UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LIMITED

(Exact name of Registrant as specified in its charter)

Not Applicable		Bermuda
(Translation of Registrant’s name into English)		(Jurisdiction of Incorporation or Organization)

Suites 1602-05, Chater House, 8 Connaught Road Central, Hong Kong
(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class		Exchange on which registered
American Depositary Shares		New York Stock Exchange, Inc.
Ordinary Shares, par value US$0.01 per share		The Stock Exchange of Hong Kong Limited

3,668,390,900 Ordinary Shares, par value US$0.01 per share

2,382,966 American Depositary Shares, each representing 100 Ordinary Shares

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o      No þ

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or (15)(d) of the Securities Exchange Act of 1934.

Yes o      No þ

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filero    Accelerated Filerþ    Non-Accelerated Filero

     Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o    Item 18 þ

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

 

 

Table of Contents

		Page
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS			2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE			2
ITEM 3. KEY INFORMATION			2
ITEM 4. INFORMATION ON THE COMPANY			21
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS			52
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			68
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			81
ITEM 8. FINANCIAL INFORMATION			86
ITEM 9. THE OFFER AND LISTING			88
ITEM 10. ADDITIONAL INFORMATION			90
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			103
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			105
Part II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			105
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			105
ITEM 15. CONTROLS AND PROCEDURES			105
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT			108
ITEM 16B. CODE OF ETHICS			108
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES			108
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE			109
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS			109
Part III
ITEM 17. FINANCIAL STATEMENTS			110
ITEM 18. FINANCIAL STATEMENTS			110
ITEM 19. EXHIBITS			110
EX-1.2 AMENDMENTS TO BYE-LAWS OF BRILLIANCE CHINA AUTOMOTIVE
EX-7.1 STATEMENT EXPLAINING RATIOS CALCULATION
EX-8.1 LIST OF SIGNIFICANT SUBSIDIARIES
EX-12.1 SECTION 302 CERTIFICATION OF THE CEO
EX-12.2 SECTION 302 CERTIFICATION OF THE CFO
EX-13.1 SECTION 906 CERTIFICATION OF THE CEO AND CFO

CONVENTIONS

     Unless the context otherwise requires, references in this annual report to “we,” “us,” “our,” the “Company” or “Brilliance China Automotive” are to Brilliance China Automotive Holdings Limited and its consolidated subsidiaries and their respective operations. References to “China” or “PRC” are to the People’s Republic of China, but do not apply to Hong Kong, Macau or Taiwan for purposes of this annual report.

FORWARD-LOOKING STATEMENTS

     Certain information contained in this annual report that does not relate to historical financial information may be deemed to constitute forward-looking statements. The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe” or similar expressions identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. Brilliance China Automotive wishes to caution readers not to place undue reliance on any of these forward-looking statements, which speak only as of the date made. Among the factors that could cause Brilliance China Automotive’s actual results in the future to differ materially from any opinions or statements expressed with respect to future periods include:

	•		unexpected adverse effects on the economy of the People’s Republic of China, or China, and China’s automobile sector in particular;
	•		increased competition from other domestic and international automobile manufacturers;
	•		increased costs for raw materials and components;
	•		possible further revaluation of the Renminbi against foreign currencies; and
	•		fluctuations in foreign exchange rates.

     When considering these forward-looking statements, you should keep in mind the factors described in “Item 3 — Key Information — Risk Factors” and other cautionary statements appearing in “Item 5 — Operating and Financial Review and Prospects” of this annual report. These risk factors and statements describe circumstances that could cause actual results to differ materially from those contained in any forward-looking statement.

CURRENCY TRANSLATION

     Unless otherwise specified, all references in this annual report to “U.S. dollars” or “US$” are to United States dollars; all references to “Renminbi” or “Rmb” are to Renminbi, which is the legal tender currency of China; all references to “H.K. dollars” or “HK$” are to Hong Kong dollars, which is the legal tender currency of Hong Kong and all references to “Euro” and “Euros” are to the legal tender currency of the European Monetary Union. On December 29, 2006, the noon buying rates in New York City for cable transfers of Renminbi, Hong Kong dollars and Euros, as certified for customs purposes by the Federal Reserve Bank of New York

was US$1.00 = Rmb 7.8041, US$1.00 = HK$7.7771 and Euro 1.00 = US$1.3197. Unless otherwise specified, translations of amounts from Renminbi, Hong Kong dollars and Euros to U.S. dollars for the convenience of the reader have been made at those rates. No representation is made that the Renminbi, Hong Kong dollar or Euro amounts could have been, or could be converted into U.S. dollars at those rates or at any other rates. In addition, all financial information presented herein has been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

          Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

          Not applicable.

ITEM 3. KEY INFORMATION

Selected Financial Data

Historical Financial Information of Brilliance China Automotive

     The following table presents the selected consolidated financial information of Brilliance China Automotive and its subsidiaries as of and for the years ended December 31, 2002, 2003, 2004, 2005 and 2006, which have been derived from our audited consolidated financial statements. The selected financial information for the years ended December 31, 2004, 2005 and 2006 and as of December 31, 2005 and 2006 should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements, prepared in accordance with U.S. GAAP, included elsewhere in this annual report, the accompanying notes thereto and “Item 5 — Operating and Financial Review and Prospects.” The financial statements and footnotes for the years ended December 31, 2002 and 2003 and as of December 31, 2002, 2003 and 2004 are not included in this annual report.

(Amounts in millions,		As of and for the years ended December 31,
except per share/ADS and operating data)		2002				2003				2004				2005				2006				2006
		(Rmb)																				(US$)
Income Statement Data:
Total Sales			7,319.5				10,109.6				6,542.0				5,469.0				10,484.8				1,343.5
Cost of sales			5,411.3				7,727.1				5,491.3				5,012.0				9,960.6				1,276.3
Gross Profit			1,908.1				2,382.4				1,050.7				457.0				524.2				67.2
Selling, general and administrative expenses			1,067.2				1,410.1				1,510.4				1,195.3				1,384.7				177.4
Net income (loss)			610.5				780.8				1.2				(671.3	)			(386.1	)			(49.5	)
Balance Sheet Data:
Total assets			13,853.7				18,288.2				17,776.4				14,692.3				14,580.4				1,868.3
Current assets			8,263.0				10,286.5				9,428.3				7,110.2				7,768.6				995.5
Current liabilities			7,332.7				8,031.0				8,187.7				8,059.8				7,181.5				920.2
Capital stock			303.2				303.4				303.4				303.4				303.4				38.9
Total shareholders’ equity			6,005.3				6,886.3				6,857.7				6,139.7				5,765.9				738.8
Cash Flow Statement Data:
Payment for capital expenditure			798.8				955.9				999.1				558.0				304.2				39.0
Depreciation and amortization			270.6				677.8				603.0				616.6				811.5				104.0
Net cash flows provided by (used in) operating activities			1,913.0				753.4				(712.4	)			883.4				1,145.6				146.8
Net cash flows provided by (used in) investing activities			(2,209.9	)			(2,491.3	)			(729.2	)			338.4				514.8				66.0
Net cash flows provided by (used in) financing activities			365.9				2,281.1				853.9				(1,622.9	)			(1,035.7	)			132.7
Per Share/ADS Data:
Basic earnings (loss) per share			0.17				0.21				0.0003				(0.1830	)			(0.1053	)			(0.01	)
Basic earnings (loss) per ADS			16.65				21.30				0.03				(18.30	)			(10.53	)			(1.3	)
Diluted earnings (loss) per share			0.17				0.21				0.0003				(0.1830	)			(0.1053	)			(0.01	)
Diluted earnings (loss) per ADS			16.65				21.16				0.03				(18.30	)			(10.53	)			(1.3	)
Cash dividends declared per ADS(1)			1.48				2.12				1.07				n/a				n/a				n/a
Operating Data:
Production volume (units)
Minibus — Deluxe model			8,620				9,291				7,682				8,752				14,277
Minibus — Mid-priced model			56,959				65,734				56,215				48,131				53,811
Subtotal — Minibuses			65,579				75,025				63,897				56,883				68,088
Zhonghua Sedans(2)			8,890				27,054				11,806				6,854				63,560
Total			74,469				102,079				75,703				63,737				131,648
Sales volume (units)
Minibus — Deluxe model			9,017				9,004				6,626				9,940				14,196
Minibus — Mid-priced model			56,121				65,614				54,992				50,060				52,049
Subtotal — Minibuses			65,138				74,618				61,618				60,000				66,245
Zhonghua Sedans(2)			8,816				25,600				10,982				9,000				62,281
Total			73,954				100,218				72,600				69,000				128,526

Exchange Rate Information

     The following table sets forth certain information concerning exchange rates between Renminbi and U.S. dollars for the periods indicated:

						Noon Buying Rate
Period		Period End				Average(1)				High				Low
2002			8.2800				8.2772				8.2800				8.2765
2003			8.2767				8.2771				8.2800				8.2765
2004			8.2765				8.2768				8.2774				8.2764
2005			8.0702				8.1826				8.2765				8.0702
2006			7.8041				7.9574				8.0702				7.8041
January 2007			7.7714				7.7883				7.8127				7.7705
February 2007			7.7410				7.7468				7.7632				7.7410
March 2007			7.7232				7.7338				7.7454				7.7232
April 2007			7.7090				7.7190				7.7345				7.7090
May 2007			7.6516				7.6758				7.7065				7.6463
June 2007 (through June 20, 2007)			7.6180				7.6465				7.6680				7.6175

Source:		The noon buying rate in New York for cable transfers payable in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.
(1)		Determined by averaging the rates on the last business day of each month during the respective year and on the last business day of each week during the respective month.

Risk Factors

     Brilliance China Automotive is subject to various changing competitive, economic, political and social conditions in China, as well as special concerns and significant risks not usually encountered by a United States company. These include the following:

Risks Relating to Brilliance China Automotive Minibus and Sedan Businesses

Brilliance China Automotive experienced a net loss of Rmb 386.1 million in 2006 and may not be profitable in 2007 or in subsequent years.

     Brilliance China Automotive recorded a net loss of Rmb 386.1 million (US$49.5 million) in 2006 as compared with a net loss of Rmb 671.3 million (US$83.2 million) in 2005. During the same period, total sales of Brilliance China Automotive were Rmb 10,484.8 million (US$1,343.5 million), representing a 91.7% increase from Rmb 5,469.0 million (US$677.7 million) in 2005. Although net loss decreased and total sales increased compared to 2005, there is no assurance that sales of vehicles by Brilliance China Automotive will not be affected in the future by the highly competitive automobile market and economic conditions in China.

     In 2006, Brilliance China Automotive also recognized a provision for impairment of goodwill of Rmb 73.3 million (US$9.4 million) associated with one of its jointly-controlled engine manufacturing companies due to lower than expected projected operating profits and cash flows. Provision for impairment of property, plant and equipment was Rmb 29.2 million in 2006, primarily due to the retirement from use of certain property, plant and equipment of the minibus and automotive components segment. There can be no assurance that Brilliance China Automotive will not be required to recognize an impairment loss on goodwill or a provision for impairment of the property, plant and equipment, or any other provision in 2007 or in subsequent years.

     As a result of these factors, Brilliance China Automotive may incur losses in 2007 and in subsequent years, which could impact Brilliance China Automotive’s ability to implement its business strategy and adversely affect its financial condition.

If demand for minibuses and sedans in China does not increase, and if Shenyang Automotive does not increase its market share, the ability of Shenyang Automotive to increase its sales volume will be adversely impacted.

     The success of Brilliance China Automotive’s business strategy will depend on the ability of its 51.0%-owned subsidiary, Shenyang Brilliance JinBei Automobile Co., Ltd., or Shenyang Automotive, to increase substantially its sales volume. Such an increase can only be achieved if Shenyang Automotive increases its market share or if there is an overall increase in the size of the minibus and sedan markets in China. Although we experienced an increase in sales from approximately 60,000 minibuses and 9,000 Zhonghua sedans in 2005 to 66,245 minibuses and 62,281 Zhonghua sedans in 2006, there can be no assurance that demand for Shenyang Automotive’s minibuses and sedans will continue to grow. If overall demand for domestic minibuses and sedans decreases in the future, the ability of Shenyang Automotive to increase its sales volume or market share could be adversely affected.

Delays in the development of new products, lack of consumer acceptance of new products and unforeseen shifts in consumer preferences may have a negative effect on Brilliance China Automotive’s financial results.

     Meeting consumer demand with new vehicles developed over increasingly shorter product development cycle times is critical to Brilliance China Automotive’s continued success. Brilliance China Automotive’s ability to strengthen its position within its traditional minibus segment while it continues to expand into additional market segments such as sedans, will play a key role in determining its future success. In order to compete successfully within its traditional markets, as well as to enter new markets with new product offerings, Brilliance China Automotive must assess trends in consumer preferences, modify existing products or develop new products to match those trends and deliver to market these newly developed or modified products before such preferences change. Delays in the development of new products, lack of consumer acceptance of new products and unforeseen shifts in consumer preferences may have a negative effect on Brilliance China Automotive’s financial results.

Brilliance China Automotive has experienced a management turnover and could continue to have problems retaining and recruiting key personnel in the future.

     Brilliance China Automotive had a turnover of its directors and executive officers in 2004, 2005 and 2006, and this trend of management changes may continue in the future. In 2004, three of its directors had either resigned or retired. Of the three directors who resigned or retired in 2004, one was an executive director and two were independent non-executive directors. In 2005, three executive directors resigned. Of the three directors who resigned in 2005, one was the President and Chief Executive Officer, another was the Vice President and Chief Financial Officer, and the third was the Vice Chairman, Executive Vice President and Company Secretary. In 2006, an executive director, who was appointed in 2004 as President and Chief Executive Officer to fill the then vacant positions, resigned and a non-executive director retired. In addition, in 2006, Brilliance China Automotive’s Chief Financial Officer resigned and one of the executive directors was appointed subsequently to fill this role. Brilliance China Automotive appointed a new President and Chief Executive Officer, two new Chief Financial Officers and new executive directors and independent non-executive directors between 2004 and now and there can be no assurance that this relatively new management team will be as effective in implementing Brilliance China Automotive’s business strategies or that any of the new strategies that the new management team may decide to implement will achieve its intended objectives.

     Brilliance China Automotive’s success depends to a large degree upon the continued contributions of key management and other personnel, some of whom could be difficult to replace. There can be no assurance that Brilliance China Automotive will be able to recruit or retain suitable candidates, and turnover of senior management can adversely impact Brilliance China Automotive’s stock price and customer relationships as well as make recruiting for future management positions more difficult. In addition, Brilliance China Automotive must successfully integrate any new management personnel that it recruits in order to achieve its operating objectives, and changes in other key management positions may temporarily affect its financial performance and results of operations as new management may need time to become familiar with its business. Accordingly, Brilliance China Automotive’s future financial

performance will depend to a great extent on its ability to motivate and retain key management personnel.

There are risks involved in Brilliance China Automotive’s joint venture with BMW to produce BMW sedans in China.

     On March 27, 2003, Brilliance China Automotive, through its indirect subsidiary, Shenyang JinBei Automotive Industry Holdings Company Limited, or SJAI, entered into a joint venture contract with BMW Holding BV, or BMW Holding, to assemble, produce and sell BMW designed and branded sedans in China. Production began in September 2003 and the 3-Series and 5-Series sedans were formally launched in China in October and November 2003, respectively. There are risks involved in this joint venture, including, but not limited to, the ability of the joint venture to obtain adequate financing as and when necessary, obtain timely delivery of imported components and parts, source necessary components at competitive prices, successfully develop, manufacture, market and sell BMW sedans in China, and obtain appropriate approvals for its new products from governmental authorities in China. Brilliance China Automotive currently has a 49.5% effective interest in the joint venture and provides guarantees for the performance of all obligations of SJAI, including required capital contributions.

Failure by Brilliance China Automotive to continue to form and maintain alliances with foreign automobile manufacturers could adversely affect its competitiveness.

     In order for Brilliance China Automotive to remain competitive and obtain additional technology and financing, it is crucial that it enters into and maintains alliances with foreign motor vehicle manufacturers. This is particularly true since China’s accession to the World Trade Organization, or the WTO, in November 2001. As a result of the reduction in import restrictions, more automobile manufacturers have been and will be entering China’s motor vehicle market. If Brilliance China Automotive cannot maintain its existing alliances with Toyota and BMW or form strategic alliances with other foreign automobile manufacturers regarding the establishment of joint ventures and the procurement of necessary components on commercially beneficial terms, its competitive position will be adversely affected.

The inability of Shenyang Automotive to access Toyota’s technical resources to upgrade Shenyang Automotive’s products, or Toyota’s provision of assistance to any of Shenyang Automotive’s competitors could negatively impact Shenyang Automotive’s sales and competitive position.

     Shenyang Automotive has historically relied to a significant extent on Toyota for technical assistance for its minibuses. On December 17, 2001, Shenyang Automotive entered into an agreement with Toyota for the technology transfer of the fifth generation of the Toyota minibus — the Granvia — for which production based upon semi-knockdown kits from Toyota commenced in 2003. In the first half of 2004, the Granvia, which is marketed under the brand name “Granse” (known as “Grace” before February 2004) when sold in China by Brilliance China Automotive, entered into commercial production, with more than 60% of its parts and components from domestic sources. Although Shenyang Automotive has introduced new products, including its successful mid-priced minibus, incorporating styling and engineering

refinements and modifications without assistance from Toyota, lack of access to Toyota’s technical resources may limit Shenyang Automotive’s ability to upgrade significantly its existing Toyota-designed products. Failure to update its existing models could eventually result in Shenyang Automotive’s products becoming technologically inferior to its competitors’ products, which could have an adverse impact on Shenyang Automotive’s sales. Although Brilliance China Automotive has no knowledge of any intention of Toyota to produce, or assist a current or potential competitor in the production of, minibuses similar to those of Shenyang Automotive in China, neither Brilliance China Automotive nor Shenyang Automotive could prohibit Toyota from doing so.

Any delay or disruption in Shenyang Automotive’s ability to obtain engines from Toyota could limit Shenyang Automotive’s ability to produce its deluxe minibuses.

