JP Morgan China Auto Trends Speech


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Presented at the August 9th JP Morgan Auto Analysts Conference in Detroit, MI

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JP Morgan China Auto Trends Speech

  1. Booz & Company August 9, 2010 Presentation The Eight Overarching China Automotive Trends That Are Revolutionizing The Global Auto Industry J.P. Morgan Auto Conference Bill Russo, Senior Advisor, Booz & Company The Westin Book Cadillac, Detroit, Michigan JPM Eight Trends Speech FINAL.ppt 0
  2. China’s automotive market has experienced solid growth, with a notable deceleration in late 2008  Passenger vehicles consistently represent the majority of total automobile demand  Robust growth momentum is recovered in 2009 driven by government incentive program and infrastructure investment Total Vehicle Industry including Import: China 2009 Sales 41% 13.64 Million 2008 Sales 2007 Sales 8% 9.67 Million - 22% 8.98 Million 2006 Sales Truck 25% 7.34 Million Truck 20% 2005 Sales Truck 21% 5.90 Million 22% PV Bus Truck PV Bus 61% 2% 64% 3% Truck 21% PV Bus Bus 60% 2% Van Van 25% 2% Van 16% 163 PV Van 16% PV Bus 3% 59% 18% 53% Van 19% PV=3.23 Million PV=4.45 Million PV=5.43Million PV=5.91Million PV=8.73Million Source: CAAM auto market press release JPM Eight Trends Speech FINAL.ppt 1
  3. In terms of passenger vehicle market, China has become the most important country in the world CAGR Size and Growth of Global Passenger Vehicle(1) Market 2001-2009, % (Major Countries) China Mark et Em erging Iran Turkey India Argentina Saudi Arabia Indonesia Brazil Thailand Russia Germany CAGR of Global Market =1.6% France Korea UK Japan Italy US Spain 2009 Market Size (Million Units) Bubble size: 2009 market size (1) Includes segment of A, B, C, D, E, F, MPV SUV Source: Global Insight Booz & Company analysis (million units) JPM Eight Trends Speech FINAL.ppt 2
  4. China’s auto market has been experiencing explosive growth, in 2009 China exceeds US to become the world largest auto market Total China Auto Sales Top Five Auto Market in the World(1) 2005 – 2010 1H, in Million Units 2008 - 2009, in Million Units 66 63 +23% 9.02 Others Jan Feb Mar 5% Brazil Apr 4% Germany 1.44 May Japan 1.42 Jun 16% US 2005 2006 2007 2008 2009 2010 first 20% 6 months 21% China 13% Vehicle sales in the first 6 months of 2010 in China rose 48% from the same period last year to over 9 million 2008 2009 1) : Data does not include heavy truck Source: Global insight, CAAM auto market press release, Literature research, Booz & Company analysis JPM Eight Trends Speech FINAL.ppt 3
  5. China's incentive-driven sales growth has slowed to a more sustainable year-over-year pace Unit ‘000 China new passenger vehicle sales (2004-2015E) 16187 14582 13137 11835 10662 9606 8654 5704 Total Passenger Vehicle 5294 4328 3267 2631 Year on Year growth 21% 24% 33% 22% 8% 52% 11% 11% 11% 11% 11% 11% % Source: Global Insight 2010; Booz & Company analysis JPM Eight Trends Speech FINAL.ppt 4
  6. While there is clear growth in the SUV, MPV and cross-over segments, China remains a sedan market SUV/ Micro Small Compact Std / Lux Mid Std /Lux MPV 2009 PV Sales Cross-over Brand Full Market Share 8% 12% 46% 14% 6% 10% 4% 1.44 Mil 17% 795,000 T h e 9% 255,290 3% 675,800 8% 582,400 7% 876,600 10% Source: Global Insight 2009 sales volume report JPM Eight Trends Speech FINAL.ppt 5
