Car Wars 2010-2013

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The US automotive product pipeline

Car Wars 2010-2013

In-depth study of the U.S. automotive product pipeline Car Wars is an annual proprietary study that assesses the relative strength of automakers’ product pipeline in the U.S. The purpose is to quantify industry product trends and then relate our findings to investment decisions.

Product pipelines more difficult to predict than ever before Given the current tenuous state of the U.S. auto industry, forecasting the future product pipeline is more difficult than ever, but it is critical to understanding the industry so we will once again take our best shot.

Macro demand meltdown a game changer The severe downturn in demand in 2008 and 2009 has dramatically altered our conclusions from last year’s study. We believe that the impact will be long lasting and put GM and Chrysler at a larger disadvantage relative to Ford.

Car Wars thesis and investment relevance We believe the replacement rate drives showroom age, which drives market share, which in turn drives capacity utilization, profitability, and stock and bond prices. OEMs with the highest replacement rate and youngest relative showroom age have gained market share from 1999-2009 (Table 1). We expect this relationship to remain over our forecast period of MY2010-13 (Charts 1 & 2).

Five key findings of our study 1) Replacement rate & showroom age are major determinants of market share.

2) Product activity is sporadic among OEMs and relative gaps are opening again.

3) GM’s market share will likely drop below the targeted range of 18%-19%.

4) Ford’s market share gains should continue driving upside in estimates.

5) Chrysler’s product pipeline is dubious and likely to drive market share losses.

Investment implications: GM: Product cycle downshifts GM’s market share losses are likely to be greater than expected and more severe in CY2009 and CY2010 while easing in later years. We believe that GM’s 18%-19% market share target is optimistic and a more realistic range is 15%-16%.

Ford: Relative position should continue to improve Ford’s market share gains in 1H:09 should continue due to the relative strength of its product replacement rate over the next four years. This appears to be a result of planning as well as the fortuitous stress at its two major competitors.

Parts/Dealers: Exposure to strong OEMs as important as ever Exposure to profitable and growing OEMs is important for profitability and returns. All else equal, exposure to OEMs with the highest replacement rates and lowest average age is a key to the success of both suppliers and dealers.

Industry Overview

Equity | United States | Autos/Car Manufacturers & Auto Parts 15 July 2009

John Murphy, CFA +1 212 449 7045 Research Analyst MLPF&S [email protected]

See Team Page for Full List of Contributors

Table 1: Replacement Rate, Showroom Age, Market Share (1999-2009)

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Rate

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U.S. Market Share D[1]

GM 14% 0.3 -9.4% Chrysler 14% 0.2 -6.6% Ford 15% 1.2 -8.7% GM-Stub 16% (0.7) 0.2% European 17% (0.3) 3.3% Toyota 19% (0.7) 7.3% Nissan 20% (1.0) 3.4% Honda 19% (0.9) 4.7% Korean 22% (1.1) 5.6% Source: Banc of America Securities-Merrill Lynch [1] Market Share is based on Calendar Years 1998-2008

Chart 1: Product Replacement Rate 2010e-2013e

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Chart 2: Average Showroom Age 2010e-2013e

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The US au tomot ive p roduc t p ipe l ine 15 Ju ly 2009

Contents Executive summary 3

Car Wars background 5

Investment implications 9

Industry & manufacturer trends 13

Company analysis 21

Conclusions 37

Appendix 41

Team Page 51

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Executive summary Car Wars is a proprietary study we conduct every year to assess the relative strength of automakers’ product pipeline in the U.S. The study is based on numerous primary and secondary sources, including industry contacts, auto show visits, trade publications, enthusiast magazines, supply chain relationships, and our general knowledge of platform strategies, and product cycle planning.

The purpose is to quantify industry product trends and then relate our findings to investment decisions.

The key metrics that we use are replacement rate, the estimated percentage of an OEM’s sales volume to be replaced with new models or next generation models; average showroom age, the number of years on the market, for the average design in an OEM’s showroom; and new model volume mix, the mix of new models by segment during the forecast period for each OEM.

Car Wars thesis We believe that the replacement rate drives showroom age, which drives market share, which drives capacity utilization, which in turn drives profitability and ultimately stock and bond prices. Table 2 shows the average annual replacement rate, relative showroom age, and market share change of the largest OEMs between MY99 and MY09. OEMs with the youngest showroom age relative to the industry have gained market share.

Table 2: Historical Replacement Rate, Showroom Age, Market Share (1999-2009) Avg. Replacement Rate Avg. Showroom Age O/(U) U.S. Market Share D[1] GM 14% 0.3 -9.4% Chrysler 14% 0.2 -6.6% Ford 15% 1.2 -8.7% GM-Stub 16% (0.7) 0.2% European 17% (0.3) 3.3% Toyota 19% (0.7) 7.3% Nissan 20% (1.0) 3.4% Honda 19% (0.9) 4.7% Korean 22% (1.1) 5.6% Source: Banc of America Securities-Merrill Lynch [1] Volume weighted average age variance [2] Market Share is Based on Calendar Years 1998-2008

Although other factors, including mix, pricing, execution, distribution, and brand power impact market share, we think this data strongly supports our thesis that successful new products drive higher market shares. Table 3 summarizes our forecasts of these key metrics for MY10 to MY13 and subsequent estimates of market share shifts.

Table 3: Forecast Replacement Rate, Showroom Age, Market Share (2010e-2013e) Replacement Rate [1] Avg. Showroom Age O/(U) U.S. Market Share D[2] Korean 27% (0.2) 3.5% Ford 25% (0.2) 3.0% Honda 24% (0.6) 3.0% Toyota 17% (0.2) 1.0% Nissan 17% (0.0) 0.5% European 16% 0.5 0.0% GM-Stub 13% 0.1 0.0% GM 11% 0.8 -5.0% Chrysler 8% (0.0) -6.0% Source: Banc of America Securities-Merrill Lynch [1] Volume weighted average age variance [2] Market share forecast is for calendar years 2009-2012

The purpose of our Car Wars study is to quantify industry product trends and relate our findings to investment decisions. Replacement rate and relative showroom age are two of the main drivers of market share gains or losses (Table 2 & 3).

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Ten key findings Our measures of replacement rate and showroom age are the major driver of market share gains and losses. Historically, Detroit has replaced its line-up every seven years while the competition has done so every four to five years – we believe this is one of the main reasons that Ford, GM, and Chrysler have lost share.

Product activity slowed, but is re-accelerating in MY11-MY13. This suggests that all-else equal the pricing environment should ease through MY10, but become more difficult in MY11 through MY13 unless demand also recovers.

New product activity is focused on Car and Crossover segments. At the same time Light Truck (body-on-frame) intros are slowing.

Gaps in relative performance are beginning to open again. We estimate that an increasing level of disparity in replacement rates will result in larger shifts in market share similar to those that have begun to emerge in 1H:09.

