| CHINA AUTOMOTIVE SYSTEMS INC ITEM 1A RISK FACTORS The Company’s business, financial conditions and results of operations could be materially and adversely affected by many risk factors |
| Because of these risk factors, actual results might differ significantly from those projected in the forward-looking statements |
| Factors that might cause such differences include, among others, the following: Risks Related to the Company’s Business and Industry Because the Company is a holding company with substantially all of its operations conducted through its subsidiaries, its performance will be affected by the performance of its subsidiaries |
| The Company has no operations independent of those of Great Genesis and its subsidiaries, and its principal assets are its investments in Great Genesis and its subsidiaries |
| As a result, the Company is dependent upon the performance of Great Genesis and its subsidiaries and will be subject to the financial, business and other factors affecting Great Genesis as well as general economic and financial conditions |
| As substantially all of the Company’s operations are and will be conducted through its subsidiaries, it will be dependent on the cash flow of its subsidiaries to meet its obligations |
| 11 ______________________________________________________________________ Because virtually all of the Company’s assets are and will be held by operating subsidiaries, the claims of its stockholders will be structurally subordinate to all existing and future liabilities and obligations, and trade payables of such subsidiaries |
| In the event of the Company’s bankruptcy, liquidation or reorganization, the Company’s assets and those of its subsidiaries will be available to satisfy the claims of its stockholders only after all of the Company’s and its subsidiaries’ liabilities and obligations have been paid in full |
| With the automobile parts markets being highly competitive and many of the Company’s competitors having greater resources than it does, the Company may not be able to compete successfully |
| The automobile parts industry is a highly competitive business |
| Criteria for the Company’s customers include: • Quality; • Price/cost competitiveness; • System and product performance; • Reliability and timeliness of delivery; • New product and technology development capability; • Excellence and flexibility in operations; • Degree of global and local presence; • Effectiveness of customer service; and • Overall management capability |
| The Company’s competitors include independent suppliers of parts, as well as suppliers formed by spin-offs from its customers, who are becoming more aggressive in selling parts to other vehicle manufacturers |
| Depending on the particular product, the number of the Company’s competitors varies significantly |
| Many of the Company’s competitors have substantially greater revenues and financial resources than it does, as well as stronger brand names, consumer recognition, business relationships with vehicle manufacturers, and geographic presence than it has |
| The Company may not be able to compete favorably and increased competition may substantially harm its business, business prospects and results of operations |
| Internationally, the Company faces different market dynamics and competition |
| The Company may not be as successful as its competitors in generating revenues in international markets due to the lack of recognition of its products or other factors |
| Developing product recognition overseas is expensive and time-consuming and the Company’s international expansion efforts may be more costly and less profitable than it expects |
| If the Company is not successful in its target markets, its sales could decline, its margins could be negatively impacted and the Company could lose market share, any of which could materially harm the Company’s business, results of operations and profitability |
| The cyclical nature of automotive production and sales could result in a reduction in automotive sales, which could adversely affect the Company’s business and results of operations |
| The Company’s business relies on automotive vehicle production and sales by its customers, which are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences |
| They also can be affected by labor relations issues, regulatory requirements, and other factors |
| In addition, in the last two years, the price of automobiles in China has generally declined |
| As a result, the volume of automotive production in China has fluctuated from year to year, which give rise to fluctuations in the demand for the Company’s products |
| Any significant economic decline that results in a reduction in automotive production and sales by the Company’s customers would have a material adverse effect on its results of operations |
| Moreover, if the prices of automobiles do not remain low, then demand for automobile parts could fall and result in lower revenues and profitability |
| 12 ______________________________________________________________________ Increasing costs for manufactured components and raw materials may adversely affect the Company’s profitability |
| The Company uses a broad range of manufactured components and raw materials in its products, including castings, electronic components, finished sub-components, molded plastic parts, fabricated metal, aluminum and steel, and resins |
| Because it may be difficult to pass increased prices for these items on to the Company’s customers, a significant increase in the prices of the Company’s components and materials could materially increase its operating costs and adversely affect its profit margins and profitability |
