Which Zipcar cars don't have cruise control?

The digital car More sales, more competition, more cooperation

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1 Germany Monitor Digital Economy and Structural Change June 19, 2017 Authors Eric Heymann Janina Meister Editor Stefan Schneider Deutsche Bank AG Deutsche Bank Research Frankfurt am Main Germany Fax: DB Research Management Stefan Schneider The digital car More turnover, more competition, more cooperation Die The traditional automotive industry as well as companies hitherto unrelated to the industry are working flat out on software solutions, driver assistance systems and other technologies that should enable networked, autonomous, traffic jam-free and accident-free driving. The digital car in its ideal form is therefore no longer a utopian vision of the future, but is gradually taking shape. However, the path to the digital car will be more like an evolution than a revolution. This is supported by factors on the supply and demand side. Mention should be made of the long development times in the industry and the durability of the car as a product. Furthermore, the consumption preferences that have grown for decades are likely to change only slowly. It will be several decades before the digital car has largely penetrated the passenger car population; this is unlikely to be the case before 2040. The technologies necessary for the digital car will drive sales growth in the auto industry. Most technologies also have to be built into digital cars. Companies that were previously not or only marginally active in the automotive industry will fight for the higher market volume. The sector is becoming much more heterogeneous and complex than it is today. Cross-industry cooperation will change the image of the industry in the coming years. Despite these collaborations, competition in the expanded automotive industry remains intense. There is no company that is unassailable in terms of the overall digital car pact. Companies from the IT world, for example, have a knowledge advantage over the classic automotive industry in some areas of the digital car (such as the future, rapidly growing automotive data market). However, mastering the entire automotive value chain in a mass market represents a considerable barrier to entry for newcomers. The actual automobile production will probably remain relatively little vulnerable and will remain the domain of traditional automakers in the future. Social mobility behavior is changing in parallel with the development of the digital car. Innovative mobility services based on car sharing and ride sharing are gaining market share, especially in large cities, where more private households will forego their own cars in the future. On the supply side, there will be a wave of consolidation over the next few years. The digital car will not be the solution to the traffic problems in densely populated cities, especially not in emerging countries. First and foremost, they need well-functioning public transport to prevent the traffic collapse. However, the digital car can contribute to an improved traffic flow in cities compared to a business-as-usual scenario. The total volume of traffic does not necessarily have to decrease; the capacity utilization of the vehicles concerned will increase.

2 The digital car is gradually taking shape State regulation moves in a field of tension 1. Introduction: The digital structural change challenges the automotive industry The car, the most important means of transport of the 20th century, is undergoing a structural change driven by digitization. This digitization process is changing both the car as a product and the entire automotive value chain. The automotive industry and companies from outside the industry are working flat out on software solutions, driver assistance systems and other technologies that are intended to enable networked, autonomous, traffic jam-free and accident-free driving and which are increasingly transforming the automobile into a rolling computer. The digital car is therefore no longer a utopian vision of the future, but is gradually taking shape. In addition, there is a changing social mobility behavior, e.g. promote the development of innovative mobility services based on car sharing and the intelligent networking of various modes of transport. Due to state regulations on climate and environmental protection, changed consumer preferences and in view of the finite nature of oil resources, alternative, low-CO 2 and energy-efficient drive technologies are increasingly coming into focus. These trends pose great challenges for the automotive industry: Technological requirements: The public's expectations of the digital car are enormous. It will take extensive capacities from the companies involved to meet these expectations (promptly). Market and competitive structures: New market players, especially from the IT and data economy, are changing the classic market structures in the automotive industry. They create pressure to innovate and position themselves and increase competition in the industry considerably. State regulation: The technological developments relating to the digital car are the focus of state regulation; this concerns, among other things, security aspects or data protection. Regulation always moves in a field of tension: on the one hand it should enable technical progress and fair competition and on the other hand it should prevent undesirable developments (e.g. the abuse of a dominant market position or the approval of underdeveloped technologies). Social mobility trends: A changed consumption and usage behavior of many (not only) young urban customers, especially in industrialized countries, as well as an increasing interest in services related to car sharing and the flexible use of different modes of transport raise the question of whether or not owning your own car is a problem Could lose attractiveness and what consequences new mobility concepts will have for manufacturers' sales potential. From an economic and transport point of view, the influence of these trends on the overall volume of traffic is of course also relevant, especially in cities. Effects on the automotive industry In this report, we consider the effects of the digitization of the car on the automotive industry. Among other things, we are looking into the question of how quickly and in which steps the digital car could establish itself. We first give an overview of the current state of the art as well as the public expectations of the new technologies. We also explain what we actually understand by the keyword digital car (Chapter 2). We analyze from an economic perspective how the market and competitive structures on the supply side of the industry will change in the future June 2017 Germany Monitor

