AlixPartners 2010 China Automotive

Outlook
April 2010

1 1
AlixPartners China Auto Outlook is the most comprehensive
study of its kind
Study Background and Methodology

Every year, AlixPartners produces a study of the global automotive industry (automakers and
suppliers), considered as one of the most comprehensive studies of its kind.
Since 2008, AlixPartners has extended the study to the auto supplier sector in China,
providing invaluable insights into this important sector of the Chinese economy.
The study draws on AlixPartners’ extensive primary and secondary research in the Chinese
auto parts sector as well as the extensive experiences AlixPartners’ teams gain in working
with participants in this sector in China and around the globe.
In addition, AlixPartners interviewed more than 50 senior executives in the Chinese auto
parts sector (domestic and foreign players) and asked them a series of 25 questions about
the state of the industry and their companies’ operational challenges and opportunities. The
survey was conducted in January-March 2010. The results are compared against similar
surveys conducted in 2008 and 2009.

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Contents
A. Automotive Industry Trends and Outlook

1. Domestic Sales Trends

2. Industry Structure

3. International Trends

B. Auto Parts Industry Review

C. AlixPartners 2010 China Auto Parts Survey

D. Conclusions
3 3
China’s auto sales are now the largest in the world, following
growth of 56% in 2009 – domestic OEM are gaining market share
 China’s light vehicle sales growth was more than 55% in 2009, following a slow-down
of growth to 8% in 2008. In Q3/2009 to Q1/2010, growth rates were about 80%.
Government stimuli have supported these massive growth rate
 China’s light vehicle sales volume became the largest in the world in 2009, as sales
declined in major car markets around the world
 Future sales growth is expected at around 20% by survey respondents.
 Chinese OEM increased their market share to 32% in 2009, from 27% in 2006. The
increase was largely driven by an expansion of domestic models from 53 to 159.
 By 2015, Chinese OEM are expected to increase their market share to about 37%
according to survey respondents. BYD, SAIC and Geely are considered the most likely
Chinese OEM to significantly increase their market shares.
 Profitability levels among domestic OEM and global OEMs’ JVs are varying widely.
Geely, BYD (Group Level), SGM and FAW-VW have the highest net profit margins at
about 10%.
 Chinese OEMs’ exports have nearly halved in 2009, and are not expected to increase
substantially by survey respondents.
 Geely’s acquisition of Volvo was the first major international acquisition by a Chinese
OEM, while SAIC and BAIC have made smaller investments.
4
Contents
A. Automotive Industry Trends and Outlook

1. Domestic Sales Trends

2. Industry Structure

3. International Trends

B. Auto Parts Industry Review

C. AlixPartners 2010 China Auto Parts Survey

D. Conclusions
5 5
Following a slow-down in growth in 2008, China’s light vehicle
sales exceeded 55% in 2009
Light vehicle sales volume 2003-2009 [m units]

YOY -
growth

11.7

7.5
6.8
5.7
4.4
3.4 3.8

Passenger vehicle Light commercial vehicle

Source: CSM, China Automotive Information Net

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 China’s passenger vehicle sales were the highest in the world
in 2009 by volume
Light vehicle sales in major global countries in 2009 [‘000 units]

Growth 56% -21% -8% 23% 11% 19% -49% 19%

Source: China Automotive Information Net, Ward, Reuter Thompson 7

Light vehicle sales are continuing to grow at around 80% in
Q1/2010, the third quarter in a row at around 80% growth rates
Light vehicle sales volume Q4/2008-Q1/2010

YOY -
growth

Current Year Prior Year

Source: China Automotive Information Net
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Vehicle sales have benefitted from government stimuli – survey
respondents expect “some” impact if stimuli will phase out
Key Policies in 2009 Key Policies in 2010

•Purchase tax reduction from 10% to •A preferential purchase tax of 7.5% for cars
5% for cars with engine size <1.6 liters with engine size <1.6 liters

•A financial subsidy of RMB 5 billion to •Continue with financial subsidies to help

help farmers upgrade to light trucks / farmers upgrade from agricultural vehicles
mini vans with engine sizes <1.3 liters to light trucks / minivans

•To speed up auto replacement by •Increase the financial subsidy by 20% to

providing subsidies for consumers who 200% (to up to 18,000 RMB) for those who
trade-in their used small- / mid-sized scrap old vehicles ahead of the assessed
trucks and mid-sized passenger cars usage life and replace them with new ones

•Spend RMB10bn on R&D in 2009-12 to •20 cities to promote new energy vehicles;
promote alternative energy vehicles with five pilot cities in which financial
subsidies to buyers of new energy cars

70% of survey respondents expect “some demand decrease” once

government stimuli will phase out. Only 19% expect “strong demand
decrease”, and 11% expect “no impact”.
Source: Thomson Reuters, Industrial Reports; AlixPartners Analysis
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Auto executives expect sales growth to remain near 20% over
the next five years
Expected light vehicle sales growth 2010-2015 [% p.a.]