| Pricing pressure by automobile manufacturers on their suppliers may adversely affect the Company’s business and results of operations |
| Recently, pricing pressure from automobile manufacturers has been prevalent in the automotive parts industry in China |
| Virtually all vehicle manufacturers seek price reductions each year, including requiring suppliers to pay a “three warranties” service charge for compensation, exchange and withdrawal in an amount equal to one percent of the total amount of parts supplied |
| Although the Company has tried to reduce costs and resist price reductions, these reductions have impacted the Company’s sales and profit margins |
| If the Company cannot offset continued price reductions through improved operating efficiencies and reduced expenditures, price reductions will have a material adverse effect on the Company’s results of operations |
| The Company’s business, revenues and profitability would be materially and adversely affected if it loses any of its large customers |
| For the year ended December 31, 2005, approximately 14prca of the Company’s sales were to Brilliance China Automotive Holdings Limited, approximately 11dtta6prca were to Beiqi Foton Motor Co, Ltd, approximately 11dtta5prca were to Chery Automobile Co, Ltd |
| and approximately 9dtta5prca were to Zhejiang Geely Holding Co, Ltd, the Company’s four largest customers |
| The loss of, or significant reduction in purchases by, one or more of these major customers could adversely affect the Company’s business |
| The Company may be subject to product liability and warranty and recall claims, which may increase the costs of doing business and adversely affect the Company’s financial condition and liquidity |
| The Company may be exposed to product liability and warranty claims if its products actually or allegedly fail to perform as expected or the use of its products results, or is alleged to result, in bodily injury and/or property damage |
| The Company started to pay to its customers’ increased after-sales service expenses due to consumer rights protection policies of “recall” issued by the Chinese Government in 2004, such as the recalling flawed vehicles policy |
| Beginning in 2004, automobile manufacturers unilaterally required their suppliers to pay a “3-R Guarantees “ service charge (for repair, replacement and refund) in an amount equal to one percent of the total amount of parts supplied |
| Accordingly, the Company has experienced and shall continue to experience higher after sales service expenses |
| Product liability, warranty and recall costs may have a material adverse effect on the Company’s financial condition |
| The Company is subject to environmental and safety regulations, which may increase the Company’s compliance costs and may adversely affect the Company’s results of operation |
| The Company is subject to the requirements of environmental and occupational safety and health laws and regulations in China |
| The Company cannot provide assurance that it has been or will be at all times in full compliance with all of these requirements, or that it will not incur material costs or liabilities in connection with these requirement |
| Additionally, these regulations may change in a manner that could have a material adverse effect on the Company’s business, results of operations and financial condition |
| The capital requirements and other expenditures that may be necessary to comply with environmental requirements could increase and become a material expense of doing business |
| Non-performance by the Company’s suppliers may adversely affect its operations by delaying delivery or causing delivery failures, which may negatively affect demand, sales and profitability |
| The Company purchases various types of equipment, raw materials and manufactured component parts from its suppliers |
| The Company would be materially and adversely affected by the failure of its suppliers to perform as expected |
| The Company could experience delivery delays or failures caused by production issues or delivery of non-conforming products if its suppliers failed to perform, and the Company also faces these risks in the event any of its suppliers becomes insolvent or bankrupt |
| 13 ______________________________________________________________________ The Company’s business and growth may suffer if it fails to attract and retain key personnel |
| The Company’s ability to operate its business and implement its strategies effectively depends on the efforts of its executive officers and other key employees |
| The Company depends on the continued contributions of its senior management and other key personnel |
| The Company’s future success also depends on its ability to identify, attract and retain highly skilled technical, particularly engineers and other employees with electronics expertise, managerial, finance and marketing personnel |
| The Company does not maintain a key person life insurance policy on Mr |
| Hanlin Chen |
| The loss of the services of any of the Company’s key employees or the failure to attract or retain other qualified personnel could substantially harm the Company’s business |
| The Company’s management controls approximately 92dtta4prca of its outstanding common stock and may have conflicts of interest with its minority stockholders |
| Members of the Company’s management beneficially own approximately 92dtta4prca of the outstanding shares of the Company’s common stock |
| As a result, these majority stockholders have control over decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders, which could result in the approval of transactions that might not maximize stockholders’ value |
