Volkswagen Group
Annual Report 2017

Plain-text annual report

Shaping the transformation together. A N N UA L R EP O R T 2017 Key Figures V O L K SWA G E N G R O U P Volume Data1 in thousands Deliveries to customers (units) Vehicle sales (units) Production (units) Employees at Dec. 31 Financial Data (IFRSs), € million Sales revenue Operating result before special items as a percentage of sales revenue Special items Operating result Operating return on sales (%) Earnings before tax Return on sales before tax (%) Earnings after tax Automotive Division2 Total research and development costs R&D ratio (%) Cash flows from operating activities Cash flows from investing activities attributable to operating activities3 of which: capex capex/sales revenue (%) Net cash flow Net liquidity at Dec. 31 Return on investment (ROI) in % Financial Services Division Return on equity before tax4 (%) V O L K SWA G E N A G Volume Data in thousands Employees at Dec. 31 Financial Data (HGB), € million Sales Net income for the fiscal year Dividends (€) per ordinary share per preferred share 2017 2016 % +4.3 +3.7 +4.5 +2.5 +6.2 +16.5 –57.1 +94.5 +90.8 x –3.9 –42.4 +10.6 –1.3 x –17.7 10,741 10,777 10,875 642.3 230,682 17,041 7.4 –3,222 13,818 6.0 13,913 6.0 11,638 13,135 6.7 11,686 17,636 12,631 6.4 –5,950 22,378 12.1 10,297 10,391 10,405 626.7 217,267 14,623 6.7 –7,520 7,103 3.3 7,292 3.4 5,379 13,672 7.3 20,271 15,941 12,795 6.9 4,330 27,180 8.2 9.8 10.8 2017 2016 % 117.4 113.9 +3.1 76,729 4,353 3.90 3.96 75,310 2,799 2.00 2.06 +1.9 +55.5 1 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. 2016 deliveries updated to reflect subsequent statistical trends. 2 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 3 Excluding acquisition and disposal of equity investments: €17,512 (€18,224) million. 4 Earnings before tax as a percentage of average equity. This version of the annual report is a translation of the German original. The German takes precedence. All figures shown in the report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period. NORTH AMERICA+4.0%EUROPE/OTHER MARKETS+2.6%2015201620174,5054,6184,738201520162017932939976201520162017ASIA-PACIFIC+4.3%3,9354,3194,506SOUTH AMERICA201520162017559422522+23.7% Moving Globally VOLKSWAGEN GROUP deliveries – in thousand units Moving Globally Key Figures NORTH AMERICA+4.0%EUROPE/OTHER MARKETS+2.6%2015201620174,5054,6184,738201520162017932939976201520162017ASIA-PACIFIC+4.3%3,9354,3194,506SOUTH AMERICA201520162017559422522+23.7%We are making the Volkswagen Group more open and efficient, more innovative and customer-centric. The figures show that we are on the right track. 2 Contents 1 2 TO OUR SHAREHOLDERS DIVISIONS 07 Letter to our Shareholders 21 Brands and Business Fields 10 The Board of Management of 24 Volkswagen Passenger Cars Volkswagen Aktiengesellschaft 12 Report of the Supervisory Board 26 Audi 28 ŠKODA 30 SEAT 32 Bentley 34 Porsche 36 Volkswagen Commercial Vehicles 38 Volkswagen Truck & Bus 40 Scania 42 MAN 44 Volkswagen Group China 46 Volkswagen Financial Services Contents 3 3 4 5 GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS ADDITIONAL INFORMATION 51 Goals and Strategies 195 Income Statement 326 Five-Year Review 54 Internal Management System 196 Statement of Comprehensive Income 327 Financial Key and Key Performance Indicators 198 Balance Sheet Performance Indicators 56 Structure and Business Activities 200 Statement of Changes in Equity 59 Corporate Governance Report 202 Cash Flow Statement 67 Remuneration Report 203 Notes 84 Executive Bodies 315 Responsibility Statement 88 Disclosures Required Under 316 Auditor’s Report 328 Glossary 330 Index 332 Scheduled Dates Takeover Law 91 Diesel Issue 95 Business Development 108 Shares and Bonds 114 Results of Operations, Financial Position and Net Assets 130 Volkswagen AG (condensed, in accordance with the German Commercial Code) 134 Sustainable Value Enhancement 157 Report on Expected Developments 164 Report on Risks and Opportunities 190 Prospects for 2018 This annual report was published on the occasion of the Annual Media Conference on March 13, 2018. A completely new ball game has begun. With new trends, new technologies, new alliances. At Volkswagen, we are harnessing the radical changes in our industry to make a new beginning. – MATTHIAS MÜLLER – 1 To our Shareholders TO OUR SHAREHOLDERS 07 Letter to our Shareholders 10 The Board of Management of Volkswagen Aktiengesellschaft 12 Report of the Supervisory Board To our Shareholders Letter to our Shareholders 7 Letter to our Shareholders What do you think makes a good company? First of all, a good company certainly delivers compelling business results. And definitely implements the necessary measures to remain successful tomorrow and far into the future. But I imagine that you, just like me, also believe there is more to a good company than this – namely the essence of the organization: what drives it and keeps it together. So ultimately it’s about attitude and values. Results, future, attitude: where does your Company stand, where does the Volkswagen Group stand now, in these three dimensions? As far as business figures are concerned, the answer could hardly be clearer: 2017 was an exceedingly successful year for us. Around the world, 10.7 million customers – more than ever before – chose a vehicle from one of our brands. We are grateful for the trust that this embodies. Our financial figures were also very convincing: sales revenue rose to €230.7 billion. At €13.8 billion, our operating profit was better than ever – despite negative special items of €3.2 billion. And at 7.4 percent, the operating return on sales before special items also exceeded the original forecast. The key performance indicators show that our operating business is strong and the Group’s financial situation is solid. The fact that we are in such a good position today after everything that has happened in recent years is the result of really great teamwork. And I would like to thank our employees all over the world for that. It goes without saying that you as shareholders will participate in your Company’s success. The Board of Management and Supervisory Board will therefore propose a dividend of €3.90 per ordinary share and €3.96 per preferred share for fiscal year 2017. This corresponds to a payout ratio of 17.3 percent. Looking ahead, we – like the entire industry – are facing major challenges and radical change. But here, too, there is reason to be optimistic. This is also reflected in our share price, which returned to the pre-crisis level at the end of 2017. We believe this also expresses the confidence shown by financial markets in our realignment. And, indeed, TOGETHER – Strategy 2025, our plan for the future, is taking effect and becoming increasingly tangible. With Roadmap E as a key element of this strategy, we are demonstrating how we intend to help e-mobility achieve its breakthrough – not just in our Company, but throughout the entire industry. At the same time, on the road to emission-free mobility, we are pressing ahead with the full range of drive- trains including efficient, ultra-modern combustion engines. Through out the Group, we have begun working hard on the other major future trends as well. On artificial intelligence, new mobility services, digital connectivity and, last but not least, on fully automated vehicles like our Sedric: the first car from the Group to come without a steering wheel or pedals. By the end of 2022, we plan to invest over €34 billion from our own resources in the key technologies of tomorrow. 8 Letter to our Shareholders To our Shareholders Each setback should above all encourage us to devote all our energy to bringing about the transformation at Volkswagen. – M AT T H I A S M Ü L L E R – To our Shareholders Letter to our Shareholders 9 This, too, shows that Volkswagen is changing course. We are steering towards the future. We are not stopping halfway, we are picking up the pace. With a clear goal in front of us: to transform the Volkswagen Group from an automaker into a company that brings sustainable mobility to people all over the world. I firmly believe that we can do this. Because we are following a clear plan for the future. Because we have very successful operations. And because within the Group we have the critical mass, innovative capacity and financial discipline to spearhead this change. You might be asking yourself: “That’s all well and good, but what about the third criterion you mentioned at the beginning, the attitude in the company, our values?” I have to admit: it is here that we are still furthest from our goal. Changing the culture of a large organization is hard. It requires time, endurance and determination. In spite of all the progress I see every day – and which I find heartening – we still repeatedly encounter setbacks. They hurt, but they are inevitable. What’s important is how we deal with them. What we learn from them. Each setback should above all encourage us to devote all our energy to bringing about the transformation at Volkswagen. It’s about more open cooperation between our brands. About more speed, pragmatism and decisiveness. A critical ability and the reduction of power distances. And last but not least, we need authentic, vibrant leadership based on values and integrity. So if you were to ask me today: “Is Volkswagen a good company?”, then my answer would be: “Yes, Volkswagen is an exceedingly successful global company. Yes, we are working very hard on the future of mobility and therefore also on our own future. And yes, at Volkswagen we have recognized how essential a solid foundation of values and a healthy corporate culture is.” But at the same time, it’s also true that our Group is not yet as good as it could be. We still have quite a way to go. For me, this means one thing in particular: we have many opportunities to turn Volkswagen into an even more successful – and an even better – company. For our customers, employees and business partners. For the environment and society. For our investors. And for you, our shareholders. Our Group still has enormous potential. We want and we will exploit this. I am looking forward to counting on your continued support as we move forward together on this journey. Sincerely, Matthias Müller The Board of Management To our Shareholders The Board of Management of Volkswagen Aktiengesellschaft Matthias Müller Chairman of the Board of Management of Volkswagen Aktiengesellschaft Prof. Rupert Stadler Chairman of the Board of Management of AUDI AG Hiltrud Dorothea Werner Integrity and Legal Affairs Dr.-Ing. Herbert Diess Chairman of the Brand Board of Management of Volkswagen Passenger Cars To our Shareholders The Board of Management 11 Prof. Dr. rer. pol. Dr.-Ing. E.h. Jochem Heizmann China Frank Witter Finance and Controlling Dr. rer. pol. h.c. Francisco Javier Garcia Sanz Procurement Dr. rer. soc. Karlheinz Blessing Human Resources and Organization Andreas Renschler Commercial Vehicles 12 Report of the Supervisory Board To our Shareholders Report of the Supervisory Board (in accordance with section 171(2) of the AktG) Ladies and gentlemen, In fiscal year 2017, the work of the Supervisory Board of Volkswagen  AG and its committees focused once again on realigning the Volkswagen Group as part of the Group’s TOGETHER – Strategy 2025, and the investigation of the diesel issue. The Supervisory Board of Volkswagen AG addressed the Company’s position and development regularly and with particular intensity in the reporting period. We supervised and supported the Board of Management in its running of the business and advised it on issues relating to the management of the Company in accordance with our duties under the law, the Articles of Association and the rules of procedure. We also observed the relevant recommendations and suggestions of the German Corporate Governance Code (the Code) at all times. The Supervisory Board was directly involved in all decisions of fundamental importance to the Group. We additionally discussed strategic considerations with the Board of Management at regular intervals. The Board of Management regularly, promptly and compre- hensively informed the Supervisory Board in writing or in person on all matters of relevance to the Company relating to its strategy, the business development and the Company’s planning and position. This also included the risk situation and risk management. In this respect, the Board of Management also informed it in particular of improvements to the risk and compliance management system with regard to the diesel issue. In addition, the Board of Management informed the Supervisory Board on an ongoing basis about compliance- related topics and other topical issues. In all cases, we received the documents relevant to our decisions in good time for our meetings. At regular intervals, we also received a detailed report from the Board of Management on the current business position and the forecast for the current year. Any variances in performance that occurred as against the plans and targets previously drawn up were explained by the Board of Management in detail, either in person or in writing. Together with the Board of Management we analyzed the reasons for the variances so as to enable countermeasures to be derived. In addition, the Board of Management presented regular reports on current developments in connection with the diesel issue at the meetings of the Special Committee on Diesel Engines. The Chairman of the Supervisory Board consulted with the Chairman of the Board of Management at regular intervals between meetings to discuss important current issues. Apart from the diesel issue, they included the Volkswagen Group’s strategy and planning, the business development, the Group’s risk situation and risk management, including integrity and compliance issues. The Supervisory Board held a total of twelve meetings in fiscal year 2017. The average attendance ratio was 84.6 %; all of the members of the Supervisory Board attended over half of the meetings of the Supervisory Board and the committees of which they are members. In addition, resolutions on urgent matters were adopted in writing or using electronic communications media. To our Shareholders Report of the Supervisory Board 13 CO M M I T T E E A C T I V I T I E S The Supervisory Board has established five committees in order to discharge the duties entrusted to it:  the Executive Committee, the Nomination Committee, the Mediation Com- mittee in accordance with section 27(3) of the Mitbestim- mungsgesetz (MitbestG  –  German  Codetermina-tion  Act), the Audit Committee and, since October 2015, the Special Committee on Diesel Engines. The Executive Committee and the Special Committee on Diesel Engines each consist of three shareholder representatives and three employee representatives. The members of the Nomination Committee are the shareholder representatives on the Executive Committee. The remaining two committees are each composed of two shareholder representatives and two employee representatives. The members of these committees as of December 31, 2017 are given on page 87 of this annual report. The Executive Committee met 17 times during the past fiscal year, mainly discussing current matters related to the diesel issue. The Committee also prepared the resolutions by the Supervisory Board in detail and dealt with the composition of, and contractual issues concerning the Board of Management other than remuneration. The Nomination Committee is responsible for proposing suitable candidates for the Supervisory Board to recommend for election to the Annual General Meeting. This Committee did not hold any meetings in 2017. The Mediation Committee did not have to be convened in the reporting period. The Audit Committee held five meetings in fiscal year 2017. It focused primarily on the consolidated financial statements, the risk management system including the effectiveness of the internal control system, and the work performed by the Company’s Compliance organization. In addition, the Audit Committee concerned itself with the Group’s quarterly reports and the half-yearly financial report, as well as with current issues and the supervision of financial reporting and the financial reporting process, and the examination thereof by the auditors. Moreover, the Audit Committee initiated the call for bids for audits and other audit-related services in the Volkswagen Group from fiscal year 2020. In this process, Volkswagen AG and other public-interest entities of the Volkswagen Group follow the selection procedure within the meaning of Article 16(3) of Regulation (EU) No 537/2014. The Special Committee on Diesel Engines is responsible for coordinating all activities relating to the diesel issue and preparing resolutions by the Supervisory Board. To this end, the Special Committee on Diesel Engines is also provided with regular information by the Board of Management. It is also entrusted with examining any consequences of the findings. The Chairman of the Special Committee on Diesel Engines reports regularly on its work to the Supervisory Board. In fiscal year 2017, the Special Committee on Diesel Engines met on eleven occasions, in which, among other topics, details pertaining to the settlements with the US authorities as well as the Supervisory Board’s proposed resolutions regarding formal approval of actions of incumbent members in fiscal year 2016 were discussed. Furthermore, as a rule, the shareholder and employee represen- tatives met for separate preliminary discussions before each of the Supervisory Board meetings. TO P I C S D I S C U S S E D BY T H E S U P E RV I S O RY B OA R D The Supervisory Board’s first meeting in the reporting period was held on January 11, 2017. A key topic at this meeting was the approval regarding the conclusion of settlements with US authorities. On January 26, 2017, the Supervisory Board held a conference call to discuss changes in the composition to the Board of Management. At the Supervisory Board meeting on February 24, 2017, we dealt in detail with the new remuneration systems for the Board of Management and Supervisory Board of Volks- 14 Report of the Supervisory Board To our Shareholders Hans Dieter Pötsch wagen AG. Following a detailed examination, we also approved the consolidated financial statements and the annual financial statements of Volkswagen  AG for 2016 prepared by the Board of Management, as well as the combined management report. We examined the dependent company report submitted by the Board of Management and, following completion of our examination, we came to the conclusion that there were no objections to be raised to the concluding declaration by the Board of Management in the report. In addition, we particularly discussed the current state of affairs with respect to the diesel issue. Another meeting of the Supervisory Board was held on March 28, 2017 at which we mainly discussed the current state of affairs with respect to the diesel issue and the agenda for the 57th Annual General Meeting of Volkswagen AG, particularly the Supervisory Board’s proposed resolutions. The Supervisory Board meeting on April 26, 2017 concentrated on strategic topics such as e-mobility and the focus of the China business. Furthermore, the Board of Management reported, among other things, on the collaboration with the monitor. To our Shareholders Report of the Supervisory Board 15 Two more Supervisory Board meetings were held on May 9 and 10, 2017 within Volkswagen AG’s 2017 Annual General Meeting. Their agenda included in particular preparations for and the post-completion analysis of the 57th Annual General Meeting of Volkswagen AG on May 10, 2017, the composition of the committees, and the current state of affairs with respect to the diesel issue. A meeting of the Supervisory Board was held on July 26, 2017 at which we addressed the topic of the allegations of supposed cartel infringements that were discussed in the media. equity of Volkswagen Bank GmbH by Volkswagen Financial Services AG, and an advisory mandate. CO N F L I C T S O F I N T E R E ST Mr. Hans Dieter Pötsch was a member of the Board of Management of Volkswagen AG until October 2015. His move to the Supervisory Board had already been planned irrespective of the diesel issue. In order to avoid conceivable conflicts of interest, Mr. Pötsch always left the meeting room prior to discussions and resolutions adopted by the Supervisory Board that might relate to his conduct in connection with the diesel issue. In a conference call on August 1, 2017, the Supervisory Board received information on the measures taken as part of the “National Forum Diesel”. No other conflicts of interest were reported or were discernible in the reporting period. The agenda of the Supervisory Board meeting on September 29, 2017 included a status report on the Group strategy TOGETHER – Strategy 2025 and the current state of affairs with respect to the diesel issue. The Supervisory Board held a meeting on November 2, 2017, in which we discussed not only the current state of affairs with respect to the diesel issue, but also the Volkswagen Group’s investment and financial planning. At the Supervisory Board meeting on November 17, 2017, we discussed in detail the Volkswagen Group’s investment and financial planning for the period from 2018 to 2022. The current state of affairs with respect to the diesel issue was another focus of the meeting. When issuing our annual declaration of conformity with the Code, we also decided on the diversity concepts for the Board of Management and the Supervisory Board as well as the profile of skills and expertise for the Supervisory Board as a whole, and the targets for the composition of the Board. The profile of skills and expertise for the Supervisory Board as a whole, and the targets for the composition of the Board, are described on pages 61 to 62 of the Corporate Governance Report. In addition to the above, we voted in writing on a variety of items in the reporting period, including an increase in the CO R P O R AT E G OV E R N A N C E A N D D E C L A R AT I O N O F CO N F O R M I T Y The Supervisory Board meeting on November 17, 2017 focused on the implementation of the recommendations and suggestions of the Code at the Volkswagen Group. We discussed in detail the version of the Code dated February 7, 2017, as published by the relevant government commission on April 24, 2017, and issued the annual declaration of con- formity with the recommendations of the Code in accordance with section  161 of the Aktiengesetz (AktG – German Stock Corporation Act) together with the Board of Management. The joint declarations of conformity by the Board of Management and the Supervisory Board are permanently available at www.volkswagenag.com/ir. Additional informa- tion on the implementation of the recommendations and suggestions of the Code can be found in the corporate governance report starting on page 59 and in the notes to the consolidated financial statements on page 312 of this annual report. M E M B E R S O F T H E S U P E RV I S O RY B OA R D A N D B OA R D O F M A N A G E M E N T In the election of employee representatives to the Supervisory Board of Volkswagen AG on April  6, 2017, Ms. Ulrike Jakob, Deputy Chairwoman of the Works Council of Volkswagen AG, Kassel plant, Ms. Bertina Murkovic, Deputy Chairwoman of 16 Report of the Supervisory Board To our Shareholders the Works Council of Volkswagen Commercial Vehicles, and Mr. Athanasios Stimoniaris, Chairman of the Group Works Council of MAN  SE and of the MAN  SE Works Council, were elected as members of the Supervisory Board. They succeeded Mr. Uwe Fritsch, Mr. Stephan Wolf and Mr. Thomas Zwiebler. The term of office began at the end of the Annual General Meeting on May  10,  2017. The remaining employee representatives on the Supervisory Board were reappointed for a further term. Effective December 14, 2017, the State of Lower Saxony delegated the new Deputy Minister-President and Minister of Economic Affairs, Labor, Transport and Digitalization, Dr. Bernd Althusmann, to the Supervisory Board of Volkswagen AG to succeed Olaf Lies for the latter’s remaining term of office. Ms. Annika Falkengren stepped down as a member of the Supervisory Board with effect from February 5, 2018. Effective February 14, 2018, the Braunschweig Registry Court temporarily appointed Ms. Marianne Heiß as a member of the Supervisory Board until the end of the Annual General Meeting on May 3, 2018. The Supervisory Board will propose electing Ms. Heiß as a member of the Supervisory Board at the Annual General Meeting on May 3, 2018. Ms. Hiltrud Dorothea Werner has been the Group Board of Management member responsible for “Integrity and Legal Matters” since February 1, 2017. She succeeded Dr. Christine Hohmann-Dennhardt, who left the Board of Management of Volkswagen AG on January 31, 2017. The Honorary Chairman of the Supervisory Board, Dr. Klaus Liesen, passed away on March 30, 2017 at the age of 85. Dr. Liesen served as a member of the Supervisory Board of Volkswagen AG between 1987 and 2006 and as its Chairman from 1987 to 2002. During this time, he made a considerable contribution to the expansion and internationalization of the Group. With his experience in business and his shrewd and diplomatic manner, he earned great respect and recognition in the process. Dr. Martin Posth, a former member of the Board of Management of Volkswagen AG, died on September 17, 2017 at the age of 73. Dr. Posth was Board member with responsibility for Human Resources from 1988 to 1993 and for the Asia-Pacific region from 1993 to 1997. During his tenure in the Volkswagen Group, he decisively shaped the development of the Company, demonstrating great commitment and expertise. They will not be forgotten. AU D I T O F T H E A N N UA L A N D CO N S O L I DAT E D F I N A N C I A L STAT E M E N T S In line with our proposal, the Annual General Meeting of Volkswagen AG on May 10, 2017 elected PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft (PwC) as auditors for fiscal year 2017. The auditors audited the annual financial statements of Volkswagen AG, the consolidated financial statements of the Volkswagen Group and the combined management report, and issued unqualified audit reports in each case. The Supervisory Board commissioned (PwC) on November 17, 2017 with an external content-related audit of the combined separate nonfinancial report for 2017. In addition, the auditors analyzed the risk management and internal control systems, concluding that the Board of Management had taken the measures required by section 91(2) of the AktG to ensure early detection of any risks endangering the continued existence of the Company. The Report by the Board of Management on Relationships of Volkswagen AG with Affiliated Companies in Accordance with Section  312 of the AktG for the period from January  1 to December 31, 2017 (dependent company report) submitted by the Board of Management was also reviewed by the auditors, who issued the following opinion: “In our opinion and in accordance with To our Shareholders Report of the Supervisory Board 17 our statutory audit, we certify that the factual disclosures provided in the report are correct and that the Company’s consideration concerning legal transactions referred to in the report was not unduly high.” The members of the Audit Committee and the members of the Supervisory Board were provided in each case with the documentation relating to the annual financial statements, including the dependent company report, and the audit reports prepared by the auditors in good time for their meetings on February 22, 2018 and February 23, 2018 respectively and the report from PwC on the external content- related audit of the combined separate nonfinancial report for 2017. The auditors reported extensively at both meetings on the material findings of their audit and were available to provide additional information. into consideration the audit reports and the Taking discussion with the auditors and based on its own conclusions, the Audit Committee prepared the documents for the Supervisory Board’s examination of the consolidated financial statements, the annual financial statements of Volkswagen  AG, the combined management report, the dependent company report as well as the combined separate nonfinancial report and reported on these at the Supervisory Board meeting on February 23, 2018. Following this, the Audit Committee recommended that the Supervisory Board approve the annual financial statements. We examined the documents in depth in the knowledge and on the basis of the report by the Audit Committee and the audit report as well as in talks and discussions with the auditors. We came to the conclusion that they are due and proper and that the assessment of the position of the Company and the Group presented by the Board of Management in the management report corresponds to the assessment by the Supervisory Board. the Board of Management and the consolidated financial statements at our meeting on February 23, 2018, at which the auditors also took part in discussions on the agenda items relating to the financial statements. The annual financial statements are thus adopted. Upon completion of our examination of the dependent company report, there are not any objections to be raised to the concluding declaration by the Board of Management. We reviewed the proposal on the appropriation of net profit submitted by the Board of Management, taking into account in particular the interests of the Company and its shareholders, and endorsed the proposal. PwC conducted an external content-related audit of the combined separate nonfinancial report for 2017 to attain limited assurance and issued an unqualified report. Upon completion of its own independent examination of the combined separate nonfinancial report for 2017, the Supervisory Board did not have any objections. We would like to express our thanks and particular appreciation to the members of the Board of Management, the Works Council, the management and all the employees of Volkswagen AG and its affiliated companies for their work in 2017. With your immense personal commitment, great loyalty and readiness to support the changes implemented, you all helped the Volkswagen Group to conclude fiscal year 2017 successfully and develop positively in many areas under the Group’s TOGETHER – Strategy 2025. Wolfsburg, February 23, 2018 We therefore concurred with the auditors’ findings and approved the annual financial statements prepared by Hans Dieter Pötsch Chairman of the Supervisory Board S N O I S I V I D 2 Divisions DIVISIONS 21 Brands and Business Fields 24 Volkswagen Passenger Cars 26 Audi 28 ŠKODA 30 SEAT 32 Bentley 34 Porsche 36 Volkswagen Commercial Vehicles 38 Volkswagen Truck & Bus 40 Scania 42 MAN 44 Volkswagen Group China 46 Volkswagen Financial Services Divisions Brands and Business Fields 21 Brands and Business Fields Amid fierce competition in a market environment that remained challenging, we achieved a new vehicle sales record with our brands in 2017. Special items from the diesel issue again affected the operating profit. G R O U P ST R U C T U R E The Volkswagen Group consists of two divisions: the Automotive Division and the Financial Services Division. The Automotive Division comprises the Passenger Cars, Commercial Vehicles and Power Engineering business areas. We report on the Passenger Cars segment and the reconciliation in the Passenger Cars Business Area. The Commercial Vehicles Business Area and Power Engineering Business Area correspond to the segments of the same name. Accordingly, the activities of the Automotive Division comprise the development of vehicles and engines, the production and sale of passenger cars, light commercial vehicles, trucks, buses and motorcycles, as well as the genuine parts, large-bore diesel engines, turbomachinery, special gear units, propulsion compo- nents and testing systems businesses. The Ducati brand is allocated to the Audi brand and thus to the Passenger Cars Business Area. The Financial Services Division, which corresponds to the Financial Services segment, combines dealer and customer financing, leasing, banking and insurance activities, fleet management and the mobility offerings. V O L K S W A G E N G R O U P R E P O R T I N G S T R U C T U R E A U T O M O T I V E D I V I S I O N Passenger Cars Business Area Commercial Vehicles Business Area m Power Engineering Business Area sw Volkswagen Commercial Vehicles MAN Power Engineering ia Scania Vehicles and Services s MAN Commercial Vehicle Co Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Bentley Porsche Automotive Others F I N A N C I A L S E R V I C E S D I V I S I O N Dealer and customer financing Leasing Direct bank Insurance Fleet management Mobility offerings 22 Brands and Business Fields Divisions In this chapter, we present the key volume and financial data relating to the Group brands and to Volkswagen Financial Services. In light of the considerable importance of the development of business in the world’s largest single market for the Volkswagen Group, we also report on business developments and the results of our activities in China in this chapter. The production figures and deliveries to customers are differentiated by brands and their models that carry the corresponding brand logo. Unit sales figures contain vehicles sold by respective brand companies, including models of other Group brands. In some cases, there are marked differences between delivery figures and unit sales as a result of our business development in China. When realigning our Group structures, we have reclassified companies from the Volkswagen Passenger Cars brand to the Group starting in 2017. This will allow us to increase transparency and comparability. Along with cross-brand logistics and services, importers that also distribute vehicles from other Group brands have been separated out from the Volkswagen Passenger Cars brand. These will be disclosed in the line “Other” and will continue to be presented in the Passenger Cars Business Area. For the Volkswagen Passenger Cars brand, the reclassifications lead to reductions in unit sales, sales revenue and operating profit. In addition, we explain unit sales and sales revenue in the Europe/Other markets, North America, South America and Asia-Pacific regions. K E Y F I G U R E S B Y M A R K E T At €17.0 (14.6) billion, the operating profit before special items in fiscal year 2017 exceeded the prior-year figure. Special items, which resulted solely from the diesel issue in the reporting year, weighed on the operating profit by €3.2 billion (previous year: operating profit reduced by €7.5 billion). Amid fierce competition in a challenging market environment, the Volkswagen Group set a new sales record of 10.8 (10.4) million vehicles in fiscal year 2017. Sales revenue increased by 6.2% to €230.7 billion. In the Europe/Other markets region, unit sales rose by 2.1% year-on-year to 4.7 million vehicles. At €142.8 bil- lion, sales revenue was 3.4% higher than in 2016, due among other things to higher volumes. Exchange rate effects had a negative impact. In North America, we sold 1.0 million vehicles, a 2.5% increase compared with the previous year, driven by stronger demand in the USA and Canada. Volume and mix effects lifted sales revenue by 9.5% to €38.8 billion. The economic environment in the markets of the South America region improved during the reporting year. The Volkswagen Group’s sales there rose by 25.1% to 0.5 million vehicles. Sales revenue rose by 25.3% to €10.0 billion, which was due both to higher volumes and positive mix effects. In the Asia-Pacific region – including the Chinese joint ventures – we sold a total of 4.5 (4.4) million vehicles in fiscal year 2017. At €39.1 billion, sales revenue exceeded the prior year by 9.4%. This increase especially resulted from a higher import volume and an improved components business at our fully consolidated companies. This figure does not include the sales revenue of our equity-accounted Chinese joint ventures. Divisions Brands and Business Fields 23 K E Y F I G U R E S B Y B R A N D A N D B U S I N E S S F I E L D 1 Thousand vehicles/€ million 2017 2016 2017 2016 2017 2016 V E H I C L E S A L E S S A L E S R E V E N U E O P E R A T I N G R E S U L T Volkswagen Passenger Cars2 Audi ŠKODA SEAT Bentley Porsche Automotive3 Volkswagen Commercial Vehicles Scania4 MAN Commercial Vehicles MAN Power Engineering VW China5 Other6 Volkswagen Financial Services7 Volkswagen Group before special items Special items Volkswagen Group Automotive Division8 of which: Passenger Cars Business Area Commercial Vehicles Business Area Power Engineering Business Area Financial Services Division 3,573 1,530 4,347 1,534 937 595 11 248 498 92 114 – 4,020 –840 – – 10,777 10,777 10,077 700 – – 814 548 11 239 478 83 102 – 3,873 –1,638 – – – 10,391 10,391 9,729 662 – – 79,979 60,128 16,559 9,892 1,843 21,674 11,909 12,789 11,087 3,283 – 105,651 59,317 13,705 8,894 2,031 20,710 11,120 11,303 10,005 3,593 – –30,288 31,826 –56,617 27,554 – – 230,682 196,949 158,466 35,200 3,283 33,733 – – 217,267 186,016 150,343 32,080 3,593 31,251 3,301 5,058 1,611 191 55 4,003 853 1,289 362 193 – –2,335 2,460 17,041 –3,222 13,818 11,146 9,309 1,892 –55 2,673 1,869 4,846 1,197 153 112 3,733 455 1,072 230 194 – –1,343 2,105 14,623 –7,520 7,103 4,668 4,167 718 –217 2,435 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 2017 figures take account of the reclassification of companies; prior-year figures were not adjusted. 