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The global economic upturn that had emerged in the second half of 2016 continued in 2017. Global gross domestic product rose by 3.7% in 2017; this represents the strongest growth rate in six years (Oxford Economics, January 2018). The increasing momentum took hold of large parts of the industrialized economies as well as of the emerging and developing countries
In the euro region, the continuing economic upturn was felt across countries and sectors. Growth in gross domestic product reached its highest level in a decade, driven by private consumption and investment as well as by strong foreign demand brought on by the worldwide economic recovery. The German economy expanded significantly, generating its highest growth rate since 2011. In the United Kingdom, however, the economy was much less dynamic. Continuing uncertainty regarding the upcoming withdrawal from the EU and the impact of the considerably weaker pound contributed to economic growth there falling behind that of the euro region. Following a weak first quarter of 2017, economic activity in the U.S. increased considerably during the remainder of the year. The Fed continued to gradually tighten its monetary policy and raised its benchmark interest rate three more times. The situation of the Japanese economy improved, with especially stronger foreign demand bolstering the higher-than-expected rise in gross domestic product.
In China, growth temporarily increased slightly for the first time since 2010, primarily due to stronger demand for exports. In addition, private consumption continued to gain in significance compared to investment, as intended by the ongoing restructuring of the economy. Momentum in the Indian economy slowed temporarily due to nonrecurring impacts. The economies in Brazil and in Russia, on the other hand, began to recover from their earlier deep recession.
In this context, the situation of the Schaeffler Group’s regions during the year was as follows: Gross domestic product in the Europe region rose by 3.3%, and the economic output of the Americas region grew by 2.0%. The Greater China region reported a growth rate of 6.5%, while gross domestic product in the Asia/ Pacific region increased by 3.6%.
The global capital markets reported some significant increases, with both the Dow Jones Industrial Average (DJIA) and the Deutsche Aktienindex (DAX) rising to new all-time highs in the fourth quarter of 2017.
In the currency markets, the euro rose against all foreign currencies significant to the Schaeffler Group over the course of the year. However, comparing annual averages to prior year provides a mixed view. In terms of annual average exchange rates, the euro gained ground against the U.S. dollar, the Chinese renminbi, and the Mexican peso. However, the euro declined slightly against the South Korean won and the Indian rupee based on annual average rates.
Trends in automobile production and vehicle population significantly affect the results of operations of the Schaeffler Group‘s Automotive OEM and Automotive Aftermarket business. The global trend in industrial production provides an indication of the development of the Industrial division’s business.
Global automobile production, measured as the number of passenger cars and light commercial vehicles produced, increased by 2.1% to approx. 95.1 million (IHS, February 2018). A strong first quarter of 2017 was followed by noticeably lower growth rates during the remainder of the year.
The Europe region reported significant growth in automobile production of 3.9%. While Turkey, France, and Russia generated above-average growth rates, especially Germany and Spain experienced declines. Growth in India, which is also part of the Europe region, remained relatively high despite momentum declining there. Automobile production in the Americas region was down 0.9% compared to prior year since very significant increases in Brazil and Mexico did not fully offset the considerable contraction in Canada and particularly in the U.S. Greater China region growth in automobile production came in at 2.6%, significantly less than the high prior-year level. The main reason for the decreased momentum was a reduction in buying incentives provided by the government. Automobile production in the Asia/Pacific region rose by 2.8%, supported, in particular, by a very strong first half of the year in Japan, while South Korea experienced a slight decline.
The global vehicle population, measured as the number of passenger cars and light commercial vehicles, rose by 3.9% to approx. 1.3 billion in 2017 (IHS, February 2018), and the average vehicle age increased slightly to 9.5 years.
In the Schaeffler Group’s Europe region, the vehicle population expanded by 2.8% to just under 530 million; the mean vehicle age rose to 11.7 years. India experienced an above-average increase in vehicle population levels. The vehicle population in the Americas region increased by 2.0% to approx. 420 million, with growth in South America slightly exceeding that in the three NAFTA states. The average age of the vehicle population rose to
9.8 years. In the China region, the vehicle population grew by 12.3% to approx. 200 million; its average age rose to 5.2 years. The vehicle population in the Asia/Pacific region was up 2.5% at 175 million, mainly driven by growth in Southeast Asia. The average vehicle age increased to 8.4 years.
Global industrial production, measured as gross value added based on constant prices and exchange rates, grew by 3.6% (Oxford Economics, December 2017).
Industrial production in the Europe region rose by 2.2%, mainly driven by the encouraging trend in Germany, where growth was noticeably higher than in previous years, not least due to higher foreign demand. India, on the other hand, reported significantly less dynamic growth. In the Americas region, industrial production rose by 2.4%. Both the U.S. and Latin America (primarily Brazil) recovered from the weak prior year. In Mexico, however, production once again remained flat with the prior year. The Greater China region’s industrial production was up significantly by 6.2%, although growth was slightly less dynamic in the second half of the year. Industrial production in the Asia/Pacific region increased by 3.9%, mainly driven by the favorable trend in Japan; South Korea reported more dynamic growth as well.
The Schaeffler Group uses various materials, especially various types of steel, aluminum, zinc, as well as plastics and lubricants. Commodity market price trends affect the Schaeffler Group’s cost to varying degrees and in some instances with some delay, depending on the terms of the relevant supplier contracts.
Prices in the procurement markets for most of the Schaeffler Group‘s significant input materials increased during the year. Comparing annual averages to prior year showed higher price levels across the board.
Steel is used to manufacture rolling bearings and automotive components. Depending on the source region, average prices for cold- and hot-rolled steel increased by between approx. 13 to just under 40% compared to prior year. The price of metallurgical coal, an important input material for steel and especially carbon-based castings, rose by approx. 30%.
Aluminum is primarily used for pressure die castings and stamped and bent parts, while applications for zinc include coating mechanical components. Copper is mainly required for use in electric motors and mechatronic components. Higher global demand combined with a decrease in supply in China drove up the annual average price of aluminum by more than 20%. The copper price increased by over 25%, with reasons including higher growth rates in industrial production. The mean price of zinc was nearly 40% higher than the prior year average.
The Schaeffler Group uses plastics, for instance to produce cages for rolling bearings, as lubricants designed to reduce friction in components, and as preservatives. Plastics and lubricants are often made based on crude oil. Increased demand and the continuation of the OPEC agreement on limiting production volumes brought the crude oil price to its highest level in two years. The annual average was still just under 25% higher than the prior year average. Based on the ICIS Global Petrochemical Index (IPEX), average prices of processed petrochemical products, including the plastics used by the Schaeffler Group, rose by over 15% compared to the prior year average.