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5. Schaeffler AG Business Report FY ended Dec. 2019

Schaeffler AG Business Report FY ended Dec. 2019

Factors
1) Net Sales
-In the fiscal year ended December 31, 2019, the Company’s sales increased by 1.3% from the previous year to EUR 14,427 million. Excluding positive currency translation effects, sales increased by 0.1% over the previous year. The Company’s increased sales in its Industrial division supported declining sales in the Automotive OEM division due to decreased prices, and the Automotive Aftermarket division due to decreased volumes.

2) EBIT
-The Company’s EBIT declined by 41.7% in the fiscal year ended December 31, 2019 to EUR 790 million. A primary contributing factor to the decrease in earnings is the negative effect of special items during the 2019 fiscal year, decreasing sales by EUR 372 million compared to a decrease of EUR 27 million in the year before. Expenses in the category included downsizing of the Company’s workforce, adjusting capacity of non-current assets, and restructuring of the Company’s business activities. Increased cost of sales combined with a negative impact of selling prices and change in product mix was another factor for the decrease in earnings.

3) Automotive OEM Division sales
-Sales in the Company’s Automotive OEM division in the fiscal year ended December 31, 2019 totaled EUR 9,038 million, an increase of 0.5% over the previous year. Excluding currency effects, sales decreased by 0.8%. Sales were mixed across the Company’s operating regions, though overall the market reflected weakness. Sales decreased by 5.8% in Europe due to a decrease in production. Sales in the Americas increased by 11.1% due to increased demand from product ramp-ups. In China, despite declining production overall, the Company’s sales in the region grew by 2.6% due to product ramp-ups in the second half of the year. Sales in the Asia-Pacific region increased by 0.9% even as vehicle production fell in the region.

4) Automotive OEM Division EBIT
-EBIT for the Company’s Automotive OEM division decreased by 57.4% from the previous year to EUR 282 million in the fiscal year ended December 31, 2019. The decrease in earnings was primarily due to a decline in gross margin combined with the one-time negative effect of certain special items, specifically related to the RACE workforce downsizing program. Increased administrative expenses and negative foreign currency effects also contributed to the decline.

5) Engine Systems sales 
-The Engine Systems business division increased by 0.4% to EUR 2,793 in the fiscal year ended December 31, 2019. Excluding currency effects, sales in the division decreased by 1.0%. Increased sales of thermal management modules and camshaft phasing units were partially offset by decreased sales in other product groups.

6) Transmission Systems sales
-In the fiscal year ended December 31, 2019, the Transmission Systems business division had sales of EUR 4,006 million, a 3.9% decrease from the previous year. Excluding currency translation effects, sales decreased by 5.5%. While sales of components for automated transmissions increased, the decreased sales for manual transmission components offset those gains.

7) E-Mobility sales
-The new E-Mobility business division had sales of EUR 676 million in the fiscal year ended December 31, 2019, an increase of 37.3% versus the previous year. Factors contributing to the division’s growth include product ramp-ups of components in CVTs, actuators and wet double clutches.

8) Chassis Systems sales
-The Company’s Chassis Systems business unit had sales of EUR 1,563 million in the fiscal year ended December 31, 2019, an increase of 0.5% from the previous year. Excluding currency translation effects, sales in the business division decreased by 0.3%. Within the division, sales of chassis actuators and wheel bearings performed particularly well.

Acquisitions

-The Company concluded a purchase agreement for the acquisition of XTRONIC GmbH based in Boeblingen. The acquisition is due to be completed in June 2019 after all closing conditions have been met. XTRONIC will be integrated into the Company as an independent entity. Its focus will continue to be on external customer relationships as well as on developing and offering solutions within the Company. XTRONIC develops customer-specific software and electronic solutions for the international automotive industry. The medium-sized, owner-managed company employs around 170 people at its Boeblingen and Wolfsburg sites. Its service portfolio includes applications ranging from automated driving and electromobility to functional safety as well as methods, tools and test systems. (From a press release on May 7, 2019)