3 Porsche (Automotive and Financial Services): sales revenue €23,491 (22,318) million, operating profit €4,144 (3,877) million. 4 Including financial services. 5 The sales revenue and operating profits of the joint venture companies in China are not included in the figures for the Group. These Chinese companies are accounted for using the equity method and recorded a proportionate operating profit of €4,746 (4,956) million. 6 Prior year adjusted. In operating profit, mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation for Scania, Porsche Holding Salzburg, MAN and Porsche. 7 Starting January 1, 2017, Porsche’s financial services business is reported as part of Volkswagen Financial Services. Prior-year figures were not adjusted. 8 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. K E Y F I G U R E S B Y M A R K E T 1 Thousand vehicles/€ million 2017 2016 2017 2016 V E H I C L E S A L E S S A L E S R E V E N U E Europe/Other markets North America South America Asia-Pacific2 Volkswagen Group2 4,731 992 526 4,527 10,777 4,635 968 421 4,367 10,391 142,753 138,079 38,818 9,988 39,123 35,454 7,973 35,761 230,682 217,267 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market. 24 Volkswagen Passenger Cars Divisions The Volkswagen Passenger Cars brand systematically pushed ahead with its “Transform 2025+” strategy in 2017 and considerably improved its operating profit. The global product initiative has launched successfully with more than ten new models. B U S I N E S S D E V E L O P M E N T The Volkswagen Passenger Cars vision is “Moving people and driving them forwards”. The “TRANSFORM 2025+” strategy therefore centers on a global model initiative through which the brand aims to lead innovation, technology and quality in the volume segment. More than ten new models were launched on the market in the reporting year. The Arteon, Volkswagen’s new top-of-the-range saloon, received the Golden Steering Wheel 2017, among other accolades. The Polo set new benchmarks in the small car segment. In the SUV segment, the brand expanded its range with the young, sporty T-Roc, the Tiguan Allspace, the Atlas for the US market and the Teramont for China. Volkswagen wants to actively shape the current phase of technological transformation in the automotive industry. The brand is therefore developing a new generation of fully networked electric vehicles based on the Modular Electrification Toolkit (MEB). The MEB concept car, the I.D. BUZZ, turned heads at the Detroit Auto Show: This fully electric microbus brings the legendary VW camper-van feeling right up to date. The brand showcased another member of the I.D. family in 2017: the I.D. CROZZ concept SUV. The first vehicles in the I.D. family are being produced at the Zwickau site, which is being developed into the Group’s European center of expertise for e-mobility. Worldwide, the Volkswagen Passenger Cars brand delivered a record 6.2 million vehicles in 2017 (+4.2%). While sales slipped slightly in Germany due to the diesel issue, they rose in all other core regions of the world. The brand recorded strong growth above all in China (+5.9%), Brazil (+19.7%) and the USA (+5.2%). The Tiguan was especially popular. With 720,000 vehicles delivered in the reporting year, it was one of the world’s most successful automobiles in 2017. Sales by the Volkswagen Passenger Cars brand in 2017 totaled 3.6 (4.3) million vehicles; the decline results from the reclassification of companies in the Group. The difference between deliveries and unit sales is mainly due to the fact that the vehicle-producing joint ventures in China are not attributed to Volkswagen Passenger Cars brand companies. The Volkswagen Passenger Cars brand produced 6.3 million vehicles worldwide in 2017; this was 4.0% more than in 2016. In late August, the 150 millionth Volkswagen rolled off the assembly line at Volkswagen’s main plant in Wolfsburg. S A L E S R E V E N U E A N D E A R N I N G S Sales revenue at the Volkswagen Passenger Cars brand in 2017 was down 24.3% year-on-year at €80.0 billion. This was due to the reclassification of companies. Operating profit before special items rose to €3.3 (1.9) billion. Volume-, mix- and margin-related factors as well as product cost optimization had a positive effect, while higher fixed costs as a result of expansion and higher depreciation and amortization charges due to the large volume of capital expenditure had a negative impact. The operating return on sales before special items increased to 4.1 (1.8)%. The diesel issue gave rise to special items of €–2.8 (previous year’s total –5.2) billion. 150 million Vehicles manufactured since 1945 Divisions Volkswagen Passenger Cars 25 P R O D U C T I O N V O L K SWA G E N PA S S E N G E R C A R S B R A N D 1 Units Golf Jetta/Sagitar Tiguan Polo Passat/Magotan Lavida Bora Santana Gol up! Touran Lamando Atlas/Teramont Saveiro Beetle Fox Sharan Touareg Arteon/CC T-Roc Suran Phideon Scirocco Phaeton 2017 2016 2017 2016 % 968,284 883,346 769,870 755,506 660,996 507,574 334,900 293,313 203,148 158,795 144,676 138,943 129,724 66,431 59,483 50,739 45,695 42,407 37,972 22,724 21,093 13,014 8,199 – 982,495 Deliveries (thousand units) 968,135 Vehicle sales 548,687 Production 6,230 3,573 6,317 5,980 4,347 6,073 794,388 Sales revenue (€ million) 79,979 105,651 Operating result before special items as % of sales revenue 3,301 4.1 1,869 1.8 +4.2 –17.8 +4.0 –24.3 +76.6 1 2017 figures take account of the reclassification of companies; prior-year figures were not adjusted. 711,878 547,187 236,427 312,177 160,130 169,970 164,248 146,285 386 47,460 61,940 50,273 41,949 47,495 44,091 – 20,163 5,131 11,963 452 6,316,832 6,073,310 T-Roc D E L I V E R I E S B Y M A R K E T (cid:339)(cid:363)(cid:3)(cid:382)(cid:305)(cid:386)(cid:294)(cid:305)(cid:363)(cid:398) Europe/Other markets North America South America Asia-Pacific % 30.1 % % 9.5 % % 6.7 % 53.7 % % i F U R T H E R I N F O R M A T I O N www.volkswagen.com m 26 Audi Divisions Audi set another sales record in 2017. The new generation of the Audi A8 is designed for highly automated driving. The “Audi AI” trademark will prospectively stand for autonomy, intelligence and innovation. B U S I N E S S D E V E L O P M E N T “Vorsprung” is an active brand promise that is delivered throughout the world, making Audi one of the most highly desired brands in the premium segment. In 2017, the brand with the four rings unveiled the new Audi A8. At the first Audi Summit, it also presented further technological milestones in cutting-edge fields such as sustainable production, lightweight construction, connectivity, automated driving and digital services. The fourth generation of the A8, Audi’s flagship, is rolling off the assembly line as the world’s first production model designed for highly automated driving. The “Audi AI” trademark will prospectively stand for autonomy, intelligence and innovation. The Audi of the future will use machine learning to continuously develop its capabilities, adapt to users’ individual needs and suggest services. This will make our customers’ lives easier and their journeys safer. In the 2017 fiscal year, the Audi brand set a new sales record, delivering 1.9 million vehicles (+0.6%). Sales increased in North America (+8.4%) and China (+1.1%), among other regions. Audi sold 1.5 (1.5) million vehicles in 2017. The Chinese joint venture FAW-Volkswagen sold a further 552 (536) thousand Audi vehicles. The Q2 and A5 models proved particularly popular with customers. Unit sales at Automobili Lamborghini S.p.A. amounted to 3,897 (3,465) vehicles. Audi produced 1.9 (1.9) million vehicles globally in the reporting year; this was 1.3% fewer than in the previous year. At Lamborghini, production of the Urus, the world’s first super sport utility vehicle, started in 2017. Lamborghini produced a total of 4,056 (3,579) vehicles in the reporting period. S A L E S R E V E N U E A N D E A R N I N G S At €60.1 billion, sales revenue for the Audi brand in 2017 exceeded the prior-year figure by €0.8 billion. At €5.1 (4.8) billion, operating profit before special items was higher than in the previous year. Product cost optimi- zation and improved price positioning had a positive effect. This was offset by, among other factors, higher depreciation and amortization charges connected with the expansion of the international model and technol- ogy portfolio as well as international production structures. The operating return on sales before special items amounted to 8.4 (8.2)%. The diesel issue gave rise to special items of €–0.4 (previous year’s total –1.8) billion. The financial key performance indicators for the Lamborghini and Ducati brands are included in the financial figures for the Audi brand. A8 Highly automated driving Divisions Audi 27 P R O D U C T I O N A U D I B R A N D Units Audi A4 A3 Q5 A6 Q3 A5 Q7 Q2 A1 TT A7 A8 R8 Q8/e-tron Lamborghini Huracán Coupé Aventador Coupé Huracán Spyder Aventador Roadster Urus 2017 2016 2017 2016 % 1,882 1,878 4 1,530 1,879 60,128 5,058 8.4 1,871 1,868 3 1,534 1,903 59,317 4,846 8.2 +0.6 +0.6 +10.4 –0.3 –1.2 +1.4 +4.4 325,307 313,380 289,959 259,618 205,006 119,595 106,515 102,084 95,346 22,174 16,968 15,854 3,179 368 Deliveries (thousand units) 357,999 361,983 Audi Lamborghini 297,750 Vehicle sales 276,211 Production 231,452 Sales revenue (€ million) Operating result before special items as % of sales revenue 65,117 103,344 19,419 105,252 26,886 26,308 24,179 3,688 – 1,875,353 1,899,588 1,822 1,008 827 278 121 4,056 1,315 587 1,104 573 – 3,579 Audi brand 1,879,409 1,903,167 A8 D E L I V E R I E S B Y M A R K E T (cid:339)(cid:363)(cid:3)(cid:382)(cid:305)(cid:386)(cid:294)(cid:305)(cid:363)(cid:398) Europe/Other markets North America South America Asia-Pacific % 48.4 % % 14.8 % % 1.2 % 35.6 % % i F U R T H E R I N F O R M A T I O N www.audi.com m 28 ŠKODA Divisions The ŠKODA brand continued its SUV initiative in fiscal year 2017 with the new Karoq. The model helped ŠKODA achieve a new sales record, with 1.2 million vehicles delivered. B U S I N E S S D E V E L O P M E N T Intelligent concepts and excellent value for money are the hallmarks of the successful ŠKODA brand. In line with its motto, “Simply Clever”, it combines future-oriented functionality with an impressive space concept that is technically simple but delivers sophisticated and practical features. ŠKODA celebrated the world premiere of the new Karoq in 2017, expanding the Czech brand’s range of SUV models. The robust, compact vehicle has been completely redeveloped with the emotional and dynamic features of ŠKODA’s new SUV design language. The vehicle offers exceptional spaciousness, new driver assistance systems, full-LED headlights and – for the first time in a ŠKODA – a freely programmable digital instrument panel. In addition, ŠKODA presented the Vision E concept car in 2017. The electric-powered concept vehicle enables highly automated driving and takes vehicle-driver connectivity to a new level. Worldwide, the ŠKODA brand delivered 1.2 million vehicles to customers in the reporting year (+6.6%), thereby achieving a new sales record. China, where deliveries increased by 2.5%, was once again the brand’s largest single market. Sales in Western Europe rose by 5.2%. They were up 13.3% in Central and Eastern Europe. ŠKODA’s unit sales rose year-on-year to 937 (814) thousand vehicles in 2017. The new Kodiaq met with a very positive reception in the market and had a major part in boosting unit sales. The difference between figures for deliveries and unit sales is mainly due to the fact that the vehicle-producing joint ventures in China are not attributed to ŠKODA brand companies. ŠKODA produced 1.2 (1.2) million vehicles worldwide across seven series in fiscal year 2017. At the end of September 2017, the plant in Kvasiny, Czech Republic, produced the 20 millionth vehicle since the brand was established. S A L E S R E V E N U E A N D E A R N I N G S The ŠKODA brand’s sales revenue increased by 20.8% year-on-year to €16.6 billion in the past fiscal year. Operating profit improved by 34.6% to €1.6 billion; the increase resulted above all from the higher volume and mix effects, with exchange rate effects having a positive and an increase in fixed costs a negative impact. Operating return on sales rose from the previous year’s 8.7% to 9.7%. 20 million Number of vehicles produced since the establishment of the brand Divisions ŠKODA 29 P R O D U C T I O N Š KO D A B R A N D Units Octavia Rapid Fabia Superb Kodiaq Karoq/Yeti Citigo 2017 2016 2017 2016 % 420,802 210,002 209,471 147,103 123,982 81,963 38,749 445,415 Deliveries (thousand units) 216,603 Vehicle sales 203,308 Production 148,880 Sales revenue (€ million) 1,167 Operating result 95,417 41,247 as % of sales revenue 1,232,072 1,152,037 1,201 937 1,232 16,559 1,611 9.7 1,126 814 1,152 13,705 1,197 8.7 +6.6 +15.2 +6.9 +20.8 +34.6 Karoq D E L I V E R I E S B Y M A R K E T (cid:339)(cid:363)(cid:3)(cid:382)(cid:305)(cid:386)(cid:294)(cid:305)(cid:363)(cid:398) Europe/Other markets North America South America Asia-Pacific % 70.4 % % 0.0 % % 0.1 % 29.5 % % i F U R T H E R I N F O R M A T I O N www.skoda-auto.com m 30 SEAT Divisions In addition to the fifth generation of the Ibiza, the SEAT brand also unveiled its compact Arona in the reporting year, expanding its range of SUVs. The previous year’s positive performance continued in impressive fashion in the results for 2017. B U S I N E S S D E V E L O P M E N T SEAT delivers solutions “Created in Barcelona” to make mobility easy. Having entered the SUV market for the first time in the previous year with the Ateca, the Spanish brand continued this path in fiscal year 2017, presenting a further model series in the form of the Arona. This marries the benefits of compact dimensions with the features of a crossover model and underscores the brand’s sporty and dynamic claim with its attractive design. It also boasts a wealth of driver assistance systems and impressive connectivity. Other models presented in 2017 included the limited-edition Leon CUPRA R and the new generation Ibiza. The Ibiza is the first model to be based on the Modular Transverse Toolkit and marks a decisive step into the future for the brand. SEAT increased its deliveries to customers by 14.6% in 2017 to 468 thousand vehicles. Almost all markets contributed to this rise, with the most significant increases achieved in Poland (+24.8%), Spain (+23.1%), the United Kingdom (+18.3%), France (+15.6%) and Germany (+13.4%). This made SEAT one of the fastest-growing brands in Europe. The Ibiza, Leon and Ateca models were particularly popular with customers, and the new Arona was positively received by the market. The SEAT brand sold 595 thousand units in the reporting period. This was 8.5% more than in the previous year. The Q3 produced for Audi is included in this figure. In 2017, SEAT produced 479 thousand vehicles, an increase of 14.9% year-on-year. S A L E S R E V E N U E A N D E A R N I N G S SEAT continued its upward trend in fiscal year 2017. At €9.9 billion, sales revenue exceeded the previous year’s record figure by 11.2%. Operating profit improved by 24.8% to €191 (153) million, another new record. Negative effects from cost increases were compensated for by the higher volume, positive mix effects and improved margins. The SEAT brand’s operating return on sales was 1.9 (1.7)%. 24.8% Increase in profit in 2017 Divisions SEAT 31 P R O D U C T I O N S E AT B R A N D Units Leon Ibiza Ateca Alhambra Arona Mii Toledo 2017 2016 2017 2016 % 163,306 160,377 77,483 33,638 17,527 13,825 13,146 479,302 163,228 Deliveries (thousand units) 149,988 Vehicle sales 35,833 31,214 Production Sales revenue (€ million) – Operating result as % of sales revenue 18,720 18,029 417,012 468 595 479 9,892 191 1.9 409 548 417 8,894 153 1.7 +14.6 +8.5 +14.9 +11.2 +24.8 Arona D E L I V E R I E S B Y M A R K E T (cid:339)(cid:363)(cid:3)(cid:382)(cid:305)(cid:386)(cid:294)(cid:305)(cid:363)(cid:398) Europe/Other markets North America South America Asia-Pacific % 94.5 % % 5.3 % % 0.2 % 0.0 % % i F U R T H E R I N F O R M A T I O N www.seat.com m 32 Bentley Divisions In 2017, Bentley celebrated the world premiere of the third generation of its best-selling Continental GT Coupé, which sets new standards in the luxury grand tourer segment. B U S I N E S S D E V E L O P M E N T The Bentley brand is defined by exclusivity, elegance and power. The third generation of the successful Continental GT debuted at the IAA in Frankfurt am Main in the reporting year. The vehicle sets new standards in the luxury grand tourer segment. Compared to its predecessor, it has a longer bonnet, a flatter front end and an extra-wide radiator grille. The exclusive interior features a virtual cockpit and a 12.3-inch foldaway touch- screen in the center console. The W12 engine puts an impressive 467 kW (635 PS) to the wheels. The Bentayga Diesel, launched in 2017, is the luxury brand’s first model to be equipped with a diesel engine. A hybrid version will follow in 2018, marking Bentley’s first step into the world of electric driving. Bentley delivered 11,089 (11,023) vehicles to customers in the reporting period, exceeding the previous year’s record figure. While deliveries declined by 6.8% in the USA, the brand’s largest single market, they rose by 15.7% in Asia-Pacific and 1.5% in Europe. At 10,566 (11,298) vehicles worldwide in 2017, the Bentley brand’s unit sales were lower than in the previous year; this was above all attributable to the new generation of the Continental GT Coupé. The highest demand was recorded for the Bentayga. Bentley produced 10,552 vehicles in 2017; the year-on-year decline of 10.7% was attributable to the produc- tion cycle. S A L E S R E V E N U E A N D E A R N I N G S Bentley recorded sales revenue of €1.8 billion in the past fiscal year, a decline of 9.2% compared to 2016. Operating profit declined to €55 (112) million; negative volume-, price- and mix-related effects were offset by positive exchange rate effects and lower expenses from the development of the model portfolio. The operating return on sales stood at 3.0 (5.5)%. 3rd generation Continental GT Coupé Divisions Bentley 33 P R O D U C T I O N B E N T L E Y B R A N D Units Bentayga Flying Spur Continental GT Convertible Continental GT Coupé Mulsanne 2017 2016 2017 2016 % 4,849 2,295 1,468 1,345 595 5,586 1,731 Deliveries (units) Vehicle sales 1,600 Production 2,272 Sales revenue (€ million) 628 Operating result 10,552 11,817 as % of sales revenue 11,089 10,566 10,552 1,843 55 3.0 11,023 11,298 11,817 2,031 112 5.5 +0.6 –6.5 –10.7 –9.2 –50.8 Continental GT D E L I V E R I E S B Y M A R K E T (cid:339)(cid:363)(cid:3)(cid:382)(cid:305)(cid:386)(cid:294)(cid:305)(cid:363)(cid:398) Europe/Other markets North America South America Asia-Pacific % 48.5 % % 23.6 % % 0.1 % 27.9 % % i F U R T H E R I N F O R M A T I O N www.bentleymotors.com m 34 Porsche Divisions The millionth Porsche 911 rolled off the production line in the past fiscal year. The sports car manufacturer entered a new segment with the Panamera Sport Turismo. The year brought new records in terms of unit sales, sales revenue and profit. B U S I N E S S D E V E L O P M E N T Exclusivity and social acceptance, innovation and tradition, performance and everyday usability, design and functionality – these are the brand values of sports car manufacturer Porsche. In 2017, Porsche put these values into practice in impressive form with the new generation of the Cayenne: the SUV has been completely redeveloped and embodies the typical Porsche attributes better than ever. Even though it comes with more standard features, the Cayenne is up to 65 kg lighter than its predecessor thanks to its lightweight construction. The Cayenne Turbo, the top-of-the-range model in the series, raises the bar for sporty performance in its segment even further. The car’s four-liter V8, twin-turbo engine puts out 404 kW (550 PS) of power, accelerating it from 0 to 100 km/h in 4.1 seconds. Porsche’s launch of the Sport Turismo, a new bodywork variant of the Panamera, has taken the brand into a new segment. The Sport Turismo uses all the technical and conceptual innovations featured in the Panamera series, which gained a second hybrid version in the reporting year with the 500 kW (680 PS) Panamera Turbo S E-Hybrid. In 2017, Porsche came first in the world’s toughest long- distance event in Le Mans for the third time in succession and also won the third consecutive championship title in the WEC world endurance championships. The Porsche brand delivered 246 thousand sports cars in the past fiscal year; this was 3.6% more than in the previous year. China remained the largest single market for Porsche with deliveries of 72 thousand vehicles (+9.6%). In North America, sales rose by 3.7%. At 248 thousand vehicles, Porsche’s unit sales exceeded the prior-year figure by 3.7% in 2017. Above all, the new Panamera saw marked sales growth. Porsche celebrated a special anniversary in 2017, when the millionth 911 rolled off the production line at the main plant in Zuffenhausen. In total, Porsche produced 256 thousand vehicles in the reporting year. This was 6.7% more than in 2016. S A L E S R E V E N U E A N D E A R N I N G S Starting January 1, 2017, Porsche’s financial services business is reported as part of Volkswagen Financial Services. The 2017 fiscal year was once again very successful for Porsche: Porsche Automotive’s sales revenue rose by 4.7% to €21.7 (20.7) billion. Operating profit improved by 7.2% to €4.0 billion; despite cost increases, the increase resulted particularly from the higher volume. The operating return on sales amounted to 18.5 (18.0)%. 1 million Porsche 911s produced Divisions Porsche 35 P R O D U C T I O N P O R S C H E A U TO M OT I V E 1 Units Macan Cayenne Panamera 911 Coupé/Cabriolet 718 Boxster/Cayman 2017 2016 98,763 59,068 37,605 33,820 26,427 97,177 Deliveries (thousand units) 71,693 Vehicle sales 14,218 Production 31,648 Sales revenue (€ million) 24,882 Operating result 255,683 239,618 as % of sales revenue 2017 246 248 256 21,674 4,003 18.5 20161 238 239 240 20,710 3,733 18.0 % +3.6 +3.7 +6.7 +4.7 +7.2 1 Porsche (Automotive and Financial Services): sales revenue €23,491 (22,318) million, operating profit €4,144 (3,877) million. Cayenne D E L I V E R I E S B Y M A R K E T (cid:339)(cid:363)(cid:3)(cid:382)(cid:305)(cid:386)(cid:294)(cid:305)(cid:363)(cid:398) Europe/Other markets North America South America Asia-Pacific % 35.3 % % 26.5 % % 1.0 % 37.2 % % i F U R T H E R I N F O R M A T I O N www.porsche.com e.com 36 Volkswagen Commercial Vehicles Divisions Volkswagen Commercial Vehicles continued to move towards emission-free urban mobility and logistics in fiscal year 2017; the e-Crafter is currently in the final stage of real-world testing. Deliveries and production hit new heights in the reporting year. B U S I N E S S D E V E L O P M E N T Volkswagen Commercial Vehicles stands for superior mobility with its three core values – reliability, profit- ability and partnership. The new Crafter celebrated a successful market launch in 2017. The vehicle has been completely redesigned based on customer requirements and offers customer-friendly functionality and practical, everyday solutions for the most diverse of transport needs in all areas of use. The e-Crafter, currently undergoing final real-world testing with major customers, is to be launched on the market in 2018, setting new standards for trade vehicles, municipal vehicle fleets and courier services in terms of emission-free urban logistics. The California XXL study also attracted attention in the reporting year. Based on the new Crafter and featuring a fixed, high panoramic roof, an extended rear end and user-friendly interior space, the concept demonstrates what a potential big brother for the California could look like in future. More than 15 thousand units of the current California, Europe’s most popular campervan, were produced in 2017; this was approxi- mately 20% more than in the previous record year 2016. Volkswagen Commercial Vehicles delivered 498 thousand vehicles in the past fiscal year, an increase of 4.2% compared with 2016. Sales in Europe rose 2.6%, while in South America they climbed by 28.1%. Volkswagen Commercial Vehicles sold 498 thousand vehicles in the reporting year, a rise of 4.1%. The Multi- van/Transporter and Caddy models were particularly popular. Production by the Volkswagen Commercial Vehicles brand increased by 16.0% in 2017 to 490 thousand vehicles. These figures include the Crafter, which is manufactured at the new plant in Wrzesnia, Poland. We also manufacture the Caddy and the T6 in Poland. The main plant in Hanover produces the Amarok, Caravelle/ Multivan and Transporter models. The Amarok is also produced in Argentina. S A L E S R E V E N U E A N D E A R N I N G S Volkswagen Commercial Vehicles generated sales revenue of €11.9 (11.1) billion in fiscal year 2017. Despite higher costs resulting from expansion of the production network, operating profit climbed 87.6% to €853 million due to margin, volume and exchange rate effects as well as product cost optimization. The operating return on sales improved considerably to 7.2 (4.1)%. 87.6% Increase in profit in 2017 Divisions Volkswagen Commercial Vehicles 37 P R O D U C T I O N V O L K SWA G E N C O M M E R C I A L V E H I C L E S B R A N D Units 2017 2016 2017 2016 % Caravelle/Multivan, Kombi 115,553 117,554 Deliveries (thousand units) Caddy Kombi Transporter Amarok Caddy Crafter 93,167 92,876 80,328 71,501 36,313 86,841 Vehicle sales 81,932 Production 63,367 Sales revenue (€ million) 11,909 11,120 71,757 Operating result 596 as % of sales revenue 853 7.2 455 4.1 498 498 490 478 478 422 +4.2 +4.1 +16.0 +7.1 +87.6 489,738 422,047 California D E L I V E R I E S B Y M A R K E T (cid:339)(cid:363)(cid:3)(cid:382)(cid:305)(cid:386)(cid:294)(cid:305)(cid:363)(cid:398) Europe/Other markets North America South America Asia-Pacific % 84.3 % % 2.1 % % 8.3 % 5.3 % % i F U R T H E R I N F O R M A T I O N www.volkswagen-commercial-vehicles.com 38 Volkswagen Truck & Bus Divisions VOLKSWAGEN TRUCK & BUS Volkswagen Truck & Bus made further steps in 2017 towards its strategic objective of becoming a global industry champion. It was helped by innovative cooperation projects between the Volkswagen Truck & Bus brands and the strategic alliance partner Navistar. (cid:18) (cid:115) (cid:101) (cid:53) (cid:75) (cid:31) (cid:101) (cid:101) (cid:3) (cid:26) (cid:31) (cid:126) (cid:31) (cid:68) (cid:81) (cid:93) (cid:73) (cid:31) (cid:75) (cid:109) (cid:3) Volkswagen Truck & Bus aims to become the industry’s global champion. Volkswagen Truck & Bus already leads the truck market in Europe and in Brazil. In the coming decade, we want to lead the industry in terms of profitability, innovation for our customers, employee satisfaction and global presence. Volkswagen Truck & Bus operates under the motto “Driving transportation to the next level”. The key to putting this into practice is to promote cooperation in research and development between the brands. An office coordinates the joint development activities across brands and countries and helps the brands get new technologies to market faster. An example is the joint e-Drivetrain platform being designed to revolutionize electric driving in the Group. Parts of the platform are to be used in various Volkswagen Truck & Bus vehicles, such as the electric-powered city buses from MAN and Scania. The first of these buses will be delivered to selected European cities in 2018, including Hamburg and Paris. Our alliance partner Navistar is also planning to use the joint e-Drivetrain platform. With the launch of the RIO platform at the end of 2017, Volkswagen Truck & Bus cemented its role as a digitalization pioneer. The cloud-based platform is also available to all other brands and new partners. Since January 2018, the RIO box has been available for retrofitting in all vehicles with a fleet management interface. RIO is thus also suited to mixed fleets containing vehicles of different brands. Since August 2017, every MAN truck delivered in Europe has been fitted with the RIO box with access to the RIO platform as a standard feature. Volkswagen Truck & Bus is already Europe’s market leader for networked trucks. Scania, Volkswagen Caminhões e Ônibus, Volkswagen Commercial Vehicles and the strategic partner Navistar are also planning to use the RIO platform in future. 211 thousand Vehicles produced Divisions Volkswagen Truck & Bus 39 P R O D U C T I O N D E L I V E R I E S Units Trucks Buses Light Commercial Vehicles 2017 2016 Units 2017 2016 188,234 19,217 3,891 211,342 167,354 Trucks 18,713 Buses – Light Commercial Vehicles 186,067 183,481 19,218 2,212 204,911 165,806 17,775 – 183,581 Strong brands D E L I V E R I E S B Y M A R K E T (cid:339)(cid:363)(cid:3)(cid:382)(cid:305)(cid:386)(cid:294)(cid:305)(cid:363)(cid:398) Europe/Other markets North America South America Asia-Pacific % 73.3 % % 1.5 % % 16.9 % 8.4 % % 40 Scania Divisions Scania expanded its new generation of trucks with vehicles for the construction industry in 2017. New solutions were also presented for sustainable transport in cities. B U S I N E S S D E V E L O P M E N T The Swedish brand Scania follows its values “Customer first”, “Respect for the individual”, “Elimination of waste”, “Determination”, “Team Spirit” and “Integrity”. Scania continued to introduce its new generation of trucks in the reporting year and presented a range of products and services with a special focus on the construc- tion industry. The vehicles are characterized by a robust design and meet the highest standards in respect of reliability and productivity. Scania also presented forward-looking solutions for low-emission transport in cities: the lighter trucks, powered by the new 7-liter range of engines, offer fuel savings of up to 10% for urban transport companies and take efficient transport to a new level. Further engine and cab options were also introduced in 2017, such as the new 13-liter gas-powered engine for long-distance transport and the latest generation of V8 engines. With the hybrid version of the Interlink Low Decker and the battery-powered Citywide Low Floor, Scania boosted its range of buses with alternative drive systems. Scania One, the new digital platform for connected services, enables fleet owners and drivers to access Scania’s connected services and optimize the coordination of their transport assignments. The Scania R 450 was voted “Green Truck of the Year” in a poll by industry magazines to crown the most environmentally friendly commercial vehicles. The key figures presented in this chapter encompass Scania’s truck and bus, industrial and marine engines and financial services businesses. Orders at the Scania brand were up 27.9% year-on-year to 109 thousand vehicles in fiscal year 2017. Scania’s leading position in Euro 6 engines, long experience with consumption-optimized vehicles and the wide range of alternative drive systems contributed to growing order books in Western Europe. Globally, Scania delivered 91 (81) thousand vehicles to customers. Sales in Europe were up year-on-year, and impressive increases were also recorded in Brazil. At 8 (8) thousand vehicles, deliveries of buses remained on a level with the previous year. Demand for services and replacement parts as well as for Scania Financial Services was again higher in 2017 than in the previous year. The Scania brand produced 96 (84) thousand commercial vehicles in the reporting period (+14.1%), including 8 (8) thousand buses. S A L E S R E V E N U E A N D E A R N I N G S Sales revenue at the Scania brand was up €1.5 billion year-on-year at €12.8 (11.3) billion. Operating profit (previous year’s figure excludes special items) improved to €1.3 (1.1) billion. This was due to higher vehicle sales and an expansion of the service business. In the reporting period, the operating return on sales (previous year’s figure excludes special items) amounted to 10.1 (9.5)%. €1.3 billion Operating profit for 2017 Divisions Scania 41 P R O D U C T I O N S C A N I A B R A N D Units Trucks Buses 2017 2016 2017 2016 % 87,454 8,327 95,781 75,452 8,488 83,940 Orders received (thousand units) Deliveries Vehicle sales Production Sales revenue (€ million) Operating result1 as % of sales revenue 1 In the previous year before special items. 109 91 92 96 12,789 1,289 10.1 86 81 83 84 11,303 1,072 9.5 +27.9 +11.6 +11.3 +14.1 +13.1 +20.3 R 650 D E L I V E R I E S B Y M A R K E T (cid:339)(cid:363)(cid:3)(cid:382)(cid:305)(cid:386)(cid:294)(cid:305)(cid:363)(cid:398) Europe/Other markets North America South America Asia-Pacific % 75.2 % % 0.9 % % 12.3 % 11.6 % % i F U R T H E R I N F O R M A T I O N www.scania.com om 42 MAN Divisions MAN successfully launched the MAN TGE van in the 2017 fiscal year and is now a comprehensive provider for all transport needs. The future program continued to have a positive impact. B U S I N E S S D E V E L O P M E N T Customer focus, enthusiasm for the product and efficiency are the core values at MAN. A new era began for MAN in 2017 with the market launch of the MAN TGE, the first light commercial vehicle from the long-established Munich-based brand. The MAN TGE is a response to high demand from logistics businesses, customer service providers and tradespeople, as well as from couriers, express and parcel delivery services. The vehicle turns MAN into a comprehensive solution provider for all transport needs. MAN also presented its e-Delivery: an electric-powered distribution truck for urban logistics. The vehicle ought to be manufactured in Brazil. The new Lion’s Coach also celebrated its premiere; optimized reinforcement enables it to meet the safety standards introduced in November 2017. The NEOPLAN Tourliner received the renowned iF product design award in the reporting period. In Power Engineering, MAN presented a new high-performance diesel engine for its 4x line. The 45/60CR will initially be available in 12V and 14V versions boasting power outputs of 15,600 kW and 18,200 kW respectively. In South America, MAN Commercial Vehicles recorded rising demand in fiscal year 2017 due to the improved economic environment. MAN also continued to expand in the European commercial vehicle market. Orders received increased by 13.9% in total to 120 thousand vehicles. Deliveries were up year-on-year at 114 (102) thou- sand commercial vehicles, including 11 (10) thousand buses. MAN produced 116 (102) thousand commercial vehicles in the reporting year, of which 11 (10) thousand were buses. Incoming orders in the Power Engineering Business Area increased by €3.7 (3.3) billion despite the con- tinued difficult situation in the shipping industry, economic difficulties in emerging markets and the low price of oil. S A L E S R E V E N U E A N D E A R N I N G S Sales revenue at MAN Commercial Vehicles rose by 10.8% year-on-year in 2017 to €11.1 billion. Operating profit (previous year’s figure excludes special items) improved to €362 (230) million due to volume and margin effects. The initiated future program had a further positive effect. The operating return on sales (previous year’s figure excludes special items) was 3.3 (2.3)%. Sales revenue in the power engineering segment fell to €3.3 (3.6) billion. In operating profit (previous year’s figure excludes special items), which amounted to €193 (194) million, negative volume effects were offset by improvements in the mix. The operating return on sales (previous year’s figure excludes special items) increased to 5.9 (5.4)%. 116 thousand Vehicles produced in 2017 Divisions MAN 43 P R O D U C T I O N M A N Units Trucks Buses Light Commercial Vehicles 2017 2016 2017 2016 % 100,780 10,890 3,891 115,561 91,902 Commercial Vehicles 10,225 – 102,127 Orders received (thousand units) Deliveries Vehicle sales Production Sales revenue (€ million) Operating result1 as % of sales revenue Power Engineering Sales revenue (€ million) Operating result1 as % of sales revenue 1 In the previous year before special items. 