ProfessionalGrowth with PwC

www.pwc.com

Growth with PwC

Emerging Markets

Agenda

Emerging Markets

The Business Case - Vanessa Iarocci & Eric Castonguay

Structuring & Tax Planning - Mark Walters

Facilitating Banking & Trade - Reesa Shurgold (HSBC)

2

Executive Summary

• Canadian private companies are missing the mark in emerging markets

• Weak growth prospects in “the west” and high growth prospects in “emergingmarkets” mean that companies have a choice to stay and stagnate or go andgrow

◦ Emerging markets are longer merely a story of basic products and low cost manufacturing

• This is not your average expansion strategy. A cautious and calculated• This is not your average expansion strategy. A cautious and calculatedapproach is necessary because emerging markets are not, at all, like “the west”

◦ High political risk

◦ Significant deal barriers

◦ Cultural differences

3

Missing the markCanadian private companies do not have astrong track record in the BRIC regionstrong track record in the BRIC region

4

“Canada may not be taking full advantage ofthe opportunities posed by rapidly growingemerging markets.”

Conference Board of Canada, 2011

Our foreign investment track record is dismal

Canadian FDI balance in Brazil, India,China

Acquisitions into BRIC regions% of total acquisition value by country

32,733

15,000

20,000

25,000

30,000

35,000

Canadia

n$

(mill

ions)

China

1.5% ofBIC FDIbalances

4%

6%

8%

10%

12%

14%

%o

fa

gg

rea

ga

ted

eal

valu

e(2

00

0-2

011

)

% of total acquisition value by country

PwC

Source: Capital IQ, PwC Analysis

1520

5,000

10,000

1990 2010

Canadia

n$

(mill

ions)

0%

2%

4%

Canada UnitedStates

UnitedKindgom

Germany Australia

%o

fa

gg

rea

ga

ted

eal

valu

e(2

00

0

1.5%

• The majority of Canadian-led dealsin the BRIC region are into China

Most Canadians are second-movers that “go it alone”

in the BRIC region are into China(42%) & Brazil (38%)

◦ Low penetration in “other” emerging / frontier markets

• Canadians are typically not firstmovers

◦ Others have “laid the

“You need to be a first moverbecause in an environment

where there is a lot ofpolitical risk, folks that

come in early can actuallyhelp shape the political andregulatory environment tobe tailored towards them.”

PwC

◦ Others have “laid thegroundwork”

◦ Most deals are majority stake acquisitions rather thanminority stakes or jointventures (JV)

be tailored towards them.”

Ian Bremmer, Eurasia Group

• Public company buyers dominate,private companies are on the

Most activity involves large public companies in anarrow band of industries

Private Company Buyer Market Share

private companies are on thesidelines

• Narrow band of industries targeted

◦ China

› Real estate (Hong Kong)

› Financial services (retailbanking, asset management,insurance)

15%

20%

25%

30%

35%

40%

%o

ftr

an

sact

ion

volu

me

PwC

insurance)

◦ Brazil

› Resources

› Real estate

› Infrastructure

› Financial services (retailbanking, asset management)

Source: Capital IQ, PwC Analysis

0%

5%

10%

2007 2008 2009 2010 2011

%o

ftr

an

sact

ion

volu

me

Go & Grow or Stay and Stagnate?Western growth prospects are low, emerginggrowth prospects are highgrowth prospects are high

The macro environment today suggests a period of slow growth isupon the developed world economies…

2010 2011 E 2012 E 2013 E

Canadian real GDP(quarter/quarter % change)

3.2 2.3 2.0 2.5 GDP growthrates below(quarter/quarter % change)

US real GDP(quarter/quarter % change)

3.0 1.8 2.2 2.6

Canadian net exports(billions, C$)

(124.4) (144.2) (148.8) (151.0)

US net exports(billions, US$)

(421.8) (411.8) (401.2) (385.3)

US CPI(all items)

1.6 3.2 2.6 2.2

rates belowhistorical norms

Persistent tradedeficits

Negative realinterest rates

US 10 Year bond yield 3.21 2.79 2.09 2.71

US Unemployment rate 9.6 9.0 9.0 9.5

Canadian real disposableincomes (year/year change,%)

3.6 1.5 2.2 2.0

US real disposable incomes(year/year change, %)

1.8 0.9 1.1 1.5

10

interest rates

Unemploymentand disposableincome metricsdismal

Source: BMO Economics, Canadian Economic Outlook, US Economic Outlook

Governments have run out of ammunition…

Country Implied AusterityMeasures (US $mm)Measures (US $mm)

France 104,569

Germany 42,020

Greece 23,044

Ireland 58,800

Italy 33,714

Japan 484,573

Welcome to the age of austerity!

