BMW AG
Annual Report 2007

Plain-text annual report

Annual Report 2007 Facts and figures 2007 s t n e t n o C 02 BMW Group in figures 04 Report of the Supervisory Board 10 10 13 17 41 44 47 47 49 51 52 55 55 57 58 62 68 73 73 74 76 78 79 80 80 89 96 117 131 Group Management Report A Review of the Financial Year General Economic Environment Review of Operations BMW Stock and Bonds in 2007 Disclosures relating to Takeover Regulations and Explanatory Report Financial Analysis – Group Internal Management System – Earnings Performance – Financial Position – Net Assets Position – Subsequent Events Report – Value Added Statement – Key Performance Figures – Comments on Financial Statements of BMW AG Risk Management Outlook Group Financial Statements Group and Sub-group Income Statements Group and Sub-group Balance Sheets Group and Sub-group Cash Flow Statements Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity Notes to the Group Financial Statements – Accounting Principles and Policies – Notes to the Income Statement – Notes to the Balance Sheet – Other Disclosures – Segment Information 135 136 Responsibility Statement by Company’s Legal Representatives Auditors’ Report 137 137 140 141 142 146 147 148 148 150 152 154 158 160 161 Corporate Governance Members of the Supervisory Board Members of the Board of Management Corporate Governance at BMW Group Compensation Report (Sub-section of Management Report) Shareholdings of Members of the Board of Management and the Supervisory Board Declaration of the Board of Management and of the Supervisory Board pursuant to §161 AktG Other Information BMW AG Principal Subsidiaries BMW Group 10-year Comparison BMW Group Locations Glossary Index Contacts Financial Calendar BMW Group in figures Revenues in euro billion 55 50 45 40 35 30 Capital expenditure in euro million 5,000 4,500 4,000 3,500 3,000 2,500 03 04 05 41.5 44.3 46.7 06 49.0 07 56.0 03 04 05 06 07 4,245 4,347 3,993 4,313 4,267 Deliveries of automobiles in thousand units Profit before tax in euro million 1,500 1,400 1,300 1,200 1,100 1,000 4,000 3,500 3,000 2,500 2,000 1,500 03 04 05 06 07 03 * 04 05 06 07 1,104.9 1,208.7 1,328.0 1,374.0 1,500.7 3,205 3,583 3,287 4,124 3,873 * adjusted for new accounting treatment of pension obligations A portrait of the Company Bayerische Motoren Werke G. m. b. H. came into being in 1917, having been founded in 1916 as “Bayerische Flugzeugwerke AG” (BFW); it became Bayerische Motoren Werke Aktiengesellschaft (“BMW AG”) in 1918. Today, the BMW Group is one of the ten largest car manufacturers in the world and possesses, with its BMW, MINI and Rolls-Royce brands, three of the strongest premium brands in the car industry. The BMW Group also has a strong market position in the motorcycle sector and operates successfully in the area of financial services. The Number ONE strategy, adopted in 2007, has set the BMW Group on course for a successful future. The business has been given a new strategic direction with the emphasis on profitability and long- term value growth. The BMW Group’s activities will remain firmly focused on the premium segments of the international automobile markets. The mission statement up to the year 2020 is clearly defined: the BMW Group is the world’s leading provider of premium products and premium services for indi- vidual mobility. 03 BMW Group in figures Vehicle production BMW MINI Rolls-Royce Motorcycles1] Deliveries to customers BMW MINI Rolls-Royce Motorcycles2] 2003 2004 2005 2006 2007 944,072 174,366 502 89,745 928,151 176,465 300 92,962 1,059,978 1,122,308 1,179,317 1,302,774 189,492 200,119 186,674 237,700 875 93,836 692 847 1,029 92,012 103,759 104,396 1,023,583 1,126,768 1,185,088 1,276,793 184,357 200,428 188,077 222,875 792 92,266 796 805 1,010 97,474 100,064 102,467 Workforce at end of year 3] 104,342 105,972 105,798 106,5754] 107,539 in euro million 2003 2004 2005 2006 2007 Revenues Capital expenditure Depreciation and amortisation Operating cash flow 6] Profit before tax Net profit 41,525 44,335 46,656 48,999 56,018 4,245 2,370 4,970 3,205 1,947 4,347 2,672 6,157 3,583 5] 2,242 5] 3,993 3,025 6,184 3,287 2,239 4,313 3,272 5,373 4,124 2,874 4,267 3,683 6,340 3,873 3,134 Change in % 10.5 27.3 21.5 0.6 7.7 18.5 25.5 2.4 0.9 Change in % 14.3 – 1.1 12.6 18.0 – 6.1 9.0 1] from 2006 including BMW G 650 X assembly by Piaggio S. p. A. 2] excluding C1, sales volume to 2003: 32,859 units 3] Figures exclude suspended contracts of employment, employees in the non-work phases of pre-retirement part-time arrangements and low income earners. 4] Including acquired entities, the comparable number of employees was 107,345 employees at 31 December 2006. 5] adjusted for new accounting treatment of pension obligations 6] In its financial statements for 2005, the BMW Group brought the cash flow computation into line with standards normally applied on the financial markets. Since then, the BMW Group discloses the figures for the cash flow from operating activities (operating cash flow), corresponding to the cash flow from Industrial Operations reported in the cash flow statement. 04 Report of the Supervisory Board Joachim Milberg Chairman of the Supervisory Board 05 Main focus of the work of the Supervisory Board Ladies and Gentlemen, The Supervisory Board monitored the business affairs and governance of the BMW Group continuously during the financial year 2007 and supported the Board of Management throughout in an advisory capacity. In a total of five meetings, the Supervisory Board deliberated at length on the performance and financial position of the BMW Group, corporate planning, the composition of the Board of Management and risk management issues. The Supervisory Board made use of regular business status reports to keep abreast of business performance, including the degree to which stated objectives have been achieved. It also selected a number of topics for more in-depth review and discussion based on reports and planning documents pro- vided by the Board of Management. Two of the main areas of focus of the Supervisory Board in 2007 were currency management and the Board of Management’s decisions concerning the future strategic direction of the BMW Group. The Board of Management also kept the Supervisory Board informed of key performance indicators, personnel developments and other significant matters, both at scheduled meetings and at other times as the need arose. The Chairman of the Supervisory Board was also kept informed regularly and directly by the Chairman of the Board of Management of all major business transactions and projects. The growing need to reduce CO2 emissions in the transport sector, the challenges that this poses for the BMW Group as a premium car maker and the technical measures introduced by the Board of Management to reduce emissions and fuel consumption were reported on in detail by the Board of Management and discussed within the Supervisory Board. In the opinion of the Supervisory Board, the package of measures known as EfficientDynamics – designed to improve fuel economy whilst simultaneously emphasising agile and dynamic vehicle concepts – represents a clear competitive advantage for the BMW Group. For this reason, the Supervisory Board fully supports the Board of Management’s strategy to extend the BMW Group’s lead in this area. In this context, the Board of Management also reported to the Supervisory Board on one particular ground-breaking project which is looking, amongst other things, at new ways of achieving greater individual mobility in the world’s megacities. One meeting of the Supervisory Board was held at the Oxford plant, enabling the Supervisory Board to see at first hand the expansion measures undertaken at the plant. It was also given an insight into the integration of the new generation of MINI models into existing manufacturing structures and the benefits of the flexible working time model devised for the plant. After detailed consideration of the BMW Group’s long-term business plan, the Supervisory Board concurred with the Board of Management’s conclusion that the plan is feasible and formally gave its approval to the plan. 06 Report of the Supervisory Board As part of a special review of value-added and currency management within the BMW Group, the Board of Management provided the Supervisory Board with an overview of current and planned currency measures as well as natural hedging activities and explained the various alternatives available to the BMW Group. On the basis of this information, joint discussions were held on the future strategy in this area. The Supervisory Board meeting in September 2007 primarily involved a discussion of the Board of Manage- ment’s detailed report on the BMW Group’s strategy process. At the same meeting, the Supervisory Board also deliberated on and made its decisions regarding the composition of the Board of Management. The Supervisory Board was appreciative of the Board of Management’s in-depth review of the current busi- ness model and its thorough analysis of the options open to the BMW Group to achieve continued long-term growth. From the perspective of the Supervisory Board, the results presented and the objectives set by the Board of Management on the basis of their analysis were convincing and well-founded. The Supervisory Board supports the strategic objective set by the Board of Management – to be the world’s leading provider of premium products and premium services for individual mobility. The Supervisory Board agrees with the Board of Management that profitability and quality of earnings should play a central role in the Group’s strate- gic realignment. It therefore encouraged the Board of Management to press ahead with the implementation of the stated strategy and gives its full backing to the measures and targets adopted by the Board of Manage- ment. This includes plans to generate some euro 6 billion of efficiency benefits by 2012 and to successively take pension obligations to employees in Germany off the balance sheet by creating external pension funds. The Supervisory Board believes that these measures will help to strengthen the Group’s competitive- ness in the long term. To coincide with the BMW Group’s strategic realignment, the Board of Management has formulated a set of core principles that are intended to serve as guidelines for managers and employees. In the opinion of the Supervisory Board, these core principles provide an excellent basis for open and objective-oriented coopera- tion throughout the Group. The Supervisory Board carefully considered the annual budget for the financial year 2008 presented by the Board of Management and approved the planned measures to improve profitability. The Supervisory Board was also fully informed of solutions and specific measures discussed with staff representatives to reduce personnel expense. The Board of Management also kept the Supervisory Board informed of the progress of the acquisition of the motorcycle company Husqvarna. This move complements the Group’s activities in the single-cylinder segment and will appeal to younger customer groups in the off-road and supermoto segments. In response to the increased complexity of tasks facing the Board of Management and with implementation of the new strategy in mind, the Supervisory Board decided to increase the size of the Board of Management by two members: Dr. Herbert Diess, who has been responsible for the Motorcycles segment since 2003, was appointed to the Board of Management with effect from 1 October 2007, taking over responsibility for the newly created Purchasing and Supplier Network division. Dr. Friedrich Eichiner, who has been responsible for Group planning since 2002, was also appointed to the Board of Management with effect from 1 October 2007 and now heads the newly created Corporate and Brand Development division. At his own request, Stefan Krause’s mandate as member of the Board of Management came to an end on 13 March 2008. The Supervisory Board thanked Mr. Krause for the successful work that he performed on behalf of the BMW Group. At its meeting on 13 March 2008, the Supervisory Board appointed Ian Robertson with immediate effect as member of the Board of Management. Mr. Robertson thereupon took over board responsibility for sales and 07 Corporate governance and Declaration of Compliance marketing. Since 2005, he has been Chairman and Chief Executive Officer of Rolls-Royce Motor Cars Ltd., a subsidiary of BMW AG. During the financial year 2007, the Supervisory Board and the Board of Management again discussed the subject of corporate governance in great detail and issued a joint Declaration of Compliance with the Ger- man Corporate Governance Code (GCGC) pursuant to § 161 AktG. The recommendations of the Govern- ment Commission on the German Corporate Governance contained in the revised code issued on 20 July 2007 will be complied with in the future except for one divergence: the discussion and regular review of the structure of the compensation system of the Board of Management is still performed by the Personnel Committee and not, additionally, by the Supervisory Board. This task has been delegated to the Personnel Committee which reports in detail to the full Supervisory Board. All other recommendations are being complied with. A detailed report on the amount and structure of the compensation of the Board of Management and the Supervisory Board can be found in the corporate governance report. In conjunction with the code recommen- dations issued on 20 July 2007, the Supervisory Board decided to amend its own procedural rules regarding the remit of the Audit Committee, to create a Nomination Committee and to expand the reporting duties of the Board of Management. The Supervisory Board sees it as an ongoing task to improve the quality of its work, both in plenum and at committee level, and in its collaboration with the Board of Management. The efficiency of the Super- visory Board’s work is therefore not only assessed, as recommended by the GCGC, on the basis of written comments of all Supervisory Board members and open debate at year-end meetings, but also during the year in the context of personal dialogue, whereby the Chairman of the Supervisory Board plays a key role in proposing areas of improvement. There was no indication during the past year of any conflicts of interest on the part of members of the Super- visory Board and Board of Management. Description of Presiding Board activities and committee work In a total of five meetings, the Presiding Board mainly focussed on preparing the plenum meetings, including the selection of special topics of report. During the past year, the Presiding Board took a close look at the Company’s dividend policy and the Group’s currency management. At a number of meetings during the course of the year, it also considered alternative concepts for the compensation of Supervisory Board work, culminating in the formulation of a proposed amendment to § 15 of the Articles of Incorporation that will be put forward for resolution at the Annual General Meeting. In view of the fact that the tasks performed by the Audit Committee go well beyond accounting and financial reporting matters (e.g. in the field of compliance), the Audit Committee changed its name in German from Bilanzausschuss to Prüfungsausschuss, bringing it into line with the name already used in English. The Audit Committee convened three times during the period under report. One of these meetings served primarily to prepare for the Supervisory Board meeting in spring 2007, the main purpose of which was to consider the drafts of the Company and Group financial statements for the financial year 2006. Apart from examining the drafts, the Audit Committee also obtained a Declaration of Independence from the external auditors, deter- mined areas of audit emphasis and, after the Annual General Meeting, issued the audit engagement letter for the financial year 2007. A further area of focus for the Audit Committee in 2007 was risk management. The Audit Committee was kept informed by the Board of Management of progress made to date to implement the Group’s compliance programme which emphasises the vital role played by managers in ensuring com- pliance with existing law. 08 Report of the Supervisory Board The six meetings of the Personnel Committee in 2007 were mainly dedicated to preparing for Board of Management appointment decisions, in particular pre-selecting candidates and deliberating on compensa- tion matters. The Personnel Committee again reviewed the appropriateness of the compensation of the members of the Board of Management – including individually agreed upper limits – in view of the tasks per- formed, the financial condition of the Group and compensation levels within the automotive industry and at other DAX-listed companies. In individual cases, the Personnel Committee authorised the acceptance of external mandates by current and former members of the Board of Management. In line with the recommendation of the German Corporate Governance Code, the Supervisory Board created a Nomination Committee in 2007 in addition to the existing committees. The Nomination Committee com- prises the Chairman of the Supervisory Board (as chairman) and two further members of the Supervisory Board representing the interests of shareholders. The Nomination Committee is charged with the task of finding suitable candidates for election to the Supervisory Board and for inclusion in the Supervisory Board’s proposals for election at the Annual General Meeting. The Nomination Committee did not hold any meetings in 2007 but convened for the first time in January 2008 to propose candidates for the forthcoming elections at the Annual General Meeting 2008. The statutory Mediation Committee (§ 27 (3) of the Law on Worker Participation) was not required to convene during the financial year 2007. The Chairman reported regularly at Supervisory Board meetings on the status of Presiding Board and com- mittee work. Composition of the Super- visory Board, the Presiding Board and the committees The names of the members of the Supervisory Board committees, including those of the newly created Nomination Committee, are shown in the corporate governance report. There were no other changes in the composition of the Supervisory Board during the year under report. The mandates of Dr. Hans-Dietrich Winkhaus and Mr. Arthur L. Kelly come to an end at the close of the Annual General Meeting on 8 May 2008. The two members will not be standing for re-election due to the age limit applicable to Supervisory Board members. Mr. Konrad Gottinger resigned as member of the Supervisory Board with effect from 15 February 2008. Mr. Heinz-Joachim Neubürger resigned with effect from the close of the Annual General Meeting 2007. Both Mr. Gottinger and Dr. Winkhaus were elected to the Supervisory Board in 1999 and carried out important functions in the Presiding Board and in various committees. Mr. Kelly, who joined the Supervisory Board back in 1992, has provided valuable services to the BMW Group during his long period of office. The Supervisory Board would like to thank the members leaving office for the dedi- cated and commendable services they have performed in the interests of the BMW Group. 09 Examination of Company and Group financial statements and the proposed appropria- tion of profit The Company and Group financial statements of Bayerische Motoren Werke Aktiengesellschaft for the year ended 31 December 2007 and the combined Company and Group Management Report were audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Munich, and given an unqualified audit opinion. The Audit Committee examined these documents initially at its meeting on 3 March 2008, discussing matters in person with representatives of the external auditors. The Super- visory Board subsequently examined the relevant drafts of the Board of Management at its meeting on 13 March 2008, after hearing the chairman’s report on the meeting of the Audit Committee. The external auditors were also present at this meeting to report on the main findings of their audit and to provide additional information as necessary. The long-form audit reports of the external auditors were made available to all members of the Supervisory Board in good time. The Supervisory Board concurred with the results of the external audit and approved the Company and Group Financial Statements of Bayerische Motoren Werke Aktiengesellschaft for the financial year 2007 prepared by the Board of Management. The Company financial statements are therefore adopted. The Supervisory Board also reviewed the Board of Management’s pro- posal for the appropriation of profit. The Supervisory Board considers the proposal appropriate and therefore concurs with it. In accordance with the conclusion reached on the Supervisory Board’s examination, no objections were raised. The Board of Management and employees of the BMW Group have once again enabled the BMW Group to post excellent earnings for the financial year 2007. The Board of Management has also defined a new stra- tegic direction for the BMW Group which puts it on course for long-term success. The Supervisory Board wishes to thank the members of the Board of Management and indeed all employees of the BMW Group for their hard work and their contribution to the past year’s performance. Munich, 13 March 2008 The Supervisory Board Yours, Joachim Milberg Chairman of the Supervisory Board 10 Group Management Report Group Management Report A Review of the Financial Year 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook BMW Group on course despite difficult conditions The BMW Group continued to perform successfully in 2007 despite difficult conditions. By achieving a sharp sales volume increase, the company has again confirmed its position as the leading provider within the premium segments of the automobile markets. External factors did, how ever, continue to affect reported figures adversely. The continuing weakness of the US dollar and the Japanese yen, the generally high cost of raw mate rials and less favourable financing conditions all continued to have a negative impact. This was exacerbated by costs of market launches for numerous new models. In its automobile business, the BMW Group registered new sales volume records for all three brands in 2007. For the first time ever, sales volume exceeded 1.5 million units, with a total of 1,500,678 BMW, MINI and Rolls-Royce brand cars sold. This represented an increase of 9.2 % over the previous year. As expected, automobile business gained pace particularly during the second half of 2007 fol- lowing the introduction of numerous new models. The motorcycles business also remained firmly on course in 2007 despite divergent developments on the major motorcycle markets. In total, 102,467 BMW motorcycles were delivered to customers, representing a new sales volume record for the BMW Group (+2.4 %). The Financial Services business continued to grow profitably in 2007, again making an important contribution to the overall performance of the BMW Group. As predicted, the general deterioration in business conditions in the face of higher financing costs and the intensely competitive market situation continued to have an adverse impact in 2007. These external factors were successfully countered by achieving dynamic growth with new products, pur- suing a strategy of targeted regional expansion and exploiting synergy benefits wherever possible. External factors again significantly influenced the amounts reported as Reconciliations in 2007. Settlement of the exchangeable bond on shares in Rolls-Royce plc, London, which was completed in 2007, resulted in a gain of euro 97 million in 2007, compared to one of euro 372 million in the previous year. In addition to this, losses had to be recognised on other derivative financial instruments, in particular on stand-alone interest rate derivatives. A changed market interest rate structure caused the fair values of these financial instruments to decrease. Dynamic revenues growth, earnings targets achieved Revenues of the BMW Group rose at an above-aver- age rate on the back of a pleasing sales volume per- formance and thanks to the dynamic growth of its financial services business. Group revenues rose to euro 56,018 million in 2007 and were therefore up by 14.3 % on a year-on-year comparison. Excluding the exchange rate impact, revenues would have risen by 17.6 %. The BMW Group profit before tax, at euro 3,873 million, was 6.1 % below the record level achieved in the previous year. Excluding the effect of the settlement of the exchangeable bond on shares in Rolls-Royce plc, London, pre-tax earn- ings were, as forecasted, slightly above the previous year’s level. Automobile business revenues reached a new high level. They rose by 12.7 % to euro 53,818 mil- lion, underlining the overall strength of business operations. Despite the impact of adverse foreign exchange factors and high raw material prices, the Automobiles segment reported a profit before tax of euro 3,232 million, 7.3 % up on the previous year. Motorcycles business revenues fell short of the previous year, dropping marginally to euro 1,228 mil- lion (– 2.9 %). However, process optimisation and efficiency improvement programmes implemented in the past continued to have a positive impact, enabling the segment to increase its profit before tax by 7.6 % to euro 71 million. Financial services business continued to grow at an extremely dynamic pace, with revenues rising by 25.8 % to euro 13,940 million. This strong growth is reflected in the segment profit before tax which, at euro 743 million, was 8.5 % up on the previous year. Segment earnings improved despite increasingly difficult refinancing conditions. Business tax reform in Germany had a positive impact on earnings, reducing the tax expense sharply. The effective tax rate for 2007 fell by 11.2 percentage points to 19.1 % (2006: 30.3 %). The Group net profit of euro 3,134 million at- tained a new high level, surpassing the previous year’s figure by 9.0 %. Increased dividend proposal The Board of Management and the Supervisory Board will propose to shareholders at the Annual General Meeting to use the unappropriated profit available for distribution in BMW AG, amounting to euro 694 million, to pay an increased dividend of euro 1.06 BMW Group Revenues by region in euro million 20,000 17,500 15,000 12,500 10,000 7,500 5,000 2,500 Rest of Europe North America Germany Asia/Oceania United Kingdom Other markets 03 8,728 11,252 10,590 5,130 4,661 1,164 04 10,574 10,205 11,961 4,915 5,249 1,431 05 12,141 10,957 11,001 5,538 5,125 1,894 06 13,226 11,779 10,601 6,200 5,214 1,979 11 Rest of Europe North America Germany Asia/Oceania United Kingdom Other markets 07 16,450 12,161 11,918 7,353 5,945 2,191 for each share of common stock (2006: euro 0.70/ + 51.4 %) and an increased dividend of euro 1.08 for each share of preferred stock (2006: euro 0.72/ + 50.0 %). The significant increase in dividend proposed for the financial year 2007 demonstrates the BMW Group’s commitment to a greater focus on the capi- tal markets. Capital expenditure remains at previous year’s level The capital expenditure volume, at euro 4,267 mil- lion, was roughly in line with the previous year’s level. The main focus of capital expenditure in 2007 was again the continued expansion of the BMW Group’s production and sales networks. 2007 saw the open- ing of the BMW Welt in Munich, the new event and delivery centre for the BMW brand. Other further major areas of capital expenditure were the continued expansion of the Spartanburg plant in the USA and investment in the Dingolfing site. In 2007, the BMW Group invested a total of euro 2,934 million in property, plant and equipment and intangible assets, 5.7 % more than in the previous year. This includes goodwill of euro 97 million arising on the acquisition of DEKRA SüdLeasing Services GmbH (renamed to: BMW Fuhrparkmanagement Beteiligungs GmbH) and that entity’s subsidiaries. BMW Group Capital expenditure and operating cash flow in euro million 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Capital expenditure Operating cash flow 03 4,245 4,970 04 4,347 6,157 * 05 3,993 6,184 06 4,313 5,373 07 4,267 6,340 *adjusted for new accounting treatment of pension obligations In its financial statements for 2005, the BMW Group brought the cash flow computation into line with standards normally applied on the financial markets. Since then, the BMW Group discloses the figures for the cash flow from operating activities (operating cash flow), corresponding to the cash flow from Industrial Operations reported in the cash flow statement. 12 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook In addition, development expenditure of euro 1,333 million was recognised as assets in accordance with IAS 38 (2006: euro 1,536 million/– 13.2 %). The decrease in capitalised development costs was due to the lower volume of series development projects required to be recognised as assets. The proportion of development costs recognised as assets went down from 47.9 % in 2006 to 42.4 % in 2007. The capital expenditure ratio (i.e. the ratio of capital expenditure to revenues) accordingly de- creased in 2007 to 7.6 % (2006: 8.8 %). Strategic realignment of the BMW Group announced At the end of September 2007, the BMW Group took on a new strategic direction. Up to the year 2020, the BMW Group intends to strengthen its position within the global premium automobile mar- ket by increasing volume of sales to more than two million units per annum. The mission statement is clearly defined: the BMW Group is the world’s lead- ing provider of premium products and premium services for individual mobility. This means that in addition to striving for organic growth in the core line of business, the BMW Group will also engage in new and profitable areas of activity throughout the automotive life-cycle and all the way along the value- added chain. At the same time, the BMW Group will invest substantially in future technologies, new vehicle concepts and pioneering drive systems. The new strategy, which has been given the name Number ONE, is aimed at profitability and increasing value over the long term. In order to achieve these objectives, two new areas of responsibility have been created within the Board of Management for the “Corporate and Brand Development” and “Purchas- ing and Supplier Network” divisions. General Economic Environment 13 Economic developments in 2007 The global economy again grew strongly in 2007, albeit at a slightly slower pace than in the previous year. In addition to rising interest rates and the con- tinuing high level of raw material prices, the main reason for this development was the weakening of the US residential property market and the resulting weaker economic growth in the USA. Although the credit crisis became acute from the middle of the year onwards, the effects it had on the economy in 2007 were relatively minor and mainly restricted to the USA. In other countries, primarily the financial markets were affected. In a number of instances, central banks were forced to take measures to en- sure that sufficient liquid funds were available on the markets. After a slow start at the beginning of the year, the US economy picked up pace again over the course of 2007, despite the enormous pressure coming from the residential property sector. Rising interest rates in recent years resulted in a large vol- ume of bad debt losses, primarily in the area of sub- prime borrowers. As a consequence, investment on new residential property fell to an all-time low, with property prices dropping for the first time in more than 15 years. Despite these developments, private consumption nevertheless grew sharply due to the employment market remaining strong up to autumn. In the face of the weak residential property market, the rise in investment volumes was far lower than that of the previous year. On the back of a weaker US dollar, exports provided some momentum for the first time in years with the result that the USA’s current account deficit decreased slightly. Overall, the USA’s gross domestic product grew by 2.2 % in 2007. The euro region also registered strong growth in 2007, albeit at a somewhat slower rate than in the previous year. Despite the positive changes evident on the employment market, consumers were more reluctant to spend than one year earlier, whereas in- vestment activity continued to increase sharply. Ex- ports grew despite the strong euro. The current bal- ance of the region as a whole was slightly positive, although the results in individual countries varied con- siderably. Overall, the euro region’s economy grew by 2.7 % in 2007. Economic growth in Germany weakened slightly in 2007, reflecting the trend seen in the euro region as a whole. Investment and exports again contributed strongly to economic growth. By contrast, private consumption failed to match the mildly positive trends seen in previous years and stagnated in 2007. One of the main negative factors was the value-added tax increase that took effect in Germany at the beginning of the year. Although the employment market im- proved, and large numbers of new jobs were creat- ed, this did not motivate consumers to spend more. On top of this, from the summer onwards, the impe- tus generated by the construction industry tailed off sharply. Despite these adverse factors, the growth rate of 2.5 % was only marginally below the previous year’s level. The economies of the new EU member coun- tries also continued to grow robustly in 2007. Private consumption and investment rose sharply in many countries, but in spite of the increase in exports, the current accounts of these countries remained, for the most part, negative and in some cases quite considerably so. The Japanese economy remained on a stable growth course in 2007 with momentum coming from both domestic demand and exports. However, the persisting worry of deflation remained in 2007, resulting in price stagnation during the year. The general price level increased only marginally, almost entirely due to higher energy prices. The Japanese Central Bank was therefore only able to raise interest rates very slightly above zero. Overall, Japan’s gross domestic product grew by approximately 2.1 % in 2007. Alongside the emerging economies of Eastern Europe, the fastest growth rates were again recorded in 2007 by the markets in Latin America and East Asia. Once again, China was one of the fastest grow- ing markets. The investment boom there continued in 2007 with the export surplus reaching a new record figure. The monetary policy measures taken, includ- ing higher interest rates, failed to hold down eco- nomic growth and a growth rate in excess of 11 % was registered for the year. In India, too, economic growth remained extremely strong at over 8 %. As in previous years, however, the Indian current account remained negative. US dollar continues to lose value over the course of the year The US dollar continued to lose value sharply over the course of 2007. After standing at US dollar 1.32 to the euro in January, it closed the year almost 10 % weaker at US dollar 1.46 to the euro. A rate of almost US dollar 1.50 to the euro was recorded at some stage during the period. 14 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook The British pound was slightly more volatile in 2007 than in preceding years. Following a healthy start, it lost in value over the course of the year, finish- ing at about GBP 0.73 to the euro. The Japanese yen remained weak against the euro. After a short period of appreciation around the middle of the year 2007, the yen then went on to lose value and closed at yen 164 to the euro, some 4.5 % lower than one year earlier. Further increases in raw material prices The average price of oil in 2007 was once again higher than in the previous year. After dropping to approximately US dollar 50 per barrel in January, the price almost doubled over the course of the year and by autumn it had risen to almost US dollar 100 per barrel. The average cost during the year was roughly US dollar 70 per barrel, up by more than 10 % com- pared to 2006. The main reasons for this were on- going shortages in oil production and processing capacities, supplies being held back by OPEC and the fact that some of the world’s oil-producing coun- tries are currently unstable. This situation was fur- ther exacerbated by rising demand, mainly from the emerging markets and also by a certain amount of speculation. The price of steel again exceeded the level of the previous year. This was also largely due to a fur- ther sharp rise in demand coming mainly from the emerging markets. The prices of most precious metals have been rising continually for several years and this trend continued in 2007. In addition to in- creased demand, the loss in value of the US dollar has created additional demand for precious metals as investments, in particular in the emerging mar- kets. Exchange rates compared to the Euro (Index: 31 December 2002 = 100) Automobile markets in 2007 The sale of cars rose worldwide by approximately 4 % in 2007 and therefore slightly faster than in the pre- vious year. As in the preceding years, the three main traditional car markets (the USA, Japan and Western Europe) did not show any significant momentum in terms of growth rates, whereas the car markets in Asian and Latin American emerging economies again grew strongly. Sales of passenger cars in the USA fell again, this time by approximately 2.5 % to 16.1 million units. Whereas in the previous year the market for light trucks had contracted drastically, the reduction in 2007 was spread across all segments of the market. The market share held by US manufacturers con- tinued to decline and stood at just over 50 %. The number of cars sold in Western Europe was static with new vehicle registrations stagnating at around the 14.8 million mark. This was largely due to the sharp decrease in Germany, where car sales fell by more than 9 % to below 3.2 million units. Steel price trend (Index: January 2003 = 100) 180 170 160 150 140 130 120 110 100 Source: German Federal Statistical Agency 03 04 05 06 07 140 135 130 125 120 115 110 105 100 US Dollar Japanese Yen British Pound Source: Reuters 03 04 05 06 07 Oil price Price per barrel of Brent Crude Euro 100 90 80 70 60 50 40 30 15 US Dollar 100 90 80 70 60 50 40 30 03 04 05 06 07 Price in US Dollar Price in Euro Source: Reuters The value-added tax increase, high fuel prices and the climate change debate all made themselves felt. Most of the other major European countries did, how- ever, experience some growth, with new registra- tions up by almost 7 % in Italy, by 2.5 % in the United Kingdom and by more than 3 % in France. By con- trast, the Spanish market contracted slightly by just over 1 %. Eastern Europe registered strong growth for the first time in years. This was mainly due to a sharp increase in new car sales in Poland, where the number of new registrations rose by almost a quarter despite the continued high volume of used car im- ports. Russia again saw double-digit growth, with passenger car sales up by more than a quarter. Unit sales again rose steeply in the emerging markets of Asia. The Chinese market grew at the fastest rate (26 %), while India recorded a growth rate of 15 %. The South Korean market grew by 7 %. By contrast, the Japanese car market failed once again to benefit from the general improvement in the economy and contracted by approximately 5 %. Precious metals price trend (Index: 31 December 2002 = 100) The Latin American automobile markets again generated strong growth in 2007, with the Brazilian and Argentinian markets each growing by approxi- mately 25 %. By contrast, the Mexican market con- tracted slightly. Motorcycle markets in 2007 As in previous years, the motorcycle markets rele- vant for the BMW Group again developed diver- gently in 2007. Worldwide motorcycles sales in the 500 cc plus segment were 0.2 % down on the pre- vious year. The drop was particularly pronounced in the USA where 4.1 % fewer motorcycles were sold. By contrast, the motorcycle markets relevant for the BMW Group grew by 3.0 % in Europe, al- though developments varied from one country to the next. Whereas the markets contracted in Ger- many (– 0.6 %) and Italy (– 4.9 %), there was growth in France (+ 0.4 %), Spain (+ 13.0 %) and the United Kingdom (+ 8.3 %). Motorcycle sales in Japan were down by 2.0 %. 310 280 250 220 190 160 130 100 70 Palladium Silver Gold Platinum Source: Reuters 03 04 05 06 07 16 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Business environment for financial services in 2007 As in the previous year, the financial services busi- ness during the first half of 2007 was influenced by high interest rate levels on the money and capital markets. The European Central Bank (ECB) con- tinued to pursue the tighter monetary policies initi- ated in 2006, increasing the reference interest rate over the course of the year by a further 50 basis points to 4.00 %. By the middle of the year, the Bank of England (BoE) had also raised its reference inter- est rate by a further 75 basis points to 5.75 %, whereas the US Federal Reserve (Fed) kept its rate at the same level. The second half of 2007 saw the onset of the subprime crisis on the US mortgage market and a resulting confidence crisis on the financial markets. The BMW Group has not been left unaffected by these developments. While the ECB decided not to change the reference interest rate, the BoE reduced its rate by 25 basis points. The Fed even reduced its rate by a total of 100 basis points. Despite these moves, refinancing conditions deteriorated signifi- cantly as credit spreads widened sharply across all sectors, thereby putting strain on the earnings of the financial services sector worldwide. Competition on the market for automobile-re- lated financial services increased in intensity. The trend is likely to continue due to products being of- fered by banks (private customer business) and other manufacturer-related financial service providers. The trend towards leasing-related products remains unchanged. These are being supplemented increas- ingly by other products such as insurance policies. Review of Operations 17 BMW Group remains best-selling premium manufacturer The BMW Group registered new sales volume records in 2007 for all three brands. In total, 1,500,678 BMW, MINI and Rolls-Royce brand cars were sold during 2007, an increase of 9.2 % compared to the previous year. The number of BMW brand cars sold rose by 7.7 % to 1,276,793 units. The MINI achieved a par- ticularly encouraging increase. This brand recorded an 18.5 % rise, with 222,875 units handed over to customers. The Rolls-Royce brand also reported strong volume growth (+ 25.5 %) in 2007. With 1,010 units sold, it was able to surpass the 1,000 mark for the first time. Sales volume increases on nearly all markets The car sales volume increase recorded by the BMW Group in 2007 was spread over practically all mar- kets. Particularly high growth rates were achieved in the emerging markets of South America and Asia, notably China. In North America, retail sales increased by 7.9 % to 363,966 units. In total, 336,225 vehicles were sold in the USA, the BMW Group’s largest single market, 7.1 % more than in the previous year. In Europe, the number of cars sold in 2007 in- creased by 10.0 % to 898,339 units. Whereas the German market as a whole contracted by 9 %, the number of cars delivered by the BMW Group fell by only 1.5 % to 280,938 units. The BMW Group sold 173,818 units in the United Kingdom, up 12.8 % BMW Group Deliveries of automobiles by region and market in 1,000 units BMW Group – key automobile markets 2007 as a percentage of sales volume USA Germany United Kingdom Italy Spain France Japan Other 27.0 22.4 4.0 4.3 4.9 7.1 11.6 18.7 compared to the previous year. In Italy, the 100,000 mark was surpassed for the first time. The sales volume there rose by 10.9 % with 106,992 units sold. In Spain, the sales volume climbed by 15.6 % to 72,853 units. The increase in France (+ 23.1 %) was particularly sharp with a sales volume of 65,093 units. Sales also grew strongly in Poland (3,543 units/+ 65.0 %) and in Russia (14,712 units/+ 54.5 %). A sales volume increase of 12.2 % was recorded in Asia. In total, 159,508 vehicles were handed over to customers in this region. Strong growth was again recorded on the Chinese markets (China, Hong Kong, Taiwan), with 61,195 units sold (+ 36.7 %). The 2.6 % decrease in sales volume in Japan (60,488 units) should be seen in the light of the 5 % contraction of the market as a whole. In India, where the BMW Group operates its own assembly plant since March 2007, sales were up five-fold to 1,398 units (+ 429.5 %). 480 420 360 300 240 180 120 60 Rest of Europe North America Germany United Kingdom Asia Other markets 03 264.6 294.9 255.8 134.5 103.5 51.6 04 299.7 315.9 283.6 145.3 106.4 57.9 05 350.8 329.0 295.9 156.2 125.7 70.4 06 375.0 337.4 285.3 154.1 142.2 80.0 Rest of Europe North America Germany United Kingdom Asia Other markets 07 443.6 364.0 280.9 173.8 159.5 78.9 18 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook BMW remains the most successful premium car brand in the world In total, 1,276,793 BMW brand cars were sold in 2007, 7.7 % more than in the previous year, thereby creating a new retail sales volume record. No other premium automobile brand was selected by so many customers in 2007. 165,803 units of the BMW 1 Series (+ 9.1 %) were sold. This increase was driven in particular by the introduction of the three-door version in May 2007. Additional impetus came from the new BMW 1 Series Coupé towards the end of the year. The BMW 1 Series Convertible available from spring 2008 will further add to the appeal of this model series. The BMW 3 Series with its Sedan, Touring, Coupé and Convertible versions was once again the best-selling BMW model series (43.5 %) and was also well ahead of its nearest competitors. Altogether, 555,219 units of this model series were sold, 9.2 % more than the previous year’s figure. This includes 310,194 units of the BMW 3 Series Sedan (– 7.7 %) and 102,399 of the BMW 3 Series Touring model (– 2.9 %). Sales of the BMW 3 Series Coupé con- tinued to make good progress in 2007, its first year of full availability. 89,572 units of the BMW 3 Series Coupé were handed over to customers, representing a 117.5 % increase over the previous year. The BMW 3 Series Convertible, available on the markets since March 2007, also enjoyed a similarly good perform- ance with sales up by 109.9 % to 52,970 units. The revised BMW 5 Series has been available since the end of March 2007. In total, 230,845 units were sold in 2007, slightly fewer (– 0.6 %) than the pre vious year’s high level. Sales of the BMW 5 Series Sedan, at 181,534 units, were down 0.6 % on the previous year and the figure for the BMW 5 Series Touring was down by 0.7 % to 49,311 units. Due to the fact that the revised BMW 6 Series did not become available until September 2007, the sales volume fell to 19,626 units (– 10.6 %) for model life-cycle reasons. This figure comprised 9,967 BMW 6 Series Coupés (– 16.5 %) and 9,659 BMW 6 Series Convertibles (– 3.5 %). Now nearing the end of its product life-cycle, the sales performance of the BMW 7 Series was in line with expectations. In total, 44,421 units (– 11.6 %) of the BMW 7 Series were handed over to customers in 2007. In its fourth year since market launch, sales of the BMW X3 Sports Activity Vehicle remained at a high level of 111,879 units (– 1.9 %). The new BMW X5, on the North American mar- kets since November 2006, has also been available in Europe and Asia since March 2007. Sales of the BMW X5 grew sharply in 2007 with a total of 120,617 units (+ 60.1 %) handed over to customers. Now in its sixth year since market introduction, the BMW Z4 could not match the sales volume figure achieved in 2006. 28,383 units of the BMW Z4 were sold, down 8.4 % against the previous year. Proportion of diesel-powered cars continues to rise The BMW brand was the most successful supplier of diesel vehicles in the premium segment in 2007. In many European countries, the proportion of diesel- powered cars is significantly higher than the equiva- lent petrol-powered versions. The highest proportion (93 %) of BMW brand diesel vehicles was recorded in Portugal. Similarly high proportions were also re- corded in France and Italy (both 89 %) and Belgium (including Luxembourg), where the proportion was 88 %. In Germany, the proportion of diesel-powered BMW brand cars rose by four percentage points in 2007 to 63 %. Diesel-powered BMW brand cars will also be sold in the USA in future. This was confirmed by the BMW Group during the North American International BMW brand cars in 2007 – analysis by series as a percentage of total BMW brand sales volume Deliveries of BMW diesel automobiles in 1,000 units and as a percentage of total volume 1 Series 3 Series 5 Series 6 Series 7 Series X3 X5 Z4 2.2 9.4 13.0 8.8 3.5 1.5 18.1 43.5 550 500 450 400 350 300 250 units 273.7 352.5 438.3 472.7 525.9 03 04 05 06 07 as a percentage of total volume 29 34 39 40 41 19 Auto Show in Detroit in January 2008. From autumn 2008 onwards, the BMW X5 and the BMW 335d, both powered by 3.0-litre in-line six-cylinder diesel engines will be available on the American market. MINI models performing successfully The new MINI has been available to customers since November 2006 and created significant momentum in 2007. Sales of MINI brand cars were up by 18.5 % compared to the previous year, reaching a new retail sales volume record figure of 222,875 units. The new MINI Clubman was launched in November in the Cooper and Cooper S variants and has already achieved a sales volume of almost 5,000 units. The high-value model mix of the MINI brand was raised even further in 2007. More than one half of customers (55.9 %) opted for the MINI Cooper. The MINI Cooper S and the MINI One accounted for 29.9 % and 14.2 % respectively of the sales volume. Rolls-Royce registers growth for the fourth time in succession The Rolls-Royce brand was again market leader in its segment during the past year. With 1,010 vehi- cles handed over to customers, it posted a new sales volume record (+ 25.5 %). The new Rolls-Royce Phantom Drophead Coupé also made a good con- tribution towards this performance. Since its sales launch in summer 2007 it has been purchased by 253 customers. Preparations for the Coupé version announced in September 2007 are running according to plan. The first Phantom Coupés will be handed over to customers in the second half of 2008. Car production volume at all-time high level The BMW Group also increased its production volume figure, recording new high levels for all three brands. In total, 1,541,503 BMW, MINI and Rolls-Royce brand cars left the BMW Group plants in 2007 (+ 12.8 %). 1,302,774 BMW brand cars were manufactured, 10.5 % more than in the previous year. In addition, 237,700 MINI brand cars were manufactured in the MINI Production Triangle in the United Kingdom in 2007, representing a 27.3 % production volume increase. 1,029 Rolls-Royce Phantoms were manu- factured at Goodwood, England, during the year (+ 21.5 %), including 300 Drophead Coupés. Production network demonstrates high level of efficiency The BMW Group’s production network again dem- onstrated its capabilities in 2007 by handling a total of 16 model start-ups (eight new and eight model revisions) and 13 start-ups for engines. Productivity of the BMW Group’s production network improved by well over 10 % in 2007. One major contributing factor to this was the consistent ability to focus efforts on generating added value throughout the whole of the production process. The BMW Group continued to expand its pro- duction network in 2007. A new assembly plant for BMW 3 Series and 5 Series production was officially opened in March 2007 in Chennai, India. This is part of the “production follows the market” strategy, creating opportunities to engage in markets with long-term growth potential. The first BMW 3 Series vehicle rolled off the assembly line in Chennai in February 2007 and production of BMW 5 Series vehicles commenced in May. 205,044 units of the BMW 3 Series Sedan and the BMW 3 Series Touring were produced at the BMW plant Munich in 2007. In October, the new visitors’ walkway through the Munich plant – the so- called “production mile” – was commissioned to coincide with the opening of the BMW Welt. Visitors are able to obtain an insight into the production of MINI brand cars in 2007 – analysis by model variant as a percentage of total MINI brand sales volume MINI brand cars in 2007 – analysis by engine variant as a percentage of total MINI brand sales volume MINI MINI Convertible MINI Clubman 2.2 15.8 MINI Cooper (including Cooper D) 14.2 MINI Cooper S MINI One 82.0 29.9 55.9 20 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook BMW cars during a two-hour visit. Since it opened, some 20 tours (with up to 30 visitors) take place each day. The production mile, which starts and finishes in the BMW Welt, runs through the pressing plant, chas- sis construction, paint shop, engine construction and assembly areas. This will enable up to 150,000 guests to visit the BMW plant in Munich each year. The BMW plant Dingolfing celebrated its 40th anniversary in March 2007. More than seven million BMW brand cars have rolled off the production lines since it opened. In 2007, a total of 282,867 vehicles left the plant. In addition to the model revisions of the BMW 5 Series Sedan, the BMW 5 Series Touring and the two M5 models in March, the revised BMW 6 Series rolled off the production lines for the first time in September. Construction work began in mid- November on a new building in which, from 2009 onwards, a completely new method of pressing com- ponents will be introduced, namely hot forming. Compared to conventional techniques, hot forming increases the stability of components by a factor of two to three. Depending on the specifications for their intended functions, components can be made thinner and therefore lighter. The BMW plant Landshut has also been operat- ing as a BMW production site for 40 years, supplying innovative vehicle components to the production network. In January, a new highly automated pro- duction line was commissioned to produce the light- weight roof for the new BMW M3. The BMW Group is thus setting new standards in the industrialised production of vehicle components made of carbon reinforced plastic (CRP). Following completion of the second construction phase, the new replace- ment engine production facilities in Landshut were commissioned in May 2007. The new structures are enabling the process chain to be optimised further by eliminating activities which do not add value and by reducing set-up and throughput times. A new building for the production of car interior compo- nents for future models also went into operation to- wards the end of 2007. The new Vocational and Further Training Centre at the BMW Landshut plant also took up activities in July 2007. Approximately 100 apprentices and their trainers at the plant now have access to a modern training workshop with additional space for teaching. The further training and adult education facilities comprise four training and seminar rooms. The new centre will ensure the long-term supply of suitably trained high-quality staff for the Landshut plant. Automobile production of the BMW Group by plant in 2007 in 1,000 units Regensburg Dingolfing Oxford Munich Leipzig Spartanburg Rosslyn Goodwood 111.7 32.8 1.0 50.2 157.5 158.9 303.8 282.9 Shenyang ( joint venture) Contract production Magna Steyr 205.0 237.7 Three new start-ups were implemented at the BMW plant Regensburg in 2007, namely the model revision of the BMW 1 Series five-door version in March, the new M3 Coupé in June and the new M3 Sedan in December. In total, 303,766 BMW cars were manufactured at the site in the course of 2007. In August, the BMW plant Regensburg was presented the J. D. Power Plant Award for the best plant in Europe. In December, construction com- menced on the extension of the pressing plant which will have 80 % more capacity and will start operations at the end of 2009. This will increase the Group’s own share of value-added to the vehicle and at the same time reduce logistics costs. In total, 158,974 vehicles were produced at the BMW plant Leipzig in 2007. Following the production start-ups for the new BMW 1 Series models (three-door version, Coupé and Conver t- ible), several model variants are now being manu- factured at the Leipzig plant. Rapid and flexible processes have made it possible to achieve the planned daily production volume after only three months. In September, the decision was taken to expand the BMW plant Leipzig by the end of 2009 with a planned capital expenditure volume of approximately euro 100 million. Over the coming two years, a pressing plant and component manu- facturing facilities for door, bonnet and boot panels will be built at the BMW site. 816,900 engines were built at the BMW Group’s largest engine plant in Steyr, Austria, in 2007, two thirds (67 %) of which were diesel engines. Since starting operations 25 years ago, more than ten million BMW engines have left the plant. January saw the start of production of the fourth genera- tion of four-cylinder diesel engines, an important 21 version of the BMW 5 Series Sedan. This model is only manufactured at the Shenyang plant and is in- tended exclusively for the Chinese market. BMW cooperation partner Magna Steyr Fahrzeugtechnik, based in Graz, Austria, manufac- tured 111,665 units of the BMW X3 for the BMW Group in 2007. The decision to have the MINI brand Sports Activity Vehicle manufactured by Magna Steyr was taken in December. One millionth MINI produced Six years after going into production, the one-mil- lionth MINI rolled off the production line at the Oxford plant at the beginning of April 2007. This specially equipped and uniquely painted MINI was added to the BMW Group Mobile Tradition collection. In September, series production of the third model variant, the MINI Clubman, began at the MINI Production Triangle, comprising the Hams Hall, Oxford and Swindon plants. The BMW Group an- nounced that annual production capacity at the Oxford plant will be increased in the medium term to 260,000 units without additional capital expenditure. Successful production start for the Rolls-Royce Phantom Drophead Coupé For the first time, more than 1,000 Rolls-Royce vehi- cles were manufactured in a single year at Goodwood, England. The first Rolls-Royce Drophead Coupé left the factory in June 2007. In October 2007, Rolls-Royce Motor Cars announced that it would be increasing production capacity at the Goodwood plant. This step was necessary as a result of the decision to develop a further model in addition to the Phantom family and in the light of the high demand for existing models. element in the overall package of measures labelled EfficientDynamics. In February, the BMW Group announced that it would be investing euro 14 million to expand its diesel development centre in Steyr. The focus will be on increasing capacities in the area of vehicle measurement technology and function testing. The Hams Hall engine plant is the only site within the production network that produces engines for both the BMW and MINI brands. In total, 367,000 engines left the plant in 2007, of which 172,600 units were intended for MINI vehicles and 194,400 units for BMW vehicles. In mid-April, the one-mil- lionth engine came off the production lines since the Hams Hall plant was commissioned. The first new-generation BMW four-cylinder petrol engine left the plant in January. It incorporates High Precision Injection technology and boasts sig- nificantly lower fuel consumption and CO2 emission values. The BMW plant Rosslyn in South Africa manu- factures only BMW 3 Series Sedans. In 2007, a total of 50,168 vehicles left the plant. As part of the on- going process of optimising logistics workflows, a nearby supplier was linked directly to the Rosslyn plant in 2007. This results in shorter and faster trans- port routes and reduces logistics costs. As further advantages, it is no longer necessary to use the public road system and environmental pollution is reduced. In total, 157,530 units of the BMW X5 and Z4 Series left the BMW plant Spartanburg, USA, in 2007. As part of its strategic realignment, the BMW Group has announced that annual production ca- pacity at the Spartanburg plant will be increased in the medium term to 240,000 units. It is planned that the X6 and a possible successor to the X3 will be built there alongside the BMW X5 and Z4. In February 2007 the US Environmental Protection Agency designated the BMW plant Spartanburg as “Energy Partner of the Year”. The award was given in recognition of the fact that the Spartanburg plant had converted its energy supply for the paint shop to run on methane gas collected from a local waste disposal site, thereby avoiding some 59,000 tons of CO2 emissions per annum. The plant in Shenyang, North China, is oper- ated by the distribution and production joint venture BMW Brilliance Automotive Ltd. In total, 32,760 units of the BMW 3 Series and 5 Series were produced there in 2007, including 21,192 units of the extended 22 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Motorcycles segment sets new sales volume record With 102,467 BMW motorcycles sold in 2007, the BMW Group registered a new sales volume record, surpassing the previous year’s figure by 2.4 %. An important contribution to this development was made by the new models of the G 650 X series which have been available on the markets since spring 2007. BMW motorcycles sales develop divergently from country to country The number of BMW motorcycles sold continued to develop divergently from one country to the next in 2007. The BMW Group sold 72,567 motorcycles in Europe, 1.7 % fewer than one year earlier. In Ger- many, sales of BMW motorcycles, at 21,507 units, were down by 8.9 % as the market continued to contract. By contrast, sales were up in Italy (14,424 units/+ 5.7 %) and Spain (10,384 units/+ 3.8 %). In the USA, where the market also contracted, the number of BMW motorcycles sold fell by 5.7 % to 12,094 units. Sales recorded in Japan, however, jumped by 25.2 % to 3,311 units, bolstered in particular by sales of the lighter models of the G 650 X series. R1200 GS remains the most popular BMW motorcycle As in the previous year, the R 1200 GS (a long-dis- tance enduro) was again the best-selling BMW motorcycle. Including the Adventure version, 30,077 units of this model were sold in 2007. The R 1200 RT touring bike came in second place with 12,201 units sold, followed by the F 650 GS, of which 10,461 units were sold (including the Dakar version). Model initiative continued The BMW Group’s Motorcycles segment contin- ued its model initiative in 2007. The K 1200 R Sport and the G 650 Xchallenge, G 650 Xmoto and G 650 Xcountry models were all introduced to the markets in spring 2007, followed by the HP2 Mega- moto in June. The new HP2 Sport was presented at the end of September at the motorcycle fair in Paris and will be available on the markets from March 2008 onwards. The HP2 Sport is the sportiest, most powerful, but also the lightest series Boxer to date and is designed primarily to attract ambitious, sports-minded motor- cyclists. Five new BMW motorcycles made their world debuts at the International Motorcycle Fair in Milan in November 2007. The R 1200 GS and R 1200 GS Adventure models have been available to customers since the end of January 2008. Both of these mod- els have been enhanced and are now fitted with more powerful boxer engines, resulting in a 5 % bet- ter performance, and new gear ratios. These features result in a significant increase in both traction and acceleration. The new medium-class BMW F 800 GS long- distance enduro combines excellent off-road char- acteristics and above-average long-distance quali- ties. This motorcycle is powered by the two-cylinder engine from the F 800 Series. The related BMW F 650 GS model is another new addition. As an all- round variant for newcomers, this model is designed for easier control and mainly for use on roads and is also powered by the same two-cylinder engine with a somewhat lower performance capability. Both of these models will be available on the markets for the start of the 2008 season. The BMW Group also presented the BMW G 450 X Sports Enduro as a fifth new product. This model, exclusively developed for enduro sports activities, will be launched in the second half of 2008. BMW motorcycles delivered in 1,000 units BMW Group – key motorcycle markets 2007 as a percentage of sales volume 105 100 95 90 85 80 75 03 04 05 06 07 93.0 92.3 97.5 100.1 102.5 Germany Italy USA Spain France United Kingdom Other 30.5 21.0 14.1 5.1 7.4 10.1 11.8 23 BMW motorcycles in 2007 – analysis by series as a percentage of sales volume R Series F Series K Series 15.8 26.1 58.1 Motorcycle production volume at previous year’s level Motorcycle production volume in 2007, at 104,396 units, was 0.6 % above the previous year’s level. 