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Automotive Full Review

Markets

Approximately 58% 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. Historically the compound annual growth rate in global production has been around 3% with expectations that this rate would continue, albeit with significant regional variations.

In the first half of 2008 this pattern was repeated with stable markets in Western Europe and Japan and solid increases in the emerging markets, including the ‘BRIC’ countries of Brazil, Russia, India and China. However, demand in North America was weaker than expected, with a 12% decline in the annualised production rate to June 2008

In the second half of the year, the effects of the global ‘credit crunch’ began to be felt and in the fourth quarter automotive volumes fell sharply in every region. No significant recovery is expected in overall global demand in the short term, with annual volumes for 2009 now forecast to fall within a range of 55 to 59 million vehicles (12% to 20% lower than the 68 million in 2008), again with regional variations (based on projections, including those of Global Insight).

Longer term, although the type and mix of vehicles may be different, global growth in vehicle production is expected to resume, trending roughly in line with overall growth in GDP.

Western Europe

In Western Europe (where sales to vehicle manufacturers accounted for approximately 30% of Group sales in the year (2007 – 32%)) overall production in 2008 was 14.7 million vehicles compared with 16.2 million in 2007, a decrease of approximately 9%. Falls were seen in the major Western European markets of Germany (3%), France (12%), Italy (20%), Spain (13%) and the UK (6%).

North America

In North America (where sales to vehicle manufacturers accounted for approximately 14% of Group sales in the year (2007 – 15%)) production in 2008 was 12.7million vehicles, a reduction of 16% from the 15 million in 2007. Within the overall figure there was again a significant change in market share with Chrysler, Ford and General Motors continuing to lose volume to foreign manufacturers. Consumer preference also continued to move from light trucks and sports utility vehicles (SUVs) to crossover and passenger vehicles.

Emerging markets

Asia Pacific production (excluding Japan where the year on year production decreased by 1% to 11.1 million vehicles) grew by 2.9% in 2008. In China, production of 8.5 million vehicles was 5% above 2007, while production in India rose by 5% to 2.0 million. In Brazil, production increased by 7.4% to 2.9 million vehicles.

Sales in Asia Pacific and Brazil accounted for 13% and 3% respectively of Group revenues in the year.

Western Europe light vehicle production North America light vehicle production Emerging Asia and Brazil light vehicle production
GKN employees

GKN Driveline operates in all major vehicle producing regions of the world, working in partnership with vehicle manufacturers to develop driveshaft and geared component technologies for the future.

GKN Driveline

GKN Driveline is the world’s leading supplier of automotive driveline components and systems. As a global tier one supplier serving the world’s major vehicle manufacturers, GKN Driveline’s market leadership is based on strong engineering capabilities to achieve optimum driveline solutions — from the smallest ultra low-cost car to the most sophisticated premium vehicle demanding complex drivetrain dynamics.

Consistently setting new technological benchmarks, GKN Driveline has the broadest range of constant velocity jointed sideshafts, propshafts, mechanically and electronically controlled torque management and associated geared components.

GKN Driveline manufactures across all major vehicle producing regions of the world and has enjoyed considerable success in developing markets, with a strong presence in South America and Asia Pacific.

Driveshafts

GKN Driveline is the global leader in the production of constant velocity jointed (CVJ) products for use in light vehicles. 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 and some longitudinal propshafts are also fitted with CVJs.

GKN Driveline, including its joint ventures, estimates that it produces approximately 41% of CVJs supplied to the global light vehicle market.

Propshafts

GKN Driveline is also one of the largest suppliers of premium propshafts (propshafts with sophisticated joints, materials or other features). We estimate that in 2008 premium propshafts represented approximately 40% of global light vehicle propshaft demand, or some 11 million propshaft assemblies. GKN Driveline’s share of this segment is approximately 18%.

Torque Technology

GKN Driveline also develops and manufactures a broad range of torque management products which deliver power to a vehicle’s wheels and manage that power to control the dynamic performance of the vehicle. It offers a range of power transfer (geared) components and power control (torque management) products as both stand alone and integrated devices to vehicle manufacturers 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 vehicles and include power take-off units (PTUs), final drive units (FDUs) and differentials. Torque Management Devices (TMDs) are mechanical (passive) or electro-mechanical (active) devices that improve vehicle performance and handling by controlling the flow of torque throughout the driveline.

