【Raffel】Automotive sector trend for KOSTALv0

Executive summary – 1/2
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
To million
be updated
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%. It’s even more concentrated in the heavy-duty truck segment whereas top 5 players
account for c.80% of share
 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
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Executive summary – 2/2
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
To be updated
• For aluminium casting supply, local companies are much stronger but the biggest carmaker groups all have their
subsidiaries producing the essential parts
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
▐ Market size and growth
Trend: Increasing GDP in China
▐ The fastest and biggest growth opportunity so far.
Historic Comparison - GDP Future Comparison - GDP
Growth Time period GDP US$bn

80,000
China‘s 70,000bn
economic 7x Over 20 years 70,000
reform
60,000
50,000
Japan‘s post 6x Over 25 years
WWII recovery 39,000bn
40,000
30,000
2nd industrial
3.5x Over 60 years 20,000
revolution (U.S.)
10,000 7,000bn
5,000bn
1st industrial 0
3.5x Over 100 years 2006 2010 2015 2020 2025 2030 2035 2040 2045 2050
revolution (UK)
70,000bn = 70 US$ Trillions = 70 Billionen (Detusch)
Source: Goldman Sachs, IBM Institute for Business Value, MelchersRaffel research
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
Auto production in China vs. Other Countries (incl. commercial car and passenger car)
Auto production forecast for the five worldwide leading manufacturing countries
Urbanization Rate in % - 1980-2030
2010-2015
Units CAGR: CAGR:
11% 8% 0% 6% 19% 5% 0% 0% 0% 10%
10-13 13-15
21mn (2050: x2)

19mn
14mn
10mn 10mn
9mn 9mn 9mn
8mn
5mn 6mn 6mn 6mn
5mn
3mn
2010 2013e 2015e
By 2050 it is estimated auto production in China will have grown to about 40 million units per year.
Source: IAPEChina, MelchersRaffel analysis
China auto market has been growing at 17% historically, reaching 19.3 million units
in 2012
Automobile sales volume by type in China, 2007 – 2012
Mn units
CAGR: 19.3 CAGR 07 – 12

18.1 18.5
17%
3.8
Commercial 9%
4.0 cars
4.3
13.6 0.5 PC - MPV 18%
0.5
0.4 2.0 PC – SUV 41%
1.6
1.3
3.3 2.2
2.2 PC
9.4
2.5
Crossover, Minicar 17%
0.2
8.8 0.7
1.9
2.6
2.5
0.2 PC1 18%
0.2 0.4
0.4
1.1 10.7
Basic
1.0 9.5 10.1
7.5
4.7 5.0
2007 2008 2009 2010 2011 2012
Export volume is just 1.06

1. PC stands for passenger cars
million units in 2012
Source: CAAM; Bank analyst reports; MelchersRaffel analysis
China is the leading production base for passenger car and enjoys the highest growth rate
at 19% in the past few years
Passenger car production by country, 2007 – 2012 Passenger car
Mn units
Mn units
18.0 19%
16.0 15.5
14.0
12.0 -3% 2007
10.0 2008
8.6 2009
8.0 -1% 2010
6.0 5.4 1% 2011
14% 4.1
4.0 3.3 2012
2.0
-
China Germany India Japan USA
CAGR 07 – 12
Source: International Organization of Motor Vehicle Manufacturers; MelchersRaffel research
For commercial vehicle, China is the second largest production base producing c.4mn
units in 2012 and enjoys a fast growth rate at 8% from 2007 – 2012
Commercial vehicle production by country, 2007 – 2012 Commercial vehicle
Mn units
Mn units
8.0
7.0 -2%
6.2
6.0
8% 2007
5.0
2008
4.0 3.7 2009
2010
3.0
-3% 2011
2.0 1.4
2012
10%
1.0 -12% 0.9
0.3
-
China Germany India Japan USA
CAGR 07 – 12
Within the commercial vehicles sector, trucks is the fastest growing segment in China
Commercial vehicle production by type in China, 2007 – 2012 Commercial vehicle
Mn units
8%
4.4 CAGR 07
0.2 3.9 – 12
3.7
0.2
3.4 0.2 Heavy buses -7%
0.1
2.3
2.5 2.6 1.9 1.7 Trucks
0.1 14%
0.2 1.7
0.9 1.2
Light commercial
1.9 1.8 1.9 vehicles 6%
1.4 1.6
1.2
2007 2008 2009 2010 2011 2012

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
GDP per capita versus passenger cars unit per 1000 people
GDP per capita, 2010