96,006 units were produced at the BMW plant Berlin and 8,390 units by the cooperation partner, Piaggio S. p. A. in Noale, Italy. Four years after commencing production, the 100,000th R 1200 GS (including the Adventure version) left the BMW plant Berlin at the end of July 2007. Never before have so many units of one model been produced at the Berlin plant in such a short space of time. Five new models came off the production line for the first time in 2007. Production of the BMW HP2 Megamoto commenced at the beginning of May. This was followed in October by the BMW R 1200 GS and the Adventure variant and in Novem- ber by the BMW F 800 GS and the F 650 GS. BMW Group acquires Husqvarna The BMW Group completed the acquisition of the motorcycle manufacturer Husqvarna on 1 October. This company operates under the name Husqvarna Motorcycles S. r. l., Cassinetta di Biandronno.* The Husqvarna models are mainly intended for the competitive sports market. With this move, the BMW Group is therefore expanding its product range with a view to increasing its appeal to younger buyers and to covering the off-road and supermoto seg- ments. The acquisition will also give the Motorcycles segment access to a worldwide sales network in the off-road segment. * Husqvarna Motorcycles S. r. l., Cassinetta di Biandronno, is not included in the con- solidated financial statements for the financial year 2007. Successful year for the Financial Services segment in 2007 The Financial Services business achieved further profitable growth in 2007 and again made an impor- tant contribution to the overall performance of the BMW Group. The total business volume as disclosed in the balance sheet increased by 16.5 % to euro 51,257 million. At the year-end, 2,629,949 lease and financing contracts were in place with dealers and retail customers, representing an increase of 15.8 % over the previous year. The proportion of new BMW Group vehicles leased or financed by the Financial Services segment was 44.7 %, 2.3 points above the percentage recorded in the previous year. Regional presence expanded The Financial Services segment continued its strat- egy of regional expansion by acquiring companies in Germany, Malaysia and Hong Kong, thereby open- ing up new opportunities for growth. This was a further demonstration of the BMW Group’s determination to broaden the international scope of its financial services business. The Finan- cial Services segment now provides services to customers in more than 50 markets, either with its own companies and divisions or in the form of ven- tures based on cooperation agreements. The BMW Group acquired DEKRA SüdLeasing Services GmbH (renamed to: BMW Fuhrparkman- agement Beteiligungs GmbH) and that entity’s sub- sidiaries at the beginning of April. In mid-April, the BMW Group acquired Sime- Lease (Malaysia) Sdn Bhd and its subsidiary, Sime- Credit (Malaysia) Sdn Bhd. These entities are oper- ating in the meantime as BMW Lease (Malaysia) Sdn Bhd and BMW Credit (Malaysia) Sdn Bhd. In Octo- ber, the BMW Group acquired 51 % of the shares of CEC Finance Ltd. (renamed to: BMW Financial Services Hong Kong Limited), based in Hong Kong. These acquisitions in Malaysia and Hong Kong have opened up two further fast-growing markets in Asia. The Financial Services segment set up a new company in Argentina in 2007. This entity offers financing and insurance products to retail customers and financing to dealers. In addition, cooperation arrangements were put in place in the Czech Republic and Slovakia and organisational units created in Poland, Hungary and India during 2007. 24 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Retail customer business remains strong Finance and lease business with retail customers, the segment’s largest line of business, was further expanded in 2007. New contracts were signed with retail customers to the value of euro 28,462 million, representing a 16.4 % increase over the previous year. The number of new contracts signed in a sin- gle year surpassed the one million mark for the first time and, at 1,086,493 contracts, exceeded the previous year’s level by 18.6 %. Approximately 60 % of these contracts related to new vehicles manufac- tured by the BMW Group. At 31 December 2007, leasing business ac- counted for 38.2 % of total new retail customer busi- ness, 0.8 percentage points above the proportion recorded one year earlier. Lease business grew by 21.0 % and credit financing increased by 17.2 % com- pared to the previous year. The number of new contracts signed for used cars rose in 2007 by 15.0 %. Approximately three- quarters of these were related to the credit financing of used BMW and MINI brand cars. At 31 December 2007, 2,401,208 contracts were in place with retail customers, 15.6 % more than one year earlier. The growth was spread across all regions. The portfolio of retail customer business contracts was up by 16.8 % in Germany, by 13.9 % in the remaining European markets and by 16.2 % for the markets in the Asia/Oceania/Africa region. There was another sharp rise (+ 16.0 %) in the Americas region, which, with 790,808 contracts, also accounts for the largest proportion of contracts in the retail customer business. tended during the period to Malaysia and Hong Kong. This means that credit financing and lease contracts are now being offered under the name “Alphera” and “up2drive” in 25 markets, either via multiple-brand dealerships or directly by Group companies. The “up2drive” brand name was introduced successfully in the area of direct business in order to meet differ- ing marketing needs. Business via dealers continues to be transacted under the name “Alphera”. One advantage of this is that it takes account of the trend amongst dealers to look for financing solutions with a single business partner. At the same time, it also takes into account the growing practise, particularly amongst younger customers, of obtaining financing via the internet. New business with multi-brand financing in 2007 was highly encouraging. In total, 124,556 new con- tracts were signed, more than doubling the number achieved in the previous year. The largest proportion of new contracts related to the Americas region. Continuous growth in the area of dealer financing The Financial Services segment supports the BMW Group dealer organisation with a comprehensive range of products. In addition to the financing of vehi- cle inventories held by dealerships, these activities also include real estate and equipment financing. By the end of the period under report, dealer financing had attained a total business volume of euro 8,364 million, corresponding to a growth rate of 15.4 %. 228,741 dealer financing contracts were in place at 31 December 2007. As in the previous year, organic growth gener- Multi-brand financing accelerates growth Business with multi-brand financing continued to make good progress in 2007. Operations were ex- ated within the multi-brand line of business and geographical expansion both contributed to this de- velopment. Contract portfolio of BMW Group Financial Services in 1,000 units Contract portfolio retail customer financing of BMW Group Financial Services 2007 as a percentage by region 2,800 2,600 2,400 2,200 2,000 1,800 1,600 America Rest of Europe Germany Asia/Oceania/Africa 25.9 13.3 32.9 03 04 05 06 07 1,623 1,843 2,087 2,271 2,630 27.9 25 Fleet business activities attain new magnitude The BMW Group operates internationally in the field of multi-brand fleet business via the Alphabet group of companies as a provider of financing, full-service leasing and fleet management services. Business volumes expanded rapidly in 2007 following the ac- quisition of DEKRA SüdLeasing Services GmbH (re- named to: BMW Fuhrparkmanagement Beteiligungs GmbH) and as a result of continued organic growth. Alphabet has commenced operations in Mexico, thus establishing a foothold for the first time on the American continent. Operations have also been taken up in Denmark, which means that Alphabet is now represented throughout the whole of Scandina- via. The international customer base also grew sig- nificantly in the 15 countries where Alphabet oper- ates. At the year-end, the contract portfolio covered 279,843 units, up by 55.6 % compared to the end of the previous year. Excluding the contracts taken over in conjunction with the acquisition of DEKRA SüdLeasing Services GmbH (renamed to: BMW Fuhrparkmanagement Beteiligungs GmbH), the vol- ume increased by 21.2 %. Thanks to organic growth and targeted acquisitions, a major provider of fleet business services has meanwhile emerged in Ger- many within the BMW Group stable. The BMW Group has also moved into a new magnitude in this dynamic business sector in international terms and is now one of the top ten fleet service providers in Europe. Continued growth in the area of insurance business In addition to credit financing and lease contracts, the Financial Services segment also operates as an agent for motor vehicle, residual liability and other vehicle-related insurance policies. These services are now being offered in more than 30 markets via cooperation arrangements entered into with local insurance companies. The segment continued its strategy of expanding insurance business with cus- tomers in international markets and entered into new cooperation agreements with partners in India, China, Greece, Hungary, Argentina and Portugal. The range of products on offer in existing markets was also expanded and new products launched on the markets in Italy and Spain. These measures contributed to the fact that new insurance business grew by 12.2 % in 2007 with 395,039 insurance contracts signed. At the end of 2007, the Financial Services segment had a worldwide portfolio of 947,394 insurance con- tracts. Deposit business influenced by increased competition The intense level of competition in the area of de- posit business remained evident in 2007. The seg- ment’s deposit volume worldwide at 31 December 2007 amounted to euro 5,732 million and there- fore 0.8 % lower than the figure recorded one year earlier. The main success factors for investment fund business were the exclusive certificates introduced in the previous year and the new fund-of-funds product concept “Comfort Invest”. The unabated trend to- wards private old-age pension arrangements by making regular transfers to investment funds also had a positive impact. In order to meet the growing advisory needs of customers, the range of services on offer in Germany was expanded accordingly, including the opportunity for customers to obtain in- vestment advice by telephone. By the year-end, the number of customer deposit accounts had increased by 6.0 % to 31,801. BMW and MINI Card activities increased world- wide in 2007. At the end of the year under report, the Financial Services segment serviced 393,741 credit card accounts, 15.9 % more than one year earlier. The BMW Card is available in eleven countries. The MINI Card is part of the product range offered in Germany, the USA, the United Kingdom and Japan. Awards for service quality The excellent cooperation between the Financial Services segment and the dealer organisation re- ceived recognition in 2007 with a number of awards won. The BMW Group was presented the J. D. Power and Associates “Dealer Satisfaction Award” in both the USA and Japan. A strong, customer-friendly approach repre- sents an important factor for the ongoing success of the BMW Financial Services segment in the area of retail customer business. This was documented in 2007 by the presentation of the J. D. Power and Associates “Customer Satisfaction Award” to BMW Group Financial Services in the USA. 26 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Risk situation remains evenly balanced During the financial year 2007, the credit risk for credit and lease financing activities remained, with the exception of the USA, at a similar level to that of 2006. There, the risk situation was negatively in- fluenced by the credit crisis. Compared to the pre- vious year, the bad debts ratio increased by 5 basis points to 0.46 %. The interest rate risk is managed using a risk-return approach. Diversified value-at- risk, as measured by the Financial Services segment to quantify the interest rate risk *, increased during the year from euro 34.9 million to euro 37.3 million. * based on a 99 % confidence level and a holding period of ten days Softlab changes name to Cirquent The softlab Group offers consultancy and other services along the entire value-added chain, with its main focus on the banking, insurance, telecommu- nication and manufacturing sectors. In order to un- derline its strong position as an organisation offering first-class service under one single brand name, the softlab Group changed its name to Cirquent at the end of 2007. Cirquent has continued to strengthen its market position over the past year. This is highlighted by the rise in revenues from euro 262 million in 2006 to euro 286 million in 2007. One of the cornerstones on which this growth has been built is the expansion consultancy business, including the Finance Trans- formation Unit, a new line of business which spe- cialises in providing advisory services to finance de- partments of corporate enterprises. In addition to sector-specific consultancy ser- vices, Cirquent also offers customer management, finance transformation, IT management, SAP con- sulting and application management services. Workforce virtually unchanged The BMW Group’s workforce increased slightly (+ 0.9 %) during the financial year 2007 to stand at 107,539 employees at 31 December 2007. This was largely attributable to acquisitions made by the BMW Group in the financial services sector. Approx- imately 75 % of the Group workforce is employed in Germany, where the number of employees edged up by 232 in 2007. The employee fluctuation ratio at the BMW Group has been at a low level for many years in com- parison with other automobile manufacturers and with companies operating in other sectors. The BMW Group continues to recruit employees on a targeted basis in order to compensate for fluctuation. In addi- tion to more than 1,200 new apprentices taken on, a total of 886 permanent jobs were advertised and filled externally by BMW AG. High number of apprenticeships 1,214 young people commenced apprenticeships with the BMW Group at the start of the new training year. A total of 4,281 apprentices were undergoing their training with the BMW Group at the end of 2007, 1.8 % fewer than at the end of the previous year. This small decrease came about despite the steady number of apprentices recruited and reflects the fact that some apprentices were able to complete their vocational training early as a result of their above- average performance. These vacated positions can- not be replaced, however, until the next round of re- cruitment. This is also the reason why the apprentice ratio in Germany (i.e. the ratio of apprentices to the total workforce) fell by 0.1 percentage points in 2007 to a level of 4.8 %. Starter programmes for high school leavers and university graduates are also in place to complement the range of opportunities available to those about BMW Group apprentices at 31 December 5,500 5,000 4,500 4,000 3,500 3,000 2,500 03 04 05 06 07 4,306 4,464 4,464 4,359 4,281 27 to begin their careers. This includes the “Fastlane” programme (a programme to help university and works students that have previously excelled on work experience with the BMW Group) and the “Drive” programme (a starter and development programme for university graduates with up to three years’ pro- fessional experience). Further training tailored to requirements As a premium provider, the BMW Group attaches great importance to both the basic and the further training of its workforce. Further training is always tailored to suit requirements and carried out with specific objectives in mind. Further training activities in 2007 were therefore focused on specific priority topics and selected target groups. In 2007, the BMW Group invested a total of euro 181 million on basic and further training courses for its employees, 1.6 % less than in 2006. Internationalisation supported by placements abroad The international transfer of knowledge and network- ing at all levels are crucial factors for globally operat- ing businesses such as the BMW Group. For exam- ple, key specialists are moved around between the various production sites as start-ups commence for new models, thus ensuring the same high quality each time. In 2007, more than 750 BMW AG employees were deployed at foreign locations. The main target countries were again the Group’s business locations in markets currently experiencing dynamic growth, in particular North America, the United Kingdom and Asia. Furthermore, approximately 175 employees from non-German locations were working in Ger- many or at other international locations away from their home countries. In the case of longer-term Employee fluctuation ratio BMW AG* as a percentage of workforce 3.5 3.0 2.5 2.0 1.5 1.0 0.5 03 04 05 06 1.43 1.91 2.45 2.68 07 2.66 * Number of employees on unlimited employment contracts leaving the company placements, employees remain abroad for an aver- age period of three years. This is a sufficient length of time for them to pass on process and technical know-how, receive further training while abroad and, at the same time, gain international experience which will stand them in good stead during the course of their subsequent careers. Apart from over 900 employees who have worked abroad for longer periods, more than 500 people were also called up for short-term international duty. The BMW Group remains a highly attractive employer Numerous studies and ranking lists in 2007 con- firmed the BMW Group’s reputation as an attractive company to work for. In the study “Germany’s Most Popular Employers” (Trendence), young academics from both the business and engineering fields chose the BMW Group as the most popular employer for the sixth year running. As documented in the study “The Ideal Employer 2007” (Universum), engineers and business management graduate career begin- ners judge the BMW Group to be one of the most attractive employers. The BMW Group’s excellent reputation as an employer helps greatly towards BMW Group employees Automobiles Motorcycles Financial Services Other thereof consultancy/software BMW Group adjusted * * Figure for end of previous year including acquired entities 31.12. 2007 31.12. 2006 Change in % 98,548 98,505 2,989 4,097 1,905 1,793 2,782 3,478 1,810 1,743 107,539 107,539 106,575 107,345 – 7.4 17.8 5.2 2.9 0.9 0.2 28 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook attracting well-qualified newcomers to join the com- pany. This special appeal as an employer is not re- stricted to the external perception of the company; it is also reflected in the outcome of the most recent employee survey carried out in 2007. Almost 90 % of employees stated that they were either satisfied or very satisfied with their working situation at the BMW Group. This means that employee satisfaction and identification with the company have remained at a consistently high level since 2002. This employee survey is carried out regularly on a worldwide basis every two years. It is a useful instrument for manage- ment, providing the basis for a continuous improve- ment process within the company. Joint agreement for BMW AG’s blue-collar and white-collar staff implemented The new Remuneration Framework Agreement (Entgelt-Rahmen-Abkommen – ERA) came into force at BMW AG on 1 June 2007. Parallel to the in- troduction of ERA, a wide-ranging concept for im- proving company competitiveness was drawn up in cooperation with employee representatives. This new concept includes plans to provide financing for pre- retirement part-time working agreements even after the current legal requirement for such arrangements has expired. This ensures that employees will also be able to retire before reaching the statutory retire- ment age. BMW AG is the first company to put a model in place to follow the statutory regulations. “Today for Tomorrow” project – seeing demographic change as an opportunity The ageing of populations of many industrialised nations can no longer be avoided. This is having an impact on the economy as a whole as well as on each individual company. In a few years’ time, the BMW Group workforce will also be considerably older on average than it is at present. The ever-rising requirement for greater per- formance will have to be fulfilled by an on-average older workforce in future. Older employees also have quite specific advantages. They have a wealth of experience and are able to pass on their knowledge of the organisation and cultural values. The more de- cisive a company is in encouraging its employees to achieve and be engaged, the more successful it will be. The BMW Group is already taking appropriate action in anticipation of these future developments. The necessary overall framework and specific in- struments are being developed in conjunction with the “Today for Tomorrow” project, which takes a comprehensive approach. The BMW Group has defined five principal areas of action: Health management and prophylaxis Within the action area “health management”, a pro- phylactic programme has been developed to en- courage employees to adopt a responsible attitude towards their own health. A new concept has been devised for corporate health forums which are not confined to specific corporate locations. These fo- rums will have an important part to play in the future. Any knowledge gained there will be used to identify areas where action needs to be taken. They will also be the basis for measures (such as weight loss pro- grammes) that may need to be aimed at specific target groups. It should then be possible to monitor the long-term efficacy of any measures taken. So far, some 28,000 employees have participated in the company’s health forums. Information about healthy living is being offered both in seminars and in the health forum. The “Fit for Job” seminar is aimed at all employees, while the “Fit for Leadership” seminar is specifically tailored to the needs of managers. Both seminars show partici- pants how they can pay more attention to healthy nutrition, physical fitness and mental equilibrium in their daily lives. Another outcome is the newly designed reha- bilitation network which has already supported over 800 employees with a shortened, effective rehabili- tation programme. Working environment The action area “working environment” is mainly concerned with creating age-compatible working conditions in technical and organisational terms – with particular regard to workplaces, working hours and job structures. All of these factors can contrib- ute enormously to maintaining and extending the working capacity of employees in the long term. A further objective is to improve the employment opportunities for personnel with health-related limi- tations. A concept for systematic rotation is currently being drawn up for use in the production area with 29 Group Intranet. It is the first communication platform to be created specifically aimed at increasing em- ployees’ awareness of their responsibility to make personal provision for the future. It contains a wealth of information and some specific aids relating to training, health, working environment and personal provision. The BMW Group’s internal media are reg- ularly updated on different aspects of saving for the future and highlighting possible areas for action. This information is wholly aimed at encouraging em- ployees to take a pro-active approach to making pro- vision for their own future. Competitive level of personnel expense Within an intensely competitive environment, the management of personnel expense becomes in- creasingly significant. A competitive level of per- sonnel expense contributes enormously to the suc- cess of the BMW Group. This is primarily concerned with bringing the idea of performance into the fore- front rather than just a one-sided cost-oriented approach. The high degree of motivation amongst employees and the positive approach taken to the workforce are maintained by a combination of rewards determined individually on the basis of performance and success and with the aid of flexible working time models. Remuneration, working time arrange- ments and other benefits are reviewed and modified regularly and in close cooperation with employee representatives. the aim of reducing repetitive physical strain and thus preserving employees’ physical and mental flexibility. Qualification and expertise In the future, traditional training methods will be en- hanced and to some extent replaced by “hands-on” learning. In the action area “qualification”, studies are being carried out to identify how learning can best be promoted, both at the workplace and for specific functions. Based on the results of these studies, it should be possible to determine the most suitable (direct or indirect) methods of learning. These findings are also taken into account in the company’s training concepts for employee and management staff de- velopment. One of the functions of qualitative personnel planning is to examine how skills and expertise are likely to develop within the company. By analysing the requirements that result from a changed age structure of its workforce, the company will find clues as to when and what type of know-how it will require in the future as well as (and how and when) that know- how will disappear as employees leave the company. Individual life-time working models In spite of improvements in preventative care, some employees may not be able, or may not wish, to con- tinue working until they reach the statutory retire- ment age. The BMW Group has, together with em- ployee representatives, devised new retirement models which best suit the needs of those concerned. These models are intended to fit in with each employee’s future plans and with the company’s requirements. The financial basis for these models is being set aside. In order to give employees the opportunity to supplement any self-financed pension plan, an attrac- tive deferred remuneration retirement scheme has been available to the workforce for several years now, allowing part of an employee’s remuneration to be converted into pension provision. Communication Appropriate communication measures help to keep managers and employees aware of changes taking place in society and within the company. One example of this is the electronic portal “My Future Provision” which employees can access on the BMW 30 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Design for recycling – EU directive on end-of-life vehicles In 2007, the BMW Group pushed ahead with its strat- egy of designing vehicles with subsequent recycling in mind. One of the areas of focus during the year was the development of a recycling concept for hy- brid vehicles. Over the last few years, a network of recovery centres for end-of-life vehicles has been set up throughout the European Union. Since 1 January 2007, customers in the EU have been able to return their BMW, MINI or Rolls-Royce vehicles to these recovery centres to be recycled free of charge. Dur- ing 2007, the BMW Group increased the number of end-of-life vehicle recovery centres by 7.8 %. In order to meet the mandatory requirements resulting from the EU End-of-life Vehicles Directive, both in ecological and commercial terms, plans are underway to increase the use of so-called “Post Shredder Technology” (PST) in the future. After completion of the vehicle shredder process, shred- der residue fractions are sorted and sifted into their various constituent materials such as metals, plastics and minerals, in preparation for further processing. On the basis of a large-scale trial performed in 2007 with approximately 500 vehicles from the current model range, the BMW Group was able to demon- strate that, with the aid of PST, it meets the manda- tory requirements relating to the recycling of end-of- life vehicles. The EU End-of-life Vehicles Directive also re- quires that recycled materials are used in new vehi- cles. This involves recycling waste materials from production processes or those won from end-of-life parts. In 2007, experts at the BMW Group suc- ceeded in extending the use of recycled materials to other components, such as the mountings for bumpers and soundproofing covers for diesel engines. The use of recycled materials in individual models was also extended to other model series. For example, the wheel arch liners produced from recycled bumper fascia previously used in the BMW 1 Series and BMW 3 Series are also being used in the X5 from 2007 onwards. Group-wide environmental protection measures set standards The BMW Group’s “Clean Production” philosophy is based on the idea of preventative environmental protection. Certified environmental management systems throughout the BMW Group have been in place since 1996. These systems serve as the basis for coordinating and optimising the Group’s environ- ment protection activities and hence the careful con- sumption of resources. The certification audit of the production function, in accordance with DIN EN ISO 9001 and DIN EN ISO 14001, was successfully con- cluded in December 2007, once again confirming the high standards prevailing at all locations in the field of quality and environmental protection. Spe- cialist external auditors (the German TÜV organisa- tion) once again confirmed a very high standard in terms of quality and environmental performance, highlighting several processes as exemplary. A new objectives-based process was introduced for production in 2007, making it easier to measure and manage the effective use of resources. Performance indicators relevant to environmental protection, such as energy consumption and waste levels at the BMW Group production sites, are measured and reported on a monthly basis and a so-called “environment effi- ciency ratio” is calculated. The aim is to improve the efficiency ratio by 5 % a year. The new “eco-facts” IT system was implemented in mid-2007. This system collates data for some 150 environmentally relevant performance indicators and is therefore an extremely useful tool for managing environmental protection activities. The introduction of “eco-facts” meant that Volatile organic compounds (VOC) per unit produced in kg/unit Process waste water per unit produced in m3/unit 3.25 3.00 2.75 2.50 2.25 2.00 1.00 0.90 0.80 0.70 0.60 0.50 03 04 05 06 2.88 2.26 2.07 2.04 07 * 2.36 03 04 05 06 0.98 0.83 0.76 0.67 07 * 0.64 * Basis for data expanded in 2007 from ten to 17 locations: Munich, Dingolfing, * Basis for data expanded in 2007 from ten to 17 locations: Munich, Dingolfing, Landshut, Regensburg, Leipzig, Steyr, Rosslyn, Spartanburg, Hams Hall, Oxford and, since 2007, Berlin (brake disc production), Eisenach, Swindon, Goodwood, Rayong (assembly), Chennai (assembly) and BMW Brilliance in Shenyang. Landshut, Regensburg, Leipzig, Steyr, Rosslyn, Spartanburg, Hams Hall, Oxford and, since 2007, Berlin (brake disc production), Eisenach, Swindon, Goodwood, Rayong (assembly), Chennai (assembly) and BMW Brilliance in Shenyang. 31 the number of plants covered by the Group’s envi- ronmental protection reporting system went up from ten to 17. Compared to 2006, the BMW Group reduced energy consumption per unit produced by 4.1 % and CO2 emissions by 10.6 %. These reductions were achieved by an array of innovative projects and measures: – Combined heat and power generation facilities (80 % efficiency rate compared to 35 % efficiency rate of conventional energy production) generate electricity and heat at plants in Dingolfing, Lands- hut, Regensburg, Steyr, Oxford, Spartanburg and at the Research and Innovation Centre (FIZ) in Munich. – A groundwater cooling system ensures environ- ment-friendly air conditioning at the FIZ. This involves using near-surface ground water to cool parts of buildings, thus saving some 8,000 MWh of electricity and 5,000 tons of CO2 annually. – The BMW plant Spartanburg meets 63 % of its energy requirements by using methane gas from a nearby landfill site. The gas, which had previously gone unused, is used as a source of energy, thus reducing the consumption of natural gas. As a result, almost 59,000 tons of CO2 emissions were avoided in the Spartanburg region in 2007. – In autumn 2007, the BMW Group’s second photo- voltaic installation was put into operation at the BMW Welt in Munich, in addition to the smaller one already in place in Leipzig. Over the past ten years, the BMW Group has suc- ceeded in reducing emissions of solvents by nearly 37 %. However, due to the fact that the num ber of production sites now covered by the reporting sys- tem rose from ten to 17, solvent emissions per unit produced were higher in 2007 than in 2006. The emissions of the sites recently added to the system will be brought down in stages to the low emission levels already achieved by the longer-standing pro- duction sites. The plants in Regensburg, Dingolfing and Leip- zig already use powder-based paint technology. The BMW plant Landshut set a new benchmark in 2007 by reducing solvent emissions in its light metal foundry operations. The sand grains needed for the casting process are no longer produced using synthetic resin binders. Instead, mineral binders are used which cause practically no smell or emissions. The BMW Group is the only automobile manufacturer in the world currently using this technology on motor components such as crankcases and cylinder heads. This process reduces the proportion of organic ele- ments discharged into the air by 98 %. Over the last five years, the BMW Group has also significantly reduced the volume of waste water it produces. During this period, the amount of water used per unit produced was cut by almost 35 %. The BMW Group accomplished this by using closed water circulation systems and by treating waste water created during the production process. For example, water used in the paint shop, in car washes and for waterproof testing on new vehicles is re-used. An innovative combination of membrane technologies has been in use at the BMW Steyr location since the beginning of 2007. At this plant, all waste water created during the production process is purified and fed back into the production system. This en- abled the plant to save approximately 30 million litres of water in 2007. Environment-friendly transportation solutions Logistics experts within the BMW Group analyse and optimise all flows of goods – from procurement through to delivery – with the objective of keeping environmental pollution caused by transportation to a minimum. The focus is on cutting down the volume of traffic, redeploying to more ecologically favourable Energy consumed per unit produced in MWh/unit CO2 emissions per unit produced in tons/unit 3.10 3.00 2.90 2.80 2.70 2.60 1.05 1.00 0.95 0.90 0.85 0.80 03 04 05 06 2.94 2.94 2.94 2.90 07 * 2.78 03 04 1] 05 06 1.00 0.94 0.99 0.94 2] 07 0.84 * Basis for data expanded in 2007 from ten to 17 locations: Munich, Dingolfing, Landshut, Regensburg, Leipzig, Steyr, Rosslyn, Spartanburg, Hams Hall, Oxford and, since 2007, Berlin (brake disc production), Eisenach, Swindon, Goodwood, Rayong (assembly), Chennai (assembly) and BMW Brilliance in Shenyang. 1] The increase is attributable to a change in the energy mix. 2] Basis for data expanded in 2007 from ten to 17 locations: Munich, Dingolfing, Landshut, Regensburg, Leipzig, Steyr, Rosslyn, Spartanburg, Hams Hall, Oxford and, since 2007, Berlin (brake disc production), Eisenach, Swindon, Goodwood, Rayong (assembly), Chennai (assembly) and BMW Brilliance in Shenyang. 32 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook carrier forms and reducing the surface protection used on new cars. A new procedure for transporting materials within the US market was introduced in July 2007 for the BMW plant Spartanburg, as a result of which billing is now based on performance. Since then, haulage contractors have only been remunerated on the basis of the volume carried, thus automatically providing an incentive to plan and use transport ca- pacities more efficiently. Transportation by sea accounted for 76.8 % of the total volume transported in 2007, almost on par with the previous year’s high level of 76.9 %. By contrast, as a consequence of wage disputes at the Deutsche Bahn (German Railways), the proportion of goods transported by rail fell from 7.2 % in 2006 to 6.9 % in 2007. Overall, 54.8 % of all new vehicles left their re- spective production plants by rail, slightly down (– 0.6 %) on the previous year. In absolute terms, how- ever, approximately 95,000 more vehicles left plants by rail than in the previous year. For the first time, the BMW plant Leipzig switched to rail on a major scale in 2007, supplying the British and Spanish mar- kets from the beginning of 2007 onwards mainly by rail. As a result, the proportion of vehicles leaving the BMW plant Leipzig by rail jumped to 27 % in a single year. The BMW Group again significantly reduced the volume of wax or adhesive films used to protect the outside surfaces of vehicles. This also enabled the use of solvents and other chemicals to be re- duced in 2007. In total, approximately 72 % of vehi- cles were delivered without surface protection in 2007, compared to 53 % in the previous year. In addition, some 3,500 tons of CO2 emissions were avoided in 2007 by transporting vehicles without surface protection. This avoided extensive cleaning on arrival, causing 80 % less CO2 emissions. Making progress towards sustainable mobility The BMW Group is aware of its responsibility in the area of climate protection and has been working for many years on reducing the fuel consumption of its fleet. The strategy of working towards sustainable mobility comprises three main stages. The BMW Group is continuously improving fuel economy in its vehicles with a combination of highly efficient engines, optimised energy management, innovative light- construction design and improved aerodynamics. In the medium term, the BMW Group is working on achieving additional fuel economy benefits by various measures, from electrification of the drivetrain through to a wide range of hybrid solutions. In the long term, the BMW Group is committed to the use of hydro- gen gained from various renewable energy sources. Consistent CO2 reduction at all levels The efficient use of fuel is a fundamental criterion for every vehicle developed by the BMW Group. The status report produced for each vehicle project provides clear and transparent information on fuel consumption and CO2 emissions, highlighting the degree to which emission reduction targets have been achieved. The agreement between the European Auto- mobile Manufacturers (ACEA) and the European Commission included a target of 140 g/km of CO2 emissions for the combined new car fleet of all European car manufacturers for 2008. This repre- sents a reduction of 25 % compared to the base year, 1995. The BMW Group is also making its con- tribution and stands by its commitment to reduce CO2 emissions for its own fleet by 25 % during the period from 1995 to 2008. The BMW Group has also cut back CO2 emis- sions significantly outside Europe in recent years. A study by the US organisation Environmental De- fense recently confirmed that the BMW Group takes top position in this area. The result of the study: of all auto mobile manufacturers represented in the USA, the BMW Group has made the best progress in terms of the reduction of CO2 emissions for its vehicle fleet during the period from 1990 to 2005. EfficientDynamics benefit entire vehicle fleet Apart from the use of highly efficient petrol and die- sel engines, the EfficientDynamics measures intro- duced by the BMW Group in 2007 also comprise energy management measures, weight reduction and improved aerodynamics. Examples of energy management improvements within the vehicle are Brake Energy Regeneration, the Auto Start Stop Function and the gear shift indicator. These innova- tions, which all help to reduce fuel consumption, were introduced on the BMW 1 Series, the BMW 5 Series and the new BMW 3 Series Convertible and Coupé models in March 2007. Since autumn 2007, model-specific EfficientDynamics packages also became standard in the BMW 3 Series Sedan, the BMW 3 Series Touring and the X models as well as in the revised BMW 6 Series Coupé and Convertible models. All MINI models apart from the convertible have been fitted with Brake Energy Regeneration, the Auto Start Stop Function and the gear shift indi- cator since autumn 2007. 33 Roadmap of the BMW Group for sustainable mobility Adoption of the EfficientDynamics strategy. > BMW Group cuts fuel consumption in Germany pursuant to VDA agreement of 1990 by 2005 by almost 30 %. > 2006 BMW Hydro- gen 7 is presented to the public. > 2007 Introduction of EfficientDynam- ics measures in numerous BMW and MINI models. > About 40 % of the BMW Group’s new vehicles in Europe will be emitting a maxi- mum of 140 g CO2/km. > First BMW Group vehicles with hybrid drive. > Use of regenera- tive hydrogen as fuel in motor traffic. 2000 2005 2006 2007 2008 2009 long-term > The principle of introducing the EfficientDynamics innovations as standard for all cars manufactured by the BMW Group, and not just for niche models, is helping to reduce CO2 emission levels across the whole fleet. This policy means that more than 450,000 BMW and MINI cars driving on Europe’s roads were equipped with these fuel-saving innova- tions by the end of 2007. By spring 2008 emission levels for 26 BMW and MINI models will be at a maxi- mum of 140 g/km CO2. Highly efficient engines for lower fuel consumption The engine is one of the main areas where fuel con- sumption can be reduced. BMW’s High Precision Injection system enables four- and six-cylinder petrol engines to achieve consumption levels during lean operation that had previously only been attained by diesel engines. BMW 1 and 5 Series vehicles sold in Europe have been equipped with this system since March 2007. In autumn 2007, this innovation also became available throughout Europe in the top- selling BMW 3 Series. In markets such as the USA, however, the sulphur-free fuel necessary for the lean operation of these engines is not yet on sale nation- wide. On these markets, the efficient VALVETRONIC engines featuring fully variable valve drive help to reduce fuel consumption. The new BMW diesel engines, equipped with third-generation Common- Rail injection technology and employing injection pressures of up to 2,000 bar, now use less fuel whilst still delivering higher performance. In autumn 2008, the BMW Group will launch the first diesel engines under the name “BMW AdvancedDiesel with BluePerformance” on the US and Cana dian markets. An oxidation catalytic con- verter and a diesel particle filter will be responsible for optimising emission levels in these engines. An SCR (Selective Catalytic Reduction) system featur- ing urea injection will reduce nitric oxide emissions (NOx). The use of this SCR system ensures that the particularly strict emission limits applicable in California and other US federal states are adhered to. It will enable nationwide introduction of BMW AdvancedDiesel with BluePerformance as a 50- state model (BIN5). Comprehensive energy management within the car Improved energy management has enabled the BMW Group to achieve far greater fuel economy throughout its latest range of models. The Auto Start Stop Function, which switches the engine off automatically when the vehicle comes to a halt, serves to save fuel. Brake Energy Regeneration technology makes use of both braking and acceler- ation phases to charge the vehicle’s battery and re- duces drag on the engine. During these phases, as soon as the driver stops accelerating, kinetic energy is automatically harnessed and fed into the battery. By contrast, the alternator is disengaged during acceleration. This results in lower fuel consumption and maximum thrust when accelerating. Electric steering assistance and the efficient, demand-con- trolled operation of fuel, coolant and oil pumps en- sure that aggregates are only activated for as long as necessary. A gear shift indicator informs the driver of the optimum moment to change gear in terms of energy efficiency. Active aerodynamics measures enable air flaps at the front of the vehicle to be opened only for as long as the engine requires air from outside for cooling purposes. This helps to speed up the warming-up phase and improve aero- dynamics at the same time. The BMW Group’s EfficientDynamics concept was awarded numerous prizes in 2007. These in- clude, among others, the “Grüne Lenkrad” prize awarded by the German Sunday newspaper “Bild am Sonntag” and the “Green Award” presented by the British motoring magazine “CAR”. Hybrid technology improves fuel economy From the BMW Group’s perspective, hybrid technol- ogy offers potential to further improve fuel economy. The Group’s aim is to develop hybrid engines that not only reduce consumption in city traffic but also 34 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook The BMW EfficientDynamics measures – an overview Roll resistance-reduced tires Brake Energy Regeneration Gear shift indicator Diesel engines with third-generation common rail and lightweight construction Electric steering assistance Auto Start Stop Function Petrol engines with High Precision Injection and lean operation Additional devices (demand-con- trolled fuel, coolant and oil pumps) Air flap control offer benefits when driving on non-urban roads and motorways. Since September 2005, the BMW Group has been working on a modular system for hybrid-driven vehicles in collaboration with Daimler, Chrysler and General Motors at a joint development centre near Detroit, USA. The objective of these cooperation arrangements is to bundle the extensive know-how held by each of the entities involved, exploit benefits and realise potential efficiency improvements. In September 2007 the BMW Group presented its hybrid car, the BMW Concept X6 ActiveHybrid, at the Frankfurt International Motor Show (IAA) in Frankfurt. The drive concept of this vehicle, which will go into series production at the end of 2009, offers a far more dynamic driving performance than conventional hybrid cars. At the same time, the ActiveHybrid requires up to 20 % less fuel than a comparable car powered only by a combustion engine. With this development, EfficientDynamics is moving closer to its objective of sustainable mobility. Shaping the future with hydrogen In the third phase of its EfficientDynamics strategy, the BMW Group remains committed to the use of renewably produced hydrogen in combustion en- gines. Major milestones for the BMW Group were the commencement of series development of a hydrogen-powered vehicle in 2001 and the presen- tation of the BMW Hydrogen 7 at the end of 2006. The BMW Hydrogen 7 is the world’s first hydrogen- driven luxury sedan designed for everyday use and is equipped with a bivalent combustion engine that can be fuelled by either petrol or hydrogen. This car has gone through the full series development process and has now been approved for road use. The Hydrogen 7 therefore meets all requirements stipulated for conventional road vehicles. The 100 cars of the BMW Hydrogen 7 small series have been made available to selected persons from politics, business and other areas of society for general daily use since April 2007 with the aim of creating a mul- tiplier effect. In addition, numerous celebrities from the film world and show business are taking the opportunity to experience the future of mobility by taking a drive in a BMW Hydrogen 7. Within a few months, these “pioneers” of hydrogen technology have covered more than 2.7 million kilometres in Europe, the USA and other regions of the world with the BMW Hydrogen 7. Development of CO2 emissions of BMW Group cars in Europe (EU-15) (Index: 1995 = 100; Basis: fleet consumption of newly registered cars in Europe (EU-15) measured on the basis of the New European Driving Cycle in accordance with the ACEA commitment) 105 100 95 90 85 80 75 95 96 97 98 99 00 01 02 03 04 05 06 07 100.0 101.0 102.4 101.0 98.6 96.7 96.7 92.9 92.9 94.8 90.0 88.6 80.0 35 Research and development expenditure reduced In 2007, research and development expenditure amounted to euro 3,144 million, a 2.0 % reduction on the pre vious year. Further information regarding research and development expenditure is provided in Note [11] of the Group financial statements. The research and development expenditure ratio was 5.6 % (2006: 6.5 %). The BMW Group’s innovation network com- prises ten sites in five countries with a total of 9,800 employees. Leading position amongst premium manufacturers The strength of the BMW Group’s innovation network was again underlined with the receipt of numerous awards in 2007. For the third consecutive time, the BMW Group took the main prize in the “International Engine of the Year Award” in 2007. The award went to the new BMW 3.0-litre Twin Turbo petrol engine which now powers the entire range of models in the BMW 3 Se- ries. The BMW Group was the most successful car manufacturer in this competition and came out winner in seven of the twelve categories as well as gaining four second places and two third places. The BMW Group won the prize for the design team of the year in the “red dot award 2007”. This accolade was awarded for exceptional achievements for its overall performance in the field of design. Eight further awards were received for two cars, three motorcycles and three products created by BMW Group DesignworksUSA. In November, the BMW Group won the newly in- troduced “Grüne Lenkrad” award from the German Sunday newspaper “Bild am Sonntag” in recognition of its EfficientDynamics measures package, which includes highly efficient petrol and diesel engines, Brake Energy Regeneration, the Auto Start Stop Function, active aerodynamics and intelligent light- weight construction innovations. EfficientDynamics is designed to boost performance while simulta- neously improving fuel economy and reducing CO2 emissions. The BMW Group offers EfficientDynam- ics as standard in all BMW models from the BMW 1 Series through to the BMW X5 and also in many of the MINI models. For the model year 2008, around 40 % of new cars sold by the BMW Group in Europe will emit a maximum of 140 g CO2/km. Third crash-test facility taken into operation Approximately 350 to 400 tests are carried out an- nually at the Research and Innovation Centre (FIZ) as part of the vehicle development process. Tests are also carried out to ensure vehicles fulfil legal and consumer protection requirements. The BMW Group’s third crash-test facility was commissioned in mid-2007. Up to 100 tests will be carried out each year at the new facility near Munich. In a new building at the facility, all tests (including roll-over tests) can be carried out regardless of pre- vailing weather conditions. The new test facility supplements the one built at the FIZ in 2005. An additional, smaller crash- test facility within the FIZ complex completes the com pany’s crash-testing capability for testing at speeds of up to approximately 30 km/h. These addi- tional capacities enable the Group’s engineers to conduct time-consuming tests that had previously only been feasible at the facilities of third-party pro- viders. The three crash-test facilities now permit a higher number of tests and greater flexibility than the “all-in- one” solutions favoured by competitors, but which entail substantially higher costs. In addition, a wide range of modern computer-based crash simulation methods are employed, particularly during the early stages of vehicle development projects. Such methods cannot, however, replace real crash tests using prototypes. Research to promote greater road safety After a four-year period, the European Commission- backed research project PreVENT was concluded in 2007, in line with schedule. The project supports the target set by the European Commission to halve the number of accidents on European roads by 2010. The objective was to raise road safety stand- ards even further through the use of preventative technologies. These applications, aimed at assisting the driver, are designed to prevent or at least mini- mise the consequences of accidents. The research shows that it will be possible to develop systems in the future that will be able, for example, to recog- nise the nature and urgency of a hazard whilst simul- 36 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook taneously taking the current condition of the driver into account. The BMW Group played a leading role in some of PreVENT’s sub-projects. Road safety research carried out by the BMW Group does not only focus on identifying solutions that will increase the safety of vehicle occupants. It is also aimed at benefiting other road users. Current research projects in the field of driver assistance systems include emergency braking to increase the safety of pedestrians, cross-traffic and traffic light assistance as well as information on wrong-way drivers and upcoming bends. However, the same basic principle remains valid for all systems – the responsibility always remains with the driver; it is the driver who has to make the decisions; and he or she must be able to override or even deactivate systems. the “Automobile Network”. The technical basis for this is the Internet Protocol (IP). The new, IP-based vehicle on-board system adds flexibility to the car’s infrastructure and also provides many other benefits. It will, for instance, enable the customer to use portable devices more easily in the car in the future. It will also make it easier for service staff to integrate new control units and/or new functions. It will no longer be necessary to install all applications permanently in the vehicle because the IP-based on-board network will keep systems connected to the internet. As far as driver assistance systems are concerned, the new developments in on-board network technology will create many op- portunities, in particular for complex systems which access information from various sources such as sensors, cameras, etc. Expertise in driving dynamics expanded The Dynamic Performance Control (DPC) devel- oped by the BMW Group actively improves driving stability, whether under load, when coasting or when the clutch is engaged. This innovative system will be available in the new BMW X6 from 2008 onwards. DPC distributes the drive torque to the two drive wheels at the rear, irrespective of engine perform- ance, thus improving steering behaviour and pre- cision, straight-line stability and traction. This simul- taneously improves steering response, thereby requiring far fewer steering corrections on the part of the driver or intervention from electronic stabilising systems. Further development to Dynamic Stability Con- trol (DSC), now in combination with the xDrive four- wheel drive system, have also led to significant improve ments in car handling characteristics and in active safety aspects, particularly on slippery road surfaces. This enhancement has been available in all four-wheel drive models of the BMW 5 Series since March 2007. Further BMW brand models and series will be equipped with this technology in the future. Integrated on-board network technology offers numerous benefits Up to five different bus systems operate in modern cars to transmit electronic data throughout the vehicle. When information from various systems is being used, the data must first be synchronised accordingly. The BMW Group is therefore conduct- ing research on a standard language to simplify 37 New purchasing and supplier network corporate division As part of its strategic realignment and in the light of the ever-increasing complexity of the supplier chain structure, the BMW Group created a new Purchas- ing and Supplier Network corporate division with effect from 1 October 2007. In addition to purchas- ing, the following functions have been assigned to the division: quality management of parts, logistics, vehicle components and systems. This new division has been charged with the task of achieving even further improvements in the areas of quality, supplier loyalty and costs. This will involve keeping the num- ber of system interfaces to a minimum and opti- mising processes right from the raw material stage through to the finished product. Purchase volume increased in Central and Eastern Europe The BMW Group’s purchase volume went up in 2007 in line with the expansion of production activi- ties. Increased global sourcing activities as well as the successful implementation of a quality and cost initiative resulted in an increase in the volume of purchases sourced in Central and Eastern Europe. The purchase volume in Western Europe also in- creased, reflecting increased production of the MINI. The purchase volume in the NAFTA region was also up, due to the first full year of production of the new BMW X5 at the Spartanburg plant in the USA. The volume of purchases sourced in South America fell sharply due to the fact that the engine cooperation arrangements with TRITEC are wound down. The proportion of production material purchases sourced in Germany was down in percentage terms and accounted for approximately one half of mate rial procurements. In the remaining regions, volumes in- creased in line with production growth. The ratio of material procurements to the total purchase volume remained practically unchanged. Situation on the commodity markets remains tense The high price levels on the raw material markets once again represented a major challenge for the Group’s purchasing departments in 2007. The addi- tional costs were spread over the entire value-added chain with the BMW Group also bearing its share. Compared to the previous year, the average market prices of steel and plastics were up by 10 % and 6 % Regional mix of BMW Group purchase volumes 2007 in %, basis: production material Germany Rest of Western Europe Central and Eastern Europe 11 3 2 10 NAFTA Asia/Australia Africa 53 21 respectively in 2007. By contrast, the price of alu- minium fell by 5 % and that of copper by 1 %. Overall, the prices of industrial raw materials, non-ferrous metals and energy raw materials in- creased by 7 %, 4 % and 2 % respectively in 2007. Compared to the previous year, the prices of pre- cious metals relevant for the BMW Group went up in 2007 by rates of between 11 % and 35 %. In the case of precious metals (rhodium, palladium, plati- num), purchase price hedges reduced the impact of sharp market price rises for the BMW Group. Close cooperation with suppliers strengthens competitiveness Given the high share of suppliers in the value-added, cooperating closely with them represents a major factor in improving products and processes. The BMW Group is involving its large system suppliers from the very initial stage of a development project even more intensively. Joint analyses are carried out to identify potential areas where efficiency can be improved and development and manufacturing costs reduced. Any solutions that these joint teams come up with are taken into account in current and future development projects. Further investigations are made along the entire value-added chain to identify potential ways of achieving further product and/or process improve- ments. Ensuring that close networks are in place between internal and external partners has an impor- tant role to play here. Increasing the transparency of activities with suppliers is also seen as being vital for the BMW Group. One of the main objectives of supplier manage- ment is to raise the quality of bought-in material. Suppliers to the Group are increasingly taking over responsibility in this respect. As part of the process of managing supplier performance and expertise, 38 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook the BMW Group provides its suppliers with supply quality performance indicators for all plants in real time. Similarly, data concerning customer complaints and warranty costs can also be called up by sup- pliers at any time. International focus sharpened by regional purchasing centres One of the main tasks taken on by the BMW Group’s international purchasing centres in 2007 was to en- gage in new procurement markets and keep abreast of any innovations relevant for the BMW Group emerging from the procurement markets. Following the opening of new purchasing centres in India, Turkey and Hungary, the BMW Group now has a presence on all major procurement markets. The capacities of existing purchasing centres, such as in China and Singapore, were also increased. In 2007, the sphere of expertise of the Group’s purchasing centres was also significantly expanded after they took over responsibility for parts quality management and for logistics. Amongst other benefits, this will help to ensure the quality and availability of parts. Cost benefits have also been achieved, particu- larly in the emerging markets. The BMW Group takes a pro-active approach to the procurement markets and also encourages its suppliers to take full advan- tage of the available potential. The positive impact that this has on purchase prices helps to increase the competitiveness of the BMW Group. High ecological and social standards expected of suppliers The BMW Group is aware of its responsibility to ensure that its suppliers also adhere to social and ecological standards. Apart from dealing with quality targets and cost aspects, the BMW Group’s national and international purchasing terms and conditions also stipulate social and ecological standards. The ability to adhere to these principles is taken into ac- count when selecting potential suppliers. Model initiative continued The growth recorded by the BMW Group in 2007 was driven by the introduction of a wide range of new vehicles and model revisions. Ten new or revised models were introduced for the BMW brand alone. In addition to the new M5 Touring, model improve- ment measures were carried out for the BMW 5 and 6 Series as well as for the five-door version of the BMW 1 Series. The three-door version of the BMW 1 Series and the BMW 1 Series Coupé also came onto the market. The BMW 1 Series Convertible was pre- sented to the public in autumn 2007 and will be on sale on the markets from spring 2008 onwards. In spring 2007, the focus was on the introduc- tion of the new BMW 3 Series Convertible, available for the first time with a hardtop option. The M version of the 3 Series Coupé followed later in the year and the M3 Sedan will celebrate its debut in 2008. The new BMW X5, which had already been launched in the USA in autumn 2006, reached dealers world- wide during the course of 2007. The second generation of the MINI was also available on the market for the first time for a full year in 2007. The new MINI is repeating the success of its predecessor. A further step in expanding the MINI model family was taken in November with the launch of the MINI Clubman in Europe. The Rolls-Royce convertible, the Phantom Drophead Coupé, has been available since summer 2007. The positive response received from media and customers alike was also reflected in the sales volume performance. BMW Welt opened The outstanding event for the BMW marketing de- partment in 2007 was the opening of the BMW Welt in Munich. Since October, a wide range of experi- ences have been on offer there to customers, visi- tors and local inhabitants alike. With this building, which explores the limits of the technically feasible, the BMW Group has set a new architectural bench- mark. The BMW Welt is the new home of the BMW brand. It stands for dynamism and elegance and reflects the premium standards of the BMW brand. The centrepiece of this multifunctional building is its individualised personal delivery centre. Each year, approximately 45,000 people from all over the world will come here to collect their vehicles. In addition to the exclusive presentation of all current car and motorcycle model series, multimedia shows and 39 exhibits will provide an insight into the research, de- velopment, design and production activities of the BMW Group, giving visitors the chance to enjoy an all-round experience of the BMW brand and of the company as a whole. The BMW Welt also boasts an events forum including state-of-the-art technology for staging all kinds of events, such as receptions and seminars, concerts, exhibitions, conferences and live transmissions. More than 500,000 people visited the BMW Welt within the first 100 days of opening. Innovative marketing and investment in brands Numerous vehicle presentations represented an im- portant aspect of the BMW Group’s marketing and communication activities in 2007. Marketing cam- paigns and similar activities, targeted purposefully at specific groups, ranged from international test-drive events for the launch of the BMW X5 through to enhanced activities on Web 2.0 to coincide with the launch of the BMW 1 Series Coupé. Campaigns were run for both specific models and for the BMW Group’s brands in general. In the European markets, the focus was primarily on com- municating the benefits of BMW Efficient Dynamics, the designation used to cover the whole range of measures adopted by the BMW Group in its bid to reduce fuel consumption and emissions. For several years now, the BMW CleanEnergy project has not only been working on the reduction of emissions, but has also embraced the vision of emission-free driving based on the use of hydrogen. The Hydrogen 7 vehicle, based on the BMW 7 Se- ries, was first presented to the public back in 2006. In 2007 the Hydrogen 7 was made available to se- lected persons from the worlds of politics, business, science and show business, thus bringing the so- called “Club of Pioneers” into being. The idea behind this is to accelerate the change towards a “hydrogen society”, including the construction of an appropriate infrastructure. One of BMW Marketing’s responses to the up- and-coming trend towards new media was to set up BMW web.tv in 2007. Using this online TV plat- form, BMW now broadcasts reports and articles every week on brand-related issues, including some advertising content. Right from the outset, several hundred thousand videos were viewed each month on average via BMW web.tv. BMW’s sport sponsoring activities were focused on motor sports, golf and sailing in 2007. The event that created the greatest media attention around the world for BMW in 2007 was The America’s Cup held in Valencia. The participation of the US American BMW Oracle Team clearly helped to raise the profile and awareness of the BMW brand. The BMW Sauber F1 Team firmly established itself as the third force in Formula One in 2007. MINI pushed ahead with the creation of a global MINI Community. In this context, another MINI United Festival was held at Zandvoort, near Amsterdam, under the motto “Friends. Festival. Challenge.” More than 8,000 visitors from 50 countries took part in the three-day event. The MINI Challenge, a special MINI club sports series, has become an established com- ponent of the Community idea, combining profes- sional sport with modern lifestyle. Marketing activities for the MINI in 2007 were mainly focused on the market launch of the MINI Clubman. The global marketing campaign with the slogan “The other MINI.” fitted perfectly with the vehicle’s claim to set new trends and created a few surprises with its snappy ads and “guerrilla” market- ing approach. At the forefront of marketing activities for the Rolls-Royce brand were the world premiere (in Detroit, USA) and the market launch (in L’Andana, Italy) of the Phantom Drophead Coupé. This exclu- sive convertible was presented at the Rolls-Royce dealerships in conjunction with numerous events. Rolls-Royce also set in motion a project for Rolls- Royce dealerships specifically aimed at attracting and providing services to customers in the ultra- luxury segment. Sales network expanded further The BMW Group intensified its sales activities in the established markets in 2007, whilst at the same time expanding activities in the growth markets. The global presence of the BMW, MINI and Rolls-Royce brands was strengthened further during the past year with the opening of four new sales locations. A subsidiary was set up in India and a sales office opened in Slovenia on 1 January 2007, followed by sales offices in Rumania and Bulgaria on 1 July. As a result of this expansion, which has taken place mainly in the growth markets of Asia and Eastern Europe, the BMW Group is now represented by its own sales organisations in 41 markets. 