Financial overview

Note (1)
Europe
The Commercial Vehicle Systems posted a slight increase in sales in FY2008. The main contributor to sales in Europe was the disc brake, recording high production figures in the first half-year in particular. In July 2008 the Company commenced production at the joint venture company, founded together with Russian commercial vehicle manufacturer KAMAZ in December 2007. In the initial phase the joint venture is producing drum brakes for all KAMAZ model series.

NORTH AMERICA
The Company's subsidiary Bendix was able to further reinforce its market position in a weak environment and posted a 1.6% increase in sales in local currency terms, primarily due to high sales of the modular systems. In 2008 Bendix began the assembly of completed driver's cabs for the heavy-duty municipal vehicles built by Autocar. Also in 2008, production of disc brakes began at the new factory in Bowling Green, KY.

SOUTH AMERICA
The Company was able to post substantial sales growth in this region in 2008.
The year of 2008 also marked the onset of production of viscous dampers for diesel engines by Hasse & Wrede, its consolidated company

ASIA/AUSTRALIA
Owing to intensified activities in Japan, India, and China in the first half of FY2008 the Commercial Vehicles Systems division was able to post a substantial rise in sales compared to the previous year. In the second half-year, however, there were clear signs of the impact of the financial market crisis in Asian markets, too, and a substantial decline in the output of commercial vehicles.

-In Japan, its plant in Sakado was again able to step up its output in 2008. Among the main reasons for this was the start of supplies of viscous dampers to Mitsubishi Fuso Truck and Bus, the market launch of the ABS6 Advanced Systems and the prevailing positive trend in terms of control modules for diesel particulate filters.
-In India, the market launch of new products such as the lift axle system and ABS provides further evidence of the Company's development in the region.
-In China, its subsidiaries in Dalian reported substantial growth in 2008, while business remained stable at the prior-year level in Shanghai. Contributory factors here included growing demand for disc brakes and the expansion of the market position for stationary dampers and jumbo dampers of between 366mm and 2,770mm. A major order for the supply of lightweight engines with 225CC compressors adapted for the local market laid the foundations for further business development in China.

Access to the Russian market
Acquisition
During the year of 2008, The Company acquired the SmarTire company (wireless sensing systems for tire pressure monitoring) and the VORAD Technologies division of Eaton (collision warning system).

Geographical topics
(1) Indian Site Becomes Total Solution Supplier
-After three years of production start-up, the Company began to offer series-produced compressors and total solutions to customers in India. During 2008, the Company's development engineers worked closely with OEM customers to bring the compressor to market. Compressor development for the new engine of Ashok Leyland engines, for example, has already been completed and series production for delivery to the truck and engine manufacturer is planned for the end of 2009.

-The Company's Indian subsidiary will be supplying the complete braking system for the World Truck shortly to be launched by Indian commercial vehicle manufacturer Tata Motors. Knorr-Bremse India has been working on localization of 350 components for the World Truck's braking system, and there will be incorporated step by step into series production. Technical solutions will either be manufactured by the Company itself or locally sourced, and test rigs were set up in 2008 for the assembly lines at the plant. In addition to domestic sales, Tata Motors aims to export the World Truck to countries such as South Africa, Russia, China, and Brazil as well as to the Gulf region.

-During 2008 Indian subsidiary also started redesigning and localizing production of components for lift axle vehicles. There are currently supplied by other sites to Tata Motors, but localization became necessary in order to meet Tata's cost targets.

(2) Visco-Damper Production in Brazil
In 2008, the Company extended its Brazilian production to include locally-produced visco-dampers, thereby becoming the sole manufacturer of these products in South America. By avoiding import duties and the logistical costs of importing the dampers from Europe, the Company is able to offer competitive prices to its customers, who include Daimler, Scania, International-MWM, and Cummins. Production capacity is 85,000 dampers per year.

