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5. Hella GmbH & Co. KGaA Business Report FY ended May 2019

Hella GmbH & Co. KGaA Business Report FY ended May 2019

Factors
1) Net Sales
-The Company’s net sales for the fiscal year ended May 31, 2019 decreased by 1.0% from the previous year to EUR 6,990 million. The primary reason for the decrease in sales is due to the change in the Company’s consolidation scope from the closure of its wholesale companies, FTZ Autodele & Vaerktoj A/S and Inter-team Sp. zo.o. as well as the sale of Hellanor AS. Excluding currency effects and changes in scope, the Company’s sales increased by 5.0% year-over-year.

-The Company’s sales in the Automotive segment increased by 6.1% in the fiscal year ended May 31, 2019 to EUR 5,766 million. Sales in the segment increased over the previous year due to increased demand for lighting systems and electronics solutions, specifically in the fields of driver assistance systems and energy management systems. However, sales growth in the segment gradually slowed as the fiscal year progressed, due to lower product sales in the Asia Pacific and Rest of World regions from decreased demand in the Chinese market.

Restructuring

-Mahle Group announced its plans to acquire all the shares in Behr Hella Service, its current joint venture with the Company, and to distribute Behr Hella Service products via its own aftermarket organization. This step will further strengthen Mahle’s position in thermal management. Mahle and the Company have agreed that Mahle will take over the Company’s 50% share in the joint venture. Once the acquisition is complete, Mahle will expand its distribution of thermal management products in the aftermarket outside Europe. The newly added activities will benefit from Mahle Aftermarket’s extensive sales network. Established in 2005, the joint venture Behr Hella Service specialized in the marketing and distribution of products for cooling and air conditioning in the automotive aftermarket. (From a press release on August 9, 2018)

Joint Ventures

-Behr-Hella Thermocontrol GmbH (BHTC), a joint venture between the Company and Mahle Behr, renovated its factory at Pune India in February 2019. BHTC also established a new SMD production line at the plant. BHTC India develops and manufactures climate operating panels and control units for vehicles across all segments. (From a press release on March 21, 2019)

-HBPO, the joint venture between the Company and Plastic Omnium which manufactures modular front-end systems, opened a new facility in Aguascalientes, Mexico, to support nearby Mercedes-Benz A-Class sedan assembly operations. HBPO's 50,200-square-foot facility currently has 70 employees and is operating on two 12-hour shifts six days a week, but will have more than 100 employees when full production is reached in 2019. The plant has the capacity to produce up to 145,000 front-end modules per year. HBPO is able to deliver just-in-sequence front-end modules to Daimler's nearby assembly line within three hours of notice. (From a Mexico-Now article on November 14, 2018)

-TMD Friction, one of Hella Pagid's parent companies, announced that it will cluster production at its Essen location. Hella Pagid will be an immediate beneficiary of the new main production plant on which the Hella Pagid headquarters are located as the extended plant will produce some of its portfolio's brake pads. Currently, TMD Friction in Essen produces 23 million brake pads annually; following the plant’s expansion, up to 65 million brake pads per year are anticipated for production in Essen alone. The new production site will additionally be updated by a modern raw material mixing facility using state-of-the-art technologies. This will benefit Hella Pagid as a majority of its brake pad portfolio has already switched to copper-free and -reduced brake pads. By using the latest techniques, Hella Pagid will reach its goal of globally distributing copper-free brake pads well before the legal deadline of 2025. (From a press release on July 31, 2018)

-HBPO, a joint venture between the Company and Plastic Omnium which supplies front-end modules, revealed that its plans to open two new assembly plants in Saltillo and Aguascalientes, Mexico remain unchanged despite the uncertainty regarding the renegotiation of NAFTA. HBPO already operates plants in Puebla, Toluca and San Jose Chiapas. The Puebla plant increased production of plastic components by 50% earlier in 2018 with the addition of a third injection-molding press. With the two new plants fully operational, HBPO aims to achieve USD 1 billion in annual revenue in Mexico by 2022. HBPO’s global revenues currently exceed USD 2.33 billion. (From a Mexico-Now article on July 13, 2018)

