Markets
Approximately 62% of GKN’s combined sales of subsidiaries and joint ventures are to the world’s passenger car and light vehicle original equipment markets. Production levels in these markets are a key driver of Group performance and, in particular, of our Automotive and Powder Metallurgy operations. The forecast compound annual growth rate in global production for 2007 to 2011 is 3.9%, somewhat higher than the longer term trend (1990–2012) of 2.7%.
Within this global picture, future growth is likely to vary significantly by region with generally stable production in the mature markets of Western Europe, North America and Japan and strong increases in the emerging markets of Asia Pacific, South America and Eastern Europe. This pattern was evident in 2007.
Western Europe
In Western Europe (where sales to vehicle manufacturers accounted for approximately 32% of Group sales in the year) overall production in 2007 was 16.1 million compared with 15.7 million in 2006, an increase of approximately 2.5%. There were increases in Italy (10%), Germany (6%), Spain (7%) and the UK (3%) somewhat offset by reductions in France (6%) and other smaller producing countries.
North America
In North America (where sales to vehicle manufacturers accounted for approximately 15% of Group sales in the year) production in 2007 was 15.0 million, a reduction of 2.0% from the 15.3 million in 2006. Within the overall figure there was again a significant change in market share with Chrysler, Ford and General Motors continuing to lose share to foreign manufacturers. Consumer preference also continued to move from light trucks and sports utility vehicles (SUVs) to crossovers and passenger cars.
Emerging markets
Asia Pacific (excluding Japan where the year on year increase in production was 1% to 11.2 million vehicles) showed very significant growth. In China, production of 8.1 million vehicles was 22% above 2006, while production in India rose by 14% to 1.9 million.
In Brazil, production increased by 16.5% to 2.7 million vehicles.
Market trends in 2008
Following the ‘credit crunch’ in the second half of 2007 there is some uncertainty about market conditions in 2008, particularly in North America where sales to the car and light vehicle market account for approximately 15% of Group sales. The current view of Global Insight Inc, a leading economic forecaster, is for similar conditions to prevail in 2008 with Western European production essentially flat, North America weakening by around 4.5% but with China, India and Brazil growing by around 14%, 20% and 15% respectively.
Input costs
The major costs in our Automotive businesses are labour, steel (either as scrap, bar or purchased steel based components), other metals including copper, nickel and molybdenum and other materials such as grease. There has been significant volatility in many raw material prices over the last two or three years which has exacerbated the pressure on margins. Our close relationships with customers and continuing emphasis on technical development and productivity improvement, together with the restructuring initiatives already noted, have enabled us largely to mitigate these and, notwithstanding their impact, we remain committed to achieving our targeted margins.
GKN Driveline
GKN Driveline specialises in the manufacture of components for light vehicle drivelines (defined as the components that transfer torque between a vehicle’s transmission and its driven wheels). These include geared components (transfer cases, power transfer units and final drive units), torque management devices (TMDs) and driveshafts (propshafts for longitudinal power transmission and sideshafts for lateral transmission). The Driveline segment comprises GKN Driveline Driveshafts (GKN Driveshafts), GKN Driveline Torque Technology Group (TTG) and other Driveline businesses.
The customer base is broad and includes virtually all major vehicle manufacturers on a worldwide basis.
GKN Driveshafts
GKN Driveshafts is the global leader in the production of constant velocity jointed (CVJ) products for use in light vehicle drivelines. The majority of CVJs are used in sideshafts for front wheel drive, rear wheel drive and four wheel drive vehicles; CVJ sideshafts are required for every driven axle with independent suspension. Some, but not all, longitudinal propshafts are also fitted with CVJs.
In 2007, based on internal estimates, GKN Driveshafts’ businesses, including its joint ventures, produced approximately 40% of CVJs for the global light vehicle market. The market share of the next largest independent producer is estimated to be less than half this level, with around 24% of CVJs produced by Vehicle Manufacturers’ (VMs) in-house operations. The strong order win rate achieved during 2007 continues to underpin our expectations of increased market share in 2008 and future years.