  7. It is likely that China’s strong economic performance will continue to 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 Increase in growing economy – the upside is High Forecast substantial Car Ownership Base Forecast Passenger Vehicle PARC (million units) Low Forecast 480   Government has been continuously 410 Government’s guiding and supporting the industry’s Support to development across manufacturing and Auto Industry distribution 330   China’s financial system is less exposed China and GDP growth is still very fixed Economy’s investment driven, thus is less vulnerable Resilience to recent financial turbulence impact   Highway network development provides Infrastructure foundation for more motor vehicle-based Development based transportation   China is investing in infrastructure to support alternative propulsion Note: Passenger vehicles contain sedans, MPVs and SUVs Source: Global Insight 2010, OPEC, DGS Report, Booz & Company analysis JPM Eight Trends Speech FINAL.ppt 6
  8. As the leading automotive market, China has the opportunity to fundamentally transform the global auto industry Shanghai: A Lean, Green Detroit … In acquiring a stake in BYD, Buffett broke a couple of his own rules. "I don't know a thing about cellphones or batteries," he admits. "And I don't know how cars work." But, he adds, "Charlie Munger and Dave Sokol are smart guys, and they do understand it. And there's no question that what's been accomplished since 1995 at BYD is extraordinary…” Source: Literature research JPM Eight Trends Speech FINAL.ppt 7
  9. The Eight Overarching China Automotive Trends That Are Revolutionizing The Global Auto Industry 1 5   China automotive capacities and Policy-driven   China market is highly fragmented Globalization Of   The government is accelerating the capabilities are integrating into the Consolidation Of China Automotive consolidation of the domestic industry value-chain of multinational auto Chinese VMs Capacities companies and suppliers to drive scale economies 2   In the face of a Global downturn, China 6 Hyper-competition   Higher share of sales in entry-level, Global Redistribution continues enjoy non-linear growth lower margin segments Across The China Of Assets To Capture   Shift in the global automotive “center of   Multinational brands expand into Auto Market China Market Growth gravity” to the East small segments while local players Segments expand into larger segments 3   Chinese VMs attempt to integrate 7   Local VMs’ market share increase Acquisition Of Assets And Key foreign acquisitions Local VMs Push To significantly but Multinational brands Development   Challenges and transactional barriers Build Brand Equity retain majority share of M&A remain   Local VMs push to build their brand Competencies equity and upgrade capability 4   Government is willing to keep investing 8 China’s Changing   Growth fueled by urbanization trend Investment In   Challenges of consumer acceptance and the emerging new middle-class Demographics and Infrastructure & New remain Growing Tier 2 & 3   Low-tier cities developing with Energy Vehicles   Active engagement of both increasing wealth Demand multinational and local players JPM Eight Trends Speech FINAL.ppt 8
  10. 1 Policy-driven Consolidation Of Chinese VMs To achieve economies of scale, the government is accelerating domestic consolidation Major Chinese Auto Manufacturers and JV Partners Selected Recent Consolidations in the Auto Industry   Changan and AVIC merger (Nov 2009)   Dongfeng’s Hangzhou unit took a 20% stake in Luxgen Motor (June 2009)   Chery and JAC proposed cooperation   BAIC is planning to purchase shares in Fujian Daimler (in progress) JPM Eight Trends Speech FINAL.ppt 9
  11. 1 Policy-driven Consolidation Of Chinese VMs In 2009, China government announced plan to build up a “Top 10” group of globally competitive automakers Existing Situation and Challenges   Over 120 registered VMs, locals cannot compete with MNCs in terms of scale Tier 1 & 2 Auto Group in China   Highly fragmented structure cannot provide for a stable development of the current domestic players   Government has long expressed desire to consolidate Tier 1 Group Tier 2 Group the industry and develop a handful of home-grown champions Definition   Has annual capacity of 2   Has annual capacity of 1 million units million units Main Objectives of Policy   Encouraged to acquire   Encouraged to acquire smaller companies smaller companies within   Boost sales and production in 2009 to 10 million units countrywide surrounding region and keep growth at about 10 percent in the next 3 years   Raise market share of domestic brand PV from 34% to Candidates   SAIC   BAIC 40%   FAW Group   GAIG   Consolidate small regional manufacturers into bigger   Dongfeng Automobile   Chery Automobile Co. national auto groups Co.   