A World Overview: Where Are the Key Future Growth Markets? Richard Walles Director, Truck Industry Research

A World Overview: Where Are the Key Future Growth Markets? Richard Walles Director, Truck Industry Research

Presentation Outline Summary of Global Developments Economic Background Regional Market Round-up Major Truck Producers Future Growth Markets Market Assessment Truck and Sector Growth Potential East Europe: Russia and Accession Countries Asia: China and India - The New Global Players 2

Economic Background: Medium-term Regional Outlook % growth 9 8 7 6 5 4 3 2 1-1 2 22 24 26 28 21 Global economic growth is now slowing and will fall further, but is expected to continue at an abovetrend rate over the next few years World economies have adjusted to high energy prices and only a very significant price increase or disruption could cause risks to future growth WORLD USA W.Europe E.Europe Asia 3

Economic Developments: World Industrial Production Quarterly Year-on-year Growth (% change) 14 12 1 8 6 4 2-2 -4-6 -8 2- Q4 21- Q4 22- Q4 OECD 23- Q4 24- Q4 Non-OECD 25- Q4 26- Q4 27- Q4 28- Q4 29- Q4 Industrial production growth in both OECD and non-oecd nations is expected to weaken over the next two years leading to lower, but still sound economic activity overall 4

Truck Sales: The Global Picture (s) Boom time for Trucks - 3, sales hit 2 million units for the first time in 24, Rest of and set to pass 2.6 million 2,5 Asia by 29 2, 1,5 1, 5 Forecast 1998 2 22 24 26 28 21 212 China E. Europe S. America Japan NAFTA W. Europe Demand growth is led by emerging markets, and driven by increased requirement for goods transportation and replacement of old truck stock Weakness in the mature markets more than compensated for by strong activity in most of the world s emerging markets 5

World Markets: Regional Sales () 2 15 1 5 2 22 24 26 28 21 2 22 24 26 28 21 7 6 5 4 3 2 1 NAFTA S - America 4 3 2 1 3 25 2 15 1 W - Europe Total 6 3 25 2 15 1 5 E- Europe 2 22 24 26 28 21 125 1 75 5 25 Asia China 2 22 24 26 28 21 2 22 24 26 28 21 2 22 24 26 28 21

Global Footprint of Western Groups Estimated Market Share in 26 N-America 25 2 15 1 5 Daimler Volvo MAN Iveco Paccar Scania 3 25 2 15 1 5 S-America W-Europe 1 8 6 4 2 E-Europe Daimler Navistar Paccar Ford Volvo GM Volvo Daimler MAN Scania Iveco Paccar 3 25 2 15 1 5 8 6 4 2 Asia Mitsubishi Fuso Nissan Diesel Daimler VW FordGM Volvo Iveco Scania Daimler Volvo Scania Iveco Paccar MAN 7

World s Top Truck Producers Trucks Above 6t GVW DAIMLER VOLVO GT NAVISTAR TATA PACCAR DONGFENG ISUZU FAW MAN FIAT IVECO TOYOTA FORD ASHOK LEY SCANIA CNHTC GM KAMAZ TORCH BEIJING VW GROUP GAZ GP MAZ 45, 4, 35, 3, 25, 2, 15, 1, 5, Mitsubishi Fuso Nissan Diesel Estimated Truck Production in 26 8

Strong Growth in Demand Generates Potential for an Additional 8, Trucks by 215 Regional Sales and Share of Global Demand ASIA NAFTA W EUROPE E EUROPE S AMERICA 3, 2,5 2, 1,5 (s) 6% 7% 16% 1% 12% 22% 6% Potential for volume growth is good, but is slanted towards emerging markets where risks are also greater 1, 5 22% 28% 34% 31% 42% 5% 2 25 21 215 World demand is forecast to average 2.6% growth per year (compound) between now and 215 9

Longer-term Growth Opportunities Focused on Heavy Trucks % Share of Heavy Trucks Produced World Truck Production (s) 1% 75% 5% 25% % 1995 2 25 21 W.Europe N.America E.Europe S.America Asia 2, 1,75 1,5 1,25 1, 75 5 Medium Heavy 25 1996 2 24 28 212 Growth rate 1995-2 2-212 Medium 6-15t -1.% p.a. 3.3% Heavy >15t GVW 4.4% p.a. 7.3% 1

Evaluation of Growth Potential Market Size and Growth Rates 25 215 1 Emerging Markets Head the Growth League ASIA Sales Volume s 75 5 25 Mature market Low growth NAFTA W.E. Japan S.A. Brazil China India Russia Poland % 2% 4% 6% 8% 1% Average Annual Growth E.E 11

