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Presentation to. Strategic Choice and Valuation - MOR 562. Adoption of Electric Vehicles (EVs) in the Automotive Landscape by 2025. 27 November 2011. CONFIDENTIAL. DRAFT. Executive Summary. 2. Executive Summary.

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DRAFT

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  1. Presentation to Strategic Choice and Valuation - MOR 562 Adoption of Electric Vehicles (EVs) in the Automotive Landscape by 2025 27 November 2011 CONFIDENTIAL DRAFT

  2. Executive Summary 2

  3. Executive Summary • All signs are pointing to a shift away from the Internal Combustion Engine (ICEs- the question is: what is the alternative? • Electric Vehicles (EVs) are currently the preferred alternative to ICEs • There are a significant number of factors that will influence adoption rates going forward • Several trends we expect to continue include: increases in oil price and more stringent environmental regulations • Infrastructure deployment and technological developments are the largest areas of uncertainty • Electric Vehicles have a promising future, but are by no means guaranteed to become the automotive choice of the future

  4. The Focal Question 4

  5. The Focal Question What Will be the Adoption Rate of Electric Vehicles (EVs) in the Broad Automotive Landscape by 2025?

  6. Overview of the Automotive Industry 6

  7. Overview of Broader Automotive Environment Mega-Trends in Automotive Industry Resulting in Far-Reaching Changes Auto Industry - A Brief Summary • Shifting consumer preferences, along with a general recovery in the demand for vehicles are expected to drive future revenues • Industry profit margins are expected to be a relatively healthy 2.0% by the end of 2011 as companies benefit from a combination of cost cutting (enacted in 2009)and rising vehicle sales Requirement for OEMs and suppliers to adapt to mega-trends in order to assure their position in an evolving marketplace 7

  8. The Global Automotive Industry – A Snapshot Market Trends Accelerated by Worldwide Economic Turmoil • Reduced volumes evidenced the need for reduction of production capacities over the past few years • Operating margins gradually to improve from current depressed levels • Accelerated consolidation and restructuring of suppliers’ universe is a likely outcome of the economic crisis Survivors expected to be stronger eventually, gain market share and pricing power 8

  9. Global Light Vehicle Sales Volumes per Region The Global Automotive Industry – A Snapshot Closing Gap Between North American and Chinese Sales Volumes • Auto demand pressure in U.S. and Western Europe led to continued decline in vehicle sales in 2008 and 2009 • China continually catching up on North American sales volumes • China in 2009 was already the single largest country in sales volumes Units (m) North America China RoW Western Europe Sales Volume CAGR ‘09E-’11E Latin America Japan Eastern Europe India ____________________ Source: Wall Street research and J.D. Power, broker research 9

  10. Global Light Vehicle Sales Volume by Region Japan Global Car Sales by Region (2001) Global Car Sales by Region (2010) W-EU N-Am BRIC RoW The Global Automotive Industry – A Snapshot Growth in BRIC Economies Outperforming Other Markets • After years of robust sales growth, global vehicle sales volume started decline in 2008, with expected trough in 2009 • “Recovery” in 2010 to be followed by more pronounced growth due to strong increase of BRIC countries and other emerging markets • Significant decrease in “Triad” (North America, Europe, Japan) market share from 73% in 2001 to 51% in 2010 • Long-term growth outlook is supported by low vehicle density in BRIC countries compared to Triad markets • In 2009, 118 cars per 1,000 potential drivers in BRIC countries vs. 660 cars in Triad region CAGR2006-2008 CAGR2009-2011E (m) (0.4%) 7.5% 2.3% 8.7% 10.0% 15.3% (4.4%) 2.2% (10.2%) 15.4% (3.3%) (4.3%) Triad Sales : 73% Triad Sales : 51% ____________________ Source: Wall Street research and J.D. Power, broker research 10