3 Technological aspects of the digital car and digitization of the production process are not the focus of the report (Chapter 3). Here we present the potential competitive advantages of new market players, e.g. from the IT and data economy compared to the strengths of classic companies in the automotive industry. We take a closer look at the position of the German suppliers and discuss the question of whether the new market players are more likely to become competitors or partners of the traditional automotive industry in the future. In Chapter 4 we examine the demand side: How quickly could the digital car catch on with customers? What are the drivers and stumbling blocks from the consumer's point of view? On the one hand, we are investigating the extent to which the car could lose its importance as an object of ownership (especially in Germany). What consequences would this have for the manufacturers' sales potential? On the other hand, we deal with the question of how driver assistance systems and alternative mobility concepts (using the example of car sharing in Germany) are received by users and shed light on the future prospects of the car sharing market. Finally, we look into the question of what consequences the new mobility options based on digital technologies could have for the absolute volume of traffic in (urban) road traffic (Chapter 5). Can the digital car meet the high expectations in terms of traffic flow and traffic safety, efficiency, convenience and ideally also environmental compatibility? Or (also) cannot the digital car save the densely populated urban centers from traffic collapse? We outline four scenarios for these questions. In the context of our report, we look less at the technical development steps and challenges on the way to the digital car. Furthermore, we do not address the (undisputedly important) question of how digitization will change the production process in the automotive industry (keywords: Industry 4.0, Internet of Things, individual production in large series). In addition, we largely ignore how quickly and to what extent alternative drive technologies (e.g. e-mobility) will also establish themselves in digital cars, although it is generally becoming apparent that the degree of electrification of vehicles will gradually increase over the next few years. However, it would go beyond the scope of this report to examine the three aspects mentioned additionally (in detail). The idea of ​​the digital car makes the utopia of a world without accidents and traffic jams appear within reach. Without anticipating the results of our report in detail, however, this path is likely to resemble a continuous evolution rather than a radical revolution. 2. Mobility today and tomorrow: how does the car stay? The number of cars is growing steadily 1 Worldwide car stock, billion 1.2 1.0 0.8 0.6 0.4 0.2 0, Sources: OICA, own estimates 2.1 A means of mass transport in transition The digitization of the car is advancing big steps forward. The technical progress in the development of the digital car is strongly represented in the media; the spectrum of opinion is quite broad. Not least in view of the ambitious research activities of the tech companies, some market observers see e.g. from Silicon Valley in the conventional car and even in the entire classic automotive industry a discontinued model. The fact is, however, that the automobile is by far the most important means of transport in the western industrialized countries and has basically been since the mass motorization that began after World War II in most industrialized countries. More and more emerging countries are following this pattern. The number of cars on the roads continues to increase worldwide and also in Germany. The automotive industry itself is an important employer in many countries and June 2017 Germany Monitor

4 Car is a very emotional product invests large sums in new or existing production facilities as well as in research and development. The automobile product has been continuously improved over the past decades. This applies to very different criteria such as performance, safety, comfort, energy efficiency or environmental compatibility or reliability. The design of the vehicles has also changed over time and continues to play a very important role for customers today. The image of a car brand also still has a major influence on the purchasing decision of many motorists. In this respect, the car was and is a very emotional product and private retreat for many customers. Of course, the function of a car to flexibly enable individual mobility remains the decisive success factor. However, the demands of customers on the car are changing. Communication and networking with other road users, with family, friends or business partners are increasingly in demand. For more and more users it is important that their car is internet-enabled and that an interface, e.g. to your own mobile devices (smartphone & Co.). Thanks to technical advances in the IT sector, these trends are also constantly being driven by the supply side. The automobile is therefore still in a state of flux. In addition to the environmental and climate compatibility and energy efficiency of vehicles, digitalization is currently the determining technological megatrend in the automotive industry. But what do we mean when we talk about the digital car? What is meant by the digital car? Driver assistance systems are gaining in importance The digital car is fully networked and communicates with its environment Today and even more so in the future, the car has many additional functions that did not exist in this form a few years ago, at least in series vehicles. The so-called driver assistance systems (FAS; Advanced Driver Assistance Systems (ADAS)) relieve the driver of more and more tasks (while driving). 