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China Review The Market for Modern Diesels

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Title: China Review The Market for Modern Diesels


1
China Review The Market for Modern Diesels
  • International Truck and Engine Corporation
  • Power Systems Research Conference
  • October 11, 2002

2
Agenda
  • International Company Profile
  • Diesel Engine Market Review
  • China Market Outlook
  • Assessment

3
INTERNATIONAL corporate profile
Organization Three Business Units
4
International
  • How We Began
  • 1831 - Cyrus Hall McCormick invents the
    mechanical reaper
  • 1902 Creation of International Harvester
    (August is centenary)
  • Five companies merged
  • Financed by J.P. Morgan
  • One of the first multinationals France, England,
    Russia, Germany, South America, Australia .

5
International .
  • How We Began
  • 1907 - Introduces countrys first
    gasoline-powered truck, Auto Buggy
  • 1917 Produced our first factory-made school bus

6
International .
  • 1920s - 1930s
  • 1933 - Our first diesel engine
  • 1934 - Our first cab-over-engine truck
  • 1935 - K line truck - later the first Chinese
    Jie Feng truck

7
International .
  • 1940s - 1980s
  • The new International W series, from the 1940s,
    included the first truck designed from the
    ground up for diesel engines
  • 1974 - S line tricks introduced - best selling
    model in our history
  • 1983 - first truck maker to offer ONLY diesel
    engines

8
International .
  • 1980s
  • 1985 - Refocused, reorganized and changed from
    International Harvester to become Navistar
    International Transportation Corp.
  • Manufacturing
  • Medium and heavy duty trucks and buses
  • Mid-range diesel engines
  • Retail and wholesale financing

9
International .
  • 1990s, 2000s Beyond
  • Refocused the International brand and became
    International Truck and Engine Corporation
  • A worldwide leader in production of mid-range
    diesel engines
  • A leader in U.S. and Canada in combined sales of
    medium/heavy trucks and buses
  • North Americas largest, most comprehensive
    customer driven package of support services
  • Worldwide expansion
  • Brazil - Maxion Motores
  • Mexico
  • China

10
International .
  • Where we are
  • Headquartered near Chicago, Illinois
  • Nearly 1,000 dealer locations across North
    America
  • Sales in more than 70 countries

11
International
  • A Leading Supplier of Mid-range Diesel Engines
  • Plants
  • Melrose Park, Illinois
  • Indianapolis, Indiana
  • Huntsville, Alabama
  • Porto Alegre, Brazil
  • Cordoba, Argentina
  • Fiscal 2001 shipped a record 420,000 engines
  • Principal customers
  • Ford Motor Company
  • International Trucks
  • Export markets

12
International Engine Group - Organization
13
INTERNATIONAL ENGINES
  • Business units Product line-up
  • V-6 and V-8
  • 4.5 l and 6.0 l high speed engines (500,000
    capacity)
  • North American market (Ford)
  • SUVs, full size pick-ups
  • Limited use in medium duty truck
  • In-line I-6
  • 7.6 l and 9.3 l low/medium speed engines (80,000
    capacity)
  • Medium truck (US Class 7)
  • Heavy truck (vocational / sever service)
  • OEM sales (gen sets, agricultural, industrial)
  • South America - IESA
  • High speed 3.0 I-4 (50,000 units capacity)
  • Medium speed I-4/I-6 (Perkins 1000 series
    license)

14
Principal customers North America - Navistar
Truck Businesses - Major automotive
OEMPrincipal customers South America -
Ford (2.8 liter) - GMC - Massey Ferguson
(Perkins license)Distribution partnerships -
Perkins and Detroit Diesel (since 1990) - F.G.
Wilson gen sets - Gomselmash (Belarus) Minsk
Tractor Works - Terex, Claas, Agco, transit
bus, fire trucks, ground supportBusiness
Development activities - China (light and
medium truck and bus) - Eastern Europe and
former Soviet Union - India (future)
Products and Customers
15
Approved Product Line Up 2004 - 2007
16
World Engine Review

17
World Engine Demand
  • 125 million units
  • 22 million diesels
  • 103 million gasoline
  • Focus on diesels
  • Huge demand in China, India
  • W. Europe pass cars
  • N. America minor player
  • Growth opportunities
  • China, India
  • North America (light trucks and pass cars)
  • Russia and E. Europe
  • High tech markets
  • No growth in heavy CVs
  • Opportunity for LCV and SUV

