GLOBAL INSIGHT AUTOMOTIVE SEMINAR

GLOBAL INSIGHT AUTOMOTIVE SEMINAR 12 JUNE 2007 OKURA GARDEN HOTEL SHANGHAI Do Diesel Cars Have a Future in China and Other Asian Markets? Tianshu Xin Director, Global Technical Research

A Reminder: Compared to Conventional Gasoline +35% better fuel economy Diesel 35% less CO 2 emission +25% better torque Copyright 2007 Global Insight, Inc. 2

Contents Diesel Cars Current Status in Asia Japan South Korea India China China Is Moving Towards Regulatory Solutions Fuel Efficiency and CO 2 Challenges Hybrid an Alternative for China? Outlook for Diesel Cars in Asia Copyright 2007 Global Insight, Inc. 3

Japan Diesel Challenges Though 99.7% of oil supply relies on import, in which 90% from Middle East, diesel vehicles face significant difficulties in Japan NOx (g/km) Yen/L 0.6 0.5 0.4 0.3 0.2 0.1 0 150 140 130 120 110 100 90 Japan 2005 EU 2005 0 0.01 0.02 0.03 0.04 0.05 0.06 PM (g/km) EU 2000 Japan 2002 Regular gasoline Diesel < 20% Difference 80 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Bad customer perception due to lost street credibility in Japan in the past Short of governmental subsidy, and diesel has less than 20% price advantage as a result of a series of tax changes Stringent Emission Standards (Enact of Automotive NOx law in 1992 and then revised in 2002 for PM control) Driving pattern undermine fuel economy advantage of diesel; added cost to diesel vehicle to meet emission standards Japanese OEMs try to differentiate themselves from European counterparts by adopting hybrid technology Copyright 2007 Global Insight, Inc. 4

South Korea Diesel Opportunities Ban on diesel car sales has been lifted since January 2005 Diesel fuel was 40% cheaper than petrol, but gap has narrowed to ~12% in 2007 due to reduction in government subsidies Consumers are becoming less resistant to diesel engine powered vehicles Most SUVs and MPVs sold are diesel Higher torque Lower fuel consumption Copyright 2007 Global Insight, Inc. 5

Diesel Popularity in India India follows Europe rather than Asian neighbours in terms of diesel penetration Diesel fuel prices about 30% lower than petrol Diesel = sturdy engines, high mileage and low consumption Perception of diesel cars: economic and efficient Highest proportion of car buyers are in the lower income brackets For many Indians diesel is preferred fuel choice, as it meets the single biggest value ethic of Indian consumers, i.e. VALUE FOR MONEY Copyright 2007 Global Insight, Inc. 6

Diesel Passenger Car Production in Asia Diesel Passenger Car Penetration 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2004 2005 2006 2007 South Korea India Japan China Copyright 2007 Global Insight, Inc. 7

Diesel Difficulties in China Consumer No incentives for buying a diesel. Higher initial outlay. and noisy, black smoke, low class status Acceptance and education need to be addressed DIESEL Manufacturer Significant opportunities exist in markets like China and a profitable business case needs to exist and mature diesel technology Government support MUST be a factor Copyright 2007 Global Insight, Inc. 8

Current Diesel Players in China 12% H eilon gjiang 10% Harbin 8% 6% Xinjiang Gansu Inner Mongolia Beijing Shanxi Hebei Tianjin C hangch un S h en y an g Liaoning Yantai Jilin 4% 2% 0% Qinghai Henan Tibet Shaanxi Hubei Xining Sichuan Yunnan N ingxia Chengdu Wuhan Chongqing Guizhou Guiyang Guangxi Hunan Anhui Nanchang Jiangxi Guangdong Guangzhou SEDAN SUV MPV Hong Kong Nanning Macau Hefei Jian gsu Nanjing H a ng zho u Fujia n Zhejiang Shanghai Fuzhou Taiwan Hainan Haikou Copyright 2007 Global Insight, Inc. 9

Oil Production vs Consumption in China Oil Production vs Consumption Gasoline Consumption 600 Others 14% Million Tons 500 400 300 200 100 0 1998 1999 2000 2001 2002 2003 2005 2010 2015 Production Consumption Others 77% Automotive 86% Diesel Consumption Automotive 23% Copyright 2007 Global Insight, Inc. 10

No Significant Difference in Fuel Price 6.0 ~60% Increase in Pump Price 5.0 4.0 Gasoline 3.0 2.0 Diesel 1.0 5% 2000 2001 2002 Feb-03 May-03 Jul-03 Dec-03 Mar-04 May-04 Aug-04 Mar-05 May-05 Jun-05 Jul-05 Mar-06 May-06 0.0 Copyright 2007 Global Insight, Inc. 11 RMB

Monthly Incremental Running Costs for Consumers 800 700 600 162/mth RMB 500 400 300 200 100 0 191/mth 2003 Jun-07 30% Fuel Tax At 15,000 km per year, and fuel consumption of 8.5L/100km Copyright 2007 Global Insight, Inc. 12

