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Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
Auto Trends in China 2011
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Auto Trends in China 2011

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Analysis of trends in China's automotive industry. Prepared by Bill Russo of Synergistics Ltd.

Analysis of trends in China's automotive industry. Prepared by Bill Russo of Synergistics Ltd.

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  • 1. February, 2011 BeijingAuto Trends in China 2011Gerson Lehrman Group Conference CallBill Russo 1
  • 2. Part 1: Review of 2010 market development and automakers performancePart 2: Emerging consumer trends and government policy changes in 2011Part 3: Emerging trends to anticipate in 2011 and beyondPart 4: Conclusion and recommendation to automakers 2
  • 3. Part 1: Review of 2010 market development and automakers performancePart 2: Emerging consumer trends and government policy changes in 2011Part 3: Emerging trends to anticipate in 2011 and beyondPart 4: Conclusion and recommendation to automakers 3
  • 4. Year 2010 is another hall-mark year for China auto industry after the short setback in 2008 due to global financial crisis Overall China Auto Industry* 2010Sales 2009 Sales 18.06 Million 13.64 Million 32% 2007 Sales 2008 Sales 46% 8.98 Million 8% 9.67 Million 2006 Sales 22% Truck 7.34 Million Truck 21% 20% Truck Truck 21% Truck 22% PV Bus PV Bus 21% Bus 64 3% 62% 3% 2% PV Bus PV Bus 61% 2% % Van Van PV Van 60% 2% 59% 18% Van Van 13% 14% 16% 16%PV*=4.45 Million PV*=5.43Million PV*=5.91Million PV*=8.73Million PV*=11.26Million   Passenger vehicles consistently represent the majority of total automobile demand   Robust growth momentum is continued in 2010 driven by government incentive program and infrastructure investment Note: * PV volume excluded pickup and van sales volume Source: CAAM auto market press release 4
  • 5. China exceeded US to become the world largest Auto market in2009 and maintained leadership in 2010 Top Five Auto Market in the World(1) Total China Auto Sales 2008 - 2009, in million units 2005 - 2010, in million units 66.0 63.6 US market sales in 2010 is only 11.58 Million, 36% less than China sales 50% 45% Others 18.06 +23% 13.64 5% Brazil 4% 6% Germany 9.67 5% 8.98 7% Japan 8% 7.34 16% US 5.90 20% 20% China 13% 2008 2009 2005 2006 2007 2008 2009 2010Note 1): Data does not include heavy truckSource: Global insight; CAAM auto market press release; Literature research; Booz & Company analysis 5
  • 6. China auto industry consolidation is progressing as Tier 1 and 2auto groups further scaled up and gained more shares in 2010Government s plan to Sales Ranking of Tier 1 and 2 auto group in 2010 Tier 1 & 2 Auto Group in China build up a Top 10 group of globally competitive automakers Tier 1 Group Tier 2 Group Unit: 000 vehicles Definition   Has annual capacity   Has annual capacity of 1 70% of total auto sales of 2 million units million units 3558   Encouraged to   Encouraged to acquire acquire smaller smaller companies within companies surrounding region 2725 countrywide 2558 2379 1490 Candidates   SAIC   BAIC   FAW Group   GAIG   Dongfeng   Chery Automobile Co. 706 Automobile Co.   China Heavy Duty Truck 502   Chang An Corp. (CNHTC) 109 Automotive Co. SAIC Dongfeng FAW Chang BAIC GAIC Chery CNHTC anSource: China Automotive Industry CAAM report Literature research; Booz & Company analysis 6
  • 7. Among international brands, VW, GM and Hyundai hasreinforced their market leadership over their competitors Passenger Vehicle Sales by Top 10 Manufacturers (2002 Vs. 2010)Shanghai Volkswagen 31% Shanghai GM 7% Faw-Volkswagen 22% Shanghai Volkswagen 7% Shanghai GM 12% FAW-VW 6% Tianjin Faw 10% Beijing Hyundai 4% 4% Peugeot Citroen 9% Dongfeng Nissan 3.8% Changan Suzuki 7% BYD 3.6% Guangzhou Honda 6% Chery 3% Chery 5% Geely 3% Geely 5% Changan Ford 2.8% Dongfeng Nissan 4% FAW Toyota 2.0% Others 21% Others 53%Source: China PV Database; Booz & Company analysis 7
  • 8. Part 1: Review of 2010 market development and automakers performancePart 2: Segment growth in 2010 and government policy changes in 2011Part 3: Emerging trends to anticipate in 2011 and beyondPart 4: Conclusion and recommendation to automakers 8
  • 9. While there is clear growth in the SUV, MPV and cross-over segments, China remains a sedan market with 70% share SUV/ Micro Small Compact Std / Lux Mid Std Lux / MPV Brand 2010 PV Sales Market Share Full Cross-over 7% 12% 36% 12% 2% 28% 3% 1,830,000 14% 959,900 7% 406,400 3% 656,400 4.8% 646,600 4.7% 1,093,000 7.9%COPV: Crossover Passenger Vehicle - i.e. pickup and light buses with 9 seats or under Source: Accuracy Automotive, CAAM 9
  • 10. Driven by government tax incentives and shift of productpreference, 2010 has seen a mixed results of segment growth Segment   Sub-segment   2010 sales   Year on year growth   Sales growth of SUV and MPV ( 000)   outperform passenger cars (%)   Vehicle sales   Total 18061.9   32.37   Passenger Total   13757.8   33.17   Vehicle   2.0L and below accounts for 60% of total SUV sales. 2WD is sold 1.7 SUV   Subtotal   1326   101.27   times more than 4WD vehicles Compact SUV 2.0L and below   799.8   105   MPV   Total   445.4   79.82   1.6L and below cars account for Passenger Car   Subtotal   9494.3   27.05   70% of total passenger car sales <1.6L   6631.8   27.98   1.6-2.0L   2152.7   29.77   Pickup and minibus enjoyed a 28% growth attributed to favorable Crossover   Pickup, 2492.1   27.77   government subsidies Minibus, etc.Source: China Automotive Industry CAAM report Literature research; Synergistics Limited analysis 10