(current US$)
60,000
Denmark
China GDP per capita is
Australia
50,000 estimated to reach c. USD 50k
Sweden
by 2050, which implies a 8-10
times increase in penetration Netherlands
Austria
Finland
Japan
Singapore China
40,000 UAE by 2050 Germany
R² = 0.793530074186247
UK
Italy
Hong Kong New Zealand
30,000 Spain
Greece
20,000 S. Korea
Czech Republic
Chile
Poland
Turkey Brazil Russia
10,000 Mexico Malaysia
China S. Africa
Sri Lanka Egypt Thailand
Philippines Morocco
India Cambodia
Passenger
- cars unit per
Bangladesh
- 100 200 300 400 500 600 700 1000 people
Source: Worldbank; MelchersRafffel analysis

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
Key factors for future trends in China automobile market
Growth
Aspect Key impact
▐
factor
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
Political ▐ Lots of subsidies is provided to new energy car,
■ E.g. Shanghai government is offering RMB40k + per new energy car purchase & free license
▐ Increasing per capita disposable income is driving passenger car demands since they are more
preferred than buses or other mass transit vehicles
Economic
▐ The export of local brand cars to emerging market including Middle East and Africa has large volume
increment in recent two years.
Social ▐ Increasing urbanization leads to higher demand for both commercial and passenger cars
▐ Local Chinese carmakers successfully created electric and hybrid energy saving vehicles
Technological ▐ 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.
▐ License plates can cost more than the car
Legal ■ 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
Environmental ■ 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
(Replacement)
Source: MelchersRaffel research
▐ Market structure and competition – Carmakers
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
Automobile sales volume market share in China, 2011 Passenger car + Commercial vehicle
% of units
Market share by player by ownership type, 2011

% of units
SAIC 22%
DongFeng 17%
Others
13% FAW 14%
Changan 11%
BAIC 8%
GAC 4%
JAC 3%
Top 10 players
87%
Brillance 3%
Central SOE
Chery 3%
Provincial SOE
Private enterprise
Great Wall 2%
Total: 18.5mn
Source: CAAM; Bank analyst reports; MelchersRaffel analysis
Typical leading local Chinese companies carry multiple foreign brands, in additional to their
self-owned brands
Examples – Multi-brand structure of typical Chinese Auto companies Passenger car + Commercial vehicle
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.
Local self-owned brand Local self-owned brand
Sino-sino local JV Sino-sino local JV
Provincial Central
SOE Sino-foreign JV SOE
1 4 5
Sino-foreign JV
2 1 2
3 6
3 4
Dongfeng Nissan
Source: Company website;, MelchersRaffel research
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
Major passenger car brands in China by price segment Passenger car
Generalization, not exhaustive

Imported foreign brands/
Foreign-Sino JV brands
Luxury
Dominated by foreign > RMB
brands, in particular
sports car 1.5mn
(>EUR 185k)
Premium
RMB 500k – 1.5mn
(EUR 62k – 185k)
Mid-range
RMB 100k – 500k
(EUR 12k – 62k)
Mass low-end
< RMB 100k
(<EUR 12k)
Mainly local Chinese brands
with lower-quality products Local Chinese auto brands
Chinese consumers see fuel consumption, safety and functionality as the most important
buying factors, which may explain why foreign brands are more preferred
Key buying factors for those who intended to buy cars within a year, China
N=27,946
Fuel consumption 38%

52% Consumers generally have higher
confidence on the safety and
Safety 49%
51% functionality of foreign brands
Price 24%
39%
Function/ 42%
Controlability 38%
After-sales service 22%

27%
Appearance/interior design 27%

25%
Brand 28%
17%
12% Owning a car and plan to get a

Space/luggage capacity 10% replacement/2nd car now
2%
Others 2% Intends to buy car within a year
Source: China automobile online consumer survey Aug 2009; MelchersRaffel research
By brand, China auto market can be split into 2 main groups. One is the foreign JV brands
(70% volume) and the other as self-owned local brands (30% volume)
Passenger car sales volume share by brand by ownership in China, 2012 Passenger car
% of units
Foreign-sino JV brands characteristics: Self-owned local brands characteristics:
Higher quality, higher price, more stylish, Lower price, smaller car size
better after-sales services
Top 10 Foreign JV brands by output volume Total: 15.4mn Top 10 self-owned local brands by output
in China volume in China
Mn units in 2012 Mn units in 2012
Changan
Volkswagen 2.1 0.75
(Chana)
GM-Wuling 1.2 Chery 0.56
Hyundai 0.9 Great Wall 0.49

Self-owned local brands
Nissan 0.8 31% BYD 0.46
Toyota 0.7 Dongfeng 0.42
Chevrolet 0.7 Foreign JV brands JAC 0.20

