Future Powertrains for China

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Ricardo lc 2009RD.08_057505.02Christian.Koehler Ricardo.com

Future Powertrains for China

Running out of Fuel?

Presentation Document

13th

September 2009

Christ ian Koehler

Managing Director Asia

Ricardo Strategic Consulting


2/20

Ricardo lc 2009Confidential Christian.Koehler Ricardo.com

The invisible hand of the government firmly directs the

development of the Chinese automotive market

China Future Powertrain

Source: Public domain, Ricardo analysis

Cut Vehicle Purchase Tax

Lower the purchase tax on

cars with engines under1.6 litre from 10% to 5%

from Jan 20 to Dec 31

2009

Subsidy for Rural Vehicle Purchase

Allocate 5 billion Yuan to

subsidize rural vehicle purchasesfrom March 1 to Dec 30 2009

Farmers who replace their three-

wheeled vehicles and outdated

trucks with smaller ones that

have an engine capacity of lessthan 1.3 litre, are eligible for

subsidies

Subsidy for Scrapping Old Vehicles

Allocate 1 billion Yuan to provide

subsidies for scrapping old vehicles

A further 4 billion Yuan is allocated

from June 1 2009 to May 31 2010

Owners of trucks and buses

exceeding a given age, or cars

which do not meet certainenvironmental standards, are

eligible for subsidies

Chinas Auto Industry Revival Plan Five Key Elements

Promote Consol idation

Primary consolidation

between and among

OEMs and suppliers

Encourage OEMs to

co-develop andproduce new cars and

key components

New tech development Funded with 10 billion

Yuan over three years

to support auto

technology innovation

and new energy autodevelopment

New Energy Vehicles Subsidized for

marketing the use of

electric, hybrid and

fuel-cell vehicles in

large and medium-

sized cities

Others Encourage development

of local brands

Boost CBU/components

exports

Develop automotiveservice and the finance

sector

Foster the market

1

2 3 4 5


3/20


China is currently in Euro III but is determined to catch up towards

tighter emission legislations, led by major cities

China Vehicle Emission Legislation (Homologation) *

Source: Literature research

Stage II Stage III Stage IV Stage V ** TBD

Beijing 2.1 CO, 0.66HC 1.5 CO, 0.46HC1.5 CO, 0.46HC, 2.0 NOX,

0.02 PM, 0.5 SmokeShanghai 5.0 NOX,, 0.10/0.13*** PM 3.5 NOX,, 0.02 PM

Nationwide 0.8 Smoke 0.5 Smoke

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-20

Note: * For European Steady Cycle and European Load Response tests

** Beijing and Shanghai implementation of Stage V is estimated

*** Specific for engine with per cylinder displacement < 0.75L and rotation speed >3000r/min at rated power

CO, HC, NOX, PM Unit: g/(Kwh)

Smoke Unit: m-1



4/20


In 2009, government incentive plans have been introduced to foster

hybrid and electric vehicle penetration

Policy on New Energy Vehicle - Incentive for PV and LCV in Public Service (RMB)

Vehicle Type Fuel Saving RateMax Electr ic Power Rate*

BSG 10%~20% 20%~30% 30%~100%

Hybrid

5%~10%4K

- - -

10%~20% 28K 32K -

20%~30% - 32K 36K 42K

30%~40% - - 42K 45K

>40% - - - 50K

EV 100% - - - 60K

Fuel Cell 100% - - - 250K

Note: * Equals to Electric motor power/ Total power of vehicle

Vehicle Type Fuel Saving Rate Use Lead-acid Battery

Use Ni-mh Battery, Lithium Ion Battery and Super

Capacitor (Max Electric Power Rate)

20%~50% >50%

Hybrid

10%~20% 50K 200K -

20%~30% 70K 250K 300K

30%~40% 80K 300K 360K

>40% - 350K 420K

EV 100% - - 500KFuel Cell 100% - - 600K

Policy on New Energy Vehicle - Incentive for City Bus > 10m (RMB)

