WAC2004 morganstanley

Slide1: 

Stephen Girsky IMF World Auto Council June 2004 Morgan Stanley Research

The State of the Industry: 

The State of the Industry Global demand growth continues to be modest, with the exception of selected emerging markets. Excess capacity likely to continue, putting pressure on prices. OEM strategies to counter deflation have been to cut costs and get the consumer to “buy up”. Company updates Questions Morgan Stanley Research

Global Demand Growing at Slow Pace: 

Global Demand Growing at Slow Pace Global Light Vehicle Demand 1.4% CAGR LMC-JD Power & Morgan Stanley Research

Morgan Stanley Global Sales Forecast FY04E: 

Morgan Stanley Global Sales Forecast FY04E 2003A 2004E % ∆ Units in MM Morgan Stanley Research Estimates

Excess Capacity Estimated at 25-30%: 

Excess Capacity Estimated at 25-30% Global Utilization at 72% Autofacts

Global Excess Capacity is Significant: 

Global Excess Capacity is Significant Honda contemplating importing small cars into U.S. from Brazil VW contemplating importing cars to Europe from Brazil Honda to import cars to Europe from China Ford/Toyota importing vehicles to Europe from Turkey Morgan Stanley Research

OEMs Spending for Growth: 

OEMs Spending for Growth 13 of 14 OEMs had FY03 CapEx > D&A BMW Mazda PSA Ford VW DCX GM Company data & Morgan Stanley Research

Zero Sum Game: 

Zero Sum Game Slow growth and excess capacity suggest deflation/revenue pressures are likely to continue. Not everybody can be a winner. Winners will be low cost producers who deliver good product that consumers are willing to pay for. Morgan Stanley Research

Capacity Situation Could Get Worse: 

Capacity Situation Could Get Worse NA Net Capacity Additions Over 1mm units Ford (122) Nissan 250 Toyota 180 Total 308 GM 125 Ford (48) DCX 80 Honda 180 Nissan 200 Toyota 30 Total 567 Ford (211) GM (98) DCX 80 Hyundai 235 Total 6 Toyota 150 2003 2004 2005 2006 Company data & Morgan Stanley Research Units in 000

Every 1 Pt. of Share Translates into $1.0bn in Profits: 

Every 1 Pt. of Share Translates into $1.0bn in Profits 1.03mm Units of Added Capacity is 6.2% of NA Capacity, or $5-$6bn in Pretax Profits Detroit Three $3,143 N.A. Pretax Profit FY03 in MM Company data & Morgan Stanley Research

Europe Estimated Capacity Additions: 

Europe Estimated Capacity Additions 2003A 2004E 2005E 2006E ‘03-’06E Company data & Morgan Stanley Research

China Estimated Capacity Additions: 

China Estimated Capacity Additions 2003A 2004E 2005E 2006E ‘04-’06E Company data & Morgan Stanley Research

Revenue Pressures Worst Since 1970’s : 

Revenue Pressures Worst Since 1970’s New Car CPI vs. Light Domestic Sales CPI & Morgan Stanley Research

Deflationary Pricing Since 2002: 

Deflationary Pricing Since 2002 Y/Y Change in Monthly New Car CPI CPI & Morgan Stanley Research

Price Reductions Pressure Manufacturers: 

Price Reductions Pressure Manufacturers Every 1% Decline in Prices is Worth $1.2bn at GM $800mm at Ford $500mm at Chrysler Company data & Morgan Stanley Research

Deflation Not Just a N.A. Phenomenon: 

Deflation Not Just a N.A. Phenomenon GM offers €1,085 discount to prospective customers who order the new Astra before it reaches the market. Jan-04 VW counters by offering €1,000 of extra trade-in values to prospective customers who switch from competitor cars to new Golf. Jan-04 VW offers free air conditioning (implied discount of €1,000) on all new Golfs through September. Feb-04 Ford offers $6,000 in additional equipment on Focus (including air conditioning and alloy wheels). This implies a 20% discount to MSRP. Mar-04. Company data & Morgan Stanley Research

