DRAFT – subject to revision Darby Asia Investors Project Lightning Draft Final Report The...

DRAFT – subject to revision

Darby Asia InvestorsProject Lightning Draft Final Report

The materials contained in this document are intended to supplement a discussion between Darby Asia Investors and L.E.K. Consulting on 28 August 2009. These perspectives are confidential and will only be meaningful to those in attendance.

L.E.K. Consulting Limited, Floor 34, CITIC Square, 1168 Nanjing Road West, Shanghai 200041, Chinat: 86.21.6122 3900 f: 86.21.6122.3988 www.lek.com

28 August 2009

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DRAFT

Darby Asia Investor. Project Lightning Draft Final Report.CONFIDENTIAL

DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT2

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DRAFT



L.E.K. was engaged to help to assess the potential investment in Lightning, a leading alternator and starter motor supplier

Introduction

Darby is currently looking at potential investment in a senior note of up to USD33.5m associated with the China business of Lightning, a US-based producer of alternators and starter motors for diesel engines

The key objective of this project is to provide Darby with an understanding of the current and expected future expected future characteristics of medium and heavy truck and bus alternator and starter motor market in China, as well as an assessment of Lightning’s competitive position within this market

The key questions in this project, include:

- development of growth driver and growth and size of the medium and heavy truck and bus alternator and starter motor market in China in the next 5 years

- key market trend over the next 5 years and the impact on Lightning

- key customer group and their typical purchasing behavior

- Lightning’s positioning in these markets including their market share and future evolution

DRAFT



Today’s objective is to share our thoughts on the market and Lightning’s positioning based on the work over the past 3 weeks

Week commencing

10 August

17 August

24 August

31 August

Module-1: kick-off and management meetings

Module-2: market overview and key trends

Module-3: customer assessment

Module-4: competitive landscape

Module-5: synthesis and recommendations

Weekly update

Weekly update

Draft final Final report

Introduction

Week commencingLevel of complete-ness

Topics in this report Remaining work

Module-1: kick-off and management meetings

100% Historical growth Future projection

Try to get latest version of projections via Darby

Module-2: market overview and key trends

80% Overall market size for new installations

Development of growth drivers

Market growth in the next 5 years

Triangulate market growth projection with more sources

Finalize market sizing for aftermarket

Module-3 & 4: customer assessment and competitive landscape

Bus alternator

95% Sector size and growth Major customer group

and their purchasing behavior

Competitive landscape in each sector

Lightning’s positioning and future outlook

High-level assessment on Lightning’s aftermarket revenue growth

Try to map the supplier and customer relationship in the market

Polish the assessment on Lightning’s aftermarket sales

Truck alternator

90%

Bus starter 80%

Truck starter

80%

After market

80%

Module-5: synthesis and recommendations

90% Assessment of Lightning’s competitive strength and weakness and likely future performance

Refine the assessment with updated information

Timeline of the project Status of the project

RHS table may change

DRAFT



This report is based on 69 interviews with industry participants, including Lightning management, experts, fleet owners, vehicle OEMs …

Management - Lightning Management (6):

General Manager

Marketing Director, Sales and Marketing Manager

OEM Sales Director

Application Director

Application Engineering Manager

Service Director

Experts (3):

Expert, Statistics Department, China Auto Yearbook

Secretary General, China Internal Combustion Engine Industry Association Electrics Branch

Analyst, CITIC Securities

Customer – Fleet Owners (9):

Manager, Anhui Anqing Transportation

Technical Manager, Yinjian International Travel Service

Technician, East Shanghai Truck Transportation

Purchasing Manager, LuoYang Bus Corporation

Technical Manager, Nanchang Public Transportation Group

Technical Engineer, Shandong Transportation Group

Director, Mechanical Division, North Transportation Corporation

Technical Manager, Shanghai Baoshan Bus

Engineer, Technical Department, Shenzhen Shenzhan Bus

Customer - OEM manufacturer (17):

Engineer, Technology Centre, Yutong Bus

Engineer, Technology Centre, JAC Bus

Engineer, Engine Division, Huanghai Bus

Engineer, Technology Centre , Shaolin Bus

Engineer, Electrical Parts Department, Zhongtong Bus

Engineer, Electrical Parts Department, Yangzhou Yaxing Coach

Engineer, Quality Control Department, Yangzhou Yaxing Coach

Purchasing Manager, Yangzhou Yaxing Coach

Engineer, Engine Department, Guilin Daewoo Bus

Engineer, Development Department, Anhui Ankai Bus

Engineer, Electrical Parts Department, Anhui Hualing Automobile

Purchasing staff, Sinotruk – Jinan

Sales manager, Sinotruk Sales Company

Engineer, Corollary Equipment Department, Faw Jiefang - Qingdao

Engineer, Technology Department, Faw Jiefeng – Changchun

Purchasing Manager, Dongfeng Motor Corporation

Engineer, Technology Department, JAC Heavy Truck

Interviews

Introduction

DRAFT



… as well as engine manufacturers, competitors and aftermarket players

Customer - Engine Manufacturer (12):

Senior Engineer, Sinotruk / CNHTC

Engineer, Electrical Parts Department, Sinotruk / CNHTC

Sales Manager, Truck Department, Dongfeng Chaoyang Diesel

Purchasing staff, Dongfeng Chaoyang Diesel

Engine Sales Manager, Dongfeng Cummins Engine

Sales Manager, Truck Department, FAW Jiefang Wuxi Diesel Engine Works

Engine Sales Manager, Kunming Yunnei Power

Electrical Parts Purchasing Manager, Kunming Yunnei Power

Purchasing Manager, Weichai Power

Engine Sales Manager, Yangzhou Diesel

Electrical Parts Purchasing Manager, Yangzhou Diesel

Engine Engineer, Guangxi Yuchai Power

Competitors (10):

Sales Manager, Beijing AOBO Automotive Electronic & Electric Appliance

Sales Manager, Xiamen Representative Office, Beijing AOBO

Sales Manager, Huzhou Dehong Auto Electrical System -Anhui

Sales Manager, Huzhou Dehong Auto Electrical System -Yuchai

Sales Manager, Jiangsu Hengli Electric Motors

Sales Manager, Huzhou Longhao Auto Parts

Competitors (10) continued:

National Sales Director , Quanzhou Yida Electric Appliance For Vehicle

Director, Technical Department, Shandong Liaocheng Wuyue Electric

Regional Sales Manager, Shendian – East China

Regional Sales Manager, Shendian – Shiyan

Aftermarket Players (12):

Technical Director, Yandangshan Zhoushi Automotive Repairing Company

Technical Engineer, Repairing Department, Jieqin Auto Trading

General Manager, Wangjia Repairing works

General Manager, Chuge Company

Technical Engineer, Liaocheng Fenghuang Repairing works

Electrical Engineer, Shanghai Gold Dragon Repairing Shop – Nanjing Station

Plant Manager, Yantai Dongbao Repairing Works

Electrical Engineer, Repairing Works of Yangzhou Transportation

Plant Manager, #1 Works, Shanghai Nankong

Electrical Engineer, Shandong Zhaoyuan Linglong Repairing Firm

Electrical Engineer, Xian Kefeng

Electrical Engineer, Shuangyashan Shunda

Interviews

Introduction

DRAFT



We also come across a number of secondary sources

Internal Data:

Lightning Information Memorandum

Management Data

Government & Associations:

China Association of Automobile Manufacturers

China Auto Industry Association

China Automotive Technology & Research Center

China Internal Combustion Engine Industry Association - Electrics Branch

Statistics

National Bureau of Statistics

China Statistical Yearbook

China Economic Yearbook

China Automotive Industry Yearbook

China Environment Yearbook

China Urban Construction Yearbook

China Commercial Intelligence Network

Broker Reports:

CICC

CITIC Securities

United Securities

Orient Securities

External Reports:

China Auto-parts Market Analysis 2008, Information Explorer

Vehicle Alternator Market Analysis and Forecast, China Auto Motor Business

Great Potential of China High Power Alternator Market, Frost & Sullivan

China Engine Supplier Output & Sales Analysis 2008, CATARC

Competition and Market Trend in Engine Industry Given New Emission Standards, Advanced International

Truck Segment Analysis, Datamonitor

China Heavy Truck Market 2008: New Opportunities, China Auto Industry Association

China Truck Market Review and Forecast, ASKCI

Medium & Large Bus Demand Forecast 2008

Auto Export Analysis 2008, China Auto Industry Association

Motor World

Secondary Sources

Introduction

DRAFT



Agenda

Executive summary

Company overview

Lightning business assessment

Synthesis

Next steps

DRAFT



Executive summary

Section Title

TBD

DRAFT



Agenda

Executive summary

Company overview


Synthesis

Next steps

DRAFT



Lightning is a leading alternator and starter motor supplier for medium and heavy trucks and buses in China

Lightning entered into China market through the JV with Beijing Jinhui Auto Electric in 2001

- Lightning now has a manufacturing site in Beijing, and a sales network consisting of 23 offices, 31 regional distributors and over 160 service point

Currently Lightning is focusing on alternators and starters for diesel engine in China

- Lightning is primarily selling into the medium and heavy truck and bus sectors

Company overview

1971 Predecessor of Lightning’s

China practice, Beijing Automotive Alternator Factory (BAAF), was established

1996 BAAF began joint venture discussion with Lightning US

1998 BAAF started to carry Lightning’s products in China

2000 BAAF was transformed from a collectively owned enterprise into a limited liability company, Beijing Jinhu Auto Electric

2001 JV between Lightning US and Jinhu was founded

Key applicationsLightning’s product range

Alternator Key function of alternator is to turn mechanical energy from engine into electrical energy, which is turn consumed by the auto electric devices, such as air conditioner and lights

Lightning’s product is for medium and heavy trucks and buses

Lightning has a broad product line, ranging in frame size from 130mm to 203mm and in output from 35 to 200+ amps