Source: MOF



5/20


0.4 0.5 0.6 0.6 0.6 0.7 0.7 0.7 0.8 0.8 0.8 0.9 1.00.6 0.8 0.9 1.0 1.1

1.2 1.3 1.4 1.4 1.5 1.5 1.6 1.6

2.5 3.1 3.1 3.2

3.3 3.6 3.8 3.9 4.1 4.1 4.2

4.3 4.40.9

0.9 0.9 1.0 1.1 1.2

1.3 1.3 1.3 1.4 1.4 1.4 1.5

0.40.5 0.5 0.5

0.5 0.5 0.6

0.6 0.6 0.6 0.7 0.7

0.7

1.01.2 1.4 1.7

1.9 2.0

2.2 2.3 2.5 2.6

2.7 2.8 2.7

1.4

2.1 2.2 2.2

2.32.5

2.6 2.7 2.9

3.0 3.1 3.2 3.3

1.3

1.4 1.6

1.8 1.9

2.02.2

2.3 2.4 2.5

2.6 2.7 2.9

0.2

0.2 0.2

0.30.3

0.30.3 0.3

0.3 0.3

0.3 0.3 0.3

0.5

0.5 0.5

0.60.6

0.6

0.6 0.6

0.7 0.7

0.7 0.7 0.7

0.20.20.2

0.20.2

0.10.1

0.1

0.10.1

0.10.1

0.1

9.4

11.4 11.9

12.8 13.5

14.615.5

16.1 16.9

17.5 18.0

18.5 19.0

0

4

8

12

16

20

24

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

SalesVolume(Mu

nits)

5.0%

6.8%

8.2%

4.3%

4.6%

8.2%

7.3%

6.0%

2.2%

2.4%

7.8%

As a result of the government push, Chinas vehicle market has

recovered and is projected to increase to 19.0M units by 2020

Source: Ricardo analysis

A

B

C

D

E+F

SUV/ MVP/

PUP

MIC Van

M/HVAN

MediumTruck

HeavyTruck

Bus

CAGR 6.0%

SegmentCAGR

China Vehicle Sales Forecast 2008-2020



6/20 Ricardo lc 2009Confidential Christian.Koehler Ricardo.com

Total

LCV

Chinas vehicle population is expected to grow at 8.6% till 2020, and

will amount to ~140M vehicles

Source: China Automotive Yearbook, Ricardo analysis

Note: PV includes sedan, SUV, MPV, Pickup and crossover

LCV includes micro van, medium van and heavy van

HCV includes medium and heavy trucks, medium and large buses

Comments

Total PARC

Due to increasing attrition ratesbased on income growth andtightening emission regulations,total PARC is expected to grow at8.6% CAGR to 139M units till2020, mainly driven by PV

PV

Forecasted to be the largest andfastest growing segment withCAGR 10.5%, driven by growingdemand for family cars

LCV

Expected to grow at 7.2% CAGR,

driven by demand in rural areas

HCV

Expected to grow at 3.7% CAGR,driven by a modest sales growthtowards more modern and

efficient trucks from current old-technology and low-payloadtrucks

10.5%

7.2%

3.7%

8.6%

PV

HCV

CAGR


31 36 41 46

52 58 63

68 73 78 8220

2224

2628

3032

34 3638

40

88

99

10 10

1010

1111

11

85

26

42

18

11

7

59

66

74

81

89

98

105

113

120

127133 139

51

0

20

40

60

80

100

120

140

160

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

VechileParc(Mu

nits)

