Keith Lomason Executive Director — China 10 Recommandments For Conducting Business in China

Who is Magna? Auto supplier – ranking in world (sales*) #4#4 Sales growth – CAGR since % Content per vehicle – CAGR since 1994** 18 % Market cap ~$7.5B *Automotive News ranking **Excluding vehicle assembly sales

2004 Sales Growth $1.9B $20.7B 22% CAGR 35%

Magna International Inc Group Structure COSMA MAGNA DONNELLY MAGNA STEYR MAGNA POWERTRAIN DECOMA INTIER INTERIORS INTIER SEATING Organization Structure MAGNA CLOSURES

A Global Presence for Global OEMs* Magna Facilities 222 Production58 Engineering, R&D Magna Employees 82,700 S. America3 Europe8125 Asia Pacific107 28,800 2, *As at September 2005 Canada628 USA5318 Mexico13 22,000 18,200 10,800

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 International, CHINA Shanghai, Pudong 7 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 10 9 INTIER SEATING Intier JiaoYun Automotive Seating, Anting (Previously SLASSCO, Shanghai) Intier-Das Mechanisms, Suzhou Intier-Das Seating, Fuzhou Intier-Das Seating, Beijing MAGNA CLOSURES Intier Automotive Co., Kunshan MAGNA POWERTRAIN Magna Powertrain, Changzhou Litens Automotive, Suzhou INTIER INTERIORS CIAI, Changshu CIAI, Changchun Interlink, Suzhou MAGNA STEYR MSF Engineering Center, Wuhan COSMA MTTS Tianjin, Tianjin (Operational 7/2006) Cosma, Anting Wuhan Tianjin Guangzhou Chengdu New/Operational Facilities

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 2.1% CAGR 3.7% CAGR 3.0% CAGR Global Production Shift Towards Lower Cost/Higher Growth Markets

The Labor Cost Shift Growth of Sourcing from ULCCs and LCCs 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 Source: Boston Consulting Group, EIU, S&P, other sources Hourly Compensation Including Benefits US$ 2009 LCCs Average of $8-10 per hour Inflation of 3-4% per annum HCCs Average of $23-27 per hour Inflation of 2-3% per annum ULCCs Average of $3 per hour Inflation of 6-7% per annum

Why China? 1990’s Lower Costs Market Potential PRC Govt. & Industry hungry for investment “good deal” partnerships offered 2000’s Market Share Scattered opportunities -Grow with existing customers -Grow with new customers -Grow into new products/capabilities

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 The “Ten Recommandments” Preface:

Recommandment One: 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 Investment Vehicle = WFOE

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! Location = Central Government Economic Development Zones (CEDZ) Recommandment Two:

Comparing Economic Development Zones and Non-EDZs Investment and Operational Costs

Social Benefit Standards 2004 * 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

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 Three: If you must use JV, Use One Partner for all China Activity

Quadruple Your Normal Training Plan Recommandment Four: 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”

Go Greenfield - Eventually Recommandment Five: 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)

Go Quickly – Or Wait Until 2010 Recommandment Six: 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

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 Where Possible, Exploit Export Opportunities Recommandment Seven:

Due Diligence & Business Plan Recommandment Eight: 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?)

Utilize External Experts When Necessary Recommandment Nine: 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

Rethink Your Normal Manufacturing Process Recommandment Ten: 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

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