“Invented for life” more than ever before: Opportunities for the profitable growth of the Bosch Group

Franz Fehrenbach
Chairman of the Board of Management of the Bosch Group,
at the Annual Press Conference, April 2007
Ladies and gentlemen:
I would also like to offer you a warm welcome to our Annual Press Conference 2007. Fiscal year 2006 and, to an even greater extent, the increasing interweaving of economic and ecological issues have confirmed that we are on the right path with our long-term strategy. This applies both to our international orientation and to our broad sectoral presence. This strategy lives up to the challenges of our age:

· With the rapid growth in the emerging markets, economic globalization is continuing to pick up speed and gain in depth.

· Ecological globalization calls for the economical use of resources all over the world. It is up to us to use our innovative strength to respond to this challenge. Anyone who thinks ecologically has to act technologically.

As a technology and services company, we can see more than ever before opportunities here across all our business sectors. This makes it all the more important for us to make constant progress with our strategic positioning: even more international presence, an even better balance among our areas of business by means of focused diversification, and orientation to the “Invented for life” ideal. Despite all our long-term considerations, we keep our sights firmly fixed on current business challenges, especially the radical structural change in the global automotive industry.

2006 in review: growth and result on target
Let us therefore look first of all at our business figures for the past year. On the whole, the economic environment in which we did business in 2006 was a favorable one. However, weaknesses became apparent in a number of core industries – especially in North America, but also in western Europe.

· The sales of the Bosch Group grew in 2006 by 5.4 percent to 43.7 billion euros. Accordingly, we achieved our growth target.

· It was above all due to our broad-based business footing that we were able to do so. Modest growth in our automotive business contrasted with a strong development in other segments. In Automotive Technology, sales increased by 3.4 percent to 27.2 billion euros. Growth in Industrial Technology was significantly stronger: by 5.1 percent to 5.5 billion euros. It was our Consumer Goods and Building Technology business sector that showed the strongest performance, growing by nearly 11 percent to 11 billion euros.

· We also benefited from our international business presence. In Asia Pacific, for example, we once again achieved double-digit growth. While growth in the region as a whole came to 12 percent, in India it reached 24 percent, and in China 30 percent. We also grew strongly in South America and eastern Europe. Our business also improved in western Europe, though in Germany this improvement was all in all only slight. Business in North America, by contrast, slowed considerably.

· Correspondingly, it was in the emerging markets that we created most of our new jobs in 2006. Worldwide, the number of associates in the Bosch Group increased by 10,300 to roughly 261,300 at the beginning of 2007 – 150,800 outside Germany and 110,500 in Germany. Most of this growth was outside Germany. In all high-cost countries, there is also a growing willingness to do more to secure competitive position. Accordingly, we were able to agree on measures to reduce personnel costs at a number of locations.

· In 2006, the 7.1 percent figure for return on sales meant that we just achieved our target corridor. Profit before tax came to some 3.1 billion euros, following 3.2 billion euros in the previous year. The positive developments in our Industrial Technology business sector, as well as in Consumer Goods and Building Technology, were not able to compensate fully for the pressure on earnings in Automotive Technology.

Still the focus of business: profitable growth
To secure long-term profitable growth for the Bosch Group, profound challenges have to be mastered, especially in automotive technology. We are faced here with two fundamental structural changes:

· On the one hand, the “balance of power” in the automotive industry will shift even more significantly toward Asia. The emerging markets there will come up from behind to race neck and neck with the established manufacturing regions – also and especially with low-price vehicles. By our estimates, a strong half of all growth in global automotive production will take place in Asia over the next ten years. Furthermore, Europe seems likely to account for only 20 percent of this growth, while the remaining 30 percent will be generated in the Americas. Even in 2006, the relative weakness in some of what have up to now been our main markets had a conspicuous impact on our business. The consequences of this are clear for us: even if we continue to grasp every possible opportunity for growth with innovations in the established markets, we shall establish a stronger presence in the world’s new growth markets. And this will only be possible if we have more manufacturing and development facilities in these countries.

