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5. Schaeffler AG Business Report FY ended Dec. 2017

Schaeffler AG Business Report FY ended Dec. 2017

Factors

1) Net Sales
-In the fiscal year ended December 31, 2017, the Company’s sales increased by 5.1% from the previous year to EUR 14,021 million. Excluding impact of currency translation effects, sales increased by 5.9% over the previous year. All of the company's regions, and especially Greater China, contributed to this growth.

2) EBIT
-The Company’s EBIT decreased by 1.8% in the fiscal year ended December 31, 2017 to EUR 1,528 million. The decline was primarily due to the decrease in gross margin and the significantly expanded R&D activities, mainly in the Automotive division. In addition, the EBIT margin was also affected by an adverse impact of currency translation.

3) Automotive Division Sales
-Sales in the fiscal year ended December 31, 2017 increased by 5.1% to EUR 10,869 million. Excluding the impact of currency translation, the growth rate was 5.9%. The division once again expanded faster than the market, i.e. global production volumes for passenger cars and light commercial vehicles, which grew by 2.1% in 2017. This expansion was largely attributable to encouragingly dynamic growth in the second half of 2017, driven by both the Automotive OEM and the Aftermarket business.

4) Automotive Division EBIT
-Automotive division EBIT decreased by 6.6% to EUR 1,283 m. In 2017, the division’s EBIT was adversely affected by EUR 47 m in special items, including EUR 17 m in special items for legal cases resulting from provisions for claims for damages. In addition, the division recognized its share of restructuring expenses incurred to set up a shared service center in Europe amounting to EUR 30 m in 2017.

5) Engine Systems
-The Engine Systems business unit grew by 5.3% to EUR 2,787 in the fiscal year ended December 31, 2017, largely driven by the valve train product groups, mainly fully variable valve train systems (primarily Multiair). The camshaft phasing units product group also saw significant increases, especially for electric phasing systems. In addition, the innovative thermal management module, which is required in both internal combustion engines and future mobility concepts, also performed very well.

6) Transmission Systems
-In the fiscal year ended December 31, 2017, the Transmission Systems business unit had sales of EUR 4,620 million, a 6.3% increase over the previous year with revenue from components for automated transmissions, such as torque converters and dual clutches, generating double-digit growth rates. Revenue in the dual-mass flywheel product group was up significantly as well. The business division’s growth was primarily driven by product ramp-ups in the Greater China region.

7) Chassis Systems
-The Company’s Chassis Systems business unit had sales of EUR 1,588 million in the fiscal year ended December 31, 2017, an increase of 3.6% from the previous year. Mainly based on the solid growth in revenue from the newest generation of wheel bearings in the Greater China region.

8) Automotive Aftermarket
-Sales for the Company’s Automotive Aftermarket business unit totaled EUR 1,874 million during the fiscal year ended December 31, 2017, an increase of 3.4% over the previous year. Mainly due to increased requirements in the independent aftermarket in the Americas region.

Acquisitions

-The company announced that, one year after acquiring the majority stake in Compact Dynamics, the company has acquired the remaining 49% stake in the company from SEMIKRON. Through the acquisition of the high-performance electric motor manufacturer, the company is expanding its expertise in the field of electric motors. (From a press release on December 12, 2017)

-The company announced that the Group has been consistently implementing its digital agenda. This includes the takeover of autinity in early October 2017. The Chemnitz-based IT company specializes in digital machine data recording and evaluation. The purchase contract for 100% of the shares has been concluded on October 4. (From a press release on October 9, 2017)

-The company announced that it now holds the majority of shares of electric motor specialist Compact Dynamics. With the integration of Compact Dynamics, the company is expanding its development capacities and its range of services in the area of electric drives. The company and Compact Dynamics, which is based in Starnberg and employs over 70 experts, have previously worked together. The copnay's recent High Performance 48 Volt concept vehicle contains a 20 kW electric axle drive system that is based on a 48-volt drive produced by Compact Dynamics. (From a press release on February 16, 2017)