GM’s market share losses are likely to be greater than targeted. We believe that GM’s 18%-19% market share target is optimistic and a more realistic range is 15%-16%. GM’s replacement rate averages just 11% over the next four years, below its historical average of 14%, and well below the industry average of 18%.

The positive reversal of Ford’s market share in 1H:09 should continue. We believe this will be driven by the relative strength of its product replacement rate of 25% over the next four years, above its historical average of 14% and well better than the industry average of 18%.

We believe Chrysler is likely to be half its current size in a few years due to a lack of product. Chrysler severely lags the industry on a number of key metrics, which is an ominous sign for market share. In our view, this is a result of a lack of investment by previous owners and the dubious potential for Fiat products in the U.S. market.

The lead Japanese OEMs have maintained for years is shrinking. Toyota and Nissan’s metrics are converging closer to the industry averages while Honda remains significantly better than average, which should in combination slow their trend of market share gains.

Korean OEMs are picking up the pace after hitting a dry patch in MY08 & MY09. Therefore, we expect Hyundai and Kia to gain significant market share, about 3.5% over the next four years.

Suppliers & Dealers success should be correlated to their exposure to OEMs with high replacement rates. We believe this bodes well for BorgWarner, a supplier, and the following dealers: PAG, Asbury, Sonic, and Group 1. It continues to be an ominous sign for many suppliers.

1. Replacement rate and showroom age drive market share gains and losses.

2. Product activity slowed, but should re-accelerate in MY11-MY13.

3. Intros more focused on cars and CUVs than ever before.

4. Gaps in relative performance are beginning to open again

5. GM’s market share losses are likely to be greater than targeted.

6. Ford’s market share gains in 1H:09 should continue through the next four years.

7. Chrysler is likely to be half its current size in a few years due to a lack of product.

8. The lead Japanese OEMs have maintained for years is shrinking.

9. Korean OEMs are accelerating product intros, which should drive significant market share gains.

10. Suppliers & Dealers success should be correlated to their exposure to OEMs with high replacement rates.

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Car Wars background The purpose of Car Wars 7

An independent view 7

Car Wars thesis 8

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The purpose of Car Wars Background and purpose Car Wars is a proprietary study we conduct every year to assess the relative strength of automakers’ product pipeline in the U.S. The study is based on numerous primary and secondary sources, including industry contacts, auto show visits, trade publications, enthusiast magazines, supply chain relationships, and our general knowledge of platform strategies, product cycle planning, and management behavior.

The purpose is to quantify industry product trends and then relate findings to investment decisions.

Key metrics The key metrics that we use include the following:

Replacement rate: One of the simplest and most important ways to measure the strength of an automaker’s product plan: the estimated percentage of its sales volume to be replaced with entirely new models or next generations of existing models.

Average showroom age: The number of years on the market, for the average model in an OEM’s showroom (measured on a stand-alone basis and relative to the industry).

New model volume mix: The mix of new models by market during the forecast period for each OEM.

Our process of data collection is continuous, and we have developed a comprehensive database of U.S. product activity going back to 1987 – through two cycle peaks and now almost two troughs. Once a year, we summarize our findings in a report and on a color poster. This year’s study forecasts activity for the 2010-2013 model years.

An independent view Relative performance is what counts Car Wars represents our independent view of automakers’ competitiveness, so it doesn’t necessarily agree with the views of the car companies. It is likely we are missing information on all OEMs. Therefore, despite differences of opinion on any one OEM’s pipeline forecast, we believe that we have an accurate view of its relative position in the market, and that’s what we believe matters when forecasting market share.

All-new versus new and improved Readers may find that our data might differ from the pronouncements OEMs make occasionally about the number of products they plan to launch. This is because our definition of what a new product is may differ from that of automakers. (New product definitions even vary from company to company.) In Car Wars, we include only products we judge to be all-new or next generation vehicles – what the industry typically calls a “major.” We don’t include mid-cycle enhancements where only modest changes are made to the vehicle, typically called a “minor.” Furthermore, we forecast volume based on what we think the average annual volume will be for the product over its entire model life. We do not use company sales targets or peak volumes, which could distort results.

Purpose of report: quantify industry product trends, market share shifts and then relate conclusions to investment decisions.

Replacement rate, average showroom age and new model volume mix are the key metrics we calculate to analyze the OEMs’ product pipeline.

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Car Wars thesis Our thesis is that an OEM’s product replacement rate drives showroom age, which drives market share, which drives capacity utilization, which in turn drives profitability and stock and bond prices. Table 4 shows the average annual replacement rate, relative showroom age, and market share change of the largest OEMs between MY1999 and 2009. The table shows how the OEMs with the youngest showroom age relative to the industry have gained market share. Although other factors, including mix, pricing, execution, distribution, and brand power impact market share, we think this data strongly supports our thesis that successful new products drive higher market shares.

Table 4: Historical Replacement Rate, Showroom Age, Market Share (1999-2009)

Avg. Volume

Replacement Rate [1] Avg. Showroom Age O/(U)

Industry Avg. U.S. Market Share Δ[2]

GM 13.9% 0.3 -9.4% Chrysler 14.4% 0.2 -6.6% Ford 15.5% 1.2 -8.7% GM-Stub 16.0% (0.7) 0.2% European 16.8% (0.3) 3.3% Toyota 18.6% (0.7) 7.3% Nissan 20.2% (1.0) 3.4% Honda 19.2% (0.9) 4.7% Korean 21.9% (1.1) 5.6% Source: Banc of America Securities-Merrill Lynch [1] Volume weighted average age variance [2] Market Share is Based on Calendar Years 1998-2008

Based on the relative strength of this historical relationship, and taking mix and strategy into account, we have forecasted market share shifts for the major automakers in the U.S. market, which is summarized in Table 5. We will discus the implications of these shifts in the following sections.

Table 5: Forecast Replacement Rate, Showroom Age, Market Share (2010e-2013e)

Avg. Volume

Replacement Rate [1] Avg. Showroom Age O/(U)

Industry Avg. Estimated U.S.