69%
GM-Buick 0.7 Geely Gleagle 0.18
Honda 0.6 FAW Haima 0.17
Kia 0.5 Lifan 0.17
Ford 0.4 Geely Emgrand 0.15
Source: China Passenger Car Association; MelchersRaffel analysis

Similar to the passenger car segment, the bus segment of commercial vehicle is a highly
concentrated market with top 10 players accounted for 80-90% share
Segment sales volume and top 3 brands in commercial vehicle – bus sector Commercial vehicle – Bus
Bus
Grand Bus Middle bus Small bus
Yuto King Hige Yuto Hige Jinb

DFM NAC JMC
ng long r ng r ei
Grand bus Middle bus Small bus

Sales volume in 2011 over last year 73.8k 91.6k 322.5k
% change vs. last year + 7.26% - 1.89% + 13.4%
Market share of top 10 carmakers 82.9% 83% 92.3%
Source: MelchersRaffel research Source: Report of Chinese Auto Industry Development in 2012
Similarly, the truck segment is highly concentrated as well
Commercial vehicle – Truck
Truck
Heavy non-
Semitrailer
holonomic Middle truck Light truck Micro truck
tractor
truck
SI
C
N F F G
F 19 h
O LI O O S
O D D D D J a D
FA T FA FA F N N M
T F F F F A n F
W R W W A T T W
O M M M M C g M
U N O O
N a
C N N
n
K
Semitrailer Heavy non-holonomic Middle truck Light truck Micro truck
tractor truck
Sales volume in 2011 over last year 257.6k 323.2k 292k 1.88m 492k
% change vs. last year - 27.4% - 14.9% - 7.4% - 7.2% - 9.9%
Market share of top carmakers Top 6 Top 7 Top 8 Top 10 Top 7
95% 96.6% 87.6% 79% 94.5%
Source: Report of Chinese Auto Industry Development in 2012
Within truck sector, heavy truck segment is highly concentrated whereas top 5
players account for 80% of market share
Top 10 players of the heavy-duty truck (>14 tons) segment in China, 2012 Commercial vehicle – heavy truck
Sales volume in k units
Market share
21%
Dongfeng 131
17%
Sinotruk 109
17%
FAW 106
Foton 87 14%
Shaanxi Automobile 84 13%
JAC 26 4%
BeiBen Heavy-duty truck 24 4%
SAIC-IVECO Hongyan 17 3%
Anhui Hualing 15 2%
Dayun Group 9 1%
Total: 636k
In China, sales volume of German auto brands is expected to increase by c.150%
by 2020
Auto sales of major German brands in China
Automobile < 3.5t; million units
Source: Desk research; MelchersRaffel research

German automakers and suppliers are investing heavily in China
Recent China investment examples of German automakers and suppliers
2013 2013 2013

Volkswagen Group to invest Benz paid 62.5million euros to The German automotive
more than €9.8 billion in China build up Fujian Benz R&D supplier, Edscha, invested 37
by 2015 for more efficient Center. The total investment in million euros in a new
products and production China will accumulate to 3 billion production site
euros by 2015. which accounts for a total of
We will be launching the largest 9000sqm in the Chinese city of
investment program in China’s Kunshan, near Shanghai.
automotive history.
—Chairman of the Board of

Management of Volkswagen
Aktiengesellschaft, Prof. Dr.
Martin Winterkorn

China automotive industry has been increasing R&D investment significantly in the
past few years
R&D investment in automotive industry in China, 2005 – 2009
Bn RMB
R&D cost
as a % of 1.66% 1.77% 1.8% 2.07% 1.93% ▐ In Feb 2013, Audi has opened a R&D
revenue Centre for Asia in Beijing, China
46 ▐ Audi’s Beijing R&D staff jumped from
40 to 300
▐ "The new Audi R&D Center Asia is an
CAGR: 39
important milestone in the
29% internationalization of Audi's R&D.“
31
- Audi Chairman Rupert Stadler
24
▐ In Nov 2012, The Chery Jaguar Land
17 Rover Automotive Company Ltd. has
set up a manufacturing facility
together with a R&D centre in
Changshu, China
▐ In 2009, China's automaker

2005 2006 2007 2008 2009 Dongfeng Motor injected £189.3
million for its R&D projects, up 44
percent compared with the previous
year
Source: China Auto Industry Yearbook 2007 – 2010; MelchersRaffel research
▐ Market structure and competition – Automobile parts manufacturers
Chinese auto parts market has been growing rapidly at c.30% in the past few years, however,
a recent decline in profit margin has indicated a higher operating risk in future
Chinese auto parts market – sector sales revenue & profit margin
Sales in China 2006-2012 Profit margin

In Mn EUR In %
China
29%
Europe
North America
QII
Source: MelchersRaffel Research, Chinese Association CAAM, FAZ

