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5. ZF Friedrichshafen AG Business Report FY ended Dec. 2015

ZF Friedrichshafen AG Business Report FY ended Dec. 2015

Factors
1) Net Sales
-The Company's sales for the fiscal year ended December 31, 2015 increased by 58.3% to EUR 29,154 million. The acquisition of ZF TRW on May 15, 2015 contributed to an EUR 8,753 million increase in sales. Excluding the Active & Passive Safety Technology Division and ZF TRW's contribution, the Company's sales still increased by 11.0% over the previous fiscal year.

2) Operating Profit
-The Company had an operating profit of EUR 1,081 for the fiscal year ended December 31, 2015, an increase of 20.5% over the previous year. While the operating profit increased, this mainly due to the sales increase from the acquisition of ZF TRW, as the return on sales decreased from 4.9% to 3.7%. The decrease in margin resulted primarily from extraordinary items, such as the acquisition of ZF TRW and Bosch Rexroth AG's business.

3) Car Powertrain Technology
-Sales from the Car Powertrain Technology Division increased by 15.5% to EUR 7,785 million in the fiscal year ended December 31, 2015. The main factor contributing to this increase was the improved sales volumes of automatic transmissions for mid-size and luxury vehicles, specifically in the U.S., Europe, and Asia. In addition, sales increased due to the ramp-up process at the Company's automatic transmission plant in Gray Court, South Carolina, U.S.

4) Car Chassis Technology
-The Car Chassis Technology Division had sales of EUR 6,550 million in the fiscal year ended December 31, 2015, an increase of 11.3% from the previous year. An increase in sales from the axle systems business in Europe, the U.S., and China along with positive currency effects contributed to the increase in sales.

5) Commercial Vehicle Technology
-Sales in the Commercial Vehicle Technology Division declined by 1.7% to EUR 2,983 million in the fiscal year ended December 31, 2015. Market weakness in Brazil and Russia combined with negative currency exchange effects lead to the decrease in sales.

TRW Acquisition

Outline
-In September 2014, the Company announced that it entered into a definitive agreement with U.S.-based safety systems supplier TRW under which the Company will acquire TRW for approximately USD 12,400 million. The transaction was completed in May 2015.

Strategic objectives
-The Company aims to combine TRW's sensing and software expertise, including cameras, radar and controllers, with its chassis systems and transmissions. The deal is expected to make the Company a key player in the fields of Advanced Driver Assistance Systems, or ADAS, and autonomous driving. The Company holds its own hardware technologies for chassis controls that will be useful for autonomous driving, but system suppliers are expected to take on a leadership role in ADAS and autonomous driving. For example, the suppliers of collision-avoidance systems would determine the types and specifications of axles and shock absorbers that the Company provides as a Tier 2 supplier. The Company thus decided to take advantage of TRW's key technologies such as electric steering, brake controls, assist systems and sensors, the Company's CEO Stefan Sommer explained in an interview.

Integration process
-The integration of TRW will occur in four phases and is expected to last between three to five years from the time of acquisition.

Acquisitions

-On July 1, 2015, the Company will acquire Halla DAS Lab Europe GmbH (HDLE), a software development department with approximately 50 employees located in Amtzell, Baden-Wurttemberg, Germany. The acquisition provides the Company with additional technology expertise for driver assistance systems. The software development team taken over from HDLE will be integrated into the Company's Corporate Research and Development (R&D). In addition to the team of developers, the Company acquired several test vehicles and development results. The Company is looking to focus on "surround view" technology for semi-autonomous driving. (From a press release on June 29, 2015)

Restructuring

-In January 2015, the Company sold its entire 50% stake in the steering systems joint venture ZF Lenksysteme (ZFLS) to the joint venture partner Robert Bosch. The former ZFLS is now called Robert Bosch Automotive Steering GmbH. The former ZFLS, based in Schwabisch Gmund, Germany, employs more than 13,000 associates in eight countries. It develops, produces, and sells steering systems for passenger cars and commercial vehicles worldwide. In 2013, it registered sales of approximately EUR 4.1 billion. With a total of 20 locations, the former ZFLS is active in the key automotive markets. Alongside locations in Europe, the U.S., and China, it also produces in India, Brazil, and Malaysia.