1 This is how they support you when steering, braking or parking. Some assistance systems are even legally mandatory. For example, an EU regulation has stipulated the installation of the electronic stability program (ESP for short) for all vehicles newly registered in the EU since 2011. This makes it easier for the driver to stay in lane in difficult driving situations (e.g. when it is slippery, rain or snow) thanks to an improved braking and steering function. Such assistance systems are the beginning of a development that will lead to the future of autonomous driving cars. To enable such a development, cars are being equipped with more and more software, sensors or radar and camera systems. Technologies are also required that ensure communication between vehicles or with traffic control systems and other permanently installed devices outside the vehicles (car-to-x communication). It is still unclear what the necessary technologies will look like in detail and what opportunities this will result for drivers in everyday life. In any case, the digital change around the automobile means a great challenge for automakers, suppliers and other companies that are positioning themselves in this market. Those who manage to master these challenges open up new growth opportunities. The digital car of the future is therefore fully networked and can communicate with its surroundings. A division of the Legal Consequences of Increasing Driving Automation working group of the Federal Highway Research Institute (BASt) provides helpful guidance for differentiating between the various levels of autonomous driving. This ranges from driver only (level 0) to 1 See Deutsche Bank Markets Research (2016). Pricing the Car of Tomorrow Part II. FITT report. London June 2017 Germany Monitor

5 Driverless driving as the final stage of automation, partially, highly and fully automated (levels 2 to 4) up to completely driverless driving (level 5). While all longitudinal and cross-sectional tasks of driving the vehicle (accelerating, decelerating, steering) on ​​the levels assisted (level 1) and partially automated (level 2) are the responsibility of the driver, the system can be highly automated (level 3) and fully automated (level 4) cope with an increasing number of driving situations automatically. For our overview of the state of technology, we orientate ourselves on those development stages. Of course, these can only be used as a rough guide. In its final technological state, the digital car would thus correspond to the highest level of driverless automation (level 5), which would require a technically functioning, comprehensive network and communication between the vehicle and the environment. Levels of automated driving (degree of automation) 2 100% 80% 60% Driver leads the vehicle Driver leads the vehicle Driver does not monitor the system Driver necessary No driver required 40% 20% 0% No system active Level 0 Driver only System assists Level 1 Assisted System takes over some driving functions. Level 2 Partially automated System takes over numerous driving functions. System takes over (almost) all driving functions Level 4 fully automated System drives without a driver Level 5 Driverless Source: VDA Enormous technological challenges Road traffic is a chaotic system with many imponderables, but rule-based vehicles with different degrees of automation will also be on the roads at the same time in the future digital cars, enormous technological hurdles have to be overcome, which we can only briefly touch on here. Road traffic is characterized by millions of constantly changing and constantly new situations and imponderables. These require decisions in fractions of a second, which in extreme cases can make the difference between life and death. 2 All decisions have direct repercussions on other road users involved. Motorway journeys in which oncoming traffic or pedestrians (normally) do not play a role are e.g. less complex traffic situations than road traffic in densely populated cities with very different road users. Automating such a chaotic system is highly complex. 3 The project is made more difficult by the fact that the technological possibilities of the existing vehicles are progressively different in a transition phase of several decades (see also Chapter 4). This means that the (error-prone) influence of humans on the overall system is also differently pronounced over time. In 20 years, for example Fully automated cars share the streets with vehicles that are still completely manually controlled by humans. The processes of decision-making in humans and digital algorithms are very different.To harmonize these different technology standards in such a way that a high traffic 2 3 For example, the question of how automated cars should decide in situations in which an accident is unavoidable, but the type of accident is open, is discussed intensively. Should an algorithm primarily protect the vehicle occupants, also at the risk of e.g. Pedestrians are hit by the car instead of a solid object? In addition to the moral aspect, insurance-related issues are of course also relevant here. For example, rail traffic is easier to automate than road traffic June 2017 Deutschland-Monitor, if only because of the route-based traffic management and the lower number of vehicles

