China Sourcing

Presented by:

Jeffrey A. TalagaManaging Director

Jeff.Talaga@safholland.com

SAF-HOLLAND Beijing Representative OfficePeng Run Da Sha (Eagle Run Plaza)

Suite B2907No. 26 Xiaoyun Road

Chaoyang DistrictBeijing China 100016

Office: (86) 10.8458.4517 and 10.8458.4518Fax: (86) 10.8458.4516

Mobile: (86) 139.107.58774Websites: www.thehollandgroupinc.com; www.saf-achsen.de

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Agenda

1. SAF-HOLLAND organization.

2. SAF-HOLLAND in China.

3. IPO process.

4. SAF-HOLLAND sourcing.

5. Why source in China.

6. Major regions driving China’s growth.

7. Summary

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1. The SAF-HOLLAND Organization

In December 2006 a merger was completed between The Holland Group and SAF; the two companies are now subsidiaries of SAF-HOLLAND GROUP GmbH headquartered in Bessenbach, Germany with combined annual turnover of approximately $975 million. The company will employ 3,000 people worldwide.

The Holland Group is an internationally recognized leader in the design, manufacture and distribution of quality engineered components to the transportation industry, specializing in coupling, lift and suspension systems for trucks, tractors, trailers and buses. The Holland Group has significant presence in the United States, Canada, Mexico, and Asia Pacific and are sold and serviced by more than 2,500 distribution locations.

SAF is a recognized specialist in integrated axle and suspension systems for trailers, offering exceptional product features and superior operating efficiency. SAF products are standard equipment with major trailer builders, with significant presence in Europe, and are sold and serviced by more than 2,100 outlets.

Drive Axle Air

Suspensions

Fifth Wheels

King Pins

LandingGear

Tire Racks

Air & Spring Suspension/Slider

Systems

PintleHooks

DrawBars

FifthWheels

DollyJacks

King Pins

Roof Bow

Side Post

Scuff Plate

Bumper

Trailer Axles

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2. SAF-HOLLAND China

SAF-HOLLAND in CHINA:

Representative Offices: - Beijing - Shanghai

Investment Company: - Hong Kong

Joint Ventures / Licensees: - Baotou Inner Mongolia - Zhenjiang Jiangsu Province - Jinan Shandong province - Yantai Shandong province

Joint Ventures Under Development: - Xi’an Shaanxi province - Xiamen Fujian province - Nantong Jiangsu province

Key Suppliers: - All principally Yangtze River Delta (Zhenjiang,

Ningbo, and Nantong)

SAF-HOLLAND China has been involved in the China market for approximately 10 years and continues to expand its presence for both domestic product consumption and export worldwide. SAF-HOLLAND currently manufactures all of its products and components under license through various licensee / joint venture arrangements, and sources product from these partnerships to also include sourcing from key suppliers.

Sourcing volume in 2006 represented US $6 million and will continue to grow.

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3a. SAF-HOLLAND IPO Process

Getting started:1. Have HQ C-level support to a China IPO; paramount to success.2. Establish project teams with HQ based on commodity. Functional representatives to include:

a. Strategic Sourcingb. Qualityc. Engineeringd. P & ICe. Logisticsf. And an executive sponsor

3. Bring over HQ people as much as possible to get them acquainted with China (even if its your 9th trip to the Great Wall in one year).4. Utilize HQ quality system procedures / documents in the supplier development process.5. Hire the ‘right’ people in China and train them at HQ on standards, requirements, and quality.

Supplier selection / qualification: (next slide)

Post-supplier development:1. Engage your supplier as part of the project team (HQ, China IPO, and supplier).2. Have HQ project team visit the supplier with an emphasis on improving operations, sharing expertise (e.g. lean initiatives), educating on continuous improvement.3. Bring key suppliers to your HQ operations; let them learn your processes.4. Have on-site full time local staff at key suppliers when the volume justifies.

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3b. Supplier Selection / Qualification

Analysis

Capabilities Commercial Technical

Capacity

HT, machining, NDT

Material testing / cert’s

Quality system

Electronics / E-friendly

‘Fit’ for your business

Ownership

Management / Tenure

Financial strength

Experience / History

Confidentiality

Equipment

Staff experience

Continuous improvement

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4a. SAF-HOLLAND sourcing: First Step Commodity

SAF-HOLLAND China initially got involved with sourcing of commodity product principally steel castings, on a direct foundry contact basis versus working through rep agencies. Steel casting today account for 60% of total sourcing volume, with the balance made of 35% weldments (fabrications) and 5% rubber products (bushings). Steel castings provided savings (landed cost) anywhere from 20% to 40%.

