Automotive_China_from_MelchersRaffel

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Automotive Trends in China

Strategic and M&A Implications

for OEM and Parts Suppliers

Hong Kong / Shanghai / Munich, June 2013

Raffel GmbH 80333 München Tel +49 89 242 086 590 Email [email protected]

© Raffel GmbH Corporate Development All rights reserved. Proprietary and confidential.

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Raffel GmbH 80333 München Tel +49 (89) 242 086 590 Email [email protected]

© Raffel GmbH Corporate Development All rights reserved. Proprietary and confidential. Automotive_CHINA_from_MelchersRaffel.pptx1

Index

0. Preliminary remarks & Executive Summary 2

1. Market size and growth 5

2. Market structure and competition – Carmakers 14

3. Market structure and competition – Automobile parts manufacturers 26

4. Market structure and competition – Automobile parts sub-sector 31

5. Future challenges & developments 41

6. M&A landscape 45

About MelchersRaffel 53

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© Raffel GmbH Corporate Development All rights reserved. Proprietary and confidential. Automotive_CHINA_from_MelchersRaffel.pptx

This paper intends to share the market landscape overview of automotive industry

in China and our main perspectives on the future development in this sector

It is also designed to present the huge possible business opportunities but at the

same time, to highlight the key strategic challenges that every company should

watch out when participating in the market

The data shown in this paper is for reference only to understand the general trend

and competitive environment, whereas some of the numbers being best estimates.

Examples given here are selected for illustrative purpose and should not be

considered as an exhaustive list

Automotive parts sub-sector information for e.g. plastic parts, electronics, metal

parts etc. are available upon request

This paper is a brief excerpt. The full document has about 50 to 60 pages.

Preliminary Remarks

2

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Market size and growth

China is the largest sales and production country for automobiles in the world by far. Sales volume has reached 19.3 million

units in 2012 – which are mainly sold domestically (c.95%)

• China is the leading production base for passenger car and the second one for commercial vehicle, just behind US

Despite the growth rate may start to slow down in the next few years, China still enjoys a faster growth rate comparing to

other European/Western countries, mainly driven by the increasing per capita income and auto penetration

Market structure and competition – Carmakers

China automobile is a highly concentrated market which is dominated by the State-owned enterprises (incl. joint-venture with

foreign companies). Typically, a leading auto Chinese company carry more than 1 foreign brand through multiple joint-venture

subsidiaries, in additional to their self-owned brands

Chinese local car-makers are still in early development stage whereas most of the local self-owned Chinese brands are

competing heavily in the low-end segment while the premium & luxury segments are mostly dominated by the foreign brands.

Chinese consumers regard fuel consumption, safety and functionality as the most important buying factors for car-purchases,

which may explain why foreign brands are more preferred

Through joint-venture setup in China, foreign passenger car brands enjoy a large market share, c. 70% of the sales volume;

while the local brands only have c.30%. For commercial vehicles, both bus and truck sub-segments demonstrated high

concentration with 80-90% share dominated by top 6-10 players

Top German auto brands are quite positive about China, which can be reflected from the heavy investment in China. It is

expected the future growth rate of sales volume in China is about 150% from 2010 to 2020

Both foreign and Chinese carmakers are expanding their R&D budgets and facilities, indicating the shift in technological and

higher quality focus

Market structure and competition – Automobile parts manufacturers

Chinese auto parts market has been growing rapidly at c.30% in the past few years, and the top local players have a

comparable size to top German companies

Executive summary – 1/2

3

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Market structure and competition – Automobile parts manufacturers (cont‘) In contrast to the carmaker market, Chinese automobile component market is very fragmented with about 30,000 companies

• Each automotive supplier sub-sectors has a unique profile – e.g. plastic parts, electronics, metal parts etc. and have to be

analysed accordingly. For main sub-sectors, the information is available from MelchersRaffel.

Future challenges & developments Carmakers: Despite the huge potential and high growth in China, international companies are expecting increasing risk in

policy changes and IP protection, and also more intense competition in the mid-range segment; while the local companies

would have to overcome challenges in capacity management, stronger competition in low-end segment and improving the

local design & branding.

Automobile parts manufacturers: In order to capture the big pie in China, European parts suppliers have to overcome

challenges in client relationship building, communicating value & being more responsive

M&A landscape In the automotive parts market, since foreign companies can set up wholly foreign-owned subsidiaries and hence the M&A

activity is relatively less, but more cases are expected in order to gain faster access to the local critical clients, or else it would

be difficult/ too late once local Chinese companies have improved their production techniques

Local Chinese auto companies have been very active in M&A deals in the past few years, in both domestic and cross-border

areas. Most of the major deals are driven by local Chinese companies acquiring foreign companies especially component

suppliers for vertical supply chain benefits and gaining knowhow/ technological capabilities, and hence improving quality level.

In contrast, foreign big auto groups acquiring local Chinese car-maker companies cases are limited due to the protectionism

mentality of the Chinese government

In near future, M&A deals involving Chinese companies are expected to increase further, mainly driven by improving financial

capabilities of local Chinese carmakers, Increasing industry consolidation and rising priority of higher quality/ technology for

local Chinese carmakers

Executive summary – 2/2

4

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▐Market size and growth

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Currently, China is the largest auto production country and the expected growth rate

in the next few years is faster than other European/Western countries

6

Source: IAPEChina, MelchersRaffel analysis

By 2050 it is estimated auto production in China will have grown to about 40 million units per year.

