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5. Mahle GmbH Business Report FY ended Dec. 2017

Mahle GmbH Business Report FY ended Dec. 2017

Factors
1) Sales
-The Company’s sales in the fiscal year ended December 31, 2017 increased by 3.8% over the previous year to EUR 12,788.0 million, reaching a record high for the third consecutive year. Almost the entirety of the Company’s increase in sales is attributable to organic sales growth. The divestiture of the Company’s industrial filtration business in October 2016 as well as changes to the consolidation scope in 2017 which includes the sale of the Company’s German forging activities, decreased sales by EUR 205 million. Negative currency exchange effects decreased sales by EUR 104 million.

2) Engine Systems and Components
-The Engine Systems and Components business unit had sales of EUR 2,799.0 million in the fiscal year ended December 31, 2017, an increase of 4.3% over the previous year. Excluding exchange rate effects, sales increased by approximately 9%. The divestiture of the Company’s German forging operations and Mahle Metal Leve Miba Sinterizados decreased sales by EUR 90 million. Increased sales of commercial vehicle steel pistons, passenger car gasoline engine pistons and complete piston systems all contributed to the business unit’s growth. Strong performances in the Asia Pacific region, specifically in the Chinese commercial vehicle market, also supported the business unit.

3) Filtration and Engine Peripherals
-Sales for the Filtration and Engine Peripherals business unit in the fiscal year ended December 31, 2017 totaled EUR 2,245.7 million, an increase of 2.5% from the previous year. The Company’s operations in Europe and China contributed the most to business unit's increased sales. Systems and components with strong sales included air intake modules, air filter modules, oil filters, cylinder head covers and oil coolers.

4) Thermal Management
-The Company’s Thermal Management business unit grew by 4.4% in the fiscal year ended December 31, 2017, to EUR 4,480.9 million. Excluding currency exchange effects, the business unit had an organic growth rate of 5%. Sales grew in both the Asia Pacific and the South America region. Increased demand for electric vehicle products, charge air coolers and cooling modules all contributed to the business unit’s growth.

Acquisitions

-The Company’s takeover of electronics specialist Nagares SA, announced in March 2017, concluded in May 2017. The Company is strengthening its competence in products for the e-mobility sector and will now be in a position to offer systems solutions across the broad product portfolio of electric drives, auxiliary components, and thermal management. Nagares employed 435 workers, had four production facilities in Spain, and had sales of approximately EUR 70 million in 2015. The development center in Valencia will operate under the name Mahle Electronics SA. The objective is to establish the location as a global competence center for the electronics business. (From a press release on May 24, 2017)

-The Company announced that it is expanding its expertise in the field of thermoelectrics by acquiring O-Flexx Technologies GmbH in Duisburg, Germany. Thermoelectric technology can be used to convert heat from combustion engines into electrical energy, or to provide heating or cooling functions from electrical energy. Established in 2006, O-Flexx Technologies specializes in developing thermoelectric elements that are used to heat the cabin of electrified vehicles. (From a press release on February 13, 2017)

Restructuring

-Bosch and the Company are planning to sell the Bosch Mahle Turbo Systems (BMTS) joint venture to FountainVest Partners, a private equity investor backed by global institutional investors. A contract for this purpose was signed on September 6th by the involved parties. The buyer intends to take over the entire joint venture, including its approximately 1,300 employees. The joint venture was founded in 2008. The two companies revealed their plans for the sale of the joint subsidiary at the beginning of 2017. FountainVest will open up important prospects and growth opportunities for BMTS in markets such as China and North America. (From a press release on September 7, 2017)

-Riken Corporation announced that it will dissolve Allied Ring Corporation, its piston ring joint venture in the U.S. with the Company, at the end of 2018. Riken's subsidiary, Riken of America Inc., and the Company’s U.S. subsidiary have reached an agreement. (From an article in the Nikkan Jidosha Shimbun on March 24, 2017)

