A presentation I made to the Automotive News World Congress in 2004. A lot of it is still true today, but it is most interesting to me to compare the predictions with what actually happened

1. Keith Lomason
Executive Director — China
10 Recommandments For
Conducting Business in China

2. Who is Magna?
Auto supplier – ranking in world (sales*) #4
Sales growth – CAGR since 1994 22%
Content per vehicle – CAGR since 1994** 18%
Market cap ~$7.5B
*Automotive News ranking
**Excluding vehicle assembly sales

3. 93 94 95 96 97 98 99 00 01 02 03 04
2004 Sales Growth
$1.9B
$20.7B
22%
CAGR
35%

4. Magna International Inc.
2005 Group Structure
COSMA
MAGNA
DONNELLY
MAGNA
STEYR
MAGNA
POWERTRAIN DECOMA
INTIER
INTERIORS
INTIER
SEATING
Organization Structure
MAGNA
CLOSURES

5. A Global Presence for
Global OEMs*
Magna Facilities
222 Production 58 Engineering, R&D
Magna Employees
82,700
S. America 3
Europe81 25
Asia Pacific10 7
28,800
2,400
500
*As at September 2005
Canada 62 8
USA 53 18
Mexico 13
22,000
18,200
10,800

6. Magna International, China
Magna International, China
Coordinate Market Development,
Purchasing, and SQA activities for
all groups that wish to participate.
Develop and maintain high-level
contacts with customers,
government officials and other key
players related to our success.
Provide short and long-term office
space and services for Magna
groups.
Magna Int’l
China office

7. Magna in China 2006:
2,500 Employees, 19 Facilities
MAGNA International, CHINA
Shanghai, Pudong
7
MAGNA DONNELLY
Optera Touch Screen Co.,
Shanghai
Auto Elect Tech. Co., Shanghai
Fu Hua Window Systems Co.
– Glass JV, Shanghai
MD Mirrors, Shanghai
MD Mirrors, Guangzhou
10
9
INTIER SEATING
Intier JiaoYun Automotive
Seating, Anting (Previously
SLASSCO, Shanghai)
Intier-Das Mechanisms, Suzhou
Intier-Das Seating, Fuzhou
Intier-Das Seating, Beijing
MAGNA CLOSURES
Intier Automotive Co., Kunshan
MAGNA POWERTRAIN
Magna Powertrain, Changzhou
Litens Automotive, Suzhou
INTIER INTERIORS
CIAI, Changshu
CIAI, Changchun
Interlink, Suzhou
MAGNA STEYR
MSF Engineering Center, Wuhan
COSMA
MTTS Tianjin, Tianjin
(Operational 7/2006)
Cosma, Anting
4
17
3
5
6
1
12
13
11 8
14
1
2
3
4
6
7 9
5
8
13
1011
12
14
Wuhan
Tianjin
Guangzhou
Chengdu
15
15
16
16
2
17
New/Operational Facilities 2006
19
18
18
19

8. 0
10
20
30
40
50
60
70
80
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Millions
ME/Africa
S. America
South Asia
C/E Europe
China/T-wan
W. Europe
Japan/Korea
N America
 The industry enters a new stage of utilizing new capacity in Emerging Markets
 Mature markets will grow more slowly as production is displaced
 Demand diversification in non-mass markets (domestic vs. export) allows for more
sustainable demand
2.1% CAGR 3.7% CAGR
3.0% CAGR
Global Production
Shift Towards Lower Cost/Higher Growth Markets

9. The Labor Cost Shift
Growth of Sourcing from ULCCs and LCCs
 Global platform rationalization
enables for a shift to Ultra-Low
Cost Countries (ULCCs)
 Several OEMs looking to
‘escape’ competitive High Cost
Countries (HCCs)
 A number of situations where
Low Cost Countries (LCCs) will
lead the charge into export
markets
Source: Boston Consulting Group, EIU, S&P, other sources
0 1 0 2 0 3 0 4 0
I n d o n e s i a
C h i n a
I n d i a
R u s s i a
T h a i l a n d
M a l a y s i a
M e x i c o
P o l a n d
B r a z i l
H u n g a r y
C z e c h R e p u b l i c
T a i w a n
K o r e a
S p a i n
I t a l y
F r a n c e
U K
C a n a d a
J a p a n
U S
G e r m a n y
Hourly Compensation Including Benefits US$ 2009
LCCs
Average of $8-10 per hour
Inflation of 3-4% per annum
HCCs
Average of $23-27 per hour
Inflation of 2-3% per annum
ULCCs
Average of $3 per hour
Inflation of 6-7% per annum

10. Why China?
1990’s
 Lower Costs
 Market Potential
 PRC Govt. & Industry
hungry for investment
 PRC Govt. & Industry
hungry for investment
 “good deal”
partnerships offered
2000’s
• Market Share
• Scattered opportunities
- Grow with existing
customers
- Grow with new
customers
- Grow into new
products/capabilities

11.  Every investment must be:
– Evaluated on its own merits
– Structured in the best way to benefit your company
 Adhering to as many of the following suggestions as
possible will help ensure a successful operation in the
China environment
The “Ten Recommandments”
Preface:

12. Recommandment One:
Exception should be made ONLY if partner provides strategic
Market Share
 There are many functions you can start in China today that do not
require a local contact:
– Purchasing
– Engineering
– Sales and Marketing
 Your group will probably be better served in the long run if you
commit to the cost of a sales office for 2-3 years to gain business as
a WFOE than you will be if you rush to market via a partnership built
on a desire to have a presence in China
Investment Vehicle = WFOE

13.  Maximum tax rate of 15%*
 Central government approved and managed
 Listed in WTO documents (legal structure)
 More developed infrastructure than most other areas
 55 locations – there is one near where you want to be!
Location = Central Government Economic Development Zones (CEDZ)
Recommandment Two:

14. Comparing Economic Development Zones and Non-EDZs Investment and
Operational Costs
Area Name Customers Build Lease/yr
Water
$/Met ton
Elect.
$/kw hour
Nat. Gas
$/m3
GM Dept Mgr Office
General
Prod
Technical
Anting, Shanghai SGM, SVW 24% 25 72.5-96.7 17.4-23.2 0.199 0.104 0.157 25,000 5,800 2200-3000 900-1200 1750-2200 45.50%
Changchun, Jilin CEDZ FAW-VW 15% 20-33 60-100 26 0.56 0.08 0.18 5000 2500 1900 2200 43.50%
Chongqing CEDZ Changan Suzuki & Ford 15% 27 60 7.2-21.7 0.33 0.055 0.12 12000 4500-7500 2200-4500 870-1450 1200-2200 40%
Changshu CAIP 15-24% 9-15 72-97 11.6-21.7 0.26 0.06 0.29 4500 3000 720-960 960-1200 30-42%
Changzhou CZYJ Auto Component Co. 15% 20 72-97 11.6-21.7 0.21 0.06 0.22 7500 1750-2600 1160-1450 870 1160-1740 30-42%
Fuzhou, Fujian CEDZ Southeast Motors 15% 10-30 97-145 0.97-1.45 0.23 0.06 10000 6000 3500 1350 1800 37-40
Guangzhou, Guangdong CEDZ Honda, Toyota 15% 30-50 96-360 21.7-50.7 0.15 0.07 N/A 5000 2600-3200 1500-1800 2200-3000 37.50%
Haikou, Hainan CEDZ Mazda 15% 13 4.3-10.1 0.16 0.07 1200 870 1450 30%
Kunshan, Jiangsu CEDZ SGM, SVW 15% 18 60-120 11.6-17.4 0.19 0.07 N/A 20,000 7,000 4,000 2,500 3,500 30%
Liuzhou, Guangxi CEDZ SGM Wuling 15% 11-22 3.6-6.0 0.19 0.06 0.49 3,500 2,500 1,500 1,500 2,000 27.4-28.7%
Nanjing, Jiangsu CEDZ Iveco, Ford, Fiat 15% 18-21.8 96 15.7 0.32 0.08 N/A 5000 4000 3300 1300 2500 25%
Pudong, Shanghai CEDZ SGM, SVW 15% 73-108 240 26-53 0.16 0.07 0.31 30,000 9,000 6,000 3,000 5,000 38.80%
Puxi, Shanghai SGM, SVW 32% 63 483 44 0.27 0.07 30,000 9,000 6,000 3,000 5,000 60%
Shenyang, Liaoning CEDZ Brilliance, BMW, SGM 15% 13 66-100 1.2-1.8 0.08 0.05 N/A 5000 4000 1750 1150 1450 42.50%
Songjiang, Shanghai SGM, SVW 24% 25-30 180 25.2 0.18 0.07 N/A 12,500 7,500 3,000 1050-1450 1750-2500 30%
Suzhou, Jiangsu SEDZ near SGM, SVW 15% 38701 240 21.6-36 0.28 0.06 0.28 14500 12000 1850 1350 1950 14-20%
Wuhu, Anhui CEDZ Chery, Hyundai 15% 11 60 14.5 0.16 0.06 0.42 4,000 1,800 1,450 850 1,185 42%
Yantai, Shandong CEDZ SGM DongYue 15% 12 85 1.2 0.22 0.07 0.29 4000-6000 2500-3500 2000-2900 870-1150 1450-1750 32%
Utilities LOCAL Salary USD/year
Social
Benefits as
% of Salary
INVESTMENT INFORMATION FOR KEY AUTOMOTIVE
LOCATIONS IN CHINA Corp.
Income
Tax
Purchase
Land use
30 Years
USD/Sqm
Standard Factory
cost USD/sqm