Starter Motor Key function of starter motor is is an electric motor that rotates an internal combustion engine to cause the engine to begin powering itself

Lightning’s product is for medium and heavy trucks and buses

Lightning has various products to fit in different diesel engine, ranging in frame size from 90mm to 130mm and in capacity from 4.0kw to 9.0kw

Source: Lightning Information Memorandum

Important note: in this report, buses and trucks refer to heavy and medium buses and trucks except indicated otherwise

DRAFT



Bus alternator is Lightning’s key product, accounting for 47% of its domestic sales in 2008. However majority of the growth comes from its truck alternator sales

Company overview

Lightning domestic sales revenue by product(2003-08)

CAGR%(2003-08)

75

119

210226

4728

0

100

200

300

400

500

600

700

6

175

209

2003

12

194

253

04

19

212

306

05

35

237

391

06

75

303

588

07

130

317

673

08

Starter 85.0

Truck

alternator 51.8

Bus

alternator 12.6

Millions of RMB

Total 26.3

Source: Management Data

198

0

100

200

300

400

500

600

700

209

142

124

673

2008Increase in starter

motor

Increase in bus

alternator

Increase in truck

alternator

2003

Millions of RMB

Lightning domestic sales growth by product(2003-08)

DRAFT



Lightning is dealing with a relatively concentrated customer base with top 5 customers accounting for 53% of total revenue in 2008

Company overview

Lightning’s domestic revenue breakdown by customer (2006-08)

0

100

200

300

400

500

600

700

391

2006

589

07

673

08

Other

Shanghai Diesel

Wuxi Diesel

Weichai Deutz

Suzhou Kinglong

Chaoyang Diesel

Kinglong

Zhengzhou Yutong

Yulin Diesel

DCEC*

Weichai Power

Millions of RMB

23.7

10.7

26.2

(28.9)

4.6**

4.8

11.1

65.5

58.7

46.4

57.2

Total 31.2

% of Top 5 customers

40.5 51.6 52.9

Note: * Dongfeng Cummins Engine Corp.; ** Growth between 2007 and 2008Source: Lightning information memorandum

As the downstream industries, including vehicle OEMs and engine manufacturers, are very concentrated in China, Lightning’s customer base is also concentrated

- share of Lightning’s top 5 customers increases from 41% in 2006 to 53% in 2008

There was a significant jump in sales to major customers in 2007, management claims that it is because they successfully expanded their sales of truck alternators in those customers

- Weichai Power had serious conflicts with its parent group and finally spin off from the group in 2006. During this process, Lightning fully supported and stayed closely with Weichai Power. In return, it gains trust from the senior management team Weichai Power and significantly increase its share within Weichai Power

CAGR%(2006-08)

DRAFT



Lightning’s price has been slightly decreasing over the past 3 years and this trend is expected to continue in the future with a slightly lower rate except for starter motors

Company overview

Lightning domestic ASP projection*(2008-12F)

(3.8)

(0.6)

(3.5)

0.0

0.5

1.0

1.5

2.0

2.5

2007 08 09H1

Bus alternator-8SC3110VC

Truck alternator-JFZ27/25

Starter-M93R/94R/100R

Thousands of RMB per unit

CAGR%(2008-12F)


Lightning historical domestic ASP of key products(2003-09H1)

0.0

0.5

1.0

1.5

2.0

11F

Starter

10F09E

Bus alternator

12F

Truck alternator

2008


(4.0)

(3.4)

(4.1)

CAGR%(2007-09H1)

Management expects starter motor update due to new emission standard will require better products and hence slightly increase the ASP

DRAFT



Lightning’s management projects a revenue growth of 13.5% over the next 5 years, with majority of the growth coming from starter motor

Company overview

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,2001,115

964

787

657673

588

391

306

04 10F 12F11F08 09E

Bus

alternator

209253

0706052003

Truck

alternator

Starter

motor

Millions of RMB

Lightning’s historical and projected domestic sales revenue (2003-12F)

CAGR%(2003-08) (08-12F)

26.3 13.5

85.0 38.5

51.8 9.8

12.6 (0.8)

Total

103

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

Increase in bus

alternator

Increase in truck

alternator

349

Increase in starter motor

1,115

Millions of RMB

2012F

673

2008

(4)

Lightning domestic sales growth by product(2008-12F)


The key objective of the project is to assess the likelihood of the growth projection

DRAFT



Agenda

Executive summary

Company overview


Synthesis

Next steps

DRAFT



Lightning assessment set-up


Chinese alternator and starter motor market

Market overview Sector analysis

Market size and growth

Customer overview

Supplier overview

Sector size and growth

Customer purchasing behavior

Competitive landscape

Market Feedback

on Lightning

Bus alternator

Truck alternator

Bus starter motor

Truck starter motor

Aftermarket

DRAFT







Customer overview

Supplier overview




Market Feedback

on Lightning

Bus alternator

Truck alternator

Bus starter motor

Truck starter motor

Aftermarket


DRAFT



The total alternator and starter motor market in China is estimated to be ~1.1bn in 2008


Alternator and starter motor market size – new installation market(2008)

Dummy

RMB620m

Alternator

RMB489m

Starter motor

Bus

10010 20 30 40 50 60 70 80 90

100

10

20

30

40

50

0

70

80

90

Percent

0

Truck

60

Source: China Association of Automobile Manufacturers, L.E.K. analysis

Assumptions

Bu

s a

ltern

ato

r

Price As Lightning has 85% share in the market, use Lightning’s average sales price (RMB1,500 per unit) as market average sales price

Alternator usage

Each large bus uses 1.85 alternators on average and each medium bus uses 1.3 alternators

Tru

ck

a

ltern

ato

r

Price Assume market average price of truck alternator is RMB450 per unit based on interview feedback and Lightning’s data

Alternator usage

Each truck only uses one alternator and no change in the future

Sta

rter

Price Assume market average price of starter is RMB550 per unit based on interview feedback and Lightning’s data

Alternator usage

Each bus and truck only use one starter

PRELIMINARY

DRAFT




The Chinese alternator and starter motor market has grown at ~14% from 2003 to 2008

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

934

2003

1,313

04

1,065

05

1,251

06

1,733

07

1,802

08

Starter motor

Truck alternator

Bus alternator

Thousands of units

Historical new installations of alternators and starter motors(2003-08)

CAGR% (2003-08)

13.4

14.1

13.8

18.8

Total

Source: China Association of Automobile Manufacturers, L.E.K. analysis

2005 drop was largely due to the decline in heavy-duty truck sales. Main reasons for heavy truck sales drop include:

- FAI decline due to macro-economic control

- strict control on overload

- raw material price surged

DRAFT



Robust growth in underlying markets and increase in bus alternator usage are the two key drivers for the growth of alternators and starter motors

Historical sales of medium and heavy duty truck and medium and large buses(2003-08)

Underlying market growth Alternator usage change

Alternator usage

2003 2008

Large bus ~70% large buses use one alternators

~30% large buses use two alternators

~25% use one alternators

~65% use two alternators

~10% use three alternators

Medium bus

Almost all medium buses use one alternators

~70% use one alternators

~30% use two alternators

Source: China Association of Automobile Manufacturers, L.E.K. interviews and analysis

Several years ago, most large buses and almost all medium buses are equipped with only one alternator

- as more buses are equipped with large air conditioning systems, single alternator cannot meet the increasing electricity demand and new buses often equip 2 alternators

- bus OEMs think average usage of alternators used in bus has become matured and will not change in the next five years

All the trucks use only one alternator and the number will not change

The sales of medium-heavy duty trucks and medium-large buses have experienced fast growth since 2003 despite a temporary drop of heavy duty trucks in 2004/05

- the increasing transportation demand and highway construction are the major drivers of truck sales

- increased urbanization has stimulated the passenger transportation, driving the demand for medium and large buses

0

100

200

300

400

500

600

08070605042003

Heavy duty truck

Medium and large bus

Medium-duty truck

Thousands of units

CAGR%(2003-08)

11.3

16.1

8.8


DRAFT



2003

Medium and heavy trucks and buses are expected to grow at a slower pace given the growth rate of major drivers have been slowing down

18

27

1716

20

21

19

24

10

12

14

16

18

20

22

24

26

28

Percent

04 05 06 07 08 09E10F

FAI directly drives the sales of heavy and medium-duty trucks

- heavy and medium-duty trucks mostly serve for fixed asset constructions

Note: * The data derives from interpolation from UN’s projection for 2000 to 2050Source: United Nations, China Economic Yearbook, Deutsche Bank, CICC, CITIC Securities, Nomura and First Capital, L.E.K. analysis

China cumulative highway length(2003-13F)

Historical and forecasted FAI growth(2003-10F)

Urbanisation rate forecast*(2003-13F)

2.2

CAGR%(2003-08)(08-13F)

6.812.3

CAGR%(2003-08)(08-13F)

1.6


The cumulative of highway length is highly correlated with the sales of heavy-duty trucks and buses

- heavy-duty trucks and large buses are mainly serving long-distance transportation

The development of urbanization is one of the key drivers of heavy-duty trucks and buses

- urbanization directly drives the demand of real estate

- a larger number of urban population requires more public transportation

2003

0

10

20

30

40

50

60

70

80

07 0905 11 13

Thousands of kilometers

2003

20

25

30

35

40

45

50

05 07 09 11 13

Percent

DRAFT



As a result, the total sales of medium-and-heavy-duty trucks and medium-and-large buses are expected to grow at 5-10% over the next 5 years

Projected sales volume* of medium-and-heavy duty trucks and medium-and-large buses in China(2003-13F)

0

100

200

300

400

500

600

700

800

900

1,000

2008 09E 10F 11F 12F 13F

High case

L.E.K.

Low case

High case

L.E.K.

Low case

High case

L.E.K.

