Business intelligence report – Huayu Automotive


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Business intelligence report – Huayu Automotive

  1. 1. Shanghai, ChinaLongmashen Enterprises Ltd Phone: +86 13901712880 E-Mail: Business Intelligence Report Huayu Automotive Prepared for CUSTOMER January 15, 2013
  2. 2. Table of ContentsKey Information 3Executive Summary 4Huayu Automotive Systems Co., Ltd (HASCO) Company Origins and Ownership Structure 5 Company Description 6 Footprint 7 Map of Chinese Auto OEM Locations 8 Complex web of Foreign Invested Auto OEMs 9 Subsidiaries & Affiliates 10 OEM customers 12 Recent business awards 13 SAIC background & its effect on HASCO 14 SWOT 15 Activities of Note 17 Huayu Financial& Management Information o Consolidated Financials 2009, 2010, 2011 18 o Key Board & Management Bios 19 o Other Board & Management Info 20Opinions of the Authors 21Authors: Keith Lomason &Data MinerReport MethodologyThis report is compiled from four sources of information: 1) Internet data, mostly in Chinese, translated, summarized and organized in a logical fashion 2) Interviews with individuals who have had direct interaction with HASCO and/or SAIC Motor, including a former buyer for Shanghai Volkswagen, a former buyer of Shanghai General Motors, a former Purchasing Manager of First Auto Works Volkswagen, and supplier quality development engineer of SGM. 3) Financial data acquired from a government financial bureau contact 4) Personal experience of the authors with SAIC &various subsidiaries of HASCO.DISCLAIMERThis material is based upon work done without knowledge of the identity of the client or its specific intentions or concerns. Due to this restriction, andthe compressed time allotted for this study, this report is more general in nature than we prefer to publish.Any opinions, findings, conclusions, or recommendations presented herein or developed in subsequent discussions as a result of this report are thoseof the authors and should be weighed carefully by the client for applicability.Business Intelligence Report on Huayu Automotive 2
  3. 3. Key InformationHuayu Automotive Systems Co., Ltd (HASCO)No. 489 WeiHai RoadShanghai, China 200041 +86 21 2201 6988Fax: +86 21 2201 6999HASCO is the automotive component-manufacturing group of SAIC Motor. It is similar in scope andconcept to Delphi of GM, and Visteon of Ford, especially in that HASCO is now a publicly tradedcompany, but SAIC Motor holds a majority position.HASCO’s core business divisions are interior andexterior trimming, metal forming & dies, function parts, electric and electronics parts, hot-workedparts, and new energy parts.HASCO has 28 directly invested companies at the end of 2011 covering a wide range of automotivecomponents and technologies. Most of these 28 companies are joint ventures with well-knownforeign suppliers. These 28 companies have set up over 166 manufacturing plants and customerservice centers in 19 locations around China.HASCO is the largest domestic automotive componentssupplier in China, and has reached this position by focusing on being “neutral” (not being tied toSAIC alone), growing their capabilities to be a Tier “zero” supplier (providing complete systems tothe OEM, from within the customers factory), and more recently by being “global”.Financial BasicsRMB (Billion) Current exchange rate: 1USD = 6.2RMBShanghai A-Share: 600741 2011 2010Turnover 52.3 Turnover 44Y-Y Growth % 19% Y-Y Growth % 78%Net Income 3 Net Income 2.5Y-Y Growth % 20% Y-Y Growth % 67%Total Assets 42.2 Total Assets 35.9Total Liabilities 19.1 Total Liabilities 16.6Total Equities 23.1 Total Equities 19.3Debt/Assets % 45% Debt/Assets % 46%Current P/E (Jan 7, 2012) 9.1706 Market Cap (mil CNY) 28,157Ranking: #1779 on Forbes Global 2000Key PeopleChen Hong ChairmanShen Jianhua Vice ChairmanZhang Haitao President (GM)Business Intelligence Report on Huayu Automotive 3
  4. 4. Executive SummaryHuayu Automotive Systems Co., Ltd. (HASCO) is the automotive component-manufacturing group ofShanghai Automotive Industry Corporation Motor (SAIC). Both companies are the largest and mostsuccessful of their industry in China, and both are basically holding companies of manufacturingoperations, most of which are foreign invested joint ventures. The two companies are very alignedin purpose and operational philosophy, and much of Huayu’s management came from and/or holdspositions in SAIC as well.HASCO has six core business units and their product range can be best compared to that of Magnaor Delphi, though their engineering and technologies are not as strong. They have 28 investedcompanies in their group, which have established over 166 manufacturing and service facilitiesthroughout China to serve multiple customers. They benefit from being well connected to thegovernment and to SAIC in the fast-growing China auto market, as well as from the technologies andmanufacturing know-how of their multiple foreign partners.These partnerships that have made them so strong in the China market are also a limitation in theirability to expand overseas. Their foreign partners will certainly not allow their JV to open facilitiesin the foreign partners home markets, and they may not be willing to enter new