Source: Eurostat, IMF, PwC Analysis11

Japan 484,573

Portugal 15,552

Spain 88,719

UK 152,348

US 1,155,000

Putting austerity into perspective !

Implied Austerity2,500

3,000

Vietnam War, 698

Implied Austerity2,158

1,000

1,500

2,000

2,500

Infl

ati

on

Ad

just

ed(U

S$

bil

lio

ns)

12

Marshall Plan115

Race to the Moon,237 S&L Crisis, 256

Korean War, 454

Iraq Invasion, 597

0

500

1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030

Year

Source: PwC Analysis, Bianco Research LLC

In contrast, emerging markets are expected to expand rapidly

UKIreland

3.1 2.5 2.6

#2

Canada France

1.5 1.6 1.9

#5

-0.9 0.2 1.8

#9

4.0 4.3 4.5

#16

Russia

1.3 1.4 2.2

#3 Russia

Germany

3.5 2.6 2.1

China

Japan

Greece

-4.5 -3.0 0.7

#17

#2

2.8 3.0 3.2

#1

US

Brazil

5.5 4.2 4.0

#12

Mexico

7.5 4.6 4.7

#11

#5 #9

Spain

10.3 9.5 9.0

#10

4.0 1.4 1.8

#6

#16#3 Russia#4

Outlook

2010e 2011f 2012f

GDP growth

PwC Med-term risk ranking*

Key AustraliaItaly

Spain

-0.1 0.5 1.2

#8

2.8 3.4 3.9

#14

South Africa

1.1 0.9 1.2

#13

2.7 3.1 3.6

#7

India

8.6 8.6 8.5

#15

*PwC ranking of medium-term risk premium; **Based on March 2011 Economist Intelligence Unit projectionsSource: PwC Economics, IMF

United Arab Emirates**

2.1 3.5 4.6

n/a

13

By 2050, China, India, Brazil and Russia will be in “the top six”

60,000

GDP by country, 2009 - 2050 2009 2050

Emerging economy

20,000

30,000

40,000

50,000

GD

Pat

Mark

et

Exch

an

ge

Rate

s(c

on

sta

nt

2009

US

$b

n)

Emerging economy

PwC

Source: PwC Forecasts

0

10,000

Chin

a

US

India

Bra

zil

Japan

Russia

Mexi

co

Germ

any

UK

Indonesia

Fra

nce

Turk

ey

Italy

Nig

eria

Canada

Spain

South

Kore

a

Vie

tnam

SaudiA

rabia

Austr

alia

GD

Pat

14

This is not just more of the same. It’s no longer merely a story ofbasic products and low cost manufacturing

Urbanisation• India, China, ASEAN and Nigeria will add1.3bn urban residents between 2009 and 2050

• The cities of the world will require tremendous investment in infrastructure to support

Emergingmiddle class

Changinglabour

markets

Emerging• Between 2005 and 2009, over 2,000 companies in emerging markets began investing

• The cities of the world will require tremendous investment in infrastructure to supportthis growth

• Shanghai and Mumbai alone will generate 25m more middle class households by 2025,but the new middle class will not be constrained to the world’s megacities

• This will create substantial opportunities in consumer goods, while straining theagricultural capacity of the world

• China may no longer be the world’s factory. Many emerging markets now have lowerlabour rates than China, and countries like Thailand and India could become morecompetitive relative to China

• Within the BRIC, the key area of competition is around innovation

Currencymovements

Emergingcompetitors

• Between 2005 and 2009, over 2,000 companies in emerging markets began investingabroad. Some are becoming industry leaders (e.g. Embraer from Brazil)

• These companies will become stronger, and could be joined by as many new multi-nationals

• Currencies in Brazil, Vietnam and Indonesia are all expected to depreciate relative to theRMB, making these countries more competitive as a low cost manufacturing destination

15

Not your average expansionThe emerging markets are not, at all, like “thewest” – a unique approach is requiredwest” – a unique approach is required

16

Market entry has a high chance of failure because it involves alarge number of difficult choices...

