A UTOMOTIVE N OW - KPMG Deutschland | KPMG | DE · PDF fileA UTOMOTIVE N OW Issue 2/2011 / Winter 2011/2012 See the bear dance ... Empowering technologies for the net-worked age of

AUTOMOTIVE NOWIssue 2/2011 / Winter 2011/2012

See the bear danceWhy nobody can ignore the Russian market

Slimming downSucceed in emerging markets with low-price components

Tempting argumentsHow to enforce compliance in the face of resistance

Connected CarsCruising on the information highway

Connected Cars

The digital revolution does not stop when it comes to the car: Studies show that young target customers in particular want to stay connected when at the wheel. Will the rolling hot spot become the standard? Will processing speed and graphic card performance be the main focus in future, rather than horsepower and road holding? There is much to suggest that the sales success of a vehicle is no longer decided by features relating to the road alone, but also its functionalities on the information superhighway.

This creates numerous challenges for the automotive industry. The car will become an open system that is not only permanently connected to the World Wide Web. Breakdown assistance, service providers and the infrastructure surrounding the vehicle will be as much a part of the cloud as other vehicles, which in turn will provide traffic management systems with information. Security must be the top priority in this respect, as errors or susceptibility to attacks from hackers could cost lives. Furthermore, everything must be updateable, because technology innovation cycles progress at a hectic pace.

In order to establish a connection between consumer electronics and the automotive world, automotive companies cannot help but team up with partners. They are well advised to get into the business early and secure overall leadership.

We would like to inform you that management responsibilities have changed. Mathieu Meyer took over the role of Head of Automotive on October 1, 2011.

We hope you enjoy reading the magazine and get some new ideas.

Yours,

Mathieu Meyer Dieter BeckerPartner, Head of Automotive Partner, Automotive

Editorial

© 2011 KPMG Europe LLP, a UK limited liability partnership, is the legal entity which effectively controls a number of the independent KPMG member firms affiliated with KPMG International Cooperative (“KPMG International“), a Swiss entity. KPMG Europe LLP and KPMG International provide no client services. All rights reserved.

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Cover story: Data trafficWithin the next two years the Internet will revolutionize private transport. Web providers and car manufacturers are vying for supremacy.

13 Business partner: Hewlett-PackardHP automotive experts Oliver Bahns and Joachim Klink on automobile networking.

Expertise: Strategic alliancesNowadays it is impossible to imagine the globalized automotive industry without international alliances. Joint ventures are, however, only one of many cooperation models.

20 Country focus: The Russian engine reignitesThe past few years have been very turbulent on the car market in this vast empire. Now the industry is attracting potential investors again.

Best practice: Slimming down for the emerging countriesThe demand for affordable small cars is growing rapidly worldwide. This poses major challenges for automotive companies and suppliers.

28 Expertise: Varying standardsWestern compliance rules frequently clash with the conventions in newly developing countries. It is difficult to overcome the resistance.

31 Exit: Santana SuperstarChina is the hottest market right now for taxi fleet business. The VW “Santana” is especially popular. On the trail in the Middle Kingdom.

Imprint

Published by KPMG AG Wirtschaftsprüfungsgesellschaft Klingelhöferstraße 18, 10785 Berlin

Editor and Project Manager KPMG Simone Beutel T +41 44 249 31 80 [email protected]

Editing, design and production corps. Corporate Publishing Services GmbH Kasernenstraße 69, 40213 Düsseldorf T +49 211 5 42 270 [email protected]

Editor-in-Chief: Florian Flicke

Cover photo: Andreas Levers/Getty Images; Mark Evans/iStockphoto (M)

Printed by: Buersche Druck- und Medien GmbHGabelsbergerstraße 4, 46238 Bottrop

CONTENTS


Data traffi cThe revolution is just around the corner. Web providers and car manufacturers want to tap into the Internet within two years. Nevertheless, the respective philosophies of the new partners could scarcely be more different. And, as is the way with revolutions, the self-image and market position of both sides will be given a good shake-up. Text: Michl Koch

Cover story: Connected Cars

4 / AutomotiveNow© 2011 KPMG Europe LLP, a UK limited liability partnership, is the legal entity which effectively controls a number of the independent KPMG member fi rms affi liated with

KPMG International Cooperative (“KPMG International“), a Swiss entity. KPMG Europe LLP and KPMG International provide no client services. All rights reserved.

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The world as a data record:(1) The Central Information Display Connected Drive in the

BMW iConcept supplies information on routes and vehicle environment.

(2) BMW illustrates how the embedding of various displays in the cockpit will look with the Vision study.

(3) The concept from Saab is called IQon infotainment.(4) It is integrated harmoniously into the interior of the Saab PhoeniX.

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Connectivity is the key concept for an emerging business worth billions that links the real with the virtual highway. In future, cars will commu-nicate via the Internet. In addition to

the entertainment aspect, the strongest arguments for connectivity are traffi c safety and more effi cient traffi c management. Only a fully networked vehicle can identify a traffi c jam while it is still developing or hear about the treacherous sheet of ice on the road ahead at precisely the moment when the person in front, who is kept on course by his ESP control, slides over it.

Moreover, vehicle manufacturers are driven by the growing relevance of a target group with a totally different mentality to traditional customers, the so-called digital natives, i.e. for young people today, and hence the buyers of tomorrow, their smart phone frequently means a lot more than having their own car. So, it’s no coincidence that Audi uses the advertising slogan “Be-ing on the road doesn’t mean being out of touch.”

Through Audi Bluetooth online, the world of Audi connect is fi nding its way into the new A6, and with Audi MMI Navigation plus drivers can navigate with Google Earth pictures or obtain online traffi c information.

“However, the symbiosis of car and IT will not be achieved without risk and fric-tion, as the driving forces of innovation come from very different backgrounds. An exciting clash of cultures is looming,” says Dieter Becker, Partner at KPMG, as he ex-plains the future challenges. The fast-paced world of information and communication meets the somewhat staid world of cars. Values that have held fi rm for 125 years in some cases are being undermined. While the auto industry has adopted development times of three to fi ve years for its products and operates strictly within its model cy-cles, which can be up to 20 years for tried and trusted components such as an axle or

an engine, modern communication devices wear out at lightning speed, sometimes within six months.

The question therefore is what does networked mobility mean for the existing superiority of OEMs and can it be main-tained?

Empowering technologies for the net-worked age of the car are, for example, the new text-based HTML5 markup language as well as the new mobile communications standard LTE broadband and, in association with this, cloud computing – all technologies that are new territory for the auto industry. At the same time, these web technologies represent the essential standard for the con-

nectivity system of all cars with web ac-cess. The result: To master the new tech-nology, established automakers are relying on the capability of partners and trusting in their ability to shape the future of “connect-ed cars” in such a way that functional reli-ability and data protection go hand in hand.

Control with the iPad Currently, any design-conscious Apple user or Google advocate can use the Inter-net connection offered by the car, if avail-able, with his or her smart phone, tablet PC, laptop or mobile navigation device or interact with the car via it. However, for automobile manufacturers this entails the disadvantage of increasingly losing control of the contents which are transmitted. Are

their products in customers’ eyes there-fore nothing more than mobile access nodes to the World Wide Web?

Two different scenarios are conceivable in view of this question, namely “car in the Internet” versus “Internet in the car.” In the fi rst case, the car itself is a mobile Internet-compliant device, while, in the second, it is the “carrier” for mobile Internet-compliant devices that all passengers can use, for in-stance, via wireless access point. Thus, all conceivable mobile end devices of the con-sumer electronics world that are already in existence would gain free entry into the pre-viously closed system of the automobile. The upside is that anyone can use the Inter-

net connection provided by the car or inter-act with the car independently by smart phone, tablet à la iPad, laptop or mobile nav-igation device.

The downside is that automobile manu-facturers would only provide their vehicles as wireless online access systems with vir-tually no control over the transmitted con-tents and intended uses. Having said that, practically any type of interaction with the vehicle and its systems seems possible. “This would also enable the comprehensive diagnosis of the vehicle outside the auto repair shop, which is already the norm in other industries such as the aviation indus-try,” comments KPMG automotive expert Dieter Becker on his experiences. A car can already be easily controlled with an iPad

“ A market worth billions is being created. There is a large amount of interest, not only in Europe, but also in the USA and China.”

Horst Leonberger, Managing Director of Telekom AG in the “Networked Vehicle” fi eld

6 / AutomotiveNow


© 2011 KPMG Europe LLP, a UK limited liability partnership, is the legal entity which effectively controls a number of the independent KPMG member fi rms affi liated with KPMG International Cooperative (“KPMG International“), a Swiss entity. KPMG Europe LLP and KPMG International provide no client services. All rights reserved.

based on the latest technology thanks to the built-in movement sensors, so who needs the automobile manufacturer and the traditional steering wheel?

Update capability is crucialThe scenario “car in the Internet” works according to the opposite principle. In this case, the car itself becomes a mobile In-ternet-compliant device and creates its own value perception via networking. The main problem is the varying lifecycle of CE technology and automobiles. The big advantage for OEMs is that by using these proprietary software solutions they can largely retain control over the con-tents and services offered, as, in contrast to open-source-based software, they

could only communicate using providers approved by them via the interfaces of-fered in the car.

Nevertheless, the question still arises as to why it takes so long to develop a car model compared with IT elements. “IT can be so quick because the electronics work virtually without any power and do not have to withstand any torques,” explains Professor Jürgen Stockmar. People and goods could not be transported without power and torque, and would have to stay put, continues the General Manager of Magna International in Graz, who has di-rected development at Audi and at Opel.

It becomes a problem when the com-munication devices are permanently con-nected to the vehicle, based on the model

of the conventional car radio, as young shoppers of tomorrow are honing their hab-its based on fast-moving goods, such as music players and video games. They are more interested in discussing iPhone ver-sus Android rather than the merits of a top-of-the-range vehicle versus a reasonably priced small car. In fact, the previously ridi-culed small car could in future be consid-ered more desirable compared to a top-of-the-range vehicle simply because it has the right, i.e. more easily updateable, connec-tivity system on board. To keep up, the de-velopment machine of automobile manu-facturers is running at full speed.

