alixpartners 2010 china automotive outlook_e

8/9/2019 AlixPartners 2010 China Automotive Outlook_E

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AlixPartners 2010 China AutomotiveOutlook

April 2010


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AlixPartners China Auto Outlook is the most comprehensivestudy of its kind

Study Background and Methodology

Every year, AlixPartners produces a study of the global automotive industry (automakers andsuppliers), considered as one of the most comprehensive studies of its kind.

Since 2008, AlixPartners has extended the study to the auto supplier sector in China,providing invaluable insights into this important sector of the Chinese economy.

The study draws on AlixPartners extensive primary and secondary research in the Chinese

auto parts sector as well as the extensive experiences AlixPartners teams gain in workingwith participants in this sector in China and around the globe.

In addition, AlixPartners interviewed more than 50 senior executives in the Chinese autoparts sector (domestic and foreign players) and asked them a series of 25 questions aboutthe state of the industry and their companies operational challenges and opportunities. Thesurvey was conducted in January-March 2010. The results are compared against similarsurveys conducted in 2008 and 2009.


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Contents

A. Automotive Industry Trends and Outlook

1. Domestic Sales Trends

2. Industry Structure

3. International Trends

B. Auto Parts Industry Review

C. AlixPartners 2010 China Auto Parts Survey

D. Conclusions


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Chinas light vehicle sales growth was more than 55% in 2009, following a slow-down

of growth to 8% in 2008. In Q3/2009 to Q1/2010, growth rates were about 80%.Government stimuli have supported these massive growth rate

Chinas light vehicle sales volume became the largest in the world in 2009, as salesdeclined in major car markets around the world

Future sales growth is expected at around 20% by survey respondents.

Chinese OEM increased their market share to 32% in 2009, from 27% in 2006. The

increase was largely driven by an expansion of domestic models from 53 to 159.By 2015, Chinese OEM are expected to increase their market share to about 37%

according to survey respondents. BYD, SAIC and Geely are considered the most likelyChinese OEM to significantly increase their market shares.

Profitability levels among domestic OEM and global OEMs JVs are varying widely.Geely, BYD (Group Level), SGM and FAW-VW have the highest net profit margins atabout 10%.

Chinese OEMs exports have nearly halved in 2009, and are not expected to increasesubstantially by survey respondents.

Geelys acquisition of Volvo was the first major international acquisition by a ChineseOEM, while SAIC and BAIC have made smaller investments.

Chinas auto sales are now the largest in the world, followinggrowth of 56% in 2009 domestic OEM are gaining market share


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Contents







D. Conclusions


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Following a slow-down in growth in 2008, Chinas light vehiclesales exceeded 55% in 2009

Light vehicle sales volume 2003-2009 [m units]

Source: CSM, China Automotive Information Net

3.4 3.84.4

5.7

6.87.5

Passenger vehicle

11.7

Light commercial vehicle

YOY -growth


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Chinas passenger vehicle sales were the highest in the worldin 2009 by volume

Light vehicle sales in major global countries in 2009 [000 units]

Source: China Automotive Information Net, Ward, Reuter Thompson

Growth 56% -21% -8% 23% 11% 19% -49% 19%


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Light vehicle sales are continuing to grow at around 80% inQ1/2010, the third quarter in a row at around 80% growth rates

Light vehicle sales volume Q4/2008-Q1/2010

YOY -growth

Current Year Prior Year

Source: China Automotive Information Net


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Vehicle sales have benefitted from government stimuli surveyrespondents expect some impact if stimuli will phase out

Key Policies in 2009 Key Policies in 2010

Purchase tax reduction from 10% to5% for cars withengine size


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Auto executives expect sales growth to remain near 20% overthe next five years

Source: AlixPartners 2010 Auto Survey

2010

Expected light vehicle sales growth 2010-2015 [% p.a.]

2011-2012

2013-

2015

23%

19%

17%


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Significant room for further long-term growth: only about 60%of urban households with income >60,000 RMB own a car

Domestic urban households with income >60,000 RMB [million households]

PV Carparc total 10.5 17.513.9

% of PVownership

59% 59%59%

7.9

58%

Source: Global Demographics, China Statistical Yearbook

60-80K

80-100K

100-150K

>150K

20.7

60%

13.6

17.8

23.6

29.6

34.8

Note: car parc does not include government owned or non-Chinese peoples cars

In major Western auto markets, such as USA and Germany, about 110-120% of ALL households own a car !


