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10 Recommandments For
Conducting Business in China
Keith Lomason
Executive Director — China
Who is Magna?
Auto supplier – ranking in world (sales*)
#4
Sales growth – CAGR since 1994
22%
Content per vehicle – CAGR since 1994**
18%
Market cap
*Automotive News ranking
**Excluding vehicle assembly sales
~$7.5B
2004 Sales Growth
$20.7B
35%
22%
CAGR
$1.9B
93
94
95
96
97
98
99
00
01
02
03
04
Magna International Inc.
2005 Group Structure
Organization Structure
COSMA
MAGNA
DONNELLY
MAGNA
STEYR
MAGNA
POWERTRAIN
DECOMA
INTIER
INTIER
INTERIORS
SEATING
MAGNA
CLOSURES
A Global Presence for
Global OEMs*
Magna Facilities
222 Production
Canada
62
USA
82,700
22,000
10
53 18
18,200
81 25
Mexico
13
10,800
S. America
3
500
*As at September 2005
8
58 Engineering, R&D
Magna Employees
7
2,400 Asia Pacific
28,800
Europe
Magna International, China
Magna International, China
Coordinate Market Development,
Purchasing, and SQA activities for
all groups that wish to participate.
Develop and maintain high-level
contacts with customers,
government officials and other key
players related to our success.
Provide short and long-term office
space and services for Magna
groups.
Magna Int’l
China office
Magna in China 2006:
2,500 Employees, 19 Facilities
MAGNA POWERTRAIN
11 Magna Powertrain, Changzhou
6 Litens Automotive, Suzhou
7
MAGNA International, CHINA
Shanghai, Pudong
16
INTIER INTERIORS
13CIAI, Changshu
16CIAI, Changchun
15Interlink, Suzhou
Tianjin
18
8
COSMA
8 MTTS Tianjin, Tianjin
(Operational 7/2006)
14 Cosma, Anting
9
10
INTIER SEATING
1 Intier JiaoYun Automotive
Seating, Anting (Previously SLASSCO,
Shanghai)
17Intier-Das Mechanisms, Suzhou
19Intier-Das Seating, Fuzhou
18Intier-Das Seating, Beijing
4
Chengdu
Wuhan 12
11
10 14
13
15 6 1
17 5
2
4 7 9
19
5
MAGNA CLOSURES
Intier Automotive Co., Kunshan
Guangzhou 3
New/Operational Facilities 2006
2
MAGNA DONNELLY
Optera Touch Screen Co., Shanghai
Auto Elect Tech. Co., Shanghai
Fu Hua Window Systems Co.
– Glass JV, Shanghai
MD Mirrors, Shanghai
MD Mirrors, Guangzhou
3
MAGNA STEYR
MSF
Engineering
Center, Wuhan
12
Global Production
Shift Towards Lower Cost/Higher Growth Markets
80
70
ME/Africa
Millions
60
S. Am erica
50
South Asia
40
C/E Europe
30
China/T-w an
20
W. Europe
10
Japan/Korea
0
N Am erica
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
The industry enters a new stage of utilizing new capacity in Emerging Markets
Mature markets will grow more slowly as production is displaced
Demand diversification in non-mass markets (domestic vs. export) allows for more
sustainable demand
The Labor Cost Shift
Growth of Sourcing from ULCCs and LCCs
HCCs
Average of $23-27 per hour
Inflation of 2-3% per annum
LCCs
Average of $8-10 per hour
Inflation of 3-4% per annum
ULCCs
Average of $3 per hour
Inflation of 6-7% per annum
Hourly Compensation Including Benefits US$ 2009
Source: Boston Consulting Group, EIU, S&P, other sources
Global platform rationalization
enables for a shift to Ultra-Low
Cost Countries (ULCCs)
Several OEMs looking to ‘escape’
competitive High Cost Countries
(HCCs)
A number of situations where
Low Cost Countries (LCCs) will
lead the charge into export
markets
Why China?
1990’s
2000’s
Lower Costs
• Market Share
Market Potential
• Scattered opportunities
PRC Govt. & Industry
- Grow with existing
customers
PRC Govt. & Industry
- Grow with new
customers
“good deal”
- Grow into new
products/capabilities
hungry for investment
hungry for investment
partnerships offered
The “Ten Recommandments”
Preface:
Every investment must be:
– Evaluated on its own merits
– Structured in the best way to benefit your company
Adhering to as many of the following suggestions as
possible will help ensure a successful operation in the
China environment
Recommandment One:
Investment Vehicle = WFOE
Exception should be made ONLY if partner provides strategic
Market Share
There are many functions you can start in China today that do not
require a local contact:
– Purchasing
– Engineering
– Sales and Marketing
Your group will probably be better served in the long run if you
commit to the cost of a sales office for 2-3 years to gain business as
a WFOE than you will be if you rush to market via a partnership
built on a desire to have a presence in China
Recommandment Two:
Location = Central Government Economic Development Zones (CEDZ)
Maximum tax rate of 15%*
Central government approved and managed
Listed in WTO documents (legal structure)
More developed infrastructure than most other areas
55 locations – there is one near where you want to be!