markets with aChinese partner when they could do this by themselves. And because their partners tend to bestrong companies with large global footprints – Visteon, ZF, Continental, Valeo, and others – it isalmost impossible to find any market other than those that are developing that will not competewith their partner.HASCO has enjoyed a growth rate higher than the industry average in China because they have beensuccessful in expanding their customer base beyond SAIC. Although they will continue this push forthe foreseeable future, they are under pressure from the government and SAIC to become moreglobal, regardless of the limitations listed above.This leaves HASCO with two options: expand overseas with products and technologies that theyown 100% - such as PFTs and Springs – or acquire companies that have a footprint that HASCOwants and products and technologies they can absorb.Any company being approached by HASCO or one of its subsidiaries to establish an agreement, ajoint venture, or more, should understand that HASCO typically has much more experiencenegotiating all of these types of arrangements than any foreign partner. HASCO alone has 28invested enterprises, most with foreign partners and has negotiated dozens if not hundreds oftechnical agreements and complex contracts.It should not be overlooked that many foreign companies have been extremely successful bypartnering with a Chinese company – in fact it could be argued that SAIC saved GM because theirrelationship is very strong. The lesson here is not to fear negotiating a deal with HASCO, but to beproperly prepared.Business Intelligence Report on Huayu Automotive 4
  5. 5. Company Origins and Ownership StructureHuayu Automotive Systems Co., Ltd. (HASCO) is one of China’s largest and most successfulautomotive components group, similar to a Delphi or Visteon in its product scope and origins. Forseveral decades, the Shanghai Automotive Industry Company (SAIC) drove auto and autocomponent manufacturing in China’s Yangzi River Delta region through joint ventures with OEMsVW and General Motors, as well as through JVs with dozens of global suppliers. In the first decade ofthe 2000’s, SAIC went through several reorganizations, segregating their vehicle manufacturingfrom their parts manufacturing operations. Parts companies were transferred to HASCO, and OEMoperations were assigned to SAIC Motor Co. Both groups were controlled by the same state-ownedenterprise, the Shanghai Automotive Industry Corporation, Group (SAIC Group), which is givendirection from the PRC government by its bureau, The Shanghai State-owned Assets Supervisionand Administration Commission (SSASAC). SSASAC 100% SAIC Group 74.3% 60.1% SAIC Motor (Ba-Shi) HASCO Other interests (OEM Mfg) (Parts mfg) *Before Dec 2011In late 2011, SAIC Motor changed direction and acquired HASCO shares from SAIC Group and nowthe structure is as follows: SSASAC 100% SAIC Group 74.3% SAIC Motor Other interests (OEM Mfg) 60.1% HASCO (Parts mfg) *After Dec 2011Business Intelligence Report on Huayu Automotive 5
  6. 6. As you can see by the chart above, although both SAIC Motor and HASCO are publicly tradedcompanies on the Shanghai A-share market, both are still heavily influenced by the PRC governmentthrough its ownership of the SAIC Group.Company DescriptionHASCO’s headquarters is in Shanghai – in fact they share an office building with SAIC Motor andSAIC Group at 489 Weihai Road in Shanghai. Not only is this convenient for many of the keyexecutives who are involved intwo or all three companies management, but it is also indicative ofthe close cooperation and purpose shared by these companies. Any foreign companyrepresentatives meeting with HASCO at this address should make it a point to try and be introducedto some of these key executives during their visit.HASCO has six core business units: Interior & Exterior Trim, Metal Forming & Dies, Electric &Electronic Parts, Hot Work Parts (castings & forgings), Functional Parts, and New Energy Parts. Thechart below will help explain what kind of products/technologies are in each unit. HASCO currentlyhas a market capitalization of over RMB 28Billion (4.6B USD – about the size of Magna in the mid1990’s), and fully intends to continue to grow.Business Intelligence Report on Huayu Automotive 6
  7. 7. FootprintHASCO is the largest automotive component supplier in China, and 35-40% of their sales are fromnon-SAIC related customers. Most of this growth from outside of SAIC is due to other OEMs in Chinaneeding the products and technologies of HASCO’s partners such as Continental, Federal Mogul, andGKN.HASCO has been very strategic in using their partners’ strengths and their own connections inChina to push their domestic expansion.China’s auto industry is spread across the country with over 100 vehicle manufacturers, but thereare approximately 30 that produce volumes of any significance. About 20 of these are foreigninvested joint ventures. The 30 key OEMs are roughly grouped in 6 areas of China – The Northeast(Changchun, Harbin, Shenyang), the North (Beijing, Tianjin), the East (Shanghai, Nanjing), the West(Chengdu, Chongqing), the Southwest (Guilin, Wuhan), and South (Shenzhen, Guangzhou).Of the foreign invested companies within the HASCO group, most were established as joint venturesdirectly with SAIC in the 1990’s and 2000’s. The Chinese ownership of these JV’s was changed fromSAIC to HASCO between 2005 and 2011, then, as mentioned above, SAIC Motor acquired majorityshares of HASCO from the SAIC Group in December 2011. The end result of these complex andBusiness Intelligence Report on Huayu Automotive 7