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and the number of urban households with income morethan 60,000 RMB is only about 16% of total in 2009

2009 2013FC

Break-down of urban households by annual income, 2009E vs. 2013FC

Source: China Statistical Yearbook

# of Householdswith income>60k RMB

65.6 m (26.8%)34.8 m (15.8%)


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Contents







D. Conclusions


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14Source: CSM; Global Insight, AlixPartners Analysis

Chinas industry structure is the most fragmented amongmajor auto markets

Chinas industry structure in a global context, 2009 figures

Marketshare oftop 5 OEM

Market

share oftop 10OEM


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Among major countries with local auto industry, Chinasdomestic OEM have the lowest market share

Market share of domestic OEM in selected countries [in % of sales volume 2009]

DomesticOEM

# of majordom. OEM

7

Global OEM

Source: Global Insight; AlixPartners analysis

1 2 4 3 1 2 3 12

Note: major domestic OEM include companies with sales volume > 30,000 vehicles


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Chinese OEMs market share has increased to 32% in 2009 BYD has been the main winner among domestic brands

Source: CSM, China Automotive Information Net

36# of dom.models

53 110 160Domestic

OEM

M/S

2006

M/S

2009

Chery 6.9% 5.5%

BYD 1.4% 5.1%

FAW 6.3% 4.7%

Geely 3.7% 3.8%

Great Wall 0.9% 1.8%

Others ca. 8% ca.11%

Market share of domestic OEM in China [in % of sales volume 2009]

Reference:

VW (both JVs) ca. 16% Hyundai ca. 10%

General Motors ca. 9%


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17Source: CSM; AlixPartners Analysis

Chinese OEM are planning to expand into larger car categories,which will likely result in further market share gains

No. of domestic OEM No. of domestic models

Mini

Sub-compact

Compact

Mid-size/Luxury

SUV

MPV

2006 2009 2013E 2006 2009 2013E

6 12 13

4 12 14

5 15 18

2 5 12

6 17 20

5 13 16

8 15 19

7 20 30

6 40 45

2 12 25

13 40 46

5 23 27

TOTAL 22 27 28 53 159 200


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Survey respondents expect a further increase of domesticOEMs market share by 5%-pts by 2015 BYD the front-runner


36%Dom. OEMMark. Share

OEM %-pts.Growth

ExpectedM/S 2015

BYD 1.3% 6.4%

SAIC 1.0% 1.9%

Geely 0.7% 4.5%

Chery 0.6% 6.1%

FAW 0.5% 5.2%

Expected market share gains of domestic OEM [by %-points vs. 2009]

37% 37%


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Domestic consolidation among auto OEM has been addressedby Chinas government, but major actions havent occurred

In November 2009, Changan announced acquiring of Hafei, Changhe, DonganEngine, as well as AVICs JV with Suzuki and Mitsubishi. Changan Group will becapable of producing 2.2 million vehicles at 21 car factories in China

Guangzhou Automobile Industrial Group completed the acquisition of 29% stakein Changfeng Motor in May 2009

GAIG

Chang-an

Key domestic M&As in 2009

BYD acquired Media Coach (Hunan based) to expand into the commercialvehicle segment in July 2009

BYD

Source: Thomson Reuters, Industrial Reports; AlixPartners Analysis

2009: Chinas government announced a goal of cutting the number of its major autogroups to from 14 to max. 10 by 2012, and to establish 2-3 auto giants.

2010: The government in principle discourages new vehicle projects and greenfieldcapacity expansion, unless domestic OEMs first take control of a domestic peer


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Contents







D. Conclusions


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Chinese passenger vehicle exports have decreased sharply in2009, and remains at low levels compared to domestic sales

Chinese PV export volume 2003-2009 [000 units]

Source: CAIA; China Customs

Destination 2008 2009

Russia 57 6

Ukraine 54 5

Africa ca. 50 ca. 50

Other (mostlyMiddle East)

ca. 145 ca. 92


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Survey respondents do not expect major export growth in2010-2015, but rather a slow recovery


Expected export sales growth rates of domestic OEM [% growth p.a.]

