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5. Rheinmetall Automotive AG (Formerly KSPG AG) Business Report FY ended Dec. 2016

Rheinmetall Automotive AG (Formerly KSPG AG) Business Report FY ended Dec. 2016

Factors
1) Net Sales
-The Company’s net sales in the fiscal year ended December 31, 2016 increased by 2.5% over the previous year to EUR 2,656 million. Excluding currency effects, sales in the division increased by 3% during the year.

2) Mechatronics
-In the fiscal year ended December 31, 2016, sales in the Mechatronics division increased by 5.3% over the previous year to EUR 1,527 million. Sales remained steady in the Automotive Emission Systems business unit, with improvements in exhaust gas flaps and exhaust gas recirculation valves offset by decreased sales in radiator modules. Sales increased in the year for divert-air valves, electro-pneumatic valves and variable pumps.

3) Hardparts
-Sales in the Company’s Hardparts division totaled EUR 921 million in the fiscal year ended December 31, 2016, a decrease of 3.3% from the previous year. The division experienced sales decreases across most business units, most significantly in large-bore pistons, due to a decline in demand for large engines. Small-bore pistons and bearings had slightly decreased sales as well.

Joint Ventures

-Pierburg, a subsidiary of the Company, and Zhejiang Yinlun Machinery Co., Ltd. have agreed to establish a joint venture in Shanghai, China. The new company will be called Pierburg Yinlun Emission Technology (Shanghai) Co., Ltd. Pierburg will be own 51% of the joint venture while Zhejiang Yinlun will own 49%. The joint venture will construct a plant on the premises of Zhejiang Yinlun's manufacturing facility in the Fengxian District, Shanghai, and plans to begin operations with one production line in 2018. The plant will produce EGR cooling modules for China. Additional production lines will be completed between 2018 and 2020. (From news releases issued by multiple sources on December 9, 2016)

-The Company announced that the joint venture between Kolbenschmidt GmbH, its wholly owned subsidiary, and the Riken Corporation has officially begun operations. The objective of the joint enterprise is the manufacture of piston rings in Hubei. KS Kolbenschmidt has taken over 30% of the shares in Riken Automobile Parts (Wuhan) Co. Ltd. The company is located on a 12,000-square-meter production facility in Wuhan, China. (From a press release on March 21, 2016)

-KS HUAYU AluTech GmbH, a joint venture of the Company and HUAYU Automotive Systems Co., Ltd., acquired major assets of Albert Hackerodt Maschinen- und Werkzeugbau GmbH & Co. KG, Langenhagen, Germany. All of Hackerodt’s 113 regular employees will be taken over according to the terms of transfer. KS HUAYU AluTech GmbH is acquiring all of Hackerodt’s plant and equipment while also entering into the existing supply contracts with Hackerodt's automotive industry customers. Hackerodt's core capabilities include the manufacture of aluminum engine blocks, cylinder heads, transmissions and other engine parts. Its customers include Volkswagen, Audi, Bentley, Bugatti, and BMW. (From a press release on February 22 2016)

Restructuring

-The Rheinmetall Group announced its efforts with its integration as a technology group. Under the name ONE Rheinmetall, management has mapped out a comprehensive strategy program that lays the foundations for a new, unified corporate culture and will integrate the two sectors, Automotive and Defense, into an even more efficient alliance. The purpose is to optimize cooperation between the two sectors, enhance group effectiveness in its business areas, generate growth, and expand market shares. With this reorganization, the automotive sector KSPG operates under the name Rheinmetall Automotive. (From a press release on September 1, 2016)

Business Partnership

-Riken Corporation will expand its business with the Company in order to more than double the volume of piston rings it supplies to the Company. Riken's piston rings are expected to account for 25% of all piston rings used in the Company power cylinder units by the fiscal year ending March 2021, which will be a significant increase from the current level of a little over 10%. (From an article in the Nikkan Jidosha Shimbun on September 13, 2016)

Contracts

-Through its group subsidiary KS Kolbenschmidt, the Company announced that it has been awarded a contract to manufacture steel pistons for car diesel engines. The order has an aggregate value of over EUR 45 million. From 2019 through 2025, the steel pistons will be produced at Kolbenschmidt's Czech facility at Usti nad Labem. The customer, a premium-segment OEM that has not previously used steel pistons, will be fitting them in a new generation of six-cylinder diesel engines. (From a press release on November 29, 2016)

-The Company has recently increased its cooperation with ZF Friedrichshafen AG. The companies signed a five-year agreement with a lifetime value of approximately EUR 66 million. The Company supplies products including thrust washers and bushes used in transmissions, brakes, shock absorbers, chassis systems and damped flywheels. This makes the Company subsidiary KS Gleitlager GmbH a 100% global supplier of bearings for ZF's 6-, 8- and 9-speed automatic transmissions. The contract covers both metallic as well as metal/plastic composite bearings under the brand name Permaglide. The components will be manufactured at the main plant in St. Leon-Rot, Germany, and in Celaya, Mexico. (From a press release on May 25, 2016)

-The Company has been awarded a new contract for steel pistons in passenger car engines. The deal is worth lifetime sales of just under EUR 118 million. The order, which also comprises the delivery of the piston pins and rings, emphasizes the Company's competency as a supplier of complete piston assemblies. The order was placed with the Czech plant in Usti nad Labem; series production will start in early 2018. The piston assemblies will be used in the four- and six-cylinder diesel engines of a premium-segment OEM. (From a press release on April 20, 2016)

