2015 Automotive News World Congress Karen Newman @newmank99 America's Automotive Industry Leader IBM Global Business Services Automotive 2025: Industry without Borders Engage with consumers, embrace mobility, exploit the ecosystem Good morning and welcome to the second day of the 2015 Automotive News World Congress. This is our 12th year hosting this event and we are proud once again to share it with PWC Excited to be IBM’s representative to launch our new Automotive study at this great event. I only have a few min but I would like start today’s session by giving you a few key insights from our Automotive 2025 Study – Industry without Borders.

About the study 250+ hours of meaningful discussion about the future of the industry By industry segment Distribution chain Suppliers 175 executives New entrants Analysts OEMs By region In 2008 we launched the study Automotive 2020: Clarity beyond the Chaos. That study gave us clear insight into the future of the industry to 2020 and helped us launch deeper though leadership pieces about mobility and retail. Last year we spent many hours with Automotive executives around the world to get to this point. Many of you in the audience helped us. These interviews took between 1-2 hours. So thank-you for the time. It was always energetic and interesting. It has been 6 years since Auto 2020 and we felt it was time to refresh our thinking about where the industry is headed and develop a new perspective on what companies need to do to be successful. For this study, we held interviews with 175 executives from various participants in the industry including OEMs, suppliers, dealers, new mobility innovators, organizations/associations, academia, government and others. Our interviews covered 21 countries around the world and accounted for over 250 hours of deep, insightful discussions about the future of the industry including customer expectations, growth strategies, mobility requirements, ecosystem disruption and many other important topics. China Rest of world 21 countries Japan North America Europe

Industry without borders Future requirements are shattering historically rigid boundaries 73% of OEM executives rated mobility services as a significant area for co-creation with consumers of all executives rated collaboration with other industries as the best opportunity for industry growth as we progress toward 2025 of all executives rated expect non-traditional industry participants to have a key role in the automotive ecosystem by 2025 73% 75% These 3 key responses let to us coining this Study, “Industry without Borders”. One thing is very clear from our discussions – the rigid, self contained industry we have known for the past decades is quickly transforming into an industry that is expected to be open, collaborative and filled with new innovators looking to disrupt all aspects of the traditional products, services and the relationships between consumers, the vehicle and the enterprise They future requirements from our study emphasize this point. 73% of OEM executives rated mobility services as a significant area for co-creation with consumers (we will show you other areas of cocreation) 73% of all executives rated collaboration with other industries as the best opportunity for industry growth as we progress toward 2025 75% of all executives rated expect non-traditional industry participants to have a key role in the automotive ecosystem by 2025 Looking toward 2025, the enterprises that welcome this open and collaborative approach to transforming the business will set the stage for success. Q3: Where do you see the best opportunities for industry growth looking toward the year 2025? (n=167-171) Q7: How extensive will your company use co-creation with consumers in the following areas by 2025? (n=156-162) Q10: Rate the extent to which participants in the automotive ecosystem will change in the next 10 years. (n=168-172) The enterprises that welcome this open and collaborative approach to transforming the business will set the stage for success

External influencers Forces shaping the auto industry will radically shift by 2025 Like we did in our Auto 2020 study, we asked industry executives to rate the influence external factors will have on the industry – now and in 2025. We asked them to pick three from a list of 9: technology progress, consumer expectations, government regulations, corporate social responsibility, global labor force, economies, government regulations, sustainability and personal mobility. Overall, what we found was a shift from external influencers focused more on the business such as economies/markets, globalization, etc in Auto 2020, to more of a focus on factors affecting the consumer in this study In this chart we show the results of both our Auto 2020 and 2025 studies for the top 4 influencers. Technology Progress: advancements in digital, vehicle and enterprise technologies will continue with a great amount of innovation coming from outside the industry Consumer Expectations: the only one of the nine influencers to change directions from our Auto 2020 study. Digitally enabled consumers are driving significant change in products, services and how companies engage with them Government Regulations: Significant increase in government involvement from Auto 2020 to handle requirements of automated/ autonomous vehicles, driver distraction with in-vehicle technologies, and disruption of traditional process models such as retail Personal Mobility: increased expectations for 2025 as urbanization, lifestyle changes and cost effective alternatives are effecting how people want to move from one place to another Q1: What are the most important external forces that will impact the industry today and in 2025? (n=175) Auto 2020 Study: 2008 & 2020 Auto 2025 Study: 2014 & 2025 Green – increase Blue – decrease