Leading Chinese auto parts suppliers are comparable to long-histoy, well-
established German companies in business turnover
Chinese auto parts market – Top suppliers’ performance comparison between China and Germany
Sales of Chinese suppliers – 2011 Sales of German suppliers – 2012

In Mn EUR In Mn EUR
Source: MelchersRaffel Research, Chinese Association CAAM, FAZ

In contrast to the carmaker market, Chinese automobile component market is very
fragmented with about 30,000 companies
No. of automobile component companies in China by turnover segment
>1 mn RMB 25,000
>5 mn RMB 8,556
>100 mn RMB 1,670
>1 bn RMB 30
>10 bn RMB 6
0 5000 10000 15000 20000 25000 30000
- The sales value of Chinese auto accessory industry in 2011 was 2 trillion rmb. There are six
different areas.
- In mainland market, the companies with shareholders from abroad seize over 75%, controlling
the most of the core technology parts. Local OEM supplies are often decentralised and weak.
Source: Industry report; MelchersRaffel research

In general, local Chinese auto accessory suppliers are suffering from low
technological capabilities and quality, resulting in thin margin and low share
Typical characteristics of local Chinese auto accessory suppliers
1. Absence of close relationships between local suppliers and the carmakers

Clients - 88.9% OEM suppliers of the European carmakers are foreign companies while that for the Japanese
carmakers is 88.5%. To the extreme, South Korean carmakers use 100% foreign suppliers. Even for the local
Chinese carmakers, local component suppliers only accounts for c.48%
2. Lack of core technology and self-innovation

Technology
The technology of engine system, power system, safety e-control system and oil-jet system are monopolized
by the multinational corporations. Most of them are just competing by price in the low-end segment.
3. Fierce competition and thin margin

Competitor The carmakers choose to have multiple suppliers providing the same products, which resulted in very thin
margin among the suppliers, i.e. <5%. Most of the suppliers of these companies have huge pressure on
working capital and hence they are at the edge of bankruptcy
4. Poor quality
Quality Most of the 30,000 suppliers are private companies. The founders are less educated and incapable to
implement the modern management system. There’s shortage of TPS or 6 sigma. Overproduction of low-
quality products is huge and thus the government has planned gradual industry consolidation in the Twelfth
Five-year Plan.
5. Limited capital source

Capital
The financial market is still controlled strictly by the government. The SMEs in the auto accessory industry do’
not have enough access to different channels of finance capitals.
Source: MelchersRaffel Research

For automobile seat segment, local suppliers are still in early development stage whereas lots
of small-size companies are offering low-quality products, thus low share
Overview of automobile seat market in China
 Lots of small firms but with several dominant players
• Over 700 auto seat suppliers in China
• Most of them locate in Jiangsu, Zhejiang and Guangdong provinces where the auto industry is most
developed.
• The biggest companies are all foreign companies, i.e. Johnson Controls (JC), Lear, FAURECIA, TACHI-S.
• Top 9 suppliers have accounted for c.90% of market share and as one single company, JC has captured 30%
of the local market by setting up 10 JV companies in China
 Local suppliers are low quality provider, lack of core R&D capability
• Cyclone injection molding is the current tech threshold of the local companies. Many local car-maker
companies chose to collaborate with the foreign seat supplier firms instead of the local suppliers
 Raw material price is likely to increase
• Polyurethane will increase beyond 2500 RMB/Ton.
• Steel plate and welded is around 4000RMB to 4700RMB, thanks to the government’s control on over-
production
Auto seat market in China is very concentrated and dominated by foreign companies,
whereas top 9 suppliers have accounted for c.90% of market share
Competitive landscape of auto seat market in China, 2012
Differen
t
Industry product Seat Suppliers and Ranking of Sales in 2012
categor
y
5. TACHI-S
2. TOYOTA BOSHKOU
Japanese 8. NHK SPRING
7. TACHI-S
4. FAURECIA 90% of the Market Share
European 9. Brose
6. Magna
Seat American 3. Lear
1. Johnson Controls
Carpet Ningbo Huaxiang
Interior Electroni Liaoning Jinxing
c parts Wuhu Wantong
Ceiling
Yangzhou Shenzhou
Local
Door set
Dash
board Yanfeng Visteon
10.DYMOS (JV)
Others (e.gn.Zhejiang province)
Source: Industry report; MelchersRaffel research

Major seat suppliers for commercial vehicles are sparsely distributed on the East side of
China along the coast, with a higher concentration near Shanghai area
Distribution of major seat suppliers for commercial vehicles in China
Fuwei Johnson(JV with JC)