6 Ensuring security is not easy. In addition, there will always be road users who are not digitally networked with vehicles (e.g. pedestrians, children, cyclists, animals, all kinds of objects on the road). If you follow the current reporting on the digital car or autonomous driving, the impression can arise that these technological hurdles are easy to overcome. However, this is not the case. Nevertheless, we expect that the digital car in its ideal form will be possible in the long term and that traffic safety will increase in the future through more automation. The legal framework for autonomous driving in Germany is in place Vehicles with partially automated driving characteristics are now being mass-produced Research has already made further progress 2.2 Many companies are driving technical progress While the vision of the digital car already took artistic form in the 1950s, which believes in progress, this is approaching earlier Future vision currently gradually evolving from technical reality. With regard to the degree of automation, we are currently in the transition between partially and highly automated driving technology (levels 2 and 3). This means: the human driver has been required and obliged to monitor the driving process at all times. This technological status also corresponds to the current legal provisions according to the Vienna Convention on Road Traffic, which stipulates that a vehicle must be checked by a driver at all times while it is being moved. The German federal government approved an amendment to this convention in 2016. It basically provides for a relaxation of the previous regulations and thus creates an initial legal framework for semi-autonomous assistance systems. In the first half of 2017, the Bundestag and Bundesrat passed a law on autonomous driving (including highly automated driving). According to this, the operation of highly and fully automated cars is generally permitted. However, the driver must be able to take control of the car at any time, including when the system prompts him to do so; so he must be ready to perceive. With regard to liability in the event of accidents, it must be clarified, among other things, whether the vehicle was traveling in automated mode or whether the driver reacted quickly enough to the system's request. In individual cases, it should often be necessary to clarify whether the insurance of the vehicle owner or the vehicle manufacturer has to pay for damage suffered by those involved in the accident. Meanwhile, technical progress is advancing: assistance systems and vehicles with partially automated driving characteristics are now being mass-produced by almost all major automobile manufacturers. These are e.g. equipped with cruise control, acceleration and braking assistant, parking aid, hill descent and starting aid, emergency braking system or adaptive cruise control. In addition to the large established automobile manufacturers from Europe, the USA, Japan and Korea, the still relatively young US car manufacturer Tesla also offers vehicles that enable partially automated driving. In addition, the (so far) non-industry IT groups Google and Apple are also active here, although the vehicles in question are not (yet) available on the market. The transportation service provider Uber is an example of the application of these new technologies and vehicles without being primarily responsible for their development or production. The current research activities are primarily aimed at highly and fully automated driving technology. Daimler is testing the highly automated research vehicle 015 Luxury in Motion and the Highway Pilot assistance system for fully automated commercial vehicles. Google, Apple and Uber have also been testing fully automated prototypes for some time. Other manufacturers such as Toyota, PSA, BMW and Volkswagen are already testing similar technologies in practice. The US car manufacturer June 2017 Germany Monitor

7 Various companies are driving technical progress Road traffic is an important source of emissions 3 Share of individual sectors in global energy-related CO 2 emissions, 2014 Source: IEA 17.5 21.2 19.2 42.1 Electricity and heat generation Industry and construction Road traffic Other number of road fatalities 4 The number of road fatalities in Germany is tending to decline Sources: DIW Verkehr in figures, Federal Statistical Office ler Ford announced that they want to produce autonomous vehicles without steering wheels and pedals by 2021. Volkswagen also presented its new electric car planned for 2020 at the last Paris Motor Show, which is also expected to come onto the market in an autonomously driving version by 2025. The list of research activities by car manufacturers and vehicle suppliers in this field is getting longer and longer, which is why only a selection can be named here. The examples make it clear: The drivers of technical progress are both the large automobile manufacturers (and their traditional suppliers) and IT groups that have hitherto been outside the industry. These put the established companies in a tight spot. In this respect, the saying applies here that competition stimulates business. It is plausible that the commitment of the traditional car manufacturers in the field of autonomous driving or the digital car would have been less without the initiatives of the newcomers. 