Key Decisions Choices Some Considerations

• Willingness to pay• Cost of customer education

1. Customer focus Affluent segment Mass market

Bu

sin

es

sm

od

el

JV Go-it-AloneAcquisition• Regulatory requirements• Management bandwidth• Execution vs. partner risk (IP, control)

4. Investmentvehicle

• Market knowledge/ risk appetite• Local ecosystem• Tech. exchange in the proposition

3. Supply chainfootprint

Export LicenseLocal

productionLocal R&D

• Cost of customer education• Minimum efficient scale

1. Customer focus Affluent segment Mass market

• Cost to deliver• Potential for defensible advantage

2. Productoffering

Global products Local branding / pricing

State-owned/ PrivateSmall private • Need to navigate regulations vs.5. Partner type

Bu

sin

es

sm

od

el

17

8. Management • Global career development• Adaptability• Retention

Foreign Local

State-owned/affiliated

Privateconglomerate

Small privatesector

• Need to navigate regulations vs.commercial behaviour

• Balance of power in partnership

5. Partner type

7. Location • Proximity to raw materials andcustomers

• Liveability

Cost-advantage Employee friendly

Ex

ec

uti

on

...in an environment that is “not like the West”...

Why deals in emergingmarkets are different

Growth

Government

Culture

markets are different

Governance

Valuation

Numerous companies have achieved growth through emergingmarkets, but some companies have also faced difficulties

Infr

as

tru

ctu

re

Examples of successes Examples of difficulties

“In the late ’90s, we decided not toPhased approach to de-

Infr

as

tru

ctu

re

A&

D

Incorporating emergingmarkets into a globalsupply chain to lowercosts and gain access todemand

“In the late ’90s, we decided not toenter China, and missed a substantialopportunity. Now, it’s too late”

Automotive component manufacturer

“Suzuki re-entered the Indian marketin 2006, after it severed a decade longties with Chennai-based TVS MotorCompany in 1999-2000, after the five-year non-compete clause expired“

The Economic Times, 17 Dec 2009

Phased approach to de-risk entry; continuouslocalisation of operatingactivities

PwC

Au

toO

the

rs

Toyota

19

Investing to provide global servicelevels to high-end customers inChina

Strong partnering inIndia “Danone ends troubled Wahaha

venture --- China partnership wasplagued by disputes over drinksbusiness; cash payout will settle legalcases “

Wall Street Journal, 1 October 2009

We draw a number of key learnings from our experience withmarket entry

Section 2 – The challenge

• Align people. Get involved early to begin learning and developing relationships. Ensuresenior management stays involved and focused on the long-term rational

• Utilize light touch models. Test the market (e.g. exports, licensing)

• Don’t change the core. Understand what’s critical to the success of your core businessmodel and first replicate that in new markets. Limit localization decisions to non-criticalparts of the business model (but do make sure the business is tailored to the local market)

• Phase investment. Understand the timing of demand growth, the economics of your costto serve and the key step changes in capacity. Plan around capacity but build in flexibility

• Don’t be afraid to walk alone. Be clear about what you get from and provide to a partner.Understand the benefits and risk that a partner brings

20

• Invest in local deals capabilities. Be aware that deals in emerging markets are differentand harder than they are in home markets. Invest in emerging markets deal executioncapabilities if you’re going to pursue an acquisition

• Learn from Private Equity. Adopt relevant lessons from Private Equity from investmentstrategy to evaluation and exit

There are lessons to be learned from private equity tode-risk market entry

Investment strategy Criteria for consideration Partnering/ co-investment

Portfolio of investments withuncorrelated risks (e.g.multiple countries)

Private Equitymodel

Think about exit from day 1(how to get out if things gobadly)

Treat with caution (be clearwhy you’re partnering and doso carefully)

Create investment modelearly as a living document(how much money will itmake?)

Management and the boarddevelop strategy together(e.g. Work closely withemerging market managers)

Investment strategy Criteria for consideration Partnering/ co-investment

Investment evaluation Strategy Development

make?)

Impersonal and fact-based(avoid over-excitement)

Focus on cash (can be in thelonger term)

Getting financial systems rightand regular monitoring(emerging market accountingsystems are generally lesssophisticated)

emerging market managers)

Discussions Financial management Governance

21

“It is not the strongest of the species that survives, nor the“It is not the strongest of the species that survives, nor themost intelligent that survives. It is the one that is the mostadaptable to change.”

Charles Darwin

Structuring into BRIC CountriesEfficient tax planning

23

Emerging Markets – Proposed structures

Canco

Branch

Canada

BRIC

24

Issues:

• Registrations• Limits on activities• Staffing• Banking – Foreign Exchange

Emerging Markets – Proposed structures

CancoFinancing

Canada

BRIC

BRIC OperatingCompany

Equity Debt

LocalFinancing

?

