Trends in China's Automotive Component Manufacturing Industry

34
1 TRENDS IN CHINA’S AUTOMOTIVE COMPONENT MANUFACTURING INDUSTRY Market Drivers, Manufacturer Overview, and Intellectual Property Protection Issues September 2014

description

China's automotive components sector is set to achieve annual growth of 20 per cent for the next five years driven by demand for new cars and a growing secondary market. The aftermarket segment will become the main outlet for automotive parts as the average age of vehicles on the road continues to rise and the current total car population has already surpassed 100 million. The counterfeit auto parts market, already the world's largest with a current value of about US$40bn, will only increase as the overall market grows. Email [email protected] to find out more

Transcript of Trends in China's Automotive Component Manufacturing Industry

Page 1: Trends in China's Automotive Component Manufacturing Industry

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TRENDS IN CHINA’S AUTOMOTIVE COMPONENT MANUFACTURING INDUSTRY Market Drivers, Manufacturer Overview, and Intellectual Property Protection Issues

September 2014

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Introduction

INTR

OD

UC

TION

• In 2013 sales of new vehicles surpassed the 20 million mark in China and new vehicle sales will continue to drive demand for automotive components.

• The independent aftermarket* will soon start to grow substantially given the rising number of cars no longer covered by manufacturer warranties.

• As used cars become a more viable option for first time buyers, increased government scrutiny of the developing sales network will positively impact the independent aftermarket.

• Based on these strong fundamentals, China’s component manufacturing industry is expected to experience growth of more than 20% per year for the next 5 years.

• While the outlook remains positive, the central government has identified over-capacity as a potential threat for the industry and has put it under observation since early 2012.

• Counterfeiting will increase as the market expands and continue to threaten manufacturer’s profits, requiring parts makers to implement stringent intellectual property protection practices.

• Exporting products remains challenging, especially for domestic component manufacturers, due to a lack of technology development and low competence in exporting high value-added products.

• Ongoing pressure from rising labour costs and the expected appreciation of the yuan will continue to challenge exporters of low value components.

Note*: The independent aftermarket refers to the independent non-OEM aftermarket

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1. CHINA’S AUTOMOTIVE COMPONENT MANUFACTURING INDUSTRY

DRIVERS OF AUTOMOTIVE COMPONENT DEMAND

COMPONENT MANUFACTURER INDUSTRY OVERVIEW

INTELLECTUAL PROPERTY PROTECTION BEST PRACTICES IN CHINA

2. ABOUT IPSOS BUSINESS CONSULTING

Page 4: Trends in China's Automotive Component Manufacturing Industry

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CAGR 2007-15

115 145 223 21

30

53

58 79

133

53 73

131

158

184

244

94

107

137

24

28

36

253

289

391

DR

IVER

S OF A

UTO

MO

TIVE C

OM

PO

NEN

T DEM

AN

D

South America

Mid East

Asia Pacific excl. Japan

East Europe

West Europe

Japan

Canada

US

2007

776

2015(F)

1,348

2010

935

5.5%

4.8%

4.8%

5.6%

12.1%

10.9%

12.4%

8.7%

Global automotive aftermarket industry value (2007-15)

Unit: USD billion

Mature markets

Emerging markets

Global automotive aftermarket is expected to grow healthily over the next several years, driven by strong performance in emerging markets

Source: Industry reports, Ipsos Business Consulting analysis

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China will continue to be a key driver of the global automotive parts industry even though growth is expected to slow slightly

2,016

2,662

3,194

3,833

4,600

5,520

6,624

7,948

2011 2012 2013 2014(E) 2015(E) 2016(E) 2017(E) 2018(E)

Total auto parts industrial output in China (2011-18)

Unit: CNY Billion

Source: CAAM; Gasgoo; National Bureau of Statistics; Ipsos Business Consulting analysis Note:*Excludes whole OEM engines

