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5. Schaeffler AG Business Report FY ended Dec. 2018

Schaeffler AG Business Report FY ended Dec. 2018

Factors
1) Net Sales
-In the fiscal year ended December 31, 2018, the Company’s sales increased by 1.6% from the previous year to EUR 14,241 million. Excluding negative currency translation effects, sales increased by 3.9% over the previous year. The Company’s increased sales in its Industrial division supported the weaker growth of the Automotive OEM division and the declining sales of the Automotive Aftermarket division.

2) EBIT
-The Company’s EBIT declined by 9.6% in the fiscal year ended December 31, 2018 to EUR 1,354 million. Excluding special items, the Company’s EBIT declined due to increased costs of sales, increased expenses as well as negative foreign currency translation effects.

3) Automotive OEM Division Sales
-Sales in the Company’s Automotive OEM division in the fiscal year ended December 31, 2018 totaled EUR 8,997 million, an increase of 0.1% over the previous year. Excluding currency effects, sales increased by 2.1%. The division experienced mixed results across its operating regions, with sales remaining flat in Europe and the Americas, decreasing in China and increasing in the Asia-Pacific region.

4) Automotive OEM Division EBIT
-EBIT for the Company’s Automotive OEM division decreased by 28.3% over the previous year to EUR 682 million in the fiscal year ended December 31, 2018. The decrease in earnings was primarily due to a large increase in production costs. A further decrease in earnings was caused by negative currency translation effects.

5) Engine Systems
-The Engine Systems business division decreased by 0.1% to EUR 2,783 in the fiscal year ended December 31, 2018. Excluding currency effects, sales in the division increased by 2.1%, primarily on the strength of increased thermal management module sales.

6) Transmission Systems
-In the fiscal year ended December 31, 2018, the Transmission Systems business division had sales of EUR 4,170 million, a 0.8% decrease from the previous year. Excluding currency translation effects, sales increased by 1.4% due to increased sales within the torque converters product group.

7) E-Mobility
-The new E-Mobility business division had sales of EUR 486 million in the fiscal year ended December 31, 2018, an increase of 16.8% versus the previous year. All of the division’s product lines contributed to the growth of the division as a whole.

8) Chassis Systems
-The Company’s Chassis Systems business unit had sales of EUR 1,558 million in the fiscal year ended December 31, 2018, a decrease of 1.7% from the previous year. Excluding currency translation effects, sales in the business division increased by 0.1%. This increase was due to growth in the chassis actuators product group.

Acquisitions

-The Company concluded a contract to acquire Elmotec Statomat Holding GmbH based in Karben near Frankfurt am Main, Germany. The acquisition will be completed during the first quarter of 2019. Elmotec Statomat GmbH is a leading manufacturer of production machinery for the high-volume construction of electric motors and possesses unique expertise in the field of winding technology. With this acquisition, the Company is expanding its expertise in the construction of electric motors and thereby driving forward the implementation of its electric mobility strategy. Wave winding technology in particular is considered a leading field of future development for electric mobility in terms of power density, efficiency, and efficient high-volume production. (From a press release on November 28, 2018)

Restructuring

-The Company proposed to reorganize its UK business activities as part of its excellence program, Agenda 4 plus One. It is anticipated that the reorganization plans will take up to two years to implement. The Company proposes to close the Llanelli and Plymouth sites in the medium term and relocate production to plants outside the UK, in the U.S., China, South Korea and Germany. At present, the Plymouth site primarily produces spindle bearings and machine parts for the Company’s Industrial division and specialized bearings for the aerospace and defense industries. At Llanelli, mechanical tappets and special-purpose bearings are made for automotive OEMs and selected industrial customers. (From a press release on November 6, 2018)

-The Company has decided to take further steps to optimize and adapt its organizational and leadership structure. The Executive Board has now decided that the Bearing Components & Technologies unit (BCT), which currently functions as an internal supplier, will be dissolved and that all plants without a divisional allocation will become part of either the Automotive OEM or Industrial division. The purpose of this realignment is to integrate the plants more closely into the Company’s business processes and to give its divisions end-to-end responsibility. The Company aims to announce the new organizational and leadership structure on July 1 and complete the entire realignment by the end of 2018. (From a press release on May 7, 2018)　