“Connected Drive meets Effi cient Dy-namics” is, for example, the formula of the BMW Group, which it wants to use to link the car and the Internet. With the function “Message Dictation” e-mails can not only be acknowledged, but also answered at the same time. “To always ensure freedom from distractions and therefore traffi c safe-ty, the e-mail functionality is only usable to a limited extent while driving,” explains Marc Bechler, the expert in charge of micro pauses at BMW. At present it is diffi cult to estimate whether the increasing complex-ity will actually remain manageable for the driver. Future traffi c legislation will there-fore have to become active in this fi eld.

“To be able to carry out the diverse number of conceivable functions in the long term, the connectivity unit in the car

Traffi c information in real-time: In the fi eld trial simTD (Se-cure Intelligent Mobility – Test Area Germany), Ford is testing new technologies for future-oriented car-to-X communication. The test in Friedberg, Frankfurt, is the fi rst comprehensive trial for car-to-X communication in Germany.



must above all be updateable,” says KPMG IT expert and partner Sebastian Paas. To do this, either the communication unit would have to be replaced and so must be no big-ger than a conventional smart phone, or the unit which acts in the vehicle as a mixture of router, radio and telephone and becomes updateable in form of a renewable memory unit through fl ash updates. Both options ensure that a connectivity-optimizable ve-hicle can be technically remodeled several times in the course of eight to sixteen years.

In this context, the solution from Audi can currently be regarded as a model for the neatly executed functional separation of what has to be protected by the OEM as sacrosanct data traffi c and data traffi c ele-ments that come in from outside as open-source-based services. The system is called “Modular Infotainment Units” (MIU). Its technical control center is a modular central computer that drives the so-called MMX Board (MMX: Multimedia eXtension). This modular approach makes it easier to update the MMI system hardware within short cy-cles at a moderate price. The MMI system stays up-to-date, as it is structurally very simple to replace the MMX module. This process is similar to the typical replacement

of a mobile phone every two years for a more up-to-date and effi cient unit. Between these mechanically based update options, fl ash-managed software maintenance anal-ogous to Windows safety updates or iTunes modernization can be carried out inconspicuously in the background.

For Horst Leonberger, Managing Direc-tor of Telekom AG in the “Networked Ve-hicle” area, it is already very clear that we are dealing with a market worth billions. Therefore, Telekom, for example, wants to offer an open solution for mobile devices based on the Google operating system An-droid. “This system is popular worldwide and offers the most dynamic growth,” says Leonberger. Telekom is working with Conti-nental on this. The result is an infotainment system called AutoLinq. “Currently we are offering it to all manufacturers worldwide, and there is a large amount of interest, not just in Europe, but also in the USA and Chi-na,” says Leonberger.

Traffi c fl ow sensor for carsOther OEMs are pursuing slightly different paths with other partners, but essentially they have the same intentions. Ford, for example, is working with Microsoft on the

Sync system that can use the same apps as standard smart phones via the platform called Open XC. In addition, in September 2011 the automobile giant presented its partnership with the start-up company Bug Labs in San Francisco. The iPod, iPhone and iPad could now, so to speak, be followed by the iCar. The question is only whether drivers have much to gain from Facebook on board and playlist fea-tures alone?

Other applications, such as the in-creased precision of general traffi c man-agement, appear much more pioneering. They are of particular importance in Euro-pean conurbation areas. Traffi c jams in-volving connected cars, for instance, are identifi ed when they develop, thanks to clear information provided by vehicles act-ing as traffi c fl ow sensors, and alleviated in good time by means of dynamic route management, which not only saves time, but also energy and money. Traffi c sen-sors in streets and traffi c lights also com-municate with road users and inform them about red phases, road management or ways of shortening their route.

In emerging markets such as India, these economic traffi c management com- Ph

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Virtual assistant on board: Toyota exhibited the Fun-Vii (Fun-Vehicle interactive internet) at the Tokyo Motor Show. A head-up display projects important information into the cockpit, with the vehicle downloading the programs via automatic update.

8 / AutomotiveNow



ponents are still a long way off due to a lack of network sensor systems. On the sub-continent, the car is still regarded as a convenient substitute for bicycles or mo-peds. The story is different in China, where the endless traffi c jams resulting from the fi rst wave of motorization, a typi-cal feature of undeveloped traffi c systems, are already an established part of daily life.Therefore, the need for automotive IT is growing with the time spent waiting, and it is establishing habits which are still alien to the West (see interview with Oliver Bahns on page 13).

According to experts, the share of elec-trical and electronic components in a car’s added value will increase to well over 50%, and not just as a result of rapidly developing electromobility. At the moment it accounts for only around 35%. In other words, it costs € 30,000.00 to produce and sell a mid-range car, leaving only one percent profi t. However, if a customer orders the “naviga-tion system with high-end audio” option for € 3,000.00 from the list of interior fi ttings, € 2,500.00 of net profi t is left in the kitty from these items alone.

The clever car will not only optimize the margins of manufacturers and traffi c man-agement, but also energy consumption. Between Finland and Portugal drivers cur-rently spend 24% of their time in traffi c jams. This standstill combined with unfavor-able route planning not only causes 50% of fuel consumption; this time spent unproduc-tively also leads to annual lost economic output of € 80 billion in EU countries. Econo-mists and ecologists are thus hoping for more traffi c effi ciency from connected cars.

Rolling networkTheir wish is in no way utopian. The tech-nical safety applications and improved real-time navigation in particular make swift socialization of connected cars a neces-sity. All traffi c fl ow indicators work better the more participants are online in the sys-tem. The interconnection of the car with its environment is an all-embracing project according to currently prevailing fi ndings. It covers not only contact with external data servers, but also communication with other vehicles and the traffi c infrastruc-ture. This is where car-to-X communica-tion technology comes in.

In contrast to current server-based tele-matics systems, car-to-X communication no longer needs central service providers to combine and process the information; this is done by the participants themselves by spontaneously networking with each other. Given the benefi t that such a rolling net-work can generate within a few years, an-other idea is gaining in importance. Do you really want to exclude all the vehicles on the road without WLAN connectivity? Continen-tal and partner T-Systems have already spotted this business opening and are working fl at out on an upgrade solution for existing vehicles due to enter the market in

advance of the mass production solutions for new cars. The second-hand market also continues to offer a very promising seg-ment, as it is twice as large as the market for new cars and can also reach the young clientele much earlier due to the low price.

This means market players are virtually forced to extend connected cars to the broad mass market, and not only due to the expected demand. Given the 50 million roll-ing fl at rates on Germany’s roads alone, the potential earnings will do the rest to radi-cally speed up introduction.

Especially in Western European metro-politan areas, with their dense traffi c, hun-dreds of thousands of electric cars will be on the road in future, but almost perma-nently on reserve power given the limited range of their battery systems. The ques-tion here is the extent to which unlimited use of new technologies will be possible in electric cars or whether it will ultimately be down to a drive or go online decision.

It is certain that, thanks to online naviga-tion, drivers will in future not only be able to book and pay on the move, but will also know where they can fi nd the next fi lling station. “This also opens up an opportunity for energy companies to further extend the Smart Grid concept and establish electric cars as an integral part of the intelligent electricity grid, using them for bi-directional electricity transfer or as temporary

Clear overview of everything: To control high traf-fi c volumes, Hesse is relying on modern control centers and intelligent vehicle-infrastructure linking.

Communicating tailgate: With the aid of state-of-the-art (O)LED technology, Edag is transforming transparent tailgates into projection areas and therefore making car-to-car communication visible and usable for all drivers.



storage,” says Dieter Becker from KPMG. Connectivity-supported electromobility also opens up undreamt-of possibilities in the area of car sharing. Operators can bill on the move, juggle and monitor the fl eet, or have a vehicle which is not being used serviced. The insurance industry is also viewing the new technologies with interest. For exam-ple, through intelligent data evaluation, a billing structure based on “Pay per Use”

could be implemented. “From an insurance point of view, such models are quite con-ceivable,” explains a spokesman from the General Association of the German Insur-ance Industry (GDV). Cars that can stop by using connectivity-based emergency brak-

ing in the face of an impending junction ac-cident or rear-end collision could then pay a lower premium.

In less densely populated rural areas, connectivity will continue to play a minor role, since issues such as parking space logistics or traffi c jams are not so important. Here the emphasis is on ensuring traffi c safety by adapting speed, although GPS-based systems could limit hazardous bend

speeds using connectivity. Car-to-X com-munication is used to warn of black ice or report obstacles in places where visibility is restricted. All OEMs are intensively re-searching the new technologies and, espe-cially in the differentiation of hardware and

software, manufacturers want to stand out from the competition and forge their brands. In the places where they support the driver or the function of the car, the electronics are to work in an emphatically inconspicuous manner. On the other hand, where the car occupants perceive them, they are intended to fascinate.

The costs of developing a new infotain-ment system are about the same as for a completely new engine. Profi tability essen-tially depends on how easy the connected car is to operate in the end. Google is also observing the latest developments with great interest: “In future we do not just want to be represented on laptops and smart phones. We also see the car as a modern and very capable mobile end device that our applications can be used on,” says Wieland Holfelder, Head of Technical Devel-opment at the Google Research Center in Munich, who was previously in charge of the Mercedes IT research department in Silicon Valley for eight years. In future, he wants drivers to be able to search for places worth visiting directly on the steering wheel when they go on vacation. They should have the contact details of their friends and Ph

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“ To be able to carry out the diverse number of conceiv-able functions in the long term, the connectivity unit in the car must above all be updateable.”

Sebastian Paas, KPMG IT expert and partner

10 / AutomotiveNow



acquaintances in the car, navigate via Google Maps and be able to use the latest traffi c information – all via voice control.