Market Share D[2] Korean 27.0% (0.2) 3.5% Ford 24.8% (0.2) 3.0% Honda 24.2% (0.6) 3.0% Toyota 16.9% (0.2) 1.0% Nissan 16.9% (0.0) 0.5% European 15.8% 0.5 0.0% GM-Stub 13.2% 0.1 0.0% GM 11.2% 0.8 -5.0% Chrysler 8.3% (0.0) -6.0% Source: Banc of America Securities-Merrill Lynch [1] Volume weighted average age variance [2] Market share forecast is for calendar years 2009-2012

Replacement rate ▼

Showroom age ▼

Market share ▼

Capacity utilization ▼

Profitability ▼

Share/bond price

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Investment implications Investment implications for Ford 11

Implications for GM 11

Implications for Chrysler 11

Investment implications for suppliers 12

Investment implications for dealers 12

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Investment implications for Ford We expect the positive market share momentum that Ford has built in 1H:09 to continue through the end of 2012 based on a relatively strong replacement rate and lower average showroom age. This should drive upside relative to current expectations. Specifically, we believe that based on strong market share gains that Ford may post better than break-even EPS in 2010 and possibly $1.00 in 2011. Table 6: Ford's replacement rate, showroom age, market share - 1999-2009 vs. 2010e-2013e

Avg. Volume

Replacement Rate Avg. Showroom Age O/(U)

Industry Avg. U.S. Market

Share Δ 1999 - 2009 15% 1.2 -8.7% 2010e - 2013e 25% (0.2) 3.0% Source: Banc of America Securities-Merrill Lynch

Implications for GM GM’s replacement rate and average showroom age point to a slight acceleration of market share losses. This puts the company’s market share target of 18%-19% in jeopardy, which means that further restructuring actions could be necessary. We believe a more reasonable target would be 15%-16%. At a trend rate of US demand of 14mm units, the discrepancy of 3% market would equate to close to 500k fewer units for North America or about two fewer assembly facilities. Table 7: GM's replacement rate, showroom age, market share - 1999-2009 vs. 2010e-2013e

Avg. Volume



Share Δ 1999 - 2009 14% 0.3 -9.4% 2010e - 2013e 11% 0.8 -5.0% Source: Banc of America Securities-Merrill Lynch

Implications for Chrysler Chrysler’s product pipeline is dubious and likely to drive significant market share losses. We anticipate that Chrysler will be roughly half its current size in a few years creating room for other automakers to gain market share. Table 8: Chrysler's replacement rate, showroom age, market share - 1999-2009 vs. 2010e-2013e

Avg. Volume



Share Δ 1999 - 2009 14% 0.2 -6.6% 2010e - 2013e 8% (0.0) -6.0% Source: Banc of America Securities-Merrill Lynch

We expect the positive market share momentum that Ford has built in 1H:09 to continue through the end of 2012 based on a relatively strong replacement rate and lower average showroom age. This should drive upside relative to current expectations.

GM’s replacement rate and average showroom age point to a slight acceleration of market share losses. This puts the market share target of 18%-19% at jeopardy, which means that further restructuring actions may be necessary. We believe a more reasonable target would be 15%-16%.

Chrysler’s product pipeline is dubious and likely to drive significant market share losses. We anticipate that Chrysler will be roughly half its current size in a few years.

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Investment implications for suppliers Proprietary technology trumps all for suppliers in our view, though exposure to profitable and growing OEMs is extremely important for their growth, profitability, and returns. Therefore, assuming all else equal, suppliers most exposed to OEMs with the highest replacement rates and lowest average age are best off. At the highest level this is a positive sign for BorgWarner and a tough sign for many NA focused suppliers (Chart 3).

Chart 3: Supplier Exposure to OEMs – 2008

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Investment implications for dealers Similar to suppliers and assuming all else equal, dealers that are most exposed to the OEMs with the highest replacement rates and lowest average age are best off, in our view. This should translate into better new car sales and earnings growth in the short term and importantly feed into the recurring parts and service profit stream in the long term as units in operation grow. The following chart summarizes the public groups' new vehicle exposure by brand.

Chart 4: Dealer 2008 new vehicle sales by brand

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Proprietary technology trumps all for suppliers in our view, though exposure to profitable and growing OEMs is extremely important for their growth, profitability, and returns.

Similar to suppliers and assuming all else equal, dealers that are most exposed to the OEMs with the highest replacement rates and lowest average age are best off.

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Industry & manufacturer trends Industry trends

New model launches 15

Replacement rate 16

Average showroom age 16

New models by segment 17

Manufacturer trends

Average showroom age 18

Relative freshness of product lines 18

Cumulative replacement rates 19

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Industry trends This section details product trends for the U.S. auto market. The size, homogeneity, relatively rich mix, and ultimately the profitability of the U.S. market continue to attract new investments from overseas automakers. However, what has been an accelerating boom of new model launches in recent years will likely slow slightly as the industry works its way through a rationalization phase we refer to as the “Big Bang”.

New model launch activity slows ever so slightly As shown in Chart 5, we expect OEMs to launch 166 new models during our forecast period (2010-2013), or an average of 42 per year. This rate is about 12% above the average number of models launched per year between 1989 and 2009, underscoring how intensely competitive the industry still is.

Chart 5: New model launches 2010e-2013e

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There are many factors contributing to the acceleration in product, including OEMs’ rush to enter new vehicles segments (CUVs, hybrids, ultra-luxury, youth, etc.), an aggressive push by some OEMs to expand product line-ups (for example, the Korean OEMs), as well as the relative richness and size of the U.S. vehicle market. Stricter CAFE standards and higher gasoline prices are also raising the profile of the CUV and car segments, which represent an increasing share of new product launches (Chart 6).

Chart 6: 2010e-2013e new vehicle launch mix vs. 2000-2009

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New model launches hit a relative lull in MY09 which we expect to continue in MY10, but pick up significantly in MY11 through the end of our forecast period in MY13.

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Replacement rate eases in MY10 and then accelerates The replacement rate mirrors the trend in new model launches to a large degree. On average, between 1992 and 2009, the industry replaced about 13% of its volume each year with new models. At this rate, the industry turns over its entire model line about every 7.7 years. Over the next four years, we expect the annual replacement rate will remain higher at close to 18%, which means that the industry will turn over in less than 6 years. MY09 was particularly important for trucks, at about 40% of new volume, driven by Ford’s new F-150 and a new Dodge Ram. However, new volume mix is moving significantly away from trucks towards cars and CUVs that we estimate will account for an unprecedented 87% of new volume launched from MY10 to MY13.

In our opinion, the continued strong pace of product activity can be linked to the intensely competitive industry environment. As with all industries, auto companies can compete through cost leadership, superior product, or product differentiation. For most OEMs, the first strategy has been unachievable, and with the reorganized and restructured Detroit Three it is even tougher to differentiate on cost. On the second strategy, there has been extreme convergence in quality as all automakers have improved to a relatively common level. That leaves almost all trying to compete by differentiating their product. This has resulted in the continued strong pace of new models introductions.

Chart 7: Replacement rate

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Average showroom age likely remains low The age of vehicles on sale in showrooms across the U.S. (Chart 16) has been on a steady decline since the early 1990s, as automakers replace their products more frequently. We attribute this trend to intensifying competition – in part from new entrants – and product line expansion by car companies that have introduced numerous new nameplates. We expect that the industry’s average showroom age will trend lower averaging about 2.6 years for MY10 – MY13, a noticeable tick down from an average age of 2.8 years for the last decade.

Industry replacement rate over the forecast period will remain well above the 13% historical average, spiking to an average of 20% for MY11 through MY13.

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Chart 8: Average showroom age [1]

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Intensified competition and the resulting new products are, of course, fabulous for consumers, who will enjoy the choice of new cars and trucks. All of this new product, however, comes at a high cost to the OEMs, which will need to become increasingly efficient with R&D and capital spending.

