Autoliv Business report FY2006

Business Highlights

Financial overview
in million dollars 2006 2005 (%) Factors
Sales 6,188 6,205 (0.3) See note 1) below
Operating income 520 513 1.4 See note 2) below


1) -Net sales for 2006 decreased by 0.3% or by $17 million to $6,188 million because light vehicle production declined by 2% in Western Europe and by 3% in North America. The effect of currency rate changes was negligible. Consequently, organic sales also declined by less than 1%.
-Organic sales were driven by higher penetration rates for side curtain airbags, strong growth in Asia and Eastern Europe and higher market share for steering wheels and safety electronics. However, this was not enough to offset the negative effects from West European and North American vehicle production, continued pricing provided to customers, the expiration of certain frontal airbag contracts and the phase-out of unprofitable products.
-Organic sales of airbag products decreased by 1%, mainly due to the decline in light vehicle production in North America and Western Europe. Sales were also affected by price erosion, the expiration of certain frontal airbag contracts and the phase-out of certain unprofitable products, partially offset by strong growth in sales of curtain airbags.
-Organic sales of seatbelt products were flat. Consequently, the Company managed to offset the decline in light vehicle production in the two largest markets. This was primarily thanks to strong performance in emerging markets and the introduction of pro-active seatbelt pretensioners.
-Since 2002, consolidated sales (including acquisitions and currency effects) have grown by 39%, compared to a 3% growth in light vehicle production in the Triad, i.e. Europe, North America and Japan.

2) -Operating margin stood relatively unchanged at 8.4% in 2006 compared to 8.3% in 2005 despite pricing pressure from the vehicle industry, higher raw material prices and distressed suppliers.
- In 2006, the Company reduced cost for purchased components by more than 3%, improved labor productivity by more than 5% and moved more than 1,000 jobs to low-cost countries.

Sales by region
-In Europe, where the Company generates approximately 50% of its revenues, organic sales declined by 5% due to the decline in West European light vehicle production, price erosion, a negative vehicle model mix and the expiration of certain frontal airbag contracts.
- In North America, which accounts for a quarter of revenues, organic sales stood unchanged despite the decline in light vehicle production. Sales were driven by strong demand for curtain airbags and other side airbags, by a favorable customer mix and market share gains in safety electronics, partially offset by price erosion, the expiration of some frontal airbag contracts and the phase-out of unprofitable inflators.
- In Japan, which accounts for almost 10% of revenues, organic sales rose by 10% compared to a 6% increase in Japanese light vehicle production. The Company's performance was partially due to strong demand for curtain airbags and market share gains in steering wheels.
- In the Rest of the World, which generated slightly more than 10% of revenues, organic sales rose by 15% driven by strong vehicle production and a 28% growth in the sales of airbags.

-In June 2006, the Company has been awarded a seatbelt contract which is 40% bigger than any seatbelt order ever that the company has received. The new contract is expected to generate revenues of approximately $600 million over the life of the contract. The new business award is a global contract from one of the world's leading vehicle manufacturers. The contract involves several different models. Shipments to the first model will start in the fall of 2008 and then be ramped up to several different models by 2010. Shipments will cease gradually and end completely in 2015. The seatbelt systems will have both pretensioners that tighten the seatbelt at the onset of the crash and load limiters that reduce the risk for bruises and rib fractures in very violent crashes. The products will be manufactured by the Company's plants in China, Romania, Poland, Hungary and Mexico.

In July 2006, the Company has acquired another 20% of the shares in Nanjing Honggouang-Autoliv Safety Systems Co., Ltd. (NHA) thereby increasing its interest in this Chinese seatbelt company to 70%.
-As of December, 2006, the Company has acquired the remaining 9% of the shares in Autoliv Philippines Inc. and made it a wholly owned subsidiary.