  11. Key Industry Drivers and Uncertainty 11

  12. Key Industry Drivers and Uncertainties Climate Change - Global Warming and the Automotive Industry ____________________ Source: Mondal, P., AbhishekKumar, Varun Agarwal, Nitin Sharma, Prashant Vijay, U. D. Bhangale, and Dinesh Tyagi. "Critical Review of Trends in GHG Emissions from Global Automotive Sector." British Journal of Environment & Climate Change(2011). Print. 12

  13. Key Industry Drivers and Uncertainties The Effects of Consumer Taste Shifts on the Automotive Industry ____________________ Source: "Global Sale of Motor Vehicles." IBIS World Industry Report (2011). Print. 13

  14. Global Oil Prices & U.S. Gasoline Prices Key Industry Drivers and Uncertainties Oil Price Volatility Increases Costs of Driving Gasoline Powered Cars • Oil price plays a big role in the rise of fall of the EV industry. Developments in past months demonstrate how quickly and drastically oil prices can change. As oil prices rise, so do incentives for improvements of technologies and developments of new, alternative, of vehicles. • Oil price increases in the reference and high price scenarios stem from a continuation of current trends driven by rising oil extraction costs and increases in demand from developing countries. The low price scenario is unlikely, being based on assumptions of dramatic increases in oil production from OPEC. • As oil prices increase, so do concerns about the fuel costs associated with fuel inefficient vehicles. • Though increased fuel efficiency lowers the impact of oil prices on the cost of driving, consumers are still vulnerable to rising prices. Crude Oil Price per Barrel Solid Lines (2009 $) U.S. Gasoline Price per Barrel Dashed Lines (2009 $) ____________________ Source: Energy Information Agency – Annual Energy Outlook 2011 14

  15. Delivered energy consumption for transportation by mode, 2010 Uses of different fuel types Key Industry Drivers and Uncertainties Development and Use of Unconventional Fuel Types • Energy demand for Light-duty vehicles (LDVs) accounts for a largest part, 60 percent, of total transportation energy use and this trend will be continued • EIA anticipates a CAGR of 0.6% in total transportation energy consumption between 2010 and 2035, slower than the 1.2% CAGR between 1979 and 2009 (largely due to increased LDV fuel economy) (Quadrillion Btu) • Manufacturers selling biofuel powered vehicles currently receive incentives in the form of fuel economy credits earned for CAFE compliance • LDVs using natural gas still have very high incremental costs and limited fuel infrastructure Conventional Unconventional • Diesel • Flex-fuel (biofuels) • Micro hybrid • Electric hybrid • Plug-in and all electric • Natural gas • Gasoline Trend Trend ____________________ Source: Energy Information Agency – Annual Energy Outlook 2011 15

  16. The Battery Industry - Market Restraints and Drivers Battery Cost & Driving Requirements Major Industry Challenges Key Industry Drivers and Uncertainties Development of Battery Technology Key to Growth of EV Industry • An EV is mainly comprised of • an electric driving device as its engine or motor • a storage battery • a power control system, for which the battery storage system is the essential component for successful breakthroughs in EV production • We believe that battery technology holds the key to EV volume production • As of today, consumer electronics remains the primary market for lithium ion batteries (LIB) which also power today’s EVs • The EV market is a bright spot of growth for the LIB industry, as each EV requires batteries costing between 6-7k for short distance requirements • A majority of LIB manufacturers have been gearing up to capture this growing market and a 20%+ YoY expansion in the automotive LIB market prior to 2017 is expected • Biggest issues to overcome in battery technology are “range anxiety” and charging time Drivers Restraints • Need to prove and test the safety aspects of emerging battery technologies • High cost • Improvements demanded in battery performance in terms of energy, power density and charging frequency • Battery technology • Government initiatives to accelerate R&D and market growth • Environmental sustainability being the key trend in the transportation industry • Need to reduce the dependency on oil driving investment in alternative propulsion technologies • Introduction of novel technologies and entry of new suppliers in the growing Europe and US markets Development of Infrastructure Across the Industry (Accurate prediction of future demand) 1 In order for the EV industry to grow, battery costs (especially for longer distances) have to drop significantly Developing a Global Presence (most manufactures located in Asia) 2 Managing Trade-off between Safety, Performance and Economics 3 Building Relationships with End Users and Raw Material Suppliers 4 ____________________ Source: Barclays Capital Analysis, Frost & Sullivan, Fubon Research 16