     While Shenyang Automotive is currently in the process of replacing the Toyota engines used in some of its minibus models with engines from Mitsubishi, Mianyang Xinchen Engine Co., Ltd., or Mianyang Xinchen, and Shenyang Xinguang Brilliance Automobile Engine Co., Ltd., or Xinguang Brilliance, currently most of the engines installed in Shenyang Automotive’s Granse deluxe minibuses are purchased from Toyota on a commercial basis. Shenyang Automotive generally maintains an inventory of Toyota engines sufficient to sustain two months of planned production. To date, Shenyang Automotive has not experienced any material disruption in its supply of engines from Toyota. Changes in regulatory requirements, tariffs and other trade barriers and price or exchange controls could, however, hinder Shenyang Automotive’s ability to import engines. An extended disruption or reduction in Shenyang Automotive’s supply of Toyota engines would consequently limit Shenyang Automotive’s ability to produce Granse deluxe minibuses.

Any delay or disruption in Shenyang Automotive’s ability to obtain engines could limit Shenyang Automotive’s ability to produce its Zhonghua sedans.

     Currently all of the Mitsubishi engines installed in Brilliance China Automotive’s Zhonghua sedans are purchased from Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co., Ltd., or Shenyang Aerospace, and Harbin DongAn Automotive Engine Manufacturing Co. Ltd., or Harbin DongAn, on a commercial basis. Shenyang Aerospace is an associated company of Brilliance China Automotive, in which Brilliance China Automotive has currently an indirect 12.8% equity interest. Harbin DongAn is a joint venture between Harbin DongAn Engine Group, Mitsubishi Group and Malaysia China Investment Holding Company. See “Item 4 — Information on the Company — Business Overview — Other Significant Subsidiaries, Jointly Controlled Entities and Associated Companies — Shenyang Aerospace.” Shenyang Automotive is currently in discussions with other domestic and overseas engine manufacturers, with a view towards broadening its engine sourcing for its Zhonghua sedans, and considering using foreign designs to produce domestically made engines for sedans and minibuses. Shenyang Automotive generally maintains an inventory of Mitsubishi and Harbin DongAn engines sufficient to sustain two months of planned production. To date, Shenyang Automotive has not experienced any material disruption in its supply of engines from Shenyang Aerospace and Harbin DongAn. However, there can be no assurance that Shenyang Automotive will at all times be able to obtain a steady supply of Mitsubishi engines from Shenyang Aerospace and Harbin DongAn. An extended disruption or reduction in Shenyang Aerospace’s

and Harbin DongAn’s supply of engines to Shenyang Automotive would consequently limit Shenyang Automotive’s ability to produce its Zhonghua sedans.

     In addition, Shenyang Automotive began to install engines manufactured by its new engine plant in its Zhonghua sedans in March 2007. There is no assurance that these new engines will be successful or will not have quality-related problems. If Shenyang Automotive is not able to timely manufacture these new engines with the desired quality, Shenyang Automotive’s ability to produce its Zhonghua sedans may be materially and adversely affected.

If Brilliance China Automotive fails to upgrade its existing production facilities or build new facilities in a timely and cost-efficient manner, its businesses, financial condition and results of operation may be negatively affected.

     In order to maintain its competitive edge, Brilliance China Automotive’s strategy is to upgrade its production facilities, including molding, welding, painting and assembly facilities and build new facilities, such as its new engine plant. Any failure or delay in implementing such upgrading or construction plans in a timely and cost-efficient manner could limit its future growth and have a material adverse effect upon Brilliance China Automotive’s businesses, financial condition and results of operations.

Shenyang Automotive’s competitors may have access to more advanced technology, greater financial resources and more substantial support from the Chinese government, which could negatively affect Shenyang Automotive’s competitive position.

     Some of Shenyang Automotive’s competitors have formed joint ventures with, or licensed technology from, foreign automobile manufacturers, and others may do so in the future. These competitors may have access to greater financial resources than Brilliance China Automotive or to technology and equipment that are more advanced than the technology and equipment utilized by Brilliance China Automotive. In addition, some of Shenyang Automotive’s potential competitors may receive substantial support from the Chinese government, including priority access to loans, favorable import quotas and tariffs, expedited approvals of proposed projects and products and preferential tax treatment. Such advantages may make it difficult for Shenyang Automotive to compete with these other automobile manufacturers.

Huachen, as Brilliance China Automotive’s substantial shareholder, may not always act in the best interest of other shareholders.

     Huachen, a wholly owned subsidiary of the Liaoning Provincial Government, currently owns 39.4% of the issued and outstanding shares of Brilliance China Automotive. Accordingly, Huachen is entitled to cast 39.4% of the votes on all matters voted on by the shareholders of Brilliance China Automotive (to the extent it is not required to abstain from exercising its voting rights under the Bye-laws of Brilliance China Automotive and applicable laws and regulations), and therefore is able to exert substantial influence over the election of Brilliance China Automotive’s directors, the outcome of actions requiring majority shareholder approval and the business in general of Brilliance China Automotive. Such influence could preclude the ability of minority shareholders to influence important business decisions of Brilliance China Automotive,

and may result in actions by Brilliance China Automotive that are not in the best interest of its minority shareholders.

Significant changes in the cost or availability of raw materials or components may have a material adverse impact on Brilliance China Automotive’s results of operations.

     Brilliance China Automotive has established relationships with over 280 suppliers in the PRC and sources the majority of its important components and raw materials from at least two different suppliers to ensure availability and increase competition among suppliers. Brilliance China Automotive has also made significant progress in increasing the domestic component content of its products. However, certain principal components of BMW sedans continue to be imported from overseas suppliers. For example, certain components used in sedans produced by BMW Brilliance Automotive Ltd., or BMW Brilliance, are imported from BMW Group and certain other components used in minibuses are imported from Toyota. Because these components are imported from the BMW Group, Toyota and other suppliers in Europe and Japan, the costs as well as availability of such components may be affected by exchange rates, import restrictions, customs clearance, shipment schedules and import duties and consequently drive up Brilliance China Automotive’s costs of production. In addition, unexpected disruptions in the supply of certain components, particularly from foreign suppliers, may also require using alternative suppliers or cause delays in the production process. Furthermore, an increase in the price of electricity or certain raw materials, such as steel, may result in increased costs of production. Significant changes in the cost or availability of raw materials or components may have an adverse impact on Brilliance China Automotive’s results of operations.

Product liabilities and recall claims may adversely affect Brilliance China Automotive’s results of operation.

     Manufacturers and sellers of defective products in China or other countries may be subject to liability for losses and injury caused by such defective products under the laws of China and other jurisdictions. However, there is currently no compulsory legal requirement under PRC legislation for automobile manufacturers to maintain insurance coverage in respect of production interruption, product liability or damage to third party properties. Brilliance China Automotive does not carry product liability insurance or insurance against losses due to production insurance, product recalls or damage to third party properties. Brilliance China Automotive cannot guarantee that product liability claims will not be brought against Brilliance China Automotive or its subsidiaries and affiliates in the future, and, if such claims are successful, that such claims will not have a material adverse impact upon Brilliance China Automotive’s results of operations, or that the Chinese government will not impose new requirement for sufficient insurance to be maintained to cover the risks associated with Brilliance China Automotive’s China operations, including those of Shenyang Automotive.

     Brilliance China Automotive’s business and future growth depend on availability of funding.

     Research and development is capital intensive. Capital costs are funded by Brilliance China Automotive from operating cash flow and financing. The availability of future borrowings and access to the capital markets for financing depend on prevailing market conditions and the acceptability of the financing terms offered. Brilliance China Automotive

cannot assure that future financings will be available on acceptable terms, or in amounts sufficient to fund its needs. If Brilliance China Automotive fails to obtain sufficient funding, it may be unable to implement its expansion plans, which may have a material adverse impact upon its business and financial condition.

Brilliance China Automotive is required to comply with increasingly stringent environmental, safety and other standards applicable to its vehicles and manufacturing facilities.

     Brilliance China Automotive’s production facilities are subject to government pollution regulations enforced by the relevant local governments. In addition, the Chinese government has set vehicle safety, exhaust and performance standards with which Brilliance China Automotive must comply. Brilliance China Automotive’s operations are sensitive to changes in the Chinese government’s environmental policies relating to all aspects of the automobile manufacturing. There is no assurance that changes in such policies would not have an adverse effect on the revenue or results of operations of Brilliance China Automotive. In addition, as Brilliance China Automotive expands its exports to other overseas markets such as the Middle East, Southeast Asia, and Europe, it may be subject to more stringent environmental, safety or other tests and standards in the markets to which Brilliance China Automotive exports its products. There is no assurance that our products will pass such tests, which could delay entry into new segments or markets and have a negative impact on our business operations.

Brilliance China Automotive is exposed to potential risks and increased costs from the requirements to evaluate internal control over financial reporting under the Sarbanes-Oxley Act of 2002, and has identified material weaknesses in its internal control as a result of such evaluation.

     The United States Securities and Exchange Commission, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company in the United States to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, an independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. The requirement for our management to evaluate and report on internal control over financial reporting first applies to this annual report on Form 20-F for the fiscal year ending December 31, 2006. The requirement for us to provide an auditor’s report on internal control over financial reporting will apply to our annual report for the fiscal year ending December 31, 2007.

     In preparation for the implementation of the requirements of Section 404, we undertook a company-wide review and documentation of internal controls, performing the system and process evaluation required, and have completed the process of reviewing and documenting the system of internal control over financial reporting to provide the basis for management’s report which is set out in “Item 15 — Controls and Procedures.” As a result of this evaluation, certain material weaknesses in our internal control over financial reporting, as set forth in “Item 15 — Controls and Procedures,” were identified.

     For the material weaknesses we have identified, we are in the process of implementing remedial measures and establishing controls to address these weaknesses, as set forth in “Item 15 — Controls and Procedures.” However, the implementation of these corrective measures is not yet complete and such measures have not been tested for their effectiveness. We cannot assure you that these measures would be effective in remedying such material weaknesses.

     Due to ongoing evaluation and testing of our internal control over financial reporting, there is no assurance that there may not be significant deficiencies that would be required to be reported or that our management will conclude that our internal control over our financial reporting are effective in the future. Moreover, even if our management concludes that our internal control over financial reporting are effective, our independent registered public accounting firm may still be unable to attest to our management’s assessment or may issue a report that concludes that our internal controls over financial reporting are not effective. If we fail to achieve and maintain the adequacy of our internal controls, we or our auditors may not be able to conclude that we have effective internal controls, on an ongoing basis, over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading prices of our ADSs. Furthermore, we have already incurred considerable costs and spent significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act. We anticipate that we will continue to incur considerable costs and use significant resources for purposes of compliance with Section 404.

There is no assurance that the research and development carried out by Brilliance China Automotive will materialize in products that can achieve market acceptance.

     Brilliance China Automotive invests and plans to continue to invest capital and other resources to develop or acquire proprietary automobile-related technologies. As the development of proprietary technologies is a highly complex, uncertain and costly process, there is no assurance that Brilliance China Automotive can successfully develop and commercialize new products based on its new technologies and innovations (or to do so in a timely manner), or that any new products that Brilliance China Automotive introduces will achieve market acceptance. For example, Brilliance China Automotive recently began manufacturing engines at its new engine plant for installation in its sedans. Sedans equipped with these engines were formally launched to the market in March 2007. Brilliance China Automotive has made significant investments for the development and manufacture of these new engines and there is no assurance that the engines built at the new engine plant will achieve the desired quality or market

acceptance. If Brilliance China Automotive’s efforts to commercialize new products developed based on such technologies are unsuccessful, it may not be able to recover its investment in such technologies and may suffer losses as a result of the failure of such products.

     Moreover, if Brilliance China Automotive’s research and development capabilities are impaired, the development of Brilliance China Automotive’s products may be delayed which, in turn, may adversely affect its business plans and operations.

Brilliance China Automotive’s intellectual property rights may be infringed by third parties and Brilliance China Automotive may also face infringement claims brought by third parties.

     Brilliance China Automotive has adopted strict policies to protect its existing and future intellectual property under existing and future patent, copyright, trademark, trade secret and unfair competition laws. However, policing breaches of its intellectual property rights is difficult and sometimes impracticable. There is no assurance that the current measures taken by Brilliance China Automotive will prevent infringement of Brilliance China Automotive’s intellectual property rights. Counterfeit automobiles and automotive parts that improperly use Brilliance China Automotive’s brands, technology or designs could cause it to lose sales and damage its reputation, brands and product images. Even if Brilliance China Automotive succeeds in establishing infringement claims against third parties, such parties may be unable to pay damages and expenses.

     Brilliance China Automotive may also face infringement claims brought by third parties. These claims against Brilliance China Automotive could cause it to incur significant legal fees and other costs, divert its management’s attention and cause significant disruptions to its businesses and operations. If an infringement claim is successfully asserted against Brilliance China Automotive, it could also be required to pay substantial monetary damages and be enjoined from further production or sale of certain products, which could have a material adverse effect on its businesses, results of operations and financial condition.

Brilliance China Automotive has uninsured risks.

     Brilliance China Automotive’s insurance coverage, as of December 31, 2006, includes fire, flood, riot, strike, malicious damage, business interruption, transportation, product and public liability. However, there are certain types of losses, for instance, losses resulting from acts of terrorism which are disproportionately expensive or practically infeasible for Brilliance China Automotive to fully insure against, or to insure at all. Therefore, there may be circumstances in which Brilliance China Automotive will not be fully insured for losses and liabilities, which may in turn result in the interruption of its business. These uninsured losses and liabilities could adversely affect the financial position of Brilliance China Automotive.

Brilliance China Automotive’s “Zhonghua” local brand may not succeed and Brilliance China Automotive may subsequently suffer losses as PRC consumers give more weight to brand recognition as they make automobile purchase decisions.

     The “Zhonghua” brand is considered one of the PRC’s “Local Brands” of domestically produced vehicles. This “Local Branding” approach encourages PRC auto companies to establish and grow their self-established auto name brands and to use domestic technologies, production facilities and components to build vehicles. Shenyang Automotive’s “Zhonghua” was recognized as a well-known “Local Brand” shortly after its launch. However, because PRC customers have associated auto brands with automobile quality, innovation and reliability, and brand recognition has become an increasingly important factor in consumers’ decisions in purchasing vehicles, certain foreign auto brands still have substantial brand recognition advantage over these “Local Brands.” Thus, although Shenyang Automotive has committed itself to this branding approach and has made efforts to boost its brand recognition, there can be no assurance that this approach will be effective in the long run, nor can there be assurance that “Zhonghua” as well as other brands Brilliance China Automotive may launch in the future can withstand the severe competition from the long-established foreign auto brands.

Risks Relating to the Minibus and Sedan Industries in China

China’s automobile demands may become more volatile due to macroeconomic factors.

     After rapid growth between 2000 and 2003, China’s sedan industry growth slowed down significantly in 2004. In particular, the sales volume increased 71.0% from 2002 to 2003, as compared to only 19.3% from 2003 to 2004. China’s sedan industry has however showed improvement since 2005. According to the China Auto Industry Comprehensive Analysis and China Auto Association, sedan sales volume increased by 21.3% to 2,784,629 sedan units in 2005, compared to the 2,294,752 sedan units sold in 2004. In 2006, sedan sales volume further increased by 36.9% to 3,811,607 sedan units as compared to that in 2005. Sales performance in China’s sedan market also improved in the first four months of 2007 with a total of 1,533,435 sedan units being sold, compared to the 1,206,185 sedan units sold in the same period in 2006, an increase of 27.1% year on year. However, there is no assurance that this growth will continue.

     The demand for automobiles in China is affected by various factors beyond Brilliance China Automotive’s control, including:

	•		economic and monetary policies implemented by the Chinese government;
	•		availability of automobile consumption loans;
	•		availability of automobile insurance policies;
	•		consumer confidence;
	•		volatility in petroleum, diesel and other commodity prices; and
	•		development of transportation infrastructure, for example express ways.

     If the general economy in China slows down or the Chinese government adopts new policies that adversely affect the automotive industry, the demand for automobiles is also likely to experience a significant downturn.

     Over the years, Brilliance China Automotive has been increasing its production capacities in anticipation of a significant increase in automobile demand in China. Any slow down in automobile demand in China, such as that experienced in 2004, may lead to an increase in Brilliance China Automotive’s inventory and could result in a significant underutilization of its production capacity. As a result, Brilliance China Automotive’s results of operations and financial condition could be materially and adversely affected.

Competition is intense in China’s automobile industry.

     Brilliance China Automotive currently faces intense competition mainly from other Chinese domestic automobile manufacturers. Many of Brilliance China Automotive’s competitors have joint ventures with leading foreign automobile manufacturers and may have significantly more resources than Brilliance China Automotive. Any further increase in competition may dilute Brilliance China Automotive’s market share and reduce its profit margin. The competition that Brilliance China Automotive faces also requires it to increase its marketing and development costs.

     As Chinese automotive components and parts industry is highly fragmented, Brilliance China Automotive competes with a large number of manufacturers in this market. Brilliance China Automotive also competes with other automobile manufacturers and automotive components and parts manufacturers in the hiring and retention of management and skilled employees. There can be no assurance that Brilliance China Automotive will be able to compete successfully with its competitors in the automobile and automotive components and parts industries. If Brilliance China Automotive’s competitors gain a competitive advantage in terms of value for money, product quality, brand recognition or financial resources, the market share, profitability and financial position of Brilliance China Automotive may be adversely affected.

Reduced tariffs and import restrictions on foreign-made motor vehicles and motor vehicle components as a result of China’s entry into the WTO may lead to increased competition for Brilliance China Automotive.

     The Chinese government imposes restrictions, quotas and tariffs on the import of foreign-made motor vehicles, as well as motor vehicle components. However, as a result of China’s accession to the WTO, which regulates trading and tariffs among its signatory states, in November 2001, China has committed to reducing its import restrictions on motor vehicles and motor vehicle components. In addition, China will be required to conform its import tariffs to the uniform tariffs under the WTO.

