Equity Research Region – U.S. Industry Report

Equity Research Region – U.S.

Industry Report

April 10, 2023

Morgan Stanley Auto Team

Please see analyst certification and other important disclosures starting on page 24.

Autos & Auto Parts Manufacturers

Stephen Girsky . (914) 225.4811 [email protected]

Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Follow the Food Chain

The Dominos are Starting to Fall

Equity Research Region – U.S. Autos & Auto Parts Manufacturers

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Stephen Girsky . (914) 225.4811 . [email protected]


• Recent data points suggest softness at the top of the automotive food chain is beginning to work its way down.

• Consumer Fundamentals are weak

• Dealer sales are soft and they are choking on inventory.

• Auto OEM earnings are under pressure. Auto-related earnings may be at risk.

• Questions

Source: Morgan Stanley Research

Follow the Food Chain: Dominos are Starting to Fall

Supplier Supplier PerformancePerformance

OEM OEM PerformancePerformance

Dealer Dealer PerformancePerformance

Consumer

Fundamentals


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Transitive Property of Auto Industry Earnings

• Consumer fundamentals lead dealer performance: If consumer fundamentals do not improve, then retail demand problems will continue and dealer earnings risk will remain high.

• Dealer performance leads OEM performance: The dealers are choking and OEM earnings risk is rising. Comp store sales growth rate slowed for virtually every public new/used auto retailer.

• OEM performance leads supplier performance: GM and Ford 2Q04 results fell below expectations. High inventory and weak demand at retail suggest further earnings risk.

• Thus, auto supplier/related estimates may be too high.

• Bottom Line: Until consumer demand improves, the entire food chain has risk with suppliers yet to feel the full brunt of the weakness. It is important to note that not all mfrs are struggling. DaimlerChrysler, for example is improving profits, gaining share, while reducing incentives.



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YTD OEM & Dealer Stock Performance

-0.7%

-9.2% -9.6% -10.5%-11.8%

-15.7%

-22.6%-22.6%-24.1%

-36.7%-40%

-30%

-20%

-10%

0%

S&P500 SAH DCX AN F LAD UAG GM GPI KMX

YTD OEM & Dealer Stock Performance

Source: Factset & Morgan Stanley Research


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Consumer Fundamentals Appear Soft

• Auto Sales did not weaken materially in the most recent recession and thus, significant pent-up demand was never created.

• Economic conditions appear mixed.

• Weak conditions at retail are being covered up with increased fleet sales.

• The number of off-lease vehicles is falling sharply. Thus, fewer consumers are being forced back to a dealer to buy or lease a new car.

• Extended financing terms are likely to prolong vehicle turnover.



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Where are We in the Sales Cycles?

Source: Bureau of Economic Analysis, Morgan Stanley Research

12

13

14

15

16

17

18

1986 1989 1992 1995 1998 2001 2004e

U.S. Light Vehicle SAAR 1986-2004E (in mm units)

Peak: 17.3

Trough: 12.3

Trendline Growth 1%Prior Peak: 16.0


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Leading Indicator Suggests Sales Should be Sluggish

Source: Global Insight; Morgan Stanley Research

Indicators Recent Condition

Interest Rates Yellow

Consumer Confidence Yellow

Gasoline Price Red

Used Car Price Red

Credit Availability Green


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Vehicle Demand, However, is Holding Up

16.5 16.5

17.7

16.6

16.1

16.4

17.3

16.9

16.6 16.6

16.0

16.5

17.0

17.5

18.0

1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04

Source: Autodata & Morgan Stanley Research

U.S. Light Vehicle SAAR by Quarter (in mm Units)


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Retail Sales Weak, Especially GM & Ford

-20%

-10%

0%

10%

1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04

GM Ford

GM and Ford Retail Sales Y/Y % Change

Source: Company data, Autodata & Morgan Stanley Research


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Higher Gas Prices May be Hurting Low End Consumers

Segment Sales YTD04 vs. YTD03

-15%

-10%

-5%

0%

5%

10%

15%Sport Wagon/Crossover

Small SUV

Large Pickup

Large Van

Minivan

Luxury Cars

Middle SUV

Total Light Vehicle

Luxury/Spec. Pickup

Small Cars

Luxury SUV

Middle Cars

Large SUV

Small Pickup

Source: NHTSA, Department of Energy, Autodata & Morgan Stanley Research

1999 2000 2001 2002e 2003e 2004e2004 vs.