Business Partnership

-The Company announced that it intends to work with BHAP and U.S. battery specialist Farasis in the field of battery management systems. The focus of the cooperation is on the development, production and distribution of battery management systems for 12 and 48 Volt electrical systems and high-voltage applications. The Company will contribute its expertise in hardware and software development to the cooperation, Farasis will bring in its knowledge in the field of battery cell production and BHAP will ensure market access, especially within the BAIC Group. The cooperation will focus on meeting demand in the Chinese market. The Company also signed a strategic cooperation agreement with Wuling Automotive Industry. Both partners intend to work together on automotive lighting technologies for the Chinese market, with a particular focus on the development of headlamps for the volume segment. The cooperation will be further substantiated in the coming months and specifically supply SAIC-GM-Wuling. (From a press release on April 17, 2019)

-The Company announced that it has extended its partnership with AEye to deliver customized sensing and perception solutions for ADAS and automated driving based on AEye’s Intelligent Detection and Ranging (iDAR) technology. AEye’s iDAR artificial perception system leads the industry in range and scan rate performance for automotive-grade LiDAR. The Company will contribute its competence in the field of embedded software and image processing and its automotive experience and industrialization capabilities along the entire supply chain to leverage and extend this platform. This joint development will bring best-in-class Level 3 ADAS solutions to global OEMs. The first joint development project will start immediately, with the objective of a SOP in 2022. (From a press release on January 8, 2019)

-Ambarella, Inc. and HELLA Aglaia announced that they are partnering to deliver a platform for the next generation of ADAS systems. Ambarella’s CV22AQ CVflow computer vision processor and HELLA Aglaia’s open application software deliver the performance and features required for NCAP and Level 2 automated driving front cameras. Combined with HELLA Aglaia’s production-proven software, the platform enables forward-facing, single-box ADAS cameras with advanced AI features and highly accurate image content recognition. (From a press release on December 17, 2018)

-The Company and Faurecia announced that they will cooperate in a strategic partnership for the development of innovative interior lighting solutions. The two companies will jointly develop lighting with high-technology content in the areas of surface lighting and dynamic lighting for a more personalized cockpit environment. Faurecia contributes its expertise as a complete system integrator for vehicle interiors and the Company supplies innovative products in the field of interior lighting. At the Paris Motor Show held in October 2018, Faurecia and the Company demonstrated a unique ambient lighting experience for a more comfortable, dynamic and versatile environment integrated into a cockpit of the future. (From a press release on November 21, 2018)

Recent Developments

-Invest Lithuania informed that Hella Lithuania plans to reach sales revenue of EUR 100 million over the next two years. The Company also plans to spend EUR 1 million on training 250 employees, of which half is expected to be received from EU funds. Hella Lithuania began operations in Kaunas Free Economic Zone in September and employs more than 70 people. Following the completion of four investment stages, the Company expects to have approximately 2,000 employees. In August, the production line of BiLED HighBeam printed circuit boards began operations. One million such boards will be produced each year. (From Invest Lithuania press release on November 19, 2018)

-The Company announced that it is participating in a consortium initiated by the Chinese automobile manufacturer BAIC to develop an intelligent mobility infrastructure in Beijing. The infrastructure will include communication between vehicles and their environment, for example via traffic lights equipped with sensors. A total of thirteen international and Chinese technology companies are involved in the non-exclusive cooperation. The Company will contribute its expertise in the areas of radar sensors and front camera software and further intensify its cooperation with BAIC. The Company and BHAP, a company belonging to the BAIC Group, have been operating a joint venture for lighting systems since 2014. In addition, the establishment of a joint venture for electronics components was announced in April 2018 and will be formally established shortly. Series production is expected to start in 2020. (From a press release on November 9, 2018)

Outlook
-The Company expects its currency and portfolio-adjusted sales to be between EUR 6.5 and 7.0 billion in the fiscal year ending May 31, 2020.