     Effective January 1, 2002, China reduced its import tariffs on motor vehicles and automotive components from between 80% to 100% and between 18% to 40%, respectively, to between 43.8% to 50.7% and between 14% to 31.4%, respectively. This range was lowered further to between 4.8% and 25% for automotive components in 2003, between 5% and 22.9% in 2004 and between 5% and 18.6% in 2005. In 2006, the import tariffs on automotive components were reduced to between 5.0% and 14.3%. In January 2007, they were further reduced to between 5.0% and 10.0%. In 2004, the average import tariffs on automotive components for the deluxe minibuses (including Granse minibuses) and Zhonghua sedans were 13.8% and 10.5%, respectively, and in 2005, the average tariffs became 9.7% and 12.1% for the imported

components for deluxe minibuses and Zhonghua sedans, respectively. In 2006, the average tariffs were reduced to 8.2% and 10.4% for the imported components for deluxe minibuses and Zhonghua sedans, respectively. In addition, tariffs on vehicles with nine seats or less and engine sizes of three liters or below fell from 43.9% in 2002 to 38.2% in 2003, while tariffs on vehicles with more than nine seats and engines of more than three liters decreased from 50.7% in 2002 to 43.0% in 2003. In 2004, tariffs were 34.2% for vehicles with nine seats or less and engine sizes of three liters or less and 37.6% for vehicles with more than nine seats and engines of more than three liters. In 2005, tariffs were fixed at 30% for all motor vehicles. These tariffs were further reduced to 28% in January 2006 and 25% in July 2006.

     Although lower tariffs and reduced import restrictions may benefit Brilliance China Automotive in terms of lower cost of imported components, lower tariffs and reduced import restrictions could also lead to a substantial increase in the number of minibuses, sport utility vehicles, sedans and other motor vehicles imported into China, thereby significantly increasing competition in Brilliance China Automotive’s current and proposed markets.

The automobile industry is heavily regulated in China, and automobile-related regulations may become even more stringent in the future.

     Brilliance China Automotive is subject to various laws, rules and regulations in China imposed at national, provincial and municipal levels that regulate or affect China’s automobile manufacturing industry and automotive components and parts manufacturing industry, including:

•

crash test requirements and other safety standards in relation to automobile and automotive parts and components;

•

emission standards;

•

maximum fuel consumption;

•

minimum warranty requirements;

•

automobile recall requirements;

•

noise, waste, discharge and other pollution controls relating to manufacturing of automobiles;

•

restrictions on road use, including time restriction and segmental restriction; and

•

market entry requirements and/or minimum production requirements for automobile and automotive components and parts manufacturers.

     Moreover, every new product type must be approved by the Chinese government before it can be introduced into the market. This approval process can sometimes be lengthy, and can impact the ability of Brilliance China Automotive to introduce new products in a timely manner. This regulatory framework may limit the flexibility of Brilliance China Automotive to respond to market conditions or competition. The cost of complying with these policies and regulations can also be significant. Brilliance China Automotive’s operations are sensitive to changes in the

Chinese government’s policies relating to all aspects of the automobile industry. There can be no assurance that changes in such policies would not have an adverse effect on the revenue or results of operations of Brilliance China Automotive.

     In addition, China’s regulators may introduce in the future more stringent regulations and measures which will affect Brilliance China Automotive’s automobile manufacturing and automotive components and parts manufacturing businesses. On December 26, 2006, the regulators introduced new measures to trim overcapacity in the PRC automobile industry and promote local brands. For example, among other things, annual sales of automobile manufacturers in China must reach certain levels in order for them to build new manufacturing plants. The imposition of any such more stringent requirements may require Brilliance China Automotive to incur substantial and costly changes to its automobile and/or automotive components and parts designs and its business structure or organization, or restrict its ability to respond to changing market conditions or competition. Moreover, Brilliance China Automotive’s failure to comply with such laws and regulations would result in fines, penalties or lawsuits.

China’s automobile industry is significantly dependent upon the economy of China.

     The performance of China’s automobile manufacturing industry is highly dependent on general economic conditions and the purchasing power of Chinese consumers. Thus, the revenue and profits of Brilliance China Automotive are subject to cyclical fluctuations and may be adversely affected by any unfavorable changes in the economic conditions in China.

Increase in fuel prices may adversely affect demand for automobiles.

     Fuel prices (including prices of petroleum and diesel) in China reached historical heights in May 2006. Any further increase in fuel prices may:

	•		have an adverse impact on China’s economy and may thereby result in a slow down for automobile demand;
	•		increase Brilliance China Automotive’s production costs due to increase in costs of petrochemical products; and
	•		discourage customers from purchasing automobiles due to increased running costs.

     If fuel prices continue to increase or remain at high levels, Brilliance China Automotive’s sales and profitability could be materially and adversely affected.

China’s re-adjustment of consumption taxes on vehicles may cause decline of demand for certain models Brilliance China Automotive currently manufactures.

     On April 1, 2006, the State Administration of Taxation of China, in an effort to encourage environmental protection and fuel efficiency, re-adjusted consumption tax rates on passenger vehicles (including imported vehicles). Before the re-adjustment, the consumption tax rate for passenger vehicles was a three-tiered system: 3% for automobiles with engine displacement lower than 1.0 liter; 5% for

automobiles with engine displacements between 1.0 liter and 2.0 liters, and 8% for automobiles with engine displacements above 2.0 liters. After the re-adjustment, tax rates on vehicles with smaller engines (under 2.0 liters) either fell or remained unaltered, whereas tax rates on automobile with larger engines were raised. The new tax rates are: 3% for 0.0-1.5 liters; 5% for 1.51-2.0 liters; 9% for 2.01-2.5 liters; 12% for 2.51-3.0 liters; 15% for 3.01-4.0 liters; and 20% for above 4.0 liters. Consequently, the tax rates on the BMW 3 and 5 series sedans produced by BMW Brilliance, as well as the Zhonghua sedans equipped with the larger 2.4-liter engines, have been raised by this re-adjustment. As a result of this new consumption tax regime, the prices of the above-mentioned vehicles have increased, which may lower demand for these vehicles in 2007 and subsequent years, and therefore negatively impact Brilliance China Automotive’s businesses and results of operations.

Risks Relating to China’s Economy and Regulatory System

China’s economic, political and social conditions, as well as government policies, could affect Brilliance China Automotive’s businesses.

     China’s economy differs from the economies of most developed countries in many respects, including:

	•		extent of government involvement;
	•		level of development;
	•		growth rate;
	•		control of foreign exchange; and
	•		allocation of resources.

     While China’s economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically and among the various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on Brilliance China Automotive’s operations. For example, Brilliance China Automotive’s financial condition and results of operations may be adversely affected by the Chinese government’s control over capital investments or any changes in tax regulations or foreign exchange controls that are applicable to it.

     China’s economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures 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 the development of industries in China by imposing top-down policies. It also exercises significant control over PRC economic growth through the allocation of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

Exchange rate fluctuations may affect the results of operations of Brilliance China Automotive.

     Brilliance China Automotive’s major operations are based in China and a significant proportion of its turnover is derived from its operations in China.

     The Renminbi was revalued on July 21, 2005 to Rmb 8.11 per US$1.00 from its previously pegged rate of Rmb 8.28 per US$1.00. The People’s Bank of China also announced that the Renminbi would be pegged to a basket of foreign currencies, rather than tied solely to the U.S. dollar, and would trade within a band against this basket of currencies, which includes, without limitation, U.S. dollars, Euro, Japanese yen, South Korean won, British pounds, Thai baht and Russian ruble. This change in policy has resulted in an approximately 6% appreciation of the Renminbi against the U.S. dollar between July 21, 2005 and December 31, 2006. There is no assurance on whether there will be any further revaluation of the Renminbi. Any further revaluation of the Renminbi may adversely affect China’s economy and may therefore lead to a downturn in the automobile demand in China.

Significant changes to China’s income tax regime could have a material adverse effect on Brilliance China Automotive’s results of operations.

     On March 16, 2007, the National People’s Congress of the PRC promulgated the PRC Enterprise Income Tax Law, or the new EIT Law, which will take effect from January 1, 2008. According to the new EIT Law, certain preferential income tax treatments currently applicable to domestic companies will be phased out in five years beginning from January 1, 2008, and after such five-year period, the applicable tax rate applicable to all domestic companies in the PRC with minor exceptions will become 25%. To date, the relevant authorities have not yet issued any detailed rules implementing the new EIT Law concerning the applicable income tax rates, computation of taxable income, as well as any phase out of specific preferential tax treatments, and the related measures for the transitional periods from 2008 and onwards have not been clarified. Consequently, Brilliance China Automotive is not in a position to reasonably assess the impact, if any, of the carrying values of deferred tax assets and deferred tax liabilities resulting from the implementation of the new EIT Law. Any increase in Brilliance China Automotive’s effective tax rate as a result of the above may adversely affect its operating results.

Budgetary constraints on China’s government entities and state enterprises could affect Shenyang Automotive’s sales and pricing of products.

     Brilliance China Automotive believes that approximately 35% and 30% of Shenyang Automotive’s 2006 revenues from minibuses and sedans, respectively, were derived from sales to governmental agencies and certain state-run enterprises. Because of Shenyang Automotive’s customer composition, sales and pricing of its products can be affected by budgetary constraints applicable to government entities and state enterprises.

Any significant failure or disruption of China’s banking system could materially and adversely affect Brilliance China Automotive’s ability to obtain credit.

     Most major banks in China are owned by the Chinese government. Most of these banks have historically extended significant amounts of loans according to governmental policy rather than for commercial reasons. As a result, these banks currently have significant loans outstanding to state-owned enterprises, many of which have incurred recurring and material losses. Consequently, many banks in China have substantial levels of loans that are not current with respect to payments of either interest or principal and may not have made adequate provisions to cover potential losses on these loans. Any significant failure or disruption of China’s banking system could materially and adversely affect Brilliance China Automotive’s ability to obtain credit and the economic environment in which it conducts its business and may also affect its customers and distributors.

Shenyang Automotive’s ability to obtain sufficient foreign exchange to satisfy its requirements is dependent on authorization of the State Administration of Foreign Exchange of China.

     Substantially all of the revenues of Shenyang Automotive are denominated in Renminbi, while some of its operating expenses, purchase costs of components and capital expenditures are denominated in foreign currencies. The Renminbi currently is not a freely convertible currency. The State Administration of Foreign Exchange of China, under the authority of the People’s Bank of China, regulates the conversion of Renminbi into foreign currency. There can be no assurance that the current authorizations for foreign-invested enterprises, such as Shenyang Automotive, to retain its foreign exchange to satisfy foreign exchange liabilities or to pay dividends in the future will not be limited or eliminated or that Shenyang Automotive will be able to obtain sufficient foreign exchange to pay dividends and to satisfy their other foreign exchange requirements.

There are inherent uncertainties in China’s legal system which may affect Brilliance China Automotive.

     China’s legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents.

     Since 1979, the Chinese government has begun to promulgate a comprehensive system of laws and has introduced many new laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new changes to existing laws and the abrogation of local regulations by national laws could have a negative impact on the business and prospects of Brilliance China Automotive and its joint ventures. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement may involve significant uncertainty. The interpretation of PRC laws may be subject to policy changes which reflect domestic political changes. As China’s legal system develops, the promulgation of new laws, changes to existing laws and the preemption of local regulations by national laws may have an adverse effect on Brilliance China Automotive’s prospects, financial condition and results of operations.

There can be no assurance that there will not be another significant outbreak of a highly contagious disease in China.

     In 2003, there was an outbreak of Severe Acute Respiratory Syndrome, or SARS, in the PRC, Singapore, Hong Kong, other Asian countries and Canada. The SARS outbreak had a significant adverse impact on the economies of the affected countries. Recently, there have been media reports regarding the spread of the H5N1 virus or “Avian Influenza A” among birds, poultry and in some isolated cases, transmission of Avian Influenza A virus from animals to human beings. There can be no assurance that there will not be another significant outbreak of a severe contagious disease. If such an outbreak were to occur in China, it may have a material adverse impact on the operations of Brilliance China Automotive and its results of operations may suffer.

     See also “Government Regulation” and “Environmental Matters” in “Item 4 — Information on the Company,” “Item 5 — Operating and Financial Review and Prospects,” “Item 8 — Financial Information — Legal Proceedings” and “Item 11 — Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 4. INFORMATION ON THE COMPANY

History and Development of Brilliance China Automotive

     Brilliance China Automotive Holdings Limited was established as an exempted company with limited liability under the laws of Bermuda on June 9, 1992. Brilliance China Automotive’s principal place of business is Suites 1602-05, Chater House, 8 Connaught Road Central, Hong Kong, telephone number: (852) 2523-7227.

     Brilliance China Automotive was initially established to hold a 51.0% interest in Shenyang Brilliance JinBei Automobile Co., Ltd. (formerly known as Shenyang JinBei Passenger Vehicle Manufacturing Company, Ltd.), or Shenyang Automotive, a Sino-foreign equity joint venture enterprise established on July 22, 1991. The remaining 49.0% (9.9% of which was subsequently sold) interest in Shenyang Automotive was owned by Shenyang JinBei Automotive Company Limited (formerly Shenyang Brilliance Automotive Company Limited and FAW-JinBei Automotive Company Limited), or JinBei. In February 2003, an amendment was made to Shenyang Automotive’s joint venture contract and as a result, the term of Shenyang Automotive became perpetual. Shenyang Automotive is currently the leading manufacturer and distributor of minibuses in China and also the manufacturer of Zhonghua sedans.

     On December 29, 2003, Brilliance China Automotive, through Shenyang XinJinBei Investment and Development Co., Ltd., or SXID, and Shenyang JinBei Automotive Industry Holdings Co., Ltd., or SJAI, its 100% and 99.0% indirectly owned subsidiaries, respectively, entered into agreements to acquire the entire equity interests of Shenyang Automobile Industry Asset Management Company Limited, or SAIAM, and Shenyang XinJinBei Investment Co., Ltd, or SXI. SAIAM and SXI own 24.38% and 8.97%, respectively, of the issued share capital of JinBei. Upon the completion of the acquisition and the receipt of government approvals for the transaction, Brilliance China Automotive’s effective interest in Shenyang Automotive will increase from 51.0% to approximately 63.9%.

     Prior to May 1998, Brilliance China Automotive’s sole operating asset was its interest in Shenyang Automotive. On May 18, 1998, Brilliance China Automotive acquired 50% and 51% equity interests, respectively, in Mianyang Xinchen, a manufacturer of gasoline engines for use in passenger vehicles and light duty trucks, and Ningbo Yuming Machinery Industrial Co., Ltd., or Ningbo Yuming, a producer of automobile windows and window molding and stripping. Mianyang Xinchen is a Sino-foreign joint venture whose 50-year term will expire in 2048. Ningbo Yuming is a wholly foreign-owned enterprise with a 50-year term that will expire in 2043. On October 19, 2004, Brilliance China Automotive, through its subsidiary Beston Asia Investment Limited, entered into an agreement with Ms. Chen Qiuling for the acquisition of her 49% interest in Ningbo Yuming. Approvals of the acquisition were obtained from the relevant Chinese authorities on November 25, 2004 and Ningbo Yuming has thus become a wholly owned subsidiary of Brilliance China Automotive.

     On August 7, 2006, Brilliance China Automotive, through its subsidiary Southern State Investment Limited, entered into an agreement with an independent third party to dispose of a 3.5% interest in Mianyang Xinchen. Upon obtaining the approval from the relevant government authorities and completion of the proposed transfer, the Company’s effective interest in Mianyang Xinchen will decrease from 50.0% to 46.5%. The disposal is yet to be completed as of the date of this annual report.

     In addition to the acquisition of interests in Mianyang Xinchen and Ningbo Yuming, Brilliance China Automotive has also acquired from Brilliance Holdings Limited, an affiliated company, a 50.0% equity interest in Xinguang Brilliance on December 11, 2000. Xinguang Brilliance is a Sino-foreign equity joint venture manufacturer of gasoline engines for use in passenger vehicles and light duty trucks. Shenyang Automotive is a major customer of each of Mianyang Xinchen, Ningbo Yuming and Xinguang Brilliance. Brilliance China Automotive believes that the acquisition of these components suppliers has enabled it to maintain the quality, and ensure a stable supply, of certain key components required for the production needs of Shenyang Automotive.

     On October 12, 1998, June 9, 2000 and July 3, 2000, Brilliance China Automotive established wholly owned subsidiaries (1) Shenyang XingYuanDong Automobile Component Co., Ltd., or Xing Yuan Dong, (2) Ningbo Brilliance Ruixing Auto Components Co., Ltd., or Ningbo Brilliance Ruixing, and (3) Mianyang Brilliance Ruian Automotive Components Co., Ltd., or Mianyang Brilliance Ruian, respectively, to centralize and consolidate the sourcing of automotive parts and components for Shenyang Automotive, Ningbo Yuming, and Mianyang Xinchen, respectively. In order to maintain their preferential tax treatment from the Chinese government, Xing Yuan Dong, Ningbo Brilliance Ruixing and Mianyang Brilliance Ruian all began manufacturing automotive components in 2001.

     Under an acquisition agreement dated April 25, 1998 between Shenyang Automotive and Shenyang State Assets Administration Bureau, Shenyang Automotive was to acquire a 21.0% indirect interest in Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co., Ltd., or Shenyang Aerospace, a Sino-foreign equity joint venture. A revised agreement was subsequently signed on August 15, 1999 among Shenyang Automotive, Shenyang State Assets Administration Bureau, Shanghai Brilliance Industrial Company Limited and Xing Yuan Dong, under which Shenyang Automotive’s effective interest in Shenyang Aerospace was reduced to

16.8% in exchange for cash consideration and the remaining 4.2% effective interest was transferred to Xing Yuan Dong at cost. At the completion of the transfer on May 25, 2000, Brilliance China Automotive’s indirect effective interest in Shenyang Aerospace was 12.8% with Mitsubishi Motors Corporation, or MMC, Mitsubishi Corporate, China Aerospace Automotive Industry Group Co., MCIC Holdings Sdn. Bhd. and Shenyang Jianhua Motors Engine Co., Ltd., or Shenyang Jianhua, owning equity interests of 25.0%, 9.3%, 30.0%, 14.7% and 21.0%, respectively. Pursuant to a share transfer agreement dated September 29, 2005, Shenyang Jianhua agreed to sell to MMC a 2.0% interest in Shenyang Aerospace. The transfer has yet to be approved by the relevant authorities in China. Upon completion of the transfer, each of Shenyang Jianhua and MMC will own an equity interest of 19.0% and 27.0% in Shenyang Aerospace, respectively. Upon completion of the acquisition of additional shares in JinBei and the receipt of approvals from the relevant PRC authorities for the transfer, Brilliance China Automotive’s effective interest in Shenyang Aerospace will increase to approximately 13.5%.