New model segment shift continues towards CUVs and Cars Chart 9 shows the U.S. market’s evolving market shift, based on the number of new models, not volumes, from traditional small, midsize, and large cars to light trucks, luxury cars, and crossovers.

Since the MY1997 launch of the Toyota RAV4 and the Honda CRV, crossovers have been the next big thing – and they still are. Forty-eight of the 166 new models we forecast for 2010-2013, or 29% will be crossovers. The segment has been dominated by Japanese OEMs, but the Detroit Three are making a big push with Ford introducing 10, GM 5, and Chrysler 2 new crossover models in the next four model years.

Chart 9: New models by segment

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In addition to the continuation of the crossover boom, which is the largest in any single category, Small and Mid/Large car launches are picking up significantly accounting for 60 launches over the next four years, or about 36% over the next four years. At the same time there is an almost 60% decline in body-on-frame truck introductions over the next four years versus the last decade.

Excess supply, competitive pressure, new entrants, etc. will continue to drive down product cycle times.

New model emphasis is still on crossovers. However, Small and Mid/Large car launches are picking up significantly accounting for 60 launches over the next four years, or about 36% over the next four years.

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Manufacturer trends Average showroom age still converging around 2.6 years Average showroom age is one way to quantify how intensely competitive the U.S. market has become in the last two decades (see Chart 10). For some time, there has been a convergence in the average showroom age. In the late 1980s through the late 1990s, there were large gaps in competitiveness where the domestic companies and Europeans had product that was five to six years old while the Japanese OEMs had products that averaged about two years old. Since the late 1980s, the domestic and European OEMs have become much more competitive. Their average showroom age is now about 2.6 years, while the Japanese product cycles have stabilized between 2 and 2.5 years. We believe that the Japanese OEMs came to realize that it wasn’t worth replacing some of their low-margin smaller cars so frequently to drive average age below 2 years. In addition, as the Japanese have developed more full line product offerings it is difficult to maintain an abnormally low average age.

However, at the end of the next four model years there will be some divergence as GM’s all important GMT900 product ages (this should improve shortly after MY13) and Chrysler’s portfolio just flat out ages while Toyota, Honda, Nissan, and Hyundai keep their product fresh at around 2 years and Ford is not far behind at 2.4 years. It should be noted that Ford’s average age improves dramatically as we anticipate the end of a few extremely old products such at the Econoline vans, Crown Victoria, and Grand Marquis.

Chart 10: Average showroom age by OEM

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Relative freshness of product lines remains low As competition further intensifies, even small differences in showroom age can impact OEMs’ performance. Chart 11 shows the relative freshness of product lines by manufacturer over the next four model years. The companies are relatively closely clustered except for GM (average showroom age 3.3 years) . GM’s average showroom age is notably above average weighted up by the aging GMT900 product line up. We expect Ford’s average showroom age to drop drastically to an average of just 2.4 years for MY10-MY13 as it cancels older products such as the Econoline and introduces new replacement product such as the Transit.

We expect Ford’s average showroom age to drop drastically to an average of just 2.4 years for MY10-MY13 as it cancels older products such as the Econoline and introduces new replacement product such as the Transit.

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Chart 11: Relative freshness of product line by manufacturer 2010e-2013e

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Cumulative replacement rates appear to drive market share Comparing cumulative replacement rates is one of the simplest and most effective ways in which we measure the strength of product plan. The replacement rate is the estimated percentage of sales volume to be replaced with entirely new models or next generation of existing models during the period.

Over the next four years, the industry will replace 72% of its volume, with the disparity among the major manufacturers widening again. We believe that the increasing deltas in replacement rates between OEMs will result in larger shifts in market share similar to those that have begun to emerge in 1H:09.

Chart 12: Cumulative replacement rates, % of 2008 CY volume replaced in MY 2010e-2013e

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Ford will likely have one of the fresher lineups as it cancels older product such as the Econoline and begins to leverage its global product to drive a lower average age. GM’s product ages largely because of the aging of the GMT900 vehicles, but this should improve upon the new models sometime beyond MY13.

We estimate that an increasing level of disparity in replacement rates will result in larger shifts in market share similar to those that have begun to emerge in 1H:09. Chrysler is the extreme outlier on the low-end due to the lack of investment of its last two owners and the dubious potential for Fiat products in the U.S. market.

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Company analysis General Motors Corp 23

Ford Motor Co 25

Chrysler 27

Japanese OEMs 29

European OEMs 32

Korean OEMs 34

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General Motors Corporation Conclusion: GM’s market share losses are likely to be greater than expected and more severe in CY2009 and CY2010 while easing in later years. We believe that GM’s 18%-19% market share target is optimistic and a more realistic range is 15%-16%. Chart 13: GM replacement rate vs. industry

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Chart 14: New model volume mix

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Chart 15: Average showroom age (years)

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GM’s replacement rate averages 11% over the next four years, below its historical average of 13% and well below the industry average of 18%.

GM’s mix is positively skewed toward Mid/Large Cars over the forecast horizon. CUVs and Small Cars are a focus for GM, but it appears to be under introducing relative to the industry and more specifically the competition.

Relative showroom age improved dramatically with the intro of the GMT900 product line-up driving an average age of about 2.2 years in MY08&09, but as those trucks are aging so is GM’s average age.

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Table 9: General Motors U.S. product pipeline 2010e-2013e 2010e 2011e 2012e 2013e Chevrolet Equinox - Small CUV Chevrolet Orlando - Minivan Cadillac BTS - Sedan & Coupe GMC Acadia - Mid CUV GMC Terrain - Small CUV Cadillac DTS - Sedan Chevrolet Impala - Sedan Buick Enclave - Midsize CUV Cadillac SRX - Luxury CUV Chevrolet Aveo - Sedan & Hatchback Buick Lucerne - Sedan Chevrolet Malibu - Sedan Chevrolet Camaro - Coupe & Convertible Chevrolet Cruze - Coupe & Sedan Chevrolet Spark - Hatchback Chevrolet Corvette - Coupe & Convertible Buick La Crosse - Sedan Chevrolet Volt - Hatchback (plug in) Cadillac CTS - Sedan & Coupe % of volume replaced : 9% % of volume replaced : 12% % of volume replaced : 12% % of volume replaced : 12% Source: Banc of America Securities-Merrill Lynch

Table 10: GM-Stub U.S. product pipeline 2010e-2013e 2010e 2011e 2012e 2013e Saab 9-4X - Mid Lux CUV Saab 9-3 - Sedan, Wagon & Convertible Saturn Outlook - Mid CUV Saturn Aura - Sedan Saab 9-5 - Sedan & Wagon % of volume replaced : 11% % of volume replaced : 6% % of volume replaced : 11% % of volume replaced : 25% Source: Banc of America Securities-Merrill Lynch

Chart 16: 2010 Cadillac SRX

Source: GM Corp

Chart 17: 2010 Buick LaCrosse

Source: GM Corp

Chart 18: 2011 Chevy Cruze

Source: GM Corp

Chart 19: 2010 GMC Terrain

Source: GM Corp

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Ford Motor Company Conclusion: Ford’s market share gains in 1H:09 should continue due to the relative strength of its product replacement rate over the next four years. This appears to be a result of planning as well as the fortuitous stress at its two main competitors.