R&D Structure

-In the fiscal year ended May 31, 2019, the Company had 7,768 employees working in research and development. This represents an increase of 4.6% in the number of employees in research and development over the previous year.

R&D Facilities

-In June 2018, the Company officially founded the research institute for vehicle electronics, E-LAB, in conjunction with TU Dortmund University and Hamm-Lippstadt University of Applied Sciences. The E-LAB develops vehicle electronics solutions for autonomous and electric vehicles. One specific focus area is the use of the vehicle as a data source to analyze road conditions.

-During the fiscal year ended May 31, 2019, the Company moved its research institute for vehicle lighting technology, L-LAB, into a shared building with its newly founded research institute for vehicle electronics, E-LAB. The relocation highlights the fact that lighting and electronics technology are becoming more linked, and should enable the Company to utilize synergies for future products.

R&D Activities

-One of the primary focuses of the Company’s research and development in its Lighting division is the standardization, modularization and size reduction of its lighting solutions. The Company is also focusing on developing both software-based headlamp technologies as well as stand-alone software modules to control lighting systems. Finally, another area of focus for the Company is the use of lighting as a means for the vehicle to communicate with other vehicles or road users.

-In its Electronics division, the Company has focused on developing solutions for all levels of vehicle electrification, including 48V mild hybrids, full hybrids, and fully electric vehicles.

-The Company has focused on the development of vehicle access systems based on a variety of technologies such as ultra-wideband, Bluetooth, near-field communication and biometric systems. The Company is working with G+D and collaborating with the Car Connectivity Consortium in its development efforts.

-The Company’s "Smart Headlamp Technology" research project aims to develop an intelligent headlamp that not only detects potential changes in performance at an early stage (condition monitoring), but is also capable of compensating for those changes (self-healing). New monitoring and control processes will ensure optimum performance of high-resolution headlamps, while complex series development processes will reduce development times and costs. The Fraunhofer Institute for Mechatronic Systems Design IEM and the universities of Paderborn and Dortmund are involved in the research project. The project started in April 2017 and is supported by the European Regional Development Fund (ERDF) for a period of three years. (From a press release on October 8, 2018)

Technological Alliances

-The Company is working with a number of companies, including U.S.-based Light Field Lab in the development of efficient and cost-effective materials and technologies for light guidance and conduction. Light Field Lab focuses on developing light guides based on nanoparticles.

-The Company is in an open strategic alliance with ZF in relation to 77 GHz radar technology. The first joint products are expected to begin series production in the second half of 2020.

-The Company and Plastic Omnium entered into a strategic cooperation. The focus of the non-exclusive cooperation will be on accelerating the holistic integration of lighting technologies into the vehicle exterior, especially in the front and rear areas. The Company contributes its competence in automotive lighting technology to the collaboration, while Plastic Omnium brings expertise in plastics processing for exterior body parts. Both companies will bring corresponding development resources together at one site in Germany. This new partnership between Plastic Omnium and the Company will provide the market with combined technologies and solutions, bringing together the best of both companies on new styling and advanced functionalities for the body exterior in systems such as smart bumpers and tailgates. (From a press release on January 21, 2019)

-Faurecia has integrated the technologies developed by the Company into a complete Cockpit of the Future with a unique ambient lighting experience for a more comfortable, dynamic and versatile environment. Faurecia and the Company have also worked to devise a series of dynamic lighting features to enhance driver information and safety in autonomous driving situations. (From a press release on October 3, 2018)

Product Development

High definition solid state light sources (HDSSL)
-The Company is developing high definition solid state light sources (HDSSL) for use in headlamp applications. HDSSL uses small LED pixels with intelligent driver chips that can be individually controlled, enabling the lamp to customize its light pattern by dimming individual pixels. The Company received an order for HDSSL from a premium OEM at the beginning of the fiscal year ending May 31, 2020. The Company expects to begin production of HDSSL headlamps in 2022.