Comparing Economic Development Zones and Non-EDZs Investment and
Operational Costs
INVESTMENT INFORMATION FOR KEY AUTOMOTIVE
LOCATIONS IN CHINA
Area Name
Customers
Corp.
Income
Tax
Purchase
Land use
30 Years
USD/Sqm
Standard Factory
cost USD/sqm
Build
Lease/yr
72.5-96.7 17.4-23.2
Utilities
LOCAL Salary USD/year
Water
Elect.
Nat. Gas
$/Met ton $/kw hour
$/m3
GM
25,000
Dept Mgr
Office
5,800 2200-3000
General
Prod
Social
Benefits as
Technical % of Salary
Anting, Shanghai
SGM, SVW
24%
25
0.199
0.104
0.157
Changchun, Jilin CEDZ
FAW-VW
15%
20-33
60-100
26
0.56
0.08
0.18
5000
Chongqing CEDZ
Changan Suzuki & Ford
15%
27
60
7.2-21.7
0.33
0.055
0.12
12000 4500-7500 2200-4500
Changshu
CAIP
15-24%
9-15
72-97 11.6-21.7
0.26
0.06
0.29
4500
Changzhou
CZYJ Auto Component Co.
15%
20
72-97 11.6-21.7
0.21
0.06
0.22
Fuzhou, Fujian CEDZ
Southeast Motors
15%
10-30
97-145 0.97-1.45
0.23
0.06
Guangzhou, Guangdong CEDZ
Honda, Toyota
15%
30-50
96-360 21.7-50.7
0.15
0.07
Haikou, Hainan CEDZ
Mazda
15%
13
4.3-10.1
0.16
0.07
1200
870
1450
30%
Kunshan, Jiangsu CEDZ
SGM, SVW
15%
18
60-120 11.6-17.4
0.19
0.07
N/A
20,000
7,000
4,000
2,500
3,500
30%
Liuzhou, Guangxi CEDZ
SGM Wuling
15%
11-22
3.6-6.0
0.19
0.06
0.49
3,500
2,500
1,500
1,500
2,000 27.4-28.7%
Nanjing, Jiangsu CEDZ
Iveco, Ford, Fiat
15%
18-21.8
96
15.7
0.32
0.08
N/A
5000
4000
3300
1300
2500
25%
Pudong, Shanghai CEDZ
SGM, SVW
15%
73-108
240
26-53
0.16
0.07
0.31
30,000
9,000
6,000
3,000
5,000
38.80%
Puxi, Shanghai
SGM, SVW
32%
63
483
44
0.27
0.07
Shenyang, Liaoning CEDZ
Brilliance, BMW, SGM
15%
13
66-100
1.2-1.8
0.08
0.05
Songjiang, Shanghai
SGM, SVW
24%
25-30
180
25.2
0.18
Suzhou, Jiangsu SEDZ
near SGM, SVW
15%
38701
240
21.6-36
0.28
Wuhu, Anhui CEDZ
Chery, Hyundai
15%
11
60
14.5
Yantai, Shandong CEDZ
SGM DongYue
15%
12
85
1.2
2500
3000
7500 1750-2600 1160-1450
10000
N/A
6000
3500
5000 2600-3200
900-1200 1750-2200
1900
2200
870-1450 1200-2200
720-960
45.50%
43.50%
40%
960-1200
30-42%
870 1160-1740
30-42%
1350
1800
37-40
1500-1800 2200-3000
37.50%
30,000
9,000
6,000
3,000
5,000
60%
N/A
5000
4000
1750
1150
1450
42.50%
0.07
N/A
12,500
7,500
3,000
0.06
0.28
14500
12000
1850
0.16
0.06
0.42
4,000
1,800
1,450
0.22
0.07
0.29 4000-6000 2500-3500 2000-2900
1050-1450 1750-2500
30%
1350
1950
14-20%
850
1,185
42%
870-1150 1450-1750
32%
Social Benefit Standards
2004
Standard ------------------------------INSURANCES AS A % OF SALARY-----------------------------Housing *Total(%)
Area
Pension Unemployment Medical Accident Maternity Fund(%) of Salary
Anting, Shanghai
22.50
2.00
12.00
1.00
1.00
7.00
45.50
Changchun, Jilin CEDZ
22.00
2.00
12.00
0.50
N/A
7.00
43.50
Changshu
18.00
2.00
8.00
0.4-0.8
1.00
8-12 29.4-41.8
Changzhou
18.00
2.00
8.00
0.4-0.8
1.00
8-12 29.4-41.8
Chongqing CEDZ
20.00
2.00
9.00
2.00
N/A
7.00
40.00
Fuzhou, Fujian CEDZ
18.00
2.00
6-8
0.5-1.5
0.70
10.00 37.2-40.2
Guangzhou, Guangdong CEDZ
18.00
2.00
8.00
0.50
1.00
8.00
37.50
Haikou, Hainan CEDZ
20.00
2.00
8.00
N/A
N/A
30.00
Kunshan, Jiangsu CEDZ
20.00
2.00
6.00
1.10
0.90
8.00
30.00
Liuzhou, Guangxi CEDZ
20.00
2.00
4.00
0.5-1.8
0.90
27.4-28.7
Nanjing, Jiangsu CEDZ
14.00
2.00
8.00
0.3-0.8
1.00
25.3-25.8
Pudong, Shanghai CEDZ
20.00
2.00
8.00
0.60
N/A
8.00
38.80
Puxi, Shanghai
24.00
2.00
7.00
N/A
N/A
15-20
48-53
Shenyang, Liaoning CEDZ
23.50
2.00
8.00
1
N/A
8.00
42.50
Songjiang, Shanghai
18.00
2.00
8.00
0.5-1.5
0.70
29.2-30.2
Suzhou, Jiangsu SEDZ
4.50
1-2
4.5-9
0.45
3.40
77.5-8213.85-19.35
Wuhu, Anhui CEDZ
23.00
2.00
8.50
N/A
N/A
7.50
41.00
Yantai, Shandong CEDZ
21.00
2.00
8.00
0.6-1.2
0.90
6.00 38.5-39.1
* Total (%) of Salary represents money that company must pay to government on behalf
of the employees