70% of survey respondents expectgrowth rates


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Geelys acquisition of Volvo has been the first major deal of adomestic OEM abroad, however activities have increased

Geely completed the acquisition of Australian Drivetrain System Internationalin June 2009; and successfully acquired Volvo in March 2010

Key overseas M&A activities of domestic OEM in 2009/2010

BAIC

Teng-zhong

Geely

BAIC fails in its bid to acquire Opel in 2009

In December 2009, BAIC bought production equipment and intellectualproperty to two product lines from Saab

Sichuan Tengzhong Heavy Industrial Machinery Co. bids to take overHummer from GM, but the deal was finally cancelled in February 2010


SAICSAIC invests into General Motors operations in India, and takes 50% share

Additional joint investments with General Motors in SE Asia planned


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24Volvo 2009

Turning around Volvo will be a major task, given a history ofsubstantial losses

Source: Volvo Car Corporation; Reuters Thompson

SalesVolume[000]

Sales

Revenue[bn US$]

EBIT[bn US$]

Geely announced it will keepVolvo as a separate entity(takeover by Geely Holding, notlisted company) and existingmanagement will remain in place

Geely will likely benefit fromimproved brand image, and

potentially from technology /engineering capability transfer

Geely announced major plans toincrease Volvos China sales,potentially building a productionplant in China

Volvos sales volume in Chinawas only 12,000 cars in 2009


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D. Conclusions


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Chinas auto parts revenues have increased by 23% to about 1,140 bn RMB in 2009.

Growth rates were lower than OEM revenues by 10%-points due to higher impact ofexport decline for auto parts producers.

Auto parts export growth declined by about 7% in 2009, but not nearly as strongly ascar markets declined in major global automotive markets.

Several major domestic auto parts suppliers have emerged. Companies likeWanxiang and Weichai have entered the top 100 global suppliers by revenue.

Auto parts profit margins remain about 2%-points higher than OEM margins, and havenearly doubled from 2008 margins (both OEM and parts profits).

Chinese auto parts suppliers are now the most profitable in the world, based onsamples of listed companies in major automotive markets. Even is global companies havestarted to recover in 2H/2009, Chinese suppliers margins are about 2x its global peers.

Chinese auto suppliers working capital requirement remains higher than global peers,but has improved throughout 2009.

Several auto parts suppliers have acquired businesses in USA and Europe, andfurther acquisitions are expected.

Chinese auto suppliers are now the most profitable in the world,and a number of overseas acquisitions have been completed


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Chinas auto parts revenues increased by about 23% in 2009,lower than OEM revenues

Auto parts revenues 2004-2009 [RMB bn]

Source: National Bureau of Statistics; China Automotive information Net ;AlixPartners analysis

YOY -growth

OEM

Parts


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Export sales growth declined in 2009, but not nearly asstrongly as car markets declined in many countries

Source: China Customs; China Automotive Information Net; AlixPartners Analysis

Export revenue 2004-2009 Export revenue breakdown 2009

-8%

-23%

-12%

-9%

Growth2008-09CAGR 48%

10%

Auto parts export revenue [US$ bn]

-7%


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Profit margins have nearly doubled in 2009, as parts suppliersare consistently about 2%-pts more profitable than OEM

Auto parts suppliers and OEMs operating margins 2004-2009 [in % of revenue]

Source: National Bureau of Statistics; AlixPartners analysis

Auto parts supplier Auto OEM


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Chinese auto suppliers have become the most profitable inthe world in 2009, clearly ahead of its global peers

Global auto parts suppliers operating margins 2007-20091) [in % of revenue]

Source: Quarterly Financial Reports of Listed Companies, AlixPartners Analysis

US

1) Based on sample of 30 public listed companies by country / region

Chinese

European

Japanese


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Chinese auto suppliers working capital requirement remainshigher than global peers, but has improved throughout 2009

Global auto parts suppliers working capital trend 2007-20091)2) [days]

Source: Quarterly Financial Reports of Listed Companies, AlixPartners Analysis

US

1) Based on sample of 30 public listed companies by country / region

2) Average working capital days: (accounts receivable + inventory accounts payable) / revenue x relevant days per period

Chinese

European

Japanese


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Several auto parts suppliers have acquired businesses in USAand Europe, and further acquisitions are expected

Key auto suppliers M&A activities in 2009

WeichaiWeichai Power acquired France-based engine producer Moteurs BaudouinSA in February 2009

Jing XiJingxi Heavy Industry, a consortium funded by three Beijing-based entities,acquired Delphis brake and suspension business in November 2009


SHMGWeichai Power, Shangdong Construction Machinery Group, ShandongAutomobile Group merged into Shandong Heavy Machinery Group in June 2009

Wan-xiang

Wanxiang Group acquiring Global Steering Systems (USA) in March 2009

Other major domestic major auto parts producers are encouraged by the Chinesegovernment to look into acquisition opportunities in USA and Europe.


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Contents




D. Conclusions


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Suppliers sales outlook strong: Suppliers on average had revenue growth rates of about22% in 2009, and expect slightly increasing growth rates in 2010/2011. Export growth rateswere only 5% in 2009, and are expected to increase to 11% by 2011.