40 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Training centre network further expanded The global initiative to improve skills within the BMW Group was successfully continued in 2007 as part of the premium service strategy. One of the tasks is to pass on knowledge quickly and directly to the markets. In 2007, for example, a train-the-trainer conference, attended by 160 trainers from 68 coun- tries, was held in this vein for the new BMW 3 Series Convertible and the new BMW X5. Training courses for dealers took place in San Diego, Newbury and Kyoto ahead of the launch of the Rolls-Royce Drophead Coupé. In 2007 the BMW Group opened up new training centres in India, South Korea, Portugal, Denmark, Japan and Greece to ensure optimal training condi- tions for people working in the dealer organisations. Internationalisation of distribution centres continued The distribution centre in Krefeld was expanded and now supplies the markets in Belgium, the Nether- lands and Luxembourg. In September 2007, the second of three planned regional distribution centres in China commenced operations in Shanghai. Parts are supplied directly from the centralised parts distri- bution centre in Dingolfing. Plans to supply parts to the new sales company and dealerships in India via the regional distribution centre in Mumbai are taking shape. The infrastructure and quality of the dealer organisation in China, where there are currently well over 100 dealerships, was further improved. The dealer network is also being expanded in India, a new market for the BMW Group. Worldwide, more than 3,000 dealerships sell BMW brand cars. The MINI brand is sold at approxi- mately 1,500 locations. In total, the dealerships which work with the BMW Group have some 100,000 em- ployees worldwide. In addition, the BMW Group has its own branches at 37 locations in 14 countries. Rolls-Royce cars are currently sold in 30 coun- tries. The sales network for this brand has been ex- panded to 80 dealerships, including four in China. Future plans of BMW Group’s sales organisation are currently focused on the following: – improving the infrastructure and quality of the dealer organisation in anticipation of further volume and model expansion, – increasing marketing activities in the area of used car business, – systematically developing relationships with cus- tomers and potential customers in all aspects. Premium service also in customer services Taking care of customers’ needs throughout the whole of the product life-cycle is one of the BMW Group’s main priorities. The objective is to provide premium quality services – not just to meet customers’ expec- tations, but to exceed them. The quality of processes and structures in place in service reception areas and workshops is constantly under scrutiny. Using its unique BMW TeleServices system, BMW is able to guarantee customers the highest levels of comfort and safety. Where necessary, a vehicle’s details can be transmitted directly via a data link to the BMW service partner, for example to a dealership prior to a forthcoming inspection or to a mobile services unit in the case of a malfunction. This automated link between vehicle and BMW service partner reduces the length of time a custom- er’s car needs to be kept at the service point and, in the event of a malfunction, allows immediate and expert help to be given on the spot. The new BMW TeleServices system has been available since September 2007 in a number of markets (Germany, Austria and France) for all new BMW 1, 3, 5, 6 and X5 series vehicles. BMW Stock and Bonds in 2007 41 Crisis on US credit market has impact on world’s stock exchanges The world’s stock markets were in general highly volatile in 2007. During the first half of the year, market prices benefited sharply from good corporate figures. In the second half, however, the markets were influ- enced by the credit crisis in the USA. The weakness of the US dollar against the euro also had an increas- ingly adverse impact on the share prices of European exporting companies. The US dollar lost 9.5 % in value against the euro during the period, closing at US dollar 1.46 to the euro on the last day of trading (29 December 2006: US dollar 1.32 to the euro). In November 2007, the US dollar even dropped to US dollar 1.50 to the euro, thus reaching its record low value since intro- duction of the common European currency in 2002. As the subprime crisis took hold in the USA, some of the gains recorded by the world’s stock mar- kets during the first half of the year were lost. On the last day of trading in 2007, the leading German stock index, the DAX, closed at 8,067.32 points, 22.3 % ahead for the year, but short of its record high level of 8,151 points in July 2007. The Dow Jones EURO STOXX 50 ended the year with a gain of 6.8 %. The Prime Automobile sector index performed very strongly over the year, gaining 37.9 % after closing at 785.54 points. BMW common stock stood at euro 42.35 on the last day of trading, compared to a price of euro 43.51 one year earlier. With this 2.7 % drop, BMW common stock was unable in 2007 to repeat the gains made in preceding years. During the year un- der report, BMW preferred stock lost sharply in value, finishing the year 16.6 % lower at euro 36.30. The change in the price of preferred stock reflects a high degree of market price speculation during 2006 and 2007. According to media reports, one major Ger- man bank took up large-scale positions in BMW preferred stock, resulting in a sharp market price increase (+ 34.3 %) in 2006. The bank unwound these positions in 2007, thus significantly influencing the market price of BMW preferred stock in 2007. Precious metal prices rose during the year, in some cases quite sharply. For the first time since 1980, the price of gold went above US dollar 800 per ounce, closing at the end of the year at US dollar 834.00 per ounce (+ 30.9 %). Oil prices developed similarly. The price for one barrel of Brent Crude at 31 December 2007 was US 94.33, well above (+ 61.2 %) its level one year earlier. Programme to buy back shares of common stock Following on from the buy-back and withdrawal from circulation of treasury shares in 2005 and 2006, a new authorisation was passed at the Annual General Meeting on 15 May 2007. On that date, the share- holders authorised the Board of Management to ac- quire up to a maximum of 10 % of the share capital in place at the date of the reso lution and to withdraw these shares from circulation without any further res- olution by the Annual General Meeting. At the same time, the authorisation from 16 May 2006 to acquire treasury shares was rescinded. The authorisation from 15 May 2007 is valid until 14 November 2008. There are currently no plans to exercise the authori- sation. The option of a share buy-back does, however, remain open to BMW AG. Buy-back of shares of preferred stock for employee stock plan BMW AG has allowed employees to participate in its success for more than 30 years. In this context, employee participation was changed back in 1989 to an employee share scheme. In conjunction with this scheme, BMW AG purchased a total of 660,305 shares of preferred stock in 2007 via the stock ex- change at an average price of euro 45.48 and issued these to employees. Development of BMW stock compared to stock exchange indices (Index: 30.12.1997 = 100) 350 300 250 200 150 100 50 0 BMW preferred stock BMW common stock Prime Automobile 98 99 00 01 02 03 DAX 04 05 06 07 42 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook The Board of Management of BMW AG has decided to continue this scheme in 2008. In order to be able to issue shares to employees, it is planned, from 1 January 2008 onwards, to buy back up to 1 million shares of preferred stock via the stock exchange. The BMW Group will report on the progress of the buy-back at its internet address www.bmwgroup.com/ir. The buy-back will be exe- cuted under the leadership of a number of securities houses or banks, which will be able to determine the timing of individual buy-backs independently of, and uninfluenced by, BMW AG. The buy-back will be carried out in compliance with the trading con- ditions contained in Article 5 of Regulation (EC) No. 2273/2003 of the European Commission dated 22 December 2003. BMW Group as a successful bond issuer In order to refinance the strong growth of the Finan- cial Services segment, the BMW Group stepped up its activities in 2007 as an issuer of bonds and asset- backed securities (ABS). During the year 2007, two benchmark bonds with a total issue volume of euro 2.4 billion were placed on the European capital markets. The BMW Group also issued bonds denominated in pounds sterling, Swiss franks and US dollars with a total vol- ume of approximately euro 680 million. It also issued a public ABS bond for the first time in the euro zone. The euro 800 million bond se- curitises trade receivables and leases. The American capital market was used in 2007 primarily for ABS transactions and commercial paper. In October 2007, for instance, a public lease- securitised ABS bond with a total volume of US dol- lar 1.25 billion was issued in the USA. Thanks to above-average ratings and regular provision of information to the capital markets, secu- rities issued by the BMW Group were – as in pre- vious years – highly sought after by institutional and private investors alike. Compared to 2006, refinanc- ing conditions deteriorated slightly in the euro region over the course of 2007. With credit markets suffer- ing under the effects of the subprime crisis in the USA during the second half of the year, the US Fed- eral Reserve was forced, for the first time since 2003, to announce several interest rate reductions. The difficult market conditions – particularly in the second half of 2007 as a result of the credit crisis in the USA – did not in any way impair the issuing activities of the BMW Group. The underlying strength of the BMW Group as one of the world’s leading suppliers of premium vehicles is therefore also re- flected in its dealings with the international capital markets. Using the internet to communicate with the capital markets The internet plays a key role for the BMW Group in the process of communicating financial information. The nature and detail of information provided is therefore continually being improved and expanded (www.bmwgroup.com/ir). Alongside much informa- tion aimed at shareholders, all of the BMW Group’s financial publications, presentations and additional material on financial statements are available for download at the Group’s corporate website. For several years now, recordings of annual and quarterly financial reporting conferences have also been avail- able as audio or video files. Sustainability growing in significance Sustainability plays an increasingly important role in investors’ decisions. For this reason, socially respon- sible investment (SRI) became an even more im- portant issue in the context of the company’s capital Development in the value of a BMW stock investment in euro thousand Investment of euro 10,000 at 1.1.1998, including dividends and proceeds from subscription rights, values at end of year 24 21 18 15 12 9 6 3 euro thousand 98 12.1 99 14.7 00 17.0 01 19.7 02 14.6 03 18.8 04 17.3 05 19.7 06 23.5 07 23.2 43 market communication activities. Regular communi- cation with sustainability investors and analysts was supplemented by roadshows in London and Paris. In September 2007, the BMW Group was again included (as in 2005 and 2006) as sector leader in the Dow Jones Sustainability Indexes. The BMW Group is therefore the only company in the sector to have been included in this important group of in- dices for sustainable investment for the ninth time in succession. It has also been included for six consec- utive years in the relevant FTSE4Good indices pub- lished by the London Stock Exchange and the Finan- cial Times. In 2007, the BMW Group was also taken into the FTSE4Good Environmental Leaders Europe 40 Index. This index comprises European companies with leading environmental practices. In December 2007, the BMW Group took third place overall (as the best automobile company) in the DAX 30 sustain- ability ratings compiled by Scoris. The BMW Group keeps the public informed of its commitment and the progress made in the field of sustainable business in its Sustainable Value Report, which is published once every two years. The current Sustainable Value Report 2007/2008 was presented to the public in mid-September to coincide with the IAA. The report can be down- loaded from the internet at www.bmwgroup.com / sustainability. A printed version can also be ordered at that address. BMW stock 2007 2006 2005 2004 2003 Common stock Number of shares in 1,000 601,995 601,995 Shares bought back at the reporting date – – 622,228 13,488 622,228 622,228 – – Stock exchange price in euro 1] Year-end closing price High Low Preferred stock Number of shares in 1,000 Stock exchange price in euro 1] Year-end closing price High Low Key data per share in euro Dividend Common stock Preferred stock Earnings per share of common stock 3] Earnings per share of preferred stock 4] Cash flow 6] Equity 1] Xetra closing prices 2] proposed by management 3] annual average weighted amount 4] stock weighted according to dividend entitlements 5] adjusted for new accounting treatment of pension obligations 6] calculated on the basis of operating cash flow 42.35 50.73 39.81 43.51 46.47 35.52 37.05 39.97 32.04 33.20 37.44 31.78 36.75 38.40 21.12 52,196 52,196 52,196 52,196 52,196 36.30 47.52 33.64 43.52 45.91 31.80 33.00 33.98 24.48 24.80 26.20 22.86 24.65 26.25 14.86 2007 2006 2005 20045] 2003 1.06 2] 1.08 2] 4.78 4.80 9.70 33.24 0.70 0.72 4.38 4.40 8.21 0.64 0.66 3.33 3.35 9.17 0.62 0.64 3.33 3.35 9.13 0.58 0.60 2.89 2.91 7.37 29.24 25.17 24.52 23.95 44 Group Management Report Disclosures relating to Takeover Regulations to § 289 (4) HGB and § 315 (4) HGB and Explanatory Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook The share capital of BMW AG, totalling euro 654,191,358 is, pursuant to Article 4 (1) of the Arti- cles of Incorporation, sub-divided into 601,995,196 shares of common stock and 52,196,162 non-voting shares of preferred stock, each with a par value of euro 1. The shares are issued to bearer. The rights and duties of shareholders derive from the German Stock Corporation Act (AktG) in conjunction with the Company’s Articles of Incorporation, the full text of which is available at www.bmwgroup.com. The voting power attached to each share corresponds to its par value. Each euro 1 of par value of share capital represented in a vote is entitled to one vote (Article 18 (1) of the Articles of Incorporation). The Company’s shares of preferred stock are non-voting within the meaning of § 139 AktG et seq., i.e. they only confer voting rights in exceptional cases stipulated by law such as when the preference amount has not been paid or has not been fully paid in one year and the arrears are not paid in the subsequent year. Except for voting rights, shares of preferred stock give the same rights as shares of common stock. Article 24 of the Articles of Incorporation confers preferential treatment to the non-voting shares of preferred stock with regard to the appropriation of the Company’s unappropriated profit. Accordingly, the unappropriated profit is required to be appropriated in the following order: (a) subsequent payment of any arrears on dividends on non-voting preferred shares in the order of ac- cruement, (b) payment of an additional dividend of euro 0.02 per euro 1 par value on non-voting preferred shares and (c) uniform payment of any other dividends on shares on common and preferred stock, provided the shareholders do not resolve otherwise at the Annual General Meeting. The right of shareholders to have their shares evi- denced in writing is excluded. Shareholders are only entitled to participate at the Annual General Meeting and exercise their voting rights if, prior to the meeting, they have given notice (in the written form prescribed by § 126b of the Ger- man Civil Code), either in German or English, of their intention to participate at the meeting. Shareholders are also required to provide evidence of their entitle- ment to participate and exercise their voting rights at the Annual General Meeting. For this purpose, doc- umentary evidence of the shareholding, issued by the custodian bank (in the written form prescribed by § 126b BGB), in either German or English, is required. Votes may also be exercised by proxy. The Company may determine that proxy authorisations may be granted electronically or by fax, and may stipulate the specific rules for granting proxy authorisations (see Article 17 of the Articles of Incorporation). The chairperson may determine a reasonable time limit with respect to the right of shareholders to raise questions and speak (Article 19 (2) of the Articles of Incorporation). When the Company issues shares to employees in conjunction with its employee share scheme, the shares are subject to a company-imposed vest- ing period of four years, during which time the shares may not be sold. The shares issued in conjunction with the employee share scheme are shares of non- voting preferred stock which are transferred solely and directly to employees. Based on the information available to the Compa- ny, the following direct or indirect holdings exceeding 10 % of the voting rights were held at the date stated: Direct share of voting rights (%) Indirect share of voting rights (%) Date Johanna Quandt GmbH & Co. KG für Automobilwerte, Bad Homburg v. d. Höhe Johanna Quandt, Bad Homburg v. d. Höhe Susanne Klatten GmbH & Co. KG für Automobilwerte, Bad Homburg v. d. Höhe Susanne Klatten, Munich Stefan Quandt GmbH & Co. KG für Automobilwerte, Bad Homburg v. d. Höhe Stefan Quandt, Bad Homburg v. d. Höhe * Confirmed by notifications as at 20 January 2007. 15.4 1.3 11.5 1.0 16.1 1.3 1.4.2002 * 15.4 1.4.2002 * 1.4.2002 11.5 1.4.2002 1.4.2002 * 16.1 1.4.2002 * 45 The voting power percentages disclosed above may have changed subsequent to the stated date if these changes were not required to be reported to the Company. Due to the fact that the Company’s shares are issued to bearer, the Company is gener- ally only aware of changes in shareholdings if such changes are subject to mandatory notification rules. There are no shares with special rights which confer control rights. The appointment and removal of members of the Board of Management are based on the rules contained in § 84 et seq. AktG in conjunction with § 31 of the German Co-Determination Law (MitbestG). In accordance with Article 7 of the Articles of Incorpo- ration, the Board of Management consists of two or more members. The Supervisory Board determines the number of the members of the Board of Manage- ment. It is responsible for appointing members to the Board of Management and for revoking appoint- ments. It also designates one of the members as the Chairman of the Board of Management. Amendments to the Articles of Incorporation must comply with § 179 et seq. AktG. All amend- ments must be resolved by the shareholders at the Annual General Meeting (§ 119 (1) no. 5, § 179 (1) AktG). The Supervisory Board is authorised to ap- prove amendments to the Articles of Incorporation which only affect its wording (Article 14 no. 3 of the Articles of Incorporation). Resolutions are passed at the Annual General Meeting by simple majority of shares unless otherwise explicitly required by binding provisions of law (§ 20 of the Articles of Incorpora- tion). In accordance with the resolution passed at the Annual General Meeting on 15 May 2007, the Board of Management is authorised, up to 14 November 2008 and subject to the price limits stipulated in the resolution, to acquire shares of common and/or non- voting preferred stock via the stock exchange, up to a maximum of 10 % of the share capital in place at the date of the resolution. The Board of Manage- ment is also authorised, without any further resolu- tion by the Annual General Meeting, to withdraw from circulation the treasury shares (common and/or non-voting preferred stock) acquired in accordance with the authorisation described above. Further- more, the Board of Management is authorised to buy back shares and sell bought-back shares in situ- ations specified in § 71 AktG, e.g. to avert serious and imminent damage to the Company or for the purposes of an employee share scheme. There is no authorised or conditional capital at the reporting date. The BMW AG is party to the following significant agreements which contain special provisions for the event of a change in control or the acquisition of control which could arise, for example, from a take- over offer: – An agreement, concluded with an international consortium of banks relating to a syndicated credit line (which was not being utilised at the balance sheet date), entitles the lending banks to give ex- traordinary notice to terminate the credit line (such that all outstanding amounts, including interest, would fall due immediately) if one or more parties jointly acquire direct or indirect control of BMW AG. The term “control” is defined as the acquisi- tion of more than 50 % of the share capital of BMW AG, the right to receive more than 50 % of the dividend or the right to direct the affairs of the Company or appoint the majority of members of the Supervisory Board. – A cooperation agreement concluded with Peugeot SA relating to the joint development and produc- tion of a new family of small (1 to 1.6-litre) petrol- driven engines entitles each of the cooperation partners to give extraordinary notification of termi- nation in the event of a competitor acquiring con- trol over the other contractual party and if any con- cerns of the other contractual party concerning the impact of the change of control on the cooper- ation arrangements are not allayed during the subsequent discussion process. – Under the terms of a contractual agreement with Daimler, Chrysler and General Motors, BMW AG acquires intellectual property rights in conjunction with a cooperation for the development of a hybrid propulsion system. The cooperation can be ter- minated with immediate effect by either party if a change of control occurs with respect to any other contractual party or an affiliate of another con- tractual party. Examples of change of control are the acquisition of beneficial ownership of securities which confer the majority of voting power or the acquisition of beneficial ownership of securities which confer 20 % of the voting power provided 46 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook that within 18 months a majority of the shareholder- elected members of the Supervisory Board are the nominees of the new beneficial owner as well as certain merger transactions and the transfer of all or substantially all of the assets involved in the performance of the cooperation agreement. – BMW AG acts as the guarantor for all of the obliga- tions arising from the joint venture agreement re- lating to BMW Brilliance Automotive Ltd. in China. This agreement grants an extraordinary right of termination to either joint venture partner in the event that, either directly or indirectly, more than 25 % of the shares of the other party are acquired by a third party or the other party is merged with another legal entity. The termination of the joint venture agreement may result in the sale of the shares to the other joint venture partner or in the liquidation of the joint venture entity. – Regarding the trading of derivative financial in- struments, framework agreements are in place with financial institutions and banks (ISDA Master Agreements), each of which contain extraordinary rights of termination which trigger the immediate settlement of all current transactions, in the event that the creditworthiness of the respective party is materially weaker following the direct or indirect acquisition of beneficial ownership of equity se- curities having the power to elect a majority of the Supervisory Board of a contractual party or any other ownership interest enabling the acquirer to exercise control of a contractual party or a merger or transfer of assets. The BMW Group has not concluded any compen- sation agreements with members of the Board of Management or with employees for situations in- volving a takeover offer. Analysis of the Group Financial Statements 47 Group internal management system The underlying long-term objective of the Group’s internal management system is to increase the value of the BMW Group. The targets set for the Automobiles, Motorcycles and Financial Services segments all stem from this objective. Within the Automobiles and Motorcycles segments, this ap- proach is put into practise for specific product, process and structure-related projects. By contrast, the Financial Services segment is primarily con- cerned with cash flows and risk positions resulting from its credit and lease portfolio. Minimum rate of return derived from cost of capital The cornerstone of the value-added management of the BMW Group is the entity-specific minimum rate of return, derived from capital market data, and based on the weighted average cost of capital: Cost of equity capital x market value of equity capital Market value of equity and debt capital WACC = + Cost of debt capital x market value of debt capital Market value of equity and debt capital The cost of equity capital is measured using the Capital Asset Pricing Model (CAPM). The cost of debt capital is partly based on the average interest rate paid for long-term external debt and partly on the interest rate applicable for pension obligations. Value management in the context of project control The strategies set for each segment (and also the ensuing project decisions) give rise to the areas of strategic emphasis which are then implemented at a functional level. The overall project development process becomes more targeted as a result of the closer link between the strategies defined for each segment and the objectives defined for specific projects. Once a project decision has been reached, the task is to manage each individual project over time. Projects are therefore monitored continuously and resources reallocated according to require- ments. The project decision and related project selec- tion are therefore important aspects of value-based management. Net present values (NPVs) and rates of return are computed as part of the decision-mak- ing process. This involves computing the present value of cash flows and the internal project rate of return (or model rate of return in the case of vehicle projects) which are expected to be generated by a project decision and comparing them with the minimum rate of return derived from capital market data. Using this method, the amount by which a project will contribute to the total value of the seg- ment can be documented when the project decision is taken. Targets and performance are controlled using project-related target NPVs and individual cash flow related parameters which have an impact on those values. The NPV of a project programme is computed by aggregating the amounts for all projects and discounting them back to a specific date. This value serves as an important target for the Auto- mobiles and Motorcycles segments. The business value of each segment is then computed by de- ducting the market value of debt capital. For both of these segments, the objective is to increase business value, as computed above, on a con- tinuous basis. Return on capital used to measure value on a periodic basis The management of product projects and product programmes is subject to basic conditions which result from periodic planning. The aim here is to Return on Capital Employed Profit before financial result in euro million 2007 2006 Capital employed in euro million 2007 2006 Return on Capital Employed in % 2007 2006 Automobiles Motorcycles 3,450 3,055 15,108 14,056 80 75 440 423 22.8 18.2 21.7 17.7 48 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Capital employed by automobiles segment in euro million 2007 2006 to the return on assets, the Financial Services seg- ment also manages its business using risk-based performance indicators such as value-at-risk. Assets employed 28,515 less: Non-interest bearing liabilities – 13,407 Capital employed 15,108 27,227 – 13,171 14,056 ROCE = Profit before financial result Capital employed monitor and manage periodic targets on a long-term basis in order to ensure that the BMW Group’s earn- ings performance can develop at a steady pace. Periodic performance is managed in the light of de- fined accounting policies and external financial re- porting requirements. The BMW Group primarily uses profit before tax and segment-specific rates of return as the key indicator figures by which it manages operating performance. For example, return on capital employed is used as the main performance indicator for the Automo- biles and Motorcycles segments. Return on sales is also used as a performance indicator. The return on assets is used for the Group as a whole. In addition ROA Group = Profit before interest expense and taxes Balance sheet total ROA Financial Services = Profit before tax Operating assets The ROCE is derived by dividing segment operat- ing profit by segment capital employed. The latter comprises all current and non-current operational assets of the segment, less liabilities used opera- tionally and which are not subject to interest e.g. trade payables. This net amount is the capital em- ployed. The ROCE target value for the Automobiles segment (i.e. the minimum required rate of return derived from the cost of capital) is at least 26 %. Return on Assets Profit before tax / Profit before interest expense and taxes in euro million 2007 2006 Operating assets / Total assets in euro million 2007 2006 Return on Assets in % 2007 2006 Financial Services BMW Group 743 4,721 685 4,979 59,040 88,997 50,529 79,057 1.3 5.3 1.4 6.3 Key performance indicators in % Return on Capital Employed Automobiles Motorcycles Return on Assets Financial Services BMW Group *adjusted for new accounting treatment of pension obligations 2007 2006 2005 2004* 2003 22.8 18.2 1.3 5.3 21.7 17.7 1.4 6.3 23.2 17.8 1.3 5.6 25.4 10.4 1.4 6.5 23.8 16.7 1.4 6.6 49 Long-term creation of value The overall target set for earnings is continuous growth, whereby the relevant performance indicators are measured against the Group’s minimum rate of return. These periodic targets are supplementary to project and programme targets. In order to implement this comprehensive target and management system, whilst at the same time satisfying periodic reporting and accounting require- ments, the model analyses show for each project decision reached the impact of cash flows on the NPV and on the model rate of return as well as the impact on periodic earnings. This approach enables the BMW Group to analyse the effect of each project- based decision on business value (quantified in terms of the NPV of the project programme) as well as on earnings and rates of return. “Multi-project planning” data gleaned from these procedures al- lows ongoing comparison between dynamic multi- period targets and periodic performance. Strategic realignment The BMW Group’s strategic realignment will also bring with it changes to the Group internal manage- ment system. In future, the BMW Group intends to focus even more on profitability and increasing business value in the long-term. This means that the efficient use of capital at a project, segment and Group level will play an even greater role. Earnings Performance The BMW Group recorded a net profit of euro 3,134 million (2006: euro 2,874 million) for the finan- cial year 2007. The post-tax return on sales was 5.6 % (2006: 5.9 %). Earnings per share of common and preferred stock were euro 4.78 and euro 4.80 respectively. Group revenues rose by 14.3 % compared to the previous year. Excluding exchange rate factors, Group revenues would have increased by 17.6 % or euro 8,397 million. Revenues from the sale of BMW, MINI and Rolls-Royce brand cars went up by 11.8 %. Revenues from motorcycles business fell by 2.5 %. Revenues from financial services business climbed by 26.5 % on the back of volume growth. Revenues from other activities of the Group amounted to euro 214 million and related mainly to the Cirquent Group (previously: softlab Group). The comparable figure for the previous year was euro 193 million. Revenue growth was spread across all regions. Group revenues increased by 12.4 % in Germany and by 21.4 % in the rest of Europe. Revenues for the Americas region rose by 5.5 %. For the Africa, Asia and Oceania regions, they grew in total by 14.0 %, mainly as a result of the sharp sales volume increase recorded in China. Cost of sales went up 2.1 per- centage points faster than revenues. This develop- ment reflected the impact of additional costs which the BMW Group has reported on since the begin- ning of 2007, namely the effect of less favourable ex- change rates and higher raw material prices. Despite these adverse factors, gross profit increased in ab- solute terms by 7.5 %, giving a gross profit percent- age of 21.8 % (2006: 23.1 %). The gross profit per- centage for Industrial Operations was down by 0.5 percentage points and that of Financial Operations by 1.1 percentage points. Information regarding the composition of these sub-groups is provided in Note [1]. Sales and administrative costs increased by 5.7 % due to the high level of business volumes; the increase was, however, lower than that of revenues. They represented 9.4 % of revenues and were there- fore 0.7 percentage points lower on a year-to-year comparison. Research and development costs were 14.8 % higher than in 2006, unchanged as a percentage of revenues at 5.2 %. They include amortisation of cap- italised development costs amounting to euro 1,109 million (2006: euro 872 million). Total research and development costs amounted to euro 3,144 million (2006: euro 3,208 million). This figure comprises research costs, development costs not recognised as assets and capitalised development costs. The research and development expenditure ratio for 2007 was 5.6 % (2006: 6.5 %). Depreciation and amortisation of property, plant and equipment and intangible assets included in cost of sales, sales and administrative costs and re- search and development costs amounted to euro 3,683 million (2006: euro 3,272 million). Pension obligations decreased as a result of the Retirement Age Amendment Act passed in 2007 which raised the statutory retirement age for the state pension scheme in Germany. The euro 103 million positive impact on earnings is spread over the relevant income statement cost lines by function. 50 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Group Income Statement in euro million Revenues Cost of sales Gross profit Sales and administrative costs Research and development costs Other operating income Other operating expenses Profit before financial result Result from equity accounted investments Other financial result Financial result Profit before tax Income taxes Net profit 2007 2006 56,018 – 43,832 12,186 48,999 – 37,660 11,339 – 5,254 – 2,920 730 – 530 4,212 11 – 350 – 339 3,873 – 739 3,134 – 4,972 – 2,544 744 – 517 4,050 – 25 99 74 4,124 – 1,250 2,874 The positive net amount from other operating in- come and expenses fell by 11.9 % compared to the previous year. Other operating income decreased primarily as a result of lower income from the reversal of provisions. Other operating expenses increased slightly by euro 13 million or 2.5 %. The profit before financial result increased by euro 162 million (4.0 %) against the previous year and therefore reached a new high level. The financial result deteriorated by euro 413 mil- lion, of which euro 445 million relates to the line “Other financial result”. As stated above, earnings in 2006 included a gain of euro 372 million resulting from the partial settlement of the exchangeable bond on shares in Rolls-Royce plc, London. Further con- versions in 2007 gave rise to a gain of euro 97 mil- lion. The bond was completely settled by the end of 2007. In addition to the gain on the exchangeable bond, other financial result also includes losses on other derivative financial instruments, in particular stand-alone interest-rate derivatives. A changed market interest rate structure caused the fair values of these financial instruments to decrease. The net result from using the equity method improved by euro 36 million. This was primarily attributable to an impairment loss recognised in the previous year on the BMW Group investment in TRITEC Motors Ltda., Campo Largo. These shares were sold to the Chrysler Group in 2007. The net positive result from investments decreased by euro 35 million. Net interest expense improved by euro 31 million. Within the net interest result, the net negative amount re- sulting from unwinding the discounting on pension obligations and recognising income for the expected return on pension plan assets improved by 3.8 % on a year-on-year basis. As a result of the changes in the financial result described above, profit before tax fell by 6.1 % com- pared to the previous year. The pre-tax return on sales was 6.9 % (2006: 8.4 %). Excluding the impact of the settlement of the exchangeable bond on shares in Rolls-Royce plc, London, and the fair mar- ket loss on the option obligation, the profit before tax improved by 0.6 % to euro 3,776 million. The Group net profit was euro 260 million or 9.0% above the figure reported in the previous year. The significantly lower effective tax rate is due to effect of the Business Tax Reform Act 2008 and the resulting decrease in deferred taxes. The Automobiles segment recorded a 9.2 % increase in sales volume and a 12.7 % increase in revenues. Segment profit improved by 7.3 % to euro 51 3,232 million despite the adverse factors described above. Revenues of the Motorcycles segment fell by 2.9 %. Ongoing efficiency improvements neverthe- less allowed the segment result to improve. The segment profit before tax, at euro 71 million, im- proved by 7.6 % compared to the previous year. The Financial Services segment was again able to expand its business successfully in 2007, enabling the segment profit to be improved by 8.5 % on a year-on-year comparison. Reconciliations to the Group profit from ordinary activities were again neg- ative in 2007, with a net expense of euro 173 million; this represented a deterioration of euro 534 million compared to the previous year. This was largely due to the higher gain recognised in the previous year on the settlement of the exchangeable bond on shares in Rolls-Royce plc, London, and to fair value losses recognised on derivative financial instruments. Financial Position The Group cash flow statement shows the sources and applications of cash flows for the financial years 2007 and 2006, classified into cash flows from oper- ating, investing and financing activities. Cash flows from operating activities are deter- mined indirectly starting with the Group net profit. By contrast, cash flows from investing and financing ac- tivities are based on actual payments and receipts. Cash and cash equivalents in the cash flow state- ment correspond to the amount disclosed in the balance sheet. Operating activities of the BMW Group gener- ated a positive cash flow of euro 11,794 million in 2007, an increase of euro 1,814 million or 18.2 % compared to the previous year. Changes in net cur- rent assets during 2007 generated a cash inflow of euro 204 million (2006: euro 174 million). The cash outflow for investing activities amounted to euro 17,248 million and was therefore euro 3,578 million higher than in 2006. Capital expenditure for intangi- ble assets and property, plant and equipment result- ed in the cash outflow for investing activities de- creasing by euro 46 million on a year-on-year comparison. The cash outflow for net investments in financial services activities rose steeply and was euro 3,604 million higher than in the previous year. Financing activities in 2007 generated a positive cash flow of euro 6,557 million (2006: euro 3,323 million). Cash inflows from the issue of bonds to- Revenues by segment in euro million Automobiles Motorcycles Financial Services Reconciliations Group Profit before tax by segment in euro million Automobiles Motorcycles Financial Services Reconciliations Group 2007 2006 53,818 1,228 13,940 – 12,968 56,018 47,767 1,265 11,079 – 11,112 48,999 2007 2006 3,232 71 743 – 173 3,873 3,012 66 685 361 4,124 52 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook talled euro 6,038 million (2006: euro 6,876 million), and euro 4,152 million (2006: euro 4,491 million) was used to repay bonds. The dividend payment in 2007 totalled euro 458 million. The cash inflow from other financial liabilities and commercial paper increased by euro 3,519 million. 68.4 % (2006: 73.0 %) of the cash outflow for investing activities was covered by the cash inflow from operating activities. The cash flow statement for Industrial Operations shows that the cash outflow for operating activities exceeded the cash inflow from investing activities by 56.6 % (2006: 21.6 %). As expected, the cash flow statement for Financial Operations shows that cash inflow from operating activities did not cover the cash outflow for investing activities due to the high level of capital expenditure on leased products and receivables from sales fi- nancing. The shortfall was 58.7 % (2006: 50.2 %). After adjustment for the effects of exchange- rate fluctuations and changes in the composition of the BMW Group amounting to a negative amount of euro 46 million (2006: positive amount of euro 82 million), the various cash flows resulted in an in- crease in cash and cash equivalents of euro 1,057 million (2006: decrease of euro 285 million). Net interest-bearing assets relating to Industrial Operations (including receivables from Financial Operations) amounted to euro 7,052 million at the year-end, representing an increase of euro 1,667 million since 31 December 2006. Net interest-bear- ing assets relating to Industrial Operations comprise cash and cash equivalents (euro 1,887 million), mar- ketable securities relating to Industrial Operations (euro 1,933 million) and receivables from the Finan- cial Operations (euro 5,910 million) less financial lia- bilities of Industrial Operations. Excluding interest and currency derivatives, the latter amounts to euro 2,678 million. Net Assets Position The Group balance sheet total increased by euro 9,940 million or 12.6 % to euro 88,997 million. Cur- rency effects, largely attributable to a weaker US dollar, again held down the increase in the balance sheet total in 2007. Adjusted for changes in ex- change rates, the balance sheet total would have increased by 16.7 % to euro 12,703 million. The main factors behind the increase on the assets side were the increased level of leased products (+ 24.7 %), financial assets (+ 21.4 %), cash and Change in cash and cash equivalents in euro million 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 – 1,000 – 2,000 – 3,000 – 4,000 Cash and cash equivalents 31.12. 2006 Cash inflow from operating activities Cash outflow from investing activities Cash inflow from financing activities Currency trans- lation, changes in Group composition Cash and cash equivalents 31.12. 2007 1,336 + 11,794 – 17,248 + 6,557 – 46 2,393 53 cash equivalents (+ 79.1 %) and receivables from sales financing (+ 12.8 %). On the equity and liabili- ties side of the balance sheet, the main increases related to equity (+ 13.7 %) and financial liabilities (+ 20.5 %). Intangible assets increased by 6.7 % to euro 5,670 million. Within intangible assets, capitalised development costs went up by 4.7 % to euro 5,034 million. Development costs recognised as assets during the year under report amounted to euro 1,333 million (– 13.2 %), equivalent to a capitalisation ratio of 42.4 % (2006: 47.9 %). The lower level of addi- tions to capitalised development costs in 2007 was due to the smaller number of projects in the series development phase. Amortisation on intangible assets amounted to euro 1,109 million (+27.2 %). The carrying amount of property, plant and equipment decreased slightly (– 1.6 %) to euro 11,108 million. The bulk of capital expenditure related to further expansion of the worldwide production and sales networks. Capital expenditure on property, plant and equipment was euro 2,684 million or 1.1 % more than in the previous year. Depreciation on prop- erty, plant and equipment totalled euro 2,471 million (+ 6.8 %). Balances brought forward for subsidiaries being consolidated for the first time amounted to euro 5 million. Capital expenditure on intangible as- sets and property, plant and equipment totalled euro 4,267 million (– 1.1 %), which, as in the previous year, was financed fully out of cash flow. Capital expendi- ture as a percentage of revenues was 7.6 % (2006: 8.8 %). due to higher business volumes. Trade receivables went up by 18.3 % compared to one year earlier. Financial assets increased by 21.4 % to euro 4,795 million, mainly as a result of higher fair values of derivative financial instruments. Liquid funds increased by 29.1 % to euro 4,352 million. Whereas marketable securities were roughly at the previous year’s level, cash and cash equiva- lents increased by euro 1,057 million compared to one year earlier. On the equity and liabilities side of the balance sheet, equity grew by 13.7 % to euro 21,744 million. The profit for the year attributable to shareholders of BMW AG increased equity by euro 3,126 million. Fair value changes recognised directly in other accumu- lated equity reduced equity by euro 61 million (2006: reduction of euro 43 million). The latter comprises translation differences, fair value gains and losses on financial instruments and available-for-sale secu- rities as well as actuarial gains and losses for pension provisions. The increase in the discount factor applied, especially in Germany, in 2007 gave rise to actuarial gains totalling euro 528 million. The carrying amounts of investments decreased, mainly reflecting the settle ment of the exchangeable bond on shares in Rolls-Royce plc, London. Translation differences re- duced accumulated other equity by a further euro 384 million. By contrast, derivative financial instru- ments increased by euro 366 million. Deferred taxes on fair value gains and losses recognised directly in equity corresponded to a negative amount of euro 388 million at 31 December 2007. As a result of the growth of financial services busi- Minority interests amounted to euro 11 million. ness, the total carrying amount of leased products increased sharply by 24.7 % to euro 17,013 million. Adjusted for changes in exchange rates, leased products would have risen by 33.2 %. The carrying amount of other investments de- creased by 47.9 % to euro 209 million, mainly as a result of the settlement of the exchangeable bond on the investment in Rolls-Royce plc, London, com- pleted in 2007. The BMW Group no longer holds any shares in Rolls-Royce plc, London. Receivables from sales financing were up by 12.8 % to euro 34,244 million due to higher busi- ness volumes. Of this amount, retail customer and dealer financing accounted for euro 26,181 million (+ 13.6 %) and finance leases accounted for euro 8,063 million (+10.0 %). Inventories increased by euro 555 million or 8.2 % to euro 7,349 million, mainly The equity ratio of the BMW Group therefore im- proved by 0.2 percentage points to 24.4 %. The equity ratio for Industrial Operations was 43.8 % compared to 40.6 % at the end of the previ- ous year. The equity ratio for Financial Operations fell from 10.4 % at the end of the previous year to 9.2 % at 31 December 2007. The amount recognised in the balance sheet for pension obligations decreased by 7.8 % to euro 4,627 million. As in the previous year, the amount re- ported under pension provisions corresponds to the full defined benefit obligation (DBO). In the case of pension plans with fund assets, the fair value of fund assets is offset against the defined benefit obliga- tion. The decrease in pension obligations was attrib- utable principally to the higher discount factor in Germany. 54 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Balance sheet structure Group in euro billion 89 79 79 89 Non-current assets 64 % 24 % 38 % 64 % 24 % 40 % Equity Non-current provisions and liabilities Current assets 36 % 36 % 36 % 38 % Current provisions and liabilities of which cash and cash equivalents and marketable securities 3 % 2 % 2007 2006 2006 2007 Balance sheet structure Industrial Operations in euro billion 40 38 38 40 Non-current assets 48 % 44 % 51 % 41 % Equity Current assets 52 % 49 % 31 % 28 % Non-current provisions and liabilities 28 % 28 % Current provisions and liabilities of which cash and cash equivalents and marketable securities 5 % 3 % 2007 2006 2006 2007 55 penses are treated as bought-in costs in the value added calculation. The allocation statement applies value added to each of the participants involved in the value added process. It should be noted that the gross value added treats depreciation as a com- ponent of value added which, in the allocation state- ment, is treated as internal financing. Net value added by the BMW Group in 2007 in- creased by 3.8 % to euro 14,096 million. The in- crease over the previous year was largely attributable to the higher level of revenues. The increase in gross value added, at 9.5 %, was even more pronounced since it is not affected by depreciation and amortisa- tion, which are higher than in the previous year. The bulk of the net value added (53.3 %) is ap- plied to employees. The amount applied to providers of finance increased to 16.1 % as a result of the high- er funding volume required for financial services business. The government/public sector (including deferred tax expense) accounted for 8.4 %. The pro- portion of net value added applied to shareholders, at 4.9 %, was higher than in the previous year. The remaining proportion of net value added (17.3 %) will be retained in the Group to finance future oper- ations. It decreased by 0.4 percentage points com- pared to one year earlier. Other provisions went down slightly (– 0.6 %) to euro 5,502 million. Deferred tax liabilities were down by euro 44 million to euro 2,714 million, whereby the deferred tax effects of the Business Tax Reform Act, fair value gains and losses recognised directly in equity and translation differences largely offset each other. Financial liabilities went up by 20.5 %, reflect- ing the strong growth of the financial services busi- ness. Within financial liabilities, bonds increased by 12.0 % to euro 18,383 million. Liabilities to banks, asset backed financing obligations and commercial paper were all also up. Trade payables amounted to euro 3,551 million and were thus 5.0 % lower than one year earlier. Other liabilities were 4.7 % higher at euro 6,130 million, mainly due to the increase in deferred income relating to service and repair contracts and lease financing. Compensation Report The compensation of the Board of Management comprises fixed and variable remuneration compo- nents. In addition, benefits are also payable at the end of members’ mandates, primarily in the form of pension benefits. Further details, including an analysis of remuneration by individual, are disclosed in the Compensation Report which can be found in the “Corporate Governance” section of the Annual Report on pages 142 to 145. The Compensation Report is a sub-section of the Management Report. Subsequent Events Report No events have occurred after the balance sheet date which could have a major impact on the earnings performance, financial position and net assets of the BMW Group. Value Added Statement The value added statement shows the value of work performed less the value of work bought in by the BMW Group during the financial year. Depreciation and amortisation, cost of materials and other ex- 56 Group Management Report BMW Group value added statement 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook in euro million Work performed Revenues Financial income Other income Total output Cost of materials Other expenses Bought-in costs 2007 2007 in % 2006 2006 in % Change in % 56,018 – 114 730 56,634 31,019 5,355 36,374 20,260 6,164 14,096 7,511 2,270 1,181 694 2,432 8 98.9 – 0.2 1.3 48,999 393 744 97.7 0.8 1.5 100.0 50,136 100.0 13.0 54.8 9.4 64.2 35.8 10.9 24.9 53.3 16.1 8.4 4.9 17.3 – 26,598 5,037 31,635 18,501 4,916 13,585 7,448 1,627 1,636 458 2,410 6 53.1 10.0 63.1 36.9 9.8 27.1 54.9 12.0 12.0 3.4 17.7 – 15.0 9.5 3.8 0.8 39.5 27.8 51.5 0.9 33.3 3.8 14,096 100.0 13,585 100.0 10.9 9.4 53.3 % Employees 24.9 54.8 16.1 % Providers of finance 8.4 % Government/public sector 4.9 % Shareholders 17.3 % Group Gross value added Depreciation and amortisation Net value added Applied to: Employees Providers of finance Government/public sector Shareholders Group Minority interest Net value added BMW Group value added 2007 in % Net value added Cost of materials Depreciation and amortisation Other expenses 57 2007 2006 21.8 14.1 7.5 6.9 5.6 20.2 16.4 24.4 43.8 9.2 23.1 14.9 8.3 8.4 5.9 24.3 16.9 24.2 40.6 10.4 129.6 115.3 5.3 1.3 22.8 18.2 6.3 1.4 21.7 17.7 % % % % % % % % % % % % % % % Key Performance Figures Gross margin EBITDA margin EBIT margin Pre-tax return on sales Post-tax return on sales Pre-tax return on equity Post-tax return on equity Equity ratio – Group Industrial Operations Financial Operations Coverage of intangible assets, property, plant and equipment by equity Return on Assets BMW Group Financial Services Return on Capital Employed Automobiles Motorcycles Cash inflow from operating activities euro million 11,794 9,980 Cash outflow from investing activities euro million 17,248 13,670 Coverage of cash outflow from investing activities by cash inflow from operating activities % 68.4 73.0 Net financial assets of Industrial Operations euro million 7,052 5,385 58 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Capital expenditure on intangible assets and property, plant and equipment was increased by 26.1 % to euro 1,670 million (2006: euro 1,324 mil- lion), with the increase mainly attributable to the high level of product and infrastructure investments made at the Dingolfing plant. Depreciation and amortisation amounted to euro 1,791 million. Equity rose by euro 727 million to euro 5,648 million. The existing authorisation to acquire treasury shares was not exercised during the financial year 2007. The equity ratio increased from 23.4 % to 25.0 %. Long-term external capital (registered profit- sharing certificates, special untaxed reserves, pen- sion provisions, the liability to the BMW Unterstüt- zungsverein e.V. and liabilities due after one year) decreased by 15.0 % to euro 4,068 million. A special untaxed reserve pursuant to § 6b (3) German Income Tax Act (EStG) was recognised in 2007. As in previous years, the cash inflow from BMW AG’s operating activities was utilised in 2007 to finance the operations of affiliated companies. Comments on the financial statements of BMW AG Whereas the Group financial statements are drawn up in accordance with IFRSs issued by the IASB, the financial statements of BMW AG are drawn up in accordance with the provisions of the German Com- mercial Code (HGB). Where it is permitted and con- sidered sensible, the principles and policies of IFRSs are also applied in the individual company financial statements. The pension provision in the individual company financial statements, for example, is also determined in accordance with IAS 19 and the full defined benefit obligation recognised. In numerous other cases, however, the accounting principles and policies in the individual company financial state- ments of BMW AG differ from those applied in the Group financial statements. The main differences relate to the recognition of intangible assets, depre- ciation and amortisation methods, the measurement of inventories and provisions as well as the treatment of financial assets. BMW AG develops, manufactures and sells cars and motorcycles manufactured by itself and foreign subsidiaries. These vehicles are sold through the Company’s own branches, independent dealers, sub- sidiaries and importers. The number of cars manu- factured at German and foreign plants in 2007 rose by 12.8 % to 1,541,503 units. At 31 December 2007, BMW AG had 76,064 employees, 92 fewer than one year earlier. Wage earners account for approximately 53 % of the workforce. In 2007, revenues were 13.9 % higher than in the previous year. Sales to foreign Group sales com- panies accounted for euro 36.0 billion or approxi- mately 74.5 % of the total revenues of euro 48.3 bil- lion. Cost of sales increased slightly faster than revenues. In absolute terms, gross profit improved by euro 0.8 billion (+ 13.4 %) and amounted to euro 6.9 billion. Adverse currency factors in the area of the US dollar and Japanese yen as well as continued in- tense competition on the automobile markets had a negative impact on BMW AG’s earnings. The change in the interest rate used to discount the pen- sion provision (raised from 4.40 % in 2006 to 5.50 % in 2007) and the new Retirement Age Amendment Act both had a positive impact on earnings. 59 2007 2006 109 4,986 4,814 9,909 2,654 1,218 5,937 644 1,763 436 80 5,268 4,823 10,171 2,866 1,075 4,478 693 1,583 106 12,652 10,801 55 73 22,616 21,045 654 1,991 2,309 694 5,648 34 – 34 654 1,991 1,818 458 4,921 34 1 – 3,793 6,292 4,347 6,131 10,085 10,478 394 1,716 2,597 2,094 6,801 607 2,046 1,618 1,313 5,584 14 27 22,616 21,045 BMW AG Balance Sheet at 31 December in euro million Assets Intangible assets Property, plant and equipment Investments Tangible, intangible and investment assets Inventories Trade receivables Receivables from subsidiaries Other receivables and other assets Marketable securities Cash and cash equivalents Current assets Prepayments Total assets Equity and liabilities Subscribed capital Capital reserves Revenue reserves Unappropriated profit available for distribution Equity Registered profit-sharing certificates Special untaxed reserve for emission rights granted free of charge Special untaxed reserves Pension provisions Other provisions Provisions Liabilities to banks Trade payables Liabilities to subsidiaries Other liabilities Liabilities Deferred income Total equity and liabilities 60 Group Management Report BMW AG Income Statement in euro million 2007 2006 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Revenues Cost of sales Gross profit Sales costs Administrative costs Research and development costs Other operating income and expenses Result on investments Net interest result Profit from ordinary activities Income taxes Other taxes Net profit Profit carried over from previous year Transfer to revenue reserves Unappropriated profit available for distribution 48,310 – 41,448 6,862 – 2,786 – 881 – 2,828 731 255 – 38 1,315 – 115 – 16 1,184 1 – 491 694 42,417 – 36,364 6,053 – 2,560 – 917 – 2,966 654 304 – 8 560 – 60 – 15 485 4 – 31 458 Revenues from the sale of vehicles to car rental companies are not recognised when there is an obligation to take back the vehicles. In accordance with the draft financial reporting pronouncement “Specific Issues relating to the Transfer of Beneficial Ownership and Profit Realisation in accordance with HGB” (IDW ERS HFA 13 revised version dated 29 November 2006) issued by the German Institute of Public Accountants (IDW), vehicles remain on the balance sheet, measured at amortised cost, because, on the basis of the criteria set out in the pronouncement, beneficial ownership has not been transferred to the car rental companies. 