Restructuring

-The company announced that in the new “E-Mobility” business unit, the company is pooling its engineering capabilities and its products and system solutions for hybrid and battery-electric vehicles for the powertrain of the future. It supports customers from the automotive industry in developing vehicle and powertrain concepts that reduce emissions. In the future, electric powertrain technologies such as electric axles will be managed by the new “E-Mobility” business unit. (From a press release on September 21, 2017)

Recent Development

-The company will act to develop traction motors for electric-powered vehicles. The company will supply electric-powered systems using outsourced motors for the time being, and will start producing systems fitted with motors produced in-house from 2020. Last year, the company decided to acquire electric motor manufacturer Compact Dynamics GmbH (CD). Combining its transmission technologies and CD's motor technologies, the company develop competitive electric systems to meet the needs arising from the electrification of vehicles. (From an article in the Nikkan Jidosha Shimbun on November 28, 2017)

-The company has announced that it will establish an independent electric mobility system division on January 1, 2018. The company will accelerate development in electrification by establishing a separate division for hybrid and electric vehicle solutions. The company has received eight volume production orders for its Electric Axle and Hybrid Module electrification solutions, of which three orders are from Chinese customers. The company will open an electric mobility research and development base in China, and strengthen its product development systems for the Chinese market by cooperating with the new facility. The company expects that its products and systems for hybrid and electric vehicles will account for at least 15% of its total automotive business sales in 2020. (From an article in the Nikkan Jidosha Shimbun on September 7, 2017)

-The company announced that it presented and explained its strategic direction and long-term growth perspectives at this year’s Capital Markets Day which took place in Buhl. Starting point was the strategy “Mobility for tomorrow” announced last year and the proven model of an integrated automotive and industrial supplier with strong manufacturing expertise and systems know-how. The strategy “Mobility for tomorrow” with its three key opportunities for the future – E-Mobility, Industry 4.0, and Digitalization – which are to develop into important growth drivers from 2020. E-Mobility becomes separate business division within the Automotive division; Industrial division to combine mechatronic activities and service business into organizational unit “Industry 4.0” Average sales growth of 4-6 percent p.a. and EBIT margin of 12-13 percent before special items in 2020 targeted. (From a press release on July 20, 2017)

-The company announced that it is one of only a few suppliers to be included in Volkswagen’s FAST (Future Automotive Supply Tracks) program. The company is one of only 60 partners involved in the FAST program and was chosen from a pool of 4,000 suppliers. The company has a strong partnership with Volkswagen and is involved in many projects in the areas of engine, transmission and chassis systems. Volkswagen uses FAST program to ensure its most important suppliers are involved in a strategic dialog at an early stage. (From a press release on July 13, 2017)

-The company announced that it has signed a cooperation agreement with the Factory Berlin startup campus for an innovation hub. At Factory Berlin, the company is looking to create new digital services for customers, expand existing business models, and develop new business models. Covering more than 16,000 square meters of office space, Factory Berlin brings together startups and well-established technology companies. Corporations and medium-size companies come to Factory Berlin to obtain support for the transformation and digitalization of their business models. (From a press release on February 1, 2017)

Awards

-The company was honored as a top-performing supplier at the 19th annual Ford World Excellence Awards by Ford Motor Company. Ford presented the company with its Quality Pillar Award and the company’s Buehl, Germany Luk GmBH & Co. KG facility with a Silver Award for its clutch actuation. Fifty-four companies were selected for awards from thousands of Ford global suppliers. While striving for zero defects, the company has globally achieved a very low level of PPM (Parts Per Million) of 2.8. More than 90 percent of the company plants are recognized with Ford’s Q1 quality certification. (From a press release on May 22, 2017)