Low case

Thousands of units

Heavy-duty trucks

Medium-duty trucks

Large and medium bus

SegmentGrowth rate

(2008-13F)Rationale

Heavy-duty trucks

8.0-10.5% Heavy-duty trucks still have growth momentum

- investment in infrastructure will boost the demand of heavy-duty trucks

- the recovery of export market will bring more orders to heavy trucks

- the process of replacement of medium-duty trucks is still on-going

However, the growth of heavy-duty trucks will slow down due to increasing base of domestic market and partial substitution from railway transportations in the future

Medium-duty trucks

5.0-5.5% Medium-duty trucks have room to grow

- investment in infrastructure will boost the demand of medium-duty trucks

- the recovery of export market will bring more orders to medium-duty trucks

However, the growth of medium-duty trucks will slow down with increasing base and trend to move to heavy duty trucks

Medium and large buses

3.4-8.4% Medium and large buses still have room to grow

- the demand driven by the urbanization process is stable and will moderately increase

- the process of replacing existing old city buses is still on-going and will persist

- the recovery of export market will bring more orders to large-medium buses

However, the growth of heavy-duty trucks will slow down with increasing base and potential substitution from emerging high-speed railway

16.1

CAGR%（ 2003-08)(08-13F)

9.6

5.4

10.5

8.0

8.8 5.0

5.0

8.4

11.3 4.5

3.4

Note: * Include both domestic and export salesSource: China Auto Industry Association, CICC, CITIC securities, United Securities, Orient Securities, L.E.K. interviews and analysis


DRAFT



Therefore, new installations of alternators and starter motors are expected to grow at c.7% over the next 5 years

0

500

1,000

1,500

2,000

2,500

1,802

2008

1,888

09E

2,024

10F

2,171

11F

2,329

12F

2,498

13F

Starter motor

Truck alternator

Bus alternator

Thousands of units

Projected new installations of alternator and starter motor (2008-13F)

CAGR% (2008-13F)

6.8

6.7Total

7.2

4.5

Source: L.E.K. analysis


DRAFT







Customer overview

Supplier overview




Market Feedback

on Lightning

Bus alternator

Truck alternator

Bus starter motor

Truck starter motor

Aftermarket


DRAFT



The purchasing and usage of alternators and starter motors involve multiple parties, including fleet owners, vehicle OEMs, engine manufacturers with engine manufacturer being the major direct purchaser

Customer overview

Source: L.E.K. interviews and analysis

Alternator & starter

Diesel Engine

Vehicle

Bus alternator

China alternators and starter motors value chain

Alternator & starter manufacturers

Engine manufacturers

Truck/bus manufacturers

Fleet owners

Major product route

Minor product route

DRAFT



The diesel engine sector is fairly concentrated, with top 5 suppliers accounting for ~70% of the overall market and ~90% of heavy duty truck engine sector

Heavy duty truck engine

Others

Shanghai Diesel

BAIC Foton

Yangchai

CNHTC (Sinotruck)

Jiangling Auto

Dongfeng Motor

Chaochai

FAW

Yuchai

0

Weichai

(Shaanxi Heavy)Yunnei

90

100

10

20

30

40

50

60

70

80

Percent

Overall diesel engine

China diesel engine manufacturing is highly concentrated

- most diesel engine suppliers are within giant SOE* auto groups or have good relationship with large SOE truck and bus OEMs

Diesel engine manufacturers usually have strong influence on decisions on alternator and starter motor supplier

- except for the bus alternator sector, where fleet owners are inclined to specify the brand, engine suppliers typically are the major decision maker for the purchase of alternators and starters

Some major OEMs and engine suppliers have internal alternator and starter motor supplier, such as FAW Engine and AOBO Alternator, Xiangfan Dongfeng’s alternators and starters to supply DCD** and DFMC***

- in Dongfeng’s engine plants, over 80% alternator and starter purchasing is from captive suppliers

“… Dongfeng’s internal starters and alternators company enjoys higher price and secured sales volume each year due to internal orders …”


China diesel engine market share by volume(2008)

Note: * SOE = State owed enterprise ** DCD = Dongfeng Chaoyang Diesel Engine *** DFMC = Dongfeng Motor CorporationSource: China Association of Automobile Manufacturers, Lightning Information Memorandum, L.E.K. analysis

Engine manufacturers are the key customer group for both alternators and starter motors

Customer overview

With Captive supply

DRAFT



Both medium-and-heavy-duty truck and medium-and-large bus OEM industries are also very concentrated in China

China medium and heavy truck and medium and large bus market share by volume(2008)

Dummy

King Long

123k units


0 10010 20 30 40 50 60 70 80 90

0

100

10

20

30

40

50

60

70

80

90

Percent

Others

BAIC Foton

Weichai (Shaanxi Heavy)

CNHTC (Sinotruk)

FAW

Dongfeng

748k units

Medium and heavy duty truck

Others

ShaolinHuanghaiJianghuaiZhongtong

Yutong

Source: China Association of Automobile Manufacturers, Lightning Information Memorandum, L.E.K. analysis

China medium-and-heavy-duty truck and medium-and-large bus OEM industries are both concentrated

- top 2 bus manufacturers account for ~50% of the market

- top 5 truck manufacturers represent over 70% of total sales volume in 2008

In most cases, vehicle manufacturers use the alternators and starters recommended by engine suppliers

- there are some exceptions when fleet owners specify the brand or vehicle manufacturers have big concern on the product quality of supplier recommended by engine manufacturers

Vehicle OEMs are typically less important for Lightning as they normally do not purchase or make supplier decision, except for some bus

OEMs

Customer overview

DRAFT



The fleet owner sector, however, is generally very fragmented with the largest bus fleet accounting for only 5% of the total number of vehicles

Fleet operation is a very fragmented industry with a large number of regional fleet owners

- using public transport sector as an example: in 2007 there are 342k buses in China, however the largest fleet owner, Beijing Public Transport Holdings, only account for ~5.5% of the total number

- truck fleets are usually owned by small companies or individuals, therefore they are even more fragmented than the bus fleets

Most large bus fleet owners typically specify alternator brand, as they care about the quality due to higher requirements. Truck fleet owners generally do not specify suppliers for both alternators and starter motors

- Lightning has already penetrated into most bus fleets and established good reputation

2007

Others

Tianjin Public Transport Group

Chengdu Public Transport Group

Chongqing Public Transport Holdings

Shanghai Bus Group

Beijing Public Transport Holdings0

100

10

20

30

40

50

60

70

80

90

Percent

Market share of leading public bus fleets(2007)

Source: China Association of Automobile Manufacturers, China Automotive Industry Yearbook, company websites, L.E.K. analysis

The strong influence and low concentration of fleet owners ensures Lightning is not likely to substantially

lose its share in bus alternator segment

Customer overview

DRAFT



To summarize, the customer base for truck and bus alternators and starter motors is very concentrated with engine manufacturers being the key customer group

Major purchaserSupplier decision maker

Bus alternator

Engine manufacturer

Bus OEM

Fleet owner Engine

manufacturer

Bus starter motor

Engine manufacturer

Engine manufacturer

Fleet owner

Truck alternator

Engine manufacturer

Engine manufacturer

Truck starter motor

Engine manufacturer

Engine manufacturer

Note: * Top 10 customers account for 63% of Lightning’s domestic sales in 2008Source: Management Data, L.E.K. interviews and analysis

Role of value chain participants in purchasing decision process

Lightning’s own sales data also reflect the importance of engine manufacturers

Customer overview

Lightning’s sales revenue to Top 10 customers* by customer type (2008)

100

90

70

50

60

80

40

30

20

10

0

Engine manufacturer

Bus manufacturer

2008

Percent

DRAFT







Customer overview

Supplier overview




Market Feedback

on Lightning

Bus alternator

Truck alternator

Bus starter motor

Truck starter motor

Aftermarket


DRAFT



Bus and truck alternator and motor starter industries are highly concentrated; Lightning is a major supplier of bus and truck alternators as well as bus starter motors

Source: Company websites and releases, L.E.K. interviews and analysis

Others

Lightning

184k units

Bus alternator

Others

Dongfeng

Iskra

AOBO

Dehong

Lightning

748k units

Truck alternator

Others

BOSCH

Yida

Hengli

Shendian

Lightning

123k units

Bus starter

Others

BOSCH

Yida

Shendian

Dongfeng

10

Truck starter

20 30 40 50 60 70 80 90

0

100

10

0

20

30

40

50

60

70

80

90

Percent748k units

Lightning

100

China truck and bus alternator and starter market share by volume(2008)

Supplier overview

DRAFT



Almost all the major suppliers are supplying both alternators and starter motors

Source: Company websites and releases, L.E.K. interviews and analysis

Supplier

Presence in sectors Background

Bus alternator

Truck alternator

Starter motor

Origin Comment

Lightning Foreign(US)

Dominant supplier for bus alternator and has increasing penetration in truck alternators and starter motors

Recognized for its superior technology and the considerate service Price of its products is still 20-30% higher than domestic ones

BOSCH Foreign (Germany)

Recognized high quality in both alternator and starter Price is far higher than Lightning’s and even doubles domestic

ones’ Less customization and services are regarded as very poor

Shendian JV with Delco Remy and Delphi

Has been the leading player in starter market with advanced technology from its JV with Remy, good customer relationship and apparent price advantage over foreign suppliers

Dehong Local Has good relationship with major truck engine manufacturers with relatively reliable quality and low price

Dongfeng Local Mainly relying on captive sales of alternators and starters within Dongfeng group with secured volume and higher price

Iskra Foreign Mainly grow with Sinotruk and become its major supplier for truck alternators

AOBO JV Has kept a very close relationship with FAW for components supply

Major bus and truck alternator and starter suppliers in China

Dominant presence Minor presence No presence

Supplier overview

DRAFT



Multiple suppliers and open bidding are the most common purchasing practice in the market

