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AD&P; > May 2014 > TALK > Insights from IHS > Michael.Robinet@ihs.com 8 INSIGHTS FROM IHS Michael Robinet, Managing Director, IHS Automotive Consulting The Changing German Landscape Michael Robinet has been a managing director of IHS Automo- tive Consulting since 2011. Prior to that, he was the director of Global Production Forecasts for IHS Automotive. His areas of expertise include global vehicle production and capacity forecasting, future product program intelligence, platform consolidation and globalization trends, trade fow/sourcing strategies, and OEM footprint/logistics trends. Someone once aptly noted, "Never let a good crisis go to waste." We are all aware of the massive change in the structure, geography and footprint of the North American automotive industry over the past 10 years, including sev- eral key bankruptcies, a substantial churn in the production footprint and a number of new OEM players building here and not importing from abroad. OEMs and suppliers are able to react more swiftly to market opportunities due to the industry-wide shift to global platform structures and build processes. In addition, compared to the 1980s and 1990s, OEMs almost appear impatient when faced with cost inequities within their footprint—quick action is necessary to correct these issues. While North America still has some lingering issues, the never-ending task of restructuring the Western European footprint is far from complete. Several OEMs are taking decisive action to rebalance the supply/demand equation— changes which will impact the industry for years to come. Germany's role of an export hub to the balance of the Euro- pean Union (EU), North America and Asia is under pressure. Through the European demand downturn which started early this decade, the premium German players knew that though their exports were strong to the U.S. and a number of other markets, their competitive position was going to be under pressure. Time to take advantage of the crisis to make some structural changes. Shifting of sourcing of a number of key oferings away from Germany is critical to competitive future. Earlier this year, Daimler added the new C-Class to the Alabama pro- duction stable after a major expansion. In 2016, Audi adds North American output in mid-Mexico with global sourcing for the next Q5 crossover and BMW continues to expand their South Carolina footprint. Expect further moves in the future. High-volume oferings such as the BMW 3-Series, Audi A4 and the Mercedes E-Class sedan are still imported as are almost engines and a majority of the transmissions. There is a checklist—some boxes are further down the list. In decades past it would be sacrilege to think that volume would shift from Germany—it sends an important message to IG Metall. To stay competitive, the premium German OEMs will expand in new markets, seek new partners (Daimler-Renault or BMW-Toyota) and think out of the box. One would expect that over time, some of the secondary vehicle development may slowly inch away from Germany. While years ahead in its genesis, what has impacted Japan with the shift of sourcing of both vehicles and in some cases development towards North America, Europe and China will eventually impact Germany. What is next? As the premium German OEMs increase their adoption of global structures and build more afliations, it will be difcult to be competitive in new markets and still export from the home market. Increasingly competi- tive build quality, cost and productivity in other lands, the ever-present threat of difcult EU emissions regimes and an aging workforce are all working against any real growth in the Western EU production footprint. The best which can be hoped for is stabilization and exports to emerging albeit low-volume markets of Africa. One more complica- tion could upset the sourcing equation. The possibility of an U.S.-EU trade agreement as well as the prospect of other bi-lateral trade agreements with the EU could alter patterns. The EU has a 10% tarif on the manufactured cost of the vehicle which equates to a roughly 6-7% reduction in the fnal vehicle price. If the Euro stays strong relative to other currencies, economics and trade will place further pressure on the footprint. Welcome to the new global automotive industry. Those who embrace change and the new reality will be more nimble, able to act more swiftly and seek new alliances to reduce risk and ensure survival. Never let a good crisis go to waste. 0514ADP Insights.indd 8 4/22/2014 1:34:37 PM