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We have derived the information and statistics set forth in this section and elsewhere in this [REDACTED] from various official and government publications, and publicly available market research sources. We have also derived information and statistics from the market research report prepared by Roland Berger (the “Roland Berger Report”). We commissioned Roland Berger, an independent market research and consulting company, to analyze and report on the industry we operate or plan to operate in for the period from 2009 to 2018. The Roland Berger Report has been prepared independently without our influence. We agree to pay Roland Berger a fee of RMB1.23 million, of which RMB0.49 million has been paid. We believe the fee is consistent with market rates. Founded in 1967, Roland Berger is one of the world’s leading strategy consultancies that supports leading international corporations, non-profit organizations and public institutions in a broad range of management issues.
In preparing its report, Roland Berger has undertaken both primary and secondary research. Primary research involved in-depth interviews with leading industry participants and industry experts. Secondary research involved reviewing company reports, independent research reports and data based on Roland Berger’s own research database. Projected data was obtained via analyzing historical data sourced from macroeconomic data as well as specific industry-related drivers. Unless otherwise noted, all data and forecast in this section are provided by Roland Berger.
Roland Berger adopted the following assumptions while making projections on the macroeconomic environment, the global and China’s automobile market, the global automotive glass market and the automotive glass markets in China, North America and Russia: (i) Both the Chinese and global economies will maintain steady growth in the forecasted period; (ii) the Chinese and global social, economic and political environments will remain stable in the forecasted period, thus ensuring the continuous development of the automobile industry; (iii) there will be no wars or otherwise large scale disasters during the forecasted period; and (iv) the Chinese road infrastructure and road conditions will continue to improve and thus will gradually reduce the replacement rate of automotive glass.
Our Directors confirmed there were no adverse changes in the market since the date of the Roland Berger Report which may qualify, contradict or have an impact on the information in this section. We believe that the sources of the information set forth in this section are appropriate and we have taken reasonable care in extracting and reproducing the information. We have no reason to believe that the information is false or misleading in any material respect or that any fact has been omitted that would render the information false or misleading in any material respect. Neither we, the [REDACTED], the [REDACTED], the [REDACTED] nor any of other parties involved in the [REDACTED] has independently verified, or make any representation as to, the accuracy of the information derived from official government or other third party sources. The information may not be consistent with, and may not have been compiled with the same degree of accuracy or completeness as, other information compiled within or outside China, and accordingly, should not be unduly relied upon.
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AUTOMOBILE INDUSTRY OVERVIEW Global Automobile Industry Global automobile sales increased from 66.0 million units in 2009 to 85.3 million units in 2013, representing a CAGR of 6.6%. Roland Berger projects global automobile sales to increase to 105 million units in 2018, representing a CAGR of 4.2% from 2013 to 2018, primarily driven by the economic recovery in the United States and Europe and the resultant increase in demand for automobiles, as well as the growing demand for automobiles in the emerging economies of Asia and South America. Global automobile production increased from 61.7 million units in 2009 to 87.6 million units in 2013, representing a CAGR of 9.2%, and is expected to grow to 107 million units in 2018, representing a CAGR of 4.1% from 2013 to 2018. The following charts set forth the geographic breakdown of the global automobile market by production volume in 2012 and 2013.
2012 2013
Other Other France regions Russia regions China 2.4% 18.1% 2.4% 17.3% China 22.8% 25.2% Russia Spain 2.6% 2.4%
Thailand Canada 2.8% 2.7% Canada United Thailand 2.9% States 2.8% United 12.3% Mexico Mexico States 3.5% 3.5% 12.7% Brazil Brazil Japan Japan 4.0% India 4.2% Germany 11.6% India South Germany 10.7% 4.9% South 6.7% 4.5% Korea 6.5% Korea 5.1% 5.4%
Source: IHS, China, the Roland Berger Report
The following charts set forth the production volumes of the top automobile manufacturers in 2012 and 2013.
