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5. Valeo Group Business Report FY ended Dec. 2016

Valeo Group Business Report FY ended Dec. 2016

Factors
1) Net Sales
-The Company’s net sales for the fiscal year ended December 31, 2016 increased by 13.6% over the previous year to EUR 16,519 million. Despite a negative currency effect of 0.9% due to the depreciation of the renminbi, like-for-like sales increases in both original equipment sales and aftermarket sales contributed towards the Company’s growth. In addition, the acquisitions of peiker and Spheros contributed a gain of EUR 450 million to net sales.

2) Comfort & Driving Assistance Systems
-The Comfort and Driving Assistance Systems Business Group had sales of EUR 3,343 million in the fiscal year ended December 31, 2016, an increase of 23.7% over the previous year. The increase in sales was driven by significantly larger order intakes in China and North America, as well as the acquisition of peiker. Overall increased demand in ADAS technologies also contributed to the increase.

3) Powertrain Systems
-In the fiscal year ended December 31, 2016, sales in the Powertrain Systems Business Group increased by 7.3% over the previous year to EUR 3,975 million. Factors contributing to the increase in sales include the launch of a number of projects in China, including belt-driven electric machines and 48 V DC-DC converters, the overall growth in 48 V electric architectures, and the general demand for products focused on emission reduction.

4) Thermal Systems
-Sales for the Thermal Systems Business Group in the fiscal year ended December 31, 2016 increased by 14.6% to EUR 4,622 million. The increase in sales was caused by a record high order intake, which included significant contracts in electrified vehicle markets for growth-driving products such as heat pumps, electric compressors, and electric vehicle battery cooling systems. The acquisition of Spheros also led to the creation of the Thermal Bus Product Group and consequently, the Company’s entry in the high-growth bus market.

5) Visibility Systems
-The Visibility Systems Business Group had sales of EUR 4,545 million in the fiscal year ended December 31, 2016, an increase of 11.6% over the previous year. The increase availability of glare-free high-beam headlamps, generalization of LED solutions, and increased sales of electronic wiper systems all contributed to the growth of the business group.

Acquisitions

-The Company announced its acquisition of a 50% stake in CloudMade, a developer of smart and innovative big data-driven automotive solutions such as machine learning platforms. CloudMade is a pioneering start-up in machine learning and artificial intelligence, with a focus on designing applications for the car industry. (From a press release on November 10, 2016)

-The Company signed an agreement with Bain Capital Private Equity, owner of FTE automotive, to purchase 100% of FTE automotive for a purchase price of EUR 819.3 million. FTE automotive, headquartered in Germany, is a producer of clutch and gear actuators. The FTE automotive acquisition will allow the Company to expand its offering of active actuation systems for transmissions. In 2015, FTE automotive generated around EUR 500 million in sales. FTE automotive has 3,700 employees and a diversified industrial footprint in eight countries, including Germany, the Czech Republic, Slovakia, Mexico and China. The transaction is expected to close in the fourth quarter of 2016 or the first quarter of 2017. (From a press release on June 2, 2016)

-The Company confirmed the acquisition of Spheros, a Germany-based manufacturer of air conditioning systems for buses, from Deutsche Beteiligungs AG as announced in December 2015. This acquisition will allow the Company to extend its thermal management activities in the fast growing bus market. (From a press release on March 31, 2016)

-The Company acquired a capital stake in Navya, a French company specializing in the development of autonomous shuttles.

Chronology of Ichikoh Acquistion

-The Company announced the launch of a takeover bid for the shares of Ichikoh. The offer will run from November 24, 2016 to January 12, 2017. During the takeover bid, the Company is offering to buy shares from Ichikoh shareholders at a price of JPY 408 per share. The Company acquired an initial stake in Ichikoh on April 27, 2000 and currently holds 31.58% of the capital. The Company hopes to increase its holdings to 55.08% from the takeover bid. The two lighting specialists have had a successful alliance since 2000. The Ichikoh takeover bid represents another key step in the development of the lighting business, especially for LED technology. The two companies will integrate production bases in Asia, mainly in Japan, but also in Thailand, Malaysia and Indonesia. (From a press release on November 22, 2016)

-The Company has obtained approval from the Japanese Competition Authority (Japan Fair Trade Commission) to take control of Ichikoh if its takeover bid for the shares of Ichikoh, in which it currently holds 31.58% of the capital, is successful. The approval by the Japanese Competition Authority was one of the conditions of the Company's takeover bid for Ichikoh, which is still subject to the Company holding at least 50.09% of Ichikoh's capital. During the takeover bid, running from November 24, 2016 through January 12, 2017, the Company is offering to buy shares from Ichikoh shareholders at a price of JPY 408 per share. The takeover bid is capped at 55.08% of the capital to maintain the liquidity of Ichikoh shares, which will continue to be listed on the Tokyo Stock Exchange. (From a press release on December 12, 2016)