Sales: 5bn RMB
Employees: 4200
Beiqi Hainachuan Customers: FAW,DFM
(Acquire of Inalfa)
Sales: 0.9bn RMB Donggang Jufeng
Employees: 2100 Sales: 25mn RMB
Zhengzhou Kinglong Lear Taixin Customers: Employees: 200
Sales: 0.1bn RMB Sales: 0.2bn RMB BAIC ， FAW, Sino Customers: FAW
Employees: 400 Employees: 500 Truck
Customers: YUTONG Customers: DFM Ji’nan Commercial Vehicles.
Sales: 0.6bn RMB
Employees: 500
Xi’an Huatai （ JV with Customers: Sino Truck
ISRI ）
Sales: 0.1bn RMB Jintan Jinpeng.
Employees: 700 Sales: 50mn RMB, 60,000 seats
Customers: CHANG’AN Employees: 300
Dongfeng Visteon Customers: CHANG’AN
Sales: 1.2bn RMB
Employees: 700 Jiangsu Youbang
Customers: Sino Truck, DFM Sales: 0.12bn RMB, 300,000 seats
Employees: 800
Customers: KINGLONG, DAIMLER
Yunhe Johnson (JV with JC)
Sales: 0.7n RMB Shichi (JC with CVG) with JC)
Employees: 600
Customers: SAIC Sales: 300,000 seats Sales: 3.5mn Seats
Employees: 100 Customers: SAIC
Dongfeng Johnson (JV with JC) Customers: DAIMLER
Sales: 0.7bn RMB Xiamen Kinglong Yanfeng Johnson (JV
Employees: 400 Zhejiang Tiancheng
Customers: DFM Sales: 1mn seats Sales: 2mn seats
Employees: 500 Employees: 500
Customers: KINGLONG, Customers:
Source: Interview with an interior company and DAIMLER
HIGER YUTONG ， HIGER
▐ Future challenges & developments
Although foreign brands are enjoying 2/3 of the market, international auto companies see
increasing policy and IP risk, plus stronger competition in mid-range segment
Key strategic challenges for international auto companies in China
For discussion
▐ F oreign car companies in China are required to former a partnership with a Chinese
company to do business in China, in the hope of transferring technology
Intellectual property
(IP) protection ▐ Before making a deal for a joint venture, foreign auto companies have to agree to employ
Chinese in upper management.
▐ As shown in the procurement policy draft announced in Feb 2013, the central
Potential government, said the official, would “take the lead” in buying Chinese-brand and energy-
efficient vehicles, instead of foreign joint-venture cars
protectionism policies
from the government
▐ Local carmakers such as Great Wall, Changan, and Beijing Auto - who typically price their
Increasing threat from cars at below RMB150k – introducing new models at prices closer to the mid-range mark of
RMB200k in Apr 2013
local rivals in
mid-range segment
Source: MelchersRaffel perspective

Despite the huge business opportunities present in China, local Chinese auto companies
found big challenges in design, branding, production and low-end segment
Key strategic challenges for local auto companies in China
For discussion
▐ Despite the China automotive industry is still expected to increase the sales volume in the
Difficulty in future, the growth rate has seen indication of slowing down.
production capacity ▐ Typical Chinese auto companies share a mentality that if you have the authorization to build
management additional capacity, you build it quickly – or you may not get a chance to do it later, which
created a high pressure on inventory and hence margin because of the over-production.
▐ Local Chinese auto companies are still competing heavily in the low-price segments. Even
though both local and foreign brands manufacture the cars domestically in China, Foreign
Huge hurdle in brands are the highly much more preferred brands for big-ticket cars.
design & branding
▐ Local auto companies are suffering from poor design and brand communication in the sports
car/luxury car segment
▐ Volkswagen in Shanghai Auto Show in Apr 2013:

■ “We are planning to introduce low-end autos, which may include a van, estate and small
Increasing pressure &
sedan priced about 6,000-7,000 euros ($7,800-$9,1000)”
competition in
low-end segment ▐ General Motors has found huge success with its first low-end model, the Chevy Sail, which
has become China’s second best selling model since its launch.

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
Key strategic challenges for European Automotive Part and System Suppliers
For discussion
▐ Given the car-making sector in China is highly concentrated and controlled by the State-
Difficulty in building owned enterprises, access to several BIG clients is the most important asset. On a relative
baisis, local Chinese companies find it easier to gain access since cultural issue or
relationships with “Guanxi”(relationship) is less an issue to them, especially for products of low technological
strategic key clients contents
▐ Joint-venture of foreign brands have a huge business size and hence large bargaining
Challenges in power over the automobile parts suppliers, resulting in high price pressure for the
component suppliers
communicating value
at defined price level ▐ Local Chinese carmakers usually perceive European suppliers charge a higher price and
since majority of local carmakers mainly compete in the low-end segment by price, they may
rather buy “OK”-quality components from the local suppliers at a lower price
▐ Many auto sourcing or supply chain managers think there’s high risk in doing business with
Hard to compete on European suppliers if they do not have local production in China as they are less responsive
flexibility or in technical support/ less flexible in delivering urgent orders
responsiveness

