Trends And Outlook Of The Auto Electronics Industry
Trends and outlook of theauto electronics industryDeloitte China Automotive PracticeOctober 2013
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ContentsAbstract4Industry Development Overview5Industry Scale and As-is Analysis8Industry Segment Development Trends10Conclusions20Contacts21Trends and outlook of the auto electronics industry 3
1. AbstractSince 2010, the global auto market has featured quite a polarized development. The United States hasbegun to emerge from the economic crisis, while European countries are facing a debt crisis and excessproduction capacity. The major emerging markets have entered a stable stage after one or two yearsof explosive growth. (For these reasons,) the auto industry is experiencing a global capacity redesign tocapture the new growth markets. At the same time, OEMs are looking for new growth opportunitiesthrough improving car performance, a trend that results from increasingly strict regulatory requirementsas well as technological developments, more specifically a leap in automotive electronics technology.Thanks to certain auto development trends such as lightweight materials, miniaturization, intelligenceand electrification, the auto electronics market is experiencing rapid growth. The improved specializationof parts manufacturers enables them to play a more important role than OEMs in leading technologicalinnovation in some segments. Meanwhile, penetration of cross- industry technology into the automotiveindustry has further intensified cross-sector competition. With the dual impact of industry-internalchanges and the external economic environment, market concentration has been further accelerated.Within the automotive electronics segments, ADAS, Connected Vehicles and electronic energy areconsidered as leading groundbreaking technologies, promising significant growth potentials and exertinga profound impact on the automotive industry chain. ADAS-- The development of sensor technology and signal processing algorithms has laid the foundationfor a rapid development of the ADAS market. With the increased safety standards and consumerdemand for safety performance, the ADAS market will become the fastest growing segment-- The technological barrier to entry to unmanned driving is relatively high, which provides anopportunity for high-tech companies (such as Google) to enter the automotive industry-- The development of unmanned vehicles may drive efficient automotive sharing and improve vehicleutilization to result in significant reduction of traffic accidents, which will exert a disruptive impact onOEMs, parts manufacturers, car financing and insurance Connected Vehicles-- Driven by the mobile internet, connected vehicles are experiencing quick innovation and increasedpenetration.-- Connected vehicles involve multi-functional and various resources. The different roles andpositioning of the relevant companies need to be benchmarked using different success factors Electric energy-- Government incentives are considered an important driver for promoting the R&D andindustrialization processes of electric vehicles-- Vehicle cost, as well as battery and charging infrastructure are major concerns for the popularizationof electric vehicles-- The electric vehicle industry chain will involve more new companies, and the influence of traditionalparts manufacturers will be further weakened4
2. Industry Development Overview2.1 Macroeconomic EnvironmentThe global auto market has experienced upsand downs in the past few years, showing quitea polarized development. Generally speaking,the focus of the auto industry has shifted fromthe traditional manufacturing countries to theemerging markets, with sales increasing year byyear (Figure 1). Rational choice of consumers hasconsolidated the leading market positions of theeconomic models with low energy consumptionand low emission.Figure 1: Sales Proportion of Regional Segments (2005-2012)EuropeAsia Pacific& Middle 40%30%20%42.9%46.8%45.3%46.5%10%0%Source：Gasgoo, OICAFigure 2: Auto Sales in Major Markets (2011-2012)Unit：10,00020112,0001,8512012Annual growth rateof 2011-2012 4.3%1,931 13.4%1,4791,5001,304-8.2%2.1.1 The traditional auto markets havea relatively gloomy outlook, and facetransformationThe US auto industry has witnessed a year-onyear sales increase of 13% in 2012(Figure 2),which is the largest since 2008. The release ofpent-up demand, continued recovery of the stockand real estate markets, and enhanced