120 114 114 116 105 102 102 102 11,087 10,005 362 3.3 3,283 193 5.9 230 2.3 3,593 194 5.4 +13.9 +11.6 +11.6 +13.2 +10.8 +57.6 –8.6 –0.9 Lion’s Coach D E L I V E R I E S B Y M A R K E T (cid:339)(cid:363)(cid:3)(cid:382)(cid:305)(cid:386)(cid:294)(cid:305)(cid:363)(cid:398) Europe/Other markets North America South America Asia-Pacific % 71.7 % % 1.9 % % 20.5 % 5.8 % % i F U R T H E R I N F O R M A T I O N www.man.eu eu 44 Volkswagen Group China Divisions Volkswagen Group China Volkswagen systematically pushed ahead with its strategic realignment in China in 2017 and launched its SUV initiative. A new joint venture for e-mobility was initiated together with the manufacturer JAC. B U S I N E S S D E V E L O P M E N T The Volkswagen Group is shaping the path to tomorrow’s world of mobility in China, a key sales market: in presenting the concept vehicles Audi e-tron Sportback, ŠKODA VISION E and Volkswagen I.D. CROZZ at the Shanghai Auto Show, we underscored our ambitious goals for e-mobility and pushed ahead with our strategic realignment. The e-mobility strategy tailored to the Chinese market plans to gradually introduce approximately 40 new, locally produced plug-in hybrids and electric vehicles through our joint ventures in addition to existing and new import models. Our fully automated concept car, the Sedric, presented in China in the reporting year, gives an insight into the mobility of the future, which is also a focus area at the Future Center Asia. The Volkswagen Group also launched its SUV initiative in the 2017 fiscal year and introduced exciting models to the market: the Teramont, Tiguan L, ŠKODA Kodiaq and Audi Q7 e-tron. Volkswagen agreed on a new joint venture for e-mobility in China with the Chinese car manufacturer Anhui Jianghuai Automobile (JAC) in 2017. The two partners each have a 50% interest in the new company, which plans to develop, produce and sell electric vehicles. The agreement includes the construction of a further factory and a research and development center for this purpose. The partnership also comprises the development and production of components for New Energy Vehicles (NEV) as well as the enhancement of vehicle connectivity and automotive services. In future, we plan to export vehicles produced in China with our joint venture companies SAIC VOLKS- WAGEN and FAW-Volkswagen. Under the agreement concluded, models that have already proven their popularity and quality in China will also be offered in other markets. This will supplement our model range, initially for customers in the Philippines and later in other countries of Southeast Asia. We currently manufacture vehicles and components at 20 sites in China. Together with our joint venture partner, FAW, we are starting the production of environmentally friendly models at two new vehicle plants in Qingdao and Tianjin on the east coast of China in 2018. On the Chinese market, the Volkswagen Group offers more than 170 imported and locally produced models from the Volkswagen Passenger Cars, Audi, ŠKODA, Porsche, Bentley, Lamborghini, Volkswagen Commercial Vehicles, MAN, Scania and Ducati brands. We delivered 4.2 (4.0) million vehicles (including imports) to Chinese customers in the reporting period. The Tiguan, Teramont, Magotan, New Bora, Audi A4 L, Audi Q7, ŠKODA Kodiaq and Superb models as well as Porsche Cayenne and Panamera saw a particularly strong increase in demand compared with the previous year. 4.2 million Vehicles delivered in 2017 Divisions Volkswagen Group China 45 E A R N I N G S Thousand units 2017 2016 % € million 2017 2016 Deliveries Vehicle sales1 Production 1 Produced locally. 4,184 4,020 4,041 3,982 3,873 3,896 +5.1 +3.8 +3.7 Operating profit (100%) Operating profit (proportionate) 11,191 4,746 11,094 4,956 Our two joint ventures SAIC VOLKSWAGEN and FAW-Volks- wagen produced a total of 4.0 million vehicles in fiscal year 2017. This was 3.7% more than in the previous year. The joint ventures produce both established Group models and those specially modified for Chinese customers (e.g. with lengthened wheelbases), as well as vehicles developed exclusively for the Chinese market (such as the Volkswagen Lamando, Lavida, New Bora, New Jetta, New Santana and Teramont). Among other vehicles, the ŠKODA Kodiaq, Octavia Combi and Karoq and the upgraded Golf and Audi A3 entered production in the reporting year. The proportionate operating profit of the joint ventures in 2017 was €4.7 billion. The negative impact of more intense competition and adverse exchange rate effects was offset by the improvements in the mix, higher volumes and product cost optimization. The figures of the Chinese joint venture companies are not included in the operating profit of the Group as they are accounted for using the equity method. Their profits are included solely in the Group’s financial result on a propor- tionate basis. Audi Q3 L O C A L P R O D U C T I O N Units 2017 2016 Volkswagen Passenger Cars 3,156,352 3,012,664 Audi ŠKODA 552,744 332,168 555,777 327,858 4,041,264 3,896,299 46 Volkswagen Financial Services Divisions Volkswagen’s financial services were in global demand again in 2017 and made a major contribution to the Group’s good results. Euro-denominated corporate bonds were again issued in the primary market during the reporting period. ST R U C T U R E O F V O L K SWA G E N F I N A N C I A L S E R V I C E S Volkswagen Financial Services comprises dealer and customer financing, leasing, banking and insurance activi- ties, fleet management and mobility services in 51 countries. Volkswagen Financial Services AG is responsible for global coordination of the Group’s financial services activities, the only exceptions being the financial services business of the Scania brand and of Porsche Holding Salzburg. In Europe, the principal companies are Volkswagen Bank GmbH, Volkswagen Leasing GmbH and Volkswagen Versicherungsdienst GmbH. VW CREDIT, INC. operates financial services activities in North America. Volkswagen Financial Services initiated a corporate restructuring in 2016, with the aim of combining the credit and deposit business within the European Economic Area (EEA) in Volkswagen Bank GmbH. Effective September 1, 2017, 100% of the shares in Volkswagen Bank GmbH were therefore transferred from Volkswagen Financial Services AG to Volkswagen AG. B U S I N E S S D E V E L O P M E N T Volkswagen Financial Services impressed customers again in the 2017 fiscal year with diverse products, attrac- tive terms and an exceptional range of services. This led it to achieve a record result. The used-vehicle market is a strategic focus for Volkswagen Financial Services, and 2017 saw the launch of the new online used-vehicle platform HeyCar. Mobility Trader GmbH, a wholly owned subsidiary of Volkswagen Financial Services AG established for this purpose, is a quality portal for all automotive brands, not only those belonging to the Volkswagen Group. HeyCar puts vehicles and quality at its heart. The platform also enables dealers to tap potential earnings from additional sales. HeyCar is completely free of advertising and purchased listings. Volkswagen Financial Services is driving the further digitalization of its business and will perform all payment service activities for the Volkswagen Group in the future. To establish, expand and operate these services (payment for parking tickets, car sharing, electric charging, fuel and road tolls) around the world, Volks- wagen Financial Services has founded a new, independent company in Luxembourg. In addition, Volkswagen Financial Services has acquired the Munich-based start-up ContoWorks GmbH, which provides an integrated platform for payment services. €2.5 billion Operating profit in 2017 Divisions Volkswagen Financial Services 47 The main refinancing sources for Volkswagen Financial Services are money and capital market instruments, asset-backed securities (ABS) transactions and customer deposits from the direct banking business. In the reporting period, Volkswagen Leasing GmbH successfully returned to the primary market for euro- denominated corporate bonds. On the capital market, it placed two floating-rate bonds with terms of two and four years, as well as a fixed-rate bond with a term of seven and a half years. The total volume was €3.5 billion, making this the largest transaction by Volkswagen Financial Services to date. In addition, two bonds with a total volume of €2.25 billion were placed over the remainder of the year. Volkswagen Bank GmbH conducted its third euro benchmark issue with three bonds and a total volume of €2.0 billion. Numerous transactions were also successfully placed internationally. The second bond issued by Volks- wagen Finance (China) Co., Ltd. in China has an issue volume of CNY 4 billion (approximately €534 million). In Brazil, the local company Banco Volkswagen S.A. issued a bond with a volume of BRL 500 million, which trans- lates to approximately €134 million. Volkswagen Financial Services Australia Pty Limited placed a bond with a volume of AUD 500 million (€339 million) and two bonds with a total volume of AUD 325 million (approximately €217 million). In the United Kingdom, bonds for GBP 850 million (approximately €1 billion) and GBP 300 million (approximately €340 million) were issued by Volkswagen Financial Services N.V. Other bonds were placed in Sweden, Norway, India, Mexico and Turkey. Volkswagen Financial Services AG successfully issued a borrower’s note loan in 2017 with a total volume of approximately €900 million, of which more than 500 million was in US dollars and the remainder in euros. The terms were three, five and seven years. Volkswagen Leasing GmbH was active on the market again in fiscal year 2017 with its asset-backed securi- ties (ABS) transactions. German leasing receivables with a volume of approximately €1.6 billion were securitized in the “Volkswagen Car Lease 25” program. Outside Germany, Volkswagen Financial Services issued various ABS transactions on the market, including in Australia, the United Kingdom, France and China. A total of eight bonds were placed. Other instruments used as part of the diversified funding strategy are customer deposits, commercial paper and credit lines. Hey Car 48 Volkswagen Financial Services Divisions Starting January 1, 2017, Porsche’s financial services business is reported as part of Volkswagen Financial Services. At 6.8 million contracts, the number of new financing, leasing, service and insurance contracts signed in the reporting period was 3.4% higher than in the previous year. The total number of contracts as of December 31, 2017 stood at a new record high of 17.2 million (+6.8%). The customer financing/leasing area accounted for 9.6 million contracts, up 7.6% year-on-year. In the Service/Insurance area, the number of contracts increased by 5.9% to 7.6 million. With credit eligibility criteria remaining unchanged, the penetration rate, expressed as the ratio of financed or leased vehicles to relevant Group delivery volumes – including the Chinese joint ventures – was steady at 33.1 (33.1)%. At the end of the reporting period, Volkswagen Bank managed 1.5 (1.6) million deposit accounts. Volks- wagen Financial Services employed 13,955 people worldwide as of December 31, 2017, 6,809 of them in Germany. S A L E S R E V E N U E A N D E A R N I N G S In the 2017 fiscal year, Volkswagen Financial Services generated sales revenue €31.8 billion, 15.5% more than in the previous year. At €2.5 billion, operating profit exceeded the previous year’s figure by 16.9%, hitting a new record. In addition to Porsche Financial Services, the increase resulted, above all, from improved margins and business growth. V O L K SWA G E N F I N A N C I A L S E R V I C E S Number of contracts Customer financing1 Leasing1 Service/Insurance Lease assets Receivables from Customer financing1 Dealer financing Leasing agreements1 Direct banking deposits Total assets Equity Liabilities2 Equity ratio Return on equity before tax3 Leverage4 Operating result Earnings before tax Employees at Dec. 31 2017 2016 % thousands € million € million € million € million € million € million % % € million € million 17,234 5,672 3,921 7,641 36,422 58,125 19,614 39,553 30,408 186,917 25,634 154,410 13.7 9.8 6.0 2,460 2,299 13,955 16,133 5,421 3,494 7,218 31,593 55,298 17,921 34,902 32,412 170,070 21,178 141,830 12.5 10.4 6.7 2,105 2,073 13,406 +6.8 +4.6 +12.2 +5.9 +15.3 +5.1 +9.4 +13.3 –6.2 +9.9 +21.0 +8.9 +16.9 +10.9 +4.1 1 Prior year adjusted, as some of the receivables from customers are now presented as lease receivables. 2 Excluding provisions and deferred tax liabilities. 3 Earnings before tax as a percentage of average equity (continuing operations). 4 Liabilities as a percentage of equity. A D D I T I O N A L I N F O R M AT I O N www.vwfsag.com T R O P E R T N E M E G A N A M P U O R G 3 Group Management Report (Combined Management Repo r t o f t h e Vo l kswa gen Gro u p a nd Vo l kswa ge n AG) GROUP MANAGEMENT REPORT 51 Goals and Strategies 54 Internal Management System and Key Performance Indicators 56 Structure and Business Activities 59 Corporate Governance Report 67 Remuneration Report 84 Executive Bodies 88 Disclosures Required Under Takeover Law 91 Diesel Issue 95 Business Development 108 Shares and Bonds 114 Results of Operations, Financial Position and Net Assets 130 Volkswagen AG (condensed, in accordance with the German Commercial Code) 134 Sustainable Value Enhancement 157 Report on Expected Developments 164 Report on Risks and Opportunities 190 Prospects for 2018 Group Management Report Goals and Strategies 51 Goals and Strategies(cid:3) We are striving for lasting success in tomorrow’s world of mobility and intend to be one of the world’s leading providers of sustainable mobility. This is the reason we have anchored the future program TOGETHER – Strategy 2025 in the Group. The future program TOGETHER – Strategy 2025, the biggest change process in the history of Volkswagen, was launched in 2016. With the future program, we are making the Volks- F U T U R E P R O G R A M T O G E T H E R – S T R A T E G Y 2 0 2 5 Excited customers Excellent employer Sustainable growth Competitive profitability Role model for environment, safety and integrity wagen Group more focused, efficient, innovative, customer- oriented and sustainable, and more systematically geared to generating profitable growth. The program creates the framework and lays the cornerstones for us to achieve our vision of being one of the world’s leading providers of sus- tainable mobility. The time horizon until 2025 shows that our thoughts and actions are long-term and future-oriented. The term TOGETHER describes the mindset that will be even more vital to the Volkswagen Group’s long-term success going forward. Our intention with the new Group strategy is for everyone in the Volkswagen Group to join us in producing exciting vehi- cles and forward-looking, tailor-made mobility solutions that will continue to inspire our customers, meeting their diverse needs with a portfolio of strong brands. Every day, we actively assume and exercise responsibility in relation to the environ- ment, society and safety, and we wish to be a role model in these areas. Integrity, reliability, quality and passion thus form the basis for our work. In this way, we will aim for technological leadership in the industry, ensure our com- petitive profitability and remain an excellent, reliable and secure employer at the same time. The Code of Collaboration formulated as part of the future program is the foundation on which the Group strategy rests. This Code describes how collaboration is to take place within the Group and between individuals in their day-to-day work. Its core values are encapsulated in the terms “genuine”, “straightforward”, “open-minded”, “as equals” and “united”. 52 Goals and Strategies Group Management Report F O U R B U I L D I N G B LO C K S O F T H E F U T U R E P R O G R A M TO G E T H E R – ST R AT E GY 2 0 2 5 Our Group strategy comprises a raft of far-reaching strategic decisions and specific initiatives essentially aimed at safe- guarding the Group’s long-term future and generating profit- able growth. It is composed of four building blocks which cover a total of 16 strategic Group initiatives. The first of these is the transformation of the core auto- motive business. Developing, building and selling vehicles will remain essential for the Volkswagen Group going for- ward. However, there will be far-reaching and lasting changes to this business in the future. That is the reason why we are comprehensively restructuring our core business to face this new era of mobility. The second key building block in our Group strategy is establishing a new mobility solutions business. In this busi- ness, we are developing innovative and efficient, attractive yet profitable mobility services that are tailored to customer requirements with the goal of being one of the leading providers in this growth market in the future. With the third key building block, we are intensifying our traditionally excellent innovative strength and placing it on an even broader footing. This is necessary both for the transformation of our core business and for the establish- ment of the new mobility solutions business. To this end, we are pushing ahead with the digital transformation in all parts of the Company. Becoming one of the world’s leading providers of sustainable mobility calls for substantial capital expenditure. B U I L D I N G B L O C K S A N D S T R A T E G I C G R O U P I N I T I A T I V E S This will be financed in particular through efficiency gains along the entire value chain – from product development and procurement through to production and distribution as well as in the central supporting areas. Additional funds for future investments can also be generated by optimizing the existing portfolio of brands and equity investments. Through the fourth key building block of the Group strategy we will safeguard the financing of the Volkswagen Group and place it on a solid basis. G OA L S A N D K E Y P E R F O R M A N C E I N D I C ATO R S O F T H E G R O U P ’ S ST RAT E GY The strategic initiatives describe how we intend to achieve our vision of being one of the world’s leading providers of sustainable mobility. For this purpose, we have defined four target dimensions – excited customers, excellent employer, role model for the environment, safety and integrity, and competitive profitability – which are designed to help us grow sustainably. Although these target dimensions apply throughout the Group, the strategic KPIs that we will use in the future to measure how well we have implemented our Group strategy, depend on the business model. After all, the business model for our passenger car-producing brands is different from that for trucks and buses and also from that of our Power Engineering Business Area and our services business. T R A N S F O R M C O R E B U S I N E S S · Sharpen positioning of brands · Develop successful vehicle and drivetrain portfolio · Partner with regional players to win in economy segment · Streamline modular toolkits · Implement model line organization · Realign “Components” business · Develop battery technology as new core competency · Develop self-driving system for autonomous vehicles and artificial intelligence · Develop best-in-class user experience across brands and customer touchpoints S T R E N G T H E N I N N O V A T I O N P O W E R · Drive digital transformation · Create organization 4.0 B U I L D M O B I L I T Y S O L U T I O N S B U S I N E S S · Establish mobility solutions business · Develop and expand attractive and profitable smart mobility offering S E C U R E F U N D I N G · Improve operational excellence · Optimize business portfolio · Integrate strategy and planning process Group Management Report Goals and Strategies 53 In the following, we describe the Group’s strategic goals attached to these target dimensions. The strategic KPIs of the competitive profitability target dimension have been defined and anchored uniformly in the Group. As the new Group strategy has yet to be specified in detail, the content of some strategic KPIs in the other target dimensions is still being determined. We report on the already defined nonfinancial strategic KPIs in the “Corporate Governance Report” and “Sustainable Value Enhancement” sections. Target dimension: excited customers This target dimension focuses on the diverse needs of our customers and on tailor-made mobility solutions. We aspire to exceed our customers’ expectations, generating maximum benefit for them. That calls not only for the best products, the most efficient solutions and the best service, but also for flawless quality and an outstanding image. We want to excite our existing customers, win over new ones and retain their loyalty in the long term – because only loyal and faithful customers will recommend us to others. our innovations and outstanding quality, we aim for maxi- mum product safety. The most important principles in this process include compliance with laws and regulations, the establishment of secure processes, and dealing openly with mistakes so that they can be avoided or rectified in the future. In terms of integrity, Volkswagen aims to become a role model for a modern, transparent and successful enterprise. The strategic KPIs of this target dimension include the decarbonization index and KPIs pertaining to emissions figures, compliance, process reliability and a culture of dealing openly with mistakes. Target dimension: competitive profitability Investors judge us by whether we are able to meet our obli- gations as regards interest payments and debt repayments. As equity holders, they expect appropriate dividends and a long-term increase in the value of their shares. We make investments with a view to achieving profitable growth and strengthening our competitiveness, thus keeping the Volkswagen Group on a firm footing and ensuring it remains an attractive investment option. The strategic KPIs consist of the net promoter score, the conquest rate and KPIs pertaining to loyalty, customer satis- faction and quality. The goals we have set ourselves are operational excellence in all business processes and becoming the benchmark for the entire industry. Target dimension: excellent employer Skilled and dedicated employees are one of the keys to sus- tainable success. We wish to promote their satisfaction and motivation by means of equal opportunities, an attractive and modern working environment, and a forward-looking organization of work. Exemplary leadership and corporate culture forms the foundation for this, enabling us to retain our core workforce and attract new talent. The strategic KPIs of this target dimension cover internal employer attractiveness determined by means of the opinion survey, external employer attractiveness, an external employer ranking as well as a KPI pertaining to cross-brand exchange and rotation and the diversity index. Target dimension: role model for the environment, safety and integrity Every day, we at the Volkswagen Group assume and exercise responsibility in relation to the environment, safety and soci- ety. This is reflected in our thoughts and actions and in all our decisions in equal measure. We pay particular attention to the use of resources and the emissions of our product portfolio as well as those of our sites and plants, with the goal of continuously improving our carbon footprint and lowering pollutant emissions. Through The strategic KPIs are operationalized for internal manage- ment purposes: target and actual data are derived from Volks- wagen Group figures. ST R AT E G I C K P I S : CO M P E T I T I V E P R O F I TA B I L I T Y Operating return on sales1 Research and development ratio (R&D ratio) in the Automotive Division Capex/sales revenue in the Automotive Division 2015 6.0% 7.4% 6.9% 2025 7 to 8% ~6% ~6% Net cash flow in the Automotive Division €8,887 million Net liquidity in the Automotive Division €24,522 million, 11.5% Positive, to allow a distribution ratio of 30% ~10% of consolidated sales revenue Return on investment (ROI) in the Automotive Division – 0.2% >15% 1 2015 before special items 54 Internal Management System and Key Performance Indicators Group Management Report Internal Management System and Key Performance Indicators This chapter describes, on the basis of the Group strategy, how the Volkswagen Group is managed and the key performance indicators used for this purpose. In addition to financial measures, our management system also contains nonfinancial key performance indicators. The Volkswagen Group’s performance and success can be measured by both financial and nonfinancial key perfor- mance indicators. With the operational excellence Group initiative, we aim to improve these indicators throughout all areas and along the entire value chain. In the following, we first describe the internal manage- ment process and then explain the Volkswagen Group’s core performance indicators. I N T E R N A L M A N A G E M E N T P R O C E S S I N T H E VO L K SWA G E N G R O U P The “Integrate strategy and planning process” Group initia- tive is focused on continuity and even closer dovetailing of the Group and brand strategies with the operational planning process. This enhances transparency when it comes to the financial assessment and the evaluation of directional deci- sions. The operational planning that is conducted once a year and generally covers a period of five years is incorporated into the strategic planning as a key management element of the Group. Medium-term planning forms the core of our operational planning and is used to formulate and safeguard the require- ments for realizing strategic projects designed to meet Group targets in both technical and economic terms – and partic- ularly in relation to earnings, cash flow and liquidity effects. In addition, it is used to coordinate all business areas with respect to the strategic action areas concerned: functions/ processes, products and markets. When planning the Company’s future, the individual planning components are determined on the basis of the timescale involved: > the long-term unit sales plan, which sets out market and segment growth and then derives the Volkswagen Group’s delivery volumes from them, > the product program as the strategic, long-term factor determining corporate policy, > capacity and utilization planning for the individual sites. The coordinated results of the upstream planning processes are used as the basis for the medium-term financial planning: the Group’s financial planning, including the brands and business fields, comprises the income statement, cash flow and balance sheet planning, profitability and liquidity, as well as the upfront investments needed for alternative products and the implementation of strategic options. The first year of the medium-term planning period is fixed and a budget drawn up for the individual months. This is planned in detail down to the level of the operating cost centers. The budget is reviewed each month throughout the year to establish the degree to which the targets have been met. Key internal management instruments comprise target/ actual comparisons, prior-year comparisons, variance analyses and, where necessary, action plans to ensure targets are met. For the current fiscal year, detailed revolving monthly fore- casts are prepared for the coming three months and the full year, taking into account the current risks and opportunities. The focus of intrayear internal management is therefore on adapting ongoing operations. At the same time, the current forecast serves as a potential, ongoing corrective to the medium-term and budget planning that follows on from it. Group Management Report Internal Management System and Key Performance Indicators 55 COR E P E R F O R M A N C E I N D I C ATOR S I N T H E VO L KSWAG E N G R O U P The Volkswagen Group’s internal management system is based on nine core performance indicators, which are derived from our strategic goals. Two of these indicators were added in fiscal year 2017 under the future program TOGETHER – Strategy 2025: > Deliveries to customers > Sales revenue > Operating result > Operating return on sales > Research and development ratio (R&D ratio) in the Auto- motive Division (from 2017) > Capex/sales revenue in the Automotive Division > Net cash flow in the Automotive Division > Net liquidity in the Automotive Division (from 2017) > Return on investment (ROI) in the Automotive Division Deliveries to customers are defined as handovers of new vehi- cles to the end customer. This figure shows the popularity of our products and is the measure we use to determine our competitive position in various markets. Deliveries are closely related to our targets of exciting our customers, being a role model in terms of the environment, safety and integrity, and being an excellent employer. One of the most important prerequisites for the Company’s long-term success is a strong brand portfolio that – on the basis of outstanding quality – offers tailor-made mobility solutions with safe, resource-efficient vehicles, thus meeting the diverse needs of customers. Demand for our products guarantees not only unit sales and production, but also full utilization of our sites and the jobs of our employees. The goals we are striving for cannot be achieved without a skilled, dedicated workforce and a consensus on shared values. Sales revenue, which does not include the figures for our equity-accounted Chinese joint ventures, reflects our market success in financial terms. Following adjustment for our use of resources, the operating result reflects the Company’s actual business activity and documents the economic success of our core business. The operating return on sales is the ratio of the operating result to sales revenue. The research and development ratio (R&D ratio) in the Automotive Division shows total research and development costs in relation to sales revenue. Research and development costs comprise a range of expenses, from futurology through to the development of marketable products. Particular empha- sis is placed on the environmentally friendly orientation of our product portfolio. The R&D ratio underscores the efforts made to ensure the Company’s future viability: the goal of competitive profitability geared to sustainable growth. investment property and The ratio of capex (investments in property, plant and equipment, intangible assets, excluding capitalized development costs) to sales revenue in the Automotive Division reflects both our innovative power and our future competitiveness. It shows our capital expen- diture – largely for modernizing and expanding our product range and for environmentally friendly drivetrains, as well as for adjusting the production capacity and improving pro- duction processes – in relation to the Automotive Division’s sales revenue. Net cash flow in the Automotive Division represents the excess funds from operating activities available for dividend payments, for example. It is calculated as cash flows from operating activities less cash flows from investing activities attributable to operating activities. Net liquidity in the Automotive Division is the total of cash, cash equivalents, securities, loans and time deposits not financed by third-party borrowings. To safeguard our busi- ness activities, we have formulated the strategic target that net liquidity in the Automotive Division should amount to approximately 10% of the consolidated sales revenue. We use the return on investment (ROI) to calculate the return on invested capital for a particular period in the Auto- motive Division, including the Chinese joint ventures on a proportionate basis, by calculating the ratio of the operating result after tax to average invested capital. If the return on investment (ROI) exceeds the market cost of capital, the value of the Company has increased. This is how we measure the financial success of our brands, locations and vehicle projects. You can find information on and explanations of the sales figures and the Volkswagen Group’s financial key perfor- mance indicators on pages 101 to 107 and on pages 114 to 129, respectively. Detailed descriptions of our activities and additional nonfinancial key performance indicators in the areas of sus- tainability, research and development, procurement, produc- tion, sales and marketing, quality assurance, employees, information technology and the environment can be found in the chapter entitled “Sustainable Value Enhancement” beginning on page 134 of this annual report. Nonfinancial key performance indicators related to compliance are described in the “Corporate Governance Report” on page 65. 