Three primary disruptors are causing industry boundaries to blur and even disappear External Factors Expect digital engagement and experiences External forces are driving disruption in the industry in three primary areas. First, Consumers are disrupting the relationship they have with auto organizations. They want these companies to rapidly accommodate their expectations for digital engagement. Plus, they can be compelled to be more involved in the business - both in co-creating products and services and in actually influencing corporate strategy. Second, Mobility is disrupting industry products and services in two ways. Self-enabling vehicles will become increasingly sophisticated and able to far exceed their main function of transporting people. Also, consumer-driven mobility — stemming from new innovators and digital technologies — is making it possible to deliver personalized experiences beyond the vehicle itself. Last, the ecosystem is disrupting individual enterprise growth and leading to industry expansion. Auto organizations are looking for new paths to growth, especially to take advantage of new consumer expectations and available technologies. Second, they need to chart a course through the evolving landscape of new participants and fluid industry boundaries. Now I would like explore on area in each of the three disruptors. First, consumers Can be compelled to co-create products and strategy Taps into intelligent vehicle capabilities Creates new offerings via consumer-driven requirements Enables new paths to enterprise growth Creates new opportunities to collaborate within and outside traditional industry borders

Consumers Greater expectations of co-creation Industry executives expect more collaboration with the consumer To a large extent Mobility Services Power of the crowd Desire of consumers to influence The power of many Thinking out of the box Encourages innovation and new ideas Not constrained by corporate culture Product Design Marketing Campaigns Service/Aftersales We asked, How extensive will your company use co-creation with consumers in the following areas by 2025? (n=156-162) The industry executives we talked to expressed a greater desire to have consumer involvement early on in the development process in multiple areas. Two out of every three executives we talked to saw mobility services was an area for greater collaboration. In addition, over half felt product design, marketing campaigns and service/aftersales were other areas to benefit from working with consumers. The “power of the crowd” can bring additional insights and benefits, and extend beyond enterprise confines by taking advantage of consumers’ desire to participate, exploiting the power of many and avoiding the constraints of corporate culture. ------- “Crowd-sourcing”, especially in those areas that touch the consumer, will provide an even greater opportunity to create products and services that meet or exceed consumer expectations. Sales programs Vehicle Assembly

Consumers There will be different crowds for different situations Multiple systems of engagement will be required to support the different groups Mobility services Marketing campaigns Sales/ Aftersales Systems of engagement must be easy, intuitive and provide a great experience to the consumer Automotive Enterprises There are two critical factors when working with the crowd – find the right crowd for the right situation and provide ways to engage that are easy, intuitive, and provide a great experience for the consumer There are different crowds for different situations Participants are included based on their expertise and interest Ability to bring in consumer experiences specific to a particular area of focus Ability to use different levels of communication based on the expertise of the crowd Multiple systems of engagement and business models will be developed to collaborate with the right crowd in a given situation, and attain relevant insights and benefits. These systems of engagement could take the form of games, contests or other methods, and must be easy, intuitive and provide a great consumer experience. Product Development Sales Other areas

Mobility Self-enabling vehicles will provide a greater personalized experience Intelligent and Intuitive enough to take care occupants and itself Self-integrating Seamless digital integration Self-socializing Vehicle social networks to assist others, utilizing the vehicle for ancillary tasks Self-configuring Personalization and customization to environment Self-driving Automated and eventually autonomous mobility In the area of mobility we will see Self enabling vehicles providing greater personalized experience through their ability to “take care” of it’s occupants, “take care” itself and “work with” others By saying “self-enabling” we are talking about the vehicle being intelligent and intuitive enough to be able to take care of its occupants through being an integrated device in the Internet of Things and by configuring itself including personal preferences for controls and seats, digital displays, multimedia and even financial and medical information (if allowed by the occupants) through the use of digital personas Taking care of itself means vehicles will be able to diagnose their own problems and find solutions which could or could not include a visit to a service center. Also, vehicles will have cognitive capabilities to learn about its occupants, the environment and usage behaviors to better optimize its own performance. Working with others includes being apart of vehicle social networks were vehicles communicate with one another to provide useful information such as traffic situations and weather conditions. Vehicles could also be used to support other situations with the owners permission to “opt in”. For example, the cameras on a vehicle could be used during an amber alert in the case of a lost child. And self driving vehicles will require a lot of collaboration between other vehicles and the infrastructure. Self-learning Cognitively adapting performance to occupants and environment Self-healing Analytics and prognostics for service and maintenance

What vehicle innovations will become commonplace by 2025? Mobility What vehicle innovations will become commonplace by 2025? Vehicle digital persona interchange Automated Autonomous Within a brand – 78% Partially – 84% Limited – 38% Within an automaker – 62% Highly – 55% Fully – 8% Between automakers – 26% Fully – 19% We asked industry executives what innovations would be commonplace by 2025 and we received some interesting results. Three out of four executives felt that digital personas would be interchangeable within an automakers brand and two thirds felt they would be interchangeable across brands in an automaker. There was still doubt with digital personas being interchangeable across multiple automakers as this is still see as a differentiator. Three fourths of the executives we talked to felt in-vehicle cognitive technologies will be a key component of how vehicles learn and reason to provide a better experience for the occupants and to optimize its own performance Over half thought vehicle “social networks” would be in place where vehicles would communicate with each other and share information, not only about traffic weather conditions but also about information specific to a given automaker. For instance, if a vehicle was experience some type of problem it hadn’t recognized before, it could communication with other vehicles of the same brand to seek help on what the issue might be. In terms of “automated” and “autonomous” driving, 84% felt partially automated driving would be commonplace and 55% said highly automated would be in place. Surprisingly, more executives – 38% - felt limited autonomous driving would be in place before fully automated which was only 19%. Finally, there is still much skeptism about fully autonomous vehicles being commonplace by 2025 with only 8% of the executives we talked to agreeing with this. Q14: What vehicle innovations will become commonplace by 2025? (n=158-167) In-vehicle cognitive learning Social networks for vehicles 74% 57%