25

Issues:

• Similar issues to setting up branchPlus

• Choice of legal entity• Minimum capital requirement• Repatriation limits• Withholding tax

Emerging Markets – Proposed structures

CancoFinancing

Canada

BRIC

Equity Debt

Foreign HoldingCompany

Equity Debt

26

BRIC

Issues:

Selection of foreign holding company• Treaty network• Substance – Mind and Management• Tax rate on local and foreign source income

BRIC OperatingCompany

Emerging Markets – Proposed structures

CancoFinancing

Canada

BRIC

Equity Debt

Foreign HoldingCompany

Equity Debt

27

BRIC

Issues:

• Set up of Bidco• Ability to merge/consolidate

Bidco

Target

Doing Business in Brazil

Forms of investment

• Branch – difficult to incorporate later• Branch – difficult to incorporate later

• Limited liability company – Sociedade Limitada – LTDA

• Corporation – Sociedade por Acoes – S/A

Repatriation

• Capital permitted

• Dividend – no w/h tax

Corporate tax

• Calendar year• Calendar year

• Rate = 15% plus 10 % surcharge = 25%

• Social Contribution Tax= 9% of profit.

28

Doing Business in Russia

Forms of investment

• Rep office – Accreditation• Rep office – Accreditation

• Branch – Registered

• Full and limited partnership

• Limited liability company

• Joint Stock company

Repatriation

• Dividends – 15% w/h tax

• Initial contribution – tax free• Initial contribution – tax free

Corporate tax

• 20%

29

Forms of investment

• Branch, Project and Liaison office

Doing Business in India

• Branch, Project and Liaison office

• Wholly owned subsidiary

• Joint venture

• Limited liability company

Repatriation

• Capital may be returned

• Dividend distribution tax = 15% plus surcharge ~ 16.6%

Corporate tax

• Resident company = 30% plus surcharge ~ 33.2%

PwC

• Resident company = 30% plus surcharge ~ 33.2%

• Non-resident company = 40% plus surcharge ~ 42.2%

30

Forms of doing business in China

Indirect investment forms

• Processing

• Representative Offices

• LicensingForeign Enterprise (“FE”)

PwC 31

Forms of doing business in China

Direct investment forms

• Equity joint ventures• Equity joint ventures

• Cooperative joint ventures

• Wholly foreign-owned enterprises

• Special purpose vehicles

◦ Service Company

◦ R&D centre

◦ Trading company in the FTZ

◦ Chinese Investment holding company

Foreign InvestmentEnterprise (“FIE”)

◦ Chinese Investment holding company

◦ Shanghai Regional Headquarters

32

Corporate tax in China

Standard rate = 25%

Special reduced rates in selected industries and geographies rangingSpecial reduced rates in selected industries and geographies rangingfrom 0% to 15%

33

Requirements for initial investment

• Currency conversion is regulated

• Cash or in-kind (within limits)

• Certified by a CPA

• Maintain separate accounts forcapital

• Technology agreements requireapproval

• Debt/equity ratio requirement

PwC 34

Repatriating capital

EJV – only on liquidation

CJV – agreement of partners and regulatory approvalCJV – agreement of partners and regulatory approval

WFOE – flexible

In all cases – sufficient foreign currency on hand

35

Repatriating earnings

Conditions

• Prior year’s losses made up• Prior year’s losses made up

• All taxes paid

• Director’s approval

• Approval to change currency

May be exempt from withholding

36

Suggested Tax Considerations for entering any BRICCountry

1. Ensure business case is well developed.1. Ensure business case is well developed.

2. Establish policies for employees assigned to destination country.

3. Complete due diligence on business partners.

4. Consider use of holding company.

5. Establish policy for the use of IP.

6. Determine optimal location.

7. Develop a capitalization strategy.

8. Develop transfer pricing policies.8. Develop transfer pricing policies.

37

Illustration of BRIC Growth – AutoIndustryAppendix 1Appendix 1

38

Illustration of BRIC Growth – Auto Assembly Outlook

For the first time in history, the number of vehicles produced in developing and emerging marketsin 2011 will be greater than the number of vehicles produced in mature markets.

