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5. ZF Friedrichshafen AG Business Report FY ended Dec. 2016

ZF Friedrichshafen AG Business Report FY ended Dec. 2016

*Figure from previous Electronic Systems division

Factors
1) Net Sales
-The Company’s sales for the fiscal year ended December 31, 2016 increased by 20.6% over the previous year to EUR 35,166 million. The primary reason for the increase in sales was due to the fact that the 2016 fiscal year was the first full year where ZF TRW was included in the Company’s consolidated financial results. When including the pro-forma sales of ZF TRW in the 2015 fiscal year, the Company’s net sales in the 2016 fiscal year increased by approximately 2%.

2) Operating Profit
-In the fiscal year ended December 31, 2016, the Company had an operating profit of EUR 1,614 million, an increase of 49.3% over the previous year. As with the Company’s net sales, the primary reason for the increase was due to the inclusion of ZF TRW as part of the Company’s consolidated financial results for a full fiscal year. Overall improved performance contributed to an operating margin gain of 0.9 percentage points.

3) Car Powertrain Technology
-Sales in the Car Powertrain Technology Division for the fiscal year ended December 31, 2016 increased by 2.5% over the previous year to EUR 7,981 million. The primary reason for the increase in sales was an increase in business of automatic transmissions for mid-size and luxury vehicles. The increase in sales of automatic transmissions was prominent particularly in the North American and European markets.

4) Car Chassis Technology
-The Car Chassis Technology Division had sales of EUR 6,447 million in the fiscal year ended December 31, 2016, a decrease of 1.6% from the previous year. While the division experienced organic growth, those gains were offset by negative currency effects, specifically in the Chinese market.

5) Commercial Vehicle Technology
-In the fiscal year ended December 31, 2016, the Company’s Commercial Vehicle Technology Division had sales of EUR 2,960 million, a decrease of 0.8% from the previous year. Sales in the division decreased despite sales growth in Europe due to weakness in the Brazilian market as well as negative currency effects.

6) E-Mobility
-The Company’s E-Mobility Division had sales of EUR 862 million in the fiscal year ended December 31, 2016. The E-Mobility Division encompasses the previous Electronic Systems Division along with several additional business units.

7) Active & Passive Safety Technology
-The Active & Passive Safety Technology Division’s sales in the fiscal year ended December 31, 2016 totaled EUR 14,446 million, an increase of 61.6% over the previous year. The main reason for the increase was the fact that 2016 was the first full year where ZF TRW, and consequently, the Active & Passive Safety Technology Division, was included in the Company’s consolidated financial results. On a pro-forma basis, the division’s sales increased by 1.2% over the previous year, primarily due to growth of the Occupant Safety Systems Business Unit and improved sales in the Asia-Pacific and in Europe.

Recent Developments

-The Company opened its new EUR 90 million headquarters, dubbed ‘ZF Forum’, in Friedrichshafen, Germany. Construction on the ZF Forum took over three and a half years, with the groundbreaking ceremony held on February 5, 2013. The new building comprises state-of-the-art offices for 700 employees, an exhibition space on the ground floor, a conference level, a 350-seat auditorium, a Knowledge Workshop for children, and a staff restaurant. The east wing of the building houses technical training facilities for employees and business partners, which provides hands-on experience with Company products, and a workshop complete with truck or bus for training purposes. (From a press release from November 22, 2016)

-The Company has established a subsidiary to invest in technology companies. Zukunft Ventures GmbH, headquartered in Friedrichshafen, opened its doors for business in September 2016. The new company's mission is to identify and invest in companies that are involved in developing technologies that could be relevant for the Company. The Company has recently invested in several technology companies, including a 40% share in Ibeo and doubleSlash. Such investments will now be handled by Zukunft Ventures. (From a press release on October 17, 2016)

-The Company’s ZF North America subsidiary is recalling 505,000 control sensors in the U.S. because they can make nine-speed transmissions shift into neutral without warning. The transmissions were sold to several automakers that will issue separate recalls. The Company said a star-shaped connector on a wiring harness was improperly crimped, which can lead to increased electrical resistance that can shift the transmission into neutral. The problem became known in July when FCA recalled 323,000 U.S. vehicles. The recall covered certain 2015 model year Chrysler 200s, Ram ProMaster City vans, Jeep Renegades and Cherokees. The Company believes a software update will fix the problem. (From a Detroit Free Press article on August 6, 2016)

