Investing in the Future

David Smith

Or investing in the past?Brand managers are obsessed on the ER words: Newer,

brighter, stronger, bolder. Rational benefits nailed by comprehensive metrics. The job of brand managers today is to stomp out intuition, instinct and imagination. Analysis, research and information reign. Researchers are locked into the rearview mirror (not the windscreen).In a consumer-owned market, they're inevitably playing constant catch-up. Consumers have been liberated by the Internet, red-hot competition and a dazzling array of customized choices - from "blobjects" to designer organics. Brands today are table-stakes - they just let you pull up a chair at the conversation. Brand management processes don't have a chance today.

Kevin Roberts, CEO Saatchi & Saatchi Worldwide

Time for a model change?Europe Auto Ind Market Cap as % of total market

0

1

2

3

4

5

6

1974 1977 1980 1983 1986 1989 1992 1995 1998 2001

Auto value creation or destruction?ROIC-WACCValue Neutral• BMW• PSA• Toyota• Nissan ?• VW-Audi ?• Hyundai ?

Value Destroyers• GM• Ford• Chrysler• Daimler• Fiat• Renault• Mitsubishi• Mazda

Value Creation• Porsche ???• Honda

Moving from domestic to international?

Tata, Geeley, SAIC etc?

Sunset or sunrise industry?• Saturated markets but

long-term BRIC growth• Over-capacity but distinct

regional footprints• Product proliferation and

brand cross-overs• Price destruction and

fragmenting power in value chain

• Consumer behaviour• Impact of banking

collapse/recession

• Lower cost sources –China and India

• Environmental change –regulatory, competitive and consumer driven.

• New wealthy middle class in BRIC’s and continued affluence in mature markets

• Changing business models down value chain

What is the future of the car?• Transportation linked to economic growth.• Electrified but no technology silver bullet• Lighter and smaller• Traffic/usage management• Incentives/fiscal distortions• Different ownership models– segmentation by battery size?• Radical change inhibited by infrastructure• Affordability is still key to consumers• Must still deliver “reasons to buy”• Premium growth driven by wealth/affluence

China• China overtook US in 2009 to be largest auto

industry.• Middle class -- by 2015 will have 4th largest

population of wealthy households• More millionaires than France• Rapid urbanization -- 39 cities with over 1 million

inhabitants – total 600 million (1 billion by 2010)• Increasing competition from low-cost and high-

technology Chinese firms.• Talent pool – constraint or driver?

So where does this leave “Team UK”?

State of the UK auto industry

• From turbulent labour and poor quality and productivity to . . .

• Competitive, high quality, good labour relations, 2nd largest global premium industry but . . .– Declining, now <1% of UK economy; <400k jobs.– Fragmented ownership – lack of cohesion– Significant and growing trade deficit.– Fragile supply chain – hollowing out accelerating– Badly under investing in technology– Climate change agenda – are we being left behind?

Is UK innovation really just ancient history?

Industrial policy – “New Industries”• New Industry, New Jobs outlines a programme of 40 initial commitments that will

keep Britain ahead of the game as we emerge from the downturn and towards our successful economic future, including:

• Rolling out high speed broadband to give access to virtually all of Britain’s homes and businesses

• Investing and laying the foundations in exciting but pre-commercial technologies like wave and tidal energy, and electric vehicles

• Adapting Britain’s energy grid to link homes and businesses to the new forms of power generation

• Continuing to protect and raise investment in science and research in the years ahead

• Spearheading innovation in areas where there are business opportunities for future growth

• Anticipating future growth in the economy in areas like low carbon or bioscience and ensuring British people have the skills to take part

• Intervening, where necessary, to ensure start-ups and young businesses have access to the finance they need to grow

• Helping UK companies, especially small and medium sized businesses to break into new export markets.

UK auto technology road map

19% of UK’s carbon emissions come from road vehicles

Mass Market EV TechnologyNiche EVs

20202000 2010 2030

Full Hybrid

Micro/Mild Hybrid

130 95 TBDEU Fleet Average CO2 Targets (g/km)

2040

Plug-In Hybrid

IC Engine and Transmission innovations (gasoline/diesel/gas/renewables)

Demonstrators Fuel Cell Vehicle

DemonstratorsCharging Infrastructure

H2 Infrastructure

Energy Storage Breakthrough

Energy Storage Breakthrough

Vehicle Weight and Drag Reduction

Fuel Cell & H2 Supply/Storage Breakthrough

Case Studies -- Zytek

Zytek is now one ofthe few companiesworldwide producingelectric vehiclepowertrains, and theonly one manufacturingvehicles (the SmartFortwo ED) for a major car manufacturer,Mercedes Benz. The Zytek electric engineis a complex assembly of many hightechnology products tightly packagedinto a single unit. This technology is alsobeing applied into Motorsport – Zytek isdeveloping a hybrid electric drive for aleading Formula One team that has already run competitively in the 2009 season.

Case Studies -- Modec

Modec is the first electric vehicle in the N2 classto attain European Whole Vehicle Type Approval

Electric motor/Power electronics

Battery packs located under the central tunnel and rear seats. Limiting volt to a 4 seat vehicle.

Engine/Generator

High Voltage cables

Human Machine Interface – displaying EV and EV/generating modes

GM Volt/Ampera?

Nissan Leaf?

The government last year extended Nissan loans and grants to help it financea £200m-plus plant producing lithium-ion car batteries in Sunderland, now part of a new “low-carbon economic area”.

Even luxury we can afford!

Jaguar Range-Extended Hybrid

Should we be picking winners?

• UK innovation deficit -- Bosch/Siemens• Test-Bed UK • Business-University Collaboration• Cross-sectoral collaboration• Innovation funding -- UK Banks• From reckless indifference to strategy in

Industrial Policy

Links to Energy Industry

• Well-to-wheel concept• Renewables vs. carbon-based generation• Clean and smart grid• Standards• Consumer usage patterns• Hydrogen and fuel cells?

Investing in the Future --unlocking the UK’s potential

• Can’t be based on yesterday’s models.• Innovation – from “sustainability” to an

integrated low carbon economy.• Export competitiveness – competing in global

markets• Leverage global sources of cost competitiveness• Use great British design talent• Needs confident and urgent national leadership,

passion and skills• Even now may be too late.