Alternative Fuels: investment Outlook for the Automotive industry

Alternative Fuels: Investment Outlook for the Automotive Industry KPMG LLP

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

Executive Summary The global automotive industry is experiencing unprecedented turmoil. In 2008, oil prices peaked at US$145 per barrel and then hit a three-year low. The credit crunch challenged consumers and vehicle manufacturers, resulting in vehicle sales declines of one third or more in the fourth quarter of 2008 for the North American automotive industry. However, the U.S. Congress and the European Union continue to urge vehicle manufacturers to build more fuel-efficient and environmentally friendly “green” vehicles. The cumulative effect is an industry that is undergoing major restructuring in the short term amid a mounting liquidity crisis while winners quickly adapt and balance economic issues with cutting-edge technologies in the long term. Numerous segments of the automotive value chain are in the midst of transformation, and this market upheaval is helping to drive significant investment opportunities in a variety of sectors. In an effort to provide a detailed perspective on these opportunities, KPMG LLP’s Transaction Services practice undertook an analysis of alternative fuels to help assess which technologies and segments could become the most active in the coming decade. This paper explores several key issues, such as how investments in alternative fuel technologies by vehicle manufacturers and suppliers could reshape the automotive industry and what types of investment opportunities could be created for both strategic and financial buyers. Principally, there are six alternative fuels that may be used to power automobiles. While gasoline is clearly the fuel of choice and will likely remain so in the foreseeable future, several alternative fuels have been explored as viable options. Alternative fuels are appealing because they both lessen U.S. dependence on foreign oil and tend to be less harmful to the environment. This paper seeks to provide insights and clarity on investment issues related to the following alternative fuels: • Gasoline and Diesel

• Natural Gas

• Electric

• Solar

• Biofuels (e.g., ethanol)

• Fuel Cells

While vehicle manufacturers have been investing in alternative fuel technology for more than a decade, automotive suppliers have made tremendous strides in supplying parts that improve fuel efficiency. The U.S. Census Bureau currently says the number of automotive parts suppliers in the United States is 3,000, with a total annual revenue of around US$150 billion. Fuel-efficiency regulations and shifts in consumer demand appear to be leading larger and better-financed suppliers to seek further opportunities as well as paving the way for new entrants. Both financial firms and strategic buyers are becoming active investors as they seek new technologies to meet consumer and regulatory demand. What follows is an analysis of the current state of alternative energies and the investment opportunities they present. © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

Gasoline and diesel fuel, electric, and biofuels appear to be the most promising in terms of both viability and investment returns.

C o nten ts Introduction

1

Transportation Fuel Infrastructure on a Collision Course with the Automotive Value Chain

2

Industry Outlook

5



Gasoline and Diesel 7

Electric 10

Biofuels 14

Natural Gas 16

Solar 18



Fuel Cells 20

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

Alternative Energy WP

Introduction The automotive sector is reeling from unforeseen volatility in oil prices. The conventional business model of producing cars and auto parts is under review as the world adjusts to this new reality. Much like the textile industry in the 1980s, the steel industry in the 1990s, and the airlines in this decade, the automotive industry is restructuring under new market forces. All segments of the automotive value chain are facing distress and are ripe for transformation that could lead to a boom in mergers and acquisitions (M&A) in the near future. Private equity firms and strategics alike need to be aware of recent entrants to the industry that are already challenging the conventional methods of assembly and distribution of vehicles. The trend toward “green vehicles” appears to be gaining ground amid consumer demand, government regulations, and increasing concern about global warming. According to experts, this “green” movement could be a prime enabler for a homogeneous auto market throughout the world, in vehicle mix and propulsion technology. Will all original equipment manufacturers (OEMs) and suppliers jump on this bandwagon? If they do, how would this shift in focus reshape the automotive industry of the future? What would be the fuel of choice for the next generation of automobiles and how would OEMs and suppliers be affected? And, above all, would these trends create new investment opportunities in the sector that investors would need to be aware of today to be ready when the right opportunity comes along? Our research, including conversations with industry leaders, private equity (PE) and venture capital (VC) firms, and investment banks, further investigates these key questions and how the answers to these questions could impact the state of M&A in the North American automotive industry.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

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CHART A

Volatility in fuel prices 160

5.00 4.50

140

4.00 120 3.50 100

3.00 2.50

80

2.00

60

1.50 40 1.00 20

0.50

0

0.00 2000

2001

2002

2003

Retail Gas

2004 Retail Diesel

2005

2006

2007

2008

Crude Oil Futures (NYMEX)

Source: Energy Information Administration (www.eia.doe.gov)

Transportation Fuel Infrastructure on a Collision Course with the Automotive Value Chain Automotive powertrains have historically been dependent on gasoline- and dieselpowered engines. This may be about to change. The mass electrification and personalization of vehicles now under way may eventually alter the automotive supplier landscape significantly. According to an April 2008 study by DuPont and Market Tools, 65 percent of consumers would pay up to 5 percent more for a product with a greener footprint. U.S. Environmental Protection Agency (EPA) regulations to reach a 35-mpg fuel-efficiency standard by 2020 combined with growing pressure to reduce greenhouse gas (GHG) emissions are causing OEMs and suppliers to move increasingly toward a different mix of vehicles and parts. That may result in a significant value shift in the automotive value chain. The success of this transformation would rest heavily on a parallel shift from production to distribution of fuels required in the fuel infrastructure, as automotive OEMs expand their influence across the fuel value chain. The two value chains will have to gradually transform in lockstep, and the assumptions driving this trend will need to be analyzed continuously.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

$ per barrel

|

$ per gallon

2

INVESTMENT OUTLOOK FOR THE AUTOMOTIVE INDUSTRY

|

3

Alternative fuels: Complexity of the current value chain

Suppliers

Automotive value chain

Restructuring & new ventures

Fuel value chain

Production Gasoline/Diesel • Widely used fossil fuel to power majority of automobiles on the road

Distribution • Established infrastructure of pipelines and fueling stations

• No major infrastructure-related innovations expected

Electric • Automobile engines function either partially or completely on electrical energy

• Use of existing electrical grid for domestic charging of vehicles

• Limited infrastructure available to

recharge electric vehicles on the go

• Opportunities to build recharging

capabilities into parking garages, battery “swap” stations, etc.

Biofuels (ethanol, biodiesel) • 1st generation ethanol made from corn, soybeans, sugarcane – 16 billion gallons produced globally (2008)

• 2nd generation ethanol (cellulosic)

OEM

• Ethanol cannot be transported via pipelines (ethanol is hydrophilic)

• Blending of hydrophil into gasoline

Consumption • Advanced gasoline engines such as

DiesOtto and part-HCCI engines, dynamic switch between two- and four-stroke cycles, turbo-charging, high-speed transmissions, VVT, etc.

