Future Powertrains for China Running out of Fuel?

Presentation Document 13th September 2009

Christian Koehler Managing Director Asia Ricardo Strategic Consulting

www.ricardo.com
Christian.Koehler@Ricardo.com RD.08_057505.02

Ricardo plc 2009

China Future Powertrain

The invisible hand of the government firmly directs the development of the Chinese automotive market
Chinas Auto Industry Revival Plan Five Key Elements
Cut Vehicle Purchase Tax

Subsidy for Rural Vehicle Purchase

Subsidy for Scrapping Old Vehicles

Lower the purchase tax on cars with engines under 1.6 litre from 10% to 5% from Jan 20 to Dec 31 2009
1

Allocate 5 billion Yuan to subsidize rural vehicle purchases from March 1 to Dec 30 2009 Farmers who replace their threewheeled vehicles and outdated trucks with smaller ones that have an engine capacity of less than 1.3 litre, are eligible for subsidies
4

Allocate 1 billion Yuan to provide subsidies for scrapping old vehicles A further 4 billion Yuan is allocated from June 1 2009 to May 31 2010 Owners of trucks and buses exceeding a given age, or cars which do not meet certain environmental standards, are eligible for subsidies
5

Foster the market

Promote Consolidation

New tech development

New Energy Vehicles

Others

Primary consolidation between and among OEMs and suppliers Encourage OEMs to co-develop and produce new cars and key components

Funded with 10 billion Yuan over three years to support auto technology innovation and new energy auto development

Subsidized for marketing the use of electric, hybrid and fuel-cell vehicles in large and mediumsized cities

Encourage development of local brands Boost CBU/components exports Develop automotive service and the finance sector
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Source: Public domain, Ricardo analysis Christian.Koehler@Ricardo.com Confidential

China Future Powertrain

China is currently in Euro III but is determined to catch up towards tighter emission legislations, led by major cities
China Vehicle Emission Legislation (Homologation) *
CO, HC, NOX, PM Unit: g/(Kwh) Smoke Unit: m-1 Stage II Beijing Shanghai Nationwide 2006 2007 2.1 CO, 0.66HC 5.0 NOX,, 0.10/0.13*** PM 0.8 Smoke 2008 2009 Stage III 1.5 CO, 0.46HC 1.5 CO, 0.46HC, 2.0 NOX, 3.5 NOX,, 0.02 PM 0.5 Smoke 2010 2011 2012 2013 2014 2015-20 0.02 PM, 0.5 Smoke Stage IV Stage V ** TBD

Note:

* For European Steady Cycle and European Load Response tests ** Beijing and Shanghai implementation of Stage V is estimated *** Specific for engine with per cylinder displacement < 0.75L and rotation speed >3000r/min at rated power

Source: Literature research Christian.Koehler@Ricardo.com Confidential

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China Future Powertrain

In 2009, government incentive plans have been introduced to foster hybrid and electric vehicle penetration
Policy on New Energy Vehicle - Incentive for PV and LCV in Public Service (RMB)
Vehicle Type Fuel Saving Rate 5%~10% 10%~20% 20%~30% 30%~40% >40% 100% 100% Max Electric Power Rate* BSG 4K 10%~20% 28K 32K 20%~30% 32K 36K 42K 30%~100% 42K 45K 50K 60K 250K

Hybrid

EV Fuel Cell

Policy on New Energy Vehicle - Incentive for City Bus > 10m (RMB)
Vehicle Type Fuel Saving Rate 10%~20% 20%~30% 30%~40% >40% 100% 100% Use Lead-acid Battery 50K 70K 80K Use Ni-mh Battery, Lithium Ion Battery and Super Capacitor (Max Electric Power Rate) 20%~50% 200K 250K 300K 350K >50% 300K 360K 420K 500K 600K

Hybrid

EV Fuel Cell

Note: * Equals to Electric motor power/ Total power of vehicle Source: MOF Christian.Koehler@Ricardo.com Confidential