Countering Deflation: 

Countering Deflation Lower costs Materials – 65-70% of the cost of a car More efficient use of components Global sourcing Overhead – 15%-25% Investment efficiency Supplier Parks Labor -10%-20% Richen mix Morgan Stanley Research

Overcoming Deflation; Getting Consumers to Buy Up.: 

Overcoming Deflation; Getting Consumers to Buy Up. APR Maturity Financed Amt Payment LTV Implied Cost of Vehicle FRB & Morgan Stanley Research

Global Labor Costs vs. Unit Growth: 

Global Labor Costs vs. Unit Growth USA Germany France Sweden UK Japan Korea Taiwan Estonia Turkey Mexico Poland Malaysia Romania Thailand China Philippines India Indonesia 100 98 87 80 62 56 32 27 16 13 11 11 8 7 6 4 3 3 1.5 Labor Cost Indexed to the U.S. 1.9% -1.1% -0.1% 7.3% 3.1% 0.8% 5.8% 11.3% NA 30.5% -4.7% 7.8% 6.6% 10.9% 19.5% 26.8% 19.8% 9.6% 6.3% FY01-FY04E Production Unit CAGR Autoliv, LMC-JD Power & Morgan Stanley Research

Global Footprint Migrating To Lower Cost Regions: 

Global Footprint Migrating To Lower Cost Regions Nissan adds 250k in Mississippi FY03 Nissan adds 150k in Mississippi FY04 DCX adds 80k in Alabama FY04 Honda adds 150k in Alabama FY04 Nissan adds 50k in Georgia FY04 Hyundai adds 300k in Alabama FY05 Toyota adds 150k in Texas FY06 Toyota adds 30k in Tijuana, Mexico FY06 N.A. Capacity Additions Mostly in Southern Belt European Capacity Additions in Eastern Europe/Turkey Toyota adds capacity in Czech/Turkey VW adds capacity 75k in Slovakia Hyundai adds 200k in Slovakia FY06 PSA adds 300k in Slovakia FY06 Source: Company data & Morgan Stanley Research

Risks to chasing low cost labor: 

Risks to chasing low cost labor Export Strategy Increases Exposure to Currency Fluctuations Logistics Material Supply Political Morgan Stanley Research

Currency Movements Add Risk to Export Strategy: 

Currency Movements Add Risk to Export Strategy Japanese ¥ vs. US$ Factset & Morgan Stanley Research

Foreign OEMs Exposed to Currency Movements: 

Foreign OEMs Exposed to Currency Movements ¥ to US$ Price Sensitivity YTD-04 Company data & Morgan Stanley Research Includes Acura, Infiniti, Lexus

Japanese Local Production Continues to Increase: 

Japanese Local Production Continues to Increase Japanese Transplant Sales as % of Total Sales in U.S. Autodata & Morgan Stanley Research

Watch Out for China: 

Watch Out for China Three Reasons Why China Is Important: China is the 4th largest auto market, and the fastest growing High Profitability Export potential Morgan Stanley Research

China Growing Portion of Company Profits: 

China Growing Portion of Company Profits China Profits Matter Company data & Morgan Stanley Research

Prospects of China Excess Capacity High: 

Prospects of China Excess Capacity High Capacity additions are being announced almost every month, as manufacturers race to establish future market share positions. While capacity does not currently appear to be in excess, we estimate that demand will need to grow by roughly 25%-30% per annum to absorb the currently-announced capacity additions over the next three years. Recent pricing actions in China a cause for concern. Company data & Morgan Stanley Research

Company updates: 

Company updates Stock performance Profits Quality Market Share Return on Investment Morgan Stanley Research

Why stock price is important: 

Why stock price is important Industry is a significant user of capital; Cost of capital is a competitive advantage. Every 1% pt on a five year car loan is worth $700-$750 per vehicle. More efficient users of capital typically have a cost of capital advantage. Morgan Stanley Research

Current Bond Yields: 

Current Bond Yields Morgan Stanley Research

Global OEM Market Values: 

Global OEM Market Values Global OEM Market Cap in US$ Factset & Morgan Stanley Research