• Hybrid-Electric Vehicle (HEV): gasoline

engine with energy storage/release from onboard battery

• Plug-in HEVs (PHEVs): battery powered

with a small conventional engine backup

Emission • Up to 20–27% reduction in carbon dioxide (CO2) emissions via “advanced gasoline engines” and powertrain advances

• Emissions lowered significantly when operating on electricity

Current Operating Cost/mile 8–10 c/mile ($2/gal gas) 16–20 c/mile ($4/gal gas) 2 c/mile (full battery mode)

• Range of electric operation is dependent on the battery technology in use

• Electric Vehicle (EV): Similar to PHEVs but without engine backup

• Biodiesel engines • E10/E85 engines

needs to be done at retail outlets, posing unique distribution challenges

• 26% greenhouse gas reduction with

>10 c/mile

ethanol and 60% with biodiesel

• Other GHGs such as nitrous oxide released • 2nd generation biofuels needed to address environmental concerns

made from wood, grass, non-edible plants – Limited production currently

• Biodiesel made by transesterification of vegetable oils – 0.5 billion gallons produced globally (2008)

Natural Gas • Natural gas is a fossil fuel with widely distributed deposits

• Natural gas is distributed via the widely

• 85% of U.S.’s natural gas

• Refueling infrastructure to support

Solar • Solar energy captured via photo-voltaic panels used to provide electricity to power automotive sub-systems

• Infrastructure to charge solar-powered

Fuel Cells

• Estimated $400 billion investment

consumption is produced domestically

• Generated via processes such as

coal gasification, electrolysis, etc.

deployed natural gas pipeline infrastructure

• CNG powertrain or CNG retrofit

• 90–97% reduction of carbon monoxide • 25% reduction of CO2 • 35–60% reduction of nitrous oxide

• Solar energy cannot be solely used to

• No emissions generated by solar power

equipment on conventional fuel vehicles

5–6 c/mile

compressed natural gas (CNG) vehicles is not widely available

vehicles in places such as parking garages under consideration

power cars due to current limitations on technology and solar power availability

systems

• Viable as a source to provide power to automobile sub-systems such as air-conditioning, panel lighting, etc.

needed by 2050 to build plants, pipeline, and storage for hydrogen

• Hydrogen Fuel Cell Vehicles (HFCVs) that utilize electrical energy from hydrogen

• Hydrogen storage and dissipation of high heat generated from HFCV operation are big issues

Source: KPMG LLP (U.S.) analysis, 2008

In the short term, however, OEMs will continue to rely on conventional internal combustion engines (ICEs). J.D. Power and Associates data shows that there are currently more than 200 vehicle models from major manufacturers available in the United States, the vast majority of which are still powered by gasoline ICEs. In the next three years, however, more hybrids and flex-fuel-enabled vehicles will hit the market. There are about 19 hybrid/electric vehicle models available in the U.S. market today, with as many as 40 projected to be launched by 2011.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

• Nonexistent as water vapor is produced as waste product

17% to 29% increase in electric mode range of HEVs when supplemented with solar power

Not feasible commercially with current technology

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To further add to the proliferation of vehicle models, diesel vehicles, which account for only 3 percent of the market, may increase CHART C in popularity. OEMs may capitalize on the success of clean diesel, fuel-efficient cars in Europe by launching as many as 20 vehicles with clean diesel engines in the United States by 2011. Hydrogen fuel cell and natural gas vehicles appear to have less support from OEMs in the near term, although Honda currently sells a natural gas vehicle, and a number of hydrogen fuel concepts are under development.

Number of models sold in North America by top OEMs, by technology (Illustrative) Technology

Now through 2011

Gasoline/ diesel

137

Hybrid

20

Flex-fuel (bio) Clean diesel Hydrogen Natural gas OEM Type:

15 33

10

44

8

12 2

4

67

248

47

39

2 20

2 1 U.S.

European

Asian

Notes: (1) Vehicle launch counts are prospective and approximate based on public announcements from top global OEMs. Vehicle count forecasts are neither final nor exhaustive. The OEMs included in the sample are: BMW Group, Chrysler, Ford, General Motors, Honda, Mercedes, Nissan, Porsche, Toyota, and Volkswagen; (2) Gasoline/diesel counts are not to scale, as illustrated by the broken line. Sources: Capital IQ, October 2008; Various OEM Web sites

As the automotive industry adapts to consumer shifts toward new transportation fuels and engine choices, significant M&A opportunities for strategic and financial buyers may become available. A review of the M&A transactions in the transportation fuel sector indicates a steady growth in the number of transactions over the past five years, peaking in 2007. Interest of strategic buyers was stronger compared with interest of financial buyers, primarily driven by acquisitive oil companies and utilities. Automotive deals related to alternative-fuel vehicles and parts remained steady until 2007, driven by consumer interest in more green vehicles and OEM interest in developing high-mileage vehicles. On the fuel side, investor interest stayed strong in gas and diesel, hydrogen, solar, and natural gas fuel infrastructure development over the past five years. We believe these investments could be the leading indicators of investments that might follow in the automotive sector in future years. In the automotive sector, electric-, gas/diesel-, and hydrogen-powered vehicles and parts demonstrated active investment over the past five years, while investments in biofuels, natural gas, and solar were minimal. Financial investors (both VCs and PEs) were dominant over strategics in automotive companies focused on hydrogen fuel and electric vehicles and parts.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

INVESTMENT OUTLOOK FOR THE AUTOMOTIVE INDUSTRY

Fuel vs. automotive deal volume M&A Transactions (Transportation Fuel sector)

951 408

2004

510

2005

689

2006

546

2007

Number of Transactions

Number of Transactions

By Fuel Type - Cumulative 2004–2008 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

2008*

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

1700

220 Gas & Diesel

364

319

364

Solar

Fuel Cells

137

Electric Biofuels Natural Gas

M&A Transactions (Automotive sector)

150 100

73

87 62

82

63

50 0

2004

2005

2006

2007

2008* Strategic

Number of Transactions

Number of Transactions

By Fuel Type - Cumulative 2004–2008 200

200

159

141

150 100 50 0

40 12 Gas & Diesel

12

Electric Biofuels Natural Gas

3 Solar

Fuel Cells

Financial

*January–August 2008 Source: Capital IQ, August 2008

Industry Outlook A summary of transportation fuels available today would clearly show a potential for diversification away from fossil fuels. While no clear winner is apparent for the long term, gasoline powertrains with fuel-efficient add-on solutions, such as turbochargers, gasoline direct injection (GDI), and others, are expected to dominate the industry in the near term. Battery-powered vehicles—the hybrid electric vehicle (HEV), plug-in hybrid electric vehicle (PHEV), and electric vehicle (EV)—also are expected to gain popularity as the cost and technology challenges are overcome. According to some estimates, mass commercialization of PHEVs and EVs may not be possible unless the cost of automotive-grade lithium-ion (Li-ion) batteries drops from US$1/watt-hr today to US$0.3/watt-hr (the same as consumer electronics). Multiple administrations have weighed their perspectives on which fuel should prevail; therefore, pure economics may not determine the ultimate winner once the political, legislative, and social ramifications are taken into account.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