61 KPMG Deutsche Treuhand-Gesellschaft Aktienge- sellschaft Wirtschaftsprüfungsgesellschaft, Munich, has issued an unqualified audit opinion on the finan- cial statements of BMW AG, of which the balance sheet and the income statement are presented here. The BMW AG Financial Statements and Manage- ment Report for the financial year 2007 will be sub- mitted to the operator of the electronic version of the German Federal Gazette and can be obtained via the Company Register website. These financial state- ments are available from BMW AG, 80788 Munich, Germany. 62 Group Management Report Risk Management 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Risk management in the BMW Group All entrepreneurial activities involve an element of risk. Some of those risks can be quite substantial. They may arise in conjunction with business opera- tions or they may affect a company as a result of external factors. Other risks arise as business be- comes more international. As a globally operating enterprise, the BMW Group is confronted with nu- merous risks. Price fluctuations on the global cur- rency, money, capital and commodity markets as well as shorter innovation cycles result in an ever- rising complexity which places great demands on enterprises with international operations. The BMW Group has long been founded on the idea of consciously taking reasonable (measur- able) risks and making full use of the opportunities relating to those risks. As part of the risk reporting system, the Board of Management and the Super- visory Board are regularly informed about risks which could have a significant impact on business development. The BMW Group has an integrated risk man- agement system which provides it with the informa- tion to be prepared for changes in market and other conditions. The system also enables it to manage the value-added process within the Group. Business decisions are reached after consideration of in-depth project analyses which present potential risks and opportunities in detail. In addition, as part of the long- term planning strategy and short-term forecasting procedures, the risks and opportunities attached to specific business activities are evaluated and used as the basis for setting targets and implementing ap- propriate risk-mitigation measures. The risk management process ensures that risks are identified at an early stage and that suitable instruments are employed for both the manage- ment and monitoring of those risks. The risk manage- ment system comprises a wide range of organisa- tional and methodological components that are all finely tuned with each other. The system’s decen- tralised structure also encourages a balanced ap- proach to risks at all organisational levels. The Group reporting system provides the deci- sion makers with comprehensive, up-to-date in- formation on performance against targets and on new developments with regard to the market and competitors. Critical success factors are monitored continuously to ensure that unfavourable develop- ments are identified at an early stage so that appro- priate countermeasures can be implemented. Overall risk management within the BMW Group is managed centrally and is reviewed for its appro- priateness and effectiveness by external auditors and by the Group’s internal audit department. The find- ings reached serve as the basis for further improve- ments. A network of risk managers is in place through- out the Group, regularly carrying out risk reviews in which significant risks are recorded, systematically identified, measured and reported upon on a timely basis. The reviews cover general economic, legal and compliance risks as well as risks specific to the automobile sector and to internal processes. Risk managers are allocated to predefined areas to carry out reviews for the risk network. The network can draw on experts with specialist knowledge in specific risk areas. Based on the BMW Group’s set of risk principles, decisions are made as to whether risks should be avoided, reduced, insured against or entered into if there are potential business opportu- nities. For the basis for an organisation that is per- manently learning, standardised rules are in place, which are consistently applied throughout the Group. Risk management is an ongoing task, since changes in the legal, economic or regulatory envi- ronment or changes within the Group itself could lead to new risks or to known risks being assessed differently. By regularly sharing experiences with other companies, the BMW Group ensures that in- novative ideas and approaches flow into the risk management system and that risk management is subjected to continual improvement. Regular train- ing sessions, continued education measures and information events are invaluable ways of preparing people for new or additional requirements with regard to the processes in which they are involved. At present, no risks have been identified which could threaten the existence of the BMW Group or which could have a materially adverse impact on the net assets, financial position or results of operations of the Group. However, risks can never be entirely ruled out. In the course of its business activities, the BMW Group is exposed to various types of risk which are 63 addressed below. Additional comments on risks in conjunction with financial instruments are provided in note [38] of the consolidated financial statements. Risks relating to the general economic environment As a globally operating enterprise, the BMW Group is affected by global economic factors such as changes in currency parities and changes on the financial markets. The US dollar is particularly impor- tant for the development of Group revenues and earnings and represents the greatest individual risk within the BMW Group’s foreign currency portfolio. Exchange rate fluctuations of the Japanese yen, the British pound and the Chinese renminbi in relation to the euro can also have a material impact on earn- ings. Based on Group forecasts, these four curren- cies account for some 75 % of the foreign currency exposure of the BMW Group. The BMW Group manages currency risks at both a strategic and an operating level. From a stra- tegic point of view, i.e. in the medium and long term, the BMW Group endeavours to manage foreign ex- change risks by “natural hedging”, in other words by increasing the volume of purchases denominated in foreign currency or increasing the volume of local production. In the short to medium term (i.e. for operative purposes), currency risks are hedged on the financial markets. Hedging transactions are en- tered into only with financial partners of first-class credit standing. The nature and scope of such meas- ures are set out in guidelines applicable throughout the BMW Group. A cash-flow-at-risk model and sce- nario analyses are used to measure exchange rate risks. These instruments are also used as part of the process of currency management for the purpose of taking business decisions. The BMW Group reduces currency risk by re- financing its financing and lease business as a gen- eral rule in the currency of the relevant market. If funds are raised in a foreign currency, swap con- tracts are concluded immediately afterwards in the corresponding local currency in order to reduce the risk exposure. Liquidity and interest-rate risks are managed within the BMW Group by raising refinancing funds with matching maturities and by employing deriva- tive financial instruments. Interest-rate risks are measured and limited both at a country and Group level on the basis of the value-at-risk concept. The risk-return ratio is also measured regularly using sim- ulated computations in conjunction with a present value-based interest-rate management system. Sensitivity analyses, which contain stress scenarios and show the potential impact of interest rate changes on earnings, are also used as tools to manage interest-rate risks. Credit lines with various banks and the use of various financing instruments ensure sufficient liquid funds are available to the Group. Li- quidity risk is continuously monitored at a separate entity level and documented in a rolling cash flow forecasting system. A major part of financing and lease business within the Financial Services segment is refinanced on the capital markets. As a result of its good credit standing, reflected in the long standing first-class short-term ratings issued by Moody’s (P-1) and Standard & Poor’s (A-1), the BMW Group is able to obtain competitive conditions. The long-term ratings for the BMW Group published by Standard&Poor’s and Moody’s in September 2005 remain unchanged, also helping the BMW Group to obtain competitive conditions. Moody’s issued an A1 rating and S & P an A+ rating, both with stable outlook. As a con- sequence of the general crisis of confidence on the financial markets, financing conditions also deterio- rated for the BMW Group in the second half of 2007, despite the good ratings that it enjoys. Changes in the international raw material mar- kets also have an impact on the business develop- ment of the BMW Group. In order to safeguard the supply of production materials and to minimise the cost risk, the commodity markets relevant for the BMW Group are closely monitored. The market price trend of precious metals such as platinum, palladium and rhodium, for which appropriate hedg- ing strategies are decided upon by the Raw Mate rials Committee, is also important in this context. Changes in the price of crude oil, which is an important basic material in the manufacture of com- ponents, have an indirect impact on production costs. As a manufacturing enterprise, the BMW Group is also affected by changes in energy prices, caused by both market factors and tax legislation. Cyclical economic fluctuations also represent risk factors for future business development. Unfore- 64 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook seeable interventionist economic policies can also impair the BMW Group’s performance in specific markets. The BMW Group anticipates these risks by monitoring the markets in detail and by observing early warning indicators. The BMW Group’s world- wide operations also have the effect of spreading risk. At the same time, determined engagement in new markets and segments with both existing and new products creates significant opportunities for the BMW Group to strengthen its competitive position. An escalation of political tensions, terrorist ac- tivities or possible pandemics could have a negative impact on the general economic situation, the inter- national capital markets and hence the business development of the BMW Group. Specific industry risks Fuel prices, whether influenced by market or gov- ernmental tax policies, and increasingly stringent requirements to reduce vehicle fuel consumption and emissions, all set high demands on the BMW Group’s engine and product development activities. One manifest result of this has been the reduction of consumption and emissions achieved with the BMW Group’s EfficientDynamics strategy. The issue of CO2 emission limits based on the unladen weight of a vehicle has been taken up by the European Commission. This involves setting differentiated CO2 emission limits on the basis of predefined vehicle classes. The proposal requires significantly higher CO2 reductions for larger vehicle classes than for smaller ones. Consumption effi- ciency requirements and proposals have also been put forward in the USA. The proposed rules for CO2 emissions and fuel economy could have a materially adverse effect on the business development of the Automobiles segment and consequently on the Group’s earnings performance. The BMW Group is confronting these challenges by rigorously applying its technological expertise and innovative strength to reduce the CO2 emissions of its vehicles. The EfficientDynamics strategy was adopted back in 2000: a combination of highly effi- cient engines, improved aerodynamics, lightweight construction and energy management reduces the average fuel consumption of the vehicle fleet. In the medium term, the BMW Group is working on achieving additional fuel economy by a wide range of measures from electrification of the drivetrain through to hybrid solutions. In the long-term, the BMW Group is committed to the use of hydrogen gained from various renewable sources to power engines. The need to reduce consumption and emissions is fully integrated into the Group’s product innovation process. A specialist department is studying the interplay of energy management, aero- dynamics, lightweight construction, drive perform- ance and CO2 emissions. The BMW Group advo- cates the use of differentiated CO2 limits for different vehicle classes. These limits should be set at levels that are transparent and therefore meet customers’ expectations. Achieving real improvements for the environment requires measures to be applied fairly to all vehicle classes. The BMW Group therefore sup- ports the current debate as to how ecological im- provements can be achieved that take all factors into account. Operating risks Risks arising from business interruption and loss of production are insured up to economically reasonable levels. The BMW Group’s highly flexible production network and working time models also help to re- duce operating risks. Close cooperation between manufacturers and suppliers is normal in the automotive sector, and whilst this provides economic benefits, it also creates a degree of mutual dependence. Some suppliers have become very important for the production ac- tivities of the BMW Group. Delivery delays, cancella- tions, strikes or poor quality can lead to production stoppages, and thus have a negative impact on profit- ability. The Group mitigates this risk by employing extensive procedures for selecting, monitoring and handling suppliers. Before selection, for example, both the technical competence and the financial strength of potential suppliers are appraised. A com- prehensive Supplier Relationship Management system, which also takes account of social and eco- logical aspects, helps to reduce risk exposure. Risks relating to the provision of financial services As a consequence of the ongoing successful growth in lease business, the BMW Group also faces 65 a volume-induced increase in the residual value risk on vehicles returned to the Group at the end of lease contracts. Residual values of BMW Group vehicles on the used car markets are continuously monitored over time, and future developments forecasted. Ex- ternal market observations are also used in this con- text. The overall risk exposure is measured each quarter by comparing forecasted market values and contractual values according to model and market and the return ratio computed. Thanks to active life- cycle management for current models and measures aimed at optimising the process of international reselling, residual value risks remained at a stable, albeit low, level compared to the previous year. Iden- tified risks are covered in the balance sheet either by provisions or by write-downs on the lease vehicles concerned. Market forecasts also confirm the stable trend for lease residuals of the Group’s car lease portfolio. Internal and external forecasts as well as actual prices achieved on the market, broadly docu- ment high residual values for cars manufactured by the BMW Group. Operational risks relating to the financial services business include the risk of damage caused by inap- propriate or failed internal procedures and systems, human error or external factors. The scope of proce- dures applied in each country to manage operational risks is set out in a Group manual which, amongst other things, addresses the requirements of the Basle II accord. This manual stipulates the rules for identifying and measuring potential risk scenarios and for computing key risk indicators on an ongoing basis. It also sets out the Group’s systematic ap- proach to recording losses and the nature of any agreed risk mitigation measures. Both qualitative and quantitative aspects are required to be taken into account in the decision process. The latter is backed up by various system-based solutions, all of which follow the principles of operational risk manage ment, such as separation of duties, dual control and the documentation of system changes. In addition, the effectiveness and efficiency of the internal control system are tested regularly. Credit risks affecting the retail customer busi- ness (leasing, financing) on the one hand and the commercial customer financing business (dealers, fleet customers, importers) on the other, are con- tinually monitored, assessed and measured, and where necessary, risk mitigating measures put into place. In line with the Group’s own mandatory risk guidelines and the stringent requirements imposed by Basle II, the main risk measurement methods used are customer scoring (retail customer business) and credit rating (commercial customer business). Close contacts with borrowers, a good understanding of the leased or financed vehicles involved, prudent measurement of collateral and the use of local credit audits all help to prevent losses. For risk manage- ment purposes, the BMW Group reverts to normal good banking practises, such as the use of maxi- mum unsecured risks for each rating category. Risk criteria such as arrears and bad debt ratios are analysed quarterly and used to actively manage the credit portfolio and improve portfolio quality. The credit decision process comprises up to three phases. Depending on the credit volume applied for and the credit risk rating of the party involved, financ- ing applications for international dealers, importers and fleet customers are presented to the local, re- gional or global credit committees for approval. The dual control and segregation of duties principles apply worldwide and are rigorously implemented. In order to minimise risk further, the BMW Group is continuously making efforts to standardise its credit- decision processes and the quality of credit applica- tions, and to ensure that uniform and transparent rating systems are in place worldwide. Provisions are recognised in the balance sheet to cover identified risks. Legal risks The BMW Group is currently not involved in any court or arbitration proceedings which could have a signifi- cant impact on its financial condition. Compliance with the law is a basic prerequisite for the success of the BMW Group. Current law pro- vides the binding framework for the BMW Group’s various business activities around the world. The growing international scale of business and the huge number of complex legal regulations increase the risk of laws being broken simply because they are not known or fully understood. The BMW Group takes all necessary measures to ensure that its management bodies, managers and staff act lawful- ly. It is essential for all employees to know and to comply with current legal regulations. The extent of 66 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook those legal regulations is set out in corporate guide- lines and in the BMW Group’s stated set of core principles. However, wrongdoing by individuals can never be entirely ruled out. It is the BMW Group’s objective to keep such risks to a minimum and to systematically uncover any cases of corruption, bribery or blackmail. The BMW Group set up a Com- pliance Committee in 2007 which reports directly to, and advises, the Board of Management of BMW AG. Like all enterprises, the BMW Group is exposed to the risk of warranty claims. Adequate provisions have been recognised in the balance sheet to cover such claims. Part of the risk, especially where the American market is concerned, has been insured externally up to economically acceptable levels. The high quality of BMW Group products, additionally ensured by regular quality audits and ongoing im- provement measures, helps to reduce this risk. In comparison with competitors, this can give rise to benefits and opportunities for the BMW Group. Changes in the regulatory environment may im- pair the sales volume, revenues and earnings per- formance of the BMW Group in individual markets or economic regions. Further information is given in the section on sector-specific risks. Personnel risks As an attractive employer, the BMW Group has found itself in a favourable position for many years in the in- tense competition for qualified technical and manage- ment staff. Employee satisfaction and a low level of employee fluctuation also help to minimise the risk of know-how drift. The BMW Group’s attractiveness as an employer also helps to ensure that appropri- ately qualified staff can be recruited, particularly in conjunction with the implementation of the Group’s new strategy. An ageing and shrinking population in Germany will have a lasting impact on the conditions prevailing in the labour, product, services and financial mar- kets. Demographic change will give rise to risks and opportunities which will affect enterprises more and more in the coming years. The BMW Group sees demographic change as one of its main challenges and is actively involved in planning for its effect on operations. The focus is on the following areas of action, aimed at creating and retaining a motivated workforce in the long-term: (1) the creation of a working environment for the future (2) promotion and maintenance of the workforce’s ability to perform with the appropriate set of skills (3) appropriate levels of qualification (4) increasing employees’ awareness of their re- sponsibility to make personal provisions for their future (5) individual employee working life-time models The BMW Group’s pension obligations to its em- ployees resulting from defined benefit plans are measured on the basis of actuarial reports. In accord- ance with IAS 19, future pension payments are dis- counted by reference to market yields on high- quality corporate bonds. These yields are subject to market fluctuation and influence the level of pension obligations. Furthermore, changes in other factors, such as longer life expectancies, can also have an impact on pension obligations. In the United King- dom, the USA and a number of other countries, funds intended to cover pension entitlements are held in pension funds which are kept separate from corporate assets and are mainly invested in fixed- income securities (with a high level of creditworthi- ness), equities and property. In Germany, by contrast, the funds remain part of the enterprise’s assets. Risks affecting pension funds are monitored continuously and managed from a risk and yield perspective. Regular asset-liability studies are per- formed and used to match the maturities of inter- est-generating investments with future pension payments, thereby reducing the interest rate risk attached to each pension fund. Investments are broadly spread in order to reduce risk. In addition, risk limits for investment activities have been de- fined for each pension fund and are monitored con- tinuously. Risk indicators (e.g. value-at-risk) are regularly computed in order to identify risks at an early stage. Risk mitigation measures are put into place as soon as predefined risk limits are reached. Worst-case analyses are also carried out regularly to assess the 67 The BMW Group protects its intellectual property by ensuring that the relevant departments have clear instructions regarding data protection and the use of information technology. Information underlying key areas of expertise is subject to particularly stringent security measures. In addition, employees working in such functions are increasingly receiving specific training in the area of data protection. potential impact on the Group of unexpectedly high market fluctuations. From 2008 onwards, in a measure to reduce risks further, the BMW Group intends to set up pen- sion funds for all of its pension commitments that are not already externally funded. This will take place over the coming years in three stages. Information and IT risks Great importance is attached in the BMW Group to the protection of data, business secrets and inno- vative development against unauthorised access, damage and misuse. The protection of information and data is an integral component of business pro- cesses and is achieved within the BMW Group by ap- plying international security standards. Employees, process design and information technology each play a role in the Group’s comprehensive security concept. The Group’s procedures are documented in regular- ly updated manuals, guidelines and process descrip- tions. All of these require employees to handle infor- mation appropriately and ensure that information systems are properly used. Purposeful communica- tion and training measures create a high degree of security awareness on the part of all people involved. The technical data protection procedures used by the BMW Group include process-specific security measures as well as standard activities such as virus scanners, firewall systems and access controls at operating system and application level. Further measures include internal testing procedures and the regular back-up of data. A security network is in place throughout the Group to ensure compliance with security specifications. Regular analyses and rigorous security management ensure high-quality protection. This includes the activities of the BMW Group’s Security Operations Centre which is re- sponsible for the security of internal network com- munications. The Group’s core process “Product develop ment” and the related IT infrastructure have been audited and certified to international security standard ISO 27001/17799. Protecting BMW Group-specific know-how is also treated as a major issue as far as cooperation arrangements and rela- tionships with partner companies are concerned. 68 Group Management Report Outlook 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook The economic environment in 2008 The BMW Group forecasts that the global economy will again lose some of its momentum in 2008, but will nevertheless continue to grow. The pace will again be set by the emerging markets in Asia, Latin America and Eastern Europe, whereas growth in North America and the rest of Europe is likely to be robust, but no- where near as high. From today’s perspective, the US credit crisis is not expected to result in massive global economic upheaval. It could, however, hold down domestic demand somewhat, particularly in the USA itself, without causing a recession there. The US growth rate in 2008 will again remain below the average registered in recent years. The impact of the property and credit crisis is not likely to tail off until the second half of the year at the earli- est. The US Federal Reserve will no doubt endeavour to stimulate the economy with further interest rate cuts. It is nevertheless likely that consumers will be much more reluctant to spend than they were a year ago. Overall, the growth rate should remain at roughly the same level as in the previous year. By contrast, a slowdown in growth is forecasted for Europe in 2008. Firstly, higher interest rates will take their toll and hold down investment volumes. Secondly, export growth is likely to weaken once again. The sharp increase in the inflation rate at the turn of the year will probably deter the European Central Bank from lowering interest rates significantly. The growth rate for Germany will also weaken. Whereas private consumption is forecasted to re- main buoyant, exports and particularly investments are likely to grow at a much slower pace. The Japanese economy should grow in 2008 at a somewhat lower pace to that of 2007, with momentum still coming from both the domestic market and abroad. The recent sharp rise in con- sumer prices – mostly due to higher energy prices – should make it easier for the Japanese central bank to increase interest rates in small steps. The emerging economies of Asia, Latin America and Eastern Europe will continue to expand rapidly with growth rates only marginally down on the pre- vious year. A generally strong euro expected The euro again appreciated sharply against the US dollar in the course of 2007. Lower interest rates, weaker growth and the USA’s high current account deficit all suggest that the US dollar is likely to remain weak in the near future. Although the British pound fell steeply during the second half of 2007, it is not expected to suffer any further significant loss in value. The Japanese yen also depreciated sharply in 2007. The fact that interest rates are still on the low side in Japan means that the yen is likely to remain undervalued for the time being. Risks affecting economic growth Energy and commodity prices will remain high in 2008, reflecting the fact that demand – in particular from the emerging economies – will continue to grow strongly. With the global economy still enjoying robust growth and the US dollar weakening, com- modities are likely to remain in demand as an invest- ment in the near future. As a result of the extremely tense situation on the markets, the risk of specula- tive price rises remains present for the foreseeable future. The most significant risk emanates from the credit crisis in the USA. Should the crisis become more serious in the USA or spill over into other markets, this could result in a significantly lower global growth rate. All in all, the credit crisis causes forecasts for 2008 to be subject to a high degree of uncertainty. Economic outlook for the automobile industry in 2008 The global automotive economy will again be driven by the emerging economies of Asia, Eastern Europe and Latin America, whereas sales on the three main traditional markets (Japan, the USA and Western Europe) are likely to stagnate. Double-digit growth is again forecasted for China and India in 2008. The forecast for Russia and some of the Latin American markets is on a similar scale. Growth will also remain strong overall in Eastern Europe. 69 By contrast, the car markets in the USA, Japan and Western Europe are still not generating any momentum. At best, the markets there will stagnate. Car sales will decrease slightly in the USA in the wake of the credit crisis. Japan is also unlikely to see any significant upturn. This also applies to Western Europe taken as a whole. A slight recovery is, how- ever, forecasted for Germany. Motorcycle markets will continue to develop divergently The divergent development of the international mo- torcycle markets will continue in 2008. The BMW Group forecasts that the overall market for motor- cycle sales in the 500 cc plus segment should be close to the previous year’s level. Whereas the US market is forecasted to con- tract slightly, the markets in Europe and Asia should remain stable overall, with European markets in par- ticular again developing divergently. More difficult environment for the financial services sector The current market environment is having an ad- verse impact on the refinancing and liquidity situa- tion and on credit risk within the financial services sector. In combination with a stronger euro, this will put a strain on profitability within the sector. Outlook for the BMW Group in 2008 In the light of the general economic environment dis- cussed above, the BMW Group believes that it will continue to perform successfully in the financial year 2008 with the initial benefits of the Group’s new stra- tegic direction already becoming visible. With the Number ONE strategy, the BMW Group will lay the foundation in 2008 for the planned im- provement in profitability. This will involve measures on both the revenue and expenditure side. In total, the BMW Group is aiming to achieve cumulative im- provements of some euro 6 billion compared to the original forecasts by 2012. The greatest potential for savings is seen in the cost of materials, the largest block of costs for the business. As the basis for its continuing success, the BMW Group is also aiming for sales volume records with all three brands and is confident of being able to retain its position as the world’s leading premium manufacturer. Further expansion of the product range and targeted engagement on new markets will also help it to achieve these objectives. Against the background of these aims, the BMW Group fore- casts that business will grow faster in the first half of 2008 and more moderately in the second. The BMW Group is also working hard to im- prove cost efficiency in order to achieve its profit- ability targets. This focus on costs, which needs to start during the development phase, involves avoiding unnecessary complexity, focusing firmly on achieving value for the customer and creating synergy benefits by the increased use of modular components. One of the objectives is to reduce research and development expenditure for new products and technologies as efficiently as possible, based on the principle “More output from less input”. This will enable the BMW Group to set the R&D ratio to a level of approximately 5.0 % – 5.5 % of revenues and still meet the same high standards. In this context, the BMW Group is also setting new targets for the ratio of internal and external input in strategically important technological areas. Further opportunities for better profitability will also come from more efficiently designed interfaces within the Group’s supplier network. In future, for example, suppliers will be involved at an even earlier stage in the decision-making process within product and technology projects. In future, wherever it makes commercial sense and the appropriate economies of scale can be realised, the BMW Group will enter into more cooperation arrangements. The BMW Group believes that, compared to the levels invested in the past, it will be able to reduce its capital expenditure ratio over the coming years whilst, at the same time, still remaining fully prepared to face any future challenges. The plan is to scale down the capital expenditure ratio to below 7.0 % of revenues. 70 Group Management Report 10 Group Management Report 10 A Review of the Financial Year 13 General Economic Environment 17 Review of Operations 41 BMW Stock and Bonds 44 Disclosures relating to Takeover Regulations and Explanatory Report 47 Financial Analysis 47 – Internal Management System 49 – Earnings Performance 51 – Financial Position 52 – Net Assets Position 55 – Subsequent Events Report 55 – Value Added Statement 57 – Key Performance Figures 58 – Comments on BMW AG 62 Risk Management 68 Outlook Within an intensely competitive environment, personnel expense management takes on an ever- greater significance. Substantial efficiency improve- ments, particularly in production, will enable person- nel capacities to be reduced, resulting in lower per- sonnel expenditure. In this context, any opportunities to improve flexibility are made use of in close coop- eration with employee representatives. This includes reducing the number of temporary personnel, the use of early retirement models and fluctuation. In addition to the earnings factors described above, the BMW Group also intends to achieve better capital efficiency – return on capital employed – as part of its strategy to increase the value of the busi- ness in the long term. The BMW Group is therefore committed to making more use of performance in- dicators that allow better management of capital em- ployed. Segments all expected to perform well In the coming years, the BMW Group will continue to take full advantage of opportunities to achieve profit- able growth in all segments. Adverse external factors caused by unfavourable exchange rates and high commodity prices will again affect the Automobiles segment’s earnings during the financial year 2008. Nonetheless, the BMW Group is targeting a further improvement in segment earn- ings, with sales volumes continuing to develop posi- tively and the efficiency improvement measures described above beginning to bear fruit. The seg- ment should also achieve a higher return on capital employed. The BMW Group’s Motorcycles segment will continue with its model initiative in 2008. An increase in motorcycle sales is forecasted for all regions. This includes a reversal of the negative trends previously witnessed in Germany and the USA. Segment revenues and earnings will be slightly higher than in 2007. The Financial Services segment will continue to grow in 2008. Market activities in the segment’s established lines of business will be intensified by expanding the product range and paying even greater attention to the needs of dealers, dealer groups and retail customers. The process of geographical expansion will also be continued, particularly in Eastern Europe and Asia. Multi-brand financial services business will be strengthened, particularly in the area of direct channel operations. In this context, the “up2drive” brand name will be additionally promoted. Within the fleet business, the integration of the acquired fleet manage- ment company, DEKRA SüdLeasing Services GmbH (renamed to: BMW Fuhrparkmanagement Be teili- gungs GmbH), will be completed and organic growth continued. All lines of business will continue to be developed in 2008, building on the high quality of service offered by the Financial Services segment in order to strengthen its outstanding market position. The various measures described above will result in a further increase in the volume of financial services business. Simultaneously, continuous measures will be implemented in conjunction with a global project to improve process efficiency. All of these factors give good reason to expect a further increase in seg- ment earnings in 2008. Overall positive outlook for 2008 External factors will continue to have an adverse im- pact on the BMW Group’s earnings during the finan- cial year 2008. Currency factors (in particular the continuing weakness of the US dollar and the Japa- nese yen), higher raw material costs and less favour- able refinancing conditions as a consequence of the credit crisis still remain the principal challenges to future earnings. By contrast, the efficiency and productivity im- provements described above will have a positive impact on Group earnings. On top of this, the BMW Group forecasts further stable growth for its operat- ing segments which will, in turn, create further impe- tus for earnings in 2008. Overall, the BMW Group is aiming to improve the quality of earnings in 2008. 71 This will also be reflected in the key performance figures such as return on sales and return on capital that are used to manage the BMW Group. Adjusted for the exceptional gain on the Rolls-Royce exchangeable bond in 2007, the BMW Group aims to achieve higher pre-tax earnings for the financial year 2008 than one year earlier. Numerous projects have already been initiated in conjunction with the Group’s strategic realign- ment, aimed at raising the quality of future earnings. By 2012, the BMW Group’s Automobiles segment is aiming to achieve a return on capital employed in excess of 26 % and a return on sales in a range of 8 % to 10 %. 72 Group Financial Statements Contents Group Financial Statements Group and Sub-group Income Statements Group and Sub-group Balance Sheets at 31 December Group and Sub-group Cash Flow Statements Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity Notes to the Group Financial Statements Accounting Principles and Policies Notes to the Income Statement Notes to the Balance Sheet Other Disclosures Segment Information Responsibility Statement by the Company’s Legal Representatives Auditors’ Report 73 74 76 78 79 80 89 96 117 131 135 136 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information BMW Group Group and Sub-group Income Statements 73 in euro million Notes Group Industrial Operations * Financial Operations* 2007 2006 2007 2006 2007 2006 56,018 48,999 55,263 49,227 14,349 11,349 – 43,832 – 37,660 – 44,331 – 39,238 – 12,877 – 10,050 12,186 11,339 10,932 9,989 1,472 1,299 – 5,254 – 4,972 – 4,647 – 4,464 – 609 – 535 [8] [9] [10] [11] [12] [12] [13] [14] Revenues Cost of sales Gross profit Sales and administrative costs Research and development costs Other operating income Other operating expenses Profit before financial result Result from equity accounted investments Other financial result Financial result Profit before tax Income taxes Net profit – 2,920 – 2,544 – 2,920 – 2,544 730 744 594 626 – 530 – 517 – 430 – 450 4,212 4,050 3,529 3,157 11 – 25 – 350 – 339 99 74 11 – 81 – 70 – 25 383 358 3,873 4,124 3,459 3,515 [15] – 739 – 1,250 – 496 – 1,066 3,134 2,874 2,963 2,449 – 194 – 167 890 – – 139 – 139 751 – 175 – 125 814 – – 33 – 33 781 – 327 424 – 246 535 – 424 – 535 Attributable to minority interest 8 6 8 6 Attributable to shareholders of BMW AG 3,126 2,868 2,955 2,443 Earnings per share of common stock in euro Earnings per share of preferred stock in euro [16] [16] 4.78 4.38 4.80 4.40 * before consolidation of transactions between the sub-groups; unaudited 74 Group Financial Statements BMW Group Group and Sub-group Balance Sheets at 31 December Assets in euro million Notes Group Industrial Operations * Financial Operations* 2007 2006 2007 2006 2007 2006 Intangible assets Property, plant and equipment Leased products Investments accounted for using the equity method Other investments Receivables from sales financing Financial assets Deferred tax Other assets Non-current assets Inventories Trade receivables Receivables from sales financing Financial assets Current tax Other assets Cash and cash equivalents Current assets [19] [20] [21] [22] [22] [23] [24] [25] [26] [27] [28] [23] [24] [25] [26] [29] 5,670 5,312 5,550 5,276 11,108 11,285 11,083 11,260 120 25 36 25 17,013 13,642 254 254 19,911 16,364 63 209 20,248 1,173 720 415 60 401 17,865 816 755 378 63 186 – 81 60 388 – 61 – 23 – 13 20,248 17,865 1,092 755 1,201 1,192 – 1,952 – 1,828 892 875 344 255 56,619 50,514 19,310 19,366 39,811 33,485 7,349 2,672 6,794 2,258 13,996 12,503 7,340 2,592 – 6,784 2,214 9 80 10 44 – 13,996 12,503 3,622 3,134 2,213 2,348 1,409 237 2,109 2,393 246 2,272 1,336 225 6,932 1,887 222 5,574 1,235 12 863 506 786 24 772 101 32,378 28,543 21,189 18,377 16,875 14,240 Total assets 88,997 79,057 40,499 37,743 56,686 47,725 Total assets adjusted for asset backed financing transactions 82,651 74,556 – – 50,340 43,224 * before consolidation of transactions between the sub-groups; unaudited 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information 75 Equity and liabilities in euro million Notes Group Industrial Operations * Financial Operations* 2007 2006 2007 2006 2007 2006 Subscribed capital Capital reserves Revenue reserves Accumulated other equity Minority interest Equity Pension provisions Other provisions Deferred tax Financial liabilities Other liabilities 654 654 1,911 1,911 20,789 18,121 – 1,621 – 1,560 11 4 [30] [31] [32] [33] [34] [35] 21,744 19,130 17,755 15,315 5,197 4,965 4,627 2,676 2,714 5,017 2,865 2,758 21,428 18,800 4,595 2,417 2,067 716 4,983 2,462 2,012 882 32 259 369 34 403 464 20,712 17,918 2,024 1,932 1,514 1,458 1,843 1,732 Non-current provisions and liabilities 33,469 31,372 11,309 11,797 23,215 20,551 Other provisions Current tax Financial liabilities Trade payables Other liabilities [32] [33] [34] [36] [35] 2,826 2,671 2,673 2,489 808 567 22,493 17,656 3,551 4,106 3,737 3,924 654 2,090 2,938 3,080 437 1,407 3,288 3,010 178 154 207 130 20,403 16,249 613 449 6,926 5,174 Current provisions and liabilities 33,784 28,555 11,435 10,631 28,274 22,209 Total equity and liabilities 88,997 79,057 40,499 37,743 56,686 47,725 Total equity and liabilities adjusted for asset backed financing transactions * before consolidation of transactions between the sub-groups; unaudited 82,651 74,556 – – 50,340 43,224 76 Group Financial Statements BMW Group Group and Sub-group Cash Flow Statements in euro million Net profit Reconciliation of net profit to cash inflow from operating activities Current tax Depreciation of leased products Depreciation and amortisation of tangible, intangible and investment assets Change in provisions Change in deferred taxes Other non-cash income and expense items Gain/loss on disposal of non-current assets and marketable securities Result from equity accounted investments Changes in current assets and current liabilities Change in inventories Change in receivables Change in liabilities Income taxes paid Notes3] Group 2007 20062] 3,134 2,874 1,002 4,698 3,689 221 – 256 111 – 181 – 11 – 700 10 894 – 817 993 3,808 3,340 – 346 242 – 329 – 68 25 – 265 – 611 1,050 – 733 9,980 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information Cash inflow from operating activities [39] 11,794 Investment in intangible assets and property, plant and equipment – 4,267 – 4,313 Proceeds from the disposal of intangible assets and property, plant and equipment Expenditure for investments Proceeds from the disposal of investments Investment in leased products Disposals of leased products Additions to receivables from sales financing Payments received on receivables from sales financing Investment in marketable securities Proceeds from marketable securities Cash outflow from investing activities Buy-back of treasury shares Payment of dividend for the previous year Proceeds from the issue of bonds Repayment of bonds Internal financing of financial operations Change in other financial liabilities Change in commercial paper Cash inflow/outflow from financing activities Effect of exchange rate and changes in composition of group on cash and cash equivalents Change in cash and cash equivalents Cash and cash equivalents as at 1 January Cash and cash equivalents as at 31 December 1] unaudited 2] Previous year’s figures adjusted due to changed presentation of taxes. 3] Interest paid and received are presented in Note [39]. 272 – 44 16 39 – 29 110 – 13,261 – 10,754 4,917 3,719 – 54,573 – 50,313 49,813 – 2,698 2,577 47,848 – 2,654 2,677 [39] – 17,248 – 13,670 – – 458 6,038 – 4,152 – 3,603 1,526 6,557 – 253 – 419 6,876 – 4,491 – 1,027 583 3,323 – 46 82 1,057 – 285 1,336 2,393 1,621 1,336 [39] [39] [39] 77 Industrial Operations1] 2007 20062] Financial Operations1] 2007 20062] 2,963 2,449 424 535 Net profit 948 4 3,665 398 – 472 146 – 180 – 11 – 703 – 98 368 – 688 6,340 938 4 3,315 – 220 77 – 436 – 70 25 – 261 – 493 658 – 613 5,373 54 4,324 24 – 143 300 – 35 – 1 – 3 – 112 745 – 129 Reconciliation of net profit to cash inflow from operating activities 55 Current tax 3,560 25 – 130 227 107 2 – – 4 – 135 485 – 120 Depreciation of leased products Depreciation and amortisation of tangible, intangible and investment assets Change in provisions Change in deferred taxes Other non-cash income and expense items Gain/loss on disposal of non-current assets and marketable securities Result from equity accounted investments Changes in current assets and current liabilities Change in inventories Change in receivables Change in liabilities Income taxes paid 5,454 4,607 Cash inflow from operating activities – 4,156 – 4,272 – 111 – 41 Investment in intangible assets and property, plant and equipment 270 – 44 16 – 359 354 – – – 2,698 2,568 – 4,049 – – 458 – – 31 – 24 76 – 392 364 – – – 2,619 2,419 – 4,417 – 253 – 419 1 – 1 – 1,634 – 1,040 – 377 845 – 129 644 – 1,624 – 1,197 2 – – 8 – 5 34 Proceeds from the disposal of intangible assets and property, plant and equipment Expenditure for investments Proceeds from the disposal of investments – 12,902 – 10,362 Investment in leased products 4,563 – 54,573 49,813 – 9 3,355 Disposals of leased products – 50,313 47,848 – 35 258 Additions to receivables from sales financing Payments received on receivables from sales financing Investment in marketable securities Proceeds from marketable securities – 13,199 – 9,253 Cash outflow from investing activities – – 6,038 – 4,152 1,634 3,980 681 8,181 – – 6,875 – 4,490 1,040 1,156 – 61 4,520 Buy-back of treasury shares Payment of dividend for the previous year Proceeds from the issue of bonds Repayment of bonds Internal financing of financial operations Change in other financial liabilities Change in commercial paper Cash inflow/outflow from financing activities – 15 104 – 31 – 22 cash and cash equivalents Effect of exchange rate and changes in composition of group on 652 – 137 405 – 148 Change in cash and cash equivalents 1,235 1,887 1,372 1,235 101 506 249 101 Cash and cash equivalents as at 1 January Cash and cash equivalents as at 31 December 78 Group Financial Statements BMW Group Group Statement of Changes in Equity in euro million Subscribed capital Capital Revenue reserves reserves Accumulated other equity Treasury Minority interest shares Total Translation Securities Derivative financial differences instru- ments Pension obliga- tions 31 December 2005 674 1,971 16,351 – 646 562 29 – 1,462 – 506 – 16,973 – – 253 Acquisition of treasury shares – – – Withdrawal of shares from circulation Dividends paid Translation differences Financial instruments Actuarial gains and losses on pension obligations Deferred tax on transactions recognised directly in equity Net profit 2006 Other changes – 20 – 60 – – – – – – – – – – – – – – – 679 – 419 – – – – 2,868 – – – – – 191 – – – – – – – – – – 370 – 22 – – – – – 20 198 – – – 28 – – 543 – 69 – 168 – – – – 31 December 2006 654 1,911 18,121 – 837 214 178 – 1,115 Dividends paid Translation differences Financial instruments Actuarial gains and losses on pension obligations Deferred tax on transactions recognised directly in equity Net profit 2007 – – – – – – – – – – – – – 458 – – – – 3,126 – – 422 – – – 7 – 183 366 – 31 – – – – – – 4 – – 528 – 113 – 279 – – 31 December 2007 654 1,911 20,789 – 1,259 35 438 – 835 see also Note [30] – – – – – – – 6 – 2 – 253 – – 419 – 199 – 172 543 – 215 2,874 – 2 4 19,130 – – 1 – – – 8 – 458 – 385 183 528 – 388 3,134 11 21,744 759 – – – – – – – – – – – – – – – 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information BMW Group Statement of Income and Expenses recognised directly in Equity 79 in euro million 2007 2006 Fair value gains and losses on available-for-sale investments recognised directly in equity Fair value gains and losses on financial instruments used for hedging purposes recognised directly in equity Exchange differences arising on the translation of foreign subsidiaries Actuarial gains and losses on defined benefit pension and similar obligations Deferred tax on gains and losses recognised directly in equity Gains and losses recognised directly in equity – 183 – 370 373 – 422 559 – 388 – 61 218 – 191 515 – 215 – 43 Profit after tax attributable to shareholders of BMW AG 3,126 2,868 Aggregate amount of net profit for period and gains and losses recognised directly in equity 3,065 2,825 80 Group Financial Statements BMW Group Notes to the Group Financial Statements Accounting Principles and Policies 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information [1] Basis of preparation The consolidated financial statements of Bayerische Motoren Werke Aktiengesellschaft (“BMW Group financial statements” or “Group financial statements”) at 31 December 2007 have been drawn up in ac- cordance with International Financial Reporting Standards (IFRSs) as endorsed by the EU. The des- ignation “IFRSs” also includes all valid International Accounting Standards (IASs). All interpretations of the International Financial Reporting Interpretations Committee (IFRIC) mandatory for the financial year 2007 are also applied. The Group financial statements comply with provision § 315a of the German Commercial Code (HGB). This provision, in conjunction with the Regulation (EC) No. 1606/2002 of the European Parliament and Council of 19 July 2002, relating to the application of International Financial Reporting Standards, provides the legal basis for preparing consolidated financial statements in accordance with international standards in Germany and applies to financial years beginning on or after 1 January 2005. The BMW Group and sub-group income state- ments are presented using the cost of sales method. The Group balance sheet and sub-group balance sheets correspond to the classification provisions contained in IAS 1 (Presentation of Financial State- ments). In order to improve clarity, various items are aggregated in the income statement and balance sheet. These items are disclosed and analysed sep- arately in the Notes. In order to support the sale of its products, the BMW Group provides various financial services – mainly loan and lease financing – to retail customers and to dealers. The inclusion of the financial services activities of the Group therefore has an impact on the Group financial statements. In order to provide a bet- ter insight into the earnings, financial and net assets position of the Group, additional information has been presented in the BMW Group financial statements on its Industrial and Financial Operations. Financial Operations include financial services and the activities of the Group financing companies. The operating interest income and expense of Financial Operations are included in revenues and cost of sales respec- tively. The holding companies BMW (UK) Holdings Ltd., Bracknell, BMW Holding B.V., The Hague, BMW Österreich Holding GmbH, Steyr, BMW (US) Holding Corp., Wilmington, Del., BMW España Finance S. L., Madrid, and BMW Holding Malaysia Sdn Bhd, Kuala Lumpur, are allocated to Industrial Operations. The main business transactions between Industrial and Financial Operations, which are eliminated in the Group financial statements, are internal sales of products, the provision of funds for Group compa- nies and the related interest. These additional disclo- sures allow the assets, liabilities, financial position and performance of Industrial and Financial Opera- tions to be presented, in accordance with the recog- nition and measurement principles stipulated by IFRSs, as if they were two separate groups. This in- formation, which has not been audited by the Group auditors, is provided on a voluntary basis. In conjunction with the refinancing of financial services business, a significant volume of receivables arising from retail customer and dealer financing is sold. Similarly, rights and obligations relating to leases are sold. The sale of receivables is a well established instrument used by industrial companies. These transactions are usually in the form of asset backed financing transactions involving the sale of a portfolio of receivables to a trust which, in turn, issues market- able securities to refinance the purchase price. The BMW Group continues to “service” the receivables and receives an appropriate fee for these services. In accordance with IAS 27 (Consolidated and Separate Financial Statements) and the interpretation con- tained in SIC-12 (Consolidation – Special Purpose Entities) such assets remain in the Group financial statements although they have been legally sold. Gains and losses relating to the sale of such assets are not recognised until the assets are removed from the Group balance sheet on transfer of the related significant risks and rewards. The balance sheet value of the assets sold at 31 December 2007 totalled euro 6.3 billion (31 December 2006: euro 4.5 billion). For an additional understanding of the asset, liability and financial position of the BMW Group, the Group balance sheet contains a supplementary disclosure of the balance sheet total adjusted for assets which have been sold. In addition to credit financing and lease con- tracts, the Financial Services segment also brokers insurance business via cooperation arrangements entered into with local insurance companies. These activities are not material to the BMW Group as a whole. The Group currency is the euro. All amounts are disclosed in millions of euros (euro million) unless stated otherwise. All of the consolidated subsidiaries have a cor- responding year-end to BMW AG. 81 The Group financial statements, drawn up in accordance with § 315a HGB, and the Group manage- ment report for the financial year 2007 will be sub- mitted to the operator of the electronic version of the German Federal Gazette and can be obtained via the Company Register website. Printed copies will also be made available on request. In addition the Group financial statements and the Group management report can be downloaded from the BMW Group website at www.bmwgroup.com/ir. The Board of Management authorised the consolidated financial statements for issue on 19 February 2008. [2] Consolidated companies The BMW Group financial statements include, be- sides BMW AG, all material subsidiaries, 17 special purpose securities funds and 24 special purpose trusts (almost all used for asset backed financing transactions) both in Germany and abroad. The number of subsidiaries, special purpose securities funds and other special purpose trusts included in the Group financial statements changed in 2007 as follows: Included at 31.12. 2006 Included for the first time in 2007 No longer included in 2007 Included at 31.12. 2007 Germany Foreign Total 45 4 – 49 144 17 6 155 189 21 6 204 65 subsidiaries (2006: 68), either dormant or gen- erating a negligible volume of business, are not included. Their influence on the Group’s earnings, financial and net assets position is immaterial. Non- inclusion of operating subsidiaries reduces total Group revenues by 1.2 % (2006: 1.5 %). One joint venture is consolidated using the equity method. The investment in TRITEC Motors Ltda., Campo Largo, was sold during the financial year 2007. 16 equity investments are not consoli- dated using the equity method since they are not material to the Group’s earnings, financial and net assets position. They are included in the line “Other investments”, measured at cost less, where appli- cable, accumulated impairment losses. A separate “List of Group Investments” pursu- ant to § 313 (4) HGB will be submitted to the opera- tor of the electronic version of the German Federal Gazette. This list, along with the “List of Third Party Companies which are not of Minor Importance for the Group”, will also be posted on the BMW Group website at the address www.bmwgroup.com/ir. The subsidiaries BMW Fuhrparkmanagement Beteiligungs GmbH, Stuttgart, LHS Leasing- und Handelsgesellschaft Deutschland mbH, Stuttgart, BMW Financial Services Danmark A /S, Kolding, BMW Renting (Portugal) Lda., Lisbon, BMW Vertriebs GmbH, Salzburg, BMW Acquisitions Ltda., São Paulo, BMW Financeira S. A. Credito, Financiamento e In- vestimento, São Paulo, BMW Leasing do Brasil, S. A., São Paulo, BMW Asia Pte. Ltd., Singapore, BMW Melbourne Pty. Ltd., Melbourne, BMW Sydney Pty. Ltd., Sydney, and BMW Financial Services New Zealand Ltd., Auckland, were all consolidated for the first time in 2007. BMW Renting Iberica S. L., Madrid (following its merger with Alphabet Fleet Services España S. L., Madrid) and British Motor Holdings Ltd., Bracknell, ceased to be consolidated companies during the financial year. The Group reporting entity also changed by comparison to the previous year as a result of the first-time consolidation of seven special purpose trusts and two special purpose securities funds and the deconsolidation of two special purpose trusts and two special purpose securities funds. In addition, the names of four entities were changed during the financial year 2007. softlab GmbH für Systementwicklung und EDV-Anwendung, Munich, was renamed Cirquent GmbH, Munich; softlab Gesellschaft für Systementwicklung und EDV-Anwendung Ges.m.b.H., Vienna, was renamed 82 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information Cirquent Ges.m.b.H., Vienna, and softlab AG, Zürich, was renamed Cirquent AG, Zürich. The name of BL Reinsurance Company Ltd., Dublin, was changed to BMW Financial Services (Ireland) Limited, Dublin. [3] Business acquisitions and disposals The acquisition of DEKRA SüdLeasing Services GmbH, Stuttgart, and that entity’s subsidiaries, LHS Leasing- und Handelsgesellschaft Deutsch- land mbH, Stuttgart, DSL Fleetservices GmbH, Stuttgart, MOBIDIG GmbH, Stuttgart, and LHS Auto- land GmbH, Stuttgart, was completed on 2 April 2007, thus expanding the scale of the Group’s fleet business. All of the above entities became wholly owned subsidiaries. During the year, LHS Autoland GmbH, Stuttgart, was merged with LHS Leasing- und Handelsgesellschaft Deutschland mbH, Stutt- gart. DEKRA SüdLeasing Services GmbH, Stuttgart, was renamed BMW Fuhrparkmanagement Beteili- gungs GmbH, Stuttgart. This entity and its subsidiary, LHS Leasing- und Handelsgesellschaft Deutschland mbH, Stuttgart, were consolidated for the first time in the second quarter. The acquisition cost was euro 121 million (in- cluding euro 1 million of transaction costs). Based on the definitive purchase price allocation, the following carrying amounts and fair values were attributed to the assets and liabilities of the acquired companies at the acquisition date: in euro million Assets Intangible assets and property, plant and equipment Leased products Investments in subsidiaries Receivables from sales financing Other assets Liabilities Provisions Financial liabilities Other liabilities Net assets acquired Acquisition cost Goodwill Allocation by segment: Automobiles Financial Services Carrying amount Fair value 2 515 3 230 15 23 699 35 8 – – – – 28 515 3 230 15 23 699 45 24 121 97 33 64 The following identifiable assets have been recog- nised and included in intangible assets, measured at fair value: – contract portfolio – customer relationships – contract management system These intangible assets are amortised systematically over the following useful lives: 4 years – contract portfolio: – customer relationships: 7 years – contract management system: 5 years The remainder of the surplus (euro 97 million) of the acquisition cost over the fair value of the iden- tifiable net assets acquired is largely attributable to potential synergy benefits which will arise from the future growth of the Group’s fleet business. BMW Fuhrparkmanagement Beteiligungs GmbH, Stuttgart, and LHS Leasing- und Handelsgesell- schaft Deutschland mbH, Stuttgart, recorded a net loss of euro 5.7 million in the period since their first- time consolidation. Net revenues of the two entities since the date of first-time consolidation amounted to euro 379 million. 