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Ford’s replacement rate for MY 2010 to 2013 is 25%, above its historical average of 15% and well better than the industry average of 18%. Therefore its positive momentum should continue driving an increase in market share of about 3% to close to 18%.

Ford appears to remain slightly over-weight truck introductions, but is also overweight Crossovers. Notably, Ford lags in passenger car introductions over the next four years despite the 2010 Taurus and 2011 Fiesta and Focus.

Ford’s average showroom age should drop dramatically through MY13 as it cancels a few older models such as the Econoline that will likely be replaced with all new product.

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Table 11: Ford U.S. product pipeline 2010e-2013e 2010e 2011e 2012e 2013e Lincoln MKT - Lux CUV Ford Explorer - Large CUV Ford Escape - Mid CUV Ford Edge - Mid CUV Volvo XC60 - Small CUV Lincoln Aviator - Large CUV Ford C-Max - Small CUV Lincoln MKX - Mid Lux CUV Ford Transit Connnect - Van Volvo S60/V70 - Sedan & Wagon Mercury Mariner - Small CUV Ford Mustang - Coupe & Convertible Ford Taurus - Sedan Ford Focus - Hatchback, Sedan & Wagon Volvo XC90 - Mid CUV Lincoln MKZ - Sedan Ford Fiesta - Sedan & Hatchback Ford F-100 - Small Pickup Ford Fusion - Sedan Mercury Fiesta Based - Sedan & Hatchback Ford Expedition - Large SUV Mercury Milan - Sedan Ford Transit - Van Lincoln Navigator - Large SUV % of volume replaced : 15% % of volume replaced : 30% % of volume replaced : 29% % of volume replaced : 25% Source: Banc of America Securities-Merrill Lynch

Chart 23: 2010 Ford Taurus

Source: Ford Motor Co

Chart 24: 2011 Ford Explorer

Source: Ford Motor Co

Chart 25: 2011 Ford Fiesta

Source: Motor Trend

Chart 26: 2012 Ford Escape – likely to be based on Kuga, shown

Source: Motor Trend

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Chrysler Conclusion: Chrysler’s product pipeline severely lags the industry on a number of key metrics, which is an ominous sign for its market share. This is a result of a lack of investment by Chrysler’s last two owners and the dubious potential for Fiat products in the U.S. market. Chart 27: Replacement rate

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Chrysler’s average replacement rate of just 8% over the next four model years is well below its historical 16% and the industry average of 18%. The extreme underperformance leads us to believe that Chrysler will be about half of its current size within the next few years.

Chrysler’s mix is skewed towards the Mid/Large Car and Truck segments. The company lags in CUVs and Small Car intros, which in combination with the truck concentration should lead to an extreme decline in market share.

Chrysler’s average showroom age drops well below the industry average in MY09 through MY12 driven by several relatively young products like the Ram pickup and minivans, but that fades quickly in MY13.

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Table 12: Chrysler U.S. product pipeline 2010e-2013e 2010e 2011e 2012e 2013e Dodge Charger - Sedan Jeep Grand Cherokee - Mid SUV Jeep (Fiat) Panda - Small CUV Jeep Patriot - Small CUV Chrysler 300 - Sedan Chrysler (Fiat) 500 - Hatchback Chrysler Sebring - Sedan, Coupe & Convertible Dodge Avenger - Sedan Chrysler (Fiat) Grande Punto - Hatchback % of volume replaced : 5% % of volume replaced : 9% % of volume replaced : 3% % of volume replaced : 16% Source: Banc of America Securities-Merrill Lynch

Chart 30: 2011 Jeep Grand Cherokee

Source: Chrysler Media

Chart 31: 2010 Dodge Charger

Source: Chrysler Media

Chart 32: 2012 Jeep Small CUV – likely to be based on Fiat Panda, shown

Source: Edmunds

Chart 33: 2012 Chrysler Hatchback – likely to be based on Fiat 500, shown

Source: Edmunds

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Japanese OEMs Conclusion: The lead Japanese OEMs have maintained for years is shrinking. Toyota and Nissan’s metrics are converging closer to the industry averages while Honda remains significantly better than average (Charts 34-36 & 62-67), which should in combination slow their trend of market share gains. Chart 34: Replacement rate

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The lead is shrinking - the Japanese OEMs have a strong stable of products launching over the next four years, with a replacement rate averaging 21%. In aggregate the replacement rate over the next four model years is just 1% above their historical average and 3% above the industry average.

Model introduction mix is close to the industry mix, with a slight over emphasis on Mid/Large Cars and Light Trucks and under on Crossovers.

Showroom age remains below average through MY13, but creeps close to the industry average in MY10 – MY11 for the first time ever. This is not just a function of increased competition, but also a function of Toyota, Honda, and Nissan’s broader product lineup.

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Table 13: Toyota OEM product pipeline 2010e-2013e 2010e 2011e 2012e 2013e Lexus RX - Mid CUV Toyota RAV4 - Small CUV Toyota 4Runner - Mid SUV Toyota Tacoma - Small Pickup Lexus HS - Sedan Lexus LF-X - Small CUV Lexus ES - Sedan Lexus LS - Sedan Toyota Prius - Hatchback Toyota Sienna - Minivan Lexus GS - Sedan Toyota Scion xB - Hatchback Lexus GX - Mid SUV Toyota Camry - Sedan Toyota Scion xD - Hatchback Lexus IS - Coupe, Sedan & Convertible Toyota Yaris - Hatchback & Sedan Lexus LF-A - Lux Coupe Toyota Avalon - Sedan Toyota Scion tC - Coupe Toyota iQ - Hatchback % of volume replaced : 11% % of volume replaced : 19% % of volume replaced : 27% % of volume replaced : 10% Source: Banc of America Securities-Merrill Lynch

Table 14: Honda OEM product pipeline 2010e-2013e 2010e 2011e 2012e 2013e Honda Accord Cross - Mid CUV Honda Element - Small CUV Honda CRV - Small CUV Acura RDX - Small CUV Acura ZDX - Mid CUV Honda Odyssey - Minivan Honda Ridgeline - SUP Honda Accord - Coupe & Sedan Honda CRZ - Hatchback Acura RL - Sedan Acura MDX - Mid CUV Honda Insight - Hatchback Honda Civic - Hatchback, Coupe & Sedan Honda Fit - Hatchback % of volume replaced : 15% % of volume replaced : 34% % of volume replaced : 21% % of volume replaced : 25% Source: Banc of America Securities-Merrill Lynch