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China Future Powertrain

As a result of the government push, Chinas vehicle market has recovered and is projected to increase to 19.0M units by 2020
China Vehicle Sales Forecast 2008-2020
CAGR Segment Bus Heavy Truck Medium Truck M/HVAN MIC Van SUV/ MVP/ PUP E+F D C B A

24
7.8%

CAGR 6.0%

20 Sales Volume (M units)

14.6 15.5
0.1 0.6 0.3 2.2 2.6 2.2 0.6 1.3 3.8 1.3 0.7

16.1
0.1 0.6 0.3 2.3 2.7 2.3 0.6 1.3 3.9 1.4 0.7

16.9
0.2 0.7 0.3 2.4 2.9 2.5 0.6 1.3 4.1 1.4 0.8

17.5
0.2 0.7 0.3 2.5 3.0 2.6 0.6 1.4 4.1 1.5 0.8

18.0
0.2 0.7 0.3 2.6 3.1 2.7 0.7 1.4 4.2 1.5 0.8

18.5
0.2 0.7 0.3 2.7 3.2 2.8 0.7 1.4 4.3 1.6 0.9

19.0
0.2 0.7 0.3 2.9
6.0% 2.4% 2.2%

16
11.4 11.9
0.1 0.5 0.2 1.6 2.2 1.4 0.5 0.9 3.1 0.9 0.6

12.8
0.1 0.6 0.3 1.8 2.2 1.7 0.5 1.0 3.2 1.0 0.6

13.5
0.1 0.6 0.3 1.9 2.3 1.9 0.5 1.1 3.3 1.1 0.6

12 8 4 0

9.4
0.1 0.5 0.2 1.3 1.4 1.0 0.4 0.9 2.5 0.6 0.4

0.1 0.5 0.2 1.4 2.1 1.2 0.5 0.9 3.1 0.8 0.5

0.1 0.6 0.3 2.0 2.5 2.0 0.5 1.2 3.6 1.2 0.7

3.3 2.7 0.7 1.5 4.4

7.3% 8.2% 4.6% 4.3% 5.0%

1.6 1.0

8.2% 6.8%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Ricardo analysis Confidential

Christian.Koehler@Ricardo.com

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China Future Powertrain

Chinas vehicle population is expected to grow at 8.6% till 2020, and will amount to ~140M vehicles
China Vehicle PARC Development 2008-2020
CAGR

Comments

160 140 Vechile Parc (M units) 120

98 113 105 89 81 74 66 51 7 59 8 8 20 22 24 9 26 68 73 78 9 28 10 30 10 32 34 10 10 36 38 11 127 120 11 11 40 133

139 11

8.6%

Total

3.7% 7.2%

HCV

100 80 60 40 20 0

42

LCV

18

82 85

10.5% PV

26 31

36

41

46

52

58

63

Note: PV includes sedan, SUV, MPV, Pickup and crossover LCV includes micro van, medium van and heavy van HCV includes medium and heavy trucks, medium and large buses Source: China Automotive Yearbook, Ricardo analysis Christian.Koehler@Ricardo.com Confidential

Total PARC Due to increasing attrition rates based on income growth and tightening emission regulations, total PARC is expected to grow at 8.6% CAGR to 139M units till 2020, mainly driven by PV PV Forecasted to be the largest and fastest growing segment with CAGR 10.5%, driven by growing demand for family cars LCV Expected to grow at 7.2% CAGR, driven by demand in rural areas HCV Expected to grow at 3.7% CAGR, driven by a modest sales growth towards more modern and efficient trucks from current oldtechnology and low-payload trucks
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China Future Powertrain

Ricardo has developed three scenarios for future powertrain technologies to understand effects on fuel consumption
China Transport Fuel Consumption Scenarios
Business as usual

Higher Fuel Efficiency

Electrification/ Light Weight

Transportation fuel efficiency remain the same as year 2008 all through 2020

Smaller Engines and mild hybridization reduce gasoline consumption of PV and micro van by 25% in 2020 Light and small trucks save 5% (diesel) fuel through improved powertrain design Turbocompounding reduces diesel consumption of medium and heavy duty buses and trucks by 20%

