10 Recommandments For
Conducting Business in China
Keith Lomason
Executive Director — China
Who is Magna?
Auto supplier – ranking in world (sales*)
#4
Sales growth – CAGR since 1994
22%
Content per vehicle – CAGR since 1994**
18%
Market cap
*Automotive News ranking
**Excluding vehicle assembly sales
~$7.5B
2004 Sales Growth
$20.7B
35%
22%
CAGR
$1.9B
93
94
95
96
97
98
99
00
01
02
03
04
Magna International Inc.
2005 Group Structure
Organization Structure
COSMA
MAGNA
DONNELLY
MAGNA
STEYR
MAGNA
POWERTRAIN
DECOMA
INTIER
INTIER
INTERIORS
SEATING
MAGNA
CLOSURES
A Global Presence for
Global OEMs*
Magna Facilities
222 Production
Canada
62
USA
82,700
22,000
10
53 18
18,200
81 25
Mexico
13
10,800
S. America
3
500
*As at September 2005
8
58 Engineering, R&D
Magna Employees
7
2,400 Asia Pacific
28,800
Europe
Magna International, China
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 POWERTRAIN
11 Magna Powertrain, Changzhou
6 Litens Automotive, Suzhou
7
MAGNA International, CHINA
Shanghai, Pudong
16
INTIER INTERIORS
13CIAI, Changshu
16CIAI, Changchun
15Interlink, Suzhou
Tianjin
18
8
COSMA
8 MTTS Tianjin, Tianjin
(Operational 7/2006)
14 Cosma, Anting
9
10
INTIER SEATING
1 Intier JiaoYun Automotive
Seating, Anting (Previously SLASSCO,
Shanghai)
17Intier-Das Mechanisms, Suzhou
19Intier-Das Seating, Fuzhou
18Intier-Das Seating, Beijing
4
Chengdu
Wuhan 12
11
10 14
13
15 6 1
17 5
2
4 7 9
19
5
MAGNA CLOSURES
Intier Automotive Co., Kunshan
Guangzhou 3
New/Operational Facilities 2006
2
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
3
MAGNA STEYR
MSF
Engineering
Center, Wuhan
12
Global Production
Shift Towards Lower Cost/Higher Growth Markets
80
70
ME/Africa
Millions
60
S. Am erica
50
South Asia
40
C/E Europe
30
China/T-w an
20
W. Europe
10
Japan/Korea
0
N Am erica
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011



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
The Labor Cost Shift
Growth of Sourcing from ULCCs and LCCs
HCCs
Average of $23-27 per hour
Inflation of 2-3% per annum
LCCs
Average of $8-10 per hour
Inflation of 3-4% per annum
ULCCs
Average of $3 per hour
Inflation of 6-7% per annum
Hourly Compensation Including Benefits US$ 2009
Source: Boston Consulting Group, EIU, S&P, other sources

