Banking on China’s Auto Market 19 April 2005 Karen Adams Senior VP Corporate Banking Head of Automotive HSBC China

Consumer Spending to Take Over…  Tight Credit Policy in China  “Engineered Soft Landing”  As investment growth eases, the consumer will take over  What will consumers spend their money on? CARS!

China Auto Sales  China’s auto market continues to grow quickly  Continued investment by the OEMs

China’s Auto Market: Trends  Price cuts & new model introductions  Decreased OEM margins  Components suppliers squeezed  Higher technology  Fuel efficiency & environmentally conscious design  Shift from institutional to private buyers  Auto finance market development

Who Buys Cars in China Today?  Institutional buyers: SOEs, government bodies, military, fleets (taxis)  China’s car market has “led with luxury” Who Will buy in Future?  Shift from institutional to private buyers  China’s car market will “follow with affordability”

What Will they Buy…? (Source: Automotive Resources Asia) Segment‘000s% change in 2004Market Share Micro %6.2% Subcompact %26.2% Sedan %39.6% Full-Size Sedan %16.5% Luxury Sedan %2.9% MPV/SUV %8.6% Total %100%

Our Forecast for China’s Car Market…  2005: a year of identifying winners & losers  Growth of small car segment (< 1.3L)  We will see another 15% overall growth in 2005  Increasing to 20% growth in 2006  Levelling off at 10-12% growth  Auto Finance Market: slow start followed by rapid growth  By 2015: 50% of cars sold in China will be financed  Emergence of 1-2 domestic global players by 2015

Risks for the Foreign Investor in China?  Overcapacity / Squeezed Margins  CPI softening but PPI still rapid  Competing products & services for consumer’s dollar  Failure of weaker domestic manufacturers  Failed “soft landing” / stangnant consumer spending Main Risk: Absence

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