Environmental activities
-The most important contribution the Company can make to the environment is to redesign and develop low weight environmentally friendly safety systems. In 2006, the Company introduced a side curtain airbag that has 38% less weight than the first curtain airbag which was introduced in 1998.
-The Company's latest passenger airbag has 25% less weight than the previous product generation which, in turn, was 30% lighter than its predecessor. These two examples alone save 10,000 tons annually (mainly steel) and lead to a corresponding environmental improvement in its supply chain.

Plans for 2007

-In 2007, the Company will continue to reduce costs, move production to low-cost countries and consolidate its supplier base. It will strengthen its superior presence in Asia, for instance, by building India's first airbag plant and by building a plant in Southern China, mainly for its Japanese customers in China and Japan.
-The Company also needs one more plant in Mexico and another one in Romania to meet the continued order intake and to prepare for additional moves to low-cost countries.
-In R&D, the Company will start developing the next generation of its night vision system and continue to explore the potentials in active vehicle structures.

Outlook for 2007
-During 2007, light vehicle production is expected to be flat in the Triad (i.e., Europe, North America and Japan) and to decline by 4% in the important West European markets. However, the Company expects to be able to offset this decline with an improved vehicle mix in Europe and North America, continued introductions of side-curtain airbags and by continued strong performance in emerging markets, primarily Asia. Based on these assumptions, organic sales for 2007 are expected to increase by at least 3%.
-Thanks to higher sales and internal cost reductions, gross margin is expected to be maintained or improve slightly depending on the possibility to further reduce component costs without aggravating the already serious supplier problems.
-The trend towards higher R,D&E expense in relation to sales is likely to continue. Two decisions in 2006 will also temporarily impact operating income. Firstly, start-up costs in Asia (primarily in China) are forecasted to increase by almost $25 million from the 2006 level. The start-up activities are necessary to pave the way for further cost reductions and expansions in low-cost countries. Secondly, the acquisition of the remaining shares in Autoliv-Mando will increase amortization by $12 million (decreasing annually through 2010). Despite these $35-40 million in additional costs that are expected to have a negative margin effect of about 0.6 percentage points, operating margin is expected to exceed 8.0%.


(in million $) 2006 2005 2004 2003 2002
R&D expenditure 398 386 368 305 229
During 2006, gross expenditures for R,D&E (research, development and customer application engineering) rose by 7%, to $507 million, corresponding to 8.2% of sales compared to 7.7% in 2005. Of the 2006 amount, $106 million was related to customer-funded engineering projects and crash tests. Net of this income, the Company spent $398 million, corresponding to 6.4% of sales, compared to 6.2% in 2005.

R&D Structure
-In July 2006, the Company has opened an engineering center in Romania that will do electronics development for European clients. After opening its first electronics plant and tech center in Shanghai to serve the Asian market, the Company is pursuing investments in low cost countries for its electronics activities. A new engineering center is now established in Timisoara to serve the European market. The new Romanian center will eventually employ over 100 persons - mainly software engineers - and will initially focus on design of safety electronics, mostly embedded software development and validation.

New Product Development

-In September 2006, the Company has been awarded development and supply contracts for a new safety electronics technology where the vehicle stability sensing function is integrated into the airbag control unit. This world-first electronics architecture will reduce complexity and provide substantial cost savings for these safety systems.

In October 2006, the Company's new Seat Cushion Airbag was recognized as a key technology for the newly launched Lexus LS460. The Company received a Toyota Technology Award for "the world's first frontal airbag for the rear-seat". The award was presented to Autoliv Japan by a Toyota management representative at Toyota's Tahara Plant in Japan. Located in the seat cushion, the new airbag works together with the seatbelt system by helping to disperse the impact forces from a collision thereby mitigating potential injuries for rear seat passengers. Through new and innovative concepts, the airbag also achieved significant size and weight reductions over previous concepts.

