China Moving Up the Value Chain and Role of Technology Transfer


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Bill Russo's presentation to the EU Trade Commissioner in Brussels on December 9, 2011.

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China Moving Up the Value Chain and Role of Technology Transfer

  1. 1. Booz & Company December, 2011 Brussels, Belgium Discussion DocumentChina Moving Up The Value Chain &The Role Of Technology TransferSeminar with Commissioner de GuchtBill Russo (罗威)
  2. 2. The China Context: Speed and IntensityCompeting in the Largest and Fastest Growing Auto MarketUnderstanding China’s Auto Policies and R&D ChallengesThe Challenge of Green MobilityConclusionsBooz & Company 1
  3. 3. China has witnessed stunning economic growth over the pasttwenty years Key Shifts Shanghai Now Shift of global centers of gravity for some industries 20 Years Ago – e.g., China is now the largest automotive market and producer in the world, and India is among fastest growing 20 Years Ago Now countries “Must Consider” gaming dynamics for some others – e.g., both China and India are low cost souring countries for most international manufacturers Breeding ground for innovations driven by market demand and/or local competition – e.g., Coke does more product innovations in China than any other markets except Japan Emergence of real wealth (HNWI’s and middle class) and Beijing grand-scale urbanization – e.g., China soon to become the world’s largest luxury goods market 20 Years Ago Now Huge infrastructure still ongoing – US$300 billion plan to build a nationwide high-speed rail network by 2025 Increasing prominence of local companies on a global scale – Resources, capabilities, market positions, etc. Significant capital flow to China and India, in particular private equity fundsBooz & Company 2
  4. 4. Chinese companies are increasingly ambitious and competitive Telecom Equipment Automobiles Sportswear/Apparel Mobile Devices Food/Beverages Construction EquipmentBooz & Company 3
  5. 5. MNCs adopting China strategy will deal with a series of keythemes 1 Open China: Market continues to open up, large-scale urbanization progresses -- the new urban middle class is becoming global consumers, with a diversity and complexity that most outsiders still don’t understand 2 Entrepreneurial China: The fast-moving, experimental, research-adept businesses are shedding their low-cost identities and building capabilities to go global 3 Official China: The government is balancing control and stability while continuing in promoting a more market- driven economy 4 One World: Companies create new sources of sustainable advantage by integrating China-based operations with their global business systemsBooz & Company 4
  6. 6. China’s development priorities are evolving through different erasof leadership… Jiang Zemin (1989 - 2002) Hu Jintao (2003 - 2012) Xi Jinping (2012 - )“Keeping a low profile” “Peaceful rise/development” “Strive for green development”韬光养晦 和平崛起 努力实现绿色发展 “Open wider to the world and realize“Allowing a few to get rich first” “Harmonious society” harmonious development”让一部分人先富起来 和谐社会 坚持扩大开放,不断实现和谐发展 “Strengthen international cooperation and“Development is the hard principle” “Sustainable development” sustain common development”发展才是硬道理 可持续发展 继续加强合作,持续实现共同发展 “Value importance of science and“Economic development as the core” “Scientific development view” technology”以经济建设为中心 科学发展观 高度重视科学科技“The ‘Three Represents’” “ Eight Honors and Eight Disgraces” “Eradicate poverty and achieve balanced三个代表 八荣八耻 development” 着力消除贫困,逐步实现平衡发展“Made in China” “Created in China” “Bring forth talent to promote comprehensive中国制造 中国创造 development” 大力培养人才,推动实现全面发展Source: Booz & Company analysisBooz & Company 5
  7. 7. …and China has a clear development agenda Where China Needs Help More balanced economic development – Government vs. private consumption Boosting – Less reliance on export; effective flow of money consumption – Urban vs. rural living standard Sufficient social “safety net” and care for people China’s Objective – Healthcare Valuing human in the Next Decade – Social security/ pension capital – Education Socio-economic development Improving transformation in a Expanding tertiary/ services industry sectors Upgrading productivity and innovation technology/ sustainable knowledge manner Preserving environment Managing Efficient usage of energy resources and Alternative energy environment Strong development in urban and rural areas Developing urban Reducing urban-rural disparity in development and rural infrastructureSource: Booz & Company analysisBooz & Company 6