-The Company announced that 32,383,612 Ichikoh shares have been tendered to its offer, which ran from November 24, 2016 to January 12, 2017, at price of JPY 408 per share. On settlement of the transaction, scheduled for January 20, 2017, the Company will hold 55.08% of Ichikoh's capital. Ichikoh will remain listed on the Tokyo Stock Exchange. Ichikoh will be fully consolidated by the Company as of February 1, 2017. (From a press release on January 13, 2017)

Joint Ventures

-The Company and Siemens announced that they have established a joint venture to manufacture high voltage powertrains. The new company is named Valeo Siemens eAutomotive. Each company will hold a 50% stake in the joint venture, which will be headquartered in Erlangen, Germany. The joint venture will have approximately 1,000 employees. (From a press release on December 1, 2016)

-The Company announced a project to enter into a 50/50 joint venture agreement with Siemens AG dedicated to high voltage powertrains. The two companies will join forces to offer various range of high voltage (above 60V) components and systems for all types of electric vehicles such as e-motors, onboard chargers, inverters, DC/DC converters. The Company will contribute its high voltage power electronics business (onboard chargers, inverters, DC/DC converters) employing around 200 people of which 90 are based in France. Its under-60V powertrain activity will not be part of this joint venture. Siemens will contribute its E-Car Powertrain Systems Business Unit (e-motors, inverters) employing around 500 people of which 370 are based in Germany and 130 in China. The joint venture will be headquartered in Erlangen, Germany and have facilities in France, Norway, Poland, Hungary, and China. It is expected to start operations in the last quarter of calendar year 2016. (From a press release on April 18, 2016)

Recent Developments

-Ichikoh Industries, Ltd. (Ichikoh) will begin offering its general-purpose LED light source units globally. Ichikoh will formally start to offer its products to European carmakers through the Company, and is aiming to win orders from a wide range of OEMs. LED light sources, which are becoming increasingly common, are designed exclusively for each car model. Ichikoh's newly developed LED light source unit is the world's first general use product, and has been adopted for Toyota Motor Corporation's new Prius. Through its alliance with the Company, Ichikoh aims to receive orders for a range of models and increase its share in the LED market. (From an article in the Nikkan Jidosha Shimbun on March 24, 2016)

Awards

R&D Facilities

-As of December 31, 2016, the Company has a total of 58 research and development centers, divided into 20 research centers and 38 development centers. The Company has 13,700 employees working in research and development.

-Breakdown of 58 R&D centers by region:

• Western Europe: 26
• Central & Eastern Europe: 6
• North America: 6
• South America: 3
• Asia, Middle East, Oceania: 16
• Africa: 1

-On November 4, 2016, the Company and Shanghai Jiao Tong University signed an agreement to jointly establish a research and development center for automotive technologies. This center is expected to open officially in 2017. It will support the Company’s development activities in four business areas: Powertrain Systems, Comfort and Driving Assistance Systems, Thermal Systems, and Visibility Systems. (From news releases issued by multiple sources on November 15, 2016)

-On September 14, 2016, the Company’s subsidiary, Valeo Group (China), and the Wuhan Economic and Technological Development Zone signed an agreement on the Company’s plan to establish an R&D center in the zone. The new center will become the Group’s comprehensive R&D facility in China based on Valeo Lighting Systems Hubei Technical Center as a founding body. It will have optical, electronic, and simulation laboratories and will develop advanced technologies such as automotive lamp, parking assist, driving assist, and man-machine interaction systems. (From news releases issued by multiple sources on September 18, 2016)

-The Company’s subsidiary, Valeo Japan Co. Ltd., announced that it has set up a new testing area for autonomous driving vehicles at its Tsukuba Techno Center in Ibaraki Prefecture to meet growing needs for the development of driver assistance and autonomous driving technologies. The Tsukuba Techno Center is engaged in designing, prototyping, and testing top column modules and switches, as well as developing mass production technologies for such products. The construction work of the 2,000-square-meter testing area was completed at the end of January 2016. The Company also intends to enhance its research and development operations for driver assistance and autonomous driving technologies in Japan, by increasing the number of engineers who are engaged in this field from current 20 to 40 by 2018. Valeo Japan currently employs 550 engineers in total. (From a press release on February 12, 2016)