With or without voice control, connect-ed cars have many redeeming features. Above all, they are the upcoming vehicle of the online generation, which intuitively knows what web feature to use and how. However, this generation does not have the income yet to purchase premium

Hot spot car: Audi connect facilitates wireless Internet ac-cess using a WLAN hotspot in combination with the Bluetooth car telephone online. With a laptop, iPad or net-book, backseat pas-sengers can conve-niently access informa-tion and e-mails or surf the Internet during the journey.

Keeping track: The head-up display projects driv-er-relevant information on request from assis-tance systems, navigation or telephone as well as warnings on the windscreen.

Glossary: Connectivity variants

Everything is linkedCar-to-car communication contributes to increasing active and passive safety: Each vehicle with connectivity equipment is a constantly active traffi c sensor (basic statement: rolling/not rolling) and provides all oncoming cars with a clear signal as to whether the road which has just been used is free or, after use of ABS, ESP or even an airbag, the entire surrounding traffi c must be warned to exercise care.

Car-to-infrastructure enables all imaginable traffi c information from traffi c light signals and temporary speed limits to free parking spaces to be received and processed in the car. Even alerts based on time of day or weather fi nd the right recipients in real-time.

Car-to-OEM/service is already in action now in top-of-the-range vehicles. The data carrier ignition key from Audi, BMW or Mercedes makes all forms with details such as mileage, service intervals or owner data obsolete in customer services. Theoretically, the TÜV (German Technical Inspectorate), district administration offi ce and traffi c control offi ce should no longer have to deal with piles of printed paper thanks to the wireless communicating key.

Car-to-enterprise: Connected technologies open up new business models for almost all existing and future automotive players, from fuel station or car park operators and tire dealers to providers of geolocation-based services or web communities (for instance, for eco-driving).

Car-to-home/offi ce brings e-mails, telephone calls, address books and all other modes of communication that have long become the norm in the offi ce or home offi ce into the car. This also includes the possibility of switching on the car heater from the breakfast table by web-based remote control or researching the route for the weekend on the computer and sending it to the car by mouse click.

Car-to-X connectivity: “X” stands as a variable for the fact that the Internet of the future will in principle make it possible for anyone and anything to interact. Anything with an IP address can also be directly connected to the car of the future. From the garage door and the house lighting to the oven – in the future, pretty much everything will be remotely controlled.

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automobiles. This is also why connectivity will not follow the standard top-down mar-keting mechanism, according to which new technologies from the premium mod-el fi lter down to the small-car category

only gradually. Corresponding solutions will therefore primarily appear as standard equipment in trendy small cars rather than drifting into the market as an expensive extra feature for luxury limousines.

At present, it remains to be seen which companies and sectors the business of the Internet in cars will include, and whether car manufacturers or web providers will stay ahead of the fi eld. Having said that, IT cor-porations will not be able to build the highly complex automobile themselves in future

either. In production alone, where per mod-el around 8,000 individual parts have to be combined 2,000 times per working day, the experience of well-versed auto experts is indispensable. It is also questionable who

has the better sales arguments for the fu-ture, as low-budget car corporations such as Tata, Lada and Dacia as well as the pre-mium brands Audi, BMW and Mercedes are all working on connected cars.

Admittedly, on the eve of the new IT-defi ned era, the latter have the edge, as do their current partners Continental, T-Sys-tems and ZF, but even if we have not heard much from the other manufacturers yet, they will defi nitely not want to miss the boat. That much is clear at least.

New alliances require clear role distribution

The connection of car and Internet is undoubtedly one of the key future changes in the automobile industry. The strong demand for Internet-compliant devices in the car is driven by a young category of consumers. Nowadays, they mainly use functions that they are famili-ar with from social media.

This trend will develop in quick steps, in that as soon as technical standards for data transfer and security have become established and the supply with real-time data is guaranteed, new services for in-creasing driving quality and traffi c safety will become established.

In the automobile industry it will be important to conclude strategic alliances with information and telecommunica-tions companies at an early stage, as they are the basis for new business mo-dels. From the point of view of KPMG, it is crucial to clearly differentiate the roles within these alliances. In addition, these alliances must be agile in order to quickly adapt new business ideas and new technical developments.

Sebastian Paas, Partner, Advisory, KPMG in [email protected]

Expressive optics: The design study Mercedes-Benz Concept A-Class integrates state-of-the-art connectivity technology. The interior can be seen with a control console.

“ We also see the car as a modern and very capable mobile end device, on which our applications can be used.”

Marc Bechler, expert in charge of micro pauses at BMW

12 / AutomotiveNow



HP wants to stop production of tablets and smart phones, and is looking into hiving off the PC division. What impact will these decisions have on your strategy in the area of connected cars?Oliver Bahns: None. Our strategy for con-nected cars is not primarily focused on in-car components, but rather on the eco-system of services in which the car will be increasingly embedded. This approach cor-responds to our current position in the au-tomobile industry and HP’s corporate strategy as a whole. We currently gener-ate 80% of our turnover worldwide in the automobile industry with IT services, i.e. with consulting, project services, software development and outsourcing. And a core element of our corporate strategy is cloud computing. The aim is to aggregate and interlink IT resources and IT programs so that they are accessible to users regard-less of time or place. And that is exactly what we are talking about with connected cars. The attractive-ness of a mobility product will in future depend on what services I can operate from it and how well they are interlinked. If I’m driving to an airport in my electric vehicle, I want to know where I can fi nd a parking space with a fi lling station, but also what plane I can catch, and at the destination I need a rental car. That is to say, a uniform platform is needed that combines, provides, manages and bills all

these services. This is our core compe-tence in the area of connected cars.

Consequently, the subject of connected cars requires strategic realignment on both sides, in both the automobile and the IT industry.Oliver Bahns: Firstly, one must under-stand that HP already plays a decisive role in around 50% of the solutions relating to connected cars. This covers, for example, telematics, embedded systems and cloud-based platforms for mobility services. Of course, we are also heavily committed to the development and operation of tradi-tional IT technologies that provide the foundations for this. In addition, we are pushing ahead with strategic realignment. This is essentially a response to the mega-trends that are currently shaping social

and economic development. For instance, the explosive rise in the interlinking of hu-man beings and devices as well as the change in generation. Soon the user group of so-called “digital natives”, which has been using pull-down menus since kinder-garten, will be taking on responsibility in the business and management world. This will also entail a fundamental change in business models, and, in all these changes, IT and the Internet will play a supporting and driving role. Hence, the convergence of traditional technologies and business models on the one hand and the world of IT and the Internet on the oth-er will take place on a grand scale. Espe-cially in the automobile industry you can clearly sense this, particularly if you are frequently out and about in China, like I am. We want to support our clients with

HP wants to stop production of tablets and smart phones, and is looking into hiving off the PC division. What impact will these decisions have on your strategy in the area of connected cars?Oliver Bahns: None. Our strategy for con-

Connected cars are one of the next key steps in the evolution of the automobile. Hewlett-Packard is at the vanguard, which makes it all the more exciting to fi nd out what technologies and business models the HP automotive experts Oliver Bahns and Joachim Klink are fo-cusing on with regard to automobile networking. Interview: Michl Koch

“The car will be a client and an asset at the same time.”

AutomotiveNow / 13

Business partner: Hewlett-Packard


“ The trend is from ‘in-car’ to ‘off-board’. IT in the car must be standardized and open, as only then can I load the latest programs.”

this change by providing horizontal IT tech-nologies and services on the one hand and industry-specifi c IT solutions on the other. Connected cars is a perfect example of our strategy.

If IT companies such as HP want to have an important say in the subject of connected cars, two worlds will collide: While automobile manufacturers develop and build their vehicles according to a strict roadmap for years and years, IT companies are continually publishing new applications and also include users in optimization. How will these two worlds get along when they work together?Joachim Klink: IT companies also have product road maps that extend for de-cades, and systems are maintained and updated for decades. Windows XP, for example, was launched on the market in 2001 and will be supported by Microsoft until 2014. You can fi nd even longer life-cycles in the area of business-critical sys-tems, for instance, in distribution logistics. There are defi nitely differences between the IT and auto industry when it comes to innovation cycles. The functionality of a software program can be enhanced daily in the form of updates if necessary, but this is only possible on a limited scale with mechanical systems such as engines or

chassis. Nonetheless, this difference will also lessen over time, as cars will consist more and more of IT, and customers will no longer be satisfi ed that no more innova-tions take place in their vehicle after pur-chase.

In what area is it particularly diffi cult to combine the two worlds?Joachim Klink: The fundamental chal-lenge is to square the innovation speed of IT and consumer electronics with the re-quirements for vehicle safety and stability. Safety is the number one challenge, as in this case we are not just talking about data theft, but also substantial damage to ve-hicles and people. The second challenge is the harmonization of innovation cycles, namely how can we succeed in making innovations from IT available in cars as quickly as possible? From our point of view, we have no choice but to make the car updateable, like PCs and smart phones. The third big challenge is the combination of the business models. You can obtain a smart phone almost for free if you take out a mobile phone contract. Ap-ple and other manufacturers offer inde-pendent developers a platform where they can offer their apps to end customers di-rectly. Customers receive free services if they agree to ad insertions or give permis-sion for their movement data to be used.

How can we transfer such models to the automobile industry? What role will deal-ers, suppliers and free app developers play in future? There are still exciting develop-ments to come.

And where do the two worlds already harmonize particularly well?Joachim Klink: In the area of traditional telematics with proprietary systems. This is technically possible, quite safe from the point of view of security and requires no creativity in terms of the business model. However, in our opinion, this is the wrong way to go. The trend is clearly from “in-car” to “off-board.” In other words, the majority of the services are reproduced outside the vehicle, on cloud platforms. On the other hand, IT in the car must be standardized and open, as only then can I load the latest programs. And only then am I able to bring the innovation speed of the IT world to the car. New functions and services are no longer expensive accesso-ries, but rather integral parts of the vehicle or the mobility concept.

