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An Assessment of Emerging Trends and Opportunities In The Battleground For Dominance Of The 21st Century Global Auto Industry

An Assessment of Emerging Trends and Opportunities In The Battleground For Dominance Of The 21st Century Global Auto Industry

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    China's Automotive Industry in 2012 China's Automotive Industry in 2012 Presentation Transcript

    • Synergistics Limited March, 2012 Hong KongChina’s Automotive Industry in 2012An Assessment of Emerging Trends and Opportunities In The BattlegroundFor Dominance Of The 21st Century Global Auto IndustryMarch 6, 2012 1
    • The China Context - speed and intensity (1/2) Shanghai 20 Years Ago Now 2
    • The China Context - speed and intensity (2/2) Beijing 20 Years Ago Now 3
    • Chinese companies are increasingly ambitious and competitive Telecom Equipment Automobiles Sportswear/Apparel Mobile Devices Food/Beverages Construction Equipment 4
    • 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 analysis 5
    • To win in China, leading MNCs are expanding their capabilitiesalong the value chainStage 1Circa early Product Sales & R&D Sourcing Manufacturing Marketing Serviceto mid 1990s Development Distribution §  Start a few, isolated production facilitiesStage 2Circa mid to Product Sales & R&D Sourcing Manufacturing Marketing Servicelate 90s Development Distribution §  Began to use China and India as §  Began to integrate §  Built brand for the local market a procurement source production facilities and local sales & distributionStage 3 Product Sales &Early 2000s R&D Sourcing Manufacturing Marketing Service Development Distribution §  Integrate China and India into §  Integrate China and India into §  Transfer global best practice global sourcing network global manufacturing networkStage 4Present to Product Sales & R&D Sourcing Manufacturing Marketing Service5-10 years Development Distributionhence §  Build R&D and PD centers §  Integrate China and India into global value chain 6
    • 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 –  Standardize the automotive market –  NDRC Circular / Structural Adjustment - Automotive 12. 2006 –  Drafted regulations on Manufacture Admittance of New Energy Vehicle 03. 2007 –  Encourage industry consolidation –  Export License Administration on Complete Vehicles 03.2007 –  Protect local automotive OEMs –  New Vehicle & Vessel Usage Annual Tax Rate 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: Synergistics Limited analysis 7
    • 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 –  Mandatory requirement for new PV approval OEMs to transfer their advanced May, 2004 –  Minimum investment ¥500M for R&D technology –  New powertrain project is required to set up –  R&D centers with only market research Build up the automotive R&D facility industry by leveraging the & 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 & development will face regulatory issues in the future Apr, 2000 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 8
    • Part 1: Review of market developmentsPart 2: Market developments and government policy changes in 2011Part 3: Emerging trends to anticipate in 2012 and beyondPart 4: Conclusion and recommendations 9
    • Part 1: Review of market developmentsPart 2: Market developments and government policy changes in 2011Part 3: Emerging trends to anticipate in 2012 and beyondPart 4: Conclusion and recommendations 10
    • In 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 Data, Synergistics Limited analysis 11
    • …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 Japan Mongolia 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 CAGR (2010-2020): 1% Laos ’000 Units Vietnam Taiwan: Cambodia Market 2010 PV 2015 PV 2020 PV Growth thru 2020: 79K India: 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 Data, Synergistics Limited analysis 12
    • China contributed 32% of the global light vehicle sales increasefrom 2007 to date Country share of incremental Global Light Vehicles Sales 1) 2007 - 2012 Other Develope Mature d Markets: Japan Countries 23% 2% Korea 2% China US 32% 12% Other Developing Countries 11% (1) Brazil 2% India Thailand 19% 2% Mexico 2% Indonisia 3% Russia Developing 5% Countries: 77%1) Includes A, B, C, D, E, F, MPV,SUV,light passenger car, and light trucksource: Global Insight 2010, Booz & Company analysis 13
    • China auto industry growth rate slowed in 2011 after explosiveexpansion in last few years Overall China Auto Industry by Sales Segments (Unit: ’000, 2007-2011) 18,505 Segment CAGR (’07-’11) 18,062 Total 2011 sales = 18.5 M (+2.45%) Sales of PV + 5.19% Sales of CV – 6.31% 4,020 Commerical Car 12.7% 4,313 13,645 2,246 PV-Crossover, Minicar 22.8% 2,492 3,330 497 PV-MPV 21.8% 445 1,618 PV-SUV 45.9% 9,381 1,318 8,792 1,948 2,634 249 2,494 658 1,063 988 197 357 226 446 10,125 PV-Basic 21.9% 9,494 7,461 4,727 5,040 2007 2008 2009 2010 2011 Total 20.4%Source: CAAM, GF Securities, Synergistics Limited analysis 14
