Global Truck Industry

KPMG INTERNATIONAL

Competing in the Global Truck IndustryEmerging Markets SpotlightChallenges and future winning strategiesSeptember 2011 kpmg.com

ii | Competing in the Global Truck Industry Emerging Markets Spotlight

AcknowledgementsWe would like to express our special thanks to the Institut fr Automobilwirtschaft (Institute for Automotive Research) under the lead of Prof. Dr. Willi Diez for its longstanding cooperation and valuable contribution to this study. Prof. Dr. Willi Diez Director Institut fr Automobilwirtschaft (IfA) [Institute for Automotive Research] [email protected] www.ifa-info.de

We would also like to thank deeply the following senior executives who participated in in-depth interviews to provide further insight: (Listed alphabetically by organization name) Shen Yang Senior Director of Strategy and Development Beiqi Foton Motor Co., Ltd. (China) Andreas Renschler Member of the Board and Head of Daimler Trucks Division Daimler AG (Germany) Ashot Aroutunyan Director of Marketing and Advertising KAMAZ OAO (Russia) Prof. Dr.-Ing. Heinz Junker Chairman of the Management Board MAHLE Group (Germany) Dee Kapur President of the Truck Group Navistar International Corporation (USA) Jack Allen President of the North American Truck Group Navistar International Corporation (USA) George Kapitelli Vice President SAIC GM Wuling Automobile Co., Ltd. (SGMW) (China) Ravi Pisharody President (Commercial Vehicle Business Unit) Tata Motors Ltd. (India)

2011 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

Competing in the Global Truck Industry Emerging Markets Spotlight | iii

EditorialCommercial vehicle sales are spurred on by economic growth going in hand with the rising demand for the transport of goods. Of course, this is common knowledge but just perfectly describes the ups and downs in the truck industry over the last couple of years. When we published our first KPMG Truck Study in 2006 (The European Commercial Vehicle Industry in the Age of Globalization) we certainly expected a rapid increase of commercial vehicles sales in the worlds emerging economies. But what we have seen until today, especially in China and India, surpassed all prospects: In terms of units sold we are already talking about Chinese manufacturers taking the global lead in certain segments and this by almost only offering their trucks in their home market. This impressively shows the enormous strength and significance of the emerging markets for the future of the global truck industry. Of course there are still considerable differences between the Triad (North America excl. Mexico, Western Europe and Japan) and emerging truck market spheres in terms of customer requirements, the importance of total cost of ownership and addedvalue services. But knowing that the developments in recent years by far exceeded the most optimistic expectations how can we foresee the potentials and importance of issues arising in five or ten years time? One thing is for sure: the markets will converge not today, but early enough to start thinking about which winning strategies could guide the way to a profitable and sustainable global truck business model for tomorrow. With this study KPMG hopes to make a stimulating contribution to the dialogue within the industry to address the forthcoming challenges with winning strategies for a better competitive positioning in the race for leadership in the global truck market place. Enjoy the read!

Dieter Becker Global Head of Automotive


DefinitionsGross vehicle weight (GVW) is the maximum allowable total weight of a fully loaded commercial vehicle. This includes the actual vehicle weight as well as passengers, cargo and fuel. Light commercial vehicles (LCV) are goods and carriage vehicles with a gross vehicle weight (GVW) that varies from one region to another. In order to ensure international comparability, all LCVs referred to in this report have a GVW below 6 tons (t).

FOR ALL INFORMATION CONTAINED IN THIS REPORT PLEASE NOTE:Heavy commercial vehicles (HCV) are commercial vehicles carrying goods with a gross vehicle weight (GVW) greater than 6 tons (t). A Full-Line Manufacturer (FLM) is a truck manufacturer producing and selling commercial vehicles in both the LCV and the HCV segment. The Triad markets are the mature vehicle markets of North America (excluding Mexico), Western Europe and Japan. The Next 11 countries refers to Egypt, Bangladesh, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam. All vehicle registration/ production data provided in this report is sourced from IHS Automotive (IHS Inc.) and is derived from official national data sources as of March 2011.


ContentsAcknowledgements Editorial Executive Summary 1 2 Developments in the global commercial vehicle market Challenges for commercial vehicle manufacturers 2.1 2.2 2.3 2.4 2.5 3 Demand shift to growth regions Continuous market cyclicality Suitable business models and brand strategies Overcoming the environmental challenge Pressure on total cost of ownership II III 2 4 8 9 14 17 19 21 22 23 24 24 25 26 30 36 37 48 58 68

Winning strategies for a successful future 3.1 3.2 3.3 3.4 3.5 3.6 Regionalized technology and product management Realization of economies of scale Flexible capacity management Multi-branding Green fleet Expansion of the value chain

4

Focus on emerging truck markets 4.1 4.2 4.3 4.4 China India Russia Prospects of convergence between emerging and mature markets

Insight: Passenger and commercial vehicle business why they are different and what they can learn from each other

72


2 | Competing in the Global Truck Industry Emerging Markets Spotlight

Executive Summary


Competing in the Global Truck Industry Emerging Markets Spotlight | 3

The world market share of Western Europe and North America will continue to decline relative to sharply rising demand in the emerging markets.

Market Development

The worldwide distribution of power in the commercial vehicle market has shifted since 2006. Asian manufacturers have secured a stronger position at the expense of Triad truck makers. With the formation of a large commercial vehicle group under VWs roof (MAN, Scania, VW CV) more consolidation in the Triad is very unlikely. India and Russia have already reached a considerable level while in China consolidation is far from over.

Global Truck makers have to be aware of the growth trends in the emerging markets, and at the same time stay alert to the continuous market cyclicality in the mature markets.

Challenges & Winning Strategies

Emerging markets are also prone to market cycles in the commercial vehicle market, but unlike in the Triad, the overall growth trend is upwards. Global truck OEMs have to evolve regionally adjusted business models and brand strategies in order to respond to differences in terms of market peculiarities, customer preferences and brand recognition. Complying with environmental standards and requirements will entail costly technologies, which truck operators may be unwilling to pay the price. Over the long term Full-Line Manufacturers, represented in all truck segments, will have better chances to compete on a global level.

Accessing any one of the emerging markets will require a highly-specific markettailored strategy. Over the medium to long term, it is likely that the TCO model in emerging markets will develop along similar lines to mature markets.

Emerging Markets Spotlight

The intervals for the introduction of environmental restrictions are increasingly shortening in the emerging markets, although there still is a time lag compared to leading Triad markets. From 2006 to 2010 the domestic production of China and India constantly exceeded the domestic sales volumes. Russia in contrast had to rely on a significant portion of foreign truck supply. A complete convergence of the emerging with the mature markets cannot be expected within a typical planning horizon of 10 to15 years. Nevertheless, in China and Russia there exists more potential for convergence than in India.

While passenger and commercial vehicles have been designed for completely different customer domains, there are several areas for the exchange of know-how. The passenger car business can transfer know-how from Western truck makers regarding multi-branding approaches in emerging markets.

Car Business vs. Truck Business

As the car market is not immune to market cyclicality either, OEMs can benefit from flexible capacity management best practices already implemented in the truck business. With the declining importance of vehicle ownership within the passenger car market, service and TCO-oriented business models from the truck business can be a major benefit for car OEMs. The main opportunities for the truck OEMs to gain knowledge from the car OEMs are the realization of scales and synergies via platform strategies and the adoption or co-development of environmental friendly drive trains.



1

Developments in the global commercial vehicle marketThe global commercial vehicle market is growing, particularly in emerging markets

Cost saving programs enabled Western manufacturers to gain profits even with reduced sales volume.