GKN Driveshafts manufactures CVJs and related products in 21 countries across all major vehicle producing regions of the world and has enjoyed considerable success in developing markets, with strong market shares of some 84% in South America and 51% in the developing Asia Pacific region (excluding Japan and South Korea).
GKN Driveshafts is also one of the largest suppliers of premium propshafts, which we define as those propshafts with sophisticated joints, materials or other features. We estimate that in 2007 premium propshafts represented approximately 38% of global light vehicle propshaft demand, or some 11 million propshaft assemblies. GKN Driveshafts’ share of this segment was in the region of 20%.
Torque Technology Group
TTG develops and manufactures a broad range of driveline products which deliver power to a vehicle’s wheels and manage that power to control the dynamic performance of the vehicle. We offer a complete range of power transfer (geared) components and power control (torque management) products as both stand-alone and integrated devices to VMs and to certain tier one suppliers.
Geared components include products enabling the distribution of power on all wheel drive/four wheel drive (AWD/4WD) and two wheel drive (2WD) vehicles and include power take-off units (PTUs), final drive units (FDUs) and differentials. TMDs are mechanical (passive) or electro-mechanical (active) devices that improve vehicle performance and handling by controlling the flow of torque throughout the driveline.
Geared components, which are sold principally to VMs in the Asia Pacific region but increasingly in the Americas and Europe, currently account for approximately half of TTG’s annual sales. Our products are enjoying continued growth above overall market levels as VMs increasingly introduce new ‘crossover’ vehicles that combine four wheel drive with car-like dynamics, comfort and improved fuel economy.
We estimate that in 2007 GKN supplied approximately 14% of TMDs for light vehicle applications globally. Sales volumes of our electronically controlled coupling devices (ETM, EMCD and ETV) are increasing progressively, building upon our established passive product range which includes the Viscodrive and Super Limited Slip Differential (LSD) product families.
Other Driveline businesses
Other Driveline businesses operate manufacturing plants, warehouses and service facilities throughout Europe and provide a comprehensive range of new and remanufactured sideshafts and other components for the passenger vehicle aftermarket. They also provide services to repair and replace heavy truck and other industrial propshafts, as well as engineering, producing and selling low volume, highly specialised propshafts and driveline components for non-automotive applications such as industrial, marine, defence and all-terrain vehicles.
GKN Driveline divisional strategy
Key long term drivers in Driveline’s markets are customer demographics, safety legislation, rising global fuel consumption, and rapidly growing personal mobility which is forecast to result in emerging markets continuing to provide the growth in new vehicle demand. Overall, this is likely to lead to some slowing of growth in the 4WD/AWD markets (with reductions in North America but increases elsewhere), increasing penetration of AWD on smaller vehicles, and some consumer shift from 4WD to AWD.
Divisional strategy recognises the different stages of development of the Driveshafts, TTG and other Driveline businesses.
GKN Driveshafts, which as noted above already has a high market share, aims to achieve profit growth through:
- maintaining technological leadership by focused product development;
- expansion in emerging markets both through overall market growth and by leveraging existing relationships with both global and local VMs;
- low cost, high quality manufacturing on a global basis; and
- selective business acquisitions where they are complementary to our core competencies, including outsourcing of CVJ manufacture by VMs.
TTG is focused on growth and aims to generate increasing shareholder value by:
- extending its position in global AWD/4WD markets, to deliver growth in core geared products;
- leveraging product technology and vehicle engineering skills to maintain leadership in TMDs, largely for AWD applications;
- capitalising on opportunities in high volume differentials for AWD and 2WD vehicles;
- increasing margins to the average level of Driveline as a whole; and
- pursuing acquisition opportunities to strengthen market positions in core products and in adjacent product markets which can benefit from our technology.