  8. 8. The China Context: Speed and IntensityCompeting in the Largest and Fastest Growing Auto MarketUnderstanding China’s Auto Policies and R&D ChallengesThe Challenge of Green MobilityConclusionsBooz & Company 7
  9. 9. For the Global Auto market, Asia pacific represents the greatestopportunity for growth… Eastern Europe Western Europe Growth thru 2020: 2,835K NAFTA Growth thru 2020: 1,527K CAGR (2010-2020): 6% Asia Pacific Growth thru 2020: 5,528K CAGR (2010-2020):1% Growth thru 2020: 12,626K CAGR (2010-2020):4% CAGR (2010-2020): 5% Africa/Middle East Growth thru 2020:1,264K = Area Reflects Size Of 2009 Actual PV Sales Latin America CAGR (2010-2020):4% Growth thru 2020: 2,899K = Area Reflects Size Of 2020 Forecasted PV Sales CAGR (2010-2020): 6% ‘000 Units Market 2010 PV 2015 PV 2020 PV Asia Pacific 22,212 30,350 34,838 NAFTA 11,545 16,877 17,073 Western Europe 12,776 14,133 14,302 Eastern Europe 3,261 5,035 6,095 Latin America 4,030 5,570 6,929 Africa/Middle East 2,946 3,783 4,211Source: Global Insight DataBooz & Company 8
  10. 10. …within Asia pacific, the greatest growth opportunity is China China: Growth thru 2020: 8,653K CAGR (2010-2020): 6% Japan: = Area Reflects Size Of 2009 Actual PV Sales Mongolia Japan Growth thru 2020: -457K North Korea CAGR (2010-2020): -1% = Area Reflects Size Of 2020 Forecasted PV Sales China South Korea India Pakistan Nepal South Korea: Bhutan Bangladesh Myanmar Taiwan Growth thru 2020: 110K Laos CAGR (2010-2020): 1% ‘000 Units Vietnam Taiwan: Cambodia Market 2010 PV 2015 PV 2020 PV India: Growth thru 2020: 79K Philippines Thailand CAGR (2010-2020): 2% China 11,462 17,296 20,115 Growth thru 2020: 2,621K CAGR (2010-2020): 8% Malaysia Japan 4,254 4,075 3,797 ASEAN: Growth thru 2020: 1,074K India 2,240 3,700 4,862 CAGR (2010-2020): 5% Indonesia ASEAN* 1,634 2,185 2,709 South Korea 1,302 1,407 1,412 Australia 807 1,020 1,117 Australia Australia: Taiwan 299 337 378 Growth thru 2020: 310K CAGR (2010-2020): 3% New Zealand 63 82 87 New Zealand Rest of Asia Pacific 152 247 328 Total 22,212 30,350 34,838Note: ASEAN figures include top 5 ASEAN member countries, including Thailand, Malaysia, Indonesia, Singapore, and Philippines Rest of Asia-Pacific includes Hong Kong and PakistanSource: Global Insight DataBooz & Company 9
  11. 11. 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 45% Others 18.06 50% +23% 13.64 5% Brazil 4% 6% Germany 9.67 5% 7% 8.98 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 analysisBooz & Company 10
  12. 12. International OEMs still dominate, but local Chinese brands havegrown significantly in terms of market share INTERNATIONAL/ LOCAL OEM CHINA PV MARKET SHARE International OEMs/Brands Top 8 Domestic OEMs International OEMs/Brands Local OEMs/Brands 17.76% VW 3.87% 16.77% Chery 4.47% 10.31% China PV Sales 2008-2010 TOYOTA 7.14% 8.80% (incl. import, million units) 5.67% GM1 FAW 9.68% 5.04% 8.47% 11.5 Hyundai 3.34% 9.29% Geely 8.29% 3.69% Honda 5.66% International 6.46% 69% 2.86% Nissan BYD 5.99% 5.7 4.65% 2.74% FORD 2.58% 1.67% 75% Brilliance 3.18% 1.66% PSA 3.19% 31% Local 3.14% 25% 1.08% Suzuki Greatwall 2.28% 2.16% 2008 2010 0.53% MMC 0.47% 1.54% 1.14% Chang’an2 BMW 1.92% 1.39% 2008 20101) Excluding CV volumes from SAIC-GM-Wuling2) Including AVICSource: Global Insight China ReportBooz & Company 11
  13. 13. China’s unique market demand profile provides considerable market opportunities for both Global and Chinese players In China auto market, there are demands in different markets China Market Characteristics Market demand Weak Very large market with significant Global players regional variation in demand patternsHigh margin High-end – Large potential customer base for local market auto OEMs in lower-tier / rural markets Global and Demand shifting from more developed Chinese players Mid-end market coastal cities to lesser developed interior marketsLow margin Low-end market Chinese players Strong Different players could target different market Booz & Company 12
