Keith LomasonExecutive Director — China

10 Recommandments For

Conducting Business in China

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

93 94 95 96 97 98 99 00 01 02 03 04

2004 Sales Growth

$1.9B

$20.7B

22%CAGR

35%

Magna International Inc. 2005 Group

Structure

COSMA MAGNADONNELLY

MAGNASTEYR

MAGNAPOWERTRAIN DECOMA INTIER

INTERIORSINTIERSEATING

Organization Structure

MAGNACLOSURES

A Global Presence for Global OEMs*

Magna Facilities222 Production58 Engineering, R&D

Magna Employees82,700

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

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

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 SEATINGIntier JiaoYun Automotive Seating, Anting (Previously SLASSCO, Shanghai)Intier-Das Mechanisms, SuzhouIntier-Das Seating, FuzhouIntier-Das Seating, Beijing

MAGNA CLOSURESIntier Automotive Co., Kunshan

MAGNA POWERTRAIN Magna Powertrain, Changzhou Litens Automotive, Suzhou

INTIER INTERIORSCIAI, ChangshuCIAI, ChangchunInterlink, Suzhou

MAGNA STEYR MSF Engineering Center, Wuhan

COSMAMTTS Tianjin, Tianjin(Operational 7/2006)Cosma, Anting

4

17 3

5

6

1

12

13

11 8

14

12

3

46

7 95

8

131011

12

14

Wuhan

Tianjin

Guangzhou

Chengdu

15

15

16

16

2

17

New/Operational Facilities 2006

19

18

1819

0

10

20

30

40

50

60

70

80

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Mill

ion

s

ME/Africa

S. America

South Asia

C/E Europe

China/T-w an

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% CAGR3.0% CAGR

Global Production

Shift Towards Lower Cost/Higher Growth Markets

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 10 20 30 40

I ndones i aC hi naI ndi a

R us s i aT hai l andM al ays i a

M ex i c o

P ol andB r az i l

H ungar y

C z ec h R epubl i cT ai wan

K or eaSpai n

I ta l yFr anc e

U K

C anadaJ apan

U SG er many

Hourly Compensation Including Benefits US$ 2009

LCCsAverage of $8-10 per hour

Inflation of 3-4% per annum

HCCsAverage of $23-27 per hourInflation of 2-3% per annum

ULCCsAverage of $3 per hour

Inflation of 6-7% per annum

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

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:

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

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:

Comparing Economic Development Zones and Non-EDZs Investment and Operational Costs

Area Name Customers Build Lease/yrWater

$/Met tonElect.

$/kw hourNat. Gas

$/m3GM 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/yearSocial

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

Social Benefit Standards 2004

StandardArea Pension Unemployment Medical Accident Maternity

22.50 2.00 12.00 1.00 1.00 7.00 45.5022.00 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 29.4-41.8Changzhou 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 40.0018.00 2.00 6-8 0.5-1.5 0.70 10.00 37.2-40.218.00 2.00 8.00 0.50 1.00 8.00 37.5020.00 2.00 8.00 N/A N/A 30.0020.00 2.00 6.00 1.10 0.90 8.00 30.0020.00 2.00 4.00 0.5-1.8 0.90 27.4-28.714.00 2.00 8.00 0.3-0.8 1.00 25.3-25.820.00 2.00 8.00 0.60 N/A 8.00 38.8024.00 2.00 7.00 N/A N/A 15-20 48-5323.50 2.00 8.00 1 N/A 8.00 42.5018.00 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 77.5-8213.85-19.3523.00 2.00 8.50 N/A N/A 7.50 41.0021.00 2.00 8.00 0.6-1.2 0.90 6.00 38.5-39.1

Suzhou, Jiangsu SEDZWuhu, Anhui CEDZ

Changchun, Jilin CEDZ

Fuzhou, Fujian CEDZ

Haikou, Hainan CEDZ

Shenyang, Liaoning CEDZ

Pudong, Shanghai CEDZPuxi, 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

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

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”

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)

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

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:

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?)

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

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

THANK YOU