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10 Recommandments For Conducting Business in China Keith Lomason Executive Director — China 10 Recommandments For Conducting Business in China Keith Lomason Executive Director — China

Who is Magna? Auto supplier – ranking in world (sales*) #4 Sales growth – 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. 5 B

2004 Sales Growth $20. 7 B 35% 22% CAGR $1. 9 B 2004 Sales Growth $20. 7 B 35% 22% CAGR $1. 9 B

Magna International Inc. 2005 Group Structure Organization Structure COSMA MAGNA DONNELLY MAGNA STEYR MAGNA Magna International Inc. 2005 Group Structure Organization Structure COSMA MAGNA DONNELLY MAGNA STEYR MAGNA POWERTRAIN DECOMA INTIER INTERIORS SEATING MAGNA CLOSURES

A Global Presence for Global OEMs* Magna Facilities 222 Production Canada 62 USA 82, 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 Coordinate Market Development, Purchasing, and SQA activities for all groups that 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, Magna in China 2006: 2, 500 Employees, 19 Facilities MAGNA POWERTRAIN 11 Magna Powertrain, Changzhou 6 Litens Automotive, Suzhou INTIER INTERIORS 13 CIAI, Changshu 16 CIAI, Changchun 15 Interlink, Suzhou 7 MAGNA International, CHINA Shanghai, Pudong 16 COSMA 8 MTTS Tianjin, Tianjin (Operational 7/2006) 14 Cosma, Anting 18 Tianjin 8 9 10 INTIER SEATING 1 Intier Jiao. Yun Automotive Seating, Anting (Previously SLASSCO, Shanghai) 17 Intier-Das Mechanisms, Suzhou 19 Intier-Das Seating, Fuzhou 18 Intier-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, Guangzhou 3 MAGNA STEYR MSF Engineering Center, Wuhan 12

Global Production Shift Towards Lower Cost/Higher Growth Markets R G 3. 0% CA 2. Global Production Shift Towards Lower Cost/Higher Growth Markets R G 3. 0% CA 2. 1% CAGR 3. 7% C l The industry enters a new stage of utilizing new capacity in Emerging Markets l Mature markets will grow more slowly as production is displaced l 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 Average of $8 The Labor Cost Shift Growth of Sourcing from ULCCs and 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 l Global platform rationalization enables for a shift to Ultra-Low Cost Countries (ULCCs) l HCCs Average of $23 -27 per hour Inflation of 2 -3% per annum Several OEMs looking to ‘escape’ competitive High Cost Countries (HCCs) l A number of situations where Low Cost Countries (LCCs) will lead the charge into export markets

Why China? 1990’s 2000’s l Lower Costs • Market Share l Market Potential • Why China? 1990’s 2000’s l Lower Costs • Market Share l Market Potential • Scattered opportunities l PRC Govt. & Industry - Grow with existing customers l PRC Govt. & Industry - Grow with new customers l “good deal” - Grow into new products/capabilities hungry for investment partnerships offered

The “Ten Recommandments” Preface: l Every investment must be: – Evaluated on its own The “Ten Recommandments” Preface: l Every investment must be: – Evaluated on its own merits – Structured in the best way to benefit your company l 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 Recommandment One: Investment Vehicle = WFOE Exception should be made ONLY if partner provides strategic Market Share l There are many functions you can start in China today that do not require a local contact: – Purchasing – Engineering – Sales and Marketing l 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) l Maximum tax rate Recommandment Two: Location = Central Government Economic Development Zones (CEDZ) l Maximum tax rate of 15%* l Central government approved and managed l Listed in WTO documents (legal structure) l More developed infrastructure than most other areas l 55 locations – there is one near where you want to be!

Comparing Economic Development Zones and Non-EDZs Investment and Operational Costs Comparing Economic Development Zones and Non-EDZs Investment and Operational Costs

Social Benefit Standards 2004 l * Total (%) of Salary represents money that company Social Benefit Standards 2004 l * Total (%) of Salary represents money that company must pay to government on behalf of the employees l 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 l

Recommandment Three: If you must use JV, Use One Partner for all China Activity Recommandment Three: If you must use JV, Use One Partner for all China Activity l Reduces intellectual property exposure l Lower costs for overseas support, training, engineering, etc… l Visteon “best practice” comparison from beginning of China activity l 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 l Education different from that in North Recommandment Four: Quadruple Your Normal Training Plan l Education different from that in North America or Europe – Learning through memorization and repetition vs. Free thinking and creativity l High turnover - especially in coastal areas l In many cases, must continually break “bad habits”

Recommandment Five: Go Greenfield - Eventually l Very few existing structures are adequate for Recommandment Five: Go Greenfield - Eventually l Very few existing structures are adequate for long-term use – Land cost in China is still relatively cheap, but will only continue to climb l 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 l Tax reduction/holiday foreign invested Recommandment Six: Go Quickly – Or Wait Until 2010 l Tax reduction/holiday 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 l Large volumes overall, but extremely fragmented and therefore difficult to justify investment

Recommandment Seven: Where Possible, Exploit Export Opportunities l Fragile domestic market – it is Recommandment Seven: Where Possible, Exploit Export Opportunities l Fragile domestic market – it is growing, but has plateaus, is very fragmented and first-time buyers cause swings l Improves economies of scale l Quality requirements for exports typically higher than domestic requirements resulting in better product than domestic competitor l 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 l Profits will be harder to come Recommandment Eight: Due Diligence & Business Plan l 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 l Hype must be ignored – know what to expect and have robust business plans – most competitive market in the world right now l Get ready for OE & Supplier shakeout and consolidation (20% during next 5 years? )

Recommandment Nine: Utilize External Experts When Necessary l Good legal advice is critical – Recommandment Nine: Utilize External Experts When Necessary l Good legal advice is critical – Keep it focused on key issues – Have solid exit/takeover clauses for JVs – Ensure all tax advantages are utilized l Understand that negotiations with a PRC partner begin AFTER the contracts are signed – not a ploy, simply a difference in cultures l 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 l Overcapacity exists at the OEMs, but Recommandment Ten: Rethink Your Normal Manufacturing Process l Overcapacity exists at the OEMs, but is even more prevalent at the Tier-2 level and below l OEMs do NOT pay for most tooling up front but want it amortized – this cost can be pushed down to the component supplier l 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 l Suppliers and sub-suppliers will need constant assistance with SQA and development activities l + management costs/- capital & component costs

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