John Murphy - Automotive News

John MurphyManaging Director & Lead U.S. Auto Analyst in Equity ResearchBank of America Merrill Lynch

Our perspective on the US auto industry

John Murphy, CFA

Research Analyst

MLPF&S

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Elizabeth L Suzuki

Research Analyst

MLPF&S

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+1 646 855 2547

Aileen Smith

Research Analyst

MLPF&S

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BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Refer to important disclosures on page 25-30. Price Objective Basis/Risk on page 23. Analyst Certification on page 24.

11 January 2017

11 January 2017

3

Contents

US auto industry dynamics – Cyclical tailwinds appear exhausted

Execution should persist, but so will investor skepticism

Conclusions

Cyclical tailwinds appear exhausted

5

1) Sales decelerating: US nearing a peak, with limited upside …

Monthly SAAR bouncing around, but sales have clearly decelerated, finishing 2016 up only 0.4%

Long-term trend: Likely modest growth to a peak in 2018, but decline thereafter

Auto industry dynamics – Cyclical tailwinds appear exhaustedSource: WardsAuto, BofA Merrill Lynch Global Research estimates

0

2

4

6

8

10

12

14

16

18

20

22

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

16E

18E

20E

22E

24E

Peak-to-peak

+4%

1955-1958

-35%

1973-1975

-23%

OPEC I1978-1982

-31%

OPEC II

1988-1991

-20%

Gulf War

2000-2009

-40%1958-1973

+172%

1982-1988

+49%2009 -2018E

+73%1991-2000

+41%

Peak-to-peak

+78%

Peak-to-peak

+7%

Peak-to-peak

+12%

Peak-to-peak

+4%

1975-1978

+39%

2018E-2025E

-22%

9

10

11

12

13

14

15

16

17

18

19

20

21

22

Jun-

00

Dec

-00

Jun-

01

Dec

-01

Jun-

02

Dec

-02

Jun-

03

Dec

-03

Jun-

04

Dec

-04

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

12 Month Moving Average 2016 auto sales

17.5 million

US monthly SAAR (mm units) US light vehicle sales – long-term trend (mm units)

6

Structural supply of miles driven is constrained, driven by significant aging of vehicles in operation …

… at the same time that demand for travel utility (miles driven) continues to grow above historical average levels indicating there may still be pent up demand

35.9% 35.7% 36.3% 37.2% 39.2% 41.6% 43.2% 44.8% 45.9% 47.1% 48.0%

29.2% 29.9% 30.2% 30.8%31.1%

30.9% 30.6% 30.1% 29.0% 25.9% 23.5%

34.9% 34.4% 33.5% 32.0% 29.7% 27.6% 26.1% 25.1% 25.1% 27.1% 28.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

VIO (11+ yrs) VIO (6 to 10 yrs) VIO (0 to 5 yrs)

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

+2.7% average growth rate, 1982-

2008

Unprecedented decline in 2008-2009,

followed by stagnant growth from 2010-2014

+3.5% average YoY growth since

mid-2015

Source: Polk, IHS Automotive, Federal Highway Administration

Auto industry dynamics – Cyclical tailwinds appear exhausted


Age mix of US vehicles in operation US miles driven (trillions)

7

2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Western Europe (Passenger) 11,762,224 11,534,767 12,101,107 13,183,210 13,943,157 13,916,593 13,997,888 14,080,931 14,165,740

Growth -8.2% -1.9% 4.9% 8.9% 5.8% -0.2% 0.6% 0.6% 0.6%

Western Europe (LCV) 1,363,164 1,347,127 1,488,985 1,646,843 1,808,234 1,853,439 1,881,241 1,909,460 1,938,102

Growth -12.6% -1.2% 10.5% 10.6% 9.8% 2.5% 1.5% 1.5% 1.5%

Western Europe 13,125,388 12,881,894 13,590,092 14,830,053 15,751,391 15,770,033 15,879,129 15,990,390 16,103,841

Growth -8.7% -1.9% 5.5% 9.1% 6.2% 0.1% 0.7% 0.7% 0.7%

Eastern Europe 4,986,074 4,943,223 4,553,514 3,891,185 3,747,211 3,915,836 4,111,627 4,296,651 4,490,000