2010

23%

2011-
2012
19%

2013-
2015
17%

Source: AlixPartners 2010 Auto Survey

10
 Significant room for further long-term growth: only about 60%
of urban households with income >60,000 RMB own a car…
Domestic urban households with income >60,000 RMB [million households]
PV Car
7.9 10.5 13.9 17.5 20.7
parc total
% of PV 58% 59% 59% 59% 60%
ownership

34.8
>150K
29.6
100-150K
23.6
80-100K
17.8
13.6

60-80K

In major Western auto markets, such as USA and Germany, about 110-
120% of ALL households own a car !
Note: car parc does not include government owned or non-Chinese peoples’ cars
Source: Global Demographics, China Statistical Yearbook 11
 … and the number of urban households with income more
than 60,000 RMB is only about 16% of total in 2009
Break-down of urban households by annual income, 2009E vs. 2013FC

2009 2013FC

# of Households
with income 34.8 m (15.8%) 65.6 m (26.8%)
>60k RMB

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Source: China Statistical Yearbook
Contents
A. Automotive Industry Trends and Outlook

1. Domestic Sales Trends

2. Industry Structure

3. International Trends

B. Auto Parts Industry Review

C. AlixPartners 2010 China Auto Parts Survey

D. Conclusions
13 13
 China’s industry structure is the most fragmented among
major auto markets
China’s industry structure in a global context, 2009 figures

Market
share of
top 5 OEM

Market
share of
top 10
OEM

Source: CSM; Global Insight, AlixPartners Analysis

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 Among major countries with local auto industry, China’s
domestic OEM have the lowest market share
Market share of domestic OEM in selected countries [in % of sales volume 2009]

# of major
dom. OEM
7 1 2 4 3 1 2 3 12

Global OEM

Domestic
OEM

Note: major domestic OEM include companies with sales volume > 30,000 vehicles

Source: Global Insight; AlixPartners analysis

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Chinese OEMs’ market share has increased to 32% in 2009 –
BYD has been the main winner among domestic brands
Market share of domestic OEM in China [in % of sales volume 2009]

# of dom.
models
36 53 110 160
Domestic M/S M/S
OEM 2006 2009
Chery 6.9% 5.5%
BYD 1.4% 5.1%
FAW 6.3% 4.7%
Geely 3.7% 3.8%
Great Wall 0.9% 1.8%
Others ca. 8% ca.
11%
Reference:
VW (both JVs) ca. 16%
Hyundai ca. 10%
General Motors ca. 9%

Source: CSM, China Automotive Information Net

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Chinese OEM are planning to expand into larger car categories,
which will likely result in further market share gains
No. of domestic OEM No. of domestic models
2006 2009 2013E 2006 2009 2013E

Mini 6 12 13 8 15 19
Sub-
compact
4 12 14 7 20 30

Compact 5 15 18 6 40 45
Mid-size/
Luxury
2 5 12 2 12 25

SUV 6 17 20 13 40 46

MPV 5 13 16 5 23 27

TOTAL 22 27 28 53 159 200

Source: CSM; AlixPartners Analysis

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 Survey respondents expect a further increase of domestic
OEMs’ market share by 5%-pts by 2015 – BYD the front-runner
Expected market share gains of domestic OEM [by %-points vs. 2009]

Dom. OEM
36% 37% 37%
Mark. Share

OEM %-pts. Expected

Growth M/S 2015
BYD 1.3% 6.4%
SAIC 1.0% 1.9%
Geely 0.7% 4.5%
Chery 0.6% 6.1%
FAW 0.5% 5.2%

Source: AlixPartners 2010 Auto Survey

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Domestic consolidation among auto OEM has been addressed
by China’s government, but major actions haven’t occurred
Key domestic M&As in 2009

Guangzhou Automobile Industrial Group completed the acquisition of 29% stake

GAIG
in Changfeng Motor in May 2009

BYD acquired Media Coach (Hunan based) to expand into the commercial
BYD
vehicle segment in July 2009

