Business review 2014 Major challenge and issues Jun 3, 2014

1. Business review 2014 Major challenge and issues Jun 3, 2014 Pyeongtak Plant

2. HR

3. HS Yoon Director of MKL Operation & General Mgr Robert James DeFauw Plant organization Representative Director Corporate Purchasing Corporate Sales Francis Moon Eric Conrad General Manager Number of salaried employees as of May 27, 2014 Finance HR & Planning Manufacturing R & D Quality Sales Purchasing Chris Lee Operation Mgr Daniel Lee Q.A Mgr Brian Choi Sales Manager Mike Chai R&D, Program Mgr Anthony Seo Finance Mgr Ken Lee HR Mgr Duke Lee SDE & Buyer Kayla Bae Finance Assist. Shelly Kim HR Assist. YJ Hwang Jr. Finance Assist. Henry Uh Jr. HR Assist. Matl’ & Logis. Production M.E Maintenance Quality Control Supplier Quality Jinu Park Matl’ & Logis Mgr Sooyup Ahn Production Egr James Yoon Manufacturing Egr John Lee Maintenance Egr David Shin Q.A Mgr Frank Seo SQE Eunhee Lee Production Assist JH Kim Quality Egr Joonhi Ahn Matl’ & LogisSpvr Martin Choi Manufacturing Egr DM Kim Maintenance Egr Jimmy Ji Quality Egr MH Lee Matl’ & Logis Assist SM Jeong Tool Room DS Bae Shift Leader JH Song Electrician (Leader) SD Kim Quality Egr DS Ahn Shift Leader HY Hwang Tool Room YM Park Mechanician Jeongmoon Cho Q.E & consignment JS Kim Electrician Alley Hwang CMM operator YD Rho Mechanician KI Byun CMM operator EK Shin CMM operator Temporary Indirect Hourly

4. Health & Safety Recordable rate Date of last lost time incident occurred are 1,549 as of the end of May, 2014. Trend of Recordable rate Incident types for the last 6 years

5. Headcount Budget 2014 HC changes in 2014 • [Termination] • Salaried employee ; WS Park (Quality Engineer • Hourly : 2 direct employees • Hourly : 2 indirect employees (Maint, Matl&Logis) • [Hiring] • Hourly direct employees • Switched to MKL regular employees from O/S • on Jan. HC Trend 155.0 156.0 144.7 130.0 126.0 84.7 84.5 78.3 59.1 50.4 4~3 shifts 2-shifts 3-shifts

6. Turnover rate Turn over rate up to 2014 [MKL empl.] Turn over trend [MKL only] BSM deletion for Theta 2.0 Merged with Asahitec Bankruptcy

7. Environment EMS objectives in 2014 【KR Won / PCS】 Waste stream trend Disposal amount by annual 【’000won】 【KR Won / PCS】

8. Challenge & Issues Completed up to May, 2014 • Ordinary wage issues • Merit Increase • OHSAS 18001 certification Upcoming Issues & Challenge • Retention plan for Key employees according to the sales decline • Extending the retirement age up to 60 by law and salary peak • Companies more than 300 of full-time workers  from Jan 1, 2016 • Companies less than 300 of full-time workers  from Jan 1, 2017 • Reduction of Legal standards working hours (Congress failed to pass) . • Standards working hours are 40 hours per week • According to mutual agreement, it is allowed up to 12 hours of overtime works per week.

9. Mafacturing

10. Table of contents 1/11 1. Production plan (sales) 2. Production status 3. Productivity 4. Theta line control plan 5. R-eng volume-up plan 6. Inventory performance 7. Inventory accuracy 8. Maintenance status 9. New business plan

11. 1. Operation – Production Plan (sales) 2/11 - In accordance with the client’s 5 months forecast, The demand of Theta BSM is expected to be decreased, the human resource operation of Theta line is planned to be downsized. - In order to deal with the R-BSM volume increase, manufacturing capacity of R BSM is planned to be increased.

12. 2. Operation- Production (Calendar day) 3/11 Production status PCS Plan Vs Actual for Theta BSM Plan Vs Actual for R-BSM Plan Vs Actual for FEMA ※ Theta BSM exceeds the target about 12%, R BSM meets the target and Tau FEMA exceeds the target about 15%. Total production volume for Theta BSM is reduced about 15% compare to last year during the same period. But R-BSM and Tau FEMA volumes are highly increased about 25% and 95% respectively.