▐ M&A landscape
Overview of M&A activity in China
▐ Early in the 1980-90s, foreign automobile companies entered Chinese market via setting up joint-
ventures with local partners in China since
 Automobile is one of the strategic development industry for China and also one of the largest employment sector,
Chinese government has been limiting the acquisition activities of foreign auto-maker companies over local Chinese
companies
▐ In contrast, the automobile parts market in China is relatively less regulated. Therefore, lots of foreign
companies have set up 100% foreign-owned companies and sometimes joint-venture companies,
hence 100% take-over of local companies is less common
▐ Today, technology-driven acquisition is the dominant type of outbound deals, while domestic
acquisitions are quite common as well thanks to the encouragement of industry consolidation from the
PRC government
■ Increasing number of foreign acquisition deals have been seen in recent years as Chinese firms now have the know-
how to act like mature international investors
▐ M&A deals involving Chinese companies are expected to increase further in the near future, thanks to a
couples of factors:
 Improving financial capabilities of local Chinese carmakers
 Increasing industry consolidation
 Loosening legal limitations - Acquisition is a more preferred ownership model than JV
 Rising priority of higher quality/ technology for local Chinese carmakers
 Increasing pressure on local sourcing for foreign auto brands
Chinese auto companies have been very active in domestic M&A deals in the past
few years
Major recent M&A domestic M&A deals in Automotive in China (1/1)
Not exhaustive
Deal value
Date Acquirer Target Details of the deal
(USD)
▐ A Chinese steel-wheel manufacturer to acquire the core
3.4mn supplier of leading local carmaker, Chery, for securing
Apr 2013 for 60% market share and strengthen the client relationship
share
Xingmin Wheel Feichi
▐ A Chinese conglomerate with auto parts business to

acquire a local Chinese car component supplier of interior
Domestic
Dec 2011 287mn design part, scrubber, and connecting pipes, from another
Changchun conglomerate, Joyson holding
Liaoyuan Deheng Junsheng
▐ SAIC to acquire assets from the parent group

Shanghai ▐ By this acquisition, SAIC aimed to accelerate the
April 2011 Automotive 4.5 bn development of making cars and new-energy vehicles
Shanghai Motor Ind-Asts under its own brand name, increase its asset size and
enhance its financial strength.
August ▐ By this acquisition, the Chinese local carmaker, BYD, to

8.8 mn enter to new energy bus industrry
2009
BYD Motor Midea Coach

Chinese auto companies have been very active in acquisition of foreign companies,
mainly for access to big clients and technological know-how – 1/2
Major recent M&A cross-border M&A deals in Automotive in China (1/2) Not exhaustive
Deal value
(USD)
▐ Chinese nonmetallic automobile parts producer, Ningbo
Huaxiang, to acquire the German producer of automobile
5.2mn for
Jun 2012 electric and electronic components.
30% share
Huaxiang Group Helbako GmbH ▐ To gain access to key clients such as BMW, Benz,
Volkswagen, Audi and Porsche
▐ Chinese automobile component group to acquire100%
foreign-owned subsidiary of Norinco, for the access to
Jul 2012 9mn global clients such as Volkswagen, Bosch
Sichuan BoHong Wuxi Norlong
Group Foundry
Cross-border
▐ Chinese automobile component group to acquire Wescast

Industries, the world's leading supplier of cast exhaust
manifolds for passenger cars and light trucks
Jul 2012 240mn ▐ To gain access to the sourcing of big international car-
Sichuan BoHong makers while Wescast is supplying to Ford, General
Group Motors and Volkswagen
Wescast Industries
▐ As part of globalization strategy in auto parts for Lingyun

▐ Chinese auto metal and plastic parts manufacturer to
acquire Kiekert for its international leading core
Mar 2012 N/A technologies, products of high qualities, high-end
customers and mature research and development system
in car lock manufacturing, and bring Lingyun’s products to
North Lingyun
Europe and NAFTA
Industrial Group kiekert ▐ Kiekery is the core supplier of Ford, BMW and Benz, etc
Chinese auto companies have been very active in acquisition of foreign companies,
mainly for access to big clients and technological know-how – 2/2
Major recent M&A cross-border M&A deals in Automotive in China (2/2) Not exhaustive
Deal value
(USD)
▐ The Chinese automotive part company to acquire one of
the largest suppliers of vehicle roof systems in the world
▐ Through the acquisition, BHAP to raise its global brand
Jul 2011 373mn awareness, as Inalfa has access to BMW Group, Daimler,
Ford Motor Company, General Motor, Volkswagen, Audi,
Beijing Hainachuan Inalfa Roof Systems Volvo, Land Rover, Rolls-Royce, Renault, Nissan, etc and
Automotive Parts Group BV BHAP can help Inalfa expand its China business
▐ The acquisition of KSM would help CITIC to expand
Jul 2011 385mn business scope and become one of the world largest
aluminum part manufacturer
CITIC Dicastal KSM Castings
Cross-border
▐ Joyson, a Ningbo-based under the hood automobile parts

