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GLOBAL AUTOMOTIVE SEMINAR 16 NOVEMBER 2007 SHANGHAI AUTOMOBILE EXHIBITION CENTRE ANTING Challenges Ahead China s Automotive Industry at a Crossroads John Zeng Senior Market Analyst, Asia

Key Highlights and Assumptions (1) Real GDP Growth (Percent) 12 10 8 6 4 2 Urban/Rural Household RMB Saving Deposit (100 Mil Yuan) 180,000 161587 25% 160,000 141051 140,000 119555 20% 120,000 103618 100,000 86911 15% 80,000 60,000 73762 59622 64332 53408 10% 40,000 5% 20,000 0 1999 2001 2003 2005 2007 2009 2011 2013 0 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Per Capita Disposable Income Of Urban Households (Yuan) Real GDP growth of 10.6% in 2006, the fourth consecutive year that exceeded 10% Saving rate is very high overall saving rate is an amazing 43% of GDP Number of households that can afford cars increases significantly with diverse needs Market and consumer dynamics entering first stage of maturity 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 16% 11759 14% 10493 9422 12% 8472 7703 10% 6860 6280 5845 8% 5425 6% 4% 2% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 (Source: China National Statistics Bureau) Copyright 2007 Global Insight, Inc. 3

Key Highlights and Assumptions (2) 10000 9000 8000 7000 6000 5000 4382 4128 4000 3256 2662 2952 3000 2492 2251 2436 1838 1949 2000 1658 1402 1000 0 1998-2006 China Foreign Trade (100 Mil US$) EXPORT IMPORT GROWTH RATE 5933 5612 7620 6600 9691 7916 1998 1999 2000 2001 2002 2003 2004 2005 2006 Investment and export led boom more modest growth in consumption Foreign trade enjoying strong surplus 6.5% of GDP in 2006. Exports crucial element of the boom and strong growth in first half of 2007 ahead of removal of export rebates Retail sales growth of 15.4% in first half of 2007 highest increase since 1997 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% 1998-2006 Fixed Asset Investment (100 Mil RMB) 120,000 109870 30% 100,000 88774 25% 80,000 70477 20% 60,000 55567 15% 43500 40,000 36898 28547 29876 32619 10% 20,000 5% 0 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 1998-2006 China Retail Sales (100 Mil RMB) 80,000 76410 16% 70,000 67177 14% 59501 60,000 48136 52516 12% 50,000 10% 37595 40,000 34153 8% 29153 31135 30,000 6% 20,000 4% 10,000 2% 0 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 (Source: China National Statistics Bureau) Copyright 2007 Global Insight, Inc. 4

Fastest-growing Market in the World But Only Gradual Changes in the Segmentation Profile Overtook the United Kingdom and France to become the fourth most significant vehicle market in 2002 Overtook Germany to become the third-largest vehicle market in 2003 Overtook Japan by a very narrow margin to become the second-largest market in 2005 Passenger car sales rose five-fold between 2001 and 2006 Segmentation profile has only changed very gradually E 9.8% SUV 4.7% MPV 4.1% OTHER 0.5% A 16.3% B 6.4% E 8.2% SUV 6.8% MPV 4.6% OTHER 0.4% A 13.3% B 10.9% D 17.1% D 13.8% C 41.1% 2001 2006 C 42.0% Copyright 2007 Global Insight, Inc. 5

Almost All the Global OEMs Present in China Domestic OEMs Manage to Hold Their Own CHN JPN EUR US KOR Chery won the most market share to 8.2%. A 48% increase in sales, raised ranking to #3 Toyota and Mazda market share gained 0.9pp to 7.5% and 3.9% respectively By brand, VW remains #1 with 16.2% market share. FIAT sales dropped 21%. GM still remains #1 as OEM, market share dropped to 9% Hyundai was the largest market share loser. Market share dropped to 5.1% from 6.8% in 2006. Pricing war fired up in 2007: Major price cuts from FAW VW, SVW, DF Nissan, SGM, PSA, Chery Market is becoming more fragmented: Hyundai lost market share while Chery raised its ranking Copyright 2007 Global Insight, Inc. 6