20

30

40

50

60

Global: Light Vehicle Assembly by Market Type2000 – 2017 (millions)

SA

EU

NA

AP

Global: Contribution to Growth by Region2010 – 2017

China 38.5% India 12%

Brazil 6.4%

0

10

20

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Mature Emerging

0% 10% 20% 30% 40% 50% 60%

MEA

EE

Source: Autofacts 2011 Q4 Data Release

Russia 6.2%

Illustration of BRIC Growth – Auto Assembly Outlook

China’s assembly growth will exceed the combined growth of the remaining BRIC countries.

3.0

14.4

5.1

7.1

26.8

India

China

BRIC: Assembly Outlook by Country2010 vs. 2017 (millions)

1.3

3.1

3.3

5.1

0 3 6 9 12 15 18 21 24 27

Russia

Brazil

2017 2010

Source: Autofacts 2011 Q4 Data Release

Trends across emerging marketsAppendix 2

41

This is not just more of the same. Emerging markets will undergodramatic changes as the result of five key trends

Emergingmarketsmacrotrends

Urbanisation

Emergingmiddle class

Currencymovements

Changinglabour

markets

Emergingcompetitors

42

6

Urban population in emerging markets, 2009-2050

India, China, the ASEAN-6 and Nigeria will add 1.3bn urbanresidents between 2009 and 2050

5.20.5

0.4

0.20.1

0.9

0.4

2

3

4

5

6

Billio

ns

0.1

Nigeria

Brazil

0.6

By 2025, India isprojected to have 3mega-cities: Deli,Mumbai andKolkata

By 2025, China isprojected to have 5mega-cities:Shanghai, Beijing,

2.5

-

1

2009 urbanpopulation in

emerging markets

India China ASEAN-6 Africa Latin America Other emergingmarkets

2050 urbanpopulation in

emerging markets

Source: UN, World Urbanization Prospects The 2009 Revision

Shanghai, Beijing,Shenzhen,Chongqing, andGuangzhou

43

China and India will see strong growth in the number of middleand upper class households, with Shanghai and Mumbaigenerating 25m more of these households by 2025

Number of middle and upper class households in key cities*, 2008-2025

14.9

9.9

8.6

19.7

16.5

12.9

10.0 9.68.610

15

20

25

Nu

mb

er

of

ho

useh

old

s(m

)

Number of middleand upper classhouseholds, 2008

Both China andIndia will also seelarge growth inmiddle classconsumers insecond tier cities

3.6

1.4

4.1

0

5

Sao Paulo Shanghai Mumbai Paris Jakarta London

Nu

mb

er

of

ho

useh

old

s(m

)

Number of middleand upper classhouseholds, 2025

*Sample of growing cities in emerging markets and established European citiesSource: PwC Economics

Rank inworldpopulation2025

4 9 3 24 25 n/a

44

Indian and ASEAN labour markets are likely to become moreattractive relative to China

Emerging markets labour costs are lowest in Asianmarkets

Wage inflation is likely to see India and ASEANbecoming more competitive relative to China

11.3

10

15

20

25

Avera

ge

lab

ou

rco

sts

per

ho

ur

(US

$)

Average hourly labour costs (US$), 2010

UK - $24

India

China

40%

60%

80%

100%

%g

row

thin

lab

ou

rp

rod

ucti

vit

y,

2010-2

015

Changing labour dynamics, 2010-2015F

markets becoming more competitive relative to China

Indian and Thailandlabour markets arelikely to becomemore attractiverelative to China

PwC

6.4

3.8

2.6 2.2 1.8

0.7

0

5

Poland Brazil Russia India China Thailand Indonesia

Avera

ge

lab

ou

rco

sts

per

ho

ur

(US

$)

Source: EIU, Jan-Feb 2010

Indonesia

ThailandRussia

BrazilPoland

0%

20%

0% 20% 40% 60% 80% 100%

%g

row

thin

lab

ou

rp

rod

ucti

vit

y,

2010

% growth in nominal wages, 2010-2015

45

Emerging markets will produce a large number of new multi-nationals

180%

New mult-nationals 2010-2024

Bubble size reflectsnumber of new

New multinationals* in emerging markets bycountry, 2005-2009

KOR

ARG

MAL

RUS

BRA CHL

CHN

IND

SIN

VIE

ROM

POL

40%

60%

80%

100%

120%

140%

160%

180%

Gro

wth

inre

al

GD

Pfr

om

20

05

-20

09

to2

010

-20

14

number of newmultinationals between2010 and 2024

300

400

500

600

700

800

#o

fn

ew

mu

ltin

ati

on

als

PwC

UKRARG

MEX

HUN

ROM

0%

20%

40%

0% 20% 40% 60% 80% 100%

Growth in number of new multinationals between 2005-2009 and 2010-2015

-

100

200

2005 2006 2007 2008 2009

China India Other emerging markets

*Note: defined as a company that it undertakes green field investment abroad for the first timeSource: PwC Economics