Due to the rapid economic recovery, in 2010 most commercial vehicle markets revived from the sales decrease they suffered in 2008 and 2009. Nevertheless, commercial vehicle sales still remain below their pre-crisis volume in most markets. Although, the enormous sales reductions have resulted in some painful lessons, extensive cost saving programs allow a majority of manufacturers to achieve respectable profits. However, particularly OEMs from the established markets continue to face a number of challenges to maintain or grow their market position in their home markets. These include increasingly stringent regulations, rising gas prices and largely saturated markets. On the other hand, economic growth in emerging markets continues to offer great potential, with the associated rise in consumer demand predicted to have a positive medium and longterm impact. Industry experts also expect that the legal framework and commodity prices will continue to play a minor role for the time being. The balance of power in the global commercial vehicle market has changed decisively over the past five years. In 2006, Western Europe accounted for about 10 percent of all commercial vehicle sales worldwide. In 2010, the figure had fallen to around 7 percent. The fall was even greater in North America, where the share of worldwide commercial vehicle registrations fell from about 50 percent in 2006 to around 32 percent in 2010.

Market share losses of the saturated markets contrast with strong market share gains in the emerging markets. In particular, China sharply increased its global market share in 2009 by about 10 percent to 28 percent, replacing the US as the largest commercial vehicle market, due largely to governmental support initiatives. By 2010, Chinese global market share had already grown to 30 percent. India enjoyed similar although less spectacular growth. Asia is now by far the largest region for commercial vehicle sales, accounting for nearly one in two commercial vehicles sold worldwide.

The world market share of Western Europe and North America will continue to decline relative to sharply rising demand in emerging markets.



Development of the commercial vehicle market (across all segments)*25,976 24,235 22,694 21,934 759 928 933 2,268 837 1,048 1,185 2,383 20,351 864 1,001 1,276 2,137 1,505 7,369 8,093 18,642 763 541 1,166 8,725 22,729 865 642 1,462 1,655 952 781 1,548 1,870 1,062 833 1,645 2,012

10,650

10,265 7,974

6,266

From a truly global perspective, the truck market is a growth market rising up to 33 million units by 2015 if current trends continue.

10,737 8,401 6,395 6,975 7,098

10,991

11,700

2006 Asia

2007 North America

2008

2009

2010 South America

2011f East Europe

2012f RoW

West Europe

Source: IHS Automotive, KPMG International *Light commercial vehicles up to six tons + heavy commercial vehicles over six tons

f = forecasted





Positive economic developments will ensure further market growth over the coming years, including a fundamental rebalancing of the global market. The truck market is expected to grow by around 14 percent between 2010 and 2012, rising up to 33 million units

by 2015 if current trends continue. In addition to the BRIC countries, the so called Next 11 states, such as Indonesia, South Korea, Vietnam and the Philippines, will contribute significantly to this growth as well.

The BRIC and Next 11 states will spur market demand in the future.

Sales ranking of manufacturers of heavy commercial vehicles (GVW > 6 tons)The worldwide distribution of power within the commercial vehicle industry has shifted since 2006. Asian manufacturers have secured a stronger position at the expense of manufacturers from the Triad, such as Daimler, Volvo Trucks and Paccar, which previously dominated the heavy duty market.2006 2007 2008 2009 2010 DONGFENG DAIMLER AG FAW1

n1 n2 n3 n4 PACCARSales Ranking

CNHTC 2 TATA MOTORS VOLVO TRUCKS TORCH BAIC 3 MAN ASHOK LEYLAND

n5 n6 NAVISTAR n7 n8 n9 FORD n10 TOYOTA

1 2 3

First Automotive Works China National Heavy Duty Truck Corp. Beijing Automotive Industry Corp.

Emerging markets manufacturer

Source: IHS Automotive, KPMG International



2

Challenges for commercial vehicle manufacturers

Global truck manufacturers are faced with a number of challenges. They have to be aware of the growth trends in emerging markets, and at the same time stay alert to the continuous market cyclicality in the Triad. A consistent worldwide business model will not be sufficient. Regional needs have to be reflected, and innovations will be needed to address technological challenges and the rising importance of total cost of ownership (TCO).

Global truck manufacturers face a number of challengesTruck OEMs have to be aware of the growth trends. One thing is for sure: regional adaptability will determine global success.

Demand shift to growth regions Rising importance of total cost of ownership. However, the reduction of TCO from the manufacturers side is not easy. Truck OEMs have to stay alert to the continuous market cyclicality in the Triad and in the emerging markets. Continuous market cyclicality

Pressure on total cost of ownership

Costly innovations will be needed to address technological challenges, which truck operators may be unwilling to pay the price.

Overcoming the environmental challenge

Suitable business models and brand strategies

Truck OEMs have to nd suitable business models and brand strategies to compete globally.

Source: KPMG International



2.1 Demand shift to growth regionsShifts in demand and consolidation will reshape the global commercial vehicle industry In terms of sales volume, manufacturers from China and India have already surpassed most of their mature market competitors.Already in todays market, a considerable proportion of trucks are sold by manufacturers from emerging markets, such as Dongfeng Motor, FAW and CNHTC (all China) and Tata Motors (India). Of course, these companies sell most of their vehicles in their respective home markets. Nevertheless, even Daimler Trucks, for years the biggest seller in the heavy duty vehicle segment, was outperformed in 2010 for the first time by the Chinese Dongfeng Group. This underlines the dynamics of the emerging markets and their potential to determine the success of commercial vehicle manufacturers with global aspirations.

International key players in heavy commercial vehicle in 2010 (GVW > 6 tons)WORLDWIDE DONGFENG DAIMLER TRUCKS FAW1

Units Sold (in thousands)

Market Share Worldwide (in percent) 300.1 280.7 274.3 199.9 194.9 125.8 113.2 10.3% 9.7% 9.5% 6.9% 6.7% 4.3% 3.9% 3.8% 3.6% 2.8% 2.7% 2.7% 2.6% 2.5% 2.2% 2.2% 1.8% 1.7%

CNHTC 2 TATA MOTORS VOLVO GLOBAL TRUCKS TORCH BAIC MAN (VW) ASHOK LEYLAND PACCAR TOYOTA NAVISTAR ISUZU FORD ANHUI JIANGHUAI IVECO (FIAT) SCANIA (VW)1 2 3

3

4

109.4 103.8 80.0 79.1 77.4 76.6 71.5 64.8 62.8 51.9 48.6

First Automotive Works China National Heavy Duty Truck Corp. Volvo, Renault Trucks, Mack 4 Beijing Automotive Industry Corp. (Auman, EuroV, Beiqi Foton) Source: IHS Automotive, KPMG International

Naturally, global market dominance does not arise from sales volume alone it remains to be seen, if emerging players will be able to compete on a global scale in terms of quality, reliability and brand reputation any time soon. Daimler Trucks, for instance, will most probably regain its leading position in the heavy trucks sector within two years through its intensified activities in China and India. Nevertheless, global sales figures indicate that well-known manufacturers from saturated markets, such as Volvo and MAN/VW, will sell fewer vehicles than Chinese and Indian manufacturers in the future. Even if one treats MAN and Scania as one group, it would still lag behind the new Asian commercial vehicle giants.



Development of the world market share by market clustersTRIAD BRIC N-113 2 1

11% 7% World Market Share 2006 62% 8%

11%

20%

World 43% Market Share 2012f 38%

RoW

4

North America (excl. Mexico), Western Europe, Japan Brazil, Russia, India, China Next -11 (No data available for Nigeria, Bangladesh) 4 RoW = Rest of World f = forecasted2 3

1


2011 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. reserved.


Consolidation has almost come to an end in mature marketsMature commercial vehicle markets in Western Europe and North America have largely consolidated, particularly in medium and heavy trucks, with six, respectively five, manufacturers sharing more than 90 percent of the market. With the formation of a large commercial vehicle group (MAN, Scania, VW Nutzfahrzeuge) under the leadership of the VW Group, more consolidation is unlikely, especially given antitrust laws. While India and Russia have already reached a considerable level of consolidation, it is far from over in China. The top five manufacturers in China Dongfeng, FAW, CNHTC, Torch and Beijing Automotive command almost 70 percent of truck sales, but several small and mid-sized manufacturers continue to compete against each other. The number of regional providers (and those focusing on particular segments) could be replaced by a smaller number of global cross-segment manufacturers. This ongoing pressure for global consolidation is illustrated by numerous cooperation agreements in the industry. These range from specific technical collaborations (such as Mahindra and Navistar)1 to capital integration (such as Daimler & KAMAZ)2, often a preliminary stage for mergers. It cannot be ruled out that players from emerging markets will become pivotal to this consolidation process as well.

