1. From Fat Profits to Hardscrabble? The Outlook for China Car Market 2005-2010 Automotive News China Conference 20 April 2005 By Michael J. Dunne Automotive Resources Asia Ltd.

2. Automotive News China Conference 2005 Page 2 At the cornerstone of China’s auto industry are the joint ventures that link global auto makers with Chinese partners. As competition intensifies, these relationships will come under pressure like never before. The Outlook for China Car Market 2005-2010 Increasingly, the Chinese companies are showing signs of a desire for greater independence. That means competing with their partners inside China and for export markets. Jilin Liaoning Shandong Tianjin JiangsuBeijing Henan Hubei Hunan Jiangxi Sichuan Chongqing Guangdong Guangxi Hainan Shanghai

3. Automotive News China Conference 2005 Page 3 USA DCXBeijing Jeep Corporation, Ltd. FordChangan Ford Automobile Corp., Ltd. GMJinbei GM Automotive Co. SAIC-GM-Wuling Automotive Stock Ltd. Shanghai GM Automotive Co. SGM Dongyue Automotive Co. Japan HondaGuangzhou Honda Automobile Co., Ltd. Dongfeng Honda Motor Co., Ltd. Honda Automobile (China) Co., Ltd. MazdaFAW Car Co., Ltd. FAW Hainan Automobile Co., Ltd. MitsubishiHunan Changfeng Automobile Manufacture Co., Ltd. NissanDongfeng Motor Co., Ltd. Zhengzhou Nissan Automobile Co., Ltd. SuzukiChongqing Changan Suzuki Automobile Co., Ltd. Changhe Suzuki Automobile Co., Ltd. ToyotaTianjin FAW Toyota Automobile Co., Ltd. Sichuan Toyota Motor Corp. FAW Huali Motor Co., Ltd. FAW Fengyue Automobile Co., Ltd. Guangzhou Toyota Motor Co., Ltd. South Korea HyundaiBeijing Hyundai Motor Company Dongfeng Yueda Kia Automobile Co., Ltd. Germany BMWBMW Brilliance Automotive Co., Ltd. VWFAW-Volkswagen Automotive Company Ltd. Shanghai Volkswagen Automotive Company Ltd. Italy FiatNanjing Fiat Co., Ltd. France PSADongfeng Peugeot Citroen Automobile Co., Ltd. Joint venture automotive companies in China The Outlook for China Car Market 2005-2010

4. Automotive News China Conference 2005 Page 4 China’s vehicle demand will climb to 5.8 million units in 2005 and approach 10 million units by 2010. This projection assumes no interruptions in economic growth and no regulations to limit car population growth, like the quota system here in Shanghai. Units Historical and Projected Vehicle Sales (2000-2010e) Passenger cars Commercial vehicles Source: Chinese Government and Auto Company Data The Outlook for China Car Market 2005-2010

5. Automotive News China Conference 2005 Page 5 What about supply? Going forward China’s auto industry will have too much capacity. But what nation’s car industry does not have overcapacity? China’s auto industry has always had too much supply. Still automakers have made hundreds of millions of dollars in profits. Any reason to think the future will be different? Units Forecast of Capacity 2010 vs. Passenger Cars Demand Demand Capacity Source: Chinese Government and Auto Company Data The Outlook for China Car Market 2005-2010

6. Automotive News China Conference 2005 Page 6 Think of China’s automotive market in three distinct time intervals. Through 2004 competition has been relatively limited, thanks to regulation. 2005 marks the start of intense competition as Chinese and foreign brands vie for market share. 1985 - 20012002 - 20042005 - 2010 Halcyon Years The Perfect StormPerfect Competition? Regulated Oligopoly Explosive Demand Market Share! The Outlook for China Car Market 2005-2010

7. Automotive News China Conference 2005 Page 7 There are now more brands producing in China than even in the United States. China’s industry expects 40 new models and variations in 2005 alone. Average production per model has shifted from 75,000 units per year per model in 2000 to less than 40,000 units per model in 2005. Who produces efficiently at lower volumes? VW 53% Honda 5% Suzuki 8% Others 7% Citroen 8% VW 27% GM 10% Honda 8% Hyundai 6% Daihatsu 5% Geely 4% Citroen 4% Others 16.7% 200020022004 20 40 60 80 100 27 58 95 No. of new models 1998 14 Year Market Share 2000 A Rush of New Models Market Share 2004 1 2 3 4 5 1 2 3 4 5 Chery 4% Toyota 3% Kia 3% FAW 2% Dong Feng 3% 125 2005 120 140 GM 5% Daihatsu 14% The Outlook for China Car Market 2005-2010