  17. Key Industry Drivers and Uncertainties Ameliorated Technology Reduces Charging Time and Increases Range 2005 2010 2015 2025 Up to 55 miles Up to 125 miles > 190 miles Driving Range / Charge > 400 miles ? 12-16 hrs. 6-8 hrs. < 1 hr. Time Taken to Charge < 15 mins. ? Up to 16kWh Up to 50kWh Battery Capacity >75kWh • During the forecast period, batteries’ key technological factors such as energy, power, and safety will witness significant changes enabled by chemicals and materials • Industry players need to be aware of the following technological trends in order to take advantage of the most important opportunities created through EVs: • New Powertrain technology • The shift from mechanics to electronics • Low tech mobility 17

  18. Regulatory - Consumer Incentives Consumer Incentives Many incentives exist, making the consumer much more likely to switch to the EV platform Production Mandates: Production is heavily regulated, forcing minimum MPG requirements and imposing severe penalties for non-compliance Corporate Average Fuel Economy (CAFE) standards set by the National Highway Traffic Safety Administration (NHTSA) Regulatory Factors - Production Civil Penalties Incurred through non-compliance Deriving the Average Fuel Economy of Production ** • $5.50 per every tenth of MPG under CAFEFuel Economy Standards • Since 1983 – US has paid over $590M • Annually Euro Companies pay $1M-$20M • Asian companies have never paid a civil penalty **This number is not to exceed 35.5 MPG by 2016 ____________________ Source: Index Mundi Commodity Prices, PluginCars.com (http://www.fueleconomy.gov/feg/taxevb.shtml) Source http://www.nhtsa.gov/cars/rules/cafe/overview.htm 18

  19. Funding for Charging Stations Government Funding Current News Related to Funding • Capital from both government and private institutions will garner significant traction to the infrastructure of EVs, specifically the network of charging stations Funding is available, and hard at work, as evidenced by the latest headlines ____________________ Source: pluginamerica.org

  20. Key Industry Drivers and Uncertainties Lobbying Efforts by Different Special Interest Groups May Increase ElectricUtilityCompanies OilCompaniesandImporters Big oil companies and importers will not support EVs as they provide gasoline. These organizations may attempt to produces electricity for EVs and compete with electric utility companies, or they might lobby the government favorable treatment for another type of alternative fuel. • According to the Center for Responsive Politics, the total spending on automotive lobbying in 2009 was ~$60.2 million, down from ~$66.9 million in 2008. An all-time high of $70.7 million was spent in 2007. During the 10 years preceding 2007, the auto industry had been spending ~$60 million annually. In 2009, there were 576 auto industry lobbyists working for 124 clients, such as carmakers, auto suppliers, lobbying groups and trade associations. Electric utility companies will support the evolution of the EVs as they will be the providers of power charging stations. Additionally, they will likely become the competitors of big oil companies. AutoAlliance EnvironmentalGroups Environmental groups will increase their efforts to convince governments to find sustainable sources of energy. Additionally, they will continue to focus on influencing consumers to switch to greener transportation solutions as well. Auto manufacturers will lobby the government to obtain incentives and lower the cost of EVs. They will also require a wide network of infrastructure. 20

