16 NOVEMBER 2007 • SHANGHAI AUTOMOBILE EXHIBITION CENTRE • ANTING GLOBAL AUTOMOTIVE SEMINAR Challenges Ahead – China’s Automotive Industry at a Crossroads John Zeng Senior Market Analyst, Asia
16 NOVEMBER 2007 • SHANGHAI AUTOMOBILE EXHIBITION CENTRE • ANTING
GLOBAL AUTOMOTIVE SEMINAR
Challenges Ahead –China’s Automotive Industry at a Crossroads
John ZengSenior Market Analyst, Asia
Copyright © 2007 Global Insight, Inc. 2
• Macroeconomic Outlook
• Challenges Faced by the Industry
• Market Outlook
Presentation Outline
Copyright © 2007 Global Insight, Inc. 3
(Source: China National Statistics Bureau)
53408 59622 6433273762
86911103618
119555
141051
161587
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
1998 1999 2000 2001 2002 2003 2004 2005 20060%
5%
10%
15%
20%
25%
Urban/Rural Household RMB Saving Deposit (100 Mil Yuan)
Per Capita Disposable Income Of Urban Households (Yuan)
5425 5845 62806860
77038472
942210493
11759
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1998 1999 2000 2001 2002 2003 2004 2005 20060%
2%
4%
6%
8%
10%
12%
14%
16%
Key Highlights and Assumptions (1)
• Real GDP growth of 10.6% in 2006, the fourth consecutive year that exceeded 10%
• Saving rate is very high… overall saving rate is an amazing 43% of GDP
• Number of households that can afford cars increases significantly with diverse needs…Market and consumer dynamics entering first stage of maturity
0
2
4
6
8
10
12
1999
2001
2003
2005
2007
2009
2011
2013
Real GDP Growth (Percent)
Copyright © 2007 Global Insight, Inc. 4
1402 16582251 2436
2952
4128
5612
9691
7620
5933
4382
32562662
249219491838
6600
7916
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
1998 1999 2000 2001 2002 2003 2004 2005 2006-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%EXPORTIMPORTGROWTH RATE
(Source: China National Statistics Bureau)
28547 29876 32619 3689843500
55567
70477
88774
109870
0
20,000
40,000
60,000
80,000
100,000
120,000
1998 1999 2000 2001 2002 2003 2004 2005 20060%
5%
10%
15%
20%
25%
30%
1998-2006 China Retail Sales (100 Mil RMB)
1998-2006 Fixed Asset Investment (100 Mil RMB)
• Investment and export led boom… more modest growth in consumption
• Foreign trade enjoying strong surplus… 6.5% of GDP in 2006. Exports crucial element of the boom and strong growth in first half of 2007 ahead of removal of export rebates
• Retail sales growth of 15.4% in first half of 2007…highest increase since 1997
1998-2006 China Foreign Trade (100 Mil US$)
29153 3113534153
37595
4813652516
59501
67177
76410
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
1998 1999 2000 2001 2002 2003 2004 2005 20060%
2%
4%
6%
8%
10%
12%
14%
16%
Key Highlights and Assumptions (2)
Copyright © 2007 Global Insight, Inc. 5
• Overtook the United Kingdom and France to become the fourth mostsignificant vehicle market in 2002
• Overtook Germany to become the third-largest vehicle market in 2003
• Overtook Japan by a very narrow margin to become the second-largest market in 2005
• Passenger car sales rose five-fold between 2001 and 2006
• Segmentation profile has only changed very gradually
Fastest-growing Market in the World… But Only Gradual Changes in the Segmentation Profile
OTHER0.5%
MPV4.1%
D17.1%
C41.1%
B6.4%
A16.3%
E9.8%
SUV4.7% MPV
4.6%
OTHER0.4%
D13.8%
C42.0%
B10.9%
A13.3%
E8.2%
SUV6.8%
2001 2006
Copyright © 2007 Global Insight, Inc. 6
Almost All the Global OEMs Present in China Domestic OEMs Manage to Hold Their Own
CHN JPN EUR US KOR
Market is becoming more fragmented: Hyundai lost market share while Chery raised its ranking
Pricing war fired up in 2007: Major price cuts from FAW VW, SVW, DF Nissan, SGM, PSA, Chery
Chery won the most market share to 8.2%. A 48% increase in sales, raised ranking to #3
Toyota and Mazda market share gained 0.9pp to 7.5% and 3.9% respectively
By brand, VW remains #1 with 16.2% market share.FIAT sales dropped 21%.