China Heavy Duty Truck   Encourage more fuel-efficient, lower-polluting vehicles   Chang’An Automotive Corp. (CNHTC) –  Market share of ≤1.5L PV to increase to 40%, among Co. which ≤1.0L to 15% –  Building 500K new energy vehicle (NEV) capacity, and increase NEV market share to 5% of PV sales Source: China Automotive Industry Stimulus Plan; Booz & Company analysis JPM Eight Trends Speech FINAL.ppt 10
  12. 1 Policy-driven Consolidation Of Chinese VMs With favorable policies, market leaders strengthened their market positions by leveraging M&A opportunities Major M&A Deals since Launch of Government Regulation Comments & Lessons Learned 2007 2009 2009   Strengthened market leadership –  Avoided government constraints on new capacity build up, achieved better Outright Outright economy of scale Acquisition of Acquisition of –  Entered new market segments or Changhe & Hafei NAC by SAIC strengthened current product by Changan competitiveness   Dec 2007   Nov 2009   Deal Size: 10.7   Deal Size:   Lessons Learned billion RMB Reorganization –  Through favorable policies, local market through state Acquisition of equity swap leaders might be able to realize quick & Changfeng by cheap inorganic growth GAIC –  Direct competition with local players   May 2009 might not be sustainable in the long term,   Acquired 29% shares, thus targeting specific market segments became largest shareholder with differentiated value proposition could   Deal Size: 1.2 billion RMB be a winning strategy Source: NDRC, Literature research, Booz & Company analysis JPM Eight Trends Speech FINAL.ppt 11
  13. 2 Global redistribution of assets to capture China market growth While GM is unloading underperforming assets to ensure survival , they are rapidly expanding their China business GM’s Sales in China Expansions of GM’s Corporate Operations (2005-2009, in Million Units) in China   Recently, GM announced a plan to set up Shanghai GMIO headquarters, managing the unified management of all overseas business, which indicates the central role +29% China plays in GM's global strategy   GM and SAIC also announced to set up a GM-SAIC Motor Investment Co. in Hong Kong with a $1 billion investment split equally between the two for use in purchasing 100 percent shares of General Motors India –  GM-SAIC India is expected to make small cars and commercial vehicles in India   GM’s mini-vehicle China JV (SAIC- 2005 2006 2007 2008 2009 GM-Wuling) will introduce the first own-brand car (Baojun, meaning   GM aims to sell 3 million vehicles a year there by 2015 treasured horse) to target the fast- as it adds new, more fuel-efficient models to meet demand growing low end market; The car   “ China GM’s largest single market worldwide and GM will model is Based on Buick Excelle and launch 25 new models in China in 2010 and 2011 in a bid is aiming to combine world-class to maintain its leading position” - Gan Wenwei, President quality with low ownership costs and General Manager of GM Source: Automotive News, Company profile, Booz & Company analysis JPM Eight Trends Speech FINAL.ppt 12