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8.0 5.4

32.7

14.8

56.9

12.1

PassengerVehicles

CommercialVehicles

DR

IVER

S OF A

UTO

MO

TIVE C

OM

PO

NEN

T DEM

AN

D

While demand for new cars will continue to drive sales of passenger vehicles, the aftermarket will become the new growth engine for components

CAGR 2013-18

17.9

19.9

22.1

23.8

25.7

27.8

17.9

19.5

21.3

22.3

23.4

24.6

'13 '14(E) '15(E) '16(E) '17(E) '18(E)

Optimistic Scenario Conservative Scenario

New passenger vehicle (PV) sales forecast

9.2%

6.6%

Car age by vehicle type (2002-13)

97.6**

% of cars repaired at

4S/3S shops*

Under warranty

~90%

50%~

15%>

Year

Unit: Million Unit: Million

0-3 Years

4-8 Years

<8 Years

Note*: 4s refers to automotive repair shops with sales, spareparts, service and survey functions Note**: The estimation of 2013 population already takes car scrappage into consideration

Source: CAAM, Gasgoo survey, Ipsos Business Consulting analysis

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As China’s used-car market develops, demand for components from the independent aftermarket is expected to increase

• Chinese consumers typically replace their vehicles 4 to 6 years after the initial purchase. Rapid growth in new vehicle sales in China from 2008 to 2012 will significantly increase supply in the used-car market over the next few years.

• China's current car population has exceeded 100 million vehicles and is expected to rise to 300 million when the market matures, demonstrating the industry’s significant growth potential.

• Compared with already mature markets, China is at an early stage of development with ample space for developing the parts industry based on the current mix of new vs used cars in the country.

Note*: Mature market refers to USA, Canada, Japan Western Europe Source: China Automobile Dealers Association(CADA), China used-car investment research report, Ipsos Business Consulting analysis

Annual used-car sales (2006–18) Proportion of total vehicle sales:

new vs. used

1.9 4.8

20.0

2006 2012 2018(F)

75%

30%

25%

70%

China Mature market*

Used-car sales

New vehicle sales volume

Unit: CNY Million

CAGR 16.7%

CAGR 26.9%

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Sichuan 466,000

Guangdong 798,000

Shandong 494,000

Beijing 466,000

Shanghai 379,000

Henan 356,000

Liaoning 223,000

Zhejiang 279,000

DR

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Regional development of the used-car market is not balanced, with five provinces accounting for 54.3% of used-car sales nationwide

Source: China Automobile Dealers Association (CADA), China used-car investment research report, Ipsos Business Consulting analysis

Used-car sales volume in China (2012)

>500,000

400,000 – 500,000 300,000 – 400,000

200,000 – 300,000

<200,000

Used-car sales volume

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81% 80% 76% 64% 58%

BD HD JL HH BJ

DR

IVER

S OF A

UTO

MO

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PO

NEN

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D

Wide variation in PV penetration across China provides both national and regional opportunities for automotive component manufacturers

61% 56%

33%

HF ZJ SH

65% 56% 48%

JM HZ GZ

Shanghai

Northern cities

Eastern cities

Southern cities

Penetration of PVs with a maximum engine size of 1.5L across various cities in China (2012)

Guangzhou

Beijing

Hohhot

Wuhan Hefei

Taiyuan

Urumqi

Huizhou

Handan Yinchuan

Jiangmen

Baoding

Zhenjiang

Jilin City

Dali

76% 74% 61% 56% 56%

TY DL WH URU YC

Central and Western cities

Source: Ipsos Business Consulting analysis

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1. CHINA’S AUTOMOTIVE COMPONENT MANUFACTURING INDUSTRY

DRIVERS OF AUTOMOTIVE COMPONENT DEMAND

COMPONENT MANUFACTURER INDUSTRY OVERVIEW

INTELLECTUAL PROPERTY PROTECTION BEST PRACTICES IN CHINA

2. ABOUT IPSOS BUSINESS CONSULTING

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China’s auto parts industry is concentrated in 6 main clusters with most component suppliers located near to their key markets

