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China Auto Industry Opportunities & Challenges

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Opportunities & Challenges For China’s Automotive Industry During The Global Financial Crisis

Opportunities & Challenges For China’s Automotive Industry During The Global Financial Crisis

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    • 1. Opportunities & Challenges For China’s Automotive Industry During The Global Financial Crisis Bill Russo March 25, 2009 www.synergisticsltd.com
    • 2. An Unprecedented Global Financial Crisis Has Resulted In The Great Recession Of 2009
      • The financial crisis which worsened in Q3, 2008 has dragged the world into the deepest economic downturn of the past six decades
        • Increasing global interdependence and synchronization of business cycles quickly spread financial turmoil across the globe
      • 2009 will likely witness the first drop in global real GDP since 1930s
        • According to Global Insight forecast, year-over-year growth rate of:
          • Advanced economies of the world to be -2.0%
          • Emerging markets to be +2.9% (compared w/ 5.8% in 2008CY)
          • World real GDP to be -0.5%
      • U.S. economy is extremely vulnerable hampered by a credit crunch and the collapse of the U.S. housing market
        • $838 billion economic stimulus bill designed to create millions of new jobs was approved in February
        • More work is to be done and US economy not expected to turn around until 2010 (GDP growth forecast -3.4% in ’09, 3.2% in ’10)
      Source: Global Insight January 2009 Interim APAC Update
    • 3. Global Financial Crisis & Other Macroeconomic Developments Create Significant Challenges To China’s Economic Expansion GDP growth real, in % to year ago Current account balance in US$ bn Real Fixed Investment Growth Percent change from a year earlier Money Supply Growth-M1 in % to year ago Source: Global Insight World Economy Quarterly Update, Q1, 2009 Inflation CPI, annual average, % to year ago Currency CNY/USD ’ 05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ‘13 ’ 05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ‘13 ’ 05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ‘13 ’ 05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ‘13
    • 4. The China Government Has Made Strong Commitment To Achieving 8% GDP Growth Target Source: www.caijing.com.cn , Feb.,2009, www.sina.com.cn Boost Domestic Demand Stimulate Backbone Industries Increase Money Supply Secure and Create Jobs
      • Fiscal subsidy to farmers for electronics and vehicle replacement
      • Car purchase tax rate reduction by 5%
      • Tax and interest rate cut for housing transaction
      • Relax consumer credit to promote individual and family buying
      • Export Slump
      • Y/Y growth -9% in ’08
      • Vehicle export see the first drop over past decade
      • Credit Crunch
      • Money supply (M1) dropped -12% in ‘08
      • Weakened Profitability
      • Industry production dropped -5.3% in ‘08
      • Increased Unemployment
      • 20 Mil migrant workers lost jobs
      • 6.1 Mil university graduates seek jobs
      Impact of Global Financial Crisis
      • New bank loans soar to 1.6 Trillion RMB in January as part of 5 Trillion full year plan
      • Majority of government spending allocated to infrastructure and public insurance system
      • Lowered bank interest rates by 5 times in 2008
      • Eased deposit reserve ratio requirement of commercial banks
      • Published stimulus plans of 10 key industries in Jan.-Feb.,2009
        • Automotive, Light Industry
        • Oil and Petrol Chemistry
        • Electronics and IT
        • Ship Manufacturing, Textile
        • Machinery Manufacturing
        • Iron and Steel, Logistics
        • Mining/Metals
      • Encourage industry consolidation and technology upgrade
      • Promote export and autonomous brand development
      • Encourage development of medium/small enterprises and service industry
      • Support SOEs to reduce job cuts
      • Ease enterprise burden by suspension or exemption of social insurance fee
      • Offer professional training to migrant workers and university graduates
      Stimulus Policies Stimulus Policies Stimulus Policies Stimulus Policies
    • 5. China’s Recently Explosive Automobile Market Growth Slowed Considerably in 2008 Total Vehicle Industry including Import: China - 2003 Sales 4.56 Million 2004 Sales 5.24 Million 2005 Sales 5.90 Million PV=2.36Million PV=2.66 Million PV=3.23 Million
      • Although 2008 2H growth has flattened, China PV sales are still up 9% YoY
      • Passenger vehicles consistently represent the majority of total automobile demand
      • China’s compact segment is still the dominant force (i.e. 34% of total PV in 2008)
      2006 Sales 7.34 Million PV=4.45 Million Top 3 Selling Vehicles = Compact Car Source: CAAM auto market press release 2007 Sales 8.98 Million PV=5.43Million 2008 Sales 9.67 Million PV=5.91Million 9% Truck 22% Van 16% Bus 2% PV 60% 15% 11% 25% Bus 3% Truck 25% Van 19% PV 53% PV 51% Van 22% Truck 24% Bus 3% Bus 2% Truck 21% Van 18% PV 59% 22% 2% PV 51% 2% PV Bus Truck Van PV 51% 26% 21% Truck 21% Van 16% Bus 2% PV 61%
    • 6. China’s Continued Growth Stands In Sharp Contrast With The Sudden Contraction Of The Global Auto Industry 1000 Units
      • ASEAN figures include top 6 ASEAN member countries, including Thailand, Malaysia, Indonesia, Singapore, Philippines, but Vietnam data is not available.
