© Oliver Wyman

Future of ICE: why accelerating R&D spend is critical for future competitiveness & to reach 50g CO2/km

June 2015

Prepared for ERTRAC

Agenda

Market Forecasts

Scenario Modelling

New ICE technologies

R&D Figures

1234

IntroductionThe Art of Market forecast

Section 1

3© 2011 OLIVER WYMAN June 2, 2015

4© 2011 OLIVER WYMAN June 2, 2015

5© 2011 OLIVER WYMAN June 2, 2015

Market forecast EV & PHEV

Press and Quotes

“EV market is nascent and tiny growing” (Green Alpha Advisors, 2012)

“2012 will be make or break for EVs.”(Pike Research, dec 2011)

“ The pure electric vehicles are taking off more slowly than hybrid cars.” (Energy Harvesting Journal, 05.2009)

“65% of global automotive executives don’t expect sales of electrified vehicles to exceed 15% of annual global auto sales before 2025”(KPMG’s 2012 automotive survey)

Market forecast examples – EV & PHEV salesIn millions units, light vehicles, global

2

4

6

8

10

12

14

16

30

2010 2015 2020 2025 2030

Published May 2008

Published May 2009Published

March 2009

Published Jan 2009

Published June 2009

Published June 2008

Published Jan 2009

Source: Press clippings, diverse market studies, IHS Automotive, J.D. Power

Published Jan 2011

Published July 2011

Published Feb 2010

Published Jan 2011

Published Nov 2009

Forecast

Published Jan 2012

Published Jan 2012

Market ForecastScenario Building

Section 2

7© Oliver Wyman 7

ApproachForecasting emerging technologies requires scenario modelling

…

2010 Current market analysis per country

2025 market sizing &segment structure evolution

Key trends identification &modelling

Demography & Macro-economy

Environmental regulation and

governance

Urbanization policies

Design of Scenarios

Scenarios

Scarcity of Energy & Resources

….

Constraints & optimization

Green taxation

Double squeeze

Reference

…

Illustrative

8© 2011 OLIVER WYMAN

ApproachIt is necessary to analyze Mega Trends around several domains, in order to build differentiated scenarios

Urbanization policies

Scarcity of energy and primary resources

Environmental regulation and governance

New vehicles designs and technologies

Connectivity everywhere

New people and freight transportation models

Changing customer behaviors

Demography and Macro-economy

9© 2011 OLIVER WYMAN

Trend descriptionA few trends in China - illustration

Source: Oliver Wyman analysis

380M migrants pouring into cities by 2030: China will experience the largest urbanization of human history

6 – 7% per year growth rate expected for the Chinese economy, slightly slower than in the past 10 years

16% of the total population by 2030 will be over 65

57% of oil in China is imported and the share will continue to increase

70%of smartphone penetration in the urban population by 2030. Vehicles would become more connected through embedded features

E-commerce The B2C E-commerce in China develops even faster than EU, stimulating the development of last mile delivery providers

OwningOwning makes a sense of “security” for Chinese people. Younger generation in Tier 1 – 2 cities will increasingly prefer using instead of owning, but it is not likely to generalize across the country. As a result, car sharing is not likely to develop by large scale in China

Health The Chinese consumers are more and more sensitive to health, safety, and thus to pollution issues

10© 2011 OLIVER WYMAN

15

3

9

2

3

1

0

5

10

15

20

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Scenario 3

Scenario 2

Scenario 1

4%

12%

20%

% o

f EV

in n

ew c

ar s

ales

Market modellingEV market share in new car sales in China

Market share of EV in new car sales (%) China total

Note : The milestones indicate years when the distance between scenario is large enough to differentiate the KPI evolution trend towards each one of them Source : Autoinfo.gov.cn + Press release + OW Analysis

Milestone #12020

Milestone #22025

∆ = 400% ∆ = 400%

11© 2011 OLIVER WYMAN

Source: Avicenne & Oliver Wyman analysis1 In ideal driving conditions2 Renault, Volkswagen and Toyota ambitions in ideal driving conditions