Industrial clusters and competitive landscape Highlights

• In terms of geographical concentration, the location of the auto parts industry is in close proximity to the auto OEM industry

• China’s auto parts industry is concentrated within the same 6 regional clusters as most auto OEMs

• Eastern China is the largest cluster for both auto parts (market share of 39%) and the auto OEM industry (market share of 37%)

• Auto parts companies are experiencing the same trends as auto OEMs which are expanding production and sales in western regions

10%

8%

39% 12%

11%

7%

Percentage output value contribution to whole auto parts industry

Westward transfer

Source: Industry reports, Ipsos Business Consulting analysis

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Foreign-invested enterprises enjoy a much higher average industrial output than domestic enterprises

Source: China Automotive Statistics Yearbook 2013, Industrial Report, Ipsos Business Consulting analysis

Number of enterprises

Industrial output (CNY Billion)

Average industrial output

(CNY Billion)

Foreign-invested enterprises

1,941 903 34% 0.47

Private enterprises 2,794 604 23% 0.22

Other domestic enterprises

5,318 1,154 43% 0.22

Total 10,053 2,662 100% 0.26

Note: Other domestic enterprises includes state-owned enterprises, collectively-owned enterprises, joint-stock cooperative enterprises, joint-stock enterprises and others

Automotive components industry overview (2012)

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Metal processing is the auto parts industry’s major segment in terms of output

Note: *Only includes independent engine parts manufacturer, excluding engine OEM companies.

Industry segment Main players Production value

Au

to p

arts

ind

ust

ry

Me

tal p

arts

N

on

-me

tal

49%

Electronics & electrical systems

Auto body components (metal)

Ch

assi

s sy

ste

m

Engine system*

Interior

Exterior

9%

18%

12%

12%

Transmission

Steering

Driving

Brake

Source: Ipsos Business Consulting analysis

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While a few national champions have emerged, international component manufacturers enjoy significant market share in China

Source: Ipsos Business Consulting analysis

4.7

4.9

5.0

5.3

7.0

8.0

22.8

39.9

58.3

80.9

0 20 40 60 80 100

Weifu High-Technology GroupCo. Ltd.

Anhui Zhongding Holding(Group) Co.,Ltd

FAWER Automotive Parts Co.Ltd.

Ningbo Huaxiang ElectronicCo., Ltd

Tri-Ring Group Corp.

CITIC

Yuchai Group

Yanfeng Visteon

Wanxiang Group

Weichai Group

6.0

6.5

7.3

8.3

9.1

9.2

9.4

9.5

11.0

12.2

13.4

14.7

15.0

22.0

24.9

0 10 20 30

Johnson Controls

Aisin

Michelin

Delphi

Lear

Bridgestone

Magna

Valeo

Cummins

Faurecia

Denso

TRW

ZF Friedrichshafen

Continental

Bosch

Top 10 domestic component manufacturers in China by revenue (2012)

Top 15 foreign component manufacturers in China by Revenue (2012)

Unit: CNY Billion Unit: CNY Billion

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Note: • Comparison to the Global Top 10 Ranking is not precise as data collection and evaluation methodologies vary. The aim is to

illustrate the significance of the Chinese and global markets for both foreign and domestic manufacturers. • Revenues of the Global Top 10 have been converted into CNY based on the 2012 average EUR/CNY exchange rate

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China’s domestic component manufacturers must continue to develop their capabilities to effectively compete globally