Multiple suppliers Open bidding


Engine manufacturer and bus and truck OEMs usually have multiple suppliers with relatively stable relationship

- customers can avoid supplying shortage by using multiple suppliers

- the competition among suppliers can also lower the price and maintain the high quality of products

“… Customers usually introduce multiple suppliers to drive the competition and lower the purchase price …”

Sales Manager , Huzhou Dehong Auto Electrical System

Historically, customers gradually reduced the number of suppliers. Currently, most of them keep one or two major suppliers and another 3-4 minor suppliers

- interview feedback suggests that most customers would like to keep the number of suppliers unchanged

Open bidding is often used in alternator and starter purchase

- most engine manufacturers are required to use open bidding in the process of component purchasing

“… As I know, most SOE companies registered in National Ministry of Industry and Information Technology are required to include open bidding in the purchasing process …”


However, customers generally stick to their supplier pool and normally only suppliers on their qualified suppliers list could attend the bidding

- the purchase price and sales volume spit between suppliers is usually determined through open bidding

Supplier overview

DRAFT



However, long-term relationship, high switching cost and under-the-table transaction make new suppliers difficult to penetrate into existing customers

Long-term relationship High switching cost Under-the-table transaction

Even having penetrated into customers, new supplier need some time to achieve large volume orders

Existing customers value suppliers with long-term relationship and would like to stay with the best ones

Current suppliers generally have good track record in both the engine manufacturers and its customers

- they understand customer needs well and satisfy customers’ requirement for quality and price

Switching costs is high as customer need new design, testing and checking feedback from their customers

- engine and OEM customer concern own reputation if any problem occur due to switching to new supplier

Existing customers would not easily switch suppliers due to high costs

- new suppliers have to go through very long and strict process. It usually take at least 2-3 years for suppliers to achieve large volume in a new customer

Under-the-table transaction is popular in the market

- suppliers would try their best to build relationships with key personnel and sometimes give kick-back directly

- it is generally regarded as a common practice in this industry and new suppliers need time to build relationships


Supplier overview

DRAFT







Customer overview

Supplier overview




Market Feedback

on Lightning

Bus alternator

Truck alternator

Bus starter motor

Truck starter motor

Aftermarket


1

A

2

B

3

C

4

D

5

DRAFT



Bus alternator market is expected to recover to 2008 level in 2013

Bus alternator- market size and growth1-A

PRELIMINARY


CAGR% (2003-08)(08-13F)

18.8

CAGR% (2008-13F)

0.5

230

214199

185172

184

166

132

112105

78

0

50

100

150

200

250

10F 11F 12F 13F09E2003 04 05 06 07 08

Thousands of units

Bus alternator market volume(2003-13F)

Bus alternator market value(2008-13F)

284275

265261251

277

0

50

100

150

200

250

300

350

2008 09E 10F 11F 12F 13F

Millions of RMB4.5

DRAFT



Although majority of the bus alternators are purchased by engine manufacturers, fleet owners are typically involved in the supplier selection and willing to specify brands based on own experience

Source: L.E.K. interview and analysis

Fleet owners

Large fleet owners Small fleet owners

Make purchasing decision

Leave to bus manufacturers

Bus manufacturers make purchasing

decision

Leave to engine manufacturers

Large fleet owners make purchasing

decision

Engine manufacturers make purchase

decision

Majority Minority Majority Minority

~Half ~Half

Minority Majority

Purchasing decision process in bus alternator segment

Major route

Minor route

Strong influence from fleet owners on supplier decision is favorable for Lightning to maintain its current dominant position in the bus alternator segment given its very good track record with fleet owners

Bus alternator- purchasing behavior

Bus alternators are purchased by either bus OEMs or engine manufacturers with the latter accounting for majority of the volume

Although not purchasing directly, fleet owners are typically the key decision makers in bus alternator segment

- fleet owners, especially large ones, usually specify the alternator brand as they care the reliability of alternators. They prefer to brand that they have good experience with

“… City bus fleets like us usually choose the alternator supplier ourselves. We usually designate the brand that we have used and appreciate …”


Lightning has established a very good reputation among fleet owners, which in return makes it top of their choices

- compared with products from other suppliers, Lightning’s products are considered to have longer life span and higher reliability

- in addition, Lightning also have very good after-sales service and can quickly response to the problems of fleet owners

Fleet owners are increasingly willing to specify alternator brands, which will benefit Lightning given its current high penetration and outstanding track record within fleet owners

1-B

DRAFT



Quality is cited as the key selection criteria by bus alternator customers, followed by service and customer relationship

Key Purchasing Criteria for Bus Alternator Average Ranking

Both fleet owners, the major decision makers, and engine manufacturers, the major purchaser, regard quality as key selection criteria. They care about the life span and reliability most

“… Quality is the most important criteria in selecting bus alternators. We would prefer products with longer life span …”


“… Among all the selection criteria, we value quality the most. Bus operation really needs alternators to have stable performance and low failure rate …”

Technical Manager, Nanchang Public Transportation Group

Service and customer relationship are also very important when determining the alternator suppliers

Price is less important and customers are willing to pay the premium for bus alternators with higher quality

“… We know that Lightning’s alternators are more expensive than other brands. But compared with the total price of a bus, this is less important and we would like to pay more for its better quality …”

Technical Manager, Yinjian International Travel Service Fleet

Moving forward, customers are expecting better customization from alternator suppliers to deal with complex electrical applications in buses. Meanwhile more large alternators will be used to satisfy the increasing power demand

Bus alternator- purchasing behavior

2.6

3.7

4.9

5.4

5.4

5.6

6.0

6.9

0 1 2 3 4 5 6 7

Payment terms

Customer relationship

Quality

Track record

and reputation

Delivery and lead-time

Customization

Price

Service

Degree of importanceLeast

ImportantMost

Important


1

2

3

4

5

6

7

8

n=14

1-B

DRAFT



Lightning occupies c.90% of the bus alternator market, followed by several minor suppliers including Feipeng and AOBO

Estimated bus alternator market share (2008)

Lightning

2008

Others *

100

0

40

80

20

60

Percent

Market participants agree that Lightning is the leading supplier in bus alternator sector with a share of c. 90%

- most leading bus OEMs and their engine supplier are using primarily Lightning’s alternators. They feel that Lightning’s quality is much better than domestic suppliers

- as alternators used in bus are large in size and more complicated, it is regarded as high in technology requirements. Minor suppliers, such as Feipeng and AOBO, are not able to compete with Lightning. They recognize Lightning’s dominant position in the bus alternator sector

“… Lightning clearly has technical advantage in the bus alternator market …”

Sales Manager, Sales Manager, Beijing AOBO Automotive Electronic & Electric Appliance

The only supplier with comparable quality is BOSCH, however BOSCH is regarded as less interested in this market and very poor in service. With its higher price, BOSCH has a much smaller market share

“… BOSCH is a famous alternator supplier for its good quality. However, it provides very poor services in China market. I think BOSCH haven’t put much efforts and investment in this area, probably because the company does not really care this market at all …”


Because Lightning’s alternators have outstanding quality, customers usually stick to Lightning’s product. Therefore Lightning is very likely to maintain its strong position in bus alternators moving forward

“… Lightning’s product does have better quality than other brands. Once people try it, they will keep using it …”

Engineer, Development Department, Anhui Ankai Bus

Bus alternator- competitive landscape

Note: * Including Feipeng, AOBO, Dehong, Qianghua, Dongfeng, Daewoo and other minor alternator suppliersSource: L.E.K. interview and analysis

1-C

DRAFT



Customers generally regard Lightning’s product quality and service as unmatched in the bus alternator sector


Key selection criteria

Best-in-classLightning’s position

Comments

Quality Lightning, BOSCH

Similar to BOSCH, much better than domestic products

“… Lightning’s bus alternators have very low failure rate. With proper maintenance, its alternators can last for 8 years, almost double the life of domestic products …”


Service Lightning Best, much better than others

“… Lightning’s pre-sales and after-sales services are both very impressive. Before selling the alternators, Lightning will first discuss with the engine supplier to decide how to fit the alternator to the engine ...When customer has a problem in daily operation, Lightning is very quick in response. It only takes them 3-4 hours to solve the problem after receiving failure report …” Engineer, Engine Department, Guilin Daewoo


Lightning Best, much better than others

“… In order to do well in this market, suppliers need to input much human resource to provide the support and the service. Lightning does make it and it really understands customer needs…”


Price Domestic brands 30-40% higher than domestic, 15-20% lower than BOSCH

“… Compared with product reliability, price is not a major issue for bus customers because some 1,000 price difference is very small compared with the total cost of a bus …”

Engineer, Technology Center, JAC Bus

“… Though the initial cost (of Lightning) is higher, but with its much longer life span and high reliability, we can save a lot in maintenance cost by using Lightning’s product …”

Engineer, Electrical Appliance Department, Yutong Bus

Bus alternator- competitive landscape1-C

DRAFT



In general, Lightning has a very solid positioning in the bus alternator market. While it is expected to maintain its position, the overall market growth is slower

The total market size reaches RMB277mn in 2008

- large bus accounting for 35.8% of the marketMarket size

Market growth

Lightning’s Current Positioning

Same as the underlying bus market, the future market growth of bus alternators is expected to be 0.5% over the next 5 years. It is slower than historical level due to the larger base and economy slowing down

Currently, Lightning is the market leader in bus alternator sector with significant competitive advantage over other competitors against key purchasing criteria (quality, service and customer relationship)

Lightning has a very good relationship with all major customers (engine manufacturer and bus OEMs) and end-users (bus fleets)

Bus alternator-summary


Lightning’s Future Outlook

Lightning already has very high penetration in the market, and there is limited room for Lightning to further increase its market share

However customers are generally very sticky to Lightning for its outstanding quality and services, therefore Lightning is likely to maintain its dominant position in the market

