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Equity Research

17 April 2018

Global Autos & Auto Parts
European Autos & Auto Parts
Industrie 4.0 vs. Tesla’s ‘lights out’? NEUTRAL

German OEM CEOs don’t need to sleep on the factory floor: In 2017 Tesla won the PR
For a full list of our ratings, price target and
war, even if Chinese OEMs took the electric sales crown. But we expect EU premium earnings changes in this report, please see
carmakers to fight back in 2018/9. And it's not so much about headline-grabbing table on page 2.
products (although the Porsche Mission E, Audi E-tron and Jag I-PACE are snapping at
the heels of Tesla on range and performance), but about the more mundane war of European Autos & Auto Parts
production efficiency. Despite his vision for full factory automation, Elon Musk is Kristina Church
sleeping on the factory floor again during his current Model 3 “production hell” woes, +44 (0)20 3134 2199
and tweeting about his underuse of human workforce. We think German OEMs are
Barclays, UK
about to launch an onslaught of attractive AND profitable electric products; we expect
them to hit targets. The German (and Japanese) model of a harmonious blend of robot Dorothee Cresswell
and human, perfected over 100 years of 'kaizen', together with the benefit of Industrie +44 (0)20 7773 2192
4.0 will ensure a speedy and efficient production ramp.
Barclays, UK
BMW is our new Top Pick in European Autos, replacing VW (OW, PT €212).
Adam Rae, CFA
Underappreciated modular capabilities as well as a supportive product cycle and positive
+44 (0)20 7116 1579
mix through 2018 and 2019 lead us to reiterate our OW on BMW with a PT of €115
(previously €114). We downgrade Daimler from EW to UW on the back of a relatively late Barclays, UK
and, as a result, more expensive commitment to electrification at a time of weakening
earnings momentum and mix at Mercedes. We therefore apply a 15% discount to U.S. Autos & Auto Parts
historical multiples, which takes our SotP-based PT to €73 (previously €82). Brian A. Johnson
+1 212 526 5627
The German OEMs don't just promise, they deliver: Silicon Valley may be better at PR
and building brand, but we believe EU premium OEMs are quietly creeping up on their BCI, US
Space-aspiring counterpart (as are Chinese OEMs). Incumbent OEMs have >100 years
Dan Levy, CFA
of know-how on world-leading processes from Just-in-Time, Lean Manufacturing, to
+1 212 526 8047
modular design and now Industrie 4.0, utilising AI (artificial intelligence) and IoT
(Internet of Things). And the incumbents are generating serious cash and profit, even in BCI, US
the face of declining diesel and tech disruption. We believe BMW's modular production
won't be threatened on range by native EV platforms. With the 5th-gen electric about to Steven Hempel, CFA
+1 312 609 7260
launch, we believe BMW is well placed to enjoy the returns of profitable BEV production,
whilst peer Mercedes, on its first gen, may see margins at greater risk.
And don't forget the importance of scale, global reach and product diversity:
Whereas Tesla has design innovation to its credit, BMW (Mercedes and Audi too) have
more cash to invest, a broader portfolio over which to spread costs and with which to
entice customers, global modular manufacturing (and distribution) expertise and long-
standing supplier relationships. With the surge in SUVs globally, the slow death of diesel
should be more than offset by strengthening mix and modular product breadth.

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with
companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision.
This research report has been prepared in whole or in part by equity research analysts
based outside the US who are not registered/qualified as research analysts with FINRA.
Barclays | Global Autos & Auto Parts

Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)
Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)

Old New 16-Apr-18 Old New %Chg Old New %Chg Old New %Chg

European Autos & Auto Parts Neu Neu

BMW (BMW GY / BMWG.DE) OW OW 90.66 114.00 115.00 1 11.88 12.26 3 12.49 12.64 1
Daimler AG (DAI GY / DAIGn.DE) EW UW 65.31 82.00 73.00 -11 8.99 8.99 - 8.74 8.95 2
Volkswagen AG-PFD Preferred (VOW3 GY / VOWG_p.DE) OW OW 172.14 195.00 212.00 9 25.43 27.24 7 27.38 30.03 10
Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.
FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research.
Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended
Industry View: Pos: Positive; Neu: Neutral; Neg: Negative

Valuation Methodology and Risks

European Autos & Auto Parts


Valuation Methodology: We continue to use a SotP valuation to reach our PT applying a 35% EV/Sales multiple, 4.4x EV/EBIT and 11x PE for the
Auto business, just ahead of the historical average despite structurally higher margins and cashflow. We continue to value the FS business at 1x
book and China JV at 8x PE. We apply a 5% conglomerate discount to the whole.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: The main downside risks to our price target,
in our view, are: 1) Europe - shouldEuropean pricing and sales deteriorate due to unexpected macro-economic factors, as well as worries for the
leasing and residual value environment intensify, BMW might struggle to reach our earnings targets; 2) US - should US demand for sedans
weaken further and residual value fall to impact the financial services book, BMW might struggle to achieve our forecasts; 3) China risk - should
the economic and demographic indicators in China prove misleading and the premium auto market fail to achieve the growth we forecast for the
next 5 years, we could see downside risk to our current earnings estimates for BMW.
Daimler AG (DAI GY / DAIGn.DE)
Valuation Methodology: We derive our price target through a SOTP analysis based on a blend of EV/sales, EV/EBIT and P/E multiples. We apply
a blended average of 30% EV/Sales, 3.7x EV/EBIT and 9.4x PE to the MBC business (a 15% discount to those we use for BMW due to weakening
model momentum and therefore earnings dynamics at the core Mercedes brand). We value the trucks business at a 15% discount to Volvo at
market. We apply a 15% conglomerate discount to our overall SotP, which we think applicable given management's focus on many different
business lines but improved focus in recent months on making legal structural changes within the overall group.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Risks that may drive the shares to outperform
include: 1. if management were to achieve a faster separation of Mercedes and the Truck Division 2. if Mercedes were to show a greater earnings
resilience, despite softer model mix, than our current assumptions 3. if profitability at Mercedes were less impacted by the costs of electrification
than we currently expect.
Volkswagen AG-PFD Preferred (VOW3 GY / VOWG_p.DE)
Valuation Methodology: To reach our current valuation for Volkswagen prefs, we employ a sum-of-the-parts valuation methodology using a
blend of peer multiples for the different brands/businesses and market values for listed holdings and minorities. We then apply a 25%
conglomerate holding discount to the preference shares, taking into account the risks surrounding recent emissions scandals and corporate
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: The main risks to our price target, in our view,
are:1) The fallout surrounding the NOx emissions scandal and possible regulatory, legal, and recall costs. 2) External risks, such as
macroeconomic factors, outside the control of the company, leading to a weaker demand and pricing environment than we currently assume
that could make our forecasts difficult to achieve, including rising raw materials and volatile FX rates and 3) risks remain around corporate
governance and management's focus on shareholders.
Source: Barclays Research.

17 April 2018 2
Barclays | Global Autos & Auto Parts

EXECUTIVE SUMMARY: 1) THEMATIC ........................................................ 4

EXECUTIVE SUMMARY: 2) COMPANY IMPLICATIONS .........................10

TESLA HAS MANY GLOBAL EV COMPETITORS... ...................................13



MORE FOCUSED ON AUTOMATION ..........................................................29


AI AND IOT........................................................................................................37

GERMAN OUTPUT QUALITY ........................................................................41

GERMAN BEV PRODUCTION STRATEGIES ...............................................43


TO BUILD ON .....................................................................................................54

GERMAN OEMS HAVE DEEP POCKETS…. ................................................57

COMPANY SECTION .......................................................................................61


MOVE TO TOP PICK, PT OF €115 ...............................................................62


PRODUCTION - REITERATE OW RATING, PT TO €212 .........................65


COMMITMENT - DOWNGRADE TO UW, PT TO € 73 ............................68

APPENDIX 1: COMPANY-SPECIFIC EV TARGETS ....................................71

APPENDIX 2: COUNTRY-SPECIFIC EV TARGETS .....................................73

APPENDIX 3: BARCLAYS POWERTRAIN FORECASTS ............................74

17 April 2018 3
Barclays | Global Autos & Auto Parts


The automobile industry is facing fundamental changes.

Alongside the electrification of the powertrain,
autonomous driving and the development of new markets,
it is above all digitalisation that is driving this process of
change. This combination of the physical and digital is
often referred to as "Industrie 4.0". (Daimler’s website)

Elon Musk wanted to automate electric vehicle production...

The above quote on “Industrie 4.0” is taken from Daimler’s website but could just as much
apply to VW and BMW. The old Toyota Production System (TPS), incorporating the notion
of continuous improvement (kaizen) and highlighting the indispensability of people to the
efficiency of the production line, may now seem anachronistic in a world of AI (artificial
intelligence) and the IoT (Internet of Things). But we agree with the arguments put forth by
our Macro colleagues (see Robots at the gate: Humans and technology at work, 10 April
2018) that technology and humans should work symbiotically with each other and that soft,
not hard, automation should be the first step until technology and AI (artificial intelligence)
advance enough to welcome the Era of the Robot. As long as incumbent OEMs remain flexible
in their employment requirements, we believe they will be prepared for the shifts.

...but 13 April he tweeted that he had underappreciated the

human element
Despite Tesla’s CEO, Elon Musk, arguing on multiple analyst earnings calls about the
importance of automation and his desire to reach a “lights out” scenario with Model 3
production (ie, full automation with only minimal human intervention), it seems that Tesla’s
current production woes have led to a change of heart. In fact on Friday last week,
@elonmusk replied to a tweet from Wall Street Journal journalist Tim Higgins to say:

Robots won’t kill all automotive jobs imminently

By contrast, Tesla’s “lights-out” or fully automated vision may be more fitting with the
current zeitgeist, but we worry it is overlooking the importance of the human touch (and
could also lead to exploding capital intensity and complexity). We strongly believe
traditional carmakers are more focused on the social-economic demands of manufacturing,
than their Silicon Valley peer. And as a result, Tesla CEO Elon Musk highlighted at FY17
results that he is living through “production hell” and is now back to sleeping on the factory
floor. By contrast, we expect the ramp of BEVs (battery electric vehicles) from traditional
OEMs in the coming years to be efficient, profitable and on target.

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Barclays | Global Autos & Auto Parts

"Yes, excessive automotion at Tesla was a

mistake. To be precise, my mistake.
Humans are underrated." @elonmusk (in
reply to timkhiggins) 8,54pm, 13 April

….German Automakers actually know how to make great

vehicles (ICE or EV) efficiently
We believe there is an We believe there is an Industrial Revolution occurring in the German auto industry but it is
Industrial Revolution occurring about perfecting the combination of human and robot, not about removing all human
in the German auto industry but elements from the production system. German carmakers are also fully focused on
it is about the perfect synthesis digitalisation within the manufacturing process, but we think valuations do not reflect any
of human and robot, not about belief in the success of new BEV launches or superior production efficiencies to start-up peers.
removing all human elements
Traditional OEMs taking the fight to Tesla with a raft of new BEV launches
from the production system
The German OEM’s may be There is no denying that Tesla has been a major disruptive force in the automotive industry
losing the PR war but that over the last few years and garnered reams of press space over the same period. If we were
doesn’t mean they won’t win to judge a car brand’s performance by the number of re-tweets or clicks, Tesla would trump
on EV production efficiency the German car industry hands down. And of course, more importantly for investors, the
(and therefore profitability) market cap of c.$50bn (or c.$500k/car produced last year) highlights that the PR machine of
Tesla has done a better job at convincing the market of the business’ potential future worth,
than the incumbent OEMs, with BMW’s market cap per car produced at a mere €23k and
GM’s at only $8.3k. But that's before the ramp of new, exciting BEVs (battery electric vehicles)
that's coming over the next few years, just as Tesla is struggling to mass produce the Model 3.

There are two key points we plan to explore in more detail in this report:
1) Can Tesla break into mass-market manufacturing and does a higher degree of
automation help?

2) Are native/standalone platforms for electric vehicles discernibly better than fully
modular production across all powertrains?

1) Does Tesla's highly automated approach make sense?

We have questioned for some time now the resilience of Tesla's business model to mass
manufacture and believe the "blue pill" pillars may be starting to crack and question the faith
of the key ‘purple pillers’ (See Challenging the blue pill pillars of faith, 29 March 2018). Tesla’s
production missteps, combined with increased competition, make it harder for the Model 3 to
achieve the ‘iPhone moment’, in our view. We remain bearish on Tesla, as we believe investors
have not adequately appreciated the myriad risks involved in Tesla’s aggressive Model 3 ramp.

And don't rule out the traditional OEMs, who have been perfecting cost-effective, highly
automated processes over 100 years of manufacturing know-how from Lean
Manufacturing, to Just-in-Time and TPS (Toyota Production System), to modular toolkits and
now Smart Factories/Industrie 4.0, We think they know how to produce EVs that have been
designed to cost (DTC). A joint study between McKinsey and A2Mac1 (“Trends in electric
vehicle design”, October 2017) recently pointed out that second-generation EVs tend to
achieve far improved performance and component integration than their predecessors.

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Barclays | Global Autos & Auto Parts

"One machine can do the work of 50 ordinary men. No

machine can do the work of one extraordinary man." Elbert
Hubbard, philosopher (1856 – 1915)

Soft not hard automation

We believe that until machine learning is advanced enough to more fully replicate human
intelligence, the importance of the human touch is still necessary. We are currently in a
period of “soft” not “hard” automation within automotive manufacturing, but the advent of
“Smart Factories” or “Industrie 4.0” (a concept that originated in Germany) highlights that
incumbent OEMs are very much capable of embracing technological change when needed.
For a much fuller discussion on these topics, our Macro colleagues published a series of
impact studies last week – for a summary see Equity Gilt Study 2018, 10 April 2018 and for
more in-depth on AI, see Artificial Intelligence: A primer, 10 April 2018.

That is not to say that automotive employment isn’t changing drastically

MGI research recently concluded that 45% of activities that people are paid to perform
today could be automated in future. Toyota and the incumbent OEMs emphasise the
importance of people to ensure quality and “kaizen” in the manufacturing process, but this
does not mean that they are not all preparing for a more drastic shift in jobs as the advent
of electrification and Artificial Intelligence converge. On a recent roadshow with VW
management, the company confirmed that they are approaching automotive employment
in a flexible nature as the shift from ICE to electrification and connectivity/autonomy
coincides with less appetite from younger workers for blue-collar factor roles. This is
enabling VW to push forward with the Future Pact to reduce blue-collar headcount by 23k,
whilst also focusing on hiring an additional 9k workers in the field of IT and software
development. We think the incumbent OEMs are as aware of the need to actively reallocate
resources to face up to technology disruption as Tesla is of the need to retain talent.

2) Are native EV platforms always better than powertrain modularity?

Additionally, we question the perceived wisdom (see McKinsey 'Trends in electric-vehicle
design' October 2017) that only native/standalone EV platforms will succeed for
manufacturing a consumer-acceptable battery electric vehicle. We believe that native
platforms are definitely the ultimate process over the long term and, for those businesses
with scale over which to spread the additional expense (eg, VW), also make sense in the
nearer term, but for premium manufacturers the return doesn’t fit with the cost outlay.

We acknowledge that a native BEV (ie, vehicle developed on a standalone platform designed
just for BEVs) has the ability to optimise the battery packaging and position and achieve
optimal energy capacity. Native EVs also achieve a larger interior space (sometimes by as
much as 10%) for the same wheelbase. In theory this means native EVs can obtain best
range too. We therefore think it makes sense for a company with the scale of the VW Group
to pursue this strategy. It may be higher risk, given the greater costs associated, but given
the learnings of MQB (which stands for Modularer Querbaukasten, translating from German
to "Modular Transversal Toolkit"), we think it will prove a successful and cost-effective
solution. But we also note the nearer term premium cars (Audi E-tron and Porsche Mission
E), will be launched on a derivative of the existing MLB-platform i.e. a modular platform


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Barclays | Global Autos & Auto Parts

similar to BMW's strategy, rather than the new performance car standalone BEV platform
(PPE) which will come in the early 2020s.