Table 15: Nissan OEM product pipeline 2010e-2013e 2010e 2011e 2012e 2013e Nissan 350Z - Coupe & Convertible Nissan Titan - Pickup Nissan Frontier - Small Pickup Infiniti EX - Small CUV Nissan Cube - Hatchback Nissan Xterra - Mid SUV Nissan Pathfinder - Mid SUV Infiniti G35 - Coupe & Sedan Infiniti M - Sedan Nissan Sentra - Sedan Nissan Altima - Sedan & Coupe Nissan Versa - Hatchback % of volume replaced : 2% % of volume replaced : 7% % of volume replaced : 42% % of volume replaced : 16% Source: Banc of America Securities-Merrill Lynch

Table 16: Other Japanese OEM product pipeline 2010e-2013e 2010e 2011e 2012e 2013e Subaru Legacy - Sedan & Wagon Subaru B9 Tribeca - Mid CUV Mitsubishi Endeavor - Mid CUV Mazda CX-7 - Midsize CUV Subaru Outback - Sedan & Wagon Mitsubishi Galant - Sedan Mazda RX-8 - Coupe Subaru Impreza - Coupe, Sedan & Wagon Mazda2 - Hatchback Suzuki Swift - Hatchback Mazda5 - Wagon Mazda3 - Sedan & Hatchback Suzuki Equator - Pickup Source: Banc of America Securities-Merrill Lynch

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Chart 37: 2010 Lexus RX

Source: Toyota Motor Co

Chart 38: 2010 Lexus HS

Source: Toyota Motor Co

Chart 39: 2011 Toyota Sienna

Source: Edmunds

Chart 40: 2010 Honda Accord Cross

Source: Edmunds Chart 41: 2010 Acura ZDX

Source: Honda Media

Chart 42: 2010 Nissan Cube

Source: Nissan

Chart 43: 2010 Honda CRZ

Source: Edmunds

Chart 44: 2010 Subaru Outback

Source: Edmunds

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European OEMs Conclusion: European OEMs’ replacement rates are below the industry average and their historical rate, and average age remains relatively stable below the industry average. We don’t expect any meaningful shift in market share over the next four years, but there could be slight erosion. Chart 45: Replacement rate

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European OEM average replacement rates are about 16%, below the industry average of 18% and their historical average also of 18% over the next four model years. This may result in small market share erosion over the next four years.

With the brands of BMW, Audi, Porsche, and Mercedes it is no surprise that the Europeans are overweight Luxury cars. However, it is worth noting that like most other makers, the Europeans are over introducing more Small Cars, by our estimation.

European OEMs have an average showroom age of about 3.1 years over the next four model years which is about half a year older than the industry average.

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Table 17: European OEM product pipeline 2010e-2013e 2010e 2011e 2012e 2013e Audi Q5 - Mid CUV VW Touareg - Mid CUV Mercedes R-Class - MPV Audi Q7 - Mid CUV Mercedes GLK-Class - Small SUV Audi Q3 - Small CUV Land Rover LRX - Small SUV Mercedes M-Class - Mid CUV Audi A7 - Sedan BMW X1 - Small CUV Mercedes CLS-Class - Sedan Range Rover - Large SUV Mercedes E-Class - Sedan & Wagon BMW X3 - Small CUV BMW 6 Series - Coupe & Convertible VW Scirocco - Hatchback BMW Z4 - Coupe & Convertible Porsche Cayenne - Mid CUV VW Polo - Hatchback BMW 3 Series - Coupe, Sedan & Convertible Porsche Panamera - Sedan Audi A6 - Sedan & Wagon Audi A3 - Hatchback Porsche Boxster - Convertible Audi A8 - Sedan Porsche Cayman - Coupe BMW 5 Series - Sedan & Wagon VW Passat - Sedan Jaguar XJ - Sedan VW Rabbit - Hatchback Porsche 911 - Coupe & Convertibe VW Jetta - Sedan % of volume replaced : 9% % of volume replaced : 24% % of volume replaced : 6% % of volume replaced : 24% Source: Banc of America Securities-Merrill Lynch

Chart 48: 2010 Audi Q5

Source: Motor Trend

Chart 49: 2010 Mercedes E-Class

Source: Edmunds

Chart 50: 2010 Porsche Panamera

Source: Porsche Media

Chart 51: 2011 BMW X1

Source: BMW

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Korean OEMs Conclusion: Korean OEMs are picking up the pace after hitting a dry patch in MY08 & MY09. Therefore, we expect Hyundai and Kia to gain significant market share. Although the pattern of Hyundai and Kia’s product intros has been volatile some stability is emerging.


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The average replacement rate of 27% over the next four model years is well ahead of the industry average of 18% their historical average of 24%. This should drive significant market share gains.

The mix of introductions for Korean OEMs is heavily overweight Small Cars and CUVs which also bodes well for market share.

Average showroom age trends peeks above the industry average in MY11, but otherwise remains below average, which should also help drive market share gains.

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Table 18: Korean OEMs U.S. product pipeline 2010e-2013e 2010e 2011e 2012e 2013e Kia Forte - Sedan & Coupe Hyundai Tucson - Small CUV Hyundai Azera - Sedan Hyundai Santa Fe - Midsize CUV Kia Soul - Hatchback Kia Sorento - Small CUV Kia Amanti - Sedan Hyundai Veracruz - Large CUV Kia Sportage - Small CUV Hyundai Accent - Hatchback & Sedan Kia Rondo - Small CUV Hyundai Equus - Sedan Kia Rio - Hatchback & Sedan Hyundai Elantra - Sedan Hyundai Sonata - Sedan Kia Optima - Sedan % of volume replaced : 15% % of volume replaced : 44% % of volume replaced : 16% % of volume replaced : 34% Source: Banc of America Securities-Merrill Lynch

Chart 55: 2010 Kia Forte

Source: Edmunds

Chart 56: 2010 Kia Soul

Source: Kia Motors

Chart 57: 2011 Hyundai Equus

Source: Car and Driver

Chart 58: 2011 Hyundai Sonata

Source: Hyundai

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Conclusions

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Conclusions We believe our measures of replacement rate and showroom age are the major driver of market share gains and losses. Historically, Detroit has replaced its line-up every seven years while the competition has done so every four to five years – one of the main reasons that Ford, GM, and Chrysler have lost share, in our view.

Product activity slowed, but is re-accelerating in MY11-MY13. This suggests that all-else equal the pricing environment should ease through MY10, but become more difficult in MY11 through MY13 unless demand also recovers.

New product activity is focused on Car and Crossover segments. At the same time Light Truck (body-on-frame) intros are slowing.

Gaps in relative performance are beginning to open again. We estimate that an increasing level of disparity in replacement rates will result in larger shifts in market share similar to those that have begun to emerge in 1H:09.