Major JVs/OEM Affiliations Note: This figure shows only major OEMs, even though there are more than 100 automotive assemblers in China. Foreign Company Local Company Joint Venture No Equity China Brilliance VW 70% 60% TOYOTA FAW-VW Brilliance BMW BMW HONDA 51% 40% Engine SiChuan GZ Toyota Toyota Engine 65% Mazda FAW-VW 25% 15% Changan Ford Mazda Changan 51% Changan Suzuki 35% Suzuki 33.4% 35% CFM Engine 14.9% 3% Shanghai -VW No Equity FORD 25% 30% Isuzu JMCG (41%) & Public (26%) JMC 12.5% Ssangyong Daewoo 20% 75% Jiangling Isuzu Qingling SH-VW Engine 51.16% 10% Shanghai GM 50.9% 25% GM FAW Group FCC (Changchun) FHC Tianjin (Hainan) Shanghai Automotive (SAIC) Roewe SH-GM engine 25% 40% 60% Daihatsu FAW Tianjin Daihatsu Toyota Tianjin-Toyota Engine Changfeng Motor 16.07% Mitsubishi Changfeng 50.14% BIG3 in China 20% Fujian Auto Southeast Motor No Equity DCX Dongfeng Motor BBDC Guangzhou Toyota Chery 30% Guangzhou BAIC BJ-Hyundai Guangzhou Honda Honda Export JV Dongfeng Motor Fengshen DPCA Dongfeng Yueda Kia Nanjing Fiat Dongfeng Honda Dongfeng Honda Engine Copyright 2007 Global Insight, Inc. 7 25% 25% FIAT 10% 60% 40% Nissan 40% Yulon- Nissan PSA Kia 36% Hyundai NAC MG

Consumer Recognition of Domestic OEMs and JVs FAW CAR CHERY SAIC The Most Promising Domestic OEMs BRILLIANCE FAW TIANJIN CHANGAN HAIMA 15.3% 13.5% 18.4% 23.3% 22.6% h 31.9% 47.8% 44.8% Chery is widely trusted by consumers due to its good performance in recent years 43.7% Known as the earliest JVs, SH- VW and FAW-VW are well recognized by consumers The Most Trusted JVs of Global OEMs 26.4% 17.2% 14.6% 10.3% 9.6% 9.3% 7.4% 6.7% 6.6% SH-VW FAW-VW GZ-HONDA SH-GM BJ-HYUNDAI GZ-TOYOTA FAW-MAZDA BJ-BENZ BR-BMW DF-HONDA CA-FORD 0% 10% 20% 30% 40% 40% 30% 20% 10% 0% Source: Car Consumer Survey 2007 by Tsinghua University Copyright 2007 Global Insight, Inc. 8

Fuel Prices Are Still Low But Will Follow International Oil Prices in the Future 11 10 9 8 7 6 5 4 3 2 1 0 Price of 93# Gasoline (RMB/Litre) Fuel Tax Scenario 3: 100% increase Scenario 2: increase Scenario 1: 30% increase Mar Aug Dec Jan June Dec Mar May Jan Nov 2004 2004 2004 2005 2005 2005 2006 2006 2007 2007 2008 Targeting reduction in energy use by 4% this year: appears quite unrealistic Gradually move to market based pricing Cutting subsidies Gasoline prices have risen by 56% between Jan 2003 and May 2006, 18% in 2006 Current price of 93 Octane gasoline is 5.34 yuan (US$ 0.71 cents) per litre, around 1/3 of U.K. price Will track international oil prices in the future Further increases needed to support conservation measures Assuming fuel tax introduction in early 2009 will initially result in 30% increase in fuel price Currently consumption tax accounts for 6% of retail gasoline and 3% of the price of diesel at the pump Copyright 2007 Global Insight, Inc. 9

Market Demand Drivers - Frequent New Product Launches 2007 Q1 Q2 Q3 Q4 WEIZHI C1 CHERY A18 FREEMA HAIMA 3 CV11 CHERY A1 SERENA MPV M1A B11 MPV M3 FAMILY CHERY V2 CV 7 MG TF F6 ROEWE750 WINGLE REFINE IV QISHI BINGYUE MG 7 OTING SUV CH011 CD-1 B21 M11 RIO LANDY CR-V PARK AVENUE XENIA C-Class MAZDA 5 EPICA LIVINA MAGOTAN VOYAGER SPORTAGE S-MAX SPACE WAGON COROLLA MAZDA 2 ZINGER MONDEO OCTAVIA Copyright 2007 Global Insight, Inc. 10

Market Demand Drivers - Massive Infrastructure Buildup 1995-2010 CHINA TOTAL HIGHWAY MILEAGE (KM) 70,000 60,000 83.04% Ranked No.2 in the () world, () expect to take place of U.S. in 2008 as No. 1 in the world 65,000 90% 80% 70% 50,000 59.83% 41,005 45,400 60% 40,000 30,000 20,000 10,000 2,141 39.42% 8,733 3,422 4,771 34,000 29,500 43.17% 40.58% 40% 24,331 32.89% 16,314 19,331 30% 25.87% 11,605 21.24% 20.60% 18.49% 20% 15.25% 10.72% 10% 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2010 0% (Source: Ministry of Transportation, P.R.China) Copyright 2007 Global Insight, Inc. 11