18
Product Driver EPA and EURO Emissions
19
Product line-up Technology
  • US EPA and EURO emissions
  • Develop best feasible engine out emissions
  • Electronic controls and optimized combustion
  • Exhaust gas re-circulation / Alternative NOX
    reduction scheme
  • Fuel and air management
  • (Future) Optimized air-fuel management
  • Achieves Euro III / EPA 2000 without after
    treatment
  • Add-on after treatment when needed (EPA 2007,
    EURO IV)
  • Europe probable use of selective catalytic
    reduction
  • North America NOX adsorption is prime path
  • Engine OEMs will have to adapt to very different
    technical regimes
  • Rest of world will gradually adopt Euro
    emissions standards
  • Western technology will be at a premium in
    developing markets
  • MUST be cost effective and sensitive to regional
    realities
  • Unregulated markets are disappearing - old 3rd
    world model is obsolete
  • Likely model for next several years Euro II
    emissions mechanical engine systems tolerance
    of fuel quality variability

20
World Diesel Demand - Forecast
FORECAST
21
World Diesels by Application
Huge number of small diesels - agricultural
22
Diesels Trucks Only
2001 Truck Diesels - by Region Source PSR
2500
Highly regulated
Less Regulated
Possibilities
Non-regulated
2000
Growth Opportunities
Possible growth with SUV and CV
1500
1.0 million growing to 2 million, with Euro
emissions and local manufacturing
Units (000)
1000
500
0
E. Europe
Far East
Japan
L. America
N. America
Other
W. Europe
23
China Market Review Key Points
  • Internationals situation
  • LOTS of unknowns with China Management issues
  • Market information and competitive situation
  • Local and national politics. Investment climate,a
    etc.
  • Deep suspicions regarding partners, intellectual
    property
  • Does not fit North American business model
  • Desired situation for China program
  • No commercial risk partner assumes financial
    burden
  • Very limited capital investment
  • Trade technology for partner capital
  • Partner is technologically advanced and needs
    little training
  • This situation does not exist.
  • Strategy
  • Continuous management communication
  • Exploit data sources (PSR in particular) for
    market analysis
  • Updates on commercial situation and competitive
    developments

24
China Market Key Points
  • Technical and financial environment
  • Demand for higher-tech engines
  • EURO II (minimum) by 2004/2005
  • Higher standards for Beijing, Shanghai, Canton,
    other cities
  • National priority to improve automotive industry
    technology
  • Joint ventures encouraged premium on new
    technology
  • Major infrastructure investments road
    transportation, logistics
  • Financial conditions are favorable
  • WTO aids in normalizing finance, insurance,
    business stability
  • available for environmental investments in
    equipment
  • available for selected investments (e.g.
    Western Region)
  • Intellectual property protections are improving
  • Central Government situation is improving
    recognition that IP concerns are a barrier to
    direct foreign investment

25
China Market Diesel Trucks and Buses
Market Summary all engines

Units
Note Includes Gasoline
26
China Market Key Points
  • WTO accession Central event
  • Serious effort to comply 124 separate
    commitments made
  • Compare to other WTO countries higher level of
    commitment
  • When successful, China will be in top tier of
    trading nations
  • Key areas eliminate import licenses harmonize
    tariffs
  • Banking and insurance systems forced to modernize
  • Decreasing influence of regional fiefdoms
  • Environmental regulations
  • Government is fully aware that clean air and
    water are essential to growth
  • Huge investments required to correct current
    situation but starting
  • Modern technology is essential no future for
    discarded Western technology
  • We expect Euro II emissions (2004/2005) and
    very gradual adoption of higher standards as
    infrastructure develops

27
China Diesel Engines for Trucks
  • Product characteristics meet middle of the
    market
  • Power 130 240 HP
  • Size I-4 / I-6 1.0 liter/cylinder
  • Emissions EURO II with evolution to EURO III
  • Manufacturing MUST be easily localized
  • Supply base China allies of Western partners
  • (e.g. Garrett, Eaton, Bosch, )
  • Technology Current not leading edge
  • Durability /Reliability As good as Western
    imports
  • Electronics Not required
  • Driveline match-up Consistent with local sources
  • Cost Can be higher than local product but
    must offer advantage

28
Market Entry Alternatives Considered
  • From simplest and least cost to most complex
  • Distribution model wholly owned
  • Distribution model joint venture partner
  • Manufacturing joint venture
  • Do it yourself market entry
  • Manufacturing joint venture is principal
    structure
  • Local partner expertise in the market
  • Fewer on-ground resource requirements
  • Favored by Government entities

29
Market Entry Assessment
  • All major car and truck OEMs have a China
    strategy
  • Very different risk profiles
  • VW Very aggressive capital investments
  • International low cost, wait and see
  • Many Tier 1 suppliers are in China or plan to
    follow customers as business develops
  • Cummins most advanced and localized
  • Garrett, Eaton, Dana, Bosch etc. all have
    manufacturing
  • Promises so far have not been fulfilled
  • Cautious investments
  • Slow payback unexpected risks
  • Market may finally be ready for Western firms
    but
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