56 Structure and Business Activities Group Management Report Structure and Business Activities This chapter describes the legal and organizational structure of the Volkswagen Group and explains the material changes in 2017 with respect to equity investments. O U T L I N E O F T H E L E G A L ST R U C T U R E O F T H E G R O U P Volkswagen AG is the parent company of the Volkswagen Group. It develops vehicles and components for the Group’s brands, but also produces and sells vehicles, in particular passenger cars and light commercial vehicles for the Volks- wagen Passenger Cars and Volkswagen Commercial Vehicles brands. In its capacity as parent company, Volkswagen AG holds indirect or direct interests in AUDI AG, SEAT S.A., ŠKODA AUTO a.s., Dr. Ing. h.c. F. Porsche AG, Scania AB, MAN SE, Volks- wagen Financial Services AG, Volkswagen Bank GmbH and a large number of other companies in Germany and abroad. More detailed disclosures are contained in the list of share- holdings in accordance with sections 285 and 313 of the Handelsgesetzbuch (HGB – German Commercial Code), which can be accessed at www.volkswagenag.com/ir and is part of the annual financial statements. Volkswagen AG is a vertically integrated energy supply company as defined by section 3 no. 38 of the Energiewirt- schaftsgesetz (EnWG – German Energy Industry Act) and is therefore subject to the provisions of the EnWG. In the elec- tricity sector, Volkswagen AG generates, sells and distributes electricity together with a Group subsidiary. Volkswagen AG’s Board of Management is the ultimate body responsible for managing the Group. The Supervisory Board appoints, monitors and advises the Board of Manage- ment; it is consulted directly on decisions that are of funda- mental significance for the Company. O R G A N I Z AT I O N A L ST R U C T U R E O F T H E G R O U P The Volkswagen Group is one of the leading multibrand groups in the automotive industry. The Company’s business activi- ties comprise the Automotive and Financial Services divi- sions. All brands within the Automotive Division – with the exception of the Volkswagen Passenger Cars and Volkswagen Commercial Vehicles brands – are independent legal entities. The Automotive Division comprises the Passenger Cars, Commercial Vehicles and Power Engineering business areas. The Passenger Cars Business Area essentially consolidates the Volkswagen Group’s passenger car brands. Activities focus on the development of vehicles and engines, the production and sale of passenger cars, and the genuine parts business. The product portfolio ranges from fuel-efficient compact cars to luxury vehicles and also includes motorcycles, and will gradually be supplemented by mobility solutions. The Commercial Vehicles Business Area primarily com- prises the development, production and sale of light com- mercial vehicles, trucks and buses from the Volkswagen Commercial Vehicles, Scania and MAN brands, the corre- sponding genuine parts business and related services. The collaboration between the MAN and Scania commercial vehi- cle brands is managed and coordinated under the umbrella of Volkswagen Truck & Bus GmbH. The commercial vehicles portfolio ranges from pickups to heavy trucks and buses. The Power Engineering Business Area combines the large- bore diesel engines, turbomachinery, special gear units, pro- pulsion components and testing systems businesses. The activities of the Financial Services Division comprise dealer and customer financing, vehicle leasing, banking and insurance activities, as well as fleet management and mobil- ity offerings. With its brands, the Volkswagen Group is present in all relevant markets around the world. The Group’s key sales markets currently include Western Europe, China, the USA, Brazil and Mexico. Volkswagen AG and the Volkswagen Group are managed by the Volkswagen AG’s Board of Management in accordance with the Volkswagen AG Articles of Association and the rules of procedure for Volkswagen AG’s Board of Management issued by the Supervisory Board. Group Management Report Structure and Business Activities 57 Each brand in the Volkswagen Group is managed by a board of management, which ensures its independent and self- contained development and business operations. The Group targets and requirements laid down by the Board of Manage- ment of Volkswagen AG must be complied with to the extent permitted by law. This allows Group-wide interests to be pursued, while at the same time safeguarding and reinforcing each brand’s specific characteristics. Matters that are of importance to the Group as a whole are submitted to the Group Board of Management in order to reach agreement between the parties involved, to the extent permitted by law. The rights and obligations of the statutory bodies of the relevant brand company remain unaffected. The companies of the Volkswagen Group are managed separately by their respective managements. In addition to the interests of their own companies, the management of each individual company takes into account the interests of the Group and of the individual brands in accordance with the framework laid down by law. At Group level, committees also address key strategic issues, for example relating to product planning, investments and management issues. To continue to enhance the Group’s leadership and man- agement model, we redesigned the portfolio of these com- mittees and the regulation landscape at Group level in the reporting period. Among other things, a Committee for Digital Transformation was created and the Committee for Liquidity and Foreign Currency was replaced by the Group Board of Management Committee for Risk Management. These changes have reduced complexity and reinforced governance within the Group. In addition, the Group functions have continued to focus on leveraging substantial synergies across all brands and business fields, pooling com- petencies and making these available to the brands. Operational fine-tuning at Group level has also been reduced further and, at the same time, greater entrepre- neurial responsibility assigned to the brands and regions, making the Group more agile and speeding up decision- making processes. The Group Board of Management can concentrate more on strategy and the management of major areas in which synergies can be created, for example joint creation of a digitalization architecture, brand positioning, product strategy, development and use of platforms and modules, procurement and plant capacity utilization. With our future program TOGETHER – Strategy 2025, the Organization 4.0 Group initiative also supports the Com- pany’s transformation and is making the Group’s organi- zation fit for the future. The aim of this initiative is to connect activities across divisions, initiate new organizational approaches and anchor these in the Group for the long term. This will not only enable but will actively create holistic stimulus for innovations, entrepreneurship and change, ensuring that the Group remains agile and competitive in future. M AT E R I A L C H A N G E S I N E Q U I T Y I N V E STM E N T S The control and profit and loss transfer agreement between MAN SE, as the controlled company, and Volkswagen Truck & Bus GmbH, a wholly owned subsidiary of Volks- wagen AG, as the controlling company, came into force upon its entry in the commercial register on July 16, 2013. The conclusion of the control and profit and loss transfer agree- ment replaced the group based on the de facto exercise of management control by a contractual group, permitting considerably more efficient and less bureaucratic cooper- ation between the MAN Group and the rest of the Volkswagen Group. Noncontrolling interest shareholders of MAN SE have the right to tender MAN ordinary and preferred shares in Volkswagen Truck & Bus GmbH during and two months after the conclusion of the award proceedings instituted in July 2013 to review the appropriateness of the cash settlement set out in the agreement in accordance with section 305 of the Aktiengesetz (AktG – German Stock Corporation Act) and the cash compensation in accordance with section 304 of the AktG. The Munich Regional Court ruled in the first instance at the end of July 2015 that the settlement payable to the shareholders should be increased from €80.89 to €90.29 per share. Both Volkswagen Truck & Bus GmbH and a number of the noncontrolling interest shareholders have appealed to the Higher Regional Court in Munich. At the end of December 2017, Volkswagen Truck & Bus GmbH held 75.73% of the ordi- nary shares and 46.95% of the preferred shares of MAN SE. At the beginning of September 2016, Volkswagen Truck & Bus GmbH, a wholly owned subsidiary of Volkswagen AG, and the US-based commercial vehicle manufacturer Navistar International Corporation (Navistar), announced that they had signed an agreement to forge a wide-ranging alliance. The transaction was closed on February 28, 2017. Volkswagen Truck & Bus acquired 16.6% of the shares in Navistar through a capital increase. The interest held was increased to 16.9% by the end of 2017. Navistar is a holding company whose sub- sidiaries produce trucks, coaches, commercial and school buses, diesel engines and service parts. The alliance includes framework agreements for a strategic technology and supply cooperation and for the joint venture Global Truck & Bus Procurement LLC, based in Lisle (Illinois), which will pursue joint global procurement opportunities. The partnership will focus on developing common powertrain systems, but may 58 Structure and Business Activities Group Management Report also entail collaboration in other areas of commercial vehicle development and procurement. Opportunities to cooperate in the fields of autonomous driving, alternative fuel technol- ogies and connectivity will also be examined. The aim is to jointly create new synergies and to achieve greater indepen- dence from the cycles in the industry. Part of the PGA Group SAS, Paris, France, was sold by POFIN Financial Services Verwaltungs GmbH, Freilassing, to the Emil Frey Group on June 1, 2017. The sale is in connection with the strategic development of Porsche Holding Salzburg’s dealer network and the corresponding focus on dealerships exclusively selling Volkswagen Group brand vehicles. The transaction encompasses dealerships in Poland, the Nether- lands, Belgium and in some cases also in France. With the “Optimize business portfolio” Group initiative, the Board of Management intends to ensure the Volkswagen Group’s competitiveness and financial performance as a forward-looking mobility provider by focusing on its core business and using its capital to the best advantage. To this end, we are continuously monitoring and analyzing our portfolio and can respond in a timely manner by making any necessary purchases or sales. L E G A L F A C TO R S I N F L U E N C I N G B U S I N E S S Like other international companies, Volkswagen companies are affected by numerous laws in Germany and abroad. In particular, there are legal requirements relating to develop- ment, products, production and distribution, as well as, among other things, to supervisory, data protection, finan- cial, company, commercial, capital market, anti-trust and tax regulations and regulations relating to labor, banking, state aid, energy, environmental and insurance law. VO L KSWAG E N A G S H A R E H O L D I N G S www.volkswagenag.com/ir Group Management Report Corporate Governance Report 59 Corporate Governance Report Corporate governance is defined as responsible, transparent corporate management and supervision that aims to add long-term value. For us, good corporate governance not only forms the basis for lasting success; it is also an important prerequisite for strengthening the trust of our stakeholders in our work. T H E G E R M A N CO R P O R AT E G OV E R N A N C E CO D E – A B L U E P R I N T F O R S U CC E S S F U L CO R P O R AT E G OV E R N A N C E Corporate governance provides the regulatory framework for corporate management and supervision. This includes a company’s organization and values, and the principles and guidelines for its business policy. The German Corporate Governance Code (the Code) contains recommendations and suggestions for sound, responsible corporate management and supervision. It was prepared by a dedicated government commission on the basis of the material provisions and nationally and internationally accepted standards of corpo- rate governance. The government commission regularly reviews the Code in light of current developments and updates it as necessary. The Board of Management and the Supervisory Board of Volkswagen AG base their work on the recommendations and suggestions of the German Corporate Governance Code. We consider good corporate governance to be a key prerequisite for achieving a lasting increase in the Company’s value. It helps strengthen the trust of our share- holders, customers, employees, business partners and investors in our work and meet the steadily increasing demand for information from national and international stakeholders. D E C L A R AT I O N S O F CO N F O R M I T Y ( VA L I D A S O F T H E DAT E O F T H E R E L E VA N T D E C L A R AT I O N ) On November 17, 2017, the Board of Management and the Supervisory Board of Volkswagen AG issued the annual decla- ration of conformity with the Code as required by section 161 of the Aktiengesetz (AktG – German Stock Corporation Act) with the following wording: “The Board of Management and the Supervisory Board declare the following: 1. The recommendations of the Government Commission of the German Corporate Governance Code in the version dated 5 May 2015 (the Code) that were published by the German Ministry of Justice in the official section of the Federal Gazette (Bundesanzeiger) on 12 June 2015 were complied with in the period from the last Declaration of Conformity dated 18 November 2016 until the amended version of the Code dated 7 February 2017 came into effect on 24 April 2017, with the exception of the following numbers listed below with their stated reasons. > a) 4.2.3(4) (severance cap) A severance cap will be included in new contracts con- cluded with members of the Board of Management, but not in contracts concluded with Board of Management mem- bers entering their third term of office or beyond, provided a cap did not form part of the initial contract. Grandfather rights have been applied accordingly. > b) 5.3.2 sentence 3 (independence of the chair of the Audit Committee) It is unclear from the wording of this recommendation whether the Chairman of the Audit Committee is "inde- pendent" within the meaning of number 5.3.2 sentence 3 of the Code. Such independence could be considered lacking in view of his seat on the Supervisory Board of Porsche Automobil Holding SE, kinship with other mem- bers of the Supervisory Board of the company and of indirect minority Porsche Automobil Holding SE, his interest in Porsche Automobil Holding SE, and business relations with other members of the Porsche and Piëch families who also have an indirect interest in Porsche Automobil Holding SE. However, in the opinion of the Supervisory Board and the Board of Management, these relationships do not constitute a conflict of interest nor do they interfere with his duties as the Chairman of the Audit Committee. This exception is therefore being declared purely as a precautionary measure. > c) 5.4.1(5 to 7) (disclosure regarding election recommen- dations) With regard to recommendation number 5.4.1(5) to (7) of the Code stating that certain circumstances must be disclosed by the Supervisory Board when making election recommendations to the Annual General Meeting, the stipulations of the Code are vague and the definitions 60 Corporate Governance Report Group Management Report unclear. Purely as a precautionary measure, the Board of Management and the Supervisory Board therefore declare a deviation from the Code in this respect. Notwithstanding this, the Supervisory Board will make every effort to satisfy the requirements of the recommendation. > d) 5.4.6(2) sentence 2 (performance-related remuneration of members of the Supervisory Board) Until the amendment to article 17(1) of the Articles of Association adopted by the Annual General Meeting on 10 May 2017 that came into effect on 1 June 2017, Supervisory Board remuneration was linked in part to the dividends. We therefore assumed that we had complied with the Code and that the variable compensation component was oriented toward the sustainable growth of the company as defined in number 5.4.6(2) sentence 2 of the Code. How- ever, as it could not be ruled out that other views would be taken in this respect, a deviation from this recommen- dation in the Code is being declared as a precautionary measure. 2. The recommendations of the Government Commission of the German Corporate Governance Code in the version dated 7 February 2017 (the 2017 Code) that were published by the German Ministry of Justice on 24 April 2017 in the official section of the Federal Gazette (Bundesanzeiger) were com- plied with in the period from when this version came into effect on 24 April 2017 and will continue to be complied with, with the exception of the numbers listed below and their stated reasons. > a) 4.2.3(4) (severance cap) > b) 5.3.2(3) sentence 2 (independence of the chair of the Audit Committee) > c) 5.4.1(6 to 8) (disclosure regarding election recommen- dations) The reasons for exceptions a) to c) are listed above in the details under point 1. > d) 5.4.6(2) sentence 2 (performance-related remuneration of members of the Supervisory Board) Until the amendment to article 17(1) of the Articles of Association adopted by the Annual General Meeting on 10 May 2017 that came into effect on 1 June 2017, Supervisory Board remuneration was linked in part to the dividends. We therefore assumed that we had indeed complied with the Code and that the variable compensation component was oriented toward the sustainable growth of the com- pany as defined in number 5.4.6(2) sentence 2 of the 2017 Code. However, as it could not be ruled out that other views would be taken in this respect, a deviation from this recom- mendation in the Code was declared as a precautionary measure. The amendment to the Articles of Association that came into effect on 1 June 2017 introduced fixed remuneration retroactively as of 1 January 2017, so that the recommendation has definitely been complied with since 1 June 2017. > e) 4.2.3(2) sentence 3 (variable remuneration package in principle future-oriented) The recommendation that the variable remuneration com- ponents based on a multi-year assessment should essen- tially be forward-looking has been recently added to the Code. The corresponding remuneration components for the members of the Board of Management were in the former system essentially based on the results of the past fiscal year and would therefore not be suitable for this recommendation. In February 2017, the Supervisory Board adopted a new system for the Board of Management remu- neration in which the multi-year variable remuneration components were essentially future-oriented. The new remuneration system was fully implemented with retro- active effect to 1 January. > f) 5.4.1(2) sentence 1 (objectives regarding the composition of the Supervisory Board; profile of skills and expertise) This recommendation concerning the specification of con- crete objectives for the composition of the Supervisory Board was supplemented when the 2017 Code came into force to the effect that the Supervisory Board should also prepare a profile of skills and expertise for the entire committee in addition to specifying objectives for its com- position. This recommendation, more specifically the supplement, has not been complied with from when the amended version of the recommendation took effect until today due to the new addition. Following consultations and specifications on the part of the Supervisory Board, this recommendation will be complied with in full as of today. > g) 5.4.1(5) sentence 2 (curriculum vitae of the members of the Supervisory Board) The recommendation to publish updated curriculum vitae of all members of the Supervisory Board on the company website every year, including an overview of the main ancillary activities, has been newly added to the 2017 Code. The curriculum vitae of members of the Supervisory Board were published on 1 August 2017; this included an over- view of their main ancillary activities beyond their Super- visory Board mandates. The recommendation has been complied with since that time.” The current declaration of conformity is also published on our website, www.volkswagenag.com/ir. With the exception of number 4.2.3(2) sentence 9 (no early disbursements of variable remuneration components) and number 5.1.2(2) sentence 1 (duration of first-time appointments to the Board of Management), the suggestions in the current version of the Code have been complied with. Provision is made to some extent for the early disbursement of multiple-year, variable remuneration components in the event that one member of the Board of Management retires (early) from the Board; independently of this, such remu- neration components could be disbursed early. The Super- visory Board will decide the duration of each first-time Group Management Report Corporate Governance Report 61 appointment to the Board of Management on an individual basis, taking the best interests of the Company into account. The suggestion made in number 2.3.2 sentence 2 (acces- sibility of the voting proxy during the Annual General Meeting) was implemented at the 2017 Annual General Meeting in such a manner that the shareholders were able to reach the voting proxies named by the Company to exercise their voting rights until 1:00 pm, also by electronic means. The suggestion made in number 2.3.3 (broadcast of the Annual General Meeting) was implemented at the 2017 Annual General Meeting so that the introductory remarks by the Chairman of the Supervisory Board and the speech of the Chairman of the Board of Management were broadcast. Our listed subsidiaries AUDI AG, MAN SE and Renk AG have also issued declarations of conformity with the German Corporate Governance Code. The declarations of conformity of our listed subsidiaries can be accessed at the websites shown on this page. CO O P E R AT I O N B E T W E E N T H E B OA R D O F M A N AG E M E N T A N D T H E S U P E R V I S O RY B OA R D The Supervisory Board advises and monitors the Board of Management with regard to the management of the Com- pany and is directly involved in decisions of fundamental importance to the Company. The Board of Management and the Supervisory Board of Volkswagen AG consult closely on the strategic orientation of the Volkswagen Group. The two bodies jointly assess, at regular intervals, the progress made in implementing the corporate strategy. The Board of Man- agement reports to the Supervisory Board regularly, promptly and comprehensively in both written and oral form on all issues of relevance for the Company with regard to strategy, planning and the situation of the Company, the development of the business, the risk situation, risk management and compliance. More information on cooperation between the Board of Management and the Supervisory Board of Volkswagen AG and on the work and structure of the committees of the Supervisory Board can be found in the Report of the Super- visory Board on pages 12 to 17 of this annual report. D E C L A R AT I O N O F CO N F O R M I T Y O F VO L KSWA G E N AG www.volkswagenag.com/ir D E C L A R AT I O N O F CO N F O R M I T Y O F AU D I A G www.audi.com/cgk-declaration D E C L A R AT I O N O F CO N F O R M I T Y O F M A N S E www.corporate.man.eu D E C L A R AT I O N O F CO N F O R M I T Y O F R E N K A G www.renk.biz/corporated-governance.html Information on the members of the Board of Management and Supervisory Board, as well as on the Supervisory Board committees can be found on pages 84 to 87. O B J E C T I V E S F O R T H E CO M P O S I T I O N O F T H E S U P E R V I S O RY B OA R D A N D B OA R D O F M A N AG E M E N T A S W E L L A S S E N I O R E X E C U T I V E P O S I T I O N S In view of the Company’s specific situation, its purpose, its size and the extent of its international activities, the Super- visory Board of Volkswagen AG strives to achieve a com- position that takes the Company's ownership structure and the following aspects into account: > At least three members of the Supervisory Board should be persons who embody the criterion of internationality to a particularly high degree. > At least four shareholder representative members of the Supervisory Board should be persons without potential conflicts of interest, particularly conflicts of interest that could arise from an advisory or board position at custo- mers, suppliers, lenders, or other third parties. > In addition, at least four of the shareholder representatives must be persons who are independent as defined in number 5.4.2 of the German Corporate Governance Code. > At least three of the seats on the Supervisory Board should be held by people who make a special contribution to the diversity of the Board. > Furthermore, proposals for elections should not normally include persons who will have reached the age of 75 on the date of the election or who will have been members of the Supervisory Board for more than 15 years on the date of the election. The above criteria have been met. In addition, the Supervisory Board has decided on the following profile of skills and expertise for the full Board: The Supervisory Board as a whole must collectively have the knowledge, skills, and professional expertise required to properly perform its supervisory function and assess and monitor the business that the Company conducts. For this, the members of the Supervisory Board must collectively be familiar with the sector in which the Company operates. The key skills and requirements of the Supervisory Board as a whole include, in particular: > Knowledge of or experience in the manufacture and sale of all types of vehicles and engines or other technical pro- ducts, > Knowledge of the automotive industry, the business model and the market, as well as product expertise, > Knowledge in the field of research and development, par- ticularly of technologies with relevance for the Company, > Experience in corporate leadership positions or in the supervisory bodies of large companies, > Knowledge in the areas of governance, law or compliance, 62 Corporate Governance Report Group Management Report > Detailed knowledge in the areas of finance, accounting, or auditing, > Knowledge of the capital markets, > Knowledge in the areas of controlling/risk management and the internal control system, > Human resources expertise (particularly the search for and selection of members of the Board of Management, and the succession process) and knowledge of incentive and remu- neration systems for the Board of Management, > Detailed knowledge or experience in the areas of codeter- mination, employee matters and the working environment in the Company. The current composition of the Supervisory Board is also in line with this profile of skills and expertise. The independent members of the Supervisory Board within the meaning of article 5.4.2 of the Code are or were Ms. Hessa Sultan Al-Jaber, Ms. Marianne Heiß, Ms. Louise Kiesling, Mr. Hussain Ali Al- Abdulla, Mr. Bernd Althusmann and Mr. Stephan Weil, as well as Ms. Annika Falkengren and Mr. Olaf Lies, who have since left the Supervisory Board. The curriculum vitae of the members of the Supervisory Board are available online at www.volkswagenag.com/ir. The statutory quota of at least 30% women and at least 30% men has applied to new appointments to the Super- visory Board of Volkswagen AG since January 1, 2016 as required by the Gesetz für die gleichberechtigte Teilhabe von Frauen und Männern an Führungspositionen in der Privat- wirtschaft und im öffentlichen Dienst (FührposGleichberG – Act on the Equal Participation of Women and Men in Leader- ship Positions in the Private and Public Sectors). Shareholder and employee representatives have resolved that each side will meet this quota separately. The shareholder represen- tatives have met the quota of at least 30% women and at least 30% men since the 56th Annual General Meeting on June 22, 2016. In the election of employee representatives to the Supervisory Board of Volkswagen AG on April 6, 2017, Ms. Ulrike Jakob, Ms. Bertina Murkovic and Mr. Athanasios Stimoniaris were elected to the Supervisory Board for the first time. The remaining employee representatives on the Super- visory Board were reappointed. The term of office began at the end of the Annual General Meeting on May 10, 2017. This means that the legally prescribed proportion of at least 30% women and at least 30% men is also complied with on the employee side of the board. Both the shareholder and the employee representatives fulfilled the quota on December 31, 2017. For the proportion of female members on the Board of Management that the Supervisory Board was required to set in accordance with the FührposGleichberG, the Supervisory Board set a target quota of 11.1% for the period after December 31, 2016. The new deadline set for achievement of this target is December 31, 2021. The appointment of Ms. Hiltrud Dorothea Werner, the Group Board of Manage- ment member responsible for Integrity and Legal Matters since February 1, 2017, brings the percentage of female members on the Group Board of Management to 11.1%. The target quota was thus fulfilled on December 31, 2017. For the proportion of women in management in accor- dance with the FührposGleichberG, Volkswagen AG has set itself the target of 13.0% women in the first level of manage- ment and 16.9% women in the second level of management for the period up to the end of 2021. As of December 31, 2017, the proportion of women in the active workforce at the first level of management was 10.4 (9.8)% and at the second level of management it was 14.0 (13.5)%. R E M U N E R AT I O N R E P O RT Extensive explanations of the remuneration system and the individual remuneration of the members of the Board of Management and the Supervisory Board can be found in the Remuneration Report on pages 67 to 83 of the management report, in the notes to the consolidated financial statements on page 313, and on page 63 of the notes to the annual financial statements of Volkswagen AG. G R O U P CO R P O R AT E G OV E R N A N C E D E C L A R AT I O N The Group corporate governance declaration forms part of the combined management report and is permanently avail- able at www.volkswagenag.com/ir. It also contains the descrip- tion of the diversity concepts for the Board of Management and Supervisory Board of Volkswagen AG. G R O U P CO R P O R AT E G OV E R N A N C E D E C L A R AT I O N www.volkswagenag.com/ir Group Management Report Corporate Governance Report 63 CO M P L I A N C E Acting with integrity and compliant and ethical behavior are essential prerequisites for the success of the Volkswagen Group. For this reason, compliance with national and inter- national laws and regulations, internal rules and voluntary commitments is among our Company’s guiding principles. We are striving to strengthen the trust of our customers, our business partners and stakeholders in our Group through fair treatment. Compliant behavior is the basis for this and must be a matter of course for all Group employees. One of our Company’s main tasks at the present time is to further enhance awareness of this. Commitment to compliance at the highest level At the Global Management Meeting in March 2017, Matthias Müller, Chairman of the Board of Management of Volks- wagen AG, underlined that integrity and compliant behavior are the responsibility of each individual in the Group: “Com- pliance and integrity are not something that can be delegated to another department or a single person – everyone must play their part.” At the presentation of the new Code of Conduct for the Volkswagen Group in September 2017, Hiltrud Dorothea Werner, member of the Board of Management responsible for Integrity and Legal Matters, said: “It is our shared respon- sibility to bring the concept of integrity to life at Volkswagen. In practice, this involves us all being familiar with the rules in place, acting responsibly and making the right decisions. The new Code of Conduct provides the basis for this.” Strengthening the compliance organization In light of the growing relevance of the topic of compliance, the Group’s compliance organization was restructured in the reporting period. Since April 2017, Group Compliance has been a separate unit, with the Group Chief Compliance Officer reporting directly to the Board Member for Integrity and Legal Affairs; he also reports to the Audit Committee of the Supervisory Board. The structures, responsibilities and processes within this unit have also been honed and reinforced. The Volkswagen Group’s compliance organization has been set up with divisional and regional compliance offices. This enables central corporate functions to be supported to an even greater extent and advised by their own compliance contacts. Additional centers of competence develop and manage key compliance issues for the entire Group. The heads of the centers of competence and the divisional and regional compliance offices report directly to the Group Chief Compli- ance Officer. Communication between the Group and brand compliance officers and networking were enhanced and intensified in the reporting period through regular meetings and team conferences. In the reporting period, there was direct communication on compliance issues at meetings of the Supervisory Board, the Board of Management and the Works Council, partic- ularly by the Board Member for Integrity and Legal Affairs and the Group Chief Compliance Officer. The Group Compliance Committee chaired by the Board Member for Integrity and Legal Affairs was formed at top management level in 2017. This committee ensures that compliance and integrity standards are uniformly applied and communicated on a cross-divisional and cross-brand basis. The core compliance team, which concentrates exper- tise on compliance issues from different departments, remained unchanged. Compliance management system Our compliance management system is based on national and international standards. Its objective is to encourage and reinforce compliant behavior in the Group. The new Code of Conduct is the key element for strengthening awareness among staff of correct behavior and finding the right contact person in cases of doubt. Where laws and regulations have been seriously violated, our restructured whistleblower system is a suitable tool for taking appropriate action. We place value on communication and training seminars to permanently anchor compliance-related content among the workforce. The basis of compliance work in the Volkswagen Group is a systematic process of risk identification and reporting in accordance with the IDW standard AsS 980. We used 2017 to review the content of and the process for the existing compliance risk analysis. The objective is to obtain trans- parency at Group level of the risk exposure of all Group com- panies included in the compliance scope. However, we are also aware that even the best compliance management system can never entirely prevent the criminal actions of individuals. Code of Conduct and guidelines The Volkswagen Group Code of Conduct was completely over- hauled in the reporting period and approved by the Group Board of Management. All Group companies are required to introduce the new Code of Conduct. This was completed at the brand level by December 31, 2017. Based on the 2010 Code of Conduct (for instance on the topic of environmental protection) the content was updated and new content added (such as product conformity). Read- ability and practical relevance were enhanced through a clear 64 Corporate Governance Report Group Management Report structure, simpler It emphasizes each individual employee’s responsibility as regards compliant behavior. language and specific examples. The introduction of the new Code of Conduct was accom- panied by an intensive internal communication drive in digital and print media. The Code of Conduct is a key component of compliance training and is also integrated into operating processes. For example, all new employment contracts for employees of Volkswagen AG include a reference to the Code of Conduct and the obligation to comply with it. In addition, compliance with the Code of Conduct remained a component of our employees’ annual reviews in the reporting period and was thus taken into account when calculating their variable, per- formance-related remuneration. In addition to the Code of Conduct, the Volkswagen Group’s compliance framework incorporates the anti-corrup- tion guidelines among others, including checklists and the express prohibition of facilitation payments, as well as guidelines on competition, antitrust law and anti-money laundering. Organizational instructions on dealing with gifts and invitations as well as on making donations also apply across the Group. Employees have access to the compliance rules and regu- lations in particular via the compliance pages on the Com- pany intranet. Whistleblower system In the Volkswagen Group, the whistleblower system refers to the internal and external contact points, where employees and third parties can report potentially serious violations of laws and internal regulations by employees of the Volks- wagen Group, in addition to the committees that support and monitor the work of these contact points. The Company has had a system for reporting any breaches of the law or regulations already since 2006. In 2017, the whistleblower system was improved and partially reorga- nized. The processes were optimized further as of Novem- ber 1, 2017 to be able to follow up on reports even faster and in a fairer and more transparent manner. Among other things, a central Investigation Office was set up in the Com- pliance department at the beginning of the year, which is responsible for coordinating the whistleblower system in the Volkswagen Group and for processing information received concerning Volkswagen AG and its subsidiaries – with the exception of AUDI AG, Dr. Ing. h.c. F. Porsche AG and Volks- wagen Truck & Bus GmbH. These companies have separate investigative offices for themselves and their subsidiaries. The whistleblower system uses defined processes to investigate reports on breaches and to penalize misconduct where appropriate. Protection of both the whistleblower and in the applicable the party affected has top priority procedural principles and guarantees. In addition, a Group Guideline sets out the responsibilities in the Group and the specific procedure for the processing of reports. Information on misconduct can be submitted in any of the major languages used by the Group and are treated con- fidentially. The people providing the information need not fear any sanctions from the Company for their actions. They can decide for themselves whether they wish to give their names. For this reason, a specially protected online reporting channel was additionally set up in 2017 through which anonymized reports from whistleblowers can be sent to the Investigation Office. We also continue to rely on existing tried-and-tested channels such as ombudspersons (counsels of trust). As the whistleblower system was enhanced, reporting was reorganized, for example to ensure standard Group-wide handling. A total of 1,489 reports were registered throughout the Group in 2017. All substantiated reports have been, or will be, investigated, and any misconduct penalized. Communication, training and advice Providing information to employees at all levels on com- pliance and offering them advice is a core component of our compliance activities. The compliance organization regularly briefs the work- force on compliance-related issues using the internal Group- wide communication platform called “Group Connect”. Con- tent on compliant behavior is also made public through the internal communication channels of the Group and its brands. Focal points of compliance communication in the reporting period were the introduction of the revised Code of Conduct and the further development of the whistleblower system. CO D E O F CO N D U C T O F T H E VO L KSWAG E N G R O U P W H I ST L E B LOW E R SY ST E M www.volkswagenag.com/presence/konzern/documents/Code_of_Conduct_2017_ VW_Konzern_deutsch.pdf www.volkswagenag.com/de/group/compliance-and-risk- management/whistleblowersystem.html e-mail: io@volkswagen.de Group Management Report Corporate Governance Report 65 Furthermore, the topic of compliant behavior was intensely discussed at employee events and works meetings. In 2017, approximately 219,000 employees across the Group participated in various forms of training courses on compliance-related topics. Following a risk-based approach, mandatory compliance training is conducted for specific target groups. In addition to traditional lectures and online tutorials, case studies, role-playing games and other inter- active formats form a part of the training provided to employees and managers. Another event held in 2017 was the Volkswagen Convention – Integrity, Culture and Compli- ance, which was attended by more than 7,300 executives and works council members from Volkswagen AG, Volkswagen Sachsen and Volkswagen Osnabrück. The Convention was aimed at driving the change process forward at Volkswagen. Employees can use special e-mail addresses to solicit advice on compliance issues. Compliance key performance indicators To measure the level of target achievement, we defined a strategic indicator for the major brands that manufacture passenger cars: > Compliance, process reliability and a zero-defect culture. This indicator is based on an evaluation of the answers to three questions in the opinion survey relating to compli- ance with regulations and processes, transparency and monitoring, and dealing with risks and errors. In the case of adverse deviations, the departments will develop and implement measures. The indicator improved to 79.53 (79.03)% during the reporting year. We have also defined a strategic indicator for the Financial Services Division – the compliance and governance indicator. In addition to achieving our economic objectives, we are also striving to ensure compliance with legislation and legal requirements and are working towards a culture shaped by compliance and integrity. To this end, we have established a compliance function within the individual companies to accompany the implementation of suitable and effective compliance standards for fields of law that have been identified as significant. To evaluate the effectiveness thereof, we will consult examination and inspection findings from both the internal and external auditing, risk management and compliance, as well as the timely processing of the measures defined by these control units. Strengthening compliance in company processes The act to transpose the Fourth EU Money Laundering Di- rective into German law presented new challenges for Volks- wagen AG as a company that is bound by the Gesetz über das Aufspüren von Gewinnen aus schweren Straftaten (GWG – Law on Tracing Profits from Serious Criminal Offences). A Group Directive, which already exists in draft form, will define the minimum standard to be implemented by all Group companies. A concept for a new sales-related business partner check was drawn up in the reporting period. A key objective of this new process is the creation of transparency within the Volks- wagen Group to prevent Group companies from entering into business relationships with business partners which other Group companies have classified as not acting with integrity. The sales-related business partner check will be gradually introduced in the Group from 2019. New business models are constantly being considered in the Volkswagen Group as part of the TOGETHER – Strategy 2025 program. Areas on which these focus in particular are digitalization, automation and electrification, but also the development of and involvement in mobility concepts. Group Compliance helps the strategic business units to implement their forward-looking projects through individual risk assess- ments and recommendations based on these. In addition, compliance will become anchored in mergers and acquisitions and real estate transactions to a greater extent. Effectiveness review Independent reviews by the Group Internal Audit function at the corporate units and the regular exchange of information with external bodies help ensure continuous improvement of the compliance management system. There are no indica- tions that our current compliance management system was ineffective in 2017. I N T E G R I T Y Volkswagen AG is undergoing the most far-reaching process of change in the Company’s history. Particularly the loss of trust as a result of the diesel issue clearly showed that, in terms of integrity, Volkswagen must become a role model for a modern, transparent and successful enterprise. This plan is one of the strategic goals of TOGETHER – Strategy 2025. By setting up the new Board of Management position for Integrity and Legal Affairs on January 1, 2016, we created the organizational framework for a centralized integrity manage- ment function. This Group function is responsible for planning, preparing and implementing programs and pro- jects aimed at raising awareness, providing explanation and intensifying a collective awareness of integrity as well as reinforcing a shared culture of integrity in the Company. A continuous exchange of ideas and discussion of issues relating to integrity are key components of the integrity management function. 