Zongshen Reports Strong Growth of Shipments in the Fourth Quarter of 2010 & Updates 2011 Growth Initiatives

VANCOUVER, BC – January 18, 2011 – (Motor Sports Newswire) –  Zongshen PEM Power Systems Inc. (“ZPP”, or the “Company”) (TSX: ZPP) is pleased to report that total gas and electric motorcycle shipments increased by 22% to approximately 138,300 units in the fourth quarter ended December 31, 2010, compared with the third quarter of 2010.

Gas Motorcycles (50+ to 250 cc gas motorcycles)

Domestic

Fourth quarter 2010 domestic shipments were 79,300 units, a 31% improvement compared with the third quarter of 2010. In the third quarter of 2010, domestic shipments were where negatively impacted by the enactment of the G3 Emissions Standard (“G3”). As 70% of the domestic sales are from rural China, the first and fourth quarters are traditionally the strongest quarters. The first quarter coincides with the annual homecoming of migrant workers from urban areas while in the fourth quarter, the rural economy is buoyed by crops sales.

On July 2, 2010, the Chinese government enacted G3 for two and three wheeled vehicles, which has a lower tolerance for emissions than the prior G2 emission standard (“G2”). All motorcycle manufacturers were required to cease production of G2 motorcycles by July 1, 2010 while dealers were granted an informal moratorium to the end February of 2011 to sell remaining G2 products.

ZPP complied with G3 and sold its entire remaining G2 inventory by October, 2010. Accordingly only G3 motorcycles were sold domestically in November and December of 2010. ZPP’s advantages in R&D and manufacturing have enabled it to produce G3 motorcycles that outperform the G2 bikes, which contributed to the strong fourth quarter sales recovery. Most of ZPP’s competitors are having difficulty to maintain performance when they convert a G2 motorcycle to meet G3 standards.

The G3 announcement on July 2, 2010 negatively affected shipments in the third quarter as distributors and dealers were focused on selling existing G2 inventory and were reluctant to stock the more expensive G3 motorcycles. Shipments rebounded in the fourth quarter as dealers were replenishing their inventory with G3 bikes.

ZPP and some of the other large motorcycle manufacturers have a tremendous opportunity to increase market share in China because many of the smaller manufacturers cannot meet the capital and technical hurdles to produce high performance G3 products. The Company believes that there will be a significant consolidation of the approximately 130 Chinese based gas motorcycle manufacturers due to G3, and the increasing consumer and government trend to demand better safety, styling and performance.

ZPP’s acquired motorcycle business division commenced preparations for G3 conversion in 2006. The estimated incremental cost to upgrade production facilities to produce G3 compliant bikes was RMB 30 million ($4.6 million). This cost estimate excludes the ZPP’s pre-existing capabilities in R&D and already modern production facilities, which means competitors without similar scale face higher conversion costs.

Export

ZPP shipped 53,500 units of exports from China in the fourth quarter of 2010, an increase of 18% compared with the third quarter of 2010, driven by an improved global economic environment and promotional activities in Latin America and Africa. For the full year of 2010, the Company expects export shipments to represent about 30% of the total motorcycles sold which is a return to historical export levels. Due to the weak global economic environments in key export markets, exports decreased to 17% of total sales in 2009.

Small Gas Motorcycle (< 50 cc gas motorcycles)

Fourth quarter of 2010 shipments of small gas bikes increased to 4,400 up 2% compared with the third quarter of 2010.

Electric Two-­Wheeler

Shipments decreased to 1,100 in the fourth quarter of 2010 from 3,300 units shipped in the third quarter of 2010. The decrease in sales was due to ZPP deciding to focus it resources on developing and selling electric motorcycles, which have more power, range and speed than the current electric scooters and bicycles.

As announced on September 16, 2010, the Company launched the first electric motorcycle to be produced in China, called the Toronto, to a select group of distributors and dealers. ZPP is the first domestic manufacturer to produce an electric motorcycle for the Chinese market. The Toronto delivers much better performance to the Chinese consumer at a retail price of about RMB 5,300 ($815), about double the average sales price of an electric scooter, but still affordable to urban workers and students. ZPP achieves this by combining some proprietary technology with its know-how and scale in motorcycle manufacturing. Since electric motorcycles made by foreign manufacturers are too expensive for the Chinese market, ZPP has limited competition in this emerging sector, unlike the market for electric scooters and bicycles in China, which is characterized by fierce competition.