  14. 14. To compete in China, multi-national companies (MNCs) areincreasingly expanding their capabilities along the value chainStage 1 Product Sales &Circa early R&D Sourcing Manufacturing Marketing Service Development Distributionto mid 1990s Start a few, isolated production facilitiesStage 2 Product Sales &Circa mid R&D Sourcing Manufacturing Marketing Service Development Distributionto late 90s Began to use China as a Began to integrate Built brand for the local market procurement source production facilities and local sales & distribution within ChinaStage 3 Product Sales &Early 2000s R&D Sourcing Manufacturing Marketing Service Development Distribution Integrate China into global Integrate China into global Transfer global best practice to sourcing network manufacturing network ChinaStage 4Present to Product Sales & R&D Sourcing Manufacturing Marketing Service Development Distribution5-10 yearshence Build R&D and PD centers in China Integrate China into global value chainSource: Booz & Company analysisBooz & Company 13
  15. 15. VW, GM and Hyundai are leaders in the largest and fastestgrowing China market… Passenger Vehicle Sales by Top 10 Manufacturers (2002 Vs. 2010) 000’ Unit 000’ Unit Shanghai Volkswagen 31% 302 SGM 9% 1,039 Faw-Volkswagen 22% 208 SVW 8% 1,001 Shanghai GM 12% 111 FAW-VW 8% 870 Tianjin Faw 10% 96 Beijing Hyundai 7% 703 Peugeot Citroen 9% 85 Dongfeng Nissan 6% 661 Changan Suzuki 7% 65 Chery 5% 682 FAW- 520 Guangzhou Honda 6% 59 5% Toyota Chery 5% 50 BYD 5% 510 Guangzhou 405 Geely 5% 46 5% Honda Dongfeng Nissan 4% 41 Changan Ford 4% 403 Others 21% 197 Others 37% 4,471Source: China PV Database; Booz & Company analysisBooz & Company 14
  16. 16. …and localization of R&D and product development capabilityin China has contributed to their success 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 PATAC local content as supply minimum local content chain develops in China. investments in requirements to preserve R&D plans are unclear at development of R&D / quality, engineering and this point. PD capabilities in brand differentiation. China. Product development and launch of VW Lavida done in China for the domestic market Hyundai: Almost 100% local Audi: Reached ~70%- content for Elantra. Highly 80% localization content established relationships (by value), designed with local supply base and JV ventures for domestic products to meet China ER&D and PD activities market Followers LeadersSource: Literature research; Booz & Company analysis 15
  17. 17. Audi’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, Synergistics Limited analysis 16
  18. 18. GM has enjoyed great success by leveraging its regional product development capacities Examples for Development of Products Geared towards China Buick Park Avenue Buick New Lacrosse Buick Excelle Segment: Std. Large Instrument panel, center Over in China, the Buick Excelle GT Price Range: 328.8K – 498.8K RMB console and door trim panels will be offered with the choice of Comments: Strong competitor of Upper interpenetrate with each other either a 1.8-liter naturally-aspirated Middle segment; Longer wheelbase of The backseat was designed in engine that churns out 145 3009mm, to replace Buick Royaum (WB fastback streamline shape horsepower or a more potent 1.6- 2939mm) with additional rear passenger liter turbocharged four-cylinder mill luxury content pumping out 181 hp The Excelle GT is built on the same platform that underpins the Chevrolet Cruze, Opel Astra and two-door Excelle XTLonger Wheel Base Upgraded Interiors and additional Rear Seat LegroomSource: Literature search; Synergistics Limited analysis 17
  19. 19. The China Context: Speed and IntensityCompeting in the Largest and Fastest Growing Auto MarketUnderstanding China’s Auto Policies and R&D ChallengesThe Challenge of Green MobilityConclusions 18
  20. 20. The Chinese government actively controls the auto industry,which it considers strategic to the economy as a whole China’s Product Market Freedom Matrix Background Consumer Goods Auto The degree of commercial freedom in China Free Parts varies from one industry to the next on two dimensions Tourism – Restrictions on foreign ownership – Restrictions on production and sale of Product market Telecom Logistics Equipment specific goods The automotive industry is characterized by Chemicals increasing liberalization of product markets (i.e., Pharmaceuticals Retail Banking demand side) but little relaxation of the existing Life Insurance Auto Manufacturing restrictions on foreign ownership (supply side) Restricted Media Refining The Chinese government considers automotive a strategic sector, and actively steers industry Telecom Operation development, primarily through its control over competition and other supply side factors Restricted Ownership Free Change in Degree of Freedom Early Today 1990sSource: Ed. Tse “The China Strategy” 19