66 Corporate Governance Report Group Management Report Behaving with integrity is a prerequisite for commercial success and for a positive future for the Company. Only with lasting, dependable integrity will our Company gain and strengthen the trust of its staff, customers, shareholders, business partners and the general public. Volkswagen will enhance the culture of integrity in the Company, thus creating a collective Group awareness for integrity. To this end, we launched an integrity program in 2016 that addresses all of the Company's employees. I N D E P E N D E N T M O N I TO R In June 2017, Larry D. Thompson was appointed as the Independent Compliance Monitor at Volkswagen under the terms of the Plea Agreement with the United States Depart- ment of Justice announced on January 11, 2017 and con- firmed by a US federal court on April 21, 2017. He will also work as Independent Compliance Auditor under the Third Partial Consent Decree concluded separately with the US Environmental Protection Agency (EPA) and the Third California Partial Consent Decree agreed with the State of California and the environmental authority California Air Resources Board, CARB (for more information on these agree- ments, please see the Litigation section starting on page 178). Mr. Thompson will assess and oversee Volkswagen’s compli- ance with the terms of the Plea Agreement and Consent Decrees for a period of three years, which includes taking measures to further strengthen the Company’s compliance, reporting and monitoring mechanisms and the implemen- tation of an enhanced compliance and ethics program. R I S K M A N A G E M E N T, AU D I T Carefully managing potential risks to the Company is a key component of our daily work. Volkswagen Group’s risk man- agement system is oriented toward identifying, assessing, communicating and managing risks at an early stage. This system is reviewed on an ongoing basis and adjusted if and when conditions change. A detailed description of the risk management system and our accounting-related internal control system can be found in the Risk Report on pages 164 to 167 of this annual report. The Supervisory Board has established an Audit Commit- tee that in particular monitors the financial accounting, the financial accounting process, the effectiveness of the internal control system, the risk management system and the internal audit system, the audit of the financial statements and com- pliance. Furthermore, the Audit Committee makes a well- founded recommendation for the election of auditor to the Supervisory Board, obtains a declaration of independence from the auditor, supervises the additional services provided by the auditor and prepares the audit engagement resolution, thereby giving consideration to the annual audit planning, the areas of emphasis for the audit, the agreed fee and the auditor’s obligation to provide information. CO M M U N I C AT I O N A N D T R A N S PA R E N C Y The Volkswagen Group publishes a financial calendar listing all the relevant dates for its shareholders in its annual report and interim reports as well as on its website at www.volkswagenag.com/ir. Among other things, invitations to the shareholders’ meetings as well as agendas for these meetings and any motions to be added to the agenda or countermotions received are also available on this website. At the shareholders’ meetings, shareholders may exercise their voting rights themselves, have this right exercised on their behalf by a third-party proxy whom they have appointed, or use a proxy designated by the Company who votes on their behalf in accordance with their voting instructions. We also give our shareholders the opportunity to watch the intro- ductory remarks of the Chairman of the Supervisory Board and the speech of the Chairman of the Board of Management on the internet. In addition, news and information on the Volkswagen Group are available on our website. The press releases and other information are published in both English and German. Immediately after their publication in accordance with legal requirements, the Company’s ad-hoc releases are also published on the same website under the heading “IR News, Ad-hoc Releases & Publications”. We publish managers’ transactions pursuant to Article 19 of the Market Abuse Regulation or section 15a of the Wert- papierhandelsgesetz (WpHG – German Securities Trading Act) under the heading “Corporate Governance”, menu item “Directors’ Dealings”. On the same web page – under the heading “IR News, Ad- hoc Releases & Publications”, menu item “Notifications of changes in voting rights” – you can also access details of the notifications filed in the reporting period in compliance with sections 21 ff. of the WpHG as well as notifications relating to other legal issues. The supervisory body appointments held by Board of Management members and Supervisory Board members can be found on pages 84 to 87 of this annual report. The share- holder structure is presented on page 110. M A N DATO RY P U B L I C AT I O N S O F VO L KSWAG E N A G www.volkswagenag.com/ir Group Management Report Remuneration Report 67 Remuneration Report The Remuneration Report details the individualized remuneration of the Board of Management and the Supervisory Board of Volkswagen AG, broken down into components, as well as individualized pension provision disclosures for the members of the Board of Management. In addition, we explain in this chapter the main elements of the new remuneration system for the Board of Management. P R I N C I P L E S O F B OA R D O F M A N A G E M E N T R E M U N E R AT I O N The full Supervisory Board resolves on the remuneration system and the total remuneration for each individual mem- ber of Volkswagen AG’s Board of Management on the basis of the Executive Committee’s recommendations. The remuner- ation system implements the requirements of the Aktien- gesetz (AktG – German Stock Corporation Act) and the recom- mendations of the German Corporate Governance Code (the Code). In particular, the remuneration structure is focused on ensuring sustainable business development in accordance with the Gesetz zur Angemessenheit der Vorstandsvergütung (VorstAG – German Act on the Appropriateness of Executive Board Remuneration) and section 87(1) of the AktG. At the beginning of 2017, the Supervisory Board of Volks- wagen AG resolved to adjust the remuneration system of the Board of Management with effect from January 1, 2017. The new system for remuneration of the Board of Management was approved by the Annual General Meeting on May 10, 2017 with 80.96% of the votes cast. The adjustment, in which the Supervisory Board was assisted by renowned, inde- pendent external remuneration and legal consultants, resulted in an alignment with the new Group strategy TOGETHER – Strategy 2025. The level of the Board of Management remuneration should be appropriate and attractive in the context of the Company’s national and international peer group. Criteria include the tasks of the individual Board of Management member, their personal performance, the economic situation, the performance of and outlook for the Company, as well as how customary the remuneration is when measured against the peer group and the remuneration structure that applies to other areas of Volkswagen. In this context, comparative studies on remuneration are conducted on a regular basis. CO M P O N E N T S O F B OA R D O F M A N A G E M E N T R E M U N E R AT I O N In this section, we provide an overview of the new remu- neration system before going into the components of the remuneration for the reporting period. Overview of the new remuneration system The new remuneration system of the Board of Management comprises non-performance-related and performance-related components. The performance-related remuneration consists of an annual bonus with a one-year assessment period and a long-term incentive (LTI) in the form of a performance share plan with a forward-looking three-year term. The perfor- mance share plan is linked to business development in the next three years and is thus based on a multiyear, forward- looking assessment that reflects both positive and negative developments. The non-performance-related component creates an incentive for individual members of the Board of Management to perform their duties in the interests of the Company and to fulfill their obligation to act with proper business prudence without needing to focus on merely short- term performance targets. The performance-related com- ponents, dependent among other criteria on the financial performance of the Company, serve to ensure the long-term impact of behavioral incentives. If 100% of the respectively agreed targets are achieved, the annual target remuneration for each member of the Board of Management will amount to a total of €4,500,000 (corre- sponding to a basic remuneration of €1,350,000, a target amount from the annual bonus of €1,350,000 and a target amount from the performance share plan of €1,800,000). The annual target remuneration for the Chairman of the Board of Management amounts to a total of €9,000,000 (basic remu- neration of €2,125,000, a target amount from the annual 68 Remuneration Report Group Management Report bonus of €3,045,000, and a target amount from the perfor- mance share plan of €3,830,000). variable remuneration therefore reflect both positive and negative developments. Annual minimum remuneration of €3.5 million (sum of basic and variable remuneration) was contractually agreed with Mr. Blessing. The Supervisory Board may cap the performance-related/ variable remuneration components in the event of extra- ordinary developments. Non-performance-related remuneration The non-performance-related remuneration comprises fixed remuneration and fringe benefits. In addition to the basic level of remuneration, the fixed remuneration also includes differing levels of remuneration for appointments assumed at Group companies. The fringe benefits result from noncash benefits and include in particular the use of operating assets such as company cars and the payment of insurance pre- miums. Taxes due on these noncash benefits are mainly borne by Volkswagen AG. The basic level of remuneration is reviewed regularly and adjusted if necessary. Performance-related remuneration The performance-related/variable remuneration consists of an annual performance-related bonus with a one-year assess- ment period and a long-term incentive (LTI) in the form of a performance share plan with a forward-looking three-year term incentive components) and phantom preferred shares. The components of performance-related/ (long-term Annual bonus The annual bonus is based upon the result for the respective fiscal year. Operating profit achieved by the Volkswagen Group plus the proportionate operating profit of the Chinese joint ventures form half of the basis for the annual bonus, with operating return on sales achieved by the Volkswagen Group making up the second half. Each of the two com- ponents of the annual bonus will only be payable if certain thresholds are exceeded or reached. The calculated payment amount may be individually reduced (multiplier of 0.8) or increased (multiplier of 1.2) by up to 20% by the Supervisory Board, taking into account the degree of achievement of individual targets agreed between the Supervisory Board and the respective member of the Board of Management, as well as the success of the full Board of Management in achieving the transformation of the Volks- wagen Group’s employees into new areas of activity. The payment amount for the annual bonus is capped at 180% of the target amount for the annual bonus. The cap arises from 150% of the maximum financial target achieve- ment and a performance factor of a maximum of 1.2. Group Management Report Remuneration Report 69 C A L C U L A T I O N O F T H E P A Y M E N T A M O U N T F O R T H E A N N U A L B O N U S T A R G E T × T A R G E T A C H I E V E M E N T = A N N U A L B O N U S Company bonus Performance factor Operational KPIs (0 – 150% target achievement) × Multiplier (0.8 – 1.2) Payment amount 5 0 P E R C E N T C O M P O N E N T 1 Target achievement in percent 5 0 P E R C E N T C O M P O N E N T 2 Target achievement in percent 150 100 50 150 100 50 0 5 10 15 20 25 30 35 0 1 2 3 4 5 6 7 8 9 10 Operating result including Chinese joint ventures (proportionate) in € billion Operating return on sales in percent CO M P O N E N T 1 : O P E R AT I N G R E S U LT I N C L U D I N G C H I N E S E J O I N T V E N T U R E S ( P R O P O RT I O N AT E ) CO M P O N E N T 2 : O P E R AT I N G R E T U R N O N S A L E S € billion 2017 % Maximum threshold 100% level of target Minimum threshold Actual Target achievement (in %) 25.0 17.0 Maximum threshold 100% level of target 9.0 Minimum threshold 18.6 110 Actual Target achievement (in %) 2017 8.0 6.0 4.0 6.0 100 70 Remuneration Report Group Management Report Performance share plan – long-term incentive (LTI) The LTI is granted to the Board of Management in the form of a performance share plan. Each performance period of the performance share plan has a term of three years. At the time the LTI is granted, the annual target amount under the LTI is converted on the basis of the initial reference price of Volks- wagen’s preferred shares into performance shares of Volks- wagen AG, which are allocated to the respective member of the Board of Management purely for calculation purposes. The conversion is performed based on the unweighted average of the closing prices of Volkswagen’s preferred shares for the last 30 trading days preceding January 1 of a given fiscal year. At the end of each year, the number of perfor- mance shares is determined definitively for one-third of the three-year performance period based on the degree of target achievement for the annual earnings per Volkswagen pre- ferred share (EPS – earnings per share per preferred share in €). A prerequisite for this is that a threshold is reached. A cash settlement is made at the end of the three-year term of the performance share plan. The payment amount corresponds to the final number of determined performance shares, multiplied by the closing reference price at the end of the three-year period plus a dividend equivalent for the relevant term. The closing reference price is the unweighted average of the closing prices for Volkswagen’s preferred shares for the 30 trading days preceding the last day of the three-year performance period. € Initial reference price Closing reference price Dividend equivalent 1 Determined at the end of the performance period. 2017 127.84 –1 2.06 E P S P E R F O R M A N C E M E A S U R E M E N T Target achievement in percent 150 100 50 0 5 10 15 20 25 30 35 40 EPS per preferred share in euros P E R F O R M A N C E P E R I O D 2 0 1 7 – 2 0 1 9 € Maximum threshold 100% level of target Minimum threshold Actual Target achievement (in %) 2017 30.00 20.00 10.00 22.69 113 The payment amount under the performance share plan is limited to 200% of the target amount. An advance of 20% on the payment amount is paid if the average ratio of capex to sales revenue in the Automotive Division or the R&D ratio of the last three years is smaller than 5%. Should a member of the Board of Management leave the Company of their own volition without good cause before the performance shares are paid out or should that member start working for a competitor, the unpaid performance shares will expire. For members of the Board of Management who held their seat as of December 31, 2016, this rule only applies in the event of a future reappointment. Ms. Werner was appointed as a member of the Board of Management with effect from February 1, 2017. In the introductory phase of the performance share plan (2017 – 2018), the members of the Board of Management who were Board members as of December 31, 2016 will receive advances of 80% of their target amount. The Chairman of the Board of Management will receive 100% of his target amount in advance. The two advances will each be paid after the first year of the performance period. After the last day of the relevant three-year performance period, settlement will be made based on actual achievement of targets. The Chairman of the Board of Management has been granted the option of immediate settlement of the performance shares at the end of his contract of service. Group Management Report Remuneration Report 71 C A L C U L A T I O N O F T H E P A Y M E N T A M O U N T F R O M T H E P E R F O R M A N C E S H A R E P L A N T A R G E T ÷ Initial reference price P E R F O R M A N C E M E A S U R E M E N T P R I C E P E R F O R M A N C E A N D D I V I D E N D S L T I Provisional performance shares (number) Final number determined for ⅓ of provisional performance shares multiplied by annual target achievement EPS per preferred share Final performance shares (number) × Closing reference price plus dividend over term = Payment amount ⅓ × ⅓ × Target achievement EPS per preferred share Fiscal year 2 ⅓ × Fiscal year 3 Fiscal year 1 I N F O R M AT I O N O N T H E P E R F O R M A N C E S H A R E S € Matthias Müller Karlheinz Blessing Herbert Diess Francisco Javier Garcia Sanz Jochem Heizmann Andreas Renschler Rupert Stadler Hiltrud Dorothea Werner Frank Witter Total P E R F O R M A N C E P E R I O D 2 0 1 7 – 2 0 1 9 Number of performance shares allocated at the grant date Fair value at the grant date 29,959 14,080 14,080 14,080 14,080 14,080 14,080 12,907 14,080 4,309,602 2,025,408 2,048,640 1,890,944 2,031,040 1,891,648 2,025,408 1,856,672 2,025,408 141,426 20,104,770 € Provision as of Dec. 31, 2017 Intrinsic value as of Dec. 31, 2017 Comprehensive income 2017 arising from performance shares Matthias Müller Karlheinz Blessing Herbert Diess Francisco Javier Garcia Sanz Jochem Heizmann Andreas Renschler Rupert Stadler Hiltrud Dorothea Werner Frank Witter Total 10,201,381 5,202,356 3,673,623 5,405,211 4,102,990 4,747,249 4,698,709 623,526 5,128,707 43,783,751 4,728,427 2,222,245 2,222,245 2,222,245 2,222,245 2,222,245 2,222,245 – 2,222,245 20,284,141 10,201,381 5,202,356 3,673,623 5,405,211 4,102,990 4,747,249 4,698,709 623,526 5,128,707 43,783,751 72 Remuneration Report Group Management Report The number of performance shares includes the provisional performance shares allocated at the grant date of the per- formance share plan. The fair value as at the grant date was determined using a recognized valuation technique. The provision recognized as of December 31, 2017 reflects the obligation to the members of the Board of Management. To determine its amount, the performance shares expected for future performance periods were taken into account in addition to the provisional performance shares determined or allocated for the performance period 2017 – 2019. The intrinsic value was calculated in accordance with IFRS 2 and corresponds to the amount that the members of the Board of Management would have received if they had stepped down on December 31, 2017. Only the nonforfeitable (vested) per- formance shares at the reporting date are included in the calculation. The intrinsic value was calculated based on the unweighted average share price for the 30 trading days (Xetra closing prices of Volkswagen’s preferred shares) preceding December 31, 2017, taking the dividends paid per preferred share during the performance period into account. The net value of all amounts recognized in income for the perfor- mance shares in fiscal year 2017 is recorded in comprehen- sive income 2017 arising from performance shares according to IFRS. Phantom preferred shares The phantom preferred shares for the remuneration withheld for 2015 will form part of the Board of Management remu- neration until they are paid out in 2019. Total remuneration cap In addition to the cap on the individual variable components of the remuneration for the members of the Board of Man- agement, the annual benefits received according to the Code, consisting of basic remuneration and the variable remuner- ation components (i.e. annual bonus and performance share plan) for one fiscal year, may not exceed an amount of €10,000,000 for the Chairman of the Board of Management and of €5,500,000 for each member of the Board of Manage- ment. If the total amount is exceeded, the variable compo- nents will be reduced proportionately. Regular review and adjustment The Supervisory Board regularly reviews and, if necessary, adjusts the level of the total remuneration cap and the individual targets. Other agreements Members of the Board of Management with contracts entered into on or after January 1, 2010 are entitled to payment of their normal remuneration for six to twelve months in the event of illness. Contracts entered into before that date grant remuneration for six months. In the event of disability, they are entitled to the retirement pension. Surviving dependents receive a widow’s pension of 66 (cid:1022)% and orphans’ benefits of 20% of the former member of the Board of Management’s pension. Contracts with members of the Board of Management whose first term of office began after April 1, 2015, provide for an entitlement – in line with the principles of the works agreement that also applies to employees of Volkswagen AG covered by collective agree- ments – to a widow’s pension of 60%, an orphan’s benefit of 10% for half-orphans and an orphan’s benefit of 20% for full orphans, based in each case on the former member of the Board of Management’s pension. Group Management Report Remuneration Report 73 B E N E F I T S B A S E D O N P H A N TO M P R E F E R R E D S H A R E S F R O M T H E R E M U N E R AT I O N W I T H H E L D F O R F I S C A L Y E A R 2 0 1 5 At its meeting on April 22, 2016, Volkswagen AG’s Super- visory Board accepted the offer made by the members of the Board of Management to withhold 30% of the variable remu- neration for fiscal year 2015 for the Board of Management members active on the date of the resolution and to make its disposal subject to future share price performance. This is being effected by first converting the amount withheld based on the average share price for the 30 trading days preceding April 22, 2016 (initial reference price) into phantom preferred shares of Volkswagen AG with a three- year holding period and, at the same time, defining a target reference price corresponding to 125% of the initial reference price. During the holding period, the phantom preferred shares are entitled to a dividend equivalent in the amount of the dividends paid on real preferred shares. The shares will be reconverted and paid out either when the three-year holding period has expired or – in the event that members retire early from office – at the time that they do so. To determine the payment amount, the average share price for the 30 trading days preceding the last day of the holding period, i.e. April 22, 2019, or preceding the leaving date will be calculated (closing reference price). The difference between the target reference price and the initial reference price will be deducted from the closing reference price, and the dividends distributed on one real Volkswagen preferred share during the holding period (dividend equivalent) will be added to the closing reference price. The figure thus calculated will be multiplied by the number of phantom preferred shares so as to calculate the amount to be paid to each Board of Management member. This will ensure that – excludingany dividend equivalents accrued – the amount withheld is only paid out in full if the initial reference price of the preferred share has increased by at least 25%. Otherwise, the amount will be reduced accordingly to a minimum of €0. The amount disbursed may not be more than twice the amount originally withheld. If members of the Board of Management retire from office before the expiry of the holding period, the disbursement amount will be calculated and paid out proportionately based on the date that their contract of service ends. The number of phantom preferred shares granted on April 22, 2016 to the members of the Board of Management who were in office at that time did not change in fiscal year 2017. The fair value as of December 31, 2017 was determined using a recognized valuation technique. The intrinsic value was calculated in accordance with IFRS 2 and corresponds to the amount that the members of the Board of Management would have received if they had stepped down on Decem- ber 31, 2017. The intrinsic value was calculated based on the average share price for the 30 trading days (Xetra closing prices of Volkswagen’s preferred shares) preceding Decem- ber 31, 2017, taking the initial reference price and the divi- dends for the relevant fiscal years into account. “Comprehen- sive income 2017 arising from phantom preferred shares” according to with IFRSs records the net amount arising from the fair value as of December 31, 2017 and December 31, 2016. “Comprehensive income 2016 arising from phantom preferred shares” in accordance with IFRSs records the net amount withheld (nominal) on the basis of acceptance by the Supervisory Board on April 22, 2016 of the statement made by the members of the Board of Management, and the corre- sponding fair value as of December 31, 2016. I N F O R M AT I O N O N T H E P H A N TO M P R E F E R R E D S H A R E S H E L D I N 2 0 1 7 € Number of phantom shares Provision Dec. 31, 2017 Provision Dec. 31, 2016 Intrinsic value Dec. 31, 2017 Intrinsic value Dec. 31, 2016 Comprehensive income 2017 arising from phantom preferred shares Comprehensive income 2016 arising from phantom preferred shares1 Matthias Müller Herbert Diess Francisco Javier Garcia Sanz Jochem Heizmann Andreas Renschler Rupert Stadler Frank Witter Total 1 Income in 2016. 10,583 1,462,126 1,046,032 1,520,036 1,058,194 4,317 8,633 8,633 7,914 8,633 1,990 596,428 1,192,718 1,192,718 1,093,382 1,192,718 274,934 426,696 853,293 853,293 782,226 853,293 196,693 620,051 1,239,958 1,239,958 1,136,688 1,239,958 285,824 431,657 863,214 863,214 791,321 863,214 198,980 416,094 169,732 339,425 339,425 311,156 339,425 78,241 50,703 7,005,022 5,011,525 7,282,472 5,069,793 1,993,496 – 139,880 – 57,024 – 114,147 – 114,147 – 104,594 – 114,147 – 26,356 – 670,296 74 Remuneration Report Group Management Report R E M U N E R AT I O N O F T H E M E M B E R S O F T H E B OA R D O F M A N A G E M E N T I N A CCO R DA N C E W I T H T H E G E R M A N CO M M E R C I A L CO D E € Matthias Müller1 Karlheinz Blessing Herbert Diess Francisco Javier Garcia Sanz Jochem Heizmann Christine Hohmann-Dennhardt (Jan. 1, 2016 – Jan. 31, 2017)2,3 Andreas Renschler Rupert Stadler Hiltrud Dorothea Werner (since Feb. 1, 2017) Frank Witter Total 2 0 1 7 2 0 1 6 Non-performance- related components Performance- related component 2,317,735 1,610,515 1,428,104 1,560,686 1,551,145 109,361 1,576,037 1,419,734 1,341,819 1,421,980 3,513,207 1,557,579 1,557,579 1,557,579 1,557,579 – 1,557,579 1,557,579 1,427,781 1,557,579 Long-term incentive component 4,309,602 2,025,408 2,048,640 1,890,944 2,031,040 Total remuneration Total remuneration 10,140,544 5,193,502 5,034,323 5,009,209 5,139,764 7,251,929 3,334,940 3,226,587 3,215,679 3,155,508 – 109,361 10,051,621 1,891,648 2,025,408 1,856,672 2,025,408 5,025,264 5,002,721 4,626,272 5,004,967 3,223,705 3,050,317 – 3,037,327 14,337,116 15,844,041 20,104,770 50,285,927 39,547,612 1 The 2016 single-entity financial statements of Volkswagen AG reported total remuneration of €6,420,151. 2 To compensate for lost entitlements resulting from the change in employer, Ms. Hohmann-Dennhardt received €6.3 million in 2016. 3 Includes top-up amount on minimum remuneration of €3.5 million in 2016; variable remuneration determined by termination agreement. R E M U N E R AT I O N O F T H E M E M B E R S O F T H E B OA R D O F M A N AG E M E N T I N ACCO R DA N C E W I T H T H E G E R M A N CO R P O R AT E G OV E R N A N C E CO D E The amounts shown as benefits received in the Board of Management remuneration tables in accordance with the Code correspond, in principle, to the amounts paid out for the fiscal year in question. In the introductory phase of the performance share plan (2017 to 2018), the members of the Board of Management who were Board members as of December 31, 2016 receive advances on the target amount, which in accordance with the Code are reported as benefits for the fiscal year in which the performance shares under the plan were allocated. The amounts shown as benefits granted in the Board of Management remuneration tables in accordance with the Code are based on 100% of the targets for the annual bonus and on the fair value at the grant date for the performance share plan. Since the members of the Board of Management agreed to the new remuneration on different dates, there is an individual grant date for each Board member and, consequently, a different fair value. The Board of Management remuneration tables in accor- dance with the Code, that show the benefits received, do not include any entries for the phantom preferred shares from the amount withheld for fiscal year 2015 because no pay- ments were made to the Board of Management members in fiscal year 2017. The three-year holding period did not expire, nor did any Board members participating in the amount withheld step down in fiscal year 2017. Since the benefits based on phantom preferred shares were first agreed upon after the end of fiscal year 2015, consideration of the impact of these agreements is incorporated into the Board of Man- agement remuneration (benefits granted) tables in accor- dance with the Code in the column for fiscal year 2016. The revised amount listed there is the difference between the fair value of the phantom preferred shares and the amount with- held on the date they were granted (April 22, 2016). Group Management Report Remuneration Report 75 R E M U N E R AT I O N O F T H E M E M B E R S O F T H E B OA R D O F M A N A G E M E N T ( B E N E F I T S R E C E I V E D A N D B E N E F I T S G RA N T E D ) I N A CCO R DA N C E W I T H T H E G E R M A N CO R P O R AT E G OV E R N A N C E CO D E M A T T H I A S M Ü L L E R Chairman of the Board of Management € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017 – 2019) Business performance bonus (two-year assessment period) LTI (four-year assessment period) Phantom shares Total Pension expense Total remuneration Benefits received Benefits granted 2017 2016 2016 2017 2017 (minimum) 2017 (maximum) 2,125,000 1,584,000 1,584,000 2,125,000 2,125,000 2,125,000 192,735 2,317,735 3,513,207 3,830,000 3,830,000 – – – 178,651 1,762,651 1,499,278 3,990,000 – 1,335,000 2,655,000 – 9,660,942 7,251,929 612,807 526,589 178,651 1,762,651 1,313,200 6,352,610 – 3,283,000 3,375,000 – 305,390 9,428,461 526,589 192,735 2,317,735 3,045,000 4,309,602 4,309,602 – – – 192,735 2,317,735 0 0 0 – – – 192,735 2,317,735 5,481,000 7,660,000 7,660,000 – – – 9,672,337 2,317,735 15,458,735 612,807 612,807 612,807 10,273,749 7,778,518 9,955,050 10,285,144 2,930,542 16,071,542 K A R L H E I N Z B L E S S I N G Human Resources and Organization € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017 – 2019) Business performance bonus (two-year assessment period) LTI (four-year assessment period) Total1 Pension expense Total remuneration Benefits received Benefits granted 2017 2016 2016 2017 2017 (minimum) 2017 (maximum) 1,350,000 1,056,000 1,056,000 1,350,000 1,350,000 1,350,000 260,515 1,610,515 1,557,579 1,440,000 1,440,000 – – 4,608,094 686,413 347,440 347,440 1,403,440 1,403,440 250,500 492,800 1,681,000 2,732,000 – – 501,000 1,180,000 3,334,940 742,542 1,232,000 1,500,000 4,628,240 742,542 260,515 1,610,515 1,350,000 2,025,408 2,025,408 – – 260,515 1,610,515 0 0 0 – – 260,515 1,610,515 2,430,000 3,600,000 3,600,000 – – 4,985,923 3,760,515 7,640,515 686,413 686,413 686,413 5,294,507 4,077,482 5,370,782 5,672,336 4,446,928 8,326,928 1 Minimum for 2017 includes a top-up amount on minimum remuneration of €3.5 million. 