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Comparison of alternative fuels Alternate Fuels – Value chain assessment Gasoline/ Diesel

Electric

Biofuels

Natural gas

Solar

Hydrogen

Production • Raw material availability • Processing cost

Alternative Powertrain Strategy • No single “silver bullet” • Potential “high-volume” automotive migration plans will evolve with development of technology and value chain capabilities • Initial primary focus: Advanced ICE from present gas, diesel, ethanol/biofuel technologies using improved powertrain system design/lubricants, power booster/turbochargers, lightweight materials, etc. • Intermediate focus on electrification: Hybrids and electric vehicles with the advent of advanced battery technologies, electrical systems, and development of component supply base, total system infrastructure, and aftermarket capabilities • Zero emission vehicle (ZEV): Fuel cells and other advanced zero emission technologies when viable, with low-cost fuel source, technically advanced hydrogenbased powertrain, and development of component supply base, infrastructure, and after-market capabilities—requiring clean energy sources to deliver “zero emission” total value chain system benefits

Distribution • Distribution cost • Infrastructure availability

Consumption • Upfront costs • Operating costs • OEM readiness/technology Emissions • Regulations • Life cycle GHG emissions

Investment Outlook

Degree of Advantage:

Low

Medium

High

Source: KPMG LLP (U.S.) analysis, 2008

Given the uncertainty, OEMs and their suppliers are spreading their risks over multiple powertrain options. Further, it is unclear if OEMs will retain control of powertrains as a core competency in the future or if financial pressures will force them to outsource and rely more heavily on their suppliers for these systems than they traditionally have, much like heavy-duty commercial vehicle manufacturers. U.S. automotive suppliers, with US$150 billion in annual revenue distributed among 3,000 suppliers, are facing tremendous changes and may be on the cusp of the biggest change in the industry’s 100-year history. The transformation of the automotive value chain—in lockstep with a similar transformation in the fuel infrastructure as a result of fuel-efficiency regulations and a probable shift in consumer demand—while a risk to small and medium-sized suppliers, presents opportunities to larger suppliers prepared to ride out this storm. OEMs, on the other hand, will be challenged to rethink their business models as the center of power, and profitability, shifts away from traditional technologies.

—Kevin Cramton, Managing Director, RHJ International

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INVESTMENT OUTLOOK FOR THE AUTOMOTIVE INDUSTRY

Effects of alternative fuel technology on the U.S. auto parts industry (Illustrative) 2008

Sector growth

2020

Total U.S. industry revenue: US$150 billion Chassis

5%

Body

12%

Interior

16%

Powertrain

32%

Electronics

Total U.S. industry revenue: >US$225 billion The chassis segment is not likely to experience much significant change over the next 12 years (may expect 1% CAGR). Steady growth of around 1% annually will likely be driven by standard design improvements and product refresh.

9%

13%

Drivers of growth in this sector will likely be technological advances and advanced electronics, providing for an estimated growth of 1–2% year over year for the next 12 years.

One of the components most affected by alternative fuels will likely be powertrain, which is expected to grow at a CAGR of around 4% over the next 12 years. Growth will be driven by new design incorporating electric engines; fuels such as biofuels, hydrogen, and natural gas; and smaller, lower-emission engines.

Collision avoidance technology, advanced batteries for electric vehicles (lithium-ion) and new entertainment, information, and software technologies (i.e., Internet, smart navigation system, advanced detection and safety software/systems) will likely account for most of the growth in this sector at an estimated 4–5% per year.

35%

Estimated U.S. suppliers: 3,000 Electronics

4%

Powertrain

35%

39%

Estimated U.S. suppliers: 2,000 Interior

Body

Chassis

Note: Electronics product/services include electrical components, aftermarket electrical components, batteries, and anti-freeze electrical components. Powertrain product/services include functional engine parts, filters, motor oil products, engine treatments, and fuel additives. Interior product/services include interior fittings, cooling system parts, interior products (aftermarket), and power tools. Body product/services include exterior fittings, exterior products (aftermarket), and protectants. Chassis product/services include shock absorbers and bearings. Sources: IbisWorld, “Auto Parts Wholesaling in the US,” August 2008; KPMG LLP (U.S.) analysis, 2008

Gasoline and Diesel Market Dynamics

Gasoline and diesel fuels have been the standard energy source since the birth of the automobile. Both fuels have a widely deployed and established infrastructure, although the primary consumers of diesel fuel in the United States have been commercial transporters. New diesel-fuel standards along with improved technology have decreased diesel’s negative effects on the environment. However, it is estimated that only 3 percent of light-duty vehicles in the United States currently run on diesel. Several issues have conspired to keep U.S. diesel penetration low. These include negative consumer experiences with past diesel engines and higher retail costs than gasoline. In addition, only an estimated 42 percent of the 180,000 gasoline stations in the United States carry diesel fuel. Despite this trend, high volatility in fuel prices and increased regulatory activity have forced OEMs and suppliers to quickly adjust to market conditions. Some momentum appears to be building for diesels, as U.S.-market penetration is expected to increase to 14 percent by 2017, according to J.D. Power.

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Already popular in Europe, clean diesel shows the promise of providing improved fuel efficiency and savings. Several car manufacturers, especially the European ones, plan to introduce a number of clean diesel cars to the consumer. While manufacturers traditionally have offered only trucks and large cars with diesel engines, European manufacturers plan to introduce luxury sedans and SUVs with clean diesel options. As reported in Automotive News over the past year, BMW plans to release a 3-series, 5-series, and 6-series as well as an SUV with a diesel engine, while Mercedes will launch GL, ML, and R-class vehicles. Volkswagen offers or plans to offer several options, including an Audi A4, an Audi Q7 SUV, and a VW Jetta. Among Japanese manufacturers, Honda and Nissan appear to have plans to release at least one diesel option. Although oil prices have recently returned to lower levels, it is unknown whether consumers will continue to retain a higher awareness and desire for fuel-efficient vehicles. To cope with this new dynamic, the industry is shifting from large V6 and V8 engines to turbo- or super-charged gasoline and diesel engines with smaller displacement. The current uncertainty over which fuel will become the standard has meant that OEMs and suppliers must continue to pursue improvements in both traditional gasoline and diesel technologies. In the last year, “advanced gasoline” engines, such as Mercedes Benz’s DiesOtto engine and GM’s part-homogeneous charge compression ignition (part-HCCI) engines, have been shown to the public in near-production form. Research is also currently ongoing into engines that transfer between two and four stroke cycles seamlessly, based on engine load. Taking these engines from concept to reality will require improvements in the capabilities of electronic engine management controls and sensors to achieve expected efficiencies over the typical life of a vehicle. The increased need for electronics in the engine compartment favors suppliers that provide engine management controls and sensors over traditional engine makers. In addition, powertrain operations, which traditionally have focused on design and manufacturing of mechanical components, will have to either acquire electronics capabilities or enter into partnerships for new technologies. One recent effect of this trend was Magna’s acquisition of BluWav Systems, a supplier of electronic engine controls. More traditional technologies, such as turbochargers, along with other exhaust recirculation mechanisms also provide improvements in fuel economy. While the overall automotive industry struggles, suppliers of these components have increased investments to accommodate the added demand for turbochargers. BorgWarner, for example, recently announced a plan to increase capacity by 40 percent over the next five years. In addition, a new joint venture between Mahle and Bosch will focus on turbochargers as a key product. Continental recently announced plans to enter the turbocharger market, based on technology it acquired as part of its Siemens VDO acquisition.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