Growth 4.9% -0.9% -7.9% -14.5% -3.7% 4.5% 5.0% 4.5% 4.5%

USA 14,465,789 15,571,591 16,489,834 17,444,835 17,514,614 17,952,480 18,042,242 16,959,708 16,111,722

Growth 13.5% 7.6% 5.9% 5.8% 0.4% 2.5% 0.5% -6.0% -5.0%

North America 17,122,137 18,371,982 19,471,408 20,685,934 21,037,595 21,563,535 21,671,352 20,371,071 19,352,518

Growth 12.5% 7.3% 6.0% 6.2% 1.7% 2.5% 0.5% -6.0% -5.0%

China 19,204,625 21,875,141 23,630,010 24,893,412 27,979,083 29,610,854 31,097,861 33,090,952 35,110,160

Growth 6.7% 13.9% 8.0% 5.3% 12.4% 5.8% 5.0% 6.4% 6.1%

Asia-Pacific 34,160,989 36,658,922 38,426,958 39,515,900 42,720,013 45,079,985 47,495,140 50,127,725 52,811,368

Growth 11.4% 7.3% 4.8% 2.8% 8.1% 5.5% 5.4% 5.5% 5.4%

South America 5,502,998 5,569,464 4,979,063 3,933,055 3,441,423 3,682,323 3,894,056 4,117,965 4,354,747

Growth 3.7% 1.2% -10.6% -21.0% -12.5% 7.0% 5.8% 5.8% 5.8%

Middle East 1,195,793 892,708 1,236,625 1,219,147 1,414,211 1,555,632 1,633,413 1,715,084 1,800,838

Growth -32.4% -25.3% 38.5% -1.4% 16.0% 10.0% 5.0% 5.0% 5.0%

Africa/Others 4,970,758 5,064,155 5,213,158 5,253,167 5,305,699 5,332,227 5,358,888 5,385,683 5,412,611

Growth 6.2% 1.9% 2.9% 0.8% 1.0% 0.5% 0.5% 0.5% 0.5%

World - Passenger 71,399,052 74,991,645 78,564,866 80,619,278 85,108,780 88,411,007 91,417,065 93,235,273 95,346,372

World - LCV 9,665,085 9,390,703 8,905,952 8,709,163 8,308,763 8,488,563 8,626,542 8,769,295 8,979,551

World 81,064,137 84,382,348 87,470,818 89,328,441 93,417,542 96,899,570 100,043,607 102,004,568 104,325,923

Change YoY (%) 5.6% 4.1% 3.7% 2.1% 4.6% 3.7% 3.2% 2.0% 2.3%

Source: LMC Automotive, JD Power, BofA Merrill Lynch Global Research estimates


Global growth not as robust and risk is likely skewed towards the downside.


8

2) Inventory could be too high if sales don’t pick up

Industry inventory continues to climb despite a decelerating sales pace, which could necessitate production downtime in 2017 and beyond

Days’ supply of inventory is now above 5-year average levels, although not too concerning just yet

-20%

-10%

0%

10%

30

40

50

60

70

80

Nov

-11

Feb

-12

May

-12

Aug

-12

Nov

-12

Feb

-13

May

-13

Aug

-13

Nov

-13

Feb

-14

May

-14

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

Nov

-15

Feb

-16

May

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Aug

-16

Nov

-16

Day

s’ S

up

ply

% A

bo

ve/B

elo

w 5

-yr

Ave

rag

e

Day

s’ S

up

ply

% Above/Below 5-yr Avg Total (DS)

Source: WardsAuto, BofA Merrill Lynch Global Research

8

10

12

14

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18

20

1.3

1.8

2.3

2.8

3.3

3.8

Nov

-08

May

-09

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-09

May

-10

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-11

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-14

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-15

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May

-16

Nov

-16

Mo

nth

ly S

AA

R (m

m u

nit

s)

Inve

nto

ry L

evel

(mm

un

its)

Inventory Monthly SAAR

In recent months, absolute inventory levels have

continued to climb, while monthly sales growth

has decelerated declined


US inventory level vs. monthly SAAR (mm units) US inventory days’ supply vs. 5 year average

9

3) Leasing is at all-time highs, creating an off-lease bubble

Lease penetration as a % of new vehicle sales is now at all-time high 30% level, well above prior peak levels of around 20%