2.3 The digital car raises high hopes and expectations As providers advance the technologies related to the digital car, public interest and expectations are growing. Increasing traffic bottlenecks (especially in the big cities of the emerging countries), air pollution from exhaust gases and an increased risk of accidents in many countries are undesirable developments that go hand in hand with current mobility behavior. There are hopes and expectations of mitigating or reversing these trends through more intelligent mobility, e.g. by means of digital cars: Traffic volume and traffic flow: There are currently over 1 billion vehicles in use worldwide (including commercial vehicles). Since 2005, the global vehicle population is likely to have increased by a total of almost 50%. Traffic performance in road traffic is also increasing steadily. Traffic jams are part of everyday life in many cities and at traffic junctions. Intelligent driving technologies could increase the flow of traffic and, ideally, so the hope of many market players lower the traffic volume or at least reduce the growth rate of the traffic volume. Climate and environmental impacts: Road traffic accounts for almost 18% of global energy-related CO 2 emissions. The digital car could e.g. Contribute through an improved traffic flow, a higher vehicle utilization or a reduced volume of traffic to make progress on the way to a long-term climate-neutral road traffic. To do this, it would of course have to be converted to (affordable) renewable energies in the next few decades; the influence of the digital car alone is very limited as long as these are predominantly powered by fossil fuels. Road safety: According to the World Health Organization, around 1.25 million people die in road traffic every year, with a slight upward trend. In Germany the number is declining, but in 2016 it was still slightly more than people. According to the German Institute for Economic Research (DIW), the causes of road traffic accidents with personal injury in Germany were almost 88% of the cases with the driver in 2015. More safety and fewer accidents in road traffic are therefore among the most important expectations of the digital car. Access to individual mobility: The proportion of adults with a driving license is very high in Germany at around 87% (as of 2014). Nevertheless, for reasons of cost, automobility is not accessible to everyone. The digital car could monitor individual mobility for more June 2017 Germany

8 causes of accidents mostly lie with the vehicle driver 5 causes of road traffic accidents with personal injury in DE, 2015, percentages,% 0.9 3.4 3.4 4.7 87.6 causes for vehicle drivers causes for vehicles causes for pedestrians road conditions Other source: DIW Verkehr enable social groups in numbers. Of course, this is a certain contradiction to the goal of reducing the overall volume of traffic. More comfort and free time: driver assistance systems already offer a high level of driving comfort. The digital car could increase comfort in the future and enable the driver to pursue more productive activities or to relax while driving. In the following, we will discuss the extent to which the expectations outlined here for the digital car can be met. 3. The supply side: the digital car is causing noticeable market shifts The high speed of technical progress on the way to the digital car is based on a race between the companies involved. The competitive pressure between long-established automobile manufacturers and players from the IT sector who have not yet been part of the industry is an important driver. When you look at media reports, you often get the impression that the classic automotive industry is in the role of being driven. But are the market opportunities for traditional automakers really that bad? Before we turn to the future prospects of the industry as a whole, a brief sketch of the automotive market is informative from an economic point of view. How exactly is the digitization process changing the market and competitive conditions? Market and competitive structures in the automobile sector: an overview Automobile value chain is very complex Few automobile manufacturers, many suppliers The entire automobile sector comprises a much larger number of players than it seems at first glance: the actual automobile industry, which is based on official statistics, should be mentioned Demarcation from the car manufacturers, the vehicle suppliers as well as the very small area of ​​the manufacturers of bodies, superstructures and trailers. In addition, other upstream and downstream sectors play an important role. Companies from the electrical engineering, metal, chemical, plastics or textile industries also supply preliminary products to the actual automotive industry. The suppliers of automobile factories, especially mechanical engineering, are also important. Various research institutions also play a major role. The downstream sectors include motor vehicle dealerships and workshops. The automotive value chain is partly organized by specialized logistics companies. Finally, there are a number of automotive-specific services (e.g. car banks, insurance companies and experts, development offices, TÜV). The number of providers varies in the individual sub-areas. In the actual automotive industry, there are very few, but mostly large car manufacturers, as opposed to a large number of suppliers. For the latter, the spectrum ranges from small and medium-sized companies to global corporations. The large number of actors involved indicates intense competition within the industry. Another characteristic of the sector and the product car is the high level of regulation. This applies above all to the areas of ecology or climate protection and security. The importance of suppliers for the innovative strength of the entire automotive industry is immense. The supplier's product portfolio is particularly diverse. This is likely to increase in the future, because the digitization of the automobile will require (even) more software instead of hardware-based systems. This ties up considerable financial and personnel capacities at the suppliers. This means a great challenge for the industry, especially since June 2017 Germany Monitor

