China Auto Market Global Strategy Global Challenges

Global Strategy
Global Challenges
Executable Solutions
China Auto 2020: China to Account for 35% Global Market Global Automotive Companies – Competitive or Obsolete for Tomorrow’s World?
France Houdard
Managing Partner
Phone US: 1 (917) 285.6528
Phone China: (00 86) 135.8591.0838
france.houdard@exolus.com
September 2014

1
Copyright © 2014 Exolus. All rights reserved..
This Report is about Opportunities and Challenges around …
Revenue Growth … Cost Reduction … Efficiency Optimization
2. Supply Chain
COSTS
Sales
Engineering
R&D
Sourcing
Production
Distribution
Marketing
Shared Services
IT HR
F&A Procure
1. Market
3. Innovation
DRIVING Shareholder Value
Research & Development
Shared Service Centers
Virtually Integrated Models
Production / Sourcing
Sales / Marketing

2
China Market Opportunity

3
1. Future Market (Auto): China Growth Explosive … US Flat Saturation
China Market 2x Larger than US Market by 2020
Source: National Bureau of Statistics of China, IHS
0
5
10
15
20
25
30
35
Million
Car Sales Volume – China & US (2000 – 2020f)
China
US
China Car Sales
10 MM (2008)
20 MM (2013)
30 MM (2017)

4
1. Future Market: China of Critical Importance to Future Performance
China Sales Accounts for 20 – 30% of Global Sales
Rank
OEM
Sales Volume
China Sales as % of Global Sales
China Market Share
1
Volkswagen
3.27 MM
33.6%
14.9%
2
General Motors
3.16 MM
32.5%
14.4%
3
Hyundai
1.57 MM
20.8%
7.2%
4
Nissan
1.27 MM
24.8%
5.8%
5
Ford
.94 MM
14.8%
4.3%
6
Toyota
.92 MM
9.2%
4.2%
7
Honda
.96 MM
18.2%
3.5%
8
Peugeot
.56 MM
19.8%
2.5%
9
BMW
.41 MM
21.0%
1.9%
Source: China Association of Automotive Manufacturers, Gasgoo
China Car Sales (2013)

5
Already World’s Largest Auto Market
26%
21%
21%
32%
China
North
America
Europe
Other
34%
14%
10%
42%
China
North
America
Europe
Other
Source: China Association of Automobile Manufacturers
Car Sales by Geography
2013
2020
1. Future Market: China Tracking to 35% of Global Car Sales by 2020

6
1. Future Market: China Trending to Bigger Vehicles (e.g., SUVs, C Model)
Consumer Trends by Auto Type
Sources: McKinsey, Bigger, better, broader: A perspective on China’s auto market in 2020
15%
80%
5%
SUV
Sedan
MPV
2011
2.8 MN SUVs
22%
73%
5%
SUV
Sedan
MPV
2020
7.3 MN SUVs
6%
17%
54%
18%
5%
A
B
C
D
E&F
2011
5%
17%
56%
16%
8%
A
B
C
D
E&F
2020
2.6x

7
1. Market Drivers: Explosive Growth in Middle Class
China’s Middle Class: 400 million (2010) … 756 million (2020)
Middle Class Income Bands (Measured against Urban Population)
Urban Population (millions)
Urban Household Income (US$ – PPP-Adjusted)
Global > US$107,800
Affluent US$3,800 - 107,800
Upper Middle US$21,501 – 53,900
Lower Middle US$13,500 – 21,500
Poor < US$13,500
607
684
822
239
255
157
106
73
53
170
355
461
525
90
99
0
100
200
300
400
500
600
700
800
900
2005
2010
2015F
2020F
2025F
531
756
Upper Middle Class
Lower Middle Class
Sources: Urbanization Rates, Population based on UN, World Urbanization Prospects 2007; MGI Consumer Demand 2008

8
1. Market Drivers: Driven by an Explosion in Urbanization
China’s Urban Population: 600 million (2010) … 822 million (2025)
China’s Urban Population (Measured against Total Population)
1.4 billion
1.3 billion
1.2 billion
1 billion
245
381
531
684
822
822
833
782
705
624
0
200
400
600
800
1,000
1,200
1,400
1,600
1985
1995
2005
2015
2025
1.45 billion
Urban Population (million)
Rural Population (million)
Source: World Urbanization Prospects 2007
Urban Population (millions)