102 98 94 90 86 82 78 74 70 Market Demand Drivers - Increased Affordability Due to the Price War Jan/2004 Apr/2004 Jul/2004 Oct/2004 Jan/2005 Apr/2005 Jul/2005 Oct/2005 Jan/2006 Apr/2006 Jul/2006 Oct/2006 Jan/2007 Apr/2007 Jul/2007 Luxury Standard Compact Small Micro Copyright 2007 Global Insight, Inc. 12

Prices Already Below U.S. Levels for Many Models in Segment A/B But Prices Remain High in C and D Brand Chevrolet Toyota Honda Hyundai Toyota Honda Hyundai Toyota Honda Hyundai Model Name Aveo Yaris Fit Accent Corolla Civic Elantra Camry Accord Sonata Retail Price in China vs. US (in US$) China US LOW HIGH LOW HIGH $8,670 $11,905 $10,560 $15,102 $8,699 $10,392 $11,150 $13,525 $10,262 $13,258 $13,850 $15,170 $9,116 $14,820 $10,415 $14,015 $17,295 $26,020 $14,405 $15,615 $18,232 $23,442 $15,010 $18,710 $13,000 $18,232 $13,395 $16,895 $25,760 $35,137 $18,470 $24,900 $24,093 $39,044 $18,625 $27,400 $21,592 $29,146 $17,345 $23,445 Prices of Chevrolet models considerably lower in China Price of Fit 25% lower than in U.S. Civic and Corolla base version prices 21% and 20% higher than in U.S. Accord and Camry base version prices 29% and 39% higher than in U.S. Copyright 2007 Global Insight, Inc. 13

Used Car Transactions Rising Rapidly Greater Focus by OEMs and Franchised Dealers Trend Cars purchased at the beginning of boom period (2002-2003) now entering used car market Number of transactions in Beijing have quadrupled since 2002 Ministry of Commence taking steps to regulate this market Gradual improvement in the status of used cars Direct Auto-finance still difficult to obtain for used cars Assumed Impact Consumer choice will extend to better quality used vehicles For a given budget, consumer will be able to choose between a larger used car and a smaller new car Development of used car market will raise role of residual values in the new car buying process Will encourage more long term approach on pricing Better balance in dealer activities between New Car, Used Car and Parts/Service activities Copyright 2007 Global Insight, Inc. 14

Car, SUV, MPV Sales Growth of 36% in 2006 (Domestic Produced Models Only) Car Sales (Thousand units) 2004 Car Sales: 2.54 million units (Domestic Built Vehicles Only) 2005 Car Sales: 3.17 million units (Domestic Built Vehicle Only) 2006 Car Sales: 4.2 million units (Domestic Built Vehicle Only) 2007 Car Sales: 5.24 million units (Forecast growth 24.8%) 2008 Car Sales: 6.15 million units (Forecast growth 17.3%) 500 450 400 350 300 250 200 150 100 50 0 2003 2007 2004 2006 2005 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Copyright 2007 Global Insight, Inc. 15

Car Ownership Per 1000 Population Still Low 600 549 546 Car Per 1,000 Population 2006 500 492 468 439 432 400 300 253 238 200 100 36 13.1 7.8 0 IN CHN TH S.K OR M Y JPN UK US FRA GER AUS Copyright 2007 Global Insight, Inc. 16

Vehicle Production - Incremental Year-over-Year Growth 2007 an Exceptional Year 1800 1600 1400 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Copyright 2007 Global Insight, Inc. 17 Growth in Vehicle Production

Total Vehicle Sales Over 13 Million Units in 2012 12,000 2008 Sales Cars: 6.28 million LCVs: 2.89 million HCVs: 879,000 Sales (Thousand Units) 10,000 8,000 6,000 4,000 Car LCV 2,000 Truck and Bus 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Copyright 2007 Global Insight, Inc. 18

2008 Segments B and C Lead Growth Limited Growth Potential for Segment A Sales Growth Forecast 2008 vs 2007 (Thousand units) 250 200 150 100 50 0 A B C D E SUV MPV OTHER Sales Increase (2008 vs 2007) Expected to account for 48% all growth in 2008 Copyright 2007 Global Insight, Inc. 19

