InterChina Strategy | Corporate Finance Auto Sector Group www.InterChinaConsulting.com Exclusive China Partner of www.InterChinaPartners.com Index • Sector Dynamics 1 • Our Auto Services & Team 2 • Perspectives On China’s Auto Sector 3 • Consulting Cases 4 • Deal Tombstones 5 Confidential © InterChina 2 Summary: Faster and more sophisticated in this maturing No. 1 auto market globally • Still driven by China’s megatrends (urbanization) • OEM will grow at 3-4%. Local leaders are Identify specific new Continued consolidating and trading up (Geely,G.Wall,Chang’An). opportunities (NEV, AD, AF, growth, • Foreign Component Manufacturers planning double digit growth. Capitalize on better quality demand, LW etc.) and with the right Market finally time of window to enter pays for Green China trends and revamped localized (good Market enough, local R&D) product portfolios. Quality. • Increasing pressure on cost/price, quality, service, R&D. Find the right approach for inorganic growth in ICE consolidation and faster • Emerging local players (currently, too many, entry into new opportunities. future consolidation to come). Change in sector Speeding up status quo with uncertainty for foreign OEMs and China as suppliers. Out-of-box strategy development for traditional NEV- Global • Accelerated development through government Autonomous support and increased customer acceptance. business with step-change Innovation • BEV / PHEV are the key focus. drivers (e.g. deregulation in center • Autonomous/ connected driving early local AF). innovation trade ups. Localize operations and production, acquisition of • Likely to be a growth driver in next 3-5 years. • Many MNC players are forecasting high double local companies to be ‘more Tomorrow’s digit growth. Chinese’. Aftermarket battle field • Distribution and service capability will be key to success. Deal with cost inflation for both short-term optimization and long-term strategic • Smaller, low-quality players face challenges; moves. Aggressive natural attrition and now open to Sale outs. • Consolidation. Shift to quality, Environment and scale benefits international players. M&A (both inbound and “Re Emergence” Consolidation • Steady M&A and JV activity, mainly focusing outbound), JV and tech of the Joint on “Access to Chinese OEMs”. transfer for various Venture inorganic approaches. Confidential © InterChina 3 Source: InterChina Interviews and Analysis Global Weighting: In both PV and CV, China takes a key role globally PV Production China vs Global Heavy Truck Production China vs Global Bus Production China vs Global (Unit: million vehicles) (Unit: million vehicles) (Unit: million vehicles) 73.5 4.2 4.1 0.36 0.32 58.2 3.0 ROW 0.26 46.0 ROW ROW 2.3 2.3 China 0.18 (54%) (55%) 0.16 China 24.8 (56%) China (45%) 0.08 3.1 13.9 (34%) 0.6 (30%) (7%) (24%) (19%) 2005 2010 2017 2005 2010 2017 2005 2010 2017 Note: The definition by OICA is slightly different than CAAM in China. For both truck and bus sectors, the statistics above use OICA figures globally and in China. In Truck sector, it includes vehicles intended for the carriage of goods. Maximum authorised mass is over the limit (ranging from 3.5 to 7 tons) of light commercial vehicles, including tractor vehicles designed for towing semi-trailers. In Bus sector, Buses and coaches are used for the transport of passengers, comprising more than eight seats in addition to the driver's seat, and having a maximum mass over the limit (ranging from 3.5 to 7 tones) of light commercial vehicles. Confidential © InterChina 4 Source: OICA, CAAM China Prospects: Likely further growth in ownership (though well below the levels of developed countries by 2035) will support the long-term development of China’s auto industry Global Comparison of Auto Penetration and GDP 650 Cars owned per Cars 1,000 Italy 600 Canada Australia 550 Germany 500 United Kingdom France 450 Japan 400 USA S1 2035: 350 5-year disposal scenario people in 2015 300 S3 2035 South Korea S2 2035: 250 7-year disposal scenario S2 2035 China 2020 200 S3 2035: 10-year disposal scenario 150 S1 2035 100 (Refer to the last slide) India China 2015 50 0 0 10,000 20,000 30,000 40,000 50,000 60,000 GDP per capita measured at purchasing power parity in 2015 (USD) Source: Chinese Yearbook, World Bank, OICA, Trading economics, various other statistics collected by InterChina Confidential © InterChina 5 Global Gravity: Both the OEM production and the after-market value chains will be the global No 1 with 1/3 of global share China PV production will still experience Ownership in 2035 will provide the next relatively strong growth, with the growth rate momentum for the market growth fluctuating around the GDP growth rate China’s PV Production – History & Forecast China’s PV Ownership – History & Forecast Unit: million cars Unit: million cars 45 350 33 220 24 160 14 58 4 19 2005 2010 2016 2022E 2035E 2005 2010 2016 2022E 2035E CAGR 29% 10% 5% 3% CAGR 25% 18% 5% 4% Confidential © InterChina 6 Source: CAAM, InterChina Interviews and Analysis Emerging Battlefields: Sector step-changes (e.g. NEV, AD, AF, LW etc.） bringing both opportunities and challenges require tailor-made solutions in China China has a huge market for …it asks for FIEs to think globally these emerging tech market, but while acting locally not an easy one… Dynamic regulatory environment (new policies, Global and In-depth deregulation etc.). China Strategy China Market Parity Assessment Immature but changing pricing mechanism. Investment Vehicle & Government Localized solutions required. Partner Lobbying Selection Growing Chinese competition. Multiple tech routes for cars, On-going Operational but also along the supply chain. Competitive- Improve- ness ments Other challenges (e.g. infrastructure etc.) Note: NEV = New Energy Vehicle, AD = Autonomous Driving, AF = de-regulated after-market, and LW = Lightweight Tech Confidential © InterChina 7 Inorganic Growth: Cross-border transactions in automotive sectors is still a hot area Volume of cross-border automotive deals in China Representative Recent Transactions 18 17 15 15 14 Sep. 2015 The electronic vehicles manufacturer NextEV 10 10 Asset deal secured a funding led by 9 USD 500 m US investment firm Sequoia Capital and Chinese firm Joy Capital. 2010 2011 2012 2013 2014 2015 2016 2017 Cooper Tire & Rubber Jan. 2016 Co acquired 65% stake in Qingdao Ge Rui Da Value of cross-border automotive deals in China 65% Rubber Co Ltd, a (RMB m) USD 92 m manufacturer of truck and bus radial tire tires based in Shandong. • Nio deal: RMB 3205 m 5,312.0 (USD 500 m) • Others: RMB 2107 m Jun. 2017 Daimler AG announced 2,263.0 1,875.8 the acquisition of a 1,513.0 1,661.0 1,229.4 1,180.0 Minority minority stake in Beijing USD 92.61 m Electric Vehicle Co. The 176.5 deal has been approved by NDRC. 2010 2011 2012 2013 2014 2015 2016 2017 Source: FactSet, Mergermarket, Bloomberg, EMIS Deal Watch, InterChina Analysis Confidential © InterChina 8 Index • Sector Dynamics 1 • Our Auto Services & Team 2 • Perspectives On China’s Auto Sector 3 • Consulting Cases 4 • Deal Tombstones 5 Confidential © InterChina 9 Service Needs (1/2): Our strategy and corporate finance teams support our client’s profitable top-line growth along the value chain of auto components and services • What could be the “realistic” opportunity scale and the “right” time of window to enter (feasibility from all aspects e.g. regulatory, value-chain wise, competition, technically Business Opportunity etc.) Assessment (esp. • How to deal with dynamic and less transparent regulatory environment in decision- in emerging making, and in effective communication of China reality back to HQ battlefields*) • How to shortlist on the “right” tech to go forwards among various competition tech, which is often influenced by the drivers beyond tech advantages • How to adapt the offerings and positioning to echo the needs in this maturing auto market Consolidate • How to develop in-China-for-China capability and capacity to deal with the speed of Commercial Strategy market development in China • How to profitably work with Chinese OEMs with more weighting in ICE and NEV but with rather different client behavior than JV OEMs Capture • How to capture adjacent product opportunity into emerging battlefields Component • How to defend the existing portfolio against the threat from new battlefields (e.g. NEV Opportunity might make some ICE components redundant) Note: The emerging battlefields refer to for example NEV (New Energy Vehicle), AD (Autonomous Driving), AF (de- regulated After-Market), LW (Light Weight tech and materials) and Service etc. Confidential © InterChina 10 Service Needs (2/2): Our strategy and corporate finance teams themes support our client’s profitable top-line growth along the value chain of auto components and services • How to revamp the business model in China, adapting to the new trends in China (e.g. from multi-step distribution model in aftermarket to one-step model with efficiency and sustainability) Revamp Service • How to develop out-of-box initiatives to outperform the competition, (e.g. alliance with Strategy retail for growth, or distribution platform model in aftermarket, or diversified channels in auto assistance) • How to revamp or optimize the route-to-market structure and partners, to respond to the new differentiation needs • How to capture the growth opportunity leveraging the sector’s consolidation trend? Speed-up via • How to conduct bolt-on acquisition for further growth Inorganic • How to develop JV (OEMs, other partners with synergy) to accelerate the growth Approach • How to know and access below-the-radar targets or non-traditional-type targets to enter into emerging battlefields Practical • How to develop new sourcing partners to deal with further localization needs Investment • Sourcing best practice benchmarking Support • How to divest the periphery assets, which is less fit with the core China strategy Note: The emerging battlefields refer to for example NEV (New Energy Vehicle), AD (Autonomous Driving), AF (de- regulated After-Market), LW (Light Weight tech and materials) and Service etc.