-ZF TRW will further enhance the capabilities of its Global Electronics business with its new Headquarters building. The new headquarters located in Detroit suburb of Farmington Hills feature 171,000 square feet of office and laboratory space and will serve as ZF TRW’s Global Electronics Headquarters. It will house more than 600 electronics experts with full component and vehicle testing capability across the driver assist, occupant safety and Radio Frequency electronics product lines. ZF TRW is expected to complete occupancy of the new building in the first half of 2016. (From a press release on January 29, 2016)

-The Company announced that the current headquarters of ZF TRW in Livonia, Michigan, the U.S. will become the Company’s North American headquarters in April 2016. At the same time, the Company’s Northville, Michigan location will serve as a central sales and engineering center. ZF TRW employs 1,200 people in Livonia, while the Company has roughly 400 employees in Northville. (From a press release on January 11, 2016)

Chronology of Haldex Acquisition attempt

-The Company announced a public offer for Haldex AB. The Company will offer SEK 100.00 (USD 11.74) per Haldex share in cash, valuing Haldex at SEK 4.4 billion (approximately USD 516.3 million). A combination of the two companies presents an opportunity for both companies to jointly expand their value to the customer in the fields of drivetrain and chassis solutions for commercial vehicles, specifically in brake and air suspension solutions and for future megatrends in mobility. The offer is conditional, among other things, upon being accepted by Haldex's shareholders to an extent that the Company becomes the owner of more than 90% of the outstanding shares in Haldex. In considering the offer, Haldex has also taken into account that the offer is clearly superior to SAF-HOLLAND's offer announced in July 2016. (From a press release on August 4, 2016)

-The Company announced that it has increased the price per share in its public cash offer for Haldex AB to SEK 110, valuing Haldex at SEK 4.85 billion (approximately USD 571.6 million). (From a press release on September 14, 2016)

-The Company, through its wholly owned subsidiary ZF International B.V., announced that it has withdrawn its recommended public cash offer to the shareholders of Haldex AG. The increased offer of SEK 120 in cash per Haldex share had been made public on 16 September 2016. The acceptance period for the offer ended on October 3, 2016. As of October 3, the Company’s offer has been accepted by shareholders representing 4,238,980 shares or 9.59% of the total share capital in Haldex. The offer was conditional upon being accepted by Haldex's shareholders to such an extent that the Company would become the owner of shares representing more than 50% of Haldex's total share capital. As this condition has not been satisfied, the Company decided not to pursue the offer. With total shareholdings in Haldex of 21.67%, the Company is now the biggest shareholder in Haldex. (From a press release on October 5, 2016)

-The Company, through its wholly owned subsidiary ZF International B.V., announced that it has reduced its shareholding in Haldex Aktiebolag to 20.11% of the total share capital as of November 30 and intends to accept Knorr-Bremse AG’s tender offer at SEK 125 in cash per share for its entire remaining stake. The Company previously held 21.67 percent in Haldex and was Haldex's largest shareholder. (From a press release on November 30, 2016)

Acquisitions

-The Company and doubleSlash Net-Business GmbH have agreed on strategic participation where the Company is to buy a 40% stake in doubleSlash. The Company wishes to further expand in the field of vehicle networking with the software company also based in Friedrichshafen. The two parties previously formed a strategic partnership in the fall of 2015 to collaborate closely in four strategic business sectors: software development, networked products and services, product data management and Enterprise Information Management (EIM). (From a press release on September 9, 2016)

-The Company has announced that it has acquired a 40% stake in Ibeo Automotive Systems GmbH. The Hamburg-based company, founded in 2009, is a market leader in lidar technology and in developing environmental recognition software with a particular focus on applications for autonomous driving. Ibeo expects to increase its workforce from around 50 to 250 employees in the medium term and will establish an Autonomous Driving Competence Center (AD-CC). The AD-CC will focus on the volume production and marketing of solutions for highly automated and autonomous driving. (From a press release on August 2, 2016)