Significant weight reduction (300kg per vehicle) will decrease PV fuel consumption by further 10% Additionally, hybridization and electrification in large numbers is assumed: 10%* micro hybrid cars save 5% fuel 2% mild hybrid cars save 12% fuel 1% full hybrid cars save 30% fuel 8% full hybrid buses save 25% fuel 1% plug-in hybrid cars save 80% fuel 1% electric cars and 8% electric buses with no fuel consumption
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Note: * Percentage of total car PARC or bus PARC Source: Ricardo analysis Christian.Koehler@Ricardo.com Confidential

China Future Powertrain

In a business as usual scenario, transport fuel consumption will grow without increases in vehicle fuel economy
Forecast Gasoline Consumption for Vehicle 2008-2020
Gasoline Consumption (M tons)
150 120 90 60 30 0
20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20

Comments

54
18 36

61
18 43

68
18 50

75
18 58

83
18

91
18

99
19

107
19

114
18

121
19

141 129 135

20 22 23

CAGR 8.4% 2.1% Total CV

Gasoline consumption will increase to 141M tons in 2020, driven by fast growth of family PV PVs gasoline consumption is expected to grow at 10.4% CAGR based on fast parc expansion CVs gasoline consumption is driven by micro and light vans; other segments are moving towards dieselization Diesel fuel consumption will grow to 113M tons in 2020, dominated by CV segment CV consumes about ~98% of total diesel fuel, which is expected to remain stable till 2020 Complete HCV parc is dieselizied currently, followed by LCV parc Diesel penetration in PV is projected to increase, but will remain as a small portion at ~2.5% by 2020
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65

73

81

88

108 114 118 95 102

10.4%

PV

Forecast Diesel Consumption for Vehicle 2008-2020

Diesel Consumption (M tons)
150 120 90 60 30 0
20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20

110 113 CAGR 103 107 98 3 93 3 3 2 83 89 2 2 6.0% Total 77 2 71 1 65 1 1 55 61 1

1 1

15.1%

PV

54

60

64

71

76

82

87

91

96

100 104 107 110

6.2%

CV

Source: Ricardo analysis Confidential

Christian.Koehler@Ricardo.com

China Future Powertrain

Higher Fuel Efficient Powertrains will provide major effects while Electrification/ Light Weight has only minor benefits
Forecast Gasoline Consumption for Vehicle 2008-2020
Gasoline Consumption (M tons) 150 120 90 60 30 0
20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20
54 53 53 61 60 59 68 65 64 75 71 69 83 76 74 91 82 79 99 87 83 107 92 86 114 95 89 121 129 135 141

Comments
In the Electrification/ Light Weight scenario, gasoline consumption will be reduced to 95M tons in 2020 33% lower compared to Business as usual and 11% lower compared to Higher Efficiency scenario Benefit from Electrification is minor based on Still small vehicle parc penetration The largest share of hybrid is Micro hybrid, which has limited fuel saving potential In the Electrification/ Light Weight , diesel fuel consumption will be reduced to 93M tons in 2020 17% lower compared to Business as usual scenario Benefit from Electrification is extremely limited based on very small sales volume and parc
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CAGR 8.4% 6.0% 4.9% Business as usual Higher Efficiency Electrification/ Light Weight

106 107 99 103 92 94 95 95

Forecast Diesel Consumption for Vehicle 2008-2020

Diesel Consumption (M tons) 150 120 90
55 61 58 58 65 61 61 71 66 66 77 69 69 83 74 74 89 78 78 93 81 81 113 107 110 98 103 85 85 88 87 90 90 92 92 94 93

CAGR 6.2% 4.8% 4.8% Business as usual Higher Efficiency Electrification/ Light Weight

60 30 0

53 53

Source: Ricardo analysis Confidential

20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20
Christian.Koehler@Ricardo.com

China Future Powertrain

An Electrification/ Light weight scenario will curb Chinas total gasoline/ diesel demand to 110M and 187M tons respectively in 2020
Vehicle Fuel Demand 2020
200

Total Fuel Demand 2020

200

187
21 29

Fuel Demand (M tons)

Fuel Demand (M tons)