In October 2006, the Company's new Safety-Vent Airbag was recognized by the Automotive News as a finalist in the prestigious 13th annual PACE award competition for innovation excellence. The new technology could generate significant savings for Original Equipment Manufacturers (OEM's) throughout the whole automotive industry over the next several years, in addition to reducing the risk of injuries for occupants positioned too close to a deploying front-seat passenger airbag. This new technology was launched recently in North America with Daimler Chrysler, and OEM's have already signed up for more than 20 programs utilizing the technology. The new Safety-Vent airbag technology is designed to address the risk associated with airbags. Although airbags save thousands of lives every year, they could be dangerous for children, small females and other occupants in the front passenger seat who are "Out of Position" ("OOP"), i.e. sitting too close to a deploying airbag.

At IAA 2005
- At the Frankfurt Auto Show in September, the Company introduced a new headlight system, jointly developed with the BMW Group. The system enables drivers to see up to 300 meters at night compared to not even 100 meters with existing low-beam headlights. The key to the system's performance is the capability of the camera to sense heat from objects and living beings. The system is so sensitive that it can see in total darkness without any lamps or illumination. As a result, the field of vision is not dependent on or limited to the beam of the headlights or of an infrared (IR) light source as in other infrared night vision systems. The system is available in the BMW 7 series as The BMW Night Vision System.

Investment Activities

in million $ FY2006 FY2005 FY2004
Investment 328 315 324
% against sales 5.3 5.1 5.3

-Capital expenditures continue to exceed depreciation of $284 million as a reflection of the growth of the automotive safety market and the need for additional manufacturing capacity.
-Capital expenditures for 2007 are expected to range from $325 million to $350 million.

Overseas Investment

-In April 2006, the Company opened its fifth plant globally for safety electronics and its eighth manufacturing facility in China. The new facility, which is located in Shanghai, will primarily produce airbag control units, both for the growing Chinese market and for other Asian markets such as South Korea and Japan. The plant could also act as a sub-contractor to its other plants in high-cost countries. The new Chinese investment represents an expansion in its use of low-cost country production. The Chinese electronics plant will have 300 employees and the capacity to increase its annual sales of electronic control units for airbag systems by nearly 20%.

-In May 2006, the Company opened a plant for airbag inflators which is the Company's ninth manufacturing facility in China and its sixth inflator plant globally. The new facility, which is located in Shanghai, will meet the demand for airbag inflators, both from the rapidly growing Chinese market as well as other Asian markets, such as South Korea and Japan. Capital expenditures will total $50 million for the current expansion phase, which is expected to meet the Company's capacity needs for airbag inflators for the next few years. The plant will then have more than 500 employees and raise its global production capacity for airbag inflators by 20% to close to 100 million annually. Most of the inflators manufactured in China will be used in its own airbags but 5-10% are expected to be sold to other airbag assembling companies. The customers for the Company's airbags will include Nissan, Mazda, Hyundai and General Motors as well as several Chinese vehicle manufacturers such as Brilliance and Changan.

-In September 2006, as part of its cost reduction strategy, the Company is expanding its operations in Turkey and has recently opened two new manufacturing facilities. The first plant will have the potential to produce one million steering wheels per year, when its fully utilized. This corresponds to approximately one-fifth of the Company's existing European steering wheel capacity. The new plant will produce both polyurethane-foamed and leather-wrapped steering wheels. Currently, Autoliv Turkey produces polyurethane steering wheels in its assembly plant for airbags and seatbelts. By moving to a new location, steering wheel production will be expanded and improved at the same time as manufacturing space in the existing plant will be released for its increasing airbag and seatbelt sales. The new manufacturing building provides 4,000 square meters (approx. 40,000 square feet) of production area at the Taysad Industrial Zone in Gebze outside Istanbul. The second new plant provides another 2,400 square meters (approx. 24,000 square feet) of production area on the same site. This plant will assemble rewinding spring cassettes for seatbelt retractors. The annual manufacturing capacity will eventually exceed 30 million cassettes when the plant is fully utilized. This corresponds to nearly 10% of the industry's current global spring cassette capacity.