13. 3. Operation - Productivity 4/11 QPPLH Target Scrap rate ※ QPPLH met our target which was 2.60 and recorded 2.70 to April.  Continuously try to achieve QPPLH goal even though production volume decrease in the second half year. ※ Scrap rate for Theta BSM is decreased about 10% compare to 2013. Production volume decrease rate is about 15% during the same period. ※ R-eng scrap rate is also decreased about 6% even though production volume is increased about 24%.

14. 4. Operation – Theta Line Control Plan 5/11 Production Volume [The period of new SONATA model release] -30,294 4 Shift 3 Shift 3.5 Shift 2.5 Shift Control Plan - Theta BSM Demand will drastically decrease. - MKL has been operating 3 shifts for Theta line. (May) - It is planned to be operating 2.5 shifts in Oct. - After October, workers from 2.5 shift will support R BSM assembly line in order to meet the client’s increasing demand.

15. 5. Operation – R-eng Volume-up plan 6/11 Production Volume -3,617 -2,993 -3,928 Volume-up Plan

16. 6. Operation – Inventory Performance 7/11 ▶ M&L team has been managed to completely consume 8,000pcs of MPI 6.1 version. (2013 year ~ Mar 2014 year) ▶ Conducted optimal inventory management towards imported materials. (Nichols portland inventory 120,000 set => 70,000 set) ▶ Achieved the improvement of inventory turns through tight control with appropriate material consumption. - Manage the stock amount of money through the optimal inventory management. ▶ Successful application management of Euro 6 with excellent inventory control of Euro 5 -> “Euro5 ZERO inventory”

17. 7. Operation – Inventory Accuracy 8/11 Apr-14 ▶ With the ZERO base inventory after Physical counting in Dec 2013, MKL has been maintained and managed high inventory accuracy from Jan 2014 - Conducted frequent analysis and rechecking activity towards inaccurate inventory that emergently stocked at vulnerable time especially at night or dawn -> contributed high inventory accuracy ▶ MKL will maintain above 90% of inventory accuracy through regular 12 times of Cycle counting and 2 times of Physical counting at one year

18. 8. Operation – Maintenance Status 9/11 Maintenance cost trend Total maintenance cost 216 Mil Won Maintenance issues • Moved machines (MCT, Washer & Leak Tester)for Tau FEMA to KODACO on March 21st → To secure the space for GM-XLDE line • Old SW machine maintenance plan → Need to consider using the parts from the idle SW machine in Theta-Eng line to secure spare inventory. → Need to repair old SW machines in R-Eng line but there will not be time for it due to increased production volume • Replaced lights from Metalhalide to LED on May 1st → Expected payback is 20month and approximately 2milion won would be saved per month. • Installed R-eng Robot Air blow to improve the cleanliness on May 7th

19. 9. Operation – New business in 2014 10/11 Schedules for New Program ▶Doosan G2 D34 Mass Balance Shaft - Investigating supplier quotations for production line. - Need to install all production line at least middle of October.

20. 9. Operation – New business in 2014 11/11 Production Equipment for GM XLDE ※ GM 2.8L XLDE Balance Shaft Module -. All production equipments for GM XLDE BSM will be done by end of June. -. Polisher & Washer for balance shafts are already installed and completed try-out. -. Assembly line & EOL tester will be delivered on middle of June after delivery of PPV samples. Polisher Washer Assembly Line EOL Tester

21. ※ Reference – Materials & Supplier 1. Local suppliers 2. Overseas suppliers % of Material Cost against Sales - SEOUL INDUSTRY 3,988 include raw material cost of KONEC and WONTAE

22. ※ Reference - Logistic cost Domestic Delivery Cost It’s cheaper using regular freight than using expedited freight - If there happens to deliver small amount, it’s better use 1 ton truck instead 5 ton truck (Our contractor) [ Cost Comparison ] 1-ton : 250,000 won (expedited truck) 5-ton : 750,000 won (regular truck) Air Freight Cost Most of all air freight cost result from sending & receiving SAMPLES (GM XLDE) Material cost incurred due to Acument (4,367,467 won – in January) ---> Delayed for product lead time

23. ※Reference- Delivery & Inventory

24. ※Reference – Application of EURO-6 R-BSM Background MKL’s objective is to successfully apply new version (Euro 6) of R-BSM while improving fuel efficiency performance through the reduction of journal dia and friction Concentrated inventory management of Euro 5 & 6 • Management with the objective of complete clear of subcontractor’s material inventory related to R-BSM Euro 5 (6th May) • 2) In accordance wtih the H,KMC’s application date(May15th), M&L team would tightly control the subcontractor’s production date of Euro 6 -> Successful Running Change with no material excess • => Successful application management of Euro 6 with excellent inventory control of Euro 5-> “ZERO” inventory ( HMC 9th May , KMC 13th May)