GM still remains #1 as OEM, market share dropped to 9%
Hyundai was the largest market share loser. Market share dropped to 5.1% from 6.8% in 2006.
Copyright © 2007 Global Insight, Inc. 7
Major JVs/OEM Affiliations
Dongfeng Motor
Note: This figure shows only major OEMs, even though there are more than 100 automotive assemblers in China.
Shanghai Automotive(SAIC)Roewe
Foreign Company
LocalCompany
Joint Venture
Tianjin
FAW Group
FHC(Changchun)
(Hainan)
FCCJMC
FAW-VWShanghai-VW Tianjin
ToyotaTianjin-Toyota
Engine
GuangzhouToyota
ChanganFord Mazda
ChanganSuzuki
GZ ToyotaEngine
HondaExport JV
DongfengHonda
DongfengHonda Engine
DongfengMotor
Fengshen
DPCA
ShanghaiGM
SiChuanToyota
GuangzhouHonda
FAW-VWEngine
SH-VWEngine
BJ-HyundaiSH-GMengine BBDC
DongfengYueda KiaChangfeng
Motor
JianglingIsuzu
SoutheastMotor
CFMEngine
Qingling
FAW Daihatsu
Brilliance BMW
NanjingFiat
33.4%25%
50%50%50%
50%
50%
40% 50%
35%3%
No Equity
50%
50%
50%
65%50%
50%
25%
10%
No Equity
10%
50.9%14.9%
30%
50%
51%
40%
60%
40%
50%
50%
51.16%
35%
70%
30%50%40%
60%
60%
50%
50%
50%
50%
50%
50%
50% 50%
50%
50%
50%
50%
50%50%
50%
25%
25%
50%36%
50%25%
16.07%
50.14%
75%
12.5%
15%25%
JMCG (41%) & Public (26%)
20%
50%
20%
51%
50%
50%
No Equity 50% 50%
50%
50%GM DCX
VW TOYOTA HONDA
FORD
Daihatsu
PSA
MitsubishiSuzuki
Mazda
Nissan
Yulon-Nissan
Daewoo
SsangyongKia
Isuzu
BMW
FIAT
Hyundai
BIG3 in China
Changan
Guangzhou
BAICChangfeng Fujian Auto
Chery
ChinaBrilliance
NACMG
Copyright © 2007 Global Insight, Inc. 8
The Most Promising Domestic OEMs
13.5%
15.3%
18.4%
22.6%
23.3%
31.9%
47.8%
0% 10% 20% 30% 40% 50%
h
FAW CAR
CHERY
SAIC
BRILLIANCE
FAW TIANJIN
HAIMA
CHANGAN
6.6%
6.7%
7.4%
9.3%
9.6%
10.3%
14.6%
17.2%
26.4%
43.7%
44.8%
0%10%20%30%40%50%
SH-VW
FAW-VW
GZ-HONDA
SH-GM
BJ-HYUNDAI
GZ-TOYOTA
FAW-MAZDA
BJ-BENZ
BR-BMW
DF-HONDA
CA-FORD
Chery is widely trusted by consumers due to its good performance in recent years
The Most Trusted JVs of Global OEMs
Known as the earliest JVs, SH-VW and FAW-VW are well recognized by consumers
Source: Car Consumer Survey 2007 by Tsinghua University
Consumer Recognition of Domestic OEMs and JVs
Copyright © 2007 Global Insight, Inc. 9
• Targeting reduction in energy use by 4% this year: appears quite unrealistic• Gradually move to market based pricing
– Cutting subsidies– Gasoline prices have risen by 56% between Jan 2003 and May 2006, 18% in 2006
• Current price of 93 Octane gasoline is 5.34 yuan (US$ 0.71 cents) per litre , around 1/3 of U.K. price• Will track international oil prices in the future• Further increases needed to support conservation measures• Assuming fuel tax introduction in early 2009…will initially result in 30% increase in fuel price• Currently consumption tax accounts for 6% of retail gasoline and 3% of the price of diesel at the pump
0123456789
1011
2004
2004
2004
2005
2005
2005
2006
2006
2007
2007
2008
Price of 93# Gasoline (RMB/Litre)
Mar Aug Dec Jan June Dec Mar May Jan
Fuel Prices Are Still Low…But Will Follow International Oil Prices in the Future
Scenario 3: 100% increaseScenario 2: 50% increaseScenario 1: 30% increase
Fuel Tax
Nov
Copyright © 2007 Global Insight, Inc. 10
Market Demand Drivers -Frequent New Product Launches