83 In addition, after obtaining approval from the relevant local authorities, BMW Holding B. V., The Hague, acquired SimeLease (Malaysia) Sdn Bhd, Kuala Lumpur, and that entity’s subsidiary, SimeCredit (Malaysia) Sdn Bhd, Kuala Lumpur, on 13 April 2007. The names of these entities have been changed to BMW Lease (Malaysia) Sdn Bhd, Kuala Lumpur, and BMW Credit (Malaysia) Sdn Bhd, Kuala Lumpur. With effect from 1 October 2007, all of the shares of Boxer S. r. l., Cassinetta di Biandronno, were ac- quired by BMW Italia S. p. A., Milan, and BMW España Finance S. L., Madrid. The acquired company was renamed Husqvarna Motorcycles S. r. l., Cassinetta di Biandronno. In addition, 51 % of the shares of CEC Finance Ltd., Hong Kong, and 100 % of the shares of BMW Osaka Corp., Osaka, Husqvarna Motorcycles NA, LLC, Wilmington, Del., and John Cooper Garages Ltd., Bracknell, were acquired during the year. CEC Finance Ltd., Hong Kong, was renamed BMW Financial Services Hong Kong Limited, Hong Kong. The entities listed above are not material in terms of the Group’s earnings performance, financial posi- tion and net assets. The investment in TRITEC Motors Ltda., Campo Largo, was sold to the Chrysler Group on 11 July 2007 in line with agreements in place between the various parties. [4] Consolidation principles The equity of subsidiaries is consolidated in accord- ance with IFRS 3 (Business Combinations). IFRS 3 requires that all business combinations are accounted for using the purchase method, whereby identifiable assets and liabilities acquired are measured initially at their fair value. The excess of the Group’s interest in the net fair value of the identifiable assets and lia- bilities acquired over cost is recognised as goodwill and is subjected to a regular review for possible im- pairment. Goodwill of euro 91 million which arose prior to 1 January 1995 remains netted against re- serves. In the event of impairment and deconsolida- tion, goodwill that has been deducted from equity is dealt with directly in equity. The companies BMW Financial Services Danmark A /S, Kolding, BMW Renting (Portugal) Lda., Lisbon, BMW Acquisitions Ltda., São Paulo, BMW Financeira S. A. Credito, Financiamento e Investimento, São Paulo, BMW Leasing do Brasil, S. A., São Paulo, BMW Asia Pte. Ltd., Singapore, BMW Melbourne Pty. Ltd., Mel- bourne, BMW Sydney Pty. Ltd., Sydney, and BMW Financial Services New Zealand Ltd., Auckland, were all consolidated for the first time as of 1 January 2007. The equivalent date for BMW Fuhrparkmanagement Beteiligungs GmbH, Stuttgart, and LHS Leasing- und Handelsgesellschaft Deutschland mbH, Stutt- gart, was 30 June 2007, and that for BMW Vertriebs GmbH, Salzburg, 31 December 2007. Receivables, liabilities, provisions, income and ex- penses and profits between consolidated com panies (intragroup profits) are eliminated on consolidation. Under the equity method, investments are measured at the Group’s share of equity taking ac- count of fair value adjustments on acquisition, based on the Group’s shareholding. Any difference be- tween the cost of investment and the Group’s share of equity is accounted for in accordance with the purchase method. Investments in other companies are accounted for as a general rule using the equity method when significant influence can be exercised (IAS 28 Investments in Associates). This is normally the case when voting rights of between 20 % and 50 % are held (associated companies). [5] Foreign currency translation The financial statements of consolidated compa- nies which are drawn up in a foreign currency are translated using the functional currency concept (IAS 21: The Effects of Changes in Foreign Exchange Rates) and the modified closing rate method. The functional currency of a subsidiary is determined as a general rule on the basis of the primary economic environment in which it operates and corresponds therefore to the relevant local currency. Income and expenses of foreign subsidiaries are translated in the Group financial statements at the average exchange rate for the year, and assets and liabilities are trans- lated at the closing rate. Exchange differences arising from the translation of shareholders’ equity are off- set directly against accumulated other equity. Ex- change differences arising from the use of different exchange rates to translate the income statement are also offset directly against accumulated other equity. Foreign currency receivables and payables in the single entity accounts of BMW AG and subsidi- aries are recorded, at the date of the transaction, at cost. Exchange gains and losses computed at the balance sheet date are recognised as income or ex- pense. 84 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information The exchange rates of those currencies which have a material impact on the Group financial statements were as follows: US Dollar British Pound Chinese renminbi Japanese Yen Australian Dollar Closing rate Average rate 31.12. 2007 31.12. 2006 2007 2006 1.46 0.73 10.70 163.77 1.67 1.32 0.67 10.29 156.88 1.67 1.37 0.68 10.42 161.28 1.64 1.26 0.68 10.02 146.06 1.67 [6] Accounting principles The financial statements of BMW AG and of its sub- sidiaries in Germany and elsewhere have been prepared for consolidation purposes using uniform accounting policies in accordance with IAS 27. Revenues from the sale of products are recog- nised when the risks and rewards of ownership of the goods are transferred to the customer, the sales price is agreed or determinable and receipt of pay- ment can be assumed. Revenues are stated net of discounts, allowances, settlement discount and rebates. In the case of long-term construction work, revenues are generally recognised in accordance with IAS 18 (Revenue) and IAS 11 (Construction Contracts) on the basis of the stage of completion of work performed using the percentage of com- pletion method. Revenues also include lease rentals and interest income from financial services. Revenues for the Financial Operations sub-group also include the interest income earned by Group financing companies. If the sale of products includes a determinable amount for subsequent services (“multiple-com- ponent contracts”), the related revenues are deferred and recognised as income over the period of the contract. Amounts are normally recognised as in- come by reference to the expected pattern of related expenditure. Profits arising on the sale of vehicles for which a Group company retains a repurchase commitment (buy-back contracts) are not recognised until such profits have been realised. The vehicles are included in inventories and stated at cost. Cost of sales comprises the cost of products sold and the acquisition cost of purchased goods sold. It includes all directly attributable material and production costs and production overheads, includ- ing depreciation/amortisation of property, plant and equipment and intangible assets relating to produc- tion and write-downs on inventories. Cost of sales also includes freight and insurance costs relating to deliveries to dealers and agency fees on direct sales. Expenses which are directly attributable to the finan- cial services business and interest expense from re- financing the entire financial services business, in- cluding the expense of risk provisions and impairment losses, are reported in cost of sales. Cost of sales for the Financial Operations sub-group also includes the interest expense of Group financing companies. Research costs and development costs which are not capitalised are recognised as an expense when incurred. In accordance with IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance), public sector grants are not recognised until there is reasonable assurance that the con- ditions attaching to them have been complied with and the grants will be received. They are recognised as income over the periods necessary to match them with the related costs which they are intended to compensate. Basic earnings per share are computed in ac- cordance with IAS 33 (Earnings per Share). Undiluted earnings per share are calculated for common and preferred stock by dividing the net profit after mi- nority interests, as attributable to each category of stock, by the average number of outstanding shares. The net profit is accordingly allocated to the different categories of stock. The portion of the Group net profit for the year which is not being distributed is allocated to each category of stock based on the number of outstanding shares. Profits available for distribution are determined directly on the basis of the dividend resolutions passed for common and 85 preferred stock. Diluted earnings per share would have to be disclosed separately. Purchased and internally-generated intangible assets are recognised as assets in accordance with IAS 38 (Intangible Assets), where it is probable that the use of the asset will generate future economic benefits and where the costs of the asset can be determined reliably. Such assets are measured at acquisition and/or manufacturing cost and, to the extent that they have a finite useful life, amortised on a straight-line basis over their estimated useful lives. With the exception of capitalised development costs, intangible assets are generally amortised over their estimated useful lives of between three and five years. Intangible assets with infinite useful lives are assessed regularly for recoverability and their carry- ing amounts are reduced to the recoverable amount in the event of impairment. Development costs for vehicle and engine projects are capitalised at manufacturing cost, to the extent that costs can be allocated reliably and both technical feasibility and successful marketing are assured. It must also be probable that the develop- ment expenditure will generate future economic benefits. Capitalised development costs comprise all expenditure that can be attributed directly to the development process, including development-re- lated overheads. Capitalised development costs are amortised on a systematic basis, following the commencement of production, over the estimated product life which is generally seven years. All items of property, plant and equipment are considered to have finite useful lives. They are rec- ognised at acquisition or manufacturing cost less scheduled depreciation based on the estimated useful lives of the assets. Depreciation on property, plant and equipment reflects the pattern of their usage and is generally computed using the straight- line method. Components of items of property, plant and equipment with different useful lives are depreciated separately. Expenditure on low value non-current assets is generally written off in full in the year of acquisi- tion. Systematic depreciation is based on the fol- lowing useful lives, applied throughout the Group: in years Factory and office buildings, distribution facilities and residential buildings Plant and machinery Other equipment, factory and office equipment 8 to 50 5 to 10 3 to 10 For machinery used in multiple-shift operations, depreciation rates are increased to account for the additional utilisation. assets are attributed to the lessee and in the case of operating leases the assets are attributed to the lessor. The cost of internally constructed plant and equipment comprises all costs which are directly attributable to the manufacturing process and an appropriate portion of production-related overheads. This includes production-related depreciation and an appropriate proportion of administrative and social costs. Financing costs are not included in acquisition or manufacturing cost. Non-current assets also include assets relating to leases. The BMW Group uses property, plant and equipment as lessee and also leases out assets, mainly vehicles produced by the Group, as lessor. IAS 17 (Leases) contains rules for determining, on the basis of risks and rewards, the economic owner of the assets. In the case of finance leases the In accordance with IAS 17, assets leased under finance leases are measured at their fair value at the inception of the lease or at the present value of the lease payments, if lower. The assets are depreciated using the straight-line method over their estimated useful lives or over the lease period, if shorter. The obligations for future lease instalments are recog- nised as financial liabilities. Where Group products are recognised by BMW Group leasing companies as leased assets under operating leases, they are measured at manufacturing cost. All other leased products are measured at ac- quisition cost. All leased products are depreciated using the straight-line method over the period of the lease to the lower of their imputed residual value or estimated fair value. 86 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information The recoverability of the carrying amount of intangible assets (including capitalised development costs and goodwill) and property, plant and equip- ment is tested regularly for impairment in accordance with IAS 36 (Impairment of Assets) on the basis of cash generating units. This relates primarily to capi- talised development costs and property, plant and equipment connected with vehicle projects. If there is no indication of impairment during the year, an annual impairment test is carried out at the year-end. An impairment loss is recognised when the recover- able amount (defined as the higher of the asset’s net selling price and its value in use) is lower than the carrying amount. The value in use is determined on the basis of a present value computation. If the rea- son for the previously recognised impairment loss no longer exists, the impairment loss is reversed up to the level of its rolled-forward depreciated or amor- tised cost. Investments accounted for using the equity method are measured at the Group’s share of equity taking account of fair value adjustments on acquisi- tion unless the investment is impaired. Investments in non-consolidated Group com- panies reported in other investments are measured at cost or, if lower, at their fair value. Investments in other companies are measured at their quoted market price or fair value. When, in individual cases, these values are not available or cannot be determined reliably, investments in other companies are measured at cost. Non-current marketable securities are meas- ured according to the category of financial asset to which they are classified. No held-for-trading finan- cial assets are included under this heading. Financial assets are accounted for on the basis of the settlement date. On initial recognition, they are measured at acquisition cost, including transac- tion costs. Subsequent to initial recognition, available-for- sale and held-for-trading financial assets are measured at fair value. When market prices are not available, the fair value of available-for-sale financial assets is measured using appropriate valuation techniques e.g. discounted cash flow analysis based on market information available at the balance sheet date. Available-for-sale assets include financial assets, securities and shares in securities funds. This cate- gory includes all non-derivative financial assets which are not classified as “loans and receivables” or “held- to-maturity investments” or as items measured “at fair value through profit and loss”. Loans and receivables which are not held for trading, held-to-maturity financial investments and all financial assets for which published price quota- tions in an active market are not available and whose fair value cannot be determined reliably, are meas- ured, to the extent that they have a fixed term, at amortised cost, using the effective interest method. When the financial assets do not have a fixed term, they are measured at acquisition cost. In accordance with IAS 39 (Financial Instruments: Recognition and Measurement), assessments are made regularly as to whether there is any objective evidence that a financial asset or group of assets may be impaired. Impairment losses identified after carrying out an impairment test are recognised as an expense. Gains and losses on available-for-sale financial assets are recognised directly in equity until the financial asset is disposed of or is determined to be impaired, at which time the cumulative loss pre- viously recognised in equity is included in net profit or loss for the period. With the exception of derivative financial instru- ments, all receivables and other current assets re- late to loans and receivables which are not held for trading and are measured at amortised cost. Receiv- ables with maturities of over one year which bear no or a lower than market interest rate are discounted. Appropriate impairment losses are recognised to take account of all identifiable risks. Receivables from sales financing comprise receivables from retail customer, dealer and lease financing. Impairment losses on receivables and loans re- lating to the financial services business are recognised using a uniform methodology that is applied through- out the Group and meets the requirements of IAS 39. This methodology results in the recognition of im- pairment losses on individual assets and groups of assets. If there is objective evidence of impairment, the BMW Group recognises impairment losses on the basis of individual assets. Within the customer retail business, the existence of overdue balances or the incidence of similar events in the past are ex- amples of such objective evidence. In the event of overdue receivables, impairment losses are always 87 recognised individually based on the length of period of the arrears. In the case of dealer financing receiv- ables, the allocation of the dealer to a corresponding rating category is also deemed to represent objec- tive evidence of impairment. If there is no objective evidence of impairment, impairment losses are recognised on financial assets using a portfolio ap- proach based on similar groups of assets. Company- specific loss probabilities and loss ratios, derived from historical data, are used to measure impairment losses on similar groups of assets. The recognition of impairment losses on receiv- ables relating to the industrial business is also, as far as possible, based on the same process applied to the financial services business. Impairment losses (write-downs and allowances) on receivables are always recorded on separate accounts and are not written off until the correspond- ing receivables are derecognised. Items are presented as financial assets to the item (usually external revenue) is recognised in the income statement. The portion of the gains or losses from fair value measurement not relating to the hedged item is recognised immediately in the income statement. If, contrary to the normal case within the BMW Group, hedge accounting cannot be applied, the gains or losses from the fair value measurement of derivative financial instruments are recognised im- mediately in the income statement. In accordance with IAS 12 (Income Taxes), de- ferred taxes are recognised on all temporary differ- ences between the tax and accounting bases of as- sets and liabilities and on consolidation procedures. Deferred tax assets also include claims to future tax reductions which arise from the expected usage of existing tax losses available for carryforward, where usage is probable. Deferred taxes are computed using enacted or planned tax rates which are ex- pected to apply in the relevant national jurisdictions when the amounts are recovered. extent that they relate to financing transactions. Inventories of raw materials, supplies and goods Derivative financial instruments are only used within the BMW Group for hedging purposes to reduce currency, interest rate and market price risks from operations and any related financing require- ments. All derivative financial instruments (such as interest, currency and combined interest/currency swaps as well as forward currency contracts) are measured in accordance with IAS 39 at their fair value, irrespective of their purpose or the intention for which they are held. The fair values of derivative financial instruments are measured using market information and recognised valuation techniques. In those cases where hedge accounting is applied, changes in fair value are recognised either in income or directly in equity under accumulated other equity depending on whether the transactions are classi- fied as fair value hedges or cash flow hedges. In the case of fair value hedges, the results of the fair value measurement of the derivative financial instru- ments and of the related hedged items are recog- nised in the income statement. In the case of fair value changes from cash flow hedges which are used to mitigate the future cash flow risk on a recognised asset or liability or on forecast transactions, unrealised gains and losses on the hedging instrument are recognised initially directly in accumulated other equity. Any such gains or losses are recognised sub- sequently in the income statement when the hedged for resale are stated at the lower of average acquisi- tion cost and net realisable value. Work in progress and finished goods are stated at the lower of average acquisition cost and net realis- able value. Manufacturing cost comprises all costs which are directly attributable to the manufacturing process and an appropriate proportion of produc- tion-related overheads. This includes production- related depreciation and an appropriate proportion of administrative and social costs. Financing costs are not included in acquisition or manufacturing cost. Provisions for pensions and similar obligations are recognised using the projected unit credit method in accordance with IAS 19 (Employee Benefits). Under this method, not only obligations relating to known vested benefits at the reporting date are recognised, but also the effect of future increases in pensions and salaries. This involves taking account of various input factors which are evaluated on a prudent basis. The provision is derived from an inde- pendent actuarial valuation which takes into account all relevant biometric factors. Actuarial gains and losses are recognised, net of deferred tax, directly in equity. The expense related to the reversal of discount- ing on pension obligations and the income from the expected return on pension plan assets are reported 88 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information [7] separately as part of the financial result. All other costs relating to allocations to pension provisions are allocated to costs by function in the income state- ment. Other provisions are recognised when the Group has an obligation to a third party, an outflow of re- sources is probable and a reliable estimate can be made of the amount of the obligation. Measurement is computed on the basis of fully attributable costs. Non-current provisions with a remaining period of more than one year are discounted to the present value of the expenditures expected to settle the ob- ligation at the balance sheet date. Financial liabilities are measured on first-time recognition at cost, which is equivalent to the fair value of the consideration given. Transaction costs are in- cluded in this initial measurement. Subsequent to initial recognition, liabilities are, with the exception of derivative financial instruments, measured at amor- tised cost. The BMW Group has no liabilities which are held for trading. Liabilities from finance leases are stated at the present value of the future lease payments and disclosed under financial liabilities. The preparation of the Group financial state- ments in accordance with IFRSs requires manage- ment to make certain assumptions and estimates that affect the reported amounts of assets and lia- bilities, revenues and expenses and contingent lia- bilities. The assumptions and estimates relate prin- cipally to the group-wide determination of economic useful lives, the recognition and measurement of provisions and the recoverability of future tax bene- fits. All assumptions and estimates are based on f actors known at the balance sheet date. They are determined on the basis of the most likely outcome of future business developments. This includes the situation in the automotive sector and the general business environment. Actual amounts could in cer- tain cases differ from those assumptions and esti- mates, if business conditions develop differently to the Group’s expectations at the balance sheet date. Where new information comes to light, differences are reflected in the income statement and assump- tions changed accordingly. There was no indication at the balance sheet date that any assumptions and estimates were subject to any material risks. For that reason, there is no reason to assume that the figures will require to be adjusted in the coming financial year. No adjustments of this nature were recorded during the financial year 2007. New financial reporting rules (a) Financial reporting rules applied for the first time in the financial year 2007 The following Standards and Revised Standards were applied for the first time in the financial year 2007: – Amendments to IAS 1 (Presentation of Financial Statements: Capital Disclosures), mandatory for financial years beginning on or after 1 January 2007 – IFRS 7 (Financial Instruments: Disclosures), mandatory for financial years beginning on or after 1 January 2007 In addition, the following Interpretations were applied for the first time: – IFRIC 7 (Applying the Restatement Approach un- der IAS 29 Financial Reporting in Hyperinflationary Economics), mandatory for financial years begin- ning on or after 1 March 2006 – IFRIC 8 (Scope of IFRS 2), mandatory for financial years beginning on or after 1 May 2006 – IFRIC 9 (Reassessment of Embedded Derivatives), mandatory for financial years beginning on or after 1 June 2006 – IFRIC 10 (Interim Financial Reporting and Impair- ment), mandatory for financial years beginning on or after 1 November 2006 IFRS 7 (Financial Instruments: Disclosures) results in a greater scope of disclosures about financial in- struments in the Notes to the Group financial state- ments. Other financial reporting rules applied for the first time in 2007 did not have a significant im- pact on the BMW Group. (b) New financial reporting rules issued in 2007 The IASB issued a revised version of IAS 23 (Bor- rowing Costs) in 2007, which is mandatory for finan- cial years beginning on or after 1 January 2009. A revised version of IAS 1 (Presentation of Financial Statements) was also issued. The revised standard is mandatory for financial years commencing on or after 1 January 2009. BMW Group Notes to the Group Financial Statements Notes to the Income Statement 89 In addition, the following Interpretations were also issued: – IFRIC 13 (Customer Loyalty Programmes) – IFRIC 14 (IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction) IFRIC 13 is mandatory for financial years commenc- ing on or after 1 July 2008 and IFRIC 14 is mandato- ry for financial years commencing on or after 1 Janu- ary 2008. These new financial reporting rules are not expected to have a significant impact on the BMW Group. This also applies to financial reporting rules issued in earlier periods and for which application in 2007 is encouraged but not mandatory. [8] Revenues Revenues by activity comprise the following: in euro million Sales of products and related goods Income from lease instalments Sale of products previously leased to customers Interest income on loan financing Other income Revenues 2007 2006 43,297 38,769 5,069 4,185 2,457 1,010 4,141 3,107 1,925 1,057 56,018 48,999 An analysis of revenues by business segment and geographical region is shown in the segment information on pages 132 to 134. [9] Cost of sales Cost of sales comprises: in euro million Manufacturing costs Warranty expenditure Cost of sales directly attributable to financial services Interest expense for financial operations Expense for risk provisions and write-downs for financial services business Other cost of sales Cost of sales 2007 2006 29,536 26,449 1,309 8,450 2,045 529 1,963 1,081 6,612 1,308 501 1,709 43,832 37,660 Cost of sales include euro 11,024 million (2006: euro 8,421 million) relating to the financial services business. Manufacturing costs include impairment losses on intangible assets and property, plant and equipment of euro 17 million (2006: euro 15 million). 90 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information Cost of sales is reduced by public-sector subsidies in the form of reduced taxes on assets and re- duced consumption-based taxes amounting to euro 16 million (2006: euro 11 million). [10] Sales and administrative costs Sales costs amounted to euro 4,284 million (2006: euro 4,039 million) and comprise mainly marketing, advertising and sales personnel costs. Administrative costs amounted to euro 970 mil- lion (2006: euro 933 million) and comprised ex- penses for administration not attributable to develop- ment, production or sales functions. [11] Research and development costs Research and development costs of euro 2,920 mil- lion (2006: euro 2,544 million) comprise all research costs and development costs not recognised as assets as well as amortisation of capitalised develop- ment costs of euro 1,109 million (2006: euro 872 million). Total research and development expenditures comprising research costs, development costs not recognised as assets and capitalised development costs were as follows: in euro million Research and development costs Amortisation New expenditure for capitalised development costs Total research and development expenditures 2007 2006 2,920 – 1,109 1,333 3,144 2,544 – 872 1,536 3,208 [12] Other operating income and expenses in euro million 2007 2006 Exchange gains Income from the reversal of provisions Income from the reversal of write-downs Gains on the disposal of assets Sundry operating income Other operating income Exchange losses Expense for additions to provisions Expenses for impairment losses Sundry operating expenses Other operating expenses Other operating income and expenses 204 90 38 229 169 730 231 64 25 210 530 200 245 141 24 102 232 744 219 109 34 155 517 227 Sundry operating income includes public-sector grants of euro 36 million (2006: euro 32 million). 91 [13] Result from equity accounted investments The profit from equity accounted investments of euro 11 million (2006: loss of euro 25 million) in- cludes the result of the joint venture, BMW Brilliance Automotive Ltd., Shenyang. In the previous year, the result of TRITEC Motors Ltda., Campo Largo, was also included. [14] Other financial result in euro million Income from investments – thereof from subsidiaries euro 1 million (2006: euro 58 million) Impairment losses on investments in subsidiaries and other companies Reversals of impairment losses on investments in subsidiaries and other companies Result on investments Expected return on plan assets Other interest and similar income * – thereof from subsidiaries euro 12 million (2006: euro 19 million) Interest and similar income Expense from reversing the discounting of pension obligations Expense from reversing the discounting of other long-term provisions Write-downs on marketable securities Sundry interest and similar expenses* – thereof to subsidiaries euro 1 million (2006: euro 2 million) Interest and similar expenses Net interest result Fair value measurement of financial instruments Sundry other financial result Other financial result 2007 2006 3 – 6 – – 3 358 287 645 – 537 – 86 – 49 – 225 62 – 46 16 32 315 259 574 – 501 – 35 – 2 – 319 – 897 – 857 – 252 – 283 – 95 – 95 – 350 350 350 99 * Interest income and expenses relating to stand-alone derivatives are netted within the net interest result. Interest income includes net interest income of euro 70 million (2006: euro 83 million) relating to stand-alone derivatives. The deterioration in other financial result is due to the exceptional gain recorded in 2006 on the partial settlement of the exchangeable bond on shares in Rolls-Royce plc, London. As well as the impact of the exchangeable bond, sundry other financial result also includes losses recognised on derivative finan- cial instruments, in particular on stand-alone inter- est rate derivatives. The decrease in the fair values of these financial instruments reflected the changes in the interest rate structure. [15] Income taxes Taxes on income comprise the following: in euro million Current tax expense Deferred tax expense 2007 2006 1,002 – 263 739 993 257 1,250 92 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information The deferred tax expense was euro 520 million lower than in the previous year, primarily reflecting the impact of the Business Tax Reform Act 2008, adopted by the German Bundesrat (Federal Council) on 6 July 2007. Deferred taxes are recognised on temporary dif- ferences between the carrying amount of assets and liabilities for IFRS purposes and their tax bases. De- ferred taxes are computed using enacted or planned tax rates which are expected to apply in the relevant national jurisdictions when the amounts are recovered. A corporation tax rate of 15.0 % applies in Germany with effect from 1 January 2008 onwards. After taking account of the average multiplier rate (Hebesatz) of 410 % for municipal trade tax and the solidarity charge of 5.5 %, the overall income tax rate for companies in Germany is 30.2 % (2006: 38.9 %). This reduced rate has been applied in 2007 to measure deferred tax assets and liabilities. As in the previous year, the tax rates for companies outside Germany remain in a range of between 12.5 % and 40.7 %. A valuation allowance is recognised on deferred tax assets when recoverability is uncertain. In determining the level of the valuation allowance, all positive and negative factors concerning the likely existence of sufficient taxable profit in the future are taken into account. These estimates can change depending on the ac- tual course of events. An analysis of deferred tax assets and liabilities by position at 31 December is shown below: in euro million Intangible assets Property, plant and equipment Leased products Investments Other current assets Tax loss carryforwards Provisions Liabilities Consolidations Valuation allowance Netting Deferred tax assets Deferred tax liabilities 2007 2006 2007 2006 1 43 558 2 1,110 1,072 1,145 3,084 1,661 8,676 – 671 – 7,285 720 – 48 572 2 1,058 849 1,540 3,653 1,600 9,322 – 528 – 8,039 755 1,528 428 3,205 1 3,767 – 51 690 329 1,859 510 3,368 – 3,696 – 134 827 403 9,999 10,797 – – 7,285 2,714 – – 8,039 2,758 Compared to the previous reporting period, the main changes to deferred tax assets and liabilities were as follows: Application of the income tax rate of 30.2 % (2006: 38.9 %), which is valid in Germany from 1 Jan- uary 2008 onwards, significantly affected the meas- urement of deferred tax assets and liabilities relating to intangible assets, property, plant and equipment, leased products, provisions and liabilities. The changes in deferred tax assets and liabili- ties relating to leased products and other current as- sets are attributable primarily to the financial services business. Deferred tax assets on tax losses available for carryforward and on capital losses increased margin- ally on a net basis. Tax losses available for carryfor- ward, which for the most part can be carried forward without restriction, totalled euro 1.8 billion at the year-end (2006: euro 1.7 billion). A valuation allow- ance of euro 43 million (2006: euro 65 million) was recognised in 2007 on deferred tax assets relating to tax losses. Capital losses in the United Kingdom increased to euro 2.2 billion at the end of 2007 (2006: euro 1.5 billion). In this context, a definitive agreement was reached with the UK tax authorities in 2007. As in previous years, these tax losses 93 amounting to euro 628 million at the end of the year (2006: euro 463 million) were fully written down since they can only be utilised against future capital gains. Capital losses are not connected to ongoing business operations. Deferred taxes recognised directly in equity amounted to euro 116 million (2006: euro 512 mil- lion). The decrease was due mainly to actuarial gains and losses (net) arising in conjunction with pension obligations and recognised directly in equity. The level of actuarial gains and losses in 2007 was af- fected in particular by the increase in the discount factors applied. Deferred taxes are not recognised on retained profits of euro 13,925 million (2006: euro 13,866 mil- lion) of foreign subsidiaries, as it is intended to invest these profits to maintain and expand the business volume of the relevant companies. A computation was not made of the potential impact of income taxes on the grounds of disproportionate expense. The tax returns of BMW Group entities are checked regularly by German and foreign tax author- ities. Taking account of a variety of factors – including existing interpretations, commentaries and legal de- cisions taken relating to the various tax jurisdictions and the BMW Group’s past experience – adequate provision has, as far as identifiable, been made for potential future tax obligations. The actual tax expense for the financial year 2007 of euro 739 million (2006: euro 1,250 million) is euro 767 million (2006: euro 354 million) lower than the expected tax expense of euro 1,506 million (2006: euro 1,604 million) which would theoretically arise if the tax rate of 38.9 % (unchanged from the previous year), applicable for German companies, was applied across the Group. The difference between the ex- pected and actual tax expense is attributable to the following: in euro million 2007 2006 Expected tax expense Variances due to different tax rates Tax reductions (–)/tax increases (+) as a result of non-taxable income and non-deductible expenses Tax expense (+)/benefits (–) for prior periods Other variances Actual tax expense 1,506 – 731 4 – 4 – 36 739 1,604 – 213 – 68 – 94 21 1,250 The sharp decrease in the effective tax rate was mainly caused by the significant increase in variances due to different tax rates. This includes the one-off impact of the remeasurement of deferred tax assets and liabilities at 31 December 2007. The total posi- tive impact for the BMW Group was euro 491 million, most of which was due to the application of the tax rate of 30.2 % (valid from 1 January 2008) for German entities. 94 Group Financial Statements [16] Earnings per share 2007 2006 Net profit for the year after minority interest euro million 3,125.9 2,867.8 Profit attributable to common stock Profit attributable to preferred stock euro million euro million 2,878.4 247.5 2,641.0 226.8 Average number of common stock shares in circulation Average number of preferred stock shares in circulation number 601,995,196 602,461,673 number 51,535,857 51,506,787 Earnings per share of common stock Earnings per share of preferred stock Dividend per share of common stock Dividend per share of preferred stock euro euro euro euro 4.78 4.80 1.06 1.08 4.38 4.40 0.70 0.72 Earnings per share of preferred stock are computed on the basis of the number of preferred stock shares entitled to receive a dividend in each of the relevant financial years. Diluted earnings per share were not applicable in either the current or prior year. 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information [17] Other disclosures relating to the income statement The income statement includes personnel costs as follows: in euro million Personnel costs Wages and salaries Social security, retirement and welfare costs – thereof retirement costs: euro 761 million (2006: euro 767 million) 2007 2006 6,268 1,243 6,207 1,241 7,511 7,448 The average number of employees during the year was: Wage earners Other employees Apprentices and students gaining work experience 95 2007 2006 51,906 46,016 97,922 52,812 44,394 97,206 6,480 6,521 104,402 103,727 For information regarding the number of employees at the year-end, reference is made to pages 26 and 27 in the Group management report. The fee expense recognised in the financial year 2007 for the auditors of the Group financial state- ments, KPMG Deutsche Treuhand-Gesellschaft, Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, pursuant to § 314 (1) no. 9 HGB amounted to euro 5 million (2006: euro 4 million) and consists of the following: in euro million Fee expense Year-end audits Tax advisory services 2007 2006 2 3 5 2 2 4 The item “Year-end audits” includes fees for the audit of annual financial statements of BMW AG, the audit of the Group financial statements and the audit of the annual financial statements of the Ger- man subsidiaries. The item “Tax advisory services” relates prin- cipally to fees for services provided to employees seconded abroad. 96 Group Financial Statements BMW Group Notes to the Group Financial Statements Notes to the Balance Sheet 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information [18] Analysis of changes in Group tangible, intangible and investment assets 2007 in euro million Acquisition and manufacturing cost 1.1. 20071] Translation differences Additions Reclassi- fications Disposals 31.12. 2007 Development costs Other intangible assets Intangible assets 7,684 813 8,497 – – 11 – 11 1,333 250 1,583 Land, titles to land, buildings, including buildings on third party land Plant and machinery Other facilities, factory and office equipment Advance payments made and construction in progress Property, plant and equipment 6,425 19,640 2,055 740 28,860 – 118 – 315 – 44 – 23 – 500 248 1,444 184 808 2,684 Leased products 17,628 – 1,219 11,038 Investments accounted for using the equity method 82 Investments in associated companies Investments in other companies Non-current marketable securities Other investments 272 195 14 481 – – 1 – – 1 – 2 18 54 – 8 62 1] including the gross balances brought forward of companies consolidated for the first time during the financial year 2] including impairment losses of euro 12 million 3] including impairment losses of euro 5 million – – – 231 264 6 – 501 – – – – – – – 538 43 581 220 618 147 5 990 8,479 1,009 9,488 6,566 20,415 2,054 1,019 30,054 6,587 20,860 37 63 64 187 – 251 261 8 21 290 Analysis of changes in Group tangible, intangible and investment assets 2006 in euro million Acquisition and manufacturing cost 1.1. 20061] Translation differences Additions Reclassi- fications Disposals 31.12. 2006 Development costs Other intangible assets Intangible assets Land, titles to land, buildings, including buildings on third party land Plant and machinery Other facilities, factory and office equipment Advance payments made and construction in progress Property, plant and equipment 6,593 739 7,332 6,150 18,977 2,078 899 28,104 – – 5 – 5 – 70 – 185 – 46 – 15 – 316 1,536 121 1,657 242 1,717 206 491 2,656 Leased products 13,983 – 1,182 8,522 Investments accounted for using the equity method 94 Investments in associated companies Investments in other companies Non-current marketable securities Other investments 191 1,002 32 1,225 – – 2 – – 1 – 3 – 152 – 11 163 1] including the gross balances brought forward of companies consolidated for the first time during the financial year 2] including impairment losses of euro 8 million 3] including impairment losses of euro 7 million – – – 445 56 501 7,684 799 8,483 152 464 16 – 632 – – – – – – – 49 1,333 211 3 6,425 19,640 2,043 740 1,596 28,848 4,578 16,745 12 82 74 807 28 909 267 195 14 476 97 Depreciation and amortisation 1.1. 20071] Translation differences Current year Disposals 31.12. 2007 2,874 310 3,184 2,529 13,525 1,515 1 17,570 – – 4 – 4 – 48 – 200 – 43 – – 291 1,109 103 1,2122] 201 2,057 213 – 2,4713] 538 36 574 61 602 141 – 804 3,445 373 3,818 2,621 14,780 1,544 1 18,946 Carrying amount 31.12. 2007 31.12. 2006 5,034 636 5,670 3,945 5,635 510 1,018 4,810 502 5,312 3,896 6,115 535 739 11,108 11,285 3,289 – 247 2,475 1,670 3,847 17,013 13,642 22 70 5 – 75 – – – – – – 6 – – 6 22 – – – – – 76 5 – 81 63 60 185 3 21 209 197 190 14 401 Depreciation and amortisation Reversals 1.1. 20061] Translation Current year differences Disposals 31.12. 2006 Carrying amount 31.12. 2006 31.12. 2005 2,447 290 2,737 2,384 13,104 1,506 1 – – 4 – 4 – 30 – 128 – 36 – 872 87 959 2] 207 1,867 239 – 445 50 495 32 1,318 201 – 16,995 – 194 2,313 3] 1,551 2,608 – 222 1,576 859 – 40 5 – 45 – – – – – 22 46 – – 46 – – – – – – 26 26 2,874 297 3,171 – – – – – – – 16 – – 16 2,529 13,525 1,508 1 17,563 3,103 22 70 5 – 75 4,810 502 5,312 3,896 6,115 535 739 4,146 447 4,593 3,757 5,871 562 897 11,285 11,087 13,642 11,375 60 197 190 14 401 94 149 997 32 1,178 98 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information [19] Intangible assets Intangible assets mainly comprise capitalised de- velopment costs on vehicle and engine projects as well as subsidies for tool costs, licences, purchased development projects and software. Amortisation on intangible assets is presented in cost of sales, administrative costs and research and development costs. In addition, intangible assets include goodwill of euro 163 million (2006: euro 66 million). This com- prises goodwill arising on earlier business acquisi- tions within the Cirquent Group and on the acquisition of DEKRA SüdLeasing Services GmbH, Stuttgart, and that entity’s subsidiaries. This item is not pre- sented separately in the BMW Group balance sheet since the amount is not significant in relation to either the balance sheet total or intangible assets. There were no reversals of impairment losses on intangible assets (2006: euro 26 million). Changes in intangible assets during the year are≈shown in the analysis of changes in Group tan- gible, intangible and investment assets on pages 96 and 97. [20] Property, plant and equipment A break-down of the different classes of property, plant and equipment disclosed in the balance sheet and changes during the year are shown in the analysis of changes in Group tangible, intangible and investment assets on pages 96 and 97. Property, plant and equipment include leased plant and machinery and other equipment amounting to euro 102 million (2006: euro 146 million) and, in addition to operational buildings used by BMW AG, also includes leased plant and equipment used primarily in the Oxford and Hams Hall production plants. Due to the nature of the lease arrangements (finance leases), economic ownership of these assets is attributable to the Group. The leases for buildings, with a carrying amount of euro 60 million (2006: euro 66 million), run for periods up to 2023 at the latest. Some of the leases contain extension and purchase options. The leases for plant and machinery and other equipment at the Oxford pro- duction plant, with a carrying amount of euro 19 mil- lion (2006: euro 46 million) at 31 December, run for periods up to 2011 at the latest. For each of the leases, there is a recurring option to extend the leases by one year. A purchase option was not agreed. The lease for plant and machinery and other facilities, factory and office equipment at the Hams Hall pro- duction plant, with a carrying amount of euro 17 mil- lion (2006: euro 25 million), runs until 2018 and may be extended for one-year periods thereafter. A pur- chase option was not agreed. Disposal of land, titles to land and buildings, including buildings on third-party land, relate primarily to a number of properties which were sold and are being leased back. Minimum lease payments of the relevant leases are as follows: in euro million 31.12. 2007 31.12. 2006 Total of future minimum lease payments due within one year due between one and five years due later than five years Interest portion of the future minimum lease payments due within one year due between one and five years due later than five years Present value of future minimum lease payments due within one year due between one and five years due later than five years 85 318 201 604 16 48 73 137 69 270 128 467 91 413 257 761 16 59 111 186 75 354 146 575 99 [21] Leased products The BMW Group, as lessor, leases out assets (pre- dominantly own products) as part of its financial services business. Minimum lease payments of euro 7,419 million (2006: euro 6,210 million) from non-cancellable operating leases fall due as follows: in euro million 31.12. 2007 31.12. 2006 within one year between one and five years later than five years 3,902 3,516 1 7,419 3,342 2,867 1 6,210 Contingent rents of euro 10 million (2006: euro 4 mil- lion), based principally on the distance driven, were recognised in income. The agreements have, in part, extension and purchase options as well as price es- calation clauses. Changes in leased products during the year are shown in the analysis of changes in Group tangible, intangible and investment assets on pages 96 and 97. [22] Investments accounted for using the equity method and other investments Investments accounted for using the equity method comprise the Group’s interest in the joint venture BMW Brilliance Automotive Ltd., Shenyang. At the end of the previous year, the interest in TRITEC Motors Ltda., Campo Largo, was also included. The interest in BMW Brilliance Automotive Ltd., Shen- yang, (with a 50 % shareholding) was as follows: in euro million 31.12. 2007 31.12. 2006 Disclosures relating to the income statement Income Losses Disclosures relating to the balance sheet Non-current assets Current assets Equity Non-current liabilities Current liabilities 627 615 106 259 80 41 244 589 568 122 286 110 34 264 Other investments relate primarily to investments in non-consolidated subsidiaries and to equity invest- ments in other entities. Additions to investments in subsidiaries relate to share capital increases at BMW Distribution S. A. S., Montigny le Bretonneux, BMW India Pvt. Ltd., New Delhi, BMW Sauber Holding AG, Vaduz, and BMW Leasing de Argentina S. A., Buenos Aires, as well as the acquisitions of BMW Lease (Malaysia) Sdn Bhd, Kuala Lumpur, John Cooper Garages Ltd., Bracknell, BMW Financial Services Hong Kong Limited, Hong Kong, and Husqvarna Motorcycles S. r. l., Cassinetta di Biandronno. Disposals of investments in subsidiaries relate primarily to the first-time consolidation of BMW Financial Ser vices Danmark A /S, Kolding, BMW Vertriebs GmbH, Salzburg, BMW Renting (Portugal) Lda., Lisbon, BMW Acquisitions Ltda., São Paulo, BMW Financeira S. A. Credito, Financiamento e Investimento, São Paulo, and BMW Financial Services New Zealand Ltd., Auckland. 100 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information Impairment losses on investments in subsidiaries relate primarily to BMW Distribution S. A. S., Montigny le Bretonneux. changeable bond issued by the BMW Group on Rolls-Royce shares. A break-down of the different classes of other In the case of investments in other companies, the changes in 2007 related to the disposal of shares in Rolls-Royce plc, London, following the exercise of the conversion option relating to the ex- investments disclosed in the balance sheet and changes during the year are shown in the analysis of changes in Group tangible, intangible and invest- ment assets on pages 96 and 97. [23] Receivables from sales financing Receivables from sales financing, totalling euro 34,244 million (2006: euro 30,368 million), comprise euro 26,181 million (2006: euro 23,038 million) for loan financing for retail customers and dealers and euro 8,063 million (2006: euro 7,330 million) for finance leases. Finance leases are analysed as fol- lows: in euro million 31.12. 2007 31.12. 2006 Gross investment in finance leases due within one year due between one and five years due later than five years Present value of future minimum lease payments due within one year due between one and five years due later than five years 3,215 6,013 1 9,229 2,886 5,176 1 8,063 3,029 5,192 6 8,227 2,758 4,567 5 7,330 Unrealised interest income 1,166 897 Contingent rents recognised as income, generally relating to the distance driven, amounted to euro 12 million (2006: euro 7 million). Write-downs on finance leases amounting to euro 52 million (2006: euro 60 million) were measured and recognised on the basis of specific credit risks. Allowance for impairment and credit risk Receivables from sales financing include euro 20,248 million (2006: euro 17,865 million) with a remaining term of more than one year. in euro million 31.12. 2007 31.12. 2006 Gross carrying amount Allowance for impairment Net carrying amount 35,036 792 34,244 31,100 732 30,368 101 Allowances for impairment on receivables from sales financing developed as following during the year under report: 31 December 2007 in euro million Balance at 1 January * Allocated/reversed Utilised Exchange rate impact and other changes Balance at 31 December * including entities consolidated for the first time during the financial year 31 December 2006 in euro million Balance at 1 January * Allocated/reversed Utilised Exchange rate impact and other changes Balance at 31 December * including entities consolidated for the first time during the financial year Allowance for impairment recognised on a Total specific item basis group basis 590 277 – 184 – 16 667 149 – 3 – 17 – 4 125 739 274 – 201 – 20 792 Allowance for impairment recognised on a Total specific item basis group basis 572 173 – 155 – 6 584 173 – – 23 – 2 148 745 173 – 178 – 8 732 At the year-end, impairment allowances of euro 125 million (2006: euro 148 million) were recognised on a group basis on gross receivables from sales financ- ing totalling euro 18,979 million (2006: euro 18,296 million). Impairment allowances of euro 667 million (2006: euro 584 million) were recognised at 31 De- cember 2007 on a specific item basis on gross re- ceivables from sales financing totalling euro 5,493 million (2006: euro 4,223 million). Receivables from sales financing which were not overdue at the balance sheet date amounted to euro 10,564 million (2006: euro 8,581 million). No impair- ment allowances were recognised for these balances. The estimated fair value of collateral received for receivables on which impairment allowances were recognised totalled euro 14,617 million (2006: euro 12,130 million) at the balance sheet date. This collateral related primarily to vehicles. The carrying amount of assets held as collateral and taken back as a result of payment default amounted to euro 36 mil- lion (2006: euro 13 million). As at the end of the previous year, there were no receivables from sales financing at the balance sheet date which have been renegotiated and which were otherwise overdue or otherwise required recognition of an impairment allowance. [24] Financial assets Financial assets comprise: in euro million 31.12. 2007 31.12. 2006 Interest and currency derivatives Marketable securities and investment funds Loans to third parties Credit card receivables Other thereof non-current thereof current 1,980 1,959 28 260 568 4,795 1,173 3,622 1,321 2,034 67 239 289 3,950 816 3,134 102 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information The change in the line item “Interest and currency derivatives” relates primarily to changed exchange rate parities with the US dollar and the British pound as well as to the changed interest rate structure. Marketable securities and investment funds relate to available-for-sale financial assets and comprise: in euro million 31.12. 2007 31.12. 2006 Stocks Investment funds Fixed income securities Sundry marketable securities 452 415 1,082 10 1,959 579 487 943 25 2,034 The contracted maturities of debt securities are as follows: in euro million 31.12. 2007 31.12. 2006 Fixed income securities due within 3 months due later than 3 months Sundry marketable securities due within 3 months due later than 3 months – 1,082 1 9 1,092 1 942 3 22 968 Investment funds include euro 10 million (2006: euro 2 million) assigned as collateral to Deutsche Treuinvest Stiftung, Frankfurt am Main, to secure obligations relating to pre-retirement part-time work arrangements. Fixed income securities include euro 77 million (2006: euro 64 million) assigned as collateral to Deutsche Treuinvest Stiftung, Frankfurt am Main, for the same reason. Allowance for impairment and credit risk Receivables relating to credit card business comprise the following: in euro million 31.12. 2007 31.12. 2006 Gross carrying amount Allowance for impairment Net carrying amount 267 7 260 244 5 239 103 Allowances for impairment on receivables relating to credit card business developed as following during the year under report: 31 December 2007 in euro million Balance at 1 January Allocated/reversed Utilised Exchange rate impact and other changes Balance at 31 December 31 December 2006 in euro million Balance at 1 January Allocated/reversed Utilised Exchange rate impact and other changes Balance at 31 December [25] Income tax assets Income tax assets can be analysed as follows: 31 December 2007 in euro million Deferred tax Current tax 31 December 2006 in euro million Deferred tax Current tax Allowance for impairment recognised on a Total specific item basis group basis 1 – – – 1 4 12 – 9 – 1 6 5 12 – 9 – 1 7 Allowance for impairment recognised on a Total specific item basis group basis 1 – – – 1 3 8 – 6 – 1 4 Maturity within one year Maturity later than one year – 118 118 720 119 839 Maturity within one year Maturity later than one year 4 8 – 6 – 1 5 Total 720 237 957 Total – 123 123 755 123 878 755 246 1,001 104 Group Financial Statements [26] Other assets Other assets comprise: in euro million 31.12. 2007 31.12. 2006 Other taxes Receivables from subsidiaries Receivables from other companies in which an investment is held Prepayments Collateral receivables Sundry other assets thereof non-current thereof current 554 641 104 729 135 361 2,524 415 2,109 584 693 202 683 120 368 2,650 378 2,272 Receivables from subsidiaries include trade receiv- ables of euro 96 million (2006: euro 198 million) and financial receivables of euro 545 million (2006: euro 495 million). A total of euro 25 million (2006: euro 44 million) has a remaining term of more than one year. As in the previous year receivables from other companies in which an investment is held are all due within one year. Prepayments of euro 729 million (2006: euro 683 million) relate mainly to prepaid interest, de- velopment costs not eligible for capitalisation as non-current assets, insurance premiums and rent. Prepayments of euro 494 million (2006: euro 522 million) have a maturity of less than one year. Collateral receivables comprise mainly custom- ary collateral arising on the sale of receivables. 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information [27] Inventories Inventories comprise the following: in euro million 31.12. 2007 31.12. 2006 Raw materials and supplies Work in progress, unbilled contracts Finished goods Goods for resale 632 871 4,731 1,115 7,349 689 911 4,280 914 6,794 At 31 December 2007, inventories measured at their net realisable value amounted to euro 473 million (2006: euro 316 million) and are included in total inventories of euro 7,349 million (2006: euro 6,794 million). Write-downs to net realisable value amount- ing to euro 40 million (2006: euro 12 million) were recognised in 2007. Amounts recognised as income from the reversal of write-downs on the disposal of in- ventories were not significant. [28] Trade receivables Trade receivables amounting in total to euro 2,672 million (2006: euro 2,258 million) include euro 3 million due later than one year (2006: euro 21 million). 105 Allowance for impairment and credit risk in euro million 31.12. 2007 31.12. 2006 Gross carrying amount Allowance for impairment Net carrying amount 2,717 45 2,672 2,335 77 2,258 Allowances for impairment on trade receivables developed as following during the year under report: 31 December 2007 in euro million Balance at 1 January Allocated/reversed Utilised Exchange rate impact and other changes Balance at 31 December 31 December 2006 in euro million Balance at 1 January Allocated/reversed Utilised Exchange rate impact and other changes Balance at 31 December Allowance for impairment recognised on a Total specific item basis group basis 68 – 11 – 18 – 1 38 9 2 – 4 – 7 77 – 9 – 22 – 1 45 Allowance for impairment recognised on a Total specific item basis group basis 74 6 – 12 – 68 6 3 – – 9 80 9 – 12 – 77 As at the end of the previous year, there were no trade receivables at the balance sheet date which have been renegotiated and which were otherwise overdue or otherwise required recognition of an impairment allowance. Some trade receivables were overdue for which an impairment allowance was not recognised. Over- due balances are catagorised into the following time windows: in euro million 31.12. 2007 31.12. 2006 1 – 30 days overdue 31 – 60 days overdue 61 – 90 days overdue 91 – 120 days overdue More than 120 days overdue 327 63 24 14 46 474 473 8 4 3 33 521 Receivables that are overdue by between 1 and 30 days do not normally result in bad debt losses since the overdue nature of the receivables is primarily at- tributable to the timing of receipts around the month- end. In the case of trade receivables, collateral is generally held in the form of vehicle documents and bank guarantees so that the risk of bad debt loss is extremely low. 106 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information [29] Cash and cash equivalents Cash and cash equivalents of euro 2,393 million (2006: euro 1,336 million) comprise cash on hand and at bank, all with a maturity of under three months. [30] Equity The Group Statement of Changes in Equity is shown on page 78. Capital reserves Capital reserves include premiums arising from the issue of shares and were unchanged at euro 1,911 million. Number of shares issued At 31 December 2007, common stock issued by BMW AG was divided into 601,995,196 shares with a par-value of one euro. Preferred stock issued by BMW AG was divided into 52,196,162 shares with a par-value of one euro, unchanged from the previous year. Unlike the common stock, no voting rights are attached to the preferred stock. All of the company’s stock is issued to bearer. Preferred stock bears an additional dividend of euro 0.02 per share. 660,305 of the shares of preferred stock are only entitled to receive dividends with effect from the beginning of the financial year 2008. During the financial year 2007, BMW AG ac- quired 660,305 treasury shares of preferred stock at an average price of euro 45.48 per share. These shares were issued to employees at a reduced price of euro 26.42 per share in conjunction with an em- ployee share scheme. As a result of the repurchase of shares of preferred stock and their sub sequent issue, the preferred stock portion of share capital remained unchanged at euro 52 million. The effect of applying IFRS 2 (Share-Based Payments) to the employee share scheme was not material for the Group. At the Annual General Meeting of BMW AG on 15 May 2007, the shareholders again authorised the Board of Management to acquire treasury shares via the stock exchange, up to a maximum of 10 % of the share capital in place at the date of the resolu- tion and to withdraw those shares from circulation without any further resolution by the Annual General Meeting. At the same time, the authorisation from 16 May 2006 to acquire treasury shares was re- scinded. The authorisation from 15 May 2007 is valid until 14 November 2008. The authorisation was not exercised in 2007. It has not yet been de- cided whether or the extent to which the authorisa- tion will be used in the future. Revenue reserves Revenue reserves comprise the post-acquisition and non-distributed earnings of consolidated Group companies. In addition, revenue reserves include both positive and negative goodwill arising on the consolidation of Group companies prior to 31 De- cember 1994. Revenue reserves stood at euro 20,789 million at 31 December 2007, 14.7 % higher than one year earlier. They were increased in 2007 by the amount of the net profit attributable to shareholders of BMW AG (euro 3,126 million) and were reduced by the payment of the dividend for 2006 (euro 458 mil- lion). The unappropriated profit of BMW AG of euro 694 million for 2007 will be proposed to the Annual General Meeting for distribution. The proposed distribution must be authorised by the shareholders at the Annual General Meeting of BMW AG. It is therefore not recognised as a liability in the Group financial statements. Accumulated other equity Accumulated other equity consists of all amounts recognised directly in equity resulting from the trans- lation of the financial statements of foreign sub- sidiaries, the effects of recognising changes in the fair value of derivative financial instruments and securities directly in equity, and actuarial gains and losses relating to defined benefit pension plans and similar obligations. Accumulated other equity was increased by deferred taxes amounting to euro 116 million (2006: euro 512 million) recognised directly in equity. Minority interest Equity attributable to minority interests was a posi- tive amount of euro 11 million (2006: euro 4 mil- 107 lion). This includes a minority interest of euro 8 mil- lion (2006: euro 6 million) in the results for the period. adjust the capital structure, the BMW Group uses various instruments including the amount of divi- dends paid to shareholders and share buy-backs. Capital management disclosures The BMW Group’s objectives when managing capi- tal are to safeguard the ability to continue as a going concern in the long-term and to provide an adequate return to shareholders. The BMW Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or The BMW Group manages the structure of debt capital on the basis of a target debt ratio. An impor- tant aspect of the selection of financial instruments is the objective to achieve matching maturities for the Group’s financing requirements. In order to reduce non-systematic risk, the BMW Group uses a variety of financial instruments available on the world’s capi- tal markets to achieve optimal diversification. The capital structure at the balance sheet date was as follows: in euro million 31.12. 