consumerconfidence will continue to drive the growth ofauto sales in the United States in 2013, but theYoY growth will fall back to around 3%. Sustainedhigh oil prices force consumers to pay moreattention to fuel efficiency, while manufacturersalso incorporate the concepts of light weightand miniaturization into their product designs.They rely on the adoption of new structures andmaterials, as well as small engines so as to reducethe vehicle weight and enable energy saving andreduction of emissions.The European auto industry is still facing aneconomic downturn and excessive productioncapacity. In 2012, auto sales within the EU fellby 8.2% compared with the previous year, arecord low since 1995. Same type auto sales willdrop 2-3% in 2013. In the next few years, thestagnant European market will force some OEMsto adjust their strategies. The European marketwill focus on R&D and technology improvementto develop more economical vehicles with lowerenergy consumption and emission, adjusting tothe European economic downturn and stricterpolicies on energy saving and environmentalprotection. In order to deal with the recession ofthe European car market, OEMs have shifted theirattention to high potential emerging markets.1,2751,1701,000 27.6%421500537 4.7% 8.8% 8.3%363 380329 358290 , OICATrends and outlook of the auto electronics industry 5
2.1.2 The sustained growth of the emergingmarkets brings uncertainty to the expansionof production capacityEmerging markets have fewer cars by population,which promises a huge potential. Economicgrowth has further increased the adoption rate ofcars. In 2012, auto sales in Brazil, China, India andRussia have continued to grow. The major globalmanufacturers have increased their investmentin emerging markets to update product lines andmeet the needs of different consumers, whichalso bring with it risks such as heavy traffic,environmental pollution and oil supply security.These problems have imposed restrictionson car consumption, and may cause the newcapacity expansion to exceed auto sales andlead to further price competition, at a time whenOEMs need to invest heavily in new technologydevelopment.2.2 Policies Related to the Auto and PartsIndustry2.2.1 Emissions and incentives policies for newenergy carsUnder the pressure of environmental protectionand non-renewable fossil fuels, exploring newenergy sources will lead development trendsin the auto industry. The strategy planning ofvarious countries regarding new energy vehiclesand industry supporting policies serves as animportant driver for the development of a newenergy auto industry. In recent years, the UnitedStates, EU and Japan have all launched a series ofpolicies and laws to provide more support to thenew energy industry.6The United States promote the developmentof the new energy auto industry mainlythrough the legislationThe legislation focuses mainly on improving theefficiency of energy use to ensure energy securityand to reduce greenhouse gas emissions. In2007, the Bush government launched several actsincluding the Energy Independence and SecurityAct, the Energy Advancement and InvestmentAct of 2007 and the Renewable Fuel, ConsumerProtection, and Energy Efficiency Act 2007, whichall aimed at reducing the country's dependenceon imported oil, developing bio-fuels, reducinggreenhouse gas emissions and improving energyefficiency. Covering a wide range of industriessuch as utilities, oil, renewable and alternativeenergy production, auto manufacturing, etc,these acts set up a fuel performance goal of35mpg (14.8km/l) for the US auto industry for2020 and other related incentive measures, andaimed to develop clean and alternative energytechnologies and markets through tax means. In2009, the United States passed the Clean Energyand Security Act. The act stipulated an averageCO2 emission level in the US of 250 grams permile by 2016, which is the first time that theUnited States have set nationwide CO2 emissionstandards. As for the discharge of harmful gases,auto emission regulations in the United States canbe divided into the Federal Emission Regulationsand the California Emission Regulations, withthe former lagging about 1-2 years behind thelatter. The US government approved the idea thatCalifornia has the right to customize its emissionstandards and may roll out a stricter standardacross the country. The latest T3 standard,equivalent to California’s LEV III, is expected tobe approved, which will help the United States tofurther reduce harmful gas emissions.