Automakers have taken advantage high residual values (used vehicle prices) and low rates to create a lower monthly payment for consumers via lease and get them into a new vehicle

Source: Experian

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1Q:0

9

2Q:0

9

3Q:0

9

4Q:0

9

1Q:1

0

2Q:1

0

3Q:1

0

4Q:1

0

1Q:1

1

2Q:1

1

3Q:1

1

4Q:1

1

1Q:1

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2Q:1

2

3Q:1

2

4Q:1

2

1Q:1

3

2Q:1

3

3Q:1

3

4Q:1

3

1Q:1

4

2Q:1

4

3Q:1

4

4Q:1

4

1Q:1

5

2Q:1

5

3Q:1

5

4Q:1

5

1Q:1

6

2Q:1

6

3Q:1

6

Historical average of lease penetration prior to 2009

was in high teens to 20% range

$350

$370

$390

$410

$430

$450

$470

$490

$510

$530

$550

1Q:1

2

2Q:1

2

3Q:1

2

4Q:1

2

1Q:1

3

2Q:1

3

3Q:1

3

4Q:1

3

1Q:1

4

2Q:1

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3Q:1

4

4Q:1

4

1Q:1

5

2Q:1

5

3Q:1

5

4Q:1

5

1Q:1

6

2Q:1

6

3Q:1

6

Average Monthly Lease Payment Average Monthly Loan Payment - New Vehicle


Lease penetration as % of US new vehicle sales Average monthly lease vs. new loan payment

10

0.0

1.0

2.0

3.0

4.0

5.0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

E

2017

E

2018

E

2019

E

2020

E

Assuming 2016 LV sales in mid-17mm range and lease

penetration of 30%, implies roughly 5mm leases were

originated in 2016 that will return off-lease in 2019+

3) Leasing is at all-time highs, creating an off-lease bubble

Current level of lease penetration is creating a tsunami of off-lease volumes that will return in 2018+

This unprecedented level of lease returns will be well above threshold level of what the new vehicle market can absorb (~20% lease returns/new vehicle sales)

Source: Experian, Manheim Consulting, BofA Merrill Lynch Global Research estimates

Vehicles Coming

Off Lease

New Vehicle

Sales

Off Lease to

New Vehicle Sales

2009 2,476,594 10,402,357 23.8%

2010 2,412,416 11,554,824 20.9%

2011 2,017,273 12,734,729 15.8%

2012 1,548,889 14,442,599 10.7%

2013 1,745,818 15,531,706 11.2%

2014 2,151,174 16,436,717 13.1%

2015 2,554,511 17,386,047 14.7%

2016 3,124,885 17,465,020 17.9%

2017E 3,591,740 17,901,646 20.1%

2018E 3,881,067 17,991,154 21.6%

2019E 5,000,000 16,911,685 29.6%

2020E 5,000,000 16,066,100 31.1%


Off-lease volumes (mm units) Off-lease volumes scenario analysis

11

4) Mix and price appear as good as can be

Passenger car vs. light truck sales is well above prior peak levels, as mix is pro-cyclical and aided by historically low gas prices

Mix has also been structurally driven by the emergence of crossovers, which may continue to gain some small share

Source: WardsAuto

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990

1991

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1993

1994

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1996

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1999

2000

2001

2002

2003

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2005

2006

2007

2008

2009

2010

2011

2012

2013

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2015

2016

Car

Truck

0%

10%

20%

30%

40%

50%

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90%

100%

2001

2002

2003

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2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Sm Car Mid Car Lg Car Lux Car CUV SUV Van Pickup Comm.


US sales passenger car vs. light truck mix US annual sales by vehicle segment

12

4) Mix and price appear as good as can be

New vehicles average transaction prices remain near all-time highs due to improving mix, while automakers are ramping up incentive activity

However, YoY % change in mix is outstripping YoY % change in ATPs, suggesting that like-for-like pricing is deteriorating

Source: WardsAuto, TrueCar, Autodata

$1,500

$2,000

$2,500

$3,000

$3,500

$25,000

$26,000

$27,000

$28,000

$29,000

$30,000

$31,000

$32,000

$33,000

$34,000

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

LTM US Average Transaction Price LTM Average Incentive

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12/2

003

12/2

004

12/2

005

12/2

006

12/2

007

12/2

008

12/2

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011

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012

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015

12/2

016

YoY % Change - Mix YoY % Change - ATP


US LTM average transaction price vs. incentive US mix YoY % change vs. ATP YoY % change