Incidentally, what use is on-board Internet to the passenger anyway?Joachim Klink: It’s not just about bring-ing the web into the car. It’s mainly about linking the car to the web. Modern mobil-ity concepts such as the current car-shar-

Joachim Klink is Director of Automotive & Aerospace EMEA at HP. The qualifi ed mechanical engineer has 17 years of experience in the automobile sector and related industries. Before Joachim Klink moved to HP in 2008, he was in charge of Global Business Development & Consult-ing at T-Systems in the fi eld of Supply Chain Management and was responsible for the car IT innovations.

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Business partner: Hewlett-Packard


As Global Director for Automotive & Aerospace, Oliver Bahns is responsible for international strategy and all business solutions for automotive and aerospace at HP. The graduate industrial engineer has acquired over 15 years’ experience in the automobile and manufacturing industry in leading consultancy and IT companies in Asia, Europe and the USA. Before he joined HP in 2008, he was in charge of global business development and consulting for the automobile and manufacturing industry at T-Systems.

“ HP already plays a decisive role in around 50% of solutions relating to connected cars.”

ing approaches are unthinkable without such interlinking. In addition, there are a number of very practical applications that become much more productive and con-venient. For instance, an electronic log book, long-distance diagnosis by the auto repair shop or the mobile offi ce, which is controlled by spoken commands. With all the benefi ts that this brings, we should not forget the importance of fun, games and entertainment. Oliver Bahns: We think it is likely that the development of connected cars will be largely driven by the demand for entertain-ment and a digital lifestyle. Just look at the trend for mobile phones and smart phones. Mobile phones did not become a mass communication vehicle through business people, but rather due to the fact that children and adolescents discovered texting as a means of communication. The breakthrough of smart phones as a mass phenomenon started with Apple’s iTunes store and continued with the app store. The development of smart phones has therefore been driven by the simple avail-ability of all types of music, games and

digital entertainment, and only now have smart phones become a serious business tool. If we assume that there will be simi-lar developments in the automobile sector, this means that innovations in the area of connected cars will not come from the luxury segment in the next few years, but mainly from the small-car segment, as these are currently the customers that are setting trends in terms of digital lifestyles.

What factors will determine the triumph of consumer electronics in the car? Joachim Klink: Firstly, consumer electron-ics will triumph alone. Any cloud-managed mobile phone navigation and any infotain-ment application on a smart phone will in future beat the systems currently in use when it comes to value for money. The question is therefore the other way round, i.e. what factors will help automobile man-ufacturers to benefi t from the triumph of consumer electronics? In this case, it can only be meaningful interaction. Most peo-ple want to use their smart phone or their tablet PC in the car and not an additional platform in the car that does the same

thing. Anyone who pursues this approach and solves it well has the upper hand.

What concept will come out on top in HP’s opinion: the car that goes into the Internet or the Internet that goes into the car?Oliver Bahns: Both will happen. To talk in IT jargon, the car will become the client and the asset at the same time. It will have access to web services and con-tents, and it will become a data supplier or even part of services that lie outside the vehicle – for instance, for traffi c manage-ment, energy management or e-mobility. The car will become part of the Internet.

Could automobile manufacturers also become contract manufacturers for the IT industry in future? To put it in drastic terms, will we one day no longer be buying an Audi, BMW or Mercedes, but rather an HP?Oliver Bahns: That will defi nitely not be the case. The automobile and IT world will converge, but the basic order will not be turned upside down.



On the road together: Companies in the automotive industry are pursuing partnerships across all national borders and industries. Together with their partners they are moving into new markets and developing innovative technologies.

16 / AutomotiveNow

Expertise: Joint ventures and alliances


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Nowadays it is impossible to imagine the globalized automotive industry without international alliances. Having realized this, the market players are acting accordingly, but frequently without knowing that there are other effective partnership models besides joint ventures. Text: Brigitte Romani

In recent years hardly a day went by without a new alliance being announced in the automobile indus-try. The omnipresent economic challenges posed by globalization and ecological requirements in terms of the fuel concepts of tomorrow are making

corporate partnerships an almost essential tool in car-makers’ and automotive suppliers’ strategic planning for a successful future.

Manufacturers are now cooperating on a wide array of projects for a range of different purposes. Renault and Nissan, for example, have had a strate-gic alliance in place since 1999 that has delivered economies of scale and synergies for a long time now, including in the development of joint vehicle platforms. BMW’s joint venture with PSA Peugeot Citroen and Daimler’s with BYD (Build Your Dreams) promote innovation through the joint development of hybrid and electric vehicle technologies. Corporate cooperation plays a big role in entering new markets as well. Nearly all Western manufacturers are sharing their know-how with their Chinese counterparts to avoid getting left behind in the country’s exploding market.

The Volkswagen Group’s joint ventures with Chi-nese manufacturers SAIC and FAW are examples of the strategic importance of alliances. These partner-ships have allowed VW to achieve unrivaled market leadership with a sales volume of 1.9 million vehicles and a share of roughly 17% of the Chinese automo-bile industry in 2010.

OEMs are also cooperating with suppliers, like Daimler’s arrangement with Japanese carbon fiber specialist Toray, and BMW’s deal with SGL Carbon to make lightweight materials for car manufacturing. Manufacturers are looking to utilize such innovative materials to improve fuel efficiency, emissions and safety. Partnering with suppliers is an even higher priority, however, with such electronic components as batteries, e-motors and power electronics. Daimler AG’s two joint ventures with the chemical and energy corporation Evonik are prime examples of this. With Li-Tec Battery and Deutsche Accumotive, the two companies are attempting to develop high-perfor-mance lithium-ion batteries for use in the electric ve-hicles of tomorrow.

Cooperation structures have also become more commonplace in the automotive supplier industry in recent years. As far back as 1999, Conti Tech AG’s drive technology joint venture with the Shanghai sup-plier Ningbo Jiebao represented a classic market en-try strategy for establishing local production in China. Today Continental is the sole owner, and a key sup-plier in the Chinese automotive market.

The 2008 KPMG study “Partnerships in the Auto-motive Supply Industry” provided a detailed look at the challenges involved in supplier partnerships in emerging markets and factors contributing to their success. The above examples illustrate how the auto-motive industry has frequently employed the classic joint-venture structure for partnerships for strategic

Strategic alliances

The classic

joint-venture

approach is often

utilized as a

partnership

option for

strategic reasons.

AutomotiveNow / 17© 2011 KPMG Europe LLP, a UK limited liability partnership, is the legal entity which effectively controls a number of the independent KPMG member firms affiliated with


reasons. Depending on the objective and particular circumstances, various different forms of cooperation should be considered, however. Alongside equity-based models like joint ventures and strategic allianc-es with mutual shareholding, contracts may also form the basis for partnerships.

These include joint R&D alliances, co-marketing and co-distribution agreements. Products and tech-nologies can also be bought and sold by way of li-censing (IP R&D). Thus a whole range of partnership structuring options exists over the entire value cre-ation process for both suppliers and OEMs. Along-side the potential benefits, alliances naturally involve challenges as well, which must be overcome for project success.

Numerous key issues must be carefully analyzed before entering into any sort of partnership arrange-ment, including accounting aspects and the fiscal effects of the planned cooperation as well as manage-ment and control issues, and legal and fiscal implica-tions. Based on these dimensions, the envisioned form of cooperation must be carefully balanced in order to ensure the optimal definition of common aspirations. A number of examples are discussed hereafter, highlighting specific forms of alliances and the relevant issues to be considered:

Joint ventures offer the most accounting transpar-ency and the best control options. Specifics regarding accounting and consolidation have to be clarified, however. Know-how or other assets contributed must be valued and, where appropriate, hidden reserves have to be disclosed. Purely contractual alliances like joint R&D partnerships involve less man-agement work, as separate accounting is generally not required.

Corporate-law-based partnerships are generally attractive in comparison to in-house options due to the potential cost savings available through shared research and distribution as well as centralized func-tions. In joint R&D arrangements and partnerships conducted under research and development con-tracts, cash contributions based on contractual up-front or milestone payments can be an attractive option for financing development costs. These arrangements do, however, always involve additional costs for monitoring the contractual partner.

Both joint ventures and contract-based partner-ships have the advantage regarding management and results monitoring that they allow deficits in resourc-es and know-how to be compensated for. In contrast to joint ventures, contractual partnerships generally present a problem in terms of appropriately allocating

Alliance options (equity-based)

Joint value creation Alternative cooperation models across the value creation process

Research*

Objectives company one

Development* ProductionMarket launch and distribution

Testing phase/further development until ready for mass production

Lower R&D costs, joint R&D as avenue for utilizing partner’s sales

Contractmanufacturing

Better security if in-house development runs into trouble

Lower production costs, shared usage of human resources

Potential distribution at company one as complementary asset incombination with marketing through the partner

Objectives company two Lower R&D costs, know-how sharing among partners

Mostly joint value creation based on shareholding (joint venture or minority stake)

Gaps in pipeline, potential fall in sales, insufficient utilization of distribution

Better access to procurement market

Distribution system in place

Joint R&D agreement

*No information on research activities Source: KPMG, 2011

Sharedmanufacturing

Alliance options (contract-based)

In-licensing

Out-licensing

Out-licensing

Co-marketing/distribution

Joint ventures

offer the most

accounting

transparency

and the best

control options.

18 / AutomotiveNow

Expertise: Joint ventures and alliances


shared costs. It is therefore essential to reach an agreement with the partner on uniform performance metrics. One disadvantage of corporate-law-based partnerships is that businesses have to be prepared to share and thus potentially lose unique core compe-tencies.

The principal legal implications of alliances con-cern corporate-law-based control and supervision op-tions, antitrust issues and possible merger control processes. While joint ventures do offer direct corpo-rate-law-based control and management, unlike con-tractual arrangements they may require a merger con-trol process.

The principal tax implications for joint ventures stem from the location chosen for the company’s reg-istered offi ce. Low tax rates and improved subsidy potential may make founding a joint venture look more appealing than a contract-based partnership. If IP or other assets are contributed to the joint venture, the parties will usually have to disclose off-book re-serves and pay tax on them. In contractual partner-ships, start-up losses can be utilized by the respective partners. When an alliance ends, dividing up the joint-ly acquired know-how poses a more complex chal-lenge in a corporate-law-based situation than a con-tractual one.