R&D Activities

Cruise4U automated car testing
-The Company’s Cruise4U autonomous vehicle is setting off on a road trip through the European heartland. The five-week trip will see the Cruise4U drive nearly 13,000 kilometers around Europe. The road trip will involve driving in automated mode through major metropolitan centers in Western Europe, from the United Kingdom in the north to southern Spain. When activated by the driver, the Company’s automated driving system will take over the vehicle's steering, acceleration and braking in real traffic conditions. (From a press release on October 26, 2016)

Demonstration of automated vehicle technologies in Tsukuba, Japan
-The Company’s subsidiary, Valeo Japan Co., Ltd. demonstrated its automatic braking and automated parking technologies for the media at an autonomous driving test area in its Tsukuba Techno Center in Tsukuba, Ibaraki, Japan. The Company showcased a demonstration model equipped with the Sightstream camera system, which replaces traditional wing mirrors with small cameras and integrated screens. A Range Rover Evoque which was fitted with the SCALA laser scanner, a front-facing camera and radar demonstrated the system by sensing obstacles and automatically applying brakes. The Evoque also featured the Sightstream camera monitoring system. A Volkswagen Sharan demonstrated the Company's Park4U automatic parking assistance system. Park4U looks for a parking space while driving and displays possible locations on the monitor. If Park4U is still engaged, the system controls operation of the steering wheel. (From an article in the Nikkan Jidosha Shimbun on September 10, 2016)

Products shown at CES 2016
-The Company presented the following products at the Consumer Electronics Show 2016:

• Valeo Cruise4U: Partially automated vehicle which gives attendees the chance to experience hands-free driving in real traffic conditions on board its demonstrator.
• Valeo Mobius 2: Combines several innovations on the dashboard and allows motorists to switch smoothly from automated to manual driving mode in complete safety, while offering a host of new services for drivers to use when the car is driving itself.
• Sightstream camera system: A system designed to replace conventional rearview mirrors with cameras. CES attendees will be able to test the technology in a specially equipped prototype that will operate in real traffic conditions.

(From a press release on January 6, 2016)

Technological Alliance

-The Company and the Yogomo Group have signed an agreement to collaborate on electric vehicle (EV) technology. In accordance with this agreement, Kailong East Automobile in the Yogomo Group will use the Company's high power components like motor controllers and battery chargers for its EX EV. (From news releases issued by multiple sources on November 3, 2016)

-The Company announced that it has partnered with Gemalto, the world leader in digital security, to ensure the security of the Valeo InBlue virtual car key system. With Valeo InBlue, drivers can use their smartphone or connected watch to lock, unlock and start their car, control applications, and remotely access useful vehicle data. Valeo InBlue leverages Gemalto's Allynis Trusted Services Hub (TSH) solution providing secure Over-The-Air (OTA) deployment and lifecycle management of applications and sensitive credentials for vehicles. Valeo InBlue is compatible with Android and iOS-based smartphones on any mobile network. Authorized users can remotely register new connected devices for use with a vehicle and receive vehicle information such as car location and fuel level, enabling easy secured car sharing and simplified rentals. (From news releases issued by multiple sources on September 22, 2016)

-The Company and Capgemini formed a partnership in 2016 which resulted in the commercial launch of Mov’InBlue, a vehicle reservation and fleet management solution based on the Company’s InBlue smart key technology. The partnership benefited from the cooperation between the Company and Gemalto in working on the security aspects of InBlue in 2016, creating a security system comparable to mobile payment solutions used by banks.

Product Development

48V e4Sport electric system
-The Company announced that it has developed the 48V e4Sport, an electric solution that contributes to lowering fuel consumption while increasing a vehicle's power, and unveiled it at the 2016 Paris Motor Show. It is a new system that recovers a vehicle's regenerative energy and stores it in a 48V battery. The 48V e4Sport comprises Hybrid 4All, a 48V starter generator-based hybrid solution, and an e-booster consisting of an electric supercharger and starter generator. The system recovers braking energy, converts it to electric power that is then stored and used. The recovered energy is used for purposes including increasing engine torque during driving, maximizing engine power using the electric supercharger, and switching to all-wheel-drive using the 48V electric rear axle drive. (From an article in the Nikkan Jidosha Shimbun on October 3, 2016)

Sightstream electronic wing mirror system
-The Company will commercialize and start mass production of its Sightstream electronic mirror system that replaces side mirrors with cameras and monitors in 2018. The system performs the function of right and left rear view mirrors, and adds sensing functions like detecting objects hidden in rear blind spots. The Sightstream's added value from enhanced functions will counterbalance its higher cost compared to traditional side mirrors. The Company aims to start supplying the system first for European and U.S. automakers. (From an article in the Nikkan Jidosha Shimbun on June 3, 2016)