Other CE, Industry & Railway Agriculture

160 120 80 40 0 Gasoline Diesel

160

95
19 76

110
120

93 CV
35

15
80 40 0 Gasoline

Other

44

LDD HDD

PV

95

58

Vehicle

93

Vehicle

Diesel

Gasoline PV is projected to consume 76M tons of gasoline based on a huge family car parc CV is forecasted to consume 19M tons of gasoline, driven by LCV Diesel HDD will drive diesel consumption to reach 58M tons, align with economy growth LDD diesel consumption, attributing to light truck, is expected to reach 35M tons

Gasoline Vehicle will continue to dominate and reach ~85% of total gasoline consumption in 2020 Driven by vehicle, total gasoline consumption will hit 110M tons in 2020 Diesel Vehicle will continue to expand its share in diesel consumption to ~50% in 2020 Total consumption will increase to 187M tons accordingly
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Source: DRC report, literature research, Ricardo analysis Christian.Koehler@Ricardo.com Confidential

China Future Powertrain

Net import of gasoline is expected to grow rapidly by ~31% to cope with increasing demand
China Domestic Gasoline Supply 2008/2020*
In M tons

China Domestic Diesel Supply 2008/2020*

In M tons

2008

2020

2008

2020
3
Need Net Import

6
25 1 60
Need Net Import Need Net Import

184 187 138

85 61
Demand Ref ining Output

Need Net Import

110

132

Ref ining Output

Demand

Ref ining Output

Demand

Ref ining Output

Demand

From 2008 to 2020, gasoline demand will grow from 61M to 110M tons at CAGR 5.0% Refining output is projected to grow slower than demand at CAGR 3.0% This results in a rapid growth of net import of gasoline at CAGR 31%, driving import dependence to 23% in 2020

From 2008 to 2020, diesel demand will grow from 138M to 187M tons at CAGR 2.5% Refining output is projected to grow faster than demand at CAGR 2.8% This results in a decrease of net import in 2020, based on a nearly sufficient domestic refining output

Note: *Assume 2020 refining operating rate is at maximum 96% Source: DRC report, China Energy Blue Book 2008, NBSC, literature research, Ricardo analysis Christian.Koehler@Ricardo.com Confidential

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China Future Powertrain

Biodiesel and ethanol will provide little relief and are expected to outweigh 1.6% of diesel and 6.5% of gasoline demand in 2020
Forecast Biodiesel Consumption 2008-2020*
Biodiesel Volume (M tons)

Comments

2
1.5

1.7

CAGR 15%

1
0.4 0.5

0.6

0.8

1.0

1.1

1.3

0
20

0.3 0.3 0.3 0.3 0.8% 1.0% 1.1% 1.2% 1.4%1.6% 0.5% 0.4% 0.4% 0.4% 0.5% 0.6% 0.7%

16

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09

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Bio-diesel is expected to increase from 0.3M tons in 2008 to 1.7M tons (equivalent to 35M tons of BD5) in 2020 Development of bio-diesel is deeply impacted by low fuel price in 2009 B5 standard issued in 2009 is somehow a positive message for biodiesels long term development Ethanol though shows little growth since it is still in the initial stage of non-grain based feedstock and deeply impacted by low fuel prices Target is to replace ~6.5% of gasoline consumption in 2020 According to government plans, ethanol production for ethanol blends gasoline targets at 10M tons in 2020 At Ricardo, we hold a conservative view on ethanol development in China and project 6.5M tons in 2020

Biodiesel (B100) Consumption

Biodiesel of Total Diesel Consumption %

Forecast Ethanol Consumption 2008-2020*

Ethanol Volume (M tons)

8 6 4
2.0 2.3

CAGR 12%
4.7 2.7 3.2 3.8 5.1% 3.7% 4.3%

5.1

5.5

6.0

6.5

2 0

1.6 1.6 1.8 2.9% 2.5% 2.7% 2.8%3.0% 3.3%

5.4% 5.7% 6.1%

6.5%

08

10

09

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20

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20

20

20

20

20

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Ethanol (E100) Consumption

Ethanol of Total Gasoline Consumption %

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Note: *Biodiesel and ethanol of total fuel consumption percentage are based on Electrification/ Light Weight scenario fuel consumption Source: Ricardo analysis Christian.Koehler@Ricardo.com Confidential