Successful alliances ultimately require a cross-functional approach, especially cross-border ones, due to their complexity. Experts from all departments concerned thus have to be involved in decision mak-ing early on. And in every case, the phrase “Let’s do it together” must be avoided. It is much more impor-tant that the partners have a clear idea of what the respective responsibilities are in order to avoid costly and unnecessary redundancies.

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Brigitte Romani joined KPMG in 1987. Since 1999 she has been a partner in the area of international tax law at KPMG in Frank-furt, where she works mainly with international corporations in the fulfi ll-ment of their tax obliga-tions. As Global Automo-tive Tax Leader, Brigitte Romani is in charge of the

worldwide Automotive team for the Tax function. She is highly experienced in structural consulting for international corporate groups active in the automotive industry. She primarily focuses on issues impacting multiple service areas that arise, for example, in the context of restructuring and partnerships.

About the author

Existing and planned partnerships

The new electricity networkThe electromobility trend demands a re-think. Businesses without experience in manufacturing electric motors, developing lithium-ion batteries and electricity distributing and billing have to share some of their core expertise with their business partners.

Engines: Daimler, for example, announced in April 2011 that it would be developing electric engines for tomorrow’s e-cars jointly with existing supplier Bosch. Ford is cooperat-ing with Magna and Renault in this area, buying electric engines from Continental. VW has opted to make its own electric engines like all its other engines, though cooperating with Continental to some extent. BMW is accessing the necessary know-how via a joint venture with PSA Peugeot Citroën. The French rely on Mitsubishi’s iMIEV for their electric vehicles, the iOn and C-Zero.

Batteries: For hybrid and electric cars, lithium-ion batteries are almost more important than the engine. The industry needs new partners for this, with whom they have never collaborated before. The most important ones come from the electronics industry. VW, for example, is partnering with Sanyo and Toshiba. Established battery maker Varta is a partner of Volkswagen. Chrysler, Fiat and BMW utilize batteries made by SB LiMotive, a joint venture between Bosch and Samsung. Daimler has two joint ventures with Evonik.

Charging: In parallel with engine and battery development, concepts are needed for charging electric cars at public stations and billing for the electricity. Nearly every major manufacturer thus already has strategic partnerships with energy providers in Europe and the US – be it in pilot projects of local scope to gather experience or to support the roll-out of comprehensive infrastructure. IT and telecommunications fi rms could get involved as well, such as in cashless billing for recharging via mobile phone and chipcard systems.

Battery technologyBMW – AC PropulsionBosch – SamsungDaimler – EvonikGeneral Motors – HitachiGeneral Motors – LG ChemNissan – NEC CorpMitsubishi – ToshibaRenault – LG ChemSanyo – Honda, Volkswagen,

Peugeot/Citroën, FordVolvo – Ener1Volkswagen – Varta

Vehicle partsBosch – ZFDaimler – TeslaFiat – SollersMagna – Hero Motor

ChassisBMW – SGL CarbonMagna – Guangzhou AutoDaimler – Toray

Engine buildingBosch – TataDaimler – RenaultFord – Chongqing Changan

AutomobileGeneral Motors – SAIC

Steering electronicsInfi neon – HyundaiMagna – IBMPeugeot/Citroën – BoschVolvo – SiemensNSK – Toshiba



China and India are considered to represent the growth markets. There is, however, yet another re-emerging giant: Russia. Although the Russian car market has been through turbulent times in recent years, the industry is once again attracting many major investors and overseas car companies. Text: Verena Diethelm

Russian Prime Minister Vladimir Putin negotiated 2,165 kilometers, all the way across Russia’s far east, from Khabarovsk to Chita, in a little yellow Lada. With his PR

move, the most powerful man in Russia and a self-confessed car fan was banging the drum in support of the Russian auto-mobile industry, and not for the first time. Putin hopes to modernize the Russian economy and to reduce its dependence on oil and gas exports by strengthening the industry.

It won’t be easy. The Russian automo-bile industry is still struggling with the leg-acy of the Soviet planned economy. Rus-sian car producers like Avtovaz reveal very vertical integration. Most stages of pro-duction are still carried out in-house. For that reason, the development of the Rus-sian car industry lags behind its Western competitors by at least 20 years.

Nevertheless, the Russian government has recognized that this type of production is uneconomical and not competitive – and is now seeking to establish a car industry according to the Western model. An ap-proach that promises success. Admittedly it will shake up the domestic car market. While Western European, Asian and US producers are increasingly benefiting from the car boom in Russia, industry experts anticipate that the proportion of Russian brands will continue to shrink in proportion to the total sales volume. The forecast seems to suggest that entirely Russian

models will completely disappear from the market in only a few years due to the in-creasingly dominant Russian/Western joint ventures.

However, this will result in tremen-dous opportunities for international car manufacturers, because more and more of the 140 million Russians can afford a car. And they need to catch up: Whereas in Germany there are 515 cars for every 1,000 inhabitants, the vehicle density in Russia is just 252 vehicles per 1,000 in-habitants. The existing vehicle fleet is also extremely outdated. Half of all the cars on

Russia’s roads are at least ten years old. An additional surge in demand could come from the infrastructure development pro-posal announced by head of government Putin.14,000 kilometers of road are to be newly developed in the next five years.

However, despite these demand stim-uli the Russian market environment is still highly volatile. The country is extremely dependent on the oil price and conse-quently prone to the associated external shocks. During the global economic crisis the Russian automobile industry experi-enced a life-threatening downturn. The Russian car boom, which had been fuelled up to that point by cheap credit and dou-ble-digit annual wage increases for the population, suddenly ended. The Russian car industry responded to the decline in

The Russian engine reignites

Waving the flag for domestic producers: Prime Minister Vladimir Putin puts gas in his yellow Lada during the 2,000-kilometer promotional tour.

20 / AutomotiveNow

Country focus: Russia


Volkswagen plant in Kaluga: The carmakers from Wolfsburg invested over 500 million euros. Up to 150,000 vehicles have been coming off the line every year since 2009.

sales by 60 percent with production ad-justments, wage reductions, short-time working, unpaid vacations and employee redundancies. Almost 28,000 jobs disap-peared at Avtovaz, and 14,000 jobs at GAZ.

But thanks to massive government aid – subsidies amounting to billions, cheap credit for car purchases and the introduc-tion of a scrap bonus – it succeeded in stabilizing demand. Since then the crisis has been overcome and sales fi gures are once again getting close to the pre-crisis level. The well-respected research insti-tute J.D. Power & Associates predicts that there are likely to be 2.21 million ve-hicles sold in Russia by the end of the year (Germany 3.24 million). By the end of this decade, Russia could take over from Germany as Europe’s largest car market.

The good growth opportunities in par-ticular, but also the government’s legisla-tive initiatives, are currently leading to a real investment boom. Russia expects foreign automobile manufacturers to in-vest seven billion US dollars in Russia by the year 2015. Prohibitive import duties, insulating the Russian market from auto-mobile imports, are to provide the incen-tive for this. And then there is what is known as decree 166: In its new edition of December 2010 it stipulates an increase in production capacity as well as a greater degree of localization as conditions for the duty-free import of components.

In order to be able to fulfi ll the require-ments, collaborative ventures with Rus-sian car producers are the most promising option for overseas investors – also be-cause the sheer size of the Russian terri-tory makes it advantageous to be able to draw on the existing supply, distribution and service networks of domestic part-ners. In return, the opportunity presents itself for Russian companies to make use of technologies and know-how that are essential for their impending moderniza-tion requirements.

For example, Volkswagen will in future build around 110,000 Jetta, Skoda Octavia

4.5

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3.43.2

2.92.6

2.32.2

2.72.4

20162015

Estimated average annual growth rate: 6,1%

20142013201220112010200920082007 20262021

1.4

1.8

Passenger car sales in RussiaAnnual growth rate in percent

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and Skoda Yeti units at the plant of Rus-sian automobile manufacturer GAZ in Ni-zhny Novgorod. VW will invest around EUR 200 million in production at GAZ. Fur-thermore, the capacity at the VW factory in Kaluga is to be increased by 50,000 to 200,000 vehicles.

US car manufacturer Ford, on the oth-er hand, is cooperating with its Russian partner Sollers, enabling joint production in

St. Petersburg at a cost of 1.2 billion US dollars. Russian producer GAZ is already assembling Chevrolet models for General Motors in Nizhny Novgorod. GM plans to fork out a billion dollars in order to expand production capacity.

French car producer Renault has meanwhile been in partnership with Lada producer Avtovaz for three years. Togeth-er with alliance partner Nissan, Renault’s share of Avtovaz is to increase from the current 25 percent to 50 percent. With the aid of this partnership, the Franco-Japa-nese-Russian trio will have manufactured almost every second car of this year’s pro-duction on Russian soil by the end of the year.

In contrast to the developments on the Russian car market, the market for com-mercial vehicles is still dominated by the three large Russian manufacturers GAZ,

KAMAZ and UAZ. In 2010 the market share of Western OEMs amounted to only about 30 percent. Their share will however certainly rise in the coming years: The fu-ture tendency for commercial vehicle cus-tomers to want increasingly high-quality vehicles, according to the Western model, is clear to see. Consequently the fi rst commercial vehicle manufacturers estab-lished in mature markets have put out

their feelers towards Russia. With an 11 percent holding in Russian heavy truck manufacturer KAMAZ, Daimler, for example, is preparing for the increasing demand for trucks with higher quality standards.

“Due to the fact that most mineral resources are found in the East and most people are in the West, there is a high demand for transport in Russia,” says Thomas Longhino, MAN CFO for Russia and the CIS countries, optimistically. In addition, Russia is considered to be a step-ping stone into the former Soviet republics – albeit with limitations. “Exporting from Russia is only profi table to the countries in the customs union, i.e. Belarus and Kazakhstan, as production costs in Russia are still ten percent higher than in Western Europe,” says Markus Osegowitsch, Gen-eral Director of VW Russia.