China Vehicle PARC Development 2008-2020



Ricardo has developed three scenarios for future powertrain

technologies to understand effects on fuel consumption

Business as usual

Transportation fuel efficiency

remain the same as year 2008all through 2020

Higher Fuel Efficiency

Smaller Engines and mild

hybridization reduce gasolineconsumption of PV and micro

van by 25% in 2020

Light and small trucks save

5% (diesel) fuel through

improved powertrain design Turbocompounding reduces

diesel consumption of medium

and heavy duty buses and

trucks by 20%

Electrification/ Light Weight

China Transport Fuel Consumption Scenarios



Significant weight reduction

(300kg per vehicle) willdecrease PV fuel consumption

by further 10%

Additionally, hybridization and

electrification in large numbers

is assumed: 10%* micro hybrid cars

save 5% fuel

2% mild hybrid cars save

12% fuel

1% full hybrid cars save

30% fuel

8% full hybrid buses save

25% fuel

1% plug-in hybrid cars

save 80% fuel

1% electric cars and 8%electric buses with no fuel

consumptionNote: * Percentage of total car PARC or bus PARC



In a business as usual scenario, transport fuel consumption will

grow without increases in vehicle fuel economy

Comments

Gasoline consumption will increase to

141M tons in 2020, driven by fast growth

of family PV

PVs gasoline consumption is

expected to grow at 10.4% CAGR

based on fast parc expansion

CVs gasoline consumption is driven

by micro and light vans; other

segments are moving towardsdieselization

Diesel fuel consumption will grow to

113M tons in 2020, dominated by CV

segment

CV consumes about ~98% of totaldiesel fuel, which is expected to

remain stable till 2020

Complete HCV parc is dieselizied

currently, followed by LCV parc

Diesel penetration in PV is projected

to increase, but will remain as a smallportion at ~2.5% by 2020


Forecast Diesel Consumption for Vehicle 2008-2020

Forecast Gasoline Consumption for Vehicle 2008-2020

8.4%

PV

CV

Total

2.1%

10.4%

PV15.1%

CV6.2%

6.0%Total

CAGR

CAGR


36 43 50 58

65 73 81 88

95 102 108 114 118

18 18

18 18

18 18

19 19 18

19 20 22

23

54 61

68 75 83

91 99

107 114

121 129

135 141

0

30

60

90

120

150

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

GasolineConsumption(Mt

ons)

54 60 64 71

76 82 87 91

96 100 104 107 110

1 1

1 1

1 1

2 2

2 2 3 3 3

55 61 65 71

77 83 89 93

98 103107110113

0

30

60

90

120

150

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

DieselConsumption(Mt

ons)



In the Electrification/ Light Weight

scenario, gasoline consumption will be

reduced to 95M tons in 2020

33% lower compared to Business as

usual and 11% lower compared to

Higher Efficiency scenario

Benefit from Electrification is minor

based on

Still small vehicle parc penetration

The largest share of hybrid is Micro

hybrid, which has limited fuel

saving potential

In the Electrification/ Light Weight ,

diesel fuel consumption will be reduced to93M tons in 2020

17% lower compared to Business as

usual scenario

Benefit from Electrification is

extremely limited based on very smallsales volume and parc

Higher Fuel Efficient Powertrains will provide major effects while

Electrif ication/ Light Weight has only minor benefits


Forecast Diesel Consumption for Vehicle 2008-2020

Electrification/

Light Weight4.9%

Higher

Efficiency

6.0%

8.4%Business

as usual

HigherEfficiency

4.8%

6.2%Business

as usual

4.8%

CAGR

CAGR


54 61

68 75 83

91 99

107 114

121 129 135 141

53 59 64 69

7483 86

89 92 94 95 95

53 60

71 76

1061039995

82

92

107

8765

79

0

30

60

90

120

150

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020G

asolineConsumptio

n(Mt

ons)

53 58 66 69

74 81 85

88 90 92

55 61 65

71 77 83 89 93 98

103 107 110 113

53 58 61 66

6978 81

85 87 90 92 93

94

78

61 74

0

30

60

90

120

150

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

DieselConsumption(Mt

ons)

CommentsForecast Gasoline Consumption for Vehicle 2008-2020

Electrification/

Light Weight

C


10/20 1 Ricardo lc 2009Confidential Christian.Koehler Ricardo.com

95 93

1544

29

21

0

40

80

120

160

200

Gasoline Diesel

FuelDemand(Mto

ns)

76

58

1935

0

40

80

120

160

200

Gasoline Diesel

FuelDemand(Mto

ns)