76 Remuneration Report Group Management Report R E M U N E R AT I O N O F T H E M E M B E R S O F T H E B OA R D O F M A N A G E M E N T ( B E N E F I T S R E C E I V E D A N D B E N E F I T S G RA N T E D ) I N A CCO R DA N C E W I T H T H E G E R M A N CO R P O R AT E G OV E R N A N C E CO D E H E R B E R T D I E S S Chairman of the Brand Board of Management of Volkswagen Passenger Cars € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017 – 2019) Business performance bonus (two-year assessment period) LTI (four-year assessment period) Phantom shares Total Pension expense Total remuneration Benefits received Benefits granted 2017 2016 2016 2017 2017 (minimum) 2017 (maximum) 1,350,000 1,260,000 1,260,000 1,350,000 1,350,000 1,350,000 78,104 1,428,104 1,557,579 1,440,000 1,440,000 35,087 35,087 1,295,087 1,295,087 250,500 492,800 1,681,000 2,607,461 – – – – – 501,000 1,180,000 – 4,425,683 3,226,587 814,654 699,856 1,232,000 1,500,000 – 124,539 4,395,348 699,856 78,104 1,428,104 1,350,000 2,048,640 2,048,640 – – – 78,104 1,428,104 0 0 0 – – – 78,104 1,428,104 2,430,000 3,600,000 3,600,000 – – – 4,826,744 1,428,104 7,458,104 814,654 814,654 814,654 5,240,337 3,926,443 5,095,204 5,641,398 2,242,758 8,272,758 F R A N C I S C O J A V I E R G A R C I A S A N Z Procurement € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017 – 2019) Business performance bonus (two-year assessment period) LTI (four-year assessment period) Phantom shares Total Pension expense Total remuneration Benefits received Benefits granted 2017 2016 2016 2017 2017 (minimum) 2017 (maximum) 1,350,000 1,079,009 1,079,009 1,350,000 1,350,000 1,350,000 210,686 1,560,686 1,557,579 1,440,000 1,440,000 205,170 205,170 1,284,179 1,284,179 250,500 492,800 1,681,000 2,482,839 – – – – – 501,000 1,180,000 – 4,558,265 3,215,679 889,410 760,864 1,232,000 1,500,000 – 249,161 4,259,818 760,864 210,686 1,560,686 1,350,000 1,890,944 1,890,944 – – – 210,686 1,560,686 0 0 0 – – – 210,686 1,560,686 2,430,000 3,600,000 3,600,000 – – – 4,801,630 1,560,686 7,590,686 889,410 889,410 889,410 5,447,675 3,976,543 5,020,682 5,691,040 2,450,096 8,480,096 Group Management Report Remuneration Report 77 R E M U N E R AT I O N O F T H E M E M B E R S O F T H E B OA R D O F M A N A G E M E N T ( B E N E F I T S R E C E I V E D A N D B E N E F I T S G RA N T E D ) I N A CCO R DA N C E W I T H T H E G E R M A N CO R P O R AT E G OV E R N A N C E CO D E J O C H E M H E I Z M A N N China € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017 – 2019) Business performance bonus (two-year assessment period) LTI (four-year assessment period) Phantom shares Total Pension expense Total remuneration Benefits received Benefits granted 2017 2016 2016 2017 2017 (minimum) 2017 (maximum) 1,351,278 1,102,017 1,102,017 1,351,278 1,351,278 1,351,278 199,867 1,551,145 1,557,579 1,440,000 1,440,000 121,991 121,991 1,224,008 1,224,008 250,500 492,800 1,681,000 2,482,839 – – – – – 501,000 1,180,000 – 4,548,724 3,155,508 – – 1,232,000 1,500,000 – 249,161 4,199,647 – 199,867 1,551,145 1,350,000 2,031,040 2,031,040 – – – 199,867 1,551,145 0 0 0 – – – 199,867 1,551,145 2,430,000 3,600,000 3,600,000 – – – 4,932,185 1,551,145 7,581,145 – – – 4,548,724 3,155,508 4,199,647 4,932,185 1,551,145 7,581,145 € Fixed remuneration1 Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration Business performance bonus (two-year assessment period) LTI (four-year assessment period) Other2 Total Pension expense Total remuneration C H R I S T I N E H O H M A N N - D E N N H A R D T Integrity and Legal Affairs Joined: January 1, 2016, left: January 31, 2017 Benefits received Benefits granted 2017 2016 2016 2017 2017 (minimum) 2017 (maximum) 88,000 21,361 7,346,000 7,346,000 261,621 261,621 109,361 7,607,621 7,607,621 88,000 21,361 109,361 88,000 21,361 109,361 88,000 21,361 109,361 – – – – – 0 0 0 0 2,444,000 492,800 2,732,000 1,232,000 1,500,000 – – – – – – – – – – – – – – – – 109,361 54,091 163,452 10,051,621 10,832,421 704,657 704,657 10,756,278 11,537,078 109,361 54,091 163,452 109,361 54,091 163,452 109,361 54,091 163,452 1 The previous year includes compensation of lost entitlements resulting from the change in employer in the amount of €6.3 million. 2 Includes top-up amount on minimum remuneration of €3.5 million in the previous year; variable remuneration determined by termination agreement. 78 Remuneration Report Group Management Report R E M U N E R AT I O N O F T H E M E M B E R S O F T H E B OA R D O F M A N A G E M E N T ( B E N E F I T S R E C E I V E D A N D B E N E F I T S G RA N T E D ) I N A CCO R DA N C E W I T H T H E G E R M A N CO R P O R AT E G OV E R N A N C E CO D E A N D R E A S R E N S C H L E R Commercial Vehicles € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017 – 2019) Business performance bonus (two-year assessment period) LTI (four-year assessment period) Phantom shares Total Pension expense Total remuneration Benefits received Benefits granted 2017 2016 2016 2017 2017 (minimum) 2017 (maximum) 1,350,000 1,056,000 1,056,000 1,350,000 1,350,000 1,350,000 226,037 1,576,037 1,557,579 1,440,000 1,440,000 – – – 4,573,616 5,361,551 9,935,167 236,205 236,205 1,292,205 1,292,205 250,500 492,800 1,681,000 2,503,637 – – 501,000 1,180,000 – 3,223,705 4,660,006 7,883,711 1,232,000 1,500,000 – 228,363 4,288,642 4,660,006 8,948,648 226,037 1,576,037 1,350,000 1,891,648 1,891,648 – – – 226,037 1,576,037 0 0 0 – – – 226,037 1,576,037 2,430,000 3,600,000 3,600,000 – – – 4,817,685 5,361,551 10,179,236 1,576,037 5,361,551 6,937,588 7,606,037 5,361,551 12,967,588 R U P E R T S T A D L E R Chairman of the Board of Management of AUDI AG € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017 – 2019) Business performance bonus (two-year assessment period) LTI (four-year assessment period) Phantom shares Total Pension expense Total remuneration Benefits received Benefits granted 2017 2016 2016 2017 2017 (minimum) 2017 (maximum) 1,350,000 1,056,000 1,056,000 1,350,000 1,350,000 1,350,000 69,734 1,419,734 1,557,579 1,440,000 1,440,000 62,817 62,817 1,118,817 1,118,817 250,500 492,800 1,681,000 2,482,839 – – – – – 501,000 1,180,000 – 4,417,313 3,050,317 829,730 665,679 1,232,000 1,500,000 – 249,161 4,094,456 665,679 69,734 1,419,734 1,350,000 2,025,408 2,025,408 – – – 69,734 1,419,734 0 0 0 – – – 69,734 1,419,734 2,430,000 3,600,000 3,600,000 – – – 4,795,142 1,419,734 7,449,734 829,730 829,730 829,730 5,247,043 3,715,996 4,760,135 5,624,872 2,249,464 8,279,464 Group Management Report Remuneration Report 79 R E M U N E R AT I O N O F T H E M E M B E R S O F T H E B OA R D O F M A N A G E M E N T ( B E N E F I T S R E C E I V E D A N D B E N E F I T S G RA N T E D ) I N A CCO R DA N C E W I T H T H E G E R M A N CO R P O R AT E G OV E R N A N C E CO D E H I L T R U D D O R O T H E A W E R N E R Integrity and Legal Affairs Joined: February 1, 2017 € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017 – 2019) Total Pension expense Total remuneration Benefits received Benefits granted 2017 2016 2016 2017 2017 (minimum) 2017 (maximum) 1,237,500 104,319 1,341,819 1,427,781 – – 2,769,600 930,689 3,700,289 – – – – – – – – – – – – – – – – – – 1,237,500 1,237,500 1,237,500 104,319 1,341,819 1,237,500 1,856,672 1,856,672 4,435,991 930,689 104,319 1,341,819 0 0 0 1,341,819 930,689 104,319 1,341,819 2,227,500 3,300,000 3,300,000 6,869,319 930,689 5,366,680 2,272,508 7,800,008 F R A N K W I T T E R Finance and Controlling € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017 – 2019) Business performance bonus (two-year assessment period) LTI (four-year assessment period) Phantom shares Total Pension expense Total remuneration Benefits received Benefits granted 2017 2016 2016 2017 2017 (minimum) 2017 (maximum) 1,350,000 1,056,000 1,056,000 1,350,000 1,350,000 1,350,000 71,980 1,421,980 1,557,579 1,440,000 1,440,000 49,827 49,827 1,105,827 1,105,827 250,500 492,800 1,681,000 2,674,522 – – – – – 501,000 1,180,000 – 1,232,000 1,500,000 – 57,478 71,980 1,421,980 1,350,000 2,025,408 2,025,408 – – – 71,980 1,421,980 0 0 0 – – – 71,980 1,421,980 2,430,000 3,600,000 3,600,000 – – – 4,419,559 3,037,327 4,273,149 4,797,388 1,421,980 7,451,980 692,743 587,216 587,216 692,743 692,743 692,743 5,112,302 3,624,543 4,860,365 5,490,131 2,114,723 8,144,723 80 Remuneration Report Group Management Report P O ST - E M P LOYM E N T B E N E F I T S In the event of regular termination of their service on the Board of Management, the members of the Board of Man- agement are entitled to a pension, including a surviving dependents’ pension, as well as the use of company cars for the period in which they receive their pension. The agreed benefits are paid or made available when the Board of Management member reaches the age of 63. As a departure from this principle, Mr. Renschler is able to start drawing his pension when he reaches the age of 62. The retirement pension is calculated as a percentage of the basic level of remuneration. Starting at 50%, the indi- vidual percentage increases by two percentage points for each year of service. In the case of the Chairman of the Board of Management, increases of 4.5 percentage points as of March 1, 2017, 4.5 percentage points as of March 1, 2018 and 5.0 percentage points as of March 1, 2019 are provided for. In specific cases, credit is given for previous employment periods and retirement pensions earned. In a departure from this rule, a retirement pension entitlement of 62% of the basic level of remuneration was set for Mr. Renschler on his appointment. The Supervisory Board has capped the percent- age at 70%. These benefits are not broken down any further into performance-related components and long-term incen- tive components. Mr. Garcia Sanz and Mr. Heizmann reached a retirement pension entitlement of 70% of their basic level of remuneration at the end of 2017 the entitlement for Mr. Renschler and Mr. Stadler is 66%. Mr. Müller had a retirement pension entitlement of 57.5% of the basic level of remuner- ation as of the end of 2017. The increase in the basic remu- neration as a consequence of the new remuneration system in place from fiscal year 2017 is therefore not taken into account for the incumbent members of the Board of Man- agement of Volkswagen AG with an existing occupational pension based on final remuneration. With regard to the existing defined contribution pension schemes for the current members of the Board of Manage- ment of Volkswagen Aktiengesellschaft, the basis used to determine the pension contributions shall in each case be increased by the difference between the previous basic remu- neration and the newly determined basic remuneration (at an unchanged contribution rate of 50% of the basic remuner- ation). For future members of the Board of Management with a defined contribution pension scheme, a contribution rate of 40% of the basic remuneration will be credited to the pension account. tribution in the amount of 50% of the basic level of remu- neration is paid to Volkswagen Pension Trust e.V. at the end of the calendar year for each year they are appointed to the Board of Management. The annual pension contributions result in modules of what is, in principle, a lifelong pension in line with the arrangements that also apply to employees covered by collective agreements. The individual pension modules vest immediately upon payment to Volkswagen Pension Trust e.V. Instead of a lifelong pension, benefits can optionally be paid out as a lump sum or in installments when the beneficiary reaches retirement age – currently 63 at the earliest. Volkswagen AG has assumed responsibility for pension entitlements due to Mr. Witter from the time before his service with the Company, although these cannot be claimed before he reaches the age of 60. On December 31, 2017, the pension obligations for mem- bers of the Board of Management in accordance with IAS 19 amounted to €125.4 (113.5) million. €12.9 (11.7) million was added to the provision in the reporting period in accordance with IAS 19. Other benefits such as surviving dependents’ pensions and the use of company cars are also factored into the measurement of pension provisions. The pension obligations measured in accordance with German GAAP amounted to €92.4 (77.2) million. Measured in accordance with German GAAP, €15.8 (7.0) million was added to the provision in the reporting period. Current pensions are index-linked in accordance with the index-linking of the highest collectively agreed salary insofar as the application of section 16 of the Gesetz zur Verbesserung der betrieblichen Altersversorgung (BetrAVG – German Company Pension Act) does not lead to a larger increase. Retired members of the Board of Management and their surviving dependents received €19.9 (11.1) million, or €19.9 (11.1) million measured in accordance with German GAAP, in the past year. Obligations for pensions for this group of persons measured in accordance with IAS 19 amounted to €269.0 (270.0) million, or €214.9 (205.6) million measured in accordance with German GAAP. The following rule applies to Board of Management contracts entered into for the first term of office before August 5, 2009: the retirement pension to be granted after a member of the Board of Management leaves the Company is payable immediately if the member’s contract is not renewed by the Company, and in other cases when the member reaches the age of 63. Any remuneration received from other sources until the age of 63 is deductible from the benefit entitlement up to a certain fixed amount. Ms. Hohmann-Dennhardt and Ms. Werner as well as Mr. Blessing, Mr. Diess and Mr. Witter received a defined con- tribution plan, which is based in principle on a works agree- ment that also applies to the employees of Volkswagen AG covered by collective agreements and includes retirement, invalidity and surviving dependents’ benefits. A pension con- The following general rule applies to contracts for the first term of office of members of the Board of Management entered into after August 5, 2009: the retirement pension to be granted after a member of the Board of Management leaves the Company is payable when the member reaches the age of 63. Group Management Report Remuneration Report 81 E A R LY T E R M I N AT I O N B E N E F I T S If the appointment to the Board of Management is termi- nated for cause through no fault of the Board of Management member, the claims under Board of Management contracts entered into since November 20, 2009 are limited to a maxi- mum of two years’ remuneration, in accordance with the recommendation in section 4.2.3(4) of the Code (severance payment cap). For Board of Management members who are commencing their third or later term of office, existing rights under contracts entered into before November 20, 2009 are grandfathered. No severance payment is made if the appointment to the Board of Management is terminated for good reason for which the Board of Management member is responsible. The members of the Board of Management are also entitled to a pension and to a surviving dependents’ pension as well as the use of company cars for the period in which they receive their pension in the event of early termination of their service on the Board of Management. Please refer to notes 43 and 46 to the consolidated finan- cial statements and the notes to the annual financial statements of Volkswagen AG for more detailed individual disclosures relating to members of the Board of Management who left the Company in fiscal year 2017. P E N S I O N S O F T H E M E M B E R S O F T H E B OA R D O F M A N A G E M E N T I N 2 0 1 7 ( P R I O R - Y E A R F I G U R E S I N B R A C K E T S ) € Matthias Müller Karlheinz Blessing Herbert Diess Francisco Javier Garcia Sanz Jochem Heizmann Christine Hohmann-Dennhardt (Jan. 1, 2016 – Jan. 31, 2017) Andreas Renschler Rupert Stadler Hiltrud Dorothea Werner (since Feb. 1, 2017) Frank Witter Total Pension expense Present value as of December 311 612,807 (526,589) 686,413 (742,542) 814,654 (699,856) 889,410 (760,864) – – 54,091 (704,657) 5,361,551 (4,660,006) 829,730 (665,679) 930,689 – 692,743 (587,216) 10,872,088 (9,347,409) 30,065,068 (27,254,749) 1,623,275 (742,542) 2,169,255 (1,298,635) 22,544,823 (21,752,138) 19,254,055 (19,836,613) – (704,657) 16,278,653 (11,231,016) 22,262,176 (21,530,818) 975,823 – 10,214,190 (9,100,545) 125,387,318 (113,451,713) 1 The amount is reported in the total amount for defined benefit plans reported in the balance sheet (see note 29 to the consolidated financial statements). 82 Remuneration Report Group Management Report S U P E R V I S O RY B OA R D R E M U N E R AT I O N Following its regular review of Supervisory Board remu- neration, the Supervisory Board proposed a reorganization of the system of Supervisory Board remuneration to the 2017 Annual General Meeting, which was approved on May 10, 2017 with 99.98% of the votes cast. The remuneration of the members of the Supervisory Board of Volkswagen AG no longer contains any performance-related remuneration com- ponents but consists entirely of non-performance-related remuneration components. This is in line with the trend in supervisory board remuneration at DAX-listed companies, most of whose supervisory board remuneration now com- prises fixed remuneration only. Compared with other large listed companies in Germany, the amount of the proposed remuneration components is also standard for the market and is appropriate. This was confirmed by a renowned, external remuneration consultant who assisted the Super- visory Board in reorganizing the remuneration system for members of the Supervisory Board. Remuneration for super- visory board work at subsidiaries continues in part to com- prise a mix of non-performance-related and performance- related components. The following applies to members of the Supervisory Board of Volkswagen AG with retroactive effect from January 1, 2017: > Members of the Supervisory Board receive fixed remu- neration of €100,000 per fiscal year. > The Chairman of the Supervisory Board receives fixed remuneration of €300,000, while the Deputy Chairman receives remuneration of €200,000. > For their work in the Supervisory Board committees, the members of the Supervisory Board also receive additional fixed remuneration of €50,000 per committee per fiscal year provided the committee met at least once per year for the performance of its duties. Memberships of the Nomi- nation and Mediation Committees established in accor- dance with section 27(3) of the Mitbestimmungsgesetz (German Codetermination Act) are not taken into account. > Committee chairpersons receive double this amount, while deputy chairpersons receive one-and-a-half times the committee remuneration listed above. > Membership of no more than two committees is taken into account, whereby the two functions with the highest remuneration are counted if this maximum number is exceeded. > Supervisory Board members who belonged to the Super- visory Board or one of its committees for only part of the fiscal year receive proportionate remuneration. > Supervisory Board members receive an attendance fee of €1,000 for attending a meeting of the Supervisory Board or one of its committees; if several meetings are held on one day, the attendance fee is paid only once. > The remuneration and attendance fees are each payable after the end of the fiscal year. In fiscal year 2017, the members of the Supervisory Board received €3,786,839 (5,396,565). Of this figure, €2,000,000 related to the work of the Supervisory Board and €836,389 related to the work in the committees. Group Management Report Remuneration Report 83 R E M U N E R AT I O N O F T H E M E M B E R S O F T H E S U P E R V I S O RY B OA R D Hans Dieter Pötsch Jörg Hofmann2 Hussain Ali Al-Abdulla Hessa Sultan Al-Jaber Bernd Althusmann3 (since Dec. 14, 2017) Birgit Dietze2 Annika Falkengren Hans-Peter Fischer2 Uwe Fritsch2 (until May 10, 2017) Uwe Hück2 Johan Järvklo2 Ulrike Jakob2 (since May 10, 2017) Louise Kiesling Olaf Lies3 (until Dec. 14, 2017) Peter Mosch2 Bertina Murkovic2 (since May 10, 2017) Bernd Osterloh2 Hans Michel Piëch Ferdinand Oliver Porsche Wolfgang Porsche Athanasios Stimoniaris2 (since May 10, 2017) Stephan Weil3 Stephan Wolf2 (until May 10, 2017) Thomas Zwiebler2 (until May 10, 2017) Members of the Supervisory Board who retired in the previous year F I X E D R E M U N E R A - W O R K I N T H E T I O N C O M M I T T E E S O T H E R 1 T O T A L – 200,000 100,000 100,000 4,583 100,000 100,000 100,000 35,972 100,000 100,000 64,028 100,000 95,417 100,000 64,028 100,000 100,000 100,000 100,000 64,028 100,000 35,972 35,972 – 75,000 – – – 50,000 38,750 – 17,986 – – – – 47,639 91,007 32,014 98,021 – 150,000 150,000 – 50,000 17,986 17,986 – 20,000 7,000 11,000 – 13,000 12,000 9,000 9,000 80,500 10,000 4,000 11,000 20,000 102,100 6,000 28,000 150,600 147,100 161,400 106,750 24,000 11,000 7,000 2017 – 295,000 107,000 111,000 4,583 163,000 150,750 109,000 62,958 180,500 110,000 68,028 111,000 163,056 293,107 102,042 226,021 250,600 397,100 411,400 170,778 174,000 64,958 60,958 W A I V E R F O R 2 0 1 6 T O T A L 2016 65,500 31,333 60,167 31,504 – 47,807 84,250 60,167 70,629 60,167 60,167 – 60,167 80,250 61,250 – 19,250 60,167 54,333 49,333 – 75,250 75,250 81,250 585,800 330,333 170,167 89,865 – 143,252 249,250 171,167 214,990 234,667 170,167 – 171,167 250,250 301,850 – 251,250 266,736 417,933 441,233 – 250,250 251,250 251,250 – – – – – 183,739 Total 2,000,000 836,389 950,450 3,786,839 1,188,190 5,396,566 1 Attendance fees, membership of other Group bodies (non-performance-related: €257,000; performance-related: €270,450). 2 These employee representatives have stated that they will transfer their Supervisory Board remuneration to the Hans Böckler Foundation in accordance with the guidelines issued by the German Confederation of Trade Unions (DGB). 3 Under section 5(3) of the Niedersächsisches Ministergesetz (Act Governing Ministers of the State of Lower Saxony), these members of the Supervisory Board are obliged to transfer their Supervisory Board remuneration to the State of Lower Saxony as soon as and to the extent that it exceeds €6,200 per annum. Remuneration is defined for this purpose as Supervisory Board remuneration and attendance fees exceeding the amount of €200. The remuneration disclosed for members of the Supervisory Board for 2016 shows the amounts determined on the basis of the old system of Supervisory Board remuneration. The members of the Supervisory Board declared to the Manage- ment Board that they waive the portion of their remu- neration for fiscal year 2016 that exceeds the amount that would have resulted for fiscal year 2016 from implementing the system of Supervisory Board remuneration resolved by the Annual General Meeting on May 10, 2017 with retroactive effect from January 1, 2017. The total amount waived for 2016 by the members of the Supervisory Board is €1,188,190. Mr. Pötsch additionally waived an amount of €115,700.00 of his variable remuneration for fiscal year 2016 and waived his remuneration for fiscal year 2017 in full. The reason for this waiver is the agreement made in connection with Mr. Pötsch’s transfer from the Board of Management to the Supervisory Board as of October 8, 2015, it had been agreed to deduct the amount of Supervisory Board remuneration received up to December 31, 2017 from the compensation payment for his Board of Management remuneration to which he would have been entitled for the period from October 8, 2015 to Decem- ber 31, 2017. 84 Executive Bodies Group Management Report Executive Bodies Members of the Board of Management and their appointments Appointments: as of December 31, 2017 or the leaving date from the Board of Management of Volkswagen AG MATTHIAS MÜLLER (64) DR. RER. POL. H.C. ANDREAS RENSCHLER (59) Chairman (since September 26, 2015) FRANCISCO JAVIER GARCIA SANZ (60) Commercial Vehicles March 1, 20151 Member of the Executive Board of Porsche Automobil Holding SE October 13, 20101 Procurement July 1, 20011 Appointments: (cid:123) Hochtief AG, Essen February 1, 20151 Appointments: (cid:123) Deutsche Messe AG, Hanover DR. RER. SOC. KARLHEINZ BLESSING (60) Chairman of the Board of Management of AUDI AG (cid:126) Criteria CaixaHolding S.A., Barcelona PROF. RUPERT STADLER (54) Human Resources and Organization PROF. DR. RER. POL. DR.-ING. E.H. January 1, 20161 Appointments: (cid:123) Wolfsburg AG, Wolfsburg JOCHEM HEIZMANN (65) China January 11, 20071 Appointments: DR.-ING. HERBERT DIESS (59) (cid:123) Lufthansa Technik AG, Hamburg Chairman of the Brand Board of Management of Volkswagen Passenger Cars July 1, 20151 Appointments: DR. JUR. CHRISTINE HOHMANN-DENNHARDT (67) Integrity and Legal Affairs January 1, 2016 – January 31, 20171 (cid:123) Infineon Technologies AG, Neubiberg Appointments (as of January 31, 2017): (cid:126) Messe Frankfurt GmbH, Frankfurt am Main January 1, 20101 Appointments: (cid:123) FC Bayern München AG, Munich HILTRUD DOROTHEA WERNER (51) Integrity and Legal Affairs February 1, 20171 FRANK WITTER (58) Finance and Controlling October 7, 20151 As part of their duty to manage and supervise the Group’s business, the members of the Board of Management hold other offices on the supervisory boards of consolidated Group companies and other significant investees. (cid:123) Membership of statutory supervisory boards in 1 Beginning or period of membership of the Board of Germany. Management. (cid:126) Comparable appointments in Germany and abroad. Group Management Report Executive Bodies 85 Executive Bodies Members of the Supervisory Board and their appointments Appointments: as of December 31, 2017 or the leaving date from the Supervisory Board of Volkswagen AG HANS DIETER PÖTSCH (66) DR. HUSSAIN ALI AL-ABDULLA (60) BIRGIT DIETZE (44) Chairman (since October 7, 2015) Chairman of the Executive Board and Chief Financial Officer of Porsche Automobil Holding SE October 7, 20151 Minister of State April 22, 20101 Appointments: Secretary to the Board of IG Metall June 1, 20161 (cid:126) Gulf Investment Corporation, Safat/Kuwait ANNIKA FALKENGREN (55) Appointments: (cid:123) AUDI AG, Ingolstadt (cid:126) Kirnaf Finance, Riyadh (Chairman) (cid:126) Masraf Al Rayan, Doha (Chairman) (cid:123) Autostadt GmbH, Wolfsburg (Chairman) (cid:126) Qatar Holding, Doha Managing Partner of Compagnie Lombard Odier SCmA May 3, 2011 – February 5, 20181 (cid:123) Bertelsmann Management SE, Gütersloh (cid:126) Qatar Investment Authority, Doha Appointments (as of February 5, 2018): (cid:123) Bertelsmann SE & Co. KGaA, Gütersloh (cid:126) FAM AB, Stockholm (cid:123) Dr. Ing. h.c. F. Porsche AG, Stuttgart DR. HESSA SULTAN AL-JABER (58) (cid:123) Wolfsburg AG, Wolfsburg (cid:126) Porsche Austria Gesellschaft m.b.H., Salzburg (Chairman) Minister of State June 22, 20161 Appointments: DR. JUR. HANS-PETER FISCHER (58) Chairman of the Board of Management of Volkswagen Management Association (cid:126) Porsche Holding Gesellschaft m.b.H., Salzburg (cid:126) Droobi Health Technology, Doha (Chairman) (cid:126) Malomatia, Doha January 1, 20131 Appointments: (cid:126) Porsche Retail GmbH, Salzburg (Chairman) (cid:126) Qatar Satellite Company, Doha (cid:126) Volkswagen Pension Trust e.V., Wolfsburg (cid:126) VfL Wolfsburg-Fußball GmbH, Wolfsburg (cid:126) Trio Investment, Doha (Deputy Chairman) UWE FRITSCH (61) (cid:126) Volkswagen Truck & Bus GmbH, Braunschweig DR. BERND ALTHUSMANN (51) Chairman of the Works Council of the Volkswagen AG Minister of Economic Affairs, Labor, Transport and Braunschweig plant JÖRG HOFMANN (62) Deputy Chairman (since November 20, 2015) Digitalization for the Federal State of Lower Saxony December 14, 20171 April 19, 2012 – May 10, 20171 Appointments (as of May 10, 2017): First Chairman of IG Metall Appointments: (cid:126) Eintracht Braunschweig GmbH & Co KGaA, November 20, 20151 Appointments: (cid:123) Deutsche Messe AG, Hanover Braunschweig (cid:126) Container Terminal Wilhelmshaven JadeWeserPort- (cid:126) Basketball Löwen Braunschweig GmbH, (cid:123) Robert Bosch GmbH, Stuttgart Marketing GmbH & Co. KG, Wilhelmshaven Braunschweig (cid:126) JadeWeserPort Realisierungs GmbH & Co. KG, Wilhelmshaven MARIANNE HEISS (45) (cid:126) JadeWeserPort Realisierungs-Beteiligungs GmbH, Chief Financial Officer of BBDO Group DR. JUR. KLAUS LIESEN (86) July 2, 1987 – May 3, 20061 Wilhelmshaven Germany GmbH, Düsseldorf (cid:126) Niedersachsen Ports GmbH & Co. KG, Oldenburg February 14, 20181 Honorary Chairman of the Supervisory Board of (Chairman) Volkswagen AG (May 3, 2006 – March 30, 2017) Dr. Liesen died on March 30, 2017. (cid:123) Membership of statutory supervisory boards in 1 Beginning or period of membership of the Germany. Supervisory Board. (cid:126) Comparable appointments in Germany and abroad. 86 Executive Bodies Group Management Report UWE HÜCK (55) BERTINA MURKOVIC (60) DR. JUR. FERDINAND OLIVER PORSCHE (56) Chairman of the General and Group Works Councils of Chairwoman of the Works Council of Member of the Board of Management of Familie Dr. Ing. h.c. F. Porsche AG Volkswagen Commercial Vehicles Porsche AG Beteiligungsgesellschaft July 1, 20151 Appointments: May 10, 20171 (cid:123) Dr. Ing. h.c. F. Porsche AG, Stuttgart BERND OSTERLOH (61) August 7, 20091 Appointments: (cid:123) AUDI AG, Ingolstadt (Deputy Chairman) Chairman of the General and Group Works Councils of (cid:123) Dr. Ing. h.c. F. Porsche AG, Stuttgart JOHAN JÄRVKLO (44) Chairman of IF Metall at Scania AB November 22, 20151 Appointments: Volkswagen AG January 1, 20051 Appointments: (cid:123) Autostadt GmbH, Wolfsburg (cid:123) Wolfsburg AG, Wolfsburg (cid:123) Porsche Automobil Holding SE, Stuttgart (cid:126) Porsche Holding Gesellschaft m.b.H., Salzburg (cid:126) Porsche Lizenz- und Handelsgesellschaft mbH & Co. KG, Ludwigsburg (cid:126) Volkswagen Truck & Bus GmbH, Braunschweig (cid:126) Scania CV AB, Södertälje (cid:126) Allianz für die Region GmbH, Braunschweig (cid:126) Volkswagen Truck & Bus GmbH, Braunschweig (cid:126) Porsche Holding Gesellschaft m.b.H., Salzburg DR. RER. COMM. WOLFGANG PORSCHE (74) ULRIKE JAKOB (57) (cid:126) ŠKODA Auto a.s., Mladá Boleslav Porsche Automobil Holding SE; Deputy Chairwoman of the Works Council of (cid:126) VfL Wolfsburg-Fußball GmbH, Wolfsburg Chairman of the Supervisory Board of (cid:126) SEAT, S.A., Martorell Chairman of the Supervisory Board of Volkswagen AG, Kassel plant May 10, 20171 DR. LOUISE KIESLING (60) Designer and entrepreneur April 30, 20151 OLAF LIES (50) (cid:126) Volkswagen Immobilien GmbH, Wolfsburg Dr. Ing. h.c. F. Porsche AG (cid:126) Volkswagen Truck & Bus GmbH, Braunschweig April 24, 20081 DR. JUR. HANS MICHEL PIËCH (75) Lawyer in private practice August 7, 20091 Appointments: (cid:123) AUDI AG, Ingolstadt Appointments: (cid:123) AUDI AG, Ingolstadt (cid:123) Dr. Ing. h.c. F. Porsche AG, Stuttgart (Chairman) (cid:123) Porsche Automobil Holding SE, Stuttgart (Chairman) (cid:126) Familie Porsche AG Beteiligungsgesellschaft, February 19, 2013 – December 14, 20171 (cid:123) Dr. Ing. h.c. F. Porsche AG, Stuttgart Salzburg (Chairman) Appointments (as of December 14, 2017): (cid:123) Porsche Automobil Holding SE, Stuttgart (cid:126) Porsche Cars Great Britain Ltd., Reading (cid:123) Deutsche Messe AG, Hanover (Deputy Chairman) (cid:126) Porsche Cars North America Inc., Atlanta (cid:126) Container Terminal Wilhelmshaven JadeWeserPort- (cid:126) Porsche Cars Great Britain Ltd., Reading (cid:126) Porsche Holding Gesellschaft m.b.H., Salzburg Marketing GmbH & Co. KG, Wilhelmshaven (cid:126) Porsche Cars North America Inc., Atlanta (cid:126) Porsche Ibérica S.A., Madrid (cid:126) Demografieagentur für die niedersächsische (cid:126) Porsche Holding Gesellschaft m.b.H., Salzburg (cid:126) Porsche Italia S.p.A., Padua Wirtschaft GmbH, Hanover (Chairman) (cid:126) Porsche Ibérica S.A., Madrid (cid:126) Schmittenhöhebahn AG, Zell am See (cid:126) JadeWeserPort Realisierungs GmbH & Co. KG, (cid:126) Porsche Italia S.p.A., Padua Wilhelmshaven (cid:126) Schmittenhöhebahn AG, Zell am See (cid:126) JadeWeserPort Realisierungs-Beteiligungs GmbH, (cid:126) Volksoper Wien GmbH, Vienna Wilhelmshaven PETER MOSCH (45) Chairman of the General Works Council of AUDI AG January 18, 20061 Appointments: (cid:123) AUDI AG, Ingolstadt (cid:123) Audi Pensionskasse – Altersversorgung der AUTO UNION GmbH, VVaG, Ingolstadt (cid:123) Membership of statutory supervisory boards in 1 Beginning or period of membership of the Germany. Supervisory Board. (cid:126) Comparable appointments in Germany and abroad. Group Management Report Executive Bodies 87 ATHANASIOS STIMONIARIS (46) COMMITTEES OF THE SUPERVISORY BOARD Chairman of the Works Council and of the AS OF DECEMBER 31, 2017 General Works Council of MAN Truck & Bus AG and Chairman of the Group Works Council of MAN SE Members of the Executive Committee and of the SE Works Council May 10, 20171 Appointments: (cid:123) MAN SE, Munich Hans Dieter Pötsch (Chairman) Jörg Hofmann (Deputy Chairman) Peter Mosch Bernd Osterloh (cid:123) MAN Truck & Bus AG, Munich (Deputy Chairman) Dr. Wolfgang Porsche (cid:123) Rheinmetall MAN Military Vehicles GmbH, Munich Stephan Weil (cid:126) Volkswagen Truck & Bus GmbH, Braunschweig STEPHAN WEIL (59) Minister-President of the Federal State of Lower Saxony February 19, 20131 STEPHAN WOLF (51) January 1, 2013 – May 10, 20171 Appointments (as of May 10, 2017): (cid:123) Volkswagen Financial Services AG, Braunschweig (cid:123) Wolfsburg AG, Wolfsburg (cid:126) Volkswagen Pension Trust e.V., Wolfsburg THOMAS ZWIEBLER (52) May 15, 2010 – May 10, 20171 Members of the Mediation Committee established in accordance with section 27(3) of the Mitbestimmungsgesetz (German Codetermination Act) Hans Dieter Pötsch (Chairman) Jörg Hofmann (Deputy Chairman) Bernd Osterloh Stephan Weil Members of the Audit Committee Dr. Ferdinand Oliver Porsche (Chairman) Bernd Osterloh (Deputy Chairman) Birgit Dietze n.n. Members of the Nomination Committee Hans Dieter Pötsch (Chairman) Dr. Wolfgang Porsche Stephan Weil Special Committee on Diesel Engines Dr. Wolfgang Porsche (Chairman) Peter Mosch Bertina Murkovic Bernd Osterloh Dr. Ferdinand Oliver Porsche n.n. (cid:123) Membership of statutory supervisory boards in 1 Beginning or period of membership of the Germany. Supervisory Board. (cid:126) Comparable appointments in Germany and abroad. 