Q1 Q2 Q3 Q42007
CHERY A18
WEIZHI C1
ROEWE750REFINE IV
FREEMA
RIO
SPACE WAGON
EPICA
S-MAX
LANDY
FAMILY
HAIMA 3 CV11
CR-V
LIVINA
COROLLA
MAGOTAN
OCTAVIA
PARK AVENUE
BINGYUE
CHERY A1
CHERY V2
XENIA
MG 7
VOYAGER
M1A
C-Class
MONDEO
CV 7
OTING SUV
B11 MPV
SPORTAGE
MG TF
M3
CD-1
F6
B21
M11
ZINGER
MAZDA 5
SERENA MPV
MAZDA 2
CH011
QISHI
WINGLE
Copyright © 2007 Global Insight, Inc. 11
��������(��)�����������(��)
1995-2010 CHINA TOTAL HIGHWAY MILEAGE (KM)
(Source: Ministry of Transportation, P.R.China)
2,141 3,422 4,7718,733
11,605
16,31419,331
24,331
29,50034,000
41,00545,400
65,000
59.83%
39.42%
83.04%
32.89%
40.58%
18.49%
25.87%21.24%
15.25%20.60%
10.72%
43.17%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2010
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%Ranked No.2 in the world,expect to take place of U.S. in2008 as No. 1 in the world
Market Demand Drivers -Massive Infrastructure Buildup
Copyright © 2007 Global Insight, Inc. 12
Market Demand Drivers -Increased Affordability Due to the Price War
7074788286909498
102
Jan/
2004
Apr
/200
4
Jul/2
004
Oct
/200
4
Jan/
2005
Apr
/200
5
Jul/2
005
Oct
/200
5
Jan/
2006
Apr
/200
6
Jul/2
006
Oct
/200
6
Jan/
2007
Apr
/200
7
Jul/2
007
Luxury Standard Compact Small Micro
Copyright © 2007 Global Insight, Inc. 13
Prices Already Below U.S. Levels for Many Models in Segment A/B…But Prices Remain High in C and D
Civic and Corolla base version prices 21% and 20% higher than in U.S.
Accord and Camry base version prices 29% and 39% higher than in U.S.
Prices of Chevrolet models considerably lower in China
Price of Fit 25% lower than in U.S.
$24,900 $18,470 $35,137 $25,760 CamryToyota
$23,445 $17,345 $29,146 $21,592 SonataHyundai$27,400 $18,625 $39,044 $24,093 AccordHonda
$16,895 $13,395 $18,232 $13,000 ElantraHyundai$18,710 $15,010 $23,442 $18,232 CivicHonda$15,615 $14,405 $26,020 $17,295 CorollaToyota$14,015 $10,415 $14,820 $9,116 AccentHyundai$15,170 $13,850 $13,258 $10,262 FitHonda$13,525 $11,150 $10,392 $8,699 YarisToyota$15,102 $10,560 $11,905 $8,670 AveoChevrolet
HIGHLOWHIGHLOWUSChina
Retail Price in China vs. US (in US$)Model NameBrand
Copyright © 2007 Global Insight, Inc. 14
Used Car Transactions Rising Rapidly …Greater Focus by OEMs and Franchised Dealers
Trend• Cars purchased at the
beginning of boom period (2002-2003) now entering used car market– Number of transactions in
Beijing have quadrupled since 2002
• Ministry of Commence taking steps to regulate this market
• Gradual improvement in the status of used cars
• Direct Auto-finance still difficult to obtain for used cars
Assumed ImpactConsumer choice will extend to better quality used vehiclesFor a given budget, consumer will be able to choose between a larger used car and a smaller new carDevelopment of used car market will raise role of residual values in the new car buying processWill encourage more long term approach on pricingBetter balance in dealer activities between New Car, Used Car and Parts/Service activities
Copyright © 2007 Global Insight, Inc. 15
Car, SUV, MPV Sales Growth of 36% in 2006 (Domestic Produced Models Only)
0
50
100
150
200
250
300
350
400
450
500
Jan.