2003Avg. Annual Gallons of Fuel Used per Vehicle 590.1 579.7 586.3 589.2 586.2 586.8 0.7 Avg. Price per Gallon of Fuel (in cents) 113.5 148.6 142.6 134.1 155.8 200.0 44.2 Avg. Annual Cost of Fuel per Vehicle $670.0 $861.2 $836.1 $790.0 $913.2 $1,173.6 $260.4


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Off Lease Vehicles Beginning to Decline

Source: Manheim 2004 Used Car Market Report (2004-2006 Manheim estimates)

Off Lease Vehicles in ‘000 Units

Off Lease Vehicles Beginning to Decline

Source: Manheim 2004 Used Car Market Report (2004-2006 Manheim estimates)

2,890

3,2753,452

3,303

2,761

2,304

1,893

1,600

2,000

2,400

2,800

3,200

3,600

2000 2001 2002 2003 2004E 2005E 2006E

385177 (149)

(542)

(457)

(411)


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Vehicle Loan Maturities are Rising

45

50

55

60

65

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04

Trough: 48.6 Dec-01

Peak: 63.5 Oct-03

Average Maturities on Financed Vehicles (in Months)

Source: FRB, Morgan Stanley Research


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Extended Financing Terms May Prolong Vehicle Turnover


-$8,000

-$4,000

$0

$4,000

$8,000

$12,000

$16,000

0 4 8 12 16 20 24 28 32 36 40 44 48 52 56

Payment Months

72m 0.0% Equity 60m 0.0% Equity 36m 0.0% Equity

Ps. Equity in 16 mths



Time to Establish Positive Equity on Financed Vehicles


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Interest Rates are Rising

2%

3%

4%

5%

6%

7%

2Q96 2Q97 2Q98 2Q99 2Q00 2Q01 2Q02 2Q03 2Q04

Source: FRB & Morgan Stanley Research

Every 100 basis point increase in rates on a 5 yr car loan is worth $700-$750 per vehicle

FMCC

5 Year Treasury

GMAC


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GM and Ford Auto Profits Remain Slim

Source: Company Data, Morgan Stanley Research * Chrysler: Operating Profit

Big Three North America Pretax Profit / Vehicle

2Q04 2Q03 1Q04 Y/Y Q/Q

GM $305 $30 $436 901% -30%

Ford $495 $454 $1,939 9% -74%

Chrysler* $774 ($1,484) $683 NMF 13%


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Dealer Results Have Been Fair at Best

-4%

0%

4%

8%

12%

AN LAD UAG GPI

1Q04 Y/Y Growth over 1Q03 2Q04 Y/Y Growth over 2Q03

Comp Store Y/Y New Vehicle Sales Growth

Source: Company data & Morgan Stanley Research


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Dealer Results Have Been Fair at Best

-15%

-10%

-5%

0%

5%

AN LAD UAG GPI KMX*

1Q04 Y/Y Growth over 1Q03 2Q04 Y/Y Growth over 2Q03

Comp Store Y/Y Used Vehicle Sales Growth

Source: Company data & Morgan Stanley Research *: KMX 2Q data per mgmt estimate


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Big Three Inventory Remain Elevated

40

50

60

70

80

90

2Q97 2Q98 2Q99 2Q00 2Q01 2Q02 2Q03 2Q04

GM Ford DCX

Big Three Inventory: Days’ Supply

Source: Company data, Autodata & Morgan Stanley Research

Normal Range


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Big Three “Implied” Retail Inventory Days’ of Supply

Source: Autodata, Morgan Stanley Research

72.7

45.6

62.8

72.4

64.9 62.2

75.7

85.5

93.0

55.9

79.8

92.5

81.1 78.7

95.8

115.1

2Q97 2Q98 2Q99 2Q00 2Q01 2Q02 2Q03 2Q04

Overall Day's Supply

Retail Day's Supply

65.9

58.2 57.8 58.6

66.370.7

81.087.0

91.5

77.681.5 82.5

92.098.3

110.9

126.1

2Q97 2Q98 2Q99 2Q00 2Q01 2Q02 2Q03 2Q04

Overall Day's Supply

Retail Day's Supply

59.957.4 58.8

78.3

63.8 62.866.2

75.476.872.3

75.5

104.9

86.784.0

94.3

104.0

2Q97 2Q98 2Q99 2Q00 2Q01 2Q02 2Q03 2Q04

Overall Day's SupplyRetail Day's Supply

GM Ford

Chrysler


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OEM Share Gains & Losses YTD04 vs YTD03