April 2011 N/A manufacturer, acquiring Preh for its premium quality
Joyson Automotive climate & driver controls, sensor systems, ECUs and
Electronic Preh GmbH
innovative automation
▐ Local Chinese automaker acquiring a German
March 2011 704 mn transmission manufacturer, GETRAG, in order to gain
Dongfeng Motor GETRAG GmbH access to superior German technology
▐ BAIC, the carmaker, became the first car producer in

February China to hold IP rights for long-torque transmissions.
42.8 mn
2011 Beijing Auto
Weigl Transmission ▐ BAIC also intends to use technologically advanced
Plant AB components in their self-developed cars
▐ Chinese SOE Chongqing Light Industry & Textile Holding
acquired a German-origin automotive supplier of car
Jul 2010 83.3mn sealing systems and mouldings
▐ SaarGummi has strong access to big clients such as
SaarGummi Group Volkswagen and Benz
CQLI
© Raffel GmbH Corporate Development All rights reserved. Proprietary and confidential. 40 40 DP_Automotive_sector_trend_ex_Alu_Casting.pptx
German automobile parts manufacturers have stepped up their market penetration in China
through acquisition and joint-venture
Examples of joint-venture / acquisition of German companies in China
▐ In August 2004, Bosch, the leading provider of automotive, energy & building
technology, and industrial technology, acquired 67% of the largest producer of fuel
injection equipment in China, Wuxi Weifu High-technology Co., Ltd.
▐ In Jan 2011, Knorr-Bremse Asia Pacific (Holding) Ltd. and the Chinese manufacturer
Chongqing CAFF Automotive Braking & Steering Systems Co. Ltd. have founded a
joint venture for the production of commercial vehicle brake system and powertrain
components. Knorr-Bremse holds a 66 percent stake
▐ “The joint venture in Chongqing will greatly strengthen our position in the high-growth
commercial vehicle market in China,”
- Klaus Deller, Member of the Executive Board of Knorr-Bremse AG.
Acquiring know-how/technology is the top consideration for Chinese automobile
companies to consider M&A deals
Most significant drivers of M&A activity in Chinese Automotive sector over the next 12 months
% of respondents (multiple answers question)
Most significant Very significant Significant
To acquire know-how/technology 31% 12% 27% 70%
To enter into a new foreign market 12% 27% 62%

23%
To achieve economies of scale 35% 19% 4%

58%
To acquire a competitor/gain market share 8% 23% 50%

19%
To benefit from the sale of distressed assets/corporate 4%20%

4% 12%
restructurings
20%
To benefit from low corporate valuations 8% 8% 4%
20%12%
To acquire other intangible assets 4%4% “Germany has an internationally
recognized Automobile sector utilizing
cutting-edge technology which Chinese
Non-core asset 4%
disposals 4%
manufacturers want.”
- Survey respondent
Source: Mainland China-based Automotive corporate M&A survey Apr-Jun 2010; MelchersRaffel research
M&A deals in automobile industry in China are expected to increase in the next few
years based on 5 key factors
Possible trigger factors for future cross border M&A deals – inbound and outbound
Chinese companies are now big enough
1 to acquire foreign companies, especially
Japanese automakers have experienced difficulties in
quality assurance in local sourcing while they are those some of the well-established
facing increasing cost pressure. Vertical European companies but suffering from
integration with acquiring a local company Improving & the Europe country debt crisis (Increasing
seems to be a popular option, which strong financial deals in both car-makers and parts sector)
Increasing pressure capabilities of local
implies local parts producers may on local sourcing for
soon be acquired by Japanese Chinese carmakers
5
foreign auto brands
companies
2
Future
M&A deals
Rising priority
of higher
quality/ Increasing industry
technology for consolidation
local Chinese
Local Chinese carmakers used to carmakers Industry consolidation is encouraged
compete heavily in the low-price by the government, with the
segment but now they are gradually Loosening legal objective to filter out small and
shifting to quality segment where limitations - Acquisition is polluting enterprises
foreign management and technological a more preferred
capabilities are highly valued 4
ownership model than JV
3
Historically there’re lots of limitations for foreign

companies to set up an independent enterprise in
Source: MelchersRaffel perspective China, so JV was more common than M&A in the past
MelchersRaffel is the company for successful Euro-Asia endeavours
 Founded: 1806 in Bremen, Germany

