Chinese Automotive Industry – Growth Prospects and Opportunities

R.Sagitha, Research AnalystEconomic Research and Analytics

Automotive & TransportationOctober 9, 2008

2

Focus Points - Chinese Automotive Industry

Chinese Automotive Industry – Overview

China – Country Profile

Policy Overview

Impact of Automotive Industry Policy (2004)

Investment Policy and Automotive Investments

Trade Agreements

Automotive Industry Regulations

Research & Development

Automotive Sales and Trade

Motor Vehicle Demand and Consumer Preferences

Growth Opportunities

Automotive Industry Definitions

3

� Population in 2007 - 1,321 million

� Population growth rate – 0.60 percent

� Percent of world population – 19.73 percent

� 12th term Presidential election was on March 22, 2008

� Election was won by Ma Ying

China – Country Profile

� Exchange rate USD to CNY – 6.84

� Stead fast increase in the value of Yuan affects trade

� The real GDP growth in 2007 was 11.40 percent

� Unemployment rate – 4.2 percent in 2007

� GDP per capita - $5,300

� Inflation rate – 11.9 percent

Political Overview Economic Overview

Demographic Indicators Exchange Rate

4

Automotive Industry Definitions

Automotive Parts and Accessories

Automotive Industry

Passenger Cars

Motor Vehicles

Commercial Vehicles

Heavy Trucks

Buses

5

Chinese Automotive Industry - Overview

Automotive Parts and Accessories

Chinese Automotive Industry

• Around 5000 manufacturers but only a fraction of them are large

• Increased government support

• Huge presence of MNCs and joint ventures

• Forms 43% of total automotive exports

Motor Vehicles

• Emerged as the second largest automotive market in the world in 2007

• The automotive production for 2007 is 8.88 million

• Vehicle production growth at 22.02 percent and automotive sales rose to 21.84 percent

6

Policy Overview

Fiscal Policy and Taxes

11th Five Year Plan

Automotive Policies

Investment Regulations

& IPR

Trade Agreements

Environment Regulations

Industry Policy

Regulation on Car

Leasing

Consumption Tax

Automotive Policies

Traffic Insurance Program

Development

of Science and

Technology

Program

Anti-Monopoly

Law

Automobile Registration

7

Impact of Automotive Industry Policy (2004)

The Chinese government wants to encourage domestic manufacturers to develop renowned brands, hence more restrictions are placed on incoming investments. Joint ventures and technology collaborations are encouraged instead.

State intervention is present in the automotive industry. Large auto groups have to submit development plans to the National Development and Reforms Commission for approval.

Auto Policy

Strict supervision on imports

Lower limit for new investments

Limit on holding by a foreign company

Restrictions on import of used vehicles

Strengthening of domesticproduction and R&D activities

8

Investment Policy

The government aims to remove tax concessions offered to foreigninvestors and also fix the statutory corporation rate currently at 20 to 25 percent.

Tax Differential

Labor Policy

Anti-Trust Law

Technology Collaboration China will focus more on R&D collaborations and technology transfers than mere volume of investment.

This law will aim to prevent the influence of multinationals in China. MNCs have dominated the Chinese market because they possess technological edge.

China is expected to strengthen labor related regulations. This would target MNCs that do not have labor unions and encourage collective bargaining.

New Auto Export ZonesEight auto export zones were named in August 2006. Around 160 manufacturers from these zones have been named national

automobile and spare parts exporting enterprises.

Ease of doing BusinessChina ranks 90th in terms of ease of doing business according to a World Bank report in 2008.

9

Automotive Investments in China 2007-2008

Ningbo and Fawer makes a JV investment of U.S. $142 million to establish a new auto parts company.

Ningbo Huaxiang - Fawer

A JV deal has been signed between the companies for sales of medium-and heavy-duty trucks in China.

Daimler - Beiqi Foton

Japan’s Asahi Glass’ has launched a new plant at Foshan with an investment of U.S. $44 million to establish a supply system of 2.2 million car sets annually in China.