However, whether the further devel-opment of the Russian car industry is a success story depends fi rst and foremost on whether they succeed in establishing a network of supplier companies. “Our biggest priority is to develop a supply in-dustry over the next fi ve years,” says Alexej Rachmanow, who is the head of the department responsible for the car industry in the Russian Industry Ministry.

Currently, however, only fi ve percent of Russian component manufacturers are capable of producing them to Western standards. International suppliers have also so far been reluctant to establish their own production facilities in Russia. This is because the quantities to be able to oper-ate component manufacturing economi-cally within the country are currently still too small for international suppliers. And there are also some not insignifi cant in-vestment risks in Russia: poor legal secu-rity, escalating bureaucracy and conse-quently corruption. The fact that raw mate-rials are often not available with the required standard of fi nish and that skilled employees are in short supply is also off-putting – not to mention the patchy and outdated infrastructure.

Admittedly, suppliers like the US com-pany Visteon, the German damper

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up to 3 yearsover 10 years

4 to 6 years

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Age structure Russian car parkAll figures in percent

Antiquated vehicle fl eet: Almost half of all the cars on Russia’s roads are more than ten years old. And only around one in four of the country’s population has any sort of vehicle.

22 / AutomotiveNow



“Powerful allies cushion volatility risk“ Peter Korolev, Manager, Strategy Group, KPMG in Russia and the CIS, talking about opportunities, risks and strategies in a world somewhere between the planned economy and unbridled capitalism. Interview: Mirko Hackmann

Mr. Korolev, after some setbacks the Russian car market is now once again seen as very attractive. Will there be more joint ventures?If we are talking about the OEM segment, it is unlikely that there will be any more joint ventures beyond those already in existence. The reason is a dramatic political turnaround: At the end of 2010 Russia introduced a ruling that the timeframe for the establish-ment of new joint ventures would end on May 31, 2011. So the four existing cooperative arrangements, Ford/Sollers, Daimler/KAMAZ, VW/GAZ and Renault/Nissan/AvtoVAZ, are the sum total and there will be no more. Things look different in the OES segment. A few joint ventures have been announced between Russian and international suppliers by the end of 2012, which will benefit from state funding. I see major potential for cooperation between Russian metallurgy giants and international tier-one and tier-two suppliers in particular. In addition, there are numerous regional governments that are very interested in establishing automotive clusters around existing production plants.

What must a foreign company be prepared for when it decides to get involved?With hindsight it has to be said that the cooperation processes between European or other international automotive equipment manufacturers and Russian companies are associated with a few challenges. When it comes to the way they see themselves, Russian OESs are still firmly in the grip of the Soviet era – and the business culture is correspondingly different. Even so, local partners are extremely useful because they have proven strategies for dealing with the authorities and market peculiarities. They also have direct access to the country’s traditional supplier companies. Home-grown managers are also more successful as a rule than teams sent in from abroad, which often take a long time to get their bearings in the unfamiliar environment.

Are there any successful strategies for protecting yourself against the extreme volatility in Russia?Because of Russia’s high dependence on international oil and raw materials prices, there is a high level of volatility, which can lead to considerable damage to growth in the short term, as in 2008. However, in the medium and long term the Russian economy – and in particular the Russian automotive market – has tremendous potential. Forecasts are based on the assump-tion that growth in this segment will increase from 2.2% this year to 5.4% within 15 years. And as demonstrated by VW, with clever management and a little patience it is possible to make a profit in spite of the crisis.

It might well be more difficult for family-run SMEs...I must admit that the risks are greater for that type of company, and a temporary downturn can have serious consequences. For that reason it is important to find a partner with a strong market position, guaranteeing secure sales even in times of crisis. However, in the end a small market participant cannot protect itself completely against economic volatility. When you invest in emerging markets you expect strong growth, and strong growth is associated with a high level of risk. The aim must be to manage this risk by carefully selecting your client portfolio and not enlarging your production facilities without knowing who is going to buy the products.

Do you know any more examples of successful joint ventures in Russia?Even though they had a few problems with corporate management at the start, Renault and Nissan successfully gained access to a one-million annual production facility through a joint venture with AvtoVAZ, the country’s biggest car manufacturer. In two or three years the alliance plans to build up its holding in AvtoVAZ to a controlling majority. Other joint ventures worth mentioning are those

of KAMAZ with Daimler or with OESs such as ZF Friedrichshafen, which produce gearboxes for their Russian partner. KAMAZ has a lot of backing in the country and enjoyed a lot of support from the state during the crisis. And in 2010 and 2011 the figures were brilliant.

How was this success possible?

Of course I don’t know the internal details, but viewed from the outside ZF was certainly well advised, because it paired up with the country’s largest manufacturer of commercial vehicles, which will also maintain this position in the next few years. ZF was also able to develop a technical solution that could be integrated into existing commercial vehicles. Similar factors apply to the joint venture with Cummins, which builds engines for KAMAZ. So it is a promising move to find a strong and well-integrated local partner and to supply it with high-quality components at a cost-effective price. As the standard of technology in Russia is lower than in the West, it is possible to achieve good profits with high-quality modules at fair prices, because that is just what is needed when it comes to mass-market production volumes.

If Vladimir Putin is president again in 2012, will he seal off the market again?

If Russia wants to be admitted to the World Trade Organization (WTO) in 2012, the country will have to dismantle trade barriers. This is a process that will be drawn out over five or even ten years. But even if Russia does not become a member of the WTO, it is unlikely that the country will be sealed off even more – the existing barriers are already too high. There are also indications that Russia intends to export as soon as it can cover its domestic demand. This could be the case in around 2016. However, if the country is preparing to export it will also have to open up to imports. Decree 166 will apply until 2020. If you work on the basis of a transition phase of just under ten years, the timing is right.

He sees Russia as an attractive investment location: Peter Korolev, Manager, Strategy Group, KPMG in Russia and the CIS.



producer Benteler, the US interior special-ist Lear and the Austrian plastics manufac-turer Isoplast have followed the call of Volkswagen and established plants in the automotive cluster in Kaluga. They are, however, still the exception. Of VW’s top 50 suppliers, 94 percent are in China, 86 percent in India, but only 38 percent have plants in Russia, says VW Russia boss Os-egowitsch.

A fundamental problem for the devel-opment of a functioning supply structure lies in the structure of Russian industry itself, which is shaped above all by state-owned enterprises and major corpora-tions. Medium-sized family businesses following the Western model have still to be developed or attracted. For that, how-ever, there is a need for incentives on the part of the Russian state in order to mini-mize the investment risks for foreign com-panies. The planned accession into the World Trade Organization offers an oppor-tunity for this. It is expected that the in-vestment climate will be improved as a result of some uniform rules.

However, WTO accession also in-volves risks for the Russian automobile industry. If it is too early, competitive pressure could threaten the existence of the national industry even more. For that

reason, in the accession negotiations, Russia is insisting on a transition period of at least seven years. The ramifications for international producers are still difficult to assess.

”In general, accession would on the one hand bring more competition to the market, but on the other hand it would reduce the customs barriers,” says Thomas Longhino from MAN.

VW Russia boss Osegowitsch sees traffic safety and environmental protection as future key issues on the Russian mar-ket, two areas in which there is still a lot of catching-up to be done. Cautious first steps in the area of environmental protec-tion are currently being made by Russian oligarch Michail Prochorow with the devel-opment of the Yo-Mobil hybrid car. The city car, driven by two electric motors and alternatively either gasoline or natural gas, is to go into production in the second half of 2012.

All in all, the Russian car market offers tremendous potential and has the ability to develop into one of the top six markets in the long term. But there are a few more challenges ahead before that happens. The tremendous sales prospects are bal-anced by some considerable location-relat-ed risks. Ph

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Regions lure investors with attractive incentives

The Russian automotive market is booming and is expected to be the largest European market by 2020, with local production growing to 3.6 million passenger cars, from 1.2 million in 2010. This is primarily driven by government measures to stimulate the localization of interna-tional OEMs in Russia.

The industry is currently undergoing a major transformation, from significant fragmentation with a large number of smaller-scale players to a limited number of major OEMs with annual production of at least 300,000 units. The following major players have announced their participation in the government localization program:

• Renault/Nissan/AvtoVAZ • Ford/Sollers • GAZ/VW • Daimler/KAMAZ

The localization of component production is slightly lagging behind that of car production, although several Russian regions are offering attractive investment incentives with the aim of developing new automo tive clusters. KPMG has been working with international OESs in relation to the localization process for almost five years. We assist our clients with market-entry strategies, site selection, business planning, and mergers & acquisitions.

Lydia Petrashova, Partner, KPMG in [email protected]

Celebrity visitor: Russian Prime Minister Vladimir Putin among the workers. Many Russian production plants still exude the spirit of the Soviet era.

24 / AutomotiveNow



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Balancing act in the emerging markets

Emerging markets, where demand for affordable small cars is surging, are the future of the auto industry. This poses major challenges for automakers and automotive

suppliers. Only those players with the determination to streamline their business will be successful in the new market segment opening up.

Text: Christoph Hus

Best practice: Slimming down

Automotive markets in emerging-market nations like China, India and Brazil are growing rapidly. Market research firm J.D.

Power says the industry is on the cusp of a long-term global uptrend. Last year the Chinese auto indus-

try alone manufactured some 13.8 million cars, according to the China Association of Auto-

motive Manufacturers.Emerging markets are definitely of inter-est to luxury carmakers, for whom the relatively small population segment of the affluent in those countries was a godsend in the economic crisis. The middle class that is emerging along with progressive industrialization will not be able to afford cars meeting Western standards in the foreseeable future, given average wage levels.It is fairly clear what market segment will be driving the car making busi-ness in this decade. “Growth will mainly be in compact car sales,” says

R.C. Bhargava, Chairman of Maruti Su-zuki, India’s largest car manufacturer.