2007 31.12. 2006 Equity attributable to shareholders of BMW AG Proportion of total capital Non-current financial liabilities Current financial liabilities Total financial liabilities Proportion of total capital Total capital 21,733 33.1 % 21,428 22,493 43,921 66.9 % 19,126 34.4 % 18,800 17,656 36,456 65.6 % 65,654 55,582 Equity attributable to shareholders of BMW AG went up during the financial year by 13.6 %, mainly due to the increase in revenue reserves. The decrease in percentage terms (equity attributable to shareholders of BMW AG as a percentage of total capital) was due to the higher funding requirements for the finan- cial services business. The BMW Group is officially rated by the rating agencies, Standard & Poor’s and Moody’s. The long-term ratings for the BMW Group published by Standard & Poor’s and Moody’s in September 2005 remain valid. Moody’s issued an A1 rating and Standard & Poor’s an A+ rating, both with stable out- look. As a result of its good credit standing, reflected in the long-standing first-class short-term ratings issued by Moody’s (P-1) and Standard & Poor’s (A-1), the BMW Group is able to obtain competitive refinancing terms and conditions. Non-current financial liabilities Current financial liabilities Outlook Moody’s Standard & Poor’s A1 P-1 stable A+ A-1 stable [31] Pension provisions Pension provisions are recognised as a result of commitments to pay future vested pension benefits and current pensions to present and former em- ployees of the BMW Group and their dependants. Depending on the legal, economic and tax circum- stances prevailing in each country, various pension plans are used, based generally on the length of service and salary of employees. Due to similarity of nature, the obligations of BMW Group companies in the US and of BMW (South Africa) (Pty) Ltd., Pretoria, for post-employment medical care are also disclosed as pension provisions. The provision for these pension-like obligations amounts to euro 55 mil- 108 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information lion (2006: euro 49 million) and is measured, similar to pension obligations, in accordance with IAS 19. In the case of post-employment medical care, it is assumed that the costs will increase on a long-term basis by 6 % p. a. (unchanged from the previous year). The expense for medical care costs in the financial year 2007 amounted to euro 6 million (2006: euro 6 million). Post-employment benefit plans are classified as either defined contribution or defined benefit plans. Under defined contribution plans, an enterprise pays fixed contributions into a separate entity or fund and does not assume any other obligations. The total pension expense for all defined contribution plans of the BMW Group amounted to euro 442 million (2006: euro 409 million). This includes employer con- tributions paid to state pension insurance schemes amounting to euro 406 million (2006: euro 388 mil- lion). Under defined benefit plans, the enterprise is required to pay the benefits granted to present and past employees. Defined benefit plans may be funded or unfunded, the latter sometimes financed by means of accounting provisions. Most of the pension commitments of the BMW Group in Ger- many relate to BMW AG, whose pension plans, like all those of the BMW Group’s German sub sidiaries, are unfunded and financed by means of accounting provisions. In addition, a deferred remuneration retirement scheme is in place which is funded by employee contributions. The main funded plans of the BMW Group are in the United Kingdom, the USA, Switzerland, the Netherlands, Belgium and Japan. Pension obligations are computed on an actu- arial basis at the level of the defined benefit obliga- tion. This computation requires the use of estimates. The main assumptions, in addition to life expect- ancy, depend on the economic situation in each particular country. The following disclosures for the United Kingdom (UK) and the other countries are based on weighted average values: in % 31 December Discount rate Salary level trend Pension level trend Germany UK Other 2007 2006 2007 2006 2007 2006 5.50 3.25 1.75 4.40 3.25 1.75 5.53 4.39 3.38 5.11 4.12 3.09 5.78 3.36 1.90 5.19 2.59 1.79 The salary level trend refers to the expected rate of salary increase which is estimated annually depending on inflation and the period of service of employees with the Group. In the case of funded plans, the defined benefit obligation is offset against plan assets measured at their fair value. Where the plan assets exceed the pension obligations and the enterprise has a right of reimbursement or a right to reduce future contribu- tions, the surplus amount is recognised in accord- ance with IAS 19 as an asset under other assets. In the case of funded pension plans, a liability is recog- nised under pension provisions where the benefit obligation exceeds fund assets. Actuarial gains or losses may result from in- creases or decreases in either the present value of the defined benefit obligation or in the fair value of the plan assets. Causes of actuarial gains or losses include the effect of changes in the measurement parameters, changes in estimates caused by the actual development of risks impacting on pension obligations and differences between the actual and expected return on plan assets. Past service cost arises where a BMW Group company introduces a defined benefit plan or changes the benefits payable under an existing plan. 109 Based on the measurement principles contained in IAS 19, the following funding status applies to the Group’s pension plans: in euro million 31 December Germany UK Other Total 2007 2006 2007 2006 2007 2006 2007 2006 Present value of pension benefits covered by accounting provisions 3,849 4,412 – – Present value of funded pension benefits – – 6,327 6,568 Defined benefit obligations Fair value of plan assets Net obligation Income (+) expense (–) from past service cost not yet recognised Amount not recognised as an asset because of the limit in IAS 19.58 Balance sheet amounts at 31 December thereof pension provision thereof pension assets (–) 3,849 4,412 6,327 6,568 – – 5,686 6,134 3,849 4,412 641 434 – – – – 3,849 4,412 3,849 4,412 – – – 6 647 651 – 4 – 5 439 440 – 1 119 336 455 343 112 134 316 3,968 4,546 6,663 6,884 450 10,631 11,430 298 152 6,029 6,432 4,602 4,998 – 2 1 – 2 1 17 127 127 11 23 16 164 4,623 5,015 165 4,627 5,017 – – 1 – 4 – 2 Pension provisions relating to pension plans in other countries amounted to euro 127 million (2006: euro 165 million). This includes euro 53 million (2006: euro 80 million) relating to externally funded plans. The change in the defined benefit obligations The changes in the pension provision and in pension assets (reimbursement claims or right to reduce future contributions to the funds) as disclosed in the balance sheet can be derived as follows: was attributable mainly to changes in the discount rates used in the actuarial computation. in euro million Germany UK Other Total 2007 2006 2007 2006 2007 2006 2007 2006 Balance sheet amounts at 1 January Expense from pension obligations Pension payments or transfers to external funds 4,414 * 4,234 239 – 80 329 – 72 439 52 – 47 792 71 – 98 164 28 – 67 202 5,017 5,228 45 319 445 – 55 – 194 – 225 Actuarial gains (–) and losses (+) on defined benefit obligations – 776 – 167 211 – 241 Actuarial gains (–) and losses (+) on plan assets – – 42 – 98 8 2 8 – 557 – 19 44 – 400 – 117 Employee contributions to the deferred remuneration retirement scheme Translation differences and other changes Balance sheet amounts at 31 December thereof pension provision thereof pension assets (–) * including entities consolidated for the first time during the financial year 52 – 87 1 3,849 4,412 3,849 4,412 – – – – 50 647 651 – 4 – 13 439 440 – 1 – – 8 127 127 – – 17 52 – 58 87 – 3 164 4,623 5,015 165 4,627 5,017 – – 1 – 4 – 2 110 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information The defined benefit plans of the BMW Group give rise to an expense from pension obligations in the financial year 2007 of euro 319 million (2006: euro 445 million), comprising the following components: in euro million Germany UK Other Total 2007 2006 2007 2006 2007 2006 2007 2006 Current service cost 150 160 64 64 29 34 243 258 Expense from reversing the discounting of pension obligations Past service cost Expected return on plan assets (–) Expense from pension obligations 192 169 323 307 – 103 – – – – – – 335 – 300 239 329 52 71 22 – – 23 28 25 1 537 501 – 103 1 – 15 – 358 – 315 45 319 445 The expense from reversing the discounting of pen- sion obligations and the income from the expected return on plan assets are reported as part of the financial result. All other components of pension expense are included in the relevant income state- ment under costs by function. Pension plan assets are invested in various investment categories, the most predominant one being bonds. Other equity instruments and alter- native investments such as property are also con- sidered. The expected rate of return is derived on the basis of the specific investment strategy applied to each individual pension fund, either by applying percentages based on long-term state bonds or using absolute estimates of pension fund income. The actual return from external pension funds United Kingdom only provides a basic fixed amount benefit, retirement benefits are largely organised in the form of company pensions and arrangements financed by the individual. The pension benefits in the United Kingdom therefore contain contributions made by the employee. Past service cost included in the expense from pension obligations decreased in 2007 by euro 103 million as a result of the Retirement Age Amendment Act passed in 2007 which raised the statutory retire- ment age for the state pension scheme in Germany. The later retirement age of employees resulted in an amendment to the pension plan in place at the Group’s German entities. The resulting decrease in the pension obligation was recognised in the income statement. was euro 314 million (2006: euro 432 million). The net obligation from pension plans in Ger- The level of the pension obligations differ de- pending on the pension system applicable in each country. Since the state pension system in the many, the United Kingdom and other countries changed as follows: in euro million Defined benefit obligation Germany Plan assets Net obligation 2007 2006 2007 2006 2007 2006 1 January Expense from pension obligations Payments to external funds Pension payments Actuarial gains (–) and losses (+) Employee contributions to the deferred remuneration retirement scheme Translation differences and other changes 4,414 * 4,234 239 – – 80 – 776 52 – 329 – – 72 – 167 87 1 31 December 3,849 4,412 * including entities consolidated for the first time during the financial year – – – – – – – – – – – – – – – – 4,414 4,234 239 – – 80 – 776 52 – 329 – – 72 – 167 87 1 3,849 4,412 111 in euro million Defined benefit obligation 2007 2006 United Kingdom Plan assets 2007 2006 Net obligation 2007 2006 1 January Expense from pension obligations Payments to external funds Pension payments Actuarial gains (–) and losses (+) Translation differences and other changes 6,568 6,576 – 6,134 – 5,784 387 – – 293 211 – 546 371 – – 278 – 241 140 – 335 – 300 – 47 293 42 495 – 98 278 – 98 – 132 31 December 6,327 6,568 – 5,686 – 6,134 434 52 – 47 – 253 – 51 641 792 71 – 98 – – 339 8 434 in euro million Defined benefit obligation 2007 2006 Other countries Plan assets 2007 2006 Net obligation 2007 2006 1 January Expense from pension obligations Payments to external funds Pension payments Actuarial gains (–) and losses (+) Translation differences and other changes 31 December 450 51 – – 16 8 – 38 455 427 59 – – 10 8 – 34 450 – 298 – 233 – 23 – 57 6 2 27 – 14 – 51 6 – 19 13 – 343 – 298 152 28 – 57 – 10 10 – 11 112 194 45 – 51 – 4 – 11 – 21 152 Plan assets in the United Kingdom and other countries comprise the following: in euro million Equity instruments Debt securities Real estate Other 31 December United Kingdom 2006 2007 Components of plan assets Other countries 2006 2007 Total 2007 2006 1,266 3,135 487 798 1,902 3,323 664 245 5,686 6,134 205 111 6 21 343 172 106 5 15 298 1,471 3,246 493 819 2,074 3,429 669 260 6,029 6,432 Benefit obligations are covered in Germany by accounting provisions. In the United Kingdom, a substantial portion of plan assets is invested in debt securities in order to minimise value fluctuations. 112 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information [32] Other provisions Other provisions comprise the following items: in euro million Obligations for personnel and social expenses Obligations for ongoing operational expenses Other obligations 31.12. 2007 31.12. 2006 Total thereof due within one year Total thereof due within one year 1,559 2,818 1,125 5,502 1,062 1,129 635 2,826 1,493 3,000 1,043 5,536 979 1,135 557 2,671 Provisions for obligations for personnel and social expenses comprise mainly profit-share schemes and bonuses, early retirement part-time working arrangements and employee long-service awards. They comprise mainly obligations and risks in re- spect of the disengagement from the former Rover Group, risks from legal disputes and the obligation for recovery and recycling of end-of-life vehicles. Provisions for obligations for ongoing operational Other provisions changed during the year as expenses comprise primarily warranty obligations. follows: Provisions for other obligations cover numerous specific risks and obligations of uncertain amount. in euro million At Translation 1.1. 2007 * differences Additions Reversal of discounting Utilised Reversed At 31.12. 2007 Obligations for personnel and social expenses Obligations for ongoing operational expenses Other obligations 1,497 – 8 890 8 – 794 – 34 1,559 3,011 1,062 5,570 – 36 – 8 – 52 1,218 369 2,477 61 17 86 – 1,362 – 190 – 2,346 – 74 – 125 – 233 2,818 1,125 5,502 * including entities consolidated for the first time during the financial year Of the amount shown as reversed, euro 143 million are included in costs by function in the income statement. [33] Income tax liabilities 31 December 2007 in euro million Deferred tax Current tax Maturity within one year Maturity later than one year – 378 378 2,714 430 3,144 Total 2,714 808 3,522 113 31 December 2006 in euro million Deferred tax Current tax Maturity within one year Maturity later than one year – 206 206 2,758 361 3,119 Total 2,758 567 3,325 Current tax liabilities of euro 808 million (2006: euro 567 million) comprises euro 161 million (2006: euro 88 million) for taxes payable and euro 647 million (2006: euro 479 million) for tax provisions. In 2007 tax provisions of euro 8 million were reversed (2006: euro 2 million). [34] Financial liabilities Financial liabilities include all liabilities of the BMW Group at the relevant balance sheet dates relating to financing activities and comprise: 31 December 2007 in euro million Bonds Liabilities to banks Liabilities from customer deposits (banking) Commercial paper Asset backed financing transactions Interest and currency derivatives Bills of exchange payable Other 31 December 2006 in euro million Bonds Liabilities to banks Liabilities from customer deposits (banking) Commercial paper Asset backed financing transactions Interest and currency derivatives Bills of exchange payable Other Maturity within one year Maturity between one and five years Maturity later than five years 5,230 4,548 5,030 5,445 1,638 105 – 497 8,945 1,450 702 – 4,708 472 – 273 4,208 503 – – – 39 – 128 Total 18,383 6,501 5,732 5,445 6,346 616 – 898 22,493 16,550 4,878 43,921 Maturity within one year Maturity between one and five years Maturity later than five years Total 4,442 2,077 5,138 4,154 1,305 279 1 260 8,450 2,205 643 – 3,196 317 – 235 17,656 15,046 3,528 16,420 6 – – – – – 220 3,754 4,288 5,781 4,154 4,501 596 1 715 36,456 Other financial liabilities of euro 898 million (2006: euro 715 million) comprise mainly finance lease liabilities. 114 Group Financial Statements Bonds comprise: Issuer Interest Issue volume in relevant currency (ISO-Code) Weighted average maturity period (in years) Weighted average effective interest rate (in %) BMW Finance N. V., The Hague BMW Coordination Center V. o. F., Bornem BMW (UK) Capital plc, Bracknell 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information BMW US Capital, LLC, Wilmington, Del. variable variable variable variable fixed fixed fixed fixed fixed variable fixed variable variable variable fixed fixed variable variable variable variable fixed fixed fixed fixed fixed fixed fixed JPY 17,500 million SKK 768 million EUR 735 million USD 81 million JPY 45,000 million EUR 5,542 million USD 950 million GBP 400 million CHF 200 million EUR 500 million EUR 150 million JPY 33,200 million EUR 275 million GBP 186 million JPY 5,000 million GBP 300 million JPY 33,000 million USD 1,475 million EUR 595 million CAD 100 million JPY 8,200 million EUR 2,500 million USD 1,212 million MXN 1,000 million CHF 450 million GBP 150 million AUD 100 million Rolls-Royce Motor Cars Limited, Bracknell variable GBP 46 million Other * unlimited variable variable variable variable variable fixed fixed fixed JPY 48,600 million EUR 1,275 million SEK 800 million USD 120 million CAD 50 million JPY 84,000 million CHF 500 million EUR 75 million 1.1 3.0 1.9 2.0 8.3 7.6 4.8 6.0 5.0 1.2 1.0 2.4 2.1 1.0 1.0 5.2 1.8 2.5 2.1 3.0 1.9 7.1 8.1 4.0 3.8 3.0 2.0 – * 1.6 2.2 2.0 6.0 1.0 13.9 4.5 1.0 1.0 4.3 4.7 5.0 2.3 4.4 5.1 5.2 2.0 4.7 4.5 0.9 4.7 6.0 1.1 6.4 1.0 4.7 4.8 4.8 0.4 4.0 5.3 7.8 2.3 4.6 5.8 5.9 1.0 4.8 4.7 5.3 4.9 2.2 2.3 4.6 115 The following details apply to commercial paper: Issuer Issue volume in relevant currency (ISO-Code) Weighted average maturity period (in days) Weighted average nominal interest rate (in %) BMW AG, Munich BMW Finance N. V., The Hague BMW (UK) Capital plc, Bracknell BMW US Capital, LLC, Wilmington, Del. EUR 1,630 million EUR 1,521 million GBP 100 million GBP 270 million USD 2,665 million 28.4 38.6 49.0 8.9 16.2 [35] Other liabilities Other liabilities comprise the following items: 31 December 2007 in euro million Other taxes Social security Advance payments from customers Deposits received Subsidiaries Deferred income Other 31 December 2006 in euro million Other taxes Social security Advance payments from customers Deposits received Subsidiaries Deferred income Other Maturity within one year Maturity between one and five years Maturity later than five years 537 46 367 56 75 1,002 2,023 4,106 – – 15 90 – 1,651 36 1,792 – – – – – 191 41 232 Maturity within one year Maturity between one and five years Maturity later than five years 553 41 267 48 40 909 2,066 3,924 – – 11 95 – 1,362 118 1,586 – – – – – 306 40 346 4.8 4.7 6.6 6.7 4.3 Total 537 46 382 146 75 2,844 2,100 6,130 Total 553 41 278 143 40 2,577 2,224 5,856 116 Group Financial Statements Deferred income comprises the following items: in euro million Deferred income from lease financing Deferred income relating to service contracts Grants Other deferred income 31.12. 2007 31.12. 2006 Total thereof due within one year Total thereof due within one year 977 1,433 358 76 2,844 580 317 49 56 1,002 763 1,295 412 107 2,577 484 266 60 99 909 Deferred income relating to service contracts relates to service and repair work to be provided under commitments given at the time of the sale of a vehicle (multi-component arrangements). Grants comprise primarily public funds to promote regional structures; this has been invested in the construction of the pro- duction plant in Leipzig. In accordance with IAS 20, they are recognised as income over the useful lives of the assets to which they relate. [36] Trade payables 31 December 2007 in euro million Maturity within one year Maturity between one and five years Maturity later than five years Total Trade payables 3,516 35 – 3,551 31 December 2006 in euro million Maturity within one year Maturity between one and five years Maturity later than five years Total Trade payables 3,624 74 39 3,737 The total amount of financial liabilities, other liabilities and trade payables with a maturity later than five years amounts to euro 5,110 million (2006: euro 4,139 mil- lion). 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information BMW Group Notes to the Group Financial Statements Other Disclosures 117 [37] Contingent liabilities and other financial commitments Contingent liabilities No provisions were recognised for the following con- tingent liabilities (stated at their nominal amount), since an outflow of resources is not considered to be probable: in euro million 31.12. 2007 31.12. 2006 Guarantees Performance guarantees Bills of exchange 132 13 2 147 224 23 5 252 As at the end of the previous year, all contingent liabili- ties relate to non-group entities. Several liability applies in the case of investments in general partnerships. The usual commercial guarantees have been given in relation to the sale of Rover Cars and Land Rover activities. Other financial obligations In addition to liabilities, provisions and contingent lia- bilities, the BMW Group also has other financial com- mitments, primarily under lease contracts for land, buildings, plant and machinery, tools, office and other facilities. The leases run for periods of one to 95 years and in some cases contain extension and /or purchase options. Lease payments of euro 61 million (2006: euro 77 million) were recognised as expense during the year. The total of future minimum lease payments under non-cancellable leases can be analysed by maturity as follows: in euro million 31.12. 2007 31.12. 2006 Nominal total of future minimum lease payments due within one year due between one and five years due later than five years 212 575 683 271 583 560 1,470 1,414 The above amounts include euro 3 million (2006: euro 4 million) in respect of non-consolidated subsidiaries and euro 7 million (2006: euro 65 million) for back- to-back operating leases. In addition, the BMW Group is the lessee in the case of operating leases for vehicles which are leased to third parties over matching periods. The following amounts are payable under these contracts: in euro million 31.12. 2007 31.12. 2006 Nominal total of future minimum lease payments due within one year due between one and five years due later than five years 403 296 – 699 677 497 – 1,174 118 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information These future obligations are matched, or ex- ceeded, by income on sub-leases. Purchase commitments for property, plant and equipment amount to euro 1,925 million (2006: euro 1,099 million). Sundry other financial commitments amount to euro 239 million (2006: euro 249 million). [38] Financial instruments The carrying amounts and fair values of financial instruments are allocated below to IAS 39 catego- ries, cash funds, cash flow hedges and fair value hedges: 31 December 2007 in euro million Assets Other investments Receivables from sales financing Financial assets Derivative instruments Marketable securities and investment funds Loans to third parties Credit card receivables Other financial assets Cash and cash equivalents Trade receivables Other assets Receivables from subsidiaries Receivables from companies in which an investment is held Collateral receivables Other Liabilities Financial liabilities Bonds Liabilities to banks Liabilities from customer deposits (banking) Commercial paper Asset backed financing transactions Derivative instruments Bills of exchange payable Other financial liabilities Trade payables Other liabilities Liabilities to subsidiaries Other * Carrying amount corresponds to fair value. Cash funds Loans and receivables Fair value Carrying amount Fair value Carrying amount – – – – – – – – – – – – – – 2,393 2,393 – – 33,490 34,244 – – 27 260 568 – – – 28 260 568 – – – – 135 1 – – – – – – – – – – – – – – 135 1 2,672 2,672 641 104 – 78 641 104 – 78 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 119 Held-to- maturity investments Other liabilities Available- for-sale Fair value option Held for trading Cash flow hedges Fair value hedges Fair value Carrying amount Fair value Carrying amount Carrying amount * Carrying amount * Carrying amount * Carrying amount * Carrying amount * – – – 52 – – – – – – – – – – – – – – – – – – – – – – – 51 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 18,808 18,383 6,485 5,702 5,446 5,882 – – 910 3,551 75 2,081 6,501 5,732 5,445 6,346 – – 898 3,551 75 2,081 209 – – 1,904 – – – – – – – – – – – – – – – – – – – – – – – 4 – – – – – – – – – – – – – – – – – – – – – – – – – – 195 802 983 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 180 13 423 – – – – – – – – – – – – – – – 120 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information 31 December 2006 in euro million Assets Other investments Receivables from sales financing Financial assets Derivative instruments Marketable securities and investment funds Loans to third parties Credit card receivables Other financial assets Cash and cash equivalents Trade receivables Other assets Receivables from subsidiaries Receivables from companies in which an investment is held Collateral receivables Other Liabilities Financial liabilities Bonds Liabilities to banks Liabilities from customer deposits (banking) Commercial paper Asset backed financing transactions Derivative instruments Bills of exchange payable Other financial liabilities Trade payables Other liabilities Liabilities to subsidiaries Other 1] Carrying amount corresponds to fair value. 2] Including the negative fair value of the option obligation relating to the Rolls-Royce exchangeable bond. Cash funds Loans and receivables Fair value Carrying amount Fair value Carrying amount – – – – – – – – – – – – – – 1,336 1,336 – – 30,183 30,368 – – 67 239 289 – – – 67 239 289 – – – – 120 3 – – – – – – – – – – – – – – 120 3 2,258 2,258 693 202 – 106 693 202 – 106 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 121 Held-to- maturity investments Other liabilities Available- for-sale Fair value option Held for trading Cash flow hedges Fair value hedges Fair value Carrying amount Fair value Carrying amount Carrying amount 1] Carrying amount 1] Carrying amount 1] Carrying amount 1] Carrying amount 1] – – – 52 – – – – – – – – – – – – – – – – – – – – – – – 51 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 16,507 16,420 4,231 5,731 4,151 4,299 – 1 728 3,737 40 2,009 4,288 5,781 4,154 4,501 – 1 715 3,737 40 2,009 401 – – 1,981 – – – – – – – – – – – – – – – – – – – – – – – 2 – – – – – – – – – – – – – – – – – – – – – – – – – – 122 511 688 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1652] 115 316 – – – – – – – – – – – – – – – 122 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information Fair value measurement of financial instruments The fair values shown are computed using market information available at the balance sheet date, on the basis of prices quoted by the counterparties or using appropriate measurement methods, e.g. discounted cash flow models. In the latter case, amounts were discounted at 31 December 2007 on the basis of the following interest rates: ISO-Code in % Interest rate for six months Interest rate for one year Interest rate for five years Interest rate for ten years EUR USD GBP JPY 4.3 4.3 4.6 4.8 4.6 4.2 4.2 4.8 5.9 5.7 5.1 5.1 1.0 1.1 1.2 1.7 These interest rates were adjusted, where necessary, to take account of the credit quality and risk of the underlying financial instrument. Gains and losses on financial instruments The following table shows the net gains and losses arising for each of the categories of financial instrument defined by IAS 39: in euro million Held for trading 2007 2006 Gains/losses from the use of derivative instruments – 39 17 Available-for-sale Gains/losses on sale and fair value gains/losses on available-for-sale securities; including equity investments carried at cost Income from investments Accumulated other equity Balance at 1 January Total change during the year – of which recognised in the income statement during the period under report Balance at 31 December Loans and receivables Impairment losses/reversals of impairment losses Other income/expenses Other liabilities Income/expenses 49 3 214 – 179 – 168 35 – 277 – 12 44 62 562 – 348 – 431 214 – 190 – 31 168 108 Gains/losses from the use of derivative instruments relate primarily to fair value gains or losses arising on stand-alone derivative instruments. Write-downs of euro 49 million (2006: euro 2 mil- lion) on available-for-sale securities, for which fair value changes were previously recognised directly in equity, were recognised as expenses in 2007. Reversals of write-downs on current marketable se- curities of euro 2 million were recognised directly in equity (2006: euro 4 million). The disclosure of interest income resulting from the unwinding of interest on future expected receipts would normally only be relevant for the BMW Group where assets have been discounted as part of the process of determining impairment losses. However, as a result of the assumption that most of the income that is subsequently recovered is received within one year and the fact that the impact is not material, the BMW Group does not discount assets for the purposes of determining impairment losses. 123 Cash flow hedges The effect of cash flow hedges on accumulated other equity was as follows: in euro million Balance at 1 January Total changes during the year – of which recognised in the income statement during the period under report Balance at 31 December 2007 2006 178 260 – 260 438 29 149 – 266 178 During the period under report, an expense of euro 4 million (2006: euro 3 million) was recognised in the income statement to reflect the ineffective portion of cash flow hedges. At 31 December 2007, the BMW Group held derivative instruments with terms of up to 41 months (2006: 44 months) to hedge currency risks attached to future transactions. It is expected that euro 384 mil- lion of net gains, recognised in equity at the balance sheet date, will be recognised in the income state- ment in 2008. At 31 December 2007, the BMW Group held de- rivative instruments with terms of up to 108 months (2006: 120 months) to hedge interest rate risks at- tached to future transactions. It is expected that euro 5 million of net gains, recognised in equity at the balance sheet date, will be recognised in the income statement in 2008. Cash flow hedges are used to hedge cash flows arising in conjunction with the supply of vehicles to subsidiaries. Fair value hedges The following table shows gains and losses on hedging instruments and hedged items which are deemed to be part of a fair value hedge relationship: in euro million 31.12. 2007 31.12. 2006 Gains/losses on hedging instruments designated as part of a fair value hedge relationship Profit/loss from hedged items 272 – 271 1 159 – 147 12 The difference between the gains/losses on hedging instruments and the result recognised on hedged items represents the ineffective portion of fair value hedges. Fair value hedges are mainly used to hedge bonds and other financial liabilities. Credit risk Notwithstanding the existence of collateral accepted, the carrying amounts of financial assets generally take account of the maximum credit risk arising from the possibility that counterparties will not be able to fulfil their contractual obligations. The maximum credit risk for irrevocable credit commitments relat- ing to credit card business amounted to euro 2,082 million (2006: euro 1,395 million). The equivalent figure for dealer financing was euro 12,043 million (2006: euro 9,968 million). In the case of performance relationships under- lying non-derivative financial instruments, collateral will be required, information on the credit standing of the counterparty obtained or historical data based on the existing business relationship (i.e. payment patterns to date) reviewed in order to minimise the credit risk, all depending on the nature and amount of the exposure that the BMW Group is proposing to enter into. Within the financial services business, the financed items (e.g. vehicles, equipment and prop- erty) in the retail customer and dealer lines of busi- ness serve as first-ranking collateral with a recover- able value. Security is also put up by customers in the form of collateral asset pledges, asset assignment and first-ranking mortgages, supplemented where appropriate by warranties and guarantees. If an item previously accepted as collateral is acquired, it un- 124 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information dergoes a multi-stage process of repossession and disposal in accordance with the legal situation prevailing in each relevant market. The assets in- volved are generally vehicles which can be con- verted into cash at any time via the dealer organi- sation. Impairment losses are recorded as soon as credit risks are identified on individual financial assets, using a methodology specifically designed by the BMW Group. More detailed information regarding this methodology is provided in the section on ac- counting policies. The use of comprehensive rating and scoring The credit risk relating to derivative financial in- struments is minimised by the fact that the Group only enters into such contracts with parties of first- class credit standing. The general credit risk on de- rivative financial instruments utilised by the BMW Group is therefore not considered to be significant. A concentration of credit risk with particular borrowers or groups of borrowers has not been identified. Further disclosures relating to credit risk, in par- ticular impairment losses recognised, are provided in the notes to the relevant category of receivables on pages 100 to 105. techniques and credit monitoring procedures ensures the recoverability of the value of receivables from sales financing which are neither overdue nor impaired. Liquidity risk The following table shows the maturity structure of contractual cash flows (undiscounted) for financial liabilities: 31 December 2007 in euro million Bonds Liabilities to banks Liabilities from customer deposits (banking) Commercial paper Asset backed financing transactions Interest and currency derivative instruments Bills of exchange payable Trade payables Other financial liabilities 31 December 2006 in euro million Bonds Liabilities to banks Liabilities from customer deposits (banking) Commercial paper Asset backed financing transactions Interest and currency derivative instruments Bills of exchange payable Trade payables Other financial liabilities Maturity within one year Maturity between one and five years Maturity later than five years Total – 5,947 – 4,736 – 5,193 – 5,474 – 1,854 63 – – 3,516 – 497 – 10,627 – 1,630 – 774 – – 5,043 234 – – 35 – 273 – 4,920 – 551 – – – 132 – – – 128 – 21,494 – 6,917 – 5,967 – 5,474 – 6,897 429 – – 3,551 – 898 – 27,154 – 18,148 – 5,467 – 50,769 Maturity within one year Maturity between one and five years Maturity later than five years Total – 5,126 – 2,178 – 5,250 – 4,159 – 1,440 – 127 – 1 – 3,624 – 260 – 9,789 – 2,385 – 699 – – 3,365 287 – – 74 – 235 – 4,007 – 18,922 – 7 – – – 127 – – 39 – 220 – 4,570 – 5,949 – 4,159 – 4,805 287 – 1 – 3,737 – 715 – 22,165 – 16,260 – 4,146 – 42,571 125 The cash flows shown comprise principal re- payments and the related interest. The amounts disclosed for interest rate and currency derivative instruments include all cash flows relating to deriva- tives that have a negative fair value at the balance sheet date as well as all cash flows relating to deriva- tives that have a positive fair value at the balance sheet date but which are part of a hedging relation- ship with a financial liability. Solvency is assured at all times by managing and monitoring the liquidity situation on the basis of a rolling cash flow forecast. The resulting funding requirements are secured by a variety of instruments placed on the world’s financial markets. The objec- tive is to minimise risk by matching maturities for the Group’s financing requirements within the framework of the target debt ratio. The long-term ratings pub- lished by Standard & Poor’s (A+) and Moody’s (A1) enable the BMW Group to obtain financing on com- petitive terms and conditions. Short-term liquidity is managed primarily by is- suing money market instruments (commercial paper). As a result of its good credit standing, reflected in the first-class short-term ratings issued by Moody’s (P-1) and Standard & Poor’s (A-1), the BMW Group is also able to obtain competitive terms and conditions in this area. Also reducing liquidity risk, additional secured and unsecured lines of credit are in place with first- class international banks. Intragroup cash flow fluctuations are evened out by the use of daily cash pooling arrangements. Market risks The principal market risks to which the BMW Group is exposed are currency risk and interest rate risk. Protection against such risks is provided in the first instance through natural hedging which arises when the values of non-derivative financial instruments have matching maturities and amounts (netting). Derivative financial instruments are used to reduce the risk remaining after netting. Derivative financial instruments are only used to hedge underlying posi- tions or forecast transactions. The scope of permitted transactions, responsi- bilities, financial reporting procedures and control mechanisms used for financial instruments are set out in detailed internal guidelines. This includes, above all, a clear separation of duties between trading and processing. Currency and interest rate risks are managed at a corporate level. Further disclosures relating to risk management are provided in the Group Management Report. Currency risk As an enterprise with worldwide operations, business is conducted in a variety of currencies, from which currency risks arise. Since a significant portion of Group revenues are generated outside the euro cur- rency region and the procurement of production material and funding is also organised on a worldwide basis, currency risk is an extremely important factor for Group earnings. At 31 December 2007, derivative financial instru- ments were in place to hedge exchange rate risks, in particular for the currencies US dollar, British pound, Canadian dollar and Japanese yen. The hedging contracts comprise mainly option and forward cur- rency contracts. A description of how currency risk is managed is provided in the Group Management Report on page 63. The BMW Group measures currency risks using a cash-flow-at-risk model. The starting point for analysing currency risk with this model is the identification of forecast foreign currency transactions or “exposures”. At the balance sheet date, exposures for the coming year were as follows: in euro million Euro/US dollar Euro/British pound Euro/Japanese yen 31.12. 2007 31.12. 2006 6,140 3,484 1,263 5,787 3,331 1,552 126 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information In the next stage, these exposures are com- pared to all hedges that are in place. The net cash flow surplus represents an uncovered risk position. The cash-flow-at-risk approach involves allocating the impact of potential exchange rate fluctuations to operating cash flows on the basis of probability dis- tributions. Volatilities and correlations serve as input factors to assess the relevant probability distribu- tions. The potential negative impact on earnings for the current period is computed on the basis of cur- rent market prices and exposures to a confidence level of 95 % for each currency. Aggregation of these results creates a risk reduction effect due to correla- tions between the various portfolios. The following table shows the potential negative impact for the BMW Group – measured on the basis of the cash-flow-at-risk approach – attributable to unfavourable changes in exchange rates for the three principal currencies at the balance sheet date. in euro million Euro/US dollar Euro/British pound Euro/Japanese yen 31.12. 2007 31.12. 2006 33 14 56 155 22 81 The BMW Group’s currency risk relates primarily to the three currencies shown. Interest rate risk The BMW Group’s financial management system involves the use of standard financial instruments such as short-term deposits, investments in variable and fixed-income securities as well as securities funds. The BMW Group is therefore also exposed to risks resulting from changes in interest rates. These risks arise when funds with differing fixed- rate periods or differing terms are borrowed and in- vested. All items subject to, or bearing, interest are exposed to interest rate risk. Interest rate risks can affect either side of the balance sheet. The fair values of the Group’s interest rate port- folios for the three principal currencies were as fol- lows at the balance sheet date: in euro million Euro US dollar British pound 31.12. 2007 31.12. 2006 6,930 6,012 2,278 7,481 5,759 3,023 Interest rate risks can be managed by the use of in- terest rate derivative instruments. The interest rate contracts used for hedging purposes comprise mainly swaps which are accounted for on the basis of whether they are designated as a fair value hedge or as a cash flow hedge. A description of how inter- est rate risk is managed is provided in the Group management report on page 63. As stated there, the BMW Group applies a val- ue-at-risk approach for internal reporting purposes and to manage interest rate risks. This is based on a state-of-the-art historical simulation, in which the potential future fair value losses of the interest rate portfolios are compared across the Group with ex- pected amounts measured on the basis of a holding period of three months and a confidence level of 99 %. Aggregation of these results creates a risk re- duction effect due to correlations between the various portfolios. 127 In the following table the potential volume of fair value fluctuations – measured on the basis of the value-at-risk approach – are compared with the ex- pected value for the interest rate relevant positions of the BMW Group for the three principal curren- cies: in euro million Euro US dollar British pound 31.12. 2007 31.12. 2006 76 109 10 62 85 7 Other risks The BMW Group is exposed to raw material price risks. A description of how the raw material price risk is managed is provided in the Group Management Report on page 63. Derivative financial instruments are used on a relatively small scale to reduce these risks, primarily for the purchase of precious metals. The risk from these derivatives was not material to the Group in 2007 and 2006 and remains small at the balance sheet date. For this reason, a sensitivity analysis for these derivatives is not provided. A further exposure relates to the residual value risk on vehicles returned to the Group at the end of lease contracts. The risks from financial instruments used in this context were not material to the Group in the past or at the balance sheet date. A description of how these risks are managed is provided in the Group Management Report on pages 64 and 65. [39] Explanatory notes to the cash flow statements The cash flow statements show how the cash and cash equivalents of the BMW Group, Industrial Operations and Financial Operations have changed in the course of the year as a result of cash inflows and cash outflows. In accordance with IAS 7 (Cash Flow Statements), cash flows are classified into cash flows from operating, investing and financing activi- ties. The cash flow statements of the BMW Group are presented on pages 76 and 77. Cash and cash equivalents included in the cash flow statement comprise cash in hand, cheques, and cash at bank, to the extent that they are available within three months from the balance sheet date and are subject to an insignificant risk of changes in value. The negative impact of changes in cash and cash equivalents due to the effect of exchange rate fluctuations in 2007 was euro 47 million (2006: negative impact of euro 42 million). The cash flows from investing and financing ac- tivities are based on actual payments and receipts. The cash flow from operating activities is computed using the indirect method, starting from the net profit of the Group. Under this method, changes in assets and liabilities relating to operating activities are ad- justed for currency translation effects and changes in the composition of the Group. The changes in balance sheet positions shown in the cash flow statement do not therefore agree directly with the amounts shown in the Group balance sheet. If the BMW Group acts as the lessor in a finance lease, the relevant cash flows are reported in the cash flow statement as part of the cash flow from investing activities. If the BMW Group acts as the lessee in a finance lease, the cash flows are reported as part of the cash flows from operating and invest- ing activities. If the BMW Group acts as the lessor in an oper- ating lease, cash flows are reported as part of the cash flow from investing activities. In the final case, where the BMW Group acts as the lessee in an operating lease, cash flows are reported as part of the cash flow from operating activities. The payment for the acquisition of DEKRA SüdLeasing Services GmbH, Stuttgart, and that en- tity’s subsidiaries (euro 121 million) is included for the most part in investing activities. 128 Group Financial Statements The cash inflow from operating activities includes the following cash flows in accordance with IAS 7.31 and IAS 7.35: in euro million Interest received Interest paid Dividends received 2007 2006 386 389 3 391 328 62 [40] Related party relationships In accordance with IAS 24 (Related Party Disclo- sures), related individuals or entities which have the ability to control the BMW Group or which are con- trolled by the BMW Group, must be disclosed un- less such parties are not already included in the consolidated financial statements as consolidated companies. Control is defined as ownership of more than one-half of the voting power of BMW AG or the power to direct, by statute or agreement, the finan- cial and operating policies of the management of the Group. In addition, the disclosure requirements of IAS 24 also cover transactions with associates and with parties which have the ability to exercise significant influence over the financial and operating policies of the BMW Group. This also includes close relatives and intermediaries. Significant influence over the financial and operating policies of the Group can arise when a party holds 20 % or more of the shares of BMW AG or is a member of the Board of Manage- ment or Supervisory Board of BMW AG. For the financial year 2007, the disclosure require- ments contained in IAS 24 only affect the BMW Group with regard to business relationships with affiliated, non-consolidated entities, joint ventures, other equity investments as well as with members of the Board of Management and the Super visory Board of BMW AG. The BMW Group’s relationships with affiliated, non-consolidated entities are based on arm’s length principles. Transactions with these entities are small in scale and in the normal course of business. Transactions of BMW Group companies with joint ventures and other equity investments – mainly BMW Brilliance Automotive Ltd., Shenyang (50 %) – all arise in the normal course of business and are conducted on the basis of arm’s length principles. Stefan Quandt is a shareholder and Deputy Chairman of the Supervisory Board of BMW AG. He is also sole shareholder and Chairman of the Super- visory Board of DELTON AG, Bad Homburg v. d. H., which, via its subsidiaries, performed logistics services for the BMW Group during the financial year 2007. In addition, companies of the DELTON Group pur- chased vehicles from the BMW Group. These service and sale contracts are not material for the BMW Group and are made, without exception, on the basis of arm’s length principles. Susanne Klatten is a shareholder and member of the Supervisory Board of BMW AG, and also a shareholder and Deputy Chairman of the Supervisory Board of Altana AG, Wesel, which purchased vehicles from the BMW Group during the financial year 2007. These sale contracts are not material for the BMW Group and are made, without exception, on the basis of arm’s length principles. With the exception of these related party trans- actions, companies of the BMW Group did not enter into any significant transactions with members of the Board of Management or the Supervisory Board of BMW AG or with companies in whose representa- tive bodies those persons are represented. The same applies to close members of the families of those persons. 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information 129 [41] Declaration with respect to the Corporate Governance Code The Board of Management and the Supervisory Board of Bayerische Motoren Werke Aktiengesellschaft have issued a declaration, required by § 161 of the German Stock Corporation Act, which is included in the BMW Group Annual Report 2007 and which is available to shareholders on the BMW Group web- site under the address www.bmwgroup.com/ir. [42] Shareholdings of members of the Board of Management and Supervisory Board The members of the Supervisory Board of BMW AG hold in total 27.70 % of the issued common and preferred stock shares, of which 16.12 % relates to Stefan Quandt, Bad Homburg v. d. H., and 11.58 % to Susanne Klatten, Munich. The shareholding of the members of the Board of Management of BMW AG is, in total, less than 1 % of the issued stock shares. [43] Compensation of members of the Board of Management and Supervisory Board Subject to the approval of the proposed dividend at the Annual General Meeting of Shareholders, the remuneration of current members of the Board of Management and the Supervisory Board amounts to euro 18.7 million (2006: euro 17.8 million). The re- muneration consists of the following: in euro million Short-term employment benefits Benefits due at end of employment relationship 2007 2006 18.0 0.7 18.7 17.2 0.6 17.8 Subject to the approval of the proposed dividend at the Annual General Meeting, the salaries of the mem- bers of the Board of Management for the financial year 2007 amounted to euro 15.2 million (2006: euro 14.5 million). This comprises fixed components of euro 2.7 million (2006: euro 2.3 million) and vari- able components of euro 12.5 million (2006: euro 12.2 million). In addition, an amount of euro 0.7 million (2006: euro 0.6 million) has been granted to current mem- bers of the Board of Management after the end of their employment relationship. This relates to the ex- pense for allocations to pension provisions. Subject to the approval of the proposed dividend at the Annual General Meeting, the compensation of the members of the Supervisory Board for the finan- cial year 2007 amounts to euro 2.8 million (2006: euro 2.7 million). This comprises fixed components of euro 0.1 million (2006: euro 0.1 million) and variable components of euro 2.7 million (2006: euro 2.6 mil- lion). Further details about the remuneration of cur- rent members of the Board of Management and of the Supervisory Board can be found in the Compen- sation Report on pages 142 to 145. The Compensa- tion Report is part of the Group Management Report. The remuneration of former Board members and their dependants amounted to euro 4.3 million (2006: euro 3.8 million). Pension obligations to former members of the Board of Management and their dependants are fully covered by pension provisions amounting to euro 38.3 million (2006: euro 38.8 million), computed in accordance with IAS 19. Members of the Board of Management or the Supervisory Board holding a BMW Bank GmbH, Munich, credit card have a credit line of up to euro 25,565. At the balance sheet date the balances resulting from credit card usage were all within the agreed limits. The names of the members of the Supervisory Board and of the Board of Management are dis- closed on pages 137 to 140. 130 Group Financial Statements [44] Application of § 264 (3) and § 264b HGB A number of companies and incorporated partner- ships (as defined by § 264a HGB) which are affiliated, consolidated entities of BMW AG and for which the consolidated financial statements of BMW AG repre- sent exempting consolidated financial statements, apply the exemptions available in § 264 (3) and § 264b HGB with regard to the drawing up of a management report. The exemptions have been applied by: – Alphabet Fuhrparkmanagement GmbH, Munich – Bavaria Wirtschaftsagentur GmbH, Munich – BMW Fahrzeugtechnik GmbH, Eisenach – BMW Fuhrparkmanagement Beteiligungs GmbH, Stuttgart – BMW Hams Hall Motoren GmbH, Munich – BMW Ingenieur-Zentrum GmbH + Co., Dingolfing – BMW Leasing GmbH, Munich – BMW M GmbH Gesellschaft für individuelle Auto- – BMW Vertriebs GmbH & Co. oHG, Dingolfing – LHS Leasing- und Handelsgesellschaft Deutsch- land mbH, Stuttgart – Rolls-Royce Motor Cars GmbH, Munich In addition, the following entities apply the exemption available in § 264 (3) and § 264b HGB with regard to publication: – Alphabet Fuhrparkmanagement GmbH, Munich – Bavaria Wirtschaftsagentur GmbH, Munich – BMW Fuhrparkmanagement Beteiligungs GmbH, Stuttgart – BMW Hams Hall Motoren GmbH, Munich – BMW Ingenieur-Zentrum GmbH + Co., Dingolfing – BMW INTEC Beteiligungs GmbH, Munich – BMW Leasing GmbH, Munich – BMW Vertriebs GmbH, Munich – BMW Vertriebs GmbH & Co. oHG, Dingolfing – LHS Leasing- und Handelsgesellschaft Deutsch- mobile, Munich land mbH, Stuttgart – BMW Vertriebs GmbH, Munich – Rolls-Royce Motor Cars GmbH, Munich 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information BMW Group Notes to the Group Financial Statements Segment Information 131 [45] Segment information Description of business segments In accordance with the rules contained in IAS 14 (Segment Reporting), the BMW Group presents segment information using business segments as its primary reporting format and geographical segments as its secondary reporting format. This distinction is based on internal management and financial reporting systems and reflects the risk and earnings structure of the Group. The activities of the BMW Group are broken down into the segments Automobiles, Motorcycles and Financial Services. The Automobiles segment develops, manu- factures, assembles and sells cars and off-road vehi- cles under the brands BMW, MINI and Rolls-Royce, as well as spare parts and accessories. BMW and MINI brand products are sold in Ger- many through branches of BMW AG and by inde- pendent, authorised dealers. Sales outside Germany are handled primarily by subsidiary companies and, in a number of markets, by independent import com- panies. Rolls-Royce brand vehicles are sold in the USA via a subsidiary company and elsewhere by in- dependent, authorised dealers. The BMW Motorcycles segment develops, manufactures, assembles and sells BMW brand motorcycles as well as spare parts and accessories. Reconciliations to the Group profit before tax for the Group include holding companies, Group financing companies and income and expenses not specifically attributable to the business segments. Reconciliations also include certain operating com- panies which are not allocated to segments, namely BMW Services Ltd., Bracknell, BMW (UK) Investments Ltd., Bracknell, and the Cirquent Group. Other explanatory comments on segment information Segment information is generally prepared in con- formity with the accounting policies adopted for preparing and presenting the Group financial state- ments. Inter-segment receivables and payables, provisions, income, expenses and profits are elimi- nated in Reconciliations. Inter-segment sales take place at arm’s length prices. Significant non-cash items comprise mainly changes in provisions, impairment losses, reversal of impairment losses and depreciation on leased products. Capital expenditure comprises additions to prop- erty, plant and equipment and intangible assets. Segment assets and segment liabilities comprise all assets and liabilities employed by the relevant busi- ness segment to generate the profit before financial result. The Financial Services segment focuses pri- The return on sales for each segment is based marily on car leasing, fleet business, retail customer and dealer financing, customer deposit business and insurance activities. The profit before financial result of this segment includes net interest income on retail customer and dealer financing business and the re- sult of lease business. Leased products are carried at acquisition cost less straight-line depreciation down to the imputed residual value of the vehicles. Leased products are written down to their fair value where this is lower. Intra-group profits on own products are eliminated on consolidation and included in the Reconciliations to the Group profit before tax. on the profit before tax. Internal financing is computed as the profit before tax adjusted for depreciation and significant non-cash items and less actual tax payments. In the case of segment information by geograph- ical region, external sales are based on the location of the customer’s registered office. Segment infor- mation is provided for the regions Germany, rest of Europe, the Americas and Africa, Asia and Oceania, in line with internal management and reporting pro- cedures. 132 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information Segment information by business segment in euro million External revenues Change compared to previous year Inter-segment revenues Change compared to previous year Total revenues Change compared to previous year Gross profit Profit before financial result Change compared to previous year Result from equity method accounting Other financial result Profit before tax Change compared to previous year Return on sales Significant non-cash items Internal financing Capital expenditure Depreciation and amortisation Additions to leased products Investments accounted for using the equity method Assets Liabilities Average workforce during the year * including impairment loss of euro 17 million due to volume-induced adjustment to forecast % % % % % % Automobiles 2007 2006 42,435 11.8 11,383 15.9 53,818 12.7 37,948 1.9 9,819 14.0 47,767 4.2 10,528 9,636 3,450 12.9 11 – 229 3,232 7.3 6.0 356 3,055 – 0.8 – 25 – 18 3,012 1.2 6.3 – 117 6,591 5,552 4,103 4,185 3,562 3,159 359 63 392 60 28,515 27,227 19,881 20,069 95,927 95,920 133 Motorcycles Financial Services Reconciliations Group 2007 2006 2007 2006 2007 2006 2007 2006 1,223 – 2.5 5 – 50.0 1,228 – 2.9 345 80 6.7 – – 9 71 7.6 5.8 11 156 45 86 * – – 670 404 1,255 3.1 10 66.7 1,265 3.4 322 75 11.9 – – 9 66 10.0 5.2 12 12,146 26.5 1,794 21.5 13,940 25.8 9,603 19.0 1,476 10.6 11,079 17.8 1,345 1,215 717 4.1 – 26 743 8.5 5.3 689 10.8 – – 4 685 13.2 6.2 214 10.9 – 13,182 16.6 – 12,968 16.7 – 32 – 35 – – – 138 – 173 – – 4,204 3,475 387 144 4,873 4,095 110 24 42 24 77 9 11 193 62.2 56,018 14.3 48,999 5.0 – 11,305 13.6 – 11,112 13.0 – – – – 56,018 14.3 48,999 5.0 166 12,186 11,339 231 862.5 – 130 361 – – 30 272 22 12 4,212 4.0 11 – 350 3,873 – 6.1 4,050 6.8 – 25 99 4,124 25.5 6.9 8.4 4,958 3,400 11,697 10,063 4,267 4,313 3,683 3,272 12,902 10,362 – 2,223 – 2,232 11,038 8,522 – – 59,040 50,529 – 772 – 63 60 614 88,997 79,057 52,626 44,480 – 5,658 – 5,018 67,253 59,927 64 77 – – 687 396 2,761 2,816 3,848 3,315 1,866 1,676 104,402 103,727 134 Group Financial Statements 73 Group Financial Statements 73 Income Statements 74 Balance Sheets 76 Cash Flow Statements 78 Group Statement of Changes in Equity Statement of Income and Expenses recognised directly in Equity 79 80 Notes 80 – Accounting Principles and Policies 89 – Notes to the Income Statement 96 – Notes to the Balance Sheet 117 – Other Disclosures 131 – Segment Information Segment information by region in euro million External revenues 2006 2007 Capital expenditure 2006 2007 Assets 2007 2006 Germany Rest of Europe The Americas Africa, Asia, Oceania Reconciliations Group 11,918 22,395 13,014 8,691 – 10,601 18,440 12,336 7,622 – 3,364 3,089 475 378 50 – 665 511 48 – 31,615 24,356 23,290 9,526 210 28,903 19,789 21,589 8,705 71 56,018 48,999 4,267 4,313 88,997 79,057 Munich, 19 February 2008 Bayerische Motoren Werke Aktiengesellschaft The Board of Management BMW Group Responsibility Statement by the Company’s Legal Representatives 135 Statement pursuant to § 37y No. 1 of the Securities Trading Act (WpHG) in conjunction with § 297 (2) sentence 3 and § 315 (1) sen- tence 6 of the German Commercial Code (HGB) “To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit of the Group, and the Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group.” Bayerische Motoren Werke Aktiengesellschaft The Board of Management 136 BMW Group Auditors’ Report We have audited the consolidated financial state- ments prepared by Bayerische Motoren Werke Aktiengesellschaft, comprising the income state- ment, the balance sheet, statements of changes in equity, cash flow statement and the notes to the consolidated financial statements and its report on the position of the Company and the Group for the business year from 1 January to 31 December 2007. The preparation of the consolidated financial state- ments and Group management report in accordance with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a (1) HGB are the responsibility of the parent company’s management. Our responsibility is to express an opinion on the consolidated financial statements and on the Group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with § 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit such that material misstatements materially affecting the pre sentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable finan- cial reporting framework and in the Group manage- ment report are detected with reasonable assurance. Knowledge of the business activities and the eco- nomic and legal environment of the Group and ex- pectations as to possible misstatements are taken into account in the determination of audit proce- dures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial state- ments and in the Group management report are ex- amined primarily on a test basis within the framework of the audit. The audit also includes assessing the annual financial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and con- solidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and Group management report. We be- lieve that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRSs, as adopted by the EU, the additional require- ments of German commercial law pursuant to § 315a (1) HGB and give a true and fair view of the net assets, financial position and results of operations of the Group. The Group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s posi- tion and suitably presents the opportunities and risks of future development. Munich, 3 March 2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Dr. Schindler Wirtschaftsprüfer Pastor Wirtschaftsprüfer Members of the Supervisory Board Members of the Board of Management Corporate Governance at BMW Group 137 Corporate Governance 137 140 141 142 Compensation Report 146 Shareholdings of Members of the Board of Management and Supervisory Board Declaration of the Board of Management and of the Supervisory Board pursuant to §161 AktG 147 Members of the Supervisory Board 137 Prof. Dr.