1

DRAFT



Truck alternator market is expected to grow at ~5% p.a. and reach RMB440m in 2013

Truck alternator- market size and growth


2-A

PRELIMINARY

CAGR% (2003-08)(08-13F)

13.8

CAGR% (2008-13F)

5.0

1,057986

920858

800748724

509

431

558

392

0

200

400

600

800

1,000

1,200

10F 11F 12F 13F09E2003 04 05 06 07 08

Thousands of units

Truck alternator market volume(2003-13F)

Truck alternator market value(2008-13F)

439418

397378

360343

0

50

100

150

200

250

300

350

400

450

2008 09E 10F 11F 12F 13F

Millions of RMB7.2

DRAFT



In most cases, alternator supplier is specified by engine manufacturer in the medium and heavy truck sector

Truck alternator- purchasing behavior

Fleet owners

Leave to truck OEMs

Truck OEMs decide brandLeave to engine manufacturers

Engine manufacturers decide brand

Majority

Purchasing decision process in truck alternator segment

Minority

Fleet owners decide brand

MajorityMinority

Major route

Minor route

Engine manufacturers are the most important decision maker along the value chain

Truck OEMs typically get alternator supply from engine manufacturers rather than purchasing by themselves

“… We do not purchase alternator ourselves and all the truck alternators come along with engines from the engine suppliers …”

Engineer, Anhui Huangling Auto

It is generally the engine manufacturer that makes the decision to select alternator suppliers

“… Our purchasing and technology department will choose alternator supplier and provide to customers …”

Senior Engineer, Sinotruk

“… Some new OEM customers may specify brands that previously used in their trucks with reliability but in most cases customers would trust in our professional selection and accept our recommendations …”

Purchasing Staff, Dongfeng Chaoyang Diesel

Truck OEMs are increasingly relying on engine manufacturers in choosing alternator suppliers

“… With more experience in working with suppliers and OEM customers, we know what customers want and would equip engines with the most suitable and reliable alternators for them …”



2-B

DRAFT



Price and quality are the most important criteria to truck alternator customers

Key Purchasing Criteria for Truck Alternator Average Ranking

Being the key decision maker, engine manufacturers value both price and quality the most

- price is a major consideration for engine manufacturers

- quality, referring to high reliability and long life span, is also important to choose truck alternator supplier

“… We want to use products with less problems otherwise it would ruin our reputation and increase our warranty costs …”

Sales Manager, Dongfeng Chaoyang Diesel

- for medium truck engines, quality of alternators would not be as important as that of heavy truck engines due to less complexity in products

Truck alternator customers are more and more caring about services from their suppliers

- services include pre-sales services to engine suppliers and after-sales services to OEMs and fleet owners

“… We would prefer using alternator suppliers who can offer appropriate products to meet our specification requirement and response quickly when problems occur on customers’ side …”


4.3

4.7

5.0

5.4

5.8

6.0

6.4

6.4

0 1 2 3 4 5 6 7

Service

Price

Quality

Customization


Payment terms

Track record and reputation



ImportantMost

Important


1

2

3

4

5

6

7

8

n=8

Truck alternator- purchasing behavior2-B

DRAFT



Lightning is already the largest supplier in the truck alternator sector with 30-40% of the market, however it is most strong in the larger capacity alternators for heavy trucks and relatively less competitive in the smaller capacity units

Estimated truck alternator market share (2008)

Lightning

60

70

Others

Dongfeng

AOBO

2008

Iskra

0

90

10

20

30

40

50

80

100

Dehong

Percent

Lightning entered truck alternator market in 2003 and has become the largest supplier. Lightning is stronger in large capacity truck alternator used primarily in larger heavy duty trucks due to their apparently better quality over other suppliers

- its share of wallet in Weichai Power and FAW Wuxi Diesel Engine, the largest two engine supplier for heavy duty trucks, has reached 95% and 40% respectively due to good quality, service and close relationship

“… Lightning has a dominant position in our truck alternator supply since 2006/2007 as it offered us great support and also our OEM customers all appreciate its quick response and service support …”


- in smaller truck alternators, market feedback is that the Lightning’s quality advantage is less significant. Lightning is behind other local suppliers, such as Dehong, for higher price

“… Lightning’s alternator is superior for higher power products for heavy trucks, but its medium truck alternator does not have obvious advantage in terms of quality and local suppliers such as us are also doing well …”

Sales Manager, Huzhou Dehong

- China truck market are moving towards more heavy duty trucks, which will benefit Lightning given its strength in the larger capacity truck alternators

Among the major suppliers, Dongfeng Alternator is captive to its parent automotive group, Dongfeng Motor Corporation (DMC). 30% of the engines used by DMC is from internal supply, which is almost only using own alternators

AOBO has kept a very tight relationship with FAW for components supply

Truck alternator- competitive landscape


2-C

DRAFT



All the current customers of Lightning are very satisfied with its products and services

Key selection criteria (3-5)

Best-in-class

Lightning’s position

Comments on Lightning

Price Dehong ~30% higher than domestic ones

“… In terms of price, Lightning would price 30% higher than Dehong and Dongfeng but may give us discount due to good partnership …” Purchasing Manager, Weichai Power

“… Lightning’s products are at least 30% higher than Dehong and a little higher than AOBO’s …” Sales Manager of Truck Department, FAW Wuxi Diesel Engine

Quality Lightning, BOSCH

Apparent advantage for larger capacity alternator; less for smaller units

“… Currently, feedback from all customers indicates that Lightning’s heavy truck alternators have low failure rate as well as longer life span …” Purchasing Manager, Dongfeng Motor Corporation

“… For medium truck engine manufacturer, quality requirement is not high and domestic products have comparable quality to Lightning’s products …” Sales Manager, Huzhou Dehong

Service Lightning Outstanding, very proactively in serving the whole value chain rather than just direct customer

“… Lightning’s service are highly appreciated by both our OEM customers and ourselves. They can offer the most suitable products for our new engines and react quickly to solve problems for our customers… Besides, it even takes all warranty expenses for us to serve our customers. We are quite satisfied with it …” Purchasing Manager, Weichai Power


Lightning; Dongfeng

Strong relationship with large customer, especially Weichai Power

“… Lightning’s truck alternator is gaining share in recent years due to strengthened relationship with major engine manufacturers …” Sales Manager of Truck Department, FAW Wuxi Diesel Engine

“… Lightning has an excellent sales team and through years of collaboration, it has established solid partnership with us. We would like to keep it as our dominant supplier in the future …” Purchasing Manager, Weichai Power


Truck alternator- competitive landscape2-C

DRAFT



Overall Lightning is likely to further increase its share in this sector. However the share gain may not be very significant as it is relatively difficult for Lightning to increase penetration dramatically in the smaller alternator segment

Total market size for medium and heavy truck alternators reached ~RMB340mn in 2008

- heavy truck alternators, where Lightning is stronger, account for 50-60% of the marketMarket size

Market growth


In line with medium and heavy truck market, the truck alternator market is likely to see steady growth at ~5% p.a.

- heavy trucks would expect to have higher growth than medium trucks, due to central government’s investment plan in infrastructure and increasing demand in transportation

Lightning would benefit from higher growth rate in heavy truck where it is stronger. As a result it could increase its share in the overall truck alternator market

Lightning is likely to keep or increase current share in major customers for its high quality and better services. However as the smaller alternator customers typically see no difference in quality among major suppliers and have existing suppliers with long-term relationship, it would be difficult for Lightning to significantly increase its penetration in those customers

Truck alternator-summary



Lightning is already the largest supplier for truck alternators. It has apparent quality advantage for larger capacity truck alternators primarily used in heavy trucks. In the smaller truck alternator, its quality advantage is regarded as less significant

With good quality and unmatched service, Lightning has very good relationship with major customers

2

DRAFT



Bus starter motor market is expected to grow at ~2% p.a. and reach ~RMB80m in 2013

Bus starter motor- market size and growth3-A


154

143

133124

115123

119

1019192

72

0

40

80

120

160

10F 11F 12F 13F09E06 07 08

Thousands of units

2003 04 05

7874

7067

63

69

0

10

20

30

40

50

60

70

80

90

2008 09E 10F 11F 12F 13F

Millions of RMB 2.411.3

Bus starter motor market volume (2003-08)

Bus starter motor market value(2008-13F)

CAGR% (2003-08)(08-13F)

CAGR% (2008-13F)

4.5

DRAFT



Bus starter motor suppliers are generally specified by engine manufacturers


Bus starter motor- purchasing behavior

Fleet owners


Leave to bus manufacturers




Majority Minority

Minority Majority

Purchasing decision process in bus starter motor segment

Unlike bus alternators, bus starter motors suppliers are mainly specified by engine manufacturers

- starter motor is viewed as part of the engine and hence it is usually engine manufacturers that decide starter motor brand

“… Since the matching of starter motor and engine is very important, I believe those engine manufacturers want to choose the starter motors themselves …”

Engineer, Technology Centre, JAC Bus

- another reason is that customers do not care the quality of bus starter motors as much as they do in alternators

However, as the end users, fleet owners are capable of imposing influence on starter motor purchasing. Lightning is leveraging its strong relationship with major fleet owners and good reputation to persuade them to ask for Lightning’s starter motors at the very beginning

“… Lightning is actively persuading bus fleet owners and let them appoint its starter motor products …”

National Sales Director, Quanzhou Yida Electric ApplianceGood relationship with fleet owners and established reputation as a quality supplier are expected to help

Lightning to gain share in the bus starter segment

3-B

DRAFT



Bus starter motor customers typically regard quality, price and customer relationship as the three most important criteria

Key purchasing criteria for bus starter motors Engine manufactures are the major customers of bus starter motors. Most of them regard quality as the top selection criteria

“… We care the life span of the bus starter motors the most. We have a strict purchasing process and would involve our technical department to test the product quality of suppliers …”

