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AD&P; > November 2015 > TALK > Insights from IHS > Michael.Robinet@ihs.com 8 INSIGHTS FROM IHS Michael Robinet, Managing Director, IHS Automotive The Cost of Over Compliance Michael Robinet has been a managing director of IHS Auto- motive 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. Recent events have underscored that emissions/fuel econ- omy compliance in combination with efcient and timely vehicle system testing to ward of costly recall and warranty campaigns will be the future diferentiators. How an OEM efciently complies with ever stifening regulations in North America, the European Union and a host of other countries, while still delivering what consumers desire in content, value and performance, certainly was a diferentiator to this point. It is even more pronounced now. Additionally, enhanced vehicle content driven by automated technologies, new mate- rials and telematics sectors, as well as other areas in an ever more complex vehicle system, will require new integrated testing protocols which will require new thinking to achieve efciently. An intense spotlight is frmly afxed on our industry. Ac- celerated recall and warranty issues emerging over the past decade—from a myriad of OEMs—started the ball rolling with politicians, regulators and consumers. The increased level of warranty activity of late is an example, so many OEMs have raised eforts in this area in an abundance of caution. The new reality is "over-compliance" and extensive testing regimes. Suppliers and OEMs alike agree that the spotlight on compliance will raise the burden to ensure there is ample room for error in testing regimes and regulation interpreta- tion for future programs. The average program will have to achieve at least a 20 to 25% improvement in CO 2 emis- sions/fuel economy to ensure compliance through the entire cycle—even with incremental improvements mid-cycle. Given faster cycle cadence (something that we've addressed several times in this space) and a vehicle which lasts 11.5 years on average (according to IHS Automotive), the speed, efciency and extent of fail-safe testing the vehicle will require new competencies. How will the new reality impact suppliers? OEMs will likely increase their threshold for inclusion of fuel saving technolo- gies on all fronts: mass reduction, aerodynamics/parasitic loss improvement and powertrain efciency. At risk are sup- pliers of incremental content or areas which are afection- ately referred to as "commodities." Upward pressure on costs to comply and test will leave less room for optional content to truly diferentiate oferings. As overall investment in new technologies and time to enhance testing of the vehicle systems take hold, pressure for cost control will rise. Ad- ditionally, if new testing protocols are instituted at the OEM and supplier levels, more time and resources may be needed to execute these. Unless investment is reduced in other areas, the time and resources associated with the new requirements will equate to additional costs. Those suppliers that can navi- gate these new challenges through strategic investment in optimal systems, customers and testing regimes will beneft. Strong OEM-supplier relationships are more important than ever. Beyond critical vehicle efciency eforts, an increasingly complex testing regime will result in higher costs that will need to be passed along to the consumer in some form. As vehicle costs escalate, afordability starts to impact new ve- hicle purchases and the intensity of this is likely to increase over the next decade. Production volumes will face some pressure as consumers rationally opt for used vehicles in some cases, delay purchases, or seek other forms of mass transit. The impact will be slow and subtle though noticeable in virtually every aspect of the industry. The new reality is speed, testing compliance and customer delight. An industry which adapts to working efciently in this new structure will fourish. Old paradigms will need to fall by the wayside.