    • VW and GM are leaders in the largest and fastest growing Chinapassenger car market Passenger Vehicle Sales by Top 10 Manufacturers (2002 Vs. 2011) 000’ Unit 000’ Unit SVW 31% 302 SGM 8% 1186 FAW-VW 22% 208 SVW 8% 1166 SGM 12% 111 FAW-VW 7% 1035 Tianjin Faw 10% 96 Dongfeng Nissan 6% 809 Dongfeng PSA 9% 85 Beijing Hyundai 5% 740 Changan Suzuki 7% 65 Chery 4% 634 Guangzhou Honda 6% 59 Chongqing Changan 4% 543 Chery 5% 50 FAW-Toyota 4% 529 Geely 5% 46 BYD 3% 449 Dongfeng Nissan 4% 41 Geely 3% 433 Others 21% 197 Other 48% 6963Note: SGM Wuling is not included for this analysisSource: China PV Database; CAAM, Booz & Company analysis 15
    • China has become an increasingly important market for premiumbrands…especially after the global economic crisis Sales Growth for Major VMs China Sales Share for Major VMs 2009 vs. 2010 2010, % of Global Sales Ranking of China sales by importance China #1 34% 29% VW Global VW 10% 47% 22% #1 Audi Audi 14% 73% 11% #3 BMW BMW 14% 101% 11% #3 Mercedes Mercedes 14% China’s growth is much faster Sales in China are becoming more than global average and more important to major VMSource: Global Insight; Booz & Company analysis 16
    • Chinese brands dominate the commercial vehicle markets Leading Chinese Construction Leading Chinese Truck Competitors Equipment CompetitorsHeavy Wheel Duty LoaderTruck FAW CNHTC DongFeng Foton Shaanqi Liugong LonKing XGMAMedium Excavatorsto Light and Others SANY ZOONLION Duty Truck FAW DongFeng Foton JAC XuGong 17
    • Part 1: Review of market developmentsPart 2: Market developments and government policy changes in 2011Part 3: Emerging trends to anticipate in 2012 and beyondPart 4: Conclusion and recommendations 18
    • While there is clear growth in the SUV, MPV and cross-over segments, China remains a 70% sedan market Std Lux / SUV/ 2011 PV Sales Micro Small Compact Std / Lux Mid MPV Brand Full Cross-over Market Share 6.2% 12.6% 37.0% 11.8% 1.9% 26.9% 3.6% 2,201 1186 419 803 618 1,172COPV: Crossover Passenger Vehicle - i.e. pickup and light buses with 9 seats or under Source: Accuracy Automotive, CAAM, Synergistics Limited analysis 19
    • Driven by government tax incentives and shift of productpreference, 2011 has seen a mixed results of segment growth… 2011 sales Year on year Segment   Sub-segment   (’000)   growth (%)   Sales growth of SUV and MPV Vehicle sales   Total 18,505.1 2.5% outperform passenger cars Passenger Total   14,485.3 5.3% Vehicle   SUV   Subtotal   1,593.7 20.2% SUV grew much faster than other Compact SUV 2.0L and below   N/A 41.9%1) segments, and compact SUV grew 41.9% in the first half year of 2011 MPV   Total   497.7 11.7% Passenger Subtotal   10,122.7 6.6% Car   Disp.≤1.6L 9,821.0 3.8% 1.6L and below cars account for 69% of total passenger car sales PV by 1.6L< Disp.≤2.0L 3,253.5 14.0% displacement 2.0L< Disp.≤3L 1,327.2 -5.4% 3.0L< Disp. 46.5 19.9% Pickup and minibus was seen Pickup, decline of 8.9% in last year Crossover   2,271.2 -8.9% Minibus, etc.1) Growth rate for Compact SUV is for 1st half year of 2011Source: China Automotive Industry CAAM report Literature research; Synergistics Limited analysis 20
    • …while the premium segment has outpaced overall market growth China new passenger vehicle sales CAGR (2005-2015E) (2005-2011) Unit ‘000 18,000 28% Total market 16,000 854 38% premium Segment 14,000 749 657 12,000 576 10,000 638 522 8,000 27% 341 6,000 Non-premium 223 259 Segment 4,000 159 106 2,000 0 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015ESource: Global Insight 2010; Booz & Company analysis 21
    • China’s premium car segment is only 5% of total PV market, muchlower than mature markets, indicating high expansion potential Premium Car Sales as % of Total Passenger Vehicle in China (2004 ~ 2015E) % of PV 24 22 Germany 2009 level 20 18 16 14 USA 2009 level 12 10 Taiwan 2009 level 8 Non-premium 6.4% 5.5% 5.6% 5.1% 5.3% 5.4% 5.6% 6 5.0% Segment 4.7% 3.8%3.8% 4.3% China 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015ESource: Global Insight 2010; Booz & Company analysis 22
    • China government incentives successfully boosted sales of 2009 and 2010, however, most policies were discontinued in 2011Government Incentive Incentive Summary Impact assessment • Mar. 2009-Dec.2010 Many personal buyers pulled ahead car purchases in • 5% sales tax reduction in 2009 and Sales Tax down to 2.5% only in 2010 2009 for 5% tax incentive and stimulus effect weakened Break 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, Subsidy for maximum light 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 23
    • Part 1: Review of 2010 market developmentPart 2: Market developments and government policy changes in 2011Part 3: Emerging trends to anticipate in 2012 and beyondPart 4: Conclusion and recommendations 24
