Automotive OEM division
Revenue EUR 8,997 m
EBIT margin before special items 7.7 %
Growth less dynamic than prior year: revenue up 2.1 % at constant currency // Lower revenue growth mainly attributable to market-driven decrease in demand in the Europe and Greater China regions in H2 // Decline in EBIT margin, primarily due to significantly less dynamic markets in H2 and insufficient compensating measures to date // Adjusted revenue and earnings guidance for the division not met // Order intake and book-to-bill ration up from prior year
in € millions.
Prior year information presented based on 2018 segment structure.
1) Based on market (customer location).
2) Please refer to chapter "Performance indicators and special items" for the definition of special items.
The previous Automotive Aftermarket BD started operating as the third division Automotive Aftermarket on January 1, 2018. In addition, the new E-Mobility BD was created within the Automotive OEM division effective January 1, 2018. As a result, the new Automotive OEM division is subdivided into the four BDs Engine Systems, Transmission Systems, E-Mobility, and Chassis Systems.
2018 held significant challenges for the Automotive OEM division. The market environment was marked by numerous uncertainties. The trade conflict between the U.S. and China, the changeover to the new emissions testing methodology WLTP, and a decrease in demand in the Chinese market had considerably adverse effect on the automotive sector, particularly during the second half of the year. The Automotive OEM division did not escape this challenging environment; as a result, it did not meet its revenue targets in the second half of the year. The division reported a 0.6% decline in revenue for the second half of the year compared to the prior year, excluding the impact of currency translation. Automotive OEM division revenue of EUR 8,997 m for the year was slightly above the prior year level (+0.1%; prior year: EUR 8,991 m). Excluding the impact of currency translation, revenue rose by 2.1%. Generating this growth under adverse market conditions, the division still outperformed global production volumes for passenger cars and light commercial vehicles for 2018, which declined by 1.1% during the reporting period.
Revenue trends varied widely across market regions in 2018. Revenue in the Europe region was merely flat with prior year due to the impact of currency translation (+0.2%). Excluding the impact of currency translation revenue increased slightly by 0.9%. The low rate of revenue growth was primarily attributable to production delays resulting from the changeover to the new emissions testing methodology WLTP in the second half of 2018. Regional automobile production volumes declined by an average of 0.5% in 2018. Americas region revenue was flat with prior year due to the adverse impact of currency translation (+0.3%). Excluding the impact of currency translation, the region generated 5.6% in additional revenue. This growth rate put the division significantly ahead of regional automobile production, which declined by 0.1%, and made it the Automotive OEM division’s main growth driver in 2018. The Greater China region reported a currency-related decrease in revenue by 0.9% (+1.2 % at constant currency). The weaker revenue growth was due, in particular, to lower demand in the second half of 2018 as a result of consumers being cautious given the trade conflict with the U.S. and stricter lending practices. Regional vehicle production dropped 3.8% during the reporting period. The Asia/Pacific region reported revenue growth of 0.6% (+2.3% at constant currency) while vehicle production there rose by 1.0%.
Engine Systems BD revenue was merely flat with prior year due to the impact of currency translation (-0.1%). Excluding the impact of currency translation, the business division generated 2.1% in additional revenue, primarily driven by the thermal management module.
Transmission Systems BD revenue declined by 0.8% due to the impact of currency translation. Excluding the impact of currency translation, revenue increased by 1.4%, which was mainly attributable to the torque converters product group.
The new E-Mobility BD combines all components and system solutions for hybrid and purely battery-electric vehicles. The product portfolio includes hybrid modules, primary components for continuously variable transmissions (CVTs), electric axles, hydrostatic clutch actuators, and electric wheel hub motors. The E Mobility BD increased its revenue for the reporting period by a total of 16.8% (+18.1% at constant currency). All of the BD’s product lines contributed to this strong growth rate.
Revenue in the Chassis Systems BD declined by 1.7% (+0.1% at constant currency) as a result of lower demand in the Greater China region. Significant revenue growth was generated by the chassis actuators product group.
Cost of sales increased by EUR 264 m or 3.9% to EUR 6,975 m during the year (prior year: EUR 6,711 m). Gross profit declined by 11.3% to EUR 2,022 m (prior year: EUR 2,280 m). The division’s gross margin fell by 2.9 percentage points to 22.5% (prior year: 25.4%), due especially to a disproportionately high increase in production cost. The decline was partly due to revenue falling short of plan and the resulting decrease in utilization of production capacity on hand, combined with compensating measures that were not yet extensive enough given the rapid decline in sales. In addition, the division could not increase production efficiency sufficiently to offset the adverse impact of pricing and costs. Furthermore, the delayed ramp-up of a few major projects resulted in project-related fixed costs adversely affecting the margin. Earnings were also affected by an adverse impact of currency translation. Additionally, the initial application of the new financial reporting standard, IFRS 15, during the reporting period has resulted in a change in the presentation of certain development services, among other things, as the new standard requires them to be classified within gross margin. This change in presentation had an adverse effect on the gross margin trend compared to the prior year, but decreased research and development expenses in return.
Functional costs increased by EUR 38 m or 2.9% to EUR 1,346 m (prior year: EUR 1,308 m), rising to 15.0% of revenue (prior year: 14.5%). During the reporting period, the change in presentation resulted in a decline in research and development expenses by 0.9% to EUR 679 m (prior year: EUR 685 m), representing 7.5% of revenue (prior year: 7.6%). Selling and administrative expenses rose considerably by 7.1% to EUR 667 m (prior year: EUR 623 m), partly due to higher logistics expenses and increased administrative expenses in connection with the program for the future, the “Agenda 4 plus One”.
EBIT amounted to EUR 682 m during the year (prior year: EUR 951 m), and the EBIT margin was 7.6% (prior year: 10.6%). The share of special items recognized by the Automotive OEM division in 2018 decreased EBIT by a total of EUR 11 m. This included EUR 24 m in restructuring expenses related to the integration of the internal supplier, “Bearing & Components Technologies”, and to the reorganization of the company’s UK business activities. Income from the reversal of a provision following the completion of an investigation of a compliance case by the relevant authorities had an offsetting effect on EBIT of EUR 13 m. In the prior year, the Automotive OEM division recognized its share of restructuring expenses incurred to set up a shared service center in Europe amounting to EUR 25 m. These expenses were partially offset by EUR 3 m in special items for legal cases which increased EBIT in the prior year. Based on that, EBIT before special items decreased to EUR 693 m (prior year: EUR 973 m), and the EBIT margin before special items fell considerably to 7.7% (prior year: 10.8%). The decrease in EBIT was primarily due to the disproportionately high increase in production cost. The adverse impact of currency translation on gross profit was partially offset by gains on transactions denominated in foreign currency.