Asahi Glass

The auto-parts giant will launch its China Technology Center (CTC) at Shanghai, which is scheduled to start its operation by the end of 2009 with an investment of U.S. $120 million.

BorgWarner

MANN+HUMMEL will commence its fourth facility in China, which will manufacture filter systems and filters for the automotive OEM and aftermarket by January 2010.

MANN+HUMMEL

Dongfeng and Nissan will invest U.S. $145 million for a new LCV plant at the Henan province with annual capacity of more than120,000 vehicles.

DFL – Nissan (China) Investment Co.

Guangzhou-Toyota will set up a second production line at Guangdong, China. The production is scheduled to start in mid-2009 with annual capacity of 120,000 vehicles.

Guangzhou-Toyota

The Swedish bearing-maker SKF has opened a new plant in Shanghai to support the growing demand from the local automakers in China with an investment of U.S. $25 million.

SKF

Yulon plans to produce SUVs, vans and sedans by 2010 in a planned joint venture with domestic partner Zhejiang Zhongyu.

Yulon Motor - Zhejiang Zhongyu

The agreement is expected to explore new opportunities for Chrysler related to distribution, components and technology in the Chinese market.

Chrysler’s MoU with Great Wall Motor

Nature of the Deal/InvestmentJV Partners/Sole Investors

10

Trade Agreements

ChinaPakistan

FTA in new areas

of cooperation

New Zealand

FTA for lowering tariffs and economic

cooperation

FT

A fo

r low

erin

g

tariffs

an

d e

co

no

mic

co

op

era

tionSingapore

India

To develop a feasibility study on

FTA between both the countries

China – ASEAN drafted FTA between the years 2002 and 2010

11

Automotive Industry Regulations

Emission Norms

• Adoption of Euro IV norms by 2010 – Beijing has adopted this standard

• Adoption of new energy vehicles like BEV, FCEV, hydrogen fuelled vehicles

• Retrofitting Beijing buses with clean diesel technology

• Government officials to use low emission, domestic vehicles by 2008

Vehicle Taxes

� Increase in consumption tax on passenger vehicles with large engines

� Preferential tax treatment for energy efficient automobiles

Safety Standards

• “Technology Demand and Testing Measure on Brake System of Passenger Vehicle”- 2008

• Developing on standards for child safety seats

Fuel Economy

• Use of clean diesel

• Di Methyl fuel buses

• Release of fuel consumption statistics by NDRC

• Pending Fuel Tax

12

Research & Development

Europe and China are working on a Memorandum of Understanding (MoU) about clean-coal technology during the EU–China Energy conference.

Fuel Quality Monitoring Facility

Bio-Fuels

Hybrid TechnologyChinese company Chargeboard signed a contract with the Beijing Bus Company to promote hydraulic hybrid technology in the city. Beijing began testing hydraulic hybrid technology deploying 50 such buses.

China has plans to restrict bio-fuel production from corn and bio-diesel from oil crops. Instead, the Government of China is encouraging to produce bio-fuel from non-food sources.

Engine test facility of the Chinese Research Academy of Environmental Sciences (CRAES) has been set up in Beijing to research on development of future fuels and customized additives to improve fuel quality.

Technical development phase-2020; Market penetration phase-2050; Fully developed market and infrastructure phase – beyond 2050.