We estimate that in 2008 GKN supplied approximately 14% of TMDs for light vehicle applications globally. Sales volumes of our electronically controlled coupling devices (Electronic Torque Manager (ETM), ElectroMagnetic Control Device (EMCD) and Electronic Torque Vectoring (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 strategy

Key long term drivers in GKN Driveline’s markets are customer demographics, safety legislation, rising global fuel consumption and rapidly growing personal mobility.

Customers in all markets are expected to move progressively towards smaller, more fuel efficient vehicles although with no compromise in terms of vehicle quality, sophistication or safety features.

AWD is expected to remain an important capability for certain segments, although increasingly this technology will be more prevalent on cars than trucks. AWD and hybrid capability provided by add-on ‘electric assist’ rear axles should also show above average growth.

GKN Driveline is well positioned, due to its market leading presence, technology and manufacturing footprint, to take advantage of future trends in the industry.

In October 2008, GKN Driveline began the integration of the Driveshafts and Torque Technology divisions into a single global Driveline division, which was completed by the year end. This allows GKN Driveline to offer a unique level of products and support for driveline solutions to our global customers and aligns its strong brand identity across the product range.

Against this background, GKN Driveline’s strategy is to continue to achieve growth through:

  • global leadership in total driveline solutions with the broadest product range, tailored to customers’ needs, which delivers the important features sought in today’s market;
  • expanding the sales of torque products into new markets and to new customers, particularly electronically controlled products;
  • continued focus on emerging markets by supporting vehicle manufacturers’ development and growth in those markets;
  • strengthening our position as market leader in traditional driveline systems and continuing to work closely with all original equipment manufacturers in the development of innovative driveline solutions for ‘electric assist’ AWD, electric and hybrid vehicles; and
  • pursuing acquisition opportunities to strengthen market positions in core products.

The other Driveline businesses are focused on developing and growing sustainable and value creative niches for our driveline technologies.

2008 Performance

On a management basis, GKN Driveline sales were £2,268 million (2007 – £2,052 million). Excluding the positive impact of currency (£284 million), the underlying decrease was £68 million (3%).

Within this, subsidiaries’ sales in the year totalled £2,123 million compared with £1,922 million in 2007. The positive impact of currency translation was £262 million so that the underlying decrease was £61 million (3%). This decrease arose entirely in the second half, with sales in the first half 7% ahead on a constant currency basis. Second half sales on the same basis were £137 million lower than the comparable period last year. Demand fell across all regions and customers, with North America and Japan being particularly affected. Total GKN Driveline sales in the fourth quarter on a constant currency basis were 16% below the equivalent level in 2007.

The share of joint venture sales (which are not consolidated in the Group income statement but are set out in note 13 to the financial statements) grew to £145 million from £130 million in 2007. On a constant currency basis, sales fell £7 million (5%) with the final quarter slowdown in China being the major contributor.

Trading profit of subsidiaries fell by £76 million from £149 million to £73 million. There was an overall benefit from currency translation of £29 million. Excluding this, the decrease was £105 million (59%) and the operating margin at constant currency reduced to 3.4% from 8.2%. Return on invested capital was 7.9% (2007 – 18.5%).

GKN Driveline sales
Driveline’s Electronic Torque Vectoring unit

GKN Driveline’s Electronic Torque Vectoring unit for the BMW X6, which provides exceptional levels of agility and driving dynamics.

GKN Driveline’s profits in the first half were held back by the rapid increase in material costs, particularly steel, which impacted profits by some £12 million in that period. Second half performance was severely impacted by the sharp global downturn in demand with profits in the half reduced to £2 million.

The Group’s share of trading profit of joint ventures decreased from £17 million to £15 million with the underlying decrease, excluding currency impacts, being £5 million (25%). The decrease arose almost entirely in China, mainly as a consequence of lower sales.