Restructuring

-German private investment company GENUI and the Cherry management announced the acquisition of the Cherry Group from the Company. The Company will sell the entire share in the subsidiary as it concentrates its investment in its core business. The Cherry Group headquartered in Auerbach, Germany has 380 employees worldwide. The Company acquired the Cherry Corporation in 2008 and created a separate product line for its computer input devices. The Cherry Group posted sales of roughly EUR 80 million in 2015. The takeover is expected to close in November 2016. (From a press release on October 20, 2016)

-The Company announced it has completed the sale agreement of its global Engineered Fasteners and Components business to Illinois Tool Works Inc. for approximately USD 450 million. The business was a part of ZF TRW and the Company’s Active and Passive Safety Technology Division. This divestment highlights the Company’s concentration on the growth of its core businesses in advanced safety, efficiency, electrification and the further development of automated driving. (From a press release on July 1, 2016)

Business Partnership

-The Company and KSPG AG signed a five-year cooperation agreement with a lifetime value of approximately EUR 66 million. Products supplied include thrust washers and bushes used in transmissions, brakes, shock absorbers, chassis systems and damped flywheels. This makes the KSPG-subsidiary KS Gleitlager GmbH a 100% global supplier of bearings for the Company'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 plant in St. Leon-Rot, Germany, and at the plant in Celaya, Mexico. (From a press release on May 25, 2016)

Contracts

-ZF TRW has announced that it will start production of its heated steering wheel technology (Conductor Insert Heating System, or CIHS) with a major European vehicle manufacturer in 2017. The design can be combined with ‘Hands On Detection’ (HOD) to enhance safety and comfort, and support the development of automated driving. The CIHS achieves greater freedom in component design by the elimination of heat induction carrier material while it enhances product performance by placing the heating wire directly on the steering wheel surface. These processes allow for a reduction in weight and complexity and permit the inclusion of additional steering wheel functions. (From a press release on May 18, 2016)

-ZF TRW has announced through its joint venture, Brakes India Limited, that it has won the first business award for its Electric Park Brake (EPB) system in India. Launching with a major global vehicle manufacturer, the technology will start production in 2017. ZF TRW has now produced more than 65 million EPB systems globally. (From a press release on February 4, 2016)

-ZF TRW announced that Rinspeed’s new Etos autonomous car is equipped with its retractable steering wheel which offers several functions including hands on/off detection to help support the driver during automated driving situations. In addition to the steering wheel, ZF TRW’s roof airbag and seat belt webbing is also fitted to the Etos. (From a press release on January 20, 2016)

Outlook

-The Company expects that its sales for the fiscal year ending December 31, 2017 will be approximately EUR 36 billion. In the medium term, the Company expects to experience annual organic growth of approximately 6%, based on increased market penetration and stable market growth.

-The Company aims to invest approximately 5% of its sales in research and development every year.

-In the fiscal year ending December 31, 2017, the Company expects to slightly increase its ratio of investment in research and development to net sales compared to 2016.

R&D Structure

-As of December 31, 2016, the Company has 14,550 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 has announced that it will set up its first-ever technology center in Hyderabad, India, which will focus on the development in software and mechanical engineering. The technology center will be operational by January 2017 and is expected to employ 2,500 engineers by 2020. It will support the Company's global development teams while enabling the Company to accelerate local product development. The Company has been operating for more than three decades in the Indian market while ZF TRW has had operations for more than 50 years through its joint venture with TVS and Rane groups. The Company has 19 production facilities in India excluding warehouses and office buildings, with approximately 12,000 employees including those in joint ventures. (From press release on August 5, 2016)

-ZF TRW announced that it has opened a crash sled section at its Anting Technical Centre in China. The facility is the Company’s fourth collision testing facility in the world and is equipped with the latest-generation servo sled and dummy calibration devices. The equipment provides advanced frontal crash testing with a yaw reproducing realistic 3D crash simulations, which exceeds US NCAP requirements for Oblique Moving Deformable Barrier at 90 km/h. The equipment can test front seat collisions, rear seat collisions, a combination, and has the capability for multiple seat plan alterations. (From an article in the Nikkan Jidosha Shimbun on April 14, 2016)