9
1. Future China: A Fundamental Change in Economic-Geography
Framework for Investment Decisions around Structuring Corporate Platforms
Heilongjiang
Jilin
Liaoning
Hebei
Beijing
Inner Mongolia
Shandong
Jiangsu
Shanghai
Zhejiang
Fujian
Guangdong
Guangxi
Hunan
Jiangxi
Anhui
Hubei
Henan
Guizhou
Yunnan
Sichuan
Chongqing
Gansu
Ningxia
Shaanxi
Shanxi
Qinghai
Xinjiang
Tibet
Tianjin
Mountains
China’s Emerging MEGA-CITIES
Mega-Cities
Mega-Corridors

10
Production / Supply Chain: Opportunities and Challenges

11
2. Supply Chain: World’s Major OEM’s Aggressively Expanding in China
OEM Investment Decisions made with China JV Partners
China Automotive Production
Sources: Company Websites, Publically Available Information

12
2014
General Motors has announced it will set up five new plants in China by the end of 2015 to satisfy the increasing market demand and compete with Volkswagen to become the China market leader.
2014
Continental AG’s CEO announced in August that it will invest at least 1 billion Euros in China to set up new plants and R&D center.
2014
Ford will invest $1.8 billion to expand its R&D center in China -- and also to build a new auto testing facility.
2014
Volkswagen announced it is investing in two more plants in China.
2. Supply Chain: Aggressive Expansion Announcements for China
Major Auto Companies making Major China Investments
Source: Company websites, news announcements

13
2012
Johnson Controls established a WOFE in Chongqing to supply batteries to Shanghai VW and Shanghai GM. Also, JCI and FAW set up a joint venture in 2011.
2014
Shanghai Anting New Technology Center, a new R&D center of TRW, was recently set up to support all of TRW’s main business areas, including the development and application of braking, steering, etc.
2012
Delphi set up three (3) WOFEs and two (2) joint ventures with SAIC in China in 2012. This includes Delphi Connection Systems (Shanghai) Co., Ltd., Delphi Diesel System (Yantai) Co., Ltd., Delphi Connection Systems (Nantong) Co., Ltd.
2. Supply Chain: Auto Industry Leaders all Expanding in China
Expanding through Direct Investment and Joint Ventures
Source: Company websites
2011
Bosch set up a WOFE (“Automotive Products (Chengdu) Co., Ltd” in China to produce automotive sensors, anti-lock braking system , etc.

14
2. Supply Chain: China Still Provides Major Labor Arbitrage Opportunity
Major Labor Cost Differential
Manufacturing Labor Costs (2003 - 2012)
Source: National Bureau of Statistic of China; U.S. Bureau of Labor Statistics, International Labor Comparisons, August 2013
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
China
United States
Singapore
Brazil
Philippines
China
USA
US$ per month

15
2. Supply Chain: Labor Costs Significantly Lower in West (35%)
Intersection: Low Cost Bands + Emerging Mega-Cities
Heilongjiang
Jilin
Liaoning
Hebei
Beijing
Inner Mongolia
Shandong
Jiangsu
Shanghai
Zhejiang
Fujian
Guangdong
Guangxi
Hunan
Jiangxi
Anhui
Hubei
Henan
Guizhou
Yunnan
Sichuan
Chongqing
Gansu
Ningxia
Shaanxi
Shanxi
Qinghai
Xinjiang
Tibet
Tianjin
Mountains
Wage Bands / Mega-City Overlay
(Normalized to Highest Wages)
Wage Bands
Mega-Cities
Mega-Corridors
1.0
1.0
1.0