This % is applied to the employees total cash compensation for calculation purposes, but
is paid by the company
While there is quite a bit of disparity between regions today, this gap will close over time
Recommandment Three:
If you must use JV, Use One Partner for all China Activity
Reduces intellectual property exposure
Lower costs for overseas support, training,
engineering, etc…
Visteon “best practice” comparison from
beginning of China activity
General motors following practice once
investment rules changed, allowing using SAIC
together to buy out other China partners
Recommandment Four:
Quadruple Your Normal Training Plan
Education different from that in North America
or Europe
– Learning through memorization and repetition vs.
Free thinking and creativity
High turnover - especially in coastal areas
In many cases, must continually break “bad
habits”
Recommandment Five:
Go Greenfield - Eventually
Very few existing structures are adequate for
long-term use
– Land cost in China is still relatively cheap, but
will only continue to climb
Operations can start in rented pre-fab facility,
but plan on move to “purpose-built”
– More efficient
– Higher quality
– Better locations (CEDZ)
Recommandment Six:
Go Quickly – Or Wait Until 2010
Tax reduction/holiday for foreign invested
enterprises being reduced – may be eliminated
– Even if you have no imminent production, you
can establish a company in a CEDZ, from
which you can begin your operations
Large volumes overall, but extremely
fragmented and therefore difficult to
justify investment
Recommandment Seven:
Where Possible, Exploit Export Opportunities
Fragile domestic market – it is growing, but has
plateaus, is very fragmented and first-time buyers cause
swings
Improves economies of scale
Quality requirements for exports typically higher than
domestic requirements resulting in better product than
domestic competitor
Savings at home may help meet customer demands*
– *Recent and ongoing revaluation of RMB will make
exports less profitable and imports more reasonable
Recommandment Eight:
Due Diligence & Business Plan
Profits will be harder to come by in future
–
–
–
–
Market growth is slowing
Vehicle prices are dropping
Price pressures on OE’s passed on to suppliers
Payment terms being extended
Hype must be ignored – know what to expect and have
robust business plans – most competitive market in the
world right now
Get ready for OE & Supplier shakeout and consolidation
(20% during next 5 years?)
Recommandment Nine:
Utilize External Experts When Necessary
Good legal advice is critical
– Keep it focused on key issues
– Have solid exit/takeover clauses for JVs
– Ensure all tax advantages are utilized
Understand that negotiations with a PRC partner begin
AFTER the contracts are signed – not a ploy, simply a
difference in cultures
Establish your own local resources group
– Maybe 1 person, maybe 100
– Specific to your needs
– Local Networking can not be over emphasized
– Can monitor swiftly changing environments
Recommandment Ten:
Rethink Your Normal Manufacturing Process
Overcapacity exists at the OEMs, but is even more prevalent at the
Tier-2 level and below
OEMs do NOT pay for most tooling up front but want it amortized –
this cost can be pushed down to the component supplier
If there is overcapacity on a component your company normally
manufactures, you will not be able to compete on price – but the
OEMs (especially foreign invested) need your engineering and
supplier management capabilities
Suppliers and sub-suppliers will need constant assistance with SQA
and development activities
+ management costs/- capital & component costs
THANK YOU