Native electric vehicles may be the ultimate solution for interior space but non-native
vehicles can reach a high range at a more cost-effective price point
Vehicle range versus price



Sales Price1
(EUR) Non-native

30 Native



0 100 200 300 400 500 600

Range km

Source: Barclays Research, US Department of Energy

We think for premium OEMs, a modular strategy is more fitting shorter term as BEV
penetration ramps. We believe the advances in modularity made by premium OEMs such as
BMW are being underappreciated by the market for their ability to generate superior range
(the iX3 is expected to have >300 miles), but at a margin-protective fixed cost base. We also
believe that given the multiple approaches to EV powertrain and battery design (eg
cylindrical, pouch and prismatic) in the market currently, a company with a fully flexible
manufacturing approach, like BMW, provides itself with the best ability to adjust design if at
a later date the industry converges on an optimal technology solution. And even if no one
solution prevails, we believe BMW will be able to offer its customers a fully modular choice
of battery pack, vehicle styling and range. Given the advances already made on ICE (internal
combustion engine) vehicles with powertrains designed to cost (DTC), BMW will leverage
on these cost advantages via its modular approach, while peers pursuing standalone/native
platforms will have a much steeper learning curve to overcome.

17 April 2018 7
Barclays | Global Autos & Auto Parts

Design approaches to managing EV powertrain and battery thermal management still vary widely among OEMs, which is why
we believe keeping a flexible approach is key to manufacturing until a convergence on a single technology solution
Powertrain Battery

Charge DC-DC AC-DC Electric Liquid Resistive

Gearbox Cooling
Module converter inverter Motor Heating heating

While plugged in or
Nissan LEAF None
on battery

VW e-Golf None None

BMW i3 While plugged in

Tesla S 60 While plugged in

Active Passive
Water cooling Interconnections
cooling cooling
Source: Barclays Research, A2 Mac1, McKinsey Centre for Future Mobility

Other areas explored in today’s report include:

Incumbent OEM EV launches are set to threaten Tesla’s early lead
With BMW poised to launch its fifth-generation electric drivetrain and GM far advanced now
via the Chevy Bolt, we believe these vehicles will achieve considerably higher performance
and cost efficiency than peers that are only at first-generation.

We look at how different electric vehicle specs are converging with those of Tesla on range,
performance and, in our view, with much more ability to ramp to scale production smoothly
and in a cost-efficient manner.

German OEMs are underestimated for their advances in “Smart Factories”

Industrie 4.0 should not be overlooked, in our view. It is the German concept of ultimate
symbiosis of man and machine that sets the German engineering capabilities of the
incumbent automakers apart from their Silicon Valley peer. We believe this understanding is
hard to replicate quickly and also offers protection versus the ramp of new BEV offerings
coming out of China.

We challenge the market assumption that >100 years of automotive engineering know-how
needs to be thrown out the window with the advent of BEVs. We are not questioning Elon
Musk’s visionary prowess nor his advances in increasing consumer acceptance of
electrification, thus forcing automotive incumbents to face up to disruption, but we
highlight why we think the market is underestimating the German OEMs (and GM too).

We also challenge the view that the Chinese have as much opportunity to deliver on EVs as
their European counterparts. We agree that they have government support, and access to
cheap battery cell supply is in their favour, but we think this underestimates the importance
of the deep learning that the traditional OEMs have enjoyed in the field of efficient

17 April 2018 8
Barclays | Global Autos & Auto Parts

manufacturing and the importance now of “smart factories”. We believe the German OEMs
in particular are leading the way in this field.

TPS, Lean-manufacturing and kaizen have been perfected by traditional

automakers over many years...
We think Elon Musk knows how to make a great car, but BMW and GM (and not to rule out
the traditional Asian automakers too) know how to make great AND profitable BEVs at
scale. From the Toyota Production System (TPS), to VW’s MQB (modular platform), the
incumbents have been applying “kaizen” over many years of manufacturing processes to
produce “Just-in-Time” products at the highest quality levels.

We believe scale may aid incumbent OEMs versus Tesla...

We look at the global production footprints of traditional OEMs and their ability to spread
costs over a wider base, as well as the benefit of long-established supplier and dealer
relationships. The market may be more excited about potential break-up opportunities
amongst the German conglomerates, but we think currently the benefits of scale can have
its advantages for incumbents versus start-up disruptors.

...and traditional OEMs have deep pockets too

Finally, we explore the superior spending capabilities of traditional OEMs and the years of
R&D and capex know-how that has enabled them to build high quality vehicles.

In our view, OEMs have been refining exactly the right levels of modularity, flexibility (fixed
vs variable costs; automation vs human expertise), working capital requirements and
vertical integration, as well as long-standing supplier relationships. With EV launches
ramping in 2018/19 we believe the Porsche Mission E and BMW iX3 will be able to perform
very strongly versus Tesla’s product offering as well as leveraging the groups’ global
breadth. We think it would be unwise to underestimate the importance of mass market
BEVs like GM’s Bolt and the Hyundai Ioniq and their ability to steal some of the Model 3’s

And the investment isn't just into vehicle production but also consumer understanding. The
industry needs to persuade customers to want to buy BEVs as much as it has to work out
how to produce BEVs profitably. We believe the OEMs’ superior cash balances compared to
Tesla, as well as years of customer understanding via Captive Finance offerings, will help
persuade customers to buy OEMs’ BEVs en masse.

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Barclays | Global Autos & Auto Parts


Three phases of electrification – who is best placed?

Near term (2018-2019) – Funding Electrification

BMW (OW, Top Pick) VW (OW) Daimler (UW)
Renewal of entire SUV line-up, drives mix A flurry of new product launches Waning new product momentum at Mercedes

Mid term (2020-2021) – Ramping Up EV Production

BMW VW Daimler
Modular production limits costs, maximises Cost of dedicated BEV platform supported by
Dedicated BEV platform and associated cost
flexibility scale
Capex and R&D spending remain elevated
Capex and R&D expenditure begin to normalise Capex and R&D expenditure begin to normalise

Long term (2022+) – Winning the EV race

Ultimate winners/losers as yet unclear

Source: Barclays Research

VW and BMW have an improving SUV mix whilst Daimler has peaked
Models Models Models
35% 38% 34%
36% 32%
30% 34%
25% 30% 28%
28% 26%
22% 22%

10% 20% 20%

2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022
VW OEM average BMW OEM average DAI OEM average

Source: IHS, Barclays Research

17 April 2018 10
Barclays | Global Autos & Auto Parts

Tailwinds from volume/price/mix versus headwinds for technology transition for Mercedes and BMW




-566 -570
2018E 2019E 2020E

MBC tailwind from price/volume BMW tailwinds from price/volume

MBC headwinds from tech transition BMW headwinds from tech transition

Source: Barclays Research forecasts

BMW has made large advances as it moves from 1st to 5th gen electric drivetrain

Source: BMW company reports, Barclays research

BMW moves to Top Pick in EU Autos

We believe BMW has used the years since the i-brand launch to test the benefits of in-house
full vertical integration versus outsourcing of electric drivetrain components. We expect
more outsourcing on the iX3 and electric Mini of commoditised parts, which should keep
costs within a reasonable range. We think BMW’s advancements in electrification are
currently misunderstood by the market, which clearly favours the use of native BEV
platforms. But with a positive mix of product (including a strong SUV renewal) and also less
risk from residuals than the market currently credits, BMW is our favoured stock in the EU
Autos space and we select it as our Top Pick with a price target of €115 (previously €114).

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Barclays | Global Autos & Auto Parts

VW remains an OW stock with high optionality

We also like VW's approach to electrification - to leverage on its knowledge of modularity
via MQB to build a standalone/native modular EV platform called MEB. We don't think this
strategy works outside of the mass market, given the additional costs in terms of retooling,
etc, but with Dieselgate propelling VW along, we think its advanced outlook on EVs (electric
vehicles) will stand it in good stead to gain profitable market share with a highly flexible EV
product offering. With the appointment of Dr Herbert Diess as new group CEO and cultural
and structural changes ongoing, we still see strong optionality within VW’s valuation and
continue to rate the shares OW. Our price target increases from €195 to €212 as we raise
our 2018 and 2019 profitability forecasts for the VW and Audi brands to take greater
account of new product momentum and the potential for additional synergies under the
group’s new corporate structure.

DAI downgrade to UW and €73 PT for short-term earnings pressure at Mercedes

We believe the Daimler Group is very well placed on future mobility trends and will by no
means be shown up as a ‘dinosaur’ in the industry. However, it is as yet unclear exactly
where Mercedes' approach to electrification fits between its German peers. We suspect if
Mercedes pursues only native EVs, their margin dilution will be substantial. In today's note
we downgrade the DAI stock to UW, not because we don't think the Group will survive in a
world of electrification and autonomy, but because for the next few years we believe that
the step-up in spending relative to peers and lower mix improvements from new product
will leave Mercedes’ margins at greater risk. We apply a 15% discount to historical premium
auto multiples in our SotP analysis to take into account waning earnings momentum at
Mercedes and therefore reduce our price target from €82 to €73.

Tesla – Model 3 highly attractive, but we remain UW the stock on the

production ramp
Meanwhile for Tesla, we give credit for the leadership Tesla has displayed in accelerating
global EV uptake, and indeed we acknowledge that at this time the Model 3 is clearly the
most attractive EV option at its price point. However, we continue to remain bearish on
Tesla, with an UW rating and $210 price target, as we believe investors have not adequately
appreciated the myriad risks involved in Tesla’s aggressive ramp. Margins are likely to
remain compressed, while cash burn remains an issue. And while there may be some merit
to the simplicity of the Model 3 structure and to Tesla’s lead in battery cost, any such
advantages over legacy OEMs are likely more than offset by the legacy OEMs’ cost
advantages in scale and other efficiencies.

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Barclays | Global Autos & Auto Parts


Incumbent OEMs selling a wider range of EVs than Tesla
To date volumes from traditional car makers of BEVs (battery electric vehicles) have been
relatively low, with many preferring to focus on PHEVs (plug-in hybrid vehicles) until
infrastructure keeps up with consumer demand for product. But we see 2019 as the tipping
point to full battery electric cars when costs have come down sufficiently for manufacturers
to offer products at attractive price points and where the build out of charging
infrastructure (including the Ionity ultra-fast shared charging network funded by BMW, DAI,
Ford and VW which will see 400 stations with a capacity of up to 350kW across Europe by
2020) make the offerings more attractive to consumers, particularly as range extensions
occur. To date, there have been few BEV vehicles to truly threaten Tesla’s lead (other than
the largely unheard of EC-Series from BAIC, which is not only China’s top selling electric
vehicle but also delivered >100k NEVs or new energy vehicles globally in 2017).We see the
competitive landscape changing drastically as we go through 2018 and 2019.

We expect BEV penetration to ramp on an S-curve

We have been highlighting for many months, see Tesla's competition hots up as the ICE
melts, 12 July 2017 and Future Powertrain 2: Are OEMs disruptors?, 15 August 2016, that
we expect a sharp and steep S-curved ramp in BEV penetration, once battery costs come
down, regulations force OEMs to comply with tougher CO2 targets and infrastructure
builds. We have consistently viewed the hybrid period as an interim technology and argued
that car makers are assured of their ability to make money on BEVs once they can break
even on battery costs - we calculate this to be at $100/kWh, see below:

FIGURE 7 Battery cost / kWh

We estimate the tipping point to EVs is $75-100 kWh
Component $75 $100 $150 $200 $300 $350
Battery cost / kWh
Mid-size ICE vehicle $26,000 $26,000 $26,000 $26,000 $26,000 $26,000
Additional HEP cost $75
$1,600 $100
$1,600 $150
$1,600 $200
$1,600 $300
$1,600 $350
Mid-size ICE 48V
vehicle $1,100
$26,000 $1,100
$26,000 $1,100
$26,000 $1,100
$26,000 $1,100
$26,000 $1,100
Mid-size ICE
Additional vehicle
HEP cost with HEP & 48V $28,700
$1,600 $28,700
$1,600 $28,700
$1,600 $28,700
$1,600 $28,700
$1,600 $28,700
Additional 48V $1,100 $1,100 $1,100 $1,100 $1,100 $1,100
Engine / transmission
Mid-size ICE vehicle with HEP & 48V -$5,500
$28,700 -$5,500
$28,700 -$5,500
$28,700 -$5,500
$28,700 -$5,500
$28,700 -$5,500
Engine / power electronics
transmission $3,250
-$5,500 $3,250
-$5,500 $3,250
-$5,500 $3,250
-$5,500 $3,250
-$5,500 $3,250
35 kWh battery (c.180-250km range)
plus $2,625 $3,500 $5,250 $7,000 $10,500 $12,250
Total drivetrain / power electronics
Electric $26,375
$3,250 $27,250
$3,250 $29,000
$3,250 $30,750
$3,250 $34,250
$3,250 $36,000
50 kWh battery (c.180-250km
(c.240-290km range) $2,625
$3,750 $3,500
$5,000 $5,250
$7,500 $7,000
$10,000 $10,500
$15,000 $12,250
Total $26,375
$27,500 $27,250
$28,750 $29,000
$31,250 $30,750
$33,750 $34,250
$38,750 $36,000
50 kWh
Source: battery
ICCT, (c.240-290km
University range)
California Berkeley, UC Davis, Barclays $3,750
Research $5,000 $7,500 $10,000 $15,000 $17,500
Total $27,500 $28,750 $31,250 $33,750 $38,750 $41,250
But car makers are largely in the camp that while hybrids (ranging from 48v mild hybrids to
plug-in full hybrids) are a helpful interim technology to gain consumer trust in range and
understanding of electric vehicles capabilities, as well as a helpful aid to achieve 2020/1
emissions targets in the face of decline diesel decline, they can never be produced
profitably. We therefore assume a much steeper and sustainable ramp for BEVs than for
hybrid vehicles (see Appendix 3 for our detailed powertrain forecasts by region).

We are not alone in assuming that battery costs can come down significantly – it is outside the
scope of this report to focus on battery technologies, but we highlight two charts from P3, a

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third party engineering and technology consultancy to the Automotive industry, highlighting
their view of the economic case for BEVs vs ICEs (internal combustion engine vehicles):

Battery costs are coming down and chemistry improvements evolving
EUO / kWh
180 Between 2020 and 2021 ~100 EUR/kWh
on battery cell level will be reached





2014 2016 2018 2020 2022 2024
NMC111 NMC622 NMC811
Source: PS3, Barclays Research. Note: NMC is Lithium Nickel Manganese Cobalt Oxide (the numbers represent ratios)

On a TCO basis, BEVs are quickly reaching parity with ICE competitors
New business models & approaches in emobility

Jaguar I-PACE S / Audi E-

Model: BMW X4 xDrive35i Tesla Model X
List Price: €61,250 €75,000 €91,250
Consumption: 8.3 l kWh/100km 18.0 kWh/100km 20,8 kWh/100km
Power: 225 kW 294 kW 245 kW
Battery: - 90kWh 75kWh
Range: - 500km 417km
Monthly costs (€/month)
Vehicle 875 987 1,003
Taxes / insurance 122 125 150
Consumption 164 78 84
Service 96 46 137
Total cost of ownership 1,257 1,236 1,374
Cost/km 1.01 €/km 0.99 €/km 1.10 €/km
Source: PS3, Barclays Research

Tesla takes the sales crown in the US

In the US, Tesla has clearly outsold all other brands for BEVs (battery electric vehicles) in
2017 and YTD 18 with the Model S, X and now 3. But the GM Bolt is hot on its heels and we
think the market will look very different as we go beyond 2018 and into 2019. Not only is
the Bolt a significant competitor to the Model 3 but Hyundai’s Kona SUV also looks to be a
realistic threat to Tesla’s attempt to break into mass market EV manufacture. And that’s
before the premium OEMs start to launch their offerings.