R&D Activities

-ZF TRW demonstrated its testing of autonomous driving equipment outside of its recently relocated technical center in Farmington Hills, Michigan. The center employs 600 electronic engineers and expects to hire 150 more in the near future. ZF TRW invested USD 30 million to purchase and renovate the 171,000-square-foot building. ZF TRW's global electronics team focuses on developing cameras, sensors, radar and software for systems that include adaptive cruise control, lane keeping assist, and emergency braking systems. The company is working on semi-autonomous highway driving systems that will be available in 2018 in the U.S. (from a Detroit News article on October 25, 2016)

-The Company is demonstrating advanced partially automated driving capabilities for customers and the media at its Driver Assist Systems facility in Brest, France. Drivers will be able to experience a 'Highway Driving Assist Multi-Lane' feature which combines environmental sensing, automatic steering, braking and acceleration to help maintain vehicle control. The system can support automatic, driver initiated lane changes by detecting the lane type and presence of vehicles in neighboring lanes. The demonstration vehicle integrates ZF TRW's AC1000 radars and next generation camera systems together with its Electrically Powered Steering Belt Drive (EPS BD) and Electronic Stability Control. (From a press release on July 14, 2016)

-The Company is using a new test vehicle to highlight how the different fields of competences between itself and TRW can be combined to generate solutions with a high customer value. The prototype combines the Dual Pinion Electrically Powered Steering (EPS) by ZF TRW on the front axle with the Company’s Active Kinematics Control (AKC) on the rear axle. Despite the slippery ground in test situations, the vehicle stays on track even when changing lanes or overtaking. The connection of the two steering systems can also be leveraged in the future for partially or fully automated vehicles. (From a press release on February 23, 2016)

Product Development

Airbag concepts for new NHTSA crash testing
-The Company announced that it will launch innovative new passenger airbag concepts in response to a new crash scenario test from the U.S. National Highway Traffic Safety Administration (NHTSA). The performance test scenario, known as the "Oblique Moving Deformable Barrier" (OMDB) will be added by the National Highway Traffic Safety Association (NHTSA) to assess new vehicles starting from the 2019 model year. The Company's new airbag systems are designed to protect front seat occupants when the vehicle is struck head-on and from the left at 90 km/h (56 mph). New airbags installed in the roof liners will have an additional safety cushion that inflates next to the driver's head that creates a pointed V shape or a rounded U shape, based on the vehicle's interior design. For the front seat passenger, the Company developed a "parallel cell front seat passenger airbag" that features a unique chamber design with a special geometry that widens towards the center of the vehicle. (From a press release on December 6, 2016)

Openmatics Dashboard fleet portal application
-The Company announced a new application from Openmatics, its aftermarket connectivity specialist, for owners of large mixed car fleets such as car rental companies, car-sharing service providers, workshops and insurance companies. The Openmatics OnBoard-Unit transfers vehicle-specific data to a secure cloud database where web-based apps access and analyze the data for users. With the new Dashboard app, Openmatics provides the functions of a fleet portal. Dashboard displays and analyzes fleet vehicles on a digital map in real time, providing various key performance indicators (KPI) for analysis, such as vehicle fleet utilization, future servicing requirements, and vehicle locations. For an electric vehicle fleet, Dashboard supports efficient charge management by displaying the battery charge state and a route to the nearest charging station if necessary. Rental car companies can use Dashboard for electrically powered cars to match their customers’ desired routes with vehicles available in the fleet. The Openmatics Dashboard is also available for conventional vehicles to help rental companies with refueling management as vehicles are returned to a parking garage. (From a press release on November 30, 2016)

X2Safe communication intelligent algorithm
-The Company presented its cloud-based X2Safe intelligent algorithm to improve traffic safety. The algorithm can be used as the basis of car-to-X, X-to-car and X-to-X applications, enabling cloud networking for vehicles and all road users. The X2Safe intelligent algorithm communicates with vehicles, smart phones and smart watches to warn drivers, pedestrians and cyclists of potential collisions and can initiate autonomous or semi-autonomous maneuvers. (From a press release on November 29, 2016)

Commercial vehicle collision avoidance technology
-WABCO Holdings Inc. has demonstrated the prototype of a collision avoidance technology for commercial vehicles. Jointly developed by WABCO and the Company, the Evasive Maneuver Assist (EMA) combines WABCO's braking, stability and vehicle dynamics control systems on trucks and trailers with the Company's active steering technology. EMA marks a critical step towards enabling autonomous driving in commercial vehicles. (From a press release on June 29, 2016)