  14. 2 Global redistribution of assets to capture China market growth To compete and succeed in China, MNCs’ R&D needs to adapt to the needs of the local Chinese market Breakdown of Passenger Vehicle Sales in China1) Proper Handling of Localization can Define Market (2009) Success - Case Study MPV Full size SUV VW - Golf GM - Excelle 5.6% Mid size 2.1% Vehicle 1.9% Compact Similar 12.1% configurations 36.4% Go to market   July, 2003   August, 2003 time & initial   149.9K RMB   149.9K RMB price 13.5% Subcompact R&D effort on   Limited   Extensive localization   Rely on SKD   Achieved CKD production production with heavy local Micro 20.9% sourcing COPV Total Sales Volume: Lowest market   109.5K RMB   82.3K RMB 8.65 million price achieved Sales   431 units sold   19,462 units Small & Economical Models are still preferred by Price- performance on only sold sensitive Chinese Consumers2) second month after going to Market Market Note: market Failure Success 1) COPV: Crossover Passenger Vehicle - i.e. minivans and light buses with 9 seats or under (Dodge Caravan) 2) Accuracy Automotive Database Source: Booz & Company Analysis JPM Eight Trends Speech FINAL.ppt 13
  15. 3 Acquisition of foreign assets and key development competencies by Chinese companies China’s automotive companies attempting to integrate foreign acquisitions into their operations will face challenges An inorganic approach to globalization-the Marriage of Geely and Volvo Key Challenges and Risks   Chairman Li has committed to keep independence of Strategic Volvo operations Geely’s Inorganic Approach Alignment and   Bridging the huge gap between Volvo’s traditional Opportunities Governance European (and some would argue “Scandinavian”) management mode and Geely’s dynamic family business mode   Learn the Volvo “eco-system” and get in the global game   Volvo maintains their current business structure, processes and supply base   Use this opportunity to Cost Structure   Geely may need to subsidize the Volvo global promote the corporate Geely operation with the very thin margins generated from name worldwide Geely’s local brand operations, which poses high risk and places pressure on Geely’s working capital   Learn to manage a high-end car brand: essential skills for a   Geely faces a number of product portfolio and platform global car company decisions regarding Volvo product offerings for China Market and the global markets Positioning   Volvo products would need to be repositioned in order to serve a mass-market instead of merely following the luxury-market leader Audi JPM Eight Trends Speech FINAL.ppt 14
  16. 4 China’s investment in new energy vehicles and related infrastructure China has a clear and compelling need to reinvent the propulsion technology of the automobile   Bejing, Xi’an, Shenyang, Shanghai and Guangzhou have been listed among the Top 10 cities with the worst Air Pollution air pollution   The rapid growth of the automotive market worsens the problem   China imports two-thirds of its oil, and its ever-increasing Energy thirst has had a dramatic impact on global energy prices. Consumption   The gasoline and diesel consumption has accounted for half of the total consumption of petroleum products.   The rapid growth of the personal automotive sales Traffic outpaced infrastructure development. Traffic congestion Congestion has been a major problem in big cities like Beijing, Shanghai, Guangzhou, etc.   China will have over 150 million vehicles in 2020 JPM Eight Trends Speech FINAL.ppt 15
  17. 4 China’s investment in new energy vehicles and related infrastructure 2010 new policies added …Since 2009, a number of policies demonstrate China’s dedication in the development of “New Energy Vehicles (NEVs) ” Recent Policies and Strategies on NEV Development Expected 2009 Apr. 2010 May Jun Jul.