INVESTMENT OUTLOOK FOR THE AUTOMOTIVE INDUSTRY

Impact on the Value Chain

The industry dynamics identified above suggest that there are multiple areas of the value chain that may feel the impact of recent trends: • Petroleum refiners. The American Petroleum Institute (API) believes that increased demand for diesel will enhance the profitability of refiners, as diesel fuel is less expensive to refine than conventional gasoline. However, reducing costs will require some initial investment in order to expand refining capacity in North America, given that the majority of diesel fuel used in the United States today is imported from Europe. • Gasoline and diesel distributors. Distributors will face increasing complexity in delivering multiple fuel types to more retail gasoline stations. This is not likely to require additional capital, since truck tankers are already capable of storing multiple fuel types separately. • Retail refueling stations. The increase in diesel penetration will require an increased number of retail fuel stations to carry the fuel. At the same time, lower consumption due to increases in fuel economy and changing driving habits will likely cause some retail gas stations to seek consolidation as a means of maintaining sales growth. • Automotive OEMs. Automotive OEMs will likely be most affected by increasing fuel economy. Traditionally, OEMs have not been able to command increased prices for vehicles with diesel engines, in line with the incremental cost of that technology. In addition, the shift to smaller engines is depressing profits in relation to the premiums paid for trucks and other vehicles with V8 engines. Finally, shifting capacity to diesel engines or smaller gasoline engines from other varieties will require additional capital. BMW’s recent announcement that it will sell engines to other automakers may mean more efficient use of capital outlays. • Automotive component suppliers. Suppliers across all tiers will have to increase capacity of components for diesel engines. Specifically, those suppliers providing engine seals, thermal and acoustic shielding, turbochargers, and engine castings will see increases in demand from a shift to diesel vehicles. In addition, suppliers providing engine management systems, engine electronics and sensors, and variable valve technologies will likely see increased demand from a general shift to smaller gasoline engines. Investment Trends

The majority of deals involving conventional fuel technologies have been made by strategic buyers attempting to consolidate their market positions as well as increase capacity ahead of expected demand increases. There is less interest from financial buyers, which may reflect the fact that most research into conventional fuel efficiency is being conducted by OEMs or large diversified suppliers. The focus on alternative fuels as opposed to research into increased conventional fuel efficiency may offer opportunistic investment in the latter, as investment is still required to help ensure new gasoline and diesel technologies can be brought to market. Diesel penetration in the North American market is expected to grow in the luxury and heavy-duty pickup and SUV segments, where the buyers (1) are not as sensitive to the cost premiums on diesel fuel and engines or (2) value the high-torque performance of diesel engines.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

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CHART G

Key gasoline and diesel technologies will require an increase in electronics capabilities within the engines; therefore, the potential for new entrants into the market with specific expertise in sensors and controls may provide opportunities for new investment.

Gasoline/Diesel M&A Transactions - North America Gasoline/Diesel Infrastructure

Automotive Sector (Gasoline/Diesel)

600

12

Number of Transactions

|

Number of Transactions

10

500 400 300 200 100 0

2004

2005

2006

2007

2008* Strategic

10 8 6 4 2 0

2004

2005

2006

2007

2008*

Financial

*January–August 2008 Source: Capital IQ, August 2008

Summary

Given the limitations faced by other alternative fuel technologies in the short term, it is expected that gasoline and diesel will remain the primary source of automotive fuels in the near term. The cost barriers to creating a new fuel-delivery infrastructure while supporting multiple platforms for traditional gasoline- or diesel-powered vehicles will delay the adoption of new alternative fuel technologies. However, with crude oil supplies dwindling or becoming more expensive to explore, regulations to reduce CO2 and other greenhouse gases, and political pressure to wean the United States off foreign oil, the long-term trend still points to a possible move away from gasoline and diesel engines.

Electric Market Dynamics

The increase in fuel-economy standards and the recent volatility in oil prices have led large automotive manufacturers to consider partial or full electric motors as an alternative to traditional internal combustion engines. Toyota popularized the gasoline HEV with its Prius, introduced in 1997 in Japan, and has sold more than one million cars globally through 2008 (Toyota press release, May 2008). Many other OEMs waited to invest in this technology, but now see it as the wave of the future, with 75 models planned globally through 2011. According to J.D. Power, the market for light HEVs in the United States is forecast to grow 32 percent to 1.4 million units in 2012 and account for 8 percent of total light-vehicle sales compared with 2 percent today. PHEVs and EVs are the next steps in this evolution as the market shifts toward greener vehicles. GM’s planned launch of the PHEV Chevy Volt in 2010 signals this shift.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

