VPCH-051109-RiBatt-P0

Shanghai, November 2005

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Asia, and China in particular, will soon play a leading role in the
production of automotive parts. By 2010 the Far East will be the
largest automotive parts market in the world, having attracted
international producers and developed its domestic producers.

This document aims to provide an overview of the market and of the

main players in China, highlighting the challenges that local producers
must face in order to emerge against global players.

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!"

Asia, and China in particular, will soon play a leading role in the production of automotive parts. By 2010 the Far
East will be the largest automotive parts market in the world, having attracted international producers and developed its
domestic producers.

• By 2010 the Far East will be the largest automotive parts market in the world: growth will be fostered by the
increase in products manufactured locally due to the cheaper labor costs. In this context, the market in China is
forecast to grow by 9-10% yearly. Already in 2004 exports of automotive parts from China surpassed imports to
the country. These exports are mainly directed to central America, where the parts are assembled into vehicles
for the US

• All major international players are present in China - led by Delphi, Bosch and Visteon - and produce a wide
variety of types of parts. Domestic players instead tend to specialize in one particular segment, engine and
drive, with WanXiang being the largest and most ambitious player

• Local players present numerous advantages compared to international players, such as: reaching local
content requirements set by the government, presenting easier logistics and supply chain management as well
as lower costs for commoditized parts. There are, however, some challenges for the Chinese players to face,
in order to emerge globally. In particular, the general lack of quality control systems, the higher costs for complex
parts and lack of R&D capabilities must be overcome

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By 2010, Far East will be the largest automotive parts market in the world

# $ % &
2003-2010, Billion US$, Percent …% CAGR 03-10

1.104 3.3%

4.4% 5.8%
3.9% 8.1%
5.8% 8.1%
876
RoW 3.8% - N. America and W. Europe will
S. America 2.9% remain large and important
E. Europe 4.2% 26.6% 2.2% markets for automotive supplies
through to 2010

W. Europe 28.7% - E.Europe will see the most

impressive growth at 8.1%
(compared to 4% between 1997 and
26.5% 1.8% 2003)
N. America 29.4% - The Far East is the second fastest
growing region at 4% CAGR and
will represent a third of the world’s
market by 2010
32.7% 4.1%
Far East 31.0%

2003 2010

Source: Value Partner analysis

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This growth will likely be fostered by products manufactured locally …

# $ ' !
CAGR 2003-2010, Percent

N. America (NAFTA) -1.7%

S. America 2.5% - Even though the markets in N. America and

W. Europe will remain important, the
supplier’s share of revenues from these
regions is expected to decrease
Asia 14.9%
- Asia will have the most impressive
growth, fueled not only by China but by
other regions such as India and ASEAN
W. Europe -3.1% where labor costs are in some cases even
cheaper

E. Europe 12.7%

RoW 3.6%

Source: Value Partner analysis

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… in China, the automotive parts market is growing 9–10% per year

! %
2000-2007, RMB Million, Percent
CAGR 02-07
100,037 9.3%
91,705
83,374 21.8% 9.4%
75,042
21.8% - Mechanical parts
64,201 66,711 21.8% account for the
22.5% biggest portion of
21.7% 9.2%
22.5% the total auto parts
51,370 21.7% 21.7% 22.5% market
22.5%
- The share of each
38,963 21.5% 22.5% 22.5%
type of part remains
Electronic 21.3% fairly constant
22.6%
55.7% 9.2%
Electrical 55.7%
22.7% 55.8% 55.7%
55.8% 55.8%
Mechanical 55.9%
56.1%

2000 2001 2002 2003F 2004F 2005F 2006F 2007F

Source: Access Asia Limited,2003

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In 2004 Exports from China surpassed Imports to China

())*+ ,
First 4 months of 2004 and 2005, Million US$, Percent

Declining Import Increasing Export

4,396

3,484 14.9%
Others* 3.6%
-30.6%
Electronic 4.4% 8.5%
parts

2,769
2,419
Body parts 47.7% 3.8% 26.5%
5.0% 17.2%

9.9%

46.6%
25.7%
Chassis parts 13.4%
40.7%
13.9%
Drivetrain 14.1% 38.0%
parts 14.4%
3.2%
Engine Parts 16.8% 3.3%
16.4% 6.2%
5.8%
Jan-Apr 04 Jan-Apr 05 Jan-Apr 04 Jan-Apr 05

* Includes Equipment and Accessories, Motorcycle parts and other parts

Source: Fourin from Customs General Administration PRC

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Exports are mainly directed to Central America and then assembled into vehicles destined to the USA

-, $ -!
April 2005, Million US$, Percent

Country Trade Balance % Exports % Imports

- China’s heavy negative trade balance
Japan (283) 0.1% 37.8% with Japan and Korea due mainly to:
. The presence in China of Vehicle
Manufacturers from those countries
Korea (111) 3.9% 21.4%
importing parts from home
. Protectionist measures on the local
Rest of Asia 298 26.9% 6.6% auto part industry by limiting imports
(especially Japan)

