COMMERCIAL VEHICLES Forecast China Commercial Vehicle …THE IMPORTANCE OF CHINA’S MARKET: With close to 50% of the world’s commercial vehicle production, China’s medium and

China State Information Center ACT Research Co., LLC • www.actresearch.net

COMMERCIAL VEHICLES Forecast

China Commercial Vehicle OUTLOOK

Q1 2014

The China Commercial Vehicle OUTLOOK is published quarterly by Americas Commercial Transportation Research Company, LLC (ACT), 4400 Ray Boll Blvd., Columbus, IN 47203. Phone: 812-379-2085, Fax: 812-378-5997, e-mail: [email protected] Copyright 2014 by ACT with all rights reserved. Reproduction, copying, or publication of this report in whole or part is not permitted without prior approval. This document is for internal use only. Questions and subscription requests should be directed to K.W. Vieth, Publisher.

Contributor to Blue Chip Economic Indicators

and WSJ Economic Forecast Panel

TABLE OF CONTENTS

Q1 2014 • China CV OUTLOOK Copyright 2014 • All rights reserved

Page(s) Report Highlights ............................................................................................................................................................. 1 Preface: The Importance of China’s CV Market ............................................................................................................ 2 Macroeconomic Analysis ............................................................................................................................................ 3-8 Economic Overview Short-term Forecast Transport Environment & Industrial Policies .......................................................................................................... 9-19 Market Environment Industry Policies Commercial Truck & Bus Market Performance ..................................................................................................... 20-22 Forecast Summary ................................................................................................................................................... 23-30 Forecast Data .................................................................................................................................................... 31-32 Short Term Forecast to Q4’14 Long Term Forecast to 2018 Market Competition ................................................................................................................................................. 33-38 Special Features ...................................................................................................................................................... 39-41 Impact of NG Fuel on China’s Commercial Vehicle Market China NS4 Emission Standards Implementation Implications Appendix ....................................................................................................................................................................... A-1 Data Specifications OEM Alliances The China Commercial Vehicle OUTLOOK is published quarterly by Americas Commercial Transportation Research Company, LLC (ACT), 4400 Ray Boll Blvd., Columbus, IN 47203. Phone: 812-379-2085, Fax: 812-378-5997, e-mail: [email protected] Copyright 2014 by ACT with all rights reserved. Reproduction, copying, or publication of this report in whole or part is not permitted without prior approval. This document is for internal use only. Questions and subscription requests should be directed to K.W. Vieth, Publisher.

Q1 2014 • China CV OUTLOOK • Page 1 Copyright 2014 • All rights reserved

Click paragraphs to zoom to more details

MACROECONOMIC ANALYSIS

The pace of China’s economy eased slightly in Q4’13, with growth of 7.7% on a y/y basis.

Infrastructure and manufacturing investments continue to be strong, but Q4 did see some slowing.

Exports ended Q4 at 4.3% growth. Imports ended the year up 8.3%.

Confidence rose again in December, reaching 102.3 and declined to 101.1 in January 2014.

Q4’13’s CPI was lower than expected.

PPI flat-lined in Q4 as a result of surplus production capacity.

Expectations for the next two quarters call for growth in the neighborhood of 7.4% in Q1’14 and 7.6% in Q2.

TRANSPORT ENVIRONMENT & INDUSTRIAL POLICIES

Manufacturing investment was a drag to GDP in Q4, which fell to 7.7%.

Manufacturing overcapacity continues to drag industrial investment.

Concern continues regarding real estate inflation pressures as well as speculative investment.

All investment, except power generation, declined in Q4.

New regulations restricting local debt are expected to pose downward pressure on infrastructure per capita.

China’s foreign trade situation continued its improvement in Q4 as domestic and international economies improved.

MEDIUM & HEAVY TRUCK MARKET PERFORMANCE

Heavy duty truck sales rose dramatically, ending the quarter with 68% y/y growth.

Significant heavy duty tractor demand continued in Q4, up 72% to 74,400 units.

Medium duty truck demand declined y/y for a second consecutive quarter in Q4, down -29.2% to 58,300 units.

Q4’13 domestic sales of large and medium buses rose 6% y/y to 36,100 units.

FORECAST

Heavy and medium truck (including tractor) markets will continue to grow in Q1’14, although modestly.

Declining growth is expected in the large and medium bus segments in Q1’14, with growth forecast to enter the negative side of the ledger during Q2.

The need for freight vehicles will rise corresponding to upticks in consumption and foreign trade, but only after existing trucks are engaged.

The next two quarters will see moderation in business and leisure travel. Growth is expected to be largest for the school bus and LNG transit bus markets.

MARKET COMPETITION

Dongfeng Group, CNHTC, and Shaanxi Automobile Group maintained their positions as the three largest heavy truck manufacturers in Q4’13.

FAW maintained its first-place market share ranking in Q4.

Major movement occurred in the medium duty market again in Q4, an indication of intense competition.

Yutong Group’s Q4 sales skyrocketed to 34%, from the previous quarter’s 24%, propelling them over King Long and into the bus market’s lead position.

SPECIAL FEATURES

Increasing costs of diesel and the growing unacceptable levels of air pollution have created an opportunity for the development of LNG-powered units.

LNG buses comprise more than 50% of the total new energy bus market.

Full implementation of China NS4 has been delayed until January 1, 2015. The major reason for the delay is the lack of availability of lower sulfur fuel.

The major difference between the implementation process in China and the rest of the industrial world is that China controls the change based on “registration” date rather than “manufacturing” date.

HIGHLIGHTS


China/U.S. Foreign Exchange RateJanuary 2008 - February 2014

Chinese Renmimbi to One U.S. Dollar

Source: Federal Reserve Board, ACT Research: Copyright 2014

08 09 10 11 12 13 145.50

5.75

6.00

6.25

6.50

6.75

7.00

7.25

7.50Yuan per US$

THE IMPORTANCE OF CHINA’S MARKET: With close to 50% of the world’s commercial vehicle production, China’s medium and heavy duty truck markets are the largest globally, according to data provided by the International Organization of Motor Vehicle Manufacturers (OICA). China’s economic revolution and construction of the highway system have spurred a boom in domestic Chinese commercial vehicle demand. Infrastructure building is occurring at a frantic pace, and the new interstate system with new regulations is changing the way freight is hauled. Progress in logistics will result in more efficient freight transportation, supporting the anticipated shift to a more domestic-oriented economy, but will likely moderate long-term commercial vehicle demand.

The steady and sustained growth of China’s economy will garner close attention from other worldwide vehicle manufacturers and suppliers, and the country’s market share is set to continue at solid levels for years to come.

Although many second and third tier component providers continue to work with 1950s-1970s technology, truck plants and key suppliers have invested in state-of-the-art machine tools and manufacturing processes from around the globe. Chinese suppliers are currently using the same design and analysis software used by their North American and European counterparts. Because they are working with large international firms, they are getting the same quality and process certifications procured by anyone who wants to work with big multinational firms.

EXCHANGE RATE: The exchange rate between the Chinese Yuan (¥ or RMB) and the $US is shown in the graph below. From the middle of 2008 to Spring 2010, the exchange rate remained at approximately ¥6.80 for each $US. By the end of February 2014, as reported by the Federal Reserve, the exchange rate had weakened to ¥6.07/USD.

PREFACE


China Real GDPY/Y Percent Change

Q1 '05 - Q4 '13

Source: People's Bank of China/National Bureau of Statistics ACT Research Co., LLC: Copyright 2014

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 405 06 07 08 09 10 11 12 13

0

2

4

6

8

10

12

14

16

18Percent

ECONOMIC OVERVIEW

The pace of China’s economy eased slightly in Q4’13, with growth of 7.7% on a y/y basis. That was down slightly from the 7.8% pace of Q3, which was the strongest since the 8.1% rate posted for Q1’13. Full-year 2013 real GDP growth was 7.7%, down slightly from 2012’s 7.8% expansion and above the 7.6% market prediction. For perspective, 2012’s expansion was the slowest annual advance since 1999, and growth was 9.3% in 2011 and 10.4% in 2010. We expect growth to slow a bit with GDP increasing around 7.5% y/y during the first two quarters of 2014.

Two factors contributed to Q4’s slowdown. First, government policy shifted from stabilization to economic structure adjustments after the Q3 growth pop. Second, recent stimulus policies masked the industrial overcapacity problem. Once those policies were relaxed, the market’s capacity surplus became more evident. As a result, manufacturing and infrastructure investment slowed, the path of the PPI reversed, and industrial production softened.

A look at the economic sectors indicates that consumption growth hit its 2013 peak during the fourth quarter, reaching 13.7% m/m in November, before declining to 13.6% in December. This remains slightly behind the 14% pace for the same time one year ago, tempered by the “Eight Provisions” implemented earlier in the year to combat extravagant spending by government officials. These provisions resulted from a December 2012 meeting of the Political Bureau of the CPC Central Committee, which detailed ways for the government to be better received by the general public. Many of these provisions centered on frugality, the reduction of unnecessary spending, and the scaling of “pomp and circumstance” during official and necessary events. Q4 consumption was buttressed by extraordinarily strong online shopping. E-commerce continues to grow in popularity.

Infrastructure and manufacturing investments continue to be strong, but Q4 did see some slowing. Urban fixed asset investment grew just under 20%, while the pace of manufacturing investment slowed slightly, ending Q4 at 18.5%. The downtick was credited to growth-stabilizing policies that expired during the quarter. Real estate investment continues to cool, restrained

by policies discouraging multiple-home ownership; it grew between 19% and 20% as opposed to the 21% to 23% growth rate earlier in 2013.

Imports and exports both ended Q2 in negative territory, down 0.7% and 3.1%, respectively. By the end of Q3, amid an improving international environment, both rebounded with imports growing 7.4% and exports declining by only 0.3%. While not yet near the double-digit export levels of 2012, China’s exports are being propelled by recovery in the European and American economies. Exports ended Q4 at



Q1 2014 • China CV OUTLOOK • Page 4

Copyright 2014 • All rights reserved

4.3% growth, after a one-month spike of 12.8% in November. Imports ended the year up 8.3%, the highest monthly increase since July 2013.

Inflation, as measured by the CPI, rose at a 2.6% pace in both 2012 and 2013. The year’s CPI hit 3.2% for the second time in October, before sliding to 3% in November and 2.5% in December. January 2014 CPI also arrived with 2.5% growth. Recent price acceleration resulted mainly from rising food prices. The NPC target for 2013 CPI growth was set at 3.5%, while 90bps above 2012, that target was lower than the NPC’s previous 4% target. As of December, inflation at the producer level was down 1.4% y/y and remained flat m/m during all three months of Q4. According to China’s National Bureau of Statistics (NBS), PPI continued to fall in January 2014, dropping to -1.6% y/y. The measure has been in negative territory for the past 23 months.

Investment: Urban fixed investment grew at a 20% q/q pace in both Q2 and Q3, off 100bps from Q1’s pace. Although it declined slightly in Q4, urban fixed asset investment still finished December above 19%. Real estate investment slowed by an equal amount between the year’s first two quarters, reaching 21% in Q2 and dropping to 20% in Q3. After small declines in October and November, real estate investment finished Q4 at nearly 20%. Manufacturing investment growth began a slow acceleration in Q3 and by September stood at a rate of 18.5% y/y. The indicator hits its yearly high at 19.1% in October, before falling to a quarter-ending 18.5% y/y. Investment will likely maintain its current plateau in the next two quarters as the economy stabilizes. However, the potential exists for decelerating investment in manufacturing amid the current overcapacity, although this may be tempered somewhat if inflation remains below the 3% mark.

Consumption: Retail sales growth in Q4 was up slightly, rising from Q3’s 13.3% end to 13.6% at the end of Q4. Retail sales ranged between 12 and 14% in 2013, down from 2012’s 14-15% range. Strong consumer sentiment helped support consumption in Q4, as did the online shopping “festivals” These “festivals,” occurring on 11/11 and 12/12, should be considered similar to the United States’ “Cyber Monday” type of e-commerce spending surge.

Consumer confidence at the end of Q2 was 97.0, its lowest point since November 2011, but this indicator jumped to 99.8 by the end of September. October’s reading spiked to 102.9, before dropping to 98.9 in November. According to the NBS, confidence rose again in December, reaching 102.3 and declined to 101.1 in January 2014.

Sales of home appliances and video equipment grew an average 14% in Q4. November’s spike placed Q4’13 sales well above the 10% expansion seen in Q4’12. Although furniture sales increased an average 22% in Q4’13, that was far below last year’s 29% Q4 growth. On the other hand, construction and decoration material sales rose an average 25% in Q4’13, 3% higher than the average sales in the same quarter of 2012.

Foreign trade: Amid Q1’13 policy incentives, both export and import volumes spiked sharply, growing an average 19% and 9% q/q, respectively. Foreign trade slowed in Q2 as dramatically as it rose in the previous quarter; the average m/m export growth in Q2 was 4.2% while average import growth was 5.3%. Additionally, 1H’13 saw the State Administration of Foreign Exchange’s (SAFE) Notice on




Relevant Issues Concerning Strengthening Management of Foreign Exchange Inflow. The policy was implemented to reduce abnormal cross-border funds, or “hot money”, and to address speculation that China’s trade surplus data had been over-inflated to veil monies in the wake of the Yuan’s appreciation.