  8. 8. extended transactions is that SAIC Motor has effectively corralled all of its auto parts manufacturingentities into a subsidiary company. This is advantageous to SAIC Motor for operational, financial,legal and control issues, with the result being similar to the paths GM and Ford took in creatingDelphi and Visteon.HASCO has at least 28 invested companies under its umbrella, most of which are joint ventures withglobal auto component manufacturers. These 28 companies have established over 166 factories andservice centers throughout China in order to break into the supply chains of OEMs around thecountry. In this regard, it is better to compare China to Europe – China’s provinces are similar toEurope’s countries, quite independent in what industries they support as long as it is not“restricted” by Beijing. The central government has been trying to consolidate the auto industryfrom over 100 OEMs to less than 10 for more than 20 years, yet there are still over 100 OEMs. Thisis because the provincial governments refuse to force any major employer in this key industry toclose, and so they support them with low cost loans, free land, and any other benefits and incentivesthey can muster. Similarly, those local OEMs tend to favor local suppliers, and only when they needsomething a local supplier cannot produce will they look outside their normal “kiretsu”. One wayaround this dilemma is to open supplier factories closer to the OEMs, and perhaps in partnershipwith an existing local supplier. HASCO has obviously been very willing to open factories in otherprovinces in order to grow their business. While not always the most cost effective method ofsupplying a customer, it is strategic and the politically correct thing to do, and often results inblocking other competitors if they are the first or second in.The following charts show why China is both the most competitive auto market in the world – everymajor and most minor vehicle manufacturers and their suppliers are here – and why China is themost complex auto market in the world – the PRC governments requirement for foreign OEMs (andoriginally component manufacturers) to have a Chinese partner, coupled with the provincialprotectionism, ofter resulted in a foreign auto or component manufacturer having multiple partnersin China.Business Intelligence Report on Huayu Automotive 8
  9. 9. Map of Auto OEMs in ChinaBusiness Intelligence Report on Huayu Automotive 9
  10. 10. Appendix B – The Complex Web of Auto OEM Joint Ventures in ChinaBusiness Intelligence Report on Huayu Automotive 10
  11. 11. HASCO Subsidiaries and affiliates (Automotive business) Year Company Name Products Owns % Partner est.Interior / Exterior Trims Interior and exterior trims,Yanfeng Visteon Automotive Trim 50% Visteon Seats, Safety 1994Systems Co., Ltd. 50% systems, Electronics Air bags,Shanghai TRW Automotive Safety TRW belts, Steering 50% 1997Systems Co., Ltd. 50% wheelsShanghai Koito Automotive Lamp Koito Lamps 50% 1989Co., Ltd. 45%Shanghai SAIC-METZELER Seals 47.5% Metzeler 1995Sealing Systems Co., Ltd. Plastic fuelYAPP Automotive Parts Co., Ltd. 33.9% SDIC 1988 tanksChassis componentsShanghai Automotive Brake ABSs, calipers Continental 51 % 1994Systems Co., Ltd. Brake cylinders 49% Power steering ZFZF Shanghai Steering Co., Ltd. 49% 1994 systems 51%Shanghai GKN Drive Shaft Drive shafts 35% GKN 50% 1988China Spring Corporation Limited Springs 100% - 1997Continental Brake Systems R&D of brake Continental 49% 2010(Shanghai) Co., Ltd. system 51%Electronic components Auto electric Hong KongShanghai SIIC Transportation appliances, Shanghai 70% 1988Electric Co., Ltd. Motors, Industrial Security 30%Shanghai Valeo Automotive Starters, Valeo 50% 1995Electrical Systems Co., Ltd. Alternators 50% Motors and GuizhouHuayu Automotive Electric motor control 60% Aerospace 2010Systems co., Ltd. systems Industry 40%Powertrain partsFederal-Mogul Shanghai Bearing Bearings, Federal-Mogul 40% 1999Co., Ltd. Bushes 60%Federal-Mogul Shanghai Compound for Federal-Mogul 40% 2007Compound Material Co., Ltd. bearings 60%Kolbenschmidt Shanghai Piston Aluminum Kolbenschmidt 50% 1997Co., Ltd. pistons Pierburg 50%Air-conditioning componentsBusiness Intelligence Report on Huayu Automotive 11