16
2. Supply Chain: Where are Pareto Optimal Deployment Envelopes?
Low Cost Bands + Emerging Mega-Cities + High-Income Geographies
Heilongjiang
Jilin
Liaoning
Hebei
Beijing
Inner Mongolia
Shandong
Jiangsu
Shanghai
Zhejiang
Fujian
Guangdong
Guangxi
Hunan
Jiangxi
Anhui
Hubei
Henan
Guizhou
Yunnan
Sichuan
Chongqing
Gansu
Ningxia
Shaanxi
Shanxi
Qinghai
Xinjiang
Tibet
Tianjin
Per Capita Income / Wage Band Overlay
1
1
1
Mountains
Per Capita Annual Income
(USD, PPP-Adjusted)
> 40,000
30,000 - 40,000
25,000 - 30,000
20,000 -25,000
17,500 - 20,000
0 - 17,500
Wage Bands
Mega-City
Mega-Corridors

17
2. Supply Chain: Major Opportunities, but Significant Risks
China Investment Process – Key Challenges
Strategy
Transaction Execution
Investment Strategy Development
Zone Screening
High Level Due Diligence
Zone & Site Evaluation & Ranking
Negotiate Investment Agreement
Detailed Due Diligence
Business Registration
Land Auction/ Construction Contracts
Zone Screening Challenges: Given that China has 8,000 zones, the process of filtering through to a suitable zone and site represents significant complexity, time commitment and high risks rooted in: wide-ranging and ambiguous regulations, hidden land quotas, unclear ownership/ zoning, investment hurdles, utility infrastructure, tax regimes, etc.
Due Diligence: Most information presented during DD unreliable as representations tend to be made by (promotion) officials pushing to hit their quotas, rather than by the broad array of officials with actual authority and responsibility for all aspects of planning, land ownership, utility availability/extensions/upgrades, geotech and so forth.
Negotiations: Negotiations involve significant counterparty risk, as representations tend to be made by those without actual authority to implement agreements. Further, there is a tendency for legal advisors to lack engineering expertise; agreements thus often lack relevant contractual terms – exposing projects to significant potential costs, delays and even failure.

18
R&D / Innovation: Opportunities and Challenges

19
3. Innovation: Where are Auto OEMs Migrating R&D Functions in China?
“R” of R&D Seeks Universities … “D” Seeks Markets & Production
Heilongjiang
Jilin
Liaoning
Hebei
Beijing
Inner Mongolia
Shandong
Jiangsu
Shanghai
Zhejiang
Fujian
Guangdong
Guangxi
Hunan
Jiangxi
Anhui
Hubei
Henan
Guizhou
Yunnan
Sichuan
Chongqing
Gansu
Ningxia
Shaanxi
Shanxi
Qinghai
Xinjiang
Tibet
Tianjin
Source: Company Websites; Exolus Research
1
1
1
Mountains
Wage Bands
Mega-Cities
Mega-Corridors
> 800
> 1,500
> 2,000
R&D Centers
(# Operations)
Auto R&D Operations

20
3. Innovation: Driven by Rapid Increase in Educated Workforce
China Science and Engineering: 1.2 Million Graduates per Year
Thousands
University Natural Sciences & Engineering Degrees (1985 – 2010)
Sources: National Science Board, Science & Engineering Indicators 2014
0
200
400
600
800
1,000
1,200
1,400
U.S.
China
UK
Japan
South Korea
Germany
China
USA

21
3. Innovation: Organization Models for Foreign R&D in China
Satellite Laboratories (Bottom-up Approach to R&D)
Mostly “adaptive” – adapting existing products to better fit local market conditions
Usually do not work on “innovation” as part of global teams
That is, they act more as listening posts for parent company/ business unit -- helping detect new ideas and product innovations based on the unique characteristics of the local market
Vulnerable to budget cuts
Contract R&D (Top-Down Approach to R&D)
More focused on “innovative” research
Usually support global team in carrying out specific module as part of global research project -- closely interacts with R&D teams at headquarters & other affiliates
Used to exploit lower cost engineers, capabilities and infrastructure
Has dense information flows, but unequal knowledge exchange -- Requires tight mechanisms to control IPR leakage
Integrated Global Partnerships (Balanced/Integrated Approach to R&D)
The China R&D Center has regional and/or global product innovation mandate
Equal participant in all corporate decisions, R&D work, & other global corporate activities
No barriers to full-fledged knowledge exchange between China R&D center and the company’s headquarters and the company’s other global R&D centers
Models Vary Considerably in China