0

15

30

45

60

75

90

China Domestic Enterprise Top 10 China Foreign Enterprise Top 10

Unit: CNY Billion

95

195

295 Global Top 10Continental

Bosch

Denso Bridgestone/ Firestone

Magna

Aisin

Hyundai Mobis

Michelin

Johnson Controls

Faurecia

Rank

Continental Bosch

ZF Friedrichshafen

Weichai Group Wanxiang Group

Yanfeng Visteon

Yuchai Group

TRW

10 9 8 7 6 5 4 1 3 2

CITIC Tri-Ring Group

Ningbo Huaxing

FAWER Anhui Zhongding

Weifu

Denso Faurecia Cummins Valeo Magna Bridgestone

Ranking comparison of Chinese and global component manufacturers

Source: Global Top 10 Ranking from Berylls Strategy Advisors, Ipsos Business Consulting analysis

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Industry experts believe the majority of domestic manufacturers will continue to struggle to increase their competitiveness in the near term

Source: Gasgoo.com (Chinese) & China Business News survey of 2,980 industry analysts and experts in 2012

14%

15%

16%

23%

29%

Don't know/no reply

Outdated managementmodels

Low brand awareness

Inability to cooperate directlywith OEMs on R&D projects

Poor quality control

Lack of core technology

Time required for domestic component manufacturers to move up the value chain

• Many smaller domestic component manufacturers focus on the after sales market which is becoming

increasingly competitive

• Export of low-value components will remain strong. Continued appreciation of the Chinese yuan will make

exporting to price sensitive regions increasingly challenging

54%

20%

26% No change

At least 15years

Within thenext 5 years

Main reasons for domestic component manufacturers’ lack of competitiveness

3%

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• Overall M&A activity in China is expected to remain at current levels. However, only a few large-scale private domestic and state-owned enterprises will be actively pursuing M&A strategies

• Foreign companies are expected to continue looking for M&A opportunities to expand their capabilities within the Chinese market

• For many small-scale domestic component manufacturers, M&A is considered at best a very difficult if not unrealistic process to develop core technologies and become more competitive

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M&A strategies remain a hot topic, however, managing an acquisition and subsequent integration is a daunting task for most domestic firms

Source*: Asia & Oceania M&A Activity Thomson Reuters, PWC, Ipsos Business Consulting analysis Source**: Gasgoo.com (Chinese) & China Business News survey of 2,980 industry analysts and experts in 2012

Asia &Oceania

2012

Domestic Inbound Outbound

15 10

13

183

China M&A Activity 2012/05-2013/06

Overview of recent automotive M&A activity in China*

Number of transactions

25%

38%

37%

Win-winprocess

Very difficult

Unrealistic

Ability to increase competitiveness through M&A with foreign companies**

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DRIVERS OF AUTOMOTIVE COMPONENT DEMAND

COMPONENT MANUFACTURER INDUSTRY OVERVIEW

INTELLECTUAL PROPERTY PROTECTION BEST PRACTICES IN CHINA

2. ABOUT IPSOS BUSINESS CONSULTING

Page 19: Trends in China's Automotive Component Manufacturing Industry

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China is the largest counterfeit auto parts market in the world, with an estimated value of CNY 255 billion in 2011

China’s counterfeit auto parts market relative value

China 83%

RoW* 17%

Total market value:

307 billion CNY

Manufacturing and sales bases for counterfeit components in China

Mainly manufacturing base

Manufacturing and sales base

Mainly sales base

• Guangdong, Henan, Zhejiang, Jiangsu and Fujian provinces are considered to be the largest auto parts counterfeiting regions in China

Note*: RoW refers to rest of the world

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The central government has improved intellectual property laws, though enforcement of trademark and anti-counterfeiting requires improvement

Government

End-user

• Relatively weaker enforcement system Relative to producers of fake medicine or food, manufacturers of counterfeit auto parts (which may

also cause fatal accidents) have not received serious punishments

• Limited product knowledge It is estimated that around 90% of ordinary end-users are not able to identify counterfeit parts, while

only 30% of professional end-users are able to identify counterfeits • High price sensitivity Many end-users do not choose 4S shops or authorised distributors to purchase genuine parts due to

their relatively higher prices

Unregistered manufacturers

Installation channels (end-user channel)