  • 11. China government incentives successfully boosted sales of 2009 and 2010, however, most policies will discontinue in 2011Government Incentive Incentive Summary Impact assessment • Mar. 2009-Dec.2010 Many personal buyers pulled ahead car purchase plan • 5% sales tax reduction in 2009 and Sales Tax down to 2.5% only in 2010 from in 2009 for 5% tax incentive and stimulus effect Break weakened in 2010 • For sales of all 1.6L and below vehicles • Mar 2009-Dec.2010 • 10% off retail price, 5,000CNY at Successfully boosted sales of mini-bus and pickup, light Subsidy for maximum truck , up by 83% in 2009 and 28% in 2010 the farmers • For farmer buyers of mini-bus, pickup and light truck • June 2009-Dec.2010 Trade-in • 5,000/car, 6,000/van, 18,000CNY/ Low subsidy level and complicated trade-in process truck discouraged car owners, the effect is very limited subsidy • For trade-in of 15+ years used cars Subsidy for •  June 2010-present Successfully boosted sales in 2nd half of 2010 and • 3,000 CNY for car buyers 1.6L and • For 1.6L and below cars and require 20%+ continue to take effect in 2011 below cars better fuel efficiency than standard Source: Literature research; Synergistics Limited analysis 11
  • 12. With termination of incentives, China auto sales will downshift toa stable growth from 2011 and rise to 20 million in next 5 years Unit ‘000 China new passenger vehicle sales 22,000 (2004-2015E) Adjusted forecast 20940 20,000 18,000 16187 14582 Initial GI forecast 16,000 13760 13137 14,000 11835 12,000 10662 9606 10,000 8654 8,000 6,000 5294 5704 Total Passenger Vehicle 4,000 4328 3267 2,000 2631 0 2004 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F Year on Year growth % 21% 24% 33% 22% 8% 52% 11% 11% 11% 11% 11% 11% Initial GI forecast Source: Global Insight 2010; Booz & Company analysis 12
  • 13. Part 1: Review of 2010 market development and automakers performancePart 2: Segment growth in 2010 and government policy changes in 2011Part 3: Emerging trends to anticipate in 2011 and beyondPart 4: Conclusion and recommendation to automakers 13
  • 14. Trend 1: Sustainable demand growth fueled by urban economic development Rapid urbanization is anticipated to rise from 48% to 60%, a fundamental driving force of private demand for cars Chinese Urbanization in Comparative Context China’s Urban PopulationUrban population as ashare of the total (%) 65 60 Forecast China 55 Overall Emerging Markets 50 45 40 35 30 25 20 15 10 5 0 60 70 80 90 00 10E 20E 30E Source: Literature research; Booz & Company analysis 14
  • 15. Trend 1: Sustainable demand growth fueled by urban economic developmentSignificant increase in middle age population and many of themwill be wealthy China Population Breakdown by Age (2007 Vs. 2020E, Million) Comments Population Increase 2008 Vs. 2020   By 2020, Chinas population in the age 268 +32 group 45 and above will increase 118 236 million, while the 25-44 age group will 180 -17 decrease 22 million 197   By 2020, with the fast wealth 417 -22 accumulation, a significant portion of the 439 400 million 45-64 age group people will be wealthy +75   Those affluent mid-age people will be +43 major customers for luxury productsSource: EIU; “China 2047”; China Statistic Year Book 2007; Booz & Company analysis 15
  • 16. Trend 1: Sustainable demand growth fueled by urban economic developmentYet China is still just entering the accelerated growth phase typicalof emerging markets Canada 600 Australia Discussion Germany   A country s threshold 500 U.K. of mobility lies near US The S- curve U.S. $10,000 GDP per capita Poland (PPP), where 400 automobile ownershipCars per 1,000 People Malaysia accelerates Russia 300 Argentina   China is at the early taking-off stage of the S- Mexico curve 200 Brazil Turkey   India remains fairly distant from the mobility India Thailand 100 inflection point, but Iran continues to make China Indonesia steady progress 0 India 1,000 10,000 100,000 China GDP Per Capita (Logarithmic Scale)Note: Each line of symbols represents a 19-year progression for one country, from 1990 through 2008, GDP Per Capita is in Purchasing Power Parity (PPP)Source: Booz & Company analysis 16
  • 17. Trend 1: Sustainable demand growth fueled by urban economic developmentIt is likely that China’s strong economic performance will continueto stimulate car industry growth for the foreseeable future China Passenger Vehicle Installed Base (PARC) Key Drivers Forecast (2009-2030)   Car ownership in China is powered by the 600 Increase in Car growing economy – the upside is High Forecast Ownership substantial Base Forecast 500Passenger Vehicle PARC (million units) Low Forecast 480   Government has been continuously 400 410 Government’s guiding and supporting the industry’s Support to Auto development across manufacturing and Industry distribution 330 300   China’s financial system is less exposed China and GDP growth is still very fixed 200 Economy’s investment driven, thus is less vulnerable Resilience to recent financial turbulence impact 100   Highway network development provides Infrastructure foundation for more motor vehicle-based 0 Development based transportation 2009 2014 2019 2024 2029   China is investing in infrastructure to support alternative propulsionNote: Passenger vehicles contain sedans, MPVs and SUVsSource: Global Insight 2010, OPEC, DGS Report, Booz & Company analysis 17
  • 18. Trend 2: Shifting preferences for increasingly savvy consumersChinese customers become increasingly savvy and motivated byemotion and self-expression, luxury B segment as an example Prioritized Purchasing Factors Prioritized Self-expression Motivations B Segment Customers B Segment Customers Driving experience 45 To enhance my 36% business image/ status Brand 40 To reflect my personality 36% Safety 38 Appearance 36 To reflect my good taste 30% Price/performance ratio 18 To integrate into 20% Quality 10 my social circle Comfort 9 Sense of independence 17% Fuel economy 7 Sense of family 17%After-sales service, maint. Costs 5 Configuration 5 My personal space 15% Trim 3 Stylish/trendy 12% Interior space 2 Versatility 2 Others’ admiration 11%Note: Based on new car buyers during Jan-May, 2009; B segment N=570, A4L N=175, 3S N=168 Driving experience includes factors such as power, handling and braking Source: Luxury Car Consumer Quantitative Survey(11-12, 2008), Booz & Company analysis 18