22
3. Innovation: Migrating Upstream to Innovative and Global Models
China-Adaptive Focus  Global-Innovative Focus
R&D centers designed to support production and adapt technologies; be near customers; cooperate with local partners; access markets; improve the local “image” of a company; launch a product simultaneously; facilitate rapid scale-up in manufacturing; and overcome protectionist barriers against imports.
As national markets become regionally more integrated, some countries may become the preferred base for adaptation, not only for the local market but for the region as a whole.
Adaptive R&D has evolved into more advanced forms of innovation, with the local market serving as a test-bed for new products for regional or even global markets.
Facilities able to do both R&D with output aimed at global exploitation by parent company.
May evolve out of locally integrated laboratories & retain tight links with production in host economy, or
Set up independently of local production to tap local innovation clusters and skills
CHINA FOCUS
ADAPTIVE
REGIONAL / GLOBAL FOCUS
INNOVATIVE

23
3. Innovation: Footprint Drivers Vary for Innovative and Adaptive R&D
Functional Objectives Drive Platform Decisions for R&D
Adaptive R&D Center
Primary Drivers
Customer Locations & Business Opportunities
Proximity to Inter-Company Production Operations
Skills Availability
Fresh graduates and mid-level engineers
Experienced management (secondary)
Local Government Support
Local Resources at Universities
Secondary Drivers
Living Environment
Facilities
Utilities
Transportation
Incentives
Innovative R&D Center
Primary Drivers
Skills Availability (experienced engineers)
Local Resources at Universities
Low Labor Costs
Secondary Drivers
Living Environment
Facilities
Utilities
Transportation
Incentives

24
3. Innovation: Where are Key Nodes for Structuring R&D Platforms?
“R” of R&D Seeks Universities … “D” Seeks Markets & Production
Heilongjiang
Jilin
Liaoning
Hebei
Beijing
Inner Mongolia
Shandong
Jiangsu
Shanghai
Zhejiang
Fujian
Guangdong
Guangxi
Hunan
Jiangxi
Anhui
Hubei
Henan
Guizhou
Yunnan
Sichuan
Chongqing
Gansu
Ningxia
Shaanxi
Shanxi
Qinghai
Xinjiang
Tibet
Tianjin
Mountains
Wage Bands
Mega-Cities
Mega-Corridors
> 800
> 1,500
> 2,000
R&D Centers
(# Operations)
Research & Development Centers (Number of Operations in Select Cities)
Source: National Bureau of Statistics, 2nd R&D Census, 2009
1
1
1

25
Platform Structuring: Where are Pareto Optimal Deployment Envelopes?
Spatial Framework for Platform Optimization Decisions
Heilongjiang
Jilin
Liaoning
Hebei
Beijing
Inner Mongolia
Shandong
Jiangsu
Shanghai
Zhejiang
Fujian
Guangdong
Guangxi
Hunan
Jiangxi
Anhui
Hubei
Henan
Guizhou
Yunnan
Sichuan
Chongqing
Gansu
Ningxia
Shaanxi
Shanxi
Qinghai
Xinjiang
Tibet
Tianjin
1
1
1
Mountains
(USD, PPP-Adjusted)
> 40,000
30,000 - 40,000
25,000 - 30,000
20,000 -25,000
17,500 - 20,000
0 - 17,500
Wage Bands
Mega-Cities
Mega-Corridors
> 800
> 1,500
> 2,000
R&D Centers
(# Operations)

26
Shared Service Centers

27
2. Supply Chain
COSTS
1. Market
3. Innovation
4. Seeking Efficiencies through Shared Service Centers
Shared Service Centers (SSC)
Sales
Engineering
R&D
Sourcing
Production
Distribution
Marketing
Sales / Marketing
DRIVING Shareholder Value
Production / Sourcing
Research & Development
Shared Service Centers (SSC)
SSC
IT HR
F&A Pro’c