3 scenarios for 2025 can be drawn from different forecastsA Pessimistic (slight change), a realistic (awareness take off) and an optimistic scenario (green world)

Slight change Awareness take off Green world

Technology advance

• 2025 battery performance: – Energy density 150-200

Wh/kg– Electrical range 200-250

km1– Cost €300/kWh

• 2025 battery performance: – Energy density 300-400

Wh/kg– Electrical range 400 km1– Cost €250/kWh

• 2025 battery performance: – Energy density 400-600

Wh/kg– Electrical range 500-800

km2– Cost €200/kWh

Environmental regulation

• Tightened emission restrictions but large gap depending on countries

• Tightened emission restrictions, emission taxes & penalties

• Mandatory share of alternative powertrain in vehicle fleet

• Maximum authorized CO2 emissions 75g/km in Europe

• Major cities have zero-emission zones downtown

Fuel price • Oil price stays below $100 per barrel (€75)

• Oil price rises to around $200 per barrel

• Oil price rises to around $300 per barrel

Subvention policy

• Government subsidy up to €1,000 not enough to compensate the gap with ICE which emissions meet regulation standards thanks to technology advances

• Government subsidy up to €2,000

• Other incentives: free parking, wide charging infrastructure network

• Government subsidy up to €2,000

• Private actors fund part of the cost through alternative sales models: leasing, car sharing, pay-as-you-go

12© 2011 OLIVER WYMAN June 2, 2015

110,8

61,3

2010 2025

Market forecast by scenario EV / PHEV market forecasted by OEMS and EV experts varies from 6.6% to 35% depending on the scenario

ICE=Internal Combustion Engine, PHEV=Plug-in Hybrid Electric Vehicle, EV=Elecrtic VehicleSource: J.D. Power, Oliver Wyman analysis

ICE

Full + Mild Hybrid

EV

Scenario 1: Slight changeProduction, in mio. vehicles

Scenario 3: Green worldProduction, in mio. vehicles

Scenario 2: AwarenessProduction, in mio. vehicles

61,3

110,8

2010 2025

PHEV

ICE

Full + Mild Hybrid

EV

PHEV

110,8

61,3

2010 2025

Full + Mild Hybrid

EV

PHEV

ICE

6.6%19%

35%

Assumption : market size constant in the 3 scenarios

13© Oliver Wyman 13

0

2

4

6

8

10

2010 2020

Decrease of Diesel in EuropeThe diesel share should decrease in Europe

1 Growth of Diesel powertrain cost to reach CO2 and pollutants targets

2 Decreasing fuel efficiency gap between Gasoline and Diesel

3 Increasing taxation of Diesel by EU

4 Degradation of the Diesel image (health, pollution)

5 Imbalance Lobby of oil & gas majors

Diesel / gasoline mix evolution in Europe main markets In million unit

-16%

+25%

48%

52%

39%

60%

Source: Oliver Wyman analysis

1% Others

Gasoline

Diesel

Trends

Energy Mix - Market ModellingSynthesis

Whatever the scenario ICE will still have a market share of

at least 60% and up to 84% & will represent the bulk of the volume !!!

Hybrid Vehicles have become a mass market while EVs are still a niche gradually taking off

ICE R&DPerformance improvement via technologies

Section 3

16© Oliver Wyman 16

ICE – Performance improvement & increasing powertrain costImprovement potential in fuel efficiency is still significant but both Gasoline and Diesel powertrain cost will increase to meet CO2 emissions standards

Levers 2025 target impact on consumption reduction

Downsizing (already in use in most vehicles) 10 to 25 %

Combustion CAI 10 to 15 %

Electronic Control Valve 10 %

Variable compression ratio 6 %

Reduced internal friction 5 %

High efficiency alternator 2 %

Management system to the battery charge 2 %

• Key evolutions vs. 2010: 2025

– Fuel Consumption: -20% / -40%

– Vehicle price: +3,5 to 20%

Source: National Renewable Energy Laboratory 2011 study, Fuel thrifty efficient, Mission “véhicule 2030 Voitures Electriques”, OW analysis