     At the end of 1998, Shenyang Automotive began to construct new production lines for the manufacture of sedans and multi-purpose vehicles, or MPVs. These new production lines were completed in mid-2002 and reached a total annual production capacity of 100,000 sedans or MPVs as at the end of 2002. Beginning in 1999, Shenyang Automotive implemented an expansion of its minibus facilities that resulted in an increase in its annual production capacity for deluxe and mid-priced minibuses from 40,000 units to 70,000 units in 2002 (based on two shifts per day). The stamping and assembly workshops for minibuses currently have annual production capacities of 80,000 and 90,000 units, respectively, based on two shifts of workers, and can be increased to 120,000 units based on three shifts. In 2003, Shenyang Automotive constructed a new painting facility with a capacity of 120,000 units per year. In June 2005, Shenyang Automotive invested and built a new engine plant with an initial planned capacity of 50,000 engines per year. The new engine plant commenced commercial production on June 26, 2006.

     On December 17, 2001, Shenyang Automotive entered into an agreement with Toyota Motor Corporation for the transfer of technology relating to the fifth generation of the Toyota minibus, the Granvia, which Shenyang Automotive markets under the brand name “Granse” (known as “Grace” before February 2004) in China. Production of this minibus model based on semi-knockdown kits from Toyota began in the second half of 2002 and commercial production using domestic parts and components commenced in the second half of 2004.

     The Zhonghua sedan, designed by the world-renowned Italdesign, was launched to the market in China in August 2002, after approval for production and sale of the Zhonghua sedan was obtained from the Chinese government in May 2002. The latest Zhonghua model, Junjie, was launched in March 2006.

     On March 27, 2003, Brilliance China Automotive, through its indirect subsidiary, SJAI, entered into a joint venture contract with BMW Holding to produce and sell BMW sedans in China. On April 28, 2003, Brilliance China Automotive increased its effective interest in SJAI from 81.0% to 89.1% and thereby increased its effective interest in the joint venture with BMW Holding BV from 40.5% to 44.6%. On December 16, 2003, Brilliance China Automotive further increased its effective interest in the joint venture to 49.5% by further increasing its interest in SJAI from 89.1% to 99.0%. BMW Brilliance received its business license on May 22, 2003 and

introduced the BMW designed and branded 3-Series and 5-Series sedans in China in October and November of 2003, respectively, based on knockdown kits supplied by BMW. BMW Brilliance subsequently launched the new 3-Series and 5-Series long-wheelbase sedans in China in September 2005 and November 2006, respectively. Since the first half of 2004, BMW Brilliance had begun to incorporate domestically produced components in its sedans.

     Brilliance China Automotive currently has no material acquisitions or divestitures planned or pending.

     For additional information see “Item 5 — Operating and Financial Review and Prospects — Liquidity and Capital Resources — Capital Expenditures.”

Business Overview

     Brilliance China Automotive’s core businesses are the manufacture and sale of minibuses and Zhonghua sedans in China through its subsidiary, Shenyang Automotive. Brilliance China Automotive also has a joint venture, BMW Brilliance, with BMW Holding to produce and sell 3-Series and 5-Series sedans in China. In 2006, Shenyang Automotive sold a total of 66,245 minibuses and 62,281 Zhonghua sedans and BMW Brilliance sold a total of 23,600 BMW sedans. Currently, Shenyang Automotive has an annual production capacity of 80,000 units of deluxe and mid-priced minibuses (based on two shifts per day), 120,000 units of deluxe and mid-priced minibuses (based on three shifts per day), 100,000 units of Zhonghua sedans (based on two shifts per day) and 130,000 units of Zhonghua sedans (based on three shifts per day). BMW Brilliance currently has an annual production capacity of 30,000 units (based on two shifts per day) and 41,000 units (based on three shifts per day). In addition, Brilliance China Automotive has also established strategic partnerships or working relationships with various other leading global automotive companies, including Toyota, Mitsubishi, FEV Motorentechnik Gmbh, Porsche, Pininfarina S.p.A., and Italdesign S.p.A.

     Shenyang Automotive’s production facilities are located in the industrial city of Shenyang, the capital of Liaoning Province in northeastern China. Shenyang Automotive’s principal products are the deluxe minibus, the mid-priced minibus and the Zhonghua sedan. Mid-priced minibuses accounted for approximately 28.8% of the total sales revenue of Brilliance China Automotive in 2006. The deluxe and mid-priced minibuses are 8 to 15-seat minibuses adapted from Toyota’s Hiace minibus (marketed under the name of “Hiase” in China) and Granvia minibuses (marketed under the name of “Granse” in China).

     On May 22, 2003, BMW Brilliance received its business license issued by the Shenyang City Administration for Industry and Commerce. Commercial production of BMW-designed and branded sedans commenced in September 2003 based on knockdown kits supplied by BMW Group. The 3-Series BMW sedans were launched in the market in October 2003 and the 5-Series were launched in November 2003. BMW Brilliance subsequently launched new versions of the 3-Series in September 2005 and the new 5-Series long-wheelbase in November 2006. Since the first half of 2004, BMW Brilliance had begun to incorporate domestically produced components in its 3- and 5-Series sedans.

     In 2006, Shenyang Automotive’s sales volume increased 86.3% from approximately 69,000 units in 2005 to 128,526 units in 2006. The 2006 sales figure comprises 66,245 minibuses and 62,281 Zhonghua sedans. The increase in overall sales was primarily due to the increase in the sales volume of minibuses and the significant increase in the sales volume of the Zhonghua sedans, in particular the Junjie model which was launched in March 2006. Our joint venture, BMW Brilliance, sold 23,600 BMW-branded sedans in 2006, compared to 17,501 in 2005. Shenyang Automotive’s sales in China has been supported by a substantial network of approximately 180 minibus distributors, including approximately 35 exclusive minibus distributors, and approximately 130 sedan distributors, as well as approximately 390 after-sales service centers for minibuses and approximately 220 for sedans. Shenyang Automotive also continued to implement its “4S” sales center system, with sales, after-sales service, spare parts and surveys offered by the same dealership outlet. As of the end of 2006, Shenyang Automotive had approximately 70 4S dealership outlets for minibuses and approximately 100 4S dealership outlets for Zhonghua sedans nationwide.

     For the year ended December 31, 2006, Brilliance China Automotive reported sales of Rmb 10,484.8 million (US$1,343.5 million), representing an increase of approximately 91.7% compared to 2005 and net loss of Rmb 386.1 million (US$49.5 million) compared with a net loss of Rmb 671.3 million (US$83.2 million) in 2005. The increase in sales and decrease in net loss was primarily due to the increases in unit sales of Shenyang Automotive’s minibuses and, especially, Zhonghua sedans in 2006, and decreases in impairment losses on intangible assets and goodwill.

Principal Products

     Shenyang Automotive’s principal products are minibuses and the Zhonghua sedans. Our joint venture with BMW, BMW Brilliance, also produces BMW 3- and 5-Series sedans.

     Shenyang Automotive’s principal minibus products are the deluxe minibus and the mid-priced minibus, which constituted approximately 13.9% and 28.8% of Brilliance China Automotive’s total sales revenue in 2006, respectively. These vehicles are used primarily for passenger transportation but can also be modified for use as police vans, ambulances or other specialty vehicles. Shenyang Automotive sells all of its minibuses under the JinBei brand name in a variety of models designed to meet the requirements of particular market segments. Brilliance China Automotive believes that Shenyang Automotive’s minibuses have established a reputation in China for high quality and reliability that has enabled Shenyang Automotive to maintain its market-leading position in recent years. Shenyang Automotive commenced production of the high-end Granse model in 2002 based on semi-knockdown kits from Toyota and started production of the domestic version of the Granse model using domestic parts and components in the first half of 2004.

     Shenyang Automotive’s Zhonghua sedan was introduced to the commercial market in China in August 2002 and constituted approximately 15.8% and 49.5% of Brilliance China Automotive’s total sales revenue in 2005 and 2006, respectively. The initial model was a five-seat manual transmission sedan with a 4-cylinder, 2.0-liter Mitsubishi engine. Shenyang Automotive now also produces manual transmission Zhonghua sedans with 2.4-liter engines and automatic transmission versions with both 2.0-liter and 2.4-liter engines. In December 2004, the

“facelift” version of the Zhonghua model, known as “Zunchi,” was launched. In March 2006, Shenyang Automotive launched another Zhonghua model, Junjie, which features a 1.6-liter, 1.8-liter or 2.0-liter engine with manual or automatic transmission.

     The following table sets forth certain information with respect to Shenyang Automotive’s principal products as of the date of this annual report.

Deluxe

Minibus

(Granvia or

Deluxe

Mid-priced

Zhonghua

Zhonghua

“Granse”

Minibus

Minibus

Sedan

Sedan

Model(1))

(Hiase Model)

(Hiase Model)

Zunchi

Junjie

Maximum number of passengers

7—8

15

15

5

5

Engine type

Toyota 4-cylinder 2.7-liter gasoline engine and Mianyang Xinchen 2.7-liter gasoline engine

Toyota 4-cylinder 2.4-liter gasoline engine and Mitsubishi 2.4-liter gasoline engine

Mianyang Xinchen and Xinguang Brilliance 4-cylinder 2.2-liter gasoline engine

Mitsubishi 4-cylinder 1.8, 2.0 and 2.4-liter gasoline engine

Mitsubishi 4-cylinder 1.8 and 2.0-liter and Mitsubishi & Harbin DongAn 1.6-liter gasoline engine

Horsepower (bhp)

105

100.6

92.5

122—170

134—173

Price Range in Rmb(2)

119,800—239,800

121,800—156,800

64,800—101,800

105,800—209,800

85,800—157,800

Fuel Consumption (Liters/100 km)(3)(4)

10

10

9.8

6.5 — 7.6

6.2 — 7.6

Maximum speed(4)

158 km/hr

130 km/hr

130 km/hr

185 — 210 km/hr

180 — 210 km/hr

Domestic component content

> 80%

> 85%

100%

92—100%

90—99%

Length

4.7 m

4.8 m

4.8 m

4.88 m

4.65 m

     The following table sets forth certain information with respect to BMW Brilliance’s principal products as of the date of this annual report.

		BMW Brilliance		BMW Brilliance
		3-Series Sedan		5-Series Sedan
Models		320i and 325i		523Li, 525Li and 530Li
Maximum number of passengers		5		5
Engine types		BMW 4 and 6-cylinder 2.0-liter and 2.5-liter gasoline engines		BMW 6-cylinder 2.5-liter and 3.0-liter gasoline engines
Horsepower (bhp)		150 — 218		177—258
Price range in Rmb(1)		339,800—461,000		477,600—699,000
Fuel Consumption (Liters/100 km)(2)		7.9 — 9.0		9.4 — 9.5
Maximum speed		215 — 242 km/hr		227 — 250 km/hr
Length		4.52 m		4.98 m

     Deluxe minibus. The deluxe minibus has historically been Shenyang Automotive’s flagship product and is among the highest quality, most technologically advanced minibuses currently produced in China. The deluxe minibus is used primarily as a passenger vehicle and features air conditioning, optional power steering, power windows, automatic locks, a rear window wiper, full interior carpeting and alternative interior configurations.

     Shenyang Automotive’s high-end products have been further improved to incorporate more user-friendly features to meet diversified customer demands. In the deluxe line, Shenyang Automotive has introduced a locally developed model, based on the Toyota 441N, which is equipped with an anti-lock braking system, improved helix rear suspension and refined interior trim. It has the highest technical content among Shenyang Automotive’s product lines.

     On December 17, 2001, Shenyang Automotive entered into an agreement with Toyota for the technology transfer of the fifth generation of the Toyota minibus — the Granvia — for which production based upon semi-knockdown kits from Toyota commenced in 2002. Shenyang Automotive began producing the Granvia using domestic parts in the first half of 2004. The Granvia is marketed under the brand name Granse (known as “Grace” before February 2004) when sold in China by Shenyang Automotive. The Granse minibus exhibits several improvements over the fourth generation minibus, including more responsive performance when carrying heavy loads, better handling, better maneuverability, 360-degree interior moveable seats and a more luxurious and comfortable interior.

     Mid-priced minibus. The mid-priced minibus was developed by Shenyang Automotive and was commercially introduced in the second half of 1996. Shenyang Automotive produces two principal mid-priced minibus models, both of which are based on the deluxe minibus and share the same styling and body of the deluxe minibus, with the principal difference being the engine. By equipping the majority of these models with a domestically manufactured Mianyang Xinchen or Xinguang Brilliance engine, Shenyang Automotive is able to sell them for significantly less than the deluxe minibus, yet still maintain function and quality standards for these models that are only slightly lower than the deluxe minibus. This has allowed the mid-priced minibus models to compete more effectively in terms of price with other domestically produced products. See “— Competition” below.

     In 2002, Shenyang Automotive introduced three new minibus models to the market, including mid-priced minibuses that utilize Mitsubishi engines and in 2003 Shenyang Automotive launched the updated versions of these minibus models. In 2004, Shenyang Automotive launched lower-priced models with more limited features in response to market demand and in the first half of 2005, a lower-priced domestic version of the Granse was launched. Early 2006, Shenyang Automotive launched the manual transmission model of the minibuses meeting the European III emission standards.

     Since the end of 2003, Shenyang Automotive’s minibus capacity has been 80,000 units per year (based on two shifts) and 120,000 units per year (based on three shifts). Brilliance China Automotive believes that its long-term interests require that Shenyang Automotive continue to expand its production capacity. Any increase in Shenyang Automotive’s future revenue will depend on its ability to continue to expand in a similar manner. Realization of its production and sales goals is also contingent upon other factors, including the development of new vehicle models, the ability to continue to achieve overall cost reductions, ongoing access to high-quality raw materials and domestic component manufacturers and maintenance of a large well-trained labor force, an effective distribution network and after-sales service capabilities.

     Zhonghua sedans. The Zhonghua sedan was designed by Italdesign and was commercially introduced by Shenyang Automotive in August 2002 after receiving approval from the Chinese government in May 2002. This sedan is designed to target the mid-priced sedan market segment, including governmental institutions, businesses and individual users in China. This sedan model was specifically designed for the Chinese market and utilizes a high degree of domestic component content, thereby offering cost advantages to consumers. In 2003, Shenyang Automotive spent approximately Rmb 200.0 million on upgrading the Zhonghua production facilities and related dies and tools. The “facelift” version of the Zhonghua model, known as “Zunchi,” was launched in December 2004 and in March 2006, the “Junjie” model was launched. The Junjie sedan uses the Zhonghua sedan design as its foundation, and is designed for family use and business use in China. Junjie was designed by Pininfarina S.p.A., an Italian design company, and other aspects of its development, including its platform, involved cooperation with Porsche. The Junjie sedan received the 2006 China CCTV China annual 1.8-liter car prize. Total investment in the Junjie product was Rmb 500 million.

     On March 27, 2001, Brilliance China Automotive entered into a three-year technical assistance agreement with BMW Group under which BMW engineers provided consulting services to help in the initial stages of production of Zhonghua sedans at Shenyang Automotive’s sedan production facilities in Shenyang, including assistance in achieving and maintaining the desired level of production quality. A similar agreement entered into in early 2006 between Shenyang Automotive and BMW Group regarding the technical support program for the Junjie sedan expired in July 2006. Shenyang Automotive currently has no plans to renew the technical assistance agreement.

     The following table sets forth Brilliance China Automotive’s revenues by category, for the years 2004 through 2006:

		2004								2005								2006
		Revenue								Revenue								Revenue
		(Rmb millions)				%				(Rmb millions)				%				(Rmb millions)				%
Minibus sales
Deluxe minibus			960				14.7				958				17.5				1,460				13.9
Mid-priced minibus			3,797				58.1				2,989				54.7				3,020				28.8
Zhonghua sedan			1,324				20.2				863				15.8				5,190				49.5
Subtotal			6,081				93.0				4,810				88.0				9,670				92.2
Other sources of income(1)			461				7.0				659				12.0				815				7.8
Total			6,542				100.0				5,469				100.0				10,485				100.0

     The following table sets forth the geographic breakdown of Shenyang Automotive’s minibus and Zhonghua sedan sales revenue throughout China for the years 2004 through 2006:

		2004								2005								2006
Province/		Revenue								Revenue								Revenue
Municipality		(Rmb millions)				%				(Rmb millions)				%				(Rmb millions)				%
Beijing			1,131				18.6				755				15.7				1,180				12.2
Guangdong			821				13.5				529				11.0				1,057				10.9
Liaoning			644				10.6				567				11.8				1,673				17.3
Shanghai			566				9.3				452				9.4				803				8.3
Jiangsu			389				6.4				283				5.9				667				6.9
Zhejiang			328				5.4				188				3.9				474				4.9
Shandong			237				3.9				183				3.8				522				5.4
Tianjin			183				3.0				115				2.4				193				2.0
Heilongjiang			134				2.2				82				1.7				184				1.9
Hebei			128				2.1				87				1.8				222				2.3
Hubei			128				2.1				82				1.7				164				1.7
Hunan			128				2.1				96				2.0				203				2.1
Shaanxi			128				2.1				77				1.6				163				1.7
Henan			110				1.8				106				2.2				193				2.0
Sichuan			103				1.7				115				2.4				221				2.3
Shanxi			103				1.7				72				1.5				164				1.7
Fujian			91				1.5				63				1.3				173				1.8
Jilin			85				1.4				72				1.5				116				1.2
Chongqing			85				1.4				48				1.0				172				1.8
Xinjiang			79				1.3				63				1.3				106				1.1
Yunnan			79				1.3				43				0.9				126				1.3
Anhui			79				1.3				53				1.1				135				1.4
Guangxi			73				1.2				34				0.7				77				0.8
Jiangxi			55				0.9				34				0.7				58				0.6
Inner Mongolia			49				0.8				34				0.7				107				1.1
Guizhou			30				0.5				19				0.4				58				0.6
Hainan			18				0.3				106				2.2				26				0.3
Other(1)			97				1.6				452				9.4				433				4.4
Total			6,081				100.0				4,810				100.0				9,670				100.0

BMW Brilliance

     On March 14, 2003, Brilliance China Automotive received formal approval from the Chinese government with respect to the feasibility study for the establishment of a joint venture between BMW Holding, a wholly owned subsidiary of BMW AG, and SJAI, an indirect subsidiary of Brilliance China Automotive. On March 27, 2003, SJAI entered into a joint venture contract with BMW Holding in relation to the establishment of the joint venture in China. On April 28, 2003, Brilliance China Automotive, through its indirectly 90%-owned subsidiary, SXID, entered into an agreement with the 10% shareholder of SJAI to acquire an additional 9% interest in SJAI, thereby increasing its effective interest from 40.5% to 44.6%. On December 16, 2003, by increasing its indirect interest in SJAI from 89.1% to 99.0%, Brilliance China Automotive effectively further increased its interest in BMW Brilliance to 49.5%.