Restructuring

-The Company has signed an agreement with the management team of Schaeffler Friction Products Hamm GmbH under which the management of Schaeffler Friction Products Hamm will take over the ownership of the company. The resulting new company will be named INNO FRICTION GmbH. The management buyout will save all 110 jobs at the location. Schaeffler Friction Products Hamm currently makes carrier plate-type friction linings for dry dual-clutch systems for customers including the Company. At its peak, production of the linings accounted for about 60% of the company’s revenues, though recently there has been a sustained and significant fall-off in demand. While the remaining production capacity for friction linings for dual-clutch systems at the Hamm location is expected to be phased out by 2020-2021, the company’s management teams sees further development and growth potential in the industrial sector. (From a press release on July 1, 2019)

Business Partnership

-The Company and ABT e-Line GmbH established a strategic collaboration for the electrification of light commercial vehicles weighing up to 3.5 tons. ABT e-Line is a 100% subsidiary of ABT Holding that, as a premium partner to Volkswagen Commercial Vehicles, has been commissioned to fully electrify light commercial vehicles including the T6 and Caddy models. ABT e-Line also bears customer responsibility for the electric powertrain, including the warranty. The Company will develop and supply technological solutions for the electric powertrain. In the initial phase, the Company will collaborate with VW and ABT on project management - from concept through to homologation - and on system supplier management. An additional objective is to develop flexible mechatronic chassis solutions. In the medium term, the Company sees potential for further orders and for small and medium-sized production volumes in the commercial and special vehicle sectors. (From a press release on December 3, 2019)

Contracts

-The Company supplies two electric axle drive products to Audi’s e-tron battery electric SUV, which has already started production. The two products will be mated to front and rear motors, respectively to support Audi’s Quattro electric AWD system. The rear electric axle drive adopts a coaxial design that is able to produce maximum power within a limited space. The front electric axle drive features an electric parking brake system and adopts a parallel-axle design. Both electric axle drives have an axial length of 150mm, weigh less than 15kg and can allow an input torque of 400Nm. (From a press release on December 13, 2019)

-The Company is supplying its modular hybrid transmission for the 2020 Ford Explorer, Police Interceptor Utility, and the 2020 Lincoln Aviator, all produced at Ford’s Chicago Assembly Plant. As one of the Company’s latest E-Mobility technologies, the modular hybrid transmission enables hybridization for the SUV, truck and off-road vehicle segments, while providing more power and torque. "By 2020, Schaeffler will have invested more than EUR 500 million in research, development and production of electric drive units to ensure we're able to provide our customers with solutions for their next-generation needs," said Marc McGrath, CEO Schaeffler Americas. Manufactured at the Company’s recently expanded Wooster, Ohio campus, the U.S. center for the Company's advanced E-Mobility development, the modular hybrid transmission offers the following drive modes: ICE (internal combustion engine) drive; electric drive; ICE + e-drive for max performance; and recuperation. (From a press release on November 5, 2019)

-The Company announced its E-Mobility business division secured a contract valued at EUR 1.1 billion from a global premium manufacturer related to the production of electric motors in the second quarter of 2019. In addition, the division’s RACE efficiency program, launched at the start of the year, is currently in its first phase of implementation. (From a press release on July 29, 2019)

Recent Developments

-The Company announced that its joint venture Schaeffler Paravan Technologie GmbH & Co. KG is increasingly focusing on technologies such as Space Drive that are licensed for road use and comply with stringent functional safety regulations. The start of volume production of this system is planned for 2021. It has also started specific projects with numerous customers who will implement the components used in the Schaeffler Mover, such as the Schaeffler Intelligent Corner Modules and Space Drive. At the beginning of September, the Company signed an investment agreement with China’s Hunan province in a move aimed at supporting and facilitating autonomous driving in China using the Company’s technologies. The Company is planning a new R&D facility in Hunan province. (From a press release on October 31, 2019)

-The Company’s subsidiary, Schaeffler India Limited announced the opening of a new corporate office in Pune, India. The new office will consolidate all corporate and sales functions and serve as India headquarters. Following the completion of the merger of LuK, INA and FAG in India, the new office is a key milestone towards integrating and establishing a singular entity. (From a press release on September 3, 2019)