  • 19. Trend 2: Shifting preferences for increasingly savvy consumersAlso the development trend of exterior styling is to be more sporty,stylish and passionate Implied values and trends reflected by the appearance of a product Question: How are you perceiving the appearance of current luxury sedan/SUV? More 3 4 5 More low personalized profiled Ambitious Low profiled Stylish Classic Edgy Streamlined Sporty Steady-going Casual Commercial Flaunting Introvert Passionate Cozy Wild Elegant Unique Affable 2006-2007 2008Source: Luxury Car Consumer Quantitative Survey(11-12, 2008) 19
  • 20. Trend 2: Shifting preferences for increasingly savvy consumersYoung generation buyers are increasingly influencing automakers’product design More sporty, sculptured and Integration of cutting edge and premium-oriented design functional technologies Sonata 2010MY Sonata 2011MY Focus 2011MY Focus 2012MY Sebring 2009MY 200C 2010MY Quest 2010MY Quest 2011MYSource: Automotive news, Booz&Co. literature research
  • 21. Trend 3: Value and relationship oriented approach to address lower tier market demandChina is a country equivalent to a continent, large anddiverse China and its Three Major Economic Regions   Three Major Economic Regions consist of Tier 1 and 2 city groups –  Yangtze River Delta Region •  Centered on Shanghai •  80 million population •  ~4.5 trillion RMB GDP –  Pearl River Delta Region •  Centered on axis between Guangzhou and Shenzhen •  45 million population •  2.5 trillion RMB GDP –  Beijing-Tianjin Region •  Bohai Sea region •  25 million population •  ~2 trillion RMB GDPSource: China Statistical Yearbook, The China Strategy, Booz & Company analysis 21
  • 22. Trend 3: Value and relationship oriented approach to address lower tier market demandHowever, 87% of total population live in Tier 3 and lowercities, among which 61% are from Tier 5 & 6 cities Diversity: Socio-Economic Levels of City Tiers (2007) GDP Per Capita (US$) Population Tier 1: Big 4 Tier 2: Mega citiesSource: China Statistical Yearbook, Literature Research, Booz & Company analysis 22
  • 23. Trend 3: Value and relationship oriented approach to address lower tier market demandMarket share of lower tier cities maintains increasing, at a fastergrowth rate than Tier 1 and 2 cities Market Share by City Tier (2005 - 2008) CAGR% 100% 5% 6% 6% 7% Comments Tier 6 43.1% 18% 19%   The 6 tier city class was 20% 21% Tier 5 34.6% identified by several indices such as GDP, sales volume etc, for 10% example: 11% 11% 12% Tier 4 35.9% –  Tier 1: Beijing 22% –  Tier 2: Chongqing 24% 24% 23% Tier 3 29.8% –  Tier 3: Wenzhou –  Tier 4: Langfang 22% 21% 21% 20% Tier 2 23.9% –  Tier 5: Xining –  Tier 6: Zhangjiajie 23%   Need for extensive dealership 20% 19% 17% Tier 1 15.6% and service network development 2005 2006 2007 2008Source: China PV Database; Booz & Company analysis
  • 24. Trend 3: Value and relationship oriented approach to address lower tier market demandAutomakers need to realign their product and marketing strategieswith distinctive consumer dynamics of lower tier citiesConsumer Profile Survey findings Automakers approach • 90% are first time car buyers Vehicle pricing to be affordable and • Car budget is 80,000RMB ($12,000) on competitive Income and average Budget Innovative brand strategy such as “Mid- • 100K CNY($15,000) disposable income annually per household market brand” development • Less financial pressure Build a trustworthy and valuable brand • More positive life attitude image Purchase • Car purchase for community and family motivation Address consumers’ roominess and care • Make less controversial choice performance needs • less product knowledge but faster Smartly decontent vehicles’ “impractical” purchase process. Purchase • Value durability, economy and electronics and features Consideration convenience Enhance vehicles’ durability and versatility • Trustworthy and value for price brand •  TV commercial, internet Take advantage of every accessible touch Information • Word of mouth is most influential point with consumers to set up emotional Channel • Outdoor ads board, car display bonding and delivery brand message • Dealer showroomSource: Nielsen 2010 Dec. China forum 24
  • 25. Trend 4: Hyper-competition across the automotive market segmentsWhile muti-national brands are expanding their portfolio intosmall segments… C Focus Hatchback B SVW POLO SPORTY  Engine:1.8L 2.0L  Dimension 4342*1840*1500  Wheelbase:2640 C Chevrolet Cruise B GZ Toyota Yaris  Engine:1.3L 1.6L  Engine: 1.6L/1.8L  Dimension  Wheelbase: 2685mm 3750*1695*1545  Wheelbase:2460  MSRP: 9.2-12.56W RMB  Launch:2008-6-12 B PSA 207 Hatchback B Smart Fortwo  Engine:1.4L 1.6L  Dimension 3900*1680*1468  Wheelbase:2450mm  MSRP: 7. 18-10.48W RMB  Launch:2009-3-18 B Hyundai i30 B Kia SOULSource: Literature research; Synergistics Limited analysis 25
  • 26. Trend 4: Hyper-competition across the automotive market segments…Chinese brands are expanding their portfolio into largersegments SU V Chery Reely V5 E Geely Emgrand EX925  Engine:2.0L  Engine:2.2L 2.4L  Dimension Dimension 4970*1880*1900 4662*1820*1590  Wheelbase:2850  Wheelbase:2800  Highlights: NA  MSRP: RMB  Launch: D Chery Riich G6 D Shanghai London GE  Engine:2.0L  Engine: 3.5L  Dimension  Wheelbase: 3100 mm 4968*1845*1526  Highlights: Luxury feature  Wheelbase:2820 and superior space  Highlights: NA  Launch:2011  MSRP: RMB  Launch: C Dongfeng S30 D Brilliance Zunchi  Engine:1.6L  Engine:1.8L  Dimension  Dimension 4502*2610*1465 4880*1800*1450  Wheelbase:2610  Wheelbase:2790 MP V BYD M6 Specialty BYD S8  Dimension  Engine:2.0L 4808mm×1802mm×1756mm  Dimension  Wheelbase: 2950mm 4490*1780*1405  Launch: 09/2009 (09Sep)  Wheelbase:2520Source: Literature research; Synergistics Limited analysis 26