     The registered capital and total investment cost of the joint venture is Euro 150 million and Euro 450 million, respectively. As of December 31, 2006, Brilliance China Automotive had injected approximately Rmb 688.5 million into the joint venture. The joint venture is 50%-owned by each of SJAI and BMW Holding and has a term of 15 years starting from May 22, 2003, the date of issuance of the joint venture’s business license, which may be extended by mutual consent of the parties to the joint venture. The business scope of the joint venture is to produce and sell BMW-designed and branded passenger cars, engines, parts and components and to provide after-sales services (including repair, maintenance and spare parts) relating to its products. Profits of the joint venture are shared equally by SJAI and BMW Holding, in proportion to their respective contributions to the registered capital of the joint venture. This joint venture contract prohibits Brilliance China Automotive from entering into similar ventures with other automobile manufacturers for the manufacture and sale of premium sedans in China.

     Brilliance China Automotive has agreed to provide a guarantee to BMW Holding in relation to the performance by SJAI of its obligations under the joint venture contract. A reciprocal guarantee has been provided by BMW AG to SJAI in respect of the obligations of BMW Holding under the joint venture contract. In addition, Brilliance China Automotive has been indemnified by SAIAM and Shenyang JinBei Automobile Industry Company Limited with respect to its liabilities under this guarantee to BMW Holding.

     On May 22, 2003, the business license for the joint venture was issued by the Shenyang City Administration for Industry and Commerce. BMW Brilliance started the production of the 3-Series BMW sedans in September 2003 and the 5-Series BMW sedans in November 2003 based on semiknockdown kits supplied by BMW Group. In September 2005, BMW Brilliance launched a new model of the 3-Series BMW sedans and in November 2006, it launched the new 5-Series long-wheelbase. Since the first half of 2004, BMW Brilliance had begun to incorporate domestically produced components in its 3-Series and 5-Series sedans. According to PRC regulations, once the local content ratio reaches a prescribed level, the import tariff on BMW Brilliance’s imported components will drop significantly from 25% to 10%, thereby reducing the overall production costs. However, given the sophisticated technology associated with BMW Brilliance’s products as well as the relatively small production volume achieved to date, there is no guarantee that BMW Brilliance will be able to meet the required local content level, or that final approval for tariff reduction will be granted by the government.

Production Process

Minibus Production Process and Equipment

•

Stamping. Shenyang Automotive produces its own semi-finished steel sheets for stamping on a “roll, drop and stack” production line. Stamping is carried out at seven production stations that utilize 31 domestic and imported presses, the largest of which is calibrated at 3,200 tons and is used to stamp roofs and side panels for the deluxe and mid-priced minibuses. The 175 dies used for stamping and cutting body components for the Hiase and Granse minibuses were purchased from Toyota. Substantially all of the stamped metal vehicle components utilized in Shenyang Automotive’s minibuses are produced in this stamping workshop.

•

Welding. The welding workshop consists of 2 production lines and 14 process conveying lines, among which the Hiase has 7 lines and the Granse has 7 lines. Each line is focused on a different section of the minibus. These lines were manufactured with Toyota technology and utilize a combination of manual welding and automatic robotic welding, the latter of which is utilized for the more difficult welding points. Each welding station is equipped with a domestically manufactured testing machine. The annual production capacity based on two shifts is 120,000 units among which 80,000 units are dedicated to the Hiase minibuses and 40,000 units to the Granse.

•

Painting. Shenyang Automotive currently operates a 36,347 square meter painting workshop that was set up in April 2004 to enhance the production capacity. The new painting workshop has three floors, each with its own function. The new workshop has an annual production capacity of 120,000 units, with space reserved for expansion up to an annual production capacity of 150,000. The new workshop uses a painting method that combines the use of a conveyor, automated machine and robotic machine. Steps taken to prepare the vehicle body for painting include de-greasing, rinsing, phosphatization and electrophoretic coating. Using the “3C1B” process, each of three coats of paint is applied by a sprayer to the minibus body and dried in a heated drying chamber. The specialized pre-painting preparation of the vehicle allows the frame to withstand corrosion for 10 to 15 years. Also, the high standard of cleanliness in the painting workshop and the advanced paint sprayers used allow Shenyang Automotive to reduce environmental pollution, provide better working conditions for the painting workshop employees, conserve raw materials and ensure that each minibus receives three consistent, high-quality coats of paint. Finally, various quality control tests are conducted, including measurement of the luster and thickness of the paint on each vehicle.

•

Assembly. Shenyang Automotive’s final assembly workshop is equipped with a combination single slot, hanging and double slot conveyor. The conveyor is 570 meters long, has 88 separate workstations and is capable of producing minibuses at the rate of one every 160 seconds. Shenyang Automotive also developed jointly with the Shenyang Automation Research Center an automated lifting system that is used in the assembly of the power train, rear chassis and crank case, as well as a computerized hydraulic machine for carrying out the transfer from a single rail conveyor onto a hanging line conveyor — the first of its kind to be developed in China.

•

Testing. Shenyang Automotive employs an advanced comprehensive vehicle testing system to ensure that each vehicle conforms to specifications, including wheel alignment, exhaust emissions, steering, braking and engine performance and testing, and windshield leakage testing. All of these final testing procedures are also supported by a comprehensive quality control staff that monitors each step of the production process. See “— Business Overview — Quality Control” below.

Zhonghua Sedan Production Process and Equipment

•

Stamping. At present, 324 pieces for 232 types of large and medium press parts of the Zhonghua sedan (including Zunchi and Junjie) are produced in the stamping (or

pressing) workshop. There are 1,029 imported and domestically produced molds, five large and medium pressing lines, among which the line producing large (2,300 ton) parts was imported from Schuler of Germany, which can supply parts for five production lines. There is also a 100-ton molding press imported from Kawasaki of Japan. The other pressing lines were purchased from domestic equipment manufacturers.

•

Welding. The welding workshop is required to assemble and weld 394 separate panels, 30 machined parts, 10 roll-pressed parts and 30 standard parts. This line was designed, manufactured and installed by Kuka of Germany. The welding line consists of 26 zones and 347 stations, and is capable of spot-welding, carbon dioxide welding, project welding, T-stud welding, sealing, brazing and hemming. At present, there are 43 working robots in this workshop, which are used to weld, seal and inspect at the most important stations on the line. The SKID apparatus that transports components both on the ground and overhead adds speed and efficiency to the welding process.

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Painting. Zhonghua sedans and the BMW-branded sedans share the same painting line. The equipment used in the painting line is provided by Durr of Germany, and the paint supply system was imported from Graco of the United States. Steps involved in the body painting process include pre-treatment, E-coat, sealing, PVC, primer, top-coat and cavity wax. The painting line is highly mechanized and automated, with a central control system imported from Siemens. The painting line may switch paints of different colors within 10 seconds and 15 paints of different colors may be used in the same painting line. All of the paints and other materials utilized in paint workshop are high quality products sourced both from within China and abroad.

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Assembly and Testing. The performance of the assembly and testing workshop is guided by an information system based on bar code technology. The layout of the final assembly shop is designed by Schenck Engineering of Germany and consists of the body buffer line, main production line, test line, water proof line, finishing line and marriage line, as well as various sub-lines and a rework area. The assembly line utilizes a double-track conveyer system for transporting the vehicles through each process.

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Instrument Production. The instrument panel workshop, occupying an area of 6,540 square meters, produces Zhonghua instrument panels. The processes include vacuum shaping, foaming, hydrocutting and welding, and use seven different machines. The workshop has a high production capacity for the production of parts and assembly of instrument panels.

BMW Sedan Production Process

     The automotive production process employed by BMW Brilliance is generally divided into four stages: welding, painting, assembly and testing. In each stage, BMW Brilliance utilizes equipment that complies with BMW Group standards. Each stage of the manufacturing process is also carefully monitored both by quality control engineers and through specialized testing equipment to ensure that the final product achieves the specified BMW Group’s quality standards.

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Welding. The manufacturing and welding process in the welding workshop is performed according to the BMW Group’s global standard. The dimensional quality is checked with a CMM Machine from Wenzel Company of Germany. The sourced welding equipment is from standard suppliers in Germany. The welding workshop contains stud welding, spot welding, mig welding and sealing operations. The line operators have been trained by the BMW Group’s specialists and the process is controlled by the BMW Group’s specialists from Germany. The quality checks and audits are consistent with those performed at other BMW Group plants.

•

Painting. All of the equipment used in the painting line is provided by Durr of Germany, and the paint supply system was imported from Graco of the United States. Steps involved in the body painting process are highly mechanized and automated, with a central control system imported from Siemens. All of the paints and other materials utilized in the paint workshop are high quality products sourced both from within China and abroad.

•

Assembly. The assembly workshop consists of two areas, both using conveyor systems designed by the German supplier AFT with 60 line stations in total, as well as handling devices for heavy parts from Dalmec Company and filling equipment from Durr of Germany.

•

Testing. The finishing and testing equipment is located in the second area of the assembly workshop. A wide range of special equipment used in BMW Group’s plants worldwide is used to test 100% of the cars produced.

Raw Materials and Components

     Raw Materials. To ensure its supply of high-quality domestic raw materials, components and spare parts, Shenyang Automotive has established stable relationships with over 280 suppliers in China as of December 2006. Shenyang Automotive sources the majority of its important components and raw materials from at least two different suppliers to ensure availability and increase competition among suppliers. In 2006, approximately 37.6% of Shenyang Automotive’s components sourcing was handled through Brilliance China Automotive’s subsidiaries and associated companies.

     Steel is the principal raw material for Brilliance China Automotive’s products. Shenyang Automotive purchases steel predominantly through the use of supply contracts. Since steel represented only approximately 5.6%, 5.2% and 5.0% of the total cost of goods sold for the Hiase minibus, Granse minibus and the Zhonghua sedans in 2006, respectively, the impact of rising steel prices on Shenyang Automotive’s overall production costs was not significant. Furthermore, this increase in the costs for steel was offset by decreases in the costs of components due to a decrease in prices of the minibus components used in the minibuses and the domestically produced components used in the Zhonghua sedans.

     Components. Shenyang Automotive has adopted a system that regularly evaluates its existing suppliers. These suppliers range from well-known international suppliers to domestic suppliers with special technology and know-how. Shenyang Automotive has conducted a comprehensive survey of its suppliers against an array of criteria, such as quality problem

feedback ratio, production capacity, quality assurance systems and after-sales services. Implementing this process has enabled Shenyang Automotive to build a stronger supplier network as the foundation for future growth.

     The domestic component content of the deluxe minibuses is currently 89% for the Hiase model and 84% for the Granse model. Previously, the principal components of the Hiase deluxe model that we imported from Toyota were the engines. Shenyang Automotive has developed deluxe minibuses that utilize Mitsubishi engines made by Shenyang Aerospace in order to offer a greater variety of products to its customers. Instead of using imported Toyota engines, Shenyang Automotive has already installed Mitsubishi engines in most of the deluxe minibus (Hiase model) units. As a result, the domestic component content of the deluxe minibuses has increased.

     The mid-priced minibus uses almost 100% domestic parts and the domestic component content of the Zhonghua sedan is over 90%. Brilliance China Automotive calculates domestic component content by “looking through” larger components, such as engines, produced by domestic Chinese entities to determine the percentage of such component’s own components that were manufactured outside China.

     Because certain components are imported from Toyota and other suppliers in Japan and Europe, the availability of foreign exchange, exchange rates, import restrictions and the level of import duties may affect the availability of certain components and Shenyang Automotive’s costs of production. See “Item 5 — Operating and Financial Review and Prospects — Liquidity and Capital Resources.”

     Shenyang Automotive is required to pay import duties on imported automobile components. Shenyang Automotive was subject to an average tariff rate of 8.2% and 10.4% on imported components used in its deluxe minibuses (including Granse minibuses) and Zhonghua sedans, respectively, in 2006. During 2006, imported components (including steel) comprised approximately 9.8% of the total cost of sales of all minibuses. In addition, imported components comprised 1.7% of the total costs of the Zhonghua sedan during 2006. Changes in foreign currency exchange rates also affect the cost of foreign-manufactured components imported by China’s domestic manufacturers to make larger components, such as engines, which we purchase domestically. The total aggregate import tariffs paid by Shenyang Automotive for 2006 were approximately Rmb 31.6 million (US$4.0 million). However, as a result of China’s accession to the WTO, import tariffs on motor vehicle components decreased to between 4.8% and 25% effective January 1, 2003. In 2004, the import tariff on motor vehicle components ranged between 5.0% and 22.9%, in 2005, between 5.0% and 18.6%, in 2006, between 5.0% and 14.3% and in 2007, between 5.0% and 10.0%. A decrease in import tariffs will result in a decrease in the percentage of the total cost of minibuses and sedans that imported components comprise.

     Brilliance China Automotive intends to continue its efforts to increase domestic component content for both deluxe minibuses and sedans, while at the same time emphasizing quality. See “Item 5 — Operating and Financial Review and Prospects.”

Other Significant Subsidiaries, Jointly Controlled Entities and Associated Companies

     Brilliance China Automotive believes that the acquisition of interests in strategic components suppliers has and will continue to broaden its revenue base, increase the reliability of the supply of certain core components of Shenyang Automotive’s and BMW Brilliance’s minibuses and sedans, enhance their ability to monitor component quality and facilitate greater coordination among the management and engineering personnel and their respective principal suppliers.

Mianyang Xinchen

     Mianyang Xinchen, directly and indirectly through Xing Yuan Dong (described below), accounted for 3.0% of Shenyang Automotive’s purchases of parts and components in 2006. Mianyang Xinchen’s principal product is the 2.2-liter 491Q gasoline engine. In 2000, Mianyang Xinchen also began producing the 491QE electronic fuel injection engine on a mass production basis to satisfy the market’s demand for products that can meet new higher emission standards. In 2001, Mianyang Xinchen developed three additional passenger vehicle gasoline engines. As a result, Shenyang Automotive has access to engines suited to a full range of light-duty passenger vehicles. Mianyang Xinchen had annual sales of Rmb 550.2 million in 2006. Shenyang Automotive accounted for 47.7% of Mianyang Xinchen’s overall sales of engines in 2006. Mianyang Xinchen currently manufactures 491Q, 4G24, 495QF and 4R gasoline engines, and 493 diesel engines. It sold over 64,400 engines in 2006. Mianyang Xinchen’s overall annual sales of gasoline engines in 2006 increased by 9.3% from 2005. Mianyang Xinchen’s current annual production capacity is 180,000 gasoline engines and 20,000 diesel engines. Mianyang Xinchen is planning to invest in and build new engine production lines for its new DK4 diesel and G10 gasoline engines. It is estimated that the DK4 line will be ready for production in the first quarter of 2008 and the G10 line will be ready for production in the second half of 2008.

     In March 2004, the technology center of Mianyang Xinchen was designated by the PRC governmental authorities as a State-class enterprise technology center, becoming only the second State-class enterprise technology center in the PRC automotive gasoline engine industry.

Ningbo Yuming

     Ningbo Yuming, directly and indirectly through Xing Yuan Dong and Ningbo Brilliance Ruixing (described below), accounted for 1.4% of Shenyang Automotive’s purchases of parts and components in 2006. Ningbo Yuming’s principal products are side windows, floor channels and interior and exterior water mouldings for minibuses and sedans. Ningbo Yuming had annual sales of Rmb 203.4 million in 2006. Ningbo Yuming intends to further develop front axles for use in different types of light duty vehicles to enlarge its market share in the safety components market. Ningbo Yuming received ISO-9002 accreditation in December 1999 and achieved the TS16949 standard in September 2006. Shenyang Automotive, which uses Ningbo Yuming’s products in all of its deluxe minibuses, mid-priced minibuses and Zhonghua sedans, accounted for approximately 96.0% of Ningbo Yuming’s sales in 2006. Shenyang Automotive also granted Ningbo Yuming the status of Class A Supplier in 1999, which it continues to hold.

Xinguang Brilliance

     Xinguang Brilliance is principally engaged in the manufacture and sale of gasoline engines for use in passenger vehicles and light duty trucks. In 2006, engine purchases by Shenyang Automotive for use in mid-priced minibuses accounted for 44.6% of Xinguang Brilliance’s total sales revenue, which amounted to Rmb 340.4 million. Xinguang Brilliance currently produces 491Q, 4G20D4 and 4G22D4 gasoline engines and has a production capacity of 70,000 engines per year. It sold over 45,000 gasoline engines in 2006.

     Xinguang Brilliance started to further develop upgraded versions of the 491Q engine in 2005. These new 16-valve 4G20D4 and 4G22D4 engines have greater power and are designed to satisfy European III and IV emission standards. They are suitable for use in JinBei minibuses and Zhonghua sedans. Xinguang Brilliance produces these new engines by using part of its existing 491Q facilities, together with a new production line. Capacity for these 4G20D4 and 4G22D4 engines is 56,000 units per year. Xinguang Brilliance sold over 3,000 4G20D4 and 4G22D4 engines in 2006.

Xing Yuan Dong, Ningbo Brilliance Ruixing and Mianyang Brilliance Ruian

     Xing Yuan Dong assists Shenyang Automotive in obtaining and developing a reliable supply of domestically produced parts and components. Xing Yuan Dong also facilitates development of locally produced automotive parts and components and acts to improve the quality of these components. When a customized component is needed, Xing Yuan Dong provides potential suppliers with designs and specifications for the customized parts and components required by Shenyang Automotive. These potential suppliers liaise with Xing Yuan Dong and negotiate with Xing Yuan Dong about the details of production. Xing Yuan Dong then selects appropriate suppliers and offers technical assistance and cost evaluations. Xing Yuan Dong continuously strives to reduce the number of Shenyang Automotive’s suppliers, lower costs, increase the efficiency and commitment of the remaining suppliers, streamline the component purchasing process and ensure a steady supply of high quality components. In 2001, Xing Yuan Dong, in order to maintain its preferential tax treatment from the PRC government, also began manufacturing automotive components for Shenyang Automotive. In 2006, 94.2% of Xing Yuan Dong’s sales were to Shenyang Automotive.