  21. By 2050, more than 70% of the world population will live in cities Change in Urban Mobility CaseStudy: Manhattan ‘08 Key Industry Drivers and Uncertainties AlternativeMeans of Transportation - From Personal to Eco-friendly Mobility • Expansion of existing highly urbanizedcities in U.S. will mergeto form Mega-regions • Cars needed to go from outer suburban areas to join the intermodal public transport andworking areas • Bus rapid transit may be installed • Cutting city parking due to emerging real estate market • Improved and lengthened bicycle lanes • OEMs may offer medium, long and micro mobility solutions as an integrated service • Micro mobility solutions such as bicycles and scooters • Booking services on train, airplane travel and hotels. • Modular trains/buses promoted by cities • As congestion increases due to urbanization, many customers will abandon car ownership (or leasing) in favor of public transit. Even in these cities, however, consumers will need periodic access to vehicles for trips to outlying areas and other special occasions. The ownership of a car may become more expensive and limited, especially in megacities. ____________________ Source: Barclays Capital Analysis, Frost & Sullivan, Fubon Research 21

  22. Scenario Overview 22

  23. Consumer Sentiment vs. Technology & Government vs. Technology Driver Selection Potential Scenarios 1 and 2 • As technology increases and consumers become more inclined to switch to alternative fuels, EV ‘s will face significant margin pressures due to increased competition. If technology increases and consumer propensity to adopt alternative energy vehicles stays flat or declines, EVs and similarly powered cars are likely to face a difficult market. Should technology remain relatively flat (no disruptive developments) and consumers favor alternative fuels, EVs will be in an ideal position. Finally, modest increases in technology and consumer sentiment similar to todays levels will leave EV sales volumes flat. Consumer Sentiment Technology • Higher levels of government involvement and significant increases in technology will lead to a situation where EV’s are at the lower-end of the alternative vehicle market. Increased government involvement and minor improvements in technology would be an ideal scenario for EV manufacturers as consumers will likely have greater incentives to purchase these vehicles and there will be little, if any, competition. Lack of government involvement and minor increases in technology will be a negative scenario for the EV as there will be less incentives for consumers to make these purchases. Lack of government involvement with a significant increase in technology would cause the EV technology to be leapfrogged. Government Technology 23

  24. Consumer Sentiment vs. Oil Prices & Infrastructure vs. Technology Driver Selection (cont.) Potential Scenarios 3 and 4 • Consumer behavior is largely influenced by the price of oil. As the price increases, it is likely that consumers will become purchasers of electric vehicles en masse. Consequently, as the price of oil declines, it is likely that consumers would continue using gasoline powered vehicles. It is very unlikely that a decline in oil prices lead to consumers continuing to purchase EVs at today’s levels. Should oil prices remain stagnant, we expect EV purchases to remain flat as well. Consumer Sentiment Oil Prices • Infrastructure and Technology will have significant impacts on the EV industry. Higher levels of infrastructure and significant technological developments will lead to increased options for consumers and as such businesses will be forced to compete on price. As infrastructure increases and technology stays relatively flat, EV manufacturers will be able to command a premium and continue to increase their sales volume. If a disruptive technology is developed and infrastructure does not increase we believe that EV technology will be surpassed. Lack of technological developments and investment in infrastructure will produce sales volumes that are similar to, or less than, today’s levels. Infrastructure Technology

  25. EV Technology as Key Driving Forces For Future Market Success The Focal Question Scenario Crossroads: Infrastructure and Technology Infrastructure Scenario 1 Scenario 2 Margin Warfare (Competition based on Price) The Sweet Spot (EV OEMs capitalize on developed infrastructure and earn high margins) Today’s Technology Future Technology Improvement of Today’s Technology Disruptive Technology Scenario 3 Status Quo Green Machine New Technology takes over (excluding Battery) 25

  26. Scenario 1 – “The Sweet Spot” 26

  27. Scenario 1 Significant Infrastructure and Limited Advancements in Technology • Increased access to infrastructure, such as charging stations, have made EV adoption much more practical • Oil price volatility and government regulations continue to push consumers away from internal combustion vehicles. • No significant advancements in technology have been made that would otherwise pose a threat to the EV/ICE marketplace A premium EV market has been created by the advances in EV related infrastructure and the lack of alternatives, other than EV, to the ICE. 27