  • 27. Trend 4: Hyper-competition across the automotive market segmentsChinese car market has seen substantial price falls and acceleratedproduct launches over past decade, undermining VM profitability Average Sales Price (ASP) index in China Discussion •  Vehicle prices have declined about 40% since 2002; Major driving forces are •  A sharp reduction in tariffs since 2001 WTO entry • Increasing competition • Hypercompetition after local brands get involved PV price development by segment in China •  Average MSRP is estimated to fall 2-3% in 2010, a much lower rate than previous years •  With increased capacity and demand slow- down, automakers will face increasing downward pricing pressure in 2011  VMs have to launch more refreshed models or new vehicles to fix down pricing pressureSource: CAAM, Forum, Nomura Research 27
  • 28. Trend 5: Divergence of performance due to deteriorated industry profitabilityManufacturing capacity oversupply will be intensified in next 5years, and low utilization will drive up manufacturing cost level International/ Manufacturer Brand Sales in 2009 Capacity in 2010 New capacity Capacity by 2015 Local Brands ( 000 Unit) ( 000 Unit) under ( 000 Unit) construction International/ SAIC-GM Buick, Chevrolet, 1787 1560 410 1970 (incl. SGM-Wuling) Wuling Local International FAW-VW VW, Audi 682 760 200 960 International FAW-Toyota Toyota 413 470 200 670 International Dongfeng Honda 209 220 240 460 Honda International Beijing Hyundai Hyundai 568 600 300 900 International GAIC Honda, Toyota, Fiat 570 720 340 1060 Local Chang An Chang an 1000 900 900 1800 Local BYD BYD 437 710 800 1510 Local BAIC Foton Foton 600 700 280 980 Local Chery Chery, Reely, Riich, 470 900 400 1300 Kerry Local Geely Emgrand, GLEagle, 326 680 1000 1680 Maple Local Great Wall Great Wall 225 500 1300 1800 Others 6350 9280 2130~3630 12910 Total 13640 18000 8500~10000 26500~28000Source: CAAM, Forum, Nomura Research 28
  • 29. Trend 5: Divergence of performance due to deteriorated industry profitabilityHistorically, leading China automakers such as SAIC has beencounting on their JVs to generate solid cash flow and profit SAIC Total Operating Income vs. Income from JVs (2003- 2008, B RMB) 7.5 Comments 6.6   JVs are critical to SAIC business –  Contributed to most of SAIC’s profit as “Cash 6.0 Cows” 5.6 –  Transferred manufacturing know-how to support SAIC’s capability development 4.5 –  Helped build SAIC auto team and developed talents 3.1   However, the prospect is is less promising 3.0 2.6 –  JVs’ revenues and profits have slumped since the crisis 1.7 1.5 –  A key partner GM is facing bankruptcy and 1.5 1.0 restructuring 0.9 0.5 0.7 0.3 0.2 0.0Source: SAIC annual reports; Booz & Company analysis
  • 30. Trend 5: Divergence of performance due to deteriorated industry profitabilityHowever, smaller volume base and low price premium put SAIC’sown brands at a cost disadvantage Relative Cost Comparison1) of Key Models2) PRELIMINARY (K RMB, 2008) 160 Key Cost Drivers   Low Scale 120 120 123   Completely self-relied R&D 106   Inefficient sourcing strategy 80   Inherent non cost-effective manufacturing 64 60 platform 40   Mid- to high-end product positioning   Not fully integrated portfolio 0 SAIC 3) 3) Invoice price1) Retail prices are sourced from dealer interviews and popular auto websites; Invoice Prices equal to retail prices minus VAT, Consumption TAX, and channel markup; SG&A and COGS are calculatedby multiplying invoice price with estimated SG&A and COGS ratios;2) Models: Rowe 550 Pingzhen; Corolla GLX-I 1.8AT; F3 GLX-I NAVI; Corolla 1.6AT; F3 GLX-i3) Used industry analysts’ estimations and comparable Corolla models in the US for triangulation and adjustment of its China COGSSource: BYD annual report; Toyota annual report; Booz & Company interviews; Booz & Company analysis
  • 31. Trend 5: Divergence of performance due to deteriorated industry profitability Surging labor and material cost driven by inflation further deteriorates Chinese automakers’ profitability in 2010 and onwards Sales Revenue Annual Performance of Great Wall Motor Gross Profit Rate Million RMB (2003 – 2010F) % 20000 35% 18000 30% 16000 14000 25% 12000 20% 10000 15% 8000 6000 10% 4000 5% 2000 0 0% Sales Revenue Gross Profit Rate According to Bureau of State Statistics, annual industrial product prices rose 5.5% in 2010 full year, however, prices of raw materials, fuel and power rose 9.6%. It will make the automakers hardly sustain their high profitability in previous years, Great Wall Motor is one of themSource: GWM Annual Report 2003-2010 Mid term
  • 32. Trend 6: Adaptive brand innovation to extend product reach and grow shareTo extend product reach and grow shares, international brands are tirelesslydelivering China market-specific adaptations and modifications Main Localization Features Brand Space and Appearance Safety Entertainment and Convenience Wheelbase increase DVD backseat entertainment system, Chinese GPS, front and rear Audi AudiA6L 3.0 TFSI 2010: electronic heated leather seat, keyless entry parking assistance 185mm. A4L 2009: 61mm and start system, sunroof, cup holder Wheelbase increase: Benz DVD backseat entertainment system, front- Benz Reverse radar E300L: 140mm seat control system, sunroof, cup holder Wheelbase increase: Reverse radio sensor BMW BMW520i: 148mm system Reverse radio sensor Lexus Electronic leather seat, cup holder system DVD backseat entertainment system, Wheelbase increase: Volvo Chinese GPS, front and rear Volvo electronic heated leather seat, keyless entry S80L: 140mm parking assistance and start system, sunroof, cup holder Note, driveline, suspension, steering, braking, engine and EMS systems are generally not adaptedSource: Literature research; Synergistics Limited analysis 32