At a news conference in early July, Zheng Yusheng, spokesman for the General Administration of Customs, said that the country’s foreign trade is facing “severe challenges” and predicted that adjustments would continue for the next 6 months. Later that month, Premier Li Keqiang noted, “China faces a complex and challenging environment, with exports and imports easing their pace of growth.” He added, “We need to advance innovative mechanisms to enhance trade facilitation and enterprises’ competitiveness.” His statement was coupled with announcement of temporary customs clearance simplification, fee adjustments, and operational easing.

Foreign trade fared better in 2H’13, with imports in positive territory for all six months and exports only negative in September. Imports ended December with 8.3% growth, while exports ended the year’s final month at a 4.3% increase. While the former’s rise is being attributed to

improved world economies, the latter’s restricted growth resulted from rising costs and declining productivity.

China continues to expand Free Trade Zones (FTZs), indicating commitment to financial and economic reform by the new leadership. However, not all foreign activities are permitted in these areas. Many focus on financial and service industries more than manufacturing. One of the restrictions directly impacting commercial vehicle operations and demand is a restriction on investment in motor transport companies engaged in cross-border road transportation. The full list of restrictions is too long to be included here but can be found through an internet search for “Special Administrative Measures for Foreign Investment Access to the China (Shanghai) Pilot Free Trade Zone.”

Inflation: Prices as measured by the CPI rose at a 2.6% pace in 2012 and 2013, with the potential for greater inflationary pressure in 2014.

CPI % change y/y Jan 2013 2.0% Feb 2013 3.2% Mar 2013 2.1% Apr 2013 2.4% May 2013 2.1% June 2013 2.7% July 2013 2.7% August 2013 2.6% September 2013 3.1% October 2013 3.2% November 2013 3.0% December 2013 2.5% January 2014 2.5%

Q4’13’s CPI was lower than expected because the economy grew at a slower rate than anticipated; the supply of vegetables was




greater than it has been in previous years as a result of warmer winter weather, and seasonal pork prices fell.

PPI flat-lined in Q4, having no m/m changes from October through December as a result of surplus production capacity. Year-over-year growth fell to -1.5% in October, before ticking upward and reaching -1.4% in the quarter’s two final months.

PPI % change y/y Jan 2013 -1.6% Feb 2013 -1.6% Mar 2013 -1.9% Apr 2013 -2.6% May 2013 -2.9% June 2013 -2.7% July 2013 -2.3% August 2013 -1.6% September 2013 -1.3% October 2013 -1.5% November 2013 -1.4% December 2013 -1.4% January 2014 -1.6%

The central government continued its prudent monetary policy in Q4’13, as both M1 and M2 stabilized. New loan volume in Q4’13 remained below expectations but did increase in all three months of the quarter when compared to the same months in 2012.




SHORT-TERM FORECAST China’s Q3 real GDP performance surprised a bit on the high side, arriving at 7.8% y/y. The economy continued to grow in Q4 but at a slower 7.7% pace. Nevertheless, softness continues and expectations for the next two quarters call for growth in the neighborhood of 7.4% in Q1’14 and 7.6% in Q2. Full-year annual growth for 2014 is forecast at 7.5%. Monetary policy should remain mildly restrictive in an attempt to control inflation, while caution dominates consumption.

Investment is the primary driver for economic development. The economic slowdown caused by overcapacity that was illuminated in November 2013 will continue through 1H’14, resulting in further softness in the manufacturing sector. Lackluster investment momentum is expected near term for the following three reasons:

After the Third Plenary Session in Q4’13, the central government began adjusting the way local government success is measured, including placing emphasis on the importance of the environment. These measures are gradually being implemented to prevent fiscal risk and will be beneficial mid- to long-term. However, they will negatively impact short-term investment at the local level and will reduce funding to projects recently started.

Many local governments are plagued with high debt-to-revenue ratios, rapidly growing debt, and high repayment levels. To counteract these concerns, the central government is attempting to adjust debt structures and this will hinder short-term infrastructure investment and heavy duty truck sales. Additionally, it could drive a continued shift to tractors from dump trucks.

Financial reforms, including the use of a market system, are increasing interest rates. This was noted twice in 2013 when monetary shortages were reported in the middle and at the end of the year. Investment funds are getting more difficult to obtain and this pressure will decrease local investment efforts.

Consumption is forecast to be stable in Q1’14, as the country’s economic cycle enters a period

of lower growth. Online shopping festivals in Q4’13 and the Chinese Spring Festival in February 2014 stimulated consumer demand. Additionally, urban income has rebounded from its Q2’13 trough and retirees have received a pension pay increase. Coupled with high consumer confidence levels, consumption is forecast to rise in Q2’14. However, efforts to combat corruption and advocate government thrift that were implemented in 2013 will continue to restrain high-end consumption, such as entertainment-related products and services, until a new norm is achieved.

Foreign Trade: As other economies recover, foreign trade will remain strong. Despite actual demand increases, however, this may not be represented nominally as comparisons will be against the inflated export data from previous years. Factors impacting the forecast include:

Improvement in global economies not seen for the past five years provides new hope for export growth, as long as there are no unforeseen tailwinds.

Foreign trade will be aided parallel to the strong U.S. dollar. Though appreciating a little against the dollar, it will appreciate more when compared to other currencies and this will enhance the RMB’s exchange




rate, as well as China’s export competitiveness.

Q1’14 export statistics may be skewed when compared to the false trade data of the previous year. By Q2’14, this comparison is expected to be mitigated and growth will rise.

Import growth will likely remain subdued, as domestic demand, manufacturing investment, and corporate profits cool.

Inflation: A close watch will be kept on the growth rate of domestic consumption. Although there has been explosive growth in on-line shopping, the impact on total consumption has been relatively minor. The shift of the Chinese economy from an export-driven system to more domestically driven will continue, but it will be closely watched to prevent the build-up of any significant inflationary pressures. CPI will

continue at a slow pace, although the food component will need to be closely monitored. PPI, which up to the most recent quarter has been contracting, should be kept in balance, maintaining the equilibrium achieved in late 2013. Prudent fiscal policies will remain in effect over the near to medium term to assist in these efforts.

Real estate inflation and speculation continues to be a concern. The pressures in the major cities will continue to be the subject of policies to prevent speculation and the resulting price impacts. The efforts of “townization” will continue, as an attempt to reduce pressures of population shifts to major urban areas and allow for a development away from the high population density eastern areas.


TRANSPORTATION ENVIRONMENT

Overview

Q3’s uptick in GDP growth to 7.8% was supported by an upswing in manufacturing investment. However, manufacturing investment was a drag to GDP in Q4, which fell to 7.7%. In addition, real estate investment remained stable and infrastructure investment declined, the latter creating a negative impact to specialty truck demand. Other factors influencing Q4 transportation demand included:

An explosive growth of online shopping that drove demand for freight transportation.

Export growth rose moderately as U.S. and European economies grew stronger while imports slowed.

Bus demand was supported by the Q4 release of new subsidy policies for energy efficient vehicles, despite the fact that these subsidies are smaller than those issues previously.

Fiscal expenditures increased at year’s end, which resulted in an upswing of bus sales.

One policy from earlier in 2013 had residual impact on Q4 commercial vehicle demand, while two others had minimal effect during the quarter but are predicted to be more significant long-term. In addition, the third Plenary Session of the 18th CPC Central Committee was held in Q4 from which policy reforms are expected to create downward pressure on commercial vehicle demand short-term before providing long-term support.

Implementation of the National IV Exhaust Standard for Heavy Commercial Vehicles scheduled for July 1st sparked pre-buys for many commercial vehicles earlier in 2013. The market reacted to the increased cost associated with vehicles equipped to meet China IV standards, which are similar to Euro IV regulations. The pre-buy impact varied widely, as implementation of the new regulations varied regionally, although most influence was reported in large cities on the east coast. This variability was in response to limited availability of low sulfur fuel, a requirement for operation of the trucks with the new emissions equipment. Another wave of implementation is expected in Q1’14, which

resulted in Q4’13 pre-buy pressures. Again, the policy is not being implemented nationwide, but rather will depend on wider fuel availability at the local level, although there will be more impact in the major metropolitan areas. This is causing uncertainty and pre-buys continue ahead of local implementation. Continuing concern over the success of both China IV regulations centers around the widespread and consistent availability of diesel fuel with the appropriate sulfur levels for the emissions equipment being installed on commercial vehicles.

The Hybrid-power Bus Promotion Project, launched at the end of Q3’12 by four Ministries including the MIIT (Ministry of Industry and Information Technology) ended at the end of May. This resulted in purchasing of large hybrid-powered buses prior to the expiration of the available subsidies. The backlash was a drag on Q3 bus sales. On September 17, 2013, the four Ministries jointly introduced a continuation notice for new energy vehicle subsidies, which slightly re-energized bus demand.

On August 1, 2013, value-added tax (VAT) began replacing business taxes for the service sector. This includes the transportation industry and is expected to benefit the truck market. (More details are available on page 17 of this report in the Industry Policies Section.)

The third Plenary Session of the 18th CPC Central Committee was held in Beijing from November 9-12. Discussions resulted in a series of reform proposals for the Central Economic Working Conference, the Central Urbanization Conference and the Central Rural Working Conference. Reform policies are expected to be comprehensive when released in 2014, with short-term downward economic pressure but longer-term growth potential.

MARKET ENVIRONMENT

Construction Market

Investment slowed dramatically in Q4’13, after remaining at a low, but stabilized level since Q3’12. Manufacturing overcapacity continues to drag industrial investment, despite the central government’s effort that began in Q2’13 to




address the overcapacity issue by restricting the launch of new projects. Much of this decelerating came from investment in tertiary industries. Investment growth in primary industries remains high as the government proceeds with its growth strategies. However, the governmental adjustment and control of investment in steel, cement and coal industries led to slower growth for the secondary industries, despite real estate market stabilization. Tertiary industry growth slid in correlation to the slide of infrastructure investment. Additionally, high local debt forced the central government to strengthen regulations to mitigate risks; this will restrain investment growth in the short-term.

For clarification, production of raw materials and basic foods/agriculture make up primary industries, while secondary industries consist of finished goods manufacturing, processing and construction. Tertiary industries are the economy’s services sector, such as retail and wholesale distribution, entertainment, restaurants, banking, health care and law.

China’s economy continues its transition from agrarian to urban. The most recent official figures indicate that 52.6% of China’s mainland population resides in urban areas. This shift will continue, as China’s NBS (National Bureau of Statistics) projects urbanization will reach 75% of the mainland population by 2034. Attaining this very aggressive target will be helped by the “townization” efforts, where urban movement is more localized, with urban areas created closer to the rural areas. The result would be a shorter move for the relocating population, and an easing in the continual issue of ever-increasing population density in the eastern/coastal area of the country.

Compared to 2012’s high level, construction investment growth in 2013 has slowed. However, activity remains positive and new projects continue to be started, although at a slower pace. In December, roughly 33,000 new projects were added month over month, which translates to 66,000 new projects y/y. However, investment volume didn’t increase significantly, signally that the December additions were smaller-scale projects. Local investment continues to be the major source of momentum, but growth in this category has slowed, with y/y gains dropping to 20% by the end of December. The quarter’s average monthly investment growth was less than 21%. Central government investment surprised on the upside again in Q4, rising to an average monthly investment growth just over 11%. This comes as debt continues to mount and headwinds from central government regulations are factored into the situation. In an effort to control local debt and investment, the central government will begin associating the project with the particular person assigned to the effort on a permanent basis. This new policy is expected to inevitably reduce local investment growth rate.



Real Estate

Skyrocketing real estate sales began in 2012 and lasted through Q1’13 when sales increased 61%, while the number of houses sold spiked at 37%. Three months later, the story was quite different with real estate sales, while still strong, growing 43% and units sold up 29%. Sales growth at the end of Q3 was down to 34% while unit sales growth reached 23%. The pace of commercial housing sales and volume continued to cool in Q4, shrinking to growth of just 8% and 14%, respectively. During the same time, housing prices continued to rise.

Concern continues regarding real estate inflation pressures as well as speculative investment. As regulations are implemented and enforced, a gradual decline is expected in this market. Real estate remains pivotal to the economic vitality of many provinces as they struggle with the balance between housing supply and demand.

The recently completed third plenary session of the 18th CCP Central Committee did express concerns regarding imbalances in real estate investment. Implementation of regulations to address those concerns will bring great uncertainty to the development of the real estate industry. For the time being, the main focus for the real estate industry is structural constraints. In first tier cities the housing price keeps rising because demand is far greater than supply, but in third and fourth tier cities prices are lower as supply is greater than demand.

