WORKING DRAFT Last Modified 11/6/2015 5:18 PM China Standard Time Printed 11/6/2015 11:22 AM China Standard Time

Unlock the Value of Steel and Automotive Industry Collaboration International Conference on Green Manufacturing – the Future of Steel and Automobile 2015 Steve Chen, Dr. Karel Eloot Chongqing, 18th November, 2015

Key trends in the Chinese automotive steel value chain Last Modified 11/6/2015 5:18 PM China Standard Time

▪ China steel demand growth has stalled and is only expected to recover at a slow speed (~1% p.a. until 2020) with cyclicality around this “plateau”; transportation remains a growth driver (~4% p.a.), mainly driven by auto steel consumption

▪ This transportation growth drives rapidly expanding production capacity – the resulting cold rolled auto sheet overcapacity (~30% in 2016) will put pressure on steel companies to differentiate their products and services vs. competitors

▪ Increasingly strict CO2 emission regulations in automotive drive fast demand growth for lightweight material

– High Strength Steel (HSS), the most cost effective lightweight material, is expected to Printed 11/6/2015 11:22 AM China Standard Time

represent 40-50% of China’s automotive steel demand in 2020

– The downward price trend in aluminum and R&D developments require steel makers (esp. in China) to accelerate capability development and innovation

▪ In this dynamic environment, collaboration between steel makers and automotive OEMs can create win-wins to turn challenges into opportunities

– Successful supplier-customer collaboration starts from customer insights and requirements to accelerate improvements across 4 dimensions: customer driven innovation, integrated supply chain, consistent quality, and competitive costs

– The prize to gain for steel companies and OEMs is faster availability of superior solutions vs. competing materials, savings across the supply chain, better purchase decisions, etc.

McKinsey & Company

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Successful supplier collaboration starts from customer insights and requirements to accelerate improvements across 4 dimensions Last Modified 11/6/2015 5:18 PM China Standard Time

steel companies need to A Chinese increase R&D capabilities (also with support from car OEMs) to catch up with the automotive innovation cycle A

B Integrated supply chain

D Competitive Cost

C Consistent Quality

manage increasingly complex material mix, while keeping inventory levels low

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Customer driven Innovation Customer insights and requirement

parties need to enhance supply B Both chain agility and reaction speed to

improving already, Chinese C Although steel companies need to accelerate

their focus on meeting quality level and consistency needs of OEMs, especially for high end steels (HSS, SBQ, …) internal cost reduction, steel D Besides companies should collaborate more with OEMs to provide latest material know-how enabling material choices from a total cost ownership perspective McKinsey & Company

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Areas for steel and auto industry collaboration – with China focus (1/2) Customer driven innovation

Integrated supply chain

Domestic steel companies are lagging in R&D capabilities in comparison to global leaders (e.g., share of R&D personnel in China is less than half of that of steel companies outside China)

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Chinese steel companies and OEMs can learn from collaboration approaches used in other industries – e.g., in semi-conductor (also an industry with thin margins and fast evolving technology) incentive schemes for suppliers to invest in innovation are used, incl. premiums, forecast transparency and purchase guarantees

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Growing use of HSS increases material mix variety and reduces batch sizes in steel plants and auto OEMs, leading to complexity in production and inventory management

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Both parties can jointly enhance supply chain agility by sharing improved demand forecasts and shortening production planning

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Leading steel companies in China have started to use Service Level Agreements (SLA) to accelerate and monitor supply chain improvement and gain competitive advantage (e.g., price premium)

McKinsey & Company

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B



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A

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Areas for steel and auto industry collaboration – with China focus (2/2)

Consistent quality

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Benchmarking against global leaders shows that domestic steel companies in China not only lag in quality levels, but often more importantly in consistency

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Besides equipment upgrade, steel companies should continue to enhance quality management

– Establish a layered critical quality control points ownership system to –

D Competitive cost

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As for steel, automotive in China is challenged by increasing industry fragmentation and overcapacity, making continuous cost reduction across the value chain critical to remain competitive

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Steel companies in China typically have 20-50 USD/t profit improvement potential across operational and commercial levers

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In addition, collaboration with OEMs offers an opportunity to proactively provide latest material know-how to assist OEMs to reduce material cost (and weight) from a Total Cost of Ownership perspective McKinsey & Company

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–

manage quality consistency; each control point must have an owner while each staff member owns minimum 1 control point Deploy an equipment precision centered equipment maintenance system on top of reliability improvement Set up quality KPI system cascading from GM to operators; implement effective quality performance management using visual KPI boards

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C

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WORKING DRAFT Last Modified 11/6/2015 5:18 PM China Standard Time Printed 11/6/2015 11:22 AM China Standard Time

If you would like to have the full presentation, please contact us:  Karel Eloot: [email protected]; +86 21 6132 3040  Antonio Sun: [email protected]; +852 2846 2028  Steve Chen: [email protected]; +86 21 6132 3045