USA (33) 0.7% 5.6% - The Rest of Asia uses China’s

manufacturing capability in parts for their
Rest of N&C local vehicle assembly
477 38.5% 2.8%
America
- Trade with USA results in a negative
S. America 24 2.7% 1.6% balance but is distorted by large imports
from other N&C American countries
which import parts for assembly into
Europe 31 16.2% 23.8% vehicles destined to both their local
markets and the US one
Others 138 10.9% 0.4%
- Europe has a fairly balanced trade with
China and represents a very important
Total 540 100.0% 100.0% portion of both imports and exports

Source: Fourin from Customs General Administration PRC

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The world’s largest car components manufactured already established a presence in the market …

' , % % .$ /0

Mechanical Electrial Parts Electronic Parts

Exhaust Body/ Brakes & Ignition Controls Incar Security

Player Engine Filters Batteries Lighting
& Chassis assemblies sys. & dials entertainment Systems
& drive
emission
Delphi
Foreign
Bosch

Visteon

Denso

Valeo

Siemens

Local Wanxiang

Dongfeng Honda Engine

Xiang Torch

Shanghai Huizhong

Shanghai Yanfeng

United Auto Electronic

Note: Shanghai Yanfeng is 50%-50% JV by SAIC and Visteon; United Auto Electronic is a 50%-50% JV by Zhonglian Auto Parts Ltd. and Bosch.
Source: Company Website

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… and are still increasing their presence

! ' 1' 2 % %
Companies a
Description Date
involved
FAW VW - New engine plant started construction near the Dalian Bonded Zone in Northeast
China’s Liaoning province. With investment of US$150 million, the joint venture May, 2005
plants is expected to start industrialized production in early 2007, targeting an
annual turnover of 300,000.

Bosch - Bosch opened a technical centre in Suzhou City in eastern China’s Jiangsu April, 2005
Province, with a total investment of US$60 million, which will provide an across
the board service of parts and system testing for parts manufactures in the
country and conduct localized production of products in the ABS 8.0 and ESP
8.0 series.
Bosch also plans to make additional investment of US$600 million in China

Delphi - Delphi announced that its new plant in Suzhou has started production, while its April, 2005
newly built R&D centre has started operation in China.
To date, Delphi has opened 15 joint ventures or WOFEs in the country.

Magna - Magna, with a business volume hitting US$20.7 billion last year, announced that it April, 2005
would launch six more new plants on top of its existing six plants.
Magna also plans to set up two R&D centers, focusing on electronic and tactile
screen technology.

Valeo - Valeo announced that it had inked an agreement with FAW to founding a JV, in April, 2005
with Valeo holding a 60% stake. The new company will engage in development
and production of air conditioner compressors.
Valeo has also announced that it plans to launch six plants in China.

Source: BizShanghai, "Start Your Engines", Aug 2005

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Local players have to face some challenges in order to emerge against global players

1' -3

Advantages Disadvantages

- Being able to reach local content requirements set - General lack of quality control systems (especially for
by government to avoid import taxes fully local companies)

- Easier logistics/SCM and ability to implement JIT - Higher cost for complex parts
(lower lead time, lower inventories)
- Lack of R&D capabilities means total dependence on
- Lower cost for commoditized parts VM; no solutions proposed

- Adding local content (e.g. technical/linguistic) - Administrative instead of managerial company running

- Generally more willing to learn and more flexible if
specifications are changed
- Flow of technical employees from OEM to supplier
results in smoother operations for supplier and lower
salary costs for OEM
- Punctuality of delivery time fluctuates
- Relatively smaller production scales; difficulties in
meeting urgent demand.
- Time for development of suppliers is longer (1/2 years)

- Building a supplier can lead to development of a

competitor

Source: Interview #1, Interview #2

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% 3 $

- Auto OEMs certified these shops owned by outside entities with

strict technical specifications and facility requirements
“4S” Shops
- “4S” shops only buy parts from OEMs and get trainings/technical
(about 5000
support directly from OEMs
shops)

- Repairing shops exist everywhere across China providing total

repairing services for customers
Repair Shops
- Without the authorization of OEMs, their parts come from various
(thousands of
channels, which leads to a poor credibility of product quality
shops)
- In addition, there exists a very large gap of service level between
the best and worse in class

- Big auto parts super malls only sell parts to end customers or
Auto Parts repairmen
Super Malls - Similar to repairing shops, their parts come from various channels
(about 500 which leads to a poor credibility of product quality
malls)

Source: Global Insight Asian Automotive Industry Forecast Report

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Shanghai Milano – China Desk

Riccardo Battaglia Sara Ciavorella

riccardo.battaglia@valuepartners.com sara.ciavorella@valuepartners.com

Fortune Gate office building, Unit 02, 25/F Via Leopardi 32

1701 Beijing Rd (W) 20123 Milano
200040 Shanghai
People’s Republic of China

Tel: +86 21 6132 4230 Tel: +39 02 485 481

Fax: +86 21 6132 4238 Fax: +39 02 480 090 10

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