      • Data source: Global Insight forecast January, 2009
      Market 2008 PV 2013 PV 2018 PV China 5,913 8,626 10,363 Japan 4,313 4,141 3,959 India 1,541 2,718 4,190 ASEAN* 1,721 2,144 2,760 South Korea 1,092 1,195 1,243 Australia 972 953 940 Taiwan 208 357 410 New Zealand 90 102 104 Hong Kong 30 36 42 Rest of APAC 157 221 315 Total APAC 16,037 20,493 24,326
    • 7. Domestic Brands Achieved Just Under 30% Share of the China Domestic Market in 2007
      • Note: The top 20 OEM’s make up 95% of the China PV market share
      2007 Full Year (incl. import) 5,433k units Source: CAAM 2007 Sales Report, Feb. 2008 SoM 2007 SoM 2006 (in %) International OEMs/Brands INTERNATIONAL / LOCAL OEM CHINA PASSENGER VEHICLE MARKET SHARE Internat. OEMs / Brands 3,925K (72.2 %) Remaining domestic OEMs 1.9% 0.7% 0.23% 0.8% 2.9% 4.6% 3.2% 5.0% 10.0% 8.0% 7.1% 10.4% 16.1% 1.6% 0.3% 0.23% 0.9% 2.2% 3.8% 5.2% 5.3% 6.9% 8.6% 9.3% 9.76% 17.1% MMC Fiat Chrysler BMW Suzuki PSA Ford Nissan HMC Honda Toyota GM VW 65K (1.2%) 7.5% 0.9% 0.4% 3.0% 1.4% 2.0% 4.7% 4.9% 7.0% 1.2% 1.0% 1.9% 1.8% 2.7% 4.0% 6.2% 7.0% Greatwall Chang’an AVI BYD Brilliance Geely FAW Chery Top 8 Domestic OEMs * *=Excluding CV volumes from SAIC-GM-Wuling TOP 10 Domestic OEMs 1,443K (26.6%) Updated: 2007 Full Year
    • 8. The China Government Must Accelerate Domestic Consolidation In Order To Achieve Economies Of Scale
      • More than 150 registered automotive manufacturers are highly fragmented and scattered
      • Sum of Top 10 OEMs’ production in 2008 accounts for 83% of total China production
      • Overcapacity is an significant problem for years which will is further worsened due to slower growth
    • 9. Most products of China local OEMs’ own brands are based on the technology sourced from their foreign partners or copied from other international OEMs Development of China Local Brands Is In Early Stage Due To Limited Sources Of Advanced Technologies And Engineering Capability Brands Model Names under Local Brands Technical Source Sales ‘08 YTD Oct. FAW/ Red Flag Hongqi Mingshi/Flagship/ Century Star, Benteng Audi, Mazda, Toyota 2,710 Chery QQ, Fengyun, Qiyun, Tiggo, Dongfangzhizi, A1, A5, V5 Daewoo, etc 299,123 Geely Beauty Leopard, Haoqing, Merrie, Jingang, ULION, Ziyoujian Daihatsu, etc 91,828 Brilliance/ Zhong Hua Zhong hua M2, Zhonghua SY 7200 Ital-Design, Porsche, etc 74,174 Lifan Lifan 520 N.A. 23,760 AVI China Baoli, Lubao, Saibao, Saima, Beidouxing, Ideal, Liana MMC, Suzuki, etc 38,251 BYD BYD Alto, Flyer, F3 Suzuki, etc 133,412 Xiali Xiali, Vitz, Vela, Echo, Weizhi Daihatsu, Toyota, etc 148,787 Greatwall Safe, Hover, Peri, Coolbear, Florid Isuzu, Fiat, Toyota 29,738 Chang'an CM8, Benben, Jiexun N.A. 37,950 SAIC Roewe 750, 550 MG 7 Series, MG TF Rover 27,648
    • 10. In addition to China Automotive Industry Stimulus Plan published on January 14, 2009, China government is drafting implementation rules including more specific targets. Such rules are under circulation among multiple authorities will be published March, 2009
      • Tier 1 Group (4 OEMs):
      • SAIC
      • FAW Group
      • Dongfeng Automobile Co.