In November 2009, Chang’an announced acquiring of Hafei, Changhe, Dongan

Chang-
Engine, as well as AVIC’s JV with Suzuki and Mitsubishi. Chang’an Group will be
an
capable of producing 2.2 million vehicles at 21 car factories in China

2009: China’s government announced a goal of cutting the number of its major auto
groups to from 14 to max. 10 by 2012, and to establish 2-3 auto giants.
2010: The government in principle discourages new vehicle projects and greenfield
capacity expansion, unless domestic OEMs first take control of a domestic peer

Source: Thomson Reuters, Industrial Reports; AlixPartners Analysis

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Contents
A. Automotive Industry Trends and Outlook

1. Domestic Sales Trends

2. Industry Structure

3. International Trends

B. Auto Parts Industry Review

C. AlixPartners 2010 China Auto Parts Survey

D. Conclusions
20 20
Chinese passenger vehicle exports have decreased sharply in
2009, and remains at low levels compared to domestic sales
Chinese PV export volume 2003-2009 [‘000 units]

Destination 2008 2009

Russia 57 6
Ukraine 54 5
Africa ca. 50 ca. 50
Other (mostly ca. 145 ca. 92
Middle East)

Source: CAIA; China Customs 21

Survey respondents do not expect major export growth in
2010-2015, but rather a slow recovery
Expected export sales growth rates of domestic OEM [% growth p.a.]

• 70% of survey respondents expect

growth rates <20% p.a. in 2013-2015

• With expected growth rates of about

10% p.a. in 2010-2015, export
volumes would not even revert to
2008 levels

Source: AlixPartners 2010 Auto Survey

22
Geely’s acquisition of Volvo has been the first major deal of a
domestic OEM abroad, however activities have increased
Key overseas M&A activities of domestic OEM in 2009/2010

Geely completed the acquisition of Australian Drivetrain System International

Geely
in June 2009; and successfully acquired Volvo in March 2010

SAIC invests into General Motors’ operations in India, and takes 50% share
SAIC
Additional joint investments with General Motors in SE Asia planned

BAIC fails in its bid to acquire Opel in 2009

BAIC
In December 2009, BAIC bought production equipment and intellectual
property to two product lines from Saab

Teng- Sichuan Tengzhong Heavy Industrial Machinery Co. bids to take over
zhong Hummer from GM, but the deal was finally cancelled in February 2010

Source: Thomson Reuters, Industrial Reports; AlixPartners Analysis

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Turning around Volvo will be a major task, given a history of
substantial losses

Sales • Geely announced it will keep

Volume Volvo as a separate entity
[‘000] (takeover by Geely Holding, not
listed company) and existing
management will remain in place
• Geely will likely benefit from
Sales improved brand image, and
Revenue potentially from technology /
[bn US$] engineering capability transfer
• Geely announced major plans to
increase Volvo’s China sales,
potentially building a production
plant in China
EBIT
[bn US$] • Volvo’s sales volume in China
was only 12,000 cars in 2009

Volvo 2009
Source: Volvo Car Corporation; Reuters Thompson
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Contents
A. Automotive Industry Trends and Outlook

B. Auto Parts Industry Review

C. AlixPartners 2010 China Auto Parts Survey

D. Conclusions

25 25
Chinese auto suppliers are now the most profitable in the world,
and a number of overseas acquisitions have been completed
 China’s auto parts revenues have increased by 23% to about 1,140 bn RMB in 2009.
Growth rates were lower than OEM revenues by 10%-points due to higher impact of
export decline for auto parts producers.
 Auto parts export growth declined by about 7% in 2009, but not nearly as strongly as
car markets declined in major global automotive markets.
 Several major domestic auto parts suppliers have emerged. Companies like
Wanxiang and Weichai have entered the top 100 global suppliers by revenue.
 Auto parts profit margins remain about 2%-points higher than OEM margins, and have
nearly doubled from 2008 margins (both OEM and parts profits).
 Chinese auto parts suppliers are now the most profitable in the world, based on
samples of listed companies in major automotive markets. Even is global companies have
started to recover in 2H/2009, Chinese suppliers’ margins are about 2x its global peers.
 Chinese auto suppliers working capital requirement remains higher than global peers,
but has improved throughout 2009.
 Several auto parts suppliers have acquired businesses in USA and Europe, and
further acquisitions are expected.