2012 2013
Other Toyota Other Toyota manufacturers 11.7% manufacturers 11.5% 26.6% 27.4% Volkswagen Volkswagen 11.0% 10.9% Suzuki Suzuki 3.3% General 3.1% General PSA Motors PSA Motors Peugeot 9.5% Peugeot 9.3% Citroën Citroën 3.6% Hyundai 3.4% Hyundai Honda 9.0% Honda 8.9% 4.9% 4.9% Renault/ Fiat Ford Renault/ Fiat Ford Nissan 5.3% 6.6% Nissan 5.2% 7.0% 8.5% 8.4%
Source: IHS. CAMM, the Roland Berger Report
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China’s Automobile Industry
In 2009, China surpassed the United States and became the world’s largest automobile market in terms of sales volume. China’s automobile sales increased from 13.6 million units in 2009 to 22.0 million units in 2013, representing a CAGR of 12.7%, and are expected to grow to 31.4 million units in 2018, representing a CAGR of 7.4% from 2013 to 2018. The following chart sets forth the historical and projected automobile sales in China for the periods indicated.
4,000 3,143 2013-18E CAGR = 7.4% 2,948 3,000 2,769 2,600 704 2009-13 CAGR = 12.7% 2,394 688 2,198 670 651 1,807 1,850 1,931 634 2,000 621 1,364 607 680 629 526 2,260 2,439 (10,000 units) 1,000 1,949 2,099 1,577 1,760 1,127 1,221 1,324 838 0 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Passenger Vehicle (PV) Commercial Vehicle (CV)
Source: the Roland Berger Report
According to Roland Berger, the following are key drivers of the growth of China’s automobile industry:
• China’s economic growth. China’s economic development has been and will continue to be the primary driver of the growth of China’s automobile market. According to the National Bureau of Statistics, China’s nominal GDP increased from RMB33.5 trillion in 2009 to RMB56.9 trillion in 2013. China’s economic growth has improved disposable income per urban resident, from RMB17,175 in 2009 to RMB26,955 in 2013, representing a CAGR of 11.9%. According to the International Monetary Fund, China’s real GDP grew at an annual rate of 9.2% from 2009 to 2013 and is projected to grow at an annual rate of approximately 7.0% within the next five years, higher than the average annual global economy growth rate of below 4.1% during the same period.
• Increasing urbanization. China’s increasing urbanization is expected to continue to drive China’s economic growth and social development. According to the Yearbook of Regional Economic Development, China’s urbanization rate increased from 46.6% in 2009 to 53.7% in 2013 and is projected to reach 54% by 2015 and 60% by 2020. Urbanization will create job opportunities, stimulate domestic demand, and drive development of China’s basic industries, which in turn will increase automotive sales in China, particularly in the second and third tier cities.
• Improved road infrastructure. China’s improving road infrastructure as a result of increased government spending on road construction and upgrading will also drive demand for automobiles. The total length of highway in China increased at a CAGR of 10.9% from 65,100 km in 2009 to 98,460 km in 2013. China’s current road network density of 45 km per 100 sq.km. remains lower than that of 67 km per 100 sq.km for the United States, 89 km per 100 sq.km. for Japan and 180 km per 100 sq.km. for Germany, indicating room for further improvement.
• Development of China’s automotive finance market. The growth of China’s automotive finance market has increased access to financing for vehicle purchases and has resulted in increased sales. China’s automotive finance market is in an early stage of development with a penetration rate of 20% in 2013 as compared with 9% in 2009. The penetration of automotive finance in China was much lower than that of 80% for the United States, India and Brazil, 60% for Japan and Western Europe and 40% for Russia, indicating strong growth potential.