Purchasing Manger, Yangzhou Yaxing Coach

However, as there is no significant difference in product quality among starter manufacturers, price and customer relationship usually have significant impact on customer decisions

“… We do not appoint bus starter motors because we think there is no big quality difference among suppliers …”


“… We prefer those starter motor suppliers with close relationship with us, as we can trust their quality and benefit from their reasonable price…”

Engine Sales Manager, Yangzhou Diesel Engine

Bus starter motor- purchasing behavior

4.3

4.3

4.7

5.0

5.0

6.3

6.3

6.7

0 1 2 3 4 5 6 7

Customization

Service



Price

Quality


Payment terms


ImportantMost

Important

1

2

3

4

5

6

7

8

PRELIMINARY


3-B

n=6

DRAFT



Lightning currently accounts for ~50% of the bus starter motor sector, with several domestic players competing in the market

Estimated bus starter motor market share (2008)

2008

Others

Bosch

Yida

Hengli

Shendian

Lightning

0

100

20

40

60

80

Percent

Market feedback indicate that Lightning has a c.40-50% market share in bus starter motor market

- leveraging its reputation and good relationship with bus fleet owners is regarded as one of the key successful factors of Lightning in the bus starter motor sector

- compared with bus alternator market, Lightning is facing more competitors in this market and its advantage in quality is not obvious

“… I cannot see significant differences between different bus starter motor brands. Though Lightning is the leader in bus alternator market, its advantage in starter motor is not obvious …”

Engineer, Technology Center, Shaolin Bus

Shendian, Hengli and Yida are regarded as major suppliers in bus starter motor market

- engine suppliers usually have long term relationship with particular suppliers. E.g. Yangzhou Diesel Engine mainly use Hengli for bus starter motor supply

BOSCH is regarded as a quality leader, however its higher price limits its penetration in this market

“… BOSCH is the best in quality, but their price is way too high, which could even double that of domestic products. Therefore its volume is not significant in this market …”

Sales Manager, Huzhou Longhao Auto Parts

Bus starter motor- competitive landscape

PRELIMINARY


3-C

DRAFT



Customers confirmed Lightning’s good quality and reputation in the starter motor market, but its advantage in this sector is less strong than that in bus alternators


Best-in-class


Comments

Quality Bosch Very good, but still not significantly better than domestic products

“… Bus owners still consider quality as one of the key purchasing criteria. As Lightning’s products have good quality, it is gaining share in bus starter motor sector …” Sales Manager, Dongfeng Chaoyang Diesel

“… We think there is no big quality difference between starter motor suppliers …”


Price Shendian 20-30% higher than other domestic brands and ~40% lower than Bosch

“… Lightning’s starter motor price is on average 20-30% higher than that of other domestic brands …” Sales Director, Quanzhou Yida Electric Appliance


Lightning Leading position; outstanding relationship with bus fleet owners

“…Right now, Lightning already has a very good relationship with bus fleet owners. Its strategy is to work closely with the OEM manufacturers and the engine manufacturers to further develop the relationship and sell more products …”

Engineer, Technology Center, JAC Bus


Lightning, Shendian

Very good among bus fleet owners; Some domestic suppliers have long-term relationship with their customers

“…Lightning’s product track record is very good, therefore many fleet owners not only pick up its alternators, but also choose its starters …”

Technical Manager, Yinjian International Travel Service


Bus starter motor- competitive landscape3-C

DRAFT



Lightning is one of the leading players in bus starter motor market. Established relationship with fleet owners will help Lightning to gain more share in this sector, but may not to a dominator level

The total market size reaches ~RMB70mn in 2008 Market size

Market growth


The future market growth of medium and large buses are expected to slow down to 2.4% largely due to slow underlying market growth and average selling price decline

Market feedback suggests that Lightning has become one of the leading bus starter motor supplier in the market

- it is leveraging its dominant in bus alternators to influence bus fleet owners to specify Lightning’s starter motor

- its good service and better quality also help it to strengthen its position

Bus starter motor-summary



Lightning is likely to gain more share in the bus starter motor market by continuing leveraging its strong relationship with existing bus alternator customers. However, it might be difficult for Lightning to reach a dominant position in bus starter motor market due to less solid competitive advantage

3

DRAFT



Truck starter motor market is expected to grow at 5% p.a. and reach ~RMB540m in 2013

Truck starter motor- market size and growth

Source: CAAM, L.E.K. interviews and analysis

1,057986

920858

800748724

509431

558

392

0

200

400

600

800

1,000

1,200

10F 11F 12F 13F09E06 07 08

Thousands of units

2003 04 05

536510

486462

440420

0

100

200

300

400

500

600

2008 09E 10F 11F 12F 13F

Millions of RMB 5.013.8

Truck starter motor market volume (2003-08)

Truck starter motor market value(2008-13F)

CAGR% (2003-08)(08-13F)

CAGR% (2008-13F)

7.2

4-A

DRAFT



Truck fleet owner and OEMs typically do not care about starter motor brand and leave the supplier decision to engine manufacturers

Truck starter motor- purchasing behavior

Typically as starter motor is regarded as part of the engine, truck OEMs and fleet owners do not care about starter motor brand and mainly get the starter motor from engine manufacturers

- normally truck OEMs and fleet owners would take start motor brand recommended by engine manufacturer

“… We pay more attention to engine brands but do not know and care about starter motor brands and would leave OEMs and engine manufacturers to decide …”

Technical Engineer, Shandong Transportation Group

“… We usually trust the choice of starter motor by engine manufacturers as they have more knowledge in those brands …”

Purchasing Manager, Dongfeng Motor Corporation

In the future, engine manufacturers would continue to be the key decision maker for starter motor purchasing

“… Starter motors are kind of a standard product with less customizations. We’re quite familiar with the suppliers and hence give recommendations to our customers. We also collect feedback from customers each year to review our suppliers. I do not think such practice would change in the future …”

Senior Engineer, Sinotruk Jinan Engine

Fleet owners

Leave to truck manufacturers

Make supplier decision


Make supplier decision

Majority Minority

Vast Majority

Purchasing decision process in truck starter segment


4-B

Engine manufacturers are the key decision maker for truck starter motor purchasing

DRAFT



Price and quality are the key criteria to engine suppliers when selecting truck starter motor supplier

Key Purchasing Criteria for Truck Starter Average Ranking

As starters are relatively standardized products, engine suppliers expect limited difference in quality among suppliers and hence care more about price

“… We only use one or two types of truck starters and would expect suppliers to offer lower price …”


Quality is also considered as major criteria to ensure reputation of engine manufacturer. However, customers feel limited quality variance among major starter motor suppliers

“… Quality of starter motors are quite important for heavy trucks as starters are easy to break down under bad environmental conditions such as snow, raining and dusty …”

Sales Manager of Truck Department, FAW Wuxi Diesel Engine

“… I think for truck starters, BOSCH would have more advanced quality but others suppliers such as Lightning, Shendian and Dongfeng do not have much difference in quality …”

National Sales Director, Quanzhou Yida Electric Appliance for Vehicle

3.8

3.8

4.7

5.0

5.2

5.8

6.3

6.7

0 1 2 3 4 5 6 7

Customization


Price

Quality


Service

Payment terms



ImportantMost

Important


1

2

3

4

5

6

7

8

4-B Truck starter motor- purchasing behavior

n=6

DRAFT



Lightning currently only accounts for c.10% of the truck starter motor sector, and it has room to further increase share but may not reach a significant level

Estimated truck starter motor market share (2008)

BOSCH

Dongfeng

Shendian

Lightning

2008

Others

Yida

0

100

10

20

30

40

50

60

70

80

90

Percent

Lightning is catching up by entering Weichai Power and FAW’s suppliers’ list but actual sales volume to them are not very significant

“… Lightning only has starter motor sales in our Deutz engine. We are mainly using BOSCH to supply starter motors for our truck engines as we have strategic partnership with them …”


BOSCH and Shendian are leading suppliers with over 50% share

- vast majority of BOSCH’s starter motor sales come from Weichai Power. BOSCH leverage its strong positioning in common rail, a key engine component, to reach strategic partnership with Weichai Power to cross-sell its starter motors

- Shendian has been a major supplier for years due to their good relationship with major engine manufacturers and lower price

Dongfeng Starter Motor has captive relationship with its auto corporation. However it is losing share due to less advanced technology for gear-reduced motor products

Going forward, Lightning is likely to have chances in share gain, however it is less likely to become a dominant player in this sector

- it has good relationship with existing major customers and track record developed through high quality alternators and outstanding services, which potentially be leveraged to increase penetration

- however as starter motor is regarded as more like a commoditized product, it is hard for Lightning to justify its higher price with slightly better quality over existing suppliers of the major engine manufacturers

- meanwhile the partnership between BOSCH and Weichai Power blocks Lightning’s future penetration increase for truck starter motor. And due to historical reason, it is difficult for Lightning to sell to Sinotruk


Truck starter motor- competitive landscape4-C

DRAFT



Lightning has a relatively weak position for starter motor currently


Best-in-class


Comments

Price Shendian 20% higher than domestic, 30-40% lower than BOSCH

“… Price of Lightning’s products is decreasing in recent years but still 20% higher than Shendian, which would be a concern for engine manufacturers …” Regional Sales Manager, Shendian

Quality BOSCH Behind BOSCH, better than domestic brands but only to a limited extent

“… Quality of BOSCH’s products is target for us as it represents the most advanced technology in the world. But I think Lightning’s quality does not differentiate much from ours …” National Sales Director, Quanzhou Yida Electric Appliance for Vehicle

“… Bosch’s auto parts products are highly reliable and its technology of starter even improve performance of our engines and currently Lightning’s product quality is close to domestic ones and could not reach BOSCH level in the short term …” Purchasing Manager, Weichai Power