An Electrification/ Light weight scenario will curb Chinas total

gasoline/ diesel demand to 110M and 187M tons respectively in 2020

Vehicle Fuel Demand 2020 Total Fuel Demand 2020

Gasoline

PV is projected to consume 76M tons of

gasoline based on a huge family car parc CV is forecasted to consume 19M tons of

gasoline, driven by LCV

Diesel

HDD will drive diesel consumption to reach

58M tons, align with economy growth LDD diesel consumption, attributing to light

truck, is expected to reach 35M tons

Source: DRC report, literature research, Ricardo analysis

PV

CV

Gasoline

Vehicle will continue to dominate and reach

~85% of total gasoline consumption in 2020 Driven by vehicle, total gasoline consumption

will hit 110M tons in 2020

Diesel

Vehicle will continue to expand its share in

diesel consumption to ~50% in 2020 Total consumption will increase to 187M tons

accordingly


LDD

HDD

95 93

110

Vehicle

Other

Vehicle

Agr iculture

CE, Industry& Railway

Other

187

Chi F t P t i



25

6085 110

61

1

Ref ining

Output

Demand Ref ining

Output

Demand

Need Net

Import

184

132

3

187

138

6

Ref ining

Output

Demand Ref ining

Output

Demand

Net import of gasoline is expected to grow rapidly by ~31% to cope

with increasing demand

China Domestic Gasoline Supply 2008/2020*

From 2008 to 2020, gasoline demand will growfrom 61M to 110M tons at CAGR 5.0%

Refining output is projected to grow slower than

demand at CAGR 3.0%

This results in a rapid growth of net import of

gasoline at CAGR 31%, driving importdependence to 23% in 2020

Source: DRC report, China Energy Blue Book 2008, NBSC, literature research, Ricardo analysis

2008 2020

Need Net

Import

In M tons


China Domestic Diesel Supply 2008/2020*

2008 2020

Need Net

Import

In M tons

Need Net

Import

From 2008 to 2020, diesel demand will grow from138M to 187M tons at CAGR 2.5%

Refining output is projected to grow faster than

demand at CAGR 2.8%

This results in a decrease of net import in 2020,

based on a nearly sufficient domestic refining output

Note: *Assume 2020 refining operating rate is at maximum 96%




1.6 1.6 1.8 2.0 2.3

2.7 3.2

3.8 4.7

5.1 5.5

6.0 6.5

3.7%4.3%5.1% 5.4%5.7%

6.1% 6.5%

3.0%2.9%2.5% 2.7%2.8% 3.3%

0

2

4

6

8

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

EthanolVolume

(Mt

ons)

Ethanol (E100) Consumption Ethanol of Total Gasoline Consumption %

0.3 0.3 0.3 0.3 0.4 0.5

0.6 0.8

1.01.1

1.31.5

1.7

0.8% 1.6%1.4%1.2%1.0%1.1%0.7%0.6%0.4%0.4%0.4%0.5% 0.5%0

1

2

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

BiodieselVolu

me(Mt

ons)

Biodiesel (B100) Consumption Biodiesel of Total Diesel Consumption %

Biodiesel and ethanol wil l provide litt le relief and are expected to

outweigh 1.6% of diesel and 6.5% of gasoline demand in 2020

Comments

Bio-diesel is expected to increase from

0.3M tons in 2008 to 1.7M tons

(equivalent to 35M tons of BD5) in 2020

Development of bio-diesel is deeplyimpacted by low fuel price in 2009

B5 standard issued in 2009 is

somehow a positive message for

biodiesels long term development

Ethanol though shows little growth sinceit is still in the initial stage of non-grain

based feedstock and deeply impacted by

low fuel prices

Target is to replace ~6.5% of gasoline

consumption in 2020

According to government plans,

ethanol production for ethanol blends

gasoline targets at 10M tons in 2020

At Ricardo, we hold a conservative

view on ethanol development in

China and project 6.5M tons in 2020


Forecast Biodiesel Consumption 2008-2020*

Forecast Ethanol Consumption 2008-2020*


CAGR 15%

Note: *Biodiesel and ethanol of total fuel consumption percentage are based on Electrification/ Light Weight scenario fuel consumption