-During its investor presentation, the Company’s Schaeffler India operations announced its future plans. The company is developing solutions to support BS VI, e-mobility and Industry 4.0. The construction of new building at Savli plant is progressing on schedule and is expected to complete in 2019. The company has also started two brand new distribution centers and two consolidated sales offices post merger. (From Schaeffler India Investor Presentation on July 24, 2019)

-The Company announced the RACE program, which is designed to sustainably increase the Automotive OEM division’s efficiency and optimize its portfolio. The abbreviation RACE stands for “Regroup Automotive for higher Margin and Capital Efficiency”. RACE consists of three stages. As part of the first stage, the division plans to further consolidate its European plant network. This will likely affect five European locations where the Automotive OEM division maintains production sites. Presently, the Company anticipates that these changes will result in a reduction of approximately 900 positions, including 700 positions in Germany. The R&D ratio (R&D expenditures as a percentage of sales) of the Automotive OEM division will be restricted to 8% to 8.5% in 2019 and 2020 taking into account IFRS 15. Furthermore, capital expenditure for the same period will be limited to no more than EUR 900 million per year. Finally, the division will increase its order intake in the E-Mobility and chassis mechatronics units to EUR 1.5 to 2 billion per year over the next three years. (From a press release on March 6, 2019)

Outlook

-For the fiscal year ending in December 31, 2020, the Company expects its sales to remain level or decline by up to 2%, excluding the effects of currency translation. Furthermore, it expects to have an EBIT margin before special items between 6.5% and 7.5%.

R&D Structure

-During the fiscal year ended December 31, 2019, the Company had an average of 7,834 employees working in research and development.

R&D Facilities

-As of December 31, 2019, the Company has 20 research and development facilities distributed as follows:

• Europe: 10 centers
• Americas: 5 centers
• Greater China: 1 center
• Asia-Pacific: 4 centers

-The Company will build a new R&D center and a lab specialized in autonomous driving vehicles in the XiangJiang New Area, Hunan. The lab will be the Company’s second research and development center in China. (From media reports on September 9, 2019)

R&D Activities

-The Company will accelerate R&D in Japan. In a bid to enhance its R&D, the Company’s Japanese subsidiary, Schaeffler Japan Co., Ltd., will develop concept cars equipped with electrification and autonomous driving functions for Japanese customers within five years, and independently conduct verification tests using actual automobiles at race courses. The Company currently has 220 automotive projects, 70% of which are led by Schaeffler Japan. Previously, the Company’s R&D was mainly conducted in Germany. Shinzo Yotsumoto, representative of Schaeffler Japan, said, “We won’t fully know acceleration and environmental performances until we conduct field tests. We will consider local customer needs, and promote our technological competitiveness for systems based on vehicles rather than for single parts.” For the development of concept cars, the Company will utilize its electrification technology, and an integrated vehicle control system equipped with the steer-by-wire technology of Paravan GmbH with which the Company established a joint venture in August 2018. Schaeffler Japan, which has been jointly conducting travel tests with automakers, intends to also independently conduct tests on poor roads. (From an article in the Nikkan Jidosha Shimbun on July 1, 2019)

Technological Alliance

-Mitsubishi Electric Corporation and the Company announced a global strategic partnership as part of the e-F@ctory Alliance network. This network supports companies with measures within the framework of the digital transformation, such as the integration of machine and plant data into manufacturing execution systems and enterprise resource planning systems. The Company contributes concepts that combine mechatronic products, condition monitoring systems, and digital services to form application-specific 4.0 solution packages. These provide the basis for the creation of customized products and services whose main focus is always on the effectiveness of the overall system. Mitsubishi Electric Corporation offers a vast range of factory automation and processing technologies, including programmable logical controllers, inverters, robots, servo-drives and HMI, helping to bring higher productivity and quality to the factory floor. (From a press release on April 5, 2019)