~   Prof. Wan Gang announced an   New Energy Automobile   Ministry of Industry & Information   An ambitious ambitious plan in cooperation with the Manufacturer Alliance (formed by Technology, Ministry of Science plan will be Ministry of Finance & the NDRC top 10 Chinese auto makers, & Technology, Ministry of submitted to the –  Promote the use of NEVs initially coordinated by China Association Finance, and NDRC jointly State Council in targeting 13 pilot cities, expanding of Automobile Manufactures) released a pilot program to Jul. and is to 20 pilot cities in 2010 announced its plan subsidize the sale of plug-in expected to be –  Support the development of –  Number of pure electric hybrids and electric vehicles in released in late energy-saving technology for use vehicles to reach 500,000 by five cities 2010 or 2011 in government fleets, including 2015 –  Purchasers of plug-in buses, postal, and sanitation –  Electric technology to be widely hybrids will receive up to   If approved, it vehicles. used in conventional cars RMB 50,000 ($7,321) will be the –  Deploy 60,000 energy saving –  hybrid vehicles to account for –  Purchasers of pure electric biggest ever vehicles in China by 2012 30% of annual production vehicles will receive up to development –  whole vehicle and key RMB 60,000 ($8,785) plan for energy component production for new –  Five cities are Shanghai, saving and new energy automobiles to reach a Changchun, Shenzhen, energy world advanced level Hangzhou and Hefei, which automobiles –  New car average fuel are corporate homes of six consumption to drop by 30%, domestic automakers reaching international levels Source: Synergistics, Synergistics Limited analysis, China Association of Automobile Manufactures, Literature Search JPM Eight Trends Speech FINAL.ppt 16
  18. 4 China’s investment in new energy vehicles and related infrastructure Local OEMs are also building capacities for NEV production Manufacturing Capacity of Local OEMs NEV Project FAW   Besturn B70 Great Wall   Capacity - 11,000   GWPERI QingYuan   HAVAL   Kulia   B6; A0   Capacity - 20,000 SAIC BAIC Chery   A5, BSG, ISG, S11, BYD S18 Chang’An Wanxiang BAIC SAIC   Jie Xun Hybrid BYD   Capacity - 300,000 (2010); -   LaCrosse Hybrid 600,000 (2014)   Roewe 750 Hybrid with capacity of 10,000 GAC DongFeng BYD   Fengsheng BSG; Fengxing MPV   F3DM, F6DM, F3e, E6   Capacity - 8,500 (2010); 20,000   Capacity - 200,000 (Xi’an); (2014) 600,000 (Shenzhen) Source: Literature search, Booz & Company analysis JPM Eight Trends Speech FINAL.ppt 17
  19. 5 Utilization of China’s automotive capacities for global expansion Multi-national companies are increasingly leveraging China’s growing capabilities as platform for global expansion Stage 1 Product Sales & Circa early R&D Sourcing Manufacturing Marketing Service Development Distribution to mid 1990s   Start a few, isolated production facilities Stage 2 Product Sales & Circa mid to R&D Sourcing Manufacturing Marketing Service Development Distribution late 90s   Began to use China as a   Began to integrate   Built brand for the local procurement source production facilities market and local sales & within China distribution Stage 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 China Stage 4 Present to Product Sales & R&D Sourcing Manufacturing Marketing Service 5-10 years Development Distribution hence   Build R&D and PD centers in China   Integrate China into global value chain JPM Eight Trends Speech FINAL.ppt 18
  20. 5 Utilization of China’s automotive capacities for global expansion Chinese OEMs are more aggressively trying to close the capability gaps in R&D, parts sourcing, and brand equity Chinese Major OEMs Capability Gaps Recent Trends on Efforts to Close the Gaps in the Auto Value Chain Sales & R&D Sourcing Manufac Marketing Take Equity of Foreign Companies tur-ing to Access Core Technologies   Mostly rely   Strength of   High ability to   Needs further on external supply base adapt for development design or and quality localization of local and JV’s foreign vary across   Only some international technology VMs brand equity Increase Investment in R&D to VMs have Own R&D Build Own Capability capacity for needs to low-cost pass foreign manufactur- safety ing standards Marketing and Portfolio Expansion to Build Brand No Capability Full Capability Note: 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 Group Source: Automotive News, Company profile, Booz & Company analysis JPM Eight Trends Speech FINAL.ppt 19