· On the other hand, the pressure of competition in the automotive industry is intensifying in all regions – and this goes for manufacturers as well as for suppliers. In 2006, we had to come to terms with a more than three percent cut in prices overall – more than ever before. Together with increased raw materials prices, this had a decisive impact on our result. Here, too, it is clear what we must do: we have to further improve our cost structures. To achieve this, we are increasing productivity by means of more efficient processes, and this not only in manufacturing, but also across the entire value added chain. This is why we are systematically introducing our Bosch Business System.

We are equally determined to continue our efforts to achieve a better sectoral balance for our business. Last year, we again made a further step in this direction, with the share of sales accounted for by our Industrial Technology and by our Consumer Goods and Building Technology rising to 38 percent. We want to continue this successful course in these business sectors:

· All business segments contributed to the excellent growth of Consumer Goods and Building Technology in 2006 – power tools and household appliances, as well as security systems and thermotechnology. While we were helped in this by favorable economic conditions, we also expanded our services business – for example, with our service centers for security systems. And we are forging ahead considerably in new areas of business, such as solar technology. I shall return to this point later. Above all, however, we are scoring successes with innovations whose customer benefit is plainly evident. One division that has especially mastered this art is Power Tools, which generates more than 35 percent of its sales with products that have been in the market for less than two years. And in Power Tools, we have within five years halved the time it takes from first product idea to start of production to a mere 12 months. This is how successes in fiercely competitive markets are defended.

· Industrial Technology is also developing positively. While we were able to stabilize our business with packaging technology, Bosch Rexroth benefited in its core business from the positive economic climate for mechanical engineering products worldwide – with sales increasing by 33 percent in China alone last year. In its main areas of activity, Bosch Rexroth is currently working at the limits of its capacity. Its capacities are therefore being extended still further, not only by means of capital expenditure, but also by means of more flexibility, so that it can react better to cyclical fluctuations.

A second set of figures: 1.4 billion euros for ecology
In addition to our classic financial data, we can present a second set of figures. These figures prove how seriously we already take our corporate responsibility for the environment:

· In 2006, we again slightly increased our research and development expenditure – to 3.3 billion euros or 7.7 percent of sales. Of this amount, more than 40 percent, or 1.4 billion euros, went into products that help to protect the environment and conserve resources.

· Last year, we applied for more than 3,000 patents worldwide – more than ever before, and 200 more than in the previous year. And of these patents, nearly 40 percent related directly to environmental protection and resource conservation.

The focal points of our business show why this is so. Let me refer you to two further statistics from our financial statements:

· With our drive systems for the automobile, which we are engineering in both the gasoline and the diesel sectors so that they consume and emit less, we generated sales of 11.4 billion euros in 2006. This was 42 percent of our business in automotive technology as a whole.

· At the same time, we are significantly expanding our business with systems that exploit renewable energies – whether at Bosch Rexroth or in Bosch Thermotechnology. In 2006, the sales generated by these systems came to just under 500 million euros. By 2010 at the latest, this figure should be twice as high – in other words, it should pass the one billion euro mark.

These figures illustrate our commitment to environmental and climate protection. They indicate that innovations are the response of a technology company like Bosch to the challenges of our age. Or, to put it differently: we provide technological answers to ecological questions.

At a very early stage, we conceptualized our automotive business as dedicated to environmental protection and resource conservation. This is shown above all by our 3S Program, created in the wake of the first oil crisis in the 1970’s, which aims to make driving safer, cleaner, and more economical. Today, too, a forward-looking strategy is called for – one that adds urgency and pace above all to our developments for lower energy consumption. However, in light of other emitters of carbon dioxide, such as private households, we do not want to limit these efforts solely to the car. Instead, with our broad-based footing, we can easily demonstrate that we are capable of acting quickly and effectively in more than one area.