  21. 21. The China Government continually issues policies to regulate theautomotive market and help grow the industry Commercial Policies (Partial) Target/ Impact – Measures for Administration of Domestic Securities Investments by Qualified 08. 2006 Foreign Institutional Investors – Provisions on Takeover of Domestic Enterprises by Foreign Investors 08. 2006 – Regulate acquisition of foreign enterprise – 11th 5 – Year’s Plan (Automotive) 09. 2006 – NDRC Circular / Structural Adjustment - Automotive – Standardize the automotive market 12. 2006 – Drafted regulations on Manufacture Admittance of New Energy Vehicle 03. 2007 – Encourage industry consolidation – Export License Administration on Complete Vehicles 03.2007 – New Vehicle & Vessel Usage Annual Tax Rate – Protect local automotive OEMs 06.2007 – New Penalty Tax for non-compliance vehicles for Stage II Fuel Consumption Mid 2008 – Improve enterprise capability Limits – Adjustment and Revitalization Plan - Automotive 01.2009 Technical Policies (Partial) Target/ Impact – LCV Fuel Consumption Limitation Standard 07.2007 – Encourage fuel efficient vehicles/engines – Remove encourage term of diesel from NDRC 11.2007 12.2007 – Protect intellectual property rights – Vehicle interior pollution limit test method (HJ/T400-2007) – CCC implementation rules update 01.2008 – Promote technology development – VIN Supervision on CBU vehicles ( MOPS/AQSIQ) 01.2008 – Enforce safety standards – Started China III (EU III Equivalent) for LDT and diesel vehicles 07.2008 – Started China IV (EU IV Equivalent) 10.2010 – Protect environmentSource: Booz & Company analysis 20
  22. 22. China follows European regulatory standards in order to promotehigher quality vehicles China and Euro Emission Control Standard Enforcement Process 1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 China IV China III (Euro IV China V China I China II (Euro III Equiv- (Euro V (Euro I (Euro II Equivalent) – alent) – Equivalent) Equivalent) Equivalent) LDV(1) in 2007 LDV and HDV only China HDV(1) in 2008 HDV Euro I Euro II Euro III Euro IV Euro V Euro VI Euro Impact on Truck Quality China governments efforts on emissions control standards will result in upgraded trucks – OEMs have to introduce new technology to upgrade engines – Modifications of other components (e.g. Chassis) are also required to support engine changes The implementation of EURO III in 2008 increased average truck prices by ~RMB20,000/Unit, we expect that EURO IV will further increase the price in the futureNote: (1) LDV – Light Duty Vehicle, HDV – Heavy Duty Vehicle, including both bus and trucksSource: “Vehicle Emission Control and Fuel Quality, Professor He, Tsinghua University”, Literature search, Booz & Company AnalysisBooz & Company 21
  23. 23. Stricter regulatory requirements on automotive investments aredesigned to accelerate technology transfer to China Overview of Government Regulations in China Investment & Establishment of R&D Centers by MNCs Highlights of Regulation Changes Overall Regulation Trends NDRC Circular of Auto Industry Structure Adjustment Implications for MNCs Dec, 2006 – Reinforced overcapacity control – Compliance with JV commitment Stricter requirements on setting up R&D Upgrade the automotive – Stressed autonomous R&D facility means longer term commitment industry to achieve – Emphasized on fuel economy & emissions – Initial investment of 500M RMB in R&D competency in the global State Certified Enterprise Technical Center center market Administration Rules – Localized powertrain Apr, 2005 – Respond to R&D center rules in AIDP – Requirements on dedicated R&D – Detailed R&D center requirements & the expenditures, work force and operation process for government approval capitals – Listed the criteria for annual evaluation Automotive industry development policy (AIDP) Chinese government is pushing foreign May, 2004 – Mandatory requirement for new PV OEMs to transfer their advanced approval technology – Minimum investment ¥500M for R&D Build up the automotive – R&D centers with only market research – New powertrain project is required to set up industry by leveraging the R&D facility & some localization capabilities might cooperation with foreign not be approved by the government or Circular of MofCOM on establishment of OEMs research with foreign investment & will face regulatory issues in the future Apr, 2000 development center – The practice of transferring mature – Defined capital & staffing requirements vehicle models to China might not be – Regulated structure, business scope & viable any more entity approval process – Illustrated preferential taxation policiesSource: Booz & Company Analysis 22