In the next six months, regulations regarding housing construction and purchase are expected to tighten in first and some second tier cities, but policies may be relaxed in third and fourth tier areas. Tight controls will remain on the purchase of second and third homes. In first and second tier cities where demand is greatest, housing prices will continue to rise, but prices are expected to remain low in third and fourth tier areas where oversupply has been prevalent for quite some time. This difference in regulatory treatment could be encouragement as an interim step in the ongoing rural-to-urban population shift, termed “townization.” This effort supports the continued rural-to-urban population movement, but attempts to redirect that population shift to smaller urban areas outside of the population-dense first and second tier cities that are concentrated in the eastern/coastal area of the country.

Infrastructure Construction

Infrastructure investment in Q3 was elevated and a significant source of support for economic growth. Investment in rail, road transport, and water conservancy maintained double-digit growth throughout the quarter. All investment, except power generation, declined in Q4. At the end of Q3, rail transport investment grew 10%. Growth of these investments oscillated in Q4 from 4% to 2%, before ending the year at 6%. While road transportation investment slipped, it did fare better than rail. This sector began Q4 with 24% growth, which only slid to 19% by the end of the quarter. Water conservancy and environmental and public facilities investment grew at a slightly slower pace, just 27% at the end of 2013 compared to the 30% growth rate seen at the end of Q3. Power generation investments were the only area where



investment accelerated, ending 2013 at just over 18%.

New regulations restricting local debt are expected to pose downward pressure on infrastructure per capita, causing growth to decelerate in Q1. However, potential for investment to rebound exists in Q2 following administrative sessions expected in March that should restart investment efforts.

Central and Local Government Investment

Central government revenue growth was 18% in Q4, following a 12% jump in Q3 and an 8% rise in Q2. After a year’s work, revenue managed to exceed the 13% growth of Q4’12. Revenue growth for local governments rose 14% in Q4, jumping from Q3’s 11% growth rate. This level of revenue growth was enough to maintain a proactive fiscal policy. Fiscal expenditures grew by just 5.3% during Q3, lower than the previous quarter. However, Q4 expenditures surged to 27%. Expenditures continue to address quality of life issues, such as environmental protection, housing assistance, education, and health care.

Fiscal income and spending are expected to moderately decline in the next six months. November’s PMI and PPI both indicated the coming of economic pattern change and this will negatively impact short-term revenue. Coupled with pressure on local governments to control debt and mitigate financial risks, expenditures are forecast to be subdued because more than 80% of China’s total fiscal expenditures are generated from local governments.

ROAD FREIGHT MARKET

In 1H’13, both y/y freight growth and turnover fell to levels last seen in January 2012 and before that in December 2009, amid lackluster consumer demand. By the end of Q3, growth reached 10.4% (9.31 billion tons), while turnover was 11.5% (1.8 trillion ton kilometers). The road freight market maintained its status quo in Q4 with volume up 10.1% (9.67 billion tons) and volume up 11.9% (1.9 trillion ton kilometers).

In the next two quarters, the economy is expected to grow slowly. As the macro economy ticks



upward, so goes demand for cargo transportation.The recent boom of online shopping is expected to bolster freight demand capacity as consumers take to the internet to buy. One caveat that will impact tractors is the central government’s policy restructuring for capacity-surplus industries that will dampen demand for transportation of commodities such as steel, coal, and cement. In addition, water and rail transportation costs are lower than those for road movement, and this will have a negative impact on the latter’s demand.

Bulk Commodities

Production of construction-related commodities saw an uptick in Q4’13, but power generation volume decreased. Although steel output declined, ending the quarter at 10% compared to the near 16% growth rate seen at the beginning of the period, iron ore and cement production rose. While the former oscillated from 6% to 11% to 10% during Q4, the latter finished December with an 11% growth rate. Coal production was able to jump into positive growth territory during 2013’s final quarter, gaining 1.5% in October and 2.5% in November. The last time coal production was above zero was January 2013.

Despite the fact that steel, coal, and cement are a major focus of national efforts to control capacity, local governments have been increasing investment in these areas, which supports transportation demand of these commodities. While good for industry, this increases the opportunity for more excess capacity situations in the future. Implementation of stronger regulations to curtail the oversupply is expected.

With local governments under less pressure, measured only by economic growth, emphasis on investment in high energy consumption industries is expected to decline. This reduction, especially in coal production, should be supported by the central government. Coupled with anticipated strict restructuring of the steel, coal, and cement industries, efforts to shrink capacity are expected. In the next two quarters, production growth of bulk commodities will slow.

Consumer Goods

Following approval of the central government’s policy known as the “New Eight Provisions” consumption of high-end retail and hospitality products has decreased. This resulted in a drag to the hotel and catering industries in early 2013, slowing growth to between 8% and 9% throughout 2013 compared to the double-digit escalations seen over at least the past five years. Growth in these segments will remain muted. While high-end service demand remained low, there was an uptick in middle and low-range service provider



demand. Overall, retail growth, which had hovered in the 13% range for most of the year, achieved 14.3% growth in 2013’s final two months. Most of the uptick came from the online shopping craze. Significant acceleration was seen in the purchase of communication equipment, furniture, and building materials.

In the next two quarters, consumer spending is expected to grow moderately, particularly when compared to 2013’s low base level. One note for the coming six months is CPI change. If CPI rises significantly, consumption will be impacted and the central government would be expected to address the situation to prevent inflationary pressures from spiraling out of control.

Foreign Trade Goods

China’s foreign trade situation continued its improvement in Q4 as domestic and international economies improved. Total foreign trade volume in China increased by just over 7% y/y, with nearly 8% growth in exports and just below 7% improvement on the import side of the ledger. For comparison, export growth in Q3 was 4%, while imports grew nearly 9% during the same period. As foreign trade increases the demand for freight transportation will rise as well.

Moderate improvement is expected in China’s foreign trade situation through 1H’14. In order to crack down on false trade, in May 2013 China’s State Administration of Foreign Exchange (SAFE) issued a Notice on Strengthening the Management of Foreign Exchange Inflows. During the adjustment period as these regulations take effect, it is important to remember that data prior

to May might have been exaggerated. Exports are expected to experience accelerated growth though, as emerging economies recover. Additionally, foreign trade will continue to grow as China’s domestic demand accelerates and generates additional demand for imported goods and materials. To summarize the short term foreign trade outlook, export demand will show stable growth over the next two quarters, while consumer demand will drive import trajectory.

Oil prices

The international oil price fluctuated around $100 USD/barrel in Q2’13, but with changes in the geopolitical climate USD/barrel prices experienced slightly more volatility in Q3, topping at $110/barrel. As the risks subsided in mid-September, prices began to fall and by the end of October they reached just over $96/barrel. Overall, prices remained below $100/barrel through the remainder of 2013 and into Q1’14.

In the year’s first quarter, the National Development and Reform Commission (NDRC) adjusted its oil pricing system. The original 4% adjustment limit, which was meant to stabilize oil



prices versus the international market gyrations, was eliminated and the adjustment interval was shortened from 22 to 10 working days. The new policy implementation resulted in four price adjustments during Q4. Domestic diesel prices were reduced by 95 Yuan/metric ton on November 1st and reduced by 155 Yuan/ton on November 14th. The next two shifts were upward with prices rising by 155 Yuan/ton on November 29th and by 60 Yuan/ton on December 12th. (Note: 1 metric ton = 7.33 bbl) Crude oil supplies are expected to increase during the next six months and prices will likely be less volatile, but much hinges on global economic recovery and geopolitical forces.

PASSENGER TRANSPORT MARKET

Urban and rural resident incomes continue to grow, but at a much slower rate than in 2012. Urban income grew near 7% throughout 2013, while rural residents saw their incomes increase just over 9%. Although lower than January’s 104.5 reading, consumer confidence rested near 100 in Q4, improved from its Q2-ending slump of 97.0.

Q4’s results generated a subdued improvement of highway passenger transport demand. Passenger transport volume grew, but at a slower pace than the previous quarter. Volume was up 4.9% in Q4, compared to Q3’s 5.7% y/y gain. Passenger turnover was also lower than the previous quarter, arriving at 6.4% in Q4 versus the 6.9% y/y uptick in Q3.

The coming two quarters should bring some stability, albeit muted, to this segment of the commercial vehicle industry. Cyclically, Q3 is the peak tourism season, as families travel before students return to school in the fall. Q4 travel diminished, as expected. Coupled with the fact that competition for passengers is growing between road, rail and air, slight declines are expected in passenger road transport. Of course, there are still areas of the country where the rail system is less developed, but the growth of this mode of transportation will have limited impact on overall passenger volume. The continuing rise of residents’ incomes and more positive confidence



measures will underpin growth in this segment.

Corporate profit growth ranged from 13% to 19% during 2013, ending the year just above 16%. Profits of state-owned companies declined 4.1% y/y by the end of Q2, but skyrocketed nearly 16% on the positive side of the ledger in Q3. Q4 profits rose around 9%. Private enterprise growth ticked slightly upward to 14% in Q4, from the previous quarter’s 13.5%. The Business Climate Index stood at 121.5 at the end of Q3’13, almost unchanged from Q2’s 120.6 reading and down considerably from Q1’s 125.6 level. The measure slipped further in Q4, falling to 119.5. The Entrepreneur Confidence Index now stands at 117.1, where it landed in Q2 and is down from Q3’s 119.5 reading. Confidence hasn’t ranged this low since 2009. The slight downturn in business climate and confidence indices will likely reduce business travel. This segment of the road passenger market is expected to remain subdued in the next six months.

Another factor impacting demand for passenger transport vehicles is the personal vehicle market. With increased desire for independent travel, private cars are being used more frequently. This will, to some extent, reduce long-term potential demand for transit buses and coaches. In Q4’13, domestic demand for personal vehicles reached a three-year high, growing 30% y/y. This elevated growth rate is a result of political and policy stimuli, as well as a low previous year base comparison. One policy that had a positive impact on private vehicle demand was the toll waiver during the National Day Holiday. New warranty policies also aided sales in October. Policies like the purchase limit regulations in Tianjin suggest introduction of similar legislation elsewhere, and this will prompt consumers considering a vehicle purchase to do so before limits are implemented in their area. Because muted economic growth is expected in the next two quarters, the auto market will be a bit sluggish. First quarter auto purchasing confidence may be buttressed by highway toll waivers during the Spring Festival Holiday. During 1H’14, private vehicle demand is expected to grow between 15% and 18%.

INDUSTRY POLICIES

One previous policy had residual impact on Q4 commercial vehicle demand, while two others had minimal effect during the quarter, but are predicted to be more significant long-term. In addition, the third Plenary Session of the 18th CPC Central Committee was held in Q4, resulting in policy reforms that are expected to create downward pressure on commercial vehicle demand short-term before providing long-term support.

Limits & Measurement of Pollutive Emission Released by Compression Ignition Vehicle Engine: On May 30, 2005, the Ministry of Environmental Protection (MOEP) and the general Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China (AQSIQ) jointly launched this policy, which scheduled the National Stage IV Emission Standard for Diesel to to be implemented on January 1, 2011. However, at the end of 2010, the effective date was postponed for one year due to limits of production technology required for vehicle modifications as well as issues with the availability



of quality (low sulfur) diesel fuel required by the new engines. At the end of 2011, the effective date was again moved, this time to July 1, 2013, because higher quality diesel was still not available.

As part of a meeting on May 21, held by the China Combustion Engine Industrial Association to promote the implementation of the new emission standard, Tang Dagang, Director of Vehicle Emission Supervision Center of the MOEP said, “Stage IV Standard was confirmed to take effect on July 1, 2013.” Since the new standards involve changing technology and fuel quality, operational costs for heavy duty commercial vehicles will increase because of increased vehicle cost along with higher fuel pricing. In addition, customers are concerned about “backward compatibility” of the new fuel to the existing engines approved under National III Emission Standards.

An executive session held a year ago by the State Council demanded that CNPC and Sinopec accelerate the pace of diesel fuel upgrade so that the the higher quality fuel would be available nationally by the end of 2014. With that goal in mind, expectations are for full implementation of the Stage IV emissions regulations in early 2015. Because full implementation is not expected near-term, pre-buys of existing design commercial vehicles continues and is expected to bolster demand of these units at least 1H’14.

Business Tax Changed to Value-added Tax (VAT): In January 2011, the State Council authorized a pilot tax reform program that would change business taxes to a value-added tax. Implementation is being handled by the Ministry of Finance and the State Bureau of Taxation and began on January 1, 2012. It began with the transportation industry in Shanghai and some modern service industries. By August 1, 2013, the reform was implemented nationwide for these industries. Beginning on January 1, 2014, the rail system and postal service were added to this taxing system, meaning that all transportation related businesses now pay tax via a VAT rather than the traditional business tax rate. VAT reform includes: Rates ranging from the standard 17% to a low

rate of 13% with newly-added rates of 6% and 11%. The latter rate applies to tangible

personal property like leases, while the 6% rate applies to other modern service industries.

The general tax calculation applies to industries of transportation, postal service, communication, service, cultural and sports-related, real estate sales, and intangible transferred assets.

The simplified calculation applies to the finance and insurance industries, as well as consumer services.

VAT is payable on income with deductions allowed for payment and advanced asset revenue.

Import and export services are charged VAT in China, but are exempt abroad.