INVESTMENT OUTLOOK FOR THE AUTOMOTIVE INDUSTRY

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Impact on the Value Chain

Mass electrification of automobiles could dramatically transform and further entwine the fuel and automotive value chains, from oil companies to auto parts suppliers. U.S. automakers are currently focused on hybridization of vehicles with low fuel economy, a fact that is likely to change as the demand for electric vehicles takes hold. In addition, OEMs such as GM have yet to define which components will become core competencies retained internally versus being acquired from external suppliers. The prospect of healthy returns as a result of this transformation may attract fresh capital to the automotive sector as OEMs and their suppliers roll out new models. • Oil companies. Traditional oil companies have provided gasoline and diesel for engines, and demand for these products is likely to increase as emerging economies, such as Brazil, Russia, India, and China (known as the BRIC nations), become more mobile. However, as fuel-economy standards in developed economies increase, oil supplies become more expensive to find and exploit, and hybrid electric and fully electric vehicles gain traction in worldwide auto markets, demand for gasoline and diesel may slow or decline. This could further drive oil companies to diversify into alternative sources of fuel. • Utilities. According to market estimates, there is enough electricity available through existing power grids during non-peak hours to charge the forecasted fleet of electric vehicles. In addition, OEMs such as GM recently announced a partnership with the Energy Power Research Institute (EPRI) to help standardize the electric car industry and ensure the energy infrastructure exists throughout the United States to recharge these vehicles. Companies such as PG&E in California are working with OEMs to create monitoring equipment that can optimize charging to low-usage hours or return charge to the power grid when connected. • Battery manufacturers. As the market for HEVs, PHEVs, and EVs grows, nickel metal hydride (NiMH) and Li-ion batteries may become popular as the energy storage of choice. While NiMH appears to be the near-term technology of choice for electric vehicles, most analysts project Li-ion may become the long-term solution as price comes down with increasing economies of scale. Numerous competing Li-ion technologies are currently under development for more than 50 HEV, PHEV, and EV models under development. Leading companies investing in new battery technologies include A123 Systems, LG Chem, Cobasys, Johnson Controls/Saft, NEC, Quantum Technologies, AESC, Hitachi, and GS Yuasa. With the current lithium supply concentrated in China, Chile, Argentina, and Bolivia and estimated reserves sufficient to power only 270 million vehicles, or half the global fleet, tremendous challenges may exist on the supply side unless new sources are discovered in the future. Also, the current trend points toward consolidation of Li-ion battery production in Asia, especially China. These issues could pose a serious national security concern to the United States if the majority of vehicles (civilian and military) run on Li-ion batteries in the future (Ward’s AutoWorld, November 2008).

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

“As we look to invest behind new trends in transportation, we are of course interested in continued innovations in battery technologies. However, we are also very aware that manufacturing and distribution scale play critical roles in the battery industry. Therefore, we are focused on innovations that either are substantial enough to overcome the disadvantages of being sub-scale or can leverage existing assets to very quickly ramp up production. Moreover, the value of any given battery advance must be weighed in the context of the performance of the overall electric powertrain, and even against the improvements in efficiency of traditional internal combustion engines.” —Justin Label, Partner Bessemer Venture Partners

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• Ultracapacitor manufacturers. A complementary technology to current NiMH and Li-ion batteries is an ultracapacitor that offers more instantaneous power, lower weight, longer life, shorter recharge cycles, and longer range. Although currently expensive, ultracapacitors may become viable options for automakers and attract additional investment capital as costs decline. Some key players in this market include Maxwell Technologies, Montena, Panasonic EV Energy, and EEStor. • Automobile OEMs. Most large automotive companies have now committed R&D dollars to some HEV models in the near term, but some have begun development on next-generation PHEV, EV, or other technologies for the long term. Some foreign automakers, such as BYD Auto and Tianjin Qingyuan Electric Vehicle Company (with the Miles Automotive Group), are attempting to gain awareness in the market by investing in PHEV and EV models. GM, Toyota, Chrysler, Volkswagen, Hyundai, and Ford are working on PHEV models while Renault, Nissan, Daimler, BMW, and Mitsubishi are focused on EV cars. • Independent start-ups. With investment backing from venture capital, sovereign wealth funds, private equity, and battery manufacturers, several new startups have begun producing PHEVs and EVs. Leading companies appear to target two market segments—the urban small-car segment and the high-end luxury segment. Key players include Fisker Automotive, Tesla Motors Company, Th!nk Global, Aptera, Mindset, Phoenix Motorcars, Loremo, Zap, and Zenn.

“The integration of the electrical grid and the vehicle is the key to widespread adoption of electric vehicles.” —David Cole, Chairman Center for Automotive Research

• Automotive component suppliers. Some automotive suppliers are uniquely positioned to provide energy-efficient parts to OEMs as HEVs, PHEVs, and EVs gain market acceptance. However, EV motors may contain only one moving part compared with more than 400 for an internal combustion engine. Higher acceptance of electric vehicles in the future could reduce demand for current parts supplied for ICEs and increase demand for sensor and control-monitoring components. According to one industry source, “If electric vehicles gain acceptance, it will be similar to when automobiles replaced the horse-and-buggy for some limited-product suppliers.” With potentially fewer parts to bid on, the supply chain of automotive suppliers may shrink through supplier consolidation. Key suppliers to electric vehicles include Bosch, Delphi, Magna, Johnson Controls, TRW, and Enova Systems. Investment Trends

M&A transactions in electricity infrastructure and power generation have grown between 2004 and 2007, while in the automotive sector investments in electric vehicles and next-generation batteries for electric vehicles have been steady since 2004. Apart from internal R&D in HEVs, PHEVs, and EVs by large automotive companies, there has been significant M&A and venture capital investment from both financial and strategic firms in the automotive Li-ion battery market. Venture capital investment in battery technology rose to US$434 million in 2007 from approximately US$100 million in 2006. In May 2008, Nissan announced an investment of US$115 million to mass-produce Li-ion batteries jointly developed with NEC over the next three years. With funding of US$132 million, A123 Systems announced in August 2008 that it would file for a US$175 million initial public offering. In September 2008, Bosch announced a US$400 million joint venture with Samsung SDI to manufacture automotive Li-ion batteries. Consolidation is likely to occur in the near future as the market moves to a select number of standardized battery solutions.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

INVESTMENT OUTLOOK FOR THE AUTOMOTIVE INDUSTRY

Electric

Automotive Sector (Electric)

70 60 50 40 30 20 10 0

35 30 25 20 15 10 5 0

Number of Transactions

Number of Transactions

M&A Transactions - North America Electricity Infrastructure

2004

2005

2006

2007

2008* Strategic

2004

2005

2006

2007

2008*

Financial

*January–August 2008 Source: Capital IQ, August 2008

Interest in a smart energy grid that assists in monitoring electric vehicle charge has fueled venture-capital interest. Venture-capital investment in energy efficiency/ smart grid technology increased to US$419 million in 2007 from approximately US$250 million in 2006 as utility companies forecast rising power grid demand. In 2006, PG&E announced that it would invest US$2.5 billion to install smart meters with its customer base by the end of 2011. Consolidation of smart grid companies appears to be under way as some of the larger, well-funded companies buy technologies of smaller players. For example, GridPoint purchased V2Green in September 2008 for its power-flow management software from a US$120 million pool of previously raised capital. More recently, Better Place announced a partnership with the state of Hawaii to deploy a vehicle-charging infrastructure. If electric vehicles become popular mass-market vehicles, investment in smart grid technology may accelerate. Sovereign funds, along with other financial investors, have also invested in startup electric car companies in the United States. Fisker Automotive completed a US$65 million Series-C financing round led by the Qatar Investment Authority, Palo Alto Investors, and Kleiner Perkins Caufield & Byers. The Miles Automotive Group attracted a US$15 million round of investment led by the Angeleno Group. In September 2008, MidAmerican Energy Holdings Co. announced a US$230 million investment in BYD Auto. If a large OEM falls behind in development of fuel-efficient engines or bets on a wrong technology, buying a small, independent PHEV or EV company may become an option to get back in the race. Summary