  24. 24. China has relatively mature IP protection regulation system, butthe IP consciousness and law enforcement still remain problematic Legal Framework for Protecting IP in China Potential Risks for MNCs’ IP in China Laws & Regulations History of local OEMs to infringing on IPs of MNCs – Chinese OEMs have historically relied on “upgrading” of foreign vehicle models due to Others Patent Copyright Trademark (i.e. Unfair lack of self-owned IPs Competition) – There have been cases where vehicles made by local OEMs look very similar to foreign models while competing with lower price Legal Implementation & Difficulties MNCs might not necessarily win even if the infringement does exist Description – Local OEMs tend to leverage media coverage, Administrative and Three different offices for patent, posing risks for MNCs to enrage local Enforcement System copyright and trademark at both the state customers and local level Enforcement will be carried out by local – The Chinese authority tends to favor local IPRs personnel, assisted by police from OEMs, and adopt strict definition of infringement the local Public Security Bureau – In all the three most prominent cases, i.e. Difficulties Insufficient that infringement is crime Toyota vs. Geely, Chevrolet vs. Chery; Honda Local protectionism may dilute the vs. Shuanghuan, MNCs lost to local OEMs strength of central legislation or the power of law enforcementSource: Booz & Company Analysis 23
  25. 25. China might lack sufficient local resources for MNCs to achieveR&D goals, especially in securing experienced R&D talents China has weak Automotive Industry R&D Capabilities1) R&D Staff R&D Staff 8% Comments 30% China’s human resources structure cannot support its development target set forth for the automotive industry 70% – Only 8% of employees are R&D related in China, Other Staff 92% ~25% of the “norms” in developed countries – Due to rapid industry growth and the need to Other Staff upgrade industry standards, the percentage is Developed Countries China estimated to grow fast in the following years The supply of automotive R&D talent in China is extremely limited Insufficient Pipeline of Automotive R&D Talents2) – China has a short history of automotive development, thus limited number of experienced R&D talents 2,263 Around 100 – China has speeded up the investment in education, institutions offer but the output quality is much less desirable Undergrad 1,079 100 auto-related majors Institutions China faces severe shortage in automotive R&D while only 8 have talents Other Higher achieved meaningful – It is estimated that the gap for local automotive Education 1,184 size R&D personnel is around 500,000 Institutions 8 – The competition to lure experienced R&D talent is extremely fierce in ChinaNote: 1) China Auto Talents Society Report 2006; 2) China Social Statistical Yearbook 2009Source: Booz & Company Analysis 24
  26. 26. The China Context: Speed and IntensityCompeting in the Largest and Fastest Growing Auto MarketUnderstanding China’s Auto Policies and R&D ChallengesThe Challenge of Green MobilityConclusions 25
  27. 27. China has a clear and compelling need to reinvent the propulsiontechnology of the automobile Air Pollution – Bejing, 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 analysisBooz & Company 26
  28. 28. As the leading automotive market, China has the opportunity todrive the standards and architecture for the global auto industry Shanghai: A Lean, Green Detroit “… In acquiring a stake in BYD, Buffett broke a couple of his own rules. "I dont know a thing about cellphones or batteries," he admits. "And I dont know how cars work." But, he adds, "Charlie Munger and Dave Sokol are smart guys, and they do understand it. And theres no question that whats been accomplished since 1995 at BYD is extraordinary…”Source: Literature research 27
  29. 29. The central government will play a proactive role in the electrification of transportation 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 28