      • Chang’An Automotive Co.
      • Tier 2 Group (4 OEMs):
      • BAIC
      • GAIG
      • Chery Automobile Co.
      • China Heavy Duty Truck Corp. (CNHTC)
      • 1st tier group
      • Each has annual production capacity of 2 million units
      • Encouraged to acquire smaller enterprise countrywide
      • 2nd tier group
      • Each has annual capacity of 1 million units
      • Encouraged to acquire smaller companies within surrounding region
      • To boost sales and production in 2009 to 10 million units and keeping growth at about 10 percent in the next 3 years
        • Market share of passenger vehicles with domestic brands should rise up from 34% to 40%
      • To consolidate numerous small regional manufacturers into bigger national auto groups
        • No. of OEMs account for 90% of total vehicle market to reduce from 14 to 10
      • To encouraging use of more fuel-efficient, lower-polluting vehicles.
        • Market share target of 1.5L and below passenger vehicles to increase to 40%, among which 1.0L and below will be 15%
        • Building up total 500K new energy vehicle (NEV) capacity, and increase market share of NEV to 5% of total PV sales.
      Main Objectives of Policy Definition Candidates China Government Plans To Build Up A “Big 10” Group Of Globally Competitive Automakers Based On Draft Industry Consolidation Plan
    • 11. Faced With A Sudden Contraction Of Global Demand, International OEMs Are Fighting For Survival Major OEMs’ Global Vehicle Sales 2005-2012Forecast (Source: Global Insight Dec.2008 Worldwide Market Forecast) List Of Brand And Asset On Sale By American Big 3 OEMs OEM Already Sold Announced to Sell Potential for Sale GM SAAB, Saturn, Hummer Opel Ford Jaguar, Land Rover, Mazda shares Volvo Chrysler 1 Billion USD non-performed assets including production facilities, tooling and dies
    • 12. Chinese OEMs Attempting To Integrate Foreign Acquisitions Into Their Operations Will Face Significant Challenges Key Challenges and Risks
      • Political/Legal Risks
      • Anti-trust restrictions and strict audit by in-country government
      • Potential resistance from public and other stakeholders who have interest or deep-rooted connections with the acquired brand/company
      • Potential objection from national security authority if company is military supplier
      • Operational Risks
      • Shortage of qualified management with international experience
      • Difficulties to integrate the parent company’ systems with the acquired company
      • Financial Risks
      • Capital investment requirements in transition process
      • Increased cost level by resulting from increased capacity and staffing
      • Lack of Synergy
      • Limited complementarities among target markets and customers
      • Significant complexity in sharing resources/technological capacities
      • Difficult to jointly develop new concept or product platform for global sales
      Cross-Cultural Examples
      • Daimler and Chrysler
      • Different business models
      • No shared platforms and network
      • Incompatible structure/process
      • Cultural Risks
      • Conflicts caused by huge differences in language, culture and values
      • Misunderstanding and failure due to ineffective communications
      • Lenovo and IBM
      • Received the US Anti-trust audit
      • Challenged by National Security Dept
      • Successfully passed all approvals
      • SAIC and Ssangyong
      • High labor cost driven by Korean Union
      • Billions of RMB Incremental Capital Injection Request
      • SAIC decides to liquidate
      • Ssangyong leadership gap
      • Ford and Mazda
      • Reasonable success in product/technology sharing
      • Ford sold out 25% Mazda shares to raise cash
    • 13. While China May Play A Role In the Restructuring of the Global Automotive Industry, Several Transactional Barriers Remain
      • China government policy and financial support essential for overseas acquisition
        • China Commission of State-owned Asset Supervision and Administration (SASAC) has stated that they are not ready to approve any overseas acquisition project by China vehicle manufacturing or financial enterprises in near term since they are not clear on the OEMs’ asset/brand value
        • Limited funding capacity of local OEMs necessitates that the government provide a source of investment capital needed to complete the transaction
      • Select asset/technology acquisition is still an economical and feasible way for China OEMs to get access to globally advanced technologies
        • Current and upcoming examples include
          • SAIC’s acquisition of Rover brand/assets for development of own brand vehicles
          • Geely’s acquisition of Manganese Bronze in 2006 (London taxi)
          • Potential deal of Fiat small car platform sharing with GAIG for own brand car development
      • Shortage of expertise in international acquisition and post-merger integration is yet another major hurdle for China OEMs
        • Local OEMs would likely rely heavily on outside experts with knowledge of international markets
        • Such advisory services will help a smooth execution and successful restructure in early stage
          • Develop acquisition strategy and proper methodologies
          • Define the right target of acquisition through a broad range of evaluation
          • Advise the due diligence and business negotiation
          • Provide project management services and track full execution
          • Aid to cross-cultural communication and facilitate conflict resolution
    • 14. Opportunities & Challenges For China’s Automotive Industry During The Global Financial Crisis About Synergistics Limited www.synergisticsltd.com
    • 15. Synergistics Limited Your Gateway To The Far East
      • Synergistics Limited is an International business development advisory firm focused on building successful cross-border partnerships. Our professionals bring considerable experience in the formulation of market-entry strategies, competitive analysis, production/supply capability assessment, regulatory and government approval requirements and identification and qualification of JV/alliance partners. The firm utilizes proven methodologies for program management and negotiation of deals with clients in Asia.