BOSCH, Shendian

Has some presence in major engine manufacturers but still need to strengthen the truck starter motor presence

“… Bosch has established a strategic alliance with us through providing overall technical solution and sales support for key auto parts such as common rail, which enables it to bundle the sales of expensive starters. Other suppliers like Lightning and Shendian could not offer the same thing to us …” Purchasing Manager, Weichai Power

“… As far as I know, Lightning has successfully sold truck starters into engine manufacturers such as Weichai, FAW, Cummins and Yuchai using its existing strong relationship with them …”

Sales Manager, FAW Wuxi Diesel Engine


BOSCH, Shendian

Behind Shendian and BOSCH for truck starter motors

“… BOSCH’s starter motors have good track record among my customers such as Foton, Shaanxi Heavy and Hualing but Lightning’s is still not as strong …” Purchasing Manager, Weichai Power

“… Currently, Lightning has a few track record in the truck business but still limited compared to its bus sector compared to BOSCH and Shendian…” Sales Manager, FAW Wuxi Diesel Engine

Truck starter motor- competitive landscape


4-C

DRAFT



In general, truck starter motor sector is a relatively large and quickly growing market. Potentially Lightning could increase its share, but less likely to become a dominant player

Market size

Market growth


Going forward, there is room for Lightning to increase its share

- it could leverage its good relationship with engine manufacturers and outstanding services to increase its penetration

However the share gain may not be very significant

- Lightning has not demonstrated greater value of money to customers and therefore would be difficult to persuade the customers to switch from their existing long-term suppliers with comparable quality and lower price

- it is hard to increase its share in Weichai Power and meanwhile it cannot sell to Sinotruk, which limits their potential increase in penetration

Truck starter motor-summary


Total market size for truck alternators reached ~RMB540m in 2008

- market size almost doubled in the past 5 years due to strong growth in trucks

Truck starter market would follow growth of the underlying market at about 5% annually

Currently, Lightning’s truck starter has 10% of the market

- it has penetrated into several large customers such as Yuchai and Weichai Power

- market feedback suggests that Lightning is outstanding in service, but its quality does not have significant advantage over existing suppliers while price is higher


4

DRAFT



Unlike the US and Europe, China’s replacement and re-manufacturing market size is relative smaller due to more repairs tradition in the market

Fewer replacement Limited re-manufacturing


Repeating repairs of alternators/starters limit the demand for replacement

“… There is ~10-20% of replacement in all repairing. Customer would not consider replacement as long as it could be repaired with lower cost …”

Electronic Engineer, Dongbao Repairing Company

Re-manufacturing is very limited in China due to poor conditions of alternators/starters after frequent repairing

“… Used alternators and starters are repaired too much in China, which makes their quality too bad to be re-manufactured…”

Electronic Engineer, Shandong Linglong Repairing Company

Aftermarket

More repairs in China

Different from the frequent replacement behavior in the US and Europe market, most Chinese customers would prefer to repairing rather than replacement if possible for cost concern

“… In most cases, replacing an alternator/starter is much more expensive than repairing, therefore repair is a better solution to most customers …”

Technical director, Yandangshan Zhou Auto Repairing Company

“… Usually replacement cost of an alternator/starter is several times as expensive as repairing cost if it not severely damaged. We only consider replacement when the repairing cost is more than 2/3 of initial cost …”

Technical Engineer, Shanxi Daquan Repairing Company

- it is not uncommon that customers repair components even the components have exceeded its life span

“… A lot of vehicle owners tender to repair alternators even it has been repaired many times. By doing so they try to extend the life of alternators so that it could last as long as the vehicle life to avoid replacement cost …”


5

DRAFT



Lightning’s products only will be used to replace its original alternators and starters in the aftermarket

Aftermarket


Normally Lightning's price is at least 20-50% higher than that of domestic products. In most cases, only Lightning’s customers will consider to replace their broken alternator or starter with a brand new Lightning product

“… In price and quality trade-off, many customers, especially individual owners will usually choose low price components with inferior quality. For example, Lightning’s product is not preferred by replacement customers due to its high price …”

Electronic Engineer, Dongbao Auto Repairing Company

“… Usually only customers using Lightning’s product will chose Lightning for replacement. I have never heard customers with domestic brands will convert to Lightening as clearly Lightning is more expensive …”


Typically most Lightning’s customers would stick to Lightning for replacement

“… Most customers with Lightning’s products will ask for Lightning for replacement. Lightning’s products have higher life span and customers do not want other brands as they think the quality is inferior. In addition, most customers equipped with Lightning’s products are less price sensitive, such as large scale logistics companies, and they would stick to better products …”


- however, there are some customers, typically some individual fleet owners, would be cost driven and switch to other cheaper product for replacement

The size of Lightning’s aftermarket depends on its historical sales and customer stickiness rather than the overall size of aftermarket

5

DRAFT



Typically majority of Lightning’s bus fleet customers would stick to Lightning for replacement. Only some individual bus owners may switch to other domestic suppliers for cost concern

Lightning’s bus fleet customers

Small bus fleetsLarge bus fleetsIndividual bus

owners

Repairing subsidiaries

Dedicated repairing shops

Roadside repairing shops

Lightning

Majority Minority

Domestic substitutes

Majority Minority

Large and small bus fleet owners normally have their own bus service companies or dedicated repairing shops and are more likely to stick to Lightning’s products for replacement

“… Our service company understands the products very well and from its experience, quality can not be assured if switching to other suppliers. Therefore we generally stick to original component supplier …”


“… Large bus fleet owners generally stick to their original component supplier to assure the quality. They typically have their own repair plants who directly purchase parts and components from original supplier …”

Purchase Manger, LuoYang Bus

Individual bus owners are more price sensitive and likely to use cheaper domestic products for replacement

Lightning has an established distributor network to sell to the aftermarket and maintain high product availability in those repairing subsidiaries of large bus companies and dedicated repairing shops


Majority Minority

5 Aftermarket

DRAFT



Majority of trucks are owned by individuals, and they are more likely to use cheap domestic products for replacements from roadside repairing shops

Lightning’s truck fleet customers

Small truck fleetsLarge truck fleetsIndividual truck

owners

Repairing subsidiaries

Dedicated repairing shops

Roadside repairing shops

Lightning

Minority Majority

Domestic substitutes

MajorityMinority

Given the highly fragmented nature of truck fleet industry, most of Lightning’s truck fleet customers are individual truck owners and would generally replace the products with domestic substitutes

- the key consideration of using domestic products is for cost concern

- even if customers are willing to use Lightning’s products for replacement, product availability would be a constraint. Trucks have a higher geography coverage and it is relatively difficult to get the original products in rural areas

“… As there’s limited choice in roadside repair shops, iindividual owners generally pick up any domestic substitutes available …”

Technical Manager. Nanchang Bus Repairing Shop

For large and small truck fleet customers, they tend to use original products due to assured high quality

“… Many truck fleet customers find out that using inferior domestic products would shorten life span of alternators or starters, which actually costs more …”

GM Technical Director, Yandangshan Zhou Auto Repairing Company

- they either have own repairing subsidiaries or dedicated repairing shops to offer the original components, which is very similar to bus fleet owners

- however majority of the truck fleets are still owned by individuals

Source: Lightning Management, L.E.K. interviews and analysis

Minority Minority

5 Aftermarket

DRAFT



Customers are increasingly to use original supplier for alternators and starter motors in the aftermarket, which will benefit Lightning in the aftermarket


Aftermarket

The aftermarket trend is positive to Lightning’s sales in future

Original alternators and starter motors are perceived to have longer life span and higher quality than alternative products, therefore customers believe sticking to original supplier can save the overall maintenance cost in the later usage

“… In the past, most of customer are using available cheap products for replacement, but they found that the price savings from low quality components are compromised by the shorter life of the components. They are more inclined to use original supplier …”

Technical Engineer, FengHuang Bus Repairing Service

“… Most customers to our plants used to ask for some cheap products. But I noticed that now majority of them ask for the exact same product equipped in their vehicles. They have realized that lower upfront price may generate large amount of repair cost in the future …”

GM Technical Director, Yandangshan Zhou Auto Repairing Company

“… Truck customers now are asking for original brand for replacement. They have concerns on the quality of cheap products. If it breaks down, they would be in serious trouble as they are often in the remote areas and would have to pay a lot to get towed away to a place for repair …”


5

DRAFT



Agenda

Executive summary

Company overview


Synthesis

Next steps

Section Title

DRAFT



Lightning has successfully penetrated into almost all major engine suppliers and bus OEMs

Segment ProducerAlternator Starter

Bus Truck Bus Truck

Bus

King Long

Yutong

Zhongtong

Heavy-duty truck engine

Yuchai

FAW Wuxi

Sinotruck

Weichai

Dongfeng Cummins


Others

Zhongtong

Yutong

King

Long

Medium and large bus OEM

Others

Dongfeng CumminsYuchai

Sinotruck

FAW Wuxi

Weichai

Heavy truck engine manufacturers

0

100

10

20

30

40

50

60

70

80

90

Percent

China engine and medium and large bus manufacturer market share by volume (2008)

Lightning’s presence in major diesel engine manufacturers

ILLUSTRATIVE

Shanghai

Minor supplierDominant supplier No presence

Synthesis

DRAFT



Quality products, outstanding service and good customer relationship are the key strengths of Lightning in the market

Quality leader Outstanding serviceGood customerrelationship

Lightning is mainly leveraging these three key differentiators to maintain and gain share in the market


Lightning is strong in the technical side, which results in its leadership in product quality

- its bus alternator quality is regarded as unmatched

- apparent quality advantage in the large capacity truck alternator sector

- it still has better quality in starter motor although the advantage is not very significant

Lightning has successfully penetrated into all major customers. As penetrating into new customers is very time consuming, Lightning clearly has advantage over other suppliers