Joint Ventures

-The Company, in cooperation with Roland Arnold and Paravan, agreed on a master agreement for the formation of a joint venture, Schaeffler Paravan Technologie. The joint venture will further development of Paravan's Space Drive drive-by-wire technology and also develop and sell mobility systems. As part of the transaction, the joint venture will acquire Paravan’s Space Drive technology. The Company will have a 90% stake in the new company. A leading drive-by-wire technology, Space Drive was developed by Paravan to help drivers with physical disabilities by replacing cumbersome mechanical vehicle control systems with 100% reliable, fully electronic systems. Space Drive features steer-by-wire functionality, which enables safe and reliable vehicle steering by purely electronic means, thereby eliminating the need for a steering wheel, steering column and associated mechanical linkages. Steer-by-wire is a key enabling technology for self-driving cars, for which safe and highly reliable steering is a fundamental requirement. (From a press release on August 6, 2018)

Recent Developments

-The Company announced that it has signed a Future Accord with IG Metall, a German metalworkers’ union which is the largest industrial union in Europe, to jointly and collaboratively manage and drive the ongoing development and transformation of the Company. The accord focuses on the three key future trends of E-Mobility, Industry 4.0 and digitalization. Under the Future Accord, the Company will also make available a EUR 50 million investment fund over a period of 5 years. A joint steering group will be established that comprises equal numbers of representatives from each of the parties. It will function as a coordinating and information sharing body with a view to achieving consensus on relevant key future issues. The accord will also strengthen the commercial viability of the Company’s locations in Germany. (From a press release on April 16, 2018)

-The Company will consolidate its development and sales structure to reinforce its operations in Japan. Schaeffler Japan Co., Ltd. (Schaeffler Japan), the Company's Japanese arm based in Yokohama, will introduce module assessment test facilities to its development sites in Japan, with the aim of developing more competitive products. Schaeffler Japan will also promote internal teams involved in technical development and proposal work for engines, transmissions, chassis, and electric mobility in business divisions to accelerate projects. The Company expects these moves will lead to the expansion of business with Japanese automakers. (From an article in the Nikkan Jidosha Shimbun on April 11, 2018)

-On March 16, 2018, the Company announced the launch of the world's first production of P2 hybrid modules at its plant in Taicang. The P2 hybrid module is a modularized solution for electrically powered powertrains. The module is composed mainly of high-power-density permanent-magnetic synchronous motors, dry clutches, and a motor actuator mechanism. It is mounted between a conventional internal combustion engine and transmission. The entire system combines motors with outputs ranging from 25 kW and 80 kW and transmits high torque of 250 Nm through the clutches. The output can reach a maximum of 800 Nm when the clutches are locked. The module supports various driving patterns such as a combination of electrically-powered start and driving, motor-assisted engine-powered driving, and starting an engine during electrically-powered driving. It is also capable of recovering energy while braking. Vehicles equipped with the module can ensure excellent driving performance using both a motor and an engine. When mounted on a plug-in hybrid vehicle that can electrically travel more than 50 kilometers, the module can improve its fuel efficiency at least by 70%. The first Chinese-brand model equipped with the P2 hybrid module was released in October 2017. In 2018, the Company’s Chinese operations will build a new electric drive research center in China to enhance its local research and development capacity. (From a press release on March 19, 2018)

-The Company is pushing ahead with its transformation to prepare for the future through the Agenda 4 plus One program. The objective of the program is to sustainably grow the Company’s value and secure its competitiveness. The program will add approximately EUR 300 million to the Company’s earnings by 2022. The Company will invest approximately EUR 1 billion in the Agenda 4 plus One program. Among the 20 initiatives in the program are the E-Mobility and Industry 4.0 initiatives in the Automotive OEM and Industrial divisions, respectively. In its Automotive OEM division, the Company has achieved a number of E-mobility milestones, with eight volume orders and 25 customer projects in progress. Under the Factory for Tomorrow initiative, the Company is building a 315,000-square-meter state-of-the-art facility in Xiangtan, China. The Agenda 4 plus One program also includes the Working Capital initiative, which uses systematic working capital management to optimize cash flow generation and reduce capital employed. (From a press release on March 7, 2018)