25. Quality

26. Customer PPM, 2014 Target: 10PPM 25

27. Supplier PPM, 2014 Target line 1800 ppm(S&H) Target line 105 ppm(N-S/H) 26

28. HMC 5-Stars rating, 2013 27

29. Challenge & Issues Struggle to reset Saudi Claim share rate • MKL submitted the official letter to request for resetting the claim share rate to HMC concerned teams according to pre-tuning with MK Lee at 23. May • HMC P/T Quality team will reply the share rate ( or share conditions) to MKL in time. • (It may be finalized by Jun ) As follows : - Vehicle version : GF/HG (produced from Asan Plant) - Sales area : Saudi area - Production date : Jan. 1. 2010 ~ April 30. 2014 - Claim Quantity : 595 ( up to RO Mar. 2014) ( the amount : 329,812,027 KRW) - Part no : 23300 - ***** - Failure code : all Current share rate 34% New share rate MKL’s target : below 14.29% 

30. Purchasing

31. Purchased Amount CY2013 % of Purchasing amount % of Purchasing location

32. CY 2014 Cost Saving Status

33. VCST gear consumption plan & Stock status • Target date : End of Oct • ( Added 1month lead-time due to reworking of whistle noise BSM )

34. Supplier development status for GMTh XLDE - Development Items : 19 Parts - 10 suppliers PP PPAP 8.29 PPV 6.13 Pilot 10.10 Production 4.20 SORP 5.4 GMTh PPV PPAP , Run & Rate

35. Challenge & Issues New tooling of TAU timing chain cover 1) Customer & Kodaco quality issue 2) Schedule for Tau repeat tooling; - End of May : Tooling Making - Mid of Jun : Complete Tooling Trial 3) Tooling Cost Impact & Recovery plan; - Tooling Cost : 175 Mil KRW - Recovery Plan : a. Negotiation : Remaining shot ( 20,000 shot) of current tooling b. Negotiation for R-eng euro 6 new tooling cost

36. CSE

37. New business • R-BSM FR 2WD & AWD • Completed the 3rd quotation submission to HMC on Apr 29. • Waiting for the customer’s final decision, although the competitor costlooks to be lower than MD. • Doosan BSA & Crank Gear • Doosan and MKL signed on the production contract on April. • MKL finance team reviewed IRR based on the tooling cost and capital approved by MD management in advance. • Need to finalize the production prints so that the supplier can proceed the production tooling. • Timing Plan • RFA approval : ~ June 13 • Production tooling completion : ~ Early of October • SOP of MKL : Middle of October • SOP of Doosan : November 1

38. New business • GMTh XLDE 2.8L • MKL delivered total 128 modules and 224 crank gears to the customer so far. • Current stage of the customer is PPV engine build as non-saleable intention. • Engineering issue • - Gerotor design changed from 6-lobe to 4-lobe due to the pump noise improvement. • - Gerotor drive design changed from double flat to square shape due to the excessive wear improvement. • - Still improving the gear noise with the customer. • Timing Plan • PPV Delivery to GM Thailand by Jul 4 • MKL production line set-up by Jun 30 • Supplier tooling completed, except for the induction hardening equipment scheduled on the middle of August. • Full PPAP approval by Aug 29 • MKL SOP on Mar 30, 2015 • GMPT SORP on May 11, 2015 • Potential New Program • HMC is going to release RFQ for New U-ENG 1.2L with 3 cylinder and 1.6L with 4 cylinder. • New U-ENG 1.2L will be required BSM application integrated to oil pump and vacuum pump.

39. Sales

40. R FR bid Price recovery of Theta BSM due to volume decrease Tau FEMA repeat tooling Price and tooling cost for R Euro6 Commercial issues for Sales • MKL submitted the revised quotation on May 19, 2014. Final bidding result has not been released yet. • The official due date was April 29, 2014. • MKL requested to HMC price recovery due to Theta volume decrease effective fromJan 1, 2015. (4000/4000/3000 KRW) HMC will review details of price adjustment in the second half of 2014. • MKL’s target : To finalize the negotiation within Q3. 1. MKL submitted to HMC the quotation for price increase and tooling cost for R Euro6. HMC will likely review the quotation by the end of June 2014. 1. MKL submitted to HMC the quotation for Tau FEMA repeat tooling.