20

20

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China Future Powertrain

To avoid fuel imports in 2020, ~60% of all sold PVs would need to be PHEVs or EVs
Diesel and Gasoline Demand 2020
Gassoline Demand (M tons)

2020 China Vehicle Sales and PARC by Type*

New Vehicle Sales
ICE

110
15 95

Full Micro Micro

85
15 70 Domestic Refinery Selfsufficient Other Vehicle

EV

6%

22% 27% 8% 4% 32%

PHEV Full ICE Mild

22% 51% 9% Mild 8% 5% 4%

EV Full

7% 7%

EV

Electrification/ Light Weight

86%
ICE

PHEV

PV: 11.9M units

Diesel Demand (M tons)

LCV: 6.0M units

HCV: 1.1M units

Vehicle PARC
187
94 93 Electrification/ Light Weight

184
94 90 Domestic Refinery Selfsufficient Other Vehicle
ICE 46%

Micro

Micro Mild 13% 5% Full PHEV 3% 5% 2% EV

Full EV

14% Mild 5% Full 2% 18% 71% 15%

EV PHEV ICE

4% 4%

93%
ICE

PV: 85.3M units

LCV: 41.8M units

HCV: 11.4M units

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Source: Ricardo analysis Confidential

Christian.Koehler@Ricardo.com

China Future Powertrain

China is at the crossroads further vehicle growth and consumer choices require government guidance

Continued Vehicle Growth in China

Vehicle Usage

At the projected level of growth, vehicle ownership in China will grow to 75 vehicles* per 1,000 capita in 2020 This will still be substantially below developed countries Further growth of private vehicle ownership seems inevitable Security of fuel supply will become a major concern as a consequence The impact on road and city infrastructure, cost and security of energy supply, and environment will be tremendous Drastic countermeasures will be required to mitigate the environmental damage and ensure fuel supply

Traffic Management Public Transport Usage Restrictions All solutions have a role to play, but better powertrain efficiency is the most promising option for short to medium gains

Vehicle Efficiency

Powertrain Technology Vehicle Technology Vehicle Downsizing Alternative Fuels

Note: * includes passenger vehicles and MIC Source: Ricardo analysis Christian.Koehler@Ricardo.com Confidential

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China Future Powertrain

Next 20+ years will see an evolution of conventional powertrains, supplemented by diverse technologies for sector/regional variations
China Powertrain Roadmap Highlights
Car/LDV Dieselisation (niche applications) 1 Generation Improved Gasoline 2nd Generation Improved/Downsized Gasoline Exhaust Energy recovery HD Truck Improving efficiency of conventional transmission New generation transmissions DCT, AT Image Car Hybrid Mainstream Car Micro / Mild Hybrids City Bus Series Full Hybrids SUV Full Hybrids Mainstream Car Full Hybrids Car Plug in Hybrids Niche EV City Car Niche Alternative Fuels LPG, NG Bi-fuel Vehicles Bio fuel Blends (Increasing %, 2nd gen) GTL etc added to blends Next Gen FC/H2 demo bus & car

st

Key Messages

Technological solutions follow Europe due to similar emission standards Cost Importance of maximising advantage from advanced ICE technologies Cost effective fuel consumption reducing technologies will prevail Sector specific solutions HEV for urban use cars and buses Efficient ICEs for longer missions / higher load factors

2010
Source: Ricardo roadmaps and technology planning Christian.Koehler@Ricardo.com Confidential

2015

2020
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China Future Powertrain

For car makers, a multi-solution portfolio of ICEs, HEVs, PHEVs & EVs, technology planning, delivery and cost performance will be key