Contents Diesel Cars Current Status in Asia Japan South Korea India China China Is Moving Towards Regulatory Solutions Fuel Efficiency and CO 2 Challenges Hybrid an Alternative for China? Outlook for Diesel Cars in Asia Copyright 2007 Global Insight, Inc. 13

China Is Moving Towards Regulatory Solutions Sept 2004 EURO II Emission Standard Implementation May 2004 Overloading Restriction 1994 Auto Industry Policy Jan 2005 New Official Vehicle Classification System June 2004 New Auto Industry Policy Fast Growing Market Oct 2004 Auto Loan Policy Stabilising with Sustainable Growth April 2005 Issued EURO III & IV Emission Standard Plan April 2005 New Local Content Regulation Auto Distribution Regulation Oct 2005 Hybrid Standards Jul 2005 Phase I Fuel Consumption Standard Apr 2006 New Consumption Tax Dec 2006 New Fuel Price Policy 2007-2010 Fuel Tax Tax advantages for newly defined independent Chinese brands Jun/Jul 2007 National Climate Change Programme Phase II Fuel Consumption Standard Euro III Emission Standard Copyright 2007 Global Insight, Inc. 14

Stricter Emission Standards Drive Advanced Technologies in China CHINA (2000) Enforcement of more stringent emission standards drives China towards advanced emission technologies CHINA (2004) EMS Beijing/Guangzhou/Shenzhen 2005/2006 Turbocharger EGR CHINA (Jul 2007) 350ppm Big Cities will be earlier CHINA (Jul 2010) 50ppm Advanced after treatment Good quality diesel EU 5(Sept 2009) CHINA (2012?) Copyright 2007 Global Insight, Inc. 15

Emission and Diesel Quality Key Timing Emission Standards 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Europe Euro III EuroI V Euro V China Euro I Euro II Euro III Euro IV Korea Euro II Euro III Euro IV Euro V India Euro I Euro II Diesel Quality: Sulphur content in ppm Euro III* Euro III/IV* 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Europe 500 50 10 China 2000 800 350 50 Korea 500 500 50/15** 15 India 2500 500 350* 350/50* * Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad, Pune, Surat, Kanpur and Agra ** Seoul Copyright 2007 Global Insight, Inc. 16

Contents Diesel Cars Current Status in Asia Japan South Korea India China China Is Moving Towards Regulatory Solutions Fuel Efficiency and CO 2 Challenges Hybrid an Alternative for China? Outlook for Diesel Cars in Asia Copyright 2007 Global Insight, Inc. 17

China s First National Climate Action Plan To cut back its greenhouse gas emissions by 950 million tonnes by 2010, with national energy supply diversification Police Harbin and improved efficiency figuring prominently in the Yantai Financial incentives on environmental-friendly, Shanxi small engine size vehicles Xinjiang Gansu Qinghai LONG-WAIT Tibet implementation of fuel Shaanxi tax Nanjing Hefei Hubei Encourage development of Hybrid Chengdu and Electric Wuhan vehicles Implementation strategy Guangzhou To enforce implementation of Fuel Economy Standard Hong Kong Nanning Macau Xining Sichuan Chongqing Inner Mongolia Beijing Hunan Jiangxi Guizhou Guiyang To accelerate development of Yunnan Diesel vehicles Guangxi Guangdong N ingxia Henan Hebei Anhui Nanchang Tianjin Jiangsu C hangch un S h en y an g H a ng zho u Fujian H eilon gjiang Liaoning Zhejian g Shanghai Fuzhou Jilin Taiwan Hainan Haikou Copyright 2007 Global Insight, Inc. 18

Fuel Economy Standards - China Weight KVW<=750kg 750kg<KVW<=865kg 865kg<KVW<=980kg 980kg<KVW<=1090kg 1090kg<KVW<=1205kg 1205kg<KVW<=1320kg 1320kg<KVW<=1430kg 1430kg<KVW<=1540kg 1540kg<KVW<=1660kg 1660kg<KVW<=1770kg 1770kg<KVW<=1880kg 1880kg<KVW<=2000kg 2000kg<KVW<=2110kg 2110kg<KVW<=2280kg 2280kg<KVW<=2510kg 2510kg<KVW 1/7/2005 7.2 7.2 7.7 8.3 8.9 9.5 10.1 10.7 11.3 11.9 12.4 12.8 13.2 13.7 14.6 15.5 L/100km 1/1/2008 6.2 6.5 7.0 7.5 8.1 8.6 9.2 9.7 10.2 10.7 11.4 11.5 11.9 12.3 13.1 13.9 CO2 (g/km) 1/1/2008 148 155 167 179 193 205 219 231 243 255 272 274 284 293 313 332 Applicable to both gasoline and DIESEL vehicles VW Jetta 1.6L Gasoline 146 g/km CO 2 1.9L Diesel 123 g/km CO 2 * NEDC Cycle ** Gasoline: 1.0L/ 100 km corresponds to 23.9 grams / km of CO 2 Diesel: 1.0L/ 100 km corresponds to 26.8 grams / km of CO2 Copyright 2007 Global Insight, Inc. 19