28
4. Shared Service Centers: Opportunity Map for China
Efficiencies … Economies of Scale … Knowledge Sharing … Standardization
Source: KPMG “A new Dawn: China’s Emerging Role in Global Outsourcing”, 2009
Heilongjiang
Jilin
Liaoning
Hebei
Beijing
Inner Mongolia
Shandong
Jiangsu
Shanghai
Zhejiang
Fujian
Guangdong
Guangxi
Hunan
Jiangxi
Anhui
Hubei
Henan
Guizhou
Yunnan
Sichuan
Chongqing
Gansu
Ningxia
Shaanxi
Shanxi
Qinghai
Xinjiang
Tibet
Tianjin
Mountains
1
1
1
Shared Service Center Hubs
Wage Bands
Mega-City
Mega-Corridors
Shared Services

29
Platform Structuring: Where are Pareto Optimal Deployment Envelopes?
Spatial Framework for the Range of Platform Optimization Decisions
Heilongjiang
Jilin
Liaoning
Hebei
Beijing
Inner Mongolia
Shandong
Jiangsu
Shanghai
Zhejiang
Fujian
Guangdong
Guangxi
Hunan
Jiangxi
Anhui
Hubei
Henan
Guizhou
Yunnan
Sichuan
Chongqing
Gansu
Ningxia
Shaanxi
Shanxi
Qinghai
Xinjiang
Tibet
Tianjin
1
1
1
Mountains
(USD, PPP-Adjusted)
> 40,000
30,000 - 40,000
25,000 - 30,000
20,000 -25,000
17,500 - 20,000
0 - 17,500
Wage Bands
Mega-Cities
Mega-Corridors
> 800
> 1,500
> 2,000
R&D Centers
(# Operations)
Shared Services

30
China Economic Health Report

31
Source: World Bank
GDP* 2013
6,4 trillions de $
3,6 trillions de $
$6.8 tr
$4.2 tr
$16.2 tr
$17.3 tr
US
China
India
$16.8 tr
India
Japan
GDP* 2020
$30.0 tr
$13.4 tr
$28.8 tr
$6.8 tr
$29.6 tr
US
India
China
Japan
EU-27
France
UK
Germany
GDP* PPP-adjusted
GDP* PPP-adjusted
EU-27
France
UK
Germany
5. Health: Projected to be #1 Largest Economy in World by 2020

32
5. Health: Senior Executives Select China as Most Attractive in World
Investor Confidence in China #1 in World
Source: World Investment Prospects Survey 2013 - 2015
Top 14 Most Attractive Destinations for Future Investment (2013 – 2015)
Percent of Responses
0
10
20
30
40
50
60
70
%

33
Source: China Statistical Yearbook
Record FDI of USD118 billion in 2013
0
20
40
60
80
100
120
140
USD billion
Foreign Direct Investment Inflows (1990 – 2013)
5. Health: Foreign Direct Investment Continues to Soar in China

34
Source: World Investment Report 2014 by UNCTAD
China Ranks #2 for Inbound FDI … or #1 when HK Included
USD billion
Foreign Direct Investment Inflows (2013)
0
20
40
60
80
100
120
140
160
180
200
220
Hong Kong Portion of FDI
5. Health: China and US Top Global Destinations for FDI

35
5. Health: Balance Sheets – Banks, Enterprises, Households
USD4 trillion in Foreign Reserves … Insulation of Financial System … Clean Balance Sheets
China’s Financial System Healthy, Benefits from Insulation, Abundant Liquidity
China banks cleaned up in 1990s: Non-performing loans in 1997 averaged 40 – 50%; only 1% in 2014.
Financial institutions extended approximately USD1.44 tr in new loans in 2013; and USD1.32 tr in 2012, USD 1.21 tr in 2011.
Forex Reserves Achieve Record High in 2013
The Central Bank has accumulated over USD 4 trillion in foreign reserves.
The accumulation of large external surpluses means financial system enjoys abundant liquidity.
Clean Balance Sheets for Enterprises and Households
State Owned Enterprise net profits as share of GDP has grown from (-1%) in 1997 to (+3.34%) in 2013.
Record corporate profit growth over past 5 years (industrial profits rose 100%); liability ratios declined.
Urban incomes have quadrupled in past 10 years.
Source: Deutsche Bank; Standard Chartered; UBS; IMF; Other