-Starting in 2016, the Company will combine all electromobility-related activities in a new E-Mobility division, which will be based in Schweinfurt, Germany. The new division complements the four existing divisions – Car Powertrain Technology, Car Chassis Technology, Commercial Vehicle Technology and Industrial Technology – as well as the newly created Active & Passive Safety Technology division, which incorporates the business activities of TRW. (From a press release on October 20, 2015)

Contracts

-The BMW X5 xDrive40e will be the first vehicle model to feature the Company's new 8-speed automatic hybrid transmission. (From a press release on September 8, 2015)

-The Company announced that its Active Kinematics Control (AKC) system is ready for volume production. The AKC system facilitates steering movements of the rear axle by modifying the toe angle. The AKC system is a standard active rear axle steering system in Porsche's 911 Turbo and 911 GT3 models. Two variants of the AKC system are available: one with an actuator in the center of the rear axle, also called a "central actuator" system, or one with a single actuator per rear wheel in Porsche's 911 Turbo and 911 GT models. (From a press release on February 5, 2015)

Outlook

-The Company expects its sales for the fiscal year ending December 31, 2016 to be between EUR 35 billion and EUR 36 billion. The significant increase is due to the acquisition of ZF TRW for a full year.

-Each year, the Company invests approximately 5% of its sales in research and development.

R&D Structure

-The Company has approximately 13,600 employees working in research and development worldwide.

R&D Facilities

-Major R&D centers

• Friedrichshafen, Germany: The corporate research & development center in Friedrichshafen coordinates the activities of ZF Engineering Pilsen and ZF Japan Engineering.
• Dielingen, Germany
• Passau, Germany
• Schweinfurt, Germany
• Pilsen, Czech Republic
• Shanghai, China
• Tokyo, Japan
• Detroit, MI, U.S.

-The Company is founding an R&D center in Yokohama, Japan, which will focus on the new E-Mobility division. Approximately 70 new positions for engineers will be created over the next two years to expand capacities for customer consulting and support and develop new technologies in the E-Mobility sector. An additional increase in personnel is planned for the future. The engineers will cooperate closely with Japanese automotive manufacturers to locally adapt Company products for the Japanese market. The Tech Center will also focus on power electronics and the development and design of completely electric drivelines. (From a press release on October 29, 2015)

-The Company has opened its extended R&D Center in Pilsen, Czech Republic. The location has a workforce of around 250 employees responsible for development services for the Company and its divisions. With the new building, the usable space in the R&D Center has doubled to approximately 7,000 square meters. The Company has invested EUR 4 million (around CZK 100 million) in the expansion. (From a press release on June 24, 2015)

R&D Activities

-The Company is presenting an electric Advanced Urban Vehicle concept, which was built entirely in-house on the base of a standard subcompact car. The concept vehicle obtains power from a traction battery, which is housed in three modules on the front and rear axle. The all-electric rear-axle drive electric Twist Beam (eTB), with electric motors mounted near the wheels, is the heart of the vehicle concept. The front axle is also highly innovative, with steering angles of up to 75 degrees enormously increasing the agility and maneuverability of the prototype. The Smart Parking Assist function steers the vehicle into any small parking space, and can be remotely operated using mobile devices such as a smartphone or smartwatch. The PreVision Cloud Assist assistance function uses cloud data about road and traffic conditions to improve driving efficiency and safety. (From a press release on July 3, 2015)

Product Development

EcoLife 6-speed automatic transmission with start/stop function
-The Company has unveiled the re-engineered ZF-EcoLife 6-speed automatic transmission which now features a start/stop function. With this function alone, the transmission achieves fuel savings of up to 10% in conventional diesel city buses. The transmission also eliminates the need for an additional electric motor, thus reducing costs and installation space. (From a press release on October 16, 2015)

8-speed hybrid automatic transmission
-The Company integrated a compact electric motor into its latest 8-speed automatic transmission, leading to a hybridized drive system that has been specifically designed to meet plug-in requirements. The BMW X5 xDrive40e will be the first model worldwide to feature the new plug-in hybrid in volume production. The electric motor provides a maximum power of 83 kW (113 hp) and a torque of 250 Nm from a standstill. That means that the X5 can be driven purely electrically at speeds of up to 120 km/h and within a range of 31 km. As a result, the standard cycle according to ECE 101 shows fuel reductions by up to 70%. (From a press release on September 8, 2015)