Fuel Economy Challenges Become Clearer USA JAPAN CHINA EUROPE CAFE (Corporate Average Fuel Economy) Classified by weight WITH adoption of CAFE method in a weight class Classified by weight WITHOUT adoption of CAFE method in a weight class NO direct fuel economy legislation Would raise the corporate average fuel economy standard for cars to 35 mpg by 2020, from 27.7 mpg in 2007, and 4% annual increases thereafter To introduce stricter fuel efficiency regulations by 2015 with average 10% improvement over 2010 target When will the next round of tighter fuel economy standards be (2012/2013)? Since voluntary agreement 2008 target of 140g/km will NOT be met, the EC is pushing for a binding legislation of 120 g/km target for 2012 Equivalent CO 2 TARGETS / EXPECTED TARGETS (g/km) 2010: 220 2015: 143 2008: 210-240 2012: 120 2020: 140? 2020: 115? 2020:???? 2020: 95? Vehicle Fuel Efficiency Standards will continue to strengthen towards a common goal, with a focus on CO 2 and emissions Copyright 2007 Global Insight, Inc. 20

How China Will Respond to Future Challenges Technologies Available diesel technology Gasoline technology revolution Costly hybrid option Stringent Fuel Economy Standard Government Support Fuel tax Financial incentives to OEMs and Consumers Consumer Perception and Education Purchasing behaviour Copyright 2007 Global Insight, Inc. 21

Contents Diesel Cars Current Status in Asia Japan South Korea India China China Is Moving Towards Regulatory Solutions Fuel Efficiency and CO 2 Challenges Hybrid an Alternative for China? Outlook for Diesel Cars in Asia Copyright 2007 Global Insight, Inc. 22

Payback Scenario Price Differential Hybrid Honda V6 Gasoline Consider the following Honda V6 Hybrid Purchase Price: $26,700 Performance: 0-60mph 7.5s COMBINED MPG: 25.5 Purchase Price: $30,140 Performance: 0-60mph 8.0s COMBINED MPG: 33.0 + $3,440 + 7.5 mpg benefit Copyright 2007 Global Insight, Inc. 23

Payback Scenario Price Differential Mileage to break even 14 14 Oil price fluctuation 12 12 10 10 8 8 6 6 4 4 2 2 0 10,000 15,000 20,000 25,000 30,000 0 2.0 2.5 3.0 3.5 4.0 Payback (Years) Payback (Years) At $3 per gallon At 15k miles per year Copyright 2007 Global Insight, Inc. 24

Payback Scenario With Narrowing Differential 140 120 100 80 60 40 20 0 Mileage ('000) $3,440 $3,000 $2,500 $2,000 Payback Mileage Payback Years At $3 per gallon / 15k mileage per year 10 9 8 7 6 5 4 3 2 1 0 Years Copyright 2007 Global Insight, Inc. 25

Hybrid Benefits Are Highly Related to the Duty Cycle of the Vehicle Fuel Economy Improvement Then compared to each other, hybrids are significantly more sensitive to the driving cycle Micro Hybrid Diesel Mild Hybrid Full Hybrid Urban Suburban Highway Source: Adapted from Eberhardt: Is the U.S. Light Duty Diesel Ready for Prime Time? SAE World Congress, April 16, 2007 Copyright 2007 Global Insight, Inc. 26

Contents Diesel Cars Current Status in Asia Japan South Korea India China China Is Moving Towards Regulatory Solutions Fuel Efficiency and CO 2 Challenges Hybrid an Alternative for China? Outlook for Diesel Cars in Asia Copyright 2007 Global Insight, Inc. 27

Diesel Environment Comparison Europe South Korea India China Diesel Technologies Available Available Available Available End Users Portfolio Private Private Private Institutions Private Gasoline vs Diesel Price Difference 21% (1995) 15% (2007) 38% (2004) 15% (2007) 43% (2005) 37% (2007) 5% Government Policy Support Support Support Uncertain Consumer Perception Copyright 2007 Global Insight, Inc. 28

Diesel Opportunities in Asia JAPAN Growing Hybrid support and strong R&D know-how SOUTH KOREA Strong Diesel after 2005 Hybrid led by Hyundai Lack of diesel technology and infrastructure CHINA Opportunity existing!! Diesel driven by European OEMs and Suppliers INDIA Price sensitivity!! Very strong Diesel market Copyright 2007 Global Insight, Inc. 29

Diesel Passenger Car Market Share 60.0% 50.0% Europe 40.0% 30.0% 20.0% 10.0% South Korea India China 0.0% China 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Copyright 2007 Global Insight, Inc. 30 Diesel Passenger Car Penetration

GLOBAL INSIGHT AUTOMOTIVE SEMINAR 12 JUNE 2007 OKURA GARDEN HOTEL SHANGHAI Thank You Tianshu Xin Director, Global Technical Research E-mail: tianshu.xin@globalinsight.com