  • 33. Trend 6: Adaptive brand innovation to extend product reach and grow shareAUDI is one of the most successful brands to introduce locallyadapted models particularly for Chinese consumers AUDI’s Sales in China AUDI A6 and A6L’s 162 Other (‘000 Vehicles) Q5/Q7 Sales Comparison A8 (‘000 Vehicles) Audi initially introduced out-dated 118 models, but then phased in +17% 100 -13% 73 current products, and finally A6 / A6L 81 introduced global models 53 58 63 63 46 52 32 36 19 15 15 16 12 A4 / A4L A100/200 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2003 2004 2006 2007 A6 AUDI’s Chinese Production A6L A6 Start Production in China Model Change Finish Production (Global Model) A6 x   A6 sales dropped 13% in 2004 A6L   New A6L launched in 2005 (Longer Model for A6L Start Production in China   A6L sales increased fast China market) Start Production in China Model Change Finish Production A4 (Global Model) A4 x A4L (Longer Model for A4L Chinese market) Start Production in ChinaSource : Global Insight 2010, FOURIN, Booz & Company analysis 33
  • 34. Trend 6: Adaptive brand innovation to extend product reach and grow shareAudi s product localization strategy has been an important driverof the brand s success in China - e.g., Audi A4L   61mm more wheel base than European Audi A4 version, and wider rear seat space   Customized designed chassis (13mm more road clearance room than European Audi A4 version) to fit road and driving condition in China   Since the gasoline quality in China market is not very stable, Audi A4L has automatic fuel quality sensing system to adjust engine performance based on gasoline quality   Customized designed seats based on Chinese customers’ contour   More sophisticated and fashionable internal design and decorationSource: Literature research, Booz & Company analysis 34
  • 35. Trend 6: Adaptive brand innovation to extend product reach and grow shareEstablishment of R&D and production development capability inChina is a market mandate now R&D and Product Development Capability - Global OEMs in China Stage - I Stage - II Stage - III Stage - IV Localization: 40% Localization: ~70% Localization: ~100% Complete PD Capability •  IP rights, Technology GM: Developed GL8 for the China market with 100% protection, etc. are localized content. PD and some of the concerns Continuing to increase the engineering changes led by that prevented rapid Focused on meeting local content as supply chain PATAC minimum local content develops in China. R&D investments in requirements to preserve plans are unclear at this development of R&D / quality, engineering and point. PD capabilities in brand differentiation. China. Product development and launch of VW Lavida done in China for the domestic Hyundai: Almost 100% local market content for Elantra. Highly Audi: Reached established relation-ships ~70%-80% localization with local supply base and content (by value), JV ventures for domestic designed products to ER&D and PD activities meet China market Followers LeadersSource: Literature research; Booz & Company analysis 35
  • 36. Trend 6: Adaptive brand innovation to extend product reach and grow shareGM is another successful example of gaining competitiveadvantage by adopting innovate brand strategy with local players GM’s Sales in China Expansions of GM s Corporate Operations (2005-2009, in Million Units) in China   Recently, GM announced a plan to set up Shanghai 1.83 GMIO headquarters, managing the unified management of all overseas business, which indicates the central role +29% 1.54 China plays in GMs global strategy   GM and SAIC also announced to set up a GM-SAIC 1.04 Motor Investment Co. in Hong Kong with a $1 billion 0.88 investment split equally between the two for use in 0.66 purchasing 100 percent shares of General Motors India –  GM-SAIC India is expected to make small cars and commercial vehicles in India   GM s mini-vehicle China JV (SAIC- 2005 2006 2007 2008 2009 GM-Wuling) will introduce the first own-brand car (Baojun, meaning   GM aims to sell 3 million vehicles a year there by 2015 treasured horse) to target the fast- as it adds new, more fuel-efficient models to meet demand growing low end market; The car   “ China GM’s largest single market worldwide and GM will model is Based on Buick Excelle and launch 25 new models in China in 2010 and 2011 in a bid is aiming to combine world-class to maintain its leading position” - Gan Wenwei, President quality with low ownership costs and General Manager of GMSource: Automotive News; Company profile; Booz & Company analysis 36
  • 37. Trend 6: Adaptive brand innovation to extend product reach and grow shareJV partnership and acquisition provide solutions for GM to gainaccess to China market, and to strengthen its presence in India GM’s Partnership with SAIC Implications to GM’s Expansion into India India   SAIC and GM formed 50:50 R&D JV in August 2010 to:   YTD Oct. 2010, GM’s sales in India grows up almost –  Jointly develop fuel-efficient engines and 79% and will surpass 100,000 year end transmission   Nov. 12, 2010, GM formally inaugurated the flexi- –  Deliver new power-train systems within 3 years engine plant in Talegoan, Pune. The plant will take   Products include small engine and front-wheel-drive total Talegoan output to 300,000 cars and 300,000 transmission that are 10% more fuel-efficient and reduce engines annually. emissions by 20%   The automaker has developed local suppliers and   A Chinese automaker and a foreign partner share awarded component supply contracts worth intellectual property rights on a core technology for the $500million. It plans to source components worth first time $1bn in the next two years for its global operations.   Nov.,2010, SAIC announced to acquire 1% GM share through investment of $500M during GM’s IPO “We are bringing in four passenger cars and two commercial vehicles in the next two years in 14 fuel variants,”…“We are planning to invest US $250m more in the Indian market.” - Karl Slym, President of GM IndiaSource: Literature research; Booz & Company analysis 37