37
About Us: Leading Investment Advisory Firm
Global Scale: Established in 1931 • 3,000 Employees • 250 Offices Worldwide
Leading Expertise: Acquisitions • Dispositions • RE Funds • Agency • Structuring
Real Estate Advisory: Industrial, Office, Residential, Retail
Business Advisory: Strategy, Targeting, Due Diligence, Structuring, Negotiations
Investment Formats: Greenfield, JV's, Acquisitions, Dispositions, Outsourcing Multi-Disciplinary Expertise: Legal-Tax, Supply Chain, Engineering, HR, Real Estate
Investment Advisory: Financial Advisory, Capital Raising, Fund Structuring Investment Sectors: Automotive, Life Sciences, Manufacturing, Technology, Real Estate Geographic Focus: Greater China and US
Leading Global Investment Advisory Firm

38
Services: Align Directly with China (M&A) Investment Process
Strategy
Client
Approval
LOI
Term
Sheet
Purchase
Agreement
Ownership
Transfer
Acquisition Strategy Development
Target Screening
Evaluation & Ranking
Negotiate LOI
Structure & Negotiate Transaction
Transaction Closing
Exolus Group
China
Expertise
Automotive
Expertise
Facility & Engineering
Expertise
Structuring & Negotiating Expertise
Due Diligence
Expertise
Client Involvement
Targets & Counterparties
Mergers & Acquisitions
M&A and JV’s

39
Exolus Group
China
Expertise
Automotive
Expertise
Facility & Engineering
Expertise
Structuring & Negotiating Expertise
Due Diligence
Expertise
Services: Align Directly with China (Greenfield) Investment Process
Strategy
Client
Approval
Investment
Agreement
DD
Findings
Legal
Entity
Land/Facility
Ownership
Investment Strategy Development
Zone Screening
Zone & Site Evaluation & Ranking
Negotiate Investment Agreement
Business Registration
Land Auction/ Construction Contracts
Client Involvement
Targets & Counterparties
Direct Investment
Greenfield Investment

40
New Entity
Philosophy: Provide Holistic Solutions that Benefit Entire Organization
Establish Manufacturing Operations
Research & Development (R&D) - Marketing, Sales & Distribution
Sales & Marketing
Shared Services
Solutions Rooted in Multi-Disciplinary Expertise:
 Real Estate, Facilities, Engineering
-Facilities, construction, geotechnical, environmental, utilities, critical paths, permitting
 Supply Chain, Sourcing, Distribution, Transportation - Logistics, distribution, taxes, modes, physical transportation, rates, providers
 Labor-Force Dynamics - Structure, laws, trends, skills, costs, quality, scalability, sustainability
 Financial Analysis & Structuring (Tax, Legal)
-Legal structures, tax structures, financial analysis, feasibility, business case, incentives
Corporate Stakeholders
Corporate Real Estate, Engineering, Manufacturing
Supply Chain, Logistics
Human Resources
Finance, Tax, Legal
Exolus
Client
China Solutions Require a Multi-Disciplinary Approach

41
Exceeding our Clients’ Expectations
Representative Clients: Serving World’s Leading Companies

2014 42
For a Comparative Perspective with the other BRIC Countries Please Refer to the Following Research Reports
Found on Slideshare @
http://www.slideshare.net/Exolus/india-2020-what-india-will-look-like-in-the-future
http://www.slideshare.net/Exolus/brazil-2020-what-will-brazil-look-like-in-the-future
http://www.slideshare.net/Exolus/russia-2020-what-will-russia-look-like-in-the-future
http://www.slideshare.net/Exolus/bric-2020-what-will-the-brics-look-like-in-the-future
Download Reports @
www.exolus.com/en/knowledge/research.html
Brazil 2020
Russia 2020
India 2020
BRIC 2020

China Auto Market Global Strategy Global Challenges

China Auto Market Global Strategy Global Challenges

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (13)

Similar to China Auto Market Global Strategy Global Challenges

Similar to China Auto Market Global Strategy Global Challenges (20)

More from France Houdard

More from France Houdard (17)

Recently uploaded

Recently uploaded (20)

China Auto Market Global Strategy Global Challenges