88 Disclosures Required Under Takeover Law Group Management Report Disclosures Required Under Takeover Law This section contains the Volkswagen Group’s disclosures relating to takeover law required by sections 289(4) and 315(4) of the HGB. C A P I TA L ST R U C T U R E Volkswagen AG’s share capital amounted to €1,283,315,873.28 (€1,283,315,873.28) on 31 December, 2017. It was composed of 295,089,818 ordinary shares and 206,205,445 preferred shares. Each share conveys a notional interest of €2.56 in the share capital. S H A R E H O L D E R R I G H T S A N D O B L I G AT I O N S The shares convey pecuniary and administrative rights. The pecuniary rights include in particular the shareholders’ right to participate in profits (section 58(4) of the Aktiengesetz (AktG – German Stock Corporation Act)), the right to partic- ipate in liquidation proceeds (section 271 of the AktG) and preemptive rights to shares in the event of capital increases (section 186 of the AktG) that can be disapplied by the Annual General Meeting with the approval of the Special Meeting of Preferred Shareholders, where appropriate. Administrative rights include the right to attend the Annual General Meeting and the right to speak there, to ask questions, to propose motions and to exercise voting rights. Shareholders can enforce these rights in particular through actions seeking disclosure and actions for avoidance. Each ordinary share grants the holder one vote at the Annual General Meeting. The Annual General Meeting elects shareholder representatives to the Supervisory Board and elects the auditors; in particular, it resolves on the appro- priation of net profit, formally approves the actions of the Board of Management and the Supervisory Board, and resolves on amendments to the Articles of Association of Volkswagen AG, capitalization measures and authorizations to purchase treasury shares; if required, it also resolves on the performance of a special audit, the removal before the end of their term of office of Supervisory Board members elected at the Annual General Meeting and the winding-up of the Company. Preferred shareholders generally have no voting rights. However, in the exceptional case that they are granted voting rights by law (for example, when preferred share dividends were not paid in one year and not compensated for in full in the following year), each preferred share also grants the holder one vote at the Annual General Meeting. Furthermore, preferred shares entitle the holder to a €0.06 higher dividend than ordinary shares (further details on this right to preferred and additional dividends are specified in Article 27(2) of the Articles of Association of Volkswagen AG). The Gesetz über die Überführung der Anteilsrechte an der Volkswagenwerk Gesellschaft mit beschränkter Haftung in private Hand (VW-Gesetz – Act on the Privatization of Shares of Volkswagenwerk Gesellschaft mit beschränkter Haftung) of July 21, 1960, as amended on July 30, 2009, includes various provisions in derogation of the German Stock Corporation Act, for example on the exercise of voting rights by proxy (section 3 of the VW-Gesetz) and on majority voting require- ments at the Annual General Meeting (section 4(3) of the VW- Gesetz). In accordance with the Volkswagen AG Articles of Asso- ciation (Article 11(1)), the State of Lower Saxony is entitled to appoint two members of the Supervisory Board of Volks- wagen AG for as long as it directly or indirectly holds at least 15% of Volkswagen AG’s ordinary shares. In addition, reso- lutions by the Annual General Meeting that are required by law to be adopted by a qualified majority require a majority of more than four-fifths of the share capital of the Company represented when the resolution is adopted (Article 25(2)), regardless of the provisions of the VW-Gesetz. Group Management Report Disclosures Required Under Takeover Law 89 S H A R E H O L D I N G S E XC E E D I N G 1 0 % O F VOT I N G R I G H T S Shareholdings in Volkswagen AG that exceed 10% of voting rights are shown in the notes to the annual financial state- ments of Volkswagen AG, which are available online at www.volkswagenag.com/ir. The current notifications of changes in voting rights in accordance with the Wertpapier- handelsgesetz (WpHG – German Securities Trading Act) are also published on this website. CO M P O S I T I O N O F T H E S U P E R V I S O RY B OA R D The Supervisory Board consists of 20 members, half of whom are shareholder representatives. In accordance with Article 11(1) of the Articles of Association of Volkswagen AG, the State of Lower Saxony is entitled to appoint two of these shareholder representatives for as long as it directly or indi- rectly holds at least 15% of the Company’s ordinary shares. The remaining shareholder representatives on the Super- visory Board are elected by the Annual General Meeting. The other half of the Supervisory Board consists of employee representatives elected by the employees in accor- dance with the Mitbestimmungsgesetz (MitbestG – German Codetermination Act). A total of seven of these employee representatives are Company employees elected by the work- force; the other three employee representatives are trade union representatives elected by the workforce. The Chairman of the Supervisory Board is generally a shareholder representative elected by the other members of the Supervisory Board. In the event that a Supervisory Board vote is tied, the Chairman of the Supervisory Board has a casting vote in accordance with the MitbestG. The goals for the composition of the Supervisory Board are described on page 61 of the Corporate Governance Report. Information about the composition of the Supervisory Board at the end of the reporting period can be found on pages 85 to 87 of this annual report. STAT U TO RY R E Q U I R E M E N T S A N D R E Q U I R E M E N T S O F T H E A RT I C L E S O F A S S O C I AT I O N W I T H R E G A R D TO T H E A P P O I N TM E N T A N D R E M OVA L O F B OA R D O F M A N A G E M E N T M E M B E R S A N D TO A M E N D M E N T S TO T H E A RT I C L E S O F A S S O C I AT I O N The appointment and removal of members of the Board of Management are governed by sections 84 and 85 of the AktG, which specify that members of the Board of Management are appointed by the Supervisory Board for a maximum of five years. Board of Management members may be reappointed or have their term of office extended for a maximum of five years in each case. In addition, Article 6 of the Articles of Association of Volkswagen AG states that the number of Board of Management members is stipulated by the Super- visory Board and that the Board of Management must consist of at least three persons. The Annual General Meeting resolves amendments to the Articles of Association (section 119(1) of the AktG). In accor- dance with section 4(3) of the VW-Gesetz as amended on July 30, 2009 and Article 25(2) of the Articles of Association of Volkswagen AG, Annual General Meeting resolutions to amend the Articles of Association require a majority of more than four-fifths of the share capital represented. P OW E R S O F T H E B OA R D O F M A N A G E M E N T, I N PA RT I C U L A R CO N C E R N I N G T H E I S S U E O F N E W S H A R E S A N D T H E R E P U R C H A S E O F T R E A S U RY S H A R E S According to German stock corporation law, the Annual General Meeting can authorize the Board of Management, for a maximum period of five years, to issue new shares. It can also authorize the Board of Management, for a maximum period of five years, to issue bonds on the basis of which new shares are to be issued. The Annual General Meeting also decides the extent to which shareholders have preemptive rights to the new shares or bonds. The maximum amount of authorized share capital or contingent capital available for these purposes is determined by Article 4 of the Articles of Association of Volkswagen AG, as amended. 90 Disclosures Required Under Takeover Law Group Management Report The Annual General Meeting on April 19, 2012 resolved to authorize the Board of Management, with the consent of the Supervisory Board, to increase the Company’s share capital by a total of up to €110.0 million (corresponding to approxi- mately 43 million shares) on one or more occasions up to April 18, 2017 by issuing new ordinary and/or nonvoting preferred bearer shares – including with shareholders’ preemptive rights disapplied – against cash and/or noncash contributions. This authorization was partially exercised in June 2014 by way of a capital increase through the issuance of 10,471,204 new preferred shares from authorized capital against cash contributions, while disapplying shareholders’ preemptive rights. This increased the share capital by €26.8 million and generated gross proceeds of €2.0 billion. At the Annual General Meeting on May 5, 2015, a reso- lution was passed authorizing the Board of Management, with the consent of the Supervisory Board, to increase the Company’s share capital by a total of up to €179.2 million (corresponding to 70 million shares) on one or more occa- sions up to May 4, 2020 by issuing new nonvoting preferred shares against cash contributions. Further details of the authorization to issue new shares and their permitted uses may be found in the notes to the consolidated financial statements on page 256. Opportunities to acquire treasury shares are governed by section 71 of the AktG. The Board of Management was most recently authorized to acquire treasury shares up to a maxi- mum of 10% of the share capital at the Annual General Meeting on April 19, 2012. This authorization applied until April 18, 2017 and has not been exercised. M AT E R I A L A G R E E M E N T S O F T H E PA R E N T CO M PA N Y I N T H E E V E N T O F A C H A N G E O F CO N T R O L F O L LO W I N G A TA K E OV E R B I D A banking syndicate granted Volkswagen AG a syndicated line of credit amounting to €5.0 billion that runs until April 2020. The syndicate members were granted the right to call their portion of the syndicated line of credit if Volkswagen AG is merged with a third party or becomes a subsidiary of another company. However, this call right does not apply in the event of a merger by absorption of Porsche Holding SE, one of its subsidiaries, or one of its holding companies and Volks- wagen AG in which Volkswagen AG is the acquiring legal entity. In addition, Volkswagen AG agreed a supplementary syn- dicated line of credit of up to €20.0 billion with a banking syndicate, initially running until December 2016 and since extended until June 2017. The syndicate members were granted the right to call their portion of the syndicated line of credit if Volkswagen AG is merged with a third party or group of third parties, or becomes a subsidiary of another company or group of other companies. Exceptions to this call right were agreed with regard to various combinations involving the current majority shareholders. This line of credit was terminated in June 2017 as per the contractual agreement. Group Management Report Diesel Issue 91 Diesel Issue During the fiscal year, we reached extensive settlement agreements in the USA. The technical measures for all affected vehicles with type EA 189 engines in the European Union were approved without exception, and implemented in most cases. We also continued to work on resolving the diesel issue. Further special items amounting to €3.2 billion had to be accounted for in the fiscal year. I R R E G U L A R I T I E S CO N C E R N I N G N O X E M I S S I O N S On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emis- sions had been discovered in emissions tests on certain vehicles of Volkswagen Group with type 2.0 l diesel engines in the USA. In this context, Volkswagen AG announced that noticeable discrepancies between the figures achieved in testing and in actual road use had been identified in around eleven million vehicles worldwide with type EA 189 diesel engines. On November 2, 2015, the EPA issued a “Notice of Violation” alleging that irregularities had also been dis- covered in the software installed in US vehicles with type V6 3.0 l diesel engines. Numerous court and governmental proceedings were subsequently initiated in the USA and the rest of the world. During the reporting period, we succeeded in ending most significant court and governmental proceedings in the USA by concluding settlement agreements. This includes, in par- ticular, settlements with the US Department of Justice (DOJ). Outside the USA, we also reached agreements with regard to the implementation of technical measures with numerous authorities. Detailed information on the individual settle- ment agreements as well as on the pending court and governmental proceedings can be found in the Report on Risks and Opportunities, starting on page 178. E XT E N S I V E I N V E ST I G AT I O N S I N I T I AT E D B Y VO L K SWA G E N A G After the first “Notice of Violation” was issued, Volkswagen AG immediately initiated its own internal inquiries and an external investigation. The Supervisory Board of Volkswagen AG formed a special committee that coordinates the activities relating to the diesel issue for the Supervisory Board. The global law firm Jones Day was instructed by Volks- wagen AG to carry out an extensive investigation of the diesel issue in light of the DOJ’s and the Braunschweig public prosecutor’s criminal investigation as well as other investi- gations and proceedings which were expected at that time. Jones Day was instructed by Volkswagen AG to present factual evidence to the DOJ . To resolve US-criminal law charges, Volkswagen AG and the DOJ entered into a Plea Agreement, which includes a Statement of Facts containing a summary of the factual allegations which the DOJ considered relevant to the settlement with Volkswagen AG. The Statement of Facts is based in part on Jones Day’s factual findings as well as the evidence identified by the DOJ itself. Jones Day has completed the work required to assist Volkswagen AG in assessing the criminal charges against the company in the USA with respect to the diesel issue. However, work in respect of the legal proceedings which are still pending in the USA and the rest of the world is ongoing and will require considerable efforts and a considerable period of time. In connection with this further work, Volkswagen AG is being advised by a number of external law firms. Furthermore, in September 2015, Volkswagen AG filed a criminal complaint in Germany against unknown individuals as did AUDI AG. Volkswagen AG and AUDI AG are cooperating with all responsible authorities in the scope of reviewing the incidents. 92 Diesel Issue Group Management Report The diesel issue is rooted in a modification of parts of the software of the relevant engine’s control unit – which, according to Volkswagen AG’s legal position, is only unlawful in the USA – for the type EA 189 diesel engines that Volks- wagen AG was developing at that time. The decision to develop and install this software function was taken in late 2006, below Board of Management level. None of the members of the Board of Management had, at that time and for many years to follow, knowledge of the development and implementation of this software function in the relevant engine control unit of the type EA 189 diesel engines. In the months after the International Council on Clean Transportation (ICCT) study was published in May 2014, the test set-ups on which the ICCT study was based were repeated in-house at Volkswagen AG and confirmed the unusually high NOx emissions from certain type EA 189 2.0 l diesel engines in the USA. The California Air Resources Board (CARB) – a part of the environmental authority of California – was informed of this result, and, at the same time, an offer was made to recalibrate the type EA 189 diesel engines in the USA as part of a service measure that was already planned in the USA. This measure was evaluated and adopted by the Ausschuss für Produktsicherheit (APS – Product Safety Com- mittee), which initiates necessary and appropriate measures to ensure the safety and conformity of Volkswagen AG’s products that are placed in the market. There are no findings that an unlawful “defeat device” under US law was disclosed to the APS as the cause of the discrepancies or to the persons responsible for preparing the 2014 annual and consolidated financial statements. Instead, at the time the 2014 annual and consolidated financial statements were being prepared, the persons responsible for preparing the 2014 annual and consolidated financial statements remained under the impression that the issue could be solved with comparatively little effort as part of a service measure. In the course of the summer of 2015, however, it became successively apparent to individual members of Volks- wagen AG’s Board of Management that the cause of the dis- crepancies in the USA was a modification of parts of the software of the engine control unit, which was later identified as an unlawful “defeat device” as defined by US law. This culminated in the disclosure of a “defeat device” to EPA and CARB on September 3, 2015. According to the assessment at that time of the responsible persons dealing with the matter, the scope of the costs expected by the Volkswagen Group (recall costs, retrofitting costs and financial penalties) was not fundamentally dissimilar to that of previous cases involving other vehicle manufacturers, and, therefore, appeared to be controllable overall with a view to the business activities of the Volkswagen Group. This assessment by the Volkswagen Group was based, among other things, on the advice of a law firm engaged in the USA for approval issues, according to which similar cases in the past were resolved amicably with the US authorities. The publication of the “Notice of Violation” by the EPA on September 18, 2015, which, especially at that time came unexpectedly to the Board of Management, then presented the situation in an entirely different light. Extensive inquiries were also conducted at AUDI AG in relation to the potential use of unlawful “defeat devices” under US law in type V6 3.0 l diesel engines. The investigation conducted by Jones Day for Volkswagen AG also compre- hensively covered this issue. The AUDI AG Board of Management members in office back at the relevant time have stated that they had no knowledge of the use of unlawful “defeat device” software under US law in V6 3.0 l TDI engines until they were informed by the EPA in November 2015. Within the Volkswagen Group, Volkswagen AG has develop- ment responsibility for the four-cylinder diesel engines such as the type EA 189, and AUDI AG has development respon- sibility for the six-cylinder diesel engines such as the type V6 3.0 l diesel engines. Nothing from the publications made up to the time this report was prepared or from the ongoing investigations and interviews on the diesel issue has presented the Volkswagen AG Board of Management with any conclusive findings or assessments of fact that would result in a different assess- ment of the associated risks (e.g. investor lawsuits). E A 1 8 9 V E H I C L E S I N T H E E U/ R E ST O F T H E WO R L D Outside the USA and Canada, around 10 million vehicles with type EA 189 diesel engines were affected. During the first quarter of 2017, the Kraftfahrt-Bundes- amt (KBA – German Federal Motor Transport Authority) issued the final outstanding official approvals needed for technical measures of 14 thousand Volkswagen Group vehicles fitted with type EA 189 diesel engines falling within its remit. The KBA ascertained for all clusters (groups of vehicles) that implementation of the technical measures would not bring about any adverse changes in fuel consumption figures, CO2 emissions figures, engine power, maximum torque and noise emissions. Once the updates have been made, the vehicles will continue to comply with the legal requirements and the emission standards applicable in each case. Group Management Report Diesel Issue 93 During the second quarter of 2017, the Vehicle Certification Agency in the United Kingdom issued the outstanding official approvals needed for technical measures to modify the ŠKODA and SEAT models with type EA 189 diesel engines falling within its remit. The technical measures for all affected vehicles with type EA 189 engines in the European Union were approved without exception, and implemented in most cases. In some countries outside the EU the technical measures have to be approved by the national authorities. With the exception of South Korea and Chile, we were able to complete the approval process in all countries. There, the majority of approvals were likewise granted; in relation to the pending approvals Volkswagen is in close contact with the authorities. Based on current planning, implementation of the tech- nical measures, which are free of charge for our customers, will run into 2018. F U RT H E R R E T R O F I T P R O G R A M S F O R T Y P E V 6 / V 8 E N G I N E S For many months, AUDI AG has been intensively checking all diesel concepts for possible discrepancies and retrofit poten- tials. A systematic review process for all engine and gear variants has been underway since 2016. This was done in close cooperation with the authorities, which were provided with detailed reports, especially the German Federal Ministry of Transport and the KBA. In this context, AUDI AG announced on July 21, 2017 that it was going to improve the emissions performance of up to 850 thousand vehicles across Europe via service measures. The retrofit package comprises voluntary measures and to a small extent measures directed by the authorities; these are measures taken within the scope of a recall, which were proposed by AUDI AG itself, reported to the KBA and taken up and ordered by the latter. A F F E C T E D V E H I C L E S I N T H E U S A / C A N A DA In the USA and Canada three generations of certain vehicles with 2.0 l TDI engines and two generations of certain vehicles with V6 3.0 l TDI engines are affected, which come to a total of approximately 700 thousand vehicles. Due to NOx limits that are considerably stricter than in the EU and the rest of the world, it is a greater technical challenge here to refit the vehicles so that the emission standards defined in the settlement agreements for these vehicles can be achieved. The EPA and CARB have approved emissions modifications and issued resale approvals for the majority of the affected vehicles with 2.0 l TDI engines. The approved modifications relate to certain Generation 1 and Generation 2 vehicles, and the first part of a two-step modification for Generation 3 vehicles. The second part of this modification has been submitted for approval. We are working in close cooperation with the EPA and CARB to obtain the outstanding approval. We have withdrawn the emissions modification proposal for Generation 2 vehicles with manual transmissions. The EPA and CARB have approved the modification measures for the Generation 2 vehicles with type V6 3.0 l TDI engines. We have submitted proposals for emissions modi- fications for Generation 1 vehicles with type V6 3.0 l TDI engines. These proposals are under review by the EPA and CARB. The relevant US and Canadian companies of the Volks- wagen Group have withdrawn the affected new and certified used vehicles from sale until the outstanding approvals are issued. The technical solutions that have been approved by the authorities have already been implemented. L E G A L R I S K S Various legal risks are associated with the diesel issue. The provisions recognized for the diesel issue and the contingent liabilities disclosed as well as the other latent legal risks are partially subject to substantial estimation risks given the complexity of the individual factors, the ongoing approval process with the authorities and the fact that the facts have not yet been definitively clarified. Should these legal risks materialize, this could result in considerable financial charges. A detailed description of these and other risks arising from the diesel issue as stated above can be found in the Report on Risks and Opportunities starting on page 178. O P E R AT I N G R E S U LT Special items recognized in operating profit relating to the diesel issue amounted to €–3.2 (–6.4) billion in fiscal year 2017, mainly due to higher provisions relating to the buy- back/retrofit programs. The diesel issue led to total special items of €–25.8 billion in the years 2015 to 2017. 94 Diesel Issue Group Management Report I N D E P E N D E N T M O N I TO R In June 2017, Larry D. Thompson was appointed as the Independent Compliance Monitor at Volkswagen under the terms of the Plea Agreement with the DOJ announced on January 11, 2017 and confirmed by a US federal court on April 21, 2017. He will also work as Independent Compliance Auditor under the Third Partial Consent Decree concluded separately with the EPA and the Third California Partial Consent Decree agreed with the State of California and CARB (for more information on these agreements, please see the Litigation section starting on page 178). Mr. Thompson will assess and oversee Volkswagen’s compliance with the terms of the Plea Agreement and Consent Decrees for a period of three years, which includes taking measures to further strengthen the Company’s compliance, reporting and moni- toring mechanisms and the implementation of an enhanced compliance and ethics program. TO O U R STA K E H O L D E R S The diesel issue prompted a process by which we strength- ened our corporate culture, particularly in the areas of com- pliance and internal control mechanisms. This development led to the initiation of programs and projects designed to intensify Volkswagen’s collective awareness of integrity. We honed our internal control systems for the product development process and vehicle testing, overhauled our Code of Conduct and the whistleblower system, and increased the frequency of the training courses provided to staff on these topics. The combination of integrity, compliance and culture is an important and indispensable part of the transformation process we are undergoing. We are renewing ourselves from the inside out and are evolving on a daily basis to merit our most important asset – the trust of our customers and stake- holders. Group Management Report Business Development 95 Business Development The global economy grew more strongly in fiscal year 2017 than in the previous year. However, global demand for vehicles did not rise as sharply as in the year before. Amid challenging market conditions, the Volkswagen Group delivered 10.7 million vehicles to customers for the first time. D E V E LO P M E N T S I N T H E G LO B A L E CO N O MY Global gross domestic product (GDP) rose by 3.2 (2.5)% in 2017. Economic momentum accelerated in both advanced economies and emerging markets year-on-year. Consumer prices increased at a slower pace worldwide than in the pre- vious year, with persistently low interest rates and rising energy and commodity prices. Europe/Other Markets GDP growth in Western Europe edged up slightly during the year to 2.3 (1.8)%, with the majority of the countries in this region seeing higher growth rates. The start of the Brexit negotiations between the United Kingdom and the European Union generated uncertainty, as did the question of what form this relationship would take in the future. The unem- ployment rate in the eurozone continued to decrease, falling to an average of 9.6 (10.6)%, though rates remained consid- erably higher in Greece and Spain. The Central and Eastern Europe region recorded a relatively strong increase in GDP in the reporting period with an increase of 3.8 (1.8)%. In Central Europe, the general uptrend gained traction, and in Eastern Europe the economy also grew at a considerably stronger pace than in the previous year. Higher energy prices led to a stabilization of the economic situation in the countries from this region that export raw materials. A growth rate of 1.6 (– 0.4)% marked the end of the recessionary period in Russia. South Africa’s GDP rose by just 0.9 (0.3)%, only slightly higher than the low figure for the previous year. Ongoing structural deficits, social unrest and political challenges weighed on the economy. Germany The German economy continued to profit from optimistic consumer sentiment and a good labor market, which led to a sharper year-on-year increase in GDP to 2.5 (1.9)% in 2017. North America Economic growth in the USA was faster than in the previous year, at 2.2 (1.5)%. The economy was supported mainly by private consumption and the expansionary monetary policy. Private gross investments also developed positively. The average unemployment rate was 4.4 (4.9)%. The US dollar was somewhat weaker than in the previous year. At 3.0 (1.4)%, GDP growth in Canada accelerated significantly. The growth rate of Mexico’s economic output fell somewhat to 2.2 (2.7)%. South America In the reporting period, Brazil left behind the economic downswing, with economic output increasing by 1.0 (– 3.5)%. The situation in South America’s largest economy never- theless remained tense, due to political uncertainty, among other things. Argentina’s GDP rose by 2.8 (– 2.2)% in spite of structural deficits and persistently high inflation. Asia-Pacific The Chinese economy expanded at the previous year’s high level with a growth rate of 6.9 (6.7)%. The Indian economy continued its positive trend but, with a gain of 6.5 (7.1)%, grew somewhat less strongly than in the previous year. The Introduction of reform measures had a temporary damp- ening effect here. Japan registered solid GDP growth of 1.8 (0.9)%. 96 Business Development Group Management Report E C O N O M I C G R O W T H Percentage change in GDP 9 9 8 8 7 7 6 6 5 5 3 3 2 2 1 1 0 0 –1 –1 Global economy Western Europe Global economy Germany Western Europe USA Germany China USA China 2013 2014 2015 2016 2017 T R E N D S I N T H E PA S S E N G E R C A R M A R K E T S In fiscal year 2017, the global market volume of passenger cars rose by 2.9% to 83.5 million vehicles, achieving a record figure for the seventh time in a row. While demand rose in the Asia-Pacific, South America, Western Europe and Central and Eastern Europe regions, the market volume in North America, the Middle East and Africa fell short of the prior- year figures. Sector-specific environment The sector-specific environment was influenced significantly by fiscal policy measures, which contributed substantially to the mixed trends in sales volumes in the markets last year. The instruments used were tax cuts or increases, incentive programs and sales incentives, as well as import duties. In addition, non-tariff trade barriers to protect the respec- tive domestic automotive industry made the movement of vehicles, parts and components more difficult. Europe/Other Markets In Western Europe, new passenger car registrations rose by 2.5% to 14.3 million vehicles, the highest level in the past ten years. The positive performance was underpinned in partic- ular by the strong macroeconomic environment, consumer confidence and low interest rates. In Italy (+8.1%) and Spain (+7.7%), the level of demand benefited from demand for replacement vehicles and particularly from significant growth in sales to commercial customers. The rate of growth in the French passenger car market was lower, at 4.8%. In the United Kingdom, the volume of demand fell 5.7% short of the record level seen in the previous year – due among other things to the change in vehicle taxation as of April 1, 2017. The number of diesel vehicles (passenger cars) in Western Europe slipped to 44.4 (49.5)% in the reporting year. The passenger car market volume in the Central and Eastern European region in fiscal year 2017 was up con- siderably on the prior-year figure, with an increase of 12.6% to 3.0 million vehicles. New passenger car registrations in the EU member states of Central Europe increased by 12.5% to 1.3 million units. Passenger car sales in Eastern Europe also achieved a double-digit growth rate (+12.6%), starting from a very low level. The main growth driver in the region was the Russian market, which, with an increase of 12.3% to 1.5 mil- lion vehicles, saw demand increase again for the first time after four years of decline. At a rate of change of 2.4%, the number of new passenger cars registered in South Africa in the reporting period (370 thousand vehicles) was slightly higher than the com- paratively low level seen the previous year. Despite the weak overall economic environment, incentive programs and lower interest rates were the principal causes of this increase. Group Management Report Business Development 97 E X C H A N G E R A T E M O V E M E N T S F R O M D E C E M B E R 2 0 1 6 T O D E C E M B E R 2 0 1 7 Index based on month-end prices: as of December 31, 2016 = 100 EUR to GBP EUR to USD EUR to CNY EUR to JPY 115 115 110 110 105 105 100 100 95 95 90 90 D J F M A M J J A S O N D Germany In fiscal year 2017, demand for passenger cars in Germany exceeded the prior-year figure by 2.7% at 3.4 million units. The fact that this was the highest level since 2009 was attri- butable not only to the buoyant macroeconomic environ- ment but also to manufacturer discounts in the form of a trade-in bonus for older diesel models as well as to an environ- mental bonus for electric-powered vehicles (all-electric and plug-in hybrid drives). New registrations for both retail cus- tomers (+4.4%) and business customers (+1.7%) increased as a result. However, domestic production and exports fell short of the comparable prior-year figures in 2017. Passenger car production declined by 1.7% to 5.6 million vehicles. Passen- ger car exports fell by 0.9% to 4.4 million vehicles; this was mainly due to the fact that the volume of exports to North America was significantly lower because of shifts in produc- tion accompanied by a weakening of the North American market. North America At 20.8 million vehicles (– 1.4%) in fiscal year 2017, sales of passenger cars and light commercial vehicles (up to 6.35 tonnes) in the North America region were just under the record level seen in the previous year. In the US market, demand diminished compared with the high level in 2016 by 1.8% to 17.2 million units. A favorable labor market, high consumer confidence and generous manufacturer incentive programs were unable to stop the downward tendency. The trend in demand towards SUV and pickup models (+5.7%) continued, accompanied by a simultaneous decline in sales of traditional passenger cars (– 10.9%). The Canadian automotive market again recorded growth (+4.6% to 2.0 million vehicles), exceeding the record figure of the previous year. By contrast, sales of passenger cars and light commercial vehicles in Mexico were down on the record volumes achieved in the prior-year period (– 4.6% to 1.5 mil- lion units). South America In South America, demand for passenger cars and light com- mercial vehicles rose from the previously low level by a sig- nificant 12.6% to 4.2 million units in the reporting period. After four years of declining new vehicle registrations, growth of 9.4% to 2.2 million vehicles was recorded again for the first time in the Brazilian automotive market. However, the mar- ket volume was still around a quarter lower than the average for the last ten years. Brazil’s vehicle exports saw a marked increase in 2017, climbing 46.5% to 762 thousand units to exceed the all-time high recorded in 2005. Exports benefited in particular from the dynamic development of the market in Argentina, where demand increased by 26.2% year-on-year to 855 thousand passenger cars and light commercial vehicles. The second-highest number of new registrations in the region's history was primarily driven by price reductions and attractive financing models offered by the manufacturers. 