Contracts

-The Company announced that it began volume production of transmissions for the electric drive in the Audi e-tron. Developed and produced in plants in Herzogenaurach and Buhl, the product provides maximum driving pleasure, a high level of comfort and optimum noise performance. The transmission is available in both parallel axis and coaxial versions and offers a high input torque of 400 Nm with low design envelope requirements, with an axial length of 150 millimeters and weight of 16 kilograms. Both variants are fitted in the new Audi e-tron. The two transmissions for Audi have been in volume production since August 2018. For the future, the Company expects a production volume of up to 250,000 transmission units per year. The Company will produce a transmission for a renowned German vehicle manufacturer in the second quarter of 2019. Up to 40,000 units will be produced yearly at the Herzogenaurach plant. (From a press release on November 13, 2018)

R&D Structure

-Throughout the fiscal year ended December 31, 2018, the Company had an average of 7,956 employees working in research and development.

R&D Facilities

-As of December 31, 2018, the Company has 20 research and development facilities distributed as follows:

• Europe: 12 centers
• Americas: 5 centers
• Greater China: 1 center
• Asia-Pacific: 2 centers

-The Company announced that it is investing EUR 60 million to enhance its location in Buhl. This project will construct a new state-of-the-art development building and new headquarters for the Company’s Automotive OEM division. The Company has opened global competence centers for electric mobility in Buhl, in Wooster, Ohio, U.S., and in Anting, China, which will be directed from the new headquarters. A total area of 23,400 square meters is planned, which will include office space for approximately 500 employees, a canteen, a spacious conference area, and prototype construction and test rig facilities. 350 new jobs, primarily in the field of electric mobility, are expected to be created over the next few years. (From a press release on September 25, 2018)

Technological Alliance

-The Company entered into a cooperation agreement with CMBlu Projekt AG to develop and manufacture redox flow batteries. Redox flow batteries are primarily based on renewable resources and can be scaled to fit various applications. The Company hopes to use redox flow batteries for electric mobility applications and to establish a sustainable energy infrastructure.

-The Company announced that Schaeffler Holding (China) and China Automotive Technology and Research Center will sign a framework cooperation agreement and work closely together in several technical fields regarding new energy vehicles. By leveraging their individual advantages and shared resources, the two companies will develop competitive technologies for the industry. (From a press release on July 27, 2018)

Product Development

Space Drive and Schaeffler Intelligent Corner Module on Schaeffler Mover
-The Company featured the Space Drive technology as a breakthrough innovation for autonomous driving. The Space Drive technology installed in the Schaeffler Mover has previously proven its viability in vehicles for people with disabilities with more than 700 million accident-free kilometers recorded. Space Drive, now being further developed by Schaeffler Paravan Technologie GmbH & Co. KG, is certified according to the highest quality and safety requirements (ISO 26262 – ASIL D) and has TÜV and road approval. In addition, it has been designed for triple redundancy. If one control unit fails, there are two safeguards preventing absolute failure. The Schaeffler Mover also features the Schaeffler Intelligent Corner Module drive system in which all propulsion and chassis components are installed in a compact, space-saving assembly unit. The assembly unit contains the wheel hub motor, suspension system including springs, and an electromechanical steering system. (From a press release on December 14, 2018)

Electrification exhibits at CES 2019
-The Company will showcase a range of electrification exhibits from a hybrid module through to the 1,200-hp Schaeffler 4ePerformance concept at CES 2019. By 2020, the Company will have invested more than EUR 500 million in research, development and production of electric drive units. The Company will showcase a hybrid module enabling OEMs to electrify pickup trucks. The compact P2 hybrid module fits between the engine and the transmission which makes it suitable for integration into existing vehicle concepts. The Company’s e-axle offers even greater versatility. It can be used either as a stand-alone unit or to extend an existing front- or rear-wheel drive into an all-wheel drive system. The Company will also display the 4ePerformance concept vehicle, which uses four Formula E motors with total power output of 880 kW (1,200 hp). (From a press release on December 7, 2018)