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Tesla leading the charge in US BEV sales by model in 2017 Renault still leader for BEV sales in Europe in 2017
35,000 35,000
30,000 30,000
25,000 25,000

20,000 20,000

15,000 15,000

Source: IHS, LMC and Clean Technica Source: IHS, LMC and Clean Technica

In Europe Renault-Nissan is currently the leading BEV manufacturer

And the US isn’t the key market for EVs, as we expect penetration rates to explode fastest in
China and then Europe, driven by government regulations and incentives. In Europe, the
Renault Zoe remains the top selling car, followed by BMW’s i3. The Renault-Nissan group
was early to the game on EVs with the Renault Zoe launched in Dec 2012 and ranked
among world’s top sell electric cars 2015 and 2016. However, the jury is out on the success
of the push into electric and whether the group was too early, and struggled to sell enough
vehicles to reach profitability. The revolutionary concept of allowing consumers to lease the
battery in the vehicle, helped to get around residual value fears but range anxiety and cost
issues restrained sales.

Equally, the i3, which we will argue later in the report was revolutionary in its production
ethos and set BMW as one of the earlier manufacturers to build a deep understanding of
standalone electric architectures, has also suffered a mixed reception – with consumer
worries more focused on the styling of the vehicle. However, in 2017, the i3 continued to
surpass Tesla’s Model S in European sales volumes.

China is a much more competitive but fast-growing EV market

Of course, with restrictions increasing in China for the sale of combustion engines (for
further detail see pg 6f of European Integrated Oil & Refining: Postcard from China, 19 Jan
2018), European and US automakers are readying themselves for a speedy uptake of BEVs .
We forecast BEV growth in China of 52% 2015-2020E. VW plans to deliver 400k NEVs by
2020 and 1.5mn by 2025 and GM 150k NEVs by 2020 and 500k by 2025. BYD is targeting
200k by 2018 (see Appendix 1 & 3). But it is a hugely fragmented market with multiple
domestic players already making inroads into the BEV market, as can be seen from Figure
10 below. Currently 93% of EV sales belong to domestic brands, although we expect this to
change in the coming years as European and US implants seek to compete in this lucrative
market. While we will not focus on China in detail in today’s note or the competitive offering
from the Chinese manufacturers, who are largely starting from a blank slate on BEVs, it is
worth noting that there are numerous Chinese EV start-ups unveiling concept cars (we saw
the Byton offering at CES in Jan, as well as XPeng’s G3). So we mustn’t forget that the
Chinese may well lead the global push in EV penetration, given the substantial government
support and also access to inexpensive Chinese-sourced battery cells.

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The Chinese BEV market is much more diverse and currently dominated by domestic players


Source: IHS, LMC and Clean Technica

Globally a Chinese manufacturer takes the lead on BEVs

In 2017, BAIC’s EC-Series BEV product took the global sales lead with >100k vehicles, and
Tesla’s Model S came in second place. And it was also a Chinese manufacturer (this time
BYD) which took the global lead on EVs (ie, including plug-in hybrids). But we think the
landscape will change dramatically over the next 2 years. Until now, we believe European
premium manufacturers have been holding back their firepower on BEVs as they refine their
manufacturing capabilities and wait for the optimum moment when consumer acceptance
starts to coincide with regulatory demands.

Consolidated US, European and Chinese BEV sales 2017

Source: IHS, LMC and Clean Technica

Global OEMs have aggressive plans for electrification, even if Tesla has been
earliest to the game
In Appendix 1 at the back of this report, we highlight the aggressive electrification plans of
numerous global manufacturers, all looking to take on Tesla’s lead on electric. Are the
German OEMs going to be too late to the PR war (if Renault’s experience in Europe is

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anything to go by, you can definitely be too early to a new concept too). We think the
brand engineering that Tesla has built can be surprisingly quickly eroded, especially when
the impressive stats of the upcoming premium models are reviewed. Much has been written
about Tesla’s lead on battery technology, providing a superior range to competitors, but in
today’s note we focus more on the less-discussed lead that we expect to come from
European production efficiencies. But first, let’s take a look at some of the upcoming,
supposed “Tesla-killer” models:

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What BEV products are hitting the market imminently?
As we have noted previously, the competition is heating up for TSLA and we see that
competition is accelerating in the coming years (see: “Tesla competition hots up as the ICE
melts,” 7/12/17). Importantly, we are now seeing some of the concept cars of the past
coming to showrooms. While we concede that the Model 3 doesn’t face competition yet in
the ~$50k fully loaded segment (which we note is smaller than the $35k segment),
competitors are coming in both at the Model S/X ~$80-100k price point, and also at the
more affordable EV price point. Just in the US and Europe (never mind the profusion of
Chinese EVs) key scheduled launches include:

Upper end

 Jaguar iPace (on sale 2Q18 in Europe, 3Q18 in US)

 Audi eTron (on sale 2H18 in Europe then US)

 Porsche Mission E (2Q19)

 Mercedes EQC (late 2019)

 BMW iX3 (early 2020)

Middle/lower end

 Chevy Bolt (on sale now)

 Nissan Leaf (on sale now)

 Hyundai IONQ EV (2018)

 Hyundai Kona EV SUV (summer 2018 in Europe, 4Q18 in US)

 GM Buick variant of Bolt

 VW ID Neo (2020)

While there’s not enough room in this report to focus on all the exciting new pure electric
products, we go into a little more depth on a few of the launches which we think will be
critical to Tesla’s competitive landscape:

Jaguar’s i-PACE
The launch of Jaguar’s first all-electric offering this month, the I-Pace, is a product pitched
as a direct competitor to the Tesla Model X, given its SUV styling. Its credentials look very
attractive, with 0-60mph in 4.5 seconds, a range of around 500km and an approximate
price point of €75-80k, ie, cheaper than an entry range Model X. Two electric motors are
powered by a 90kwH lithium ion battery and it takes 2hours for a full charge or 45 minutes
for 80% using super fast charge. Like the Porsche BEV, it uses the more expensive (but
better performance) PSM motor and can reach 400PS and 696 Nm of torque. The first
vehicles are due to be delivered this summer. Like Tesla, Jaguar is utilising the idea of OTA
(over the air) updates to ensure the latest technology, 3 screens and ensuring best
customer experience, with live charging updates to deal with range-anxiety. The company
have given no detail on their volume targets but early reviews have been very favourable.

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Jaguar I-Pace – the first battery electric SUV launched to appeal to similar customers to Tesla’s Model X

Source: Jaguar website

Audi’s e-tron
Audi will supply the next big EV release in August of this year. We are looking forward to the
hotly-anticipated launch event of the Audi e-tron in Brussels over the summer, but from the
specifications already in the market, it looks to compete with Tesla on both range and
performance. The e-tron CUV will be built using the MLB-Evo architecture, a derivative of
VW’s MLB for longitudinally mounted combustion engines. However, to save costs in future
years, Audi and Porsche are looking at a shared architecture for electric cars, called PPE
(Premium Platform Electromobility) from c2022, and will be used for higher utility vehicles
than the Mission E. Stefan Weckbach, Porsche’s head of BEVs, said he plans to take the best
modules from both the J1 and MLB-Evo platforms for the PPE development, which began 18
months ago (for a deeper discussion on VW’s platforms plans, see the following section of
this report). But with 0-60mph in 4.5 seconds and a range of >310 miles and a 95 kWh
battery, we expect the car to be a strong performer. Range-anxiety will also be aided by
fast-charge capabilities within 30 mins.

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Audi e-tron – the VW group’s first electric SUV and launched using the MLB-evo architecture

Source: Audi website

Porsche “Mission E”
One of the most exciting new BEV launches, we think, will be Porsche’s offering from next
May (the concept is named Mission E). It will be a sport sedan which will seat 5 people, with
an 800 volt battery, a range of c300 miles/500km (under NEDC so more like >250 miles
under WLTP) and 0-60 mph in 3.5 secs. It will be capable of “Turbo Charging”, ie charging
to 80% in 15 mins from ultra-fast DC at 350kW and 800 volt. All Ionity chargers will support
800 volt as will Electrify America, the VW built EV charging network in the US.

The Mission E will be produced at Zuffenhausen from 2019 with factory capacity of
c20k/annum, although with some flexibility to flex higher if necessary. We will discuss
platform strategies in the later section of this report, but while the parent group VW is
focused on modularity, Porsche is aiming to retain its exclusivity via a standalone
architecture for the Mission E, called J1. The Mission E Cross Turismo BEV crossover
concept unveiled at Geneva this year will be based on the same platform.

Porsche Mission E – will be the first electric 5- door sports-car product to fully compete against Tesla’s Model S

Source: Porsche website

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What is different about the Porsche BEV versus competitor products is that it will utilise a
Permanent Magnet Synchronous Motor (PSM) versus Asynchronous Motors (ASM) used by
other vehicles. We believe this will be a key differentiating factor versus Tesla’s Model S, as it
will enable the car to maintain high speeds for a sustained period of time, eg on the German
autobahn. ASM has high peak performance but lower continuous performance.

From recent discussions with Porsche AG executives, it seems that Porsche management
are comfortable that the lower complexity of BEVs will ultimately bring opportunities in
terms of profitability (definitely in comparison to PHEVs, which require a much more
complicated design due to the need for both a battery and combustion engine). We imagine
BEVs will still come in below the profitability of ICE (internal combustion engine) for now,
but management assure us that they can be profitable at 20k/annum. The project budget
for the Mission E was c€700mn but employees shouldered some of the burden for this cost
via paycuts, which they will hope to recoup at a later date.

And don’t forget that Porsche also sells PHEVs, with the company to offer two variants in
future including the high-performance “Turbo S E-Hybrid”. In fact, almost 60% of Panamera
sedans Porsche now sells in Europe are the plug-in E-Hybrid version. And in addition, in the
U.S. 20% of its Cayenne SUV sales are the E-Hybrid, and that's before the new generation of
Cayenne E-Hybrid goes on sale. We believe this breadth of offering, along with the highly
successful and profitable combustion engine vehicles, should enable the Porsche brand to
compete head on with Tesla.

Wait until late 2019/20 for Mercedes and BMW’s new BEV launches
Consumers have to wait for late 2019/early 2020 for the competitive offerings from
Mercedes and BMW. Both companies will launch new BEV products pitched against the
Model X given their SUV body styles.

Mercedes’ EQC is the first in the EQ range

So far Daimler’s pure electric vehicle sales have been limited to the electric Smart (ForTwo
and ForFour) first produced in 2009 and the electric Mercedes B Class launched in 2013.
Daimler has sold a total of 28k electric smarts and just under 14k electric B class to date.
Production of the electric B class was halted in Q3 2017 on the back of soft demand levels.
We note the B Class Electric Drive’s electric powertrain was co developed and sourced from
Tesla, which is in direct contrast to BMW’s i-brand capabilities, which ensured total in-
house competency and sourcing.

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Mercedes EQC is the first of the EQ family products for Mercedes and shows the consumer preference for SUV styling

Source: Mercedes website

In November 2016, Mercedes-Benz announced a more serious EV effort. Under Daimler’s

€10bn “emission free driving plan” the company will launch more than 10 pure electric
vehicles by 2022, with BEVs contributing 15-25% of total volumes sold by 2025. As a first
step Daimler will bring the EQC SUV to market in 2019, with two further variants to follow
soon thereafter. The vehicle is expected to have a range of roughly 500km and can
accelerate to 100km/h in under 5 seconds. We understand the battery pack with a capacity
of over 70kWh is supplied by Deutsche Accumotive with cells from Korean manufacturer SK
Innovation. Daimler intends to manufacture electric vehicles in 6 global locations across
Europe (Bremen, Rastatt, Sindelfingen), China and the US (Tuscaloosa). We expect the
product, like BMW’s iX3 to offer a range of different energy storage options and price levels,
to ensure maximum customer appeal. However, consumers must wait another year to get
their hands on the product.

We also argue later in the report that we believe Mercedes are behind their Munich-peer in
terms of in-house capabilities on electric and therefore have a steeper ramp up in spending
over the coming years. Whilst BMW is preparing to launch the fifth-generation electric
drivetrain, Mercedes’ EQ brand is still very much in its infancy. We think Mercedes’ recent
delivery on product styling should enable a very successful reception for the EQ family at
launch, but we believe the phasing of spending will hold back Mercedes’ margins for the
next two years and restrain share performance – hence today’s downgrade to UW.

BMW came early to the EV game with i-brand/i-NEXT

In Feb 2011, BMW launched the sub-brand i-brand, as a follow on from Efficient Dynamics.
BMW were very early to the electric offerings with the fully electric i3 launched in 2013 and
also the sportier plug-in-hybrid i8 in the same year. What we think the market often forgets
about the ibrand is that it was not only about these two cars but focused on wholly
renewable sourcing, even down to using responsibly sourced wool and leather and
eucalyptus wood from sustainably managed forests. And the use of Carbon Fibre
Reinforced Plastics (CFRP) in the vehicles, as well as light-weight aluminium, helped
maintain the vehicles lighter footprint. The i3 had many critics on its styling but it still won
two World Car of the Year Awards: World Green Car of the Year and also World Car Design
of the Year. The i3 was also given an iF Product Design Gold Award. And at the 2017 New
York International Auto Show the newly launched 94Ah version of the i3 was named "World

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Urban Car of the Year". BMW were also the first to offer the concept of fully flexible leasing
packages on the i3 to overcome early adopters “range-anxiety” on BEVs (eg providing an i3
customer with an X5 for longer journeys for a specified number of days of the year).

After the iX3, BMW returns to the sedan shape for the BMW But the new electric Mini will keep more traditional styling
iVision –

Source: BMW presentation Source: BMW presentation

Currently BMW offers nine electrified models and management have stated their aim to
launch 25 new electrified models, including 12 BEV models by 2025. In addition to the
existing i3 and i8, other future models include the ix3 coming in 2020, iNEXT crossover, and
an i4 sedan (previously called the i Vision Dynamics), which are due in 2021. BMW recently
patented a list of nine names spanning from iX1 to iX9 in addition to the i1 to i9 names
patented back in 2010. We believe the company has plans to fully electrify its fleet, but with
minimal disruption to profitability by ensuring complete flexibility across powertrains (as we
discuss in the following sections of the report). We believe the benefits of being about to
launch the fifth generation of eDrive will provide BMW with superior electric technological
know-how than competitors.

Mini BEV coming in 2019

An all-electric version of BMW’s Mini is due in 2019 and will draw heavily on the electric
drivetrain of the i3. Indeed the original Mini E concept from 2009 went on to spawn the i3
project. The new BEV Mini will be built in Oxford, although the batteries and electric motors
required for the new Mini will be built in BMW’s Dingolfing and Landshut plants in Bavaria.
Interestingly, BMW management have said that the existing Mini factory at Cowley will
require minimal alterations before production of the new EV could begin – we think largely
because of the modularity of the electric concept across the BMW group. It is possible the
new BMW will use an aluminium and carbon-fibre mix to keep down weight and increase
the car’s range and efficiency, with the concept vehicle capable of 190 miles.

BMW has also signed a letter of intent with Great Wall to develop and produce the electric
Mini in China. We understand the drivetrain and the battery technology will be sourced
locally, but the launch date and exact production location are yet to be announced.

iX3 due in early 2020

In early 2020, BMW will offer the iX3 to rival Mercedes’ EQC. Little is known as yet of the
iX3’s spec but it is expected to have a range of >300 miles. It’s the first of BMW’s electric
cars that uses its normal range of cars as a base, unlike the i3 and i8 and will come in two
forms: a plug-in hybrid version and the fully electric model as part of BMW's fifth-generation
EV platform (which will be used in 11 further electric BMWs due to arrive by 2025). The iX3
will have twin electric motors (one at the front and one on the rear axle) to maximise torque

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and traction. We expect this product to be based on the fifth generation eDrive and to be a
very credible BEV product, appealing to SUV-orientated consumers.