  28. Scenario 1 What Does Advanced Infrastructure Imply? Extensive Infrastructure to Eliminate Current EV Pain Points • … Create infrastructure with enough charging stations / leasing schemes until batteries increase their energy storage capacity Governments 1 • … Reduce timing required to fully charge batteries 2 • … Build charging facilities at owner’s “home” parking, owner’s workplace, and throughout entire public infrastructure Auto Manufacturers 3 Start-Ups Range Anxiety of Batteries Eliminated, Paving Way for Growth of EV Market ____________________ Source: Barclays – Electric Vehicles: Niche Future or Mainstream Potential? 28

  29. Scenario 1 How Infrastructure Fits Within the EV Market Structure Five Major Parties and Market Integrators to Push Infrastructure Expansion Forward Integrators such as a Better Place will be key drivers in combining efforts of other parties involved Utilities pushing EV next to their current operations since it represents new markets to them ____________________ Source: Frost & Sullivan 29

  30. Scenario 1 Swift Proliferation of Infrastructure and No Alternative to EV/ICE BCG – “The cost target of $250 per kWh is unlikely to be achieved at either the cell level or the battery pack level by 2020.” The lack of technological improvements coupled with the proliferation of charging infrastructure, will create a ‘Sweet Spot’ for the EV,allowing them to become the preferred alternative to ICEs in the next decade. The next five years will experience a significant increase in both residential and non-residential charging locations What’s the Alternative to ICE? • Charging stations become more ubiquitous. This gives consumers the confidence to rely solely on their EV since they can charge en route, similar to their gas station of the past. • Continuous pressure for alternatives to the ICE create a huge opportunity for the EV sector. 30

  31. Current Charging Stations EV Infrastructure Incentives & Laws Scenario 1 Current Indicators for a Strong EV Infrastructure in the U.S. CA - home of EV technology - pushes hardest for development of infrastructure None 3 or less 21-30 4-8 Charging Stations in So. Cal (2009) Laws & Infrastructure to Promote EVs 21-30 4-8 None 3 or less • Inyo, Kern, Ventura Counties – 23 • Orange County – 50 • Riverside County – 20 • San Bernardino County – 36 • San Diego County - 27 • Santa Barbara & San Luis • Obispo Counties – 13 • San Francisco Bay Area - 129 • Sacramento & Vicinity – 114 • Free parking and/or reserved in selected city streets, airports, transit stations • Exemption from emission/smog test • HOV lane use exemption (single riding possible) • Discounted registration fee • Tax exemption ____________________ Source: Frost & Sullivan 31

  32. Scenario 2 – “Margin Warfare” 32

  33. Scenario 2 Infrastructure Developments Converge W/ Advancements in Technology • Battery technology improvements and advanced infrastructure developments have been made to create a wide-scale deployment of EVs in 2025 • A new break through technology appears and a new type of “super green“ vehicle is achievable • Oil price volatility and government regulations make internal combustion vehicles less attractive A competitive market between internal combustion vehicle makers, EV manufacturers, and super green vehicle developers 33

  34. U.S. Sales of unconventional LDVs by fuel type, 2010 to 2025* Scenario 2 Market Adoption • As oil prices rise and with it the purchasing price of ICEs, consumers react by purchasing more fuel efficient cars • A technology called “super battery” makes EVs comparable to conventional ICEs in performance • Growing market share of EVs from 2012 to 2015 creates a new business opportunity for network operators who provide service-based contracts to EV owners • These operators agree to subsidize battery costs to EV owners in return for long term pay-per-mile service contracts. The most notable difference with this contract is that an electric car is able to be cheaper than a comparable gasoline powered car • Continuous pressure for alternative sources of energy in transportation leads to a new break-through technology in 2018. A new generation of vehicles appears and slowly gains market share due to its relatively high price (Million units) ____________________ (*) Source: Energy Information Agency – Annual Energy Outlook 2011 34

  35. Scenario 2 Competitive Advantages Accelerated by Technology Advancements ____________________ Source: UC Berkeley, EVs in the U.S – A New Model to 2030 35