-Ing. Dr. h. c. Dr.-Ing. E. h. Joachim Milberg Chairman Former Chairman of the Board of Management of BMW AG Chairman of the Presiding Board, Personnel Committee, Audit Committee and Nomination Committee; member of the Mediation Committee Mandates Bertelsmann AG FESTO AG MAN AG (Deputy Chairman) (until 10. 05. 2007) SAP AG (from 16.05. 2007) Deere & Company Manfred Schoch* Deputy Chairman Chairman of the General Works Council Industrial Engineer Member of the Presiding Board, Personnel Committee, Audit Committee and Mediation Committee Stefan Quandt Deputy Chairman Industrial Engineer Member of the Presiding Board, Personnel Committee, Audit Committee, Nomination Committee and Mediation Committee Mandates DELTON AG (Chairman) Dresdner Bank AG (until 31.12. 2007) DataCard Corp. Konrad Gottinger * (until 15.02. 2008) Deputy Chairman Member of the Works Council, Dingolfing Member of the Presiding Board, Personnel Committee, Audit Committee and Mediation Committee Dr. Hans-Dietrich Winkhaus Deputy Chairman Former Chairman of the Board of Henkel KGaA Member of the Presiding Board, Personnel Committee, Audit Committee and Nomination Committee Mandates Deutsche Lufthansa AG ERGO Versicherungsgruppe AG Henkel KGaA Ulrich Eckelmann* Head of Division Industry, Technology and Environment with the Executive Board of IG Metall Bertin Eichler * Executive Member of the Executive Board of IG Metall Mandates ThyssenKrupp AG (Deputy Chairman) BGAG Beteiligungsgesellschaft der Gewerkschaften GmbH (Chairman) * Employee representative Membership of other statutory supervisory boards Membership of equivalent national or foreign boards of business enterprises 138 Corporate Governance Members of the Supervisory Board Members of the Board of Management Corporate Governance at BMW Group 137 Corporate Governance 137 140 141 142 Compensation Report 146 Shareholdings of Members of the Board of Management and Supervisory Board Declaration of the Board of Management and of the Supervisory Board pursuant to §161 AktG 147 Franz Haniel Engineer, MBA Mandates DELTON AG (Deputy Chairman) Franz Haniel & Cie. GmbH (Chairman) Heraeus Holding GmbH Metro AG (Chairman) (from 04.11. 2007) secunet Security Networks AG Giesecke & Devrient GmbH Arthur L. Kelly Managing Partner of KEL Enterprises L. P. Mandates BASF SE DataCard Corp. Deere & Company Northern Trust Corp. Robert Bosch Corp. Snap-on Inc. Susanne Klatten BSc., MBA Honorary Senator of the Technical University of Munich Mandates ALTANA AG (Deputy Chairman) UnternehmerTUM GmbH Willibald Löw * Chairman of the Works Council, Landshut Prof. Dr. rer. nat. Drs. h.c. mult. Hubert Markl Former President of Max-Planck-Gesellschaft zur Förderung der Wissenschaften e. V. Professor of Biology (retired) Mandates Münchener Rückversicherungs-Gesellschaft AG Georg von Holtzbrinck GmbH Sanofi-Aventis S. A. Wolfgang Mayrhuber Chairman of the Board of Management of Deutsche Lufthansa AG Mandates Eurowings Luftverkehrs AG Fraport AG LSG Lufthansa Service Holding AG Lufthansa Cargo AG Lufthansa Technik AG Münchener Rückversicherungs-Gesellschaft AG Thomas Cook AG (Deputy Chairman) (until 02. 04. 2007) HEICO Corp. SWISS International Air Lines AG Heinz-Joachim Neubürger Senior Advisor of Kohlberg Kravis Roberts & Co. Managing Director of Kohlberg Kravis Roberts & Co. Ltd. Export Merchant, MBA Mandates Allianz Versicherungs-AG ProSiebenSat.1 Media AG (from 17. 07. 2007) KKR Guernsey GP Limited (until 15. 06. 2007) Gruppo Banca Leonardo S. p. A. (until 19. 07. 2007) 139 Werner Neugebauer * Regional Executive Officer of IG Metall Bavaria Franz Oberländer * Member of the Works Council, Munich Anton Ruf * Director Product Line L7 Stefan Schmid* (from 03.01. 2007) Chairman of the Works Council, Dingolfing Prof. Dr. Jürgen Strube Chairman of the Supervisory Board of BASF SE Mandates Allianz Deutschland AG BASF SE (Chairman) Bertelsmann AG (Deputy Chairman) Commerzbank AG Fuchs Petrolub AG (Chairman) Hapag-Lloyd AG Linde AG Werner Zierer * Chairman of the Works Council, Regensburg * Employee representative Membership of other statutory supervisory boards Membership of equivalent national or foreign boards of business enterprises 140 Corporate Governance Members of the Board of Management Dr.-Ing. Norbert Reithofer Chairman Frank-Peter Arndt Production Mandates BMW Motoren GmbH (Chairman) BMW (South Africa) (Pty) Ltd. (Chairman) Leipziger Messe GmbH Ernst Baumann Human Resources, Industrial Relations Director Mandates Krones AG Dr.-Ing. Herbert Diess (from 01.10. 2007) Purchasing and Supplier Network Dr.-Ing. Klaus Draeger Development Dr. Friedrich Eichiner (from 01.10. 2007) Corporate and Brand Development Mandates BMW Brilliance Automotive Ltd. (Deputy Chairman) (from 01.11. 2007) BMW (US) Holding Corp. Dr. Michael Ganal Sales and Marketing (until 30. 09. 2007) Finance (from 01.10. 2007) Mandates BMW Brilliance Automotive Ltd. (Deputy Chairman) (until 31.10. 2007) Stefan Krause Finance (until 30. 09. 2007) Sales and Marketing (from 01.10. 2007) Mandates Allianz Deutschland AG General Counsel: Dr. Dieter Löchelt Membership of other statutory supervisory boards Membership of equivalent national or foreign boards of business enterprises Members of the Supervisory Board Members of the Board of Management Corporate Governance at BMW Group 137 Corporate Governance 137 140 141 142 Compensation Report 146 Shareholdings of Members of the Board of Management and Supervisory Board Declaration of the Board of Management and of the Supervisory Board pursuant to §161 AktG 147 Corporate Governance 141 Corporate Governance at BMW Group For the BMW Group, corporate governance is an all- embracing issue which affects all areas of the enter- prise. Transparent reporting and a policy of corporate governance aimed at the interests of stakeholders are well-established traditions within the BMW Group. Cooperation between the Board of Management and the Supervisory Board, in an atmosphere of commonly shared trust and responsibility, have long been the basis for managing the affairs of the BMW Group. The underlying corporate culture at the BMW Group is founded upon the principles of transparency, placing trust in others and taking responsibility for one’s own actions. Declaration of Compliance and the BMW Group Corporate Governance Code Management and supervisory boards of companies listed in Germany are required by law (§ 161 German Stock Corporation Act) to report once a year whether the officially published and relevant recommenda- tions issued by the “German Government Corporate Governance Code Commission”, as valid at the date of the declaration, have been, and are being, com- plied with. Companies affected are also required to state which of the recommendations of the Code have not been or are not being applied. The Board of Management and Supervisory Board of Bayerische Motoren Werke Aktiengesell- schaft believe that the recommendations and sug- gestions contained in the German Corporate Govern- ance Code (GCGC) contribute to an enhancement of the financial markets in Germany, in particular for international investors. At the joint meeting held on 4 December 2007, the Board of Management and Supervisory Board of BMW AG issued the Declara- tion of Compliance with the new version of the Ger- man Corporate Governance Code valid from 20 July 2007. BMW AG continues to comply with the rec- ommendations of the GCGC with only one excep- tion: namely, that the discussion and regular review of the structure of the compensation system of the Board of Management is performed by the Personnel Committee. The Chairman of that committee informs the members of the Supervisory Board at its next meeting in detail. All other recommendations are com- plied with. Moreover, the Board of Management and Supervisory Board have, in the past, developed the BMW Group’s own corporate governance code on the basis of the GCGC taking account of the specific circumstances of the BMW Group. The aim is to provide shareholders and other stakeholders with a comprehensive and stand-alone document covering the corporate governance practices applied by the BMW Group. The BMW Group’s Corporate Govern- ance Code has been revised in conjunction with the new version of the GCGC. A copy of it can be ob- tained, along with other shareholder information, from the BMW Group website. Interested parties can also find other general information about the BMW Group, up-to-date analysts’ reports and all Group financial publications at www.bmwgroup.com/ir. A coordinator responsible for all corporate govern- ance issues reports directly and on a regular basis to the Board of Management and Supervisory Board. Compliance at BMW Group The corporate culture that has evolved at the BMW Group is characterised by clear lines of responsibility, mutual respect and trust. Nevertheless, the risk of wrongdoing by individuals can never be entirely ruled out. The BMW Group is firmly committed to keeping such risks to a minimum and to systematically un- covering and following up any cases of corruption that might occur. In accordance with the anti-corrup- tion principle enshrined in the United Nations Global Compact, the BMW Group has a well-established internal control system, the effectiveness of which is tested regularly using a risk-based approach. In ad- dition, employees in relevant divisions and depart- ments are sensitised to the risk of corruption. The ways in which employees are expected to deal with this risk are set out in corporate guidelines and in the BMW Group’s stated set of core principles. Those requirements are supplemented by organisational rules such as the dual control principle and segrega- tion of duties between requisitioning and purchas- ing. Regular and mandatory job rotation within the purchasing function helps to prevent dependencies between the parties involved and therefore receives the full support of the personnel department. In addi- tion, all business units are subjected to audit by the Group’s internal audit department within a prede- fined time scale in accordance with the Standards promulgated by the German Institute of Internal Au- diting. Processes and areas of the BMW Group that are exposed to a higher degree of risk are audited more frequently, for example in countries where cor- ruption is more prevalent. The internal audit depart- ment also provides tools to specialist departments to carry out their own risk assessment and controls. One example of the effectiveness of the Group’s internal control mechanisms is the uncovering of various incidences of corruption in BMW AG’s pur- chasing department in 2005. Legal proceedings culminated in the conviction of a number of ex-em- 142 Corporate Governance Members of the Supervisory Board Members of the Board of Management Corporate Governance at BMW Group 137 Corporate Governance 137 140 141 142 Compensation Report 146 Shareholdings of Members of the Board of Management and Supervisory Board Declaration of the Board of Management and of the Supervisory Board pursuant to §161 AktG 147 ployees of the BMW Group during the years 2006 and 2007. In order to reduce the risk of irregularities, the applicable rules for receiving payments/benefits and attending non-business events have once again been communicated to employees working in the purchasing department as well as to some 600 sup- pliers. In 2007, the BMW Group set up a Compliance Committee which reports directly to, and advises, the Board of Management of BMW AG on compli- ance-related matters. The Committee has, amongst other functions, the task of identifying and assessing compliance-related risks and other risks which could endanger the good reputation of the BMW Group. By analysing the structural, organisational and/or process-related context of identified breaches of rules, the Compliance Committee is also able to de- sign preventative measures and instruct the relevant departments to implement those measures. Each and every employee of the BMW Group is obliged to act responsibly and in compliance with the law. In the interest of investor protection and in order to ensure that the BMW Group complies with regu- lations relating to potential insider information, the Board of Management has appointed an Ad-hoc Committee which is made up from representatives of various specialist departments and whose mem- bers examine the relevance of issues for ad-hoc disclosure purposes. The procedures and decision- taking process applied by this committee, which has been in place since 1994, have been brought into line with the revised requirements of the Investors’ Protection Improvement Act. All persons working on behalf of the enterprise and with access to insider information in accordance with existing rules have been, and continue to be, included in an appropriate list and informed of the duties arising from insider rules. Compliance matters are also included in the Board of Management’s reports to the Audit Com- mittee set up by the Supervisory Board. Compensation Report The BMW Group supports the endeavours of the German Corporate Governance Code to increase transparency in the disclosure of the components of compensation. The following section therefore de- scribes the principles relating to the compensation of the Board of Management and the stipulations set out in the statutes relating to the compensation of the Supervisory Board. As well as discussing the structure of remuneration, the components of compensation are also disclosed in absolute figures. In accordance with the recommendations of the GCGC, the compensation of each member of the Board of Management and the Supervisory Board is disclosed by name and analysed into components. 1. Compensation of the Board of Management Responsibilities The determination and monitoring of the compen- sation of the Board of Management are the respon- sibility of the Personnel Committee of the Super- visory Board. The Personnel Committee comprises the Chairman of the Supervisory Board and his four deputies. Overall objectives The compensation model used for the Board of Management should be attractive in the context of the competitive environment for highly qualified ex- ecutives. As an incentive to encourage performance, the variable component should be linked to a high degree to the financial success of the BMW Group. The structure of the compensation of the Board of Management should also contain parallels to the compensation system applied to employees and senior management. Components of compensation The compensation of the Board of Management comprises a fixed and a variable component. In addi- tion, benefits are also payable at the end of mem- bers’ mandates, primarily in the form of pension benefits. For the purposes of determining the overall compensation of the Board of Management, the Personnel Committee, having considered the overall position and forecasts of the BMW Group, decides on an overall salary framework, which will include a high variable proportion. The Personnel Committee reviews the com- pensation system at regular intervals, with regard to the structure and amount of the remuneration of the Board of Management. Fixed salaries comprise a base remuneration amount, which is paid as monthly salary, and other remuneration elements. Other remuneration ele- ments comprise mainly the use of company cars and the payment of insurance premiums. The factors determining the amount of variable compensation enable members of the Board of Management to earn a competitive level of income with a very high bonus element (2007: 82.2 %, 2006: 143 84.1 %) for financial years in which the BMW Group performs well. The measures used to determine the variable component of compensation are the Group net profit and the dividend level for the relevant year, subject to specifically defined upper limits. As a change from the previous arrangements, upper limits were agreed with the members of the Board of Management for the financial year 2007 based on amounts actually paid in the previous year. The compensation system does not include any stock options, value appreciation rights comparable to stock options or any other stock-based compen- sation components. No compensation agreements have been concluded with members of the Board of Management for situations involving a take-over offer. Similarly, they did not receive any payments or benefits from third parties in 2007 on account of their activities as the members of the Board of Manage- ment. Pension agreements are in place for the event of the termination of a mandate. Pensions are paid to former members of the Board of Management who have either reached the age of 65, or, if their mandate had terminated earlier and had not been extended, to members who have either reached the age of 60, or who are unable to work due to ill-health or accident, or who have entered into early retirement in accordance with a special arrangement. The amount of the pension comprises a basic monthly amount of euro 10,000 or euro 15,000 (Chairman of the Board of Management) plus a fixed amount. The fixed amount is made up of approximately euro 75 for each year of service in the company before becoming a member of the Board of Management plus between euro 154 and euro 400, or between euro 153 and euro 600 (Chairman of the Board of Management), for each full year of service on the board (up to a maximum of 15 years). Pension payments are adjusted by analogy to the rules applicable for the adjustment of civil servants’ pensions: the pensions of members of the Board of Management are adjusted accordingly when the civil servants’ remuneration level B6 (excluding allow- ances) is increased by more than 5 %. If a mandate is ended early before the member of the Board of Management reaches the age of 60, a transitional payment amounting to two-thirds of the pension theoretically earned up to the date when a full pension can be drawn, may become payable if, after a minimum of three years of service as a mem- ber of the Board of Management, this is considered appropriate on the basis of an objective evaluation of all circumstances. Arrangements are in place con- cerning the offsetting of other income against pen- sions and transitional payments. The amounts disclosed below as the annual pension provision allocation for each member corre- sponds to the pension service cost. Members of the Board of Management holding a BMW Bank GmbH credit card have a credit line of up to euro 25,565. At the balance sheet date the balances resulting from credit card usage were all within the agreed limits. Compensation of the Board of Management for the financial year 2007 (total) On the basis of the agreed upper limits, the total re- muneration of the current members of the Board of Management of BMW AG for the financial year 2007 amounted to euro 15.2 million (2006: euro 14.5 mil- lion). This comprises fixed components (including other remuneration) of euro 2.7 million (2006: euro 2.3 million) and variable components of euro 12.5 mil- lion (2006: euro 12.2 million). in euro million 20071] 2006 Amount Proportion Amount Proportion Fixed remuneration 2.7 17.8 % Variable remuneration 12.52] 82.2 % Total remuneration 15.2 100.0 % 2.3 12.2 14.5 15.9 % 84.1 % 100.0 % 1] The Board of Management of BMW AG was increased in 2007 by two additional members. 2] Calculation based on an agreed upper limit. In addition, an amount of euro 0.7 million (2006: euro 0.6 million) was incurred for current members of the Board of Management after termination of their em- ployment relationship. This relates to the expense for allocations to pension provisions (service cost). The amount paid to former members of the Board of Management and their dependants was euro 4.3 million (2006: euro 3.8 million). Pension ob- ligations to former members of the Board of Manage- ment and their dependants are fully covered by pension provisions amounting to euro 38.3 million (2006: euro 38.8 million), computed in accordance with IAS 19. 144 Corporate Governance Members of the Supervisory Board Members of the Board of Management Corporate Governance at BMW Group 137 Corporate Governance 137 140 141 142 Compensation Report 146 Shareholdings of Members of the Board of Management and Supervisory Board Declaration of the Board of Management and of the Supervisory Board pursuant to §161 AktG 147 Compensation of the individual members of the Board of Management for the financial year 2007 in euro Norbert Reithofer Frank-Peter Arndt Ernst Baumann Herbert Diess 1] Klaus Draeger Friedrich Eichiner 1] Michael Ganal Stefan Krause Total 2] Fixed remuneration Other remuneration Salary Fixed remune- ration Total Variable remuneration Remuneration Total Allocation for year to pension provision 600,000 300,000 360,000 75,000 300,000 75,000 360,000 360,000 15,222 98,199 15,737 9,662 55,900 11,068 14,220 16,222 615,222 398,199 375,737 84,662 355,900 86,068 374,220 376,222 3,139,200 1,569,600 1,818,300 392,400 3,754,422 1,967,799 2,194,037 477,062 1,569,600 1,925,500 392,400 1,818,300 1,818,300 478,468 2,192,520 2,194,522 2,430,000 236,230 2,666,230 12,518,100 15,184,330 161,124 84,851 95,394 28,909 85,602 25,157 122,013 72,557 675,607 1] Member of the Board of Management from 1 October 2007. 2] Group perspective. 2. Compensation of the Supervisory Board Responsibilities, regulation pursuant to Articles of Incorporation The compensation of the Supervisory Board is de- termined by shareholders’ resolution at the Annual General Meeting. Compensation is currently based on shareholders’ resolutions taken at the Annual General Meeting on 18 May 1999 and § 15 of the Articles of Incorporation of BMW AG. The Articles of Incorporation of BMW AG can be accessed via the Internet. Components of compensation Each member of the Supervisory Board receives, in addition to the reimbursement of expenses, a fixed amount of euro 6,000 (payable at the end of the year), a variable amount of euro 1,500 for each per- cent of the dividend resolved by the shareholders at the Annual General Meeting in excess of 4 % of the company’s share capital (common stock). The Chair- man of the Supervisory Board receives three times this amount and each deputy receives two times this amount. The company also reimburses to each member of the Supervisory Board any value added tax arising on their remuneration. The Board of Management and the Supervisory Board have decided to put forward a resolution at the Annual General Meeting to be held on 8 May 2008 regarding a new rule for the compensation of the Supervisory Board. In order to reflect the control and advisory functions exercised by the Supervisory Board in a more balanced way in the total compen- sation amount, it is planned that the fixed proportion should be raised and the variable proportion reduced. Under the new rule, the variable compensation will – subject to a predefined upper limit – be based in the future on earnings per share (EPS) if EPS is above a predefined minimum amount. In this way, compen- sation will be based to a greater extent on the actual success of the business. Compensation of the Supervisory Board for the financial year 2007 (total) Against the background of the proposed dividend increase and in anticipation of the new rule that will be put forward at the Annual General Meeting, all members of the Supervisory Board have agreed to an upper limit for their compensation for the financial year 2007 (see below). On this basis, the compensation of the Super- visory Board for activities during the financial year 2007 amounted to euro 2.8 million (2006: euro 2.7 million). This comprised a fixed component of euro 0.1 million (2006: euro 0.1 million) and a variable com- ponent of euro 2.7 million (2006: euro 2.6 million). in euro million 2007 Amount Proportion 2006 Amount Proportion Fixed compensation 0.1 3.6 % Variable compensation 2.7 96.4 % 0.1 2.6 3.7 % 96.3 % Total compensation 2.8 100.0 % 2.7 100.0 % 145 Compensation of the individual members of the Supervisory Board for the financial year 2007 in euro Fixed compensation1] Variable compensation 2] Total Joachim Milberg (Chairman) Manfred Schoch (Deputy Chairman) Stefan Quandt (Deputy Chairman) Konrad Gottinger (Deputy Chairman) Hans-Dietrich Winkhaus (Deputy Chairman) Ulrich Eckelmann Bertin Eichler Franz Haniel Arthur L. Kelly Susanne Klatten Willibald Löw Hubert Markl Wolfgang Mayrhuber Heinz-Joachim Neubürger Werner Neugebauer Franz Oberländer Anton Ruf Stefan Schmid 3] Jürgen Strube Werner Zierer Total 18,000 12,000 12,000 12,000 12,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 5,967 6,000 6,000 310,680 207,120 207,120 207,120 207,120 103,560 103,560 103,560 103,560 103,560 103,560 103,560 103,560 103,560 103,560 103,560 103,560 102,993 103,560 103,560 328,680 219,120 219,120 219,120 219,120 109,560 109,560 109,560 109,560 109,560 109,560 109,560 109,560 109,560 109,560 109,560 109,560 108,960 109,560 109,560 155,967 2,691,993 2,847,960 1] In accordance with § 15 of the Articles of Incorporation, the fixed compensation is paid after the end of the financial year. 2] Calculation based on the dividend proposal of the Board of Management and Supervisory Board and the compensation upper limit agreed with the members of the Super- visory Board. The variable remuneration for the financial year 2007 will not be paid until after the shareholders have passed a resolution at the Annual General Meeting 2008 regarding the appropriation of the unappropriated profit available for distribution. 3] Member of the Supervisory Board from 3 January 2007. Members of the Supervisory Board holding a BMW Bank GmbH credit card have a credit line of up to euro 25,565. At the balance sheet date the balances resulting from credit card usage were all within the agreed limits. None of the members of the Supervisory Board performed advisory, agency or other services for the BMW Group in a personal capacity in 2007. In consequence, no additional compensation was paid. It is BMW Group’s policy and practice not to enter into contractual relationships with members of the Supervisory Board requiring them to provide personal services, in particular advisory and agency services, in return for compensation (cf. Section 4.4 of the BMW Group Corporate Governance Code). 146 Corporate Governance Shareholdings of Members of the Board of Management and the Supervisory Board The members of the Supervisory Board of BMW AG hold in total 27.70 % of the issued common and preferred stock shares, of which 16.12 % relates to Stefan Quandt, Bad Homburg v.d.H. and 11.58 % to Susanne Klatten, Munich. The shareholding of the members of the Board of Management is, in total, less than 1 % of the issued stock shares. Members of the Supervisory Board Members of the Board of Management Corporate Governance at BMW Group 137 Corporate Governance 137 140 141 142 Compensation Report 146 Shareholdings of Members of the Board of Management and Supervisory Board Declaration of the Board of Management and of the Supervisory Board pursuant to §161 AktG 147 Declaration of the Board of Management and of the Supervisory Board of Bayerische Motoren Werke Aktiengesellschaft with respect to the recommendations of the “Government Commission of the German Corporate Governance Code” pursuant to § 161 German Stock Corporation Act 147 The Board of Management and Supervisory Board of Bayerische Motoren Werke Aktiengesellschaft (“BMW AG”) declare the following with respect to the recommendations of the “Government Commission on the German Corporate Governance Code”: BMW AG will comply with all recommendations published in the official section of the electronic Federal Gazette (Code version dated 14 June 2007) except for one divergence: the discussion and regular review of the structure of the compensation system of the Board of Management is performed by the Personnel Committee and not, additionally, by the Supervisory Board (section 4.2.2 paragraph 1 GCGC). During the period since filing the most recent declaration on 5 December 2006, BMW AG has, ex- cept for the one divergence stated above, complied with all recommendations published in the elec- tronic version of the Federal Gazette on 24 July 2006 (Code version dated 12 June 2006). Munich, 4 December 2007 Bayerische Motoren Werke Aktiengesellschaft Supervisory Board Board of Management Reason for divergence Section 4.2.2 paragraph 1 GCGC: The Supervisory Board has transferred discussion and regular review of the structure of the compen- sation system of the Board of Management to the Personnel Committee. The Supervisory Board is informed on a regular basis and in detail of the work of the Personnel Committee. 148 Other Information BMW AG Principal Subsidiaries Principal subsidiaries of BMW AG at 31 December 2007 Equity in euro million Net result Capital investment in % in euro million Domestic1] BMW Bank GmbH, Munich 2] BMW Finanz Verwaltungs GmbH, Munich BMW INTEC Beteiligungs GmbH, Munich 2] Cirquent GmbH, Munich 3] BMW Ingenieur-Zentrum GmbH + Co., Dingolfing BMW Maschinenfabrik Spandau GmbH, Berlin BMW Leasing GmbH, Munich 2] BMW Hams Hall Motoren GmbH, Munich 4] BMW Fahrzeugtechnik GmbH, Eisenach 2] BMW M GmbH Gesellschaft für individuelle Automobile, Munich 2] 1] In the case of German subsidiaries, based on financial statements drawn up in accordance with HGB. 2] profit and loss transfer agreement with BMW AG 3] Consolidated with the operating subsidiaries of Cirquent GmbH, Munich. The sub-group financial statements have been drawn up in accordance with IFRS. 268 130 113 71 47 41 16 15 11 5] – – 46 – – 4 1 – – – – 100 100 100 100 100 100 100 100 100 100 4] profit and loss transfer agreement with a subsidiary of BMW AG 5] below euro 0.5 million 6] In the case of foreign subsidiaries, based on financial statements drawn up in accordance with uniform IFRSs accounting policies. Equity and net result are translated at the closing rate. 148 Other Information 148 150 152 154 158 160 161 BMW AG Principal Subsidiaries BMW Group 10-year Comparison BMW Group Locations Glossary Index Contacts Financial Calendar 149 Principal subsidiaries of BMW AG at 31 December 2007 Equity in euro million Net result Capital investment in % in euro million Foreign 6] BMW Österreich Holding GmbH, Steyr BMW Motoren GmbH, Steyr BMW Russland Trading OOO, Moscow BMW China Automotive Trading Ltd., Beijing BMW Austria Gesellschaft m. b. H., Salzburg BMW Holding B. V., The Hague BMW Australia Finance Ltd., Melbourne, Victoria BMW Finance N. V., The Hague BMW Overseas Enterprises N. V., Willemstad BMW (South Africa) (Pty) Ltd., Pretoria BMW Italia S. p. A., Milan BMW (Schweiz) AG, Dielsdorf BMW Japan Corp., Tokyo BMW Japan Finance Corp., Tokyo BMW Canada Inc., Whitby BMW Belgium Luxembourg S. A. / N. V., Bornem BMW France S. A., Montigny le Bretonneux BMW Australia Ltd., Melbourne, Victoria BMW Portugal Lda., Lisbon BMW Hellas Trade of Cars SA, Athens BMW Sverige AB, Stockholm BMW Nederland B. V., The Hague BMW Automotive (Ireland) Ltd., Dublin BMW New Zealand Ltd., Auckland BMW Korea Co., Ltd., Seoul BMW (UK) Holdings Ltd., Bracknell BMW (UK) Ltd., Bracknell BMW (UK) Manufacturing Ltd., Bracknell BMW Financial Services (GB) Ltd., Hook BMW (UK) Capital plc, Bracknell BMW Malta Ltd., St. Julians BMW Malta Finance Ltd., St. Julians BMW Coordination Center V. o. F., Bornem BMW España Finance S. L., Madrid BMW Ibérica S. A., Madrid BMW de Mexico, S. A. de C. V., Mexico City BMW (US) Holding Corp., Wilmington, Del. BMW Financial Services NA, LLC, Wilmington, Del. BMW Manufacturing, LLC, Wilmington, Del. BMW of North America, LLC, Wilmington, Del. BMW US Capital, LLC, Wilmington, Del. 1,545 851 157 138 64 6,191 444 407 62 386 373 335 303 251 211 191 174 101 58 42 38 37 30 25 22 1,263 1,125 929 345 161 865 729 594 339 266 16 1,147 656 564 397 203 286 173 47 91 14 402 41 – 4 2 28 119 30 37 20 54 42 64 32 22 12 17 25 16 14 – 4 – 6 264 104 34 1 89 62 4 44 99 – 4 14 149 113 – 41 – 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 150 Other Information BMW Group 10-year Comparison Deliveries to customers Automobiles 3] Motorcycles 4] Production Automobiles 3] Motorcycles 5] Financial Services Contract portfolio 2007 IASs/IFRSs 2006 IASs/IFRSs units units 1,500,678 1,373,970 102,467 100,064 units units 1,541,503 1,366,838 104,396 103,759 contracts 2,629,949 2,270,528 Business volume (based on balance sheet carrying amounts) euro million 51,257 44,010 Income Statement Revenues Gross profit percentage Group Gross profit percentage Industrial Operations Gross profit percentage Financial Operations Profit before financial result Profit before tax Return on sales (earnings before tax /revenues) Income taxes Effective tax rate Net profit/ – loss for the year Balance Sheet Non-current assets Current assets Equity Equity ratio Group Industrial Operations Financial Operations Non-current provisions and liabilities Current provisions and liabilities Balance sheet total Cash Flow Statement Cash and cash equivalents at balance sheet date Operating cash flow 8] Capital expenditure Capital expenditure ratio (capital expenditure/revenues) 148 Other Information 148 150 152 154 158 160 161 BMW AG Principal Subsidiaries BMW Group 10-year Comparison BMW Group Locations Glossary Index Contacts Financial Calendar Personnel Workforce at the end of year 7] Personnel cost per employee Dividend Dividend total Dividend per share of common stock/preferred stock euro million 56,018 48,999 % % % euro million euro million % euro million % euro million euro million euro million euro million % % % euro million euro million euro million euro million euro million euro million % 21.8 19.8 10.3 4,212 3,873 6.9 739 19.1 3,134 56,619 32,378 21,744 24.4 43.8 9.2 33,469 33,784 88,997 2,393 6,340 4,267 7.6 23.1 20.3 11.4 4,050 4,124 8.4 1,250 30.3 2,874 50,514 28,543 19,130 24.2 40.6 10.4 31,372 28,555 79,057 1,336 5,373 4,313 8.8 euro 107,539 76,704 106,575 76,621 euro million 694 458 euro 1.06/1.08 0.70/0.72 1] adjusted for new accounting treatment of pension obligations 2] reclassified after harmonisation of internal and external reporting systems 3] including Rover Cars up to 9 May 2000 excluding C1 production by Bertone, production volume C1 up to 2002: 33,489 units 6] the net profit before exceptional items amounted to euro 663 million 7] figures since 1998 of treasury shares 151 2005 IASs/IFRSs 2004 IASs/IFRSs adjusted1] 2003 IASs/IFRSs 2002 IASs/IFRSs adjusted 2] 2001 IASs/IFRSs 2000 IASs/IFRSs 2000 HGB 1999 HGB 1998 HGB 1,327,992 1,208,732 1,104,916 1,057,344 97,474 92,266 92,962 92,599 1,323,119 1,250,345 1,118,940 1,090,258 92,012 93,836 89,745 93,010 905,657 84,713 946,730 90,478 1,011,874 1,011,874 1,180,429 1,187,115 74,614 74,614 65,168 60,308 1,026,775 1,026,775 1,147,420 1,204,000 74,397 74,397 69,157 60,152 2,087,368 1,843,399 1,623,425 1,443,236 1,297,702 1,317,150 40,428 32,556 28,647 26,505 25,306 24,958 970,747 17,578 1,010,839 16,859 855,250 12,564 46,656 44,335 41,525 42,411 38,463 37,226 22.9 20.9 12.0 3,793 3,287 7.0 1,048 31.9 2,239 47,556 27,010 16,973 22.8 39.1 10.4 29,509 28,084 74,566 1,621 6,184 3,993 8.6 23.2 21.9 12.5 3,774 3,583 8.1 1,341 37.4 2,242 40,822 26,812 16,534 24.4 41.6 9.7 26,517 24,583 67,634 2,128 6,157 4,347 9.8 22.7 22.1 12.3 3,353 3,205 7.7 1,258 39.3 1,947 36,921 24,554 16,150 26.3 45.4 9.8 22,090 23,235 61,475 1,659 4,970 4,245 10.2 22.8 22.7 10.5 3,505 3,297 7.8 1,277 38.7 2,020 34,667 20,844 13,871 25.0 43.1 9.4 20,028 21,612 55,511 2,333 4,553 4,042 9.5 25.3 24.0 16.0 3,356 3,242 8.4 1,376 42.4 1,866 31,282 19,977 10,770 21.0 37.0 8.4 19,223 21,266 51,259 2,437 4,304 3,516 9.1 22.8 23.5 12.0 2,065 2,032 5.5 823 40.5 1,209 30,079 19,261 9,432 19.1 35.9 8.1 17,386 22,522 49,340 2,927 3,966 2,781 7.5 35,356 18.1 – – 1,578 1,663 4.7 637 38.3 1,026 20,056 15,819 4,896 13.6 19.1 8.0 13,457 17,522 35,875 2,879 – 2,138 6.0 34,402 16.4 – – 931 1,111 3.2 448 40.3 –2,487 6] 19,857 17,650 3,932 10.5 11.9 8.7 14,785 18,790 37,507 2,055 – 2,155 6.3 32,280 16.0 – – 1,232 1,061 3.3 537 50.6 462 18,586 12,053 6,445 21.0 28.7 10.0 9,331 14,863 30,639 1,935 – 2,179 6.8 105,798 75,238 105,972 73,241 104,342 73,499 101,395 69,560 97,275 66,711 93,624 63,548 93,624 62,307 114,952 55,710 118,489 51,703 4199] 419 392 351 350 310 310 269 234 0.64/0.66 0.62/0.64 0.58/0.60 0.52/0.54 0.52/0.54 0.46/0.48 0.46/0.48 0.40/0.42 10.23/10.74 and Land Rover up to 30 June 2000 4] excluding C1, sales volume to 2003: 32,859 units 5] up to 1999 including BMW F 650 assembly by Aprilia S. p. A., from 2006 including BMW G 650 X assemply by Piaggio S. p. A./ exclude dormant employment contracts, employees in the non-work phases of pre-retirement part-time arrangements and low wage earners 8] figures available since 2000 9] adjustment to dividend due to acquisition 152 Other Information BMW Group Locations. The BMW Group is present in the world markets with 23 production and assembly plants, 41 sales subsidiaries and a research and development network. 148 Other Information 148 150 152 154 158 160 161 BMW AG Principal Subsidiaries BMW Group 10-year Comparison BMW Group Locations Glossary Index Contacts Financial Calendar 153 Headquarters Research and Development BMW Group Research and Innovation Centre (FIZ), Munich BMW Group Forschung und Technik, Munich BMW Group Car IT, Munich BMW Innovations- und Technologiezentrum für Leichtbau, Landshut BMW Entwicklungszentrum für Dieselmotoren, Steyr, Austria BMW Group Designworks, Newbury Park, USA BMW Group Technology Office, Palo Alto, USA BMW Group Engineering and Emission Test Center, Oxnard, USA BMW Group Technology Office, Tokyo, Japan BMW Group Entwicklungsbüro, Beijing, China Production Berlin plant Dingolfing plant Eisenach plant Goodwood plant, GB (headquarters of Rolls-Royce Motor Cars Limited) Hams Hall plant, GB Landshut plant Leipzig plant Munich plant Oxford plant, GB Regensburg plant Rosslyn plant, South Africa BMW Brilliance Automotive Ltd., Shenyang, China (joint venture with Brilliance China Automotive Holdings) Spartanburg plant, USA Steyr plant, Austria Swindon plant, GB Wackersdorf plant Contract production Magna Steyr Fahrzeugtechnik, Austria Assembly plants CKD production Cairo, Egypt CKD production Chennai, India CKD production Jakarta, Indonesia CKD production Kaliningrad, Russia CKD production Kuala Lumpur, Malaysia CKD production Rayong, Thailand Sales subsidiary markets Malaysia Argentina Malta Australia Mexico Austria Netherlands Belgium New Zealand Brazil Norway Bulgaria Philippines China Poland Canada Portugal Czech Republic Romania Denmark Russia Finland Slovakia France Slovenia Germany South Africa Great Britain South Korea Greece Spain Hungary Sweden India Switzerland Indonesia Thailand Ireland Italy USA Japan 154 Other Information Glossary [ACEA] Abbreviation for “Association des Constructeurs Européens d’Automobiles” (European Automobile Manufacturers Association). [EBIT] Abbreviation for “Earnings Before Interest and Taxes”. The profit before income taxes, minority interest and financial result. [Common stock] Stock with voting rights (cf. preferred stock). [Cost of materials] Comprises all expenditure to purchase raw materials and supplies. [DAX] Abbreviation for “Deutscher Aktien Index”, the Ger- man Stock Index. The index is based on the weighted market prices of the 30 largest German stock cor- porations (by stock market capitalisation). [Deferred taxes] Accounting for deferred taxes is a method of allocating tax expense/benefit to the appropriate accounting period. [Derivatives] Financial products, whose measurement is derived principally from market price, market price fluctua- tions and expected market price changes of the underlying instrument (e.g. indices, stocks or bonds). [DJSI] Abbreviation for “Dow Jones Sustainability Index World”. A family of indexes created by Dow Jones and the Swiss investment agency SAM Sustain- ability Group for companies with strategies based on a sustainability concept. The BMW Group has been one of the leading companies in the DJSI since 1999. [EBITDA] Abbreviation for “Earnings Before Interest, Taxes, Depreciation and Amortisation”. The profit before in- come taxes, minority interest, financial result and depreciation/amortisation. [Effectiveness] The degree to which offsetting changes in fair value or cash flows attributable to a hedged risk are achieved by the hedging instrument. [EfficientDynamics] The aim of EfficientDynamics is to reduce con- sumption and emissions whilst simultaneously increasing dynamics and performance. This involves a holistic approach to achieving optimum automo- bile potential, ranging from efficient engine tech- nologies, lightweight construction and comprehen- sive energy and heat management inside the vehicle. [Equity ratio] The proportion of equity (= subscribed capital, reserves, accumulated other equity and minority interest) to the balance sheet total. [ERA] Remuneration Framework Agreement. 148 Other Information 148 150 152 154 158 160 161 BMW AG Principal Subsidiaries BMW Group 10-year Comparison BMW Group Locations Glossary Index Contacts Financial Calendar 155 [Free cash flow] Free cash flow corresponds to the cash inflow from operating activities of Industrial Operations less the cash outflow for investing activities of Industrial Operations. [Gross margin] Gross profit as a percentage of revenues. [IASs] International Accounting Standards. [IFRSs] International Financial Reporting Standards, intended to ensure global comparability of financial reporting and consistent presentation of financial statements. The IFRSs are issued by the International Accounting Standards Board and include the International Accounting Standards (IASs), which are still valid. [Internal financing] Internal financing is calculated as the profit before tax, adjusted for depreciation and amortisation and significant non-cash items, less income tax paid. [ISO 14001] An internationally recognised standard for environ- mental management systems. [Operating cash flow] Cash inflow from Industrial Operations. [Preferred stock] Stock which receives a higher dividend than com- mon stock, but without voting rights. [Principal subsidiaries] Subsidiaries are those enterprises which, either directly or indirectly, are under the uniform control of the management of BMW AG or in which BMW AG, either directly or indirectly – holds the majority of the voting rights – has the right to appoint or remove the majority of the members of the Board of Management or equivalent governing body, and in which BMW AG is at the same time (directly or indirectly) a share- holder – has control (directly or indirectly) over another enterprise on the basis of a control agreement or a provision in the statutes of that enterprise. [Production network] The BMW Group production network consists worldwide of 16 plants, six assembly plants and one contract production plant. Within this network, the plants supply one another with systems and com- ponents and are all characterised by a high level of productivity, agility and flexibility. [Production Triangle MINI] The three British plants (Hams Hall, Oxford and Swindon) are jointly manufacturing the MINI – with greater capacity levels, flexibility and efficiency. The Hams Hall plant produces the new MINI petrol engines; the Oxford plant remains responsible for chassis construction, painting and assembly. The Swindon plant produces the pressed panels and chassis components. [Rating] Standardised evaluation of a company’s credit standing which is widely accepted on the global capital markets. Ratings are published by inde- pendent rating agencies, e.g. Standard & Poor’s or Moody’s, based on their analysis of a company. [Return on Assets BMW Group] Profit before interest expense (expense from revers- ing the discounting of pension obligations and of other long-term provisions, sundry interest and simi- lar expenses) and tax as a percentage of the balance sheet total. [Return on Assets Financial Services] Profit before tax as a percentage of operating assets. [Return on Capital Employed] Profit before financial result as a percentage of capital employed. Capital employed is defined as operating assets less non-interest bearing liabilities. For this purpose, non-interest bearing liabilities exclude non-interest bearing provisions and liabili- ties. [Return on sales] Pre-tax: Profit before tax as a percentage of revenues. Post-tax: Profit as a percentage of revenues. [Risk management] An integral component of all business processes. Following enactment of the Law on Control and Transparency within Businesses (KonTraG), all companies listed on a stock exchange in Germany are required to set up a risk management system. The purpose of this system is to identify risks at an early stage which could have a significant adverse effect on the assets, liabilities, financial position and results of operations, and which could endanger the continued existence of the company. This applies in particular to transactions involving risk, errors in accounting or financial reporting and violations of legal requirements. The Board of Management is required to set up an appropriate system, to docu- ment that system and monitor it regularly with the aid of the internal audit department. [Sports Activity Vehicle] The BMW X5 is the first-ever Sports Activity Vehicle – a combination of a typical BMW sedan featuring sporting and comfortable driving features on the one hand, with far-reaching driving abilities in terrain on the other. This creates a new market segment. In 2004, the BMW Group added another SAV, the BMW X3, to its model range. [Subscribed capital] The share capital of a company is computed by multiplying the nominal value of the shares by the number of shares. [Supplier relationship management] Supplier relationship management (SRM) uses focused procurement strategies to organise net- worked supplier relationships, optimise processes for supplier qualification and selection, ensure the application of uniform standards throughout the Group and create efficient sourcing and procurement processes along the whole value added chain. 156 Other Information 148 Other Information 148 150 152 154 158 160 161 BMW AG Principal Subsidiaries BMW Group 10-year Comparison BMW Group Locations Glossary Index Contacts Financial Calendar 157 [Sustainability] Sustainability or sustainable development. The United Nations Conference on the Environment and Development, held in Rio de Janeiro in 1992, re- solved a global action plan for combating poverty, ensuring a suitable population policy, promoting urban development, human rights, trade, agriculture, environmental protection, research and technology. Referred to as Agenda 21, this action plan serves to ensure sustainable development, preserving the world’s natural resources and limiting the emission of pollutants to a volume the environment can ab- sorb or degrade. [xDrive] The xDrive all-wheel drive system distributes engine power fully variably to all four wheels. The system recognises at a very early stage when power has to be shifted and reacts in fractions of a second. This in- creases driving dynamics, ensures maximum traction and can maintain the vehicle’s directional stability in critical situations. 158 Other Information Index [A] Accounting principles 58, 84 Analysis of changes in Group tangible, intangible and investment assets 96, 98 – 99 Annual General Meeting 07, 26, 106, 129, 144 – 145, 161 Application of § 264 (3) and § 264b of the German Commercial Code (HGB) 130 Apprentices 20, 26, 95 Attributable to minority interest 73 [B] Balance sheet structure 54 Board of Management 05 – 10, 12, 41 – 42, 45, 55, 62, 66, 81, 106, 128 – 129, 134 – 135, 138, 140 – 147, 155 – 156 Bonds 41 – 42, 51 – 52, 55, 66, 77, 110, 113 – 114, 119, 121, 123 – 124, 154 [C] Capital expenditure 02 – 03, 11 – 12, 20 – 21, 51 – 53, 58, 69, 131, 133 – 134, 151 Cash and cash equivalents 51 – 54, 59, 74, 77, 106, 119, 121, 127, 151 Cash flow statement 03, 11, 51 – 52, 127, 136 CO2 emissions 05, 21, 31 – 32, 34 – 35, 64 Commercial Code 58, 80, 135 Compensation of members of the Board of Manage- ment and Supervisory Board 129 Compensation Report 07, 55, 66, 129, 142 Compliance 07 – 08, 42, 65, 69, 141 – 142 Consolidated companies 81, 83, 128 Consolidation principles 83, 136 Contingent liabilities and other financial commit- ments 117 Corporate Governance 55, 129, 141 – 142, 145 – 147 Cost of materials 55 – 56, 154 Cost of sales 49, 73, 80, 84, 89 – 90, 98 Current assets 51, 59, 74, 77, 85 – 86, 92, 99 – 100, 104, 151 Current tax 74 – 75, 77, 91, 103, 112 – 113 [D] DAX 41, 43, 08, 154 Dealer organisation 24 – 25, 40, 124 Debt 13, 47, 65, 102, 105, 107, 111, 125 Deferred income 55, 59, 115 – 116 Deferred taxes 53, 77, 87, 92 – 93, 106, 154 Development 06 – 07, 11 – 13, 34, 41 – 43, 52 – 53, 45, 73, 84 – 86, 90, 97 – 98, 104, 108, 135 – 136, 140, 152 – 153, 157 Dividend 10 – 11, 43 – 44, 77, 84, 94, 106, 129, 143 – 145, 151, 155 Dow Jones Sustainability Index World 154 [E] Earnings per share 49, 43, 73, 84 – 85, 94, 144 EfficientDynamics 21, 28 – 29, 32 – 35, 154 Employees 26 – 29, 56, 67, 95, 106 – 108, 110, 141 – 142, 151 End-of-life Vehicles 30, 112 Environment 13, 16, 21, 28, 30 – 31, 47, 50, 53, 83, 88, 136 – 137, 142, 155, 157 Equity 43, 46 – 47, 53 – 54, 57 – 59, 73 – 75, 77 – 79, 81, 83, 86 – 87, 91, 93, 97, 99, 106 – 107, 110 – 111, 122 – 123, 128, 133, 136, 148 – 149, 151, 154 Exchange rates 14, 49, 52 – 53, 70, 83 – 84, 126 Explanatory notes to the cash flow statements 127 [F] Financial assets 52 – 53, 57 – 58, 74, 86 – 87, 101 – 102, 119, 121, 123 – 124 Financial instruments 10, 46, 50 – 51, 53, 63, 91, 78 – 79, 86 – 88, 91, 106 – 107, 118, 122 – 127 Financial liabilities 52 – 53, 55, 75, 77, 82, 85, 88, 107, 113, 116, 119, 121, 123 – 124 Financial result 47 – 48, 50, 73, 88, 91, 110, 131, 133, 151, 154, 156 Financial Services 03, 07, 09 – 10, 23, 35, 42, 58, 61, 63, 80 – 83, 99, 131, 133, 149, 151, 156 Financial statements 11, 23, 80 – 81, 83 – 84, 88, 95, 106, 128, 130 – 131, 135 – 136, 148, 155 Fleet consumption 34 Foreign currency translation 83 [G] Group Management Report 09, 10 – 71, 81, 95, 125 – 127, 129, 135 – 136 [I] Income statement 49 – 50, 60 – 61, 73, 80, 83, 87 – 89, 94, 99, 110, 112, 122 – 123, 136, 151 Income tax assets 103 Income taxes 87, 93, 154 Intangible assets 11, 53, 58 – 59, 74, 77, 82, 84 – 86, 89, 92, 97 – 98, 131 Internal financing 55, 77, 131, 133, 155 Inventories 24, 53, 74, 77, 84, 87, 104 Investments accounted for using the equity method and other investments 99 [K] Key data per share 43 [L] Leased products 52 – 53, 74, 77, 82, 85, 92, 97, 99, 131, 133 Locations 152 [M] Mandates of members of the Board of Manage- ment 140 Mandates of members of the Supervisory Board 137 Marketable securities 52 – 54, 59, 77, 80, 86, 91, 97, 101 – 102, 122 Market price changes 154 Minority interest 56, 73, 75, 94, 106 – 107, 154 Motorcycles 10, 15, 22 – 23, 83, 99, 131, 133 [N] New accounting treatment 02 – 03, 11, 43, 48, 151 New financial reporting rules 88 – 89 Non-current assets 54, 74, 77, 85, 99 – 100, 104, 151 148 Other Information 148 150 152 154 158 160 161 BMW AG Principal Subsidiaries BMW Group 10-year Comparison BMW Group Locations Glossary Index Contacts Financial Calendar [O] Other disclosures relating to the income statement 94 Other investments 53, 74, 81, 86, 97, 99 – 100, 119,121 Other liabilities 55, 59, 75, 82, 115 – 116, 119, 121 – 122 Other operating income and expenses 50, 60, 90 Other provisions 55, 68, 75, 88, 112 Outlook 63, 69, 107 [P] Pension provisions 53, 58, 59, 75, 88, 107 – 109, 129, 143 Personnel costs 90, 94 Prepayments 59, 104 Principal subsidiaries 148 – 149, 155 Production network 03, 19, 50, 53, 155 Profit before tax 10, 37, 48 – 49, 63, 73, 131, 133, 151, 155 – 156 Property, plant and equipment 11, 59, 74, 77, 82, 84 – 86, 89, 92, 97 – 98, 118, 131 Purchases 37 [R] Rating 63, 65, 87, 107, 124, 155 Receivables 42, 53, 59, 74, 77, 80, 82 – 83, 86 – 87, 100 – 105, 119, 121 – 122, 124, 131 Receivables from sales financing 52 – 53, 74, 77, 82, 86, 100 – 101, 119, 121, 124 Reconciliations 10, 51, 131, 133 – 134 Related party relationships 128 Research 31, 35, 49 – 50, 57, 60, 71, 73, 84, 90, 98, 152 – 153, 157 Return on sales 48 – 49, 131, 133, 151, 156 Revenue reserves 59 – 60, 75, 106 – 107 Revenues 05, 07, 10 – 11, 49, 62, 65, 73, 80 – 82, 84, 88 – 89, 125, 133, 151, 155 – 156 Risk management 62, 125, 156 [S] Sales and administrative costs 49 – 50, 73, 90 Sales volume 03, 10, 17 – 19, 22 – 23, 38, 49 – 50, 66, 69, 151 Segment information 89, 131, 133 – 134 Shareholdings of members of the Board of Manage- ment and Supervisory Board 129 Stock 11, 23, 41, 43 – 44, 46, 53, 58 – 59, 73, 84 – 85, 94, 106, 129, 141, 143 – 144, 146 – 147, 151, 154 – 156 Subscribed capital 59, 75, 154, 156 Subsidiaries 12, 37, 79 – 84, 91, 93, 95, 98 – 100, 104, 106 – 108, 115, 117, 119, 121, 123, 127 – 128, 148 – 149, 152, 155 Suppliers 37, 142 [T] Trade payables 48, 55, 59, 75, 116, 119, 121, 124 [W] Workforce 03, 26, 26 – 29, 58, 66, 133, 151 Index of graphs 159 [Finances] BMW Group Capital expenditure 02 BMW Group Profit before tax 02 BMW Group Revenues 02 BMW Group Revenues by region 11 BMW Group Capital expenditure and operating cash flow 11 Exchange rates compared to the Euro 14 Steel price trend 14 Oil price 15 Precious metals price trend 15 Contract portfolio of BMW Group Financial Services 24 Contract portfolio retail customer financing of BMW Group Financial Services 2007 24 Regional mix of BMW Group purchase volumes 2007 37 Change in cash and cash equivalents 52 Balance sheet structure Group 54 Balance sheet structure Industrial Operations 54 BMW Group value added 2007 56 [Production and sales volume] BMW Group Deliveries of automobiles 02 BMW Group Deliveries of automobiles by region and market 17 BMW Group – key automobile markets 2007 17 BMW brand cars in 2007 – analysis by series 18 Deliveries of BMW diesel automobiles 18 MINI brand cars in 2007 – analysis by model variant 19 MINI brand cars in 2007 – analysis by engine variant 19 Automobile production of the BMW Group by plant in 2007 20 BMW Group – key motorcycle markets 2007 22 BMW motorcycles delivered 22 BMW motorcycles in 2007 – analysis by series 23 [Workforce] BMW Group apprentices at 31 December 26 Employee fluctuation ratio BMW AG 27 [Environment] Process waste water per unit produced 30 Volatile organic compounds (VOC) per unit produced 30 CO2 emissions per unit produced 31 Energy consumed per unit produced 31 Roadmap of the BMW Group for sustainable mobility 33 Development of CO2 emissions of BMW Group cars in Europe (EU-15) 34 The BMW EfficientDynamics measures – an overview 34 [Stock] Development of BMW stock compared to stock exchange indices 41 Development in the value of a BMW stock invest- ment 42 This version of the Annual Report is a translation from the German version. Only the original German version is binding. 160 Other Information Contacts Business Press Telephone +49 89 382-2 33 62 +49 89 382-2 41 18 +49 89 382-1 08 81 presse@bmwgroup.com Fax E-mail Investor Relations Telephone +49 89 382-2 42 72 +49 89 382-2 53 87 +49 89 382-1 46 61 ir@bmwgroup.com Fax E-mail The BMW Group on the Internet Further information about the BMW Group is available online at www.bmwgroup.com. Investor Relations information is available directly at www.bmwgroup.com/ir. Information about the various BMW Group brands is available at www.bmw.com, www.mini.com and www.rolls-roycemotorcars.com 148 Other Information 148 150 152 154 158 160 161 BMW AG Principal Subsidiaries BMW Group 10-year Comparison BMW Group Locations Glossary Index Contacts Financial Calendar Financial Calendar 161 Interim Report to 31 March 2008 Annual General Meeting Interim Report to 30 June 2008 Interim Report to 30 September 2008 29 April 2008 8 May 2008 5 August 2008 4 November 2008 Number ONE Opportunities < New > Efficiency The art of engineering our own future. BMW Group. The art of engineering our own future. 03 001 The art of engineering our own future. 002 The BMW Group’s strategic realignment. To stay in the lead, we need to meet tomorrow’s challenges today. We need to take responsibility for finding answers to the key questions the world is facing – from climate change to the depletion of fossil fuel reserves, from the effects of demo- graphic developments to those of globalisation. These challenges affect all of us. And so we all have to find ways of dealing with them. 04 Foresight The foresight to detect potential in the challenges of the future. The art of engineering our own future. 05 Freedom The freedom to be able to question old habits. Melting glaciers make water levels of the oceans rise by 0.8 millimetres each year (World Climate Report of the United Nations 2007). Natural phenomenon or call for action? Accept demographic structures or tap their hidden potential? The population of the industrialised nations is ageing. For example: in Germany, one out of three people will be older than 60 in 2030. Today’s global export volume of goods and services amounts to over 10,000 billion euros each year. Export globally or explore local opportunities? The end of an era or a driving force for innovation? Fossil fuels are running out, global crude oil reserves will have been exploited a few decades from now. Millions of people travel the streets of megacities like Los Angeles every day. Traffic congestion is a common occurrence. Collective stalemate or impulse for new concepts of individual mobility? 16 Agility The agility to see change as a new opportunity time and again. The art of engineering our own future. 17 Knowledge The knowledge to have defined the framework for future activities. 18 Objective The objective to reinvent completely the concept of individual mobility. The art of engineering our own future. 19 Willpower The willpower to stay in the lead in the future. BMW Group. 20 002 The BMW Group’s strategic realignment. Profitability and Growth Value enhance- ment as the main objective. Profitability and growth to safeguard independence. Scope to engineer our future. 23 002 The BMW Group’s strategic realignment. 24 Mission 26 House of Strategy 38 Vision 24 Mission At the beginning of the 21st century, the world is facing a number of challenges too great and too complex to be tackled successfully with short-term solutions. The BMW Group has seriously looked into these matters, well aware of the fact that each challenge also presents an opportunity. We know: those who best master their future tasks get the chance to maintain a lasting lead over competitors in the industry. Following more than a century in automotive engineering, we want to break new ground in individual mobility. In the long term, our idea is to strive for the optimum by making sustainability the guideline behind all our activities. Only the claim to achieve the best can result in premium quality. This belief has always made the BMW Group cut its own path. EfficientDynamics is only one example which demonstrates that this approach has brought us to a new level time and again. We are going to continue along this path – for the benefit of our customers, our employees and our shareholders. The BMW Group’s strategic realignment. 25 Based on this belief, we analysed more than 200 trends. Above all, we asked ourselves: How can we align what we do even better with our customers’ demands and requirements in the future? What more can we do to counter climate change? Which effect does the demographic development have on society – and our company? How do we make best use of the opportunities arising from the value change in our society? How can individual mobility in a world of megacities be guaranteed in the long term? Obviously, we were not able to find conclusive answers to all these questions. But this was not our goal in the first place. The main point was that – by looking at our environment – we were able to set the direction the BMW Group will be taking by 2020 and to develop our corporate strategy Number ONE. ONE stands for “New Opportuni- ties” and “New Efficiency”. In a nutshell: we will make best use of new opportunities and reach a new efficiency level so as to guarantee the BMW Group’s lead over competitors as well as the power and independence to shape the company’s future actively. 26 House of Strategy. The drawing up of “Number ONE” resulted in the House of Strategy adopted by BMW AG’s Board of Management. The vision to be realised by 2020 is the strategy’s roof. It consists of specific targets concerning retail, return on capital employed and return on sales. The cross beam is the strategic competitive advantage, resulting from the BMW Group’s particular strengths and distinctive features. The differ- ent options for further activities form the strategy’s four pillars: “Growth”, “Shaping the Future”, “Profitability” and “Access to Technologies and Customers”. Before we come to the four pillars, a few remarks about what makes the BMW Group unique and provides a clear competitive advantage. All prod- ucts are characterised by high emotional appeal and trendsetting design. The product substance delivers on the premium promise of the three brands BMW, MINI and Rolls-Royce. BMW Group services also promote the individual brand experience. We claim to have developed a unique understanding of our customers and their requirements. This leads to a high level of customisation in our products as well as great innovative power. Plus: a unique corporate culture. The BMW Group’s strategic realignment. 27 The BMW Group has always been different from other companies, thanks to our unique corporate culture. This culture is based on values imple- mented by all employees. Day by day. We scrutinised this value system in the face of the challenges lying ahead and modified it to a certain extent. Those who want to take a company to a new level must bear in mind that this endeavour requires a climate that allows employees to align their thoughts and actions with the new requirements. That offers them individual scope to be creative and act as an entrepreneur. That provides clear guide- lines outlining the roadmap. This is how our twelve basic principles were developed. They will in future define everybody’s performance. This includes, for example, that we focus more strongly on customer benefit in all decisions. That each employee feels personally responsible for our success – for both accomplishments achieved and ahead. That we are committed to sustainability as the guide- line for our further business development, including ecological, social and corporate responsibility. This corporate culture provides the foundation of our strategy. Vision Competitive Advantage Growth Shaping the Future Profitability Access to Technologies and Customers Basic Principles BMW Group House of Strategy: four strategic directions are pursued to realise our vision for the year 2020. 28 « Growth. How will we continue to grow with our existing brands and products? How can we reach new customer groups and open up new markets? Growth means dynamics. Only profitable growth guarantees that our shareholders’ invest- ment will bear fruit, that employees will receive a profit-sharing contribution, and that we will be able to invest in new technologies at the same time. Growth is also crucial in determining a company’s position among competitors. As a premium provider, the BMW Group operates in a segment that grows faster than the total automotive market. Today, one out of ten vehicles sold is a premium product. We have identified three future growth areas: our existing core business as well as new potential along the vehicle life-cycle and in our industry’s value chain. Initially, the priority is to strengthen the BMW Group’s lead in today’s core business. Organic growth with the existing brands will provide a retail volume of 1.8 million cars and 150,000 motorcycles by 2012. Structured by region, absolute growth in the next decade will be highest in Europe and the United States. This is why the BMW Group will continue to strive for market leadership among premium manufacturers in the mature markets. The highest growth rates, however, will be achieved in Asia, with China and India as well as in Latin America, Eastern Europe and Russia. So, following the expansion of our production network to include China and India, we will also be expanding our sales structures by implementing new market strategies. The BMW Group’s strategic realignment. 