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Group Strategy and Management

Strategy “Mobility for tomorrow”

The Schaeffler Group is a global automotive and industrial supplier. Top quality, outstanding technology, and exceptionally innovative spirit form the basis for the continued success of the company. By delivering high-precision components and systems in engine, transmission, and chassis applications, as well as rolling and plain bearing solutions for a large number of industrial applications, the Schaeffler Group is already shaping “Mobility for tomorrow” to a significant degree.

In late 2016, the Schaeffler Group developed its strategy “Mobility for tomorrow” to guide its way into the future and presented it to the public. The company continued to press forward with the implementation of this strategy in 2017: For instance, creating the new E-Mobility business division and the organizational unit Industry 4.0 set the course for future development in two key future-oriented fields. All initiatives under the “Agenda 4 plus One” excellence program are in the implementation phase. Implementation of the program is currently 35% complete. Following extensive communication measures, the strategy is fully known and understood throughout the company. All strategic activities, ranging from design right through to implementation and communication, focus on the same fundamental elements: one common vision and mission, 4 focus areas, 8 strategic pillars, and the 20 strategic initiatives of the “Agenda 4 plus One”.

Vision and mission

In its mission, the Schaeffler Group describes the task it is committed to. Underlying this mission are three key concepts: working in partnership with all customers and business partners, top-level expertise in manufacturing technology, and advanced systems know-how. The Schaeffler Group's vision and mission mutually complement and amplify each other, with the vision describing the aspirations that will guide the group’s activities in the future.

4 Focus areas

As its fundamental assumption about the future of its markets, the Schaeffler Group has identified four megatrends that will significantly influence its future business: climate change, urbanization, globalization, and digitalization. From these megatrends, the Schaeffler Group derived 4 focus areas that form the basis for the company's strategic direction.

(1) Eco-friendly drives

One of the primary goals of the Schaeffler Group is to develop energy-efficient drive systems with low or zero emissions. In the automotive field, this means on the one hand further optimizing conventional combustion engines, and on the other hand developing drive solutions in the area of E-Mobility, whether for vehicles with hybrid drive trains or for battery electric vehicles. Key components such as variable valve-control systems, the thermal management module, wet and dry double-clutches, and electronic control modules help reduce CO2 emissions of conventional drives based on internal combustion engines. In addition, for the Schaeffler Group’s automotive customers, innovative products for the field of electric mobility, such as hybrid modules, the electric axle drive, or the wheel hub drive “E-Wheel Drive”, play an increasing role in achieving lower CO2 emission targets. The same logic can be applied to modern industrial drive systems, where the Schaeffler Group’s wealth of knowledge in the automotive field is essential.

(2) Urban mobility

The shift in mobility is nowhere as noticeable as it is in megacities across the globe. At the same time, it is nowhere as necessary. Cities like Moscow, Tokyo, or Shanghai experience a daily traffic volume in which fast and flexible movement is almost impossible. At the same time, more and more cities are banning cars from their downtown areas. This trend calls for new mobility solutions, whether in micro-mobility or by designing more efficient public transit. Responding to this trend, the Schaeffler Group is further expanding its product portfolio for hybrid and electric mobility. Its torque sensor bottom brackets, for instance, have positioned the Schaeffler Group as an innovative supplier in the growing e-bike market, and the “Bio-Hybrid” micro mobile and the “Torque Stick Board” nano mobile demonstrate its strong innovative ability in this area.

(3) Interurban mobility

The term interurban mobility means interconnecting global centers. As globalization progresses, traffic will increase significantly worldwide over the years to come, particularly rail and air traffic, and require a large degree of flexibility. Providing modern and efficient mobility solutions presents a key challenge to both industries. The same is true for the off-highway sector, including agricultural technology, outside the cities. In this area, the Schaeffler Group and its innovative rolling bearing solutions and exceptional systems know-how are set to lead the market.

(4) Energy chain

Common to all of the focus areas mentioned above is the continuing need for the cleanest energy possible. In light of dwindling resources and significant climate challenges, worldwide demand for clean energy is growing. Schaeffler partners with the energy sector, assisting in the development of renewable energy production and focusing on wind power, hydropower, and solar power. In conventional energy generation as well, the Schaeffler Group sees opportunities for expanding its range of products and services. After all, ultimately all segments of the energy chain – from its production to its transport and conversion to energy consumption, must be optimized further. Hence, in addition to conventional energy generation, Schaeffler also offers a comprehensive portfolio of products in the field of renewable energy – from bearing solutions for wind turbines through to solutions for solar and water power.

8 Strategic pillars

The strategy “Mobility for tomorrow” defines the company’s scope for future action and constitutes the basis for the continuous further development of the Schaeffler Group. In order to describe this scope for action in a manner that is specific and easily understood, the company has devised 8 strategic pillars that describe what Schaeffler wishes to achieve or further improve in the future.

(1) We want to be the preferred technology partner for our customers.