(3) Closer Cooperation with Cummins in China
In China, the Company intensified its cooperation with Cummins. Cummins selected the Company as an exclusive supplier for the so-called Avalon engine project. Together with the joint venture Beijing Futon Cummins, the Company signed a five-year agreement to supply light engines with low-cost 225CC compressors specially developed for the local market. A total of 140,000 of these engines are to be produced per year. In 2008, the Company's subsidiary in Dalian also developed a new vibration damper for a Xi'an Cummins' heavy engine. The Dalian company has been supplying Cummins and its four Chinese joint ventures with locally manufactured compressors and visco-dampers since 2005.

(4) Hasse & Wrede in China
In 2008, Hasse & Wrede Dalian maintained its high growth rates of recent years with visco-dampers, stationary dampers, and 366mm to 2,770mm jumbo dampers. The Company demonstrated its technology in the field of dampers at marketing events held at the Dalian plant. Its production portfolio was well received by customers such as STX Engine and Hyundai Heavy Industries in Korea and Jinan Diesel Engine and Henan Diesel Engine Industry in China.

Note: Expenditure on R&D increased to Euro 171.3 million (2007: Euro 158.7 million) or 5.1% of consolidates sales. In the commercial vehicle sector the focus was on the development of innovative systems designed to boost energy efficiency and road safety.


Expanded development center at Budapest
In this favorable environment, the existing development center at Budapest is being expanded to enable a consistent focus on preparing new truck Platforms for series production. Staffing in Budapest is being boosted by almost 100 new engineers, and the resources already available for developing electronic systems are to be supplemented with additional capacity for design.
The main customers of the development center will remain the Electronic Systems and Air Supply and Treatment CoCs.

Technological Alliance
In 2008, Knorr-Bremse Hungary further strengthened its collaboration with Russian educational institutions, with a main focus on joint projects for developing braking system components for the Russian market. Its Hungarian company maintains close links with technical universities in Moscow, Nizhny Novgorod and Naberezhnye Chelny that enable the Company to benefit from the extensive technical expertise of the Russian engineers. Collaboration also involves joint participation in tendering and the allocation of teaching contracts at the educational institution to the Company's employees. One example of this cooperation is the R&D center in Budapest, a spin-off from the University of Budapest dating back to 1995, which by 2008 had a workforce of some 170 engineers.

Product developments
EBS5 Evolution Package
The EBS5 Evolution Package was first introduced at the 2008 IAA Commercial Vehicles. In addition to the usual mechatronic components, this development of an existing electronic braking system features a new generation of electronic unit (ECU) as well as improved diagnostic functions. The EBS5 Evolution Package integrates ABS (anti-lock system), ASR (traction control), and ESP (electronic stability program) to offer higher levels of safety and reliability on the road. The Evolution Package also introduces ESP for road trains for the first time - which means that ESP is now available for all categories of heavy truck.

Capital expenditures by division

Overseas Investment
Production starts at Joint venture with KAMAZ
In July 2008 the joint venture formed at the end of 2007 between the Company and KAMAZ launched series production of the 420 mm drum brake. A second assembly line, mainly for production of the 400 mm drum brake, was set up the following September. Knorr-Bremse KAMA now assembles and supplies all drum brakes for KAMAZ trucks. Maximum production capacity at the site is more than 25,000 brakes per month and can be flexibly adapted to demand.

Both partners hold a 50 percent share in the new company, which is located at the KAMAZ site in Naberezhnye Chelny, Republic of Tatarstan. KAMAZ has integrated its existing drum brake production into the joint venture, and the long-term plan is for the Company to develop production of disc brakes, torsional vibration dampers, and other components at the site. The Company is also responsible for industrial management of the joint venture, which will be the exclusive supplier of brakes for trucks produced by KAMAZ. The Company will also supply other manufacturers in Russia and neighboring countries. The joint facility was officially opened in October. The current 75 workforce is due to be expanded in the long term.