What can we do in the vehicle?
I. Make innovations international
Looking first of all at the automotive industry, we have to consider that this industry is currently fighting a war on several fronts. All over the world, automakers as well as suppliers are under increasing competitive, cost, and consolidation pressure. But that is not all. They also have to satisfy the internationally stronger demands made of road traffic. These are not only about lower consumption and carbon dioxide emission levels, but also about accident protection and pollution emissions. In all these disciplines, we want to be a driving force by virtue of our innovative strength. Fundamentally, this is an ambition we can fulfill in two ways:

· on the one hand, by making available internationally our innovations that were initially successful in Europe,

· and on the other hand by means of technological developments that offer new potential economies – in the gasoline and the diesel engine, with alternative drives, and with other measures beyond the powertrain.

Let me turn first of all to the idea of making our pioneering achievements available worldwide. There is an example of this from accident protection: our Electronic Stability Program ESP(r), whose annual sales we expect to triple in the U.S. alone to three million units by 2010. At the same time, the prospects for “Clean Diesel” in the U.S. market are improving. By mid-2008, we shall have fulfilled the extremely strict US07 Bin5 pollution standard with the help of Denoxtronic, our urea metering system. Following that, we forecast a boost to business, especially because the diesel is so economical. The diesel consumes over 30 percent less fuel than a gasoline engine, and emits roughly 25 percent less carbon dioxide. This can also be put in a nutshell as follows – more diesel equals less CO2. And if, as we estimated some time ago, the share of diesel-driven light vehicles in the U.S. increases from 6 to 15 percent by 2015, then this is good for the climate.

The “Clean Diesel” may become established even faster in the Asian emerging markets. The driving force behind this development is emission standards that can only be fulfilled with high-pressure injection systems. This year we shall sell a good 100,000 common-rail systems in China, and the same number in India. By 2010, we are likely to see some 1.3 million such systems in each of these countries. Even if we expect the share of new vehicles equipped with diesel to rise in Europe as a result of tighter carbon dioxide limits, the focus of growth is shifting to the other major economic regions of the world. While we currently sell only one-fifth of our high-pressure injection systems in Asia and America, in 2015 this figure will be nearly 50 percent.

As a matter of principle, however, we cannot transfer European high-tech one-to-one to emerging markets, much less to the low-price vehicles that are showing above-average growth in these countries. Nonetheless, even these vehicles should be driven by economical and clean technology. For the 2,000-euro car of an Indian automaker, for example, we are supplying the gasoline injection system. This is a team effort by our engineers in India, China, and Germany – an area where we can draw on a lot of experience at Bosch, as the “international collaboration” theme in our Annual Report shows.

What can we do in the vehicle?
II. Tap new potential for fuel economy
Apart from internationalization, we are continuously further developing our innovations. In light of the undeniable urgency of climate protection, we are working with automakers to develop additional fuel-saving potential, and thus to proportionately reduce carbon-dioxide emissions. To this process we contribute our wide range of systems competence across all drive technologies:

· We are developing diesel engine management further, which will result in a further reduction in carbon-dioxide emissions of up to 10 percent – and this in an engine that is already economical as it is.

· For the gasoline engine, we are using the second generation of our gasoline direct injection as a basis for intensive work on downsizing concepts. This means a smaller engine and fewer cylinders, but thanks to turbocharging the same power. The result is a 15 percent reduction in carbon-dioxide emissions as compared with conventional injection concepts.

· And we are combining the internal combustion engine and the electric motor to create hybrid drive systems. Compared with a classic port-injection gasoline engine, a gasoline hybrid reduces carbon-dioxide emissions by 25 percent. However, this is an advantage that it demonstrates more in urban traffic than over long distances. Bosch has received a first major contract for such a hybrid drive. We have already developed a prototype for the diesel hybrid, which is technologically more complex, but also more economical.

The many avenues Bosch is pursuing are also shown by our components for CNG-driven vehicles and our Flex Fuel engine management system – an extremely important development for South America, since it allows vehicles to run on ethanol. But beyond all these technologies, we can see and are working on a series of technological solutions for lower consumption and lower CO2 emissions – solutions such as thermal and vehicle electrical system management, variable valve control, or super-efficient alternators. Each of these developments can reduce CO2 by between two and four percent. And our start-stop system that is now going into series production for BMW enables a saving of as much as eight percent in urban traffic.