Platform for 77 GHz radar
-The Company has continued development of a modular and scalable platform concept for 77 GHz radar sensors. 77 GHz radar provides functionality such as blind spot detection, cross traffic detection and 360-degree object detection of the area around the vehicle. The Company intends to begin series production of 77 GHz radar technology in 2021.

Shake sound sensor
-During the fiscal year ended May 31, 2019, the Company completed the series development of its structural health and knock emission (SHAKE) sound sensor. The sensor uses piezoelectric elements to detect contact on a service and then can transmit this information to enable specific functionalities. For example, the SHAKE sensor can detect moisture when water drops impact the wheel housing, which can then be used to determine the amount of moisture on the road. The SHAKE sensor can also detect sound by picking up nearby sound waves. The Company began series production of the SHAKE sensor at the end of 2018.

Open Fusion Platform
-The Company, as part of a group of IT and automotive companies, has developed a near-series fusion platform with open interfaces (Open Fusion Platform, abbreviated to OFP). OFP enables automobile manufacturers and their suppliers to cost-effectively integrate highly and fully automated driver assistance functions for the purposes of automated driving. It was developed by the Company together with the German Aerospace Center, Elektrobit Automotive, Infineon Technologies AG, InnoSent, Hella Aglaia Mobile Vision, Reutlingen University, the RWTH Aachen Electromobility Center, Streetscooter Research and TWT GmbH Science and Innovation. In addition, Continental and Nvidia supported the project in the role of associated partners. The project, funded with EUR 4.4 million by the Federal Ministry of Education and Research, was successfully completed after three years with the integration of the first fully autonomous driving functions in three demonstration vehicles. Four cameras and eight 77 GHz radars, covering 360 degrees around the vehicle, provided input for the OFP. An additional V2X communication module also enabled communication between vehicles and external infrastructure, such as a charging plate. During the project, an ISO working group for the standardization of the sensor data interfaces was launched by the research group together with other leading automobile manufacturers and suppliers. (From a press release on March 21, 2019)

Demonstration truck with lighting solutions for commercial vehicles
-The Company has equipped a show truck with lighting solutions developed specifically for commercial vehicles such as trucks and trailers. The lighting and electronics expert presents its products for design, individuality and safety at trade fairs and events. A highlight is the Shapeline lamps, which give the truck a unique appearance. With the modular lamp series, lighting systems can be customized based on the vehicle’s design principle. Two variants - Tech and Style - are available for this purpose. (From a press release on January 16, 2019)

Technologies showcased at 2019 North American International Auto Show
-The Company announced that it will showcase its safe and smart electronics and lighting technologies at the North American International Auto Show in Detroit. The Company's demonstration vehicle in the AutoMobili-D atrium and its partner booth, which it shares with its joint venture HBPO GmbH, will demonstrate the Company’s mobility solutions, including sensors, lighting and more. It will present Organic Light-Emitting Diodes (OLEDs), which are integrated into the rear combination lamps of the 2019 Audi A8. Static relay attack protection for remote keys via motion detection technology will be showcased through a car access demonstration. The cybersecurity solution protects against these attacks by putting the key in "sleep mode" while it is not moving. Unmoved key fobs cannot be triggered by any wireless communication device. Other technologies that will be shown include the Structural Health and Knock Emission (SHAKE) Sensor, a first-of-its-kind solution for providing cars with the sense of hearing and touch in order to increase a vehicle's awareness. Another system that will be displayed is 4th Gen Radar, a fourth generation, mid-range radar sensor with increased field of view, resulting in significantly improved detection capabilities. (From a press release on January 11, 2019)

Technologies showcased at IAA Commercial Vehicles 2018
-The Company will present intelligent lighting and electronics solutions for trucks, trailers and busses at the IAA Commercial Vehicles in Hanover. The Company will also provide insights into the future of mobility by exhibiting prototypes. Hella Visiotech projection technology allows communicating via light to warn other vehicles and pedestrians or to mark out certain work areas. The Company also offers blinking side marker lights for trailers with which to implement the current ECE R48 regulation. It is introducing new reversing and work lights whose plastic housing fully protects them against corrosion. This prevents work light failures and improves safety. The Zeroglare glare-free illumination option also provides more work safety. Warning lights, such as the K-LED Blizzard, result in greater attention during loading and unloading while marking heavy-duty transport. (From a press release on August 13, 2018)