ICE gasoline

The fuel efficiency gap between Gasoline and Diesel should decrease

Key levers for consumption improvementNot exhaustive

1717© Oliver Wyman

4 5 6Variable Distribution New generation of gearboxes Combustion Improvement

(CAI…)

1 2 3Turbocharging Direct Injection Stop & Start & Cylindrer De-

activation

ICE Technology Trends Mainly different technologies can be leveraged to improve ICE efficiency

Source: Analyse Oliver Wyman

7 8 9Car Electrification Emission controls & air

handlingLight weighting

Not exhaustive

ICE R&DKey Numbers

Section 4

1919© Oliver Wyman

Regulation Trends – Tighter Norms across the WorldThe easy part of the journey has been done, the next wave will require exponential investments….

CO2 Emission Reduction Targets( g/km) Comments

• 2000-2015 – Easy part: – High reduction potential– Known technologies– Incremental innovation– Reasonable R&D and CAPEX

Investment

• 2015-2030 – Tough part: – Lower reduction potential– New technologies– Disruptive innovation– Higher R&D and CAPEX Investment

280

60

260

240

220

200

180

160

140

120

100

80

2002 2006 2010 2014 2018 2022 2026 2030

US (FTP75/US06

Europe (NEDC)

Japan (JC08)

China (NEDC)

S. Korea (NEDC)

Source: IHS, Analyses Oliver Wyman (1) NEDC: Nouveau Cycle Européen de Conduite

2002- 2030

-65%-63%-56%

-33%

Today

The last grams of CO2 …will be costly to reach !!!

© Oliver Wyman www.oliverwyman.com

Number of ICE Family by OEM Due to larger R&D & CAPEX need, OEMs are gradually reducing the number of main families which are developed more in cooperation to share costs

Source : analyses Oliver Wyman

Evolution of ICE product offering : average number of ICE families between 2001-2004 & 2009-2012Only engine family developed by OEM are accounted for

7,06,5 6,3 6,3

14,5

11,010,5

7,0

9,0

19,0

12,812,3

19,519,0

18,3

15,8

17,0

14,3

12,0

7,06,8

7,57,8

6,5

7,0

12,3

8,58,8

9,510,5

11,8

12,812,811,8

8,5

14,314,8

14,515,0

14,815,3

14,315,0

15,0

10,0

11,5

9,3

9,0

11,5 11,511,3

11,3

6,36,8

7,5

7,07,3 6,5

6,06,0 5,55,8

7,0

6,86,87,3

7,0

7,06,8

7,0 6,8

8,8

10,010,5

9,59,0

8,5

8,5

8,5 8,8

5

7

9

11

13

15

17

19

2001-2004

2002-2005

2003-2006

2004-2007

2005-2008

2006-2009

2007-2010

2008-2011

2009-2012

2010-2013

Total 89 88 86 84 80 77 75 7391 72

R&D IntensityThe number of patents on Diesel Engines has doubled in 15 years…

2222© Oliver Wyman

2012 2025

R&D by moduleOf all vehicle modules, engines and electric drive systems account for the largest share in R&D & are growing fast

Automotive R&D Spendin bn. €

DrivetrainChassis

Electric/ Electronic

Vehicle

Exterior

ICE/aux. systems

Electric drive systems

Body structure

Interior

Source: Oliver Wyman

~150

~110

’12-’25CAGR

4.3%

2.9%

4.5%

7.0%

3.3%

6.1%

2.5%

2.5%

0.1%

2.3%

• More than 120 Md€ is spend annually in R&D by automotive players…

• Spend will increase by 30B€ in 2025

• One third of this spend is dedicated to develop new powertrains to meet tightening regulations across the globe !!

• But public funding will be more and more required to meet emissions targets beyond 2025

Conclusion

It is key to keep investing in developing new ICE to address the mainstream market in order: • to improve fuel consumption • to increase performance • to reduce emissions,• to increase automotive industry image in sustainable

development • and last but not least, to create jobs !!