However, it is not possible simply to add up the potential of individual solutions. Together with automakers, our aim is to find integrated solutions – technology packages that can be applied to specific classes of vehicle. In this way, we can play a major part in tackling the ambitious goal set for the year 2012: that of limiting the carbon-dioxide emissions of the new vehicle fleet in Europe to 130 grams per kilometer. However, this target can only be achieved in reality if all models become more economical, and especially the middle and compact-class models that are produced in large volumes. And whatever we do for new technologies in new cars, we must not forget the vehicles already on the roads. In Germany, these vehicles are older than ever before: more than eight years old on average. Replacing such an eight-year-old vehicle with a new one that is equally powerful can reduce consumption by 1.2 liters per 100 kilometers, and CO2 emissions by 20 grams per kilometer. This is an argument in favor of a CO2-based vehicle tax, which provides an incentive for purchasing energy-efficient cars. A political framework condition such as this could have a more lasting effect on the future development of automotive technology than mere emission limits.

What can we do in the home?
More solar and geothermal energy
We can also do a lot for climate protection in private households – an area that is the focus of our attentions in many respects. Our household appliances are one example. We are the only brand to have been awarded the EPA’s “Energy Star” rating in all product segments. Our cooling appliances alone consume as much as 78 percent less electricity today than they did in 1990. No less importantly, our condensing boilers use 30 percent less gas or oil than conventional systems. Whenever the issue is one of energy efficiency, and thus of CO2 emissions, nobody should believe that old technology is still good enough. And yet, the backlog of deferred modernization is even greater in households than it is on our roads. More than half of all German boilers are more than ten years old. If the owner of a typical detached house were to exchange such a conventional boiler for a modern condensing boiler, he could reduce his annual CO2 emissions by more than five metric tons. This is a bigger saving than the total saving achieved by applying the tighter EU emission limits, planned for 2012, to eight passenger cars driving 20,000 kilometers a year. The environment benefits from this, and it is also good business for Bosch Thermotechnology.

When it comes to modernizing heating systems, we promote not only condensing technology, but also solar and geothermal energy. With systems that utilize renewable energies, our Thermotechnology division will generate sales of 400 million euros this year – 100 million euros more than in 2006. And we have every reason to be confident beyond this year: in Spain, for example, the installation of solar technology in new houses or when performing major renovation work has been an official requirement for a year now. By 2015, systems that utilize renewable energies will account for more than a quarter of the European thermotechnology market. In Germany, the figure will be as much as one half by as early as 2009. But what are we doing to prepare for this imminent boom?

· We are permanently expanding our manufacturing capacities for solar collectors. For example, our competence center in Wettringen, Germany, is being extended. And in Aveiro, Portugal, we have put a new production line into operation. This year, we shall sell 150,000 collectors, and by 2009 twice as many.

· Thanks to our acquisitions in Sweden and the U.S., we have risen to become the world market leader for electrical heat pumps. Above all, we have managed to enter the strongly growing U.S. geothermal market. We are currently investing in expanding our capacities there.

What becomes evident here is that the times when renewable energies were just a niche market are over. Whenever markets display strong growth, there is a need for increased capacity and, above all, international distribution channels. Our Thermotechnology division, which is well positioned outside Germany’s borders as it is, can draw on its strengths more than ever here. At the same time, mastering the various systems for energy in the household and integrating them with each other is becoming an ever more demanding task – an engineering task to which our core competence of “metering, governing, and controlling” is well suited. Our engineers are also working on further concepts, such as combined heat and power. Our goal is a house that is self-sufficient in its energy needs.

