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5. Schaeffler AG Business Report FY ended Dec. 2016

Schaeffler AG Business Report FY ended Dec. 2016

Factors
1) Net Sales
-In the fiscal year ended December 31, 2016, the Company’s sales increased by 1.2% from the previous year to EUR 13,338 million. Excluding negative currency translation effects, sales increased by 3.4% over the previous year. Declining sales in the Company’s Industrial division was offset by growth in the Automotive division.

2) EBIT
-The Company’s EBIT increased by 11.0% in the fiscal year ended December 31, 2016 to EUR 1,556 million. In 2016, the Company was negatively affected by EUR 144 million in special items, compared to EUR 238 million in the prior year. Additionally, higher gross margins in the Automotive division contributed to the increase in earnings. The gains were partially offset by decreases in the Industrial division as well as increased research and development expenses.

3) Automotive Division Sales
-Sales in the Company’s Automotive division in the fiscal year ended December 31, 2016 totaled EUR 10,333 million, an increase of 3.6% over the previous year. Excluding currency effects, the division grew by 6.0%. Increased sales in the division is attributable to an increase in global production volumes for passenger cars and light commercial vehicles and an increase in the average value of Company products installed per vehicle. Growth in the Company’s Greater China region was particularly notable, as it recorded double-digit percentage gains over the previous year.

4) Automotive Division EBIT
-EBIT for the Company’s Automotive division increased by 21.9% over the previous year to EUR 1,383 million in the fiscal year ended December 31, 2016. The increase in earnings was due to decreased negative effects from special items, higher sales volumes and an improved revenue mix and was partially offset by negative currency effects and increased research and development costs.

5) Engine Systems
-The Engine Systems business unit grew by 1.8% to EUR 2,643 in the fiscal year ended December 31, 2016. Factors contributing to the increase in sales include the start of volume production of the electromechanical camshaft phasing system, as well as increased sales in accessory drives and thermal management modules. However, sales of fully variable valve train systems decreased during the year.

6) Transmission Systems
-In the fiscal year ended December 31, 2016, the Transmission Systems business unit had sales of EUR 4,349 million, a 3.3% increase over the previous year. Increased sales volumes of dual-mass flywheels, components for automated transmission, as well as clutches and gearing components in manual transmission contributed towards the gain.

7) Chassis Systems
-The Company’s Chassis Systems business unit had sales of EUR 1,531 million in the fiscal year ended December 31, 2016, an increase of 4.5% from the previous year. Growth in the business unit was attributable to the improved performance of wheel bearings and the volume production of electromechanical active roll control systems.

8) Automotive Aftermarket
-Sales for the Company’s Automotive Aftermarket business unit totaled EUR 1,810 million during the fiscal year ended December 31, 2016, an increase of 6.2% over the previous year. Higher sales in the Americas and Europe regions contributed to the increase in revenue.

Acquisitions

-The Company announced that it concluded a purchase contract with Semikron International GmbH for the acquisition of 51% of the shares of Compact Dynamics GmbH, a manufacturer of high-performance electric motors. The Company and Semikron have also agreed to cooperate in the development of power electronic systems and the integration of electronic components into future alternative drive concepts. With the agreement, the Company is expanding its expertise in electric motors and power electronics for the development and production of electric drives. Compact Dynamics, based in Starnberg, Germany, is a specialist in the field of innovative, electric drive concepts with a focus on high-performance drives. The Company and Compact Dynamics have previously worked together for many years, including on the development of the electric drive system for the Audi ABT Schaeffler Team in the FIA Formula E electric racing series. Through the transaction and option to acquire the remaining shares in 2018, the Company is obtaining essential expertise for the development and production of its own electric motors for automobile applications. The transaction will be completed in the first quarter of 2017. (From a press release on December 20, 2016)

Restructuring

-The Company announced that it would sell Magdeburg-based subsidiary Schaeffler Motorenelemente AG & Co. AG to the Weber Group. The contract for the sale was signed on December 21, 2016. Schaeffler Motorenelemente, an indirectly wholly owned subsidiary of the Company, specializes in the mechanical processing of cylinder heads and other complex housings for the automotive industry. During the 2015 financial year, the subsidiary generated sales of approximately EUR 42 million. All of the subsidiary’s 185 employees will be retained by the new owner. The Weber Group manufactures drive components for passenger cars, commercial vehicles, and recreation vehicles. The transaction is expected to close in the 1st quarter of 2017. (From a press release on December 22, 2016)

Recent Developments

-The Company announced that it has opened a new office in Moscow, Russia, focusing on the rail industry and expansion of its automotive business. The Company opened its first plant in Russia in the city of Ulyanovsk in 2014. (From a press release on December 7, 2016)

Awards

-The Company announced that its products received 43 quality awards from its customers to the automotive and manufacturing industry during 2016. In North America, the Company received an award by Nissan for “top quality” in engine systems. The Company has supplied Nissan with more than 24 million parts from its plant in Cheraw (U.S.) – without a single defective part. (From a press release on December 14, 2016)

-In 2016, the Company’s mechatronic active roll control won the German Innovation Award.