| Additionally, these stockholders control the election of members of the Company’s board, have the ability to appoint new members to the Company’s management team and control the outcome of matters submitted to a vote of the holders of the Company’s common stock |
| The interests of these majority stockholders may at times conflict with the interests of the Company’s other stockholders |
| There is a limited public float of the Company’s common stock, which can result in its stock price being volatile and prevent the realization of a profit on resale of the Company’s common stock There is a limited public float of the Company’s common stock |
| Of the Company’s outstanding common stock, approximately 11prca is considered part of the public float |
| The term “public float” refers to shares freely and actively tradable on the NASDAQ SmallCap Market and not owned by officers, directors or affiliates, as such term is defined under the Securities Act |
| Due to the Company’s relatively small public float and the limited trading volume of its common stock, purchases and sales of relatively small amounts of the Company’s common stock can have a disproportionate effect on the market price for the Company’s common stock |
| As a result, the market price of the Company’s common stock can be volatile |
| This stock price volatility could prevent a stockholder seeking to sell Company common stock from being able to sell it at or above the price at which the stock was bought |
| Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware may discourage a takeover attempt |
| Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware, the state in which the Company is organized, could make it difficult for a third party to acquire the Company, even if doing so might be beneficial to the Company’s stockholders |
| Provisions of the Company’s certificate of incorporation and bylaws impose various procedural and other requirements, which could make it difficult for stockholders to effect certain corporate actions and possibly prevent transactions that would maximize stockholders’ value |
| Risks Related to Doing Business in China and other International Countries Because the Company’s operations are all located outside of the United States and are subject to Chinese laws, any change of Chinese laws may adversely affect the Company’s business |
| 14 ______________________________________________________________________ All of the Company’s operations are outside the United States and in China, which exposes it to risks, such as exchange controls and currency restrictions, currency fluctuations and devaluations, changes in local economic conditions, changes in Chinese laws and regulations, exposure to possible expropriation or other Chinese government actions, and unsettled political conditions |
| These factors may have a material adverse effect on the Company’s operations or on the Company’s business, results of operations and financial condition |
| The Company’s international expansion plans subject it to risks inherent in doing business internationally |
| The Company’s long-term business strategy relies on the expansion of the Company’s international sales outside China by targeting markets, such as the United States |
| Risks affecting the Company’s international expansion include challenges caused by distance, language and cultural differences, conflicting and changing laws and regulations, foreign laws, international import and export legislation, trading and investment policies, foreign currency fluctuations, the burdens of complying with a wide variety of laws and regulations, protectionist laws and business practices that favor local businesses in some countries, foreign tax consequences, higher costs associated with doing business internationally, restrictions on the export or import of technology, difficulties in staffing and managing international operations, trade and tariff restrictions, and variations in tariffs, quotas, taxes and other market barriers |
| These risks could harm the Company’s international expansion efforts, which could in turn materially and adversely affect the Company’s business, operating results and financial condition |
| The Company faces risks associated with currency exchange rate fluctuations, any adverse fluctuation may adversely affect the Company’s operating margins |
| Although the Company is incorporated in the United States, the majority of its current revenues are in Chinese currency |
| Conducting business in currencies other than US dollars subjects the Company to fluctuations in currency exchange rates that could have a negative impact on the Company’s reported operating results |
| Fluctuations in the value of the US dollar relative to other currencies impact the Company’s revenues, cost of revenues and operating margins and result in foreign currency translation gains and losses |
| Historically, the Company has not engaged in exchange rate hedging activities |
| Although the Company may implement hedging strategies to mitigate this risk, these strategies may not eliminate the Company’s exposure to foreign exchange rate fluctuations and involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategy and potential accounting implications |
| If relations between the United States and China worsen, the Company’s stock price may decrease and the Company may have difficulty accessing the US capital markets |
| At various times during recent years, the United States and China have had disagreements over political and economic issues |
| Controversies may arise in the future between these two countries |