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• Supportive government initiatives. The automobile industry is a core pillar of the Chinese economy. Since 2009, the PRC government has introduced a number of initiatives to support the automobile industry, including the “Rural Subsidy Program For Vehicle Purchases”, “New Energy Vehicle Subsidy Policy” and “Old-For-New Trade-In Auto Program”, which have contributed to the rapid growth of automobile sales in China from 2009 to 2012. The impact of supportive government initiatives on China’s automobile industry has become less significant in recent years, primarily due to the expiration of some of these supportive initiatives, and the restrictions on vehicle purchases imposed by China’s local governments to control air pollution and traffic congestion. AUTOMOTIVE GLASS INDUSTRY OVERVIEW The automotive glass market can be divided into two segments: the Original Equipment Manufacturers (OEM) market for glass products sold to automobile manufacturers principally for installation on new vehicles, and the Aftersales Replacement Glass (ARG) market for glass products sold to aftermarket suppliers for replacement purposes. Global Automotive Glass Industry Overview As the world’s economy recovers from the global financial crisis in 2008, global demand for automotive glass increased from 294 million sq.m. in 2009 to 415 million sq.m. in 2013, representing a CAGR of 9.0%. Roland Berger expects global automotive glass demand to increase to 528 million sq.m. in 2018, representing a CAGR of 4.9% from 2013 to 2018. The following chart sets forth the historical and projected global demand for automotive glass for the periods indicated.
6 2013-18E CAGR = 4.9% 5.28 4.99 4.73 2009-13 CAGR = 9.0% 4.44 1.05 4.15 4.22 0.97 3.96 0.93 4 3.56 3.73 0.90 0.87 0.76 0.84 2.94 0.71 0.74 0.69 4.23 2 3.80 4.02 3.31 3.35 3.54 (100 million sq.m.) (100 million 2.85 2.99 3.20 2.25
0 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
OEM ARG
Source: the Roland Berger Report The global OEM automotive glass market grew to 331 million sq.m. in 2013, representing a CAGR of 10.1% from 2009 and accounting for 79.8% of the global automotive glass market. The growth of the global OEM automotive glass market outpaced the global automobile market during the same period, principally driven by increased market demand for larger windshields and the increasing popularity of vehicle sunroofs. The global OEM automotive glass market is expected to grow to 423 million sq.m. in 2018, representing a CAGR of 5.0% from 2013 to 2018. The global ARG automotive glass market grew to 84 million sq.m. in 2013, representing a CAGR of 5.0% from 2009, and is expected to grow to 105 million sq.m. in 2018, representing a CAGR of 4.6% from 2013 to 2018. Global automotive glass sales increased at a CAGR of 7.6% from US$10.6 billion in 2009 to US$14.2 billion in 2013. Market prices for automotive glass depend on a number of factors, including raw material costs and market supply and demand. The average price of automotive glass decreased from US$36.30 per sq.m. in 2009 to US$34.10 per sq.m. in 2010, primarily reflecting the impact of the global financial crisis in 2008. The average price of automotive glass has stabilized at US$34 per sq.m. since 2010, primarily as a result of the recovery of the global automobile market and the closure of several unprofitable automotive glass manufacturing facilities.
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The global automotive glass market is highly concentrated with the top four players accounting for approximately 77% of total global automotive glass sales volume in 2013. The following chart sets forth the market share of the world’s top automotive glass manufacturers. Other 13% AGC Guardian 22% 5% Xinyi 5% Fuyao 20% Saint Gobain 16%
NSG 19%
Source: the Roland Berger Report
In 2013, our sales represented 20% of the total global automotive glass sales. Among the top four global automotive glass manufacturers, we are the only automotive glass manufacturer that specializes in automotive glass. In 2013, we derived 94.9% of our revenue from automotive glass sales, as compared with 23% for AGC, 48% for NSG and 5% for Saint Gobain. In 2013, we had operating profit margin of 22.2%, whereas the glass manufacturing divisions of AGC, NSG and Saint Gobain had operating profit margin of 3.5% or less. Trends of the Global Automotive Glass Industry
• Increasing popularity of vehicle sunroofs. The demand for vehicle sunroofs is expected to grow, driven by the increasing emphasis on driving comfort.
• Increased usage of glass on vehicle. Automotive glass usage per vehicle increased at a CAGR of 1.4% over the past decade, and is expected to continue to increase in the future, primarily driven by the increase in tilt angle on front windshield for greater vision space, as well as the demand for larger sunroofs.
• Improved automotive glass features and functions. Smart glass products with value-added features and functions to improve energy efficiency and driving comfort and safety, such as electrically-switchable smart glass, water-repellent glass, and head-up display (HUD), are becoming widely used in vehicles.