PHEV/EV technologies will play an important role in the automotive industry. The infrastructure to power EVs already is available via the electrical grid. In addition, battery costs are projected to decrease as production increases, making the payback period on these vehicles shorter. However, there are limitations to the growth of this technology. These include the range that electric vehicles may be driven before a battery recharge, which in turn creates a need for a fuel-assisted motor for long-range trips. Furthermore, the infrastructure for roadside or daytime recharging (e.g., battery swap stations or parking lot plug-in stations) is not currently available.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

“While the focus has been on batteries, electric drive units, power electronics, and thermal systems still cost as much as the batteries themselves since there is currently a limited market without truly competing suppliers.” —Frank Weber Vehicle Line executive Global E-Flex Platform General Motors Corporation

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Biofuels Market Dynamics

Biofuels like ethanol and biodiesel, produced from renewable biological resources such as plant biomass, are being viewed as a potential alternative to conventional fuels in automotive applications. While ethanol production in 2007 amounted to 6.5 billion gallons per year (bgy), it amounts to only 3 percent of gasoline supply. Demand for biofuels has been driven by the 2007 Energy Bill, which established targets of 36 bgy by 2022, as well as by government incentives, which provide a US$0.51/gallon tax rebate on ethanol. However, the increased production of firstgeneration biofuels led to steep increases in the price of feedstock, such as corn, required to produce the fuel, igniting the food-versus-fuel debate. This increased price of corn has severely impacted the bottom line for ethanol producers, and analysts have recently suggested that three out of four ethanol production plants are in danger of closing. Overcapacity issues have further exacerbated the woes of these producers, as the demand for ethanol is not expected to reach available capacity any time soon, especially in light of the decrease in the price of crude oil. Realistically, mass adoption of biofuels for automotive transportation would require commercialization of second-generation fuels that do not rely on feedstock from the human food chain. These second-generation fuels are now driving M&A and investment activity in biofuels. Despite recent decreases in corn prices, such volatility in basic food material is unlikely to be tolerated in exchange for fuel or climate concerns. Impact on the Value Chain

Biofuel production has attracted interest from agricultural and oil companies as well as vehicle OEMs. Agricultural companies such as Cargill have made investments in biotechnologies by acquiring assets, making equity investments, and entering into joint ventures. Oil companies such as Shell, with its investment in Iogen Corp, are seeking to ensure their presence in the alternative fuel ecosystem and have invested significantly in second-generation biofuels. OEMs such as GM, Volkswagen, and Daimler have also made investments in technology for second-generation biofuels. Other independent companies are also present in both the core biofuel value chain and supporting industries. These seek to capitalize on differentiators such as strategic locations of distribution facilities, vertical integration into feedstock production, and development of strong intellectual property. Most automobiles can run on gasoline or diesel blended with some ethanol (up to 10 percent) and biodiesel (up to 15 percent), respectively. Higher blends of biofuels such as E85 (85 percent ethanol and 15 percent gasoline) require either flexfuel vehicles or regular vehicles retrofitted with equipment costing approximately US$100. However, despite the low capital requirements for conversion, E85 has not gained much attention due to lower mileage and limited availability—ethanol cannot be distributed via regular pipelines and needs to be transported by truck and blended on site. Additionally, despite the 30 percent tax incentives, conversion costs to retrofit gas stations for biofuels are prohibitive.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

INVESTMENT OUTLOOK FOR THE AUTOMOTIVE INDUSTRY

Even though OEMs such as GM are introducing many flex-fuel models, the market for their adoption has been limited. GM has invested in companies such as Coskata and Mascoma as it is anxious to see the commercialization of cellulosic ethanol, which is essential for the success of its flex-fuel strategy. While GM plans for the number of flex-fuel vehicles on the road to double to 12 million by 2010, the rollout of new models could be severely impacted by current market conditions, as the Detroit Three produce 95 percent of these vehicles. OEMs such as Daimler and Volkswagen have extensive experience with diesel engines in Europe, and thus are focusing on biodiesel, which is more amenable to transportation and blending than ethanol. CHART I

Investment Trends

Biofuels attracted a considerable amount of investment starting in 2004. Strategic investors have primarily driven public placement, with the presence of financial investors increasing in 2006 and 2007. The total value of transactions peaked in 2007, exceeding US$2.4 billion. However, a decrease in the number of transactions in 2008 (YTD) can be attributed to both the weakness in financial markets and the depressed profitability of the biofuel sector due to high raw-material prices, volatile oil prices, and the challenge to develop an economically viable business model. Financial investors drove private placements, though they contributed to a smaller percentage of total deal value. The deal volume for private placement showed trends similar to the deal volume for M&A activity in this time period.

Biofuels infrastructure M&A Transactions - North America Private Placement

35

35

700

2500

30

600

25

500

20

400

15

300

10

200

5

100

2000

30 25

1500

20

1000

15 10

500

5 0

3000

0 2004 Strategic

2005 Financial

2006

2007

2008*

Total Deal Value

Number of Transactions

40

US$ millions

Number of Transactions

45

0

2005 Strategic

2006

2007

Financial

Other

2008*

0

Total Deal Value

*January–August 2008 Source: Capital IQ, August 2008

As the demand for first-generation biofuels stagnates, further consolidation may be expected, as reflected in the March 2008 merger of US BioEnergy with VeraSun in a deal valued at US$707 million, creating the world’s largest stand-alone ethanol producer with a planned production capacity of 1.6 billion gallons per year. The surviving consolidated companies will drive the commercialization of second-generation biofuels. Strategic acquirers will seek to maximize benefits from vertical integration and pursue acquisition of independent companies that offer maximum synergies.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

US$ millions

Public Placement

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In addition, horizontal integration to increase economies of scale and international expansion may also drive M&A activity for small and mid-sized players in the industry. Companies with strong intellectual property, better plant design, and biotransformation (fermentation) processes should receive attention from investors. Summary

Biofuels will be an important component of the alternative-fuels ecosystem being created to alleviate dependence on fossilCHART fuels.KHowever, strong growth in this industry will be possible only with second-generation products, and these may provide significant investment opportunities. It is important to note that under the current “best case” scenario, biofuels can be expected to sustain no more than 15 percent of demand for automotive fuels in the near future with the amount of feedstock currently available and the commercialization of second-generation biofuels. Significant long-term changes and technological innovation could dramatically change this outcome.

Natural Gas Market Dynamics

Natural gas is used extensively for residential as well as commercial purposes, but its use as an automotive fuel in the United States is very limited (accounting for about 0.15 percent of the total consumption). Natural gas deposits are more abundant and widely available compared with crude oil; almost 85 percent of demand can be fulfilled domestically. Natural gas as an alternative fuel source is gaining in popularity in Asia, Latin America, and Europe, as the price differential between conventional fuel and natural gas has grown (see chart below, premium for diesel is more than $2/gal in 2008, compared with natural gas). However, success in North America for non-fleet applications has been limited—only 147,000 of the 7 million natural gas vehicles (NGVs) on the road are in the United States.