  • 38. Trend 7:Increasing focus on the automotive aftermarketLeading automakers have fully established dealer network inhigher tier region and start to shift focus to lower tier cities now 5 Provinces (2009) Unit ‘000 62.2 3% 42.3 1% 1% 1% 5% 3% 4% Cadillac 5% 6% 7% 6% Volvo 41.4 11% 16% 8% 9% 21% Lexus 33.3 18% 17% 20% Benz 24% 20.8 22% 16.9 29% 26% 28% BMW 27% 14.6 14.1 Top 10 provinces account for 45% 38% 13.2 about 75% of premium car sales 36% 29% 34% Audi 10.7 92.5 38
  • 39. Trend 7: Increasing focus on the automotive aftermarketAutomakers can use sub-dealer network to extend their productand service reach to lower-tier city’s buyers Higher Tier Cities Trade-off Lower Tier Cities   High margin of the total sales and after-   Low margin of the total sales and after- Economics of sales revenue sales revenue Dealer   Able to get enough discount from   Get very low discount from original original manufacturers manufacturers   Provide different kinds of sales and   Provide limited sales and after-sales Service Range after-sales services services Sep Up   High standard - cost of set up is usually   1S or 2S sub-dealer facility: Standards of the 2-5 times that of low-end brand Independent Car showroom, without or Shop according to the international principles with a shared workshop   Provide extensive trainings to dealers,   Only provide basic training, usually no Dealer’s Support including personal development plan specific development plan for dealer’s (i.e. training) employees Operational   Develop strict operational policy - will   Provide basic standards, but lack of cancel the contract if dealer could not execution capability Management satisfy the requirementsSource: Interviews; Booz & Company analysis
  • 40. Trend 7: Increasing focus on the automotive aftermarketDevelopment and sales of aftermarket accessories also help unlocknew profit potential for automakers, in-vehicle telematics is oneexample   Building upon wireless communication, GPS, and multimedia technology, in- vehicle telematics platform enables following major functions/services –  Navigation and smart traffic management –  Hand-free phone communication –  Remote vehicle diagnostics –  Safety and security –  Entertainment –  Location-based value-added serviceSource: Literature research, Booz & Company analysis 40
  • 41. Trend 7: Increasing focus on the automotive aftermarketToyota G-BOOK was the first global OEM telematics service forChinese market Background Models equipped with G-BOOK   Launched in 2002, G-BOOK service was   Lexus RX provided by TOYOYA for Japanese market   Currently G-BOOK subscription base in   Toyota Crown more than 2.6 million in Japan   China is the first oversea market for G-   Toyota Camry BOOK services; In March 2009, new Lexus RX 350 in China market started to be equipped with G-BOOK Price and Fee   Major service functions include: Emergency service, Vehicle diagnostic report, Stolen   All new G-BOOK equipped vehicles come vehicle location, Navigation, Phone with at least two year free service operator service, etc. depending on the length of warranty   Partner with China Telecom for   No future service pricing announced yet communication coverageSource: Company Website, Booz & Company analysis 41
  • 42. Trend 7: Increasing focus on the automotive aftermarketSYNC is an in-vehicle communications, information andentertainment system developed by Ford and Microsoft Background Models equipped with SYNC   Fast delivered in Fall 2007, Ford SNYC   Plan to first equip on new Ford Edge in allows drivers to connect and control China market by Fall 2010 mobile phone and digital media players for communication, entertainment and information services by voice commands   In North America, SYNC is standard equipment for Lincoln, and high-serious models for Ford and Mercury vehicles Price and Fee   SYNC subscription base reached 1 million by May 2009 and 2 million by March 2010   In North America, optional SYNC   Ford SYNC SYNC is running on the equipment installation at MSRP $395 Microsoft Auto operating system   It s expect SYNC will provide 2-3 year   Major service functions include: Hand-free free service after launching in Chinese calling, Entertainment, Traffic & Direction, market Emergency service, Vehicle health reportSource: Company Website, Booz & Company analysis 42
  • 43. Trend 8: Accelerated drive to globalization Strong rebound of overseas market fueled Chinese automakers’ export, Great Wall Motor has seen a remarkable growth Annual Sales Volume of GWM GWM’s overseas market sales share* (2003 – 2010, unit) (Total export of 2010CY: 55,000 vehicles)450000400000 CAGR (’03-’10) 34%350000 Others Australia300000 27% 20%250000 Lybia Russia200000 0% 12%150000 Algeria 4%100000 Chili 8%50000 Iran South 0 9% Italy Africa 11% 10% China Export =based on sales revenue of GWM in each country market out of total export revenue Source: GWM Mid-term Report 2010
  • 44. Trend 8: Accelerated drive to globalizationGWM has made remarkable progress in shifting from CBU exportto KD assembly in overseas plants GWM’s overseas production facilities Total capacity target: 160,000 by 2011 and 400,000 by 2015 Russia Ukraine Bulgaria Italy Iran Eqypt Turkey Sri lanka Vietnam Malaysia Ethiopia Sudan Thailand Senegal Indonesia Venezuela* PhilippineKD plant (established):12 Brazil KD plant (intended): 8 South AfricaSource: Great Wall Motor press release, www. Gwm.com.cn
