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Prepared for Macquarie SecuritiesBy Michael Dunne

February, 2012

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The Beijing Declaration: “We Have a Problem”

Beijing is home to Asia’s worst traffic jams. In 2011, the capital introduced a quota system that reduced sales to 240K units from 650K units in 2010

Will Beijing lead a national rollback of car sales as other cities follow the leader?

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In 2009, China’s NDRC unveiled highly ambitious plans to go electric

Range anxiety

Costs

Fires

Technology ownership

There would be capacity to build one million units of electric vehicles by 2012. Several “Big Issues” remain:

In August 2011, President Wen

Jia

bao

penned an influential opinion piece: “It’s too early to commit to an electric car strategy!”

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Back to Chinese pragmatism: “How Can We Manage This Car Market Monster?”

Sobered by the false starts with electrics, leadership is now warming to hybrids as a practical interim solution.

China imports 60 percent of its annual oil consumption. Car ownership rates still in their infancy.

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# Auto Group1 FAW

2 BAIC

3 SAIC

4 Guangzhou Auto

5 ChangAn

6 DFM

7 BYD

8 Chery

9 Geely

10 Great Wall

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The Many Detroits

of China One thing that keeps China from achieving an electric vehicle revolution is its convoluted and decentralized power structure. Just too many Detroits!

Different from Japan and Korea, China’s industry is not neatly consolidated. Beijing policies get diluted or warped to fit local conditions.

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China’s Politics Leads to Massive Brand ProliferationThere are more than 60 unique brands competing for share in China. They fall in four basic categories.

In China’s half private, half state-owned economy, brand consolidation is still many years away.

SOEs JVs Independents Off-spring brands

NVUMë NVVMë OMMMë OMNMë

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Chinese R&D: Receive and Duplicate

Chery QQ

US$4,600

Chevrolet Spark

US$6,000

China’s murky rules environment leads to some murkier competition.

Thinking of taking a Chinese company to court in China? Good luck.

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So What’s the China Car Market Picture in 2012?

Passenger Vehicle Market Shares 2011

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General Motors, 10.00%

Hyundai/Kia,

9.40%

Toyota, 6.30%

Renault-Nissan, 6.80%

Honda, 4.40%

Others, 33.80%

FAW, 3.20%

Chery, 4.30%

Geely, 3.70%

Volkswagen, 13.80%

BYD, 4.30%

Passenger Vehicle Fuel Mix -

2011

Gassoline, 98.50%

Hybrid/Elec, 0.30%

Diesel, 1.20%

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The Billion Dollar Profits Club

Companies making more than a billion dollars a year in China:

Heard on the Street: “We used to make our money in North America, now we make our money in China”, Carlos Ghosn.

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Sky-High Profits Lead to Scary Large Capacity . . .

China’s National Development and Reform Commission (NDRC) says that China’s annual production capacity could explode to 40 million by 2015.

GM alone will add 200

dealers in 2012. “Automakers are increasing their capacity blindfolded”. Chairman Xu Bingjin, China National Dealers Association

Looming Automotive Ghost Towns??

26M(Demand)

40M(Capacity)

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Exports 2011 2010 Top Export Destination – 2011

Q1 153.7 106.4

Q2 212.6 143.8

Q3 250.8 154.6

Q4 230 (E) 160.5

FY 847.1 (E) 565.3

140,000

94,00086,000

63,00049,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Brazil Algeria Russia Chile Iraq

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. . . < 5% growth in 2011 Spurred Jump in Exports

Chery, Great Wall and Geely lead export charge to developing markets.

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Demand to 2015: Higher, albeit at a slower paceChina economic growth model at a crossroads: Domestic consumption must replace fading over-exuberant demand for Chinese exports

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101214161820

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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Chinese Rules: The Top Makes Policy, the Bottom Takes CountermeasuresChina’s emission rules – based on Euro standards – are getting stricter

Standard Timing Adoption Euro Equivalent

China 1 2000.012002.08

BeijingNationwide Euro 1

China 2 2005.12 20004.7

BeijingNationwide Euro 2

China 3 2008.032007.07

BeijingNationwide Euro 3

China 4 2011.07 Nationwide Euro 4

China 5 Proposed 2012 Beijing Euro 5

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China’s PGM Demand Accelerating

Tougher standards and higher demand drove China’s PGM demand higher by 16% in 2011

Drivers Limiters

• 70% First Time Buyers

• 90% Cash Transactions

• Replacement Market Rise

• Deep Car Culture

• Electric Vehicles?

• Beijing Sales Quotas

• Higher Car Taxes

• Economic Reversal

Drivers far outweigh the limiters in the period to 2015. After that, electric vehicles could become a threat.

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Which Brands Will Triumph Depends on Your Point of ViewChina makes no secret of its ambition to dominate its home market. For now, Chinese customers prefer the cache of foreign brands.

30%

45%

25%

25%

15%

60%

The Chinese Viewvs.Global Automakers’ View

2015 2015

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