VW has aggressive electric plans post-Dieselgate

The VW Group’s push into electrification may have been spurred into action by Dieselgate,
but we believe that this was one of the few positive outcomes of the affair and could now
position VW at the forefront of electrification. We explain in the following section how VW
are taking a different approach to electrical manufacturing than BMW (with a bottom-up
approach to building a stand-alone electric platform called the MEB). We can see why such
a strategy makes sense for a mass market, global automaker that can build enough scale on
its electric platform. And VW clearly has one of the most aggressive approaches to electric
penetration with a stated aim of having 20-25% of its sales comprised of BEVs by 2025 and
offering 80 electrified products by the same year, of which 50 will be BEVs. The group is also
investing €70bn by 2030 to bring electrification across its entire range of 300 models.

VW’s ID Range
After VW’s e-Golf and e-UP! City car, VW will launch its I.D. range of BEVs beginning with
the A-segment sized ID Neo in 2019, the first VW-badged MEB model. The ID Neo will be
followed by the ID Crozz, a small CUV that also will be sold in the U.S. beginning in 2020.
Next is a battery-electric sedan (likely around 2021), followed by a CUV one size bigger than
the Crozz. The I.D. Buzz, a modern interpretation of the VW Bus/Campervan, is due in 2022,
followed by additional derivatives and yet another MPV/CUV prior to 2025. Commercial
vehicles based on the MEB platform may also be on the cards. All the cars will have >250
mile range. The final car in the group was launched at this year’s Geneva Motorshow, the
I.D. Vizzion, and will come by 2022 with >400 miles of range and 111kWh battery, which is
greater than Tesla’s current offering.

VW ID Crossover concept showcases the popularity of mini SUVs, or CUVs (crossover utility vehicles)

Source: VW website

The ID Neo, is claimed to boast a range of 249-373 miles, easily eclipsing the 186-mile
range of the face-lifted version of the e-Golf. And it will have its electric motor at the rear,
freeing up space within the front section of the ID, which means that VW can exploit the
packaging advantages inherent in pure electric drivetrains to provide a roomy four-seat
interior offering accommodation similar to today’s larger Passat. VW describes the battery
used by the ID as being scalable and hints at differing capacities in each of its upcoming
electric models in much the same way that it offers differing power outputs in today’s

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combustion engine models – ie, a fully flexible offering due to its modular manufacturing
concept (more on this later). Little is being said about the charging system for the ID,
although VW management claim that its battery can be recharged to 80% within 30
minutes, so it is likely to be enabled for an 800V system similar to that employed by Porsche
on the Mission E.

And VW believes battery costs will become competitive

Earlier in March, VW held its annual analyst day and revealed that via its contract with
battery suppliers, it expects to get to battery cell costs below €100 per kWh by 2020 (or
~$120/kWh), and to continue to reduce costs beyond that. This is similar to GM’s guidance,
which based on its contracts with supplier LG assumes $100/kWh on a cell basis by 2022.
Assuming pack costs add another ~40%, it could imply $140/kWh for GM and VW in 2022
– well within the range of Tesla’s goal of $100/kWh.

Or put another way, on a 50kWh battery system, the legacy OEMs would be at a
$2,000/vehicle cost disadvantage. But with ~$15,000 of materials and assembly costs in
the rest of the car, a 10% scale advantage for the legacy players could close all but $500
of the cost gap.

Chevy Bolt – another step of GM’s aggressive push into electrification

The Chevy Bolt marks GM’s increasingly aggressive push into the arena of electrification.

We acknowledge that at a starting price of ~$36k (pre EV tax credits), the Bolt is a fairly less
compelling offering than the Tesla Model 3, which offers much more of a luxury appeal, and
which will comp more to a vehicle like the BMW 3-Series. Rather, the Bolt, while offering a
nice option package, will still comp against other mass-market offerings.

That said, we believe the introduction of the Bolt marked a very crucial step for GM’s push
into electrification. In particular, GM will be able to leverage the Bolt as it expands in
electrification. GM is expanding its current EV platform with two new crossover entries in
2020. And perhaps more importantly, the learnings of the Bolt can be leveraged as GM
launches an all-new modular EV platform in 2021, which will encompass multiple brands
and segments. The platform will support vehicles in the US and China, and will have a
structurally integrated new battery system – benefiting from the ability to manufacture
batteries at scale, while modular cell assemblies enable flexibility.

Moreover, while the Bolt currently sells at a loss (we’ve heard estimates up to $9k
loss/vehicle), the Bolt is a crucial step toward making GM’s EVs profitable. GM is targeting a
30% cost reduction per unit, driven by lower battery costs (cell cost to decline to sub-
$100/kwhr vs. the current level of $145/kwhr), as well scale and manufacturing
improvement. And with its EVs to ultimately be priced comparably to current ICE prices, it
likely implies that GM expects its EV powertrain cost to be at parity or better by the time the
new platform emerges.

Finally, beyond serving as GM’s first legitimate purely electric offering, the Bolt is also
significant, as it is at the center of GM’s autonomous ridesharing platform, which GM
highlights offers simpler integration of technologies, while also is optimal for urban

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Latest generation of GM’s autonomous Chevy Bolt, highlights GM’s advances in
autonomy as well as electrification

Source:, used with permission

Hyundai’s Kona Electric SUV, another Model 3 competitor

Hyundai’s all-electric Kona coming later this summer is another SUV-based electric car and
will likely be pitched at a similar price point to the Chevy Bolt. It will be front wheel drive.
There’s a short-range edition with a 39.2kWh battery that can travel up to 186 miles on a
single charge. The longer long-range 64kWh version can manage 292 miles on one charge.

The list of upcoming BEVs could go on, but suffice it to say there’s lots of competition
coming in the battery electric vehicle market and much of the competition comes from
global auto manufacturers that know how to make cars efficiently and at scale.

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Comparison of upcoming BEV product offerings
Nissan Hyundai VW Renault BMW GM Tesla BAIC Tesla Jaguar BMW Mercedes Audi Porsche Tesla

EC180 Model X Model S

Principal model Leaf 2 IONIQ EV ID Neo Zoe i3 94A Bolt Model 3 I-PACE iX3 EQC e-tron Mission E
EV 100D 100D
Small Small Mid-sized Small
Body style Small car compact compact Small hatch SUV SUV SUV SUV SUV Sports Sports
hatch hatch sedan hatch
Release date 2018 2018 early 2020 Sep-16 Jul-16 Dec-16 Jul-17 Dec-16 2015 Mar-18 Late 2019 Aug-18 May-19 Jun-12
5.1 secs / 5.6
0-60 mph 7.4 secs 8.5 secs >8 secs 8.2 sec 6.4 secs 6.3 secs sec (ex range NA 4.7 secs 4.5 secs 5 secs >5 secs 4.5 secs 3.5 secs 4.1 secs
/ std)
LG Chem
LG Chem, Samsung
LG Panasonic / CATL + SK (specifically
Battery partner Nissan LG Chem Samsung, LG Chem Samsung Panasonic LG Chem SDI and Panasonic
Chem Insourced Samsung Innovation Mission E
Prismatic, or Pouch Pouch Pouch Prismatic Pouch Cylindrical Cylindrical Pouch Prismatic Cylindrical Prismatic Prismatic Cylindrical
114 (180 220/310
Range (miles) 150 125 200-300 250 range- 238 (standard / 125 295 310 >300 >250 >310 300 335
extended) long-range)
9.5 26 hours. 9hr45
16 hours 60 hours on 10 hours, 9hr45, 30 45 hours on
30 hours, hours, Supercharge hours, 15
(60% in slow charge. 45 mins mins to slow charge.
Full recharge 80% in 30 16.5- 1hr to can do 60% mins to
30 mins 4 hours 8.5hr 7 hours Supercharge to 80% tbc tbc 70% via Supercharge
time* mins using 30.5h 67% via in 30 mins for 80% via
via fast- can do 80% via fast fast- can do 80% in
fast-charging fast standard "turbo-
charging) in 40 mins charging charge 40 mins
charging battery charging"
100 kWh 100 kWh
(options also range of range of (options also
Energy storage 40 kWh 28kWh 90 kWh 41 kWh 33kWh 60kWh 50/75 kWh 21kWh 90kWh 95kWh 90 kWh
exist for 75 options options exist for 75
kWh) kWh)
Weight (Kg) 1475 1358-1438 NA 1468 1343 1,746 1610/1730 1085 2,459 2133 2199 2199 2,148
Estimated battery $220/kW Not Not $190/kW Not Not Not Not Not
$300/kWh $300kWh < $190/kWh < $190/kWh < $190/kWh
cost h disclosed*** disclosed h disclosed disclosed disclosed disclosed disclosed
Vehicle price (ex- to well-spec'd >23,600*
25,000 c28k c36k c30k c28k c20k c78k >70k c70k >45k >70k >80k c80k
Grant) in € diesel Golf *
Source: Company data, Barclays Research *2.3kW (10A, 230V) domestic ** battery leased *** VW targeted <$100kWH for cell cost by 2020

17 April 2018 27
Barclays | Global Autos & Auto Parts

There is a proliferation of BEV launches coming from traditional automakers over the next two years

Production Range
OEM Brand Model Type SOP Comment
region (mi)

2017 Launches
On sale in US winter 2017, Europe as Opel
GM Chevrolet Bolt Car Sep-16 North America 238
EV version of Golf, 125m range, US and
Volkswagen Volkswagen Golf Car Apr-17 Europe 125
Hyundai Hyundai KONA SUV Jun-17 Japan/Korea On sale in Europe and NA in 2018 210
In slow ramp in NA, Europe sales later in
Tesla Tesla Model 3 Car Jul-17 North America 310
Europe & NA & On sale in Europe and NA in January 2018;
Renault/Nissan Nissan Leaf Car Dec-17 151
Asia 151m range
2018 Launches
Tata Jaguar I-PACE SUV Feb-18 Europe On sale in Europe spring and NA summer 298
e.GO e.GO Life Car Apr-18 Europe Expected pricing ~$16k, 130km range 78
Chery Chery Tiggo2 SUV Sep-18 Europe Electric variant of Chinese SUV -
McLaren McLaren Ultimate Series SPORT Sep-18 Europe Pure electric hypercar likely >€1mn ??? -
Dimensions like Q5, 300m range, on sale
Volkswagen Audi e-tron quattro SUV Aug-18 Europe 275
in fall
Hyundai Kia Soul SUV Oct-18 Japan/Korea Redesigned for 2018 with 111m range 111
2019 Launches
Hyundai Kia Telluride SUV Jan-19 North America EV version of three-row SUV -
PSA Peugeot 208 Car Feb-19 Europe EV variant of 208 Car, 50kWh bat ~250
PSA Peugeot DS3 Crossback SUV Apr-19 Europe EV variant of new small SUV 280
0-60 in 3.5s; capable of long-range at
Volkswagen Porsche Mission E Car May-19 Europe >310
high speed
Daimler Mercedes-Benz EQC SUV Jun-19 Europe 0-60 in <5s; ~300
General Motors Buick B-CUV EV SUV Oct-19 North America Bolt based Buick crossover ~230
Based on Vizzion concept, 413m NEDC
Volkswagen Volkswagen ID Car Nov-19 Europe ~350
Urban EV concept, targets 2019 Europe
Honda Honda B-Hatch EV Car Nov-19 Japan/Korea 155
May be more like 2020 or 2021, no
Tesla Tesla Model Y SUV Nov-19 North America ~300
factory yet
Small SUV EV, for US, Europe and Asia by
Ford Ford B-CUV SUV Dec-19 North America ~300
Concept introduced at Shangahi show in
Volkswagen Audi e-tron Sportback Car Dec-19 Europe 275
BMW Mini Mini E Car Dec-19 Europe Urban EV concept >190
Expected spring 2019 as an "indulgent,
Tata Jaguar XJ replacement Car May-19 Europe 300
super-luxury" car
Geely Volvo XC40 SUV Dec-19 Europe Based on 40.2 concept 310
BMW BMW iX3 SUV Europe All electric version of popular SUV 300
During Nothing confirmed for 18/19 but 8 by
Renault Renault TBC TBC Europe
2022 2022
Source: Barclays research, company data, Autocar, Electrek, Autoexpress, carwow
Note: ranged stepped down from NEDC to EPA

17 April 2018 28
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In our experience most German management teams are extremely hesitant to promise
anything they might possibly not be able to deliver. The cautious approach to target-
setting we tend to see from the management teams at VW, Daimler and BMW when it
comes to volumes, profitability and cash flow is likely more than frustrating for bullish
investors. Yet on the flip side, this modest attitude when it comes to forecasting and the
typically quiet confidence in communication also makes us feel comfortable that the EV
targets set by the German OEMs over recent months will in all likelihood be met. We
believe these management teams know how they are going to deliver on their volume
guidance, they know how many cars they can produce and sell and they know how
much they will cost. For example, BMW management announced they’d sell 100k
electrified units in 2017, and they did just that (in fact the company ended up selling
slightly more at 103k). Their approach stands in stark contrast to Elon Musk’s track
record of broken promises.

Tesla may have won many devotees on its vehicle design and tech features, but it has
become clear that Tesla’s execution on mechanical issues is far from legacy auto
industry standards — slow production ramps with quality issues, especially in the early
days of each model. And the Model 3 has been no exception – in February, 2017 Tesla
forecast that it would achieve an exit rate of 5000/week for the model 3 in 4Q17, a
forecast Elon Musk repeated in a tweet in July 2017. In reality, production ended 1Q18 at
a rate of ~2000/7-day week, a pace that appeared to continue into April.

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Model 3 production forecasts

Source: Company reports, @elonmusk on Twitter

Incumbent OE Production is based on >100 years of

expertise. Tesla aims to throw out the rule book
Tesla CEO Elon Musk bounded into the auto industry and challenged it with a bold vision of
accelerating the pace of production through automation. A clean slate may have aided his
vision for vehicle design but we fear it may present an obstacle, rather than an opportunity,
to ensuring quality, reliability and efficiency in mass production. Tesla suggests that by
throwing out the rule-book, starting with a blank page for engineering and by increasing the
levels of vertical integration and automation, the company can attain a level of production
efficiency that the rest of the industry can only dream of.

And yet the Model 3 production ramp is still not going to plan and we keep coming back to
our conference call questioning of Mr Musk and his leadership team on the differences
between the Toyota Production System and what Tesla is trying to do in the Gigafactory
and the M3 line in Fremont. From their answers, and from subsequent discussions with
Tesla IR, it appears that they are seeking to get to a nearly ‘lights out’ factory. That is,
assembly lines with little human labour beyond some workers monitoring computer
displays of production flows. As Mr. Musk said:

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Yes. Imagine like if the Model S was -- or the way you design a Model S, design your
factory like it's a car. You still have a lot of workers. You still have a lot of people. I
mean, just like with Model S, say, we have a large service organization. There's
scheduled maintenance. There are things that break. There are crashes that need to be
repaired. There are technology upgrades. But you don't actually ship people with the
Model S. That would be weird. That's not like hanging people in the car. So you have --
we expect that the Tesla factory has people -- a lot of people around the factory but
very few people in it. (Source: Tesla 4Q17 call)

The details around involving humans in the process by building a front line culture of quality
cannot be ignored, in our view. But as even Tesla executive Doug Field (ex Apple) noted,
even if this were possible for an iPad – which is still highly manual production at Foxconn –
a vehicle is far more complex.

Yes, the model at Foxconn was very different where very quick product ramps and
very high scale was achieved through manual processing of also what is
fundamentally a product whose simplicity is orders of magnitude below ours. And
iPad is less complicated than our centre screen in many ways. So it's a very
different order of magnitude in terms of the kind of product you're building, and it's
extremely manual because that is the way that you have to ramp very quickly and
then end the life of our product and bring up a new one.

