At the beginning of 2008, the outlook was for continuing strong growth in China. However, as 2008 unfolded, the economies in North America, Europe and other markets declined to depths not seen in many years. Automotive sales plunged in many markets resulting in the bankruptcy of Chrysler and General Motors in 2009.  Economic conditions were better in China, but the global recession reduced GDP's growth in 2008 to 9%, which was the slowest rate since 2001. For 2008, the Chinese automotive market grew 6.7% to 9.34 million units, but this was the slowest growth in a decade.  With record revenues and 22.1% growth in 2008 compared with 2007 results, we once again outpaced the overall Chinese automotive industry performance. As China's automotive market continued to expand, it became the world's largest market starting in January 2009.

The Chinese government made a strategic change in 2009 to entice consumers to spend more. A number of stimuli, subsidies and incentives were implemented to re-ignite the Chinese economy. A RMB 4 trillion (US$590 billion) spending program was established, the sales tax was reduced to 5% from 10% to encourage sales of more affordable and environmentally friendly cars with small engines, and a RMB 5 billion (US$732 million) subsidy was granted to help farmers replace 3-wheel vehicles and outdated trucks. The healthcare system is being reformed to provide wider coverage of the population with higher healthcare subsidies. 

We remain very optimistic about the prospects for the Chinese automotive industry and we see opportunities in the global market. As China's largest independent power steering manufacturer, we focused on expanding our market share.  During 2008, we did not lose any key customers as we added new ones. We secured another Sino-joint venture as we shipped units to Dongfeng Peugeot Citroen Automobile Company Ltd.  We further penetrated the domestic OEM automotive market by adding ChangAn Auto. And we captured our first global automotive OEM headquartered in North America.

Our new customers highlight our manufacturing excellence, improved quality controls and our R & D capabilities to meet the strictest performance and reliability requirements for our safety-related steering products. Automotive technologies and vehicle models change, and we continue to invest in new products. Within a three-year period, our R & D center's new products generated cumulative sales in excess of RMB 847 million through 2008. Newly developed products were approximately 9.8% of 2008 sales. We continue developing innovative products such as electric power steering (EPS), to maintain our leadership and to have products for future vehicles. It is expected that fuel efficiency and environmental concerns will lead to the future purchase of more alternative energy and electric cars. BYD surprised the global auto market by rolling out the world's first commercial electric car. As BYD is among our top 5 customers, we are well positioned to provide advanced steering systems. The high-quality standards of OEMs for key safety-related products, the rising technology content in our power steering products and our close relationships with over 50 customers, especially large Chinese national brands, combine to create significant barriers to entry for our competitors. 

In 2008, we achieved record sales of 1.3 million systems and components representing revenues of $163.2 million, a 22.1% increase compared to 2007 sales of $133.6 million.  Net income was $12.4 million, or $0.46 per weighted average diluted share, for the 2008 year compared with $8.9 million, or $0.37 per weighted average diluted share last year. The 2008 global recession affected our operations, especially in the second half of 2008, as we conserved our financial resources and controlled our costs.

We believe the worst is over and we look forward to the rest of 2009 as the Chinese Association of Automobile Manufacturers (CAAM) increased its vehicle sales projection from 5% to 8.7% for this year. Key customers such as Chery Auto Ltd., Zhejiang Geely Automobile, ChangAn Auto Co. Ltd., and BYD have experienced accelerated demand for their small, fuel efficient vehicles in early 2009. Given this growth, we expect revenue growth to be over 20% in 2009.  

We will maintain our market leadership by continuing to penetrate the Chinese automotive OEMs, developing new products, optimizing our operating efficiencies, and seeking potential acquisitions. We are now better positioned for growth, especially in the global market, than any time in our history. We continue to be excited about our future and we wish to acknowledge the dedication of our employees and thank our shareholders for their loyalty as we build shareholder value.

Sincerely,
Qizhou Wu
CEO & Director
China Automotive Systems, Inc.