• Counterfeit component production Currently, a large number of small unregistered component manufacturers are flooding the market

with counterfeit products

• Independent installers Aftermarket products are often installed in small independent workshops that either unknowingly sell

counterfeit products to end-users (car owners) or are directly involved in offering low cost alternatives to well known brands

Source: Ipsos Business Consulting analysis

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Local government officials often sell confiscated counterfeit parts back to the manufacturer, or auction them to the public

Donated by government Rarely occurs in the auto

parts market

Purchased by the company If the government refuses to destroy the

counterfeit components and the brand would like to avoid the harmful effects from the auction process, the brand must purchase counterfeit parts directly from the government

4 methods of disposal

1

2

3

4

Auctioned by the government (after removing trademark) Worse situation for the branded component manufacturer Counterfeit parts re-enter the distribution channel and steal

market share of genuine parts

Destroyed by government Most desirable situation for the

brand Brand or third-party agency has

to build a strong relationship with relevant government departments Brand or third-party agency must

supervise government destruction of counterfeits

Source: Ipsos Business Consulting analysis

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Anti-counterfeiting systems are considered the most effective internal strategy for reducing counterfeits and can be supplemented by secondary actions

Strengthen channel management - integrate brand protection performance into the distributor evaluation system

1 Update anti-counterfeiting system - upgrade to a 2-dimensional barcode (double layer design), the most advanced anti-counterfeiting technology available

3

4

5

Limit authorised activity scope of supplier- design, manufacture, label and operating anti-counterfeiting system should be controlled by the brand itself

Increase end-user brand loyalty - offer superior products and complementary services to end-users to motivate them to use genuine parts

2

Improve end-user education - promote product identification knowledge through commercial advertisements

Possible methods to strengthen a company’s internal strategy

Source: Ipsos Business Consulting analysis

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Five levels of anti-counterfeiting label technology are currently being implemented in China

Types of anti-counterfeiting label by level of sophistication

Lev

el

of

sop

his

tica

tio

n

Laser label, thermo-label (温变标签): Appears differently when viewed from different angles or

in different temperatures

Query code label: Must verify the randomly generated code on each label via telephone, text

message or internet

Grained label: Cross-grained to serve as a distinction mark; query via telephone call, text

message or internet

Security-line: A security-line embedded into the label

Wireless anti-counterfeiting: Double-layer design; offers the product traceability via Wi-Fi

monitoring

Source: Ipsos Business Consulting analysis

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Cooperating with third-party agencies is the usual model for conducting brand protection work

Note*: IP stands for Intellectual Property Ipsos Business Consulting is not affiliated with nor recommending any of the agencies listed above

Third-party agencies

Law firms

Company internal intellectual

property team

Detect Verify Action

Law firms

Third-party agencies

Intellectual property

team

Litigation

Cooperation model Involvement

Description

Intellectual property team • Overall management and case evaluation • Team usually consists of 1-2 full-time staff members for overall IP protection work

Third-party agencies • Investigation and on-site action • Specialised agencies are hired to cover different aspects of IP work. Each agency has its own

business specialty and focuses on specific regions

Law firms • After-case litigation

Examples of some external agencies* include: Sinofaith, Wan Hui Da, Unitalen, CTMO, MIZIP and Genuineways

Source: Ipsos Business Consulting analysis

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A comprehensive selection process is crucial to assess resources and capabilities when choosing a third-party agency

Capabilities &

practices

Reputation

Intellectual property business specialty

Geographic coverage

Relationship

Recent accomplishments in intellectual property field

Depth of case investigation

Communication skills

shown in field-work Honesty in fieldwork High quality document

delivery

Background &

resources

Preliminary selection 1 Real-case selection 2

Third-party agencies should be authorised for case-based cooperation through a two-phase selection process

Source: Ipsos Business Consulting analysis

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Manufacturers also work with third-party agencies on a yearly contractual basis if they are able to meet specific requirements