9 Boundaries between the actual automotive industry and adjacent sectors are blurring Complexity of the automotive value chain forms a market entry barrier at the same time the production process has to be continuously optimized for cost reasons. The need to bring alternative drive technologies to market maturity requires additional resources at the same time and, in the long term, calls into question entire business areas. When switching from the conventional combustion engine to battery-electric mobility, a number of components (e.g. transmission or exhaust gas cleaning) will simply be superfluous, even if this does not happen overnight. Overall, the circle of potential suppliers is expanding as a result of the digitization of the car (especially in the areas of electrical engineering, software and data processing as well as digital security). For the market structures of the industry this means: The automotive sector is becoming even more complex, new product lines and potential market players are emerging, and a clear separation between the automotive sector and adjacent areas is becoming more and more difficult. Why do we explain these market structures? Well, in view of the complexity of the entire automotive value chain outlined, the intense competition and the high level of regulation, the industry appears at first glance to be less attractive or difficult to challenge for newcomers and lateral entrants. Nevertheless, in the course of the digitization of the automobile (and the increasing importance of alternative drives), new players are on the move. This presents the automobile manufacturers, the large and internationally operating suppliers as well as small and medium-sized suppliers with different challenges. From an economic point of view, it is therefore important to paint a differentiated picture. Who could dare to jump into which areas of the automotive sector of the future? Digital ecosystems are among the new players in the automotive sector 3.1 New market players have already started With Google and Apple, two companies from outside the industry are heavily involved in the race for the digital car. Given their innovative strength and financial strength, they have been seen as new competitors to the automotive industry since their ambitions in this field became known. Google tested its first prototype of an autonomous car back in 2009 and is considered by many market observers to be a pioneer in this field. But the new players are far more diverse. Therefore, there is no simple answer to the question of how great the potential threat to the traditional automotive industry is. Who are the new players in the market and why are they (or not) interested in the automotive business? For a closer look at the new competitive situation in the automotive industry, we use the following classification, on the basis of which we introduce potential competitors for the traditional automotive industry with their recent activities and the direction of their business activities: i. New automobile manufacturers ii. iii. New suppliers of digital ecosystems iv. Digital mobility service providers and car sharing providers New automobile manufacturers Only a few new automobile manufacturers Worldwide, the number of independently operating automobile manufacturers has fallen almost steadily over the past few decades; The intense competition and the importance of economies of scale in purchasing, production and sales have made a significant contribution to this consolidation process. New providers with June 2017 Germany Monitor

10 Tesla is making progress in autonomous driving of national importance are the absolute exception. And there is actually no (new) provider that is primarily driven by the topics of digital cars or autonomous driving. So there is currently hardly any direct competition in the core business of automobile production. The US company Tesla Motors, which was founded in 2003, fits best into the picture. The company is primarily known for relying entirely on electric drives so far with a focus on vehicles in the luxury class of automobiles. However, Tesla is also making significant progress in the area of ​​autonomous driving. Tesla is the first manufacturer to announce that it will equip its cars with the necessary hardware that will enable autonomous driving at a later date. The company also announced plans to set up an online platform for providing mobility services. Tesla is thus positioning itself in the business areas of autonomous driving and digital mobility services. From a business point of view, Tesla has so far mainly generated losses for various reasons and is still a niche provider in terms of the number of vehicles sold. Due to the company's focus on the construction of electric vehicles, which should enable autonomous driving in the future, Tesla is currently probably the only (quite) new direct competitor of the classic automobile manufacturers in the core business of automobile construction.New suppliers A wide range of products opens up for old and new suppliers Without the innovative strength of automotive suppliers, the digital car will probably find it difficult to find its way onto the road. It is to be expected that many of the established companies will expand their product range in this area. At the same time, new providers are also entering the market. The group of potential new suppliers is large and difficult to understand. On the one hand, broad-based IT and software companies such as Google, Apple or the Chinese search engine provider Baidu are signaling their interest in expanding their business models into the field of digital cars; on the other hand, there are highly specialized manufacturers on the market, e.g. of driver assistance systems such as the Israeli manufacturer Mobileye. Numerous new strategic partnerships and collaborations are currently emerging here. The area of ​​security is also becoming increasingly relevant for the automotive industry and opens up access to the industry for young companies, among others. The Israeli start-up Argus Cyber ​​Security, for example, specialized in the problem of car hacking. Digital ecosystems Apple and Google are constantly expanding their offerings In the public perception, so-called digital ecosystems from the IT and data industry are often viewed as the greatest competitors of the traditional automotive industry. The best-known examples are certainly Google and Apple. While Google originally started with its search engine as a provider of software-based Internet services, Apple was one of the first providers of computers for private use to initially become known as a hardware provider. Both companies have expanded their offerings significantly over the years; their wide range of products has now become a trademark. Both Google and Apple have developed technologies with which smartphones, each equipped with their own operating system, can be networked with the vehicle's communication system (Android Auto and Apple CarPlay). Apple has been attracting attention in the industry with Project Titan since 2014. According to media reports, Apple had poached numerous specialists from the automotive industry. Therefore, the ongoing discussions are understandable that the company on an autonomously driving and electric June 2017 Germany monitor