    • 8 key trends in China’s automotive industryTrend 1: Sustainable demand growth fueled by urban economic developmentTrend 2: Shifting preferences for increasingly savvy consumersTrend 3: Value and relationship oriented approach to address lower tier market demandTrend 4: Hyper-competition across the automotive market segmentsTrend 5: Adaptive brand innovation to extend product reach and grow shareTrend 6: Increasing focus on the automotive aftermarketTrend 7: Accelerated drive to globalizationTrend 8: Investment in Energy Saving Vehicles and Related Infrastructure 25
    • Trend 1: Sustainable demand growth fueled by urban economic development Rapid urbanization and the rise of an urban middle class is the fundamental driving force of private demand for cars China’s Urban Population 1999-2020F 1,258 1,285 1,308 1,328 1,343 1,413 Comments §  By 2020, urban population share 61% 57% 54% 52% 43% Rural anticipated to rise to 57%, a fundamental 65% driving force of private demand for cars 43% 46% 48% 57% Urban §  By 2020, Chinas population in the age 35% 39% group 45 and above will increase 118 million, while the 25-44 age group will 1999 2002 2005 2008 2010F 2020F decrease 22 million China Population Breakdown by Age Population 2007 Vs. 2020E, Million Increase §  By 2020, with the fast wealth 1,432 2008 Vs. 2020 accumulation, a significant portion of 1,321 A significant portion 236 of the 45-64 age 268 +32 the 400 million 45-64 age group people0 -14  180 15-24 197 group will be -17 will be wealthy wealthy by 2020 417 25-44 439 -22 §  Those affluent mid-age people will be 45-64 325 400 +75 major customers for luxury products 65+ 167 +43 124 2007 2020E Source: Literature research; Booz & Company analysis 26
    • Trend 1: Sustainable demand growth fueled by urban economic developmentChina is still just entering the accelerated growth phase typical ofemerging markets Canada 600 Australia Discussion Germany §  A country’s threshold of 500 U.K. 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 27
    • 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 28
    • Trend 2: Shifting preferences for increasingly savvy consumers Savvy consumers are increasingly seeking emotion and self- expression and thereby influencing product design Prioritized Purchasing Factors More sporty, sculptured and B Segment Customers premium-oriented design Driving experience 45 Brand 40 Safety 38 Appearance 36 Price/performance ratio 18 Quality 10 Comfort 9 Fuel economy 7 Sonata 2010MY Sonata 2011MYAfter-sales service, maint. Costs 5 Configuration 5 Trim 3 Interior space 2 Versatility 2 Prioritized Self-expression Motivations To enhance my B Segment Customers Integration of cutting edge and business image/ status 36% functional technologies To reflect my personality 36% To reflect my good taste 30% BMW’sTo integrate intomy social circle 20% microNavigation Sense of independence 17% map system Sense of family 17% shares trip My personal space 15% information with Stylish/trendy 12% smart phones 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 29
    • Trend 3: Value and relationship oriented approach to address lower tier market demand87% of China’s total population live in Tier 3 and lowercities, among which 61% are from Tier 5 & 6 cities Diversity: Socio-Economic Levels of City Tiers (2009) GDP Per Capita (US$) 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Population Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 & 6Source: China Statistical Yearbook, Literature Research, Booz & Company analysis 30
    • Trend 3: Value and relationship oriented approach to address lower tier market demandGrowth rate of lower tier cities increasing faster than Tier 1and 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 31
    • 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, Booz & Company analysis 32
    • Trend 4: Hyper-competition across the automotive market segmentsLocal VMs are growing passenger vehicle market sharesignificantly but international OEMs still dominate INTERNATIONAL/ LOCAL OEM CHINA PV MARKET SHARE International OEMs/Brands International OEMs/Brands Top Local OEMs/Brands 8 Domestic OEMs VW 17.76% 3.87% 15.19% Chery 3.24% 10.31% TOYOTA 5.55% China PV sales 2008-2011 (incl. import, million units) 5.67% GM1 8.80% FAW 8.18% 5.18% Hyundai 8.47% 10.1 5.11% 3.34% Geely 8.29% 2.99% Honda 4.27% 6.46% 2.86% Nissan 5.58% 5.7 71% International BYD 3.10% FORD 2.74% 2.89% 1.67% 75% Brilliance PSA 3.18% 1.37% 2.79% 29% Local Suzuki 3.14% 25% 1.08% 1.52% Greatwall 2.52% MMC 0.53% 2008 2011 0.54% 1.54% 1.14% Chang’an2 BMW 0.66% 1.41% 2008 20111) Excluding CV volumes from SAIC-GM-Wuling2) Including AVICSource: Global Insight China Report, Booz & Company analysis 33
    • Trend 4: Hyper-competition across the automotive market segmentsManufacturing 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 34
    • 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 35
    • Trend 5: 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 36
    • Trend 5: Adaptive brand innovation to extend product reach and grow shareFor example, Audi’s product localization strategy has been animportant driver of 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 37