(Source: Tesla 4Q17 call)

The question at this point, in our view, is whether Tesla went for too much automation, and
is having difficulty – not just at the Gigafactory, where they acknowledge production
equipment was not operating well and the assembly line had to be redesigned – but at
Fremont as well. This is what has led to Mr Musk’s description of “production hell”. And
what was his solution out of the hell? Bringing in German automation companies offering
“plug-and play” systems.

Mr Musk further explained: “The most fundamental difference is thinking about the factory
really as a product, as a quite vertically integrated product.” He envisions the most
automated vehicle plants in the world, where material delivery, manufacture, and assembly
will be done without human intervention, and where his production lines will be far faster
than the conventional manual assembly lines that he mocks: “Grandma with a walker can
exceed the speed of the fastest production line.”

We disagree with this view. We think the traditional automotive production process has
been evolving over many years to ensure minimal waste, optimum quality and the optimal
interfaces between human and machine interaction (which is by no means zero human
intervention). Automation works well in a stable environment, but in the auto industry there
is a turbulent environment of rapid product and technological change – people are much
more capable of adapting to these changes. This is something we think the traditional
OEMs have learnt over many years, starting with the early paradigm of lean manufacturing.
We think it makes sense to take a step back and remind ourselves just how far the
traditional OEMs have evolved in their methods of auto production:

Traditional OEMs cannot risk their brand reputation with poor execution on early models
(hence months of beta testing in deserts and tundra) and have therefore been forced to
take a less disruptive route to electrification, but one, we believe, that is more assured of

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Refresher #1: Prior state of the art – Toyota Production System

Toyota was the first in the auto industry to develop the idea of organising its manufacturing
and logistics into a defined system known as the Toyota Production System (TPS), focused
on “just-in-time” production, which was a precursor of both “lean manufacturing” and
modularity. There has been copious academic research 2 focusing on both the Toyota Way
and also Lean Manufacturing, but what we wish to highlight is that the automotive industry
is still to this day held up as the innovators in the field of production systems as a result of
the advances started by Toyota. The company even shared its processes with suppliers and
donated the system to non-profit organisations to help improve efficiencies. The system
remains in practice today across multiple global production locations.

Three main pillars run through the TPS, all of which remain relevant today:

1. Just-in-time, ie, making what is needed, only when it is needed and only in the amount
that is needed in order to eliminate as much waste as possible

2. Jidoka, ie, automation with a human touch, with a focus on stopping to fix problems
immediately in order to ensure the highest quality right from the start. Toyota were
adamant that the human touch was necessary to ensure this quality and also focus on
future development of the business via organisational learning

3. Kaizen – continual improvement and always striving for innovation and evolution

Toyota’s now well-known manufacturing system was first popularised in a book by three
MIT academics called The Machine That Changed the World, which became a best-selling
in the 1990s and sparked many other manufacturers to emulate the strategy. The principle
of the indispensability of people and their importance to the process of “kaizen” were
heavily emphasised by Toyota.

These concepts have been copied by many other automakers (as well as non-automotive
companies) over the years to ensure minimal production glitches, downtimes, etc. The
efficient production concept has also ensured that the car industry has better managed its
cost base over the cycle to ensure a tight balance between fixed and variable costs,
employing a high level or temporary labour to ensure maximum flexibility but also best
quality. Toyota learnt that given the high fixed costs in the industry, building to demand was
the best way to ensure as flexible a cost base as possible. However, this requires the very
opposite of Mr Musk’s vision, ie, a reduction in automation, to lighten the fixed cost load
and ensure “intelligent automation”.

The social part of the equation shouldn’t be forgotten – traditional OEMs have strong relationships with their
employees, suppliers and distributors – a culture built over many years which is hard to replicate, particularly by
a company like Tesla, which we think is so intent on ignoring the sociological aspect.

Refresher #2 - VW’s Modular Production System

The next big innovation in manufacturing came with the advent of modularity. The best
known proponent of the modular system is VW. VW announced a Modular Toolkit Strategy
back in 2007, which from 2012 became known as MQB (modular transverse matrix) and
has since been benchmarked by most of the world’s top automakers.

2For a more popular read on the topic, see The Machine That Changed the World, 1990 Womac, Jones and Roos and
Lean Thinking

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IHS said of VW’s MQB strategy:

“it could be the single most important automotive initiative of the past 25 really changes the game” Michael
Robinet, MD of IHS (a third party automotive consultancy), Reuters 10 Feb 2013

The modular design philosophy is to manufacture and sell as many models as possible
while using the same parts as much as possible. Under the MQB approach, VW’s platforms
were intended to feature a greater degree of plug-and-play modularity, flexibility and parts
commonality, with products tailored for specific markets/segments but at reduced cost.
The idea was to protect the different brands’ characters and individuality but significantly
enhance profits.

The ultimate targets of modular design are so called Lego blocks 3 . A modular design
strategy depends on design technology, and due to the high technological hurdle, the first
vehicle maker to achieve this goal was leading truck maker Scania4, now part of the wider
VW Group:

Figure 25: Scania’s high profit margins stemmed partly from modular design technologies
Scania: Modular design concept

Source: Barclays Research, based on company data, used with permission

Need to guarantee quality Modular design has a high technological hurdle because it requires at the design stage for
based on combination of each part that products can be made by assembling all of the various parts. In other words,
individual parts quality assurance is required not only at the individual parts level, but also at the stage of
assembling these parts. We do not think Tesla has been able to replicate this idea, partly due

3see Satoshi Hino’s practical modular design.

4Other reasons for Scania’s high margin include:1) better product mix due to its focus on heavy duty, and 2) higher
service business ratio.

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to lacking scale and partly due to Mr Musk’s manufacturing vision which relies on hiring
engineers (and now engineering systems of automation from Germany) to make the
system work, rather than developing talent from within. Also the speed of product design
was such that Tesla did not focus on a design that could be built with quality and
adaptability in mind.

In particular, we think strict safety standards in the automobile industry serve to increase
the modular design hurdle. Should a specific part be defective, the number of models
subject to recall increases in proportion to the number of models that use that part. As a
result, the development and design of individual parts requires greater caution than under
non modular systems (and would therefore not suit the “production hell” scenario of Tesla’s
current Model 3 production woes).

Greater cost benefits if However, the achievement of modular design (the ability to make different products using
achieved the same parts) results in significant cost benefits. Reducing the number of parts facilitates:
1) lower manufacturing fixed costs (dies and machine tools) for parts production, and 2)
economies of scale. Tesla may currently have the cost-leadership on batteries but we think
the gap is closing here and yet they are unable to close the gap on production cost
capabilities with traditional OEMs.

Another advantage of modular Another advantage of modular design is the inability to imitate, as indicated by other global
design is an inability to imitate commercial vehicle makers historically being unable keep pace with Scania despite seeing
its high profit margins. Modular design expertise is in the design technology, and
competitors are unable to learn this expertise through the reverse engineering of finished
products. Not only do we believe this sets the Western OEMs apart from Tesla, but also
from their Chinese competitors in terms of manufacturing – it may be easy to copy a
vehicle’s styling but less easy to replicate a global modular engineering strategy, even if the
companies enjoy a lower overall fixed cost base. We also believe the success of modularity
relies on a degree of scale which Tesla so far has been unable to attain.

When VW launched MQB in 2012 (modularer querbaukasten; modular transverse matrix)

the company said it would allow it to: 1) reduce capex, development costs, and
manufacturing costs; 2) benefit from economies of scale; 3) increase production flexibility;
and 4) shorten development times. We believe VW spent up to $60bn on the development
of MQB and many critics point to the lack of payback in terms of margin progression.
However, we believe the scale of the group required such an intense investment to shift all
production facilities onto the new system and that some of the benefits are yet to be
achieved, as more vehicles ramp onto MQB. Today there are over 20 different models
across the group already sitting on MQB with more still to come (see Figure below).

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MQB share in overall production is rising steeply

2015 2017 2018 2020
Source: VW Shaping the Transformation Together Presentation

One of the negatives of the system may have been to allow VW to let differentiation of
product spiral out of control, but we believe this is something they are now working hard to
bring back into line.

Parts-sharing synergies cross over vehicle sizes and segments based on modular toolkit strategy
VW: Technological concept of modular design strategy
Platform strategy Modular strategy Modular Toolkit strategy

Platform Module Module

Synergies limited to same class Synergies extend across two or more classes Synergies extend to all classes

C ▷ ◁ C
Vehicle Class

B ▷ ◁ B

A ▷ ◁ A

A0 ▷ ◁ A0

A00 ▷ ◁ A00

Body design Body design Body design

Body Vehicle-specific Vehicle-specific



Source: Barclays Research, based on company data.

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Barclays | Global Autos & Auto Parts

The Germans are not alone in deploying modular design systems, with Hyundai (NR) in
Korea starting to pursue a platform integration strategy from 2009 and Renault-Nissan’s
CMF concept operating along similar lines to VW’s modular architecture. Toyota also
moved on from TPS to launch Toyota New Global Architecture (TNGA) to enhance product
strength and reduce costs.

In other words, production processes in the auto industry have been rapidly evolving
over the years via constant “kaizen”, and we think it is naive to assume that a disruptor
such as Tesla can announce new ideas for automation of processes and wipe out the
entire learning of the incumbent industry over the last 100 years.

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While in the previous section we argued that Tesla’s approach to production has been to
over-automate (and therefore increase complexity and expense), we are arguing that the
German OEs are using technology to their advantage within their factories. In fact, we
believe while the Japanese led the way with lean manufacturing and the TPS, German
modularity and now “smart factories” show the industry is at the cutting edge of
manufacturing progress. It may be less headline grabbing to be leaders in Industrie 4.0 than
Tesla’s space-ambitions, but given the increased use of AI (Artificial Intelligence) and IoT
(Internet of Things) within traditional OEM factories, we believe the industry is still leading
the way in its knowledge of how to make profitable and cash generative vehicles, whether
they be internal combustion powered or electric.

BMW CEO Krueger believes: “Silicon Valley isn’t the only place where rapid progress is being made in technology”
Analyst FY17 results presentation, 21March 2018
The latest developments in both factory automation and robotics, particularly in Germany,
continue to reduce the required workforce, relieve workers of unpleasant or unsafe jobs and
help to improve reliability and product quality. We believe this enables German OEMs to
have the most efficient manufacturing processes but also to ensure the highest quality
levels for their products, whilst equally protecting profitability.

Key benefits of “smart factories” include:

 Greater flexibility – the ability to respond faster and more flexible to customer demands

 Greater efficiency – enabling an efficient use of resources and improved inventory


 Greater speed – this can enable shorter innovation cycles and faster product innovation
and hence improve time-to-market

 Logistic management – helps with “just-in-time” delivery but also enables greater
flexibility in vehicle configuration

 More attractive working environment – a better synthesis of man and machine, doesn’t
take away the importance of human intervention but can improve the ergonomics and
provide more attractive work space for employees, especially given demographic
changes and differing working demands (eg, blue collar work holds less appeal in
general to the younger generation)

Industrie 4.0 originated in Germany

We remind investors that the term “Industrie 4.0” originated in Germany to promote the
computerisation of manufacturing. Moreover, we think the German auto industry has been
at the forefront of this manufacturing revolution. The auto industry has been developing
increasingly efficient manufacturing processes by utilising Industry 4.0 to create “smart
factories” focused not only on modularity but also on increased usage of Artificial
Intelligence (AI) and the Internet of things (IoT). In combination these systems ensure the
optimal real-time communication between cyber-physical systems and humans. On a
continuous basis the insights gained from intelligent data analysis in Germany’s auto plants
improve quality, enhance the production processes, reduce throughput time and, as a
result, cuts costs. German automakers have worked for many years improving the
manufacturing process to reach what we believe is an optimal symbiosis between man and
machine to ensure the highest quality and flexibility of output.

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Germany leading the push on automation and manufacturing efficiency

“The full potential of the industrial Internet will be felt when the three primary digital elements – intelligent devices,
intelligent systems and intelligent automation – fully merge with the physical machines, facilities, fleets and networks. When
this occurs, the benefits of enhanced productivity, lower costs and reduced waste will propagate through the entire
industrial economy.”

Source: Peter Evans and Macro Annunziata, GE, Industrial Internet: Pushing the Boundaries of Minds and Machines (2012)

In particular, we believe the BMW production lines are far more advanced than their West
Coast competitor and that the market is underestimating the benefits of BMW’s “smart
factories”. Tesla may be emulating the concept, and potentially why the purchase of
Grohman was felt necessary, but we believe Mr Musk has misunderstood the concept of
“smart factories” and has gone too far in his automated vision. We discuss each OEM’s
strategies on EV production in more detail below.

BMW is not the only German manufacturer focused on Industrie 4.0

"At Mercedes-Benz, we use the term 'Industrie 4.0' to describe the digitalisation of the entire
value chain, from design and development to production, where the term has its origin, and
finally to sales and service," says Markus Schäfer, Member of the Divisional Board
Mercedes-Benz Cars, Manufacturing and Supply Chain Management, Daimler AG. "For us at
Daimler, there is no question that the digital revolution will fundamentally change our
industry. This applies to the methods by which we develop, plan and produce our vehicles.
It applies to the way we make contact with our customers. And not least, it can be
experienced through our products themselves."

"If man, machine and industrial processes

are intelligently networked, individual
products of high quality can be created
more rapidly, and production and
manufacturing costs can be made
competitive." (Daimler website)

Given the increasingly diverse requirements of customers around the globe, it is important
for automotive manufacturers to ensure the most efficient manufacturing processes and
the maximum diversity for minimal cost outlay. Customers are increasingly demanding
shorter innovation cycles and the benefits of Industrie 4.0 are enabling the German OEMs to
provide this and deal with the increasing demands of electrification and digitalisation

Toyota’s TPS has now given way to TNGA

Toyota is in the process of rolling out an updated version of its vaunted Toyota Production
System (TPS), called the Toyota New Global Architecture (TNGA). In a world where
automation and AI are at the fore, it might seem that lean and the human touch are taking a
back seat as slightly antiquated. And yet Toyota’s new production processes are more
fitting with the below quote:

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Barclays | Global Autos & Auto Parts

"One machine can do the work of 50

ordinary men. No machine can do the
work of one extraordinary man." Elbert
Hubbard, philosopher (1856 – 1915)

Do robots kill jobs or create them?

The auto industry may be responsible for over half the commercial robot purchases in North
America, but Wil James, president of Toyota Motors Manufacturing in Kentucky, recently
stated that “our automation ratio today is no higher than it was 15 years ago” with robots
responsible for less than 8% of the work on Toyota’s assembly lines. Mr James continues
that “Machines are good for repetitive things but they can’t improve their own efficiency or
the quality of their work. Only people can.” Toyota are heavily focused on ensuring the
human touch is not lost via automation, but that automation works alongside humans to
ease the burden of difficult work, ensure greater efficiency but always ensuring that humans
have the ultimate connection to the production line to ensure quality.

This does not mean that the Japanese system stymies innovation. Toyota is extremely proud
of allowing their employees to use their ingenuity to design new automated processes and
ensure more ergonomic comfort and more efficient jobs. And the system also fosters a
process of employee satisfaction and self-regard. Indeed in 2015 Toyota promoted a 52-
year veteran of the firm, who started on the factory floor, to head up global manufacturing,
just showing how much importance is placed on factory experience. The TNGA strategy aims
to reduce costs not primarily through labour cuts but via smarter use of materials (light-
weighting), improved modularity and trimming platform variants. Robots have a place but not
as replacements for people but rather as basic tools to enhance factory performance.