For many years now Schaeffler’s comprehensive systems know-how, cutting-edge technological expertise, and unwavering commitment to customer service have made the company a highly sought-after development partner for its customers in the automotive and industrial sectors. On this basis, the Schaeffler Group will continue to shape the mobility of the future together with its customers.

(2) We are an Automotive and Industrial supplier.

The Schaeffler Group is an automotive and an industrial supplier. The two divisions are united by the Schaeffler Group's worldwide manufacturing excellence and global platform of production facilities combined with economies of scale in purchasing materials and commodities. In addition, Schaeffler’s global research network facilitates cross-divisional technological innovations. Diversification across divisions will continue to generate synergies and promote the transfer of know-how in the future.

(3) We are a global company with a local presence throughout the world.

With its approx. 170 locations worldwide, 74 production facilities, 18 research and development centers and a tight-knit sales and service network, Schaeffler ensures that the customer always finds it close at hand. For only those who recognize and understand the challenges confronting their customers can develop tailored solutions. And only those who maintain a local presence are able to respond quickly.

(4) We produce components and systems.

Schaeffler supplies components for products that facilitate and promote mobility. At the same time, the company understands and is able to deliver complex modules and complete system solutions. Schaeffler values both business segments equally. And for good reason: Those without expertise in components will not be able to handle the system.

(5) We view E-Mobility, Industry 4.0, and Digitalization as key opportunities for the future.

As a leading technology partner, the Schaeffler Group began engaging in the topics of E-Mobility, Industry 4.0, and Digitalization years ago and has made these areas a clear priority. As a supplier, Schaeffler wants to take an active role in shaping this development for its customers and considers this a key future opportunity.

(6) We strive for the highest possible quality, efficiency, and delivery performance.

Quality is of paramount importance for Schaeffler. It has always had the goal to consistently ensure high quality and product safety in all applications. Another Schaeffler goal is to serve its customers with the highest-possible efficiency and delivery performance.

(7) We want to be an attractive employer.

The Schaeffler Group’s employees are vital for guaranteeing its success. Identifying, promoting, and retaining the best team for the Schaeffler Group in the long term is crucial for the successful realization of the company’s strategy. The Schaeffler Group is not only concerned about new employees here. Rather, it wants to be an attractive employer for all of its employees.

(8) We live by the values of a global family business.

The Schaeffler Group is a listed family business. A company with a strong foundation of values, established by its founders. Schaeffler particularly identifies with the corporate values “Sustainable”, “Innovative”, “Excellent”, and “Passionate”. These values form the basis for the continued success of the Schaeffler Group for the benefit and in the interest of its customers and business partners, employees and managers as well as its shareholders and family shareholders.

20 Strategic initiatives

In execution of the strategy “Mobility for tomorrow”, the company launched its “Agenda 4 plus One” excellence program with the Schaeffler Group's 16 most significant strategic initiatives in 2016. The strategic initiatives are grouped in 4+1 categories: Customer focus, Operational excellence, Financial flexibility, Leadership and talent management, and – as “plus One” – Securing long-term competitiveness and value creation. All initiatives have the same objective: positioning the Schaeffler Group for the future and making it even better. The stated aim is to successfully implement all initiatives by the end of 2020, i.e. in 4+1 years. Each initiative is the responsibility of a member of the Executive Board as a sponsor, managed by a project manager, and supported by a project organization. A program office was established to coordinate the management of the strategic initiatives and thus ensure the success of the “Agenda 4 plus One”.

Once the program organization was successfully set up and had proven its worth, the Executive Board decided to expand the program by four additional initiatives, increasing the number of initiatives to 20 effective January 01, 2018: “Global Supply Chain2, “Aftermarket Kitting Operation” (AKO), “Global Reporting”, and “Focus”. This will ensure the initiatives are successfully implemented in a consistent format.

The Global Supply Chain focuses on optimizing global supply chains taking into account integrated planning and the interfaces between production and distribution. The initiative is designed to improve working capital, speed up delivery, and improve delivery performance.

The Aftermarket Kitting Operation initiative involves the construction of a state-of-the-art assembly and packaging center – AKO for short – for the Automotive Aftermarket designed to further optimize Automotive Aftermarket processes and generate sustained improvements in quality of delivery.

The Global Reporting initiative is aimed at improving the Schaeffler Group's consolidation and reporting systems as well as management information.

The fourth new initiative, the Focus initiative, will deal with improving the building situation at the company’s main locations in Germany and is designed to increase efficiency and improve space requirements as well as appearance.

Like these four initiatives, all 16 initiatives originally planned are in the implementation phase. They have reached varying maturity levels depending on their scope. The following discusses selected key successes achieved over and above those already addressed elsewhere in the annual financial report. A transfer to or establishment of business units or line functions will ensure that the initiatives are implemented for the long term.

First and foremost, there are the E-Mobility and Industry 4.0 initiatives. As a result of the growing number of customer projects and in order to accommodate the increasing significance of these activities, dedicated business units were set up for both effective January 01, 2018. The E-Mobility business division brings together all products and system solutions for hybrid and pure battery electric vehicles. Due to the significance of the Chinese market, a second competence center will be set up in China in 2018 as well. In the Industrial division, the entire industry-specific business with mechatronic systems and digital services as well as the required related components are being combined in an independent organizational unit Industry 4.0. As a supplier, Schaeffler wants to take an active role in shaping the digital transformation for its customers with Industry-4.0-enabled products.