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
Why China?
1990’s
2000’s
 Lower Costs
• Market Share
 Market Potential
• Scattered opportunities
 PRC Govt. & Industry
- Grow with existing
customers
 PRC Govt. & Industry
- Grow with new
customers
 “good deal”
- Grow into new
products/capabilities
hungry for investment
hungry for investment
partnerships offered
The “Ten Recommandments”
Preface:
 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
Recommandment One:
Investment Vehicle = WFOE
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
Recommandment Two:
Location = Central Government Economic Development Zones (CEDZ)
 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!
Comparing Economic Development Zones and Non-EDZs Investment and
Operational Costs
INVESTMENT INFORMATION FOR KEY AUTOMOTIVE
LOCATIONS IN CHINA
Area Name
Customers
Corp.
Income
Tax
Purchase
Land use
30 Years
USD/Sqm
Standard Factory
cost USD/sqm
Build
Lease/yr
72.5-96.7 17.4-23.2
Utilities
LOCAL Salary USD/year
Water
Elect.
Nat. Gas
$/Met ton $/kw hour
$/m3
GM
25,000
Dept Mgr
Office
5,800 2200-3000
General
Prod
Social
Benefits as
Technical % of Salary
Anting, Shanghai
SGM, SVW
24%
25
0.199
0.104
0.157
Changchun, Jilin CEDZ
FAW-VW
15%
20-33
60-100
26
0.56
0.08
0.18
5000
Chongqing CEDZ
Changan Suzuki & Ford
15%
27
60
7.2-21.7
0.33
0.055
0.12
12000 4500-7500 2200-4500
Changshu
CAIP
15-24%
9-15
72-97 11.6-21.7
0.26
0.06
0.29
4500
Changzhou
CZYJ Auto Component Co.
15%
20
72-97 11.6-21.7
0.21
0.06
0.22
Fuzhou, Fujian CEDZ
Southeast Motors
15%
10-30
97-145 0.97-1.45
0.23
0.06
Guangzhou, Guangdong CEDZ
Honda, Toyota
15%
30-50
96-360 21.7-50.7
0.15
0.07
Haikou, Hainan CEDZ
Mazda
15%
13
4.3-10.1
0.16
0.07
1200
870
1450
30%
Kunshan, Jiangsu CEDZ
SGM, SVW
15%
18
60-120 11.6-17.4
0.19
0.07
N/A
20,000
7,000
4,000
2,500
3,500
30%
Liuzhou, Guangxi CEDZ
SGM Wuling
15%
11-22
3.6-6.0
0.19
0.06
0.49
3,500
2,500
1,500
1,500
2,000 27.4-28.7%
Nanjing, Jiangsu CEDZ
Iveco, Ford, Fiat
15%
18-21.8
96
15.7
0.32
0.08
N/A
5000
4000
3300
1300
2500
25%
Pudong, Shanghai CEDZ
SGM, SVW
15%
73-108
240
26-53
0.16
0.07
0.31
30,000
9,000
6,000
3,000
5,000
38.80%
Puxi, Shanghai
SGM, SVW
32%
63
483
44
0.27
0.07
Shenyang, Liaoning CEDZ
Brilliance, BMW, SGM
15%
13
66-100
1.2-1.8
0.08
0.05
Songjiang, Shanghai
SGM, SVW
24%
25-30
180
25.2
0.18
Suzhou, Jiangsu SEDZ
near SGM, SVW
15%
38701
240
21.6-36
0.28
Wuhu, Anhui CEDZ
Chery, Hyundai
15%
11
60
14.5
Yantai, Shandong CEDZ
SGM DongYue
15%
12
85
1.2
2500
3000
7500 1750-2600 1160-1450
10000
N/A
6000
3500
5000 2600-3200
900-1200 1750-2200
1900
2200
870-1450 1200-2200
720-960
45.50%
43.50%
40%
960-1200
30-42%
870 1160-1740
30-42%
1350
1800
37-40
1500-1800 2200-3000
37.50%
30,000
9,000
6,000
3,000
5,000
60%
N/A
5000
4000
1750
1150
1450
42.50%
0.07
N/A
12,500
7,500
3,000
0.06
0.28
14500
12000
1850
0.16
0.06
0.42
4,000
1,800
1,450
0.22
0.07
0.29 4000-6000 2500-3500 2000-2900
1050-1450 1750-2500
30%
1350
1950
14-20%
850
1,185
42%
870-1150 1450-1750
32%
Social Benefit Standards
2004
Standard ------------------------------INSURANCES AS A % OF SALARY-----------------------------Housing *Total(%)
Area
Pension Unemployment Medical Accident Maternity Fund(%) of Salary
Anting, Shanghai
22.50
2.00
12.00
1.00
1.00
7.00
45.50
Changchun, Jilin CEDZ
22.00
2.00
12.00
0.50
N/A
7.00
43.50
Changshu
18.00
2.00
8.00
0.4-0.8
1.00
8-12 29.4-41.8
Changzhou
18.00
2.00
8.00
0.4-0.8
1.00
8-12 29.4-41.8
Chongqing CEDZ
20.00
2.00
9.00
2.00
N/A
7.00
40.00
Fuzhou, Fujian CEDZ
18.00
2.00
6-8
0.5-1.5
0.70
10.00 37.2-40.2
Guangzhou, Guangdong CEDZ
18.00
2.00
8.00
0.50
1.00
8.00
37.50
Haikou, Hainan CEDZ
20.00
2.00
8.00
N/A
N/A
30.00
Kunshan, Jiangsu CEDZ
20.00
2.00
6.00
1.10
0.90
8.00
30.00
Liuzhou, Guangxi CEDZ
20.00
2.00
4.00
0.5-1.8
0.90
27.4-28.7
Nanjing, Jiangsu CEDZ
14.00
2.00
8.00
0.3-0.8
1.00
25.3-25.8
Pudong, Shanghai CEDZ
20.00
2.00
8.00
0.60
N/A
8.00
38.80
Puxi, Shanghai
24.00
2.00
7.00
N/A
N/A
15-20
48-53
Shenyang, Liaoning CEDZ
23.50
2.00
8.00
1
N/A
8.00
42.50
Songjiang, Shanghai
18.00
2.00
8.00
0.5-1.5
0.70
29.2-30.2
Suzhou, Jiangsu SEDZ
4.50
1-2
4.5-9
0.45
3.40
77.5-8213.85-19.35
Wuhu, Anhui CEDZ
23.00
2.00
8.50
N/A
N/A
7.50
41.00
Yantai, Shandong CEDZ
21.00
2.00
8.00
0.6-1.2
0.90
6.00 38.5-39.1



* 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
Recommandment Three:
If you must use JV, Use One Partner for all China Activity
 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 Four:
Quadruple Your Normal Training Plan
 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”
Recommandment Five:
Go Greenfield - Eventually
 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)
Recommandment Six:
Go Quickly – Or Wait Until 2010
 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
Recommandment Seven:
Where Possible, Exploit Export Opportunities
 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
Recommandment Eight:
Due Diligence & Business Plan
 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?)
Recommandment Nine:
Utilize External Experts When Necessary
 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
Recommandment Ten:
Rethink Your Normal Manufacturing Process
 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
THANK YOU