Feb.
Mar
.
Apr
.
May
Jun.
Jul.
Aug
.
Sep.
Oct
.
Nov
.
Dec
.
Car
Sal
es (T
hous
and
units
)
2005
2003
2004
2006
2007
2004 Car Sales: 2.54 million units (Domestic Built Vehicles Only)2005 Car Sales: 3.17 million units (Domestic Built Vehicle Only)2006 Car Sales: 4.2 million units (Domestic Built Vehicle Only)2007 Car Sales: 5.24 million units (Forecast growth 24.8%)2008 Car Sales: 6.15 million units (Forecast growth 17.3%)
Copyright © 2007 Global Insight, Inc. 16
Car Ownership Per 1000 Population Still Low
549 546
492468
439 432
253 238
3613.1 7.8
0
100
200
300
400
500
600
AU
S
GER
FRA
US
UK
JPN
MY
S.KO
R
TH CH
N
IN
Car Per 1,000 Population 2006
Copyright © 2007 Global Insight, Inc. 17
Vehicle Production - Incremental Year-over-Year Growth…2007 an Exceptional Year
0
200
400
600
800
1000
1200
1400
1600
180020
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Gro
wth
in V
ehic
le P
rodu
ctio
n
Copyright © 2007 Global Insight, Inc. 18
Total Vehicle Sales…Over 13 Million Units in 2012
Cars: 6.28 million LCVs: 2.89 millionHCVs: 879,000
2008 Sales
0
2,000
4,000
6,000
8,000
10,000
12,000
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Sale
s (T
hous
and
Uni
ts)
Car
LCV
Truck and Bus
Copyright © 2007 Global Insight, Inc. 19
0
50
100
150
200
250
A B C D E
SUV
MPV
OTH
ER
Sale
s In
crea
se (2
008
vs 2
007)
2008 – Segments B and C Lead Growth Limited Growth Potential for Segment A
Sales Growth Forecast 2008 vs 2007 (Thousand units)
Expected to account for 48% all growth in 2008
Copyright © 2007 Global Insight, Inc. 20
Sales Growth Diffusing Away from Mega-Cities
25.0%
8.1%
20.6%
27.6%
33.4%33.7% 34.4%
36.0%
Tier 1 Tier 2 Tier 3 Tier 4
2005 2006
Xinjiang
Gansu
Heilongjiang
Jilin
Liaoning
Taiwan
Tibet
Sichuan
YunnanGuan
gxiGuangdong
Fujian
Shandong
Hubei
Hunan Jiangxi
Hainan
Inner Mongolia
NingxiaQinghai
Hebei
Shanxi
Henan
Anhui
Zhejiang
JiangsuShaanxi)
Guizhou
Tianjin
Shanghai
Beijing
Per Capita GDP in US$
Car Ownership Per ‘000 people
Tier 1
Tier 2
Tier 3
Tier 4
50>5000
3000 - 5000
1000 - 3000
<1000
18
5
<5
More opportunities for local brands
Copyright © 2007 Global Insight, Inc. 21
MSRPMSRP
CHINA
MSRPMSRP
DEVELOPED COUNTRIES
PURCHASE TAXCONSUMPTION TAX
HIGH REGISTRATION FEES
PURCHASE TAXCONSUMPTION TAX
HIGH REGISTRATION FEES
Generally 30-35% of MSRP
CONSUMPTION TAXCONSUMPTION TAX Generally 5-25%
High Cost of Ownership, Environment, and Infrastructure Hold Back Car Consumption in Mega Cities
The extra costs Chinese consumers have to bear hold back car consumption
FUEL TAX??FUEL TAX??