CAGR 12%




93 90

94 94

Electrification/

Light Weight

Domestic

Refinery Self-

sufficient

DieselDemand(M

tons)

Other

Vehicle

To avoid fuel imports in 2020, ~60% of all sold PVs would need to be

PHEVs or EVs

Diesel and Gasol ine Demand 2020

9570

1515

Electrification/

Light Weight

Domestic

Refinery Self-sufficient

Gass

olineDemand(M

tons)

Other

Vehicle

110

85

2020 China Vehicle Sales and PARC by Type*

ICE

6%EV

27%

PHEV32%

Full

4%

Mild8%

Micro

22%

187 184

PV: 11.9M units



New Vehicle Sales

Vehicle PARC

ICE

51%

EV4% PHEV

8%Full

5%

Mild9%

Micro

22%

ICE

86%

EV

7%

Full

7%

Full

3%

Mild

5%13%

Micro

71%

ICE

2%EV

5%PHEV

4%

Full

93%ICE

4%

EV

LCV: 6.0M units HCV: 1.1M units

PV: 85.3M units LCV: 41.8M units HCV: 11.4M units

Micro

14%

2%Full5%

Mild

EV

15% PHEV

18%

46%ICE




China is at the crossroads further vehicle growth and consumer

choices require government guidance


Note: * includes passenger vehicles and MIC


Continued Vehicle Growth in China Vehicle Usage

At the projected level of growth, vehicle

ownership in China will grow to 75vehicles* per 1,000 capita in 2020

This will still be substantially below

developed countries

Further growth of private vehicleownership seems inevitable

Security of fuel supply will become a

major concern as a consequence

The impact on road and city

infrastructure, cost and security ofenergy supply, and environment will be

tremendous

Drastic countermeasures will be

required to mitigate the environmentaldamage and ensure fuel supply

Traffic Management

Public Transport

Usage Restrictions

Vehicle Efficiency

Powertrain Technology

Vehicle Technology

Vehicle Downsizing

Alternative Fuels

All solutions

have a role to

play, but better

powertrainefficiency is the

most promising

option for short

to medium

gains




Next 20+ years will see an evolution of conventional powertrains,

supplemented by diverse technologies for sector/regional variations

Source: Ricardo roadmaps and technology planning


Improving efficiency of conventional transmission

GTL etc added to blends

Bi-fuel Vehicles

Next Gen FC/H2 demo bus & car

1st Generation Improved Gasoline

2nd

Generation Improved/Downsized Gasoline

Car/LDV Dieselisation (niche applications)

New generation transmissions DCT, AT

Niche Alternative Fuels LPG, NG

Bio fuel Blends (Increasing %, 2nd gen)

Exhaust Energy recovery HD Truck

Mainstream Car Micro / Mild Hybrids

Mainstream Car Full Hybrids

SUV Full Hybrids

Car Plug in Hybrids

City Bus Series Full Hybrids

Niche EV City Car

2010 2015 2020

Image Car Hybrid

Technological solutionsfollow Europe due to

similar emission standards Cost

Importance ofmaximising advantagefrom advanced ICEtechnologies

Cost effective fuelconsumption reducingtechnologies will prevail

Sector specific solutions

HEV for urban use cars

and buses Efficient ICEs for longer

missions / higher loadfactors

China Powertrain Roadmap Highlights Key Messages

Image Car Hybrid



16/20

1 Ricardo lc 2009Confidential Christian.Koehler Ricardo.com

For car makers, a multi-solution portfolio of ICEs, HEVs, PHEVs &

EVs, technology planning, delivery and cost performance will be key

Note: ICE= Internal Combustion Engine; HEV = Hybrid-Electrical Vehicle; PHEV = Plug-in HEV; EV = Electrical Vehicle; CTL = Coal to liquid; GTL = Gas to liquid; BTL = Biomass to liquid;CNG = Compressed Natural Gas; LPG = Liquefied Petroleum Gases; LNG = Liquefied Natural Gas; FAME = Fatty Acid Methyl Ester; DME = Di-Methyl Ester; E10 = Ethanol 10% Fuel