Overview of Chinese commercial vehicle manufacturer groups LCV (< 6t) HCV (> 6t) Anhui Ankai Anhui Jianghuai Chengdu Dayun Sichuan Highway Machinery Chengdu Wangpai CNHTC Fujian Xinfuda Guangzhou Bus Hanyang Auto Henan Shaolin Hualing Hunan Axle Works Nanjing Chunlan/Xugong Norinco North Benz Shandong Wuzheng Shitong Special Vehicle Torch Zhejiang Youngman FULL-LINE (LCV + HCV) BAIC Chengdu Xindadi China First Tractor Dongfeng FAW Fujian Longma Jinggong Zhenjiang King Long Lifan Group Nanjing Automotive SAIC Shandong Huayuan Kama Shuguang Group Sichuan Nanjun Yaxing Zhengzhou Yutong Coach

24 companies

18 companies

16 companies

Brilliance-Jinbei Changan Chery Dongan Heibao Feidie Auto Fujian Auto Great Wall Guangzhou Auto Guilin Bus Guizhou Yuantong Aeronautic Auto Hebei Changzheng Hebei Zhongxing Hubei Sanhuan Hubei Sanjiang Hunan Zoomlion Axle Works Jianghuai Jiangling Jiangxi Fire Engine Liaoning Lingyuan Auto Shaanxi Automotive Shandong Auto Shandong Kaima Shandong Tangjun Ouling Auto Sichuan Yinhale MachinerySource: IHS Automotive, KPMG International

Bold = more than 50.000 units sold in 2010

1

Joint venture (51:49) Mahindra Navistar Engines produces diesel engines for medium and heavy commercial trucks and buses in India Daimler Trucks had bought a 10 percent stake in KAMAZ in 2008, bought another 1 percent in June 2011

2



Leading players in key regions and markets in 2010 (GVW > 6 tons)

WEST EUROPEUnits Sold (in thousands) DAIMLER TRUCKS VOLVO GLOBAL TRUCKS3

Market Share (in percent) 46.7 42.2 31.3 23.3% 21.0% 15.6% 13.7% 13.0% 10.2%

MAN PACCAR IVECO (FIAT) SCANIA (VW)

27.5 26.0 20.5

NORTH AMERICAUnits Sold (in thousands) DAIMLER TRUCKS NAVISTAR PACCAR FORD VOLVO GLOBAL TRUCKS3

Market Share (in percent) 73.5 72.2 27 .4% 26.9% 15.8% 12.4% 8.5%

42.6 33.4 22.8

SOUTH AMERICAUnits Sold (in thousands) DAIMLER TRUCKS MAN FORD IVECO (FIAT) VOLVO GLOBAL TRUCKS3 20.6 19.7 31.3 60.2 70.9 Market Share (in percent) 26.1% 22.1% 11.5% 7 .6% 7 .3%




EAST EUROPE (incl. Russia)Units Sold (in thousands) KAMAZ GAZ GROUP VOLVO GLOBAL TRUCKS3

Market Share (in percent) 28.9 23.9 25.4% 20.9% 7 .5% 6.8% 6.6%

8.5 7.7 7.6

MAZ MAN

CHINAUnits Sold (in thousands) DONGFENG FAW1 CNHTC2 TORCH BAIC4

Market Share (in percent) 299 273 200 20.6% 18.8% 13.7% 7 .8% 7 .5%

113 109

INDIAUnits Sold (in thousands) TATA MOTORS ASHOK LEYLAND EICHER MOTORS SWARAJ MAZDA1 2 3

Market Share (in percent) 189 59.3% 25.0% 8.9% 2.2% 1.9%

80 28 7 6

First Automotive Works China National Heavy Duty Truck Corp. Volvo, Renault Trucks, Mack 4 Beijing Automotive Industry Corp. (Auman, EuroV, Beiqi Foton)

ASIA MOTOR WORKS



2.2 Continuous market cyclicalityMarket cyclicality dominates the commercial vehicle business also in emerging marketsThe commercial vehicle business will continue to be strongly cyclical, especially in the mature markets of the Triad, where swings of between 15 and 25 percent are considered normal.

Dependency on overall economic development: Commercial vehicle sales usually trail behind changes in GDP .

This cyclicality is caused by a dependency on overall economic development. Declines in gross domestic product (GDP) lead to a fall in the transportation of goods, and surplus trucks are temporarily decommissioned. When demand rises again, companies reactivate these trucks before buying new ones, leading to a time-lag between the rise in GDP and the demand for trucks. This is illustrated by the quarterly development of GDP in the US between 2006 and 2010 and light commercial vehicle sales for the same period.

Time lag illustrated using the example of the US market for light commercial vehicles (LCV)Observation Period 1: While GDP rose substantially in Q3 2006 going into the following quarter, commercial vehicle sales continued to decline as a response to the previously fallen GDP Thus, a high point of the . GDP together with a low point in , commercial vehicle sales, was observed in the fourth quarter of 2006. Commercial vehicle sales rose once again in the first quarter of 2007 despite falling GDP in that quarter. Observation Period 2: It is also very clearly visible from the 4th quarter of 2009 to the 2nd quarter of 2010 that the peak of GDP shows a time lag of two quarters in relation to the peak of commercial vehicle sales.

Connection between commercial vehicle demand and GDPObservation Period 1 Observation Period 2

Q2/06 Q3/06 Q4/06 Q1/07 Q2/07 Q3/07 Q4/07 Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 % Growth in Truck Sales % Growth in GDP

Source: IHS Automotive, US Department of Commerce (2011), Institut fr Automobilwirtschaft [Institute for Automotive Research]



Emerging markets are also prone to cycles in the commercial vehicle market, but unlike in Triad markets, the overall growth trend is upwards. Manufacturers in emerging markets must therefore prepare for continuous growth in capacity and align this with their strategies.

Development trends in commercial vehicle demand in China, India and Russia

Light commercial vehicle demand (on a basis of accumulation)

AVERAGE SALES (20012009) Russia = 296,000 units China = 2,900,000 units India = 333,000 unitstrend

2001Source: VDA, KPMG International

2002

2003

2004

2005

2006

2007

2008

2009



DAIMLER AGInterview with Andreas Renschler, Member of the Board and Head of Daimler Trucks Division at Daimler AG (Germany)Andreas Renschler, Head of Daimler Trucks, expects a fairly steady recovery of the global commercial vehicle industry after two almost catastrophic years. Although strong cyclicality has always played a pivotal role in the commercial vehicle industry, the 2008/2009 market turmoil went far beyond anything we could have expected, says Renschler. The market is now growing again, but of course there are regional differences, he adds. Renschler sees the mature markets of North America and Europe still being some way off their pre-crisis levels. In contrast, India and Russia are showing rapid signs of recovery, not to mention the Chinese market, where the demand for trucks was largely unaffected by the global economic woes. He is convinced that the best way to gain a sense of future market potential is to look at GDP A growing economy . always goes hand-in-hand with increasing freight transport volumes boosting the demand for trucks, he explains. Winning strategies for a global player In terms of business strategies for global truck manufacturers, Renschler says its not all about quantitative market development, as qualitative differences among emerging and mature markets will remain a limiting factor for some time. In China or India, were talking about an average sales price of 30,000, compared to Europe with prices from 80,000 to 100,000. As long as global markets remain as diverged as they are today, a world truck approach is not a viable option, he says. In line with this, Renschler is sure that there is not the one universally applicable concept to access foreign markets. It always depends on the specific regulatory environment and market specialties. To successfully address price and cost-sensitive emerging market customers, a multi-brand strategy is an important aspect for Renschler. For a full-line manufacturer like Mercedes-Benz, which is predominantly known for its high-quality and relatively costly premium cars, the differentiation between its various product segments is an absolute necessity, he says. With its Fuso brand, an important pillar for Daimlers success in Asia, and the recently introduced BharatBenz, especially focused on the Indian domestic market, Renschler believes Daimler is on the right track. In more mature markets, he sees an ongoing trend towards a more differentiated view on the total cost of ownership for trucks: After all, the number one purchase reason in mature markets is the total cost per kilometer, not in contrast to emerging markets the initial price of a truck. Thats why Daimler increasingly pursues value added services around the truck itself to open up further revenue potentials. Renschler especially sees huge potential for value added services around preventive maintenance, since Daimler has a widely spread service network all over the world.