Global natural gas consumption and conventional fuel price differential 3,000

2.50

2,500

2.00

2,000

1.50

1,500

1.00

1,000

$/gallon

|

Natural Gas Used by NGVs (MMcf)

16

0.50

500

0.00

0 2000 2001 2002 2003 2004 2005 2006 2007 2008* Annual NGV Fuel Consumption

Price Difference (Diesel–NGV Fuel)

*January–August 2008 Source: Capital IQ, August 2008

While regulatory mandates for natural gas in the United States have been minimal, effective January 2006 the government increased incentives for both vehicle and fueling station owners to support NGVs. As NGVs in North America will most likely remain limited to fleet vehicles, relevant investment in this fuel will be focused on refueling infrastructure, natural-gas powertrains, and retrofit equipment.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

INVESTMENT OUTLOOK FOR THE AUTOMOTIVE INDUSTRY

Impact on the Value Chain

While the natural gas sector has always attracted investment, an increase in the price of conventional fuels has led to more activity, with the number of deals increasing from 68 in 2004 to 99 in 2007, and total deal value exceeding US$18 billion. However, due to limited use of natural gas as an automotive fuel in North America, its impact on the automotive sector has been small so far. • Automotive OEMs. Automotive OEMs produce vehicles with powertrains modified for dedicated compressed natural gas (CNG) operation. While the only commercially available CNG vehicle in the United States is the Honda Civic GX, automotive OEMs such as Ford, Citroen, Fiat, and others have released multiple models with CNG and bi-fuel powertrains internationally. • Natural-gas engine manufacturers. Manufacturers such as Cummins have entered into joint ventures with Westport to develop dedicated natural gas engines for commercial transportation vehicles such as trucks and buses. • Natural-gas storage system manufacturers. These companies produce storage tanks required to store CNG and liquefied petroleum gas (LPG) onboard the NGVs for operation as well as at refueling stations. • CNG retrofit equipment. Companies such as BAF Technologies and Baytech Corporation produce equipment to retrofit regular vehicles for dedicated CNG operation. As very few CNG-dedicated vehicles are available commercially, the services of these companies are often used by fleet owners seeking to capitalize on federal credits by converting their fleets to natural gas. Per Natural Gas Vehicles for America (NGV America, www.ngvamerica.org), stringent requirements from the EPA make the economics of producing retrofit equipment unviable for small manufacturers. To minimize the relatively high retrofit costs (up to US$10,000), conversions using unlicensed equipment are prevalent. • CNG refueling stations. Gas production and distribution companies such as Questar are partnering with retail petroleum providers such as Phillips 66, Sinclair, and Tesoro to lease space on their footprints and build natural gas refueling stations. Companies such as Clean Energy that design, build, finance, and operate CNG/LPG fueling facilities have recently turned profitable and are seeing favorable valuations and analyst ratings. Investment Trends

Investment in natural gas as a fuel has increased by more than 80 percent in terms of total deal value between 2004 and 2008. The majority of this investment activity (85 percent in 2007) was driven by strategic acquirers led by the energy and utilities industries. Activity from financial institutions, although a smaller percentage of the deal volume, increased by 50 percent between 2004 and 2008. In North America, the strategy of NGV America has been to focus on fleet vehicles, which are characterized by high-mileage requirements and centralized refueling. Targeting this segment reduces issues associated with a lack of refueling infrastructure. Companies such as Clean Energy, the pioneer in vehicular natural gas fuel, have made some investments and acquisitions in refueling infrastructure for fleet vehicles. Other activity has been driven by joint ventures, such as the one between Cummins and Westport for engines, and private equity financing for specialty natural gas vehicles (US$160 million funding for the Vehicle Production Group LLC led by Perseus LLC). International automotive investment has focused on compression systems, distribution, and refueling equipment for NGVs. © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

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Natural gas infrastructure M&A Transactions - North America Number of Transactions

18

120 100 80 60 40 20 0 2004

2005 Strategic

2006

2007

2008*

Financial

*January–August 2008 Source: Capital IQ, August 2008

Summary “Forty percent of light vehicles will be powered by compressed natural gas in the future.” —T. Boone Pickens Source: Ward’s AutoWorld, September 2008

Abundance of natural gas and lower cost per mile would seem to favor the economics of owning a natural gas vehicle. However, NGVs suffer from limited range and an inadequate refueling infrastructure that would require a very large investment to develop for mass adoption of these vehicles. Since OEM interest in introducing natural gas–based light vehicles in North America appears low, success of natural gas as an alternative fuel may be limited to increased penetration with fleet vehicles.

Solar Market Dynamics

Theoretically, with a free energy input source and the long life of photovoltaic panels, solar energy arguably represents the best possible alternative to conventional fossil fuels for automotive purposes. However, given technological, geographical, and seasonal limitations associated with solar energy, the possibility of its use to power automobiles in the near future is very low. Despite these limitations, companies such as Toyota have been looking to use solar energy for “add-on” functions, such as powering part of the air-conditioning unit and charging the navigation unit, portable power pack, and backlit information displays. Toyota is also reportedly researching an electric vehicle that would receive some of its power from solar cells installed on the car, with long-term research focusing on a car powered exclusively by solar cells installed on the car. Additionally, products from companies such as Solar Electric Vehicles aim to increase the range of current hybrid electric vehicles by using solar energy to provide electric charge. Thus, in the near future solar technology is likely to be only a supplementary energy source providing focused opportunities. As much as solar may be a viable marketing tool to show consumers that auto manufacturers are committed to “going green,” Kentaro Endo, a director at Japan’s Ministry of Economy, Trade, and Industry who specializes in renewable energy, noted that the application of solar energy was severely limited in vehicles. Endo stated, “It would be very difficult to power a whole car (using solar power), even with technology advances.”

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

INVESTMENT OUTLOOK FOR THE AUTOMOTIVE INDUSTRY

Impact on the Value Chain

• Utilities. Utility companies are not heavily invested in solar energy, as it goes against their current business model. • Automotive OEMs. Toyota has created a strategic partnership to develop solar technology. Fiat introduced a concept vehicle in May 2008 that would be powered by solar and hydrogen fuel. • Independent start-ups. Fisker Automotive is planning to include a solar roof on the Fisker Karma vehicle, which is mainly a marketing tool for the “green” brand. • Independent automotive suppliers. Independent companies, including Kyocera Corp and Solar Electric Vehicles, have led the way to producing solar products that are currently add-ons for developed vehicles. Investment Trends

The solar sector has continued to show strength, as indicated by the rising value of transactions reported, even amid a difficult economic climate. Many of these transactions are the result of acquisition of solar installers and integrators by large public solar companies in an effortCHART to vertically integrate. However, a large M number of deals in the automotive sector were reported as well, such as Bosch’s acquisition of a 44.76 percent stake in ErSol Solar Energy AG from VENTIZZ Capital Partners AG for US$753 million in 2008. In July 2008, Toyota entered into an agreement with Kyocera Corp to supply solar panels to be installed on the roof of the next-generation Toyota Prius.