Schaeffler has been at its customers’ side as an expert solution partner for many years, a connection that has always been key to innovation. The Customer Excellence initiative moves this customer-focused culture further into the spotlight. It especially aims to continually improve and optimize the company’s dialog with the customer, customer interaction, and customer relationship management.

An appropriate, customer-oriented structure is essential for the indirect functions as well. The objective of the Shared Services initiative is to set up a powerful, cross-functional shared services organization. Starting with the first shared services units that are already well-established, this initiative will create a global network of coordinated multifunctional shared services locations embedded in the regions. Prerequisites include a new group process model with clear responsibilities that was developed in the Process Excellence initiative and can now be used in a next step to optimize processes.

The company’s brand identity and corporate image are harmonized under the Global Branding initiative. In future, the Schaeffler Group, as a company with operations worldwide, will focus on the “Schaeffler” corporate brand. This will illustrate its commitment to growing together even more as a listed family business. This will only work with one common strategy, one corporate brand, one remuneration model, and one strong foundation of common values. Harmonizing the Schaeffler Group's corporate image around the world will reduce the complexity of the group’s current brand architecture while at the same time strengthening its corporate brand. The individual product brands, such as INA, LuK, and FAG will remain, but will be used only in connection with the related product and in conjunction with the Schaeffler corporate brand. In Schweinfurt, this initiative has already started. The Schaeffler Group plans to move all Schaeffler locations worldwide to the new branding concept by the end of 2019.

Financial Ambitions 2020

The company intends to grow its revenue - excluding the impact of currency translation - by an average of 4 to 6% per year over the coming years and to achieve an EBIT margin before special items of 12 to 13% by 2020. On this basis, the Schaeffler Group wants to achieve free cash flow before cash in- and outflows for M&A activities of approx. EUR 900 m by 2020. Furthermore, the group intends to increase its earnings per share to approx. EUR 2.00 in 2020.

In addition to these operational indicators, it is critically important for the success of the Schaeffler Group to further improve its financial flexibility and the quality of its balance sheet. For this purpose the company has set itself the task of managing the ratio of net financial debt to equity – known as the gearing ratio, the quotient of the two variables – to be less than 75% by 2020. Moreover, the group is planning to pay out dividends amounting to 30-40% of annual net income before special items to its shareholders. Summarizing the Financial Ambitions 2020, the Schaeffler Group wants to maintain and secure in the long term the investment grade rating gained in 2016, as it represents the basis for further growth strategies.

All these ambitions can ultimately be merged into one key objective: The Schaeffler Group wants to continue to grow profitably and create sustainable value.

M&A strategy

The Schaeffler Group pursues a strategy of mainly organic growth based on its existing technological expertise and innovative edge. Under this strategy, acquisitions will primarily be made if they add technological value or strengthen the Schaeffler Group’s current market position. The company will generally focus on acquisitions related to the future-oriented fields of E-Mobility, Industry 4.0, and Digitalization.

For this purpose, the company has defined the details of key elements of its M&A strategy and further developed its M&A process in 2017. At the core of this approach is an M&A radar that is applicable groupwide and defines seven focus areas where the company is aiming to acquire expertise and generate inorganic growth both within the various divisions and across divisions. The company’s search for opportunities to expand the profile of its expertise and its portfolio specifically targets these clearly defined areas. It focuses on smaller, additive targets with a transaction volume in the nine figure range intended to complement and strengthen the technology spectrum, thus adding long-term value.

Having already successfully acquired Compact Dynamics GmbH in late 2016, Schaeffler acquired autinity systems GmbH, an IT company based in Chemnitz, Germany, in the context of Industry 4.0 and Digitalization in a variety of industrial applications in 2017. The acquisition builds on the existing collaboration between the two companies and allows the Schaeffler Group to benefit especially by accelerating further developments in the fields of machine data recording and condition monitoring.

Strategy communication

Following the announcement of the strategy “Mobility for tomorrow” in late 2016, the Board of Managing Directors explained the strategy in person to selected management and employees at international townhall meetings. This was supported by extensive further communication, especially in the form of a strategy brochure and various focal points in the company’s online and print communication. On this basis, the company’s strategy and future direction were also communicated to individual customers and business partners.

Also in 2017, the strategy was rolled out to all employees at the various Schaeffler Group locations based on a comprehensive roll-out plan using a variety of media in the Schaeffler Group's four regions. The key elements of this communication were presentations and workshops with manufacturing plant employees and administrative staff as well as communication mainly via print media and digital platforms. On this basis, the core elements of the strategy – mission and vision, 4 focus areas, 8 strategic pillars, 20 strategic initiatives and the corporate values – are embedded within the company in a uniform manner for the long term. The company is planning additional activities for the coming years to ensure a long-term understanding of the strategy and to refresh knowledge of its contents.

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