-The Company announced that it is selling its forging activities to the Austrian Frauenthal Group. The agreement affects the Plettenberg and Roswein plants, which employ approximately 510 and 130 people, respectively. The plants focus on the production and development of highly stressed steel-forged blanks for connecting rods and balancer shafts. The two locations generated annual revenue of approximately EUR 125 million in 2016. Upon the change in ownership, the agreement for safeguarding the employment of all Company employees in Germany will also apply to the employees of Plettenberg and Roswein. This rules out compulsory redundancies until the end of 2019. The Frauenthal Group is a conglomerate of two divisions, Frauenthal Automotive and Frauenthal Trade, and features nine locations in Europe and China. In 2015, the Frauenthal Group achieved a revenue of approximately EUR 791 million and employed an average of 3,121 staff. (From a press release on January 30, 2017)

-The Bosch Group and the Company announced that they have decided to seek a buyer for their joint venture, Bosch Mahle Turbo Systems (BMTS). The joint subsidiary was founded in 2008. With a total of around 1,400 employees, BMTS develops and produces turbochargers for manufacturers of passenger cars and commercial vehicles. Production is largely based in St. Michael, Austria and in Shanghai, China. In Germany, BMTS has a presence at two locations in Stuttgart and Blaichach. (From a press release on January 23, 2017)

Recent Development

-Behr Hella Service exclusively sells Sanden e-compressors on the Independent European Aftermarket as of early July 2017. Behr Hella Service’s Premium Line, which is a new product marking system in early 2017, identifies approximately 4,500 products made by manufacturers with Original Equipment expertise. In addition to various articles produced by Behr, AKG and Visteon, the latest Sanden compressor generation is now part of the marking system. It comprises different vehicle models, including the Mercedes-Benz B-Class and the Volvo V60 hybrid. (From a press release on June 23, 2017)

Contracts

-Hussein Najari, CEO of IKCO’s Supplying Automotive Parts Company, announced details of a project underway in the Iran Khodro Industrial Group to build a platform for several new vehicles. Najari said that Pininfarina, Hyundai Powertech, and the Company are among the main partners of Iran Khodro’s new project. Pininfarina is designing a modular platform for hatchback, sedan, crossover and pick-up vehicles. The Company is designing two levels of a turbocharged three-cylinder gasoline engine to power the vehicles. Hyundai Powertech is developing an automatic transmission for IKCO. The first new vehicle is expected to be launched in 2020. More than 100 Iranian companies are involved in the planning of the new project. (From a press release on October 30, 2017)

-Anand Group informed that the Company’s subsidiary, Mahle Filter Systems India, added a new product range by foraying into carbon canister products to meet BS-IV and BS-VI emission standards. The product is being used in Maruti Suzuki’s Ertiga MUV. (From Anand Group newsletter)

-The EUR 748 million invested in research and development during the fiscal year ended December 31, 2017 is approximately 5.8% of the Company’s sales during the year.

R&D Structure

-As of December 31, 2017, the Company has 6,067 employees working in research and development across 16 major research and development centers.

R&D Facilities

-The Company’s Mahle Powertrain subsidiary took the delivery of a sophisticated altitude and climatic control system from Weiss. The high-tech control system forms part of an overall investment of GBP 8 million, being made by the Company at its Northampton site. This will become its global center for Real Driving Emissions testing, which is set to be completed by the middle of 2018. The new facility will enable OEMs to develop next-generation gasoline engines without the associated costs of traditional trips for altitude and temperature extremes. Once operational, the test chamber will be able to simulate a maximum altitude of 5,000 meters, a temperature range of -40 °C to +60 °C, a humidity range of 10 - 80% relative humidity, and an air circulation capability of 70,000 m³/hr. (From a press release on December 14, 2017)

Technological Alliance

-The Company and Faurecia will collaborate for the development of innovative interior thermal management technologies for future mobility solutions. Within the framework of this cooperation, Faurecia will bring its unique expertise as a full interior system integrator while the Company adds its holistic thermal expertise for passenger comfort and energy efficiency. The two companies have already identified several potential collaboration fields addressing topics such as air distribution, air conditioning integration solutions for electric vehicles and the mutual development of personalized thermal management for the future cockpit. (From a press release on October 10, 2017)