Mobility solutions at CES 2019
-The Company announced that it will unveil innovations for future mobility at CES 2019 including three concept vehicles and other smart system solutions. Schaeffler Bio-Hybrid GmbH will present two versions of its near-production Bio-Hybrid – a new, contemporary form of personal urban mobility and goods distribution. The Bio-Hybrid will be launched on the market in 2020 with cargo and passenger versions. The Schaeffler Mover offers a flexible, zero-emissions platform for diverse vehicle concepts. All the drive and suspension components of a wheel are installed in a space-saving unit, the Schaeffler Intelligent Corner Module. The 90-degree steering angle provides the Schaeffler Mover with unique maneuvering capabilities. The Company will also present e-axles, 48-volt systems and hybrid powertrains. (From a press release on December 5, 2018)

Products shown at Schaeffler Symposium in Japan
-The Company announced that it will present several innovations at the 11th Schaeffler Symposium in Tokyo. A wide range of products will be presented to visitors during the symposium, including the DH-ST 6+2 dedicated hybrid transmission, which is based on an automated manual transmission and offers two electric and six mechanical gears. The Schaeffler Mover, a platform for robo-taxis and urban transport vehicles, will also be presented at the Symposium. The Symposium has taken place every four years for 40 years. The 11th iteration represents the second time that the symposium is hosted in Japan. (From a press release on October 31, 2018)

Actuators shown at International VDI Congress
-The Company will present a highly integrated electromechanical actuator for multi-speed electric axles and an integrated parking lock actuator at the 18th International VDI Congress. The electric axle actuator (EAA) will go into volume production this year and is an example of how transmission actuators are used in hybrid and electric vehicles. A key feature is two adjustment motors which are controlled only when gears must be engaged or disengaged. Except for a minimal idling current, this actuator has almost zero energy losses. The Company’s integrated parking lock actuator (PLA) was developed as an efficient actuation module for the parking lock function in electric vehicles. This actuator has a weight of less than 460 grams and requires very little installation space. (From a press release on June 27, 2018)

Transmission and planetary gear concepts shown at International Vienna Motor Symposium
-At the 39th International Vienna Motor Symposium, the Company will present its expertise in engine systems and highly innovative electric axle systems in parallel axis and coaxial design. The single-speed electric axle in a coaxial arrangement is characterized by a highly integrated stepped planetary gear set combined with a spur gear differential. The design results in a compact packaging. The single-speed transmission concept presented in Vienna allows an input torque of 400 Nm despite an axial space requirement of 150 millimeters. The planetary gear design concept can also be applied to parallel axis drives. The Company will also present a particularly compact and light single-speed transmission concept in parallel axis design. Like the coaxial variant, this concept is also designed for an input torque of 400 Nm and can be combined with an optional parking lock. (From a press release on April 27, 2018)

Belt tensioners, electronic camshaft phasing systems and transmission bearings
-The Company announced that it will be presenting innovative solutions for internal combustion engines and transmissions and for their hybridization at the 11th Schaeffler Symposium. In order to ensure operating modes can dynamically change, the Company has developed new solutions for belt tensioners. The Company therefore introduced an electrically actuated active tensioner at the Symposium. The Company will present its new electronic camshaft phasing systems which enable higher phasing speeds than hydraulic systems. In addition, the Company has developed a new design for transmission bearings with particularly low friction, called angular roller units (ARU). The Company has developed switchable roller finger followers for cylinder deactivation in three-cylinder engines, which will be integrated into Ford’s volume-production vehicles. (From a press release on April 16, 2018)

Schaeffler Mover urban vehicle concept
-The Schaeffler Mover urban vehicle concept is debuting at the 11th Schaeffler Symposium. Its drive and chassis components are combined in a space saving manner in a compact unit, called the Schaeffler Intelligent Corner Module. This module is installed in all four wheels and includes the wheel hub motor, wheel suspension including the spring system, and the actuator for the electromechanical steering system. The wheel suspension design selected enables a steering angle of up to 90 degrees. The traction motor of the wheel module has been designed as a permanently-excited synchronous motor and is a variant of the wheel hub motor developed by the Company in a development project in 2013. In the current design for the Schaeffler Mover, each of the four 300-volt electric motors supplies a continuous output of 13 kilowatts and a peak output of 25 kilowatts. The nominal torque of 250 Newton meters per motor can be doubled for short periods. The feasibility study, which can be seen at the symposium, will be successively developed by the Company in the coming months. There are plans to produce a roadworthy prototype including the cabin and climate control systems during the year. (From a press release on April 12, 2018)