Bhargava’s company just recently brought out a compact car, the Alto K10.

In addition to Tata and Maruti Suzuki, numer-ous Chinese manufacturers intend to get a

piece of the action as well, including BYD (Build Your Dreams), Brilliance and Geely. But Western car-

makers are not giving up without a fight. Last year for ex-ample, US automakers Ford and General Motors (GM) launched

compact cars in the Indian market. GM is now selling its Chevrolet Beat there. “India is a key market for us,“ says GM President Tim Lee, who runs the corporation’s international business.Western and Asian automakers are both facing a major challenge in their contest for a share of the new growth markets. Automotive suppli-ers as well, who have always played an important role in the automotive industry, are having to figure out how to play the game under different rules. For exam-ple, nine German suppliers provide parts and components for the Tata Nano: Bosch, Continental, Freuden-berg, Schaeffler, Mahle, ZF, Behr, BASF and engine developer FEV. Other parts suppliers include the British firm Caparo, US companies Delphi, TRW Automotive and the Swedish/American Autoliv. To do business with the Indians, Western suppliers had to learn to offer more simply made and extremely inexpen-sive parts.

Uncomplicated build a mustSuppliers had to meet many challenges to avert failure in this undertaking, one of which was obtaining detailed data on customer require-ments in the new growth markets. The next step was to develop the necessary know-how and stream-line every link in the value chain to achieve maximum



effi ciency. Tremendous fl exibility was required as well due to occasionally heavy order volume fl uctuations, affecting costs and margins.

Western suppliers had to completely rethink parts design for the new emerg-ing-market sub-compact cars. Bosch for example designed its parts for the Tata Nano in India, rather than back home. This was a necessary move, as car repairs are often made by the roadside in that coun-try using the simplest tools, and under extremely adverse circumstances. Car components thus had to be tailored for these circumstances, which was nearly impossible for engineers in Europe or the US to achieve.

Not cheap in terms of qualityDespite the great effort required, Bosch emphasizes the positive aspects of collab-oration with Tata. The experience Bosch gained in the Nano project was highly valuable, learning how to make simpler, lower-cost parts – know-how transferable to other emerging-market nations. Bosch still has great expectations for the project, with plans to invest around 300 million euros in the partnership with Tata by the year 2013.

German investment is extremely wel-come in India apparently, since when the diesel version of the Nano goes on the market in September of this year, some of its engine parts will be made by Bosch, including a tiny common rail direct injec-tion system. The sub-compact car busi-ness has been important to Bosch for a long time. “In 2010 we made a billion eu-ros selling equipment for low-priced cars,“ says Bernd Rohr, chairman of Bosch’s Automotive Technology division.

In emerging markets, sub-compact car sellers compete mainly on price, but sup-pliers have to make sure their parts are not cheap in terms of quality. “Vehicle components have to meet the same qual-ity standard whether the car comes off the line in Europe, America or Asia,“ says Detlef Jürss, Vice President, Product De-velopment, at Johnson Controls. “Car manufacturers are trending toward uni-

form standards across all markets.“ This is because they are unwilling to accept the risk of trouble later on due to inferior parts quality. Many suppliers make com-ponents specifi cally for buyers in develop-ing countries while adhering to the same quality standards when selling to premi-um manufacturers. “Components for ba-sic starter vehicles made only in emerg-

ing-market nations still have to meet strict safety requirements,“ says Jürss.

The challenge for suppliers is thus to deliver quality at prices lower than West-ern carmakers will pay. It remains to be seen how long Western OEMs will con-tinue accepting higher prices. Experts agree that on the whole European suppli-ers are particularly well prepared to meet this challenge, due to their experience and innovative capability. “They are not going to let go of their leadership posi-tion,“ says Sean McAlinden of the Center for Automotive Research. “After all, Ger-man automotive suppliers in particular have invested tremendously in research and development; even small to mid-sized enterprises have dedicated development departments.”

The Chinese are 75 years behindMakers of compact cars for emerging- market nations demand more than just high-quality, low-cost parts. They also want to implement innovations more

Nano-components from European suppliersWho supplies what?

Autoliv: Seat belts

BASF: Catalytic converter

Behr: Heating, ventilation

Bosch: Starter motors, engine control units, injectors, sensors

Caparo: Body

Continental: Engine speed regulator, gas pump, gas gauge

FEV: Diesel engine

Freudenberg: Seals (engine and drive train)Gabriel: DampersMahle: Gas and air filtersSaint-Gobain: GlazingSchaeffler: Wheel bearings and locking devicesTT-Electronics: SpeedometerVibracoustic: Engine mountsZF: Steering tie rod

A local presence: Bosch developed components for the Tata Nano in its own Indian factories.

26 / AutomotiveNow

Best practice: Slimming down


consistently than premium car manufac-turers – like electric propulsion, for exam-ple. China may soon become a mass mar-ket for electric vehicles. But for this to happen, the technology needs to mature, and this requires highly specialized suppli-ers for its success. Experts say Asian sup-pliers are still very far from being able to compete with Europeans in this domain.

After all, argues Paul Gao, CEO of Chi-nese auto development company Chery-Quantum, the automotive industry con-tends with extraordinarily complex techni-cal challenges. “Highly complex and sophisticated processes are involved,” says Gao. “The Chinese are 75 years be-hind the West in the development and manufacture of mechanical parts.“ This is partly the reason why the auto industry will not be able to completely shift produc-tion to Asia in the near future the way the consumer electronics industry did.

Western cars a status symbolThe new demands on manufacturers of low-cost sub-compact cars could in fact spur innovation among Western suppliers. The companies themselves would benefit from this, and perhaps established car manufacturers in Europe and the US as well. Technologies now being developed

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The traditional and the modern: The two meet up in am-bitious India. And the demand for afford-able sub-compacts is growing continu-ously.

Yezdi Nagporewalla, Partner, KPMG in India [email protected]

No compromises in matters of quality, comfort and safety

While the industry is recognizing the changing trend towards smaller cars, grooming oneself for that is no easy task. Increasingly, industry experts are acknowledging that manufactu-ring small, cost-efficient cars entails the transformation of all aspects of manufacturing, i.e. moving away from existing technologies and making room for innovation.

Designing, engineering and sourcing strategies are being redefined and new alliances are being formed to save capital costs. Considering the cost-sensitive customers of this segment, the entire automotive value chain including sup-pliers is working towards enhancing cost efficiency while recognizing that compro-mising on safety, quality and comfort is not an option.

by suppliers for low-cost vehicles could in future be used in premium cars too, ex-perts say. BMW, Daimler and Audi have been working on the Chinese and Indian markets for quite a while. People buying a Tata Nano today may want to trade up to a small Audi when his or her country has developed from an emerging economy into an industrialized one in ten years. Af-ter all, Western cars are a major status symbol.

Everyone in the industry knows low-cost cars for emerging markets represent a key trend that is here to stay. The risks are widely known, but failing to act is the biggest risk of all. The prospect of being left behind in these new growth markets is simply too serious. Europeans and Americans are thus forced to maintain a balancing act. They have to conquer the growing sub-compact car market on the one hand, while remaining uncompromis-ing premium providers in established mar-kets on the other. The partnership be-tween Maruti and Suzuki demonstrates how effectively this can be done. This In-do-Japanese joint venture enjoys a 46.6% market share in India, ahead of Korean carmaker Hyundai. The stake VW ac-quired in Suzuki (19.9%) thus looks like a move to be emulated.



When automotive firms move into emerging markets, their compliance rules frequently collide with national customs. Ensuring the upholding of one’s own legal and ethical standards in the face of opposition is a challenging task. Text: Dr. Oliver Engels and Martin Bärenfänger

Varying standards

In the broadest sense, compliance means conform-ing to policies and rules that have become an-chored in the value systems of today’s corpora-tions and guide their actions. The shifting of global growth opportunities in the direction of up-and-

coming emerging markets with looser standards pos-es major challenges for carmakers and their suppliers, in particular due to the great extent of their global in-terconnectedness. Multinational automobile firms op-erate in multiple legal systems and within a variety of cultures and traditions.

Personnel and executives working for their subsid-iaries and joint ventures often come from foreign cul-tures. Yet under local corporate law, the German par-ent company remains principally responsible for en-suring that organizational structures are in place at their subsidiaries for compliance and other matters, to the extent that its legal influence prevails.

There are two key questions in this regard:1. What is the most effective means for multinational

corporations to implement a well-structured compli-ance management system – potentially without the consent of or with resistance from people in the respective foreign culture?

2. How can multinational carmakers ensure that their operations in different legal systems where their subsidiaries are located are both effective and on legally sound footing?

Huge damage to reputationIn many cases, there are enormous differences between legal systems with respect to compliance risks. Chinese courts, for example, can impose a death sentence on corrupt managers.

Foreign managers are subject to harsh prison sentences as well, like the chief executive of the Chinese subsidiary of the Australian/UK mining firm Rio Tinto; despite being an Australian citizen, he received a ten-year prison term in China. The maxi-mum prison sentence imposable was 27 years.

National legal systems have very different antitrust regulations as well. The European Commission only imposes fines on perpetrating firms, but Brazilian courts, for example, may enforce up to 50% of fines imposed on a cartel on the personal assets of the managers directly or indirectly involved. Criminal pros-ecution may ensue in some countries as well.

According to a data privacy study by NGO Privacy International of 70 countries in and outside the EU,

Hotspot China: De-spite China’s courts now issuing draconian sentences against cor-rupt managers in some cases, the country is still not close to meet-ing Western compli-ance standards.

28 / AutomotiveNow

Expertise: Global compliance


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many have much stricter specific regulations than in Germany, even though data privacy is less culturally institutionalized in most countries. This is why differ-ing national legal systems can present a dual chal-lenge for businesses in certain situations. When for-eign requirements are stricter than in Germany, cor-porate policies and procedures based on German law may violate laws and customs in countries where subsidiaries are located. Should the opposite be the case, less stringent requirements for foreign corpo-rate subsidiaries than under German regulations may violate German law, leading to heavy damage to the company’s reputation.