Product Development

Rinspeed MetroSnap concept vehicle with Company Space Drive drive-by-wire system
-On November 28, Rinspeed announced that it will debut the MetroSnap concept vehicle at CES 2020. The MetroSnap is a simple, fast, safe and inexpensive swapping system for the vehicle bodies for which the Swiss company has filed for patent protection. Because the batteries are located in the Skateboard chassis and not the Pod vehicle body, the vehicle does not need to be parked to charge the battery and can simply swap to a fully charged chassis. The charging process takes place elegantly and without wasted time while cleaning or loading the Pod. The MetroSnap uses the Space Drive drive-by-wire system from Schaeffler-Paravan Technologie Company. (Based on Rinspeed press release on November 28, 2019)

Mover autonomous vehicle autonomous software development and testing
-Fraunhofer FOKUS informed that it has implemented the automation of the variably controllable mover together with Schaeffler Paravan Technologie GmbH & Co. KG for the development of the Company’s Mover autonomous vehicle. The autonomous driving function of the Mover was developed virtually in all stages. The PHABAMCS simulator from Fraunhofer FOKUS forms a realistic digital twin of the Mover with its vehicle characteristics, and thus enables rapid and agile evaluation of the timetable. The 3D simulation operates all external interfaces of the Mover (sensors, control, card) and allows efficient development and testing of perception, driving functions and localization. The complete software development of the Mover can be carried out in parallel to the hardware setup, which minimizes the cost and time of real-life testing. (From a press release on November 26, 2019)

Technologies demonstrated at 2019 Tokyo Motor Show
-The Company will showcase its integrated perspective on the entire mobility-sector energy chain and profile its innovative system solutions at the 2019 Tokyo Motor Show. For the first time in Asia, the Company will present its own electric motors in power classes from 15 to over 300 kW, as well as key components for fuel cell vehicles. Bipolar plates are produced by precise forming and coating in the thin-layer range. When stacked, these plates form the core of the fuel cell system. Other highlights include the Company’s Intelligent Corner Module with its 90-degree steering angle, drive-by-wire as a key enabling technology for self-driving cars and the Schaeffler Mover mobility concept for urban spaces. At its urban mobility research hub in Singapore, the Company is engaged in the development and testing of advanced mobility solutions and software in partnership with various start-ups. (From a press release on October 24, 2019)

XTRONIC Control Unit for autonomous driving
-The Company presented its XTRONIC Control Unit as a basis for autonomous driving. It combines safety, monitoring, operating, and comfort functions in a single system. The most important data are always available in the cloud and can be accessed from anywhere via a mobile device. Applications for the control unit include partially autonomous vehicles, commercial vehicles and motorhomes. The control unit recently went into volume production for several global OEMs to use in these fields. (From a press release on September 12, 2019)

Space Drive drive-by-wire system and Schaeffler Mover concept vehicle at IAA 2019
-The Company announced that it will be presenting the third generation of its Space Drive technology and the enhancements that have been made to the Schaeffler Mover concept vehicle, highlighting solutions for autonomous and sustainable mobility in urban spaces at IAA 2019. Space Drive is a leading drive-by-wire technology comprised of a triple-redundant electronic interface that operates vehicle steering, accelerator, and braking functions and thus enables autonomous driving across a wide range scenarios. Schaeffler Paravan aims to have this system ready for volume production by 2021. Space Drive is used in the Schaeffler Mover. The Mover integrates all of the components needed for driving functionally – drive system, battery, braking system, and steering – in a single compact unit known as a rolling chassis. This makes the Mover an attractive solution for urban mobility as it supports a range of superstructures and can thus be used in numerous applications from robo-taxis to autonomous delivery vehicles. The system bridges the gap between the control level for automated vehicle steering and the four wheel modules with the Schaeffler Intelligent Corner Modules. (From a press release on September 9, 2019)

