? ? ? ? ? ? ? ? ? ? China automotive and components market29 2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.China Automotive and Components Market 20051 2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.PrefaceChinas automotive sector has been on a rollercoaster ride. From heady growth in 2003 to handwringing over sluggish growth and price wars in 2004, the market has been anything but predictable. To date 2005 has been a relatively positive year for the industry, yet views on the long-term development of the market cover a wide range of opinions. The auto sector in China is still developing and is far from becoming one single, seamless and integrated market providing plenty of ammunition to support the positions of both market optimists and pessimists.It is against this backdrop that we launch our third annual review of the automotive and components market in China. For this 2005 report, we have chosen to focus on three topics that are critical to the future development of the sector in China, and which we feel may present opportunities for existing market participants as well those who have yet to enter the market:?Passenger car exports?Component and aftermarket sector?Car-related servicesIn conducting the study we drew on a number of industry sources and literature, as well as discussions with industry participants in China in August and September 2005 to capture a practical “bottom-up” view of market developments. Key findings arising from our analysis include:?Overall a positive outlook for Chinas long term growth, but a challengingenvironment for some as the fragmented and crowded market matures and consolidates?Exports should not be seen as an instant cure for the over-investment that hastaken place in China exports are coming, but significant hurdles must be overcome?OEMs are focusing increasingly on improving local component sourcing andthe aftermarket, and component exports may rise as a result?Demand for automotive related services is set to grow as China embraces thecar cultureWe hope that this report provides insights and clarity in a market that is changing rapidly.Paul Brough Head of Financial Advisory Services KPMG in China and Hong Kong SARNovember 20052China Automotive and Components Market 2005 2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.?The information in this report is of a general nature and is not intended toaddress the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.?KPMG does not accept responsibility to any party that relies oninformation or views expressed in this report; companies should seek professional advice and conduct a thorough assessment of the particular situation prior to making any business decision.?Our report is based on information available to us at the end of September 2005. Our information and analysis is based on research conducted from July to September 2005.China Automotive and Components Market 20053 2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.ContentsPageMarket development4Passenger car export segment9Autoparts and aftermarket segment15Car-related services204China Automotive and Components Market 2005 2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.Market developmentChina, still a growth marketIn recent years, Chinas automotive industry has experienced tremendous growth to become one of the leading automotive markets globally with sales and production of passenger cars reaching 2.3 million in 2004. China is now the fifth largest market in terms of sales, and is expected to overtake Japan by 2010 to take the number two position1.Compared to other major automotive markets, however, China still has ample room for growth. Chinas car penetration is one of the lowest in the world, fuelling optimism from local and foreign investors alike over the attractiveness of the sector in the long run.Growth vs. penetration of global passenger car markets (2004)Note:Size depicts sales units of market (millions) Source:Euromonitor reports, 2004; EIU Viewswire; KPMG analysisAfter doubling sales in 2003, passenger car sales slowed in 2004, due in part to government measures to cool the market. Though growth in China has slowed down, it is still relatively robust at an estimated 14 percent per year in the long term, compared to marginal growth in other mature markets. Growth will continue to