  12. 12. Shanghai Sanden Behr Automotive Air systems, 38.5% Sanden 35% 2000Air Conditioning Co., Ltd. Compressors Behr 17.5% ShanghaiShanghai Behr Thermal Systems Air conditioning Sanden Behr 50% 2004Co., Ltd. (SBTS) systems and Behr GmbHStamped partsShanghai Superior Die Technology SAIC 69.9%Co., Ltd. Body panels HongKong 2004 Co.,Ltd.Shanghai Tractor & Internal Body frames 100% - 1989Combustion Engine Co., Ltd. Forged partsHot-working parts Sintering parts,Shanghai Union Automobile & 100% Plastic parts, - 1988Tractor Industry Trade Co., Ltd. Steering hoses Teksid 50% CylinderHua Dong Teksid Automotive Donghua blocks, Cast 25% 1998Foundry Co., Ltd. Automotive iron products Industrial 25% Large, Hongkong- nonferrous die MacauShanghai Cosmopolitan casting 60% International 1992Automobile Accessory Co., Ltd. products, Investment Pumps, Piston 40% pins CylinderKolbenschmidt Pierburg Shanghai heads, Intake Kolbenschmidt 50% 2000Nonferrous Components Co., Ltd. manifolds, Pierburg 50% Water pumpsShanghai Sandmann Foundry Co., Forged parts 100% - 2000Ltd.Shanghai Xinfu Motorcycle Co., Oil pumps 100% - 1960Ltd.Drive train systems Clutches,Shanghai Sachs Powertrain ZF Sachs Torque 50% 2002Components Systems Co.,Ltd. 50% convertersAs can be seen in the table above, the only joint ventures established in the last five years are the R&D facility with Continental and the motor and motor control development facility with GuizhouAerospace. This indicates that Huayu is fairly well set with its manufacturing activity and is focusingon improving its abilities and access to advanced technologies.Business Intelligence Report on Huayu Automotive 12
  13. 13. OEM Customers in China- Shanghai VW- Shanghai GM- SAIC Motor- Shanghai Volkswagen Nanjing Branch- SAIC Motor Passenger Vehicle Pukou plant- SAIC-GM-Wuling- Shanghai GM (Shenyang) Norsom- Shanghai GM Dong Yue- Shanghai Huizhong- Shanghai Volvo- Nanjing Iveco- Chery Automobile- Geely Automobile- Great Wall- BYD Auto- Jiangling Isuzu- Jianghuai Automobile- Soueast (Fujian) Motor- Brilliance Jinbei- BMW Brilliance- Changan Automobile- Changan Ford Mazda- Changan Ford Mazda Nanjing Plant- Changan Suzuki- GAC Changfeng- Dongfeng-Peugeot-Citroen- Dongfeng Nissan- Dongfeng Nissan Passenger Vehicle- Zhengzhou Nissan- GAC Honda- Dongfeng Honda- FAW-VW- FAW Haima- FAW Car- Tianjin FAW Toyota- Sichuan FAW Toyota- Tianjin FAW Xiali- Beiqi Foton- Beijing Benz- Beijing HyundaiWhile this list is impressive, more than 60% of HASCO sales come from the first 11 customers,which are all subsidiaries or joint ventures of SAIC.Business Intelligence Report on Huayu Automotive 13
  14. 14. Recentbusiness awards by part, customer, and HASCO subsidiaryCockpit and Center Console SAIC Motor Roewe 950 Yanfeng VisteonassemblyFender Module BMW X5 Yanfeng VisteonMucell PAB door prototype JAC Binyue - Dongfeng PeugeotPlastic tailgate module PSA508 - Citroen Grand CherokeeDoor trims Chrysler - 2011Knee airbags BMW Y7 - Shanghai SuperiorHot forming A/B column Shanghai GM Chevrolet Malibu Die Technology Co., Ltd. Kolbenschmidt Pierburg ShanghaiCylinder/cylinder VW EA111 Shanghai VW Nonferrouscover/intake manifold engines Components Co., Ltd. Dongfeng Peugeot Shanghai KoitoLED Front Fog Lamp Peugeot 308 Citroen Automotive LampAdaptive Front Lighting Dongfeng Peugeot Shanghai Koito Peugeot 308System(AFS) Citroen Automotive LampFuel tanks Shanghai VW Polo YAPPFuel tanks Shanghai VW Passat B5 YAPPFuel tanks FAW VW A-platform series YAPP Yanfeng KSS (Shanghai)Air bags Geely gruop LG-3 Jinying Automotive Safety SystemsSteering wheels Geely gruop LG-3 Jinying Yanfeng KSS Yanfeng VisteonInstrument cluster Shanghai GM Chevrolet New Sail Automotive Electronics Yanfeng VisteonAudio systems Shanghai GM Chevrolet New Sail Automotive ElectronicsAirbag Shanghai VW Tiguan Yanfeng Key KSSBuckle FAW-VW Audi -Weatherstrip Beijing Benz E series -Lamps GAC Motor Trumpche -Plastic tailgate module Dongfeng PSA Peugeot 508 -Plastic fender module Brilliance BMW X5 -Electric wiper Shanghai VW Tiguan -Business Intelligence Report on Huayu Automotive 14
  15. 15. Power window FAW-VW Audi -HVAC control module Changan Ford Focus -SAICbackground & its effects on HASCOBecause HASCO is controlled by SAIC, it is appropriate to take some time to discuss SAIC’s growthover the past 15 years. SAIC is more successful than its China rivals not just because they have twomajor foreign partners, and not just because both of these partners are located in the same city.SAIC’s success is largely due to Hu Maoyuan and other SAIC managers seizing the opportunity tolearn from both of their foreign OEM partners and then actively using from both what they felt wasbest for SAIC Group and SAIC Motor.SAIC realized that they would not become a global player by building GM and VW cars in China.They also felt it would take too long to learn from their JVs what they needed in order to build theirown car and have significant independence from those partners. SAIC made the decision toacquirecapabilitiesby purchasing patents to specific vehicle technologies, such as Rover sedans, andby acquiring other car companies, such as Nanjing Auto, which had bought the rights to MG cars.SAIC also pursued a plan to have several of their key engineers, quality staff and management rotatebetween SVW and SGM before coming back to SAIC where they could consolidate what they hadlearned to create a bigger and more competitive company. Where other Chinese OEMs havestruggled and/or failed with acquisitions of foreign technology or acquisitions of foreign OEMbrands, SAIC bought the technology and brand but ensured they had good management to launchtheir vehicles and to embark on an aggressive acquisition of other Chinese OEMs, and in openingfactories, sales, and purchasing offices overseas.HASCO is in a similar