29 In 2007, BMW was the world’s best-selling premium brand for the third consecutive year. The importance of the premium segment can be explained by a particular social phenomenon: the desire for individual products which help people distinguish themselves from others. Premium customers request premium product substance and quality. And they are willing to pay an adequate price. We are also aware that demand for traditional vehicle concepts in the premium segment will diminish. These variants will be replaced by new concepts, such as the Sports Activity Vehicle – a segment first opened up by the BMW Group. Concepts such as coupé, convertible and roadster will remain popular as well. Apart from those, there is a trend towards crossovers. In other words, the intelligent combination of characteristics of various vehicle concepts. We have therefore decided to include some crucial expansions of the product portfolio in our corporate long-range planning: – a BMW Gran Turismo, to be developed by BMW M based on the concept study CS, – a Rolls-Royce Coupé as the third Phantom model alongside the Sedan and the Drophead Coupé, – an additional Rolls-Royce model to be positioned below the Phantom regarding price and size, – a BMW Progressive Activity Sedan – a new interpretation of the sedan concept, combining its characteristic flair with new intelligent functions, – the X1 following the X6 as the fourth member of the X family – and finally, a Sports Activity Vehicle of the MINI brand. The BMW Concept CS is the starting point for the development of a BMW Gran Turismo – only one of many new models announced in the context of the BMW Group’s strategic realignment. 30 No matter whether we are talking about new or existing markets, new or well-proven con- cepts – we will not lose sight of one thing: to always develop brand-specific premium offers that fully meet our customers’ requirements and make best use of the respective brand’s strength. If this cannot be done with existing brands, we might consider expanding our brand portfolio in the future. As a result of our strategic review, we have acquired Husqvarna Motorcycles to complement our motorcycle division. Together with BMW Motorrad, the new brand will help increase sales in the motorcycle business by as much as 50 percent by 2012. But we will not stop at that: only 25 percent of total revenues to be achieved during the vehicle life-cycle is created in the new car business, while service, parts and accessories, and the used car business account for the other 75 percent. We intend to exploit the greater potential along the vehicle life-cycle, with new sales channels in the accessory business and a broader range of services. As far as marketing of pre-owned cars is con- cerned, the BMW Group benefits from the fact that the company’s cars retain their value better than most. In this field, our best option is high-end remarketing such as BMW Premium Selection and MINI next. Accessory sales and resale are only two examples of many opportunities in this business area. The BMW Group’s strategic realignment. 31 Just like the remarkable potential along the vehicle life-cycle, the value chain offers consider- able potential. One of our company’s strengths is our expertise in engine manufacturing – we have built premium engines for airplanes, motorcycles and automobiles for over 90 years. Engines from Munich, Steyr and Hams Hall are world famous. This is why it seems a logical choice to provide drive systems to other manufacturers in certain growth areas. Approximately one-fifth of our operating profit is presently achieved with financial services. Once again, this is a field in which we see chances for substantial growth. Going beyond the present core business of Financial Services, we are currently addressing additional fields, including vehicle financing for foreign-brand vehicles, vehicle-related insurances and direct banking as well as further geographical expansion. A further addition to our service range will be new offers concerning individual mobility and modules making everyday life even more convenient for our customers. Taking advantage of all these options, the BMW Group will generate growth as the driving force for further progress. Growth Value Chain « Product Initiative « Core Business Market Initiative Growth Vehicle Life-cycle Sights set on future growth. In addition to the core business, there is considerable potential along both the vehicle life-cycle and the value chain. The two areas we have identified are highly profitable and expected to generate a substantial result contribution. 32 « Shaping the future. How can we take advantage of the changing con- ditions as an opportunity for growth? How can we align our product portfolio accordingly? How can we create new concepts for individual mobility? When the automobile was invented at the end of the 19 th century, nobody would have guessed the changes in society and the business world this invention would bring about. Today, individual mobility has become an inherent part of our private and professional life. But conditions have changed dramatically. Experts warn us of the effects of global warming caused by carbon emissions from industrial production, power plants, households and road traffic. Add to that the depletion of fossil fuel resources. The traditional combustion engine powered by petrol or diesel will no longer be able to provide a satisfying answer to this problem. Mobility in so-called megacities, large metropolitan and urban areas, is reaching its limits. This is why we are taking on the challenge to help guarantee future individual mobility. It is a basic need we intend to meet by developing contemporary solutions. We will be developing completely new vehicle concepts. To create something entirely different you have to be willing to break new ground. There cannot be any taboos. Nothing can continue as it used to be. As an automotive manufacturer with a more than 90-year history, we consider it our social and corporate responsibility to make these challenges our top priority. For we want to add new chapters to our company’s success story in the future. Which drive system is sustainable, efficient and high-performance enough? Does every car need to have four wheels? Which interior concepts really correspond to the demographic change? Which vehicle concepts suit megacity traffic? How can we customise our vehicles even better? What else will customers demand in the third millennium? And can we pursue the idea of sustainable automotive engineering even more consistently? Do new business models make sense? These are some of the questions that have led to a trendsetting future project launched as an element of our new strategy Number ONE. We know that we are facing the critical task for the automotive industry in the third millennium. Tackling this challenge is essential for survival in our industry. And the company to come up with the best solution will have a competitive advantage for many years to come. The BMW Group’s strategic realignment. 33 ==1 ==2 ==1 – 2 With the energy and drive strategy EfficientDynamics, the BMW Group has indicated the course towards future individual mobility. Today’s accomplishments include an intelligent energy management for Brake Energy Regeneration and battery charging. But there is more to electrifying the drivetrain: in 2009, BMW will launch a dynamic and efficient hybrid car. With the new strategy, the BMW Group has furthermore announced to invest into the development of entirely new vehicle concepts equipped with new drive systems. 34 « Access to technologies and customers. How does our cooperation with development partners and suppliers look like? How can we make best use of the initiative of independent dealers and fleet service providers and still stay in close touch with our customers? Future competitive advantages will result from collaborations and networks established within the automotive industry as well as from distinguishing oneself from others in the industry through brand-specific strengths – something the BMW Group has always done well. This is how we have developed a number of innovations offering added value to our customers over the course of the past few years. The premium segment comes up with most innovations in the automotive industry: progress for more environmental compatibility, technologies to improve active and passive safety, solutions for more convenience and entertainment. Ideas that have given us the reputation to be the innovation leader. For a company such as the BMW Group, it is crucial to derive key technologies from the strate- gically important issues. The right balance between in-house production, supplier management and collaborations gives us access to these technologies. Future cooperations are also relevant to the sales organisation: in our industry, the dealers and fleet service providers are the main points of contact with the customer. But it will be important in the future to guarantee direct customer contact for the BMW Group when cooperating with these partners. This is essential if we truly want to satisfy our customers’ demands over their vehicles’ entire life-cycle. And first and foremost, it helps us learn for the future from customers’ present demands. Despite increasingly fierce competition, strategic cooperations will define the automotive industry and its environment. In this endeavour, we guarantee one thing: a BMW will always be a BMW, a MINI always a MINI, and a Rolls-Royce always a Rolls-Royce. The BMW Group’s strategic realignment. 35 ==1 ==2 ==1 ==2 This radar-based system is an example from the innovation network set up by the BMW Group and suppliers. Active cruise control with stop and go function supports the driver when starting the car and when braking in slow traffic, while always maintaining the required safety distance. It is designed for speeds up to 180 kilometres an hour and can automatically brake the car down to a standstill. BMW ConnectedDrive acts as a virtual co-pilot. The system connects the vehicle with its environment and with general traffic. In future, it is supposed to be complemented by intelligent vehicle-to-vehicle communication via Wireless LAN. Providing information collected by other vehicles, the system informs the driver about potentially dangerous braking manoeuvres and traffic holdups nearby. 36 « Profitability. How can we reduce cost per vehicle produced? How can we reach economies of scale? How can we minimise the effect of exchange rates? How can we create added value for our customers and achieve an adequate price for our products? Profitability and earnings quality are the decisive factors in everything we do; our goal is inde- pendence. We consider it vital to apply the capital provided in such a way as to make investing an attractive option for our shareholders by generating positive results in our operating activi- ties. People investing in a premium manufacturer expect a premium return. Therefore, we have to concentrate on those business areas promising a return on investment that matches our premium aspirations. At the same time, we never lose sight of guaranteeing our company’s lasting independence. More output from less input. That is the philosophy behind EfficientDynamics. This idea is not only applied to our products, but also to the entire company. As far as costs are concerned, we understand less input as: re-evaluating all cost structures and achieving an increase in efficiency of at least five percent a year. We have set up a far-reaching programme that will help us tap into an efficiency potential of approximately six billion euros by 2012. We will invest in future technologies while reducing costs, investment and therefore reduce capital applied per unit. So growth will remain the driving force behind our success. Exceeding this growth, we intend to achieve economies of scale by establishing collabora- tions in the areas of components, drive systems and modules. It has always been one of the BMW Group’s key strengths to make best use of project-based cooperation and cost- efficient networks. In 2007, we concentrated strongly on collaborations in the areas of engine development and hybrid technology. A factor that is highly relevant to our profitability targets is that our cars and motorcycles are popular all over the world. For our automobiles the United States have been the most important individual market for years. This is why we depend to a large extent on the development of currency exchange rates, mainly between the US dollar and the euro. In order to minimise the effect, we will in future increase our purchasing volume in the US dollar area as well as the number of units produced in the United States. This is why we will stock up production capacities of our US plant in Spartanburg to 240,000 units to be applied, among other things, to the production of the successor of the current BMW X3. Our supplier network and our glo- bal purchasing structures will also have a share in strengthening our natural hedging activities. As far as performance is concerned, we understand more output as continuing to position our vehicles consistently in the premium segment. Premium is what we do best. This is our key strength, and this is where we achieve our best results. Our customers, employees and shareholders stand to benefit from our accomplishments in this segment. Additional earnings potential will arise from expanding present operations and launching new activities. The BMW Group’s strategic realignment. 37 ==1 ==2 ==3 ==1 – 3 The BMW Group’s brands – BMW, MINI and Rolls-Royce – are among the world’s most valuable automotive brands, thanks to the company’s strong premium position. 38 Vision Our strategy Number ONE will guide us to the year 2020. To see us through the first five years we have set ourselves an initial interim goal. By 2012, we will increase automobile retail to 1.8 million units and motorcycle sales by 50 percent to stand at 150,000 bikes per year. From 2012 onwards, we intend to achieve a return on capital employed of 26 percent and consequently a return on sales of between eight and ten percent. Our strategic objective is to ensure that: The BMW Group is the leading provider of premium products and premium services for individual mobility. The BMW Group’s strategic realignment. 39 This means that we no longer refer to ourselves as a producer, but rather as a provider, and are making customer orientation and our understanding of service the focus of the BMW Group. At the same time, we continue to operate in the premium segment, not only in terms of our cars and motorcycles, but also in terms of our services. We are thus building on our strengths and concentrating on our core competence in a clearly defined segment. We consider potential future fields of action all types services relating to individual mobility. 40 Strategic Objective The objective is to be the leading provider of premium products and premium services for individual mobility. Bayerische Motoren Werke Aktiengesellschaft 80788 Munich, Germany Telephone +49 89 382-0 Fax +49 89 382-1 08 81 The year 2007. Seize the future. 03 The year 2007. Seize the future. 04 Preface by the Chairman of the Board of Management. 08 Report: A matter of consistency. 26 The year 2007. 04 Norbert Reithofer Chairman of the Board of Management Preface by the Chairman of the Board of Management. 05 Ladies and Gentlemen, 2007 was a successful year for the BMW Group and an eventful one, too. We accom- plished what we set out to do at the start of the year and delivered what we had promised you, our shareholders. In addition to that, more than 1.5 million customers around the world bought an automobile from the BMW Group in 2007 and a further 102,000 people bought a BMW motorcycle. Our revenues also reached a new record of 56 billion euros. We also proved our strength in terms of earnings – under very difficult circumstances marked by the weak US dollar, rising raw material prices, and intense compe tition. We were only able to achieve all of this because every per- son in the company showed utmost personal dedication to achieving our ambitious goals. On behalf of the Board of Management and myself, I would like to express my sincere thanks to all our employees. My thanks also go out to our dealer network and our business partners who last year once again made a major contribution to the success of our company. But above all I would like to thank the customers who placed their trust in us over the past year: a trust which we will not disappoint – and which we need to earn over and over again in the future. We made this a core requirement and obligation when we developed our new strategy Number ONE. 2007 targets fulfilled Earning customer trust 06 Strategy Number ONE developed Competitive edge through EfficientDynamics Number ONE is our path to the future. This strategy will allow us to address the challenges we all face as a company and as part of society. The most important task for an automobile supplier is surely that of reducing vehicle emissions. That is abso- lutely essential to ensure individual mobility in the future. In 2007 our EfficientDynamics package proved that we are on the right path and can already deliver solutions today. This approach has also been endorsed by inde- pendent sources. The “Grünes Lenkrad” environmental award we received for EfficientDynamics is just one of many examples. EfficientDynamics can be summed up as better performance with lower consumption. This principle is already having a definite effect today: in Europe, around 40 percent of the BMW Group’s 2008 new vehicle models generate only 140 g CO2/km or less. That translates into fuel consump- tion of less than 5.1 l/100 km diesel or 5.8 l/100 km petrol. With EfficientDynamics we have a package of measures which is unique in the industry – and thus gives us a competitive edge. We bring the same consistent approach that we use to tackle the reduction of CO2 emissions to other challenges. Whether climate change, globalisation, or the impact of demographic developments in different parts of the world – we aim to find solutions to the questions we must all ask ourselves, because we know that whoever is best at meeting these challenges will have a competitive advantage in the future. Preface by the Chairman of the Board of Management. 07 Turning challenges into opportunities To be more specific: those who have the right products to deal with climate change will have the best chances in the marketplace. Those who face up to the challenges of globalisation and exploit them as opportunities will be less dependent on currency effects and will be able to open up new markets. And those who do not take demo- graphic structures for granted, but respond flexibly to them instead, will continue to have highly qualified, efficient employees in the future. That is what turns challenges into opportunities for competitive advantage. We will exploit these opportunities. Rest assured that the BMW Group will continue to stand its ground against its com- petitors and further expand its leading position in the premium segments of the international automobile and motorcycle markets. To be precise: we will maintain our leading position. Our new strategy Number ONE will help us – and the dedication and motivation of all our employees will guarantee our success. Yours, Norbert Reithofer Chairman of the Board of Management 08 001 A matter of consistency. Report Leader in Innovation Fresh thinking: better perform- ance and safety combined with less consumption and lower emissions. Leadership begins in the mind. 11 001 A matter of consistency. Report To enable individual mobility in the future, we have to completely rethink things today. BMW Group engineers reveal what sustainable mobility could look like through a mixture of unconventional ideas which are already taking effect today and will have a broad impact reaching far into the future. Their most important tools are curiosity, expertise, and plenty of questions. 12 ==2 ==1 Report: A matter of consistency. 13 It weighs all of two kilos and measures just 18 centimetres. Its sole purpose is to provide the engine with a steady supply of coolant. It is hardly surprising that most car owners are completely unaware of its existence during the vehicle’s lifetime. And yet it represents a minor revolution. The electric water pump is part of a comprehensive energy strategy with which the BMW Group is completely redefining the relationship between efficiency and performance. This strategy includes technical innovations which immediately reduce the fuel consumption of the new vehicle fleet, as well as innovative hybrid solutions and the use of hydrogen from regenerative sources – measures which stretch far into the future of individual mobility. This strategy goes by the name of EfficientDynamics. Its philosophy is better performance, less consumption. That is how the BMW Group translates its responsibility for protecting the climate and resources into highly-effective innovations. Hundreds of engineers, programmers, mechanics and other specialists within the BMW Group’s global development and production network are currently working on this silent revolution in efficiency. At Forschungs- und Technik GmbH, researchers are refining technologies which will one day use the energy from vehicle exhaust emissions. In Troy, Michigan, the Global Hybrid Cooperation is developing electric drive assemblies which exceed the efficiency of all known hybrid drives. At the Research and Innovation Centre (FIZ) in Munich – with more than 8,500 developers the Group’s biggest think-tank – engineers conceptually take apart every new vehicle and scrutinise it for energy-saving potential. This is how efficiency boosters like Auto Start Stop Function, Brake Energy Regeneration, or active aero- dynamics are born. All these EfficientDynamics features have quite an effect on their own – but together they make a huge difference. ==1 Optical 3D data capture using a wind tunnel model designed to improve vehicle aerodynamics. ==2 Examining the vehicle’s aero- dynamic features. ==3 The active air flap control auto- matically manages the air supply according to the engine’s cooling requirements. ==3 14 Many of these technologies represent completely new solutions – but developing concepts for eco- nomical high-performance vehicles is a success story that goes back a long way. In 1975 the BMW Group was the world’s first manufacturer to introduce electronic petrol injection: “L-Jetronic” made it possible for the first time to precisely control fuel supply. Together with the revo- lutionary Valvetronic engine management system, innovative lightweight bodies, series implementation of the Common Rail Technology, the fuel-efficient diesel turbocharger, and other BMW innovations, these measures are today considered technological milestones on the road to less consumption in auto- mobile design. Many key technologies which were discovered and readied for series production by the BMW Group later found their way into the mass market. For instance, the integrated overrun fuel cut- off, which made its debut in 1976 in the BMW 3.0si, is taken for granted these days, just like ABS or the catalytic converter. “Engineers at the BMW Group,” says Dr. Johannes Liebl, “always were the ones to break new ground for more efficient automobile design.” Liebl is a mechanical engineer who has worked as an engine designer at the BMW Group for 23 years. The 57-year-old currently coordinates the group-wide EfficientDynamics development work, including a whole troop of highly effective “groundbreakers”. “At a time of climate change,” says the engineer, “EfficientDynamics provides us with a comprehensive answer to questions about saving resources, climate protection, and securing individual mobility. And we are not just developing solutions for the medium and long term. Customers and the climate are already benefiting from our solutions from the very first kilometre they drive.” The result is that where a BMW 320i back in 1983 still guzzled 9.6 litres of petrol over 100 km, the current BMW 320i needs only 6.1 litres and still offers substantially better performance, greater comfort and improved vehicle safety. However, these responses are only possible because developers at the BMW Group consistently ask questions in a new way. Report: A matter of consistency. 15 ==1 – 3 BMW Group employees prepare 1:2 vehicle models for wind tunnel tests. ==1 ==2 ==3 16 ==1 ==2 ==3 Report: A matter of consistency. 17 How can we use the momentum of thrust phases? How can the fuel injected into engines be used even more efficiently? Or how does switching on the headlamps or air conditioning affect a vehicle’s energy consumption? Where do further potential energy savings lie hidden within the vehicle? And how do you measure all of this? The last question in particular has tremendous ramifications, because even though design engineers can now simulate all manner of designs and functions on the computer, until recently there was no software capable of calculating a vehicle’s overall utilisation of energy resources. But that is exactly what the “energy optimisers” at the BMW Group were interested in. “Traditionally,” explains Dr. Liebl, “when you design an automobile all the vehicle’s functions and the energy they use are added together. The total represents the performance required from the engine. It is then up to the engine developers to provide this performance with the least possible consumption.” In the industry this design approach is referred to as “end of pipe” – where engineers try to correct at the end what was neglected at the start. However, in automotive design “end of pipe” thinking is rapidly reaching its limits. Air conditioning, driving dynamics systems, and every extra comfort and safety feature increase the demand for power output – and ultimately raise fuel consumption and carbon dioxide emissions. This is where physics sets natural limits: engine efficiency cannot be enhanced indefinitely. With the EfficientDynamics strategy developers at the BMW Group take a more comprehensive approach that starts at an earlier stage. Like the designers of a regatta yacht who trim every fibre, every square inch of their boat for top performance, they now analyse the consumption and potential for improvement of every single component at the beginning of each vehicle’s development. They optimise what can be optimised and ultimately combine many substantially improved elements to make far more efficient vehicles. They are supported by simulation software refined five years ago by the BMW Group together with the Technical Universities of Dresden and Munich. “Dymola” fulfilled the requirements which made it possible to completely rethink efficient vehicle design. This simulation software maps all energy fluxes in the vehicle. Dymola now allows considerable energy potential to be utilised – even in seem- ingly insignificant components such as the water pump. Specifically, regular mechanical water pumps typically lose up to 2,000 watts of energy – enough to drive a small moped. Since virtually all motor vehicles around the world are fitted with a mechanical water pump, you could say that today’s millions of automobiles are driving millions of small mopeds, too. ==1 The engineers of the BMW Group are continually developing features to enhance vehicle efficiency. ==2 – 3 The BMW Group presents its first fully hybrid vehicle: the BMW Concept X6 ActiveHybrid. 18 ==1 ==3 ==2 Report: A matter of consistency. 19 This is where the BMW Group’s engineers come in: their electric water pump only switches on when it is actually needed – and for that it only needs the energy of two bright light bulbs. This technology, which was driven largely by the BMW Group (and still the only auto manufacturer in the world to use it) currently saves two percent of fuel in the automobile. In this way – segment by segment, component by component – the engineers scour all models for potential economies: engineering minor revolutions such as highly-efficient Brake Energy Regeneration and the jet-guided direct fuel injection system that result in consumption figures which only used to be possible for diesel engines; optimising small things such as air flaps which open or close on their own depending on the engine’s cooling requirements; designing a detachable air conditioning compressor which only springs into action when it really needs to cool; drastically reducing the roll resistance of tyres and replacing conventional hydraulic steering with much more economical electric steering. In the meantime, all of these features are standard in almost all models of the BMW and MINI brands. Many of them seem so obvious that one has to wonder why they were not implemented long ago. The reason is that these apparently simple solutions often conceal extremely complex technologies. Just how complex can be seen from the example of the ASSF. ==1 Tyres with less roll resistance are especially fuel-efficient, owing to reduced strain on tread and sidewalls. ==2 – 3 Preparations for flow and circu- lation testing of the engine com- partment in the wind tunnel. ASSF stands for Auto Start Stop Function and is the most radical approach to throttling engine con- sumption since it cuts off the engine immediately once it is no longer needed. A small number of automobile manufacturers tried automatic engine stop functions years ago, but they were quickly withdrawn from the market because they were too cumbersome, too unreliable, and, as a result, ineffective. However, engineers at the BMW Group knew from simulations and trial runs that switching off and restarting the drive train for state-of-the-art injection engines pays off after just a few seconds’ standing time. A red traffic light lasts on average about 20 seconds. “That made us realise that there were huge potential savings to be discovered here,” one developer remembers. “What we didn’t realise at the outset was how much work would be involved in successfully harnessing that potential.” 20 ==1 ==2 Report: A matter of consistency. 21 As a core vehicle function, switching the engine on and off must be coordinated with the window regulator, air conditioning, electronic immobiliser system, and a total of 17 other control units on board. The engineers had to ensure that the engine does not switch off if it is too cold or too hot outside or simply because the battery gets too low to easily restart the engine after a stop, for instance. Clustered around the ASSF is a small orchestra of sensors which synchronise how the system is used. What at first glance appears to be a simple engine function actually comprises a highly-intelligent sys- tem which affects the vehicle’s whole organism. Today, this function is considered a particularly effec- tive energy feature of the EfficientDynamics package, offering customers a major benefit without being at all conspicuous. In the standardised European Driving Cycle it saves around three percent of fuel. Developers at the BMW Group are currently pulling out all the stops to implement the system in the Group’s automatic models as soon as possible – up until now it has only been available for manual transmissions. And yet their imagination and their pioneering spirit are still far from being exhausted. Among other things the EfficientDynamics engineers are researching technologies which will tap into an energy source that has so far been completely ignored: heat. For technical reasons little more than a third of the fuel in the engine block is converted into operating power; almost two-thirds are lost in the form of waste heat in the engine compartment and through the exhaust pipe. “But what if we could harness that energy?” automotive engineers wondered. What if we could obtain energy from the heat? The technology to do this is already doing the rounds of test benches at the Munich Research Centre. In simple terms, the principle of the steam engine is transferred to the auto- mobile: liquid is heated in two loops to generate the steam to drive a motor – the so-called “turbo steamer”. The energy from the exhaust gas produced can be used on the one hand to support the drive train; on the other hand there is also sufficient energy in the exhaust gas to easily supply the air conditioning, vehicle computer and navigation system as well as all the electronic consumer loads on board. ==1 – 2 Setting up the technology to measure and analyse all energy flows in the vehicle. ==3 The Auto Start Stop Function helps to reduce fuel consumption substantially by switching off the engine when standing. ==3 22 ==1 Using High Precision Injection petrol engines can produce con- sumption figures which only used to be possible for diesel engines. ==2 – 3 The BMW Hydrogen 7 is the world’s first premium sedan with hydrogen combustion engine. In just the same way that their engineers now analyse every vehicle down to the last detail, the com- pany’s energy strategy also takes a holistic approach. It covers all three of the Group’s brands: BMW, MINI and Rolls-Royce; reaches far into the future of sustainable mobility with hybrid and hydrogen drives – and yet still delivers drastically improved consumption data today. For instance, the High Precision Injection introduced in the 2007 models is the world’s first jet-guided direct fuel injection system in large-series production to facilitate fuel-efficient lean operation across a particularly wide range of speeds. This also results in quite noticeable and measurable fuel savings even in every- day traffic. Combined with “traditional” vehicle optimisations such as sophisticated aerodynamics, intelligent lightweight construction concepts, and energy management features, this means that since autumn 2007 around 40 percent of the BMW Group vehicles sold in Europe have CO2 emissions of only 140 g/km or less. This corresponds to a consumption of 5.8 litres petrol or 5.1 litres diesel over 100 km. As part of an unusual development cooperation, BMW Group engineers are currently exploring how the hybrid technology – so often discussed in public – can be used much more effectively. Classic hybrids, like the ones on the roads today, realise their true potential for savings primarily in city traffic. However, at constant and higher speeds those efficiency gains are largely cancelled out by a sharp increase in fuel consumption. That is quite different with the two-mode hybrid technology that is an important component of the second, medium-term phase of the EfficientDynamics strategy: “Two- mode hybrids support the combustion engine not just at low speeds, but also at average and higher speeds,” explains Rainer Rump. As head of the development cooperation he is one of about 100 de- velopment engineers at the BMW Group who have been working at the Hybrid Development Center in Troy for just over two years. In this Detroit suburb in the US state of Michigan the BMW Group has joined forces with Daimler, Chrysler and General Motors to form the Global Hybrid Cooperation. This is the first time the automotive industry has seen a cooperation of this kind between four major manufac- turers working together to advance technology. The two-mode drive train also promises impressive efficiency gains: when the first BMW model with two-mode hybrid drive hits the market in late 2009 it will consume up to 20 percent less fuel than a comparable model fitted with just a combustion engine. “In this instance we made a very deliberate decision to cooperate on development so that we could ==1 Report: A matter of consistency. 23 bring the potential of the two-mode hybrid technology to the market as fast and as cost-efficiently as possible,” explains Rump. “Of course, at the beginning everyone was a little sceptical whether such close collaboration between competitors could even work. But the results exceeded all our expectations.” While engineers from all four manufacturers are developing the components for the hybrid system together in the core area of the Hybrid Development Center, developers from the BMW Group are working on the brand-specific application of the hybrid drives in a separate secu- rity zone. This guarantees that a BMW with hybrid drive will still be distinctive as a BMW. The de- velopers’ aim is to create a comprehensive modular system from which the BMW Group can offer its customers the best hybrid solution tailored to each model. Nevertheless, the declared aim of the BMW Group is to cut carbon dioxide emissions by 100 percent over the long term. That sounds visionary, but is already reality on roads in Europe and the United States. One hundred models of the world’s first series-produced, hydrogen-driven luxury sedan, the BMW Hydrogen 7, have been on the roads since spring of 2007. Their drivers have meanwhile clocked up more than 2.7 million kilometres with the Hydrogen 7 fleet and pro- vided researchers like Wolfgang Strobl with valuable insights. “In many respects hydrogen is the ideal fuel,” says the EfficientDynamics manager at the BMW Group Forschung und Technik GmbH. “It combusts without leaving any residue, is highly effective and can be produced cost- effectively in large quantities in a way that is CO2-neutral.” The necessary technology already exists – for instance in the form of solar power stations that have been generating electricity in California for the megacity of Los Angeles for 20 years – and has been successfully proved and tested. The go-ahead for the development of the necessary capacities and infrastructure is still pending. Strobl and his research colleagues are using the intervening period to work, among other things, on improving tank technology. Because although hydrogen is extremely environmental-friendly, it is also a very volatile energy source. The hydrogen is stored at minus 250 degrees Celsius in refrigerated liquid form in a tank similar to a thermos flask. 70 layers of wafer-thin aluminium foil and ==2 ==3 24 an ultra-high vacuum in the tank of the BMW Hydrogen 7 ensure absolutely minimal cooling losses – it would take a snowball 13 years to melt completely in this marvel of insulation. Other fields of research include innovative on-board power supply concepts and further consolidation of the hydrogen engine’s performance. “Even after 100 years of development diesel and petrol engines have only achieved an efficiency of around 40 percent,” explains Wolfgang Strobl. “But with hydrogen as fuel higher energy efficiency is already possible today.” The 191 kW drive of the Hydrogen 7 – with the option of using hydrogen or regular petrol – already accelerates from zero to 100 km/h in just 9.5 seconds. That goes to show how powerful sustainable mobility can be. The EfficientDynamics strategy represents a real paradigm shift in automotive design. Up until now the energy-efficient models on the market were generally associated with pricey options and lower stand- ards of comfort, performance and safety – and, as a result, were not very successful. The philosophy of the BMW Group is completely different: The EfficientDynamics innovations come as standard in new models and make an impact with every vehicle sold. Drivers who want to be responsible about their mobility no longer need to forego dynamic performance. For the most part BMW Group customers are happily unaware of the energy innovations in their vehicles. There are only two factors which make them perceptible: better driving dynamics and lower consumption. In this way the EfficientDynamics strategy has an impact that is both deep in terms of vehicle technology and broad in terms of market. In 2007 alone the BMW Group already sold more than 450,000 vehicles equipped with EfficientDynamics. In the European Federation for Transport and Environment’s (T& E) comparison of the 14 highest-volume premium suppliers the BMW Group already occupies the top spot for cutting CO2 emissions. The authors of the independent US “Environmental Defense Report” were even more explicit: no other manufacturer did more over recent years for the reduction of fuel consumption and CO2 emissions than the BMW Group. In their performance class the vehicles of the BMW Group are already by far the most efficient with regard to consumption and emissions. And let us not forget that EfficientDynamics is only just gathering momentum: according to engineer Liebl, “The best ideas probably haven’t even occurred to us yet.” Report: A matter of consistency. 25 ==1 – 2 Thanks to its EfficientDynamics package the BMW Group has significantly reduced the fuel con- sumption and CO2 emissions of its vehicles. ==1 ==2 26 002 The year 2007. Profitable Growth Operate more effectively. Substantially increase effi- ciency. Continue to improve and respond faster. Achieve greater autonomy. 29 002 The year 2007. January February March April May June July 30 World premieres in Detroit 31 Research Centre for Artificial Intelligence 32 International Motor Show Geneva 33 Ten years Intercultural Learning 33 BMW goes India 34 Acquisition of DEKRA SüdLeasing completed 34 One-millionth MINI 34 Number one in corporate sustainability 34 World debut for BMW Concept CS in Shanghai 34 International Engine of the Year Award 35 Mille Miglia 2007 35 State Opera for All 35 Design Team of the Year 36 MINI United Festival in Zandvoort 37 BMW Group acquires Husqvarna Motorcycles 37 90 years of BMW August 37 MINI wins top marks in frontal crash test September 38 IAA Motor Show Frankfurt 40 BMW Group sets course for the future 40 World debut of BMW HP2 Sport 40 Rolls-Royce announces a new Coupé October 41 BMW Welt opens 42 World premiere at the Tokyo Motor Show 42 Rolls-Royce production expands November 43 New BMW motorcycles at the EICMA 2007 43 “Grünes Lenkrad” environmental award for BMW EfficientDynamics December 43 Scientific Award 2007 presented 30 January 07/ 01 World premieres in Detroit. The BMW 3 Series Convertible is presented to the public for the first time at the North American International Auto Show in Detroit. With its classic lines and the convenience of a new retractable hardtop, this fourth-generation model heralds a new chapter in the four-seater convertible’s success story. In Detroit the BMW Group also unveiled the new BMW X5 as well as the BMW Hydrogen 7, the first hydrogen-powered sedan for everyday traffic. 07/ 01 The MINI brand also has a world premiere to offer the public in Detroit with its MINI Sidewalk Convertible. It is also the first time that the second, completely new generation of MINI was on display on the North American continent. The year 2007. 31 07/ 01 At the unveiling ceremony for the Phantom Drophead Coupé Ian Robertson, Chairman and Chief Executive of Rolls-Royce Motor Cars, was also able to announce a new record in sales volume. For the third time in a row the Phantom was able to confirm its leading position in the super-luxury class. The Drophead Coupé broadens the Rolls-Royce brand’s range of models. Like the Phantom, it is manufactured at the Goodwood facility. February 22 / 02 BMW Group Research and Technology participates in the German Research Centre for Artificial Intelligence. Collaboration focuses on issues such as the future of the internet and its importance to mobile usage and in supporting mobility in an ageing society. This long-term cooperation further expands the BMW Group’s research subsidiary’s global technology and partner network. 32 March 06 / 03 International Motor Show in Geneva – world premieres and visions. Alongside the new BMW 1 Series, the new BMW 5 Series and the M5 Touring are also presented to the public for the first time. The BMW M3 concept study is also unveiled. The company also introduces a wealth of technical innova- tions. The EfficientDynamics package is particularly well received. The year 2007. 33 06 / 03 The MINI brand brings more world debuts to the Geneva Motor Show: the new MINI One and the new MINI Cooper D, the most economical MINI ever built. 26 / 03 Ten years BMW Group Award for Intercultural Learning. In front of more than 300 guests the Board Member for Human Resources, Ernst Baumann, presents the winners of the 2006 competition with their awards. The tenth anniversary of the internationally recognised event showcases more than 40 award-winning pro- jects and academic papers as well as several hundred more, equally prize-worthy, efforts. 29 / 03 BMW goes India. The opening of the BMW plant in Chennai, India, is the company’s second move into India’s growth market. The first step was taken on January 1st 2007 when the BMW Group set up a subsidiary in Delhi. The new plant will produce vehicles of the BMW 3 Series and 5 Series for the Indian market. 34 April 02 / 04 Acquisition of DEKRA SüdLeasing completed. In early April the acquisition of Dekra SüdLeasing Services GmbH (renamed to: BMW Fuhrparkmanagement Beteiligungs GmbH) and its subsidiaries by the BMW Group is finalised. It was approved by the EU Commission in late March. 05 / 04 One-millionth MINI. The one-millionth MINI rolls off the production line six years after series production started in Oxford. The MINI Cooper S is manufactured to individual customer specifications. The “customer” is BMW Group Mobile Tradition, for whom the designers created a special roof graphic composed of one million tiny MINI cars. 12 / 04 Number one in corporate sustainability. According to a survey of 28 German companies the BMW Group is num- ber one in the efficient use of financial, ecological and social resources. The BMW Group is five times better at managing corporate sustainability than the German economy as a whole. The study was conducted by the Berlin Institute for Future Studies and Technology Assessment (IZT). Evaluations were based on economic, ecological and social indicators such as capital expenditure, water consumption, amount of waste produced and the num- ber of occupational accidents. 20 / 04 World debut of the BMW Concept CS at the Auto Shanghai 2007. Here the BMW Group turns its attention to a new vehicle segment. The BMW Concept CS concept study com- bines the exclusivity of a luxury-segment Gran Turismo with the fascination of a high-per- formance sports car. May 09 / 05 “International Engine of the Year Award” goes to BMW. The BMW 3.0 litre Twin Turbo in-line 6-cylinder petrol engine is voted “International Engine of the Year” in the world’s leading engine contest. This engine is used in all BMW 3 Series model variants. Overall the BMW Group wins seven of the twelve competition categories. The year 2007. 35 16 / 05 BMW at the Mille Miglia 2007. The first Mille Miglia was held 80 years ago. For the past 25 years it has been held as an endurance race. For the 25th anniversary BMW Group Mobile Tradition sends nine of its most striking classic cars to Northern Italy. A total of 19 teams take to the start in a BMW. Together with 300 other classic racing cars they make the legendary drive over 1,000 miles from Brescia through Ferrara to Rome and back again. 19 / 05 State Opera for All. Jules Massenet’s opera “Manon” is broadcast live from the sold-out “Staatsoper unter den Linden” opera house on a big screen on Bebelplatz square. This is made possible by cooperation between the State Opera and the BMW Group. Over the next few years the Berlin public will again have the opportunity to enjoy free open-air opera – a new highlight for Berlin’s cultural calendar. June 25 / 06 BMW Group Design is “Design Team of the Year”. The 2007 red dot award for “Design Team of the Year” goes to the BMW Group. Chief Designer Chris Bangle accepts the award in Essen on behalf of all his staff. The BMW Group also picks up eight further awards for outstanding product design: two automobiles and three motorcycles from the BMW Group as well as three other products designed by BMW Group DesignworksUSA also receive a red dot. 36 22 / 06 MINI United Festival in Zandvoort. More than 8,000 people from 50 countries flock to the MINI United Festival in the Dutch resort of Zandvoort on the North Sea coast. Under the motto “Friends. Festival. Challenge.” the MINI fan community enjoys three days of a unique mix of racing atmosphere, party and lifestyle. Many visitors had come a long way to be a part of MINI United 2007. Probably the longest journey, at 4,200 kilometres, was that of Yuliya Tkachenk. She set off from Krasnodar in Russia some seven days before the start of the festival to be in Zandvoort with her MINI. The year 2007. 37 July 19 / 07 The BMW Group acquires Husqvarna Motorcycles. The acquisition of Husqvarna Motorcycles is a logical move to continue BMW’s activities in the field of lightweight sports motorcycles. Like BMW Motorrad, Husqvarna is one of the world’s oldest, most established motorcycle companies. 21 / 07 90 years of BMW – trademark for innovation. On this exact day 90 years ago the Bayerische Motoren Werke was recorded in the register of companies. Two days later the letters BMW were being used on the company’s products. August 01 / 08 MINI wins top marks in frontal crash test. The new MINI emerges from the Euro NCAP Crash Test with a top rating of five stars. This verdict is also confirmed by the ADAC (Allgemeiner Deutscher Automobilclub). The foundation for the top rating in this rigorous testing procedure is the new MINI’s design with its focus on a high degree of passive safety available in all MINI versions. 38 September 13 / 09 New models at the IAA Motor Show Frankfurt. The new BMW 1 Series Coupé has its world premiere at the IAA Motor Show in Frankfurt. It combines driving pleasure with exemplary efficiency. Also unveiled for the first time are the new models of the BMW 6 Series, boasting drive innovations and specific design modifications. The newly designed BMW M3 Coupé also makes its world debut. For the first time the BMW Group introduces a coupé for the Sports Activity Vehicles segment in the shape of the BMW Concept X6. The BMW Group’s first automobile with hybrid drive is the BMW Concept X6 ActiveHybrid. The year 2007. 39 13 / 09 The MINI Clubman debuts as the brand’s third model variant in Frankfurt. The MINI Clubman offers greater functionality and has a hatch with two doors that open to the side as well as an extra “Clubdoor” which opens to the rear on the vehicle’s right-hand side. The new MINI John Cooper Works CHALLENGE was developed primarily for the Clubsport Series’ MINI Challenge. 40 27/ 09 BMW Group sets course for the future. With its strategic realignment the BMW Group is consistently aligning itself to achieve profitability and increase value over the long term. The strategic objective is clearly defined: the BMW Group as the world’s leading provider of premium products and premium services for individual mobility. As part of the realignment the BMW Group also creates two new divisions as of October 1st: “Corporate and Brand Development” and “Purchasing and Supplier Network”. 28 / 09 BMW HP2 Sport makes its world debut in Paris. At the “Mondial du Deux Roues” the new BMW HP2 Sport cele- brates its world premiere. The sportiest, strongest, yet lightest series-produced Boxer of the HP model series so far is designed with the ambitious sports rider in mind. Its fascination lies in a wealth of exclusive details which were previously used only in racing – some of them are now finding their way into series production for the first time. 28 / 09 Rolls-Royce announces a new Coupé. Rolls-Royce Motor Cars confirms that a coupé version of the Phantom will be launched in 2008. This model will be an elegant two-door coupé derived from the Phantom Drophead Coupé and will offer exceptional handling performance. The year 2007. October 41 17 / 10 BMW Welt opens. Right next door to the BMW Group headquarters, the BMW Museum, and the company’s first plant, the BMW Welt opens its doors to the public. The architecturally striking building, for which the architect pushed the limits of what is technically possible, is the new home of the BMW brand. At the core is the individual, personalised BMW Automobile Delivery in which up to 45,000 BMW automobiles a year can be handed over to their new owners. Visitors can look forward to an extensive programme which allows them to experience the BMW brand and the company in its entirety. BMW Welt is also the venue for a wide range of different cultural, social and corporate events. 42 22 / 10 World premiere at the Tokyo Motor Show. The BMW M3 Sedan is revealed to the world public for the first time at the 40th Tokyo Motor Show. Following on from the Coupé, it is the second BMW M3 body variant. 23 / 10 Rolls-Royce production expands. Rolls-Royce Motor Cars announces that it will expand production capacity at its Goodwood facility. The company is thus responding to the strong demand for Rolls-Royce automobiles and preparing for the planned extension of its model range. The year 2007. 43 November 06 / 11 New BMW motorcycles at the EICMA 2007. The revised models of the BMW Group’s most successful motorcycles – the BMW R 1200 GS and the BMW R 1200 GS Adventure – are just two of the world premieres at the 65th EICMA International Motorcycle Show. The new BMW F 800 GS with its excellent off-road characteristics and long-distance qualities is also showcased. Another newcomer is the BMW F 650 GS: an all-round version suitable for beginners. The fifth world debut belongs to the BMW G 450 X which was developed exclusively for Enduro Sport. 08 / 11 “Grünes Lenkrad” environmental award for BMW EfficientDynamics. The BMW Group receives the “Grünes Lenkrad” award, presented for the first time in 2007 by the German Sunday newspaper “Bild am Sonntag”. The award recognises the EfficientDynamics package which comes as standard in the BMW 1 Series through to the BMW X5, and is also found in many MINI models. December 06 /12 Scientific Award 2007 presented. The BMW Group’s Scientific Award is presented at an award ceremony held at the Deutsches Museum in Munich. The award, which focused on “Passion for Innovation”, is one of the most renowned and lucrative awards for up-and-coming scientists. The award honours outstanding graduate and doctoral theses from 24 disciplines. Through its Scientific Award, which has been presented every two years since 1991, the BMW Group underlines the tremendous importance of innovation and supports young people whose pioneering research will further society. 44 The year 2007. At the end of 2007 the BMW Group’s product range includes 26 models that produce only 140 kilograms of CO2 per kilometre or less. If the Hydrogen 7 is included, that number increases to 27. In 2008 the company aims to roll out more than 800,000 automobiles equipped with EfficientDynamics features across Europe. At the same time the BMW Group will continue to forge ahead with its work on innovative drive solutions. That is how innovations turn into valuable competitive advantages – and how challenges become opportunities. Consumption data Values measured in accordance with the New European Drive Cycle (EU Directive: 80 / 1268 / EEC in the relevant applicable version). Valid for vehicles with a European country specification. Model Urban (l/100 km) Extraurban (l/100 km) Combined CO2-emissions [g/km] (l/100 km) Model Urban (l /100 km) Extraurban (l/100 km) Combined CO2-emissions [g/km] (l/100 km) BMW 116i 3-door 118i 3-door 120i 3-door 130i 3-door 118d 3-door 120d 3-door 123d 3-door 116i 5-door 118i 5-door 120i 5-door 130i 5-door 118d 5-door 120d 5-door 123d 5-door 125i Coupé 135i Coupé 120d Coupé 123d Coupé 118i Convertible 120i Convertible 125i Convertible 135i Convertible 318i Sedan 320i Sedan 325i Sedan 325xi Sedan 330i Sedan 330xi Sedan 335i Sedan 335xi Sedan 318d Sedan1] 320d Sedan 325d Sedan 330d Sedan 330xd Sedan 335d Sedan 2] M3 Sedan3] 318i Touring 320i Touring 325i Touring 325xi Touring 330i Touring 330xi Touring 335i Touring 335xi Touring 318d Touring1] 320d Touring 325d Touring BMW 7.5 (8.3) 7.9 (8.2) 8.7 (8.4) 4.8 (5.3) 5.8 (6.4) 139 (152) 330d Touring 4.7 (5.0) 5.9 (6.2) 140 (148) 5.1 (5.1) 6.4 (6.3) 152 (150) 330xd Touring 335d Touring2] 8.3 (9.1) 9.2 (9.8) 9.2 5.0 (5.3) 6.2 (6.7) 163 (176) 5.6 (5.8) 6.9 (7.3) 181 (193) 5.4 6.8 178 12.2 (12.3) 6.0 (6.0) 8.3 (8.3) 197 (198) 5.4 (6.9) 6.1 (7.2) 6.5 (7.3) 7.5 (8.3) 7.9 (8.2) 8.7 (8.4) 4.0 (4.5) 4.5 (5.4) 119 (144) 320i Coupé 4.1 (4.4) 4.8 (5.4) 128 (144) 325i Coupé 8.7 (8.9) 9.8 (9.7) 4.9 (5.1) 6.3 (6.5) 151 (156) 5.5 (5.6) 7.1 (7.1) 170 (170) 4.4 (4.6) 5.2 (5.6) 138 (148) 325xi Coupé 10.9 (10.8) 6.1 (6.2) 7.9 (7.9) 189 (189) 4.8 (5.3) 5.8 (6.4) 139 (152) 330i Coupé 9.9 (9.9) 5.6 (5.6) 7.2 (7.2) 173 (173) 4.7 (5.0) 5.9 (6.2) 140 (148) 330xi Coupé 11.0 (11.0) 6.2 (6.2) 8.0 (8.0) 193 (193) 5.1 (5.1) 6.4 (6.3) 152 (150) 335i Coupé 13.2 (13.1) 6.7 (6.9) 9.1 (9.2) 218 (221) 12.2 (12.3) 6.0 (6.0) 8.3 (8.3) 197 (198) 335xi Coupé 14.1 (13.8) 7.1 (7.3) 9.7 (9.7) 232 (232) 5.4 (6.9) 6.1 (7.2) 6.5 (7.3) 4.0 (4.5) 4.5 (5.4) 119 (144) 320d Coupé 4.1 (4.4) 4.8 (5.4) 128 (144) 325d Coupé 4.4 (4.6) 5.2 (5.6) 138 (148) 330d Coupé 11.4 (11.4) 5.9 (5.9) 7.9 (7.9) 190 (190) 13.0 (13.2) 7.0 (6.9) 9.2 (9.2) 220 (221) 4.1 (4.4) 4.8 (5.4) 128 (144) 4.4 (4.6) 5.2 (5.6) 138 (148) 330xd Coupé 335d Coupé2] M3 Coupé3] 6.1 (7.2) 6.5 (7.3) 8.5 (8.7) 8.9 (9.1) 6.0 (7.2) 7.8 (8.3) 8.2 (9.0) 9.1 (9.7) 9.1 17.9 4.1 (4.5) 4.8 (5.5) 128 (145) 4.8 (5.3) 5.9 (6.4) 155 (169) 4.9 (5.2) 6.1 (6.6) 160 (175) 5.5 (5.7) 6.8 (7.2) 178 (190) 5.3 9.2 6.7 12.4 177 295 5.0 (5.4) 6.3 (6.6) 149 (158) 320i Convertible 9.0 (9.4) 5.2 (5.4) 6.6 (6.9) 157 (165) 5.2 (5.5) 6.6 (6.8) 158 (163) 325i Convertible 10.4 (10.6) 5.9 (6.1) 7.6 (7.8) 181 (187) 11.7 (11.6) 6.0 (6.1) 8.1 (8.1) 195 (195) 330i Convertible 10.5 (10.6) 6.0 (6.1) 7.7 (7.8) 185 (187) 13.3 (13.5) 7.1 (7.0) 9.4 (9.4) 224 (225) 335i Convertible 13.6 (13.4) 7.1 (7.2) 9.5 (9.5) 226 (226) 120d Convertible 6.4 (7.4) 4.3 (4.5) 5.1 (5.6) 134 (148) 320d Convertible 7.9 (8.5) 8.4 (8.9) 9.8 (9.7) 4.8 (5.2) 5.9 (6.4) 142 (152) 4.8 (5.1) 6.1 (6.5) 146 (156) 5.5 (5.6) 7.1 (7.1) 170 (170) 325d Convertible 330d Convertible M3 Convertible3] 6.9 (7.5) 8.1 (8.6) 8.6 (9.3) 4.3 (4.8) 5.3 (5.8) 140 (153) 5.1 (5.6) 6.2 (6.7) 164 (176) 5.3 (5.5) 6.5 (6.9) 170 (181) 18.7 (17.3) 9.6 (9.4) 12.9 (12.3) 309 (293) 10.9 (10.8) 6.1 (6.2) 7.9 (7.9) 189 (189) 520i Sedan 9.2 (9.4) 5.4 (5.4) 6.7 (6.9) 162 (164) 9.9 (9.9) 5.6 (5.6) 7.2 (7.2) 173 (173) 523i Sedan 10.1 (10.3) 5.7 (5.9) 7.3 (7.5) 174 (178) 11.0 (11.0) 6.2 (6.2) 8.0 (8.0) 193 (193) 525i Sedan 10.3 (10.4) 5.7 (5.8) 7.4 (7.5) 176 (178) 13.2 (13.1) 6.7 (6.9) 9.1 (9.2) 218 (221) 525xi Sedan 11.3 (11.2) 6.2 (6.3) 8.1 (8.1) 193 (193) 14.1 (13.8) 7.1 (7.3) 9.7 (9.7) 232 (232) 530i Sedan 10.9 (10.8) 5.8 (5.6) 7.7 (7.5) 182 (178) 4.1 4.7 123 530xi Sedan 11.5 (11.6) 6.2 (6.0) 8.2 (8.1) 194 (193) 4.1 (4.4) 4.8 (5.4) 128 (144) 540i Sedan 15.8 (14.4) 7.4 (6.9) 10.5 (9.7) 250 (232) 4.8 (5.3) 5.9 (6.4) 155 (169) 550i Sedan 16.6 (15.5) 7.6 (7.2) 10.9 (10.3) 260 (246) 5.7 6.0 (7.1) 7.8 (8.3) 8.2 (9.0) 9.1 (9.7) 9.1 4.9 (5.2) 6.1 (6.6) 160 (175) 520d Sedan 5.5 (5.7) 6.8 (7.2) 178 (190) 525d Sedan 5.3 6.7 177 525xd Sedan 17.9 (17.0) 9.2 (9.0) 12.4 (11.9) 295 (285) 530d Sedan 8.0 (8.6) 8.5 (9.1) 9.9 (9.8) 4.9 (5.3) 6.0 (6.5) 144 (156) 4.9 (5.3) 6.2 (6.7) 148 (160) 5.6 (5.7) 7.2 (7.2) 173 (173) 530xd Sedan 535d Sedan 2] M51] 6.5 (7.5) 8.2 (8.5) 8.8 (9.1) 8.6 (9.1) 9.2 (9.6) 9.0 22.7 4.3 (4.6) 5.1 (5.6) 136 (149) 5.0 (5.3) 6.2 (6.5) 165 (172) 5.4 (5.6) 6.7 (6.9) 179 (183) 5.1 (5.2) 6.4 (6.6) 170 (176) 5.5 (5.5) 6.9 (7.0) 183 (186) 5.4 10.2 6.7 14.8 178 357 11.0 (10.9) 6.2 (6.3) 8.0 (8.0) 193 (191) 520i Touring 9.4 (9.5) 5.6 (5.5) 6.9 (7.0) 166 (167) 10.0 (10.1) 5.7 (5.8) 7.3 (7.4) 175 (178) 523i Touring 10.6 (10.6) 6.0 (6.0) 7.7 (7.7) 183 (184) 11.1 (11.1) 6.3 (6.3) 8.1 (8.1) 194 (194) 525i Touring 10.8 (10.7) 5.9 (6.0) 7.7 (7.7) 183 (184) 13.4 (13.2) 6.9 (7.0) 9.3 (9.3) 222 (223) 525xi Touring 11.8 (11.7) 6.4 (6.5) 8.4 (8.4) 201 (201) 14.2 (13.9) 7.2 (7.4) 9.8 (9.8) 235 (235) 530i Touring 11.1 (11.0) 6.0 (5.8) 7.9 (7.7) 187 (184) 5.8 6.1 (7.3) 7.9 (8.4) 4.2 4.8 125 530xi Touring 12.0 (12.1) 6.4 (6.3) 8.5 (8.4) 203 (201) 4.2 (4.6) 4.9 (5.4) 4.9 (5.6) 131 (146) 6.0 (6.5) 158 (172) 550i Touring 520d Touring 17.0 (16.1) 6.7 (7.7) 7.8 (7.5) 11.2 (10.7) 267 (254) 5.3 (5.8) 140 (154) 4.5 (4.7) Model Urban (l /100 km) Extraurban (l /100 km) Combined CO2-emissions [g/km] (l/100 km) Model Urban (l /100 km) Extraurban (l/100 km) Combined CO2-emissions [g/km] (l/100 km) BMW 525d Touring 525xd Touring 530d Touring 530xd Touring 535d Touring2] M5 Touring1] 630i Coupé 650i Coupé 635d Coupé2] 630i Convertible 650i Convertible 635d Convertible 2] M6 Coupé1] M6 Convertible1] 730i2] 730Li2] 740i2] 740Li2] 750i2] 750Li2] 760i2] 760Li2] 730d2] 730Ld2] 745d2] X3 2.0i1] X3 2.5si X3 3.0si X3 2.0d X3 3.0d X3 3.0sd2] X5 3.0si2] X5 4.8i2] X5 3.0d2] X5 3.0sd2] X6 xDrive35i 2] X6 xDrive30d 2] (from 05/08) X6 xDrive35d 2] X6 xDrive50i 2] (from 05/08) Z4 2.0i1] Z4 2.5i Z4 2.5si Z4 3.0si Z4 3.0si Coupé Z4 M Roadster1] Z4 M Coupé1] MINI 8.4 (8.6) 9.1 (9.2) 8.8 (9.3) 9.6 (9.9) 9.2 22.4 5.2 (5.4) 6.4 (6.6) 171 (176) 5.6 (5.7) 6.9 (7.0) 184 (187) 5.3 (5.3) 6.6 (6.8) 176 (180) MINI One MINI One Convertible1] MINI Cooper 6.8 (9.0) 4.4 (5.0) 5.3 (6.5) 128 (155) 9.8 5.4 7.0 168 6.9 (9.1) 4.5 (5.0) 5.4 (6.5) 129 (156) 5.8 (5.6) 7.2 (7.2) 192 (192) MINI Cooper Convertible 10.0 (10.7) 5.7 (5.8) 7.3 (7.6) 174 (182) 5.6 10.6 6.9 15.0 182 361 MINI Cooper D MINI Cooper S 4.7 (6.5) 7.9 (9.7) 3.5 (4.2) 3.9 (5.0) 104 (134) 5.2 (5.3) 6.2 (6.9) 149 (165) MINI Cooper S Convertible 11.3 (12.7) 6.6 (6.4) 8.3 (8.7) 199 (208) 11.2 (11.0) 6.0 (5.8) 7.9 (7.7) 188 (184) MINI Cooper Clubman 17.8 (15.9) 8.1 (7.4) 11.7 (10.5) 279 (249) MINI Cooper D Clubman 9.2 5.6 6.9 183 MINI Cooper S Clubman 7.1 (9.2) 4.9 (6.6) 8.0 (9.8) 4.5 (5.1) 5.5 (6.6) 132 (159) 3.6 (4.2) 4.1 (5.1) 109 (136) 5.3 (5.4) 6.3 (7.0) 150 (168) 11.8 (11.6) 6.3 (6.0) 8.3 (8.1) 198 (192) 19.2 (16.5) 8.8 (7.7) 12.6 (10.9) 299 (258) 9.6 21.4 22.0 14.6 14.6 16.3 16.3 16.9 16.9 20.7 20.7 10.9 11.0 12.8 12.6 5.8 10.2 10.6 7.5 7.5 8.2 8.2 8.3 8.3 9.5 9.5 6.2 6.3 6.8 6.9 7.2 14.3 14.7 10.1 10.1 11.2 11.2 11.4 11.4 13.6 13.6 7.9 8.0 9.0 9.0 190 342 352 241 242 267 268 271 272 327 327 210 212 239 215 12.8 (13.1) 7.3 (7.4) 9.3 (9.5) 224 (228) 13.4 (13.3) 7.3 (7.6) 9.5 (9.7) 229 (233) 8.2 (8.3) 9.7 (9.9) 9.7 13.7 16.9 10.2 10.3 14.9 10.4 10.5 17.6 10.6 5.5 (5.8) 6.5 (6.7) 172 (178) 6.0 (6.4) 7.4 (7.7) 196 (206) 6.7 8.2 9.2 6.9 7.0 8.6 7.0 7.1 9.5 5.5 7.8 10.2 12.0 8.1 8.2 10.9 8.2 8.3 12.5 7.4 208 244 286 214 216 262 217 220 299 176 11.8 (12.0) 6.1 (6.3) 8.2 (8.4) 197 (202) 11.9 (12.4) 6.2 (6.6) 8.3 (8.7) 199 (207) 12.4 (12.7) 6.2 (6.5) 8.5 (8.8) 204 (211) 12.8 (12.7) 18.2 6.3 (6.5) 8.6 8.7 (8.8) 207 (209) 292 12.1 Rolls-Royce Rolls-Royce Phantom2] Rolls-Royce Phantom Long wheelbase 2] Rolls-Royce Phantom Drophead Coupé2] 23.2 11.3 15.7 23.3 11.4 15.8 23.2 11.3 15.7 377 380 377 Figures in brackets only valid for automatic transmissions 1] only available with manual transmission. 2] only available with automatic transmission. 3] Values in brackets are valid for 7-gear M dual clutch transmission with Drivelogic Further information and constantly updated data for the vehicles is available on the Internet at www.bmw.com, www.mini.com and www.rolls-roycemotorcars.com. 18.2 8.6 12.1 292 As of March 2008 a t a d n o i t p m u s n o C The manufacture of, and the paper used for, the BMW Group’s Annual Report 2007, have been certified in accordance with the criteria of the Forest Stewardship Council (FSC). The FSC prescribes stringent standards for forest manage- ment, thus helping to avoid uncontrolled deforestation, human rights infringements and damage to the environment. Since products bearing the FSC label are handled by various enterprises along the processing and trading chain, the FSC chain of custody certification rules are also applied to enterprises which process paper e.g. printing companies. Published by Bayerische Motoren Werke Aktiengesellschaft 80788 Munich Germany Telephone +49 89 382-0 

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