Case-based third-party agency

Yearly-based third-party agency

Key focus &

responsibilities

Responsibilities • Conduct all types of

investigations including counterfeit manufacturers, logistics and warehousing, distribution

• Respond to brand’s key concerns and clues for further investigation

Responsibilities • Only focus on 1-2 specific case

type(s) such as manufacture, warehouse or distribution

• Market monitoring

Specific requirements focus around measurement of success the agencies have in helping the manufacturer protect its intellectual property Case success rate Percentage of high-value cases Depth of investigation

Source: Ipsos Business Consulting analysis

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Clear incentives and evaluation structures can be designed to ensure third-party agencies remain highly motivated

Incentives

Evaluation “Floating-rate” payment method Payment for third-party agencies is based on the total value of counterfeit parts captured per case The third-party agencies can obtain an average 20-30% of the total case value, and a maximum payment of CNY 100,000 per case

Sole long-term partnership Willing to offer sole long-term partnership to agency which fulfills brand protection assignments

Strict elimination system Agencies that cannot pass the evaluation will

be excluded without hesitation

Depth of investigation is a key indicator in evaluating an agency. For example, the manufacturer should end cooperation with an agency if the firm only focuses on taking down counterfeit sales sites and warehouses instead of following clues and further investigating the original manufacturing sites

Source: Ipsos Business Consulting analysis

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Typical brand protection workflow and IP committee organisation for successful and efficient IP management

Note*: The same third-party agency

Example of brand protection workflow Group intellectual property

committee

Third-party

agency*

Brand protection manager

Decide whether to take further

actions

Intellectual property team

evaluates reported case

with sales team

Provide feedback to the agency

Third-party agency*

Related government departments

Intellectual

property team provides the authorisation

documents (授权书) to the third-party

agency

Report final results and offer certification such as penalty decision notice (处罚决定书), and detention

warrant (拘留证)

Report information on

counterfeit parts

Cooperates with relevant government

departments to conduct anti-

counterfeit work

Yes No

Two staff members from

legal department

One staff member from marketing

department

One staff member from customer

service department

One staff member from each threatened

product category

Group vice president

Source: Ipsos Business Consulting analysis

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1. CHINA’S AUTOMOTIVE COMPONENT MANUFACTURING INDUSTRY

DRIVERS OF AUTOMOTIVE COMPONENT DEMAND

COMPONENT MANUFACTURER INDUSTRY OVERVIEW

INTELLECTUAL PROPERTY PROTECTION BEST PRACTICES IN CHINA

2. ABOUT IPSOS BUSINESS CONSULTING

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Ipsos Business Consulting

is the specialist division of Ipsos that has been helping companies build, compete and grow by addressing a wide range of issues in the business-to-business arena for twenty years.

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Ipsos Business Consulting Hubs

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tom

oti

ve

Re

late

d

Auto OEM

Vehicle Parts

Other Vehicle

Related

Various types of vehicles: • Commercial vehicles • Passenger vehicles

Various types of parts & components for vehicles:

• Engine and engine parts • Filters • Tires • Other parts

Other auto-related products: • Automotive lubricant • Automotive painting • Other products

Construction

Vehicle OEM

Various types of construction vehicles: • Excavator • Bulldozer • Forklift • Dump truck • Other construction vehicles

Our service range in automotive related industries

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Page 33: Trends in China's Automotive Component Manufacturing Industry

[email protected]

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Authors of this Paper

Markus Scherer Head of Consulting Hong Kong

Industry focus: Automotive Industrial machinery Construction materials Finance

Wijaya Ng Head of Consulting Greater China

Industry focus: Automotive Industrial machinery Construction materials Consumer products

Phone: Email:

Phone: Email:

+852 2839 0647 [email protected]

+86 21 2231 9598 [email protected]

Page 34: Trends in China's Automotive Component Manufacturing Industry

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