situation to SAIC in that most of their world-class technologies are locked intotheir joint ventures with a foreign partner, but instead of trying to understand and absorbtechnology and business practices from two partners, they are trying to do this with over 25international partners. Most foreign partners share only as much technology, innovation andprocesses with their Chinese partners as is absolutely necessary to manufacture the required partsin China. If HASCO is going to grow faster than the general market and expand overseas, they willneed to find alternatives to forming joint ventures with global suppliers.Between late 2011 and mid-2012, HASCO pursued a course of using its joint venture with Visteon inShanghai to purchase certain assets of Visteon globallyafter Visteon had declared bankruptcy. In theend, HASCO and Visteon could not come to terms on the value of the assets and what would orwould not be included in the deal. This indicates that HASCO is not desperate in their desire toacquire overseas assets, and is not going to make a deal that they do not feel is good for them.Because SAIC also pulls the strings of their subsidiary Yangzhou Automotive Plastic Parts (YAPP), asthey do with HASCO, it is not surprising then that YAPP too walked away from a deal with Inergywhen those two parties could not come to an agreement that YAPP/HASCO/SAIC found beneficial.In short, any company entering into negotiations with HASCO needs to realize that SAIC will havesignificant influence on the parameters of any agreement, so it would be beneficial to understandthe goals of both Chinese companies and how any agreement would effect them.Business Intelligence Report on Huayu Automotive 15
  16. 16. Business Intelligence Report on Huayu Automotive 16
  17. 17. SWOT SWOT ANALYSIS FOR HASCO Strengths Weaknesses Largest supplier Group in China 60% Sales from SAIC, 5% Exports Strong Government Ties Lack of Self Developed Technologies Weak Self Developed Car Components Deep Financial Resources (Roewe) Opportunities Threats Weak global suppliers may be acquired Other China OEMs protect their suppliers Weak domestic suppliers may be acquired Disgruntled JV Partners Western brands benefit from Japan backlash Lack of global footprint limits robustnessStrengths:Largest Supplier Group in China – Shanghai has a long-standing reputation of being one of the topChinese cities for business, and the success of SAIC and its subsidiaries certainly bolster this image.The management of SAIC are very strategic and shrewd, and they are armed with a huge war chestand some of the best homegrown or absorbed technologies and acumen. They are carrying the bigstick and are not afraid to use it.Strong Government Ties - In addition to their deep pockets and 25 years of modern automotiveindustry experience, HASCO is ultimately looked after and influenced by PRC government officials.Because of this scrutiny and their success, HASCO has strong relationships within the governmentthat can provide favorable treatment for business expansion opportunities.Deep Financial Resources - HASCO is reporting a 10% net income and has been profitable for manyyears running. Between their retained capital, the government loans they could get, and SAIC’s deeppockets, HASCO has no problem funding any expansion plan that their management can justify.Weaknesses:60% Sales from SAIC, only 5% from Exports - Although HASCO is the most customer-diversecomponent supplier in China, some customers are still reluctant to give them business eitherbecause they are part of an OEM in competition with SAIC or because they want to protect theirlocal supply base. In any case, 60% of their sales are tied to one Chinese OEM customer - SAIC -when there are over a dozen they could be selling to.Lack of Self Developed Technologies - Other than Plastic Fuel Tanks and Springs, there are very fewtechnologies that have been developed by HASCO itself. Most of the technology exists within theBusiness Intelligence Report on Huayu Automotive 17
  18. 18. joint venture subsidiaries and was supplied by a foreign partner. While HASCO employees aresurely learning from the foreign partners and will one day bring this expertise back into HASCOdirectly, it is a slow path to independence.Weak Self Developed Car Components - HASCO, in conjunction with SAIC Motor, helped design andengineer many of the components for SAIC’s self branded vehicle, Roewe. Most experts consider thisbrand “pretty good for a China brand,” but far from world class. This shows that HASCO is still weakin self-developed componentry.Opportunities:Weak Global Suppliers may be Acquired – HASCO is in a strong position to go on a global acquisitionspree if they decide to do this. They could make weaker suppliers an enticing offer to acquire theassets and customer relationships if they are pushed by SAIC to go global quickly.Weak Domestic Suppliers may be Acquired –Due to provincial protectionism, the fastest way forHASCO to expand in China would be to acquire weaker suppliers around the country. The challengewill be to identify targets that HASCO could acquire without violating JV agreements or at leastupsetting one or more of their existing partners.Western Brands Benefit from Japan