• Increasing automotive glass modularization. The demand of global leading automobile manufacturers for automotive component modularization is increasing as they seek to reduce production costs, optimize supply chains and enhance quality control. This is expected to drive automotive glass manufacturers to increase the value-add of automotive glass products by incorporating additional value-added processes, such as pre-assembly and encapsulation. Entry Barriers to the Global Automotive Glass Industry
The significant barriers to entry into the automotive glass industry include the following:
• Manufacturing and sales network. The difficulty of quickly establishing a manufacturing network covering major automobile production bases and a comprehensive sales network present barriers to entry into the automotive glass market. A manufacturing and sales network is crucial to meeting OEM customers’ delivery requirements cost-effectively and expanding the customer base in the ARG automotive glass market.
• Advanced technology requirement for the production of automotive safety glass with multiple functions. Rapid evolution of glass functions intensifies competition among
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manufacturers and presents entry barriers to new players with insufficient research and development capabilities. In addition, automotive glass manufacturers must meet the stringent technological requirements imposed by the regulatory authorities. • Intensive capital investment. In Europe, the United States and China, the establishment of an automotive glass manufacturing facility with production capacity of over one million pieces generally requires investment of approximately C40 million to C60 million, US$70 million and RMB200 million, respectively. In addition, to ensure the adequate and timely supply of high-quality float glass for automotive glass production, automotive glass manufacturers generally establish high-quality float glass production lines near their automotive glass manufacturing facilities, which require additional investment of approximately C100 million to C150 million and RMB300 million for each facility in Europe and China, respectively. • Product certification. Automotive glass manufacturers must obtain various national safety and quality certifications for their automotive products in the countries and regions where they sell products, including China’s CCC, US’s DOT, EU’s ECE, Japan’s JAS and Brazil’s INMETRO. China’s Automotive Glass Industry Benefiting from the rapid growth of China’s automobile market, the demand for automotive glass in China increased from 60.1 million sq.m. in 2009 to 96.5 million sq.m. in 2013, representing a CAGR of 12.6%, and is expected to increase to 150.6 million sq.m. in 2018, representing a CAGR of 9.3% from 2013 to 2018. The following chart sets forth the historical and projected demand for automotive glass in China for the periods indicated.
18,000 16,000 15,061 2013-18E CAGR = 9.3% 13,939 14,000 12,850 1,734 11,800 1,575 12,000 10,715 1,425 2009-13 CAGR = 12.6% 9,645 1,277 10,000 8,612 1,134 7,939 8,141 997 859 8,000 6,005 648 748 6,000 542 12,364 13,327 (10,000 sq.m.) 10,523 11,425 4,000 8,648 9,581 7,291 7,393 7,753 2,000 5,463 0 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
OEM ARG
Source: the Roland Berger Report
China’s OEM automotive glass market grew to 86.5 million sq.m. in 2013, representing a CAGR of 12.2% from 2009 and accounting for 90% of China’s automotive glass market by sales volume. Between 2013 and 2018, China’s OEM automotive glass sales volume is expected to grow at a CAGR of 9.0%, outpacing the expected growth of China’s automobile production, primarily driven by increased usage of automotive glass per vehicle, resulting from the increasing popularity of vehicle sunroofs as well as the increasing demand for luxury vehicles and value-added vehicle options and features. China’s ARG automotive glass market grew to 10.0 million sq.m. in 2013, representing a CAGR of 16.5% from 2009, and is expected to further grow to 17.3 million sq.m. in 2018, representing a CAGR of 11.7%. China’s automotive glass sales (including imports but excluding the sales of sunroof glass products) amounted to RMB11.5 billion in 2013, representing a CAGR of 13.2% from 2009 to 2013 and accounting for 13.1% of the global automotive glass market. Roland Berger expects China’s automotive glass market will continue to grow, primarily driven by (i) the increase in second-time vehicle purchases, (ii) the increased disposable income per urban resident in China and the increasing demand for luxury vehicles and value-added vehicle options and features, (iii) preferential tax treatment for automotive glass manufactures that are certified as high technology enterprises, and (iv) the PRC government’s stimulus policies to encourage product innovation by automotive glass manufactures.