Since its launch, ZPP sold roughly 240 Toronto electric motorcycles, and now has a backlog of orders for 1,300 units.

“We ended the fourth quarter of 2010 with a strong finish despite G3 overhang from the third quarter. Our fast sales recovery in November and December is a testament to our strong brand, superior products and ability of our talented management team to overcome industry challenges. ZPP is now among a select group of manufacturers positioned to realize market share growth and acquisition opportunities created by this emissions standard. I am also particularly pleased that our efforts on export sales have resulted in a sharp rebound. A larger presence overseas will not only diversify our revenue base but also opens up more cooperation opportunities with distributors and others for further sales growth,” said Mr. Zuo Zongshen, CEO and Chairman. “With G3 behind us, we are going into 2011 with good tailwind. While we expect to continue to reap some of the rewards of the investments we made in the electric motorcycle and increased promotion in key export markets, we also have a pipeline of projects that will continue to deliver growth and value for shareholders in the near term and years to come.”

2011 Growth Initiatives

E­motorcycles

The annual sales of the electric two-wheelers in China are an est. 20 million units annually and volume is expected to grow 11% per annum over the next 4 years. The Company believes that the growth will be lead by premium products such as the Toronto, where ZPP is focusing its resources. Most of the current competing offerings are low price/low quality, and ZPP differentiates itself by producing innovative and high quality products that cater to the increasingly more affluent and demanding Chinese consumers.

In December, the Company finalized an application with the Chinese Ministry of Industry and Information Technology for an electric motorcycle production license. ZPP expects to become the first company in China licensed to produce electric motorcycles and the technology behind the Toronto is expected to be the standard used to evaluate new electric motorcycle production license applications by competitors. The official receipt of this production license is expected in the first quarter of 2011. ZPP is currently optimizing the electric motorcycle supply chain to prepare for a wider Toronto product launch and introduce additional electric motorcycles in 2011.

Gas Bikes

In the first half of 2011, ZPP will introduce four additional gas motorcycle models in the 110 to 125 cc range, which is the best selling motorcycle size in China. ZPP will also increase promotion and advertising activities and as well as increase credit limits and terms to certain distributors to support their sales growth.

Export Markets

ZPP will enter six new markets in Africa as well as increase promotional activities in other existing markets that have has recovered from the 2009 economic crisis to further spur sales. There will also be a push in select foreign markets to collaborate with our distributors to market the higher margin Zongshen brand, which currently represents 20% of export sales.

Acquisitions

The Company believes that G3 will accelerate the consolidation of the Chinese motorcycle industry. ZPP will assess opportunities to acquire other manufacturers at attractive valuations that offer unique products or have access to markets currently not served by ZPP. ZPP will also assess earnings accretive acquisitions of complementary assets from Zongshen Industrial Group.

Third Quarter 2010 & Fourth Quarter 2010 Shipments
Unit Shipments Domestic Export
Q4 2010 CBU KD CBU KD Total
Large Motorcycle 79,300 14,000 39,500 132,800
Small Gas Motorcycle 4,200 200 4,400
E-bike 600 200 300 1,100
Total 84,100 200 14,200 39,800 138,300
Unit Shipments Domestic Export
Q3 2010 CBU KD CBU KD Total
Large Motorcycles 60,400 6,400 38,800 105,600
Small Gas Motorcycle 4,200 100 4,300
E-bike 1,200 300 1,800 3,300
Total 65,800 100 6,700 40,600 113,200
(rounded to the nearest 100 units)
CBU = Complete Built Units; units are shipping in assembled form
KD = The total of Complete Knocked Down and Semi Knocked Down units; units are shipped in completely or semi-complete disassembled kits

About Zongshen PEM Power Systems Inc.

Zongshen PEM Power Systems Inc. is a public company trading under the symbol ZPP on the Toronto Stock Exchange. The Company manufactures gas motorcycles, electric motorcycles, electric bicycles and other e-vehicles in China for the Chinese domestic and international markets. Zongshen PEM Power System’s largest shareholder is Zongshen Industrial Group, one of China’s largest manufacturers and distributors of engines and power equipment.

SOURCE: Zongshen PEM Power Systems Inc.

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