-The company was awarded by the German Center of Automotive Management (CAM) 2017 in the “drives” category for being the most innovative automotive supplier. The jury honored the innovative combination of the company's CVT transmission with a hybrid function, i.e. an integrated electric motor. This transmission is characterized by particularly low energy losses as well as an extremely compact design, which offers a decisive advantage in terms of its design envelope and weight savings. The company has designed this plug-in hybrid concept on the basis of a CVT for high-volume B and C-segment vehicles. (From a press release on May 5, 2017)

-The company announced that it was honored with two Automotive News PACE Awards. The company's electromechanical active roll stabilizer and automatic transmission one-way clutch assembly received top honors. This is the ninth time in 11 years that the global automotive supplier has been named a PACE Award winner or finalist. (From a press release on April 4, 2017)

Outlook

-The Company expects it's revenue to grow by 5 to 6% excluding the impact of currency translation in 2018. In addition, the company expects to generate an EBIT margin before special items of 10.5 to 11.5% in 2018.

R&D Structure

-The Company averaged 7,634 employees working in research and development throughout the fiscal year ended December 31, 2017.

R&D Facilities

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

• Europe: 10 centers
• Americas: 5 centers
• Greater China: 1 center
• Asia-Pacific: 2 centers

-The company announced the expansion of its operations at INA Bearings in Talegaon, Pune. The expansion will include a new manufacturing facility and a new R&D facility within the existing premises. The new production facility will manufacture engine and transmission components, serving the domestic and export markets. The R&D facility will focus on enhancing product development and engineering capabilities driving innovation for customers. The Pune plant, currently running at full capacity, employs 700 people and with the new facility, it is expected to generate additional employment in the future. The company is in the process of merging its two unlisted entities, INA Bearings India Pvt Limited and Luk India Pvt Limited, with the listed entity the company India Limited. (From a press release on November 27, 2017)

-The company Japan will establish a cross-functional development system. The company's current organizational structure is vertically divided for different industries like automotive and industrial machinery industries. Due to the fact that base technologies in different fields have a number of similarities, the company will organize a cross-organizational project for each area to effectively use in-house resources. The company Japan has also started development of unique concept cars optimized through cooperation among departments. The company will encourage collaboration beyond organizational borders to strengthen its technological development capabilities, and accelerate practical use of Japan-originated technologies. (From an article in the Nikkan Jidosha Shimbun on March 31, 2017)

R&D Activities

-The company announced that it has established a new joint lab with Nanyang Technological University, Singapore (NTU Singapore) to focus on solutions for mega cities, especially smart mobility devices. The research projects include studying human user behavior on personal mobility devices in Singapore and the development of portable smart technologies that can enhance the users' safety and last-mile experience. NTU and the company will develop applications that will allow personal mobility devices to interact seamlessly and safely with traffic infrastructure and vehicles around them, using an industry standard vehicle-to-everything (V2X) wireless communication technology. The research initiative has a combined funding of SGD 5 million over three years. (From a press release on March 20, 2017)

Technological Alliance

-The company announced that it cooperates with CITIC Pacific Special Steel (CPS) to strengthen their business relationship both economically and technologically. CPS has been the company's supplier for 13 years. The company primarily supplies the Chinese market, including the 13 the company production plants in China and the Asia Pacific region, but also locations in the USA and Europe. In addition, CPS supplies more than 50 the company's suppliers with increasing annual growth rates. Since 2012, the company has increased the quantity of special steels it purchases from CPS by an average of 13 percent year after year to approximately 140,000 tons. Growth rates are also expected to be around 10 percent during the next few years. The company group is also planning a new production location in Xiangtan, China as expansion at the existing locations has reached its limits. Initial operation of the plant that will produce automobile parts and precision bearings is planned for the end of 2018. (From a press release on March 31, 2017)