Global Share Winners: 

Global Share Winners Global Share Winners FY01-FY04E LMC-JD Power & Morgan Stanley Research Based on production units

Global Profitability Winners: 

Global Profitability Winners Global Operating Margin LTM as of 1Q04 Company data & Morgan Stanley Research

Global Automotive Operating Income: 

Global Automotive Operating Income Automotive Operating Income LTM as of 1Q04 ($ in MM) Company data & Morgan Stanley Research

Global Financial Position: 

Global Financial Position Industrial Net Debt/(Cash) ($ in MM) Company data & Morgan Stanley Research

Off-Balance Sheet Liabilities: 

Off-Balance Sheet Liabilities GM ($1,116) ($57,544) ($58,660) Ford ($3,447) ($28,797) ($32,244) DCX (€6,400) (€13,400) (€19,800) VW (€11,431) NMF (€11,431) BMW (€3,490) NMF (€3,490) PSA (€1,402) NMF (€1,402) Fiat* (€1,005) NMF (€1,005) Renault (€880) NMF (€880) Pension Liability Healthcare Liability Company data & Morgan Stanley Research ( in MM) Fiat FY02 data, 20-F for FY03 not available Total Liability

J.D. Power IQS Results 2004: 

J.D. Power IQS Results 2004 Problems per 100 Vehicles: Out-performance JD Power & Morgan Stanley Research

J.D. Power IQS Results 2004: 

J.D. Power IQS Results 2004 Problems per 100 Vehicles: Under-performance JD Power & Morgan Stanley Research

Actual vs. Perceived Quality: 

Actual vs. Perceived Quality Actual Quality > Perceived Quality = Share Opportunity Actual Quality < Perceived Quality = Share Risk Actual – Perceived Quality Gap CNW & Morgan Stanley Research

Toyota Asset Turns vs. Margin: 

Source: Company data, Morgan Stanley Research Toyota Asset Turns vs. Margin Stock Performance: 1 Yr: + 42.8% 3 Yr: - 4.0% 5 Yr: + 13.7% Toyota Asset Turns vs. Operating Margin Company data & Morgan Stanley Research

Nissan Asset Turns vs. Margin: 

Source: Company data, Morgan Stanley Research Nissan Asset Turns vs. Margin Stock Performance: 1 Yr: + 26.2% 3 Yr: + 38.7% 5 Yr: + 123.1% Nissan Asset Turns vs. Operating Margin Company data & Morgan Stanley Research

Honda Asset Turns vs. Margin: 

Source: Company data, Morgan Stanley Research Honda Asset Turns vs. Margin Stock Performance: 1 Yr: + 19.0% 3 Yr: - 11.3% 5 Yr: - 10.0% Honda Asset Turns vs. Operating Margin Company data & Morgan Stanley Research

GM Asset Turns vs. Operating Margin: 

Source: Company data, Morgan Stanley Research GM Asset Turns vs. Operating Margin Stock Performance: 1 Yr: + 21.6% 3 Yr: - 19.7% 5 Yr: - 38.0% GM Asset Turns vs. Operating Margin Company data & Morgan Stanley Research

Ford Asset Turns vs. Margins: 

Source: Company data, Morgan Stanley Research Ford Asset Turns vs. Margins Stock Performance: 1 Yr: + 42.1% 3 Yr: - 48.2% 5 Yr: - 60.3% Ford Asset Turns vs. Operating Margin Company data & Morgan Stanley Research

DCX Asset Turns vs. Margin: 

Source: Company data, Morgan Stanley Research DCX Asset Turns vs. Margin Stock Performance: 1 Yr: + 35.0% 3 Yr: - 14.3% 5 Yr: - 56.1% DCX Asset Turns vs. Operating Margin Company data & Morgan Stanley Research

Volkswagen Asset Turns vs. Margin: 

Source: Company data, Morgan Stanley Research Volkswagen Asset Turns vs. Margin Stock Performance: 1 Yr: + 15.2% 3 Yr: - 38.4% 5 Yr: - 45.9% Note: Transitioned to IAS in 2001 Volkswagen Asset Turns vs. Operating Margin Company data & Morgan Stanley Research