The EU promotes auto fuel performancethrough fuel taxesThe high fuel prices resulting from the Europeanfuel tax has pushed European OEMs to developvehicles with higher fuel performance. Comparedwith the United States, the EU has put moreemphasis on strategies of reducing greenhousegas emissions. In 2008, the European Commissionapproved a new CO2 emission standard forpassenger cars, which requires the average CO2emission of new passenger cars to be below130kg/km, and all new cars are required tomeet this standard by 2015. The EU's goal ofthe new energy development mainly focuses onbiofuels, and targets to replace 23% of fuel by2020 and reduce the greenhouse gas emissionsby 20% (same as that of 1990) while renewableenergy consumption is to increase to 20% of thetotal. In terms of exhaust emissions, the EU hasformulated a European car emission standard andadopted the Euro IV standard as from 2005. TheEU standard is relatively broad compared to theUnited States and Japan, and it is therefore usedby most developing countries. The National IVstandard we adopted in 2010 is equivalent to EuroIV.Japan is committed to driving the autoindustry towards environmental protectionand sustainable developmentAt the Copenhagen Climate Summit in 2009,Japan committed to a 25% reduction in CO2emissions in 2020 compared with 2009, and to animprovement in the fuel performance to 21km/L.At the same time, with a view to the goal ofenhancing industrial competitiveness, Japan hasput forward several subsidy and tax incentivesto actively promote the development of a newenergy auto industry. The New Economy StimulusPlan launched in 2010 proposes to strengthenthe competitiveness of the auto industry withthe help of the advanced technologies and thepopularization of next-generation ecologicalvehicles, with a goal of 50% of total car salesby 2020 being made up of hybrid and electricalvehicles. Regarding exhaust emissions, Japanhas formulated the strictest standard for harmfulgas emissions in the New Long-term Regulation2009. OEMs will not be punished for a failure tomeet the new standard, but the annual vehicleinspection is strictly implemented to push OEMstowards accelerating technological improvementsand meeting the requirements of the newstandard.2.2.2 Safe driving regulationsThe most influential regulations in the worldregarding auto safety technology are theEuropean ECE/EEC and the US FMVSS standards.The European ECE standard is widely used inother countries including Japan, South Korea anddeveloping countries.The EU issued regulations (EC) 661/2009 in2009, which added the state-of-the-art securitytechnology and imposed new technologyrequirements on vehicles. Meanwhile, it specifiedthat some models must have an electronicstability control system, tire pressure monitoringsystem, advanced brake system, and lanedeparture warning system installed. The safetyregulations in the United States also have similarprovisions. Recently, the United States put moreemphasis on safety risks during the car backingup. The Kids Transportation Safety Act has forcedthe vehicle to be equipped with back guidemonitors, to be implemented probably in 2015.In recent years, the US states of Nevada andCalifornia have approved road testing ofunmanned vehicles along with the developmentof unmanned driving. Google has even obtainedthe first special license for unmanned cars inthe United States. The National Highway TrafficSafety Administration (NHTSA) thinks it is hightime to formulate regulations and laws for theseadvanced unmanned vehicles. At present, theNHTSA has carried out research projects for aperiod of two to three years to formulate lawsand regulations for unmanned vehicles, whichwill exert a great impact on intelligent drivingassistance and the technology development ofunmanned vehicles.Trends and outlook of the auto electronics industry 7
3. Industry Scale and As-is Analysis3.1 Scale of the Auto Electronics IndustryThanks to the auto development trends focusingon lightweight materials, miniaturization,intelligence and electrification, the marketof auto electronics is experiencing a rapidgrowth. Europe and the United States haveimproved energy-saving, emission reductionand safety performance of vehicles throughmandatory regulations. The developments inconsumer electronics has given rise to moredemanding requirements for communicationsand entertainment functions of vehicles,so the development of safety control andcommunications and entertainment electronicsare expected to experience rapid growth. In viewof the current situation, major OEMs will alsoconsider auto electronics as the key factor ofcompeting through differentiation.Figure 3 Sales Scales and Growth of Auto Electronics Segments(2008-2016E)2012-2016CAGRUnit: 100 Million 10%2,348 5%1,34020081,5081,22120091,61816%Power Control8.8%32%Safety Control10.2 %22%Communications& Enertainmentsystem10.8 %30%Others8.9 %1,2842010201120122016ESource：Industry Experts, Strategy Analytics, TechNavio, Deloitte Analysis83.2 Impact of Technology Development/Innovation on the Industry Landscape3.2.1 More Important Roles of Auto PartsManufacturersThe technology innovation and developmentof auto electronics mainly focus on energysaving and environmental protection, safety andcomfort, communications and entertainment,with an unprecedented speed and breadth oftechnological innovation. Meanwhile, innovationis becoming more and more interdisciplinary,involving industries such as materials sciences(light materials), the chemical industry (batteries)and Consumer Electronics (communicationsand entertainment systems). Meanwhile, highcosts, the risks of all-round development and thetechnical complexity make it difficult for OEMsto carry out the R&D of some technologies ona stand-alone basis. More parts manufacturersare thus becoming involved fill in this gapof technology R&D of OEMs through heavyinvestment in the battery, positioning, navigationand other new technologies. OEMs therefore tendto outsource more and more parts, resulting inthe rapid improvement of parts standardizationand modularization, which is aligned with OEMs'platform strategies to reduce costs and enhancethe flexibility of production lines.3.2.2 Improved OEM SpecializationAlong with the increased complexity oftechnological innovation, the parts or componentmodules have become increasingly complex andspecialized, resulting in a less obvious synergybetween OEMs' modules and parts developmentand production. Therefore, some well-knownparts manufacturers rely on divesting non - corebusinesses and conducting horizontal ratherthan vertical acquisitions, so as to improve thespecialization and competitiveness of their corebusiness, which has facilitated the centralizationof the segments.