13

5) Raw materials likely won’t go down further

Total $ cost of raw materials in the average vehicle, while still at historically low levels, finally started fading higher in 2016

$ cost of raw materials as % of average transaction prices has fallen to historically low levels amid low commodity prices and high ATPs, but has started to reverse course

Source: TrueCar, Autodata, BofA Merrill Lynch Global Research

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

1990-2016 average = $2,540

Floor since downturn (2009) appears to

be around $2,000

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Jan-

02

Jun-

02

Nov

-02

Apr

-03

Sep

-03

Feb

-04

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug

-06

Jan-

07

Jun-

07

Nov

-07

Apr

-08

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-08

Feb

-09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Mar

-11

Aug

-11

Jan-

12

Jun-

12

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-12

Apr

-13

Sep

-13

Feb

-14

Jul-1

4

Dec

-14

May

-15

Oct

-15

Mar

-16

Aug

-16

Raw material cost as a % of ATP reached a

low of 6% in later 2015, but has since reverted

to 8% range

2002-2016 average = 10%


Total raw material $ cost per average vehicle $ cost of raw materials as % of transaction price

14

35%

37%

39%

41%

43%

45%

47%

49%

51%

53%

55%

Jan-

95

Sep

-95

May

-96

Jan-

97

Sep

-97

May

-98

Jan-

99

Sep

-99

May

-00

Jan-

01

Sep

-01

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-02

Jan-

03

Sep

-03

May

-04

Jan-

05

Sep

-05

May

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Jan-

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Sep

-07

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-08

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09

Sep

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-10

Jan-

11

Sep

-11

May

-12

Jan-

13

Sep

-13

May

-14

Jan-

15

Sep

-15

May

-16

Historical level of used vehicle price to

comparable new vehicle is around 45%


6) Used vehicle pricing likely won’t hold up forever

Used vehicle pricing, measured by Manheim index, remains near all-time highs, driven by a supply-demand imbalance in secondary market

Ratio of the price a 3.5 y.o. used vehicle (mix/ mileage adjusted) to a new vehicle is above historical levels, and will likely remain so until supply outstrips demand

Source: Manheim Consulting

95

100

105

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115

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125

130

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-00

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-12

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Nov

-14

Nov

-15

Nov

-16

November '15 = 125.1

November '16 =

124.7

Manheim used vehicle value index 3.5 y.o. vehicle vs. comparable new vehicle price

15Auto industry dynamics – Cyclical tailwinds appear exhausted

0

50

100

150

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0%

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-83

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US

Ave

rag

e G

as P

rice

(ce

nts

/gal

)

US

Lig

ht

Veh

icle

Sal

es M

ix

Light Trucks

Cars

CUVs

7) Gas prices may be as low as they can go

Price of oil/gas finally started to fade higher from historical lows in early 2016, and although still at low levels, it is unlikely they decline much further

Rising gas prices could cause a mix shift back toward smaller, more fuel-efficient passenger cars, or could even cause consumers to drive less, hampering demand

Source: US Energy Information Administration, WardsAuto

$2.49

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Jan-

03

Jun-

03

Nov

-03

Apr

-04

Sep

-04

Feb

-05

Jul-0

5

Dec

-05

May

-06

Oct

-06

Mar

-07

Aug

-07

Jan-

08

Jun-

08

Nov

-08

Apr

-09

Sep

-09

Feb

-10

Jul-1

0

Dec

-10

May

-11

Oct

-11

Mar

-12

Aug

-12

Jan-

13

Jun-

13

Nov

-13

Apr

-14

Sep

-14

Feb

-15

Jul-1

5

Dec

-15

May

-16

Oct

-16

Low of $1.87 in early 2016 compares to

previous low of $1.67 in 2008

US average retail gas price ($/gallon) Average US gas price vs. vehicle sales mix

16

8) Rapid growth in miles driven is unlikely to persist

Miles driven reached an inflection point in 2015, after years of stagnant growth, indicating that demand for travel utility had finally reaccelerated

Rising gas prices could cause a mix shift back toward smaller, more fuel-efficient passenger cars, or could even cause consumers to drive less, hampering demand