This approach may be at odds with the perceived wisdom as evidenced in many academic
studies that automation trumps all. Tesla’s CEO Elon Musk clearly follows this aspiration with
his ‘lights-out’ concept at his Model 3 plant, and Kia (NR) in Korea is also claiming productivity
improvements of nearly 200% as a result of automation (some Kia plants have >1,000 robots
but <1,000 humans on the assembly line). We have seen analysis suggesting over the next two
decades some 47% of American jobs will be lost to automation, and in China and India the
numbers could be as high as 77% and 69% respectively. However, Toyota (and many other
incumbent automakers) believes in the importance of focusing on the human ability to
innovate and improve while even the most advanced AI systems still lack full cognition skills.
When the next level of AI is available, the robot era will likely arrive but we’re not there yet.

Robots at the Gate – Humans and technology at work

Our Macro team last week published a series of reports focused on the interaction of
technology and people (for an overview of the multiple reports see Equity Gilt Study 2018,
10 April 2018), in which they argued similarly to Toyota and the incumbent OEMs that it takes
time for a technology to mature before full automation can be achieved and that “soft
automation, where only parts of a job are automated, is more dominant than hard
automation, where technology fully substitutes labour”. As we will discuss in the “Tesla
Production System’ section, we worry that Tesla is pushing too fast for hard automation either
before the technology has fully matured or at a detriment to capital intensity and complexity.


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Soft not hard automation encouraged by incumbent OEMs

In our recent management meetings with VW, the company commented that the advent of
technological advances is working in tandem with a decline in popularity of blue-collar jobs
with the younger workforce. While VW are as keen as Toyota to ensure the ‘human
element’ remains prevalent in their factories, the company is also aware that electrification
brings also simplification (a BEV has c40% fewer components versus ICE) and therefore a
shift in employment away from traditional ICE manufacturing roles towards software
development and other technology-related jobs is no bad thing. Hence while VW is aiming
for 24k job losses over the coming years, some of these will be replaced by 9k additional
jobs in IT and software.

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Not only do we believe that the German OEMs know how to manufacture EVs reliably, we
also believe that their production systems give them a clear competitive edge when it
comes to the cost efficiency and quality-focus of the product. We think the past 100 years
of manufacturing know-how have led to continuous advances in technology and process.
We wrote at length in our feedback pieces from Israel about traditional OEMs leadership in
technology and how investors are missing the Auto Tech advances sitting within GM and
the European premium OEMs. See: Global Autos: How Elon spurred the Israeli Auto Tech
scene, and gave legacy auto an edge, 12 March 2018, and Global Autos: Who's leading the
Auto Tech Arms Race? Findings from Israel, 12 March 2018.

And we also think the market is missing the ability of the German premium OEMs to make
the highest quality electric cars. In their quieter PR approach to both electric and
autonomous, the traditional industry has been viewed as being the “dinosaur” to Tesla’s
“disruptor” credentials, but we believe the “slower but surer” approach will lead to the most
lasting products with the greatest consumer acceptance. Have you ever sat in a German
premium car and touched the leather interior and compared it to the quality of the Model S?
(although Tesla fans would point out the software experience is a more important brand
attribute than plush interiors – which we agree with for the lower volume S/X but may be
an issue as Tesla moves into the mid-luxury market)

German premiums have consistently performed well in JD Powers quality reviews

It is extremely hard to show concrete evidence of the higher quality of products. The JD Powers
dependability surveys have for years been used to show benchmark quality in the industry (and
it is clear from a look at the historical surveys that the 3 German premium manufacturers have
consistently recorded above average results, even in weaker product years). But Tesla sells too
few cars currently to be included in the survey for comparison purposes:

German and Japanese brands score highly in the JD Powers’ US dependability surveys over the past few years (consistently
above the industry average

2015 2016 2017 2018

Problems per Problems per Problems per Problems per

Name plate Name plate Name plate Name plate
100 vehicle 100 vehicle 100 vehicle 100 vehicle
Lexus 89 Lexus 95 Lexus 110 Lexus 99
Buick 110 Porsche 97 Porsche 110 Porsche 100
Toyota 111 Buick 106 Toyota 123 Buick 116
Cadillac 114 Toyota 113 Buick 126 Infiniti 120
Honda 116 GMC 120 Mercedes 131 Kia 122
Porsche 116 Chevrolet 125 Hyundai 133 Chevrolet 124
Lincoln 118 Honda 126 BMW 139 Hyundai 124
Mercedes 119 Acura 129 Chevrolet 142 BMW 127
Scion 121 Ram 129 Honda 143 Toyota 127
Chevrolet 123 Lincoln 132 Jaguar 144 Lincoln 133
BMW 146 Mercedes 135 Mercedes 147
BMW 142
Industry Industry Industry Industry
147 152 156 142
Average Average Average Average
Source: JD Power

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Tesla has had more difficulty with initial quality in early production models
From blog reports it is clear that Tesla customers have had many grumbles in the early days
since the launch of each new product. For example, the S and particular the X had
numerous early quality issues (such as the issue with the falcon doors), which did not dent
the love for the vehicle amongst the early adopters 6. And legions of bloggers have noted
numerous issues with the Model 3, including panel gaps and touch screen malfunctions. 7

German OEMs do not have the luxury of being able to support such a multitude of
complaints, which are more accepted from a “start-up”. BMW’s i3 may have had its critics
as regards the styling of the first generation vehicle, but the money invested into the electric
and light-weighting technology clearly paid off in terms of the quality of the engineering.

Consumer Reports feedback has improved for Tesla – Model S now top ranked
From 2014, owners reported many powertrain issues with Tesla’s Model S sedan but in
2015 US magazine Car and Driver named the Model S the “car of the century”. However, in
October 2015, two months after naming the Tesla 'the best car ever tested,' Consumer
Reports (a US independent consumer product review magazine) declined to give the Tesla
Model S a "recommended" designation, citing too many complaints from owners.
Complaints ranged from minor issues, such as misaligned doors and squeaky body, to
severe ones – e.g. total drive train replacement and inoperable door handles. In their 2016
Annual Auto Reliability Survey, Consumer Reports improved the Model S rating to average
reliability, while reporting that the Model X has had significant malfunction issues. The
magazine also raised "serious concerns about how some automakers, including Tesla, have
designed, deployed, and marketed semi-autonomous technology”. By 2017, Consumer
Reports finally marked the car as “above average” for the first time – 3 years after launch.
And for 2018, the Model S is Consumer Reports’ highest rated electric car with a score of 94
(the Chevy Bolt comes in next at 77 and the BMW i3 scores 66). But the Model X is much
more poorly scored at just 53.

But Model X is still struggling to get a “recommended” rating (Model 3 yet to be tested)
When Tesla’s Model X was first launched, Consumer Reports wrote that the all-wheel drive
Model X 90D “largely disappoints, as rear doors are prone to pausing and stopping, the
second-row seats that cannot be folded, and the cargo capacity is too limited. Even its
panoramic, helicopter-like windshield was disapproved of as it is cranky-sounding and it is
not tinted enough to offset the brightness of a sunny day.” The report continued that overall
"the ride is too firm and choppy for an $110,000 car”. That said, Tesla addressed these
issues with several software updates, and no known issues remained after the 8.0 firmware
was released. But in June 2016, Tesla had to settle a lawsuit over usability concerns and
accept the Model X was rushed to production before being ready. It may therefore be no
surprise that the model still fails to score highly in the 2018 review.

Traditional OEMs cannot risk a poor quality review

We believe the money invested into capex and R&D by the traditional OEMs to ensure the
smooth production of their vehicles is not only to ensure the best possible cost base but
also to ensure the highest quality products. They have too high a reputation at stake to risk
with a “rushed out” EV that cannot maintain their brand reputation. It therefore comes as
no surprise that Consumer Reports says of BMW “that single mission focus contributes to
making the i3 the most energy-efficient car we've ever tested....combining the super-
efficient powertrain with lightweight construction creates an extremely energy-efficient car
that gets the equivalent of 139 mpg when running on electricity -- the highest we've ever
seen in our testing.” We suspect, when tested, the Model 3 may fail to achieve high
accolades in the early years.


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Key BEV strategies:

 VW standalone/native EV platforms (MEB and PPE), although first Audi and
Porsche launches will be built on adapted ICE platforms (MLB)

 BMW fully modular manufacturing across all powertrains and body styles, building
on ibrand know-how and launching 5th gen electric drivetrain (likely more
outsourced than original i3)

 Mercedes- strategy unclear. Marketed as standalone/native platform for EQ but

more likely adaptation of existing modular platform. Likely behind on spending with
EQ in its nascent generation

 Tesla: standalone BEV platform but struggling to ramp to scale and also failing to
offer consumer flexibility of non-BEV powertrains

 GM: flexible, modular platform similar to BMW but leveraging scale to bring down
purchasing costs, particularly of battery cells, and utilising non-vertical integration
to buy-in commoditised components

The VW Production System

MQB benefits continuing just as MEB system is launching
As discussed in the earlier section, VW was the first proponent of a modular system of
production. Over the years since its inception in 2012, we have written at length on VW’s
modular system called MQB (starting with an in-depth note comparing MQB to Japanese
production systems: Toyota, Nissan step forward: Target global mass market with lower
costs but better product appeal, 27 August 2012) and many academic and press articles
have highlighted how revolutionary the modular system was at conception.

MQB was developed for transverse-engine vehicles, alongside Audi’s MLB for longitudinal-
engine vehicles and NSF (new small family) for small vehicles. It involved a great expense
and due to the scale of the VW Group and its multiple brands and production locations, a
complex procedure to adjust all production to the new modular concept. And just when the
benefits of MQB might fully be being enjoyed within the VW group, the decision was made,
post Dieselgate, to develop a new modular system, the Modular Electrification Toolkit
(MEB), a modular system for manufacturing electric vehicles. MEB has been undergoing
development since 2015, to further optimize the strengths of the MQB, while making it
suitable for electro-mobility. The so-called Early Phase of development will come to a
conclusion in the spring of 2017, and series production of the first e-vehicle under the I.D.
banner is due to start in 2019.

MEB the next step beyond MQB but is more evolution than revolution
Some in the market are disappointed that the Lego-blocks basis of MQB was not sufficient
to provide the flexibility needed for electrification, but VW is adamant that an entirely new
system is necessary to optimise electric vehicle design. The e-vehicles currently available
from Volkswagen are being made using the MQB, which shows it is possible to build EVs on
an ICE platform, but newer EV products from the ID range and beyond will launch on the
MEB. VW management’s belief is that they need an entirely standalone production system
for BEVs to ensure optimum positioning of the battery and optimum flexibility and cost
base. This differs from BMW’s fully modular concept of production across all powertrains,

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but we believe is possible due to the scale of cars produced by VW (with a target of 2-3mn
or 20-25% Group sales of BEVs alone by 2025).

VW has bullish market VW predicts industry BEV sales to account for about 10% of the global market in 2025, with
prediction for BEV sales by VW outpacing that share slightly. BEVs will control a much larger 35% of the global
2025 – 10% of the global premium segment by then, the automaker says. Pricing will be among the keys to market
market and 35% of global growth, and VW is promising to position its MEB vehicles competitively based on each
premium sales model’s interior volume. Because the MEB’s purpose-built design doesn’t have to
accommodate an engine and transmission, it allows for a flat floor and a roomier-than-
normal cabin. The upcoming I.D. Crozz CUV, for example, has a Tiguan footprint but the
interior package of the bigger Atlas model. VW says it will be priced similarly to an Atlas.

As we discussed in the ‘upcoming BEV products’ section earlier, VW has ensured a cost-
effective supply of battery cells, which helps with their plans to sell BEVs at rates
competitive with comparable diesel engines. Management have stated that they are
confident of securing battery cells at below €100 per kWh by 2020 (or ~$120/kWh), and to
continue to reduce costs beyond that. Similarly to GM, we believe this is due to the Group’s
scale and its ambitious BEV targets, but when combined with the cost advantages of MEB it
should enable VW to have significantly greater flexibility and over time a reduced cost base
than its Silicon Valley competitor, Tesla. Combined with a greater breadth of product
offering across all powertrains and bodystyles and brands, this should be a significant
competitive advantage by the early 2020s.

VW is pursuing a dedicated/standalone approach to BEV production

For VW, therefore, dedicated production lines make the most sense. Matthias Erb, executive
vice president and chief engineering officer for the North American region, says of the MEB
platform that the benefits to product design from having a dedicated electric-vehicle
platform are worth the gamble of having standalone plants and outweigh the cost of any
manufacturing inefficiency from mixing production with ICE vehicle. VW is starting by
converting its Zwickau plant in Germany, currently home to Golf production, to 100% MEB
output. The company also plans production in China– VW wants to build 1.5 million new-
energy vehicles, mostly BEVs, annually in China by 2025. US MEB production is planned too,
although no firm commitment has been made.

“We (are) more convinced VW isn’t specifying volume plans for the MEB dedicated-BEV platform, but says it expects
than ever that volume-wise demand in the U.S. for all-electric vehicles to reach 10% of the market by 2025 and that the
you can build real (full-scale) Volkswagen brand should exceed that level. There will be no mix of internal-combustion-
factories for electric vehicles,” engine cars and BEVs in production on a single assembly (as opposed to the strategies of
says VW’s Erb GM and BMW which we discuss below), though it’s possible for the vehicles to share a paint
shop and portions of a body shop.

Audi/Porsche to share platforms

While Audi will utilise MEB for compact cars over time, unlike the VW brand's ID products,
the first Audi and Porsche BEVs will come on adaptations of the existing ICE-based MLB
platform - C-BEV for Audi and J1 for Porsche. But by 2021 a jointly developed standalone
platform called Premium Platform Electric (PPE) will be launched. Close to 1000 employees
are currently working on the project and given the performance credentials of the
upcoming Porsche Mission E, we expect it to be equally capable of 800-volt charging and
likely with an even higher range. Porsche CEO Blume said in a recent statement, "if we had
to tackle the challenge ahead on our own, the costs would be c30% higher". And we believe
the benefits of the Group’s scale really give VW an advantage versus the competition on
EVs, as long as the company learns from its mistakes with MQB and ensures there is more
discipline in model derivatives.

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The BMW Production System

Flexibility via modularity is key; standalone EV platforms may come later
BMW have also spent many years perfecting and refining the production processes and we
do not believe the CEO Krueger is wrong to claim that the company now has “the most
flexible production network in the world”. However, we do think that the market may have
missed the importance of this and views BMW’s approach to electrification (ie modularity
that can be flexed to any powertrain penetration rates) as less exciting than peers with a
more dedicated (ie separate platform) approach. VW’s standalone MEB strategy makes
sense given its global scale, but we believe a more niche, premium OEM needs to ensure
greater flexibility to maintain profitability.

BMW started investing in electrification early...

BMW has the money to invest That is not to say that BMW has scrimped on its spending on electrification. In fact the
in electrification. This year company was one of the earliest to the electrification race, firstly with its focus on Efficient
alone €200mn will be invested Dynamics and then via the launch of the i-brand. BMW invested $100mn into its plant (joint
in one factory in Leipzig which with SGL Carbon) in Moses Lake, Washington for carbon-fibre reinforced plastic bodywork
will be fully modular and its Leipzig plant was inaugurated in 2010 with an investment of €400mn. And as we will
argue in the following section, BMW still have plenty more money to invest. €200mn will be
BMW started early with invested this year in its new plant at Leipzig (which will finish by 2020) and this plant will be
EfficientDynamics and then fully modular with electric capabilities.
moved on to the ibrand and
now iNEXT
...and focused on the entire lifecycle of the EV via sustainable production
BMW has been focused on modularity since at least 2014 but has also been keen to
highlight its “well to wheel” sustainability focus, ie, looking at the entire production process.
The carbon footprint of the original i3 was around a third smaller than that of the BMW
118d (which was already voted World Green Car of the Year 2008) and around 50% smaller
if the car is running on power generated from sustainable sources.