Yptokey software solution for digital key and access authorization
-The Company announced that the spin-off Yptokey has developed a software solution for digital key and access authorization systems. This new technology enables users to lock and unlock systems using, for example, mobile devices such as smartphones. It also allows them to manage access authorization quickly and securely. Initially this technology will be integrated by companies dealing with locking systems; in the medium term Yptokey also plans to launch a solution for the automotive market. (From a press release on June 28, 2018)

Technologies showcased at Steering Systems USA 2018
-The Company announced that it is presenting state-of-the-art steering and braking solutions for autonomous and electric vehicles at the Steering Systems USA in Detroit. The Company is showcasing steering control modules as fail-safe or fail-operational. The system will be able to continue safe operations in case of a fault in the electronics, making it suitable for level 4 automated driving. The Company is also displaying the latest generation of its Torque and Angle Sensor (TAS), based on Contactless Inductive Position Sensor (CIPOS) technology. The Motor Position Sensors (MPS) as an efficient alternative to resolver or magnetic sensors for Brushless Direct-Current (BLDC) or Permanent Magnet Synchronous Motor (PSMS) will also be presented. The Company is showing an integrated braking solution for the first time in the U.S. It is a compact and reliable solution where the engine and pedal travel sensors are integrated in a housing with two separate circuit boards. (From a press release on June 21, 2018)

-The Company’s capital expenditures include investments towards long-term expansion of its global development, administrative and production network; maintenance for its infrastructure; and product-specific capital equipment.

Investments outside Germany

<India>
-The Company announced that it has opened a second electronics plant in India. The new production facility in Mehsana, Gujarat, India, will meet the growing demand for electronic components and provide additional benefits due to its proximity to nearby customers. Production at the new location will initially focus on sensor solutions for accelerator pedal sensors and will gradually expand to other electronic products. In the first expansion phase, the plant will comprise a building area of around 5,000 square meters and employ up to 200 people. The investment for the first expansion will be in the lower-double-digit million euros. (From a press release on February 27, 2019)

<Mexico>
-HBPO, a joint venture between the Company and Plastic Omnium which supplies modular front-end systems, announced its new plant in Saltillo, Coahuila is completed and ready to support a new program from FCA. While HBPO did not disclose the date the new plant will start operations or which program it will support, it is very likely to be the 2019 Ram 2500/3500 Heavy Duty pickup. The Ram Heavy Duty truck debuted at the NAIAS in Detroit and is built at FCA’s Saltillo Truck plant, with first units scheduled to arrive at U.S. dealerships in March. With the addition of the Saltillo site, HBPO now operates five just in sequence plants in Mexico. (From Mexico-Now article on January 21, 2019)

-The Company inaugurated its eighth manufacturing facility in Mexico in the municipality of Apaseo El Grande, where it has invested USD 12 million and recruited 250 workers to start its first phase of operations. The facility, dedicated to the production of body control modules, driver assistance systems and lightning components, is expected to increase its workforce to 650 employees once it becomes fully operational. Total investment planned for the site remains undisclosed. (From a Mexico-Now article on June 11, 2018)

<Lithuania>
-Invest Lithuania announced that the Company has opened a new plant in Lithuania in the Kaunas Free Economic Zone. The production focus will initially be on lighting electronics components and will expand to various sensors, actuators and control units. Currently, approximately 70 employees are working for the Company in Lithuania. Over time, the number of employees is intended to increase to 250. The overall investment volume until the finalization of this expansion phase will be in the mid double-digit million euro figures. After a construction period of less than a year, the Company was able to start series production across some 7,000 square meters of production space. (From Invest Lithuania press release on September 13, 2018)