Even though the legal consequences of corrup-tion and anticompetitive behavior can be severe in these countries, there is still considerable readiness to engage in such illegal activity, creating the impres-sion that it is not vigorously pursued. Yet this is a false impression. In the BRIC nations, prosecution of compliance violations has recently picked up consid-erably. In April 2010, Russian President Medvedev inaugurated a “National Strategy for Fighting Corruption,” whereas one year previously Brazil introduced a “National Day for Cartel Prosecution,” and India passed a “Right to Information Act” enti-

tling any citizen to promptly review official docu-ments so as to verify the correctness of decisions made. A lot of things are changing in China too, where there is increasing scrutiny of government employees.

For example, the Chinese Central Discipline In-spection Commission has sent all government em-ployees a list of corrupt actions, requiring them to per-form a “self-evaluation,” the results of which are re-viewed by their managing supervisor. Such programs will likely increase the probability of foreign compa-nies involved in such activities being caught.

Reducing variable compensation The criteria defining material compliance risks are highly similar in most countries around the world. The legal consequences, however, vary greatly, as men-tioned. And compliance regulations are not equally binding in every country with respect to labor law.

In the Russian Federation, for example, the Labor Law Code does not allow the firing of an employee simply due to violating internal ethics guidelines – unless the rule violated is already stipulated by law. The Russian Civil Code allows gifts to civil servants valued at up to EUR 80 approximately, as long as no



About the authors

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Martin Bärenfänger is a manager at KPMG Germany who advises numerous multinational manu-facturing and trading firms on how to effectively manage compliance risks.

Dr. Oliver Engels is a KPMG part-ner and key contact for Enterprise Risk Management and Gover-nance, Risk & Compliance (GRC) in Germany and EMEA (Europe, Middle East and Africa).

specific quid pro quo is expected. Yet the same gift may violate a corporate zero tolerance policy.

Expertise: Global complianceSanctioning employees for such actions may not be possible due to conflicting bodies of national labor law. In a multinational corporation, reducing variable compensation components to which employees have no contractual claim can, however, be used as an ef-fective sanctioning tool within the corporate compli-ance management system.

Global car manufacturers can also set up compli-ance help desks and whistleblower systems to gener-

ate statistical information that, among other things, provides information about the countries in which compliance awareness efforts are not yet having the desired effect. Businesses can use the information gleaned to implement specific measures for improving compliance and the compliance culture in the coun-tries in question. These may range from supplemen-tary content-oriented seminars to cultural measures.

In summary, compliance is a moving target that can only be optimized gradually. As they become more risk-aware, many companies have begun record-ing, prioritizing and professionally managing risks with-in dedicated compliance departments.

Hotspot India: There is a tradition of corruption on the subcontinent as well, which the government is now attempting to fight.

Culture■ Awareness of the significance of rules

as a foundation for the appropriateness and effectiveness of the CMS

■ Major influencing factor: basic attitude and conduct of management (“tone at the top”)

Objectives■ Setting of key CMS objectives to be

attained on the basis of the general enterprise objectives

■ Determination of the relevant sub-areas and rules contained therein

Organization

■ Determining organizational processes and procedures

■ Determining roles, responsibili-ties and reporting channels

■ Determining and providing the necessary resources

Risks■ Identifying key compliance risks■ Introducing systematic proce-

dures for risk identification and reporting

Creating conformityLike many other business processes, modern management systems can be employed for compliance. A roundup of key aspects.

Program

■ Introducing principles and measures for containing risks and avoiding violations

■ Documentation

Communication■ Notifying affected employees and any

third parties concerning the compliance program and roles/responsibilities

■ Determining reporting channels for compliance risks and notifications of violations

Monitoring and optimization■ Monitoring for appropriateness and

effectiveness■ Prerequisite: adequate documentation■ Reporting on weak points and violations■ Management bears responsibility

and imposes penalties for improper conduct

30 / AutomotiveNow

Expertise: Global compliance


Exit Here

Santana SuperstarChina is the hottest market right now for taxi fl eet business. The Volkswagen Santana is especially popular. Operators are also profi ting from the taxi boom in the Middle Kingdom – but not drivers.

Text: Christian Pietschner and Christine Weißenborn

The streets of China are dominated by notchback silhou-ettes in a retro 1980s design. The Santana, now only known in this country as a sought-after collector’s item somewhere between antique and new-model classic cars, is the most popular taxi in the Middle Kingdom.

Shanghai Volkswagen’s Santana model has been manufactured since 1985 by the joint venture between Volkswagen and SAIC. Over 3.6 million Santanas have been made in China thus far, both the original Santana seen most frequently on China’s roads and the subsequent versions, the Santana 2000, Santana 3000 and Santana Vista.

The reason for its popularity as a taxi is that the Santana was the fi rst modern car made by a Western manufacturer to be mass-produced in China, and thus it is better known than other models. Also, in the Chinese taxi market it is key for cars to be inexpensive and cheap to maintain, according to Volkswagen. A lot of room for passengers and baggage is also very important. This is why the traditional notchback sedan has been the biggest segment in China; the Jetta, too, has been very popular along with the Santana.

Citroens are also favored, as is the Hyundai Sonata, as steadi-ly increasing economic prosperity and a rising middle class are spurring demand for taxis. The big multinational car rental compa-nies are gaining a more important presence in the business, of-fering luxury chauffeur services for the more affl uent. Unlicensed drivers are becoming more numerous too, however, as illegal travel in unregistered taxis is the cheapest option to get by for the millions who migrate to the country’s big cities from rural ar-eas, costing a third less usually than with offi cial drivers.

China’s taxi drivers in a test

They are polite, will not refuse any trip request no matter how odd, and handle complaints earnestly and without delay. According to a ranking conducted by the China Association for Quality, Shanghai’s drivers have the best reputation among Chinese taxi drivers. Their colleagues from Beijing came out much worse in the rankings, as they are known for unsafe driving, being sarcastic and too opinionated politically – most often a combination of all three. For foreigners it is thus not always a disadvantage if their taxi driver can’t speak English – and an extra bonus if the driver doesn’t smoke. Taxi drivers in Nanjing were explicitly criticized for smoking too much during the ride.

This is becoming a real problem for licensed taxi drivers – who have got a tough enough job as it is. China’s taxi industry is an oligopoly. Small, independent fi rms owning just a few cars, or only one, are virtually unknown in China’s biggest cities. Drivers sit behind the wheel for an average of twelve hours a day, seven days a week under most circumstances. On average they earn 500 to 700 yuan per day, but have to pay 230 yuan in license fees and rent. Gas costs another 200 yuan. Drivers have to use some of the rest to maintain and repair the vehicles, which they them-selves are responsible for. No more than 20% of the money is left after expenses.



KPMG AG Wirtschaftsprüfungsgesellschaft Mathieu Meyer Partner, Head of Automotive Theodor-Heuss-Strasse 5 70174 Stuttgart, Germany T +49 711 9060 41730 [email protected]

KPMG AG Wirtschaftsprüfungsgesellschaft Dieter Becker Partner, Automotive Theodor-Heuss-Strasse 5 70174 Stuttgart, Germany T +49 711 9060 41720 [email protected]

KPMG AG Wirtschaftsprüfungsgesellschaft Stephanie Göring Manager, Executive Automotive Theodor-Heuss-Strasse 5 70174 Stuttgart, Germany T +49 711 9060 41271 [email protected]

KPMG AG Simone Beutel Manager, Global Executive Automotive Badenerstrasse 172 8026 Zurich, Switzerland T +41 44 249 3180 [email protected]

KPMG LLP John D. Leech Partner, Coordinator Automotive UK One Snowhill, Snow Hill Queensway Birmingham B4 6GH, United Kingdom T +44 121 232 3035 [email protected]

KPMG AG Herbert Bussmann Partner, Coordinator Automotive Switzerland Badenerstrasse 172 8026 Zurich, Switzerland T +41 44 249 3359 [email protected]

Contacts

KPMG Auditores S.L. Francisco Roger Rull Partner, Coordinator Automotive Spain Torre Realia Plaça Europa, 41-43 08908 L‘Hospitalet de Llobregat (Barcelona), Spain T +34 93 253 2959 [email protected]

KPMG N.V. William J. D. Koot Partner, Coordinator Automotive Netherlands Laan van Langerhuize 1 1186 DS Amsterdam, Netherlands T +31 20 656 4558 [email protected]

KPMG Ulrik Andersen Partner, Coordinator Automotive CIS Naberezhnaya Tower Complex, Block C 10 Presnenskaya Naberezhnaya Moscow 123317, Russia T +7 495 937 2981 [email protected]

KPMG Ergün Kis Partner, Coordinator Automotive Turkey Yapi Kredi Plaza C Blok Kat: 17 34330 Levent-Istanbul, Turkey T +90 212 317 7421 [email protected]

KPMG S.à r.l. Louis Thomas Partner, Coordinator Automotive Luxembourg 10, Rue Antoine Jans 1820 Luxembourg, Luxembourg T +352 22 5151 5527 [email protected]

KPMG Frank Vancamp Partner, Coordinator Automotive Belgium Avenue du Bourgetlaan 40 1130 Brussels, Belgium T +32 2 708 3670 [email protected]

kpmg.eu

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions expressed herein are those of the interviewees/authors and do not necessarily represent the views and opinions of KPMG Europe LLP.

© 2011 KPMG Europe LLP, a UK limited liability partnership, is the legal entity that effectively controls a number of the independent member firms that have elected to merge with it. KPMG Europe LLP is part of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (“KPMG International“), a Swiss entity. KPMG Europe LLP and KPMG International provide no client services. No member firm that is part of KPMG Europe LLP or any other KPMG member firm has any authority to obligate or bind KPMG Europe LLP, KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

All rights reserved. Printed in Germany.

The KPMG name, logo and “cutting through complexity” are registered trademarks of KPMG International Cooperative (“KPMG International”).

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