What can we do in power generation?
Investment in wind power
As much as we push for more efficient energy consumption, by equal measure we are also pioneering CO2-free power generation. Our subsidiary Bosch Rexroth is a very important player here. The technology it delivers is not only used in factories, but also off the shores of Norway and the United Kingdom, where the first prototype power stations for utilizing marine energy have been built. However, their development is still at a stage that wind power reached 20 years ago. How has wind power developed since then? It is now an industry that every year records demand for new wind power stations with a generating capacity equivalent to seven nuclear power stations. And in the next ten years, this figure will grow a further threefold. Bosch Rexroth supplies the core components for wind turbines: transmissions and systems for adjusting the position of the rotor blades. Its sales with these products will rise from 120 to 160 million euros this year. Over the course of the year we shall considerably expand our manufacturing capacities for transmission units. Globally speaking, this will mean an investment of some 300 million euros over the next few years – a clear signal to our customers.

At the same time, we are developing innovative solutions such as differential gears for multi-megawatt-class wind turbines. The more sophisticated the technological requirements made of the industry become, the more manufacturers will choose collaboration with specialists who are not directly associated with their competitors. We are the largest independent supplier in the industry – an advantage similar to the one we enjoy as an automotive supplier.

Outlook: continuing the strong development of the Bosch Group
It is not only in our business generally, but also with climate protection in particular that the added value of our balanced corporate structure becomes apparent. This assertion is based on two essential insights which can be summarized as follows:

· First, our regional and sectoral base is so broad that we can provide technological answers to the challenge of climate change that go beyond Europe and the automobile.

· Second, we will broaden our business even further, beyond the diversity we already have – also in order to make the most of renewable energies. Our diversification is not a random process, but focuses solely on areas to which we can apply our strengths. It is precisely this that is meant when we speak of focused diversification.

As you know, we have closed a number of acquisitions – Pacifica in Australia, Beissbarth in Germany and Italy, and Florida Heat Pump Holding in the U.S. – acquisitions in automotive technology as well as beyond it. We shall continue along this path of securing a strong development for the Bosch Group, and be guided in our actions by our core competencies.

For the current year, we expect our business to develop only modestly. True, the business environment will remain generally favorable in 2007, but not so favorable, especially in the automotive industry, that the wage-bargaining parties – in Germany, for example – should be tempted to reach wage agreements that are too generous. Anyone who believes that the times are so good that they need not worry about costs is paving the way not for better times, but for worse. In the current year, the growth of the global economy as a whole will slow down somewhat, and this in all regions. As before, the most dynamic growth will come from the Asian emerging markets. Globalization continues to fuel the global propensity to invest, and German industry in particular benefits from this, in the broadest sense of the term. At the same time, however, we have to adapt ourselves to continuingly high raw materials prices and, above all, to a further appreciation of the euro.

In this environment, the nominal increase in our sales in the first three months of this year was generally restrained. Apart from continuing weaknesses in the automotive markets in North America, exchange-rate effects are the main reason for this. In the further course of the year, however, we expect these to be offset by stimuli from a globally positive economic development, which is likely also to have a positive effect on the automotive industry. Following the increase in VAT in Germany, our forecast for developments here is more positive than in the recent past, now that the many years of strong demand from outside Germany have resulted in a significantly improved investment climate, and thus in an appreciable increase in employment.

Nonetheless, the strong appreciation of the euro leads us to expect slightly lower sales growth for the Bosch Group in 2007 than in 2006. After adjusting for currency effects, growth is likely to be a strong five percent. Given this figure, we are again aiming for a pre-tax return on sales of seven percent. However, given the conditions I have mentioned, above all in automotive technology, we shall have to work hard to achieve this overall result.

I should like to close my presentation by stressing a crucial point: As we pursue our entrepreneurial tasks, it is a matter of far more than merely theoretical concern for us to preserve the balance between economic, societal, and ecological responsibility. This is in our own immediate interest, just as it is in the interest of the economy as a whole. The more our products are “Invented for life,” the better our chances in the market will be. And in the long run, a company like Bosch can only remain stable if the radical disruption of the world and its climate can be avoided.