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As a net exporter of automotive glass, automotive glass production in China amounted to 135 million sq.m. in 2013, representing a CAGR of 12.4% from 2009. Automotive glass manufacturers generally locate their manufacturing bases near automotive OEMs due to the limitation of effective transportation radius, and to ensure reliable and timely delivery of automotive glass products to OEM customers. The following map sets forth the footprints of leading automotive glass manufacturers in key automobile manufacturing bases in China.
Jilin
福耀 Fuyao
旭硝子 AGC
板硝子 NSG
聖戈班 Saint Gobain
信義 Xinyi
上海耀皮 Shanghai Yaopi
北京 吉林 Beijing Jilin
天津 遼寧 Tianjin Liaoning
安徽 山東 Anhui Shandong
廣西 上海 Guangxi Shanghai
河南 湖北 Henan Hubei
四川 廣東 Sichuan Guangdong
重慶 Chongqing
Source: the Roland Berger Report
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The average price of automotive glass sold in China decreased from RMB116.4 per sq.m. in 2009 to RMB115.6 per sq.m. in 2010, principally due to a decrease in new vehicles model launches in China and an increase in sales of mini commercial vehicles. Automotive glass used on new vehicle models generally have higher selling prices compared to those used on vehicles in later stages of the model cycle. Driven by the PRC government’s fiscal policies to incentivize the purchase of light commercial vehicles, mini commercial vehicle sales as a percentage of total automotive sales in China increased from 11.4% in 2008 to 14.5% in 2009. Automotive glass for mini commercial vehicles generally have relatively lower selling prices than passenger vehicles in China. As a result of the increase in the number of new vehicle model launches in China driven by economic recovery and the increase in passenger vehicle sales as a percentage of total automotive glass sales in China, the average price of automotive glass increased slightly from RMB117.7 per sq.m. in 2011 to RMB119.0 per sq.m. in 2013.
China’s automotive glass market is highly concentrated with the top five manufacturers accounting for approximately 89% of China’s automotive glass sales. China imported a small quantity of automotive glass each year primarily for use on imported vehicle models and prototype vehicles. Excluding imported automotive glass, the top five manufactures accounted for 95% of China’s automotive glass sales in 2013. The following chart sets forth the share of manufacturers in China’s locally manufactured automotive glass market by sales in 2013.
Other Shanghai Yaopi 2% 3% NSG 4% Xinyi 7%
Saint Gobain Fuyao 9% 63%
AGC 12%
Source: the Roland Berger Report
Automotive glass for passenger vehicles accounted for 66% of China’s automotive glass market and 81% of China’s OEM automotive glass market in 2013 by sales volumes. China’s passenger vehicle glass market has a higher market concentration than the commercial vehicle glass market, primarily due to rapid market growth and relatively higher technological entry barriers. China’s passenger vehicle glass market is dominated by large automotive glass manufacturers with strong technological, production and marketing capabilities, including us, AGC and Saint Gobain, which accounted for 72%, 11% and 9%, respectively, of total passenger vehicle sales in China.
We are one of the very few automotive glass manufacturers in China who have obtained product certification from European, American, Japanese and South Korean automobile manufacturers. Our customer base includes all of China’s top 10 passenger vehicle manufacturers in China, as well as other well-known automobile manufacturers such as BMW, Mercedes, Bentley, Rolls Royce and Porsche. The following table sets forth the customer relationships between the top three automotive glass manufacturers and the top ten passenger vehicle OEMs in China.
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Auto Glass Manufacturer Fuyao AGC Saint Gobain
SGM ߛߛߛ FAW VW ߛߛ SVW ߛߛ Beijing Hyundai ߛߛߛ Dongfeng Nissan ߛߛߛ Chervy ߛ FAW Toyota ߛߛ Changan Ford ߛߛ Geely ߛߛ Great Wall ߛߛ
Source: the Roland Berger Report
Float glass and PVB are the two primary raw materials used in automotive glass production. Float glass generally account for approximately 35% to 40% of the production costs of automotive glass. Due to oversupply, the price of float glass has declined by approximately 30% since 2010. At present, the price of mainstream float glass used in automotive glass production is approximately RMB55 to RMB65 per weight box. The price of 4 mm float glass is around RMB220 to RMB280 per sq.m. The following chart indicates the price trend (indexed to 100 at inception) of float glass in China.