Source: Federal Highway Administration

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

+2.7% average growth rate, 1982-

2008

Unprecedented decline in 2008-2009,

followed by stagnant growth from 2010-2014

+3.5% average YoY growth since

mid-2015

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1Q:0

4

3Q:0

4

1Q:0

5

3Q:0

5

1Q:0

6

3Q:0

6

1Q:0

7

3Q:0

7

1Q:0

8

3Q:0

8

1Q:0

9

3Q:0

9

1Q:1

0

3Q:1

0

1Q:1

1

3Q:1

1

1Q:1

2

3Q:1

2

1Q:1

3

3Q:1

3

1Q:1

4

3Q:1

4

1Q:1

5

3Q:1

5

1Q:1

6

3Q:1

6

Growth in miles driven eclipsed 5% in 3Q:15

(almost twice historical rate), but has since then

decelerated


US miles driven (trillions) US miles driven – YoY % change

17

9) Rates already starting to rise, affordability at risk

It is unlikely that auto financing can get incrementally better for consumers given already historically low interest rate environment

Generally lower rates and extended terms have allowed monthly payments to only moderately increase although ATPs are materially higher … this trend may reverse

Source: Bloomberg, Bankrate.com, Experian


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9% average loan rate, 1975-2016

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Prime Subprime

US auto 48-month national average interest rate US average new loan monthly payment

18

10) Tail risks are growing and have a negative bias

Source: BofA Merrill Lynch Global Research


• Incoming Trump administration

• Brexit

• Hard landing in China after government stimulus programs

• Currency rate volatility

• Central bank activity vs. fiscal stimulus

• New political regimes

• Geopolitical events

• Inflation

• Raw material price spikes

• Technology and other disruptive forces

Macro risks and other exogenous events are driving increased uncertainty, which

combined with a cresting cycle, is not supportive of auto stocks.

Execution should persist, but so will investor skepticism

20

Track record of execution is building, but still relatively short

Source: BofA Merrill Lynch Global Research* GM 2000 metrics represent Old GM Co, (i.e. pre-bankruptcy), GM 2009 metrics represent New GM Co. (i.e. post-bankruptcy)

**FCA 2000 and 2009 metrics not available, as Chrysler entered into Ch. 11 in 2009 and did not completely merge with Fiat until 2011


Auto companies have started to build a track record of execution and structural

improvements, which should persist and may help to mitigate cyclical pressure and other

headwinds, but this level of discipline is short-dated.

Ford 2000 2009 2015

EPS $3.26 $0.01 $1.93

NA Pre-tax Margin 9.9% (0.8%) 10.2%

Total Auto Pre-tax Margin 5.1% (1.3%) 6.2%

Auto Net Debt/(Cash) (mm) ($4,444) $8,679 ($10,728)

Free Cash Flow (mm) $10,914 ($1,169) $5,147

Pension/OPEB Under/(Over)funded Status (mm) ($6,548) $6,181 $3,684

GM 2000* 2009** 2015

EPS $8.62 ($37.11) $5.02

NA EBIT Margin 5.6% (25.8%) 10.3%

Total Auto EBIT Margin 3.9% (16.1%) 6.8%

Auto Net Debt/(Cash) (mm) N/A ($7,030) ($11,183)

Free Cash Flow (mm) N/A ($22,763) $2,211

Pension/OPEB Under/(Over)funded Status (mm) ($1,735) $17,071 $10,414

FCA 2000* 2009* 2015**

EPS N/A N/A € 1.12

NA EBIT Margin N/A N/A 6.4%

Total Auto EBIT Margin N/A N/A 4.3%

Auto Net Debt/(Cash) (mm) N/A N/A (€ 5,049)

Free Cash Flow (mm) N/A N/A € 932

Pension/OPEB Under/(Over)funded Status (mm) N/A N/A (€ 5,143)

Now vs. then – Financial metrics for major automakers

21Source: Continental, BofA Merrill Lynch Global Research

Progression toward autonomous driving

Five themes for 2017

Likely steps of powertrain evolution

While many companies are prudently investing in vehicle autonomy, electrification,

connectivity, and mobility to fortify their longer-term positioning, we believe these

investments are a necessary burden without much incremental return in the near-term. As

targets for such developments are in the mid-2020 timeframe, we believe the cycle will

continue to be the single biggest determinant of earnings and cash flow for most

automotive companies, for now.

