Financial overview

Joint Venture
- In December 2006, DEUTZ AG and FAW Jiefang Automotive Co., Ltd., which is based in Changchun, China, signed a contract to set up a joint venture to manufacture and sell diesel engines. DEUTZ and FAW will each own a 50% stake in the joint venture, which will operate under the name of DEUTZ (Dalian) Engine Co., Ltd. (DEUTZ Dalian). DEUTZ will assume industrial leadership of the company and will invest the equivalent of EUR 60 million in the new company. The establishment of DEUTZ Dalian will considerably expand the co-operation that has already existed for over 10 years between DEUTZ and FAW Group.

The Company expects to commence operations during the middle of 2007.
The heart of the joint venture, the new engine plant for the production and assembly of Euro III-compliant engines, will come into full production within two years of the start of operations. Alongside this development, products from the other plants in the joint venture will be marketed to the FAW Group and existing Chinese customers.

R&D Expenditure

R&D Structure
The R&D activities of the Company are mainly concentrated in Cologne, although there is a second site located at Dursley in the Uited Kingdom. The R&D facility for DEUTZ Power Systems is situated in Mannheim, Germany.

Product Developments
- Milestones in R&D activity in the segment in 2006 were successful production launch of the TCD 2013 4V commercial vehicle engines and industrial engines with full electronic engine control, both in the 4-liter to 8-liter capacity category. Ongoing development projects included the further development of engines with lower output ratings in the Mobile Machinery, Automotive, and Agricultural Machinery segments.

Key current research areas in the Compact Engines segment are as follows:
- Development of basic principles for technologies to achieve EU Stages III B and IV/EPA Tier 4 emission standards for on-road applications (injection systems, combustion development, supercharging)
- Exhaust gas aftermarket technologies, such as selective catalytic reduction and state-of-the art particulate filter systems
- Research projects, for example, on innovative particulate filter technologies for exhaust gas after treatment and on strategies for the monitoring and generation of future particulate filter systems
- Alternative fuels, drive concepts, new design concepts and fuel consumption reduction on existing systems

Compact engine segment
- Capital expenditure in the Compact Engines segment was considerably higher than in the previous year at 104.3 million euros (2005: 80.7million euros).
- Much of this investment was concentrated in the new assembly facility for the TCD 2013 4V series at the Cologne-Porz plant*. This facility became operational during the year under review. In connection with this development, production of components at the Cologne-Deutz and Zafra, Spain, sites was expanded.

The new assembly facility for the TCD 2013 4V commercial vehicle engine was built in just six months and the first assembly lines are already being installed. This increases the yearly assembly capacity at the Cologne-Porz facility by 30,000 engines.

In 2007 and subsequent years, a considerable amount of attention will be given to the expansion of the DEUTZ Dailan joint venture in China. The Company will invest around 60 million euros in 2007 for 50 per cent of shares in the joint venture.