BMW Asset Turns vs. Margin: 

Source: Company data, Morgan Stanley Research BMW Asset Turns vs. Margin Stock Performance: 1 Yr: + 19.5% 3 Yr: - 13.6% 5 Yr: + 35.5% Note: Transitioned to IAS in 2001 BMW Asset Turns vs. Operating Margin Company data & Morgan Stanley Research

Summary; Prepare For Change: 

Summary; Prepare For Change Global deflation likely to continue Consumers will continue to but cars although where they buy them will change. Technology will change how cars operate and how they are put together. Flexibility is key success factor Morgan Stanley Research

Stock Price, Price Target, & Rating History: 

Stock Price, Price Target, & Rating History GM, $45.62, Equal-Weight, Price Target N/A Morgan Stanley Research

Disclaimers: 

Disclaimers Global Stock Ratings Distribution (as of May 31, 2004) Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months. ANALYST STOCK RATINGS Overweight (O). The stock’s total return is expected to exceed the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock’s total return is expected to be in line with the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock’s total return is expected to be below the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months. More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst’s view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner. Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts. ANALYST INDUSTRY VIEWS Attractive (A). The analyst expects the performance of his or her industry coverage universe to be attractive vs. the relevant broad market benchmark over the next 12-18 months. In-Line (I). The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad market benchmark over the next 12-18 months. Cautious (C). The analyst views the performance of his or her industry coverage universe with caution vs. the relevant broad market benchmark over the next 12-18 months. Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA. Morgan Stanley Research

Important Disclosures: 

Important Disclosures Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Stephen Girsky. Important US Regulatory Disclosures on Subject Companies Important US Regulatory Disclosures on Subject Companies The information and opinions in this report were prepared by Morgan Stanley & Co. International Limited and its affiliates (collectively, "Morgan Stanley"). As of April 30, 2004, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: DaimlerChrysler AG, Ford, General Motors. Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of DaimlerChrysler AG, Ford, General Motors. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from DaimlerChrysler AG, Ford, General Motors. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from DaimlerChrysler AG, Ford, General Motors. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from DaimlerChrysler AG, Ford, General Motors. Within the last 12 months, Morgan Stanley has either provided or currently is providing investment banking services to the following companies covered in this report DaimlerChrysler AG, Ford, General Motors. Within the last 12 months, Morgan Stanley has either provided or currently is providing non-investment banking, securities related services to and/or in the past has entered into an agreement to provide services or currently has a client related relationship with the following companies covered in this report DaimlerChrysler AG, Ford, General Motors. The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley & Co. Incorporated makes a market in the securities of Ford, General Motors. Morgan Stanley Research

Other Disclosures: 

Other Disclosures Other Important Disclosures For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www.morganstanley.com and other electronic systems. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdings disclosed in the section entitled "Important US Regulatory Disclosures on Subject Companies", Morgan Stanley and/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons. Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley sells to and buys from customers the equity securities of companies covered in its research reports on a principal basis. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company. With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. (continued on next page) Morgan Stanley Research

Other Disclosures: 

Other Disclosures Other Important Disclosures (continued) The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. This publication is disseminated in Japan by Morgan Stanley Japan Limited; in Hong Kong by Morgan Stanley Dean Witter Asia Limited; in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte., regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia by Morgan Stanley Dean Witter Australia Limited A.B.N. 67 003 734 576, a licensed dealer, which accepts responsibility for its contents; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., which accept responsibility for its contents; and in the United Kingdom, this publication is approved by Morgan Stanley & Co. International Limited, solely for the purposes of section 21 of the Financial Services and Markets Act 2000 and is distributed in the European Union by Morgan Stanley & Co. International Limited, except as provided above.Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International Limited representative about the investments concerned. In Australia, this report, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities is available on request. © 2004 Morgan Stanley Morgan Stanley Research

Slide54: 

Stephen.Girsky@morganstanley.com