-The company announced that it cooperates with Diehl Metall in the field of synchro rings and synchronization systems for transmissions. The manufacturing and development locations of both companies are close together in many regions. Now synchronization systems can be manufactured in Germany, Brazil, China, India and Thailand. Synchro rings and synchronization systems are some of the essential components in a vehicle transmission and determine the comfort of manual transmissions, automatic transmissions and double clutch transmissions. Synchronization systems will also be needed in future applications of hybrid transmissions, some with new functions. (From a press release on March 8, 2017)

Product Development

Hybrid technologies
-The company informed that it relies on hybrid technologies using an efficient internal combustion engine, purely electric drives, and an environmentally-friendly and sustainable view of the entire energy chain (“well-to-wheel”) for the development of customized system solutions for the electrified drive train. With the electric axle, the company has developed a modular system solution for hybrid vehicles and all-electric cars. The product range starts with electric axles with single-speed ratio in a coaxial or parallel axis design. The two-speed axle developed by the company enables lateral dynamics to be improved using a torque vectoring component. This function is ensured by integrating an appropriate transmission and an electric motor designed for seven kilowatts. (From a press release on December 4, 2017)

Low-emission and zero-emission driving future technologies
-The company announced that it is showcasing future technologies for low-emission and zero-emission driving under the motto “Mobility for tomorrow” At the International Motor Show IAA. The company will invest half a billion euros and hire an additional 1,200 employees under an independent “E-Mobility” business division. With the latest generation of the electric axle, which is being presented at the IAA, the company has developed, for example, a modular system solution for hybrid vehicles and all-electric cars. It will display the latest generation of the thermal management module (TMM). (From a press release on August 24, 2017)

New deep groove ball bearings for passenger car drive shafts
-The company announced that its new “CoRX” and “Twin-Ax” deep groove ball bearings for passenger car drive shafts, which deliver durability even under extreme conditions are equipped with two labyrinth sealing rings that are smartly interconnected and make the ingress of water and contamination into the inside of the bearing impossible. “CoRX” and “Twin-Ax” bearings are suitable for a wide range of applications: they can be installed as both prop shaft and side shaft bearings and require no additional seals to be fitted (depending on the customer’s requirements). (From a press release on July 25, 2017)

"Sensotect" a coating technology
-The company has developed "Sensotect," a coating technology that adds sensor functions to three-dimensional objects. Sensotect applies a sensor circuit coating of 2 to 3 micron thickness to measure loads on the objects, vibration, and temperature. Use of the coating on automotive wheel bearings will make it possible to detect road surface conditions by measuring the forces exerted on the bearings and distortions. The company will promote the technology to automakers and machine tool makers as a base technology for the Internet of Things. (From an article in the Nikkan Jidosha Shimbun on June 19, 2017)

Clutch discs with centrifugal pendulum-type absorbers
-The company developed clutch discs with centrifugal pendulum-type absorbers. The new clutch discs reduce torsional vibration that is created between the engine and the transmission. In terms of performance and cost, they are between traditional torsional damper clutches and dual mass flywheels. Mass production is expected begin in 2017, first in Europe. In China, the first model with the company's new clutch discs is expected to be available at the end of 2017. (From a press release on February 21, 2017)

48 Volt electric power axle drive
-The company presents the "High Performance 48 Volt" concept vehicle at NAIAS 2017. In this vehicle, an electric rear axle supplements the front axle drive which comprises a conventional internal combustion engine and belt-driven 48 volt starter generator. The electric motor and the associated power electronics are integrated into a single unit on the rear axle. Twenty kilowatts of purely electric power is thus permanently available from the 48 volt axle drive. The company electric axle produces a starting torque of up to 2,000 Nm. The 48 V architecture allows different driving strategies to be selected in order to reduce CO2 emissions and increase driving dynamics, such as emissions-free, purely electric driving up to 35 km/h in areas where traffic is restricted. The vehicle can also sail at speeds of up to 70 km/h. The company also shows “E-Wheel Drive”. In wheel hub drives, all the necessary components, such as the electric motor, the power electronics, brakes and cooling, are located within the wheel rim. This saves space that can be used for new interior design concepts. The wheel hub drive has an obvious application in self-driving taxis or nimble, autonomously driven passenger cars which transport the residents of large cities over short distances in the future. (From a press release on January 9, 2017)