     Ningbo Brilliance Ruixing was established on June 9, 2000 as a wholly owned subsidiary of Brilliance China Automotive to facilitate the trading and development of automotive components between Ningbo Yuming and Shenyang Automotive. In 2006, 99.4% of Ningbo Brilliance Ruixing’s sales were made to Shenyang Automotive and 47.7% of Ningbo Brilliance Ruixing’s purchases were from Ningbo Yuming. Beginning in 2001, Ningbo Brilliance Ruixing also began manufacturing automotive components for Shenyang Automotive. Ningbo Brilliance Ruixing’s principal products are front axles, mirrors and suspensions.

     Mianyang Brilliance Ruian was established on July 3, 2000 as a wholly owned subsidiary of Brilliance China Automotive to facilitate the trading and development of automotive components for Mianyang Xinchen. In 2006, 4.7% of Mianyang Brilliance Ruian’s sales were made to Mianyang Xinchen and 91.6% of Mianyang Brilliance Ruian’s sales of its manufactured automotive components were made to Shenyang Automotive through Xing Yuan Dong. In 2001, Mianyang Brilliance Ruian also began manufacturing automotive components for Shenyang Automotive.

Shenyang Aerospace

     Shenyang Aerospace was formed for the purpose of manufacturing the 2.0-liter, 122 horsepower and the 2.4-liter, 130 horsepower Mitsubishi gasoline engines. Shenyang Aerospace commenced trial operation in March 1999. Shenyang Automotive uses these engines in its deluxe minibuses and in the Zhonghua sedans. In addition, Shenyang Aerospace’s engines are also sold domestically to other passenger vehicle producers. Mitsubishi Motors Corporation, or MMC, Mitsubishi Corporation, China Aerospace Automotive Industry Group Co., MCIC Holdings Sdn. Bhd. and Shenyang Jianhua Motors Engine Co. Ltd., or Shenyang Jianhua, own equity interests of 25.0%, 9.3%, 30.0%, 14.7% and 21.0% respectively, in Shenyang Aerospace. Pursuant to a share transfer agreement dated September 29, 2005, Shenyang Jianhua agreed to sell to MMC 2% interests in Shenyang Aerospace. The transfer has yet to be approved by the relevant authorities in the PRC. Upon the completion of the transfer, each of Shenyang Jianhua and MMC will own equity interests of 19.0% and 27.0% in Shenyang Aerospace, respectively. After the acquisition of additional shares of JinBei and the receipt of approvals from relevant PRC authorities for the transfer, Brilliance China Automotive’s effective interest in Shenyang Jianhua will increase to 71.1% and consequently Brilliance China Automotive’s effective interest in Shenyang Aerospace will increase to approximately 13.5%.

Brilliance Dongxing and Xingchen Automotive Seats

     In December 2001, Brilliance China Automotive entered into an agreement with Brilliance Holdings Limited for the acquisition of the entire issued share capital of Key Choices Group Limited, or Key Choices, at a consideration of approximately Rmb 278.2 million. Key Choices is an investment holding company and its principal assets are the 100% equity interest in the registered capital of Brilliance Dongxing and a 90% equity interest in the registered capital of Shenyang Xingchen Automotive Seats Co., Ltd., or Xingchen Automotive Seats. Brilliance Dongxing is a foreign-invested enterprise established in the PRC whose principal products are automotive components for use in passenger vehicles. In 2006, Brilliance Dongxing had annual sales of approximately Rmb 260.2 million and about 99% of its sales were to Shenyang Automotive and Xing Yuan Dong. Xingchen Automotive Seats is a Sino-foreign equity joint venture established in the PRC in December 2001 that formerly was principally engaged in the manufacturing of automotive seats. However, Xingchen Automotive Seats ceased its operations in the second half of 2002.

Brilliance JinBei Engine Plant

     In 2004, Shenyang Brilliance Jinbei Automobile Co., Ltd., or JinBei, invested in a new engine plant located in the Shenyang Economic and Trade Development Zone. Construction on this plant was completed in December 2004 and the plant occupies 280,000 square meters of land, with a building size of approximately 64,000 square meters and a main workshop area of 52,000 square meters. FEV Motorentechnik GmbH provided certain technologies relating to engine production, and most of the required equipment was imported from Germany.

     The first product currently under development at this plant is a four-cylinder, 16-valve multiple injection 1.8TCI turbo-charged engine for sedans. This engine will form the core of the new Brilliance China Automotive family of engine products and serve as the basis for expanding

the size of engines used in Shenyang Automotive sedans from 1.6 liters to 2.0 liters. The development of 1.8-liter engines began in 2005, and trial production commenced in 2006. Zunchi and Junjie sedans that are equipped with the 1.8-liter engines were launched to the market in March 2007. It is expected that mass production of sedans with 1.8-liter engines will start in the second half of 2007.

     The engines will be mainly manufactured for use in Zhonghua sedans and the minibuses, but will also be open for sale to third party automotive manufacturers both domestically and abroad. The targeted capacity for the first phase of development is 50,000 engines per year, with two subsequent phases having targeted capacity of 100,000 and 200,000 engines per year, respectively. The first phase will require Rmb 1.13 billion in investment for completion. The intellectual property rights over the engines developed are owned by Brilliance China Automotive.

Shenyang Brilliance Power Train Machinery Co., Ltd.

     Shenyang Brilliance Power Train Machinery Co., Ltd. is a PRC joint venture that was established in December 2004 by Shenyang Automotive and Brilliance China Automotive with registered capital of US$29.9 million. Shenyang Automotive holds a 51% equity interest and Brilliance China Automotive holds a 49% equity interest. Shenyang Brilliance Power Train Machinery Co., Ltd. was established to purchase engines, manual and automatic transmissions and other components from various suppliers, including the Brilliance JinBei Engine Plant and to assemble completed powertrains for the engines made by Brilliance JinBei Engine Plant that can be used in automobiles, in particular Zhonghua sedans. The plant has been in operation since the end of 2005. The powertrain products will primarily be used in Zhonghua sedans and will also be sold to automobile makers that have no powertrain manufacturing capacity of their own.

Shenyang Chenfa Automobile Component Co., Ltd.

     Shenyang Chenfa Automobile Component Co., Ltd., or Shenyang Chenfa, is a wholly foreign-owned enterprise held by Brilliance China Automotive, with a registered capital of US$8.0 million and a total investment of US$8.4 million. Its scope of business is the production and sale of powertrains and automotive components. Shenyang Chenfa was established in June 2003 and currently has over 70 employees. The main product of Shenyang Chenfa is powertrains for Mitsubishi engines used in the Zhonghua sedan, of which it is capable of producing 100,000 units per year. This line has been in operation since March 2004. It also has an engine manifold production line and a cam bearing frame production line with a capacity of 50,000 units per year. Shenyang Chenfa is also responsible for purchasing engine management systems and other automotive components for Brilliance China Automotive.

Sales and Marketing

     The following tables set forth by vehicle model for the years 2004 through 2006 the number of Shenyang Automotive minibuses and sedans sold and BMW Brilliance sedans sold and the percentage of unit sales represented by each model:

		2004								2005								2006
		Units								Units								Units
		Sold				%				Sold				%				Sold				%
Shenyang Automotive
Deluxe minibus			6,626				9.1				9,940				14.4				14,196				11.0
Mid-priced minibus			54,992				75.8				50,060				72.6				52,049				40.5
Zhonghua sedan			10,982				15.1				9,000				13.0				62,281				48.5
Total			72,600				100.0				69,000				100.0				128,526				100.0
BMW Brilliance
BMW sedan			8,708				100.0				17,501				100.0				23,600				100.0

     Shenyang Automotive’s marketing efforts are supervised by its general manager and are conducted primarily through a regionalized sales program under which Shenyang Automotive has divided China into six major sales regions and three “sales belts,” each headed by an experienced senior executive. These regions are further subdivided into 30 provincial sales regions for minibuses and 26 provincial sales regions for sedans. Each of these sales regions corresponds to a separate province in China. These units are responsible for meeting defined sales targets, with the executives’ compensation linked to performance. In addition, Shenyang Automotive implements a commission compensation package for its sales personnel and rewards with bonuses its non-sales personnel who develop customer leads that result in minibus sales. The retail prices and commission scales are both nationally unified by Shenyang Automotive, thereby preventing cross-regional sales and price competition. Shenyang Automotive’s minibuses and Zhonghua sedans are marketed through its nationwide sales network as well as annual automobile industry trade shows and at special sales shows sponsored by JinBei and Shenyang Automotive. Approximately 95% of Shenyang Automotive’s 2006 unit sales of both minibuses and sedans were made to its distributors and approximately 5% of both were made directly to customers.

     Shenyang Automotive’s sales in China have been supported by a substantial network of approximately 180 minibus distributors, including approximately 35 exclusive minibus distributors, and approximately 130 sedan distributors, as well as approximately 390 after-sales service centers for minibuses and approximately 220 for sedans. Shenyang Automotive also continued to implement its 4S sales center system, with sales, service, spare parts and surveys offered by the same dealership outlet. As of December 31, 2006, Shenyang Automotive had approximately 70 dealership outlets for minibuses, and approximately 100 dealership outlets for sedans, which had achieved the 4S dealership standard.

     Shenyang Automotive’s minibus and sedan sales were generally made on a cash basis in 2006. However, credit is generally offered to a few large customers following a financial assessment and an established payment record. Credit terms are generally between 30 to 90 days and security in the form of guarantees or bank notes is obtained from major customers. Designated staff monitors accounts receivable and follow up regarding payment collections. Customers considered to be of high credit risk are required to make payment in full on a cash basis. In addition, in order to incentivize customers and facilitate sales, Shenyang Automotive

also accepts three-month to six-month bank-endorsed notes as payment for its minibuses and sedans.

     Shenyang Automotive has 5 regional distribution centers in order to shorten delivery lead-times and to increase cost efficiencies. Also, by utilizing transportation methods such as trucking, rail and shipping, Shenyang Automotive ensures that most vehicles are not driven until they reach the end users. In 2006, all finished products were delivered to customers with zero mileage.

     The following table sets forth the geographic breakdown of Shenyang Automotive’s minibus and sedan unit sales throughout China for the years 2004 through 2006:

		2004																2005																2006
		Minibuses								Sedans								Minibuses								Sedans								Minibuses								Sedans
Province/Municipality		Units				%				Units				%				Units				%				Units				%				Units				%				Units				%
Beijing			13,031				21.1				1,002				9.1				10,395				17.3				453				5.0				10,480				15.8				5,201				8.4
Guangdong			9,385				15.2				825				7.5				7,107				11.8				467				5.2				7,959				12.0				6,114				9.8
Liaoning			6,173				10.0				1,145				10.4				6,461				10.8				1,650				18.3				7,113				10.7				15,089				24.2
Shanghai			6,933				11.3				296				2.7				6,347				10.6				141				1.6				7,509				11.3				3,130				5.0
Jiangsu			4,254				6.9				569				5.2				3,915				6.5				138				1.5				4,899				7.4				3,934				6.3
Zhejiang			3,534				5.7				505				4.6				2,578				4.3				88				1.0				2,955				4.5				3,319				5.3
Shandong			1,927				3.1				812				7.4				2,313				3.9				296				3.3				2,377				3.6				4,593				7.4
Tianjin			1,512				2.5				552				5.0				1,468				2.4				185				2.1				1,596				2.4				974				1.6
Heilongjiang			1,094				1.8				334				3.0				1,079				1.8				94				1.0				1,337				2.0				1,051				1.7
Hebei			1,089				1.8				361				3.3				1,187				2.0				44				0.5				1,621				2.5				1,387				2.2
Hubei			1,104				1.8				373				3.4				1,136				1.9				53				0.6				1,333				2.0				830				1.3
Hunan			1,006				1.6				408				3.7				1,125				1.9				275				3.1				1,141				1.7				1,510				2.4
Shaanxi			993				1.6				447				4.1				958				1.6				126				1.4				1,064				1.6				1,090				1.7
Henan			937				1.5				299				2.7				1,285				2.1				207				2.3				1,287				1.9				1,297				2.1
Sichuan			751				1.2				386				3.5				1,007				1.7				623				7.0				1,369				2.1				1,631				2.6
Shanxi			815				1.3				323				3.0				922				1.5				143				1.6				1,064				1.6				1,062				1.7
Fujian			811				1.3				229				2.1				824				1.3				98				1.1				1,067				1.6				1,288				2.1
Jilin			845				1.4				146				1.3				950				1.6				55				0.6				971				1.5				625				1.0
Chongqing			549				0.9				351				3.2				476				0.8				232				2.6				909				1.4				1,364				2.2
Xinjiang			764				1.3				166				1.5				830				1.4				90				1.0				693				1.0				672				1.1
Yunnan			674				1.1				244				2.2				551				0.9				90				1.0				841				1.3				841				1.4
Anhui			748				1.2				201				1.8				663				1.1				101				1.1				847				1.3				894				1.4
Guangxi			681				1.1				161				1.5				478				0.8				30				0.3				463				0.7				564				0.9
Jiangxi			440				0.7				193				1.8				396				0.7				120				1.3				398				0.6				428				0.7
Inner Mongolia			355				0.6				203				1.9				414				0.7				92				1.0				619				0.9				794				1.3
Guizhou			139				0.2				166				1.5				161				0.3				110				1.2				276				0.4				545				0.9
Hainan			175				0.3				39				0.4				1,519				2.5				31				0.3				123				0.2				229				0.4
Other(1)			899				1.5				246				2.2				3,455				5.8				2,968				33.0				3,934				6.0				1,825				2.9
Total			61,618				100.0				10,982				100.0				60,000				100.0				9,000				100.0				66,245				100.0				62,281				100.0

     Generally, Shenyang Automotive’s sales are the highest in the second and fourth quarters of the year.

     The Chinese government continues to encourage the development of the relatively underdeveloped, resource-rich western provinces of China and significant government resources have been allocated in the past to develop the infrastructure of the western provinces. Brilliance China Automotive believes the government’s policy regarding western China will be conducive to the development of the local automotive markets. Although Brilliance China Automotive’s largest market today remains in the eastern coastal provinces, Brilliance China Automotive believes that the market in the western provinces of China represent substantial upward growth potential in the future. Brilliance China Automotive will continue to expand its dealership system in that region to tap into this potential growth.

     Approximately 10.0% of consolidated revenues in 2006 were generated from Shanghai Shenhua Holdings Co., Ltd. (formerly known as Shanghai Brilliance Group Co., Ltd. and Shanghai Shenhua Industrial Co., Ltd.) or Shanghai Shenhua. Shanghai Shenhua is an affiliate of Brilliance China Automotive that serves as the principal distributor of Shenyang Automotive’s products. Shanghai Shenhua operates under substantially the same commercial terms and arrangements with Shenyang Automotive as its other third party distribution agents. However, in southern China, where it sells solely to distributors on an exclusive basis, Shanghai Shenhua receives an additional compensation of 1% on sales as commission for operating after-sales service centers.

     Shenyang Automotive uses a computerized sales monitoring system to accurately identify customer demographics, determine which products and options are most in demand and improve inventory control. As Shenyang Automotive brings more product options to market, Brilliance China Automotive believes that this computer system will provide Shenyang Automotive with the ability to track customer preferences in various regions and adjust its production and distribution efforts accordingly.

     In 2006, Shenyang Automotive spent approximately Rmb 250.1 million (US$32.0 million) on overall advertising, consisting primarily of Internet, television and print advertising.

Competition

     The Chinese minibus manufacturing industry is highly fragmented and competitive. According to the Chinese Automotive Technology & Research Center, in 2006, approximately 41 manufacturers sold an aggregate of 144,331 minibuses. The top five manufacturers sold an aggregate of 114,377 minibuses during the same period. Significant competitive factors in the industry include price, quality, reliability and customer service. Brilliance China Automotive believes that Shenyang Automotive is competitive in all of these respects, and particularly in terms of quality, although Shenyang Automotive has experienced competition in recent years from other manufacturers producing lower priced, mid-range minibuses.

     The Chinese sedan manufacturing industry is also very competitive and fragmented. The top five brands account for 44.4% of the overall market based on unit sales volume in 2006. The market shares of the three leading manufacturers have been decreasing over the past several years. New models are being introduced on an increasingly rapid basis as the number of new entrants into the market has also increased. Unit sales of sedans totaled 3,811,607 units in 2006, making sedans the largest segment of the Chinese automotive market, accounting for 52.8% of the overall market. Due to the implementation of macro-economic polices and austerity measures, the domestic demand for automobiles in China has declined significantly since the second half of 2004. Nevertheless, sedans are widely expected to continue to be the fastest growing segment of the Chinese automobile market over the next few years. However, while vehicle ownership is expected to continue to increase steadily in China as a result of increasing individual disposable income, there is also expected to be increasing pricing pressure as tariff rates decline and competition continues to grow from domestic, foreign and foreign-invested sedan manufacturers.

     Historically, Chinese motor vehicle producers have been exposed to little competition from non-Chinese enterprises, partly as a result of import restrictions on foreign-made components and motor vehicles. However, as a result of China’s accession to the WTO, which regulates trading and tariffs among its signatory states, in November 2001, China committed to reducing its import restrictions on motor vehicles and motor vehicle components. In addition, China will be required to conform its import tariffs to the uniform tariffs under the WTO.