  36. A Look Forward… Scenario 2 Implications for Automakers ____________________ Source: XXX 36

  37. Scenario 2 Timeline of Technology Breakthroughs and Investment Dynamics 2012 New models such as Ford C-Max, GM Cadillac ELR, Toyota Scion IQ hit the market 2014: Super battery – an improvement of battery life that makes EVs having close performance to comparable ICEs 2025: Super-green vehicles gain a siginicant market share from EVs and ICEs Breakthrough in 2018: A company called U.S.M. invented an alternative source of renewable energy used in auto vehicles. This creates a new generation of super-green vehicles 2011 2025 2021 The first few models of super green vehicles hit the market with relatively high prices 2011 Obama announces 54.5 mpg CAFE standard by 2025 Beginning 2018 There are aprocimately 60,000 charging stations operated by service providers such as Better Place, ECOtality 2012 The newly elected Gorvernment sets roadmap to reduce trade deficit and the dependence on impoted oil 2015 - 2017 Investments pour into development of network operators and infrastructure to make EVs more attractive ____________________ Source: XXX 37

  38. Scenario 3 - “Green Machine” 38

  39. Scenario 3 Overview • Green Machine: • A break through technology appears and a new type of “super green“ vehicle is achieved • Oil companies try to oppose this new technology due to potential future losses, but customers will likely speak in droves • Governments will be in favor of the new technology, as there will be less need for infrastructure spending and subsidies. However, they will face significant pressure from lobbyist working for big oil companies and EV manufacturers Without a well-developed infrastructure and disruptive technology advancements, EV dies 39

  40. U.S.SuperGreenVehicleSales, 2018 to 2025 Scenario 3 The Rise of New Break-Through Technology • Government supports public transportation, and due to new technological breakthroughs, works to shift to the “super green” vehicles • New technology is adopted quickly by consumers and OEMs • New super green vehicles start to gain market share by 2015, beginning mainly at the high end, but due to government purchases and subsidies, mass adoption will occur rapidly 42

  41. Scenario 3 A Snapshot of the Year 2025 ____________________ Source: UC Berkeley, EVs in the U.S – A New Model to 2030 41

  42. A Look Forward… Scenario 3 Implications for Automakers 42

  43. Scenario 3 Timeline of Technology Breakthroughs and Investment Dynamics 2012 New models such as Ford C-Max, GM Cadillac ELR, Toyota Scion IQ hit the market 2022: Oil companies transforms themselves as energy companies and supply the energy for OEMs and other businesses. 2014: Oil companies start to offer alternative fuels such as Hydrogen in their gas stations. EV infrastructure is not established. 2025: Super green vehicles are market leaders. ICEs and other alternative fuel vehicles die. Breakthrough in 2018: A new technology is found! The new super green vehicle does not require any additional fuel and can self sustain itself. 2011 2025 EV dies 2021 The first few models of super green vehicles hit the market with relatively high prices 2011 Obama announces 54.5 mpg CAFÉ standard by 2025 Beginning 2018 The oil companies goes agains the new super green vehicles. Utility companies oppose as they will loose their share in EV. 2012 The newly elected Government sets roadmap to reduce trade deficit and the dependence on impoted oil 2023 The cost of super green vehicles start to decline, customer demand increases significantly. 2015 - 2017 Oil companies see the rise of EVs and start to take precautions. They lobby the government to hinder EV development 43

  44. Conclusion 44

  45. U.S. Market Adoption of EV under three scenarios, 2011 to 2025 Conclusion EVs will take a big share in LDVs market under the first two scenarios Market share of total LDVs solid line (percentage) EV units sold solid column (million) • Scenario 1 - sales of EVs will grow significantly and reach ~10 million in 2025 or 60% of total sales of light duty vehicles • Scenario 2 - sales of EVs will increase dramatically in the first few years, then growth will slow down due to increased competition • Scenario 3 - sales of EVs will drop to a significantly low level in the future • Recommendation: OEMs should identify investment opportunities that overlap all three scenarios and invest now as the market is changing rapidly

  46. Questions?

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