11 Diverse participations Automobile data is very interesting for digital ecosystems powered Apple Car work. In the meantime, however, news about uncertainties regarding the concrete continuation of the project could also be found in the press. In the spring of 2017, Apple submitted an application in the USA to be able to carry out test drives with self-driving cars. Google has been making headlines for some time with its autonomous tests. The plans announced in October 2016 to convert the previous research department in this area into an independent company have become more concrete. Since December 2016, a new subsidiary called Waymo has been driving the development of autonomous driving technologies. At the same time, a message caused a sensation that Google also wanted to become active in the mobility service segment. Basically, both companies strive for partnerships with car manufacturers and digital mobility service providers. For example, Google took a stake in the mobility service provider Uber and is cooperating with the car manufacturer Fiat Chrysler, whose vehicles the company is converting for its tests in the field of autonomous driving. Apple has invested in the Chinese mobility service provider Didi Chuxing, and a cooperation with the Indian transport service provider Ola enables passengers of the Indian market leader to use Apple's music offering. Due to their origins, it is obvious that the two companies are particularly interested in expanding and marketing digital services that can be useful for everything to do with road traffic and beyond. Ultimately, they are (also) concerned with monetizing the flood of data that is available or generated before, during and after a car journey. The more extensive the companies have access to the current and expected data of the individual drivers and the vehicles used, the easier this project will be. Ultimately, users are likely to pay with their personal data so that they are offered tailor-made information about their car journey in the broadest sense, or that they can better use the journey time according to their individual preferences for business and private purposes. Questions of data sovereignty and security thus become relevant. Experience from other digital business areas (e.g. from social media) shows that many Internet users are quite indifferent, generous or at least carefree with regard to their data volume. Digital mobility service providers and car sharing providers Many young companies offer digital mobility services Finally, digital mobility service providers in the broadest sense form a large group of new players. A comparison of the best-known companies in terms of product range or business model as well as sales market shows that the providers are very differently oriented and their business models are changing. One thing they have in common is that they are mostly quite young companies. The best known is probably the US driver service provider Uber (since 2009). The company is active in many countries and uses an app to refer passengers to drivers with rental cars or private cars. Google and Toyota have a stake in Uber. Since 2016, the company has been drawing attention to itself with its autonomous test drives with vehicles from the automaker Ford. The direct competitor in the US market is Lyft (since 2012), in which General Motors, among others, has a stake. Founded in 2010, the Israeli-American company Gett is active in more than 100 cities around the world. VW has been involved in Gett since 2016. In contrast to Uber (and Lyft), Gett only works with licensed taxi drivers and thus avoids the legal gray areas that Uber currently used to monitor Germany before June 2017

12 Criticism of the business model of providers of digital mobility services Consolidation on the supplier side, probably Car manufacturers in the car sharing market Active use of the car product is changing due to car sharing & Co., especially in the European market. On the one hand (with a view to the selection of drivers) there are corresponding licenses, which private drivers usually do not have. In this context, many insurance-related issues (e.g., liability in the event of incidents) remain the subject of legal gray areas in Uber's business model. Therefore the mediation offer is e.g. in Germany currently classified as illegal by court order and was subsequently discontinued throughout Germany for the time being. On the other hand, labor law issues on the subject of employment and wages are currently in public discussion. How this legal debate about private digital mobility services will turn out is currently not foreseeable. Different solutions from country to country are likely. The mobility service Didi Chuxing (since 2012) has been active on the Chinese market. Apple has a stake here. The provider Grab-Taxi (since 2012) is the market leader in Southeast Asia and cooperates with the start-up nutonomy, which is testing autonomous taxi services in Singapore. The Indian market for mobility services is served by the local provider Ola, which has also been cooperating with Apple since November 2016. There is therefore a high level