2.3 Suitable business models and brand strategiesThe business model of full-line multi-brand manufacturers is growing in importanceOver the long-term, full-line manufacturers (FLM) such as Daimler, Volvo, or Tata, represented in all truck segments with their own products, will have better chances to compete on a global level. In contrast, specialists active solely in the heavy truck segment will struggle to defend their status in the global market, because they may have greater trouble realizing synergies or differentiating their products on a global scale. A regionally adjusted brand strategy therefore also plays a crucial role for truck manufacturers. Using a multi-brand strategy, manufacturers can respond to regional differences in terms of penetration and brand recognition. For example, the Daimler Groups BharatBenz brand, recently introduced specifically for the Indian market, illustrates the emergence of regionally-tailored products. Selected business models and brand strategies in the global truck marketGlobal 65 60 55 50 45 40 35 30 25 20 15 10 5 0 Local 1VOLVO VW 1 GLOBAL TRUCKS1 MAN (MAN/SCANIA/VW) (+VW TRUCKS) VW (VWN/SCANIA)1average=33.8

A multi-brand strategy enables regional factors to be taken into account.

2

Markets served in CY 10

Analysis of the business models and brand strategies of selected commercial vehicle manufacturersVertical axis: Shows in how many markets manufacturers were represented in 2010 with their respective brands and models. Horizontal axis: The Brand Portfolio Index (BPI) shows the respective intensity of the manufacturers brand strategies. The index sets the respective number of brands in the manufacturer portfolio against the manufacturer with the most individual brands in the portfolio (in this case Daimler).

DAIMLER AG1 PACCAR ISUZU1average= 0.6

3

DONGFENG1

4

TATA1

BEIJING AUTOMOTIVE11Full Line Manufacturer

0.2

0.4

0.6

0.8

1.0

hypothetical Single brandSource: IHS Automotive, KPMG International

KPMGs BPI Brand portfolio index = [0;1]

Multi brand

By analyzing the global market presence and brand portfolios of selected manufacturers, we see the current commercial vehicle business split into four dimensions: 1. Manufacturers of a few brands with global market presence 2. Multi-brand manufacturers with global market presence 3. Manufacturers of a few brands with multiregional market presence 4. Multi-brand manufacturers with multiregional market presence



It is interesting to see that global manufacturers from mature markets are consolidating different segments under a single corporate entity. There are a number of reasons for this: 1. A full-line multi-brand manufacturer is better able to cope with increasing pressure to realize economies of scale at all value creation levels. In particular, the growing price pressure from emerging markets makes it ever more important to leverage cost cutting opportunities to stay globally competitive. 2. An FLM can better benefit from potential synergies between light and heavy trucks, particularly in green diesel engine technology and electronic vehicle architecture (such as assistance systems) to comply with globally rising environmental standards. 3. Lastly, the strong growth of emerging markets will increasingly require a more diversified global footprint, with market-tailored product, brand and pricing strategies.

Offering a full line of trucks under several brands especially benefits mature market OEMsThe rising Chinese Dongfeng Group and the well-established Daimler Trucks Group, number one and two in terms of heavy duty truck sales in 2010, demonstrate two contrasting approaches, perhaps owing to their geographic origin. Daimler introduced or acquired various brands and sells its trucks in over 50 countries. By catering to a full range of truck segments, Daimler can offer a greater variety of trucks tailored to specific markets and local customer preferences without blurring its worldwide brand reputation or value propositions. In contrast Dongfeng, almost solely active in its Chinese home market with low-cost products, does not differentiate its products or segments through a multi-brand approach. Looking at these and other examples, one can assume that using a multi-branding approach correlates with the number of markets served and therefore with the global aspirations of the respective manufacturers. Globally active specialists like MAN and Paccar, operating in more than 30 markets, also tend to have several brands in their portfolio. Volkswagens plans to merge heavy commercial vehicle specialists MAN and Scania, with its light commercial vehicle branch, clearly indicate the increasing trend of consolidating several commercial vehicle segments and global brands under one roof. This newly aligned VW truck group will certainly have an important position in the global market as it will offer a full line of commercial vehicles with several renowned brands.

Emerging players will have to engage multi-branding from bottom up to succeed in more sophisticated foreign markets.

For emerging players like Dongfeng and Tata, it remains to be seen how they will approach globalization in the years to come. Differentiating their products in more sophisticated foreign markets via multi-branding could be a viable option. In contrast to the top-to-bottom approach of their mature market peers, they will have to differentiate their products from the bottom up. Consequently, the introduction of a premium brand could be of crucial importance, to separate their global products from their products low-cost reputation in their home markets.



2.4 Overcoming the environmental challengeThe Triad markets are taking a pioneering role on environmental restrictionsPollution restrictions in mature markets have risen steeply in recent years. Manufacturers have responded by substantially cutting particle and nitrogen oxide emissions, as well as fuel consumption and thus CO2. Measures within the engine have included particle filters, Selective Catalytic Reduction (SCR) and aerodynamic optimization.

Technological innovations are constantly reducing truck emissions.

Development of commercial vehicle emissions per ton-kilometer1.2Projection

1.0

0.8

0.6

0.4

0.2

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2000

CO2/tkmSource: TREMOD/VDA (2010)

Nox/tkm

Particle/tkm

Ever stricter limits will be introduced, with the Triad countries taking the lead; in particular the United States with its EPA limits. Under EPA 10, for example, nitrogen oxide limits were drastically reduced in the US by nearly 80 percent to 0.27 g/kWh. EURO VI also calls for a further reduction of nitrogen oxide and particle emissions, although a little less stringent compared to the US limits. Generally, implementing these requirements will entail costly technologies. It remains to be seen if truck operators will be willing to pay the price.

Environmental demands in emerging markets are tightening, but they are not inevitableEmission limits in emerging markets are not yet at the level of the Triad markets. This is partly because low transport costs are vital for economic growth. Also, there is a desire to give local manufacturers time to develop more environmentallyfriendly vehicles. Nevertheless, it is apparent that environmental demands are also rising in emerging markets, as seen with the local equivalent of Euro IV already introduced in China, India and Russia. Interestingly, China, India and Russia all introduced Euro I to III at around the same time. However, Indias pace now seems to have slowed, as the most stringent limits of Bharat Stage IV (equivalent to Euro IV) only apply to the national capital region of Delhi and another eleven cities. Hence, they can be easily circumvented by registering vehicles outside large cities.

In particular large metropolitan regions, such as Beijing and Delhi, strongly regulate exhaust limits rural areas are still less affected by governmental regulations.


2030

2017

1995

1996

1997

1998

1999

2001

2018

0.0


The time lag between the introduction of exhaust limits between mature and emerging markets narrowed significantly.

Looking at the pace at which environmental legislation for trucks is being introduced in emerging markets, the time lag with the West has shortened significantly. It may be assumed, therefore, that the pace of introducing environmental standards is linked with the rapid sales increases in those markets. When it introduced Euro III equivalent exhaust limits in 2008, for example, China was six years behind the EU schedule. However, the time lag between the introduction of the next stage equivalents (Euro IV and V) narrowed to only three years. Logically, more stringent limits lead to a greater need for technological sophistication - in both emerging markets and developed markets. It will be interesting to see how domestic players from the emerging markets will approach the challenge of increasing requirements.