| Any political or trade controversies between the United States and China could adversely affect the market price of the Company’s common stock and the Company’s ability to access US capital markets |
| The Chinese Government could change its policies toward private enterprises, which could adversely affect the Company’s business |
| The Company’s business is subject to political and economic uncertainties in China and may be adversely affected by its political, economic and social developments |
| Over the past several years, the Chinese Government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization |
| The Chinese Government may not continue to pursue these policies or may alter them to the Company’s detriment from time to time |
| Changes in policies, laws and regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on the Company’s business |
| Nationalization or expropriation could result in the total loss of the Company’s investment in China |
| 15 ______________________________________________________________________ The economic, political and social conditions in China could affect the Company’s business |
| All of the Company’s business, assets and operations are located in China |
| The economy of China differs from the economies of most developed countries in many respects, including government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources |
| The economy of China has been transitioning from a planned economy to a more market-oriented economy |
| Although the Chinese Government has implemented measures recently emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese Government |
| In addition, the Chinese Government continues to play a significant role in regulating industry by imposing industrial policies |
| It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies |
| Therefore, the Chinese Government’s involvement in the economy could adversely affect the Company’s business operations, results of operations and/or the financial condition |
| The significant but uneven growth in the economy of China in the past 20 years could have an adverse effect on the Company’s business and results of operations |
| The Chinese Government has implemented various measures from time to time to control the rate of economic growth |
| Government control of currency conversion and future movements in exchange rates may adversely affect the Company’s operations and financial results |
| The Company receives substantially all of its revenues in Renminbi, the currency of China |
| A portion of such revenues will be converted into other currencies to meet the Company’s foreign currency obligations |
| Foreign exchange transactions under the Company’s capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange in China |
| These limitations could affect the Company’s ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures |
| The Chinese Government controls its foreign currency reserves through restrictions on imports and conversion of Renminbi into foreign currency |
| Although the exchange rate of the Renminbi to the US dollar has been stable since January 1, 1994, and the Chinese Government has stated its intention to maintain the stability of the value of Renminbi, there can be no assurance that exchange rates will remain stable |
| The Renminbi could devalue against the US dollar |
| The Company’s financial condition and results of operations may also be affected by changes in the value of certain currencies other than the Renminbi in which the Company’s earnings and obligations are denominated |
| In particular, a devaluation of the Renminbi is likely to increase the portion of the Company’s cash flow required to satisfy the Company’s foreign currency-denominated obligations |
| Because the Chinese legal system is not fully developed, the Company’s legal protections may be limited |
| The Chinese legal system is based on written statutes and their interpretation by the Supreme People’s Court |
| Although the Chinese government introduced new laws and regulations to modernize its business, securities and tax systems on January 1, 1994, China does not yet possess a comprehensive body of business law |
| Because Chinese laws and regulations are relatively new, interpretation, implementation and enforcement of these laws and regulations involve uncertainties and inconsistencies and it may be difficult to enforce contracts |
| In addition, as the Chinese legal system develops, changes in such laws and regulations, their interpretation or their enforcement may have a material adverse effect on the Company’s business operations |
| Moreover, interpretative case law does not have the same precedential value in China as in the United States, so legal compliance in China may be more difficult or expensive |
| 16 ______________________________________________________________________ It may be difficult to serve the Company with legal process or enforce judgments against the Company’s management or the Company |
| All of the Company’s assets are located in China and three out of the Company’s directors and officers are non-residents of the United States, and all or substantial portions of the assets of such non-residents are located outside the United States |
| As a result, it may not be possible to effect service of process within the United States upon such persons to originate an action in the United States |
| Moreover, there is uncertainty that the courts of China would enforce judgments of US courts against the Company, its directors or officers based on the civil liability provisions of the securities laws of the United States or any state, or an original action brought in China based upon the securities laws of the United States or any state |