As reported in the half year results, the strategic restructuring programme announced in 2004 was completed and charges in the year totalled £4 million (2007 – £19 million).

Further restructuring was launched in the last quarter of 2008, to enable the business to adjust to the severe market and economic downturn. Action was taken to downsize the workforce through redundancies and reductions in temporary and agency staff. In addition, short-time working and unscheduled plant shut-downs were introduced across all plants. In total around 1,700 people left GKN Driveline in the final quarter. Further restructuring will be carried out in 2009 recognising continuing weak automotive markets.

Charges recognised in 2008 in relation to this restructuring amounted to £33 million, of which impairments were £25 million, redundancy and shorttime working was £6 million, and other reorganisation costs were £2 million.

Capital expenditure on tangible assets in the year totalled £108 million (2007 – £94 million), representing 1.2 times (2007 – 1.3 times) depreciation.

During 2008 sideshaft production started at a new state of the art facility at Oragadam, India. Expansion continued in China with ground breaking at a new sideshaft facility at Wuhan, the start of production for transmission differentials in Pudong and the opening of a new forge at Shenjiang (both in Shanghai). In addition, a new sideshaft facility in Eskiesehir, Turkey was completed.

GKN Driveline invested £63 million in the year on research and development focused on advanced driveline products including ultra low-cost driveshafts and active torque management devices. Amortisation of capitalised ETV development costs commenced in early 2008, as the programme went into production.

Sustaining its position as a global technology leader, GKN Driveline launched the first production ETV 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, the division won some 77% of all available CVJ driveshaft business, further enhancing future market share.

GKN Driveline 2008
£m
2007
£m
Sales    
Subsidiaries 2,123 1,922
Share of joint ventures 145 130
Total 2,268 2,052
Trading profit    
Subsidiaries 73 149
Share of joint ventures 15 17
Total 88 166
Return on sales 3.9% 5.8%

Other Automotive businesses

Products

Our Other Automotive subsidiary businesses, 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% share in Chassis Systems Ltd, which manufactures structural chassis components for Jaguar Land Rover in the UK, and in Emitec, which manufactures metallic substrates for catalytic converters in Germany, the US, China and India.

Business strategy

Our Other Automotive businesses aim to create sustainable value through maintaining technology strengths and driving cost-effective manufacturing that will allow them to take advantage of opportunities for growth in their specific regional or global markets.

Emitec, which is a joint venture company in which both GKN and Continental have a 50% interest, aims 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.

2008 Performance

Sales on a management basis totalled £176 million compared with £229 million in 2007. Excluding the UK cylinder liner manufacturing operation (Sheepbridge), which was closed during 2007, the combined sales of continuing subsidiaries and joint ventures were £176 million compared with £207 million in 2007, with an underlying decrease of £44 million (20%).

Sales of subsidiaries in the year were £84 million compared with £109 million in 2007. Excluding the UK cylinder liner manufacturing operation, sales of £84 million were £3 million (3%) below 2007.

The share of sales of joint ventures decreased from £120 million to £92 million with a severe curtailment in activity levels, most notably in the second half, both in the structural chassis business and Emitec, which was particularly hard hit by declines in the particulate filter retrofit market.

Trading profit of continuing businesses on a management basis declined to £2 million from £12 million in 2007. Within this figure, there was a loss at subsidiaries of £4 million (2007 – £3 million loss). Joint venture profits reduced by £9 million impacted by volume losses in all businesses. The Chinese cylinder liner business was profitable in the year having reached breakeven in 2007.

Other Automotive businesses were significantly impacted by the market downturns, particularly in the UK and, as a result, an £11 million impairment charge has been taken against the carrying value of fixed assets. £2 million in redundancy costs were also incurred in the year and further restructuring actions will be implemented in 2009.

Other Automotive 2008
£m
2007
£m
Sales    
Subsidiaries (excluding Sheepbridge) 84 87
Share of joint ventures 92 120
Total 176 207
Trading profit    
Subsidiaries (4) (3)
Share of joint ventures 6 15
Total 2 12
Return on sales 1.1% 5.8%

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