Backlash – Ever since Japan’s “aggressive” move towards thedisputed Diaoyu islands, Japanese brands across the board have suffered deep sales drops in China– especially autos. This backlash is slowly disappating, especially as people recognize that they areputting Chinese factory workers out of work, but the disputes over these islands will continue foryears and this backlash will resurface periodically. The reason this is an opportunity for HASCO isthat most of their customers are western OEMs, who enjoy the benefits of the backlash againstJapan.Threats:Other Chinese OEMs Protect their Suppliers – Many Chinese OEMs are invested in their supply base– either financially, politically, or both. This relationship makes it difficult for non-related suppliersto break into these Chinese “kiretsus”.Disgruntled JV Partners –HASCO is somewhat painted into a corner, and almost any action they taketo expand could have negative ramifications with their partners in China. Most of their joint ventureagreements have been established to manufacture and sell products in China, for China. Any activityin China or overseas that encroaches on their partners “turf” could be the beginning of the end formany of their currently healthy joint ventures.Lack of Global Footprint limits Robustness – Financially, this does not look to be a problem for thenext decade as the China market is predicted to continue to grow substantially during this period.From a business expansion perspective, however, HASCO does not have the cultural diversity orglobal experience to move quickly into a new market.Business Intelligence Report on Huayu Automotive 18
  19. 19. Activities of Note2011-2012 – HASCO enters into negotiations with Visteon to acquire assets outside of China viatheir JV in China with Visteon. The negotiations ended with no deal.2011 June – HASCO JV, Shanghai GKN Drive Shaft Co. (SDS) opens its operation in Changchun,following the “one partner for all of China” philosophy that many foreign companies are nowpursuing.2010 December – HASCO forms an electronics JV with Guizhou Aerospace to bring “New Energy”competencies into their fields of expertise.2010 March – HASCO signs an agreement with Jianghuai Automotive in a continuing effort toexpand beyond the SAIC circle of customers.“In March 2010, the Company and Jianghuai Automobile reached a basic agreement setting theframework to form a strategic alliance. The new collaboration is part of the Companys initiatives tobuild relationships with companies having no affiliation with the Shanghai Automotive Group, itsparent company.” (From HASCO press release, March 29, 2010)2009 – HASCO signs an agreement with FAW in Changchun in an effort to expand beyond the SAICcircle of customersCompetitionWith the number and range of partnerships and products under their umbrella, HASCO isconsidered the competition to almost every Tier One supplier in China. Companies like Magna,Bosch, Denso, and Delphi are the major competitors when comparing breadth of product andpresence in China, but there are literally hundreds of local and international companies in Chinathat compete with HASCO on a smaller scale.The predicament HASCO faces (as do most Chinese OEMs and parts makers) is that their partners inChina are likely their competition overseas. This is because most joint venture agreements betweenChinese suppliers and a foreign partner exist solely for business in China and do not extend to othermarkets – especially not the foreign partners home market. Most of these partners are from thedeveloped markets, so this will create uncomfortable situations if HASCO opens a facility overseasthat will directly compete with a JV partner.For example, HASCO has a JV with TRW – a long established U.S. automotive safety products andtechnology supplier. The JV is in Shanghai and has been established to do business in China usingtechnologies from TRW. HASCO now wants to enter the North American market, but could theycompete with the source of their technology by opening an air bag facility in Michigan? It is alsounlikely that HASCO management would risk upsetting their partner, even if they believed theycould compete.Business Intelligence Report on Huayu Automotive 19
  20. 20. HASCO’s best options are to target the “neutral” territory of other developing auto markets or toacquire or partner with companies that already have a foothold in the developed markets.HASCO Financial Information RMB (Mill) 12/31/11 12/31/10 12/31/09 Current exchange rate: 1USD = 6.2RMB Income Statement Operational Revenue 52298.78 44062.68 24667.86 Operational Costs 43786.55 37131.74 20723.49 Operational Income 5822.72 4941.95 2690.46 Income before Tax 5943.01 4981.83 2716.73 Minus Income Tax 597.15 496.68 172.11 Net Income 5345.86 4485.14 2544.62 Balance Sheet Cash 12354.78 9930.07 7057.69 Current Assets 27427.66 23185.86 16486.54 Fix Assets 4645.95 4065.31 3682 Total Assets 42184.88 35868.48 27527.65 Current Liabilities 17453.26 15348.31 11356.18 Non-current Liabilities 1649.99 1162.98 869.35 Total Liabilities 19103.25 16511.29 12225.53 Total Equity 23081.62 19357.19 15302.12 Cash Flow Statement Cash and Equivalent in the Year Start 10169.94 6894.61 1205.53 Net Cash Gain from Operations 4632.87 4494.43 3416.31 Net Cash Gain from Financing -1069.6 -294.64 1074.48 Net Cash Gain from Investments -1699.01 -1352.82 1198.28 Total Net Cash Gain in the Year 1864.27 2846.97 5689.08 Cash and Equivalent in the Year End 12034.21 9741.58 6894.61Business Intelligence Report on Huayu Automotive 20