Transportation and logistics companies will pay the VAT according to their profits, rather than their revenue. In other words, the more tax paid on input items, such as a new vehicle, the less tax paid on final profit. When purchasing a new vehicle, the purchaser will receive a VAT invoice listing the sales tax. This amount will be deducted from the firm’s income/profit tax paid later. Because most areas didn’t implement the VAT reform until August 1, 2011, only trucks purchased after 2011 can take advantage of this program. Those purchasing vehicles prior to 2011 must use the former depreciation method to calculate their payable tax. As a result, companies with assets (vehicles) from 2011 or older will pay higher taxes, which makes replacing those units desirable. Additionally, newer vehicles will cost less in oil consumption and repair costs, as well as providing improved performance. Coupled with a 17% tax reduction, many logistics firms believe the time is right to make purchases and this will contribute positively to the growth of heavy duty truck demand. Notice for Continuous Promotion and Application of New Energy Vehicles (NEVs): On January 17, 2013, the National Development and Reform Commission (NDRC), the Ministry of Finance and two other ministries introduced a notice to accelerate the development of NEVs, energy conservation, emission reduction, and air pollution abatement. Subsidies are being offered for both the development as well as for the purchase of NEV vehicles. When used, the goal is to make the purchase price of a NEV bus



equivalent to the purchase of a conventionally powered bus for the local government purchaser. To some degree this is an extension of previous efforts. Following approval by the State Council, the ministries began to promote the NEV subsidy programs. Applications will be accepted through 2015 on the purchase of NEVs. Policy specifics include: Vehicles available for subsidies from the

central government must be qualified Battery Electric Vehicles (BVs), Plug-in Hybrid Vehicles (PHEVs) and Fuel Cell Vehicles (FCVs). Preference will be given to NEVs for use by government and public agencies, including buses.

Subsidies will reduce consumers’ costs for NEVs, which tend to have higher premiums.

Funds will be appropriated to NEV manufacturers on a seasonal basis. OEMs must apply for these subsidies at the end of each season through the local financial and technological departments where sales are registered. The application will be submitted to the Ministry of Finance and the Ministry of Technology by the local finance and technology departments. Following an audit, the four ministries will appropriate the subsidy funds and determine the payment schedule.

Subsidy payments are calculated as the difference between the comparable non-NEV price and the higher NEV fee. A sample schedule follows:

Thousand YUAN per vehicle

Types The length L（meter） 6≤L＜8 8≤L＜10 L≥10

BVs 300 400 500

PHEVs(REEVs included)

NA 250

Additionally, the subsidies for super-capacitor and lithium titanate quick charge BVs are 150,000yuan. The subsidy for BEV specialty vehicles, used mainly in postal, logistic and sanitation vocations, is 2000yuan per KWH, which comes to less than the 150,000yuan level for each vehicle. Super-capacitor technology allows for better performance and faster recharges when combined with conventional batteries in buses. With China being the world’s largest producer of lithium titanate, those subsidies also help support that domestic industry as well as the many

supporting industries for that battery technology. Although the new subsidies apply only to BEVs and PHEVs, the central government will increase expenditure allowances for highly recommended NEVS. This is expected to boost the sales of large and medium buses through Q4’14.

Market Influences Resulting from the Third Plenary Session of the 18th CPC Central Committee: The Third Plenary Session convened on November 9, 2013 in Beijing to consider President Xi Jinping’s work report. On November 12th, The Decision of the CPC Central Committee on Several Important Issues of Comprehensively Deepening Reform (The Decision) was reviewed. As a result of The Decisions’ analysis of the relationship between China’s economy and government a series of reforms are planned: Reposition the relationship between the

market and the government: o The Decision states that allocation of

resources should be more market driven, that the government’s direct involvement in this process should be sharply reduced, and that the government should serve as an overseer or “night watchman.”

o Any price that can be impacted by the market will be set by the market in the future, rather than the government.

o Except for some special areas, investors and enterprises will no longer need government review and approval, as long as all regulations and laws are followed.

o A unified market entrance system will be implemented to reduce entry barriers and create a more level playing field.

o Research and development efforts will be guided by the market.

o The objective of this restructuring is to allow the market to drive economic activities without as much intervention from the government as has been needed in the past.

o The economic role of the government will be to ease fluctuations, prevent economic risks, make rules governing the market, strengthen market oversight, and provide public services.

Fiscal and financial reforms including: o The Decision states that the central and

local governments’ financial and administrative authority are currently



unbalanced. To increase fiscal revenue, local governments pay great attention to land, raising land prices, creating high housing prices, and authorizing land grabs. Local governments have also financed investment and other efforts using credit, creating risky debt situations.

o According to The Decision, the central government’s administrative authority on expenditures for public service should be increased.

o The local tax system needs to be adjusted to insure sufficient local tax revenue.

o Reform specifics include improving annual budget control, establishing multi-year budgeting, creating budget transparency, and cancellinig priority spending linked to GDP.

Reform land structures now divided into either urban or rural: o Rural land cannot be traded and the only

way it can be rezoned for urban uses is through government-backed land acquisition. Farmers have no share in value added to the land and when farmers migrate to cities, the land sits idle.

o More land is needed to increase urban construction, and land for these uses is in short supply.

o The Decision states that reform should include a construction-land market in which farmers would receive compensation.

o During a Central Conference on Rural Work in December and a Nationwide Urbanization Work Conference held in December, both groups concluded that rural land reform is necessary, that rural urbanization, also termed “townization”, should be a priority. To ensure that does not severely impact long-term food

production, a “red line” should be established to secure both quantity and quality of foods and grains for the future.

Reform State-owned Enterprises (SOEs): o The Decision illuminated long-standing

problems of the SOE system, including lack of market innovation and entrepreneurial spirit, low operator initiative, too much short-term government intervention, and too little long-term government supervision.

o Because SOEs are state owned, they have a close relationship with the government and banks, which has created both an innate advantage as well as an entry barrier for private enterprises. Therefore, reform must be market oriented, and a separation between government and enterprises must be made.

o Separation measures need to include a division between supervision and capital management, integrating SOEs in the market economy by developing a diversified ownership economy, managing SOE classified areas, and encouraging non-public enterprises to participate in SOE reform.

The Third Plenary Session of the 18th CPC Central Committee wants the market to decide the level and direction of resource allocation and believes the level of government intervention should be reduced. The Committee promotes resource conservation, strengthening system standards and government supervision, improving the quality of economic development rather than the speed of economic growth, and increasing efficiencies. Overall, these reforms are expected to negatively impact commercial vehicle demand.


Q4’13 growth in the three commercial vehicle sectors yielded varied patterns. Heavy duty truck sales rose dramatically, ending the quarter with 68% y/y growth, while medium truck sales contracted, down -36.7% y/y at the end of December. Large and medium bus sales closed 2013 on a positive note, after oscillating from -6.7% y/y growth in October to 17.3% in November and finishing December at 5.9%. Heavy truck and tractor growth was spurred by 2012’s weak volume, which created “easy comps.” Additionally, the impact of the Nation IV Standard, general replacement demand and a steady macro economy also helped support the improvement, with the heavy duty equipment faring particularly well. Medium duty vehicles saw declines for the second consecutive quarter when compared to elevated 2012 levels caused by policies encouraging sales of these vehicles.

HEAVY DUTY TRUCKS (Dump & Straight)

Domestic sales of Chinese heavy duty trucks (excluding tractors) switched directions q/q in Q4, jumping to 112,000 units from Q3’s 88,000 units. This is a 43% y/y increase and the third quarter growth has exceeded 30%. Exports fell again, dropping -9.5% y/y to 14,400 units. The decline primarily continues to be a slowdown of emerging country economies, political instability in other countries, and appreciation of the RMB.

The country’s stable economy contributed to the growth of heavy truck sales in Q4, buttressed by sales resulting from the National IV Emission Standard. Incomplete chassis growth improved, more than 39% y/y, while freight hauling truck demand rose nearly 42% y/y in Q4. Construction-related vehicle growth dropped in 2013’s third quarter, down 6.7% y/y, before turning positive in Q4, with 25% growth.

HEAVY DUTY TRACTORS

Following an eight-month sales slump, Q2 and Q3 tractor demand saw dramatic y/y jumps ahead of the scheduled July 1st National IV Standard emission implementation. It is also noteworthy that these comparisons were against a very weak previous year base in 2012. The significant sector demand growth continued in Q4, up 72% to 74,400 units. Year-over-year domestic sales comparisons in Q4 were:

2012 2013 October -32% 50% November -21% 80% December 7% 88%

COMMERCIAL TRUCK & BUS MARKET PERFORMANCE



In addition to the lower 2012 comparison base, factors impacting Q4’13 domestic tractor sales included:

Replacement demand – Tractor demand between 2008 and 2010 was high and replacement of those units began in Q3’13 and continued in Q4.

National IV Emissions Standard – Despite the fact that these regulations took effect on July 1st, enforcement remains uneven. The central government has issued no enforcement notice and has instead abdicated this to local governments. Because local authorities are free to begin enforcement on their own schedule, tractor demand continues to release in the form of local pre-buys in advance of local IV Emissions Standards implementation. The implemenation is occurring more in the major metro areas, and the rate of implemenation is being slowed by the availabiltity of the appropriate low-sulfur fuel.

MEDIUM DUTY TRUCKS

Q1’13 medium duty growth was just 7.5% y/y, with 67,000 units sold. In Q2, domestic medium duty truck sales reached 80,000 units, up 31.5% y/y and 24% higher than Q1. While still positive year over year at 3.6%, Q3 domestic sales of medium duty trucks was nearly 28% lower than Q2’13, at 56,000 units. The slowdown resulted from comparison to solid sales in Q3’12. Also a factor was a shift to heavy duty trucks during the quarter. Although this was good for that part of the industry, it was a drag for the medium duty truck segment. For these same two reasons, medium duty truck demand declined on a year-over-year basis for a second consecutive quarter in Q4, down -29.2% to 58,300 units.

Evaluating the market by body types, the incomplete truck and transport segments both saw negative growth in Q4, the former falling to -16% with the latter to -30%. Specialty vehicles dropped considerably in Q1, down 29% y/y.



Although still on the negative side of the ledger, the rate of decline moderated for these trucks in Q2 and Q3, with declines of 11% and 12%, respectively. This segment’s demand plummeted in Q4, down 40% y/y. The specialty market segment has now posted declines for eight consecutive quarters.

LARGE AND MEDIUM BUSES

Q4’13 domestic sales of large and medium buses rose 6% y/y to 36,100 units. This compared to a sharp fall in Q3 when sales tumbled 28% to just 21,000 units. Export volumes also saw an uptick by nearly 7% to 17,500 units. As with its colleague truck categories, low base-year comparisons explain much of the bus market growth.

Considerations impacting the large and medium bus markets in 2013 included:

The 18th CPC National Congress was convened, resulting in a temporary suspension of new passenger bus lines by government authorities.

Negative ramifications lingered from the “Safety and Technology Conditions for Motor Vehicles” regulations that were implemented on September 1, 2012. The impact of these regulations will continue to be seen through most of 2014.

A positive factor for this market is that safe, efficient transportation of students is considered a very important component of China’s societal improvements. The impact will, however, be relatively low in the short-to-medium term.

Policies encouraging new energy use and emission reduction increased the demand for large and medium LNG, electric, and other alternatively fueled city buses.

Alternative fueled buses accounted for 40% of the total large bus sales for most of 2013, suggesting that energy saving and new energy formats are propelling the market. The “clean” operation of these types of buses makes them critical for usage in public transportation in urban areas where air pollution continues to be a major quality of life issue. Medium duty demand improved in Q4 from the previous quarter’s -10% fall to a rise of

nearly 5% y/y. Demand for medium duty buses oscillated through 2013, ranging from February’s 25.5% y/y drop to June’s 28.1% y/y growth.


China Real GDPY/Y Percent Change

Q1 '05 - Q2 '14F

Source: People's Bank of China/National Bureau of Statistics ACT Research Co., LLC: Copyright 2014

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 405 06 07 08 09 10 11 12 13 14

0

2

4

6

8

10

12

14

16Percent

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

0

100

200

300

400

500

600

700

800

900

Percentage

Millions

Forecast of Population Urbanization

Urban Population (Millions) L Urbanization (%) R

Source: China State Information Center ACT Research Co., LLC Copyright 2014

SHORT-TERM OUTLOOK

Heavy and medium truck (including tractor) markets will continue to grow in Q1’14, although modestly, as a result of replacement demand; an “easy comp” to the same quarter in 2013 also contributes. Ongoing demand will be enhanced with pull-forward/pre-buy purchases due to concerns over the implementation of National IV Emissions Standards. A y/y decrease is expected in Q2 amid economic softness and a stronger 2013 comparison base. Consumption, aided by domestic delivery needs generated by growing e-commerce impact, is expected to rise steadily. However, the e-commerce growth will not be enough to offset the downward pressure of investment in real estate, manufacturing and infrastructure. Additionally, import and export growth will be weak in Q2.