 Group Companies: more than
50 in the world – focusing on
Europe, Southeast Asia, and
Greater China
 Access to Know-how and network of 1,700
 Branches and representative offices in Asia: 25
employees in technology, consumer and luxury
markets in Europe and in 25 offices in Asia  Other locations: South Africa, Ethiopia
 Experience from 150 years of successful business  Employees in Europe: ca. 600 (ca. 500 in Germany)
in China  Employees worldwide: 1,700 (1,000 in Asia).
 Offices in Shanghai, Hongkong, Singapore
and Munich, Germany
 Experience in advising
 Client Service:
companies in the larger
Strategy middle class.
Business Development The employees of Raffel CD
Designing Business Models have both industrial and consulting experience in
M&A the international environment.
Acquisition and Desinvestment of Companies  For M&A activities (purchase and sale of companies
Structuring Joint Ventures and Alliances and business units), Raffel CD combines the necessary
 Contact: M&A technique, strong strategy and market expertise.
www.melchersraffel.com This allows the creation of outstanding value for
E-mail: info@melchersraffel.com the customer.
© Raffel GmbH Corporate Development All rights reserved. Proprietary and confidential.
Source: MelchersRaffel 44 DP_130508_Automotive_sector_trend
44
MelchersRaffel has offices and access to networks in all relevant Asian countries
MelchersRaffel Shanghai
13 floor, East Ocean Centre
588 Yan-An Road (East)
Shanghai 200001 / PRC
sha@melchersraffel.com
MelchersRaffel Ltd. Hongkong

Shun Tak Centre West Tower
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Singapore 307591
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office location of the Melchers group office location of MelchersRaffel

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【Raffel】Automotive sector trend for KOSTALv0

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Executive summary – 1/2

Market size and growth

Market structure and competition – Carmakers

Market structure and competition – Automobile parts manufacturers

Market structure and competition – Automobile parts manufacturers (cont‘)

Future challenges & developments

▐ The fastest and biggest growth opportunity so far.

Historic Comparison - GDP Future Comparison - GDP

Growth Time period GDP US$bn

21mn (2050: x2)

2010 2013e 2015e

CAGR: 19.3 CAGR 07 – 12

2007 2008 2009 2010 2011 2012

Export volume is just 1.06

2007 2008 2009 2010 2011 2012

Source: International Organization of Motor Vehicle Manufacturers; MelchersRaffel research

GDP per capita, 2010

Source: Worldbank; MelchersRafffel analysis

Market share by player by ownership type, 2011

Local self-owned brand Local self-owned brand

Sino-sino local JV Sino-sino local JV

Generalization, not exhaustive

Fuel consumption 38%

After-sales service 22%

Appearance/interior design 27%

12% Owning a car and plan to get a

Hyundai 0.9 Great Wall 0.49

Toyota 0.7 Dongfeng 0.42

Chevrolet 0.7 Foreign JV brands JAC 0.20

Honda 0.6 FAW Haima 0.17

Kia 0.5 Lifan 0.17

Ford 0.4 Geely Emgrand 0.15

Source: China Passenger Car Association; MelchersRaffel analysis

Grand Bus Middle bus Small bus

Yuto King Hige Yuto Hige Jinb

Grand bus Middle bus Small bus

Commercial vehicle – Truck

Shaanxi Automobile 84 13%

BeiBen Heavy-duty truck 24 4%

Source: Desk research; MelchersRaffel research

2013 2013 2013

—Chairman of the Board of

Source: Company website;, MelchersRaffel research

▐ In 2009, China's automaker

Sales in China 2006-2012 Profit margin

Source: MelchersRaffel Research, Chinese Association CAAM, FAZ

Sales of Chinese suppliers – 2011 Sales of German suppliers – 2012

Source: MelchersRaffel Research, Chinese Association CAAM, FAZ

>1 mn RMB 25,000

>5 mn RMB 8,556

>100 mn RMB 1,670

0 5000 10000 15000 20000 25000 30000

Source: Industry report; MelchersRaffel research

1. Absence of close relationships between local suppliers and the carmakers

2. Lack of core technology and self-innovation

3. Fierce competition and thin margin

5. Limited capital source

Source: MelchersRaffel Research

 Lots of small firms but with several dominant players

• Over 700 auto seat suppliers in China

 Raw material price is likely to increase

• Polyurethane will increase beyond 2500 RMB/Ton.