The use of CFRP on the scale used in BMW’s i models is the highest in the automotive industry
worldwide. It’s still unclear whether the lightweight material will ever be cost-effective but it
has clearly helped to enhance the group’s environmental credentials. The production process
for the i-brand models consumes around 50% less energy and 70% less water vs current
average production at the BMW group, which is already best-in-class. All the electricity used
to produce i-models at the Leipzig plant is wind-generated and 100% sustainable. Likewise, all
of the energy used in carbon fibre production at Moses Lake is entirely derived from
renewable, locally generated hydroelectric power and is completely carbon-free.

And BMW also pioneered engine modularity:

BMW’s modular approach to production involves the engine as well as the vehicle design. In
2014 BMW started migrating toward a modular engine family for all gasoline and diesel
engines or the new “B” family engines to replace the outgoing “N” family. This approach
enabled >60% of all gasoline engines to share components, and 40% sharing between
gasoline and diesel.

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High commonality between gasoline and diesel in the new EfficientDynamics family

Cylinders (inline) -3 -4 -5

Common parts
shared within
gasoline or diesel
Gasoline >60% engines is c.60%

Between the

gasoline and diesel
engines there is
40% sharing

Diesel >60%

Source: BMW, used with permission

Engine modularity has given BMW greater flexibility than peers

This has enabled major flexibility for BMW giving all engines a common interface to the car,
thus enabling hybrid and now battery electric vehicles to join the modular process too. We
believe the market is underestimating the degree of this flexibility – which has become ever
more necessary given the uncertainties of penetration rates, as evidenced by the sharp
decline of diesel across Western Europe. The efficiency of BMW’s engine plant in Steyr in
Austria (which has seen over 20mn engines leave the three assembly lines since its
inception in 1979, helped by running 3 shifts daily and being able to run 7 days/week when
necessary), with an engine rolling off the line every 14 seconds and reaching its vehicle
manufacturing plant within 8 hours, we believe is something that Tesla, or other start-up
companies might find hard to replicate. Although Tesla need only focus on electric
drivetrains, we believe BMW’s ability to have full flexibility across all powertrains should
enable the group to offer the best products to customers, whether they require petrol,
diesel, hybrid or BEV. Over the last 40 years BMW has invested €6.4bn in the plant at Steyr,
including in emissions testing.

The ibrand wasn’t just about electrification but also about sustainable
We think the market is forgetting quite how game-changing the production of BMW’s i-
brand vehicles was when compared to traditional methods of manufacturing. The company
has been combining innovative materials, smart data analytics and renewable energy
sourcing for more than ten years now. BMW uses automated bonding (no need for screws,
rivets and welding), combined with the innovative use of Carbon Fibre Reinforced Plastics
(CFRP). The production lines are significantly shorter (110m versus traditional lines of
several kilometres) and smart robots proliferate. But this isn’t the fully automated
production of Elon Musk’s vision, but a smart working environment where robots coexist
with human engineers to increase flexibility, shorten production times but not at the risk of
quality. For further details on the production differences of the original i3 versus Tesla’s
model S, see BMW i – a different concept vs Tesla, 22 May 2014.

What are BMW doing today on electric?

We believe BMW’s culture of quiet confidence means that they tend to hold back from any
major announcements around technology until they have 100% confidence in delivery. We
remain convinced that the company’s strategy to keep production facilities flexible for any
powertrain (be it ICE, PHEV or BEV) is the least risky strategy given future penetration rates

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are largely outside the control of the industry. And yet, we understand why the market
views this strategy as ‘boring’ when GM (OW) across the pond is promising to take on Tesla
with an accelerated autonomous timeline and VW is promising aggressive BEV penetration
and a wide range of products produced on a standalone platform.

BMW are not behind on electrification

The market seems to think that BMW took an early lead on electric with the i-brand but has
since seen competitors leapfrog on EV strategy. We don't think this is a fair perception. The
technology workshops in Munich in December showcased how advanced BMW's modular
strategy truly is. It is not a straightforward toolkit but a complex system to ensure that all
production facilities can produce any drivetrain from combustion engine (ICE) to BEV. And we
have been impressed with the advances in electric drivetrain engineering since the first
generation i3. The 5th gen electric vehicles starting with the iX3 BEV at end 2019 and Mini E in
the same year and continuing with the i-NEXT in 2021 should be a significant step on from the
earlier generations and will utilize the latest battery technologies and drivetrain engineering.

BMW has the capabilities in- Currently BMW are producing all electric motors in-house and also the battery packaging,
house to understand the entire as management view this as an area where they have a technological edge. The benefit of
battery supply chain and the Gen 5 electric drivetrain is that it will be fully scalable to different power and range
development process and are requirements, from entry level to performance level, by the addition or subtraction of cell
investing heavily in the new modules. BMW also believe they have a cost advantage with their electric motor, with no
Battery Competence Centre in loss of functionality, by using no rare earth metals, but are still extremely competitive on
Munich efficiency and energy density. BMW also has the capabilities in-house to understand the
entire battery supply chain and development process, which they expect to advance further
via the investment in the battery competence centre in Munich due to open in 2019 –
management have said they will invest €200mn at the site over the next four years.

However, BMW do not intend to manufacture batteries in-house but do currently see
advantages of keeping the pack engineering capabilities in-house. The engineering team
sees many improvements in battery technology coming in the next few years, although
solid state batteries remain only in the development stages. Production facilities are fully
scalable globally to ensure BMW will have pack production capabilities worldwide as
penetration rates rise. But BMW aren't just focused on battery production and raw material
procurement; they are also aiming to look along the whole lifecycle of the battery and factor
in 2nd-life usage and recycling to their business plan.

BMW is about to move to its 5th gen electric engine when other OEMs are just
starting development of the 1st gen
We believe that BMW’s progression to the 5th generation of electric platform, and the
billions invested into modular engineering across the business’s global product range, will
ensure BEV production which in our view is not only of a higher quality than Tesla’s but also
with a much more profitable cost base.

So all in all, we do not believe that BMW is at all behind on EVs, despite the market’s
current perception. What we believe is that they will have highly credible EV options
across the spectrum of power and performance options and will be ready to deliver as
penetration rates ramp, and we clearly think this is in contrast to Mercedes, which appears
not only to be attempting the less cost-efficient standalone platform strategy for EVs, but
also to be further behind in terms of generation development of electric drivetrains (as we
will discuss below, Daimler’s current drivetrains were bought from Tesla).

BMW a pioneer of Industrie 4.0 and Smart Factories

In addition to its advances in modularity, BMW is also an innovator in terms of utilising
“Smart Factories”. In many academic studies on Industrie 4.0, BMW’s plants across
Germany and Austria are used as case studies. It may not garner sensational headlines, but

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BMW’s knowledge of data analytics to ensure the smoothest functioning of all parts and
machines, cuts the error rate and minimises time. Indeed the production time of a vehicle in
the body shop has been halved (from 40 hours to 20 hours in a smart factory). Additionally,
the production requires 50% less power and 70% less water versus the old BMW
production average. And of course the i-brand factory at Leipzig is all hydro-powered. BMW
knows how to revolutionise manufacturing processes, in our view.

BMW on Industrie 4.0

"We leverage the opportunities of digitalisation in many areas. Complex processes can be made even more efficient by using
IT-supported technologies in production" Oliver Zipse, BMW Board Member for Production

As CEO Krueger stated last month: “The BMW iNEXT is far more than just a car. By that, we
mean it is a future-proof, scalable modular system. It will enable the entire company and all
our brands in terms of technology, design and new approaches. The iNEXT combines
Autonomous Driving, Connectivity, Electrification and Services.”

BMW have been highlighting their “smart factories” for many years, including this chart from a 2015 production
presentation which emphasizes not only the flexibility and quality but also the importance of human-robot collaboration


• Upto 9 derivatives per line • Continuous innovation to meet
sustainable production claim
(e.g. IPP2)

• Use of high-tech, sustainable



• Smart automation of line • Just-in-time logistics for

production efficiency and productivity
• Production and quality
increase through human-robot- • Continuous improvement


• “Buy” decision to ensure best capital efficiency

1. Including M derivatives, 2. Integrated paint process

Source: BMW, Barclays Research

The Daimler Production System

Mercedes marketing its EV production as ‘standalone’
In contrast to BMW, and perhaps in reflection of Daimler’s relatively limited production
expertise when it comes to manufacturing Mercedes electric vehicles (the electric B class
powertrain was outsourced to Tesla), the group is launching its EQ range (SUVs, saloons,
coupes and cabriolets) on an entirely separate platform. Daimler argues that today’s battery
technology requires purpose built electric vehicles as the physical size of the battery takes
up a much larger space than a traditional ICE. Only a unique vehicle design is able
accommodate this. Management concedes, however, that longer term improvements in
energy density may make it possible to produce both vehicle types on the same platforms
as eventually batteries will require no more space than a typical combustion engine.

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...but in reality it may be more similar to BMW’s modular approach

However, we note that the incremental electric vehicle production capacity Daimler has
announced is to be added to existing plants rather than at Greenfield sites. Given the
advantages in terms of cost, flexibility and greater potential for additional model variants /
derivatives we would expect Daimler to ultimately end up with the same shared electric and
ICE platform set up as is the case at BMW.

We fear Mercedes have greater electric production costs to swallow

We understand that the electric vehicles planned near term will mainly run on a separate
production line. Only during the final part of the production process is it possible for
different models to share the same assembly line as ICE cars. We suspect that given the lack
of detail regarding the full EQ brand production processes, as well as the rushed
announcement of Mercedes’ BEV plans at the Paris Motorshow in 2016, the brand may be
more in its electric manufacturing infancy than its Munich-peer. Mercedes are clearly not
approaching the 5th generation of electric drivetrain and we suspect have more to invest in
plant capex too.

In the longer term, Daimler’s innovative cubeTEC production concept will allow electric and
ICE vehicles to share production lines from the body shop onwards, and we believe this too
explains the location of the new EV capacity. We do not see Mercedes as behind in the
arena of “Smart Factories” or use of A.I. to improve productivity. We just worry that the
company is pursuing a more expensive strategy for converting platforms to electric. All the
parts for various models/derivatives including EVs will be provided in the so-called
“Supermarket”. Driverless transport systems deliver these to GEO stations. A fully flexible
GEO station uses the jigless process: several robots on an adjustable NC axis work together
holding and turning the relevant parts into the optimal welding positions. In this way parts
of varying size can be combined automatically in the body shop. In other words, DAI fully
understands modularity and robotics and may well end up pursuing more of a similar,
modular strategy to BMW if they discover native electric platforms require greater scale.

The Tesla Production System – or “A Robot Too Far”

After the spirited discussion on the 4Q call where we probed Tesla management around the
differences between Toyota’s Production System and the approach Tesla is taking to
manufacturing, we have further looked at what we think Tesla might be trying to achieve.
Let's call it, to give it the benefit of the doubt, the Tesla Production System. Based on Elon
Musk’s conference call comments, as well as interactions with Tesla IR, and comments
made by Mr Musk during a Fremont plant tour on CBS Morning News TV last week8 and in
a tweet posted last week, we see several key elements to the Tesla Production System:

1. Simpler design of a vehicle to make it easier to manufacture

2. Battery manufacturing automation

3. Automation of the initial stages of the vehicle manufacturing (stamping, welding,


4. Automation of a portion of final assembly – which attempted to push automation too

far and now, by Mr. Musk’s own tweeted admission 9, needs to be dialled back

Simpler design – electric and few options

To its credit, Tesla has attempted to design the Model 3 as a vehicle with a relatively simple
and easy manufacturing process. While the idea of design for manufacturability is by no

9See Gibbs, “Elon Musk drafts in humans after robots slow down Tesla Model 3 production,” The Guardian, April 16,

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means new10 or unique to Tesla (i.e. many of the legacy OEMs, such as Toyota, have led in
this way), the Model 3 appears relatively simpler in three ways:

 As an electric vehicle not only is its powertrain simpler with fewer moving parts than an
ICE and transmission, but the body and frame of the car can be optimized to sit on top
of the battery/drivetrain ‘sled,’ as opposed to having to wrap around an internal
combustion engine, transmission, and emission system.

 The design of the vehicle interior itself is rather sparse, without buttons, dials, movable
vents, etc. that add to manual labour assembly. Moreover, the lack of buttons and dials
around the car, combined with a multi-domain controller which consolidates vehicle
controls (and note, luxury vehicles currently have around ~150 ECUs, or electronic
control units), implies a more compact electrical architecture and wiring harness.

 There are relatively few trim option variations on the Model 3. Powertrain options are for
different battery sizes and future front wheel drive – which Tesla appears to have
delayed. Software options for autopilot and ‘full self driving’ of course require no manual
labour. The only interior option is the premium package, which adds premium heated
seating and cabin materials, power adjustable front seats, steering columns and side
mirrors, a premium audio system, tinted glass roof, auto dimming mirrors, and a center
console with covered storage and docking for smartphones.

We would note while the product simplicity and lack of choice is fine for the dedicated early
adopters, it may not be enough variety for the mass market buyer. Tesla would need to
expand the option set to hit 500k+ annual sales for the Model 3. After all, Henry Ford’s
Model T strategy was ultimately displaced by Alfred Sloan’s GM, who was able to build car
varieties ‘for every purse and pocket.’

Gigafactory automation for battery cell and pack

We've seen the Fremont battery pack assembly area several times, and toured the
Gigafactory in its early days. We are frankly somewhat surprised that there had been
manufacturing bottlenecks around battery pack assembly at the Gigafactory (which Tesla
called out as the primary Model 3 bottleneck in 4Q17). Indeed, one would assume that this is a
core Tesla skill, especially relative to other manufacturers, and has benefited from continuous
improvement at the Fremont Model S/X pack assembly over the years (see: Kaizen comes to
California – 12/5/14).

Note, however, that as opposed to Tesla’s cylindrical battery cell format, most other OEMs
have chosen a large pouch battery format, which makes the assembly of the packs themselves
less complex than Tesla's efforts to assemble several thousand small cell formats.

We assume Tesla’s production of the motor and drivetrain to be automated, although other
automakers told us that some hand-assembly is needed on electrical motors to piece
together delicate parts.

Automated stamping, welding and paint – like the legacy industry

In the Fremont plant, the stamping, paint, and welding frame operations for Models S, X
and 3 appear very similar to those of legacy OEMs, with a high degree of automation - And
the use of robotics is by no means new for legacy OEMs. For example, in 1961 GM installed
the Unimate #001 prototype robot in a Trenton, NJ diecasting factory, and used the Unimate
for welding when it revamped its Lordstown plant in 196911.

10 For example, we found mention of the concept as far back as 1988, see Whitney, “Manufacturing by Design,”
Harvard Business Review, July 1988
11 See Unimate/The First Industrial Robot at

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However, in our past visits to Tesla’s Fremont factory, we observed on several occasions
manual polishing was needed on the stamped aluminium panels, and in the CBS Morning
News workers could be observed hand sanding rear panels and using a hand-held power
grinder to smooth out a door frame.

Final assembly – attempting more, but not yet full automation, and likely the
source of some bottlenecks
Tesla appears to have attempted a path of significantly greater automation than traditional
OEMs in its vehicle assembly. While on several conference calls Elon Musk has outlined a
vision of what would be a lights-out factory (his so-called “Alien Dreadnought”), with humans
just monitoring the process as opposed to actually touching the product, it appears at least for
the Model 3 this is more of a long-term aspiration than an achievement.

We have been assured by Tesla management that Model 3 still uses hand labour for delicate
tasks involving soft parts, such as threading the wiring harness into the vehicle, applying the
headliner, and other steps.