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China’s auto parts revenues increased by about 23% in 2009,
lower than OEM revenues
Auto parts revenues 2004-2009 [RMB bn]
OEM

YOY - Parts
growth

Source: National Bureau of Statistics; China Automotive information Net ;AlixPartners analysis
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Export sales growth declined in 2009, but not nearly as
strongly as car markets declined in many countries
Auto parts export revenue [US$ bn]

Export revenue 2004-2009 Export revenue breakdown 2009

Growth
CAGR 48% 10% -7%
2008-09

-8%

-
23%

-
12%

-9%

Source: China Customs; China Automotive Information Net; AlixPartners Analysis

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Profit margins have nearly doubled in 2009, as parts suppliers
are consistently about 2%-pts more profitable than OEM
Auto parts suppliers and OEMs operating margins 2004-2009 [in % of revenue]

Auto parts supplier Auto OEM

Source: National Bureau of Statistics; AlixPartners analysis

29
Chinese auto suppliers’ have become the most profitable in
the world in 2009, clearly ahead of its global peers
Global auto parts suppliers’ operating margins 2007-20091) [in % of revenue]

Chinese

Japanese
US
European

1) Based on sample of 30 public listed companies by country / region

Source: Quarterly Financial Reports of Listed Companies, AlixPartners Analysis

30
Chinese auto suppliers working capital requirement remains
higher than global peers, but has improved throughout 2009
Global auto parts suppliers’ working capital trend 2007-20091)2) [days]

Chinese

Japanese
US
European

1) Based on sample of 30 public listed companies by country / region

2) Average working capital days: (accounts receivable + inventory – accounts payable) / revenue x relevant days per period

Source: Quarterly Financial Reports of Listed Companies, AlixPartners Analysis

31
Several auto parts suppliers have acquired businesses in USA
and Europe, and further acquisitions are expected
Key auto supplier’s M&A activities in 2009

Weichai Power, Shangdong Construction Machinery Group, Shandong

SHMG Automobile Group merged into Shandong Heavy Machinery Group in June 2009

Weichai Power acquired France-based engine producer Moteurs Baudouin

Weichai
SA in February 2009

Wan- Wanxiang Group acquiring Global Steering Systems (USA) in March 2009
xiang

Jingxi Heavy Industry, a consortium funded by three Beijing-based entities,

Jing Xi
acquired Delphi’s brake and suspension business in November 2009

Other major domestic major auto parts producers are encouraged by the Chinese
government to look into acquisition opportunities in USA and Europe.

Source: Thomson Reuters, Industrial Reports; AlixPartners Analysis

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Contents
A. Automotive Industry Trends and Outlook

B. Auto Parts Industry Review

C. AlixPartners 2010 China Auto Parts Survey

D. Conclusions

33 33
Revenue growth and profit margins are expected to remain
strong – lack of qualified people the key growth challenge

 Suppliers’ sales outlook strong: Suppliers on average had revenue growth rates of about
22% in 2009, and expect slightly increasing growth rates in 2010/2011. Export growth rates
were only 5% in 2009, and are expected to increase to 11% by 2011.
 Key growth challenges are lack of qualified management resources and increasing price
competition. Improving sales effectiveness, competitive pricing and expanding aftermarket
sales are top growth initiatives
 Net profit margins shows for participating suppliers were about 9% in 2009, and
expectations are that margins slightly improve to about 10% in 2010/2011. Profitability
among export vs. domestic business, and aftermarket vs. OEM business was about the
same in 2009, while global OEMs’ JVs were somewhat more profitable than domestic OEM.
 Key challenges to maintain high profits are considered to be potential raw material price
increases, cost pressure from OEM and price competition.
 Technology improvement is an important topic for most suppliers. About 65% of suppliers
recognize need for technology improvement, while 50% plan to recruit international experts.
 M&A deal activity is expected to increase in 2010/2011. All survey respondents expect
increasing deal activity in 2010/2011, and more than 40% are actively planning domestic
M&A deals in the near future.

