One Billion Customers in China?

Estimation of Passenger Car Demand for

Year 2030

Discussion Document: Shanghai Volkswagen 上海大众

S pecific

M easurable

Achievable

R elevant

T imeline based

Agenda

• Objective

• Model of Replacement Customers

• Model of 1st Time Customers

• Estimation

• Implications

• Appendixes

Estimation of China Passenger Car Demand by SMART 2

SMART estimates passenger car demand in China for year

2030

• Analyze historical dataset from 1999 to 2007

• Do not consider

– Segments

– Regions

– Supply (technology, competition)

Estimation of China Passenger Car Demand by SMART 3

Dataset breaks down as 1st time and replacement

customers, where replacement model is time series linear

• 10-year write-off is defined by regulation

• Auto insurance companies assume average 10-year write-

off and 90% replacement rate in China market

• Total year n = Replacement year n + New year n

– Replacement year n = 90% x Total year n-10

– New year n = 1st Time Customers Model year n

Estimation of China Passenger Car Demand by SMART 4

Year 2000 2010 2020

1st Time

ReplacementTotal90%

90%

Influence chart indicates potential drivers for 1st time

customers demand

Estimation of China Passenger Car Demand by SMART 5

Demand Consumer

Substitute

Complement

-

+

+

Public

TransportationMotorcycle

Bicycle

Road

Highway Gasoline

Insurance

Household

Income

Urban

Population

+

+

-

-

+

+

Cars are not

necessities at

current stage

+

+

+

SMART analyzes potential drivers and remove weak one,

e.g. fuel oil price

Fuel oil price has very weak

correlation with car sales

Pearson = 0.2573105

Fuel oil has weak correlation

with gasoline in China

Pearson = 0.4063604

Estimation of China Passenger Car Demand by SMART 6

Source: Bloomberg

-

100

200

300

400

500

600

700

800

900

1,000

- 500 1,000

Car

Sa

les

(K

Un

it)

Fuel Oil Price (USD)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

- 500 1,000

Ga

so

lin

e P

ric

e (

RM

B)

Fuel Oil Price (USD)

Multiple regression model (square root) explains 99.4%

historical car sales

Estimation of China Passenger Car Demand by SMART 7

Source: CSB

0

1,000

2,000

3,000

4,000

5,000

6,000

Actual Car Sales (K Unit) Model Prediction (K Unit)

0

20

40

60

80

100

120

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

Highway (K KM) Forecast (K KM)

SMART forecasts drivers, e.g. time series square root

model for highway length

Estimation of China Passenger Car Demand by SMART 8

Forecast meets

government plan:

85K KM in 2022

Source: CSB, http://www.gov.cn/ztzl/2005-09/16/content_64418.htm

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,0001999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

Car/Urban Capita% Actual Car Sales (K Unit) Model Prediction (K Unit)

Multiple regression model predicts demand of 1st time

customers

Estimation of China Passenger Car Demand by SMART 9

Source: CSB

Threshold of Mature Stage

Penetration Rate

0

5,000

10,000

15,000

20,000

25,000

Replacement Est. (K Unit) 1st Time Customer Est. (K Unit)

Actual Car Sales (K Unit) Car Sales Est. (K Unit)

SMART estimates passenger car demand in China for year

2030

Estimation of China Passenger Car Demand by SMART 10

≈ 20M

≈ 12M

Source: CSB

≈ 8M

2007 2022 2024

≈ 6M

Estimation identifies managerial implications

• Demand will increase to 20M in year 2030

– Investing China today will bring SVW significant financial return

• Customers behaviors will change around year 2022

– SVW could consider developing new products for replacement

customers

• Household income is the most significant driver in short-

term

– Small cities also have business opportunity for SVW

Estimation of China Passenger Car Demand by SMART 11

Appendixes

Estimation of China Passenger Car Demand by SMART 12

S pecific

M easurable

Achievable

R elevant

T imeline based

Passenger car sales pushes up China gasoline price

Estimation of China Passenger Car Demand by SMART 13

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

- 200 400 600 800 1,000

Ga

so

lin

e P

ric

e (

RM

B)

Car Sales (K Unit)

Source: Bloomberg

Insurance premium is not a driver for passenger car sales

Estimation of China Passenger Car Demand by SMART 14

Source: CSB

-

1

2

3

4

5

6

7

8

9

10

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Possesion of Passenger Cars (K) Average Premium (K RMB)

Road length is too volatile to be a strong driver

Estimation of China Passenger Car Demand by SMART 15

Source: CSB

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

Road Length (K KM) Linear (Road Length (K KM))

Tornado sensitivity chart indicates household income is

the most critical driver

Estimation of China Passenger Car Demand by SMART 16

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

Household Income

Urban Population

Highway Length

Minus Plus

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Household Income (RMB) Forecast (RMB)

Time series S-Shape model forecasts household income

Estimation of China Passenger Car Demand by SMART 17

Source: Bloomberg

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

Population (K People) Forecast (K People)

Time series square root model forecasts urban

population, while government plan indicates same trend

Estimation of China Passenger Car Demand by SMART 18

Forecast

meets 2010

goal 50%

Forecast

meets 2020

goal 60%

Source: CSB, http://www.chinabgao.com/reports/65327.html

USA historical dataset indicates 48% is start point for

mature stage

Estimation of China Passenger Car Demand by SMART 19

Source: US Department of Transportation

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Increase YoY% Motor/Capita%