Our other Driveline businesses are focused on developing and growing sustainable and value creative niches for our Driveline technologies.
2007 Highlights
On a management basis GKN Driveline sales increased to £2,052 million from £1,997 million in 2006. Excluding the adverse impact of currency (£53 million) and the small effect of the 2006 divestment of Fujiwa (£5 million), the underlying increase was £113 million (6%).
Within this, subsidiaries’ sales in the year totalled £1,922 million compared with £1,884 million in 2006. The negative impacts of currency translation and 2006 divestment were £47 million and £5 million respectively so that the underlying increase was £90 million (5%). This increase arose in GKN Driveshafts in South America and Europe reflecting the high level of business wins over the past two years, in TTG where there was strong demand from Japanese customers and in other Driveline businesses where market conditions were favourable.
The share of joint venture sales (which are not consolidated in the Group income statement but are set out in note 12 to the financial statements) also grew significantly to £130 million from £113 million in 2006, with the underlying increase £23 million (21%). This arose mainly in the Chinese companies where the organic sales growth was 31%, ahead of the overall market.
Trading profit on a management basis increased by £15 million from £151 million to £166 million. There was no overall translational impact from currency but a £1 million negative impact from 2006 divestments. Excluding this, the increase was £16 million (11%) and margin improved to 8.1% from 7.6%. Return on invested capital was 18.5% (2006 – 17.2%).
Subsidiaries’ trading profit was £149 million compared with £138 million in 2006. Excluding the impact for 2006 divestments noted above, the increase was £12 million (9%) with increases in both GKN Driveshafts and TTG as a result of the higher level of sales. In GKN Driveshafts, however, the profit improvement was held back somewhat by the net impact of higher than anticipated raw material costs and the shortage of certain steel products which caused significant operational inefficiencies and led to additional costs in Europe. These were mitigated somewhat by the profits arising from property rationalisation actions and non-recurring credits arising from changes to the retiree medical arrangements in the US. Return on sales improved from 7.3% to 7.8%.
The Group’s share of trading profit of joint ventures increased from £13 million to £17 million with the underlying increase, excluding minor adverse currency impacts, £4 million (31%). The increase arose almost entirely in China, mainly as a consequence of higher sales.
The strategic restructuring programme announced in 2004 was effectively completed and charges in the year totalled £19 million (2006 – £37 million). A final charge of approximately £4 million will be made in the 2008 accounts in respect of costs which, under accounting rules, cannot be accrued in 2007.
Capital expenditure on tangible assets in the year totalled £94 million (2006 restated – £96 million) and was 1.3 times (2006 – 1.3 times) depreciation.
GKN Driveline spent £57 million in the year on research and development. £55 million was charged to profit and £2 million capitalised. This latter figure was incurred by TTG and represented investment on programmes the first of which has gone into production early in 2008.
In GKN Driveshafts there has been continued development of crosstrack™ and countertrack™ technology for mature markets and low cost joints for specific applications (such as the Tata Nano, launched in India in early 2008) in emerging markets.
Countertrack™, which is used in fixed CVJ applications, offers reduced size, weight and CO2 emissions. Firm agreements have been reached with seven vehicle manufacturers to supply countertrack™ joints for up to 4 million vehicles (at annualised rates) with the first of these entering production in 2008.
Crosstrack™ offers improved NVH (noise, vibration and harshness) characteristics as well as lower weight, and negotiations are at an advanced stage with a leading European vehicle manufacturer.
Demand for low cost vehicles will be significant in emerging markets and we have made considerable investment in developing a low cost driveshaft for use in such vehicles. These are now available and are manufactured in Brazil, India and China for use on the Tata Nano and Indica and Dacia Logan. Although selling prices on such products tend to be somewhat lower, margins are similar to those on traditional designs.
Sustaining its position as a global technology leader, TTG launched the first production Electronic Torque Vectoring product for BMW, providing exceptional levels of agility and driving dynamics, and a high performance lightweight FDU and 4WD torque control for the new Nissan GT-R. Work continues with three customers on developing active front LSDs and FDUs for hybrid vehicles.