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Survey respondents expect revenue growth to remain above 20%
in 2010/2011
Auto suppliers sales revenue growth in 2009-2011 In the 2009 survey, only a
quarter of suppliers expect
over 20% growth rate for
Average:
2010, while in this year’s
2009: 21.9% survey nearly 50% of
2010: 22.6% suppliers expect more than
2011: 23.5% 20% revenue growth

2009 Actual 2010 FC 2011 FC

Note: XX % means share of survey participants (from total of 50 respondents)
Source: AlixPartners China Auto Survey 2010
35
On average, suppliers who participated in our survey are
expecting improved export growth rates around 10% in 2010/11
Auto suppliers export revenue share and growth 2009-2011

Revenue structure 2009 Export revenue growth (average)

Export:
Export:
17%
17%

Domestic:
83%

Note: XX % means share of survey participants (from total of 50 respondents)

Source: AlixPartners China Auto Survey 2010
36
Lack of qualified people is considered the main challenge for
suppliers’ revenue growth plans, followed by price competition
Auto suppliers revenue growth challenges in 2010-2011

In 2009, 60% of respondents put export slow down as the No.1 challenge

Note: XX % means share of survey participants (from total of 50 respondents)

Source: AlixPartners China Auto Survey 2010
37
Key growth initiatives: improving sales effectiveness,
competitive pricing and aftermarket are top growth initiatives
Auto suppliers sales growth initiatives 2010-2011

Note: XX % means share of survey participants (from total of 50 respondents)

Source: AlixPartners China Auto Survey 2010
38
Average net profit margins in 2009 were about 9% –
expectations for 2010/2011 are slightly higher, at 10% margins
Auto suppliers net profit margins 2009-2011 [in % of revenue]

Average: In the 2009 survey, more than 50% of

suppliers expect net profit margins
2009: 9%
below 5% in 2009/2010
2010: 10%
2011: 10%

2009 Actual 2010 FC 2011 FC

Note: XX % means share of survey participants (from total of 50 respondents)
Source: AlixPartners China Auto Survey 2010
39
With the massive OE market growth in 2009, suppliers’ sales to
OEM customers was more profitable than aftermarket sales

Aftermarket revenue in % of total Aftermarket profitability

Export:
17%

2009 Actual 2010 FC

Note: XX % means share of survey participants (from total of 50 respondents)
Source: AlixPartners China Auto Survey 2010
40
Raw material prices, cost pressure from OEM and price
competition are the key challenges for suppliers in 2010/2011
Auto suppliers profit challenges 2010-2011

In the 2009 survey, 40% of respondents considered material cost increase the
key challenge
Note: XX % means share of survey participants (from total of 50 respondents)
Source: AlixPartners China Auto Survey 2010
41
About 65% of suppliers recognize the need for technology
improvement, while 50% plan to recruit international experts
Auto suppliers product technology plan 2010-11
Regulation Impact on
Product Technology
Improvement Plan
Technology

Note: XX % means share of survey participants (from total of 50 respondents)

Source: AlixPartners China Auto Survey 2010
42
All suppliers expect to see increased M&A activities in 2010-
2011, especially in domestic market
Auto suppliers merger and acquisition plan 2010-2011
Overall M & A
Activity
M&A plans
Suppliers’

Note: XX % means share of survey participants (from total of 50 respondents)

Source: AlixPartners China Auto Survey 2010
43
Challenges for international M&A are mainly around managing
and integrating foreign companies
Auto suppliers international merger and acquisition challenges

Note: XX % means share of survey participants (from total of 50 respondents)

Source: AlixPartners China Auto Survey 2010
44
Contents
A. Automotive Industry Trends and Outlook

B. Auto Parts Industry Review

C. AlixPartners 2010 China Auto Parts Survey

D. Conclusions

45 45
Chinese auto OEM and suppliers are growing in confidence –
“war for talent” will likely be key challenge in near future
1. Chinese OEM are expanding and gaining more confidence: Chinese OEM have
benefited most from the massive demand growth for cars in 2009, as their market shares
have increased from 28% in 2008 to 32% in 2009. Industry executives are expecting
Chinese OEM to further win market share going forward. Geely’s acquisition of Volvo and
BYD’s partnership plans with Daimler reflect the growing stature of Chinese OEM
2. Chinese auto parts suppliers are now the most profitable in the world: Chinese auto
suppliers are equally benefiting from the domestic car production growth, and industry
profitability is now around 10%.
3. Lack of qualified people, price competition and rising cost base will be key
challenges: lack of qualified managers to lead international expansion, technology
improvement and building professional organizations and processes will likely lead to a
war for talent in the near future.
4. Key initiatives will be hiring international experts and domestic M&A deals: Chinese
auto companies will likely hire more international experts to fill the talent gap and
introduce broader management experience. Domestic M&A deals are likely to increase
significantly, while international deals will be selective and limited to few major players.

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