  • 45. Trend 8: Accelerated drive to globalizationTo expand global distribution, Chinese OEMs are aggressivelytrying to close the capability gaps in R&D, parts sourcing, andbrand equity Chinese Major OEMs Capability Gaps in the Auto Value Chain Recent Trends on Efforts to Close the Gaps Sourcin Sales & R&D Manufa g Marketing Take Equity of Foreign Companies to ctur-ing Access Core Technologies   Mostly rely   Strength of   High ability to   Needs further on external supply base adapt for development design or and quality localization of local and JV’s foreign vary across   Only some international technology VMs brand equity Increase Investment in R&D to Build VMs have Own R&D Own Capability capacity for needs to low-cost pass foreign manufactur- safety ing standards Marketing and Portfolio Expansion to Build Brand No Capability Full CapabilityNote: Evaluation based on assessment of major Chinese OEMs such as First Automobile Works, Shanghai Automobile Industry Company, Dongfeng Motor Corp, Guangzhou Automobile Group, Chery Automobile, Great Wall Motor, Chongqing Chang’An Automobile, Haima Automobile, Beijing Automobile, Fujian Motor Industry GroupSource: Automotive News, Company profile, Booz & Company analysis
  • 46. Part 1: Review of 2010 market development and automakers performancePart 2: Emerging consumer trends and government policy changes in 2011Part 3: Emerging trends to anticipate in 2011 and beyondPart 4: Conclusion and recommendation to automakers 46
  • 47. Implications of eight China automotive consumer and industrytrends to shape up automakers’ strategy Eight Emerging Consumer and Industry Trends Implications for the automakers playing in China 1 Sustainable demand growth fueled by urban economic   Carmakers need to realign their strategic focus with development the fastest growing segments, e.g. lower tier cities   Future resource allocation has to start from where 2 automakers can outperform their competitors Shifting preferences for increasingly savvy consumers   Adaptive brand innovation will be pursued to extend 3 Value and relationship oriented approach to address the product reach and grow share lower tier market demand   Carmakers need to invest in development of sub- dealership in lower tier markets 4 Hyper-competition across the automotive market   Heavier involvement into dealer service delivery and segments service innovation also becomes a mandate. 5 Divergence of performance due to deteriorated industry   China will attempt to lead the transition to new profitability energy vehicles, but competency gaps remain   Chinese VMs will increasingly seek technology 6 Adaptive brand innovation to extend product reach and partnerships with multi-national VMs and suppliers grow share to increase brand equity 7   Strong rebound of non-triad market demand fuels Increasing focus on the automotive aftermarket Chinese car export up. Improved product quality and shift from CBU to KD assembly will benefit 8 global distribution of Chinese carmakers Accelerated drive to globalization China is now the center stage in the battle for 21st Century global automotive industry dominance 47
  • 48. In summary, we recommend carmakers to realign their strategicfocus with shift of demand and markets of highest potentials  Automakers need to allocate resource to where they can outperform their competitors. One of the key takeaways is to make sure their product and service offerings addressable to the lower tier city buyers  International automakers need to make adaptive brand innovation to extend their product reach and grow share, such as delivering China market-specific adaptations and modifications, extending the range of segment participation, and creation of new brands with Chinese partners  Carmakers need to increasingly focus on the automotive aftermarket, including establishment of sub-dealership network and heavier involvement into service delivery and innovation  To capture non-triad market demand, product excellence achievement and shift from CBU to KD assembly are key takeaways for Chinese local carmakers Thank you! 48
  • 49. Thank You! 49
  • 50. Back up 50
  • 51. Currently, several key development trends are taking place… Areas for Improvement Key Agenda Issues   More balanced economic development –  Government vs. private consumption spending Boosting –  Less reliance on export; effective flow of money consumption   Raising living standards in both urban and rural areas   Sufficient social “safety net” and care for people Valuing human –  Healthcare capital –  Social security/ pension –  EducationSustainablesocio-economic Improvingdevelopment   Expanding tertiary/ services industry sectors technology/transformation   Upgrading productivity and innovation in both primary and knowledge secondary industries   Preserving natural environment and ecosystem (incl. water, Managing land and air) resources and   Efficient usage of energy and replacing reliance on oil/ coal environment   Balanced and strong development in urban and rural areas   Reducing disparity between urban and rural in terms of Developing infrastructure, income, etc. infrastructure for urban and rural 51