Integrated electric motor technology development platform
-The Company announced that it has a modular, highly integrated electric motor technology platform for the development of various electric products. The potential applications range from hybrid modules and dedicated hybrid transmissions to electric motors for electric axle drives. Voltage ranges from 48 to 800 V and performance classes from 15 to over 300 kW are possible. Volume production for a range of customer projects worldwide is set to begin in 2021. Comprehensive expertise in mechanical components, manufacturing processes, and winding technologies as well as an in-depth understanding of all vehicle systems guarantee short development times and ensure smooth processes in the production of technologically sophisticated electric motors. The Company’s network of manufacturing plants and special machinery and tool manufacturing facilities will be used to set up and operate the production lines. The Company will publicly present the electric motors – which were developed in-house and are ready for volume production – as complete systems for the first time at IAA 2019. (From a press release on September 6, 2019)

Technologies demonstrated at IAA 2019
-The Company will present the latest version of its fully variable UniAir valve train system at IAA 2019. This system is more compact and 30% lighter than the previous version and allows the air path in the engine to be fully optimized and maximum dynamics achieved when load and speed changes occur. The system comprises a module that is installed between the camshaft and the valve stem, together with the relevant software. The Company’s eRocker solution is designed for the exhaust side. The system’s electromechanical actuation makes it independent of the engine’s oil circuit, and it can also be applied with relative ease. The Company will also present its electric cam phasing unit, which makes rapid adjustments based on the speed and temperature and allows the valve timing to be optimized throughout the entire operating and temperature range. Another system shown will demonstrate 48V hybridization through a belt-driven starter generator, which allows a significant reduction in fuel consumption and emissions of 5 to 7% to be achieved. Finally, the Company will showcase an individually adjustable thermal management module for internal combustion engines and hybrid and electric drives that provides enhanced control of the operating temperature throughout the entire powertrain. (From a press release on September 4, 2019)

Modular system offering solutions for commercial vehicle electrification
-The Company announced that its modular system comprising E-Drive, Space Drive, and digitalization will pave the way for the electrification of commercial vehicles. The E-Drive modular system comprises an electric motor, software, and power electronics, which makes customer-specific system solutions for commercial vehicles possible particularly with regard to functionality and optimum efficiency. Its Space Drive technology has a triple-redundant design and is currently the only system solution worldwide that meets the highest quality and safety requirements, in particular the strict ISO 26262 ASIL D functional safety standard. (From a press release on June 4, 2019)

Swivel bearing with spherical cap ball socket to reduce steering gear noise
-The Company now provides a solution to undesirable noise in the steering gear in electric cars in the form of a swivel bearing. The bearing is equipped with a specially curved spherical cap ball socket. Thanks to the design, the bearing is able to tilt within itself and thus compensate the swiveling of the worm shaft without generating increased frictional torque and noise. A further advantage is that the worm shaft can be radially preloaded so that there is no clearance between the worm shaft and the worm gear. This reduces clatter - a clattering noise generated because the rotation direction of the worm shaft changes every time the steering direction changes and the opposing tooth flanks come into contact. The swiveling motion of the newly designed bearing also compensates misalignments in the housing. (From a press release on February 22, 2019)

Patents

-In the fiscal year ended December 31, 2019, the Company filed 2,417 patents with the German Patent and Trademark Office, making it the second-ranked company in Germany based on the number of patents filed for the sixth consecutive year.
 

-Most of the Company’s capital expenditures in the fiscal year ended December 31, 2019 impacted the Europe region.

-In Europe, the Company invested primarily in its assembly and packaging center in Halle, Germany and the IT 2020 initiative. Other investments include the acquisition of territory in Herzogenaurach, Germany, the investment of new product start-ups in the Automotive OEM division, and increasing capacity for systems and components related to electric mobility. The Company also invested in expanding production capacity of its rolling bearing business.

-In the Americas, the Company’s capital expenditure was dedicated towards expanding production capacity, equipment and machinery for products and systems related to the E-Mobility business division. The Company also invested to expand capacity in the Transmission Systems business division.

-In China, the Company continued investments to expand production capacity and support new product start-ups, specifically in the Transmission Systems, Engine Systems and E-Mobility business divisions. Investments were also made for the Company’s rolling bearing business.

-In the Asia-Pacific region, the Company focused expanding the capacity of its plant in Vietnam which manufactures radial insert bearings and needle roller bearings. The Company also invested in South Korea to expand capacity for its Transmission Systems business division.

