m Grant

Portfolio

Electric

Machines and

Power

Electronics

£5.8m Grant

Portfolio

1 1

1 7 8

12 14

18 19

20

Energy and Fuel Supply

Other

Transmission and Driveline

Control Systems

Electric and Hydrogen Propulsion Systems

EPSRC investment profile

Technology Strategy Board investment profile, May 2012

“The work being carried out by the Automotive Council has been fantastically helpful, it's given

great clarity around the direction of travel” Chief Executive, GKN



Summary

There are several factors that make recent investments sustainable and opportunity creating:

■ The broad mix of manufacturers and model types produced by OEMs in the UK

■ The commercial and critical success of the models produced

■ The low export dependency of UK produced cars on any one particular geography

This success story is backed up by attractive financial and manufacturing fundamentals:

■ A flexible workforce as evidenced by recent announcements by JLR and GM Vauxhall

■ Utilisation and capacity levels that are consistently among the highest in Europe

■ Internationally competitive labour and taxation rates

■ Strong R&D capabilities and a real commitment to low carbon technologies

■ More consistent industrial policy and key initiatives such as the Automotive Council

However, the recent change in fortunes has highlighted challenges faced by many OEMs and their suppliers

including:

■ Some reports of skills shortages in key areas

■ A need to reinvigorate the ‘ecosystem’ of tier 2 and 3 suppliers

All OEMs and their suppliers spoken to as part of this study considered that the appropriate government

departments are taking co-ordinated and meaningful action to address these issues with cross-party

political support.



Next Steps

Detailed presentations to suppliers most likely

to consider UK investment

Presentations to UK banks and new equity

investors likely to provide external funding to the

supply chain

Parliamentary breakfast event to take place on

23rd October

© 2012 KPMG LLP, a subsidiary of KPMG Europe LLP and a

member firm of the KPMG network of independent member firms

affiliated with KPMG International Cooperative ("KPMG

International"), a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are

registered trademarks or trademarks of KPMG International

Cooperative (KPMG International).

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED

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