Outlook

-In the fiscal year ending December 31, 2017, the Company expects to increase its sales between 4% and 5% compared to the previous year, excluding any currency translation effects. This outlook is based on the assumption that global automotive production will increase by 1.5% in 2017 and that global industrial production will increase.

R&D Structure

-The Company averaged 7,121 employees working in research and development throughout the fiscal year ended December 31, 2016.

R&D Facilities

-The Company's research and development centers are distributed as follows:

• Europe: 9 centers
• Americas: 5 centers
• Greater China: 1 center
• Asia-Pacific: 2 centers

-The Company signed a cooperation agreement to establish a joint research laboratory with Southwest Jiaotong University (SWJTU) in China on May 16. The joint research laboratory will be located in the National Key Laboratory for Traction Drives and will be dedicated to the research and development of axle bearings for rail vehicles. (From a press release on May 23, 2016)

Technological Alliance

-The Company has chosen IBM as its strategic partner for its digital transformation. With IBM, the Company is creating a digital platform for processing large amounts of data. From October 2016, the resulting Schaeffler Cloud will be available for the first user cases and applications. During the first phase, the partnership will focus on: optimizing maintenance in the wind energy sector, digitized monitoring and optimization of trains, connected vehicles, Industry 4.0 for tooling machines, and connected equipment operations centers. In regards to the automotive industry, the Company will be able to integrate sensors and control units into components such as bearings and clutch release systems to gather information. IBM will support the Company in the partnership by providing technology and acting as a consultant. (From a press release on October 4, 2016)

-The Company announced that it has jointly developed an electric variable valve timing control (Electric Cam Phaser/ECP) mechanism for gasoline engines with Nissan Motor Co., Ltd. This is the first time that the Company has worked on a variable valve control device that is controlled electrically. The newly developed ECP can change the timing of how the valve opens and closes regardless of lubricant temperature or hydraulic conditions. The mechanism is especially suitable for valve timing control before the engine restarts in vehicles equipped with a stop-start system. (From an article in the Nikkan Jidosha Shimbun on June 6, 2016)

R&D Activities

-The Company and the Friedrich-Alexander University of Erlangen-Nuremberg (FAU) have developed a new rolling bearing spin test stand as part of a collaborative research project. Bearings are exposed to 3,000 times gravitational acceleration on the test stand and tested under the resulting high loads. The test stand, which is located in its own 22-square-meter test bunker and weighs 16 tons, took three years to design. The results of the research project will be used to optimize current rolling bearing technology with the aim of cutting fuel and energy consumption in vehicles and machines. In conjunction with FAU, the Company improved and further developed the software required for the simulation process. The new software enables the simulation of the behavior of rolling bearings even before a prototype is built by enabling optimizations to be made to the computer model. The last round of tests and adjustments are now being carried out. The first measurements are planned to begin in October. (From a press release on March 10, 2016)

-The Company will increase its investment in electrification technologies from the current 10% to over 25% of its total R&D expenditures, equivalent to approximately 5% of sales volume, by 2018. As the need for electrification technology to improve fuel efficiency is growing globally, the Company will accelerate the development of electric drive systems and mechatronics, and aim to expand its business by combining work in the field with its expertise in mechanical systems. (From an article in the Nikkan Jidosha Shimbun on February 10, 2016)

-The Company announced that it is participating in the OmniSteer project, which is funded by Germany’s Federal Ministry of Education and Research with a budget of EUR 3.4 million. The project is set to last three years. New chassis types with wheels that can be steered individually and electric drives make it possible to increase maneuverability and therefore efficiency, particularly in flowing urban traffic. The OmniSteer project is aimed at researching suitable concepts and prototypes by 2018. Together with innovative wheel suspension types that allow a wider range of steering motion on the front and rear axle, suitable distance and lane guidance systems (highly integrated lateral and transverse guidance systems) are also being developed that will significantly increase maneuverability. One possibility presented is the capability to switch seamlessly between front-wheel, rear-wheel, and all-wheel steering depending on the situation. (From a press release on February 5, 2016)

Product Development

Highlights from CES 2017
-The Company is presenting solutions for future networked mobility at CES 2017. It will exhibit Bio-Hybrid, a vehicle which is between a pedelec and a small electric car in terms of size and range. It offers some protection from the weather with its roof. The vehicle is 85 centimeters wide and has four wheels to provide driving stability. This width was chosen to ensure the vehicle can be used on cycle paths in most countries. The Bio-Hybrid's driver does not have to rely solely on mechanical pedaling as assistance is provided by an electric drive. The electric motor recuperates energy during braking and feeds the captured electric power back to the battery. The Company will also exhibit sensor technology for the networked automobiles of the future with intelligent rolling bearings. The bearings are equipped with integral sensor functionality and provide first-hand data such as the technical condition of all components in a vehicle. (From a press release on December 13, 2016)

iTC torque converters
-The Company has developed a new generation of iTC torque converters that are smaller, lighter, and more sophisticated with improved vibration damping performance. A key feature of the new iTC is a lock-up clutch that is integrated into the converter’s turbine. This not only makes the system lighter by using fewer parts, it also creates space for more efficient torsion dampers. (From news releases issued by multiple sources on September 12, 2016)