     Effective January 1, 2002, China reduced its import tariffs on motor vehicles and automotive components from between 80% to 100% and between 18% to 40%, respectively, to between 43.8% to 50.7% and between 14.0% to 31.4%, respectively. This range was lowered further to between 4.8% and 25% for automotive components in 2003, between 5.0% and 22.9% in 2004, between 5.0% and 18.6% in 2005, between 5.0% and 14.3% in 2006 and between 5.0% and 10.0% in January 2007. Tariffs on vehicles with nine seats or less and engine sizes of three liters or below fell from 38.2% in 2003 to 34.2% in 2004, while tariffs on vehicles with more than nine seats and engines of more than three liters decreased from 43.0% in 2003 to 37.6% in 2004. In 2005 tariffs have been fixed at 30% of all motor vehicles. These tariff levels were reduced to 28% in January 2006 and further reduced to 25% in July 2006. Such reductions in tariffs and import restrictions could potentially increase the competition Brilliance China Automotive will face from foreign manufacturers.

Shenyang Automotive’s main competitors in the Chinese minibus and sedan market include, but are not limited to, the following:

Minibus

•

Southeast Motors. Southeast Motors is currently 25% owned by Taiwan China Motors, 50% owned by Fujian Provincial Automobile Industry Company and 25% owned by Mitsubishi. Southeast Motors has launched over thirty different models of light passenger vehicles (including minibuses) under the Delica and Freeca brand names and also launched the MPV in 2004. Southeast Motors had an annual production capacity of 60,000 minibuses. According to Qing Xing Che Yao Wen, a publication issued by China’s Light Car Market Analysis Association, Southeast

Motors’ sales volume in 2006 was 7,555 minibuses, representing a 39.0% decrease from 12,381 minibuses in 2005. Delica series includes seven-, eight- and eleven-seat ordinary, luxury and super luxury models and is currently priced between Rmb 79,800 to Rmb 219,800.

	•		Nanjing Iveco. In 1995, Italy’s Fiat Auto Company and Yuejin Group established Nanjing Iveco Automotive Company, Ltd., a 50-50 equity joint venture, for the manufacture of 33 models of five-ton passenger, goods and off-road vehicles in the Iveco S series. Models currently in production include the A30, A40 and A49 passenger vehicles, as well as a separate series of goods vehicles. Nanjing Iveco has an annual production capacity of 60,000 vehicles. According to Qing Xing Che Yao Wen, in 2006, Nanjing Iveco sold 20,060 vehicles, representing an 11.3% increase from 18,018 minibuses in 2005. Its minibuses are currently priced between Rmb 119,000 to Rmb 206,900.
	•		Jiangling Motors. Jiangling Motors Corp. of Jiangxi Province is currently 50% owned by the Ford Motor Company and 50% owned by the Changan Group. Jiangling Motors produced China Transit, a Ford brand minibus, light trucks and pick-ups. At present, China Transit is available in 15-seat, 12-seat and 9-seat versions. According to Qing Xing Che Yao Wen, in 2006, Jiangling Motors sold a total of 23,029 minibuses, representing a 25.9% increase from 18,289 vehicles in 2005. Production capacity was approximately 100,000 per year. Its minibuses are currently priced between Rmb 105,800 to Rmb 177,900.

Zhonghua Sedan

     Brilliance China Automotive considers the following companies to be its main competitors in the market for sedans with engine size between 1.8 liters to 2.0 liters and priced between Rmb 80,000 and Rmb 210,000:

	•		First Auto Works Group of the PRC. First Auto Works is one of the largest automotive companies in the PRC. First Auto Works’ Hongqi sedan was launched in 2001 and is considered one of the PRC government’s showcase PRC-made sedans. Its Hongqi Mingshi is priced at approximately Rmb 159,800 to Rmb 198,800. According to the monthly report issued by China’s Association of National Passenger Vehicle Market Information, First Auto Works sold 10,280 Honqi Mingshi sedans in 2006, representing a 13.8% increase from the 9,036 units in 2005. First Auto Works introduced the Besturn 2.0-liter and 2.3-liter sedans in August 2006, with selling prices from Rmb 151,800 to Rmb 208,800.
	•		Shanghai Volkswagen Automotive. Shanghai Volkswagen Automotive was one of the original state-designed automobile manufacturers in the PRC. It is currently 50% owned by Volkswagen AG of Germany and 50% owned by Shanghai Automotive Industry Corp. It still holds a dominant share of the PRC sedan market and competes with the Zhonghua sedan through the Santana 3000 sedans. The Santana 3000 has a 1.78-liter engine and sells for between Rmb 118,000 to Rmb 149,000. According to the monthly report issued by China’s Association of National Passenger Vehicle

Market Information, in 2006, Shanghai Volkswagen Automotive sold 82,617 units of Santana 3000 sedans representing a 24.9% increase from the 66,152 units in 2005.

•

Beijing Hyundai. Beijing Hyundai was established in 2002 as a 50-50 joint venture between Beijing Auto Investment and Hyundai Motor Co. of South Korea. It currently produces and sells the Sonata 2.0-liter, Sonata 2.5-liter and Sonata 2.7-liter, and the Elantra 1.6-liter and 1.8-liter models. The Sonata 2.0-liter sells for approximately Rmb 149,800 to Rmb 228,000. The Elantra 1.8-liter sedan sells for approximately Rmb 112,800 to Rmb 151,800. According to the monthly report issued by China’s Association of National Passenger Vehicle Market Information, in 2006, Beijing Hyundai sold 37,095 units and 169,716 units of the Sonata 2.0-liter and the Elantra, respectively, representing a decrease of 17.6 % and 3.9 %, respectively, from that of 45,006 and 176,589 respectively, in 2005.

BMW Sedans

     Brilliance China Automotive currently considers the Audi and Mercedes-Benz sedans produced by FAW Volkswagen and Beijing Benz Daimler Chrysler Auto Co. Ltd., respectively, as well as the Japanese imported Lexus sedans to be its closest competitors in the domestic market for high-end luxury cars in terms of quality, craftsmanship, price, performance and technology.

	•		FAW Volkswagen. FAW Volkswagen is 10% owned by Audi AG, 30% by Volkswagen AG and 60% by First Auto Works of China. FAW Volkswagen produces and sells the Audi A4 and A6 sedans and the Volkswagen Jetta and Bora sedans in the PRC. FAW Volkswagen’s Audi sedans have a dominant share of the PRC’s premium sedan market because of its strong sales to the PRC government. FAW Volkswagen sold 45,176 and 61,686 units of Audi A6 sedans in 2005 and 2006, respectively. The Audi A4 sedan was formally launched in the PRC market in 2003 and had a total sales volume of 10,791 and 15,536 in 2005 and 2006, respectively. A new Audi A6 was launched in June 2005. The Audi A4 sedan currently sells for between Rmb 275,400 and Rmb 500,900, and the new Audi A6 sedan sells for between Rmb 347,200 and Rmb 856,300.
	•		Beijing Benz. Beijing Benz Daimler Chrysler Auto Co. Ltd., or Beijing Benz, a 50-50 joint venture between Daimler Chrysler and Beijing Automotive Industry Holding Company, obtained a license to produce the Mercedes-Benz C-Class and E-Class sedans in the PRC in August 2005. Beijing Benz launched its domestically produced models of E280 and E200K in December 2005. These E-Class sedans currently are sold for between Rmb 525,000 and Rmb 648,000 in the PRC. The vehicles are produced in a new facility in Beijing with an initial production capacity of 20,000 units per year. The C-Class sedans currently available for sale in China at Rmb 398,000 are imported. Beijing Benz will commence producing the new C-Class sedan in late 2007.
	•		Lexus. Lexus sedans are imported from Japan by Toyota Motor (China) Investment Co., Ltd. In 2006, the sales volume of Lexus in China was 13,344 units. The new IS and ES models were introduced into the PRC in August 2006 and sales of these two

models in 2007 up to May 2007 reached 5,967 units. The ES350 currently sells for between Rmb 469,000 and Rmb 549,000 and the IS300 currently sells for between Rmb 435,000 and Rmb 479,000.

Governmental Regulation

     The automobile industry in the PRC is controlled at the central government level by the National Development and Reform Commission, or NDRC, and the Ministry of Commerce. These entities were created as a result of the governmental restructuring that commenced in March 2003. The NDRC generally oversees and regulates the automobile industry in the PRC and any new product or new automobile production facility must obtain the prior approval of this body before entering the market. Similarly, approval from the Ministry of Commerce must be obtained prior to any changes to existing products or the expansion of existing facilities. Both of these entities must also approve any Sino-foreign joint venture for the production of automobiles.

     On June 1, 2004, the NDRC issued a new automobile policy to replace the one that had been in place since 1994. Two of the policy’s stated goals are industry consolidation and enhancement of corporate capacity for research and development. To further these goals, the new policy sets minimum levels of investment for new plants and research and development. Engine plant investments are required to be over Rmb 1.5 billion and new automobile manufacturing projects must be over Rmb 2.0 billion. New automobile projects must also include a product research and development investment of at least Rmb 500 million.

     In contrast to the old regulations, foreign investors in the automobile and motorcycle market will now be allowed to control more than 50% of a joint venture with the PRC partners if the joint venture is located in an export processing zone and plans to sell its products in overseas markets. The new policy will also allow foreign investors to establish more than two joint venture plants in the PRC to produce the same categories of vehicles if they do so with their existing PRC partners through acquisitions of other companies in the PRC.

     The new policy acknowledges the success of the PRC’s automobile industry and seeks to encourage this “pillar industry” to foster further growth, particularly of domestically produced and branded products and research and development, through consolidation of smaller, less-efficient manufacturers and increased foreign and domestic investment. In addition, the policy aims to centralize or reorganize certain automobile-related sectors, such as consumer loan services, to reduce overhead and administrative burdens on the industry and allowing industry participants to focus on their core businesses.

     By encouraging industry consolidation and establishing clearer guidelines for foreign investment, the policy, in the opinion of Brilliance China Automotive, encourages existing players in the industry to grow and provides incentives for targeted investment from both domestic and foreign sources. Certain implementing regulations have been promulgated and more such regulations are expected to be promulgated by the NDRC in the future.

     On February 28, 2005, the General Administration of Customs, the NDRC, the Ministry of Finance and the Ministry of Commerce jointly issued the Administrative Measures on the Import of Automobile Parts with Complete Vehicle Characteristics. This measure sets up detailed standards and procedures of the identification of automobile parts with complete vehicle characteristics and treats automobile parts with complete vehicle characteristics, which include semi-knocked down kits, as complete vehicle imports and imposes vehicle import tariffs instead of component tariffs on them. Current vehicle import tariff level is 25% whereas current component tariff levels are between 5% and 10%.

     On April 1, 2006, the State Administration of Taxation of the PRC, in an effort to encourage environmental protection and fuel efficiency, re-adjusted consumption tax rates on passenger vehicles (including imported vehicles). Before the re-adjustment, the consumption tax rate for passenger vehicles was a three-tiered system: 3% for automobiles with engine displacement lower than 1.0 liter; 5% for automobiles with engine displacements between 1.0 liter and 2.0 liters, and 8% for automobiles with engine displacements above 2.0 liters. After the re-adjustment, tax rates on vehicles with smaller engines (under 2.0 liters) either fell or remained unaltered, whereas tax rates on automobile with larger engines were raised. The new tax rates are: 3% for 0.0-1.5 liters; 5% for 1.51-2.0 liters; 9% for 2.01-2.5 liters; 12% for 2.51-3.0 liters; 15% for 3.01-4.0 liters; and 20% for above 4.0 liters.

     On December 26, 2006, the NDRC issued a circular to assess the current PRC automobile industry and developments since the 2004 policy. Consistent with the 2004 policy, the NDRC continues to stress the importance of stable growth and preventing overcapacity in the automobile industry, and to encourage industry consolidation and reorganization among sectors, in particular the components sector. The NDRC also encouraged more research and development be focused on new products, such as environmental friendly models, in order to enhance and upgrade domestic products. The NDRC also imposed, among other things, a requirement that annual sales of automobile manufacturers in China must reach certain levels in order for them to build new manufacturing plants.

Quality Control

     As a result of technical and managerial training from Toyota and technical assistance from BMW, Shenyang Automotive has adopted a highly regimented production quality management system for its minibuses and sedans. This two-fold system concentrates both on the quality of the raw materials and other production inputs and on the production process itself. In the production process, the focal point of quality control is the production line worker, who undergoes extensive training and testing to ensure that he or she performs the assigned task to the highest quality standards and is qualified and able to determine on his or her own whether or not the product meets the required specifications. In addition, Shenyang Automotive’s specialized quality control engineers are present at each step of the production process, with 16, 16 and 12 separate quality inspection points for Hiase minibuses, the Granse minibuses and Zhonghua sedans, respectively.

     In addition, Shenyang Automotive has established a quality improvement unit to supervise and monitor after-sales service centers in major regional sales bases, such as Guangzhou, Shanghai and Beijing, which also serve as channels for information feedback on

product quality. Designated personnel are assigned to follow-up on finding remedies for recurring quality issues in a timely manner.

     Shenyang Automotive was granted the internationally recognized ISO-9001-94 quality system certificate in October 1995, making it the first major automobile manufacturer in China to be awarded such certificate. Shenyang Automotive has successfully obtained recertification in each subsequent year by demonstrating a continued commitment to upholding among the highest quality standards in China’s automobile industry. Since the second half of 2006, Shenyang Automotive has applied the TS16949 quality system introduced by the international automobile industry for the major automobile components, replacing the QS9000 and VAD6.1 accreditations (which are not specific to the automobile industry) it previously had. By applying the TS16949 system, Shenyang Automotive believes that its products will be further recognized in the international markets. To date, approximately 256 of Shenyang Automotive’s over 280 component suppliers have achieved TS16949 certification and approximately 33 are accredited by ISO-9000.

After-Sales Service

     In 2006, Shenyang Automotive’s minibuses were sold with a 24-month or 50,000 kilometers (18-month or 30,000 kilometers for minibuses sold in 2002 and 2001) first-to-occur limited warranty. The Zhonghua sedans were sold with a 36-month or 60,000 kilometers (24-month or 40,000 kilometers for sedans sold in 2002) first-to-occur limited warranty. In addition to these basic limited warranties, during 2003 Shenyang Automotive also offered customers a broader warranty for its Zhonghua sedans. During the warranty period, Shenyang Automotive pays service stations for parts and labor covered by the warranty; thereafter, customers must pay for all parts and labor. Since December 2004, Zunchi sedans were sold with a 10-year or 200,000 kilometers first-to-occur limited warranty on key components. In 2006, Junjie sedans were sold with a 36-month or 60,000 kilometers first-to-occur limited warranty. In 2006, total warranty costs for minibuses and sedans sold during the year were approximately Rmb 19.2 million (US$2.5 million) and Rmb 23.0 million (US$2.9 million), respectively.

     There are approximately 390 and approximately 220 service centers for Shenyang Automotive minibuses and sedans, respectively, throughout China, with centers clustered in areas that match distribution patterns of the vehicles. Such centers have been granted authority by Shenyang Automotive to service its minibuses and sedans, including the provision of repair services and the sale of spare parts. This extensive service network has enabled Shenyang Automotive to adopt its current policy of resolving routine customer complaints in all provincial capitals and major cities within 24 hours and major problems within three days.

     To improve customer service, Shenyang Automotive continually reevaluates its existing distributors based on certain criteria, including financial soundness, customer service capabilities and customer complaint record. Shenyang Automotive has also implemented a more advanced “4S” sales center system, with sales, service, spare parts and survey offered by the same dealership outlet. As of the end of 2006, Shenyang Automotive had approximately 70 and approximately 100 4S dealership outlets for its minibuses and sedans, respectively.

     BMW Brilliance currently has over 70 distributors, which are mainly located in first tier cities in China. The number of distributors is expected to increase to over 90 by the end of 2007. Like Shenyang Automotive, BMW Brilliance has implemented the more advanced 4S sales center system.

Environmental Matters

     The Chinese government has set vehicle safety, exhaust and performance standards with which Shenyang Automotive and BMW Brilliance must comply. Brilliance China Automotive believes that Shenyang Automotive’s and BMW Brilliance’s minibuses and sedans currently meet the standards imposed by the government. Their respective facilities are subject to government pollution regulations enforced by the Shenyang municipal government. If operations are found to be in violation, the government will allow a period of time to remedy the problem. If it should fail to do so, the government can force a shutdown of Shenyang Automotive’s or BMW Brilliance’s operations until such time as the violator complies with the regulations. To date, neither Shenyang Automotive nor BMW Brilliance has been cited as violating a government pollution regulation.

     On January 1, 2000, the cities of Beijing and Tianjin, as well as Yunnan Province, put into effect emission standards that were significantly stricter than the then prevailing gasoline vehicle emission standards. Since then, these emission standards have been adopted nationwide. Shenyang Automotive’s electronic fuel injection minibus, introduced in 1999, passed the emission standards tests at the China National Automobile Testing Center in Tianjin in October 1999. In 2001, Shenyang Automotive began to install multiple electronic fuel injection engines, which are currently used in all of Shenyang Automotive’s mid-priced minibuses. With the installation of this engine in the mid-priced minibus, currently all of Shenyang Automotive’s minibuses meet European II emission standards. All Zhonghua and BMW sedans also meet these emission standards. In 2004, the Chinese government began to encourage its vehicle manufacturers to meet the European III standards. In 2006, nearly all the Zhonghua sedans, Granse minibuses, Hiase minibuses and BMW sedans currently meet the European III emission standards. It is expected that these Zhonghua sedans, Granse minibuses and Hiase minibuses will meet the European IV emission standards in June 2008.

Insurance

     Shenyang Automotive currently hold insurance policies that Brilliance China Automotive believes are customary and standard for companies of comparable size in comparable industries in China. Shenyang Automotive does not carry product liability insurance, and Brilliance China Automotive believes it is customary and standard in the Chinese automobile industry for manufacturers not to carry product liability insurance. BMW Brilliance has elected to purchase product liability and other insurance in order to conform with BMW’s worldwide standards. Brilliance China Automotive does not carry any business interruption insurance.