Investment Outside Germany

<Hungary>
-The Hungarian Investment Promotion Agency (HIPA) informed that Company subsidiary Schaeffler Savaria will broaden its portfolio in Szombathely by building a development center that will develop and manufacture electric drive systems and components. The Company will invest EUR 70 million to enhance production of complete drive train systems and components, adding 150 new employees. Schaeffler Savaria has been engaged in manufacturing clutches for passenger and agricultural vehicles for 20 years, employing over 3,320 people in Szombathely. (From HIPA press release on November 28, 2019)

-The Hungarian Investment Promotion Agency informed that the new production hall of the FAG plant belonging to the Company was constructed in Debrecen. The 22,000-square-meter building, which was built through an EUR 80 million investment will feature new equipment, including machinery with state-of-the-art grinding technology. As a result of the comprehensive development and the increased production volume, the Company expects to create approximately 500 new jobs in the upcoming years. Thanks to the considerable capacity increase, the European car manufacturing plants will be provided with bearings from the Debrecen plant’s new production line. (From HIPA press release on January 16, 2019)

<China>
-The Company held a cornerstone laying ceremony on October 23, 2019, for a new plant in Taicang High-tech Zone. The plant will be built at a 90,000-square-meter site. The Company aims to complete construction and begin operations in 2022. The new plant will produce parts for automotive engines and electrified vehicles as well as bearings for airplanes. The Company also plans to integrate its Taicang Chaoyang Road Plant to the new plant. Currently, the Company has two industrial parks, four plants, one dual system training center, and one general service center in Taicang. Once the new plant is completed, the Taicang site will be larger than 230,000 square meters. (From some media reports on October 24, 2019)

-On September 6, 2019, the Company signed an agreement with the management committee of the XiangJiang New Area, Hunan, regarding the establishment of a new local company. The new company will locally introduce Space Drive steer-by-wire system technology for autonomous driving. It also will develop Mover platform systems and 90-degree intelligent steering modules for future autonomous driving needs. The Space Drive steer-by-wire system is currently the Company’s only technology that meets European standards for autonomous driving. (From media reports on September 9, 2019)

-The Company’s subsidiary, Schaeffler (Nanjing) Co., Ltd., held a ceremony for the start of construction of its fourth plant. The new plant spanning 22,000 square meters will produce large bearings in size ranges including 800-1600mm, 1200-2000mm, and larger than 2000mm. The Company aims to begin operations in July 2020. (From a press release on August 20, 2019)

<Vietnam>
-The Company has inaugurated a new plant at Bien Hoa City in Dong Nai province of Vietnam. The Company has invested more than EUR 45 million in this facility, which has a total area of 25,000 square meters in Phase 1, and will create 300 jobs. The new plant will increase the production capacity of the existing products including: tapered roller bearings, radial insert ball bearings, and steering column bearings. The plant will also add new product lines for radial insert ball bearings as well as needle roller bearings, the flagship product of the Group. With 70 condition monitoring devices installed at key positions, the plant is the first facility in Southeast Asia to apply the latest Industry 4.0 solutions developed by the Company. (From a press release on May 9, 2019)

<India>
-During the fiscal year ending December 31, 2018, the Company invested INR 2.4 billion in India. These investments are for expanding plant buildings at Talegaon and Savli, and increasing the Company’s engineering capabilities. This will help it increase production capacities at all plant sites, allowing it to rapidly address home market requirements while enhancing flexibility. The Savli site produces low friction ball bearings which reduces noise levels and friction significantly. The Talegaon plant manufactures engine components for internal combustion engines that help OEMs meet emission norms. (From Schaeffler India annual report 2018)

<Mexico>
-The Company celebrated the grand opening of its new, state-of-the-art automotive aftermarket assembly and packaging center in Cuautitlan Izcalli, Mexico. The 18,000-square-meter Aftermarket Kitting Operation will supply automotive aftermarket customers in the U.S., Mexico, Central America and South America. The Company invested over USD 5.6 million in the complex, which can process more than 124,000 items daily through its receiving, packaging and shipping departments. (From Mexico-Now article on February 15, 2019)