SHORT TERM: ~2010

4 Nationwide Implementation 3 Regional Implementation 2 Pilot Projects 1 Technology Ready

MEDIUM TERM: ~2020

LONG TERM: ~2040

Gasoline, Diesel, HEV

Gasoline, Diesel, HEV, E10, CTL, GTL

Gasoline, Diesel, HEV, CTL, GTL, BTL

CNG, LPG, E10, LNG

CNG, LNG, LPG, FAME, BTL

CNG, LNG, PHEV, Electric, Hydrogen

M10, FAME, CTL, DME

PHEV, Electric, Hydrogen

Hydrogen, BTL

Note: ICE= Internal Combustion Engine; HEV = Hybrid-Electrical Vehicle; PHEV = Plug-in HEV; EV = Electrical Vehicle; CTL = Coal to liquid; GTL = Gas to liquid; BTL = Biomass to liquid; CNG = Compressed Natural Gas; LPG = Liquefied Petroleum Gases; LNG = Liquefied Natural Gas; FAME = Fatty Acid Methyl Ester; DME = Di-Methyl Ester; E10 = Ethanol 10% Fuel Source: CATARC, Ricardo Ricardo plc 2009 Christian.Koehler@Ricardo.com Confidential

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China Future Powertrain

Car makers need to take key actions in engineering, supply and production to prepare for new powertrain technologies
Value Chain Key Actions for OEMs
Upstream Supply R&D Production Downstream

9. Evaluate economies of 5. Continue to develop 1. Critically evaluate scale and commonality best in class ICE systems to competencies in advanced by technology sharing obtain highest technology and vehicle engineering upon across vehicle lines from lowest cost base short, medium and long-term (PC, CV, etc.) technology paths 6. Develop new technology filters 10.Evaluate next round and amend technology 2. Execute vertical integration in of modularization development, deployment and selected areas of promising strategy in the context cost control processes to be core technology of technology road responsive to the new cadence 3. Develop alliances or maps 7. Redefine own core partnerships to access, lock 11.Reinforce abilities as competencies in Engineering in & preserve key IP in the integrator of future incl. alliances / partnerships supply chain on important but powertrain and suppliers non core technologies technologies and 8. Align powertrain and vehicle 4. Transform supply chain for systems architectures to accept short, medium and long term technology evolution at lowest technology scenarios capital cost/complexity
Source: Ricardo Analysis Confidential Christian.Koehler@Ricardo.com

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China Future Powertrain

New powertrain technologies will trigger further changes in downstream activities

Value Chain Key Actions for OEMs
Upstream Sales 12. Develop best in class niche vehicles to build green image (EV/PHEV) 13. Align Marketing with selected nearterm technology to re-define/reenforce Brand DNA and promote green image 14. Prepare Dealerships and Distribution network for new technology and products based upon core ICE and derivatives Downstream After Sales 15. Prepare Service Network for future challenges 16. Capitalise on repair & maintenance revenues from new technology 17. Evaluate new revenue streams like inuse service (e.g.: battery charging / exchange stations) 18. Evaluate new revenue models in finance & lease, rental, mobility services, etc. 19. Gain stake in accessory sales and customization

Source: Ricardo Analysis Confidential Christian.Koehler@Ricardo.com

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Going forward Summary

The powertrain future will be evolutionary rather than revolutionary, with decisions impacting technology, cost, skills & processes

The future of the automotive powertrain is government- rather than customer- or even technology-driven This is especially true for China where vehicle growth and consumer choices will continue to be guided by the government Evolutionary improvements to today's technologies will achieve significant impact at low risk, but at increased cost There will be no single revolutionary winning technology: the P/T future will be an evolving mixture of 2nd gen. ICEs, HEVs, EVs, with ICE still playing the predominant role short- to medium-term "Revolutionary" technologies all carry too many risks or issues to impact near- to mid-term mass markets
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Source: Ricardo Strategic Consulting Christian.Koehler@Ricardo.com Confidential

Thank you

Ricardo Shanghai Co. Ltd. Room 501 Gems Tower, Caohejing Hi-Tech Park 487 Tian Lin Road, Minhang District Shanghai 200233, P.R. China

Christian Koehler
Managing Director Asia Ricardo Strategic Consulting

Telephone: +86 21 5208 0170 Facsimile: +86 21 5208 2811 Mobile: +86 136 2179 8724 Christian.Koehler@ricardo.com

Confidential

Christian.Koehler@Ricardo.com

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