New Truck Sales in Eastern Europe s units RUSSIA NEW EU OTHER 3 25 2 15 1 5 The region has much to offer, but is hampered by a poor road network, lack of transport and logistics infrastructure, and mostly out-dated business practices New truck sales have doubled in the past 1 years (1997 26) and good growth is expected in the medium term Basic Drivers: - renewal of old generation trucks - fleet expansion - new stock for international transport routes So far, most of the growth has been limited to the new accession countries but is now spreading across the region 1995 2 25 21 215 Country coverage: Belarus, Bulgaria, Croatia, Czech Rep., Estonia, Hungary, Kazakhstan, Latvia, Lithuania, Poland, Romania, Russia, Slovakia, Slovenia, Ukraine, Uzbekistan 12

Market Composition Changing Fast in Favour of Imported Brands s units Local Western Brands Asian 35 3 25 2 15 1 5 2 25 21 215 Growth of western imports has come mainly from the new EU accession countries, but has now spread to Russia Russia and CIS countries will be targeted by Asian brands with alternative low-cost units aimed at specific sectors Recent entrants include Hyundai, Isuzu, TATA, but will surely be joined by Chinese majors like FAW, Dongfeng and others Country coverage: Belarus, Bulgaria, Croatia, Czech Rep., Estonia, Hungary, Kazakhstan, Latvia, Lithuania, Poland, Romania, Russia, Slovakia, Slovenia, Ukraine, Uzbekistan 13

Russia Market Dynamics Sales Production Assembly 175 15 125 1 75 5 25 1995 2 25 21 215 Fast growing and large market potential is attracting increasing numbers of foreign assemblers Attractive low labourcost conditions and a large market too good to resist Volvo already produce low volumes but are set to expand facilities and likely to be joined in Russia by Scania, Renault, Isuzu, Hyundai, and others 14

Russia s Road Infrastructure A Key Project of the Infrastructure Improvement Program The East-to-West Connection : This is the most intensive and ambitious Road Construction Program being undertaken in Russia. The key aim is to provide a high quality road connection between the East and the West of the country. This will greatly improve transport links with the East and allow increased development which will lead to a more attractive investment region. At the same time, additional road connections to the highway will open up links and trading opportunities with neighbouring countries. There is a lack of a modern road network in Russia and much still needs to be done in developing an improved system of secondary roads in order to maximise road transport potential. 15

Beyond Accession: The New Europe Transport sector remains in transition, full integration with WE still underway Impact on truck sales mixed, but on balance positive (+) Economic growth (+) Further modal shift from rail toward road (+) Ongoing scrappage of older vehicles (-) Improved payload utilisation (-) Improved use of individual trucks - logistics Patterns of production Organization of transport Consequences Solid base for rising sales But parc growth will lag GDP, while in some cases, truck parc could even shrink as individual fleet payload capability rises 16

EU Enlargement: How Much Bigger? The 1 Accession Countries Truck Sales in the New EU Countries - 26 POLAND CZECH 6, Sales Production HUNGARY SLOVAKIA LITHUANIA 4, SLOVENIA LATVIA 2, ESTONIA ROMANIA BULGARIA 5, 1, 15, 1998 2 22 24 26 17

EU Enlargement: Key Players in 26 Estimated Share of Sales Markets in the New EU countries are already dominated by West European brands and the few indigenous producers who still remain, are weak, and face an uncertain future RENAULT 12% SCANIA 11% Other 1% MERCEDES- BENZ 18% DAF 13% VOLVO 14% IVECO 14% MAN 17% 18

Asia The Region Awakens Following the recession in 1998, sales in the region more than doubled by 24. The Chinese market took a leading role in the recovery as demand for trucks soared on the back of major infrastructure investment projects. China s share of regional sales has risen to over 5% from below 4% in the 199s. India has replaced Japan as the second largest consumer of trucks in the region and accounted for 25% of sales in Asia last year. Japan s malaise continues whilst restructuring in the transport industry has helped little, and truck demand has re-adjusted to a new, lower level. Truck Sales s units 15 125 1 75 5 25 1998 2 22 24 26 28 21 212 OTHER INDONESIA S. KOREA JAPAN INDIA CHINA Other includes: Australia, Hong Kong, Malaysia, New Zealand, Pakistan, Philippines, Singapore, Thailand, & Taiwan 19

Prospects for Growth in Asia Baseline index of truck output: 2 = 1 5 45 4 35 3 25 2 15 1 5 2 22 24 26 28 21 212 CHINA INDIA ASIA JAPAN S. KOREA 2