3.2.3 More Fierce Cross-industry CompetitionWith an increasing growth of informationtechnology and consumer electronics adoptedin the auto industry, the traditional auto industryis facing an attack from new industries such asthe mobile Internet, the consumer electronicsindustry, etc. Internet companies want to enhancetheir existing business and cloud service abilitiesthrough the acquisition and increase of thecustomer flow, so as to speed up the layout ofcar terminals, and turn cars into an importantentrance and platform of the Internet. Leveragingtheir technological advantages, many informationtechnology companies have crossed over intothe auto industry to promote the informatizationand intelligent development of vehicles. Recently,Apple has released an "iOS in the car" application,which marks the official entrance of the mobileInternet and consumer electronics giant intothe auto industry. "IOS in the car" can enablemultiple functions such as map navigation,music play, sending and receiving messages,phone call making and surfing on the Internet,all without distracting the driver. Its advent willput an end to OEMs' traditional dominanceover car-internal entertainment and navigationsystems, further speeding up the integration ofinternal entertainment and navigation systemswith the external equipment, including mobilephones, tablet computers, etc. In addition toApple's practice of entering the auto industry viathe entertainment and navigation platform, moreand more Internet companies try to leverage theInternet-based services and their advantages inproduct R&D and in operational management ofthe mobile Internet platform (e.g.: mobile phones)to gain some market share in future telematicsservices. Another giant, Google, has turned toautomatic driving and is trying to find a solutionto free drivers from the drudgery of driving.Google's potential success would undoubtedlypose a threat to the traditional leading suppliers inthe ADAS area.3.3 Industry Restructuring & M&A Acceleration3.3.1 Increased CentralizationSeveral factors combine to further increase thecentralization of the auto parts industry. Forone, parts purchasing of OEMs has a tendencytowards modularization in order to reducemanagement costs and to improve efficiency.Another factor is that OEMs tend to dependon the parts manufacturers in terms of R&D.The parts manufacturers therefore seek toimprove their all-round capability through M&Asin order to meet the requirements of OEMs.The macro-economic gloom in Europe and UShas worsened the marketing environment forparts manufacturers, and some manufacturershave therefore had to resort to bankruptcy,restructuring or mergers. Meanwhile, somecompanies experiencing a lack of funds but withadvanced technology have become ideal targetcompanies for some cash-rich companies. Forinstance, Autoliv enhanced its leading position inpassive safety service areas through an acquisitionof Delphi's passive safety assets in 2009.3.3.2 A More Open Supplier SystemTraditionally, there have been three kinds of partssupply models: the American vertical integrationmodel, the Germany independent suppliermodel and the Japanese consortium model.With increased specialization, more centralizedsegments and intensified market competition,the independent and self-contained supplypattern, however, is gradually broken down. Theaccelerated globalization of the auto industry alsopaves the way for manufacturers in the emergingmarket to step into the parts supply system. TakeToyota as an example, which has establishedcooperations with local Chinese suppliers. Partsmanufacturers will therefore increase theirindependence with a more diversified clientstructure and a more open supply system.Trends and outlook of the auto electronics industry 9
4. Industry Segment DevelopmentTrends4.1 The Product Life Cycle and Technology Development Trends of Various SegmentsAuto electronics can be divided into four major categories: power controls, safety controls,communications and entertainment systems, and bo
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