      • Synergistics Limited will help your organization:
      • Formulate a strategic approach to the market
      • Devise plans for reaching out to partner organizations
      • Navigate the process of negotiating towards a result
      • We have experience in opening new international markets utilizing a life-cycle management approach from strategy formulation through industrialization. This methodology has proven effective in securing negotiated agreements to form new companies, achieving government approvals, ultimately resulting in the industrialization of components and production and sale of finished goods in multiple Asian countries.
      • Synergistics Limited brings seasoned experience in negotiating agreements, building strong relationships with government officials and clients and leveraging functional synergies.
      • Synergistics Limited will help you mobilize teams to capitalize on market opportunities. We bring a unique blend of management, global business, engineering and operational experience to your business. 

In addition to subject-matter expertise, we also bring an in-depth knowledge, appreciation and respect for the local culture and history to your organization.
      • Synergistics Methodology Life-Cycle:
      • Strategy Formulation
        • Development of specific and measurable project targets
        • Establishment of project management structure with leadership and working teams
      • Market and Competitive Assessment
        • Determination of the competitive landscape and key market participants
      • Production and Supply Capability Assessment
      • Understanding of Regulatory and Government Approval Requirements
      • Introduction to Potential Alliance Partners
      • Negotiation Strategy and Support
      www.synergisticsltd.com
    • 16.
      • Bill Russo is the Founder and President of Synergistics Limited. He has extensive experience in the automotive and electronics industries, with more than 25 years of experience at driving strategy and performance improvement in Fortune 500 environments.
      • In his role as the first Vice President of North East Asia automotive operations for Chrysler, Bill successfully negotiated and secured government approval for 6 vehicle programs within a 3-year time period with 3 different Asian partners. In this time period, he launched a regional holding company as well as 2 distribution companies. Bill oversaw the industrialization of the first Chrysler and Dodge-branded vehicles in Asia.
      • As head of Product & Business Strategy, Bill led the integration of 3 key planning functions: strategic planning, long-range product planning and the capital investment plan. He had played a major role in achieving a major business turnaround by strengthening operational transparency through deployment of a system-wide balanced scorecard. His work earned international acclaim and was featured in leading business journals ( Harvard Business Review , Controlling magazine).
      • As a Business Transformation Consultant, Bill has led global cross-functional multi-disciplinary teams in the identification and implementation of business improvement initiatives throughout key value streams and functions. He holds a US Patent for his innovative efforts towards reducing automotive New Product Development cycle time.
      • Bill is a dynamic speaker and frequently published author and opinion leader. His viewpoints on the China Automotive industry have been frequently published online and his viewpoints have aired on National Public Radio. Bill has also authored numerous articles on corporate governance, performance management , technology management and process reengineering. He has spoken frequently at conferences hosted by the Conference Board, Hammer & Company and the Balanced Scorecard Collaborative. He has also spoken at 2 Automotive industry conferences at China’s Great Hall of the People.
      • Bill is a tireless and passionate individual who utilizes his process-driven skills to achieve results.
      • Bill has a Master of Science in Manufacturing Systems Engineering from Lehigh University in Bethlehem, PA, and a Bachelor of Science in Chemical Engineering from Columbia University in the City of New York
      www.synergisticsltd.com

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