Torsion beam rear suspension for FWD vehicles
-The Company has developed a new torsion beam rear suspension for front-wheel-drive vehicles. The new suspension is the world's first rear suspension with a leaf spring made from glass fiber reinforced plastics (GFRPs). The suspension offers a weight reduction of 13% while maintaining handling performance equivalent to that of a multi-link suspension. The Company has also lowered the cost of the new suspension to the level of a multi-link suspension. The Company will actively propose the new suspension to OEMs for compact cars smaller than the C-segment and hybrid vehicles, with goals to commercialize the system in three years. (From an article in the Nikkan Jidosha Shimbun on July 14, 2015)

Cloud-based Advanced Driver Assistance System for Smart Urban Vehicle
-The Company has unveiled the Smart Urban Vehicle concept equipped with a cloud-based advanced driver assistance system (ADAS). The ADAS system was developed in collaboration with Google Inc and is the Company's first ADAS system for autonomous driving. The cloud-based system enables danger avoidance and predictive driving by automatically adjusting the drive torque, and reducing speed before entering a bend based on data in the cloud. The concept vehicle is also equipped with a multifunction steering wheel developed by ZF TRW. (From an article in the Nikkan Jidosha Shimbun on July 7, 2015)

-Approximately 79% of the Company's capital expenditure in the fiscal year ended December 31, 2015 was dedicated towards technical equipment and machinery. 18% was invested towards factory, office and other equipment and the remaining 3% was spent on land and buildings. The largest percentage of capital expenditure was related to the ramp-up process for new products and the production capacity expansion of existing products.

-In terms of regions, most of the capital expenditure was focused on Germany, the U.S., Mexico, and China.

-Investments made in the Car Power Technology focused primarily on the expansion of production capacity of 8-speed and 9-speed transmissions manufactured in Gray Court, South Carolina, U.S. Other capital expenditures went towards capacity expansion of transmissions and transmission control units at Saarbrucken, Germany; dual clutch transmissions at Brandenburg, Germany; and torque converters at Schweinfurt, Germany.

-In the Car Chassis Technology Division, the Suspension Technology Business Unit invested in the construction of a second manufacturing plant in China for the production of shock absorbers.

-Capital expenditures for the Company's Commercial Vehicle Technology Division went towards TraXon commercial vehicle transmissions manufactured at Friedrichshafen, Germany; as well as portal axles for buses at Passau, Germany.

-Capital expenditures for the Company's new Active & Passive Safety Technology Division centered around capacity expansions in North America, Europe, and Asia. Specifically, investments were made for the capacity expansions of 8-speed and 9-speed transmission control units in Auerbach and Diepholz, Germany. Additional expenditures were dedicated to assembly and test equipment for shift-by-wire systems in Diepholz, Germany; Shenyang, China; and Juarez, Mexico.

Investments outside Germany

<China>
-The Company announced that its two new plants, one for brake systems and the other for occupant safety systems, in Zhangjiagang, Jiangsu, China began operations. The brake system plant, constructed on 23,000 square meters of land, produces electric parking brakes, front brake calipers, and vacuum boosters, and assembles brake housings, carriers and actuators. The plant expects to hire over 750 people in 2016. The safety system plant has a land area of 16,000 square meters and produces driver, front passenger, side, and curtain airbags. It also assembles FS1 and SPR4 retractors, lock systems, and hood lifters. The plant intends to employ more than 500 people by the end of 2016. (From news releases issued by multiple sources on November 2, 2015)

<Eastern Europe>
-The Company is planning to introduce a restructuring plan for shock absorber production. To date, shock absorber production is located at the Company's Schweinfurt, Eitorf and Ahrweiler sites in Germany. As it is no longer possible to manufacture them at competitive prices in a high-wage country such as Germany, production will be moved away from the country. Most of it will be handled by the Company's existing production facilities in Levice, Slovakia and Gebze, Turkey. A portion of the production of advanced electronically controlled shock absorbers will be relocated from Schweinfurt to Eitorf, Ahrweiler and other facilities in Eastern Europe. This will enable the Company to safeguard jobs in Eitorf and Ahrweiler through the end of 2022. The Schweinfurt facility, which is gradually relinquishing all shock absorber production, will instead house the new E-Mobility division. (From a press release on October 20, 2015)