Organizational Structure

     The following table lists information concerning the subsidiaries, jointly controlled entities and associated companies of Brilliance China Automotive as of December 31, 2006:

						Effective
						Interest held by
		Jurisdiction of				Brilliance China
Name of Companies		Incorporation				Automotive
Subsidiaries
Shenyang Brilliance JinBei Automobile Co., Ltd.		China					51.0	%
Ningbo Yuming Machinery Industrial Co., Ltd.		China					100.0	%
Shenyang XingYuanDong Automobile Component Co., Ltd.		China					100.0	%
Shenyang Jianhua Motors Engine Co., Ltd.		China					60.8	%
Ningbo Brilliance Ruixing Auto Components Co., Ltd.		China					100.0	%
Mianyang Brilliance Ruian Automotive Components Co., Ltd.		China					100.0	%
Shenyang JinBei Automotive Industry Holdings Company Ltd.		China					99.0	%
Shenyang XinJinBei Investment and Development Co., Ltd.		China					100.0	%
Shenyang Brilliance Dongxing Automotive Component Co., Ltd.		China					100.0	%
Shenyang Jindong Development Co., Ltd.		China					75.5	%
Shenyang Chenfa Automobile Component Co., Ltd.		China					100.0	%
Shanghai Hidea Auto Design Co., Ltd.		China					63.3	%
Shenyang Brilliance Power Train Machinery Co., Ltd.		China					75.0	%
China Brilliance Automotive Components Group Limited		Bermuda					100.0	%
Southern State Investment Limited		BVI					100.0	%
Beston Asia Investment Limited		BVI					100.0	%
Pure Shine Limited		BVI					100.0	%
Key Choices Group Limited		BVI					100.0	%
Brilliance China Automotive Finance Ltd.		BVI					100.0	%
Brilliance China Finance Limited		BVI					100.0	%
Jointly Controlled Entities
Mianyang Xinchen Engine Co., Ltd.		China					50.0	%
Shenyang Xinguang Brilliance Automobile Engine Co., Ltd.		China					50.0	%
BMW Brilliance Automotive Ltd.		China					49.5	%
Associated Companies
Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co., Ltd.		China					12.8	%
Shenyang JinBei Vehicle Dies Manufacturing Co., Ltd.		China					48.0	%

Property, Production Facilities and Equipment

     The Shenyang municipal government granted to Shenyang Automotive the right to use three parcels of land situated in the northern, eastern and western sectors of Shenyang with a total area of approximately 960,000 square meters, approximately 90% of which is currently utilized by Shenyang Automotive and BMW Brilliance. These land use rights will expire in 2021.

     The western parcel consists of 66,000 square meters, 40,000 square meters of which is occupied by a mid-priced minibus production facility for stamping out parts. This facility is currently utilized to produce a small number of special purpose minibuses and can also be used to produce components as well.

     The northern parcel covers 40,000 square meters and is used by Shenyang Automotive primarily for parts production.

     The eastern parcel covers 854,000 square meters, including Shenyang Automotive’s and BMW Brilliance’s production facilities. Shenyang Automotive’s minibus facility currently has a production capacity of 80,000 minibuses per year (based on two shifts) and 120,000 minibuses (based on three shifts). This facility is specially designed for the manufacture and assembly of minibuses and consists of four workshops. The stamping and assembly workshops for minibuses currently have annual production capacities of 80,000 and 90,000 units, respectively, based on two shifts of workers, and can be increased to 120,000 units based on three shifts. The welding and painting workshops currently have annual production capacities of 120,000 units, based on two shifts of workers.

     In 2003, Shenyang Automotive completed the construction of new manufacturing facilities for sedans (including the Zhonghua sedan), which has a production capacity of 100,000 units, based on two shifts per day, and 130,000 units, based on three shifts per day. The new manufacturing facilities are located adjacent to Shenyang Automotive’s previously existing minibus production facilities in the eastern parcel and include new pressing, welding, painting and final assembly lines. Dies and other key production equipment were purchased from leading European equipment manufacturers for the Zhonghua sedan. The total costs for completion of this expansion project were approximately US$250.0 million, including new equipment, construction costs and other expenditures, but excluding the design costs for the sedans. See “Item 5 — Operating and Financial Review and Prospects — Liquidity and Capital Resources.”

     Certain workshops in these new sedan manufacturing facilities are currently shared with BMW Brilliance, including part of a welding workshop for the BMW sedans, all of the painting facilities, and part of the Zhonghua sedan assembly shop, which is currently used by BMW Brilliance to test BMW sedans.

     Shenyang Automotive has transferred legal titles and ownership of certain buildings in its eastern parcel to BMW Brilliance for use in the production of BMW sedans. The agreement also states that BMW Brilliance will lease back a substantial portion of those buildings to Shenyang Automotive. BMW Brilliance also has the option to require Shenyang Automotive to purchase back such buildings at the purchase price less depreciation upon the occurrence of certain events, including the passing of a valid resolution pursuant to the joint venture contract by the board of directors of BMW Brilliance. For financial reporting purposes, the buildings were retained as fixed assets on the balance sheet of Brilliance China Automotive and the portion of consideration received from BMW Brilliance is treated as a financing and will be partially offset against the lease rental payable in future years.

     In December 2003, BMW Brilliance purchased certain machinery and equipment from Shenyang Automotive for use in the production of BMW sedans. The agreement of sale includes an option for BMW Brilliance to require Shenyang Automotive to purchase back such machinery and equipment at the purchase price less depreciation upon the occurrence of certain events, including the passing of a valid resolution pursuant to the joint venture contract by the board of directors of BMW Brilliance. This machinery and equipment is maintained by BMW Brilliance for the manufacturing of its products, as well as to provide certain services to Shenyang

Automotive upon the payment of a service fee, which is a predetermined fixed charge per unit based on the number of Zhonghua sedans produced by Shenyang Automotive using this machinery and equipment.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     The following discussion should be read in conjunction with the rest of this annual report, including the consolidated financial statements and notes thereto contained elsewhere in this annual report. The results discussed below are not necessarily indicative of the results to be expected in any future periods.

Overview

     Brilliance China Automotive is a holding company. Prior to 2002, Brilliance China Automotive’s operating segment consisted solely of the manufacture and sale of minibuses and automotive components through its subsidiaries and associated companies within China. No separate financial information and segment information was disclosed. In 2002 and 2003, Brilliance China Automotive began manufacturing and selling Zhonghua sedans and BMW sedans through Shenyang Automotive and BMW Brilliance, respectively, which are managed separately because each of them represents a strategic business unit that serves a different market in the PRC automobile industry. Therefore, Brilliance China Automotive’s reportable operating segments consist of (1) the manufacture and sale of minibuses and automotive components, (2) the manufacture and sale of Zhonghua sedans and (3) the manufacture and sale of BMW sedans. The accounting policies of each operating segment are the same. Brilliance China Automotive evaluates performance based on stand-alone operating segment net income and generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Brilliance China Automotive’s activities are conducted predominantly in China. Accordingly, no geographical segmentation analysis is provided.

     Prior to May 1998, Brilliance China Automotive’s sole operating asset was its interest in Shenyang Automotive. As a result, Brilliance China Automotive’s historical results of operations had been primarily driven by the sales price, sales volume and cost of production of Shenyang Automotive’s minibuses. With a view to maintaining quality, ensuring a stable supply of certain key components and developing new businesses and products, Brilliance China Automotive acquired interests in various suppliers of components and established joint ventures in China since May 1998. As a result of these additional investments and joint ventures, Brilliance China Automotive’s income base has since broadened and its future financial performance is driven by the sales of numerous vehicles and components in addition to those produced by Shenyang Automotive.

     In May 1998, Brilliance China Automotive acquired indirect interests in two components suppliers: (1) a 51% equity interest in Ningbo Yuming Machinery Industrial Co., Ltd., a wholly foreign-owned Chinese enterprise primarily engaged in the production of automobile window molding, stripping and other auto components; and (2) a 50% equity interest in Mianyang Xinchen Engine Co., Ltd., a Sino-foreign joint venture manufacturer of gasoline engines for use in passenger vehicles and light duty trucks. On October 19, 2004, Brilliance China Automotive,

through a subsidiary, entered into an agreement to acquire the remaining 49% interest in Ningbo Yuming. With the approval of the acquisition by the government on November 25, 2004, Ningbo Yuming became a wholly owned subsidiary of Brilliance China Automotive.

     In October 1998, June 2000 and July 2000, Brilliance China Automotive established Shenyang XingYuanDong Automobile Component Co., Ltd., Ningbo Brilliance Ruixing Auto Components Co., Ltd. and Mianyang Brilliance Ruian Automotive Components Co., Ltd., respectively, as its wholly owned subsidiaries to centralize and consolidate the sourcing of auto parts and components for Shenyang Automotive. In 2001, in order to maintain their preferential tax treatment from the Chinese government, all three companies began manufacturing automotive components as well.

     In December 2000, Brilliance China Automotive acquired a 50% equity interest in Shenyang Xinguang Brilliance Automobile Engine Co., Ltd., a Sino-foreign equity joint venture manufacturer of gasoline engines for use in passenger vehicles. In December 2001, Brilliance China Automotive acquired a 100% equity interest in Shenyang Brilliance Dongxing Automotive Component Co., Ltd., a foreign-invested manufacturer of automotive components in China.

     In May 2002, Shenyang Automotive obtained the approval from the Chinese government to produce and sell its Zhonghua sedans in China. The Zhonghua sedans were launched in the market in August 2002. In March 2006, a new model of the Zhonghua sedan, Junjie, was launched in the market.

     On March 27, 2003, Brilliance China Automotive, through its indirect subsidiary, Shenyang JinBei Automotive Industry Holdings Co., Ltd., or SJAI, entered into a joint venture contract with BMW Holding BV to produce and sell BMW-designed and branded sedans in China. The registered capital and total investment cost of the joint venture was Euro 150 million and Euro 450 million, respectively. At that time, Brilliance China Automotive’s effective interests in SJAI and the joint venture with BMW were 81% and 40.5%, respectively. On April 28, 2003, Brilliance China Automotive increased its effective interest in SJAI from 81% to 89.1% and thereby increased its effective interest in the joint venture with BMW from 40.5% to 44.6%. On December 16, 2003, Brilliance China Automotive further increased its effective interest in SJAI from 89.1% to 99.0% and thereby increased its effective interest in the joint venture with BMW from 44.55% to 49.5%.

     On December 29, 2003, Brilliance China Automotive entered into agreements in relation to the proposed acquisition of an indirect 40.1% interest in Shenyang JinBei Automotive Company Limited, the joint venture partner of Shenyang Automotive and a supplier of automotive components for Brilliance China Automotive’s minibuses and sedans. JinBei is an A-share company listed on the Shanghai Stock Exchange. As a result of JinBei’s recent share reform, which took place in August 2006, all issued shares of JinBei were converted into tradable shares on the Shanghai Stock Exchange. Brilliance China Automotive’s prospective 40.1% interest in JinBei consequently was reduced to 33.1%. Upon obtaining the approvals from the relevant government authorities and completion of the proposed acquisition, Brilliance China Automotive’s effective interest in Shenyang Automotive will increase from 51% to approximately 63.9%.

     On November 28, 2003, Brilliance China Automotive, through its wholly owned subsidiary, Brilliance China Automotive Finance Ltd., issued an aggregate principal amount of US$200.0 million (equivalent to approximately Rmb 1,654.3 million at the time of issue) zero coupon convertible bonds due 2008. These bonds are guaranteed by Brilliance China Automotive and are convertible into fully paid ordinary shares with a par value of US$0.01 of Brilliance China Automotive at an initial conversion price of HK$4.60 per share at any time from January 8, 2004 to November 14, 2008, unless the bonds have previously been redeemed or matured. Brilliance China Automotive Finance Ltd. may redeem a portion of the convertible bonds in certain circumstances at the early redemption amount (as defined in the Trust Deed constituting the bonds) during the period from November 28, 2005 to November 14, 2008. In addition, all or some of the bonds may be redeemed at the option of the holder at 102.27% of their principal amount on November 28, 2006 and upon certain events, such as the change of control of Brilliance China Automotive or the shares of Brilliance China Automotive ceasing to be listed on The Stock Exchange of Hong Kong Limited, the bonds may be redeemed at the option of the holder at the early redemption amount (as defined in the Trust Deed constituting the bonds). These bonds rank equally with all of Brilliance China Automotive’s senior, unsecured and unsubordinated obligations. As of December 31, 2006, all of the outstanding bonds had been repurchased or redeemed. Total consideration for the repurchase and redemption amounted to approximately US$202.5 million.

     On June 7, 2006, Brilliance China Automotive, through its wholly owned subsidiary, Brilliance China Finance Limited (formerly known as Goldcosmos Investments Limited), issued zero coupon guaranteed convertible bonds due 2011 with an aggregate principal amount of approximately US$183.0 million (equivalent to approximately Rmb 1,460.8 million at the time of issue). These bonds are guaranteed by Brilliance China Automotive and are convertible by the holders into fully paid ordinary shares with a par value of US$0.01 of Brilliance China Automotive at an initial conversion price of HK$1.93 per share at any time from July 6, 2006 to May 8, 2011, unless the bonds have previously been redeemed or matured. Brilliance China Finance Limited may redeem the convertible bonds in whole but not in part in certain circumstances at the early redemption amount (as defined in the Trust Deed constituting the bonds) during the period from June 7, 2008 to May 8, 2011. In addition, each holder will have the right, at the option of the holder, to redeem in whole but not in part the convertible bonds at 122.926% of their principal amount on June 7, 2009. Unless previously redeemed, converted or purchased and cancelled, the convertible bonds will be redeemed at 141.060% of their outstanding principal amount on June 7, 2011. As of December 31, 2006, none of the bonds had been repurchased, redeemed or converted into ordinary shares of Brilliance China Automotive.

Production Volumes and Sales

     Brilliance China Automotive derives its revenues from the sale of minibuses, sedans and automotive components in China. Total sales for the years ended December 31, 2006 and 2005 was Rmb 10,484.8 million and Rmb 5,469.0 million, respectively. The increase in sales was primarily due to increase in unit sales of Shenyang Automotive’s minibuses and, especially, Zhonghua sedans in 2006.

     The mid-priced minibus continues to be one of Brilliance China Automotive’s most popular and competitive products. Despite increasing competition in China’s automobile

industry, Brilliance China was able to maintain its position as the market leader in the minibus market in 2006. Sales of deluxe minibuses, mid-priced minibuses, Zhonghua sedans and components represented 13.9%, 28.8%, 49.5% and 7.8%, respectively, of Brilliance China Automotive’s total sales revenue in 2006. Brilliance China Automotive expects that the minibuses, together with the Zhonghua sedans, will continue to represent a significant proportion of its total revenue.

Costs and Expenses

     The major elements of Shenyang Automotive’s production costs in recent years have been the purchase of automotive components, labor and depreciation and amortization. Shenyang Automotive has significantly lowered its per unit production costs by improving operating efficiency, increasing production volume and increasing the domestic component content ratios of its deluxe and mid-priced models. As a result, average per unit production costs (including depreciation and amortization) for the deluxe model have been steadily decreasing over the past several years. The domestic component ratio of the Zhonghua sedans also increased from 60% in August 2002 to its current level of over 90%.

     In 2006, per unit production costs for minibuses remained relatively stable. The average per unit production costs for the Zhonghua sedans decreased by approximately 39.1% mainly due to an improvement in production efficiency and economies of scale together with a decrease in cost of components in 2006. Due to the intensified price competition brought about by the significantly weakened market and the change in product mix, the average selling prices of minibuses and Zhonghua sedans decreased in 2006 by an average of 2.8% and 14.9% respectively, compared to those in 2005. Gross profit increased from Rmb 457.0 million (US$56.6 million) in 2005 to Rmb 524.2 million (US$67.2 million) in 2006 as a result of an increase in unit sales of Shenyang Automotive’s minibuses, and especially Zhonghua sedans, and a decrease in the average unit costs for both the minibuses and Zhonghua sedans.

     Imported components are generally more expensive than domestically produced components and were subject to import duties that have ranged as high as 120% since January 1992. However, as a result of China’s accession to the WTO in November 2001, import duties on automotive components decreased to between 14% and 31.4% in 2002, between 4.8% and 25% in 2003, between 5% and 22.9% in 2004, between 5% and 18.6% in 2005, between 5% and 14.3% in 2006 and between 5% and 10.0% in 2007. In 2004, Shenyang Automotive paid an average tariff of 13.8% and 10.5% on its minibus (including Granse minibus) and sedan components, respectively. In 2005, Shenyang Automotive was subject to an average tariff rate of 9.7% and 12.1% on imported components used in its deluxe minibuses (including Granse minibuses) and Zhonghua sedans, respectively. In 2006, the average tariffs were reduced to 8.2% and 10.4% on imported components for deluxe minibuses and Zhonghua sedans, respectively. Shenyang Automotive intends to continue its efforts to increase the domestic component content of its products, while at the same time maintaining quality. However, Brilliance China Automotive expects that future improvements in domestic component content for its existing mid-priced and deluxe minibuses (other than the Granse model) will be at a rate slower than in prior years due to an already high domestic component content ratio, and the extent and rate of any corresponding price reductions are expected to be lower than in prior years. Brilliance China

Automotive expects to increase the ratio of domestic components in the Granse minibus and the Zhonghua sedan. Brilliance China Automotive also expects BMW Brilliance to increase the domestic components ratio in its BMW sedans. However, given the sophisticated technology associated with BMW Brilliance’s products as well as the relatively small production volume achieved to date, there is no guarantee that BMW Brilliance will be able to meet the required local content level, or that final approval for tariff reduction will be granted by the government.

Results of Operations

		Year ended December 31,
		2006				2005				2004
		(Rmb thousands)
Sales to third parties			9,067,505				3,859,151				4,402,141
Sales to affiliated companies			1,417,249				1,609,839				2,139,857
Total sales			10,484,754				5,468,990				6,541,998
Cost of sales			(9,960,587	)			(5,011,955	)			(5,491,250	)
Gross profit			524,167				457,035				1,050,748
Selling, general and administrative expenses			(1,384,718	)			(1,195,336	)			(1,510,442	)
Interest expense			(177,001	)			(182,354	)			(182,458	)
Interest income			90,738				60,189				58,800
Equity in earnings of associated companies and jointly controlled entities, net			149,320				48,995				126,261
Subsidy income			50,176				3,139				1,815
Other income, net			106,150				43,650				25,709
Impairment loss on intangible assets			—				(173,000	)			(50,000	)
Impairment loss on goodwill(1)			(73,343	)			(257,720	)			(47,320	)
(Loss) before taxation and minority interests			(714,511	)			(1,195,402	)			(526,887	)
(Provision) benefit for income taxes			(47,879	)			(101,884	)			63,110
Minority interests			376,282				625,997				464,991
Net (loss) income			(386,108	)			(671,289	)			1,214