Hydrogen Economy

Coal Gasification

13

Automotive Sales and Trade

Automotive Sales

0

2000000

4000000

6000000

8000000

10000000

2001 2002 2003 2004 2005 2006 2007

Year

Production Units

Automotive Production

Trends in Passenger Car Market

•High level of growth in the passenger car segment between 20 and 30 percent annually since 2005

•Concentration of passenger car dealers in developed provinces of China

•The growth in the market is moving slowly faster due to hike in fuel prices and vehicle purchase taxes

0

2

4

6

8

10

2001 2002 2003 2004 2005 2006 2007

Year

Units (Millions)

PassengercarsTotal sales

Production Trends

•China has overtaken Germany in car production for 2007

•China’s domestic car production continued to grow with the JV’s foreign car makers

•A shift from cars driven by fossil fuels to cars driven by clean fuels

Source: OICASource: China Today

14

Motor Vehicle Demand and Consumer Preferences

Source: National Bureau of Statistics

1.29 billion consumers

250 million

60 million

•The upper-middle-class drives the demand for cars in the price bracket of $3600 to $12,500.

•The affluent class in China is buying luxury brands. Auto manufacturers also offer captive auto financing to enable such purchases.

•The Chinese government insisting on authorized dealers in the sales network, auto financing is likely to be a determining factor in the purchase of high-end models.

Consumer Preferences

•Safety and reliability are the main purchasing criteria.

•Convenience of commutation is another important reason for purchasing a car.

•Brand is not top a priority for the average car buyer.

2001 2010

100 million

470 million

> $5000 per annum

> $10000 per annum

1.37 billion consumers

15

Chinese Automotive Industry - Growth Opportunities

Auto PartsAuto Parts

Consumers demand wide ranges of features to be incorporated in the motor vehicle. Many global players in the auto parts segment have entered China and are continuing to increase their investments.

Passenger Cars Passenger Cars

The per capita car ownership in China is around 7 or 8 per 1000. This is much lesser than the global average of 120 per 1000.So there is scope for growth of demand in the Chinese market.

Small CarsSmall Cars

The introduction of stricter emission norms and tax incentives for fuel efficient vehicles has started working in favor of small cars.

Mini SedansMini Sedans

The demand is likely to be high for mini sedans and economy cars. The high price of fuel will push the demand for fuel efficient vehicles

Environment Friendly VehiclesEnvironment Friendly Vehicles

China ‘s hydrogen economy plan and measures to promote fuel efficient vehicles will benefit vehicle manufacturers and parts makers who possess the technology.

Chinese Automotive

Industry

High Value Added ComponentsHigh Value Added Components

China presents a good opportunity for suppliers in OEM market and the aftermarket. Even though China’s auto parts export is considerably high, it still imports parts and components.

1

6

5

4

3

2

16

Chinese Automotive Industry - Growth Opportunities

TrucksTrucks

The Beijing Olympics 2008 has created demand for special purpose vehicles. The truck industry is set to witness a surge in demand due to Road transportation and infrastructure development projects.

New FuelsNew Fuels

The Automotive Industry policy supports development of new fuels like alcohol fuel, natural gas and mixed fuel. The state also has in place a hydrogen economy roadmap.

Ancillary IndustriesAncillary Industries

Manufacturers of auto-related industries improve product standards and market competitiveness to develop in step with the auto industry.

After Sales ServiceAfter Sales Service

The government’s insistence on creating after sales service by vehicle manufacturers or authorized dealers opens up a great opportunity for auto parts manufacturers.

Auto Financing ServicesAuto Financing Services

Companies that offer auto finance have the opportunity to create an entire value chain comprising of services like dealer finance, leasing and insurance services.

Used Car marketUsed Car market

China drew rules allowing qualified companies to engage in used car sales in 2005.This will allow consumers to sell their used cars to authorized dealers and in exchange avail price cuts on new cars.

Chinese Automotive

Industry

1

2

3

4

5

6

17

Your Feedback is Important to Us

Growth Forecasts?

Competitive Structure?

Emerging Trends?

Strategic Recommendations?

Other?

Please inform us by taking our survey.

What would you like to see from Frost & Sullivan?

18

For Additional Information

• To leave a comment, ask the analyst a question, or receive the

free audio segment that accompanies this presentation, please contact Stephanie Ochoa, Social Media Manager at (210) 247-

2421, via email, analystbriefings@frost.com, or on Twitter at

http://twitter.com/stephanieochoa.