TOLL CHARGEROAD MAINTANACE FEE
TOLL CHARGEROAD MAINTANACE FEE
ROAD TAXFUELTAX
ROAD TAXFUELTAX
OTHER FEES/CAR TAX
OTHER FEES/CAR TAX
OTHER FEESOTHER FEES
Copyright © 2007 Global Insight, Inc. 22
• Aims to control the total fuel consumption growth within 50% when PARC reaches 55 million units– Reduce average vehicle fuel consumption by 15%– Encourage use of small displacement vehicles– Government funding hybrid/fuel cell vehicle program in “863” project to
develop alternative fuel and powertrain technology• Focus on promoting purely Chinese car manufacturers
– Aim to increase market share of local brands to at least 50% in the passenger car market
• Strong support of independent R&D activities– Direct finance support and indirect tax incentives
• Aims to consolidate State-owned Enterprises
Government Policy - 11th Five-Year Plan Emphasis on Independent Technical Development
• Traditional Big 3 (FAW, Dongfeng, and SAIC) are facing increasing pressure to build up independent passenger car brands and a high local R&D capability
• New emerging local Chinese companies will be able to obtain more government funding to accelerate independent technical development
Copyright © 2007 Global Insight, Inc. 23
Technical Road Map of Chinese R&D Build-up
Increasing R&D capabilities and technology tra
nsfer, stronger lo
cal supplier base
Low
end
Over 60 Local OEMs
Step 1: Imitation, reverse engineering of foreign OEM models. R&D complete outsourcing
Low
–to
-Med
ium
Full
Prod
uct L
ine-
up
Shakeout, Market Reshuffling
Step 2: Improve collaboration with international suppliers, joint development with overseas R&D institutes
Around 10 major local
OEMs
Step 3: Synchronize the supply chain, independent development, increasing R&D capabilities and technology transfer
Pre 2000 2000-2015 Post 2015
Step 4: Be able to compete with global OEMs
Further consolidation?
Copyright © 2007 Global Insight, Inc. 24
Local OEMs’ Product Line-ups Shift Up…More Direct Competition with Global OEMs
THO
USA
ND
RM
B
0
50
100
150
200
250
300
FAW
-XIA
LICHERYGEELY
BRILLIA
NCE
HAFEI
BYDCHANGAN
HAIMA
LIFAN
FAW
CAR
SAIC
NAG
V5
Vision
Merrie Flyer
F3
CV11
CV6
Zunchi
JunjieFamilia II
Freema
520Lubao
Saibao VVela
Xiali
Besturn
Roewe 750
MG75
BJ212
1996-2006 2006
More higher priced models expected after 2006, including
Chery F11, Geely GH-1 and FAW HQE etc
Copyright © 2007 Global Insight, Inc. 25
0%
10%
20%
30%
40%
50%
60%
70%
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Market Share Trends by OEM Country of Origin
CHN
JPN
EUR
US
KOR
Copyright © 2007 Global Insight, Inc. 26
Profitability Under Pressure
Downward Pressure on Prices
• Price war continues• Greater consumer choice and
intense competition• Looming over-capacity in the
medium and long term
Upward Pressure on Costs
• Faster pace of new model launch– Higher tooling and product costs
• Rising commodity and oil prices• Higher sales and marketing
costs– Greater competition
Cost Reduction Measures
• Greater scale economies and efficiencies• Higher local content levels• Fresh investments in “lower cost” cities in interior• Greater use of domestic suppliers
Copyright © 2007 Global Insight, Inc. 27
Conclusions
• The Chinese Government will continue to offer favourable policies to support domestic OEMs, as auto sector is regarded as pillar industry
• The relationship between global OEMs and domestic OEMs becomes strained due to more direct competition and violation of IP rights
• Tight relationships are also likely to appear within JVs over the coming years as increasing technology transfer and a stronger local component supplier base enable domestic OEMs to seek independence
• The domestic OEMs are expected to continue to grow despite the production ramp up by global OEMs
• Energy consumption becomes a constraint. Market competition willgradually shift from price war to energy efficiency
16 NOVEMBER 2007 • SHANGHAI AUTOMOBILE EXHIBITION CENTRE • ANTING
GLOBAL AUTOMOTIVE SEMINAR
Thank You
John ZengSenior Market Analyst, Asia
E-mail: [email protected]