Eco-system A significant shift in where industry growth will come from Bringing more value by extending beyond traditional boundaries Significant Collaborating with other industries 34% Creating new services-based offerings 13% Leveraging disruptive technologies outside the vehicle 20% Creating new product categories -12% Percentage change from Auto 2020 Investing in new business models -6% One of the biggest surprises we saw from this study compared to our Auto 2020 study was the shift in growth strategies from six years ago. We asked, Where do you see the best opportunities for industry growth looking toward the year 2025? (n=167-171) In our Auto 2020 study, the industry growth strategies were clearly focused on expanding into new markets and creating new products and customer segments. And while these are still important, the results of this study clearly show a different focus of working with others to enrich the value of using the vehicle through digital technologies, new mobility services and personalized experiences Collaborating with other industries was the #1 growth strategy with 73% of the executives agreeing with this. This is a significant shift in thinking in what has been a traditionally closed industry. Close behind was the focus on creating new services-based offerings with 69% seeing this as a growth strategy. This is being driven by the recognition that auto companies need to have a key role in the emerging consumer-driven mobility ecosystem and that the competition is not only other automakers but also new mobility innovators, such as car sharing and taxi services, who are capitalizing on revenue generating opportunities. Leveraging disruptive technologies from outside the vehicle is also seen an important growth strategy with 62% supporting this – also a significant shift in thinking from six years ago. When we looked at the differences in thinking between the OEMs and suppliers, investing in new business models clearly stood out as a growth strategy for suppliers. Seventy two percent of suppliers, compared to 51% of OEMs felt this was an important strategy. Suppliers truly see an opportunity in the future to expand beyond their traditional role in the automotive ecosystem through collaborating and partnering with other industries, expansion in autonomous driving and mobility services and the ability to explore new business models for new revenue streams Entering new markets -37% Forming new JV/alliances/partnerships 7% Targeting new customer segments -13%

Eco-system Ecosystem disruption OEMs and suppliers disagree on where the significant disruption will occur OEMs Suppliers 73% 65% 55% 44% 63% 61% 47% 40% 59% 38% 60% 16% Significant Retail channels Marketing & sales Product development Aftermarket Research When we asked where the biggest disruption will be in the industry ecosystem over the next 10 years, retail channels was predicted to have the most disruption with changing dealer roles, the use of online intermediaries and buying directly through the internet as top contributors. I hope the retail panel later today will discuss this more. Beyond that, there is a clear difference of opinion between OEMs and suppliers where the most significant disruption will occur. OEMs feel greater disruption will occur in process areas that are closer to the consumer while suppliers see greater change that are further away. One areas that sticks out is disruption in the supply chain. Only one third of the OEM executives see significant disruption in the supply chain while almost two thirds of supplier executives see this. Q8: Where do you see the biggest disruption (both from within and outside of Auto) occurring in the traditional industry value-net by 2025? (n=166-171) Supply chain Manufacturing

While one third of the companies overall feel they will adapt to the challenges of 2025, only one in five feel they are prepared now Companies who feel they are prepared for 2025 OEMs (23%) Prepared Suppliers (13%) Companies who feel they will be able to adapt Hopefully, the results of this study have given you the feeling there is still much change ahead as we progress to 2025. Disruptions with the consumer, mobility and the ecosystem will not only create new opportunities for automotive companies but will also create many challenges – some the industry has never had to face before as the borders come down. One of our last questions was, How prepared industry executives felt their companies were for the challenges ahead. Only one out of five said they thought their companies were prepared for the challenges of the future. But one third felt confident their companies could adapt in time to be successful. We all know this industry has been very adaptable over the last decade and I am our respondents were not giving themselves enough credit. As I did my interviews I saw some with good processes to imagine the future and others lacking in that area. The time to start is now and the pace of change is not controlled by the industry anymore. - 2025 will be here sooner than you expect! Q22a: Based on everything we have covered today, how prepared is your company to face the challenges on the way to 2025? . (n=156) Q22b: How adaptable is your company to face the challenges on the way to 2025? (n=151) OEMs (30%) Adaptable Suppliers (33%) The pace of change is no longer controlled by this industry

For more information about this study and to get the full version of this report, see ibm.biz/auto2025 Join the conversation #Auto2025 Hopefully, the results of this study have given you the feeling there is still much change ahead as we progress to 2025. Disruptions with the consumer, mobility and the ecosystem will not only create new opportunities for automotive companies but will also create many challenges – some the industry has never had to face before as the borders come down. Thank you for your attention today. Please visit our booth outside to receive a copy of the study or to download the study to your tablet.