China: Key Demand Issues Strong economic growth will mean healthy demand in freight transport Firm growth in overall tonne-km Infrastructure spending is high until at least 28, and the Olympics Support demand for construction vehicles Considerable scope for shift from waterways and rail, to road Higher replacement demand Inferior build quality in the past, prompts replacement Inferior road conditions Overloading Restrictions on overloading have resulted in demand switch for more, and higher GVW trucks Possible clampdown on credit Rising concern over default rates Truck sales will follow cyclical pattern 21

China: Who Is Who in the Truck Market? Estimated Sales at Group Level in 26 58, Trucks DONGFENG FAW CNHTC TORCH BEIJING AUTO. SAIC ANHUI JIANGHUAI LIFAN GROUP ISUZU VOLVO DAIMLERCHRYSLER OTHERS HEAVY MEDIUM 5, 1, 15, Others include: Chengdu, Sichuan, North Benz, Shitong, China First Tractor, Hualong Shangdong, Nanjing Imported brands such as MAN, Hino, Scania, Hyundai, Fiat/Iveco had volumes below 1, units in 26 22

Heavy Trucks Have Established Dominance in the Chinese Market s 6 MEDIUM 5 HEAVY 4 3 2 1 1995 1997 1999 21 23 25 27 29 211 Factors driving the swing towards heavy trucks include: Mega construction projects throughout China and massive investment in road building and infrastructure development Legislation providing for heavy trucks, greater payload capability, and new engine emission standards 23

China: Opportunities as New Brands Hit the Scene Data in s of Units PRODUCTION and ASSEMBLY 1 8 6 4 2 1995 2 25 21 215 VOLVO DC HINO HYUNDAI ISUZU OTHER SAIC ANHUI BEIJING (Foton) CNHTC TORCH FAW DONGFENG 24

China s Road Infrastructure Current Status of Road and Highway Network: Over 1.9 million kms of road exist in China, 52% of all roads are paved 1.5 million km consists mainly of national/provincial highways and include nearly 42, km of expressways Nearly all expressways are toll roads, with most favouring a card toll system of charging based on distance travelled All expressways are recently built (within the last 2 years) and of high quality with ambitious expansion projects underway. In the last four years, around 5,km of highway were being completed each year Road networks are vastly improved around cities, but also along the East coast between major economic centres China s major cities and industries are situated on the eastern coast line, where the road infrastructure is at more developed level; rural areas tend to be poorly developed and only as they develop economically, does the road system follow Rural roads are often unpaved; governmental plans include the construction of 2, km in the short term Development in China is very uneven with central and western areas containing little traffic good roads are present, but the infrastructure is not as dense In mid 25, the Chinese government cut the business tax rate on highway toll income from 5% to 3%. This was to compensate for a reduction in tariffs for heavy duty trucks introduced earlier in the year 25

India: Now the Second Largest Market in Asia - Dominated by the Two Indigenous Groups, But Others Are Moving in Truck Sales s 35 3 25 2 15 1 5 Tata Eicher Motors Ashok Leyland Swaraj Mazda Others incl. Mahindra, Force Motors, Volvo,etc 1998 2 22 24 26 28 21 212 Leading producer Tata accounts for over 6% of sales and will continue to dominate for the foreseeable future. The new range of heavy duty trucks Newgen brings the latest technology to the market Volvo was the first foreign assembler to establish a presence, but others including MAN (Force Motors), Navistar (Mahindra), etc. have found the prospects of strong growth in a large market very tempting and are moving in Exports from India have been limited, but will grow as OEMs begin targeting other emerging markets 26

A Key Project in India s Road Infrastructure Improvement Programme For Inter-city transport, the Golden Quadrilateral Project is the most significant High quality road linkages between the key economic centres of India imply 1) More Road haulage feasible, which encourages Truck demand, making heavy trucks more useable 2) Advanced Trucks have optimal operating conditions, and outperform local old-generation vehicles in terms of efficiency 3) Return on investment for High-End Trucks can only be recovered given a better and improved infrastructure environment 6,km stretch linking : Delhi-Calcutta-Mumbai and Chennai Progress to date: 54km - already 4 lanes 729km - 4 lanes in progress 442km - proposed for private sector 288km - project preparation 1397km - yet to be awarded North-East-South-West Corridor 73km 58km - 4 lanes in progress, rest in early stages of development 27

Conclusions Although the global economy is slowing, the outlook remains favourable and economic growth should continue at above trend over the next two years The truck industry is in the midst of a boom and with minor regional exceptions should continue to see further growth for another couple of years There are sound business opportunities in selective growth markets for both truck makers and component suppliers alike, but there are also many risks. Whilst growth opportunities may be higher in emerging markets, so are the risks The end game is not only about volume growth, but also in identifying niche market opportunities to bring gains in added value and synergies to the business 28

Thank You Richard Walles Director, Truck Industry Research E-mail: richard.walles@globalinsight.com