2.5 Pressure on total cost of ownershipFuel costs dominate the total cost of ownership in mature markets in emerging markets however, it is the purchase price that mattersThe commercial vehicle business has always been characterized by an emphasis on total cost of ownership (TCO). As an investment asset, the acquisition and operating costs of a commercial vehicle naturally have a direct influence on the profit margins of truck operators. The typical TCO in a mature commercial vehicle market differ substantially from an emerging market. In the emerging markets of Asia in particular, the acquisition price still plays a dominant role in the TCO over the lifetime of a truck. Acquisition costs are therefore at the forefront in investment decisions, either because the subsequent costs are comparatively low or because repairs and service are typically performed by owner-drivers themselves. Over the medium to long term, however, it is likely that the TCO model in emerging markets will develop along similar lines to mature markets, particularly with regard to rising fuel costs, as well as growing demand for service and repair. Frequently, diesel fuel is subsidized or taxed at a substantially lower rate than gasoline in emerging markets, but sensitivity to fuel prices will increase with rising crude oil prices. Similarly, with the increasing technical complexity of commercial vehicles, it is likely that only qualified specialists will be able to perform service and repairs in the future. The reduction of the TCO by commercial vehicle manufacturers is crucial since it is virtually impossible for hauliers to pass a rising TCO on to freight prices due to the intense competitive pressure. The largest TCO component that can be influenced in mature markets such as Western Europe is fuel costs (30 percent). Advances in engine technology, such as optimized diesels engines and alternative fuels, provide a number of sales angles for manufacturers. Other possibilities on the manufacturers side include depreciation (which can be indirectly influenced by the purchase price), service and maintenance costs and at least in part insurance costs. However, the reduction of TCO from the manufacturers side is not easy, as the most influential components of TCO are to do with the regulatory environment (ecological requirements, taxes and tolls), particularly in mature markets and increasingly in emerging markets as well. It is likely that these external factors will continue to grow in importance, weakening the ability of manufacturers to influence the TCO for the benefit of their customers. Overview of the TCO in trucks in Western Europe

Fuel costs, service and repair are becoming increasingly important in emerging markets.

30%

Tires 1% Interest 2% Road Tax 2% Repair & Maintenance 5% Vehicle Insurance 6% 10% 18%

Fuel

40-ton Tractor Semitrailer Combination

26%

Wages Overhead Depreciation

Weve addressed things like fuel economy, weight, and driver environment. Next, well see technologies such as collision avoidance systems, stability systems anything which can reduce their [the operators] overall costs further.Dee Kapur, President of the Truck Group, Navistar International Corporation

Source: Commercial Vehicles and CO2, ACEA/Iveco, 2011



3

Winning strategies for a successful future

Commercial vehicle manufacturers with global ambitions face considerable challenges in both emerging and mature markets. To survive, they will have to adopt winning strategies to respond to shifting global demand, market cyclicality, environmental issues and the growing pressure on the total cost of ownership (TCO). Moreover, they must tailor their business models and brand strategies to address the specific characteristics of different markets.

Challenges & suitable winning strategies in the global commercial vehicle industry Regionalized technology and product management Realization of economies of scale Multi-branding

Demand shift to growth regions

Green eet Expansion of the value chain

Flexible capacity management Pressure on total cost of ownership Expansion of the value chain Continuous market cyclicality

Realization of economies of scale Green eet

Overcoming the environmental challenge

Suitable business models and brand strategies

Regionalized technology and product management Multi-branding Expansion of the value chain

Source: KPMG International



3.1 Regionalized technology and product managementGlobal market leadership will be determined by the regional adaptability of multinational OEMsVehicle concepts geared toward the demands of Western customers will make little impression in emerging markets. Gearing vehicle designs to local customer demands will be essential. This will mean reducing product complexity and using local resources and suppliers.

A World Truck concept is not promising. Different concepts must be developed for the mature and emerging markets.

Regionalized technology and product management at BharatBenz Vehicles must be adapted to the needs of the local market. In India, for example, the design must be suitable for poorly constructed roads and overloads. For this reason, BharatBenz reduces its electronics only to the absolute essentials. In addition, it is necessary to stabilize the axles and adapt the frame and suspension. The engine capacity has to be adapted to low average speeds and the gear ratio to torque that triggers early. It is power, not RPMs, that counts in order to get frequently-overloaded trucks in motion. Transmissions must be designed in a correspondingly robust manner. The BharatBenz is pinning its hopes on the modular principle in India and integrating elements such as frames or drive trains of various Fuso models, specifically with newly developed components, into the Modified Indian Truck Starting in July 2012, it will compete with local low-cost brands such as Tata, Mahindra & Mahindra . and Ashok Leyland.Source: AutomotiveNow, Spring 2011, KPMG International

Besides low-cost technologies, mature market OEMs will need to establish national servicing and spare parts networks to gain a foothold in strategically important Asian markets. Entering an emerging market with local partners (mandatory in China) therefore has numerous advantages. These include using local know-how, brand recognition and existing service networks. Disadvantages include internal management resistance, delays in modernizing products and production, and inflexibility of brand positioning. Possible conflicts arising from the parallel establishment of a companys own brand, to occupy the premium niche, can be more difficult to resolve within a cooperation agreement. Overlaps can arise with respect to target groups and market segments, particularly if the local partner itself wants to become active in the premium segment. For global OEMs operating fully-owned subsidiaries in emerging markets, correctly integrating regional control structures into the overall companys strategy is vital. Since the emerging markets of China, India and Russia have many differences, a regionally-adjusted approach is essential. In China, for instance, a globally-operating German OEM decided to keep its Chinese affiliate as close as possible to its parent companys CFO instead of indirectly managing it through its Asia Pacific sales bureau.

There is no patented solution for market development with or without local partners.



3.2 Realization of economies of scaleModular systems with a high percentage of non-variable parts are necessaryAs a result of market specifics and divergent customer demands, real economies of scale in the commercial vehicle industry can only be realized at the aggregate level. The largest leverage effect is the standardization of the drive train and the electronics architecture, to which depending on market specification a total of 60 to 70 percent of the added value of a truck is attributable.

We definitely put a lot of effort into developing standardized cross-segment components for our trucks. In the end, we have to account to very specific end user requirements across all markets and these set very tight limits to standardization. Just take our Wrth plant for our heavy trucks in Germany: Not even two out of the 120,000 units we produce there every year are identical. Of course, such a high degree of differentiation is not necessary in the emerging markets.Andreas Renschler, Member of the Board and Head of Daimler Trucks Division, Daimler AG (Germany) This requires the development of a modular system that makes it possible to use the same aggregates and components in different production series true to the principle of as many non-variable parts as possible, as many individualized technologies as necessary. The cost-relevant aggregates and components (engine, axles, transmissions, and electronics) are at the forefront in this regard. Only in this way can the necessary product differentiation be presented at the customer level. Scania is viewed as a benchmark for this kind of modular system. Daimler Trucks is striving to increase the percentage of non-variable parts from its current level of 50 percent to 70 percent.

As many non-variable parts as possible, as many individualized technologies as necessary.

3.3 Flexible capacity managementFlexibility is necessary to master market cyclicalityMarket cyclicality occurs in both mature and emerging markets. To manage the up and downs, OEMs have to be flexible. Manufacturers in mature markets already have established processes and measures to increase flexibility. Nevertheless, especially for the capital-intensive manufacturing industry, market cyclicality still presents huge challenges for only internally-focused strategies like flexible employment relationships, variability of fixed costs or fractal factory concepts.