Sales Growth Diffusing Away from Mega-Cities More opportunities for local brands Per Capita GDP in US$ Car Ownership Per 000 people Xinjiang Tibet Gansu Qinghai Yunnan Inner Mongolia Sichuan Ningxia Guizhou Shaanxi) Guan gxi Shanxi Henan Hub ei Hunan Hebei Beijing Shandong Jiangxi Guangdong Tianjin Jiangsu Anhui Fujian Liaoning Zhejiang Taiwan Heilongjiang Jilin Shanghai 2005 2006 25.0% 8.1% Tier 1 Tier 2 Tier 3 Tier 4 20.6% 27.6% >5000 3000-5000 1000-3000 <1000 50 18 33.4% 33.7% 36.0% 34.4% 5 <5 Hainan Tier 1 Tier 2 Tier 3 Tier 4 Copyright 2007 Global Insight, Inc. 20

High Cost of Ownership, Environment, and Infrastructure Hold Back Car Consumption in Mega Cities Generally 30-35% of MSRP PURCHASE TAX CONSUMPTION TAX HIGH REGISTRATION FEES FUEL TAX?? OTHER FEES/ CAR TAX TOLL CHARGE ROAD MAINTANACE FEE OTHER FEES ROAD TAX FUELTAX The extra costs Chinese consumers have to bear hold back car consumption CONSUMPTION TAX Generally 5-25% MSRP CHINA DEVELOPED COUNTRIES MSRP Copyright 2007 Global Insight, Inc. 21

Government Policy - 11 th Five-Year Plan Emphasis on Independent Technical Development Aims to control the total fuel consumption growth within when PARC reaches 55 million units Reduce average vehicle fuel consumption by 15% Encourage use of small displacement vehicles Government funding hybrid/fuel cell vehicle program in 863 project to develop alternative fuel and powertrain technology Focus on promoting purely Chinese car manufacturers Aim to increase market share of local brands to at least in the passenger car market Strong support of independent R&D activities Direct finance support and indirect tax incentives Aims to consolidate State-owned Enterprises Traditional Big 3 (FAW, Dongfeng, and SAIC) are facing increasing pressure to build up independent passenger car brands and a high local R&D capability New emerging local Chinese companies will be able to obtain more government funding to accelerate independent technical development Copyright 2007 Global Insight, Inc. 22

Technical Road Map of Chinese R&D Build-up Low to- Medium Full Product Line-up Low end Shakeout, Market Reshuffling Around 10 major local OEMs Step 3: Increasing R&D capabilities and technology transfer, stronger local supplier base Over 60 Local OEMs Step 1: Imitation, reverse engineering of foreign OEM models. R&D complete outsourcing Step 4: Synchronize the supply chain, independent development, increasing R&D capabilities and technology transfer Step 2: Improve collaboration with international suppliers, joint development with overseas R&D institutes Further consolidation? Be able to compete with global OEMs Pre 2000 2000-2015 Post 2015 Copyright 2007 Global Insight, Inc. 23

Local OEMs Product Line-ups Shift Up More Direct Competition with Global OEMs 300 1996-2006 2006 THOUSAND RMB 250 200 150 100 BJ212 Vela V5 More higher priced models expected after 2006, including Chery F11, Geely GH-1 and FAW HQE etc Vision Zunchi F3 Saibao V CV11 Freema Besturn Roewe 750 MG75 50 0 Xiali QQ Merrie Junjie Lubao Flyer CV6 Familia II 520 FAW-XIALI CHERY GEELY BRILLIANCE HAFEI BYD CHANGAN HAIMA LIFAN FAW CAR SAIC NAG Copyright 2007 Global Insight, Inc. 24

Profitability Under Pressure Downward Pressure on Prices Price war continues Greater consumer choice and intense competition Looming over-capacity in the medium and long term Upward Pressure on Costs Faster pace of new model launch Higher tooling and product costs Rising commodity and oil prices Higher sales and marketing costs Greater competition Cost Reduction Measures Greater scale economies and efficiencies Higher local content levels Fresh investments in lower cost cities in interior Greater use of domestic suppliers Copyright 2007 Global Insight, Inc. 26

Conclusions The Chinese Government will continue to offer favourable policies to support domestic OEMs, as auto sector is regarded as pillar industry The relationship between global OEMs and domestic OEMs becomes strained due to more direct competition and violation of IP rights Tight relationships are also likely to appear within JVs over the coming years as increasing technology transfer and a stronger local component supplier base enable domestic OEMs to seek independence The domestic OEMs are expected to continue to grow despite the production ramp up by global OEMs Energy consumption becomes a constraint. Market competition will gradually shift from price war to energy efficiency Copyright 2007 Global Insight, Inc. 27

GLOBAL AUTOMOTIVE SEMINAR 16 NOVEMBER 2007 SHANGHAI AUTOMOBILE EXHIBITION CENTRE ANTING Thank You John Zeng Senior Market Analyst, Asia E-mail: john.zeng@globalinsight.com