Declining growth is expected in the large and medium bus segments in Q1’14, with growth forecast to enter the negative side of the ledger during Q2. The downturn will result from higher 2013 sales comparisons. Most of the growth anticipated will come from government purchases, including public transportation and new energy vehicles. Sales of coaches will be negatively impacted by high-speed rail and the popularity and impact of private passenger vehicles. Sales have been declining for the past two years, and a rebound is expected, but it is questionable whether the market will ever return to historic levels.

MACROECONOMIC ANALYSIS TO 2018

China’s economy has undergone profound changes and made great strides in the past thirty years. With GDP per capita now at $6,000, China has become the world’s second-largest economy and moved into the rank of middle-income countries. With this rapid economic development have come national challenges, including an expanding urban/rural income gap. The economy’s rapid development has also caused excessive and poorly regulated mining, power generation, and mid-channel processing industries, such as smelting, which results in growing environmental damage. China’s

economic growth will inevitably proceed at a slower pace in the next five years when compared with the past five years. We estimate that China’s economic growth in the next five years will average 7.5% annually. Balancing income growth between urban and rural areas will continue to be important; improving rural incomes will allow further “townization”, although sufficient rural population levels will need to be maintained to provide needed food and materials for the overall population and economy.

Key factors influencing long-term development:

INTERNATIONAL: Despite positive signals, developed economies lack the impetus needed for dramatic change; therefore, international recovery remains progressive, but slow. Emerging economies are faced with lower growth opportunities. Additionally, there is a concern that accommodative fiscal policies currently in place by leading governments may not continue.

DOMESTIC: Although economic growth means old problems are solved, it also means that new challenges appear. Disparity still exists between urban and rural residents

FORECAST SUMMARY

FORECAST SUMMARY


which has a regional impact on development. Manufacturing overcapacity now exists, and much of that is inefficient and environmentally negative. Those factors combine to make it difficult for business to increase profit and growth. Further compounding these difficulties are growing environmental and social issues. Without legislation it would be difficult to keep internal resources such as fresh waters clean. Additionally, policies are needed to address outsourced dependencies such as the need for foreign oil. Sensing the need to create balance between economic growth and environmental destruction, the State Council created a plan of action for the prevention and control of atmospheric pollution. Although this will mandate a system of responsibility for environmental issues, it will simultaneously shift investment potential from production output to technological innovation.

PRODUCTION INPUTS: When considering long-term economic growth, production-related factors must be taken into account. Those include the availability of labor, capital and total productivity. Each is expected to decline by varying degrees in the next five years.

o Labor: The labor supply will become increasingly tight, as workers’ wages rise and the workforce ages. The continuation toward higher urban population will allow proportionately higher economic growth over the coming years, despite the projected lower growth rate of the active labor force. Urbanization, which is more of a long-distance shift in population, will be joined by “townization”, a second level of population concentration that is less driven by long-distance population movement. This will also help ease the issues related to continually increasing population density in large urban areas density.

o Capital Investment: Capital investments have been stunted as business leaders lack confidence and have adopted a “wait and see” attitude. Capacity, efficiency and location are major factors to be considered, with location being a major consideration regarding urban

environmental concerns. Also, the shift toward a more domestic economy and away from strong export driven growth redirects investment. There are corresponding implications for transportation of goods domestically as well as improvements in logistic productivity. Structural reforms will also impact investment and capital growth.

o Productivity: In the future, production efficiency, innovation, and improved management skills are all factors that will be required to support economic growth. China has implemented many significant economic reforms over the past three decades. These include rural reforms, a shift from a planned economy to a more market-driven economy, open trade and investment reforms in state-owned enterprises and banks, and urban housing reforms. After all the significant gains of the past, future reforms are expected to be more complex and include price implications involving land, labor, and capital.

China’s economy has seen a tremendous amount of growth and the country continues to develop. However, there are still many strategic opportunities to be implemented as development progresses. A recent report to the 18th CPC National Congress noted that there is “stress on adhering to the thinking that only development counts.” Therefore, political leaders will have to “ensure that development is based on improved quality and performance” and “ensure that economic entities under all forms of ownership have equal access to factors of production in accordance with the law.” The report also stated that there is still a need to “make great efforts to promote urbanization.” The Third Plenary Session of the 18th Central Committee of the CPC stressed that economic development is still the priority in policy making.

China’s economic development remains positive overall, but varies somewhat by region, industry, sector, and enterprise.

REGION: Economic transformations in the Eastern region came early and quickly, particularly in the service and manufacturing segments. Activity in the Central and Western

FORECAST SUMMARY


Heavy-Duty Truck SalesUnits & Y/Y % Change

Q1 '07 - Q4 '14

Source: SIC ACT Research Co., LLC: Copyright 2014

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 407 08 09 10 11 12 13 14

0

50

100

150

200

250

-50

Units (000s)

0

50

100

150

200

250

-50

Y/Y %

Domestic

Export

Y/Y % Chg

Total

Heavy-Duty Truck SalesUnits & Y/Y % Change

2009 - 2018 F


2009 2010 2011 2012 2013 2014 F 2015 F 2016 F 2017 F 2018 F

0

250

500

750

1,000

-250

-500

Units (000s)

0

25

50

75

100

-25

-50

Y/Y % Chg

Units

Y/Y % Chg

regions is growing, albeit at a slower pace. Resident incomes in those two areas remain subpar, but there are strong efforts toward improving their regional standing.

INDUSTRY: While growth in the service industry has gained momentum, secondary industries, such as manufacturing, have experienced a slowdown. Expectations are that the service industry will continue to grow as the country moves toward more of a consumption based model, and growth of new sectors of opportunity such as e-commerce will add to that progress. Labor intensive industries will contract long-term, as will heavy chemical industries, especially those with high pollution generation and low profit margins. Investment in power generation will support increased power demand, but will also be directed toward more environmentally friendly power generation. Development in small to medium-sized cities will accelerate longer-term. The impact of e-commerce will be seen in both retail channels as well as the required delivery services

SECTOR: New technology-related businesses are growing faster than traditional sectors, while consumption is outperforming investment-related efforts. Emerging sectors, such as communication and medical technologies, are exhibiting dramatic growth. More traditional businesses, such as pharmaceutical, food, automobile, and textiles, while stable, are not significant contributors to accelerated economic growth. Improvement in non-traditional sectors will parallel the rise in incomes.

ENTERPRISE: Small and medium-sized businesses are the major factors powering job creation, as well as increased tax revenue. In general, they are more innovative and provide the greatest opportunity for enhanced economic development. As they continue to expand, the central government is expected to modify policies to reduce or remove barriers that might limit development for these enterprises.

As long as individuals remain dissatisfied with the economic and social systems, the central government will be motivated to pursue reforms that address Chinese residents’ concerns. Policy

reform will become critical to solving the growing “middle income” trap and these reforms will involve expanding the focus of “development” to include improvement in quality and efficiencies, as well as actively promoting urbanization and marketability efforts.

FUTURE DEMAND FORECASTS

Medium and Heavy Duty Trucks

The need for freight vehicles will rise corresponding to upticks in consumption and foreign trade, but only after existing trucks are engaged. Changes in infrastructure investment and environmental policy will impact commercial vehicle demand, as well. Over the longer term, new unit sales will be determined by freight volume need, replacement demand, and efficiency-driven market change.

Short-term, freight demand is expected to be moderate, with minimal support from foreign

FORECAST SUMMARY


Heavy-Duty Tractor SalesUnits & Y/Y % Change

Q1 '07 - Q4 '14


1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 407 08 09 10 11 12 13 14

0

25

50

75

100

125

150

-25

Units (000s)

0

100

200

300

400

500

600

-100

Y/Y %

Domestic

Export

Y/Y % Chg

Total

Heavy-Duty Tractor SalesUnits & Y/Y % Change

2009 - 2018 F


2009 2010 2011 2012 2013 2014 F 2015 F 2016 F 2017 F 2018 F

0

100

200

300

400

500

-100

Units (000s)

0

50

100

150

200

250

-50

Y/Y % Chg

Units

Y/Y % Chg

Total Heavy-Duty SalesUnits & Y/Y % Change

Q1 '07 - Q4 '14


1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 407 08 09 10 11 12 13 14

0

50

100

150

200

250

300

350

-50

Units (000s)

0

50

100

150

200

250

300

350

-50

Y/Y %

Heavy Truck

Heavy Tractor

Y/Y % Chg

Total Heavy-Duty SalesUnits & Y/Y % Change

2009 - 2018 F


2009 2010 2011 2012 2013 2014 F 2015 F 2016 F 2017 F 2018 F

0

250

500

750

1,000

1,250

1,500

-250

-500

Units (000s)

0

25

50

75

100

125

150

-25

-50

Heavy Truck

Heavy Tractor

Y/Y % Chg

trade, bulk commodities, and domestic consumption. Year-over-year, growth of the heavy and medium duty truck markets in the next two quarters will slow, and post some declines on the way to a minor y/y drop in 2014. These markets will return to a y/y growth path in 2015.

Road freight volume is composed of construction materials (cement, sand, stone, etc.), bulk commodities (coal, iron, and steel), and consumer goods. China’s economy will grow steadily over the upcoming years, but that improvement will progress at a slower rate than in the recent past.

o Construction is driven by infrastructure and real estate investment. China’s urbanization and townization trends will continue but at a slower pace, with heavy industrialization entering its later growth phase. As a result, infrastructure investment will continue to grow, with emphasis on railways, roads, and

airports, but at a more moderate rate during the next five years than the previous five. Moreover, urbanization will continue to support real estate demand.

o Bulk Commodities: Economic growth will put continued pressure on bulk commodity consumption. Growth in materials such as coal, iron, and cement will continue, but at a slower pace. Again, it bears mentioning that coal hauling is a critical driver of regional truck demand. Many of China’s industries are high-energy consuming businesses, and ongoing environmental and energy efficiency initiatives will constrict their growth. Economic restructuring should also improve the rate of bulk commodity consumption per unit of GDP. According to the “12th 5 Year Plan”:

Coal output is projected to grow, but at a slower rate than the overall economy. The output of raw coal in

FORECAST SUMMARY


Medium-Duty Truck SalesUnits & Y/Y % Change

Q1 '07 - Q4 '14


1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 407 08 09 10 11 12 13 14

0

20

40

60

80

100

-20

-40

Units (000s)

0

25

50

75

100

125

-25

-50

Y/Y %

Domestic

Export

Y/Y % Chg

Total

Medium-Duty Truck SalesUnits & Y/Y % Change

2009 - 2018 F


2009 2010 2011 2012 2013 2014 F 2015 F 2016 F 2017 F 2018 F

0

50

100

150

200

250

300

350

-50

-100

Units (000s)

0

5

10

15

20

25

30

35

-5

-10

Y/Y % Chg

Units

Y/Y % Chg

2013 was 3.68 billion tons, a 0.8% y/y increase. Future coal production will be strictly controlled in correspondence to energy-saving policies, air pollution control, and adjustments to China’s energy structure.

While China’s economic growth will generate increased demand for steel, the rate of growth will be at a more modest pace than that seen recently. The output of crude steel in 2013 was 780 million tons, a 7.6% y/y increase. It is projected that 2.58 billion tons of steel will be consumed by 2015. Based on comparisons to industrialization in the U.S. and Japan, China’s demand for steel still has room to grow and will shift from export driven usage to demand more driven by domestic requirements. China is now in its mid- to late-stage industrialization and its per capita crude steel consumption was 573 kg in 2013. This compares to the crude steel peaks of 710 kg in the U.S. and 1089 kg in Japan at the height of those countries’ industrialization periods.

o Consumption: Macroeconomic policies will gradually shift emphasis toward “safeguarding investment” and “expanding domestic consumption.”

The 12th 5-Year Plan calls for increasing income, business, and

consumer confidence, as well as new policies to increase consumer spending.

During the 18th National People’s Congress (NPC), the central government proposed for the first time that per capita income of urban and rural residents should double by 2020, which is greatly conducive to consumption.

Total retail sales of consumer goods were 23.781 trillion Yuan in 2013, a 13.1% y/y increase. This was 11.5% y/y, adjusting for price increases.

As income increases and consumer confidence builds, retail sales of consumer goods will steadily rise. Correspondingly, transport demand of consumer goods will also rise.

Investment in railway construction is expected to increase, especially to support the transport of coal. This shift will spur reduction of coal transport by road. Several large capacity coal railway lines are currently in the planning stages. These include lines serving Central and Southern Shanxi: the Zhunger-Caofeidian and the Alashan-Qinhuangdao Railways. The share of freight moved via highways will gradually decline, and with it tractor sales, as goods movement on rail is cheaper, more efficient, and energy saving.

Improvements in vehicle quality, road availability, and logistics efficiency will precipitate an increase in the effective and

FORECAST SUMMARY


appropriate carrying capacity of commercial vehicles. This will impact the transport capacity of each vehicle, but will reduce the number of vehicles needed to move the same amount of freight.

o Investment in roads will continue, although at a slower pace than recent years. The Ministry of Transport has published its National Highway Network Plan for 2013-2030. This is China’s first national mid-to-long term highway network plan. It calls for China’s highway network to reach 5.8 million km, with national highways at 7% (401,000 km), provincial highways at 9%, and rural roads at 84%.

o Vehicle modifications will include higher horsepower and better components, resulting in longer-lasting trucks.

o Cost pressures from oil prices and labor rates will emphasize the importance of increased logistical efficiency. Lower transportation cost per unit will also help boost company profitability. The logistics industry will become more competitive, professional, efficient, and savvy.