-Pierburg GmbH, a subsidiary of the Company, has received an order from a Chinese OEM with a lifetime value of around EUR 85 million for control valves, actuators for intake manifolds, and electric switchover valves. They will be installed in two-liter diesel engines destined for SUVs, pickups, and delivery vans. A percentage of the valves will be sourced locally from Pierburg's Chinese plant in Kunshan starting from 2018, while others will be sourced from the plant in Berlin, Germany. (From a press release on April 6, 2016)

-The Company has booked a new order for piston modules with a lifetime volume worth around EUR 32.5 million. The contract was awarded by a major American automotive manufacturer who will install the modules into three-cylinder diesel engines built at its European plants. Starting in 2019, the pistons will be manufactured at the Company’s Czech plant in Usti nad Labem. (From a press release on March 22, 2016)

-The Company has been awarded a follow-up contract to supply gasoline engine pistons for the four-cylinder, 2-liter units of an American OEM. The deal is worth over EUR 170 million. The components will be produced at the Company’s facility in Celaya, Mexico for shipment to the customer's North American and European plants starting from 2017. The aluminum pistons ordered are from the Company’s Liteks lineup. Besides its traditional combustion engine vehicles, the customer also builds hybrid drive units which are fitted with the Company’s pistons. (From a press release on February 17, 2016)

-The Company announced that it has received a large order in the double-digit million euro range from an Indian manufacturer. The order is for modern electric-motor-driven exhaust-gas recirculation systems, to be delivered starting from December 2016 for a series of mid-size commercial vehicle engines. These engines fulfill India's BS-IV emission standard. (comparable with Euro IV) (From a press release on February 3, 2016)

-The Company’s research and development activities focuses on reducing emissions and improving fuel economy through advances in both combustion engines and electric drives.

R&D Employees

Product Development

NAIAS 2017 showcased products
-The Company announced that it would exhibit its Liteks piston family at NAIAS 2017. The Liteks piston family has been developed specifically for lightweight, low-friction pistons for gasoline engines. In cooperation with Riken Corporation, the Company is displaying other pistons with rings. In addition, the Company will display a compact exhaust-gas recirculation valve which helps save fuel on both normally aspirated and turbocharged engines. This valve is already in series production in the U.S. (From a press release on December 16, 2016)

FlexVent exhaust gas recirculation flap valve
-The Company’s Pierburg subsidiary developed FlexVent, an exhaust gas recirculation flap valve with integrated sensor technology for large-volume diesel engines in commercial vehicles. The integrated sensor has a high measuring accuracy and allows for the valve to implement specific gas control strategies to reduce emissions and fuel consumption. Based on initial studies, the valve can enable fuel savings of approximately 1%. FlexVent is currently in the prototype phase and undergoing testing with a customer.

Electric vacuum pump
-The Company has newly developed electric vacuum pumps that provide a savings of one gram of CO2/km based on the NEDC compared to conventionally powered components. The savings are generated as the pump is only activated when needed. Because of this, usage of the engine’s lubrication system is also lessened.

Electric fuel vapor pump
-The Company has developed an electric pump that extracts fuel vapors from the gas tank and then redirects the gas to the intake system of turbocharged gasoline engines such that more of the fuel is burned. The pump helps to reduce emissions from unburned hydrocarbons.

UpValve variable valve control system
-Pierburg, a Company subsidiary, has developed a new variable valve control system called UpValve. The UpValve system has been optimized for high-speed performance and response behavior, and allows for cylinder deactivation as needed. Depending on the reference cycle, the UpValve system provides 5% savings in fuel consumption for turbocharged gasoline engines. Production of the UpValve system, which is currently being tested, is scheduled to begin in 2019.

-The Company’s capital expenditures were divided such that its operations in Germany received approximately 45% of the total investment. The remaining 55% was invested in the Company’s foreign operations.

Mechatronics Division
-In the fiscal year ended December 31, 2016, the Company invested EUR 82 million in the Mechatronics division, remaining approximately level compared to the previous year’s investment in the division. The capital expenditure was directed primarily towards capacity expansion for new customer projects as well as the industrialization of new products.

Hardparts Division
-The Company invested approximately EUR 56 million in its Hardparts division in the fiscal year ended December 31, 2016, a decrease of EUR 16 million from the previous year. While all business units within the division contributed to the decrease, the large-bore pistons and small-bore pistons units had disproportionately less investment.

Investments in Germany

-Neckarsulm-based KS HUAYU AluTech GmbH, a joint venture between the Company and HUAYU Automotive Systems, announced that it is currently enjoying a constant growth in new business. The order influx for aluminum die castings is such that KS HUAYU needs to expand its capacities. The joint venture plans to expand the production area by 5,000 square meters, which includes a new foundry of 3,400 square meters and the renovation and conversion of the adjacent existing buildings of the piston operations. Construction work will start as early as the beginning of 2017, with operations scheduled to begin for July 1, 2018. KS HUAYU will also be investing in several new die-casters and other equipment. The smelting capacity at the location will rise to up to 100 tons a day. (From a press release on December 8, 2016)

-In 2016, the Company completed the expansion of its foundry at Niederrhein, Germany.

Investments in Germany

-The Company announced that a new production shop recently opened at the site of Kolbenschmidt Czech Republic, a.s. (KSCZ), close to Usti nad Labem. The new building has two stories with a total area of approximately 8,000 square meters. One part houses areas initially displaced by the expansion, while another is for expanding foundry capacities for commercial vehicle aluminum pistons and prototypes. Currently, a high-volume project for a major German customer is underway. As such, the number of employees at the shop will rise from 80 to approximately 120. (From a press release on October 20, 2016)