Index
180 169 164 160 140 140 126 123 124 120 100 104 100
80
60
40 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2013 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Dec
Source: Wind, the Roland Berger Report
In light of the fluctuations in float glass market price, stable and adequate supply of high-quality automotive grade float glass not only reduce the market risk exposure of automotive glass manufacturers but also enable them to lower their production costs through improving production yields. There are approximately 100 automotive grade float glass production lines in China, 20% of which are capable of producing high-quality automotive grade float glass. In 2013, we contributed to 36% of the total high-quality automotive grade float glass production capacity in China, while our competitors Shanghai Yaopi, Xinyi, Saint Gobain, G-Crystal and AGC accounted for 13%, 13%, 13%, 7% and 6% of total high-quality automotive grade float glass production capacity in China.
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PVB generally accounts for 20% to 25% of the automotive glass production costs. The market price of PVB used in automotive glass production is approximately RMB50 to RMB60 per sq.m. Although the market price of PVB has slightly increased in the past three years, automotive glass manufacturers generally enter into long-term supply contracts with the top three global PVB manufacturers, Dupont, Sekisui and Eastman, to secure stable PVB supply and to manage their exposure to fluctuations in PVB prices. Therefore, the PVB costs of automotive glass manufacturers with high-volume PVB purchases remained relatively stable.
North America’s Automotive Glass Industry
The demand for automotive glass in North America (including the United States, Canada and Mexico) increased from 47.8 million sq.m. in 2009 to 80.5 million sq.m. in 2013, representing a CAGR of 13.9%, and is expected to further increase to 93.9 million sq.m. in 2018, representing a CAGR of 3.1% from 2013 to 2018. The United States is the largest automotive glass market in North America. In 2013, the demand for automotive glass in the United States amounted to 56.2 million sq.m., accounting for 70% of total demand for automotive glass in North America. Total automotive glass sales in the United States amounted to US$3.0 billion in 2013, accounting for 21% of global automotive glass sales during the same period. In 2013, the United States relied on imports to meet 13% of its domestic demand for automotive glass, and exported 8% of domestically-produced automotive glass.
Russia’s Automotive Glass Industry
Driven by the recovery of Russia’s economy from the global financial crisis, and the resulting increased demand for automobiles, the demand for automotive glass in Russia increased at a CAGR of 17.3% from 6.9 million sq.m. in 2009 to 13.1 million sq.m. in 2013. The demand for automotive glass in Russia is expected to grow to 17.8 million sq.m. in 2018, representing a CAGR of 6.4% from 2013, primarily driven by the establishment of manufacturing bases in Russia by global leading automobile manufacturers, and the Russian government’s policies and initiatives to promote the development of Russia’s automobile industry. Between 2009 and 2013, Russia’s automotive glass production grew at a CAGR of 13.7%, while automotive glass import grew at a CAGR of 22.2%. Total automotive glass sales in Russia amounted to US$330 million in 2013, accounting for 2.3% of global automotive glass sales during the same period.
As of December 31, 2013, AGC was the only global automotive glass manufacturer with operating automotive glass manufacturing facilities in Russia and had a market share of 49% by sales in 2013. Salavatsteklo, a local manufacturer in Russia, supplied automotive glass to 25% of Russia’s local automobile manufacturers and had a market share of 11% by sales in 2013. In 2013, Russia relied on imports of automotive glass from manufactures such as Fuyao, Xinyi, Hanglass, NSG and Sisecam, to meet approximately 29% of its domestic demand for automotive glass. In recent years, the globally leading automotive glass manufacturers, including us, have begun to establish manufacturing facilities in Russia. As the trend of automobile production localization continues in Russia, domestic production in Russia is expected to constitute an increasing percentage of Russia’s domestic demand for automotive glass.
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