Solar infrastructure M&A Transactions - North America

Disclosed Value (US$ millions)

3,500

50

3,000

40

2,500

30

2,000 1,500

20

1,000

10

500

Volume (Announced Deals)

60

4,000

0

0 2004

2005

Strategic Buyers Value Financial Buyers Volume

2006

2007

2008*

Financial Buyers Value Strategic Buyers Volume

*January–August 2008 Source: Capital IQ, August 2008

Summary

Under current solar panel conversion capabilities, the direct use of solar energy in automotives will most likely be limited to powering accessories, including airconditioning, navigation units, and backlit information displays, or as a supplemental power source for hybrid or fuel-cell vehicles in high-insolation regions. The larger potential for solar energy in the automotive industry is in the use of solar power as a source of electricity to be used in PHEVs and EVs. Although a recent increase in transaction volume would seem to indicate strong investor interest in solar infrastructure development, such as solar panel production and installation, it is unclear if this is a leading indicator of more investments to follow in the automotive sector. © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

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Fuel Cells Market Dynamics

A migration to hydrogen fuel cell–powered vehicles could vastly reduce dependence on oil and reduce carbon dioxide emissions in the long term, according to a recent study funded by the Department of Energy and published by the National Research Council (NRC). The studies indicate that in the past four years hydrogen fuel-cell vehicle (HFCV) technology has advanced rapidly due to investments by major automotive companies, venture-backed start-ups, and national programs such as The FreedomCAR and Vehicle Technologies (FCVT). Currently, GM has a test fleet of approximately 100 fuel cell–powered Equinox SUVs in operation. Additionally, Honda has started leasing, on a test basis, approximately 200 of its FCX Clarity HFCVs. However, HFCVs appear at least 15 years away from being a commercially viable business for automakers. Two major constraints limit the commercial adoption of HFCVs in the near term: high costs and a lack of infrastructure to mass-produce and distribute hydrogen fuel to consumers. Furthermore, this timeline is based on a “best-case” scenario, which assumes the continued achievement of technical goals, significant government expenditures and policy shifts, and wide-ranging consumer adoption of these vehicles. Despite the long-term advantages, significant limitations exist that constrain the commercial success of HFCVs. The most significant limitations are the production costs and raw materials (namely platinum) associated with fuel-cell stacks. Additionally, there are certain technological limitations that must be resolved to achieve commercial viability for fuel cells. Among these issues are the storage of enough hydrogen fuel to make long trips as well as the ability to disperse the large amounts of heat generated during fuel-cell operation. Impact on the Value Chain

The fuel-cell industry comprises many players operating across the value chain and in specific niche ancillary areas. The main players in this industry include: • Hydrogen suppliers. This industry must be established before fuel cells become commercially viable. Major contributors currently are United Technologies and General Electric, which have invested in hydrogen production technologies and stationary fuel-cell systems. • Oil and gas companies. Large and sustainable reductions in GHG emissions may be achieved through a migration from conventional vehicles to HFCVs. Therefore, these businesses have an incentive to be part of the hydrogen fuel economy. Several oil and gas companies have substantial investments in hydrogen production, including Shell, Chevron, and BP. • Automotive OEMs. Most major automotive players currently have hydrogen fuel–cell programs under development. Both GM and Honda have test vehicles on the road. HFCVs seem to be part of a portfolio of alternative fuel vehicles under development. However, significant R&D expenditure is necessary to bring down production costs. • Independent companies. Synergies between the electric power sector and the transportation sector could drive down the cost of hydrogen. In the short term, electrolysis of water can be used to extract hydrogen fuel where natural gas or other sources of the fuel are unavailable. In the long term, co-generation of hydrogen and electricity in gasification energy plants is one potential option. © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

INVESTMENT OUTLOOK FOR THE AUTOMOTIVE INDUSTRY

CHART N

Investment Trends

Fuel cells have attracted a substantial number of investors since 2004, primarily venture capitalists and angel investors. The value of transactions peaked in 2008, averaging approximately US$60 million per transaction. An increase in the number of transactions in 2007 and 2008 can be attributed to heightened interest in the alternative fuels following a surge in oil prices.

Fuel Cells M&A Transactions - North America Automotive Sector (Fuel Cell) 70 60

80

50 60

40 30

40

20 20

Value of Transactions (US$ millions)

Number of Transactions

100

10

0

0 2004

Strategic

2005

2006

2007

2008*

Avg. deal value

Financial

*January–August 2008 Source: Capital IQ, August 2008

Venture-capital and angel-investor funding has provided most of the investment capital to this sector in addition to constituting the majority of the transaction volume. These investors have funded primarily start-up and small-cap enterprises engaged in manufacturing of fuel cellsCHART or fuel-cell components as well as compaO nies that are developing technology to produce hydrogen on a commercial scale. The distribution of investments across strategic players indicates that automotive suppliers and oil and utilities have contributed to the majority of the deal volume, while OEMs have been involved in few deals.

Investment distribution for fuel cells (2004–2008) Financial Investors Private Equity 8%

Strategic Investors Big Auto 7%

Spinoffs 2% Other 13%

Public Offering 14%

Potential OEM Suppliers 52%

Private Placement/ Angels 53% Venture Capital Funding 23%

Utilities/ Big Oil 28%

Source: Capital IQ, August 2008

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

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Summary

A migration toward hydrogen fuel-cell vehicles and the establishment of a hydrogen infrastructure have several positive global implications, including reduced dependence on oil and significantly reduced GHG emissions. The potential rewards are high for private companies; however, adoption of this technology will require government leadership and commitment. Many auto OEMs have developed concept vehicles that run on hydrogen; however, two manufacturers will release a limited number of vehicles that run on hydrogen fuel or gasoline. It appears that Mazda is poised to release a limited supply of hydrogen rotary vehicles in the near future. BMW has released a hydrogen vehicle in a limited volume that operates with both hydrogen and gasoline. Other manufacturers have no immediate plans to commercialize, but appear to be betting on fuel-cell vehicles. It is unclear how practical these vehicles are, as hydrogen fuel is very limited and expensive.

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 081113

us.kpmg.com Contact Us For more information, please contact one of these KPMG professionals: Gary Silberg Partner, Transaction Services [email protected] 312-665-1916 Preet Nagvanshi Director, Transaction Services [email protected] 212-872-6731

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG LLP, the audit, tax, and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International. KPMG International’s member firms have 123,000 professionals, including more than 7,100 partners, in 145 countries. © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 081113

Alternative Energy WP

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