Patents

-In the fiscal year ended December 31, 2017, the Company filed 2,316 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 announced that it has opened a new engine thermal management module plant in Svitavy, Czech Republic. A thermal management module speedily controls engine and transmission temperatures. The demand for modules, which reduce fuel consumption while cutting CO2 emissions, is increasing. The plant was built with an investment of EUR 18.5 million (approximately JPY 2.46 billion). Schaeffler is planning an additional investment of EUR 100 million (approximately JPY 13.3 billion) to hire 900 employees. (From an article in the Nikkan Jidosha Shimbun on December 4, 2017)

-The company announced the expansion of its operations at INA Bearings in Talegaon, Pune. The expansion will include a new manufacturing facility and a new R&D facility within the existing premises. The new production facility will manufacture engine and transmission components, serving the domestic and export markets. The R&D facility will focus on enhancing product development and engineering capabilities driving innovation for customers. The Pune plant, currently running at full capacity, employs 700 people and with the new facility, it is expected to generate additional employment in the future. The company is in the process of merging its two unlisted entities, INA Bearings India Pvt Limited and Luk India Pvt Limited, with the listed entity Schaeffler India Limited. (From a press release on November 27, 2017)

-The company group announced that it is building its first ever “Factory for tomorrow” at the new production location in Xiangtan in the Chinese province of Hunan. In 2018, the construction of the production plant will begin and it is expected to start operating in 2019. The building will be constructed on a total area of approx. 315,000 square meters. Components and systems for engines, transmissions, and chassis systems will be manufactured for the automotive industry in this plant. It is modeled on the shape of a butterfly. The four halls represent the wings, and the buildings in the center represent the body where various departments are accommodated including the administrative departments. (From a press release on November 27, 2017)

-The company group announced that it has invested USD 60 million in the creation of new production areas, a shipping center, and office space at its Wooster, Ohio location. Beginning in 2018, the company will begin manufacturing hybrid modules for a U.S. OEM in the expanded 8,900-square-meter manufacturing area. The expanded capacities at the Wooster plant will also be used to produce automatic transmissions, torque converters, and torque converter lockup clutches. In addition, employees at the location are working on future production of an electric axle. The company’s recent U.S. investments include USD 36.5 million for the expansion of its plant in Fort Mill, South Carolina. (From a press release on November 6, 2017)

-The company group announced that it is investing USD 36.5 million for the expansion of one of its two plants in Fort Mill, South Carolina. A new 6,000-square-meter multi-functional administration building has also been constructed, as well as road infrastructure to accommodate the location’s enlargement and increasing traffic. Expanding the plant’s production space by 3,250 square meters has increased the capacities for stamping, heat treatment, and mounting of axial bearings, which are used in 8-, 9-, and 10-speed automatic transmissions. The company also operates plants in Spartanburg and Cheraw in South Carolina in addition to the plant in Fort Mill, where the company’s U.S .headquarters is based. (From a press release on June 7, 2017)

-The company announced that it is continuing with the strategic expansion of its footprint in Asia Pacific with an investment of EUR 55 million to build a new greenfield plant in Vietnam. The investment is expected to generate 250 jobs in Dong Nai province by the end of 2019. With the new investment, the company is significantly expanding the existing product range of radial insert ball bearings by transferring the entire global production responsibility to Vietnam. It will also set up a new product line for needle roller bearings. The new plant, located in Bien Hoa City, is being developed on a modular concept on a 100,000 sq. m. plot. The annual production capacity will be 15 million pieces on completion of Phase I, which will cover half of the area. Construction of the first phase is expected to complete in Q4 of 2018 whereas Phase II is likely to commence in 2022 over the remaining 50,000 sq. m. (From a press release on November 3, 2017)