  30. 30. Comparing with mature markets, China stands out as asignificant opportunity and seems more ready to introduce EV Key Forces in China Driven by greater environmental Passenger ownership per pressure and energy Government Consumer capita in China suggest a very China consumption, China Support Acceptance low penetration of vehicles in government has stronger Market Is a China incentive to promote cleaner Significant Consumer habit in China is still technologies in automobile Opportunity in the forming process due to industry relatively short driving history Meanwhile, China’s automobile Thus consumer acceptance to industry has lagged behind EV is comparatively high than foreign leaders under internal mature markets (e.g. US with Mass Production combustion engine era, and approx. 20-year driving history) Environment the emergence of EV provides Meanwhile, the switching cost is a great opportunity for China to expected to be low catch up Readiness for EV China possesses ample resources to achieve low cost production Mature Market Established battery manufacturers with China large-scale capacity, especially supply lithium battery to cell phone/laptopSource: Booz & Company analysis industry 29
  31. 31. Since 2001, EV has been a key part of development agenda, thishas helped propel EV’s technical development to-date 10th Five-Year-Plan 11th Five-Year-Plan 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 National science development program (863): “National science development program (863)”: key electric vehicle projects key energy efficient and alternative energy vehicle projects Car: more prototypes developed by OEMs and Car: small scale production and export overseas universities BEV Bus: demonstration on Beijing city bus line Infrastructure: State Grid considering charge station construction Car: Local OEM released HEV launch plan Car: prototype developed HEV Bus: 400,000km demonstration in Wuhan Bus: HEV and PHEV listed on the government product agenda bulletin Car: prototype developed in Tongji University Demonstration: UNDP in Shanghai and Beijing FCEV Bus: prototype developed in Tsinghua University Infrastructure: 2 filling stations in Shanghai and Beijing Government initiatives led the development More OEMs involved in EV initiatives of a number of EV project More efforts in commercialization EVsNote: BEV = Battery-powered Electric Vehicles; HEV = Hybrid Electric Vehicles; PHEV = Plug-in Hybrid Electric Vehicles; FCEV = Fuel Cell Electric VehiclesSource: Synergistics Limited analysis 30
  32. 32. In the “12-5” period, China has committed to developing sevenemerging industries 12-5 Plan Strategy Highlight Drivers for the Trend Continue to increase value added China’s leading industries, such as steel Eliminate outdated capacity industry and petrochemical industry, consume Leading Develop advanced equipment Energy a larger amount of energy per unit of GDP, Industries manufacturing industry Consumption whose growth will not be sustainable with the limited reserve of energy Increase government support to China has very limited reserve of natural develop the 7 emerging industries* resources such as ore, oil, etc, which motivates Seven Lack of the Chinese government to cultivate industries of strategic significance Emerging Natural that are less natural resource consuming Industries GDP contribution of the 7 industries Resources should increase to 8% by 2015 from the current 2% Cultivate the culture industry to be a With China’s labor cost rising, Chinese industries leading industry have been losing edge in international competition Producer Implication: the share of value added Increasing It is necessary for China to transform its industry Services of GDP by the culture industry needs Labor Cost structure to make it more technology and Industry to double from the current 2.5% to innovation-driven 5%Note: 7 strategic emerging industries include energy efficiency & environmental protection, new generation information technology, bio-technology, high-end equipment manufacturing, alternative energy, new materials, electric vehicleSource: China 12-5 plan; Literature research; Booz & Company analysis 31
  33. 33. Summary of China 12th Five-Year Plan, the Energy Saving andNew Energy Vehicles Development plan (2011-2020) proposal Policies Summary Implication Government will push core technology OEM Improving energy efficiency, environmental protection and transfer from international brands to Innovation safety technologies; indigenous brands through approval of new JV and capacities Revised Policy on Development of Automotive Promote cross-regional M&As Increase Industry might be released this year. Industry To form 2 to 3 super big automotive groups with production SAIC, FAW, Dongfeng and Chang’An will be Concentration capacity with over 3 million units encouraged to conduct more takeovers MIIT, NDRC, MOST and MOF are key regulatory authorities Government Funding: 100 billion yuan •MOST supports development of electric