  21. 21. Biographies of Key Executives Hu, Maoyuan SAIC Group - Chairman, Party Secretary SAIC Motor – Chairman, Party Secretary HASCO –Chairman (until 2012) He was born in 1951, and received a masters degree from Shanghai Jiaotong University. In the early 1980s, Hu held several positions in the Shanghai Automobile Industry Company, and in 1999 he became its president. He began his career in the automotive industry in 1968 and became a member of the Communist Party of China in 1980. He held senior management positions in the Shanghai Tractor Plant and Shanghai Automotive Industry Corporation (SAIC Motor’s predecessor company). He also served asthe president of Shanghai Huizhong Automotive Manufacturing Co., Ltd, and was the first president of Shanghai GeneralMotors. He has initiated several advanced corporate management concepts and is the author of Dialogue with theWorld, a fable storybook which interprets SAIC corporate cultures. Chen, Hong SAIC Motor, Vice-Chairman, President & CEO HASCO, Chairman (since 2012) Born in 1961, a senior economist with a B.A degree, Chen Hong has been the “heir-apparent” to Hu Maoyuan within the SAIC Motor company. Mr. Chen’s career with SAIC has included positions in both the SVW and the SGM joint ventures, where it is assumed he learned the best of both foreign partners operations and corporate practices so that he could drive the growth and advancement of SAIC Motor as a global player. Shen, Jianhua SAIC Motor, Vice President HASCO, Vice Chairman Born in 1953, and a senior economist with a PhD from Shanghai Tongji University, Mr. Shen held positions of increasing responsibility in Shanghai Motorcycle Plant, Shanghai Automotive and Tractor IJB Co., Shenzhen Zhongruy Auto Machinery Industry and SAIC Motor and Group Companies. Mr. Shen Jianhua has been Vice Chairman of the Board in HUAYU Automotive Systems Company Limited since April 20, 2009. He is also Vice Chairman of the Board in SAIC Motor Corporation Limited. He used to be Vice President in SAIC Motor Corporation Limited, and Vice President and President in another Shanghai-based company. Zhang, Haitao HASCO, President(General Manager) Mr. Zhang Haitao has been General Manager and Director in HUAYU Automotive Systems Company Limited since April 20, 2009. Mr. Zhang has held positions in engineering at the Shanghai Institute of Welding Machines, in sales and general management of Shanghai GKN, as senior management of Ssangyong Automotive, and as Chief Economist of SAIC Motor.Business Intelligence Report on Huayu Automotive 21
  22. 22. Full List of Board Members (and other positions they hold)Chen Hong Chairman (Vice Chairman & President of SAIC Motor)Shen Jianhua Vice Chairman (President of SAIC Group, Vice President of SAIC Motor)Xue Jian Member (Deputy Party Secretary SAIC Group)Zhang Haitao Member, President HASCOSun Chiping Member (Director & Secretary of CPC Committee of ICBC Bank)Hu Honggao Member (Director of Fudan University)Chen Bulin Independent Director (Party and State Owned Asset Control affiliations)Zhang Weijiong Independent Director (Vice President of China-Europe International Business School)Zhu Rongen Independent Director (University and Investment affiliations)List of Supervisory Board Members (and other positions they hold)Zhu Genlin Chairman (CFO SAIC Group)Yang Jingyi Member (Senior Administrator at SAIC Group and SAIC Motor)Jiang Dongyue Member (Director of HASCO audit department)List of Key Managers (and other positions they hold)Zhang Haitao President (Board Member – ME, Drive Shaft, Economic & Senior management background)Xun Yizhong Vice President (Engine plant, PM, and Quality background)Wu Heng CFO (SAIC Finance background)Mao Qiwei Board Secretary (Party leader, SAIC Motor)Business Intelligence Report on Huayu Automotive 22
  23. 23. Opinions of the AuthorsWhen evaluating HASCO for any purpose, the influence of SAIC Motor must be considered. As a“parent company”, SAIC is strong, protective, and demanding; successful in their partnerships, yetstruggling to develop their own brand and global footprint. HASCO and SAIC are both in apredicament created out of need that is more and more frequently becoming a hindrance.In the 1980’s and 1990’s foreign automotive OEMs and component manufacturers were welcomedto form joint ventures by the Chinese government, but then limited in their ownership share to50%. Restrictions have eased on most component manufacturers today, but foreign OEMs are stillrestricted to 50%. China welcomed these foreign players because they needed the technology tobuild vehicles with modern performance and safety standards. After 10-25 years of existence formany of these JVs, Chinese partners are beginning to feel restricted by these agreements in that theyhave provided access to a huge domestic market yet they can not easily grow their businessoverseas.Although there are reasonable growth opportunities within China for the