In order to achieve additional flexibility, it is necessary to look outside the company itself. Inter-company cooperation, strategic alliances, flexible networks or virtual organizations can all help companies to become more flexible. The in- and outsourcing of various processes can provide access to the resources, information and skills of external partners. This in turn, may help a company react more quickly to market changes, rather than relying on internal resources alone. A virtual organization, for example, has the advantage that although it is perceived as one company, it actually comprises a group of companies. Similar concepts like virtual factories also offer opportunities to build flexible networks that can cope with varying production volumes. However, few of these concepts will work in the emerging markets. OEMs therefore need to implement processes that have previously been successful in the mature markets. Current growth rates in emerging markets mean there is little urgency for OEMs to implement comprehensive strategies, but growth cannot keep up its extraordinary pace forever. Also, manufacturers should not neglect the supply chain, helping all parties to be more aware of demand changes and to react appropriately. In addition, for both markets, manufacturers need to be able to accurately forecast and comprehensively analyze market trends and demand changes.

Partnering with external parties can increase flexibility.

3.4 Multi-brandingIn global competition, the brand offers regional differentiation potentialAbove all, different business models will be needed to handle mature and developing commercial vehicle markets. The business model for commercial vehicle manufacturers in Triad markets is based on a product-service bundle with technically high-quality, high-value vehicles, as well as complementary services (such as spare parts logistics, financial services and fleet management). The USP (unique sales proposition) is ultimately a minimization of the TCO, while simultaneously ensuring reliable readiness of the vehicles for use. In contrast, a successful business model for emerging markets must place the low-cost truck at the forefront. At the same time, the subsequent costs must be kept low through ease of repair. In this context, brands emphasize different points in the commercial sector than the consumer sector, but they should not be neglected. This applies primarily to the trust function of the brand, namely the respective customer promise that the brand makes. There are many arguments in favor of pursuing a multi-brand strategy in the commercial vehicle sector. However, it must be remembered that brand attributes for commercial vehicles are heavily focused on rational values such as quality, reliability and economic benefit, rather than more emotional messages typical of consumer brands. The use of multiple brands makes it possible to address regional peculiarities through different brands. Two full-line manufacturers that operate worldwide, Daimler Trucks and Volvo Trucks, are active in European markets with traditional premium brands characterized by high customer and environmental demands. In the North American market, conversely, the two companies use traditional US brands. Gaps in the brand portfolios are supplemented by European premium brands. In turn, the growing Latin American market is handled using brands from the European region. In Asian markets, known and new local brands are used, or activities are carried out through joint ventures with local manufacturers.

BUSINESS MODELS Triad: Product-service bundle with technically and qualitatively high-value vehicles. Emerging markets: Low-cost trucks with low follow-up costs.

The brands of global manufacturers vary in Europe, North America, India and China.



Comparison of the brand portfolios of Daimler Trucks and Volvo TrucksEurope Daimler Heavy DutyMercedes-Benz Actros Zetros Unimog

North America Volvo DaimlerFreightliner Cascadia CenturyClassST Columbia Coronado Classic(XL) FLD Western Star Stratosphere 4900 6900 LowMax

South America DaimlerMercedesBenz Actros inha L Tradicional

Asia DaimlerMitsubishi Fuso FP/FV Beiqi Foton Motor Co. (CN) JV with Foton Auman MercedesBenz Actros BharatBenz (I)

VolvoMack Titan Pinnacle Granite Volvo VN-model VHD-model Nissan Diesel UD

VolvoVolvo FH-model FM(X)-model Renault Premium Kerax

VolvoVolvo FM-model Renault Premium Kerax Nissan Diesel (J) Condor Quon Jinan Huawo Truck Co. (CN) JV with CNHTC VECV Ltd. (I) JV with Eicher

Volvo FH-model FM(X)-model Renault Magnum Premium Kerax

Middle Duty

Mercedes-Benz Axor Econic

Volvo FL -model FE-model Renault Midlum Access

Freightliner usinessClass B M2 Mitsubishi Fuso FK/FM

Mack Terrapro

MercedesBenz Axor

Volvo VM-model Renault Midlum

Mitsubishi Fuso FK/FM BharatBenz (I) Beiqi Foton Motor Co. (CN) JV with Foton Auman

Nissan Diesel (J) Condor Renault Midlum VECV Ltd. (I) JV with Eicher Nissan Diesel (J) Condor Renault Maxity Master VECV Ltd. (I) JV with Eicher

Light Duty

Mercedes-Benz Atego Mitsubishi Fuso Canter

Renault Mascott Maxity Master Trafic

Mitsubishi Fuso FE/FG

MercedesBenz Atego Accelo

Mitsubishi Fuso Canter FE/FG Beiqi Foton Motor Co. (CN) JV with Foton Aumark Ollin Lovol Forland

J = Japan, CN = China, I = India, JV = Joint Venture Source: IHS Automotive, Institut fr Automobilwirtschaft [Institute for Automotive Research]

The prerequisite to successful multi-branding is systematic brand control, balancing additional costs with additional revenues. To be successful, different OEM brands cannot become competitors. If there are excessive overlaps regarding customer segments and markets, the brand portfolio may need to be adjusted.

3.5 Green fleetThe optimization of diesel engines offers the best long-term cost-benefit ratioThe road map of engine concepts shows that diesel engines will be the number one propulsion system for trucks in the long term (approx. 15 years). Even further consumption reductions will be achieved, for example, by cutting emissions or by more efficient exhaust treatment systems, such as selective catalytic reduction (SCR). Established American and European manufacturers in particular have a competitive advantage in this area, because of decades of diesel technology knowhow. The truck renewal potential in the medium and heavy-duty truck sector is particularly weak, as current alternative technologies do not offer convincing benefits for cost-sensitive truck operators.



In the medium and heavy-duty truck segment, simply optimizing conventional diesel engines can still deliver efficiency gains of five to eight percent.Prof. Dr.-Ing. Heinz Junker, Chairman of the Management Board, MAHLE Group

Road map of engine concepts: Status quo and potentialAlready available in serial production The optimization of diesel engines offers the best long-term cost-benet ratio for commercial vehicles Automatic start-stop and brake energy recuperation systems are available today and already used in light to medium commercial vehicles Natural gas engines already reached maturity, but offer lower efciency gains compared to optimized diesel engines Several OEMs already offer mild-hybrids in the light commercial vehicle segment (e.g. Daimler) Short-term (approx. 5 years) Savings up to 8% can be achieved; a substitution with alternative drive systems is most likely in the light commercial vehicle segment Savings up to 20% can be achieved; signicant advantages in urban stopand-go trafc Mid-term (approx. 10 years) Comprehensively deployable in all vehicle classes Long-term (approx. 15 years) In particular in the heavy duty segment no alternative to internal combustion engines evident

Increasing environmental bene ts through fuel savings and emission reduction

Optimized/downsized internal combustion engines

Micro-hybrids

Gas engines (LPG/LNG)

Savings up to 25% can be achieved, further reduction potential through bio gas; but low market penetration Savings up to 20%, prototypes in operation in the medium and heavy truck segments Small series production in the light and medium commercial vehicle segments; savings up to 30% (40% with plug-in solutions)

Low potential for long-distance trafc, but favorable for shortdistance urban transport

Mild-hybrids

Further technical improvements and cost reductions will allow competitive positioning in inner city trafc First prototypes in operation in the class above 12 tons Plug-in hybrids will most probably not be used in long-distance and heavy duty transport

Full-hybrids

Alternative fuels (biomass-to-liquid, methanol, ethanol, bio fuels)

Depending on the production process, alternative fuels already offer up to 40% greenhouse gas reduction potential

Comprehensively deployable in all vehicle classes

In the mid-term bio diesel will be the most important biogenic alternative fuel

Sustainable second generation bio fuels still in development

Electric engines

Demonstration vehicles and small series production in the light commercial vehicle segment

Emission saving potential between 30% and 100% depending on the underlying energy mix

First prototypes in operation in the medium duty segment, use of electric engines not foreseeable in the heavy duty segment yet Reduction potential up to 100% provided that hydrogen is produced from renewable energy

Hydrogen/ fuel cells

Several prototypes already in operation, until 2030 reasonable market share possible in the light commercial vehicle segment

Source: Shell, VDA et al., Institut fr Automobilwirtschaft [Institute for Automotive Research]



Despite the advantages of optimized diesel engines, concepts like micro-hybrids are already being introduced across many vehicle classes as the first expansion stage of electrically-supported engines. They have already been offered, for ten years in some cases, by leading market providers, including in the heavy class. Micro-hybrid technologies usually encompass an automatic start-stop system and mechanisms for recuperation (brake energy recovery). By their nature, these systems are particularly suitable for vehicles in frequent stop-and-go traffic (such as delivery and municipal vehicles) and can lead to fuel savings of up to 20 percent. Natural and liquified petroleum gas engines are already in use as sophisticated alternative engines, primarily in vans and light trucks. Due to their lower energy density and smaller range, however, this technology is rarely used in long-distance and heavy-duty traffic.