Solid-state lidar
-The Company has developed a Solid-state LiDAR sensor for autonomous cars and advanced driver assistance systems (ADAS) and unveiled it at the Automotive Engineering Exposition 2016 Yokohama. The Company reduced the size of the sensor by eliminating laser reflection mirrors, brushless motors and other moving parts, thus improving its price competitiveness. The sensor emits 16 laser beams that are almost four degrees wide, and detects objects in the surrounding environment in three dimensions. The sensor has a detection range of less than 80 meters and detection angle of 60 degrees. Though this is narrower than the detection range of the Scala laser scanner that will go into mass production in 2017 (200 meters, 145 degrees,) the new sensor is expected to drastically reduce costs. The Company expects it to be used in A to C segment models that require high price competitiveness. (From an article in the Nikkan Jidosha Shimbun on May 26, 2016)

Valeo 360AEB Nearshield emergency braking system
-The Company developed an emergency braking system which utilizes 360-degree vision around the vehicle to protect pedestrians when vehicles are moving at low speeds. Valeo 360AEB Nearshield uses four miniature cameras and ultrasonic sensors on the front and rear bumpers to detect obstacles around the vehicle. If an obstacle is detected, the vehicle will first warn the driver and apply the brakes if necessary to avoid a collision.

Valeo eCruise4U automated vehicle system
-The Valeo eCruise4U is an automated vehicle capable of driving in electric mode at low speeds, combining automated technology with a 48 V hybrid system. The eCruise4U features several systems developed by the Company:

• Sensor array combining cameras and laser scanners; Lidar Cocoon system is comprised of six Scala laser scanners around the car
• Valeo Perception system which analyzes the environment around the vehicle and provides data used for vehicle control
• Lateral and longitudinal vehicle control technology which accounts for powertrain conditions to ensure smoother braking and acceleration
• New ADAS ECU based on merge algorithms, which enables the ECU to analyze all inputs from sensors and anticipate future events to control the vehicle

Kinetic rear light
-The Kinetic rear light provides a means for the vehicle to communicate with the environment by displaying pictograms and messages. For example, an automated car using can display a message on the Kinetic rear light system, informing the vehicle behind it about a hazardous situation in front of the automated vehicle.

Front-end module concept
-At the 2016 Paris Motor Show, the Company presented a front-end module featuring three technologies designed to improve vehicle aerodynamics and reduce weight:

• Lightweight bolster: The bolster is made from a composite material using continuous fibers pre-impregnated with thermoplastic resin. For a given tensile strength, the composite provides a weight reduction between 30% and 40% compared to steel and a weight reduction between 25% and 30% compared to aluminum.
• Active grille shutters: The system closes the radiator grille shutters at the front of the vehicle if the air conditioning is not at the highest setting. This improves the drag coefficient by an average of 9% and halves engine warm-up times in cold weather.
• Compact engine cooling module: The module features the Company’s newest high- and low-temperature radiators and a water-cooled condenser. The system frees up space in the front with no effect to comfort or air conditioner operations.

-The table below lists products and technologies developed by the Company within the last three years which contribute to sustainable mobility by either reducing CO2 or other pollutant emissions, or providing driving assistance through connectivity or autonomous functions.

-The Company’s capital expenditure during the fiscal year ended December 31, 2016, was primarily used to increase production capacity and expand existing plants in China, France, Korea, Mexico, the U.S., Hungary, Poland, Japan, Romania, and the Czech Republic.

Investments Outside France

-Changshu Valeo Automotive Wipers Systems Co., Ltd., the Company’s new subsidiary, began operations on November 7, 2016. The subsidiary is the Company’s third wiper system production facility in China next to Wenling and Shanghai. The 17,000-square-meter-plant currently employs 300 people. It has 13 advanced automated production lines and serves as the major supply base for wipers. The Company plans to add facilities for installation and inspection of wipers in the future. (From news releases issued by multiple sources on November 9, 2016)

-Guangzhou Valeo Engine Cooling Co., Ltd., a Company subsidiary, officially started production at its new plant in the Wuhan Economic & Technological Development Zone on March 24, 2016. A total of CNY 18.5 million was invested in the plant that produces front-end modules made up of bumper beams, horns, radars, engine condensers, radiators, water tanks, fans, headlamp brackets, and other components. The plant's annual production is expected to reach 110,000 units, worth a total of CNY 150 million. The plant currently has three assembly lines and one injection molding line. The front-end modules will be initially supplied for Dongfeng Honda's new Civic. They are also expected to be used on the CR-V. (From news releases issued by multiple sources on March 28, 2016)