vehicles as priority, ($15.28 billion) New-Energy pure EV for buses and mini cars and hybrid and plug-in hybrid Vehicles power auto for medium size vehicles •MIIT supports development of energy saving vehicles (including hybrid power vehicles) and new energy vehicles (including pure EV and plug-in hybrid power vehicles) Encourage the development of self-owned brands Domestic self-owned brands to reach 50% Industry Upgrading Enhance R&D capability for whole vehicles and key Over 10% self-owned brands to export modules/parts More tax break and incentives for electric Consumption Encourage the purchase of energy saving vehicles car makers and buyers are expected Stimulus Differentiated incentives for hybrid and electric car buyers are releasedSource: China 12-5 plan; Literature research; Booz & Company analysis 32
  34. 34. China government has established their medium-term targets forNEVs, and planned around 5~10Mn PARC by 2020 Electric vehicles in Chinese central government’s Alternative-energy vehicles 12th five-year plan (2011-15) development plan (2011-20) Highlights Highlights No. of electric vehicles on the road: 1Mn by 2015 Financials: Chinese central government to provide Production capacity of vehicle batteries: 10Bn 100Bn RMB for the next 10 years in developing WH. Cost of vehicle batteries should halve due to alternative-energy electric vehicles increased production scale Number of electric vehicles on the road: 5~10Mn by 2020. Equivalent to 20% of all private passenger Guidelines vehicles R&D: continue the country’s 3-by-3 R&D framework Production capacity of BEV: 1Mn a year by 2020 and increase its pace in EV commercialization Infrastructure: increase the network of EV charging Program coverage stations R&D and technical developments Technical standards: set Chinas own EV standards Development of core EV components as well as participating in setting international Commercialization, demonstration and roll-out pilot standards programs Expand the use of EV in the public transport Establish network of charging stations in public sector places (such as car parks) Increase technical collaborations between EV stakeholders Develop technical and R&D talentsSource: Literature research, Booz & Company analysis 33
  35. 35. The China Context: Speed and IntensityCompeting in the Largest and Fastest Growing Auto MarketUnderstanding China’s Auto Policies and R&D ChallengesThe Challenge of Green MobilityConclusions 34
  36. 36. Conclusions The global economic center of gravity has shifted to the East, and China has become the battleground for 21st Century auto industry dominance – Successful global players develop local innovation capabilities through customized product development, “market-back” perspective based on deep understanding of local market, and leveraging of global resource base in R&D – Price is still the most important consideration factor in purchasing a car for Chinese consumers, the ability to tailor products to their needs while maintaining low cost is critical to success in the market. Successful MNCs must realize localization with low cost and integrate China into their global R&D network In an increasingly hyper-competitive environment, MNCs face stricter regulations set forth by the Chinese government in getting approval for setting up projects in China – Requirements on larger capital investment, localized powertrain and dedicated work forces etc. all add up to the entry barriers – The Chinese government encourages foreign OEMs to transfer their advanced technology Environment and economic sustainability concerns are urging ”Green Mobility” innovations, which will potentially revolutionize the 21st Century global auto industry – China, with desire for a sustainable growth and strong government support, is striving to lead this Green Mobility revolution – The Green Mobility revolution will require a new “ecosystem” of collaborative partnerships, and China’s young industry lacks the key capabilities required to repower transportation – MNCs must take note of China’s desire to lead this revolution leadership and seek opportunities to get involved in its new EV eco-system development Given the macro trend of technology transfer, MNCs must take preventative actions concerning IP protection issues – China has set up a comprehensive legal framework for IP protection, but the problem lies in the implementation and enforcement – The Chinese legal system tends to favor local companies, thus MNCs might lose lawsuits even if reasons are justified 35