8. Automotive News China Conference 2005 Page 8 What is the impact on prices and profits? Now, China’s price-volume distribution begins to resemble what is normal for developing markets. Car demand in developing markets reflects incomes distribution: Many have-somes, a small percentage of unusually wealthy and not much in between. <=US$ 12,000 US$ 12,000-18,000 US$ 18,000-24,000 >US$ 24,000 Share of Cars Priced Under $12,000: China vs. India 24% 75% 25% 38% 45% The Outlook for China Car Market 2005-2010

9. Automotive News China Conference 2005 Page 9 China’s individual buyers - not businesses - will drive growth going forward. Affordability is key. Consider the shifts in the fastest growth segments between 2003 and 2005. The margin on the Regal was estimated at $3,500 per unit. On the QQ, it’s closer to wood shavings. Chery QQ (Jan-Feb 2005)Buick Regal (2003)Hyundai Elantra (2004) US$4,000 - US$6,800US$ 25,000 – US$ 40,700US$15,000 - US$18,000 Fastest growing segments 2003-2005 The Outlook for China Car Market 2005-2010

10. Automotive News China Conference 2005 Page 10 Consider the case of Beijing Jeep. In 2003 it launched the Cherokee 2500, set the sticker at an aggressively-low $13,500 and doubled sales. But its success also attracted Chinese competition. In the first two months of 2005, Beijing Jeep saw the 2500 sales was 158 units. Chinese makers as a group sold 5,304 units. US$ 10,000 Zhongxing Shuanghuan: US$ 13,200 Jeep 2500 US$ 10,000 GreatWall Safe The Outlook for China Car Market 2005-2010

11. Automotive News China Conference 2005 Page 11 Upstart Chinese car and parts makers have a cost structure out of line with global producers. Land. Loans. Labor. Health Care. The real threat to profits in China comes in the form of these risk-taking insurgents. “In The Club” “Young Tigers” The Outlook for China Car Market 2005-2010

12. Automotive News China Conference 2005 Page 12 By 2007, Chery will ship 250,000 cars to North America. And by 2010, the nation will exports $100 billion worth of car parts worldwide. To put the export target in perspective, parts exports from Japan and Mexico combined are around 80 billion dollars. 250,000 to USA in ‘07 The Next New Chery or a Maxima Clone? The Outlook for China Car Market 2005-2010

13. Automotive News China Conference 2005 Page 13 China car exports in 2004 were 9,335 units. Car exports to 2010 will grow at different rates, depending on the producer and the market. Honda plans to export 50,000 units to Europe from its majority-owned plant. Chery and Geely are signing export contracts will most developing market economies. Chinese Automakers Joint Ventures Majority Owned Companies Exporters South America Middle East Europe Southeast Asia Africa JapanNorth America The Outlook for China Car Market 2005-2010

14. Automotive News China Conference 2005 Page 14 Automotive parts exports from China reached $7.3 billion in 2004. (In 2005 China by comparison will already export textiles worth $100 billion.) In 2004, Delphi exported 200 million dollars of parts. Today, most Chinese parts exports are produced in Zhejiang for the after market, not OEMs. Billion Dollars China Parts Exports 2002 - 2010 Drivers Constraints 1.Survival in China Market 2.Global Sourcing 1.Parts & Product Match 2.Logistics/Timing Source: Chinese Government and Auto Company Data The Outlook for China Car Market 2005-2010

15. Automotive News China Conference 2005 Page 15 China has the potential to become the most competitive automotive industry in the world. For suppliers and services-based companies looking to fasten a hold here, it is essential to manufacture at low cost going forward. China’s motorcycle industry experience the same type competitive cycle during the 1990s. Low cost manufacturing is key. 19992003 Global 40% Chinese 60% Global 98% To Survive is to Prosper 2005 Global 60% Chinese 40% Chinese 2% China Cell Phones Market The Outlook for China Car Market 2005-2010

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