15. Social Benefit Standards
2004
Standard
Area Pension Unemployment Medical Accident Maternity
22.50 2.00 12.00 1.00 1.00 7.00 45.50
22.00 2.00 12.00 0.50 N/A 7.00 43.50
Changshu 18.00 2.00 8.00 0.4-0.8 1.00 8-12 29.4-41.8
Changzhou 18.00 2.00 8.00 0.4-0.8 1.00 8-12 29.4-41.8
20.00 2.00 9.00 2.00 N/A 7.00 40.00
18.00 2.00 6-8 0.5-1.5 0.70 10.00 37.2-40.2
18.00 2.00 8.00 0.50 1.00 8.00 37.50
20.00 2.00 8.00 N/A N/A 30.00
20.00 2.00 6.00 1.10 0.90 8.00 30.00
20.00 2.00 4.00 0.5-1.8 0.90 27.4-28.7
14.00 2.00 8.00 0.3-0.8 1.00 25.3-25.8
20.00 2.00 8.00 0.60 N/A 8.00 38.80
24.00 2.00 7.00 N/A N/A 15-20 48-53
23.50 2.00 8.00 1 N/A 8.00 42.50
18.00 2.00 8.00 0.5-1.5 0.70 29.2-30.2
4.50 1-2 4.5-9 0.45 3.40 77.5-8213.85-19.35
23.00 2.00 8.50 N/A N/A 7.50 41.00
21.00 2.00 8.00 0.6-1.2 0.90 6.00 38.5-39.1
Suzhou, Jiangsu SEDZ
Wuhu, Anhui CEDZ
Changchun, Jilin CEDZ
Fuzhou, Fujian CEDZ
Haikou, Hainan CEDZ
Shenyang, Liaoning CEDZ
Pudong, Shanghai CEDZ
Puxi, Shanghai
Liuzhou, Guangxi CEDZ
Housing
Fund(%)
*Total(%)
of Salary
------------------------------INSURANCES AS A % OF SALARY------------------------------
Yantai, Shandong CEDZ
Kunshan, Jiangsu CEDZ
Anting, Shanghai
Chongqing CEDZ
Guangzhou, Guangdong CEDZ
Nanjing, Jiangsu CEDZ
Songjiang, Shanghai
 * Total (%) of Salary represents money that company must pay to government on behalf
of the employees
 This % is applied to the employees total cash compensation for calculation purposes, but
is paid by the company
 While there is quite a bit of disparity between regions today, this gap will close over time

16. Reduces intellectual property exposure
Lower costs for overseas support, training,
engineering, etc…
Visteon “best practice” comparison from
beginning of China activity
General motors following practice once
investment rules changed, allowing using SAIC
together to buy out other China partners
Recommandment Three:
If you must use JV, Use One Partner for all China Activity

17. Quadruple Your Normal Training Plan
Recommandment Four:
Education different from that in North America or
Europe
– Learning through memorization and repetition vs.
Free thinking and creativity
High turnover - especially in coastal areas
In many cases, must continually break “bad
habits”

18. Go Greenfield - Eventually
Recommandment Five:
Very few existing structures are adequate for
long-term use
– Land cost in China is still relatively cheap, but
will only continue to climb
Operations can start in rented pre-fab facility,
but plan on move to “purpose-built”
– More efficient
– Higher quality
– Better locations (CEDZ)

19. Go Quickly – Or Wait Until 2010
Recommandment Six:
Tax reduction/holiday for foreign invested
enterprises being reduced – may be eliminated
– Even if you have no imminent production, you
can establish a company in a CEDZ, from
which you can begin your operations
Large volumes overall, but extremely
fragmented and therefore difficult to justify
investment

20.  Fragile domestic market – it is growing, but has plateaus,
is very fragmented and first-time buyers cause swings
 Improves economies of scale
 Quality requirements for exports typically higher than
domestic requirements resulting in better product than
domestic competitor
 Savings at home may help meet customer demands*
– *Recent and ongoing revaluation of RMB will make
exports less profitable and imports more reasonable
Where Possible, Exploit Export Opportunities
Recommandment Seven:

21. Due Diligence & Business Plan
Recommandment Eight:
 Profits will be harder to come by in future
– Market growth is slowing
– Vehicle prices are dropping
– Price pressures on OE’s passed on to suppliers
– Payment terms being extended
 Hype must be ignored – know what to expect and have
robust business plans – most competitive market in the
world right now
 Get ready for OE & Supplier shakeout and consolidation
(20% during next 5 years?)

22. Utilize External Experts When Necessary
Recommandment Nine:
 Good legal advice is critical
– Keep it focused on key issues
– Have solid exit/takeover clauses for JVs
– Ensure all tax advantages are utilized
 Understand that negotiations with a PRC partner begin
AFTER the contracts are signed – not a ploy, simply a
difference in cultures
 Establish your own local resources group
– Maybe 1 person, maybe 100
– Specific to your needs
– Local Networking can not be over emphasized
– Can monitor swiftly changing environments

23. Rethink Your Normal Manufacturing Process
Recommandment Ten:
 Overcapacity exists at the OEMs, but is even more prevalent at the
Tier-2 level and below
 OEMs do NOT pay for most tooling up front but want it amortized –
this cost can be pushed down to the component supplier
 If there is overcapacity on a component your company normally
manufactures, you will not be able to compete on price – but the
OEMs (especially foreign invested) need your engineering and
supplier management capabilities
 Suppliers and sub-suppliers will need constant assistance with SQA
and development activities
 + management costs/- capital & component costs

24. THANK YOU