However, Tesla has also indicated that tasks that are performed by humans in the traditional
assembly line, including securing the dashboard and applying the door panels to the hinges,
are done by robots. In legacy OEMs plants we have toured, these are performed by workers
using tools such as torque wrenches with built-in pressure sensors to make sure the nut is
neither over- or under-tightened. Indeed, as discussed in a recent piece highlighting how
Toyota is accentuating human craftsmanship amid the push toward automation:

Robots can’t do everything

Fundamentally, Toyota’s production principles were keyed to the notion that people
are indispensable, the eyes, ears, and hands on the assembly line–identifying problems,
recommending creative fixes, and offering new solutions for enhancing the product or

See: Rothfeder, Jeff, “At Toyota, The Automation Is Human-Powered,” Fast Company,

So without having seen the Model 3 assembly (except at a distance during our most recent
Fremont visit), we make several observations:

 Elon Musk himself has now admitted (via Twitter) that Tesla – under his direction – has
pushed automotion too far:

Yes, excessive automation at Tesla was a mistake. To be precise, my mistake. Humans

are underrated. -- Elon Musk (@elonmusk) April 13, 2018.

 It’s unclear how long it will take to get the automated parts of the line working
consistently at a 5000/week rate – or if it will even get there without significantly more
human labour.

 With people involved now in the soft assembly and, given Mr. Musk’s tweet, likely to be
more involved in other processes, the importance of involving front-line workers in
quality and productivity improvement becomes paramount. Of course, the Toyota
Production System, famously stresses the involvement of front-line workers in
improving operations and quality (and indeed, a prime example of the respect for front-
line workers at Toyota is evident with Mitsuru Kawai, a 52-year veteran of Toyota, at the
head of global manufacturing – the highest position ever held by a former blue-collar
worker at Toyota).

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Tesla has posted job listings for rework at the end of its assembly line, which would
seem to make sense, as in a more automated line there aren't employees to check the fit
and finish as the product goes down the line.

Moreover, the Toyota front-line culture has also been adopted by the Detroit
automakers, who spent painful decades working with the UAW to adopt the process.
For example, in the mid 2000s Ford F-150 was ramping up during a tour of the
Dearborn plant, we saw the assembly line stopped on several occasions while a front-
line blue collar worker explained to engineers with clipboards what she found wrong in
that process.

This process breeds a culture that respects both the front-line as well as the low-level
manufacturing employees, who might be wondering whether a culture of the CEO
sleeping at the assembly line really helps (ie, Elon Musk).

GM progressing on “Smart Manufacturing,” leading in

manufacturing of autonomous vehicles
There are those who will criticize GM as one of the “dinosaurs” – an automaker which will
inevitably be disrupted by the likes of Tesla, Waymo, etc. – a point with which we disagree,
as GM’s initiatives to lead in the disruption of the auto industry are underappreciated.
However, if there is one thing GM excels at which the “dinosaur” critics can’t ignore, it’s
GM’s leadership and proficiency at vehicle manufacturing. Simply, while Tesla has struggled
with the task of taking a vehicle to concept and having flawless production (unsurprising, as
Tesla is still relatively young as an automaker), GM on the other hand excels at taking a
vehicle concept and bringing it to fruition via flawless volume production.

GM’s Global Manufacturing System has five key elements: 1. People Involvement, 2.
Standardization, 3. Built-in Quality, 4. Short lead time, 5. Continuous Improvement.
Moreover, GM has developed GMA as a global manufacturing process, which allows it to
quickly scale up new platforms in new geographies.

As an example, consider GM’s large pickup/SUV platform (K2XX), a platform with ~1.2mn
units annually, which likely accounts for well over half of GM’s total company profit. Over
the course of ~2 years, GM is expected to undergo a highly orderly changeover of the
platform to the next-gen version – similar to the way Ford went through a highly orderly
and largely flawless changeover of its F-Series several years ago to an aluminium body.
Such manufacturing expertise cannot be underappreciated.

But beyond its traditional lean manufacturing expertise, GM is also engaging in next-gen
“smart” manufacturing. While areas such as 3D printing and drone technology are being
employed, we’d highlight the Auto Big Data component of GM’s manufacturing, which is being
used for active monitoring and predictive maintenance. Indeed, alongside data efforts by GM’s
OnStar business, the data initiatives in manufacturing provide another indication of GM’s
leadership in the realm of Auto Big Data (see: The coming ocean of Auto Big Data, 4/26/17).

And while technology is transforming the manufacturing process, at the same time GM is
keeping the humans at the center of the manufacturing. Through the likes of “collaborative
robots” and technology which assists the front-line worker, arguably GM has an
opportunity to see enhanced manufacturing efficiency.

Finally, GM deserves credit for its leadership in manufacturing of autonomous vehicles. A bit
over a year ago GM became the first automaker to assemble self-driving test vehicles (its
autonomous Chevy Bolt) in a mass-production facility. Indeed, GM’s autonomous Chevy
Bolt, a vehicle without a steering wheel or pedals, will be assembled at its Orion Township
facility, alongside the non-autonomous Chevy Bolts. This is an important development, as

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we believe that success in the autonomous world will require aviation-grade safety and
deep automotive engineering rigor to balance out the quick development of autonomous
functionality – a balance which we believe GM offers (see: AVs – from app-grade to
aviation-grade safety, 3/26/18).

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In addition to considering the German OEMs’ substantial expertise in auto
manufacturing – their ability to reliably produce high quality cars – we feel it is
important to bear in mind quite how global their production and distribution footprint
already is. We believe this presents a significant advantage as they begin to roll out the
manufacture and sale of electric vehicles across geographies.

German OEMs’ global unit sales 2017

VW BMW Daimler
4% 17% 16%
2% 1% 2%
Greter China
42% 45%
9% 10% 46% Middle East / Africa

2% 2% Asia (ex-China)

40% South America

25% 24%
North America

Source: IHS Markit

All three German OEMs have announced electric vehicle capacity not just for Europe but
also for the US and China. We note that VW, Daimler and BMW have been making cars in
the US since 2011, 2005 and 2003 and in China since 1984, 1997 and 1994 respectively.

By contrast, Tesla has struggled to gain a foothold in China and sales in Europe have been
more lacklustre than in the US (outside of heavily incentivised countries such as Norway
and Netherlands). Just over half of Tesla’s unit sales in recent years have been in the US.
While the growing exports of Model 3 to global markets, as well as the potential creation of
international manufacturing capabilities, may change that mix, we think investors may be
under appreciating risks in expanding internationally.

German OEMs are also at an advantage when it comes to distribution. VW sells its vehicles
in 153 countries. Daimler runs 8500 sales centres globally. And BMW is represented in
more than 150 countries with 3400 BMW, 1580 Mini and 140 Rolls Royce dealerships. It
seems hard to deny that these networks present a solid launch pad for their electric vehicle
roll out.

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Global passenger car production locations VW, BMW, Daimler – harder for Tesla to replicate a global manufacturing and distribution footprint

Source: Barclays Research, Company Reports

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Global EV production plans
VW BMW Daimler
>EUR72bn investment in
EV capacity and projects
by 2030 > Investment of EUR10bn
>16 production facilities >25 Electrified Models by by 2025 for the expansion
for EVs by 2022 (currently 2025, including 12 fully of the Mercedes electric
3) electric cars fleet
Global EV Plans
>80 new electric models by > Electrified models to > Launch 10 pure EVs by
2025, including 50 BEVs contribute 20-25% of sales 2022
(currently 8 BEV and PHEV by 2025 >EVs to contribute 15-25%
models) of sales by 2025
>Production of 3m
>Electric Mini to be >EQ models to be made In
manufactured at Cowley Bremen from 2019 and
>EUR1bn investment in
European EV plant UK from 2019 later Rastatt, and
Zwickau for EV production
Plans >€200 investment in Sindelfingen
ramp up
'Battery Cell Competence >EUR500m investment in
Centre' in Munich lithium ion battery pack
> No formal >Investment of $1bn to
> Production of electric X3
North American announcement, but EV expand Alabama plant to
to start at Spartanburg in
EV Plans production likely at build EQ SUV from 2020
Chattanooga facility
>Electric X3 to be
manufactured in Da Dong
>EQ SUV to be made in
from 2020
>Joint VW JAC investment China from 2019
>Letter of Intent with
of EUR10bn to develop and >Joint Daimler BAIC
Great Wall Motor for
China EV Plans produce 40 electric vehicles investment of €655m for
production of electric MINI
for the Chinese market by the production of BEVs and
> High-Voltage Battery
2025 battery packs in China
Centre opened in Shenyang
in Oct-17 (JV with
>Daimler and TAAP to
> BMW to expand PHEV
Rest of Asia EV invest €100m (in part) for
battery capacity in Thai
Plans a new battery assembly

Source: Barclays Research, Company reports, Reuters, Bloomberg, FT

Of course EV infrastructure will be necessary too, to entice consumers to buy the vehicles,
but the Ionity venture across Europe should help considerably and the Chinese
government’s plans for 500,000 public charging points to encourage EV sales of 2m by
2020 provide significant support. In any case, the advantage of having a fully global
distribution network, supplier relationships and globalised modular production facilities
already in place stand in stark contrast to Tesla.

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German OEMs are investing The German OEMs have had to ramp up their spending on electric mobility significantly
heavily in the future over recent years. All three have seen their expenditure for capex and capitalized R&D drift
up not just in absolute terms but also as a percentage of sales. First and foremost this
increase reflects their efforts to meet emission reduction targets primarily through vehicle
electrification. More recently spending has been further inflated by the costs associated
with autonomy and mobility services. We expect this high level of expenditure to continue
in the coming years.

VW has announced it intends to spend €72bn on electric vehicle capacity and related
projects by 2030. Daimler has committed €10bn by 2025 to the expansion of the Mercedes
electric fleet. BMW has never released an overall spending commitment for electrification,
perhaps reflecting the fact that it committed to the EV game much earlier than its peers.
The group does, however, drip feed regular investment announcements into the market,
most recently publishing a €200m plan for a Battery Cell Competence Centre in Munich.

Spending on capex and R&D continues to drift up
EUR bn VW Passenger Cars % of sales EUR bn BMW Automotive % of sales EUR bn Mercedes % of sales
Capex and Capitalised R&D 10% Capex and Capitalised R&D 10% Capex and Capitalised R&D 10%



20 9% 20 9% 20 9%
8% 8% 8%

15 7% 7% 15 7%
6% 6% 6%
5% 5% 5%
10 10 10
4% 4% 4%
3% 3% 3%
5 5 5 2%
2% 2%
1% 1% 1%
0 0% 0 0% 0 0%

EUR Mn % of sales EUR Mn % of sales EUR Mn % of sales

Source: Company reports

With capex and capitalized R&D of $3.4bn (c.€2.8bn) in 2017, Tesla’s spending is around
50% at the level of BMW and Daimler. And yet as a percentage of sales Tesla outspends its
German premium competitors by a multiple of 4.

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Tesla outspends competitors by 4x as a % of revenue… …but has significantly less net cash than German OEMs

EUR Mn % of sales EUR Mn

18,000 35.0% 25,000

16,000 30.0%
14,000 20,000
10,000 20.0% 15,000
8,000 15.0%
4,000 5,000
2,000 5.0%
0 0.0% 0
VW BMW Mercedes Tesla VW BMW Daimler Tesla
passenger automotive -5,000 Industrial Industrial Industrial
cars 2017 Capex and Capitalised R&D
2017 Net industrial cash
% of sales (rhs)
Source: Barclays Research, company reports Source: Barclays Research, company reports

But their pockets are deep… Moreover, while Tesla ended FY2017 with a net debt position of $4.4bn, Daimler, BMW and
VW are sitting on comfortable net cash positions of between €16 and €22 bn.

…and cash generation is set to Even taking into account VW, BMW and Daimler’s significant expenditure plans on
continue electrification we expect to see solid free cash generation in the coming years. Daimler,
BMW and VW are all poised to benefit from favourable mix developments as the global shift
towards higher margin SUVs continues. Combined with moderate volume growth, an
ongoing focus on cost discipline and, in the case of BMW, new product momentum, they
are well placed to meet the challenges of the future, not just the electrification of their line
up but also the transition to autonomous driving. By contrast we forecast a continued cash
burn at Tesla until at least 2023.

Free cash flow estimates 2017-2020

-2,000 VW industrial BMW automotive Daimler industrial Tesla
2017A 2018E 2019E 2020E

Source: Barclays Research, company report. Note: Barclays definition of FCF = Operating Cash Flow – (Capex + Capitalised R&D). VW FCF is pre diesel provisions

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Tesla ‘core vs. context’ – Tesla Software vs. Tesla Auto – reinforces the cash
risks of manufacturing woes
We highlighted Tesla’s dilemma of ‘core vs. context’ in a piece in 2015, yet it still remains
highly relevant (see: “Core vs. context – the dilemma of Tesla Software vs. Tesla Auto”

Simply, the challenge Tesla faces is that while it has an advantage over its competition in
the crucial area of software (which will be the defining factor for vehicles moving forward),
this advantage is at risk of being overshadowed by Tesla’s challenges in the more mundane,
yet crucial, task of manufacturing efficiency.

We think the ‘core vs. context’ framework is an appropriate one to use for Tesla. Broadly, if
it creates differentiation, it’s core; if not, it’s context. Both core and context are necessary for
success, but context does not provide a competitive advantage. Ideally, you invest more
resources in core and less in context.

Applying the ‘core vs. context’ model to Tesla, “core” is software and “context” is its auto
manufacturing ops. While Tesla is currently spending the right amount on software, we are
concerned that it has been inefficient on the “context” side. While this model may have
worked for Models S/X, it may not work as Tesla ramps on Model 3. Simply put, if Tesla
doesn’t significantly improve its capital efficiency on the context products/processes, then
it will likely be unable to invest enough on the core products which will make Tesla truly

Thus far, the capital efficiency track record for Tesla hasn’t been good, and the capital calls
are only going to be more intensive moving forward. We think the market likely under-
appreciates the capital intensity that comes with vertical integration (supporting elevated
machining and engineering costs – tooling, forging, casting, product design, etc). Moreover,
with Tesla expanding its focus into other areas (i.e. energy storage, trucks), risk exists that
capital efficiency could get worse.

We estimate all of this adds up to nearly $27bn of capex for Tesla through 2023, with a FCF
burn of $7.5bn during that period, as profit per vehicle remains low.

Of course, the saving grace to all this is if the capital markets remain an open well for Tesla – if
investors remain willing to fund their losses and cash requirements, then none of this is an issue.

The flow of innovation – core vs. context

The Flow of Innovation

Core Context
Invest more Extract some
resources resources
here here

Mission Critical
2. Deploy 3. Manage

Invest some Extract more
resources 1. Develop 4. Offload resources
here here

Source: TCG Advisors

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Tesla will need to spend $27bn of capex through 2023… …driving a $7.5bn cash burn
Capex, $mn $27bn of capex between 2018 and 2023 Free Cash Flow,
$mn $7.5bn cash burn between 2017 and 2023

$6,000 $1,000
$500 290
5,064 5,235
$5,000 $0
4,312 -6
4,100 4,209 -$500 -219
$4,000 -505 -635
3,415 -853 -807
-$1,500 -1,024
$3,000 -$2,000 -1,591
$2,000 1,635 -$3,000
1,281 -2,964
970 -$3,500
239 264 -3,932
2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E
2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E

Source: Company reports, Barclays Research estimates Source: Company reports, Barclays Research estimates
FCF defined as cash from operations less capex, inclusive of collateralized lease

Capex per unit, capex as % of sales – both will remain …while operating profit per unit is likely to remain low given
elevated through Tesla’s ramp… significant investment in R&D and SG&A
Capex per unit Capex as % sales Adj. EBIT per unit

$90,000 70%
$6,000 4,671

60% $4,000 2,945

$75,000 2,354
1,656 1,501
50% 195
$60,000 $0
40% -$2,000 -1,195
-4,085 -4,160
$30,000 -$6,000
20% -6,113
$15,000 10% -$10,000

-$12,000 -11,294
$0 0%
2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E -$14,000
2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E
Capex per unit (LHS) Capex as % sales (RHS)

Source: Company reports, Barclays Research estimates Source: Company reports, Barclays Research estimates

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