foreseeable future, HASCOis setting its sights on expanding globally, and becoming a leader in technology in China.These two targets will be the driving force in HASCO’s next decade of expansion and growth.HASCO former Chairman, Hu Maoyuan, undoubtedly heavily influenced these targets, and hisprotégé and successor to the Chairman’s seat, Chen Hong, will surely carry the same banner formany years.Where Hu presided over two decades of unbridled growth and profitability, however, Chen has amuch more complicated future to manage. Consider this: HASCO is mostly a collection of foreigninvested joint ventures where the foreign party has provided the technology. HASCO, is effectively aholding company, where its expertise exists within its subsidiaries and not within its ownmanagement. If HASCO wants to open an airbag facility outside of China, for example, they have twochoices: ask their JV partner to allow the JV to open a subsidiary overseas, or open a facility of theirown. In the first instance, if the JV partner says “no”, then it is unlikely to happen, even if the partnerholds a minority share of the JV. In the second instance, HASCO will have to take their key staff outof the JV to open the overseas facility because these are the only employees who will understand thetechnology and the operations. These employees will be limited in their knowledge to the productsthat have been built for the China market, and frankly, most Chinese automotive engineers do nothave the experience or creative thinking required to satisfy the demands of global OEMs. Thisoption would also very likely upset the foreign airbag partner and could cause trouble within the JV.HASCO’s most likely route to success, therefore, is to expand overseas with products andtechnologies that they own 100% - such as PFTs and Springs – or to acquire companies that have afootprint that HASCO wants and products and technologies they can absorb. Agreements like theone YAPP has with ABC is only a stepping stone in their path to global expansion, and is very muchin line with the typical way the Chinese would pursue a deeper relationship – remember that, whengeneralizing, the Chinese are very patient and long-term focused. It makes sense that they want toget to know a partner better over time before committing to something more permanent, ordeciding to search for another partner.Business Intelligence Report on Huayu Automotive 23
  24. 24. For those companies that have partnered with Chinese companies in China already, the ones thatare most successful typically have two things in common: regardless of ownership ratio, they treateach other as equals; and the two partners agree that they will pursue all China business withintheir scope as a team, where neither party will open another facility by itself or with a differentpartner. General Motors and Visteon were two of the first companies to pursue this arrangementand it has produced very good results for both of them.GM, in fact, utilized its success and very strong relationship with SAIC (HASCO’s parent) to helpthem through a very difficult financial situation in 2009. Shortly before GM filed for bankruptcyprotection in North America, SAIC agreed to purchase 1% of GM’s shares in Shanghai GeneralMotors (SGM) for 84.5m USD and assistance in getting a 400m USD loan. SAIC agreed to thestipulation that GM could buy these shares back when they became financially healthy – as long asSAIC would be allowed to book revenue from SGM. Effectively, SAIC “loaned” money to GM whenthey could not (easily) get money from anywhere else. GM restructured its China operations when itcame out of protection so that SAIC could book the revenue. They separated operations from sales,allowed SAIC to keep 51% of the sales company, but went back to a 50/50 ownership structure forthe operations. Sales are now booked at the sales company instead of at the operations, so SAIC canbook the sales per PRC tax laws. In addition, SAIC purchased 500m USD worth of shares of GM whenthey had their IPO in 2010.The situation between GM and SAIC is an example of a good joint venture in China. Again, speakingin generalities, once the JV deal is signed, as long as the partners treat each other as equals, theChinese are very reasonable and committed to their partners success. They expect the same fromtheir partner.Any company being approached by HASCO or one of its subsidiaries to establish an agreement, ajoint venture, or more, should understand that HASCO typically has much more experiencenegotiating all of these types of arrangements than any foreign partner. HASCO alone has 28invested enterprises, most with foreign partners. SAIC has formed joint ventures in China andoverseas with foreign partners and has negotiated dozens if not hundreds of technical agreementsand complex contracts. These companies in particular are very good at this, and any foreign partyinvited to the table needs to be properly prepared.It cannot be overstated, however, that no matter how difficult and frustrating negotiations for anytype of relationship with HASCO or a subsidiary may be, once the deal is done, the performance islikely to be very satisfactory for both parties.Business Intelligence Report on Huayu Automotive 24