Initial foundry developments started with a long-list of pre-qualified foundries as recommended from the China Foundry Association in Beijing (www.foundry-china.com) with on-site visits to qualify the foundry capabilities / quality system. Pre-qualify filters were as follows: - must be privately owned and not a state-owned operation - must have ongoing business with one or more large international accounts (such as Caterpillar, Dana, etc.) - must have a demonstrated quality system (versus a piece of paper hanging on the wall) - must have international experience and familiarity with USA standards such as ASTM, SAE, and others - must have competent management and technical staff - preferably be located in a coastal region for easy port access - preferably have an import / export license to avoid 3rd party costs

Scrap iron Melting Finished Components

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4b. SAF-HOLLAND sourcing: Second Step Value Based OPS

As a second step SAF-HOLLAND China started to add value to commodity products such as steel processing, machining, painting, and some assembly, and also started to source sub-assemblies and finished assemblies.

Value based OPS products identified for sourcing in China included low-margin / high repetitive volume type of products. Our experience shows that one-off or low volume type of products are not suitable for sourcing in China. Cost reductions were realized based on lower labor / overall overhead costs in China versus USA, however steel pricing for common strip and coil stock are negligible differences China versus USA.

Steel processing, machining, & assembly Finished products

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5. Why Source in China?

Source: CM&D

Utility Costs

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

China Indonesia Malaysia Philippines Thailand

Electrical

Water

Sewer

Real Estate Costs

$0

$10

$20

$30

$40

China Indonesia Malaysia Philippines Thailand

Land Purchasing

Cost to Build

Cost to Lease

Source: Deloitte research

Manufacturing WagesAverage Monthly Wage for Manufacturing

Workers (2000-2002)

$60

$61

$66

$98

$138

$402

$1,179

$1,385

$1,564

$1,683

$0 $500 $1,000 $1,500 $2,000

Vietnam

Indonesia

India

China

Thailand

Malaysia

Taiw an

Korea

Hong Kong

Singapore

US$/month

Source: ECN (Bolland) from CEIC

- Perceived cost advantages from low labor rates (but not always the best reason) - Globalization of supply chain - Offsetting domestic market consumption; volume balance and absorption - Improvements in transparency, supplier capabilities, and ease of doing business

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6a. The Major Regions Driving China’s Growth

Yangtze River Delta(Shanghai, Suzhou, Nanjing)• Over 30 cities with 1

M people• +/- 20% GDP• +/- 33% of FDI and increasing

Bohai Rim (Beijing/Tianjin)• +/- 20% GDP• > 20% of FDI • Political Capital

Pearl River Delta• Over 10% of China GDP• > 25% of FDI • > 35% of exports

Source: Asian Wall Street JournalXinhua Economic NewsMOFCOM

The Developing Interior

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6b. Geography Overview

Yangtze Delta– Stiff competition for resources– Electricity concerns abating (with disastrous consequences to the environment)

Bohai Rim– Traditional SOE heavy industrial base– Political center (disproportionate resources invested)– Strong industrial park investment (TEDA versus BDA)

Pearl River Delta– The original “low-cost” China source (key geographic relationship to Hong Kong)– Excellent transport infrastructure– Challenging labor stability

The Developing Interior– Lower cost/more stable workforce (but “communist” iron rice bowl work mentality

still exists)– 2nd/3rd class infrastructure (but improving in some areas) – Longer/substantially less efficient supply chain

Source: CM&D

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7. Summary

Source: CM&D

1. Sourcing in China can be successful but it takes due diligence, tenacity, and strong support from HQ.

2. There are no quick or short-term paths to sourcing in China; it is a long-term process.

3. Sourcing in China is no longer a competitive advantage; it’s a necessity as most of your major competitors are probably already here doing the same.

4. Current factors affecting the sourcing environment will only intensify; this includes reduction in export tax rebates, strengthening of the Renminbi, State Council macro-economic controls, trade surplus, and environmental issues.

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Thank You