  21. 6 Hyper-competition across the China auto market segments While muti-national brands are expanding their portfolio into small segments… C Focus Hatchback B SVW POLO SPORTY  Engine:1.8L 2.0L  Dimension 4342*1840*1500  Wheelbase:2640 C Chevrolet Cruise B GZ Toyota Yaris  Engine:1.3L 1.6L  Engine: 1.6L/1.8L  Dimension  Wheelbase: 2685mm 3750*1695*1545  Wheelbase:2460  MSRP: 9.2-12.56W RMB  Launch:2008-6-12 B PSA 207 Hatchback B Smart Fortwo  Engine:1.4L 1.6L  Dimension 3900*1680*1468  Wheelbase:2450mm  MSRP: 7. 18-10.48W RMB  Launch:2009-3-18 B Hyundai i30 B Kia SOUL JPM Eight Trends Speech FINAL.ppt 20
  22. 6 Hyper-competition across the China auto market segments …Chinese brands are expanding their portfolio into larger segments SUV Chery Reely V5 E Geely Emgrand EX925  Engine:2.0L  Engine:2.2L 2.4L  Dimension Dimension 4970*1880*1900 4662*1820*1590  Wheelbase:2850  Wheelbase:2800  Highlights: NA  MSRP: RMB  Launch: D Chery Riich G6 D Shanghai London GE  Engine:2.0L  Engine: 3.5L  Dimension  Wheelbase: 3100 mm 4968*1845*1526  Highlights: Luxury feature  Wheelbase:2820 and superior space  Highlights: NA  Launch:2011  MSRP: RMB  Launch: C Dongfeng S30 D Brilliance Zunchi  Engine:1.6L  Engine:1.8L  Dimension  Dimension 4502*2610*1465 4880*1800*1450  Wheelbase:2610  Wheelbase:2790 MPV BYD M6 Specialty BYD S8  Dimension  Engine:2.0L 4808mm×1802mm×1756mm  Dimension  Wheelbase: 2950mm 4490*1780*1405  Launch: 09/2009 (09Sep)  Wheelbase:2520 JPM Eight Trends Speech FINAL.ppt 21
  23. 6 Hyper-competition across the China auto market segments Chinese car market has seen substantial price falls and accelerated product launches over past decade, undermining VM profitability Chinese Car Price Index Changes across Segment (2004-2007) Discussion   For 2008 and onwards, it is difficult for China VMs to continue the pace of price drop by 5-6% annually due to constraints of economics   VMs must increasingly launch refreshed models or brand new vehicles to maintain price stability   Competition is shifting from pure price to differentiation of product features, brand performance and aftersales service Source: Global Insight China Report JPM Eight Trends Speech FINAL.ppt 22
  24. 6 Hyper-competition across the China auto market segments Manufacturing capacity oversupply will be intensified in next 5 years, mostly driven by aggressive expansion of China local brand International/ Manufacturer Brand Sales in 2009 Capacity in 2010 New capacity Capacity by Local Brands (‘000 Unit) (‘000 Unit) under 2015 construction (‘000 Unit) International/ SAIC-GM Buick, Chevrolet, Wuling 1787 1560 410 1970 Local (incl. SGM-Wuling) International FAW-VW VW, Audi 682 760 200 960 International FAW-Toyota Toyota 413 470 200 670 International Dongfeng Honda Honda 209 220 240 460 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 26500~28000 JPM Eight Trends Speech FINAL.ppt 23
  25. 7 China VMs push to build brand equity Local VMs are growing market share significantly 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 17.77% 3.87% 16.63% Chery 5.11% 10.32% TOYOTA 7.81% China PV sales 2008-2009 (incl. import, million units) 5.67% GM1 8.82% FAW 9.19% 4.62% 8.47% 8.6 Hyundai 10.13% 3.12% Geely 8.29% 3.66% Honda 6.73% 5.7 International 6.46% 71% 2.86% Nissan 6.18% BYD 5.17% FORD 2.96% 75% 2.95% 1.67% Brilliance PSA 3.18% 1.45% 3.19% 29% Local 3.14% 25% 1.08% Suzuki 2.67% Greatwall 1.76% 0.67% 2008 2009 MMC 1.01% 1.54% 1.14% Chang’an2 BMW 1.07% 1.71% 2008 2009 1) Excluding CV volumes from SAIC-GM-Wuling 2) Including AVIC Source: Global Insight China Report JPM Eight Trends Speech FINAL.ppt 24