Necessary tech and product investments to continue

22Source:, BofA Merrill Lynch Global Research

Five themes for 2017

Examples of prudent & disciplined actions by companies at this point in the cycle:

• Continuing to invest in product in a balanced manner (i.e. towards all vehicle segments)

• Managing relatively lean inventory levels

• Taking minor production downtime to proactively manage inventory levels

• Pulling back on leasing penetration to mitigate negative impact on residual values when vehicles return off-lease

• Allocating a sufficient, but balanced, amount of capital towards emerging trends (electrification, autonomy, etc.)

• Maintenance or temporary reduction of excess capacity

• Smaller acquisitions of technology that can be commercialized over time

• Building a bigger cash cushion to ensure liquidity and dividend through an eventual downturn

As the cycle grinds towards its peak, investors will be closely watching for signs that US

auto companies are losing their discipline. Should companies remain disciplined and

operate through the downturn, a re-rating of stocks may occur.

Examples of potentially risky & less prudent actions by companies:

• Making short-sighted decisions with respect to product (i.e. exiting passenger cars, etc.)

• Allowing inventory levels to become inflated

• Increasing incentives to clear inventory on dealer lots, while continuing to increase production

• Continuing to push leasing penetration in an effort to drive new vehicle sales higher

• Failing to allocate capital towards emerging trends (electrification, autonomy, etc.)

• High-cost capacity expansion

• Expensive acquisitions

• General divergence from disciplined allocation of capital towards new/un-tested business ventures

Discipline to be tested

23

Conclusions

Conclusions

US/NA auto cycle is naturally decelerating, and many tailwinds could become headwinds

− Auto sales in the US have decelerated, finishing 2016 up slightly YoY at 17.5mm units.

− We believe that even if 2017/2018 new vehicle demand is boosted somewhat by fiscal stimulus from the incoming Trump administration, the turn in the cycle is inevitable given the tsunami of off-lease vehicles coming back into the market in 2019 and 2020.

The industry is much better positioned to deal with a downturn

Rationalization actions, investments in future proofing the industry, and a track record of management execution should position the industry well to deal with the ultimate downturn. However, investors remain skeptical as the industry’s track record of success is short relative to the long cycle.

Time to prepare for the inevitable

− We still expect the industry to grind higher over the next year or two. In our view, during that time building cash and preparing a detailed plan of action for declining volumes is key for all industry participants.

24

Price Objective Basis and Risk

Fiat Chrysler Automobiles N.V. (FCAU / XFYKF)

Our $9.50 PO for FCAU US (€8.50 for FCA IM) is based on an EV/EBITDAP multiple of about 2x and P/E of about 4.5x on a blended average of our 2017e & 2018e estimates, which is a discount to peers Ford and GM. In our view, FCA warrants a valuation discount to Ford and GM, as the company is still several years behind its domestic peers on a number of key aspects, such as product, platform rationalization, and balance sheet status. There is also a a large burden of proof that lies ahead for FCA to determine if near-term restructuring, rationalization, and growth will be sufficient to transform the company into a viable long-term player.

Downside risks to our PO: 1) Slowdown/reversal of the recovery in the US auto industry. 2) International regions remain volatile and do not support FCA's growth plans. 3) New product launches fail to achieve targeted growth and market share gains. 4) Deterioration in mix from trucks to cars. 5) Competitive pricing pressures. 6) FCA is unable to material de-lever its balance sheet before the downturn. 7) Stress in capital markets makes borrowing more expensive. 8) Key members of management leave.

Upside risks: 1) Continued strength in US auto cycle. 2) Growth in China remains robust, which FCA is able to leverage with product launches. 3) Global product launches are successful in achieving targeted growth and market share gains. 4) Mix and pricing remain favorable. 5) FCA is able to materially de-lever its balance sheet before the downturn.

Ford Motor (F)

Our $14 PO is based on a P/E of 7.5x a blended average of our 2017e & 2018e estimates, at the lower end of the company's historical range heading into a cyclical peak, which we believe is warranted as the US is now in the later innings of its cyclical recovery. Downside risks to our PO: 1) slower-than-anticipated recovery in the US market, 2) a sharp and sustained rise in input costs, 3) disruption in the supply base, 4) significant increase in gas prices, 5) new vehicle pricing deteriorates, 6) market share losses pressure results, 7) unwillingness of dealers to shoulder inventory risk, 8) suppliers gain significant pricing power, 9) stress in capital markets makes borrowing more expensive, 10) key members of management leave Ford, 11) dealership network is impaired and unable to sell F vehicles.