    • Trend 5: Adaptive brand innovation to extend product reach and grow shareExample: GM’s multi-tiered product strategy 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 38
    • Trend 6: Increasing focus on the automotive aftermarketDespite massive size and rapid growth of auto sales in China,current new car market is very fragmented Market Size and Growth Competitive Landscape Sales Volume of New PV Market Share of Top 10 Dealers (Thousand Units) +9% (2009, Sales revenue in Billion RMB) 17,730 +26% Power Diversity (35.5) 10,330 6,760 3% China Grand (32.5) 5,180 6,300 3,970 3% 1% 3,270 Yuantong (22.4) 2% 1% 2% 1% 1% Lei Shing Hong (20.5) 1% Guangdong Materials Group (15.2) 2004 2005 2006 2007 2008 2009 2015E 1% China Automobile Trading (13.8) Sales Revenue of New PV Zhongsheng (13.7) (In Billion RMB) +10% Yongda (11) 83% Shandong Yuantong (10.6) 1,930 +23% SCAS (10.3) Others 1,070 730 790 600 380 440 Given no dominant player, there is a huge space for growth and integration 2004 2005 2006 2007 2008 2009 2015Source: Literature research, Booz & Company analysis 39
    • Trend 6: Increasing focus on the automotive aftermarketDomestic dealers have the potential to maximize value capture byrealizing synergies across a variety of after market services Dealer Revenue Breakdown, China vs. U.S Dealer Profit Breakdown, China vs. U.S 2009 2009 100% 100% 20% New car sales 50% 60% New car sales After-sales service, auto 35% parts, 85% financing, insurance After-sales service, 11% auto parts, financing, 40% insurance 45% Used car sales 29% Used car sales 13% 10% 2% China U.S China U.S Source: Morgan Stanley report, literature research, Booz & Company analysis 40
    • Trend 7: 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 Recent Trends on Efforts to Close the Gaps in the Auto Value Chain Manufactu Sales & Take Equity of Foreign R&D Sourcing Marketing Companies to Access Core r-ing 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 Increase Investment in R&D to technology VMs VMs have brand equity Build Own Capability Own R&D 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 41
    • Trend 8: Investment in Energy Saving Vehicles and Related InfrastructureWith 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 Limited analysis 42
    • Trend 8: Investment in Energy Saving Vehicles and Related InfrastructureComparing with mature markets, China stands out as a significantopportunity 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 consumption, China China low penetration of vehicles in Support Acceptance 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 §  China possesses ample resources to Readiness for EV achieve low cost production Mature Market §  Established battery manufacturers with large-scale capacity, especially supply China lithium battery to cell phone/laptop industry 43
    • Trend 8: Investment in Energy Saving Vehicles and Related InfrastructureIn 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 Services §  Implication: the share of value added Increasing §  It is necessary for China to transform its industry Industry of GDP by the culture industry needs Labor Cost structure to make it more technology and 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 44
    • Trend 8: Investment in Energy Saving Vehicles and Related InfrastructureChina 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: 1 Mn 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: 5~10 Mn 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 45
    • Trend 8: Investment in Energy Saving Vehicles and Related InfrastructureHowever, 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 §  Relative low fuel cost does not create in fact meet their expectations economic advantage of alternatives over conventional petrol fuel §  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 products 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 recommendations 47
    • In summary, we recommend carmakers to realign their strategicfocus with shift of demand and markets of highest potentials§  Automakers need to allocate resources to where they can outperform their competitors. One of the key takeaways is to make sure their product and service offerings address the lower tier city buyers§  International automakers need to extend their product reach and grow share by delivering China market-specific adaptations and modifications, extending the range of segment participation, and consider 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§  Chinese brands must increasingly focus on closing the capability gaps with foreign VMs, with particular focus on product excellence achievement by both organic and inorganic means.§  China’s push for vehicle electrification will create opportunities for companies to get involved in EV eco-system development, but commercialization challenges are significant. Thank you! 48