Initial prototypes of full-hybrid systems are being tested in classes over 12 tons.

More heavily hybridized engines (mild/full) are infrequently used in commercial vehicles. Daimler offers three trucks (the Mercedes-Benz Atego, the Freightliner Business Class M2 and the FUSO Canter) that are equipped with a parallel hybrid system (mild-hybrid). This makes it possible to operate the diesel engine alone or with the support of an electric engine. The electric engine automatically switches on, depending on the driving situation. Such systems help substantially reduce consumption. A full-hybrid system promises even stronger savings, enabling a vehicle to be propelled for a certain stretch of distance purely electrically. The first prototypes for this technology are being tested by commercial vehicle manufacturers including in classes over 12 tons. Alternative fuels today are already reducing greenhouse gases. Depending on the manufacturing process, up to 40 percent of environmentally-harmful gases can be avoided. Alternative fuel systems are suitable for all vehicle classes. In the case of biofuels, however, their negative impact on rainforests and their reduction of land for food production is a disadvantage. More sustainable second-generation biofuels are only in the laboratory phase and might offset some of these disadvantages in the longer-term. Only chargeable batteries or hydrogen/fuel cell drives offer the potential for 100 percent reduction in consumption and emissions. The reduction potential depends on the electricity mix in a given area or, as the case may be, the manner of hydrogen production. Despite these first prototypes, development and deployment costs remain high. Broad deployment of these technologies should not be expected in the short-term. In the commercial vehicle segment in particular, there is a special focus on the economic efficiency of an alternative engine concept. Buyers are less willing to pay a price for eco-innovations in commercial vehicles than passenger cars. Therefore, commercial vehicle manufacturers must seek new ways to substantially reduce costs for hybrid systems, either by developing co-operation agreements, or by increasing their acceptance among customers. Electrification offers additional potential for reducing fuel consumption and emissions. One idea for electrifying heavy trucks is the concept of the trolley truck, for which the industry is currently conducting feasibility studies. Trucks would be equipped with a two-rod electricity collector (similar to an electric bus) and draw the electricity needed from a two-pole direct-current line stretched above the road. The truck would be able to drive purely electrically on the freeway, charge the onboard batteries if needed, and after leaving the freeway, drive for a certain range on electricity before the conventional diesel engine takes over. If up to 12 percent in CO2 could be saved in the case of the hybrid engine, the amount could be 20 to 50 percent in the case of the trolley truck, depending on the electricity mix on which the electricity generation is based.

The willingness to pay a price for eco-innovations is much lower for commercial vehicles than passenger cars. The trolley truck combines the concept of individual traffic with that of an electric bus.



MAHLEInterview with Prof. Dr.-Ing. Heinz Junker, Chairman of the Management Board at MAHLE Group

Environmental challenges for suppliers within a global commercial vehicle industryWhen it comes to power trains, emerging and mature markets are already converging, according to Professor Heinz Junker, chairman of the MAHLE Group, one of the 30 largest companies worldwide in the automotive supply industry. The convergence is mainly driven by worldwide efforts to implement the latest environmental regulations, says Junker. However, he acknowledges that the regulatory environment and customer requirements in emerging markets will still diverge significantly for some years to come. For example, although China is closing the gap, there is a time-lag of some years in adopting European vehicle standards. Global suppliers therefore need to be able to adapt to differences between market spheres and respond to regional or country-specific requirements. Junker says that even between emerging markets significant differences can be observed: In China, for instance, domestic truck manufacturers are increasingly demanding Western state-of-the-art technologies. In India, on the other hand, the focus is still firmly on low-cost components. Alternative drive train technologies for trucks are particularly relevant for an engine specialist like MAHLE he says. He , adds, though, that the main focus for hybridization for the foreseeable future will be light commercial vehicles operating in urban stop-and-go traffic areas.



3.6 Expansion of the value chainAdditional services are booming, with growing potential also in emerging markets Downstream services can substantially contribute to increased revenues.Stronger service offerings have been used in recent decades to add value for OEMs downstream from production and distribution. There are already commercial vehicle manufacturers earning up to a fifth of their sales revenue from services and this share may double by 2030. In light of sustained price pressures, the importance of downstream activities will further increase in the commercial vehicle business. Added-value services in the commercial vehicle industry

Global

Eco-/driver safety trainings Cross-border-nancing Buy-back-obligation Financing Damage management Tire replacement Maintenance contract Leasing Telematics services Project management Fleet management

Regionalization

Insurance Toll management Special equipment Maintenance & repair

Local

Truck, superstructure and retrotting

Used truck trade-in Breakdown service

Warranty Serial-/special ttings

Contract hire/ short-term rental

Owner-Driver

Company size

Large eet

Source: Institut fr Automobilwirtschaft [Institute for Automotive Research]

3.6.1 After-sales marketThe after-sales market, with its sub-segments of spare parts and accessories, service and repair, as well as vehicle bodies and retrofitting, represents serious earnings potential for truck manufacturers. This is due to the rising complexity of trucks, as well as technology upgrades to comply with stricter emissions standards and retrofits to meet new safety requirements. In the commercial vehicle market in particular, prompt spare parts supply is of great importance. With a strong market presence, OEMs can achieve a competitive advantage and increase customer loyalty by ensuring low vehicle downtimes. This, of course, has long been standard practice for commercial vehicle manufacturers.

Exterior and structural parts (e.g. tires) dominate the after-sales market.

The medium- and heavy-duty after-sales market is led by exterior and structural components like tires, windows, mirrors, bumpers, truck roof, side fairings and trailer doors. In mature markets, these usually account for up to half of total after-sales revenue. Taking revenue potential into account, tires are exchanged most frequently, while all other parts in this category are probably only replaced after accidents.



Another huge truck after-sales market category (around one-third of a mature market) is mechanical parts, including engine, chassis, powertrain and suspension parts. Nevertheless, long service lives for many of these components limit their revenue potential. Lastly, electrical and electronic parts have increased in importance over the last couple of years, as the electrical content of a typical truck has risen. This is mostly due to stronger emissions controls in mature markets and in several metropolitan areas of the emerging markets.3 Truck OEMs could further leverage the serious after-sales potential of captive online platforms to promote their services and parts. According to a 2010 automotive online aftermarket study carried out by Google in cooperation with Compete, only a small proportion (one percent) of spare parts are ordered directly from the manufacturer, whether online or offline. The majority of the business is conducted by after-sales retailers, accounting for 44 percent of offline and 52 percent online orders. This certainly offers serious space for OEMs to grow their after-sales business. Although the rate of online parts purchasing and direct shipment is increasing, four out of five customers are still buying automotive parts in person at a traditional store. Nevertheless, according to the studys quantitative research, providing better information on specifications can enable OEMs to win new business, as the average online to offline purchase conversion rate for automotive parts can be as high as 85 percent for several components (e.g. batteries, brake parts).

OEMs can tap new revenue sources via online after-sales platforms.