46

Movements in exchange rates are likely to decrease the costadvantage of manufacturing in China relative to other emergingmarkets

% change2.0

Indexed global exchange rates (relative to US$), 2003-2015F

Forecast

2003-2010 2010-2015

75.3% (12.6)%

22.2% 18.5%

1.6% 9.3%

(5.4)% 2.2%

(8.3)% (1.3)%0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2003

=1

Brazil

China

India

UK

Indonesia

PwC

Source: PwC analysis, OANDA, EIU

(16.7)% (6.0)%

0.0

0.2

0.4

2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F

Vietnam

47

PwC has helped numerous companies expand

Case Studies

PwC has helped numerous companies expandinto emerging markets

PwC 48

Case Study 1: Understanding how quickly a domestic supply chaincould be established in India was critical to timing entry for anautomotive supplier.

India market entry

The client’s automotive turbocharger business is a leading globalsupplier of turbine wheels. It is a vertically integrated business, withcapabilities in-house to melt superalloys, the key input for turbochargers wheels. The superalloy business had recently beenreceiving a number of requests from customers in India. Thebusiness was considering an investment in India to satisfy thisdemand. The client hired PwC to test the business case.

Our key focus was on understanding the market potential. We foundthat while rapid growth in automobiles was driving demand forturbochargers, this didn’t necessarily equate to demand for superalloys. By speaking with automotive experts, and procurementalloys. By speaking with automotive experts, and procurementheads at the leading global turbocharger manufacturers, we mappedlikely movements in turbocharger production and themanufacturers’ sourcing strategies. We then looked at theinvestment plans of turbine wheel producers to understand thetiming of local demand.

We recommended a customer-led phased approach to enteringIndia. The client is currently exploring several options to do so.

49

Case Study 2: Assessment of the key competitive factors in theglassware industry highlighted alternative investmentopportunities in China

China commercial diligence and location study

Libbey is a major US manufacturer of table glassware, covering ahuge range of beverage glasses for home and trade use. Theglassware industry had become more global, and competitors suchas Luminarc of France and Pasabahce of Turkey were expandingrapidly into international markets.

Libbey had been presented with an investment opportunity inChina, which we helped them to assess through a commercial duediligence investigation. In glassware, distance from the source ofraw materials and energy prices are key competitive factors. Weconsidered the cost of this opportunity versus alternative locations,determined that other locations would offer better long term costs,materials availability and market access, and then conducted amaterials availability and market access, and then conducted asearch that resulted in a short-list of proposed alternative locations.

After helping Libbey negotiate investment incentives with approvalauthorities, the Langfang development zone in between Beijing andTianjin was selected, and the plant opened in March 2007 with aninvestment of almost US$60million.

50

Case Study 3: Understanding the China strategy of the automotiveassembler, and how they planned to address the market was key indrawing up a list of acquisition targets

China M&A Strategy

Our client was the independent parts aftermarket brand for a US‘big three’ automotive assembler. In China, most vehicle assemblershad managed to establish ‘closed loop’ parts distribution systems,meaning that service centres only installed parts made by thevehicle manufacturer, but this situation was changing and the clientwanted to quickly establish a presence in the independentaftermarket, as car owners were increasingly going outside theclosed loop to lower costs.

PwC helped the client to assess how this market could be addressed,how it was likely to evolve, consider a range of partnering strategiesoutside of existing parts distributors, and finally help draw up ashort list of acquisition targets, by first understanding how the clientshort list of acquisition targets, by first understanding how the clientwould address the market, and then assessing targets by how closelythey fit the client’s strategy and how likely it would be for a deal toclose. The work was made more difficult by the generally poorquality of market information available, which meant that we had totriangulate information sources to get as reliable a data set aspossible. We then went on to provide financial due diligenceservices to the deal.

51

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We want to do business with you.We want to do business with you.

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Contacts

Mark WaltersTax PartnerTax Partner(519) 570 5755mark.g.walters@ca.pwc.com

Vanessa IarocciDirector, Consulting & Deals(416) 941 8352

Eric CastonguayEric CastonguayManaging Director, Consulting & Deals(416) 815 5094

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