Technologies shown at Schaeffler Symposium
-The Company is presenting a large number of technology innovations at the 11th Schaeffler Symposium, from April 11-13, 2018. Displayed systems include components and system solutions for optimizing powertrains based on internal combustion engines, the electrification of automobile drives for hybrid and electric vehicles and new vehicles concepts. With the Schaeffler Mover and a cargo variant of the Bio-Hybrid, the Company will showcase specific vehicle concepts for future urban mobility. The Schaeffler Mover is a compact, flexible and freely scalable platform suitable for a range of different mobility solutions in urban areas and features electric wheel hub drives, 90-degree steering system, and a modular design. Technologies for individual powertrains – internal combustion engines and hybrid vehicles, and electric vehicles – are being presented in specialist presentations and in exhibitions divided according to drive type. (From a press release on April 12, 2018)

Patents

-In the fiscal year ended December 31, 2018, the Company filed 2,383 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 fifth consecutive year.

-Most of the Company’s capital expenditures in the fiscal year ended December 31, 2018 were focused in the Europe and Greater China regions.

-In Europe, the Company invested to expand production capacity of its Engine and Transmission Systems business divisions as well as its standard rolling bearings business. The Company also invested in equipment and machinery for various start-ups including electric axle development and manufacturing in Herzogenaurach and hybrid transmissions development and manufacturing in Buehl.

-In the Americas, the Company’s capital expenditure was dedicated towards expanding production capacity, equipment and machinery for products and systems related to future electric drive concepts. Capacity expansion in the Americas has enabled the Company to meet greater demand for torque converters and torque converter lockup clutches.

-In China, the Company invested to expand production capacity and support new product start-ups, specifically related to engine and transmission systems. Investments were also made to expand the production capacity and logistic capabilities for the Company’s rolling bearing business.

-In the Asia-Pacific region, the Company focused on a new plant in Vietnam to increase production of rolling bearingsx

Investment Outside Germany

<India>
-The Company inaugurated a new production hall at its facility in Pune, India, implementing the One Schaeffler strategy. The new production facility will boost local manufacturing capabilities of Schaeffler Group in India. It will manufacture engine and transmission components for the domestic and export markets. Schaeffler also announced the completion of the merger of INA Bearings and LuK India with Schaeffler India Limited. The combined entity is one of the leading Indian automotive and industrial suppliers with over INR 41 billion in revenues and approximately 3,000 employees. It has doubled the investment in India to INR 3,250 million in 2018 and will continue to do so for the next few years. The combined entity will offer a full range of mobility solutions in engines, transmissions and chassis components and a wide range of ball and roller bearings, housings and services across mobility and industrial applications shaping future mobility. (From a press release on October 24, 2018)

<China>
-On September 16, the Company’s subsidiary, Schaeffler Friction Products (Suzhou) Co., Ltd. completed the construction of its continuously variable transmission (CVT) chain production line in Suzhou. This is the Company’s the first CVT chain production line in Asia. Located in the HuGuan Industrial Park in the Suzhou High-tech District, Schaeffler Friction Products (Suzhou) currently produces friction materials for manual transmission clutches in passenger cars and dry-type double clutches for automatic transmissions in passenger cars. It also makes friction materials and parts of their materials for clutches for trucks. The CVT chain project is to be implemented in two stages. Upon completion, the new production line will produce 675,000 chains and generate CNY 600 million a year. The new production line will be able to provide CVT chains locally instead of forcing the chains to be imported outside of China. (From a press release on September 18, 2018)

<U.S.>
-The Company announced the opening of a new Silicon Valley location. The facility, located in San Jose, California, establishes the Company’s foothold in this leading tech region. The new office will work to foster new relationships with local disruptors, start-up companies and potential technology partners that will further facilitate the Company’s advanced automotive and industrial product developments. The team will also work to define and develop new tools and methods that will further enable the Company to quickly advance new technology solutions. (From a press release on March 15, 2018)