  26. 7 China VMs push to build brand equity Chery and Geely are most aggressive in revitalizing their brand portfolio Price “Chery is ready to meet the (000 CNY) challenge of the global market. We've succeeded in launching 120 four brands of new cars this year, 2009" (Chery's president, Yin Tongyao) 100 80 “A brand is closely related to its cultural background. Isolated from that background, it is 60 worthless… it would be not very easy for Geely or any other Chinese carmaker to make a 40 success of a foreign brand acquisition…A brand is like a person's name. Even if I change 20 my name to Hu Jintao, I am not Hu Jintao.” (Geely's chairman, Li Shufu) Segment Car/Compact SUV Full size SUV/MPV Micro/Small Car Medium/Large Car Source: Literature research, Synergistics Ltd. analysis JPM Eight Trends Speech FINAL.ppt 25
  27. 8 China’s rapidly changing demographics and growing demand in lower tier cities Urbanization is the trend, China's urban population is projected to rise by a whopping 150 million by 2020 China Population Breakdown by Urban and Rural (2008 Vs. 2020E, Million) Discussion   Clearly, the concentration of wealth will likely continue under this unmistakable 100% trend of urbanization, both through the 18% 26% development of currently rural areas and the permanent migration of rural 45% population to existing urban areas 65% Urban   It will be curious to see which one of these two modes of urbanization will gain 82% 74% more momentum as it will affect the geographical dispersion of demand for 55% luxury items 35% Rural 1978 1990 2008 2020E Source: EIU; <China 2040>; China regional economy statistic yearbook 2008 China Population Yearbook Booz & Company analysis JPM Eight Trends Speech FINAL.ppt 26
  28. 8 China’s rapidly changing demographics and growing demand in lower tier cities In urban areas, the new mid-class is emerging fast, the total number of mid-class will reach 40 million in 2020 China’s Household Income Distribution China’s Mid-class Development (1990-2010F) (Mn Individuals) +35.5 +3.3 2000 2008 2020E Note: “Mid-class” is defined as people with more than RMB 150,000 annual income Source: Asian Demographics; Study commissioned by Beijing Young Post; China Auto Yearbook; China Statistical Yearbook; Morgan Stanley; Goldman Sachs; EIU analysis; Global Insight; Literature Research; Booz & Company analysis JPM Eight Trends Speech FINAL.ppt 27
  29. Implications of eight overarching China automotive trends for the global auto industry Eight Overarching China Automotive Trends Implications for the Global Auto Industry 1   The global center of gravity for the automotive Policy-driven Consolidation Of Chinese VMs industry has shifted to the east, with gains in China significantly offsetting declines in “mature” markets 2 Global Redistribution Of Assets To Capture   Policy-driven consolidation of local players will be a China Market Growth slow process with little impact on capacity in the 3 Acquisition Of Assets And Key Development near-term Competencies   Capable “triad” market suppliers and other assets will become acquisition targets for major local 4 Investment In Infrastructure & New Energy Chinese VMs and consolidators as a means to fill Vehicles capability gaps –  Key systems will be of high interest (i.e. 5 Utilization of China’s automotive capacities powertrain, safety, electronic controls, etc) for global expansion   China will attempt to lead the transition to new 6 Hyper-competition Across The China Auto energy vehicles, but competency gaps remain Market Segments   Chinese VMs will increasingly seek technology partnerships with multi-national VMs and suppliers 7 to increase brand equity Local VM Push To Build Brand Equity   Continued market expansion driven by socio- 8 China’s Changing Demographics and Growing economic forces will create opportunities in spite of Demand in Lower-Tier Cities the fragmented supply landscape China is now the center stage in the battle for 21st Century global automotive industry dominance JPM Eight Trends Speech FINAL.ppt 28