Customer feedback is very consistent that they are very satisfied with Lightning’s performance as a supplier

- except for complaints on price, all the feedback from the customer side is very positive

Lightning is clearly providing the best services in all the sectors. It offers good services along the value chain rather than just focusing on the purchaser

“… For example, when there’s product failure on the OEM side, Lightning gave very timely response to the OEMs rather than being asked by Weichai. This has impressed both OEMs and Weichai and therefore we all prefer Lightning as our major supplier …”

Purchasing Manager, Weichai

Power

Synthesis

DRAFT



Lightning’s is adopting a “three-wave” growth strategy to fuel its future growth; currently it is entering the starter motor segment, which is less complex and price sensitive

RevenueILLUSTRATIVE

Time

Lightning revenue growth roadmap

First wave: bus alternator

Second wave: truck alternator

Third wave: starter motor

2000 2007 2010 Future…

Note: * Size of the bubbles are relative, not in proportion to the actual market sizesSource: L.E.K. analysis

High

Low High

Pric

e se

nsiti

vene

ss

Technical complexity

Lightning product characteristicsILLUSTRATIVEBus

alternator

Truck alternator

Bus & truck

starter

Bubble size = market size*

Synthesis

DRAFT



According to the management projection, the majority of Lightning’s future growth is expected to come from starter motor sector. This also implies a substantial share gain in the starter motor sector

103

0

200

400

600

800

1,000

1,200

673

1,115

2008 Increase in bus

alternator

349

Increase in truck

alternator

Increase in starter motor

10

2012F

Millions of RMB

Lightning domestic sales growth by product(2008-12F)

0

10

20

30

40

50

60

70

80

90

Bus alternator

Truck alternator

Starter motor

2008

2012F

Percent

Implied Lightning’s domestic market share by product (2008 vs. 12F)

Source: Management Data, L.E.K. Interviews and analysis

Synthesis

Part of Lightning’s projection of truck alternators and starter motors includes sales to other sectors like light trucks and engineering vehicles. Those sales is excluded in the market share analysis

DRAFT



L.E.K. has studied three perspectives to assess the future growth prospects of Lightning

Lightning future growth assessment

Underlying market growth

Price changeMarket share

change

Synthesis

DRAFT



0

200

400

600

800

1,000

1,200

1,400

12F

Heavy-duty truck

Medium-duty truck


13F11F10F09E2008

Thousands of units

The underlying market of alternators and starter motors is expected to continue moderate growth over the next five years

Projected sales volume of medium-and-heavy duty trucks and medium-and-large buses in China(2008-13F)

Note: * The slow growth of medium and large bus is largely due to sales volume decline in 2009 due to economic downturnSource: China Auto Industry Association, CICC, CITIC securities, United Securities, Orient Securities, L.E.K. interviews and analysis

CAGR% (2008-13F)

5.0

3.4*

9.6

7.7Total

Synthesis

DRAFT



Going forward, management expects Lightning’s ASP to decline steadily, which is confirmed by market participants as an industry general trend

Note: * Average price for all the products in each categorySource: Management data, L.E.K. interview and analysis

Lightning domestic ASP projection*(2008-12F)

CAGR%(2008-12F)

(3.8)

(3.5)

(0.6)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6


2008 09E 10F 11F 12F

Bus alternator

Truck alternator

Starter

Lightning management expects a ~3% p.a. price drop. Competition and customer pressure are the key reasons for price drop

“… A 3-5% p.a. price decline is very common in auto component industry. OEMs have target to reduce sourcing cost each year. In order to keep our current market share, we have to lower our price …”

Marketing Director, Lightning

“… Due to the fierce competition and pricing pressure from customers, we have to lower our price every year. …”

Sales Manager, Huzhou Dehong Auto Electrical System

For starters, management expects a slight increase moving forward from 2009. As they believe the upgrade of emission standard from Euro II to Euro III requires starters to use better parts to maintain same quality, which increase the cost and hence price. This is in line with market feedback

“… The price of alternators will keep decreasing steadily by less than 5% each year. However the new Euro III emission standard is likely to drive up the starter motor price as more expensive component need to be used …”

National Sales Director, Quanzhou Yida Electric Appliance For Vehicle

Synthesis

DRAFT



Lightning has a very solid position in its current major business, bus alternators, and it is very likely to maintain its strong positioning

Implied Lightning’s domestic share in bus alternator segment (2008 vs. 12F)

0

10

20

30

40

50

60

70

80

90

2008 12F

Percent

-4%

Lightning is expected to keep its dominant position in the bus alternator sector

Comments

Current market position

Lightning currently is the dominant player in the bus alternator sector with ~90% market share

- Lightning’s product is regarded as the best in quality

- Lightning’s service is also outstanding for both pre-sales and after-sales

As quality and service are critical to fleet owners, the major decision maker, they are very satisfied with Lightning and would stick to it

Future prospects

As all the parties along the bus alternator value chain have very positive feedback on Lightning, it would be difficult for competitors to gain share from Lightning in this segment

In addition, there is an increasing trend that large fleet owners, with whom Lightning has already established very solid relationship, are more inclined to specify brand for their purchase. This is also very favourable to Lightning given its dominate share and good track record within bus fleet owners

Source: Management Data, L.E.K. analysis

Synthesis

DRAFT



Comments


Overall, Lightning is a strong player in truck starter segment, with 30-40% market share

Lightning currently is stronger in the alternators with larger capacity, which are typically used for heavy trucks

- large capacity truck alternator usually has higher requirement in quality and there are few suppliers with comparable quality in the market

However, Lightning’s position in smaller units, which are mainly used for medium-duty truck is relatively weaker

- as the quality requirement for smaller alternators is not that high and the difference among major suppliers are insignificant, market competition is more fierce

Future prospects

The growth trend of underlying market is in favour of Lightning as heavy-duty truck is gaining more share in the overall truck market and Lightning is strong here

Meanwhile Lightning’s superior service could help it to maintain its strong position or even slightly increase in the truck alternator sectors

However, Lightning is paying more attention to light truck alternator segment, which might be the main reason for its share decrease in management’s projection

Although management’s projection indicates it may lose share in the truck alternator segment due to focus shift, it is expected Lightning will continue to have a strong presence in the market Implied Lightning’s domestic share in truck alternator (2008 vs. 12F)

0

5

10

15

20

25

30

35

2008 12F

Percent

-6.8%

Lightning should be able to maintain its current market position in the truck alternator sector


Synthesis

DRAFT



39

13

0

10

20

30

40

2008 12F

Percent

+25.5%

Currently Lightning is a decent player in the starter motor segment; Lightning management has an ambitious growth target over the next 4 years in this segment

Implied Lightning’s market share in starter motor segment (2008 vs. 12F)

Comments


As the annual sales volume of truck is ~7 times of that of bus, Lightning’s market position in the starter segment largely depends on its performance in the truck starter sector

Currently Lightning has a decent share in the starter motor segment due to its weaker position in truck starter motor

- Lightning has a relatively strong presence in the bus starter sector, as it could leverage its good relationship with bus fleet owner to help to increase penetration

- however, Lightning’s position in truck alternator segment is relatively weak as truck starter is more “commoditized”

Future prospects

Going forward, Lightning management expects to gain substantial share in this segment by penetrating into major customers in the market

Lightning is likely to gain some share in the market by leveraging its existing relationship developed from its alternator business and excellent services

However, it would be difficult for Lightning to substantially increase its share in both truck and bus starter segment over the next 3-5 years

- vehicle manufacturers and fleet owners care less about quality in the starter segment

- customers are more price sensitive, but the quality difference among major suppliers is regarded as minor

- existing starter motor suppliers already have very stable relationship with customers and it would be hard to take significant share given there is no very obvious advantage from Lightning’s offering


Synthesis

DRAFT



Ligh

tnin

g’s

shar

e in

bus

sta

rter

As truck accounts for the majority of the market, to reach management’s projection, Lightning seems have to reach over 30% market share in the truck starter segment, which seems a little difficultImplied Lightning’s market share in the truck starter motor segment

Lightning’s overall market share in starter segment

Lightning’s current share in bus starter

Lightning’s target overall market share in starter segment in 2012

Range Lightning should be able to achieve

15% 25% 35% 38% 40% 45% 50%

30% 12.8% 24.3% 35.7% 39.2% 41.4% 47.2% 52.9%

35% 12.1% 23.6% 35.0% 38.4% 40.7% 46.4% 52.2%

40% 11.4% 22.8% 34.3% 37.7% 40.0% 45.7% 51.4%

45% 10.7% 22.1% 33.6% 37.0% 39.3% 45.0% 50.7%

50% 9.9% 21.4% 32.8% 36.3% 38.6% 44.3% 50.0%

55% 9.2% 20.7% 32.1% 35.5% 37.8% 43.6% 49.3%

60% 8.5% 19.9% 31.4% 34.8% 37.1% 42.8% 48.6%

65% 7.8% 19.2% 30.7% 34.1% 36.4% 42.1% 47.8%

70% 7.0% 18.5% 29.9% 33.4% 35.7% 41.4% 47.1%

75% 6.3% 17.8% 29.2% 32.6% 34.9% 40.7% 46.4%80% 5.6% 17.0% 28.5% 31.9% 34.2% 39.9% 45.7%

Range Lightning is likely but a little difficult to achieve

Range Lightning is difficult to achieve

Lightning’s overall market share in starter segment in 2008 (13.4%)

Lightning’s share in truck starter segment in 2008

(~15%)


Synthesis

DRAFT



Agenda

Executive summary

Company overview


Synthesis

Next steps

Section Title

DRAFT



Next steps

To finish the remaining researches and update the final report accordingly, include

- market sizing for aftermarket

- assessment on Lightnings’ aftermarket sales projection

To polish the analysis in the draft report

To update the report based on today’s discussion

To schedule the date for final discussion in the next week

Next steps

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