1. Discussion Document: Shanghai Volkswagen 上海大众
One Billion Customers in China?
Estimation of Passenger Car Demand for
Year 2030
S pecific
M easurable
A chievable
R elevant
T imeline based

2. Agenda
• Objective
• Model of Replacement Customers
• Model of 1st Time Customers
• Estimation
• Implications
• Appendixes
Estimation of China Passenger Car Demand by SMART 2

3. 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

4. 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
1st Time 90%
90%
Total Replacement
Year 2000 2010 2020
Estimation of China Passenger Car Demand by SMART 4

5. Influence chart indicates potential drivers for 1st time
customers demand
Public
Motorcycle
Transportation
+ Cars are not
necessities at
+ Substitute current stage
Household
+ Income
Bicycle - +
+
Demand Consumer
Insurance + +
- Urban
Population
+ Complement
+ -
Road
Highway Gasoline
Estimation of China Passenger Car Demand by SMART 5

6. SMART analyzes potential drivers and remove weak one,
e.g. fuel oil price
Fuel oil price has very weak Fuel oil has weak correlation
correlation with car sales with gasoline in China
Pearson = 0.2573105 Pearson = 0.4063604
1,000 7.00
900
6.00
800
Gasoline Price (RMB)
5.00
Car Sales (K Unit)
700
600 4.00
500
400 3.00
300 2.00
200
1.00
100
- 0.00
- 500 1,000 - 500 1,000
Fuel Oil Price (USD) Fuel Oil Price (USD)
Source: Bloomberg
Estimation of China Passenger Car Demand by SMART 6

7. Multiple regression model (square root) explains 99.4%
historical car sales
6,000
5,000
4,000
3,000
2,000
1,000
0
Actual Car Sales (K Unit) Model Prediction (K Unit)
Source: CSB
Estimation of China Passenger Car Demand by SMART 7

8. SMART forecasts drivers, e.g. time series square root
model for highway length
120
Forecast meets
100 government plan:
85K KM in 2022
80
60
40
20
0
2011
2009
2015
2029
1999
2001
2003
2005
2007
2013
2017
2019
2021
2023
2025
2027
Highway (K KM) Forecast (K KM)
Source: CSB, http://www.gov.cn/ztzl/2005-09/16/content_64418.htm
Estimation of China Passenger Car Demand by SMART 8

9. Multiple regression model predicts demand of 1st time
customers
9,000 100%
8,000 90%
7,000 80%
70%
6,000
60%
5,000
Threshold of Mature Stage 50%
4,000
Penetration Rate 40%
3,000
30%
2,000 20%
1,000 10%
0 0%
2011
2009
2015
1999
2001
2003
2005
2007
2013
2017
2019
2021
2023
2025
2027
2029
Car/Urban Capita% Actual Car Sales (K Unit) Model Prediction (K Unit)
Source: CSB
Estimation of China Passenger Car Demand by SMART 9

10. SMART estimates passenger car demand in China for year
2030
25,000
≈ 20M
20,000 2007 2022 2024
15,000 ≈ 12M
10,000
≈ 6M
5,000 ≈ 8M
0
Replacement Est. (K Unit) 1st Time Customer Est. (K Unit)
Actual Car Sales (K Unit) Car Sales Est. (K Unit)
Source: CSB
Estimation of China Passenger Car Demand by SMART 10

11. 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

12. Appendixes
S pecific
M easurable
A chievable
R elevant
T imeline based
Estimation of China Passenger Car Demand by SMART 12

13. Passenger car sales pushes up China gasoline price
7.00
6.00
5.00
Gasoline Price (RMB)
4.00
3.00
2.00
1.00
0.00
- 200 400 600 800 1,000
Car Sales (K Unit)
Source: Bloomberg
Estimation of China Passenger Car Demand by SMART 13

14. Insurance premium is not a driver for passenger car sales
35,000 10
9
30,000
8
25,000 7
20,000 6
5
15,000 4
10,000 3
2
5,000
1
- -
2000
2002
1998
1999
2001
2003
2004
2005
2006
2007
Possesion of Passenger Cars (K) Average Premium (K RMB)
Source: CSB
Estimation of China Passenger Car Demand by SMART 14

15. Road length is too volatile to be a strong driver
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
-
2005
1999
2000
2001
2002
2003
2004
2006
2007
Road Length (K KM) Linear (Road Length (K KM))
Source: CSB
Estimation of China Passenger Car Demand by SMART 15

16. Tornado sensitivity chart indicates household income is
the most critical driver
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
Household Income
Urban Population
Highway Length
Minus Plus
Estimation of China Passenger Car Demand by SMART 16

17. Time series S-Shape model forecasts household income
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
Household Income (RMB) Forecast (RMB)
Source: Bloomberg
Estimation of China Passenger Car Demand by SMART 17

18. Time series square root model forecasts urban
population, while government plan indicates same trend
1,000,000 Forecast
900,000 meets 2020
goal 60%
800,000
700,000
600,000
Forecast
500,000 meets 2010
400,000 goal 50%
300,000
200,000
100,000
-
2003
2009
2015
2021
2027
1999
2001
2005
2007
2013
2017
2019
2023
2025
2029
2011
Population (K People) Forecast (K People)
Source: CSB, http://www.chinabgao.com/reports/65327.html
Estimation of China Passenger Car Demand by SMART 18

19. USA historical dataset indicates 48% is start point for
mature stage
90.0% 7.0%
80.0% 6.0%
70.0% 5.0%
60.0%
4.0%
50.0%
3.0%
40.0%
2.0%
30.0%
20.0% 1.0%
10.0% 0.0%
0.0% -1.0%
1971
1973
1999
2001
1961
1963
1965
1967
1969
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
2003
Increase YoY% Motor/Capita%
Source: US Department of Transportation
Estimation of China Passenger Car Demand by SMART 19