Modular rear axle system
-The Company announced that it has developed a new modular design rear axle for the first time. The new axle system can be freely combined with engines, rear motors, and four wheel steering systems. The Company will market the rear axle system to automakers by highlighting the fact that it reduces costs, while also providing compatibility with a wide range of drive systems and features to meet local needs. (From an article in the Nikkan Jidosha Shimbun on March 9, 2016)

Electric axle drive system
-The Company has announced that its new electric axle drive system will start volume production with a European vehicle manufacturer in 2018. The 113-kg system features an electric motor configured as an asynchronous motor (ASM) and generates up to 150 kW. The maximum engine torque of 380 Nm is converted into a 3,500 Nm axle torque. The technology is suitable as an all-electric drive for battery-powered, fuel-cell or hybrid electric vehicles and is suitable for both front and rear axle applications. Production will take place in Schweinfurt, Germany, the headquarters of the Company's new E-Mobility Division. Construction of the new production facility is currently underway. (From a press release on March 2, 2016)

Patents

-In 2016, the Company filed more than 1,200 new patent applications.

-The Company announced that a total of 1,036 new patents were registered in 2015, an increase of 14% compared to the previous year. (From a press release on May 12, 2016)

-In the fiscal year ended December 31, 2016, approximately 81% of the Company’s capital expenditure was invested in technical equipment and machinery. 16% was invested towards factor, office and other equipment, while the remaining 3% was invested on land and buildings. The largest percentage of capital expenditure was used towards expanding production capacities for existing products and the production ramp-up of new products.

-Geographically, the Company’s capital expenditure in the fiscal year ended December 31, 2016 focused on Germany, the U.S., China and Mexico.

-In the fiscal year ending December 31, 2017, the Company expects to slightly increase its ratio of capital expenditure to net sales compared to 2016.

Investments in Germany

-The Company announced the official production start-up of the new 8-speed dual clutch transmission (8DT) at the Brandenburg plant in Germany. Company and Porsche engineers developed a hybrid transmission modular kit based on the all-new 8-speed dual clutch transmission for standard and all-wheel drives. The Company is investing more than EUR 100 million in the highly flexible production of the new transmission system at the Brandenburg plant, which develops and produces manual transmissions and dual clutch transmissions for passenger cars. Approximately 1,200 employees produce more than 600 transmission systems a day at Brandenburg. (From a press release on June 16, 2016)

Investments outside Germany

-In its 36th Annual General Meeting, the Company’s subsidiary, ZF Steering Gear, informed that it has decided to setup a new manufacturing unit at Pithampur, Madhya Pradesh. The company has already taken possession of the leased plot and is developing the plant and the necessary equipment. The plant is expected to begin production in about 18 months. The Company is planning to invest approximately INR 1.5 billion in developing the new plant. This plant will help ZF Steering Gear (India) Limited expand its production capacity and increase its geographical advantage. (Based on ZF Steering Gear chairman’s speech during Annual General Meeting)


-The Company has announced an investment of around EUR 2.9 million at its radar facility located in Brest, France. The investment is being utilized for new equipment, tooling and components for the development of its next-generation radar sensor, as well as a 500-square-meter warehouse expansion. The Company’s radar systems are designed, assembled and tested at Brest which currently occupies approximately 2,200 square meters. The facility produces around 300,000 units per year, and is expected to produce more than one million units by 2020. (From a press release on July 13, 2016)


-Following the easing of economic sanctions at the beginning of 2016, the Company is intensifying its business commitments in Iran. As such, the Company has opened up the ZF Pars SSK subsidiary, which will start to consolidate its business activities in the region. The initial group of around ten employees will be based in Tehran with the prospect of hiring additional employees as business activities expand. The Company set up operations in the region approximately 30 years ago and has been a 16.7% shareholder in the S.S. Charkheshgar joint venture since the middle of the 1980s. Commercial vehicle transmissions primarily used in city buses have been produced in the Tabriz plant in northern Iran. The business activities of this joint venture will be intensified while the production facility is also scheduled to be modernized and updated. (From a press release on June 15, 2016)