GM’s market share losses are likely to be greater than targeted. We believe that GM’s 18%-19% market share target is optimistic and a more realistic range is 15%-16%. GM’s replacement rate averages just 11% over the next four years, below its historical average of 14%, and well below the industry average of 18%.

The positive reversal of Ford’s market share in 1H:09 should continue. We believe this will be driven by the relative strength of its product replacement rate of 25% over the next four years, above its historical average of 14% and well better than the industry average of 18%.

We believe Chrysler is likely to be half its current size in a few years due to a lack of product. Chrysler severely lags the industry on a number of key metrics, which is an ominous sign for market share. This is a result of a lack of investment by previous owners and the dubious potential for Fiat products in the U.S. market.

The lead Japanese OEMs have maintained for years is shrinking. Toyota and Nissan’s metrics are converging closer to the industry averages while Honda remains significantly better than average, which should in combination slow their trend of market share gains.

Korean OEMs are picking up the pace after hitting a dry patch in MY08 & MY09. Therefore, we expect Hyundai and Kia to gain significant market share, about 3.5% over the next four years.

Suppliers & Dealers success should be correlated to their exposure to OEMs with high replacement rates. We believe this bodes well for BorgWarner, a supplier, and the following dealers: PAG, Asbury, Sonic, and Group 1. It continues to be an ominous sign for many suppliers.

1. Replacement rate and showroom age drive market share gains and losses.

2. Product activity slowed, but should re-accelerate in MY11-MY13.

3. Intros more focused on cars and CUVs than ever before.

4. Gaps in relative performance are beginning to open again

5. GM’s market share losses are likely to be greater than targeted.

6. Ford’s market share gains in 1H:09 should continue through the next four years.

7. Chrysler is likely to be half its current size in a few years due to a lack of product.

8. The lead Japanese OEMs have maintained for years is shrinking.

9. Korean OEMs are accelerating product intros, which should drive significant market share gains.

10. Suppliers & Dealers success should be correlated to their exposure to OEMs with high replacement rates.

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Appendix

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Appendix Chart 59: New model volume mix industry summary, 2010e-2013e model year

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Mid/LargeCarSmall Car

Lux ury &Sporty CarCrossov er

Lt. Truck


Chart 60: Total number of models offered in the U.S. market

16917417518218117818518817018616616616617018519919220220521020622423624222123022735 31 34 26 35 38 36 21 48 21 39 35 38 41

39 32 41 41 40 43 55 43 32 3449 42 41

100120140160180200220240260280300320340

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Chart 61: Average showroom age by product segment

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GM has the lowest level of truck introductions while Ford, Chrysler and the Japanese automakers have the highest. Surprisingly Small Car intros generally lag Mid/Large Cars and CUVs.

Total number of models launched in the U.S. is on a steady climb, but levels off in MY10-MY13.

Even among segments there is a general convergence around an average showroom age between two and three years. However, the Small Car segment continues to get fresher while Light Trucks are aging.

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Chart 62: Toyota replacement rate

37%

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Toy otaToy ota 92-09 Av g.Industry Replacement Rate


Chart 63: Toyota’s absolute and relative average showroom age

1.8 1.60.9 1.1 1.11.6 1.5

2.61.9 2.3

1.3 1.11.82.1 2.8

1.91.9 2.0 1.92.5 2.32.4 2.3 2.62.52.1

(4)(3)(2)(1)

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Older

Av erage Show room Age


Chart 64: Honda replacement rate

37%

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HondaHonda 92-09 Av g.Industry Replacement Rate


Chart 65: Honda’s absolute and relative average showroom age

0.7 0.30.6 1.1 1.71.4 2.00.8

1.8 1.11.8

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2.0 2.22.0 2.31.7 1.72.51.91.9

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Chart 66: Nissan replacement rate

36%

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NissanNissan 92-09 Av g.Industry

Replacement Rate


Chart 67: Nissan’s absolute and relative average showroom age

1.1 1.52.02.9 2.42.2 2.5

3.93.0

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Price objective basis & risk Asbury Auto (ABG, $10.20, C-1-9) Our price objective of $13 is based on 12.5X our 2010 EPS estimate. We believe that the ABG brand mix should be relatively supportive and the quality of the business warrants a multiple at the higher end of the dealer range. Downside risks to our price objective are 1) A cyclical downturn below our forecasts for US SAAR would put significant pressure on new vehicle sales 2) increased weakness in the Florida market to which ABG is exposed 3) the possibility of higher interest rates 4) OEMs wariness toward public groups 5) consumer dissatisfaction with auto retailing and 6) the potential for franchise law changes 7) potential covenant breach. Upside risks to our price objective are 1) a general recovery in the economy 2) a significant recovery in US sales 3) a recovery in the Florida market to which ABG is exposed 4) the possibility of lower interest rates.

BorgWarner (BWA, $30.51, C-2-9) We believe global macro pressure will challenge even the best run suppliers in our coverage universe, and therefore view average 5yr multiples as being warranted for BWA. This would indicate a stock at about $35 (EV/EBITDA approximately 9.0X). We believe BWA's relative operating and balance sheet strength will allow investors to look past 2009 to the company's 2010 EPS. Downside risks to our objective 1) an extreme drop in gas prices coupled with relaxed fuel efficiency regulation 2) increased competition in the turbo industry 3) a continued downdraft in volumes 4) an even more than expected severe increase in raw material costs. Upside risks to our objective 1) an extreme increase in gas prices 2) greater than expected penetration of turbo charged GDI engines in the US and Europe 3) a significant recovery in volumes in the US and Europe 4) a significant decline in raw material costs.

Ford Motor (F, $5.84, C-1-9) Our $8.75 PO is based on an EV/EBITDA multiple of 5X using an average of our 2010 and 2011 estimates, which is consistent with the company's 5-yr historical average. Downside risks to our PO: 1) restructuring plan disappoints materially 2) the U.S. market was to fall lower than ests 3) input costs rise meaningfully 4) disruption in the supply base 5) significant increase in gas prices pressure demand 6) new vehicle pricing deteriorates 7) market share losses pressure results 8) unwillingness of the dealer body to shoulder inventory risk 9) suppliers gain significant pricing power 10) F is unable to receive the same terms from the UAW that may be negotiated by GM/Chrysler in bankruptcy court 11) further stress in capital markets makes borrowing prohibitive for F 12) trough in sales materializes later than we think, rendering our call early 13) key member of mgmt are unable to continue working at Ford 14) the dealership network is impaired and unable to sell F vehicles 15) significant share dilution if F funds its VEBA obligation with stock 16) US gov fails to support suppliers in the event of a GM/Chrysler bankruptcy 17) failure to execute could lead to bankruptcy. Upside risks to our PO: 1) restructuring plan performs better than expected 2) U.S. auto sales recover meaningfully 3) input costs drop meaningfully 4) the potential for further government stimulus 5) a rapid recovery in the global economy 6) large market share gains from competitors 7) a much better UAW contract.