Regarding vehicle scrap and replacement, the Ministry of Commerce solicited opinions on the “Draft of Automotive Compulsory Scrapping Standard” during Q1’13. The proposal set limits on the maximum age of operation for commercial vehicles. While having minimal short-term impact, this standard would help support, and potentially smooth, long-term commercial demand. When implemented, it would also result in a gradual upgrading in the efficiency and quality of commercial vehicles in operation.

o Replacement demand is determined primarily by historical sales and retirement policies. Demand is expected to increase in the next five years.

o Rules for Mandatory Motor Vehicle Retirement Standards were published by the Ministry of Commerce in December of 2012 and became effective in May 2013. This stipulates a retirement age and mileage for every type of commercial vehicle.

o In addition, according to Air Pollution Control in Key Areas during the 12th Five-Year Plan, China will basically eliminate yellow label cars registered before 2005. These are high emission vehicles that entered the market prior to the implementation of pollution control standards. While a small percentage of total vehicles in operation, these vehicles are estimated to be responsible for over three quarters of unfavorable emissions. The replacement of these vehicles will undoubtedly have a significant impact on both replacement-driven automobile demand as well as environmental quality.

Medium and Large Bus Forecast

This market is separated into the urban transit, road passenger (tourism and passenger transport), and school bus segments. The next two quarters will see moderation in business and leisure travel. Growth is expected to be largest for the school bus and LNG transit bus markets. The renewal of government subsidies supporting alternate energy buses in 2014 will buttress the alternate fuel share of the market in the future. Some q/q contraction from 2013’s high market proportion is likely in early 2014 before this segment returns to positive performance later in the year.

Urban Transit Market: Although increasing urbanization and national environmental policies will boost demand for municipal buses, the public bus market will grow through 2017 at a decreasing rate, particularly if the increase in private vehicles and larger size public buses are factored into the equation. While urban railway construction will increase, a market for public bus transportation still exists long-term. The largest growth of this segment is expected in smaller cities where the current number of buses is limited. These are also cities that fall below guidelines for urban rail construction.

China’s urban population was 730 million in 2013, an urbanization rate of nearly 54%. At this point, the rate of growth in urbanization is expected to slow dramatically, rising only around 1% annually. China’s urban population

FORECAST SUMMARY


Large & Medium Bus SalesUnits & Y/Y % Change

Q1 '07 - Q4 '14


1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 407 08 09 10 11 12 13 14

0

10

20

30

40

50

60

-10

Units (000s)

0

25

50

75

100

125

150

-25

Y/Y %

Domestic

Export

Y/Y % Chg

Total

Large & Medium Bus SalesUnits & Y/Y % Change

2009 - 2018 F


2009 2010 2011 2012 2013 2014 F 2015 F 2016 F 2017 F 2018 F

0

50

100

150

200

250

-50

Units (000s)

0

20

40

60

80

100

-20

Y/Y % Chg

Units

Y/Y % Chg

is expected to reach 810 million by 2018. Despite this slowing in urbanization growth, this is a societal factor that will continue to drive a growing demand for public transit.

China’s guidelines for rail transportation construction allow subway (underground railway) construction in cities with a GDP over RMB100 billion, fiscal revenue over RMB10 billion, and a population above 3 million people. Light rail lines are permitted in areas with GDP over RMB60 billion, fiscal revenue over RMB6 billion, and population above 1.5 million. Given the continual urban population shift, future rail construction and market penetration will grow rapidly, replacing some need for public transit buses.

Amid growing national priority to curb traffic congestion and pollution, the central government created an action plan to prevent and control of atmospheric pollution, which asks governments at all levels to increase the

number of buses per 10,000 people. It is expected that policy emanating from the 13th Five Year Plan will increase the bus-person ratio to an even greater number, furthering demand for transit vehicles.

Road Passenger Bus Market: The continual impact of income distribution reform will generate steady personal income growth. One of the transportation sector benefits will be increased residential travel. In 2012, high passenger transportation demand accounted for nearly 94% of the overall market. However, this is expected to slow as private vehicle travel becomes more popular. The improved availability of rail transportation in remote areas of the country, which has historically been a source of bus transportation, will result in slower long-term bus transport demand.

The “12th 5 Year Plan” targets personal income growth to exceed GDP growth rate.

o The first challenge is to increase the share of resident income in the total national income distribution.

o Secondly, measures including taxation and transfer will be used to adjust income distribution between different sectors and regions, as well as between urban and rural areas, with an end-goal of gradually improving the incomes of low and middle income citizens in all geographic areas.

o These initiatives will result in a steady income rise over the coming years. Higher incomes will increase consumption expenditures, including travel, with a corresponding increase for road passenger buses as rural incomes are projected to grow faster in an attempt to gain parity with urban areas.

The 18th NPC proposed a project to double income. By 2020 both GDP and per capita income are expected to meet this goal.

The existing railway network serves only selected areas, but road networks have the flexibility to connect the largest cities and the smallest villages. This flexibility means roads serve a greater portion of the population than railways, confirming growth in the passenger bus market.

FORECAST SUMMARY


Grand Total SalesUnits & Y/Y % Change

Q1 '07 - Q4 '14

Source: SIC ACT Research Co LLC: Copyright 2014

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 407 08 09 10 11 12 13 14

0

100

200

300

400

500

-100

Units (000s)

0

50

100

150

200

250

-50

Y/Y % Chg

Heavy Truck Heavy Tractor Medium Truck Large & Medium Bus Y/Y % Chg

Grand Total SalesUnits & Y/Y % Change

2009 - 2018 F


2009 2010 2011 2012 2013 2014 F 2015 F 2016 F 2017 F 2018 F

0

500

1,000

1,500

2,000

2,500

-500

-1,000

Units (000s)

0

10

20

30

40

50

-10

-20

Y/Y % Chg

Heavy Truck Heavy Tractor Medium Truck Large & Medium Bus Y/Y % Chg

Railway construction will continue at a fast pace, particularly in the high-speed passenger segment, as China expands its “bullet train” investment. The railway network is projected to reach 128,000 km by 2020; high-speed passenger railways will be 16,000 km of that system.

Railway passenger transportation is a long-term competitor to mid and long distance bus transportation. The continued growth of rail passenger capacity will support increased residential travel efficiency. China’s relatively low population density will help support new bus demand for long-distance travel in areas not served by the rail system.

School Bus Market: A series of highly publicized school bus accidents sparked significant attention to this market in 2012. Despite the relatively small size of the school bus market, it will grow under the support of state policies.

On April 12, 2012, the State Council passed the Regulation on Chinese School Bus Safety Management. These rules address both local and national responsibilities for school transit administration. Safety technology standards,

operational rules, and proposed government-sourced expenditure support also were addressed. The regulations prioritize rural school bus procurement in the short-term.

Despite this, current policies mandate that “funding of school buses should be shared by the central government and the local government.” They add that this will be “formulated by financial departments of the State Council.” However, these formulas have not been released and the relevant tax incentives have not yet been implemented. While these regulations have not had significant impact in the short term, those obstacles are not expected to significantly thwart long-term growth of the school bus market; demand is inevitable with 182 million high school and primary school students in China. For perspective, if only 10% of the students are transported via school bus, that would require at least 300,000 buses.

With standards of safety and living on the rise, central and local governments will have to provide subsidies to address issues of education and welfare.

Q1 2014 • China CV Outlook • Page 31 Copyright 2014 • All rights reserved

Q1 Q2 Q3 Q4 2011 Q1 Q2 Q3 Q4 2012 Q1 Q2 Q3 Q4 2013 Q1(F) Q2(F) Q3(F) Q4(F) 2014(F)Heavy Trucks 214,645 192,309 107,563 110,179 624,696 139,099 124,524 85,596 93,998 443,217 115,581 164,764 103,850 126,391 510,586 122,000 163,000 106,800 112,900 504,700

Heavy Tractors 76,003 60,874 60,965 59,001 256,843 64,150 43,685 34,362 48,611 190,808 53,176 69,149 60,627 80,452 263,404 60,000 65,000 65,000 65,500 255,500

Total Heavy-Duty 290,648 253,183 168,528 169,180 881,539 203,249 168,209 119,958 142,609 634,025 168,757 233,913 164,477 206,843 773,990 182,000 228,000 171,800 178,400 760,200

y/y % growth 8.7% -20.1% -17.5% -25.3% -13.1% -30.1% -33.6% -28.8% -15.7% -28.1% -17.0% 39.1% 37.1% 45.0% 22.1% 7.8% -2.5% 4.5% -13.8% -1.8%

q/q % growth 28.3% -12.9% -33.4% 0.4% 20.1% -17.2% -28.7% 18.9% 18.3% 38.6% -29.7% 25.8% -12.0% 25.3% -24.6% 3.8%

Medium-Duty Trucks 70,124 81,966 61,218 77,307 290,615 70,935 69,017 60,411 88,297 288,660 73,212 86,128 62,062 65,011 286,413 73,000 87,000 59,000 62,000 281,000

y/y % growth -2.4% 4.5% 2.6% 23.3% 6.6% 1.2% -15.8% -1.3% 14.2% -0.7% 3.2% 24.8% 2.7% -26.4% -0.8% -0.3% 1.0% -4.9% -4.6% -1.9%

q/q % growth 11.8% 16.9% -25.3% 26.3% -8.2% -2.7% -12.5% 46.2% -17.1% 17.6% -27.9% 4.8% 12.3% 19.2% -32.2% 5.1%

Large & Medium Buses 31,354 36,436 45,409 50,252 163,451 32,830 41,168 45,208 50,362 169,568 32,353 45,556 39,643 53,569 171,121 33,000 42,000 50,000 54,000 179,000

y/y % growth 1.8% -5.1% 8.3% 5.6% 3.0% 4.7% 13.0% -0.4% 0.2% 3.7% -1.5% 10.7% -12.3% 6.4% 0.9% 2.0% -7.8% 26.1% 0.8% 4.6%

q/q % growth -34.1% 16.2% 24.6% 10.7% -34.7% 25.4% 9.8% 11.4% -35.8% 40.8% -13.0% 35.1% -38.4% 27.3% 19.0% 8.0%

Grand Total 392,126 371,585 275,155 296,739 1,335,605 307,014 278,394 225,577 281,268 1,092,253 274,322 365,597 266,182 325,423 1,231,524 288,000 357,000 280,800 294,400 1,220,200

y/y % growth 5.9% -14.3% -10.0% -11.9% -7.7% -21.7% -25.1% -18.0% -5.2% -18.2% -10.6% 31.3% 18.0% 15.7% 12.8% 5.0% -2.4% 5.5% -9.5% -0.9%

q/q % growth 16.4% -5.2% -26.0% 7.8% 3.5% -9.3% -19.0% 24.7% -2.5% 33.3% -27.2% 22.3% -11.5% 24.0% -21.3% 4.8%

2012

SHORT TERM FORECAST (including export)

201420132011

FORECAST DATA

FORECAST DATA

Q1 2014 • China CV Outlook • Page 32 Copyright 2014 • All rights reserved

2009 2010 2011 2012 2013(F) 2014(F) 2015(F) 2016(F) 2017(F) 2018(F)Heavy Trucks 423,363 660,510 624,696 443,217 510,586 504,700 532,500 574,500 609,000 628,750

y/y % growth 22.0% 56.0% -5.4% -29.1% 15.2% -1.2% 5.5% 7.9% 6.0% 3.2%

Heavy Tractors 211,241 354,459 256,843 190,808 263,404 255,500 272,800 296,200 316,750 334,000

y/y % growth 8.7% 67.8% -27.5% -25.7% 38.0% -3.0% 6.8% 8.6% 6.9% 5.4%

Total Heavy-Duty 634,604 1,014,969 881,539 634,025 773,990 760,200 805,300 870,700 925,750 962,750

y/y % growth 17.2% 59.9% -13.1% -28.1% 22.1% -1.8% 5.9% 8.1% 6.3% 4.0%

Medium-Duty Trucks 253,174 272,717 290,615 288,660 286,413 281,000 285,750 291,250 297,000 301,750

y/y % growth 19.2% 7.7% 6.6% -0.7% -0.8% -1.9% 1.7% 1.9% 2.0% 1.6%

Large & Medium Buses 129,763 158,722 163,451 169,568 171,121 179,000 186,400 195,000 202,000 207,000

y/y % growth 9.2% 22.3% 3.0% 3.7% 0.9% 4.6% 4.1% 4.6% 3.6% 2.5%

Grand Total 1,017,541 1,446,408 1,335,605 1,092,253 1,231,524 1,220,200 1,277,450 1,356,950 1,424,750 1,471,500

y/y % growth 16.6% 42.1% -7.7% -18.2% 12.8% -0.9% 4.7% 6.2% 5.0% 3.3%

LONG TERM FORECAST (including export)