Preferences of after-sales parts purchasersPurchased Parts Online Purchased Parts Ofine

Aftermarket automotive retailer website

52%

44%

Aftermarket automotive retailer

19%

Local independent automotive shop

Online independent seller

19% 17% Retailer

Online retailer website 10% 7% Dealership website 5% Dealership

6% Oil change service shop 1% Direct from manufacturer

Direct from manufacturer website 3%Source: The 2010 Automotive Aftermarket Study, Google & Compete

3

Medium- & Heavy-Duty Truck Aftermarket, Freedonia Market Research



3.6.2 Financial servicesWhereas vehicles including commercial vehicles were predominantly purchased for cash decades ago, the majority of todays vehicles are financed or leased in mature markets. It is more important than ever for companies to ensure their liquidity. Therefore, financing alternatives such as credit or leasing can be used both as a sales tool and to ensure additional income. In a mature market such as Germany, only 13 percent of newly sold trucks are paid for in cash. New trucks are financed or leased at more or less equal share of 42 and 45 percent, respectively.Penetration rates of financing for commercial vehicles in Germany43%

New vehicles

Auto

21% 36% 42%

Truck 13%

45%

51%

Used vehicles

Auto

2% 47% 23%

Truck

10% 67% 0 10 20 30 Financing 40 50 Leasing 60 70 Cash Purchase 80

Financing formSource: puls Marktforschung (2010)

In the used truck market, two-thirds of vehicles are purchased for cash.

A different picture emerges for used vehicles. In this area, two-thirds of commercial vehicles are purchased for cash; only ten percent of vehicles are leased, and 23 percent of trucks are financed. It is apparent that the rate of financed used passenger cars is substantially higher than the one of used trucks. This opens up opportunities even in a saturated market like Germany to generate qualitative growth, and thus additional earning potential, by means of used commercial vehicle financing. Truck manufacturers offering financial services compete with banks, insurance companies and providers from other service sectors. Although the majority (62 percent) of lease contracts are concluded through OEM captive finance providers, non-captive providers still have the upper hand with close to 51 percent in the case of financing. A comparison with the passenger car percentages shows that the captives have a much stronger positioning in this area, with close to 70 percent. In the vehicle financing sector in particular, commercial manufacturers can tap into additional potential with attractive financing packages.



Market shares of captive financing companies for commercial vehicles in Germany

Auto Financing

69%

31%

Truck

49%

51%

Leasing

Truck

62%

38%

0

10

20

30

40

50

60

70

80

90

100

CaptiveSource: puls Marktforschung (2010)

Non Captive

In the emerging markets, on the other hand, there is a great need to catch up with respect to financial services. In China, for instance, vehicle financing for both corporate and private customers is quite a new concept. Around 90 percent of all vehicles purchased in China are paid for in cash; financing accounts for the remaining 10 percent, as vehicle leasing is almost non-existent. Of course, this is largely because of cultural issues, but also due to the low level of awareness and consumer education regarding financing the Chinese government did not allow non state-owned companies to offer vehicle financing until 2004. In India, the local Mahindra & Mahindra Group already offers financial services, but their focus, beyond simple vehicle financing, is on life insurance contracts, financing business equipment or rural house construction. Financial services do not only bear additional earning potential for local manufacturers. Manufacturers from mature markets entering such growth markets could leverage their existing know-how as a distinct competitive advantage. However, appropriate structures must first be established by both local and foreign commercial vehicle manufacturers. Recent examples show intensified efforts by established OEMs to cater to the rising demand for financial services. For instance, Volvo Trucks started to operate a financial services arm in India in November 2010. With its Indian partner, Sri Equipment Finance Pvt Limited, a leading infrastructure and construction equipment financing company, Volvo Financial Services India leverages its partners market expertise to offer a wide range of financial programs for its commercial trucks. Likewise, Daimler recently announced that it will be establishing a subsidiary of Daimler Financial Services in India.

Financial services are almost non-existent in the emerging markets although today efforts are intensifying.



3.6.3 Contract hire/short-term rentalMobility solutions will become increasingly popular in the commercial vehicle market.Innovative mobility solutions in the form of contract hire/short-term rental are also playing an increasingly important role. For example, commercial vehicle providers in Europe and the US offer individually structured mobility packages for commercial vehicle operators. For instance, Mercedes Benz CharterWay, the international commercial vehicle financial services, contract hire and fleet management arm of Daimler AG, combines leasing or financing arrangements with a variety of addedvalue services in a single package based payment. CharterWay was founded in 1992 and has offered contract hire and rental services for commercial vehicles since 1998. Essentially, such packages occur in three variants: Firstly, commercial vehicles can be offered for short- to medium-term rental. This enables road hauliers to flexibly increase their transport capacities for peak periods on an ad hoc basis, without capital commitment or risk. In a more service-oriented approach, hauliers can furthermore combine a needs-based bundle of services, sometimes including maintenance and repair services. If necessary, this can include a replacement vehicle by the service provider. In a third variant, such a short- to medium-term mobility package can be expanded to a full-service contract including fuel cards, insurance and fleet monitoring.

3.6.4 Used vehicle tradeJust like the used passenger car business, which is in many cases professionally operated by car manufacturers, the used commercial vehicle market opens up further revenue potentials for truck OEMs.

The used vehicle trade in the commercial vehicle sector has developed as an attractive business model.

Many commercial vehicle OEMs already operate professional online commercial vehicle exchange platforms, in which customers can search for suitable vehicles worldwide according to price classes, vehicle age and kilometer reading, as well as body and payload. For some manufacturers, the business involving used commercial vehicles is operated similarly to the passenger car business under a special used vehicle brand with a comprehensive concept.

3.6.5 Fleet management solutions and telematics servicesWith fleet management solutions (FMS) and telematics services, large vehicle fleets can be better controlled with respect to the economic efficiency and optimization of logistical, informational and organizational processes. Technological advances in communication and information technology are favoring the further development of FMS because they have lowered the costs of implementing systems, providing real-time control and information. To benefit from fleet management services, network infrastructure has to be implemented on a wide scale. In emerging markets many of these new services cannot be offered on a large enough scale due to bad network coverage. Besides the lack of efficient IT systems, the sheer size of China, India and Russia limits the implementation of professional fleet management services. However, demand will increase as road infrastructure improves, customer expectations rise and more sophisticated IT networks develop. Today, one of the first global players engaging in fleet management services in the emerging markets is General Motors. GM introduced its Onstar in-vehicle security, communications, and diagnostics system for its passenger vehicles in China, and will most probably expand its services to the commercial vehicle domain.

FMS in developing markets trail behind due to lower technology level and road density.



The service portfolios of the various manufacturers generally include the following: Servicesrelatingtovehiclemanagementinclude,forexample,deployment analyses with driving style evaluation, trip recording, service plans and condition inspections. Reportingtoolswhichofferthepossibilityofclearlylayingouttheextensive telematics data for the addressee (management, vehicle fleet manager or drivers). Servicemanagement,includingsendingonlinedatafromthevehicletothe service shop, for planning service schedules. Transportmanagement,suchastourplanningandmonitoring,shipment tracking, order management, navigation, barcode scanners or digital signatures. Othertoolssupport,forexample,commercialvehicleoperatorsincomplying with legal requirements, such as logging drivers work and driving hours, or temperature monitoring for cold goods. Inaddition,somecompaniesalsooffertrainingforvehiclefleetmanagers, administrators and drivers. In particular, sharply rising total costs of ownership are expected to boost demand for these services in the years to come. Fleet management solutions, for instance, offer vast opportunities to increase fleet fuel economy through telematics and vehicle management (e.g. avoiding traffic congestion, efficient tour planning). In addition, companies can use telematics to enhance driver productivity or maximize cargo space by efficiently allocating fleet vehicles. To counteract rising repair and maintenance costs, vehicle diagnostics and preventive maintenance tools can also avoid engine and other core component failures, which can lead to significant downtime and profit losses.



4

Focus on emerging truck marketsAll emerging markets are distinctAlthough commercial vehicle markets in Russia, India and China are all growing, there are key differences. All three emerging markets have distinct characteristics which make them unique. Just to mention a few, China distinguishes itself through its sharply fragmented company environment; the Indian market, on the other hand, is largely consolidated among three very dominant local manufacturers. The Russian market, meanwhile, is fairly Europeanized due to its relative proximity to the European market. Accessing any one of these

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