  • 52. …and have yielded potential opportunities for different industries NON-EXHAUSTIVE Key Agenda Issues Industries Affected Market Impact Consumer, Retail   New consumer brands Boosting Automotive. Healthcare,   New and modernization of retail formats consumption Travel/Tourism   Expansion of lifestyle and leisure sectors   Infrastructure and services to support auto Valuing human Healthcare, Financial   New health care services: premium, rural capital Services, Education   Financial product innovation - pensions, health   Growth in training institutes, remote learning Improving ICT, Healthcare, Automotive,   Smart initiatives - e.g. Smart City, Smart Grid technology/ Resources, Mining,   Technologies to increase resource extraction knowledge   Increased mobile and data connectivity Managing Oil, Gas, Mining, Coal,   Large scale investment in solar, wind resources and Construction, Automotive,   Environmental protection and remediation environment Industrials   New Energy Vehicle ecosystem Developing Construction, Health,   Infrastructure demands in cities and countryside infrastructure for Agriculture, Real Estate,   Design, construction, technology, services needs urban and rural Education, Transportation 52
  • 53. New Energy Vehicle Market updateWith increasing pressure from air pollution, oil consumption andcongestion, China is compelled to reinvent propulsion technologies China to Reinvent Propulsion Technologies Air Pollution   Beijing, Xi’an, Shenyang, Shanghai and Guangzhou have been listed among the Top 10 cities with the worst air pollution. The massive growth of the automotive market only adds to the problem   The rapid growth of the automotive market worsens the problem. For example, Beijing’s automobile industry contributed 73% of the overall pollution problem in 2003 Energy Consumption   China imports two-thirds of its oil, and its ever-increasing thirst has had a dramatic impact on global energy prices   The gasoline and diesel consumption has accounted for half of the total consumption of petroleum products Traffic Congestion   In the light of the current rate of development and gas consumption level, China will have over 150 million vehicles and petroleum consumption will exceed 250 million tons in 2020 For alternative propulsion technologies such as clean diesel, hybrid and electric vehicles, China does not lead the technological developmentSource: Synergistics; Booz & Company analysis 53
  • 54. New Energy Vehicle Market updateThe central government is playing a key role in shaping industrydevelopment Official China at Work SASAC Vehicle Manufactures Electric Vehicles Market Battery Utilities Manufacturers CompaniesNote: SASAC: State-owned Assets Supervision and Administration Commission of the State CouncilSource: Booz & Company analysis 54
  • 55. New Energy Vehicle Market updateSince 2009, a number of policies demonstrate China’s dedication inthe development of “New Energy Vehicles (NEVs) ” Recent Policies and Strategies on NEV Development Expected2009 Apr. 2010 May Jun Jul.~   Plans from Ministry of Finance   New Energy Automobile   Government pilot   More & the NDRC to… Manufacturer Alliance program to subsidize ambitious –  Promote pilot use and plans to… purchase of plug-in plan national expansion –  Increase number of pure hybrids and electric expected to –  Support development of electric vehicles vehicles in five cities1 be released energy-saving technology in –  Promote popularity of in late 2010 public domain electric technology or 2011 –  Deploy 60,000 energy saving –  Increase proportion of vehicles in China by 2012 hybrid vehicles –  Advance technology for NEV and key components –  Drop average new car fuel consumption to reach international levelsNote 1): Five cities are Shanghai, Changchun, Shenzhen, Hangzhou and Hefei, which are corporate homes of six domestic automakersSource: Synergistics, Synergistics Limited analysis; China Association of Automobile Manufactures; Literature research 55
  • 56. New Energy Vehicle Market update Hidden PageLocal OEMs are also building capacities for NEV production Manufacturing Capacity of Local OEMs NEV Project FAW   Besturn B70 Great Wall   Capacity - 11,000   GWPERI QingYuan   HAVAL   Kulia   B6; A0   Capacity - 20,000 SAIC BAIC Chery   A5, BSG, ISG, S11, BYD S18 Chang An Wanxiang BAIC SAIC   Jie Xun Hybrid BYD   Capacity - 300,000 (2010); -   LaCrosse Hybrid 600,000 (2014)   Roewe 750 Hybrid with capacity of 10,000 GAC DongFeng BYD   Fengsheng BSG; Fengxing MPV   F3DM, F6DM, F3e, E6   Capacity - 8,500 (2010); 20,000   Capacity - 200,000 (Xi an); (2014) 600,000 (Shenzhen)Source: Literature research; Booz & Company analysis 56
  • 57. New Energy Vehicle Market updateHowever, EV products still needs to improve price competitivenessand infrastructure readiness to gain retail sales Consumer Position   Currently hybrid car price is too high for   Consumers must be convinced that the price mass market acceptance and performance of the new energy vehicle can   Current low gas price makes little in fact meet their expectations difference between petrol engine and new fuels   Readiness of charge facility and battery   Inconvenience of battery charging is recycling network is key issue within also a constraint for electric cars consumers consideration set operation   Higher tax incentive and better charging   Families on a tight budget is less likely support are essential to generate real demand to pay extra for environmentally sustainable green productsBooz & Company 57
  • 58. Trend 3: Value proposition to lower tier buyersPotential car buyers in lower tier cities have different mindset andprofile from Tier 1 city buyers; Pragmatism takes center stage The Chinese Mindset   Pragmatism in approach to opportunities   Context-appropriate trade-offs across cost, quality, time (appropriate for China)   High aspirations, which drive momentum Cost/Price Quality Time/Speed   Labor advantages ,but   Acceptable quality for   Preference for the offense disadvantaged on capital customers   Critical path driven   All costs negotiable:   Calibrate price/quality that meets magic price point   Relatively low “burden of proof”   Only the essentials   Adjust quality over time   Imitation as a way of life   Deep understanding of “real costs” in China   Avoid unnecessary “bells and   Rapid learning and adaptation whistles”Booz & Company 58

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