General Motors Company (GM)

Our $42 PO is based on a P/E of 6.5x on a blended average of our 2017e & 2018e estimates, at the lower end of the company's historical range heading into a cyclical peak, which we believe is warranted as the US is now in the later innings of its cyclical recovery. Risks are: 1) A slower-than-expected global economic recovery, 2) Soft consumer confidence, 3) Another wave of stress in the supply base, 4) New management team, 5) Rising raw material costs, 6) Competitive pricing pressures, and 7) Additional recall charges.

25

Analyst Certification

We, John Murphy, CFA and Elizabeth L Suzuki, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

26

Important Disclosures

27


Equity Investment Rating Distribution: Autos Group (as of 31 Dec 2016)

Coverage Universe Count Percent Inv. Banking Relationships* Count Percent

Buy 35 43.21% Buy 17 48.57%

Hold 16 19.75% Hold 14 87.50%

Sell 30 37.04% Sell 20 66.67%

28


Equity Investment Rating Distribution: Global Group (as of 31 Dec 2016)

Coverage Universe Count Percent Inv. Banking Relationships* Count Percent

Buy 1590 50.64% Buy 989 62.20%

Hold 702 22.36% Hold 438 62.39%

Sell 848 27.01% Sell 406 47.88%

* Issuers that were investment banking clients of BofA Merrill Lynch or one of its affiliates within the past 12 months. For purposes of this Investment Rating Distribution, the coverage universe includes only stocks. A stock rated Neutral is included as a

Hold, and a stock rated Underperform is included as a Sell.

29


FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation).

Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*

Buy ≥ 10% ≤ 70%

Neutral ≥ 0% ≤ 30%

Underperform N/A ≥ 20%

30


Price charts for the securities referenced in this research report are available at http://pricecharts.baml.com, or call 1-800-MERRILL to have them mailed.

MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Fiat Chrysler Auto, Ford Motor, General Motors Co.

MLPF&S or an affiliate was a manager of a public offering of securities of this issuer within the last 12 months: Ford Motor, General Motors Co.

The issuer is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Fiat Chrysler Auto, Ford Motor, General Motors Co.

MLPF&S or an affiliate has received compensation from the issuer for non-investment banking services or products within the past 12 months: Fiat Chrysler Auto, Ford Motor, General Motors Co.

The issuer is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Fiat Chrysler Auto, Ford Motor, General Motors Co.

MLPF&S or an affiliate has received compensation for investment banking services from this issuer within the past 12 months: Fiat Chrysler Auto, Ford Motor, General Motors Co.

MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer or an affiliate of the issuer within the next three months: Fiat Chrysler Auto, Ford Motor, General Motors Co.

MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this issuer. If this report was issued on or after the 9th day of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 9th day of a month reflect the ownership position at the end of the second month preceding the date of the report: Ford Motor, General Motors Co.

MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the issuer on a principal basis: Fiat Chrysler Auto, Ford Motor, General Motors Co.

The issuer is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Fiat Chrysler Auto, Ford Motor, General Motors Co.

BofA Merrill Lynch Research Personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking. The analyst(s) responsible for this report may also receive compensation based upon, among other factors, the overall profitability of the Bank’s sales and trading businesses relating to the class of securities or financial instruments for which such analyst is responsible.

31

Other Important Disclosures

Prices are indicative and for information purposes only. Except as otherwise stated in the report, for the purpose of any recommendation in relation to: (i) an equity security, the price referenced is the publicly traded price of the security as of close of business on the day prior to the date of the report or, if the report is published during intraday trading, the price referenced is indicative of the traded price as of the date and time of the report; or (ii) a debt security (including equity preferred and CDS), prices are indicative as of the date and time of the report and are from various sources including Bank of America Merrill Lynch trading desks.

Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments.

BofA Merrill Lynch Global Research policies relating to conflicts of interest are described at http://go.bofa.com/coi.

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John Murphy - Automotive News