Q1 2014• China CV OUTLOOK • Page 33 Copyright 2014 • All rights reserved

Make Q4'13 Sales Q4'12 SalesYr/Yr %

Change

Dongfeng Group 31,588 19,874 58.9%

CHNTC Sinotruk 24,430 17,898 36.5%

Shaanxi Auto 17,440 11,451 52.3%

BAIC Group 14,088 12,978 8.6%

FAW Group 11,309 9,907 14.2%

Anhui JAC 8,271 6,167 34.1%

Shanghai Auto 7,019 3,800 84.7%

Anhui CAMC 3,709 2,566 44.5%

Beiben 2,143 2,575 -16.8%

Tri-Ring Group 1,386 770 80.0%

Other 4,986 7,623 -34.6%

Total 126,369 95,609 32.2%

Heavy Duty Truck Market Share Trends


4.0%

1.1%

1.7%

2.9%

5.6%

6.6%

8.9%

11.1%

13.8%

19.3%

25.0%

0% 5% 10% 15% 20% 25% 30%

Q1'13

Q2'13

Q3'13

Q4'13

HEAVY TRUCK & TRACTOR OEMs

STRAIGHT TRUCKS (excluding tractors):

Dongfeng Group, CNHTC, and Shaanxi Automobile Group maintained their positions as the three largest heavy truck manufacturers in Q4’13. Dongfeng’s market share rose from 22% to 25% q/q, while CNHTC’s fell slightly from 20% to 19% over the same period. Shaanxi Auto’s market share jumped to 14% from the previous period’s 13%. Beiqi Foton Motor, at 9%, and FAW Group, 7%, retained their fourth and fifth market share positions during the quarter, insuring a consistent 78% of the market sales for the top five producers. Sales contracted for six of the top 10 manufacturers, with Dongfeng, Shaanxi and FAW the only three to show significant growth. Tri-Ring Group’s share was virtually unchanged at just 1.1%. The largest share declines were reported by CNHTC and Beiqi Foton. Sales of heavy trucks grew at a faster pace than the previous quarter with y/y growth up 32%.

Major factors impacting fourth-quarter sales included:

The slight drop in GDP slowed freight demand as infrastructure and real estate investment contracted.

Pre-buy sales continued ahead of the China IV Emission Standards implementation, which are happening at the discretion of local governments rather than as a country-wide enforcement by the central government.

The replacement of business taxes with a VAT (value added tax) system encouraged logistics companies to replace older equipment prior to the new tax implementation.

Dongfeng and Shaanxi Auto’s efforts in Q4’13 focused on production of incomplete chassis, which drove overall market sales.

SAIC’s sales were concentrated in the specialty vehicle sector.

Downturn in the coal and real estate markets negatively impacted Baotou Beiben’s sales. The company’s future success hinges on locating new revenue market sources.

(For reference, information on strategic alliances between China’s commercial truck OEMs and OEMs from around the world is included on Page A-1 of this report.)

MARKET COMPETITION

MARKET COMPETITION



Change

FAW Group 23,863 14,846 60.7%

BAIC Group 17,121 9,055 89.1%

Dongfeng Group 15,239 6,861 122.1%

Shaanxi Auto 10,477 7,412 41.4%

CHNTC Sinotruk 6,359 5,465 16.4%

Chengdu Dayun 3,389 18 18727.8%

Beiben 1,406 2,227 -36.9%

Anhui CMAC 1,280 878 45.8%

Other 1,392 1,689 -17.6%

Total 80,526 48,451 66.2%

Heavy Duty Tractor Market Share Trends


1.8%

1.5%

1.7%

4.2%

7.9%

13.0%

18.9%

21.3%

29.6%

0% 5% 10% 15% 20% 25% 30% 35%

Q1'13

Q2'13

Q3'13

Q4'13

TRACTORS

FAW maintained its first-place market share ranking in Q4, despite a drop from the previous quarter’s 33% share to just 30% of the market. BAIC and Dongfeng also retained their respective second and third place finishes in Q4, the former with 21% market share and the latter with 19%. The top five were rounded out with Shaanxi and Sinotruck at 13% and 8%, respectively. In China’s tractor market, the top five manufacturers control 90% of the segment’s sales. This is actually down slightly from the 92% controlled by the top five in Q3’13. SAIC Motor moved into the top eight producer category with a 1.5% market share, overtaking Anhui Hualing. Year over year, Chengdu Dayun claimed the largest growth, albeit against a low 2012 comparison, while Baotou North Benz was the only mainstream manufacturer to see sales decline. Year over year growth for this industry segment reached 66%.

Factors influencing the Q4’13 tractor market included:

Much like the heavy truck situation, sales increases primarily resulted from pre-buys in anticipation of the National IV Emissions and VAT implementations.

Although the overall macroeconomic slowing doesn’t fare well for this market, logistics companies are encouraged to purchase additional units to move product purchased via online shopping.

Q4 sales are compared to a low 2012 base.

Chengdu Dayun was able to double its sales q/q as its lightweight products are becoming more accepted in the marketplace.

Dongfeng’s growth resulted from larger logistics companies purchasing en masse ahead of the VAT implementation, growing 122% y/y.

Shaanxi Automobile’s y/y growth slowed to 41%, compared to the previous quarter’s 100+%, as its LNG tractors continue to boost sales.

MARKET COMPETITION



Change

Dongfeng Group 20,098 17,664 13.8%

FAW Group 13,920 14,888 -6.5%

CHNTC Sinotruk 6,283 5,760 9.1%

Qingling 4,929 6,801 -27.5%

Chongqing Lifan 4,194 13,382 -68.7%

Anhui JAC 2,929 3,027 -3.2%

Sichuan Nanjun 2,717 5,304 -48.8%

BAIC 2,638 3,497 -24.6%

Shandong Tangjun 2,519 5,066 -50.3%

Jinbei Automotive 1,631 10,577 -84.6%

Other 3,177 3,160 0.5%

Total 65,035 89,126 -27.0%

Medium Truck Market Share Trends


4.9%

2.5%

3.9%

4.1%

4.2%

4.5%

6.4%

7.6%

9.7%

21.4%

30.9%

0% 5% 10% 15% 20% 25% 30% 35%

Q1'13

Q2'13

Q3'13

Q4'13

MEDIUM DUTY TRUCK OEMs

Major movement occurred in the medium duty market again in Q4, an indication of intense competition. Dongfeng, which dropped from 32% to 23% of the segment in Q3, still sits in the leader position and has regained part of the prior quarter’s losses, now at 31% market share. FAW held onto second place in the quarter, moving to nearly 22% of the segment and narrowing the gap between first and second position. Chongqing Lifan fell to third place in Q4, overtaken by Sinotruck, 3rd, and Qingling Motor, 4th. Jinbei Auto, who was in fifth position last quarter, plummeted to tenth in Q4 with -84.6% y/y sales. Total market share of the top 3 manufacturers grew from 54% in Q3 to 62% in Q4, its highest concentration in three years.

Factors influencing the Chinese medium duty truck market in the fourth quarter include:

Compared to a high baseline in Q4’12, medium duty sales fell year over year, with only Dongfeng and Sinotruk returning positive y/y growth in Q4’13.

To a lesser degree than their heavy duty counterparts, emission standard and VAT pre-buys will positively impact the medium duty segment.

Dongfeng’s growth came from its customer base of larger logistics companies, as well as from market approval of its new products.

Sichuan Nanjun Auto Group’s sales decreased y/y, -48.8%, experiencing a transition period after establishing a joint venture with South Korea’s Hyundai Motor.

MARKET COMPETITION



Change

Zhengzhou Yutong 18041 15025 20.1%

King Long 13232 11525 14.8%

Anhui JAC 4222 4734 -10.8%

Dongfeng Group 3485 3951 -11.8%

FAW 2718 2918 -6.9%

Zhongtong 1814 1184 53.2%

BAIC 1471 1745 -15.7%

SAIC 1439 1276 12.8%

Yangzhou Asiastar Bus

1433 867 65.3%

Jinhua Youngman Auto

1310 1082 21.1%

Other 4384 6052 -27.6%

Total 53,549 50,359 6.3%


Large and Medium Bus Market Share Trends

8.2%

2.4%

2.7%

2.7%

2.7%

3.4%

5.1%

6.5%

7.9%

24.7%

33.7%

0% 10% 20% 30% 40%

Q1'13

Q2'13

Q3'13

Q4'13

LARGE & MEDIUM BUS OEMs

Yutong Group’s Q4 sales skyrocketed to 34%, from the previous quarter’s 24%, propelling them over King Long and into the market’s lead position. King Long fell from Q3’s 27% market share to 25% in Q4. JAC Motor maintained its third position, but share dropped from 9% to 8% during Q4. Dongfeng (7%) and FAW (5%) were able to hold their respective places of fourth and fifth, while BAIC Group overtook the sixth position from Zhongtong. The top two bus makers garnered 51% of the market in Q3, but that jumped to 58% in Q4. This is a three-year high that surpasses Q2’s 56%, as well as the 52% achieved in Q4’12. Overall, the large and medium bus markets grew a significant 6.3% in Q4, compared to the -12.5% drop of Q3.

The large and medium bus market was impacted by the following factors in Q4’13:

Despite slowing economic conditions in China, central government spending rose 15% in Q4, stimulating bus sales.

Sale of energy efficient buses was boosted by the Notice on Continuous Promotion of Energy-efficient Vehicles, which was issued in late September, despite lower subsidies included in the notice.

Local municipalities continue to subsidize LNG and hybrid buses, supporting local bus manufacturers.

Zhengzhou Yutong achieved considerable success in overseas markets during Q4.

Yutong’s benefits came from government contracts.

Yangzhou Asiastar Bus’ sales are improved by a joint venture with Weichai Power.

Public transportation continues to be encouraged in North China, amid the serious air pollution situation.

Alternative fuel options spur the sale of Zhongtong buses, but this is negatively impacted when subsidies are lowered.

MARKET COMPETITION


STRATEGIC ALLIANCES

Sinotruk and Datong Beiyu New Energy Company Form Strategic Cooperation on Transforming Vehicles into Oil- and Gas-Powered: On October 12, 2013, Sinotruk and Datong Beiyu New Energy Company signed a strategic cooperation plan on transforming vehicles into oil- and gas-powered in Datong, Shanxi. Sinotruk’s gas engine, jointly developed with EContols in the US, is one of the most advanced and most stable gas engines in China, winning a large share of the market. Datong Beiyu New Energy Company is a national manufacturer of specialty vehicles. The cooperation on transforming vehicles into oil- and gas-powered will be supported technically by Sinotruk, who will also provide the vehicle components. Datong Beiyu will be responsible for the conversion. Both will establish service points to guarantee after-sales service of these transformed vehicles, ensuring their safety and reliability. JAC Motor’s Southwestern Base Makes Suining, Sichuan Home: On December 1, 2013, People’s Government of Suining, Sichuan, and China Anhui Jianghuai Automobile Co., Ltd. (JAC Motor) signed a construction contract. It is reported that the base will be located in Suining Anju Industrial Park, approximately 1100 mi/1800km southwest of Beijing, and will include three centers: JAC Motor Automotive Engineering and Transformation Plant, the Southwestern Distribution Center, and the Southwestern Sales and Marketing Company.

The construction will take three years, with a planned investment of 1.1 billion RMB (US$178 million) during the first phase. Partial operations are expected to begin in 1H’14 and when completed in late 2016 production over 10 billion RMB (US$1.6 billion) is anticipated. This contract will enhance the manufacturing capacity in Suining and will be crucial for JAC Motor to explore the Chinese Southwest market. Zhengzhou Yutong and China National Machinery Import & Export Corporation (CMC) Sign Strategic Cooperation Plan: On December 19, 2013, Yutong and CMC signed a strategic cooperation agreement which requires full-scale cooperation of the two companies’ key businesses. CMC is the first large state-owned export enterprise in China, exceeding in its information channel, market development, business integration and project investments. Yutong is one of the leading companies in bus and machinery products in China with sales and service networks around the world.

JOINT VENTURES

Dongfeng Motor Group and Volvo Group Receive Initial Approval for Joint Venture: The NRDC (National Development and Reform Commission) gave its approval of this joint venture, which was initially announced in January 2013. The NRDC, an agency under the Chinese State Council, has administrative and planning control over the Chinese economy. While NRDC approval is an important step toward completion of this venture, other approvals are still needed. The plan is for AB Volvo to acquire 45% of a new subsidiary of DFG, Dongfeng Commercial Vehicles (DFCV), which would include most of DFG’s existing medium and heavy duty commercial vehicle business. Completion of the transaction is projected for mid-2014.

Hyundai and Sichuan Nanjun Auto Group Announce Joint Commercial Vehicle Venture: Korea’s Hyundai and Sichuan Nanjun announced plans to produce Hyundai Trago model cargo and dump trucks at a plant in Ziyun Sichuan Province. The facility, a 50/50 venture, will have an annual volume of 160k units. The effort is part of Hyundai’s strategic plan to produce 400k

MARKET COMPETITION


commercial vehicles by 2020, with production reportedly targeted for China, Turkey and the U.S. China production is scheduled to begin later in 2014.