During the year, GKN Driveshafts won some 80% (2006 – 75%) of all available (i.e. externally sourced) CVJ driveshaft business which represents approximately 60% of the total available market, i.e. including in-house manufacture. This win rate further underpins the anticipated revenue growth from 2008 onwards. Similarly, TTG extended its global footprint, winning business with customers in Japan, Asia Pacific, Europe and North America for some 1.5 million vehicle sets which will begin to come on stream at the end of 2008.
| GKN Driveline |
2007
£m |
2006
£m |
| Sales |
|
|
| Subsidiaries |
1,922 |
1,884 |
| Share of joint ventures |
130 |
113 |
| Total |
2,052 |
1,997 |
| Trading profit |
|
|
| Subsidiaries |
149 |
138 |
| Share of joint ventures |
17 |
13 |
| Total |
166 |
151 |
| Return on sales |
8.1% |
7.6% |
| Other Automotive |
2007
£m |
2006
£m |
| Sales |
|
|
| Subsidiaries (excluding Sheepbridge) |
87 |
93 |
| Share of joint ventures |
120 |
92 |
| Total |
207 |
185 |
| Trading profit |
|
|
| Subsidiaries |
(3) |
(1) |
| Share of joint ventures |
15 |
8 |
| Total |
12 |
7 |
| Return on sales |
5.8% |
3.8% |
Other Automotive
Our Other Automotive subsidiary activities, which are predominantly UK based, but with small facilities in the US and China, manufacture structural components, chassis and engine cylinder liners for the passenger car, SUV and light vehicle and truck markets in Western Europe, the US and China. Customers include vehicle manufacturers and engine makers. We also have a 50% stake in Chassis Systems Ltd (CSL) which manufactures structural components for Land Rover in the UK, and in Emitec which manufactures metallic substrates for catalytic converters in Germany, the US, China and India.
Divisional strategy
Our Other Automotive businesses aim to create sustainable value through maintaining technology strengths and driving a cost-effective manufacturing base that will allow them to take advantage of opportunities for growth in their specific regional or global markets.
Through our investment in Emitec and, in conjunction with our partner in the joint venture, Continental, we aim to create increasing and sustainable value through the global application of Emitec’s metallic substrate technology to meet increasingly stringent emissions legislation in petrol and diesel automotive, truck and two/three wheel vehicle applications.
2007 Highlights
Sales on a management basis totalled £229 million compared with £212 million in 2006. Excluding Sheepbridge, which was closed during the year, the combined sales of continuing subsidiaries and joint ventures were £207 million compared with £185 million in 2006 with an underlying increase of £23 million (13%).
Sales of subsidiaries in the year were £109 million compared with £120 million in 2006. Excluding Sheepbridge, sales of £87 million were £6 million (6%) below 2006.
The share of sales of joint ventures increased from £92 million to £120 million with particularly strong growth in Emitec in Germany as a result of legislation enacted in 2006 requiring the retrofitting of particulate filters to diesel powered vehicles.
Trading profit of continuing businesses on a management basis rose to £12 million from £7 million in 2006. Within this figure, there was a loss at subsidiaries of £3 million (2006 – £1 million), largely as a result of lower demand in the AutoStructures business coupled with the impact of a severe breakdown in pressing capacity which cost some £1 million. As a result of these capacity issues, operational activity is being reorganised and this has led to a non-cash asset impairment charge of £1 million. The Chinese cylinder liner business was just above break even in the year and modest improvement is expected in 2008. Return on invested capital was 18.8% (2006 – 10.4%).
Both joint ventures performed well and the Group’s share of profits improved from £8 million to £15 million. CSL benefited both from higher sales and the one time impact of the finalisation of contractual pricing arrangements. Emitec profits reflected the strong sales performance noted above.