Product Development

Innovations shown at Electric Vehicle Symposium
-The Company is showcasing its range of solutions for e-mobility, including the Mahle Efficient Electric Transport (MEET) vehicle concept at the 2017 Electric Vehicle Symposium. Besides the MEET concept, the Company will present thermal management solutions for electric vehicles and a range extender. MEET is a highly efficient 48-volt vehicle concept designed for urban mobility. (From a press release on October 6, 2017)

Mahle Efficient Electric Transport demonstrator concept at IAA 2017
-The Company announced that it has developed a highly efficient 48-volt vehicle concept for urban mobility, which can be transferred to a wide range of platforms owing to its modular approach. The Mahle Efficient Electric Transport (MEET) demonstrator concept will celebrate its world debut at IAA Cars 2017 in Frankfurt, Germany. The technical focus of MEET is on maximizing energy efficiency in urban applications. In accounting for journeys at higher speeds, the Company used a system's power of 28 kW for the concept. This allows a voltage level of 48 volts. As the voltage level is below the 60-volt threshold, there is no need for cost-intensive protective measures against electrical hazards. Consequently, systems costs are considerably lower than for high-voltage applications with similar performance. The Mahle Interior Permanent Magnet Synchronous Motor (IPM) traction drive is an extremely efficient combination of a synchronous motor with permanent magnets and integrated 48-volt electronics. The motor provides maximum efficiency and dynamics in a wide speed range. The drive unit is comprised of two electric motors that each provide 20 kW of power and 80 Nm of torque. In terms of comfort, the MEET uses a thermoelectric heat pump and surface heaters with two-zone air conditioning. (From a press release on August 3, 2017)

Reduced friction power cell unit
-The Company has developed a power cell unit (PCU), consisting of a piston, piston pin, piston rings and cylinder liners, with reduced friction. The PCU’s design utilizes optimized clearances, low-friction surfaces and a decrease in frictional contact area. The decrease in friction enables an increase in the engine’s output without changing its basic geometric dimensions. The reduction of friction in the new PCU reduces CO2 emissions by up to 2.5%. Furthermore, the components have been designed to allow the use of low-viscosity oils. Consequently, the pistons will require less cooling oil and the system will save additional fuel.

U-Flex oil control rings
-The Company’s U-Flex piston rings reduce oil ash and particulate emissions by reducing the amount of oil that enters an engine’s combustion chamber.

Liquid management module
-The Company has developed a new liquid management module consisting of an electric coolant pump operable at 12 or 48 volts, combined with a cooling circuit control and an integrated fail-safe. The module provides advantages in that coolant flows can be controlled more quickly, and that the warm-up phase for combustion engines can be shortened. Thus, the module provides CO2 emission savings of up to 2%. In addition, the module can be installed in electric vehicles.

Air conditioning system components
-The Company has developed an electric compressor for both 400- and 800-volt applications. The Company has also developed a new CareMetix cabin air filter, which uses five layers to filter out solid and gas particles from the air while also eliminating odors.

Patents

-In 2017, the Company had 369 first filings of patents.

-The Company’s capital expenditure on tangible fixed assets in Europe amounted to approximately 50%, or approximately EUR 306 million of the total capital expenditures during the fiscal year ended December 31, 2017. The Company’s European investment went into its mechatronics plant in Slovenia, as well as towards the expansion of facilities in Poland, Czech Republic, Romania and Germany.

-Capital expenditures in North America during the fiscal year ended December 31, 2017 consisted of approximately 23%, or EUR 141 million of the Company’s total capital expenditures. The Company’s capital expenditures in North America focused primarily on expanding locations in the U.S. and Mexico.

-Approximately 21%, or EUR 129 million, of the Company’s total capital expenditure was invested in the Asia Pacific region. Investments were made primarily in plant expansions and new facilities in China. The Company also made significant investments in expanding locations in Japan.

Investments outside Germany

-On May 16, 2017, the Company held an opening ceremony for its new compressor plant in the Changshu New & Hi-tech Industrial Development Zone, Jiangsu. The plant originates from an existing facility in Suzhou. With the move to the larger facility in Changshu, the plant's capacity has doubled. Construction began in August 2015. A total of CNY 180 million has been invested in the production facilities. Currently, approximately 330 employees work at the plant. The Company is planning additional investments in the future for this site. (From news releases issued by multiple sources on May 17, 2017)