Schaeffler System 48 V mild hybridization concept car
-In 2016, the Company presented its “Schaeffler System 48 V” concept car, which demonstrates an example of economical and efficient 48 Volt mild hybridization. The vehicle, based off an Audi TT, utilizes a drive architecture with an electric axle comprised of a 48 V electric motor on the rear axle. The electric axle serves to complement the front-wheel drive engine, and is powered using a lithium-ion battery which is connected by a voltage transformer to the 12 V on-board system. The system features torque vectoring, reduces energy consumption through regenerating brakes, and reduces space and weight by combining the electric motor and electronics into a single unit.

E-Wheel Drive electric wheel hub
-The Company has developed a highly integrated electric wheel hub drive known as E-Wheel Drive. In the system, all components necessary for acceleration, decelerations and safety are located inside the wheel rim, saving a significant amount of space. In addition, the E-Wheel Drive offers benefits in maneuverability, driving dynamics, and active safety.

Collaboration for Gasoline Technology Car II
-The Company worked in cooperation with Continental and Ford to develop the Gasoline Technology Car II concept. Using the Company’s expertise in drive trains for internal combustion engines, the concept features potential CO2 reductions of up to 25%. The Gasoline Technology Car II also features an automated clutch with electronic clutch management.

Patents

-In the fiscal year ended December 31, 2016, the Company filed 2,334 patents with the German Patent and Trademark Office, making it the second-ranked company in Germany based on the number of patents filed for the second consecutive year.

Investment Outside Germany

-The Company has officially started operations at its first production facility in Chonburi, targeting customers across Southeast Asia and Oceania. The Company inaugurated the new EUR 20 million (THB 778 million) plant at the Hemaraj Chonburi Industrial Estate II. The 55,000-square-meter facility had a pilot launch in February, manufacturing four automotive components: clutch release systems, clutch pressure plates and discs, mechanical and hydraulic belt tensioners, and synchronizer rings. Its annual production totals 500,000 to 1 million pieces of each product type. Future expansions of the plant will be based on customer demand. Currently, the plant has a capacity utilization rate of 60%. (From a Bangkok Post article on October 15, 2016)


-The Company’s subsidiary, Schaeffler (Nanjing) Co., Ltd. held an inauguration ceremony to celebrate the official opening of Hall 3, its new production facility in Nanjing, China. The new facility, which has approximately 30,000 square meters of floor space and will accommodate around 1,000 employees, will produce camshaft phasing units, hydraulic tappets, chains, and tensioners as well as other engine components. The components produced in Hall 3 will be supplied to a number of domestic and international automobile manufacturers. (From a press release on October 14, 2016)

-The Company announced that it will invest in a new production base in Xiangtan, Hunan Province, China, to expand its production capacity in Greater China and better serve customers in both the domestic and international markets. The first phase of the project will occupy a total area of around 20 hectares. The plant will manufacture automotive parts and precision bearings and is scheduled to enter operation by the end of 2018. The second phase will involve the construction of a second plant, a logistics center and a training facility. (From a press release on August 18, 2016)


-The Company announced that it is expanding in North America at its Wooster, Ohio and Fort Mill, South Carolina locations. The Company will build new manufacturing and administration facilities at both locations. The Company is investing a total of EUR 83.6 million in the U.S., with a total of approximately EUR 52 million in its Wooster, Ohio facility. The expansion, which is approximately 8,500 square meters, will include production space, a shipping hall, and offices while creating 250 new jobs. The location in Northeast Ohio designs and manufactures components for automatic transmissions such as torque converters and converter lockup clutches for the automotive industry. Construction will begin in June 2016 and completion is planned for 2017. The remaining EUR 31.6 million will be invested in the expansion of one of its two plants and the addition of a corporate office building in Fort Mill, South Carolina. More than 100 new jobs will be created in Fort Mill within a short time. It produces rolling bearings, bearing components, and camshaft phasing units. It also serves as the regional headquarters. Production will begin in the fall of 2017. (From a press release on May 13, 2016)


-The Company announced that the FAG Magyarorszag Ipari Kft. plant in Debrecen, Hungary will be expanded. The increasing demand for rolling bearings in Europe led to the development of the new manufacturing hall. The production volume in the Hungarian plant will increase by approximately 50% while the number of employees will increase by 500 in the next few years. The Company is investing approximately EUR 80 million in the expansion. The foundation stone is expected to be laid in the late summer of 2016. The first parts from the new production facilities will be delivered in the second half of 2017. The production location in Debrecen is one of two Company plants in Hungary. Approximately 1,400 employees manufacture rolling bearings for the automotive industry at FAG Magyarorszag Ipari Kft. Bearings up to 120 mm in diameter are produced for the European market. (From a press release on April 18, 2016)