Urbanization Rate in % - 1980-2030Auto production forecast for the five worldwide leading manufacturing countries

2010-2015

2010 2013e 2015e

14mn

Units

8mn9mn

5mn

3mn

19mn

10mn9mn

6mn5mn

21mn

10mn9mn

6mn 6mn

(2050: x2)

Auto production in China vs. Other Countries (incl. commercial car and passenger car)

CAGR:

10-13 11% 8% 0% 6% 19% 5% 0% 0% 0% 10%CAGR:

13-15

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China is the leading production base for passenger car and enjoys the highest

growth rate at 19% in the past few years

7

15.5

5.4

3.3

8.6

4.1

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

China Germany India Japan USA

2007

2008

2009

2010

2011

2012

Passenger car production by country, 2007 – 2012

Mn units

Mn units

CAGR 07 – 12

19%

-1%

14%

-3%

1%

Source: International Organization of Motor Vehicle Manufacturers; MelchersRaffel research

Passenger car

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China is not only the largest global production site, but it also has a huge growth

potential driven by the increase in car penetration and rising GDP per capita

8

R² = 0.7935

-

10,000

20,000

30,000

40,000

50,000

60,000

- 100 200 300 400 500 600 700

GDP per capita versus passenger cars unit per 1000 people

Source: Worldbank; MelchersRafffel analysis

Passenger

cars unit per

1000 people

GDP per capita, 2010

(current US$)

Australia

Denmark

Sweden

China GDP per capita is

estimated to reach c. USD 50k

by 2050, which implies a 8-10

times increase in penetration

UK

UAE

Singapore

Hong Kong

Spain

Germany

Czech Republic

Greece

Malaysia

S. Korea

ItalyNew Zealand

BrazilMexico

RussiaPoland

Netherlands

JapanAustria

Finland

Chile

Turkey

S. Africa

Thailand

China

MoroccoCambodia

Egypt

Bangladesh

PhilippinesIndia

Sri Lanka

China

by 2050

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Key factors for future trends in China automobile market

Overall the automotive industry in China is expecting to grow further, which is in

particular driven by the political, economic and social developments in China

9

Political

▐ Government is planning to have 2~3 huge players of >3 mn capacity and 4~5 >1.5mn capacity.

▐ Electric vehicles was identified as one of the 7-strategic industries in the government 5-year plan

▐ Lots of subsidies is provided to new energy car,

■ E.g. Shanghai government is offering RMB40k + per new energy car purchase & free license

Economic

Social

Technological

Legal

Environmental

Source: MelchersRaffel research

Growth

impactAspect Key factor

▐ License plates can cost more than the car

■ Shanghai is one of four Chinese cities that limit car purchases by imposing quotas on registrations.

The prices paid at Shanghai’s license auctions in recent months—RMB90k

▐ Pollution control

■ Beijing Environmental Protection Bureau released two sets of Euro VI equivalent emission

standards for heavy-duty trucks and for non-road machineries in Apr 2013

▐ Increasing per capita disposable income is driving passenger car demands since they are more

preferred than buses or other mass transit vehicles

▐ The export of local brand cars to emerging market including Middle East and Africa has large volume

increment in recent two years.

▐ Increasing urbanization leads to higher demand for both commercial and passenger cars

▐ Local Chinese carmakers successfully created electric and hybrid energy saving vehicles

▐ Chinese OEM suppliers can make their own IP protected accessories in parts of the car. e.g. BYD has

the advantage of their lithium battery in the world.

(Replacement)

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▐Market structure and competition – Carmakers

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Top 10 players87%

Others13%

At company level, passenger car market in China is highly concentrated whereas top

10 companies have accounted for about 90% share in sales volume, mainly SOEs

11

2%

3%

3%

3%

4%

8%

11%

14%

17%

22%

Great Wall

Chery

Brillance

JAC

GAC

BAIC

Changan

FAW

DongFeng

SAIC

Automobile sales volume market share in China, 2011

% of units

Market share by player by ownership type, 2011

% of units

Central SOE

Provincial SOE

Private enterprise

Total: 18.5mnSource: CAAM; Bank analyst reports; MelchersRaffel analysis

Passenger car + Commercial vehicle

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Examples – Multi-brand structure of typical Chinese Auto companies

Typical leading local Chinese companies carry multiple foreign brands, in additional

to their self-owned brands

12

Sino-foreign JV

Sino-sino local JV

Local self-owned brand

Dongfeng Nissan

1 2

3 4

Sino-foreign JV

Sino-sino local JV

Local self-owned brand

1

2

3

4

6

5

Due to historical legal limitation, All foreign brands manufactured in China are produced through joint ventures with

Chinese partners. Big Chinese Auto groups usually carry > 1 foreign brand, in additional to their self-owned local brands.

Source: Company website;, MelchersRaffel research

Provincial

SOE

Central

SOE

Passenger car + Commercial vehicle

http://www.peugeot.com.cn/

http://www.dongfeng-citroen.com.cn/

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Major passenger car brands in China by price segment

Foreign brands are dominating the more high-end & luxury car segments while majority

of the local carmakers are still competing heavily in the mass low price segments

13

> RMB

1.5mn

(>EUR 185k)

Dominated by foreign

brands, in particular

sports car

< RMB 100k

(<EUR 12k)Mainly local Chinese brands

with lower-quality products

RMB 100k – 500k

(EUR 12k – 62k)

RMB 500k – 1.5mn

(EUR 62k – 185k)

Generalization, not exhaustive

Imported foreign brands/

Foreign-Sino JV brands

Local Chinese auto brands

Mass low-end

Mid-range

Premium

Luxury

Source: Company website;, MelchersRaffel research

Passenger car

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FULL DOCUMENT IS AVAILABLE UPON

REQUEST

Please send an email to [email protected] with your name, position and

company name. Thank you for your interest.

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Automotive_China_from_MelchersRaffel

Business

leading production

sino local

future challenges

market structure

foreign brands

passenger

plastic parts

1 foreign