of dynamism in the still young mobility service sector. At the same time, the start-up scene is struggling with allegations that the business model works largely due to poorly paid jobs (especially in the form of bogus self-employment) or unregulated working hours. Such allegations are also known from other areas based on digital services (e.g. payment and working hours of parcel deliverers in the area of ​​e-commerce or couriers in so-called food delivery services). As long as regulatory barriers to market entry are low, it is to be expected that more companies will enter the market for digital mobility services and that new cities / regions will be opened up. However, since network effects and economies of scale are also important for user acceptance and the cost base of the provider, consolidation is probably inevitable; Compare this to the market for long-distance bus routes in Germany, where, after an initial rapid increase in the number of new providers, there are only a few large providers (who, however, use subcontractors). While the business model of digital mobility service providers is almost exclusively designed for the digital brokering of driving services, car sharing providers are focusing more on the rental of vehicles. A look at the larger car sharing providers, however, shows that these often have their origins, at least in Germany, with the car manufacturers (and car rental companies) themselves and thus ultimately do not represent completely new players. E.g. the Car2Go offer (since 2012) a service from Daimler in cooperation with the car rental company Europcar. The car sharing service DriveNow is offered by BMW in cooperation with the rental car company Sixt and is expanding into the American market under the name ReachNow. Car rental companies have a natural proximity to car sharing anyway. For example, the largest car sharing provider in the USA (Zipcar) is operated by the car rental company Avis. It can be said that both the companies that specialize in the provision of driving services and the car sharing providers do not compete directly with the classic automotive industry in automobile production. Rather, their market penetration changes the usage behavior and the demand of motorists for individual mobility. In Chapter 4, a June 2017 Germany Monitor, we go into the effects of a changed demand behavior on car manufacturers

13 New markets around the "digital car" are opening up 6 Estimated annual sales potential according to sectors of the automotive industry, USD billion It is uncertain how big the market for the digital car will be in the future. This also applies to the question of who can develop the new markets, how quickly and how profitably. However, current estimates give an approximate impression of the corresponding orders of magnitude. According to a study by McKinsey 4, global sales in the car market (car sales, aftermarket, shared mobility as well as data market and digital services) could grow by 5% annually to over USD billion by 2030; this would correspond to a doubling compared to today. The young digital sub-markets are above-average growth drivers. According to this assessment, the share of the data market and digital services in 2030 (depending on sales development) would account for around 6 to 10% of total sales (currently it is practically nonexistent). The markets for shared mobility are also likely to grow strongly. While sales in this area are not even 1% (around USD 30 billion) of the entire market today, it is estimated that their share could rise to over 20% (around USD billion) by 2030. It is true that such long-term forecasts should always be treated with caution; and a clear definition of the markets is not possible. But the magnitudes in the estimate quoted indicate that the data and service market related to car traffic and the shared mobility sector hold enormous potential. In which future markets should the new players primarily position themselves? And how are their respective market opportunities to be assessed? Competition in individual market segments is different. Competition in the traditional core business of automobile production is unlikely to change much. There is much to be said against digital ecosystems entering into automobile production , Development of new technologies around autonomous driving, mobility services, car sharing and digital data services) can turn out very differently: Automobile production: Since hardly any new provider with its activities specifically targets automobile production, in our estimation the competition in this traditional core business is only likely to increase change little. Of course, Tesla has developed into an important competitor in individual markets, especially for German manufacturers in the luxury class of automobiles; This is especially true for car markets in which electromobility is subsidized by the state. 5 The company has massively increased the pressure to innovate on established providers in the field of electromobility, also through clever marketing. Even if Tesla succeeded in implementing its ambitious growth plans and generating positive results over the long term, the company would remain a relatively small provider for years to come, measured against total global vehicle production. From today's perspective, we also do not expect the major digital ecosystems to expand their business model to include automobile production. There are several arguments in favor of our thesis: The automotive industry is a highly regulated market. The requirements for the vehicles are e.g. in terms of environmental and climate compatibility or safety will continue to increase. Why should companies that have previously been 4 5 See McKinsey (2016). Monetizing car data. New service business opportunities to create new customer benefits. See Heymann, Eric (2017). Electric cars have a false start Dilemma for the auto industry and the state. Deutsche Bank Research. Current comment. Frankfurt am Main June 2017 Germany Monitor