MARKET DEVELOPMENTS

Sinotruk Develops Team to Address Sichuan Province LNG Truck Market: Sinotruk is working on the project with Sichuan Zhongyou Clean Energy, LNG refilling equipment producer Huaqi Houpu and a credit agency. The goal is to promote sales of LNG in Sichuan province in the 2014 through 2018 timeframe. The initial agreement covers the purchase of 600 LNG trucks. Each LNG refilling station is anticipated to have service capacity for 200 to 300 HD commercial trucks.

Shacman LNG Heavy Truck Wins Orders in Sichuan: The truck OEM signed orders with Baima Mining and Panzhihua Fubang for 100 LNG HD Trucks: Shacman’s success in NG trucks is supported by its supply relationships with companies such as Weichai, Fastre, and Hande. Separately Shacman noted that their LNG truck sales volume was 11,000 units in 2013, with a projection of 16,000 trucks for 2014.

Foton Awarded with Orders for 90 Auman LNG Heavy Trucks: Foton received orders for 40 LNG heavy trucks from Zio Fulaide Automotive Sales Co., Ltd in Shandong and 50 LNG heavy trucks from Tangshan Jidong Longsheng Automotive Sales Co., Ltd. The major factors supporting the popularity of LNG trucks are their lower emissions and operations cost.

World’s Largest LNG Project Enters Operation in Inner Mongolia: As reported by chinatrucks.com, Wuhai City of Inner Mongolia announced that the world’s largest coke oven gas liquid natural gas project was complete and entered full operation in early January 2014. The project is located approximately 600mi/1000km west of Beijing. Petro China Kulun Hauyou Natural Gas Co. invested 4.7 billion yuan (US$750 million) in the project, which has been under construction since April 2011. Initial NG production began in October 2012, with full production attained on January 6 of this year. Coke oven gas is a byproduct of the “coking” process that converts coal into coke which is used to make steel. The process removes liquid and gas impurities in the coal, and can cause environmental issues. The project will capture and re-use 1.5 billion cubic meters of coke oven gas, converting it to 320 million cubic meters of LNG, or approximately 250,000 tons of gas, annually. The project will replace the use of as much as 940,000 tons of coal, while the LNG will be used to replace diesel fuel in transportation.


IMPACT OF NATURAL GAS FUEL ON THE COMMERCIAL VEHICLE MARKET

Despite decades-long development in other countries, natural gas (NG) fueled commercial vehicles are relatively new in the Chinese marketplace. NG powered buses appeared in the 1950s, but never dominated the market. However, the growing demand for energy conservation and increased public awareness of environmental protection in recent years has spurred demand for low fuel consuming and reduced emission generating commercial vehicles. Although NG is available in compressed form (CNG) or liquefied form (LNG), China’s domestic focus for commercial vehicles is LNG due to a lack of pipelines.

Much like other countries, China’s commercial vehicle use of natural gas fuel should be analyzed via the different sectors. Because trucks and tractors are used to transport goods, manufacturers and operators chose whatever form of fuel is most economical. On the other hand, buses are primarily used for mass transit, whether it is long-distance travel, inter-city transit, or school transportation. Many of these operations are conducted by government entities and, while economics are important, more consideration is given to environmental impact.

Natural gas’ impact on the truck market

Traditionally, heavy trucks in China are fueled by diesel. However, increasing costs of diesel and the growing unacceptable levels of air pollution caused by this fuel have created an opportunity for the development of LNG-powered units. In 2011, there were 3,000 LNG heavy duty units sold in China. That number increased to 17,000 in 2012 and grew to 30,000 units in 2013.

Despite the higher vehicle premium reported between 70,000 and 100,000 Yuan ($11,400 to $16,000 USD) for an LNG fueled vehicle over its diesel counterpart, the price of NG is 20% to 40% cheaper than diesel. (Note: NG price varies by region. Because the West region has more NG available, the price is cheaper than on the East coast where NG must be imported. Additionally, NG prices are market driven, while diesel prices are set by the government.) With the fuel savings, some companies are able to recover their premium within one year, meaning the firm will spend 70 to 80 thousand yuan less per year in fuel than some of their competitors. Because vehicles using LNG reduce emissions compared to diesel-driven units, they are aligned with national policies aimed at reducing air pollution. Their purchases are supported by local governments, especially those rich with gas resources such as Shaanxi and Xinjiang. LNG

vehicles are also supported in Shandong, where NG stations have been built throughout the province. As with the development of NG in the United States, China’s growth is beginning regionally. Due to the rapid vehicle sales growth in Shaanxi and Xinjiang, the Shaanxi Automobile Group became the first OEM to sell more than 10,000 LNG heavy trucks in 2013.

The biggest limitation to the acceptance of heavy duty trucks powered by LNG is the minimal number of refueling stations. The impact of a lack of infrastructure is similar in both China and the U.S.

SPECIAL FEATURES

SPECIAL FEATURES


Most provinces and cities in China do not yet have, or have few, NG stations.

The National IV Emission Standards are projected to be in place nationwide in early 2015. Currently, the price of trucks that will meet these standards costs 20,000 to 40,000 Yuan more than level III vehicles ($3,200 to $6,400 USD). Each regulatory iteration, and the associated price increase, weakens diesel’s advantage. Additionally, the price of diesel is expected to climb, which will make the NG option more attractive. As price premiums between diesel and NG powered commercial vehicles narrow, the opportunity to develop more demand for LNG heavy trucks will grow. As demand for these vehicles grow, construction of fueling stations to serve the market will also be pressured to expand rapidly. The market share of LNG heavy trucks was 4% in 2013, and is projected to grow to 10% in the next few years.

Natural gas’ impact on the bus market

Although some medium buses use LNG fuel, most units running on LNG in China are large buses. They are primarily used in transit buses, funded by the government for public transportation purposes. During the past two years, the Chinese government has strongly promoted the use of alternative fuel (or new energy) vehicles as they ease urban traffic pressure and reduce air pollution.

With stiff competition from railways for passenger transport, long-distance coach sales have declined in recent years. However, the sale of public buses has been supported by national policy. In 2013, public bus sales accounted for nearly 40% of the total bus market. The percentage of new energy (alternative fuel) units exceeds 60% of that market segment. For reference, new energy buses include electric, hybrid, trolley, and LNG powered units.

Most of the renewed government subsidies for alternative fuel vehicles are designed for electric buses, but some plug-in hybrids will benefit from these incentives as well. However, market stability of these units is poor, despite the available funding. Because many of the hybrid units are not eligible for grants, the sale of these vehicles remains relatively unchanged. On the other hand, LNG and trolley bus sales are more promising in the alternative fuel arena. Of the two, LNG buses offer more opportunities as they are not restricted by the availability of cable construction as are trolley units. LNG buses comprise more than 50% of the total new energy bus market.

Many local governments are encouraging the use of LNG buses. Beijing declared that it would no longer purchase diesel buses and 3,000 buses purchased in 2013 were LNG. Guangzhou currently has 1,619 LNG buses in operation, more than 30% of its fleet. Shandong subsidizes its LNG buses with 30,000 yuan per bus, and Sinchuan has launched a pilot program with eight cities to promote LNG buses. Dazhou plans to use more than 800 LNG buses as part of the Sinchuan program by 2015.

Among the total sales of large and medium sized buses in 2013, LNG accounted for 10%. This percentage is forecast to increase at a much faster rate in the next few years.

SPECIAL FEATURES


CHINA NS4 EMISSION STANDARDS IMPLEMENTATION IMPLICATIONS

On May 30, 2005, the Ministry of Environmental Protection (MOEP) and the general Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China (AQSIQ) jointly launched a policy, which scheduled the National Stage IV Emission Standard for Diesel (NS4) to to be implemented on January 1, 2011.

Although the national government approved the implementation of China NS4, it later delayed full implementation until January 1, 2015. In China the local/provincial governments control the actual implementation and date. The major reason for the delay is the lack of availability of lower sulfur fuel.

In addition, they specified several stages for the implementation of this regulation. The first step required the rule to become effective in July 2013 in first tier cities such as Beijing, Shanghai and Tianjin. The primary reason these areas were chosen for initial implementation was the higher levels of air pollution found there.

The next step was to modify the requirement allowing new vehicles with NS3 certification to continue to be sold/registered. Of course, newer designed vehicles were still required to meet NS4 certification.

The major difference between the implementation process in China and the rest of the industrial world is that China controls the change based on “registration” date rather than “manufacturing” date. This has several consequences that drive market behavior:

Dealer inventory of the older certification level may no longer be registered. Therefore, those vehicles cannot be sold. o This forces a pre-buy of newer

technology truck inventory to minimize inventory risk.

o Dealers can still sell the NS3 vehicles for activities which require no registration, such as agricultural and other uses by rural owners.

o NS3 vehicles could also be sold in regions where full NS4 implementation has not occurred.

o NS3 vehicles can be exported to any country that will accept them.

Fleets and end users are not permitted to

trade or resell older vehicles through traditional channels. o Vehicles can be sold for non-registering

activity uses in rural areas. o Older vehicles can be sold for use in

regions where full implementation has not occurred.

o These vehicles would be sold for export. o Vehicles, which cannot be registered to

another by law, could be retailed in a “gray market” manner by which the original owner would maintain the registration under his name but ownership would unofficially belong to another person or company.

Specialty body builders need to pre-buy the

newer technology to insure completed trucks can be registered.

This approach to implementation drives a pre-buy, but unlike the rest of the world the China pre-buy is driving purchases of newer technology vehicles to support new registrations. In the rest of the world pre-buys generally occur to avoid higher costs or untested technology solutions.

The most advanced areas for NS4 are Guangzhou and Shenzhen (near Hong Kong). Hualing and Dongfeng are the vehicle manufacturers leading the NS4 change. FAW and truck builders using Weichai engines have been slower to adopt as they focus more on rural areas with lower prices.

Q1 2014 • China CV OUTLOOK • Page A-1 Copyright 2014 • All rights reserved

DATA SPECIFICATION: Trucks in China are classified by European weight categories versus U.S. categories. Medium duty trucks in China are rated between 6 and 14 tons. That is reasonably equivalent to Class 4-7 vehicles in the USA. Heavy duty trucks in China are those with GVWs over 14 tons and are equivalent to heavy duty Class 7 and Class 8 in the USA. The table below illustrates the classification system of vehicles in China.

The importance of the China commercial vehicle market has resulted in several alliances being formed between China OEMs and OEMs from around the world. These arrangements can vary in their complexity and strategic intent. For reference, the following table lists current alliances for China’s top commercial vehicle OEMs.

Classification of trucks in US Classification of trucks in China Mini Light Medium Heavy Class Weight (pounds) <1.8T 1.8-6T 6-14T >14T Class 1 6,000 Class2 6,001-10,000 Class 3 10,001-14,000 Class 4 14,001-16,000 Class 5 16,001-19,500 Class 6 19,501-26,000 Class 7 26,001-33,000 Class 8 >33,000

Where US trucks fall in China’s classification system Not included in this class Small portion included in this class Major portion included in this class Totally included in this class

Bus Market Segmentation

Bus Type Bus Length Passenger Capacity (Including Driver)

Medium Bus 7 to 10 Meters 23 to33 Feet

24 to 43

Large Bus Over 10 Meters Over 33 Feet

44 or more

China OEM Alliance with

BAIC Group (Foton) Daimler

Dongfeng Group Volvo

Anhui JAC Navistar

Shanghai Auto (SAIC) / Hongyan Truck

IVECO

CHNTC Sinotruk MAN

APPENDIX

ACT RESEARCH RELEASES NG WHITE PAPER AND

SPECIAL SUPPORTING FLEET CASE STUDY

Natural Gas--- •is gaining traction as a fuel for heavy trucking •acts differently than other fuels when it escapes containment •is lighter than air and will rise •requires code compliant maintenance facilities

AND THAT'S WHY ACT RESEARCH BRINGS YOU THIS NEW WHITE PAPER

TAKING THE NEXT STEP: Preparing the Maintenance Shop for the Arrival of Natural Gas Trucks

A 26 page in-depth look into the process of transforming a maintenance facility from its current state to one that is code compliant.

SPECIAL CASE STUDY

In addition, ACT Research is releasing a natural gas case study featuring Monarch Beverage Company. The study details their transition to a natural gas fueled fleet.

Topics included in this case study---

what prompted Monarch to consider natural gas fuel the financials that made the consideration serious the process of adapting their maintenance facility how Monarch worked with their local fire marshal Monarch's unique position, with their sister company EF Transit, as a shipper and a trucker what they learned and what they would do differently

For more information or to order, click here.

ALSO:

TRUCK FUEL PAYBACK CALCULATORS

Truck fuel payback calculators take the mystery out of making the best fuel choice for the application. They quickly compare diesel powered trucks to NG-spark, HPDI and DNG. Further, by comparing these results, you can then also compare NG-spark against either of the two dual fueled trucks, both new and used.

Access the fuel payback calculators at no charge: Click here.

Americas Commercial Transportation Research Co., LLC, 2014

China Commercial Vehicle OUTLOOK

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