-1.0%

-0.8%

-0.5%

-0.3%

0.0%

0.3%

0.5%

0.8%

1.0%


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Incentives at Record High


Aug-04 Avg Incentive


Y/Y Change



Y/Y Change

Hummer $3,762 $2,039 84.5% Industry Avg $3,121 $3,004 3.9%

Audi $3,019 $1,889 59.8% Cadillac $6,376 $6,417 -0.6%

Nissan $2,207 $1,467 50.4% Saab $6,799 $6,895 -1.4%

Isuzu $5,230 $3,478 50.4% Chevrolet $4,246 $4,353 -2.5%

LandRover $5,387 $3,702 45.5% Mazda $2,488 $2,552 -2.5%

Volvo $3,987 $2,750 45.0% Infiniti $1,495 $1,544 -3.2%

Jeep $4,777 $3,358 42.3% Buick $4,356 $4,621 -5.7%

Volkswagen $2,306 $1,681 37.2% BMW $2,379 $2,575 -7.6%

Hyundai $2,625 $1,918 36.9% Saturn $3,134 $3,432 -8.7%

Mercedes-Benz $1,934 $1,518 27.4% Mitsubishi $2,680 $3,076 -12.9%

Honda $1,143 $898 27.3% Lexus $1,587 $2,020 -21.4%

Oldsmobile $5,974 $4,759 25.5% Chrysler $2,874 $3,660 -21.5%

Kia $2,717 $2,166 25.4% Subaru $1,301 $1,729 -24.8%

Jaguar $5,094 $4,424 15.1% Toyota $844 $1,150 -26.6%

Mercury $5,300 $4,733 12.0% Porsche $293 $430 -31.9%

GMC $5,029 $4,561 10.3% Mini $239 $397 -39.8%

Pontiac $3,946 $3,647 8.2% Acura $301 $932 -67.7%

Ford $3,686 $3,418 7.8%

Suzuki $2,839 $2,641 7.5%

Dodge $4,040 $3,766 7.3%

Lincoln $7,361 $7,037 4.6%

Industry Avg $3,121 $3,004 3.9% Source: Autodata; Morgan Stanley Research


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GM and Ford Auto Profit Margins Remain Slim

Source: Company Data; Morgan Stanley Research * Chrysler: Operating Profit

Big Three North America Pretax Profit Margin

2Q04 2Q03 1Q04 Y/Y Q/Q

GM 1.4% 0.1% 2.0% 1.3% -0.6%

Ford 2.2% 2.1% 8.4% 0.1% -6.2%

Chrysler* 3.8% -8.0% 3.1% 11.8% 0.7%


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Actual vs. Perceived Quality by Brand

Source: CNW, JD Power, Morgan Stanley Research

-80

-60

-40

-20

0

20

40Actual Quality < Perceived Quality =

Share Risk

Actual Quality > Perceived Quality = Share Opportunity


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Important Disclosures

Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Stephen Girsky.

Important US Regulatory Disclosures on Subject CompaniesThe information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and its affiliates (collectively, "Morgan Stanley").

As of July 30, 2004, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: General Motors, Ford and DaimlerChrysler AG.

Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of General Motors, Ford and DaimlerChrysler AG.

Within the last 12 months, Morgan Stanley has received compensation for investment banking services from General Motors, Ford and DaimlerChrysler AG.

In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from General Motors, Ford and DaimlerChrysler AG.

Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from General Motors, Ford and DaimlerChrysler AG.

Within the last 12 months, Morgan Stanley has either provided or currently is providing investment banking services to the following companies covered in this report General Motors, Ford and DaimlerChrysler AG.

Within the last 12 months, Morgan Stanley has either provided or currently is providing non-investment banking, securities related services to and/or in the past has entered into an agreement to provide services or currently has a client related relationship with the following companies covered in this report General Motors, Ford and DaimlerChrysler AG.

The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Morgan Stanley & Co. Incorporated makes a market in the securities of General Motors and Ford.


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Ratings Distribution and Definitions

Global Stock Ratings Distribution(as of August 31, 2004)

Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.

ANALYST STOCK RATINGSOverweight (O). The stock’s total return is expected to exceed the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stock’s total return is expected to be in line with the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U). The stock’s total return is expected to be below the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst’s view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts.

ANALYST INDUSTRY VIEWSAttractive (A). The analyst expects the performance of his or her industry coverage universe to be attractive vs. the relevant broad market benchmark over the next 12-18 months.In-Line (I). The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad market benchmark over the next 12-18 months.Cautious (C). The analyst views the performance of his or her industry coverage universe with caution vs. the relevant broad market benchmark over the next 12-18 months.Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA.

Coverage Universe IInvestment Banking Clients (iBC)

Stock Rating Category Count % of Total Count

% of Total IBC

% of Rating Category

Overweight/Buy 641 36% 268 41% 42% Equal-Weight/Hold

817 45% 297 45% 36%

Underweight/Sell 339 19% 94 14% 28% Total 1,797 659


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Stock Price and Ratings History



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Other Disclosures

Other Important DisclosuresThis research report has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.

For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www.morganstanley.com and other electronic systems.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdings disclosed in the section entitled "Important US Regulatory Disclosures on Subject Companies", Morgan Stanley and/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons.

Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley sells to and buys from customers the equity securities of companies covered in its research reports on a principal basis.

Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company.With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.

Morgan Stanley research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits.

(continued on next page)


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Other Disclosures

Other Important Disclosures (continued)The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.

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