Source: CATARC, Ricardo

NationwideImplementation

Gasoline, Diesel, HEV,

CTL, GTL, BTL

Gasoline, Diesel, HEV Gasoline, Diesel, HEV,

E10, CTL, GTL

4

RegionalImplementation

3 CNG, LNG, PHEV,

Electric, Hydrogen

CNG, LPG, E10, LNG CNG, LNG, LPG,

FAME, BTL

Pilot Projects

2 M10, FAME, CTL, DME PHEV, Electr ic,

Hydrogen

Technology Ready

1 Hydrogen, BTL

SHORT TERM: ~2010MEDIUM TERM:

~2020

LONG TERM: ~2040



17/20


Car makers need to take key actions in engineering, supply and

production to prepare for new powertrain technologies

Upstream

R&DSupply Production

Source: Ricardo Analysis

1. Critically evaluate

competencies in advanced

and vehicle engineering upon

short, medium and long-term

technology paths

2. Execute vertical integration in

selected areas of promising

core technology

3. Develop alliances or

partnerships to access, lock

in & preserve key IP in the

supply chain on important but

non core technologies

4. Transform supply chain for

short, medium and long term

technology scenarios

5. Continue to develop

best in class ICE systems to

obtain highest technology

from lowest cost base

6. Develop new technology filtersand amend technology

development, deployment and

cost control processes to be

responsive to the new cadence

7. Redefine own core

competencies in Engineering

incl. alliances / partnerships

and suppliers

8.Align powertrain and vehicle

architectures to accept

technology evolution at lowestcapital cost/complexity

9. Evaluate economies of

scale and commonality

by technology sharing

across vehicle lines

(PC, CV, etc.)

10.Evaluate next round

of modularization

strategy in the context

of technology road

maps

11.Reinforce abilities as

integrator of future

powertrain

technologies and

systems

Value Chain Key Actions for OEMs

Downstream



18/20


New powertrain technologies wil l trigger further changes in

downstream activit ies

Upstream Downstream

Sales After Sales

Source: Ricardo Analysis

12. Develop best in class niche

vehicles to build green image

(EV/PHEV)

13. Align Marketing with selected near-

term technology to re-define/re-enforce Brand DNA and promote

green image

14. Prepare Dealerships and

Distribution network for new

technology and products based

upon core ICE and derivatives

15. Prepare Service Network for future

challenges

16. Capitalise on repair & maintenance

revenues from new technology

17. Evaluate new revenue streams like in-use service (e.g.: battery charging /

exchange stations)

18. Evaluate new revenue models in

finance & lease, rental, mobility

services, etc.

19. Gain stake in accessory sales and

customization

Value Chain Key Actions for OEMs

Going forward Summary


19/20


The powertrain future will be evolutionary rather than revolutionary,

with decisions impacting technology, cost, skills & processes

The future of the automotive powertrain is government- rather thancustomer- or even technology-driven

This is especially true for China where vehicle growth and consumer choiceswill continue to be guided by the government

Evolutionary improvements to today's technologies will achieve significantimpact at low risk, but at increased cost

There will be no single revolutionary winning technology: the P/T future

will be an evolving mixture of 2nd

gen. ICEs, HEVs, EVs, with ICE still playingthe predominant role short- to medium-term

"Revolutionary" technologies all carry too many risks or issues to impact

near- to mid-term mass markets

Source: Ricardo Strategic Consulting


20/20


Ricardo Shanghai Co. Ltd.

Room 501 Gems Tower, Caohejing Hi-Tech Park

487 Tian Lin Road, Minhang District

Shanghai 200233, P.R. China

Christian KoehlerManaging Director AsiaRicardo Strategic Consulting

Telephone: +86 21 5208 0170

Facsimile: +86 21 5208 2811Mobile: +86 136 2179 8724

[email protected]

Thank you

Future Powertrains for China

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