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Group 1 Auto (GPI, $25.49, C-1-9) Our price objective of $29.00 is based on a multiple of 12.5X our 2010 EPS estimate, which is at the high end of the historical range for GPI. Over time we believe the stock will trade to the higher end of its historical range as management focuses on cost savings and growth by acquisition to drive 15% earnings growth in the long run. Downside Risks to our price objective 1) the loss of Hesterberg and/or Rickel, 2) the possibility that GPI is unable to achieve the earnings growth we forecast, 3) the possibility of higher interest rates, 4) OEMs wariness toward public groups, 5) consumer dissatisfaction with auto retailing, and, 6) the potential for franchise law changes. Upside Risks to our price objective 1) stronger than anticipated earnings growth 2) further declines in interest rates, and 3) favovrable franchise law changes.

Penske Auto Group (PAG, $16.14, C-1-9) Our price objective of $19 is based on 15X our 2010 EPS estimate, at the high end of the average for the stock over the last 5 years. We believe that multiple upside is warranted given the strength of PAG's model and luxury brand mix. Downside Risks to our price objective, 1) the loss of Roger Penske's leadership, 2) the possibility that PAG is unable to achieve the earnings growth we forecast, 3) the possibility of higher interest rates, 4) OEMs wariness toward public groups 5) consumer dissatisfaction with auto retailing, and 6) the potential for franchise law changes. Upside Risks to our price objective, 1) stronger than anticipated earnings growth, 2) lower interest rates, and 3) the potential for favorable franchise law changes.

Sonic Automotive (SAH, $9.21, C-1-9) Our price objective of $11.50 is based on 10x our 2010e EPS, around the historical average and below the 2010e dealer average P/E. Downside Risks to our price objective 1) a cyclical downturn below our forecasts for US SAAR would put significant pressure on new vehicle sales, 2) possibility that SAH is unable to achieve the earnings growth we forecast, 3) the possibility of higher interest rates, 4) OEMs wariness toward public groups, 5) consumer dissatisfaction with auto retailing, 6) the potential for franchise law changes, and 7) potential covenant breach. Upside Risks to our price objective 1) a cyclical upturn in the US SAAR which would boost new vehicle sales, 2) better than anticipated earnings growth 3) the possibility of lower interest rates,

Analyst Certification I, John Murphy, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

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US-Automotives Coverage Cluster Investment rating Company ML ticker Bloomberg symbol Analyst BUY Asbury Auto ABG ABG US John Murphy, CFA Ford Motor F F US John Murphy, CFA Goodyear GT GT US John Murphy, CFA Group 1 Auto GPI GPI US John Murphy, CFA Magna Intl MGA MGA US John Murphy, CFA Penske Auto Group PAG PAG US John Murphy, CFA Sonic Automotive SAH SAH US John Murphy, CFA NEUTRAL BorgWarner BWA BWA US John Murphy, CFA Cooper Tire CTB CTB US John Murphy, CFA Genuine Parts GPC GPC US John Murphy, CFA Johnson Controls JCI JCI US John Murphy, CFA TRW Automotive TRW TRW US John Murphy, CFA UNDERPERFORM American Axle AXL AXL US John Murphy, CFA ArvinMeritor ARM ARM US John Murphy, CFA AutoNation, Inc. AN AN US John Murphy, CFA Gentex GNTX GNTX US John Murphy, CFA Lithia Motors A LAD LAD US John Murphy, CFA

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Important Disclosures Investment Rating Distribution: Autos Group (as of 01 Jun 2009) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 33 44.00% Buy 14 48.28% Neutral 13 17.33% Neutral 5 55.56% Sell 29 38.67% Sell 15 60.00% Investment Rating Distribution: Distributors Group (as of 01 Jun 2009) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 7 70.00% Buy 3 42.86% Neutral 0 0.00% Neutral 0 0.00% Sell 3 30.00% Sell 1 33.33% Investment Rating Distribution: Global Group (as of 01 Jun 2009) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 1303 40.83% Buy 602 51.10% Neutral 807 25.29% Neutral 362 51.49% Sell 1081 33.88% Sell 394 39.96% * Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months. For purposes of this distribution, a stock rated Underperform is included as a Sell.

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% * Ratings dispersions may vary from time to time where BAS-ML Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.

INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent BAS-ML Comment referencing the stock.

Price charts for the securities referenced in this research report are available at http://www.ml.com/research/pricecharts.asp, or call 1-888-ML-CHART to have them mailed.

MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Asbury Auto Grp, BorgWarner, Ford Motor, Group 1 Automoti, Penske Auto Group, Sonic Automotive.

MLPF&S or an affiliate was a manager of a public offering of securities of this company within the last 12 months: BorgWarner, Ford Motor. The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Asbury Auto Grp, BorgWarner,

Ford Motor, Group 1 Automoti, Penske Auto Group, Sonic Automotive. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: Ford Motor,

Group 1 Automoti. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Asbury Auto Grp, BorgWarner,

Ford Motor, Group 1 Automoti, Penske Auto Group, Sonic Automotive. MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Asbury Auto Grp, BorgWarner,

Ford Motor, Group 1 Automoti, Penske Auto Group, Sonic Automotive. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company

within the next three months: Asbury Auto Grp, BorgWarner, Ford Motor, Group 1 Automoti, Penske Auto Group, Sonic Automotive. MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company. If this report was issued on or after the 10th day

of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 10th day of a month reflect the ownership position at the end of the second month preceding the date of the report: BorgWarner, Ford Motor, Group 1 Automoti, Sonic Automotive.

MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Asbury Auto Grp, BorgWarner, Ford Motor, Group 1 Automoti, Penske Auto Group, Sonic Automotive.

The company 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: Asbury Auto Grp, BorgWarner, Ford Motor, Group 1 Automoti, Penske Auto Group, Sonic Automotive.

The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived from investment banking revenues.

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Other Important Disclosures MLPF&S or one of its affiliates has a significant financial interest in the fixed income instruments of the issuer. If this report was issued on or after the 10th day of

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Team Page John Murphy, CFA +1 212 449 7045 Research Analyst MLPF&S [email protected] John Lovallo II, CFA +1 212 449 6166 Research Analyst MLPF&S [email protected] Elizabeth Lane +1 212 449 6091 Research Analyst MLPF&S [email protected] Harald Hendrikse >> +44 20 7996 4890 Research Analyst MLPF&S (UK) [email protected] Thomas Besson >> +33 1 53 65 59 47 Research Analyst Merrill Lynch (France) [email protected] Koichi Sugimoto >> +81 3 6225 6909 Research Analyst Merrill Lynch (Japan) [email protected] Daniel Kim, CFA >> +852 2536 3443 Research Analyst Merrill Lynch (Hong Kong) [email protected] >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain Merrill Lynch entities that take responsibility for this report in particular jurisdictions.

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Car Wars 2010-2013

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