Key growth challenges are lack of qualified management resources and increasing pricecompetition. Improving sales effectiveness, competitive pricing and expanding aftermarketsales are top growth initiatives

Net profit margins shows for participating suppliers were about 9% in 2009, and

expectations are that margins slightly improve to about 10% in 2010/2011. Profitabilityamong export vs. domestic business, and aftermarket vs. OEM business was about thesame in 2009, while global OEMs JVs were somewhat more profitable than domestic OEM.

Key challenges to maintain high profits are considered to be potential raw material priceincreases, cost pressure from OEM and price competition.

Technology improvement is an important topic for most suppliers. About 65% of suppliersrecognize need for technology improvement, while 50% plan to recruit international experts.

M&A deal activity is expected to increase in 2010/2011. All survey respondents expectincreasing deal activity in 2010/2011, and more than 40% are actively planning domesticM&A deals in the near future.

Revenue growth and profit margins are expected to remainstrong lack of qualified people the key growth challenge


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Survey respondents expect revenue growth to remain above 20%in 2010/2011

Auto suppliers sales revenue growth in 2009-2011

2009 Actual 2010 FC 2011 FC

Source: AlixPartners China Auto Survey 2010

In the 2009 survey, only a

quarter of suppliers expectover 20% growth rate for2010, while in this yearssurvey nearly 50% ofsuppliers expect more than20% revenue growth

Average:

2009: 21.9%

2010: 22.6%

2011: 23.5%

Note: XX % means share of survey participants (from total of 50 respondents)


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On average, suppliers who participated in our survey areexpecting improved export growth rates around 10% in 2010/11

Auto suppliers export revenue share and growth 2009-2011

Revenue structure 2009 Export revenue growth (average)

Export:17%


Domestic:83%

Export:17%



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Lack of qualified people is considered the main challenge forsuppliers revenue growth plans, followed by price competition

In 2009, 60% of respondents put export slow down as the No.1 challenge

Auto suppliers revenue growth challenges in 2010-2011




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Key growth initiatives: improving sales effectiveness,competitive pricing and aftermarket are top growth initiatives

Auto suppliers sales growth initiatives 2010-2011




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Average net profit margins in 2009 were about 9% expectations for 2010/2011 are slightly higher, at 10% margins

Auto suppliers net profit margins 2009-2011 [in % of revenue]

In the 2009 survey, more than 50% ofsuppliers expect net profit marginsbelow 5% in 2009/2010

2009 Actual 2010 FC 2011 FC


Average:

2009: 9%

2010: 10%

2011: 10%



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With the massive OE market growth in 2009, suppliers sales toOEM customers was more profitable than aftermarket sales

Aftermarket revenue in % of total Aftermarket profitability

Export:17%


2009 Actual 2010 FC



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Raw material prices, cost pressure from OEM and pricecompetition are the key challenges for suppliers in 2010/2011

Auto suppliers profit challenges 2010-2011


In the 2009 survey, 40% of respondents considered material cost increase thekey challenge



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About 65% of suppliers recognize the need for technologyimprovement, while 50% plan to recruit international experts

Auto suppliers product technology plan 2010-11


RegulationImpacton

Pro

ductTechnology

Tech

nology

Improve

mentPlan



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All suppliers expect to see increased M&A activities in 2010-2011, especially in domestic market

Auto suppliers merger and acquisition plan 2010-2011

OverallM

&A

Activity

Su

ppliers

M&

Aplans




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Challenges for international M&A are mainly around managingand integrating foreign companies


Auto suppliers international merger and acquisition challenges



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Contents




D. Conclusions


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1. Chinese OEM are expanding and gaining more confidence: Chinese OEM have

benefited most from the massive demand growth for cars in 2009, as their market shareshave increased from 28% in 2008 to 32% in 2009. Industry executives are expectingChinese OEM to further win market share going forward. Geelys acquisition of Volvo andBYDs partnership plans with Daimler reflect the growing stature of Chinese OEM

2. Chinese auto parts suppliers are now the most profitable in the world: Chinese autosuppliers are equally benefiting from the domestic car production growth, and industryprofitability is now around 10%.

3. Lack of qualified people, price competition and rising cost base will be keychallenges: lack of qualified managers to lead international expansion, technologyimprovement and building professional organizations and processes will likely lead to awar for talent in the near future.

4. Key initiatives will be hiring international experts and domestic M&A deals: Chineseauto companies will likely hire more international experts to fill the talent gap andintroduce broader management experience. Domestic M&A deals are likely to increase

significantly, while international deals will be selective and limited to few major players.

Chinese auto OEM and suppliers are growing in confidence war for talent will likely be key challenge in near future

alixpartners 2010 china automotive outlook_e

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