98 Business Development Group Management Report Asia-Pacific The market volume in the Asia-Pacific region rose by 4.7% in the past fiscal year to 37.0 million units; this was the highest absolute increase in new vehicle registrations worldwide. Once again, the main growth driver was the Chinese passenger car market, although the growth rate was low compared with previous years, with an increase of 4.5% to 23.9 million vehicles. This was mainly because customers brought forward purchases at the end of 2016 in anticipation of a rise in the tax rate on vehicles of up to 1.6 l at the beginning of 2017. The number of passenger cars sold in India grew 9.3% year-on-year to 3.1 million units, topping the 3 million mark for the first time ever. This was due not only to high con- sumer confidence, a wealth of new models and attractive financing products, but especially to the goods and services tax introduced on July 1, 2017, which resulted in part in improved purchasing conditions for the consumer. The Japanese passenger car market showed a substantial improvement over the low prior-year level with sales of 4.4 million vehicles in the reporting period (+6.1%). The main reasons for the positive trend were the market success of new models and the continued government support for fuel- efficient, low-emission vehicles. T R E N D S I N T H E M A R K E T S F O R CO M M E R C I A L V E H I C L E S Overall demand for light commercial vehicles in fiscal year 2017 was slightly lower than in the previous year. A total of 9.1 (9.3) million vehicles were registered worldwide. In Western Europe, the number of new vehicle registra- tions rose by 4.7% during the year to 1.9 million units, driven by the region’s continued positive economic performance. The markets in Italy, France and Spain recorded moderate to high growth rates, while the United Kingdom registered a decline. In Germany, the comparative figure for 2016 was exceeded by 3.6%. Central and Eastern European markets recorded percepti- ble growth on the whole with 326 (306) thousand vehicle registrations. In Russia alone, 123 (116) thousand light com- mercial vehicles were registered. There, market performance benefited from the ruble’s recovery and the drop in inflation. Most of the markets in this region succeeded in maintaining or exceeding their prior-year results. In North and South America, the light vehicle market is reported as part of the passenger car market, which includes both passenger cars and light commercial vehicles. Registration volumes of light commercial vehicles in the Asia-Pacific region decreased to 6.0 million units in the reporting period (– 3.1%). In China, the region’s dominant market, demand for light commercial vehicles of 3.4 million units was down a substantial 8.2% on the prior-year figure. This decline is mainly due to the shift in demand for micro vans towards more cost-effective MPVs and SUVs. As a conse- quence of the sustained economic growth in India, consid- erably more vehicles were registered than in 2016; here, 560 (510) thousand new units were registered. The market volume fell in Japan as a result of the persistently weak eco- nomic trend (– 5.0%). Global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes in the markets that are relevant for the Volkswagen Group was higher in fiscal year 2017 than in the previous year, with 547 thousand new vehicle registrations (+7.4%). In Western Europe, the number of new truck registrations remained level with the previous year at a total of 289 thou- sand vehicles. While the market in Spain remained at the previous year’s level, in Italy it expanded. Demand in the United Kingdom and the Netherlands declined. New registra- tions in Germany, Western Europe’s largest market, were on a level with the previous year. Central and Eastern Europe saw demand rise by 17.7% to 153 thousand units on the back of the positive economic performance. This growth was attributable to the Russian market; here, registrations moved up 47.7% from a low prior- year level to 72 thousand vehicles. Reasons for this were the incipient recovery of the economy, declining inflation rates and demand for replacement vehicles. South America saw a significant increase in market volume compared with the previous year. Here, the number of new vehicle registrations rose by 11.8% to 105 thousand units. In Brazil, the region’s largest market, demand for trucks was up 2.9% on the low prior-year figure. This reflected a recovery of the market once the difficult economic climate improved. There was a very sharp increase in new vehicle registrations in Argentina (+78,7%), buoyed by the political reforms and stimulus from the agricultural sector. Demand for buses in the markets that are relevant for the Volkswagen Group was considerably higher than in the previous year. The markets in Central and Eastern Europe as well as South America contributed in particular to this growth. T R E N D S I N T H E M A R K E T S F O R P OW E R E N G I N E E R I N G The markets for power engineering are subject to differing regional and economic factors. Consequently, their business growth trends are generally independent of each other. The number of orders for merchant vessels remained very low in the first half of 2017. Construction of new bulk carriers and container ships in particular fell short of expec- tations on account of overall low freight rates. In the second Group Management Report Business Development 99 half of 2017, however, the market volume in merchant ship- ping stood at a higher level overall and a slightly positive trend in new orders for ships became apparent. Yet, despite the ongoing recovery in oil prices, existing overcapacity in the offshore sector continued to curb investment in oil pro- duction. As a result, new ship construction came to a virtual standstill here. By contrast, a stable uptrend was again recorded in demand for cruise ships, ferries, fishing vessels and dredgers. The special market for government vessels also continued on a positive trajectory. In spite of the still low liquid fuel prices, the somewhat positive trend towards gas- powered ships stabilized in expectation of stricter emission standards. As a whole, the marine market showed slight growth at a low level in 2017 compared with the previous year. China, South Korea and Japan remained the dominant shipbuilding countries, accounting for a global market share of more than 75% measured in terms of the number of ships. On account of low market volumes, all market segments are seeing considerable competition and a sharp drop in prices as a result. Demand for energy solutions in emerging economies increased slightly once again in 2017. The Middle East, South- east Asia, Africa and South America regions continue to be relevant markets for energy solutions. Particularly on larger projects, order placement is being delayed due to ongoing muted growth in key emerging markets and persistently difficult financing conditions for customers. Overall, there was a slight year-on-year increase in demand for decentral- ized diesel and gas engine power plants in 2017. The shift away from oil-fired power plants towards dual-fuel and gas- fired power plants intensified further. Nevertheless, nearly all projects continue to be subject to intense competition and pressure on prices, which has a negative impact on the earnings quality of orders. The market for the construction of turbomachinery is mainly dominated by investment projects in oil and gas, the processing industry and power generation. In spite of a modest recovery, oil prices remained low on the whole in 2017. As a result, leading oil and gas companies kept capital expenditure at a low level. Planned projects were postponed again or canceled. Demand for products from the processing industry and power generation remained generally weak in 2017. Failure to reduce overcapacity in some industries, such as steel-making, prevented any recovery in the corresponding markets. Insufficient capacity utilization at many manufac- turers intensified the level of competition. Overall, the mar- ket volume for turbomachinery in the reporting period was marginally higher than in the prior-year period. Competition and pressure on prices remain fierce. The marine and power plant after-sales business for diesel engines generally performed positively and benefited from a continued increase in interest in long-term maintenance contracts and retrofit solutions. The after-sales market for turbomachinery showed a slight uptrend. T R E N D S I N T H E M A R K E T F O R F I N A N C I A L S E R V I C E S Demand for automotive financial services was high once again in 2017, due above all to the expansion of the overall market for passenger cars and low key interest rates in the main currency areas. Particularly insurance and service pro- ducts such as maintenance and servicing agreements were especially popular, as customers in more advanced automo- tive financial services markets are putting greater focus on optimizing overall running costs. In the fleet segment, some customers consulted automotive financial service providers in order to optimise their entire mobility management beyond mere fleet operation. There was also increased demand from both private and business customers for mobility services centered on vehicle usage rather than ownership. In Europe, sales of financial services climbed further in the reporting period, strengthened by higher vehicle sales and demand for after-sales products such as servicing, main- tenance and spare parts agreements as well as automotive- related insurance. Demand developed positively in most countries; in the United Kingdom, France, Spain and Italy in particular, automotive financial services products continued to enjoy rising popularity. The UK’s decision to leave the EU has not yet had a negative impact on local demand for finan- cial services. In Germany, the share of loan-financed or leased vehicles remained stable at a high level in 2017. Alongside traditional products, mobility services and after-sales products were particularly popular. In South Africa, structural deficits and political uncer- tainty curbed economic growth, which also impacted on the automotive industry. Demand for automotive financial services products remained stable. Sales of automotive financial services in North America remained at a high level in the fiscal year now ended. In the USA, the overall market for financial services products once again performed positively. In particular, demand for leasing through captive financial service providers was consistently high. In Mexico, demand for automotive financial services products continued at a high level. 100 Business Development Group Management Report The macroeconomic and political situation in Brazil remained tense in 2017 and had a negative impact on the consumer credit business for new vehicles as well as on sales of the country-specific financial services product Consorcio, a lottery-style savings plan. The negative trend tapered off slightly in the second half of the year, however. Argentina’s automotive industry was helped in 2017 by price reductions and attractive financing models from manufacturers. The above-average demand for vehicles was the basis for a good year for automotive financial services. The performance of markets in the Asia-Pacific region during the reporting period was mixed. In China, the pro- portion of loan-financed vehicle purchases rose. Despite increasing restrictions on registrations in metropolitan areas, there is still considerable potential to acquire new customers for automotive-related financial services, particularly in the interior of the country. Demand for automotive financial services in Japan and Korea was stable on the whole. In Australia, the central bank’s continued policy of low interest rates stimulated demand for automotive-related financial services and service contracts. In the commercial vehicles segment, the European mar- ket for financial services again performed positively; demand also rose in China. The tense economic situation in Brazil once again put pressure on the truck and bus business and the related financial services market, though this negative trend weakened somewhat in the second half of the year. N E W G R O U P M O D E L S I N 2 0 1 7 The Volkswagen Group launched a large number of attractive new models on the market in fiscal year 2017. The current product portfolio comprises 355 models. It covers almost all key segments and body types, with offerings from small cars to super sports cars in the passenger car segment, and from pickups to heavy trucks and buses in the commercial vehicles segment, as well as motorcycles. The Volkswagen Passenger Cars brand kicked off its global product initiative in 2017, starting with the new Golf. The updated bestseller not only features improved design and new engines, but also a large number of new digital driver assistance systems and an innovative infotainment system. The range of the all-electric e-Golf was extended to 300 km. The Arteon, the brand’s new top-of-the-range saloon, cele- brated its world premiere. The elegant and dynamic five-door vehicle with the proportions of a Gran Turismo and coupé lines is impressively spacious and comfortable. The new Polo, which is now based on the Modular Transverse Toolkit (MQB) too, brings technological innovations to the small car segment that were previously available only in higher vehicle classes. The Polo is ushering in a new era in Brazil, where it is setting new standards in terms of quality, driving dynamics and digital innovations. In 2017, Volkswagen Passenger Cars substantially expanded its range of vehicles in the SUV seg- ment. The new T-Roc is a young, sporty crossover model with which the brand hopes to kindle enthusiasm among new groups of customers. A long version of the Tiguan, the suc- cessful compact SUV, was also launched on the market. This version is available in Europe as the Tiguan Allspace as well as in China and the USA. Of the large SUVs, the Teramont came on the market in China and the Atlas in the USA. This means that the brand is now represented in four of the five largest vehicle segments in the USA. The Audi brand launched the new Q5 in 2017. The sporty, progressive A5 family was also supplemented by the revamped A5 Sportback and A5 Cabriolet. At the same time, Audi expanded its range of environmentally friendly models with the A4 Avant g-tron and A5 Sportback g-tron. The brand’s flagship, the new Audi A8, was developed as the world’s first production model designed for highly automated driving. With a new design language, an innovative touch control interface and systematic electrification of the drive, the A8 is once again a reflection of the slogan “Vorsprung durch Technik”. Audi also launched its fastest open-top production model, the R8 Spyder V10 plus, on the market. In China, the locally built Audi A3 was revamped. ŠKODA began its SUV drive in 2017: the self-confident, powerful Kodiaq, which is based on the MQB platform, has carved out a new segment for the brand. It features all of the brand’s strengths: sophisticated functionality, effortless spa- ciousness, cutting-edge technology and outstanding value for money. The compact SUV Karoq followed during the year. The completely redeveloped model stands out from the crowd thanks to its emotional and dynamic design as well as a wealth of innovations. The popular Octavia received an upgrade. The Citigo, the Rapid and the Rapid Spaceback were also given a face-lift. The SEAT brand continued its major product initiative in the reporting period with the revitalized Leon. The fifth generation of the Ibiza also came onto the market. SEAT made its debut in the crossover segment with the Arona. The Ateca’s younger brother combines the special merits of a compact city car with the robust features of an SUV. In 2017, Porsche supplemented the second generation of the Panamera by adding several model variants, including the Panamera 4 E-Hybrid and Panamera Turbo S E-Hybrid, the Executive models and the Sport Turismo. In the 911 model series, Porsche launched the GTS models, the new 911 GT3 and the 911 GT2 RS – the sporty vanguard of the model series. Porsche also celebrated the world premiere of the new Cayenne. The successful model, which has been redeveloped from the ground up, combines more than ever before the per- formance typical of a Porsche with utmost everyday practi- cality. In 2017, Bentley rolled out the Bentayga Diesel, the first of the brand’s models with a diesel engine and also the world’s Group Management Report Business Development 101 fastest diesel SUV. The Continental GT Supersports also celebrated its market debut. Lamborghini launched the new Huracán RWD Spyder on the market and the Huracán Performante, along with the upgraded Aventador in the versions S Coupé and S Roadster. Bugatti began 2017 with deliveries of the 1,500 PS super PA S S E N G E R C A R D E L I V E R I E S WO R L D W I D E With its passenger car brands, the Volkswagen Group is present in all relevant automotive markets around the world. The Group’s key sales markets currently include Western Europe, China, the USA, Brazil and Mexico. The Group recorded encouraging growth in many key markets. sports car Chiron, which is limited to 500 vehicles. In the reporting period, the Volkswagen Commercial Vehicles brand launched the fully re-engineered Crafter on the market, which has been designed systematically with a strong focus on customer needs. Scania presented a new generation of trucks for the con- struction and forestry industries, new engines and cabs as well as new services. With the latest generation of Euro 6 V8 engines, Scania is setting new standards in terms of fuel efficiency. MAN entered the world of vans for the first time in 2017 with the TGE. In the bus segment, the new Lion’s Coach celebrated its premiere. This marks the beginning of a new design language for buses. In the high-performance diesel engine segment, MAN Power Engineering presented the successor to the 48/60CR, the latest addition to its 4x line. Ducati rolled out a total of seven new models in 2017: the Ducati SuperSport, the Monster 797 and 1200, the Multistrada 950, two new Scrambler models and the limited 1299 Superleggera. During the reporting period, deliveries of passenger cars to Volkswagen Group customers worldwide rose to 10,038,650 units amid partly difficult conditions in some relevant markets such as the United Kingdom and the USA. This was an increase of 403,164 vehicles or 4.2% on the pre- vious year. Since the passenger car market as a whole expanded by 2.9% in the same period, the Volkswagen Group’s share of the global market rose slightly to 12.1 (11.9)%. The Group recorded the highest absolute growth in China. Sales figures in Germany and Mexico, among others, were down on the previous year. All Volkswagen Group brands lifted delivery volumes year-on-year. The Volkswagen Passenger Cars brand recorded the strongest growth in absolute terms, setting new records, as did Audi, ŠKODA, Porsche, Bentley and Lamborghini. The table on page 104 gives an overview of passenger car deliveries to customers of the Volkswagen Group in the regions and the key individual markets. The demand trends for Group models in these markets and regions are described in the following sections. VO L K SWA G E N G R O U P D E L I V E R I E S In fiscal year 2017, the Volkswagen Group increased its deliveries to customers worldwide by 4.3% year-on-year and once again achieved a new record of 10,741,455 vehicles. The chart on the next page shows how deliveries changed from month to month and compares each monthly figure to the same month of the previous year. Deliveries of passenger cars and commercial vehicles are reported separately in the following. VO L K SWA G E N G R O U P D E L I V E R I E S 1 2017 2016 Passenger Cars 10,038,650 9,635,486 Commercial Vehicles 702,805 661,555 Total 10,741,455 10,297,041 % +4.2 +6.2 +4.3 1 Deliveries for 2016 have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. Deliveries in Europe/Other markets In 2017, the passenger car market as a whole expanded by 2.5% in Western Europe. Deliveries to customers of the Volks- wagen Group there rose less pronouncedly, by 1.4% to 3,157,107 vehicles. Among other factors, this trend was due to the Golf and Polo model change, the fact that customer confidence has not yet been fully restored following the diesel issue and to customer uncertainty generated by the public discussion on driving bans for diesel vehicles. How- ever, demand for Group models was up year-on-year in virtually all major markets in this region, with the Tiguan, Audi Q2 and SEAT Ateca models seeing the highest increases. The Audi A5 Sportback and Porsche Macan models were also very popular. The new Polo, T-Roc, Tiguan Allspace and Arteon models from the Volkswagen Passenger Cars brand, the ŠKODA Karoq and Kodiaq, and the SEAT Arona and Ibiza were very well received by the market. The Group’s share of the passenger car market in Western Europe was 22.0 (22.3)%. 102 Business Development Group Management Report V O L K S W A G E N G R O U P D E L I V E R I E S B Y M O N T H Vehicles in thousands 2017 2017 2016 2016 1, 1,100 1, 1,000 900 900 800 800 700 700 600 600 J F M A M J J A S O N D In the Central and Eastern Europe regions, where passenger car markets have grown considerably, the Volkswagen Group delivered 12.9% more vehicles to customers in the reporting period than in the previous year. The Czech Republic and Poland continued to see strong growth in demand for Group models, and in Russia we also registered a marked upsurge in unit sales. Demand for the Golf, Tiguan, Audi Q2, ŠKODA Fabia, ŠKODA Rapid and ŠKODA Octavia models was very encouraging. In addition, the new ŠKODA Karoq and Kodiaq models and the SEAT Ateca models were exceedingly popular. The Volkswagen Group’s share of the passenger car market in Central and Eastern Europe improved slightly to 22.1 (22.0)%. In South Africa, demand for Volkswagen Group vehicles in 2017 increased by 1.4% compared with the previous year. The passenger car market as a whole grew by 2.4% in the same period. The best-selling Group model in South Africa was the Polo. In the markets of the Middle East region, which are seeing a modest decline, we sold 6.6% fewer vehicles in the past fis- cal year than in the year before. The Polo, Golf, Passat and ŠKODA Octavia models saw the highest demand. Deliveries in Germany The German passenger car market continued its growth in fiscal year 2017, expanding by 2.7%. The Volkswagen Group delivered 1,131,414 passenger cars to customers in its home market, a slight decrease on the prior-year level (– 0.5%). This was due in particular to the fact that customer confidence has not yet been fully restored following the diesel issue as well as to customer uncertainty generated by the public discussion on driving bans for diesel vehicles. The Tiguan, Audi Q2, Audi A4 Avant, Audi A5 Sportback and SEAT Ateca models saw the strongest growth in demand. The new T-Roc, Tiguan Allspace and Arteon models from the Volkswagen Passenger Cars brand, the new ŠKODA Karoq and Kodiaq models, the new SEAT Arona and Ibiza models and the Porsche Macan were also very popular. In the registration statistics of the Kraft- fahrt-Bundesamt (KBA – German Federal Motor Transport Authority), seven Group models led their respective segments at the end of 2017: the up!, Polo, Golf, Tiguan, Touran, Passat, and Porsche 911. The Golf continued to top the list of the most popular passenger cars in Germany in terms of regis- trations. Deliveries in North America The Volkswagen Group handed over 962,980 vehicles to customers in North America during the reporting period in a slightly declining overall market for passenger cars and light commercial vehicles. This was 3.8% more than in the pre- vious year. The Group’s market share was 4.7 (4.4)%. The Jetta remained the Group’s best-selling model in North America. In the US market, demand for Volkswagen Group models rose by 5.8% compared with the previous year. The market as a whole declined by 1.8% in this period. Models in the SUV and pickup segments remained particularly popular. The Golf Estate, Audi A5, Audi Q5, Audi Q7 and Porsche Macan models enjoyed an encouraging rise in demand. The new SUV Atlas, the Tiguan Allspace from the Volkswagen Passenger Cars brand and the Audi A5 Sportback were well received by the market. Group Management Report Business Development 103 W O R L D W I D E D E L I V E R I E S O F T H E G R O U P ’ S M O S T S U C C E S S F U L G R O U P M O D E L R A N G E I N 2 0 1 7 Vehicles in thousands Golf Jetta Tiguan Polo Passat Lavida ŠKODA Octavia Audi A4 974 879 724 716 701 505 419 341 In Canada, we delivered 16.6% more vehicles to customers in the reporting period than in the previous year in a growing overall market. Demand for the Golf Estate, Audi A4, Audi Q5 and Porsche Macan models developed particularly encour- agingly. The new SUV Atlas and Tiguan with extended wheel- base were also very popular. In the Mexican market, which is declining on the whole, the Group’s sales fell by 6.4% compared with the previous year. The Vento, Jetta, Gol and SEAT Ibiza models were partic- ularly popular. Deliveries in South America The markets for passenger cars and light commercial vehicles in South America witnessed a clear surge in demand in 2017 (+12.6%). In this region, the Volkswagen Group handed over 445,636 vehicles to customers, an increase of 23.0% on the weak previous year. The Volkswagen Group’s share of the pas- senger car market in this region rose to 11.5 (10.5)%. The Brazilian market also recovered in the reporting period. We delivered 17.7% more vehicles to customers there than in the previous year. The Gol, Voyage and Saveiro models saw the highest increases. Demand was also strong for the new Polo. Group sales were up 35.7% year-on-year in Argentina. The market as a whole grew at a somewhat weaker pace at 26.2%. The Gol was the best-selling vehicle in Argentina. The Suran and Amarok models were also very popular. Deliveries in the Asia-Pacific region The passenger car markets in the Asia-Pacific region experi- enced the largest growth in absolute terms of any world region again in 2017. Demand for Volkswagen Group models rose in this region by 4.2% year-on-year to 4,462,387 units. The market share in this region was unchanged at 12.1 (12.1)%. China, the world’s largest single market, was again the main growth driver of the Asia-Pacific region in the reporting year, recording the highest absolute increase. Above all, there was continued strong demand for attractively priced entry- level models in the SUV segment. Deliveries to customers of the Volkswagen Group in China exceeded the prior-year figure by 5.0%. The successfully concluded negotiations by the Audi brand for the strategic further development of its business in China contributed to this positive result in the second half of the year. The Bora, Magotan and Passat models recorded encouraging growth rates. Demand was likewise high for the new Phideon, the Audi A4 and the Porsche Cayenne. The new C-Trek, the new version of the Tiguan with extended wheelbase, and the new ŠKODA Octavia Combi were successfully launched on the market, as were new SUV Teramont and the ŠKODA Kodiaq. The Indian passenger car market grew further during the reporting year. The Volkswagen Group delivered 9.7% more vehicles to customers there in this period than in the previous year. The most popular Group model in India was the Polo; the new Ameo from the Volkswagen Passenger Cars brand and the ŠKODA Rapid were also very popular. Passenger car deliveries to the Group’s customers in Japan in the past fiscal year exceeded the prior-year figure by 2.1%. The total market volume grew at a somewhat stronger pace in the same period. The Polo, Golf and Audi A3 were the most sought-after Group models. 104 Business Development Group Management Report PA S S E N G E R C A R D E L I V E R I E S TO C U STO M E R S B Y M A R K E T 1 Europe/Other markets Western Europe of which: Germany United Kingdom Spain Italy France Central and Eastern Europe of which: Russia Poland Czech Republic Other markets of which: Turkey South Africa North America of which: USA Mexico Canada South America of which: Brazil Argentina Asia-Pacific of which: China Japan India Worldwide Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Lamborghini Porsche Bugatti 1 Deliveries for 2016 have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. D E L I V E R I E S ( U N I T S ) C H A N G E 2017 2016 (%) 4,167,647 3,157,107 1,131,414 4,062,454 3,114,032 1,136,971 531,592 270,645 259,920 256,712 668,522 173,384 145,024 142,842 342,018 158,523 79,968 962,980 625,128 223,548 114,304 445,636 272,231 125,153 4,462,387 4,173,834 84,827 72,467 10,038,650 6,230,229 1,878,105 1,200,535 468,431 11,089 3,815 246,375 71 523,111 244,990 238,537 249,146 592,275 155,672 122,622 134,926 356,147 173,965 78,897 928,033 591,063 238,946 98,024 362,343 231,196 92,257 4,282,656 3,975,071 83,109 66,046 9,635,486 5,980,309 1,867,738 1,126,477 408,703 11,023 3,457 237,778 1 +2.6 +1.4 – 0.5 +1.6 +10.5 +9.0 +3.0 +12.9 +11.4 +18.3 +5.9 – 4.0 – 8.9 +1.4 +3.8 +5.8 – 6.4 +16.6 +23.0 +17.7 +35.7 +4.2 +5.0 +2.1 +9.7 +4.2 +4.2 +0.6 +6.6 +14.6 +0.6 +10.4 +3.6 x Group Management Report Business Development 105 CO M M E R C I A L V E H I C L E D E L I V E R I E S The Volkswagen Group delivered a total of 702,805 commer- cial vehicles to customers worldwide in 2017 (+6.2%). Trucks accounted for 183,481 units (+10.7%) and buses for 19,218 units (+8.1%). Sales of light commercial vehicles increased by 4.6% year-on-year to 500,106 units. In Western Europe, deliveries were up by 1.9% on the pre- vious year at 426,774 vehicles as a result of the sustained economic recovery; of this total, 334,087 were light commer- cial vehicles, 87,258 were trucks and 5,429 were buses. The Transporter and Caddy were the most sought-after Group models in the Western European markets. We handed over 76,054 vehicles to customers in the markets in Central and Eastern Europe in the period from January to December 2017 (+16.3%); of this figure, 41,291 were light commercial vehicles, 33,613 were trucks and 1,150 were buses. The Transporter and the Caddy were the Group models experiencing the highest demand. In Russia, the region’s largest market, sales climbed 61.9% year-on-year to 18,291 units on the back of the incipient economic recovery, demand for replacement vehicles and falling inflation rates. In the Other markets, deliveries of Volkswagen Group commercial vehicles fell by 5.3% to a total of 67,155 units: 46,678 light commercial vehicles, 17,050 trucks and 3,427 buses. Deliveries in North America amounted to 13,416 vehicles (+20.4%), which were handed over almost exclusively to customers in Mexico. In this region, we handed over 10,432 light commercial vehicles, 1,042 trucks and 1,942 buses to customers. The Volkswagen Group sold a total of 75,949 units (+28.3%) in South America. Of the units delivered, 41,331 were light commercial vehicles, 29,589 were trucks and 5,029 were buses. The Transporter and the Amarok were particularly popular. In Brazil, deliveries rose by 34.9% once the difficult economic climate improved; here, 12,633 light commercial vehicles, 20,363 trucks and 2,785 buses were handed over to customers. In the Asia-Pacific region, the Volkswagen Group delivered 43,457 vehicles to customers in the reporting period; 26,287 light commercial vehicles, 14,929 trucks and 2,241 buses. This was 20.8% more than in the previous year. The Transporter and the Amarok were the most popular Group models. In China, sales were up 47.2% on the previous year at 10,408 vehicles. Of this total, 5,566 were light commercial vehicles, 4,532 were trucks and 310 were buses. CO M M E R C I A L V E H I C L E D E L I V E R I E S TO C U STO M E R S B Y M A R K E T 1 Europe/Other markets Western Europe Central and Eastern Europe Other markets North America South America of which: Brazil Asia-Pacific of which: China Worldwide Volkswagen Commercial Vehicles Scania MAN 1 Deliveries for 2016 have been updated to reflect subsequent statistical trends. (cid:3) D E L I V E R I E S ( U N I T S ) C H A N G E 2017 2016 (%) 569,983 426,774 76,054 67,155 13,416 75,949 35,781 43,457 10,408 702,805 497,894 90,777 114,134 555,255 418,931 65,396 70,928 11,140 59,196 26,532 35,964 7,071 661,555 477,974 81,346 102,235 +2.7 +1.9 +16.3 – 5.3 +20.4 +28.3 +34.9 +20.8 +47.2 +6.2 +4.2 +11.6 +11.6 106 Business Development Group Management Report D E L I V E R I E S I N T H E P OW E R E N G I N E E R I N G S E G M E N T Orders in the Power Engineering segment are usually part of major investment projects. Lead times typically range from just under one year to several years, and partial deliveries as construction progresses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction business. Sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turboma- chinery, which together generated well over two-thirds of overall sales revenue. O R D E R S R E C E I V E D I N T H E PA S S E N G E R C A R S S E G M E N T I N W E ST E R N E U R O P E Due to the positive development of the Western European markets, demand for passenger cars increased in fiscal year 2017 compared with the previous year. Incoming orders in the reporting period were 6.0% higher than in 2016. At the same time, incoming orders rose in Germany (+6.7%), just as in other significant markets throughout the region. O R D E R S R E C E I V E D F O R CO M M E R C I A L V E H I C L E S Orders received for light commercial vehicles of the Volks- wagen Group in Western Europe were 2.7% higher than in the previous year at 347,964 units. New orders for mid-sized and heavy trucks and buses witnessed a positive trend in 2017, with orders received for 225,813 vehicles (+18.5%). In Western Europe, our main sales market, ongoing positive economic stimulus gave a boost to incoming orders. The order intake in South America rose after the difficult economic climate improved, especially in Brazil.(cid:3) O R D E R S R E C E I V E D I N T H E P OW E R E N G I N E E R I N G S E G M E N T The long-term performance of the Power Engineering busi- ness is determined by the macroeconomic environment. Individual major orders lead to fluctuations in incoming orders during the year that do not correlate with these long- term trends. Orders received in the Power Engineering segment in 2017 amounted to €3.7 (3.3) billion. Engines & Marine Systems and Turbomachinery generated around two-thirds of the order volume in a persistently difficult market environment. The power plant business performed positively. For example, a Turkish energy company ordered 38 engines with a combined output of 754 MW for its floating power plants, which provide a flexible solution to pressing energy short- ages. The Company was also successful in the Indonesian market, securing orders for 25 engines with an aggregate output of 314 MW. VO L K SWA G E N G R O U P F I N A N C I A L S E R V I C E S The Financial Services Division combines the Volkswagen Group’s dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility offerings. The division comprises Volkswagen Financial Services and the financial services activities of Scania, Porsche and Porsche Holding Salzburg. Demand for the Financial Services Division’s products and services remained strong in fiscal year 2017. At 7.3 (7.1) million, the number of new financing, leasing, service and insurance contracts signed worldwide was above the previous year’s level. The ratio of leased or financed vehicles to Group deliveries (penetration rate) in the Financial Services Divi- sion’s markets rose to 33.4 (33.3)% in the reporting period. As of December 31, 2017, the total number of contracts was 18.4 million, up 5.7% as against the end of 2016. The number of contracts in the Customer financing/Leasing area rose by 6.3% to 10.1 million, while it increased by 5.0% to 8.4 million in the Service/Insurance area. In the Europe/Other markets region, the number of new contracts signed in the past fiscal year climbed 3.7% to 5.4 million. At the end of the reporting period, the total num- ber of contracts was 13.4 million, up 8.0% year-on-year. Of this figure, 6.4 million contracts were attributable to the Customer financing/Leasing area (+8.6%). The penetration rate improved to 47.6 (46.8)%. The number of contracts in North America as of Decem- ber 31, 2017 declined to 2.7 million, 4.7% fewer than in the previous year. The Customer financing/Leasing area accounted for 1.8 million contracts (– 3.4%). The number of new con- tracts signed amounted to 874 thousand, a decrease of 11.6% versus the previous year. The ratio of leased or financed vehi- cles to Group deliveries in North America fell to 60.5 (63.3)%. Group Management Report Business Development 107 In South America, 205 (197) thousand new contracts were signed in 2017. The total number of contracts at the end of the reporting period was 538 thousand, down 16.9% compared to the end of the previous year. The contracts mainly related to the Customer financing/Leasing area. At 26.6 (30.4)%, the penetration rate was lower than in 2016. In the Asia-Pacific region, the number of new contracts signed rose by 12.7% to 834 thousand units. At the end of 2017, the total number of contracts was 1.8 million, up 15.9% year-on-year. The Customer financing/Leasing area accounted for 1.5 million contracts (+20.8%). The ratio of leased or financed vehicles to Group deliveries in this region was 16.1 (15.1)%. S A L E S TO T H E D E A L E R O R G A N I Z AT I O N The Volkswagen Group’s sales to the dealer organization increased by 3.7% to 10,777,048 units (including the Chinese joint ventures) in the reporting year. This was due to higher demand in Asia-Pacific, especially China, in South America and North America, and in Europe. Outside Germany, the unit sales volume rose by 4.1%. In Germany, we increased unit sales by 0.6%. At 11.7%, the proportion of the Group’s sales accounted for by Germany was lower than in 2016 (–12.1%). The Golf, Polo, Jetta, Lavida and Tiguan were our biggest sellers last year. The largest increases in demand were recorded by the Tiguan, Gol and Atlas/Teramont models from the Volkswagen Passenger Cars brand, the Audi Q2 and the A5 family, and the ŠKODA Kodiaq and SEAT Ateca. The Porsche Panamera achieved a strong growth rate. P R O D U C T I O N The Volkswagen Group produced 10,875,000 vehicles world- wide in fiscal year 2017, 4.5% more than in the previous year. In total, our Chinese joint ventures manufactured 3.7% more units than in the year before. The percentage of the Group’s total production accounted for by Germany was lower than in 2016, at 23.7 (25.8)%. Our plants worldwide produced an average of 44,170 vehicles per working day, an increase of 2.3% on the prior-year level. Starting in 2017, the Crafter is included in the Volkswagen Group’s production figures. I N V E N TO R I E S Global inventories at Group companies and in the dealer organization were higher at the end of the reporting period than at year-end 2016, mainly due to demand-induced stock building. E M P LOY E E S Including the Chinese joint ventures, the Volkswagen Group employed an average of 634,396 people (excluding trainees) in fiscal year 2017, an increase of 2.4% year-on-year. Our companies in Germany employed 284,734 people on average in 2017; at 44.9 (45.2)%, their share of the headcount was slightly below the level of the previous year. The Volkswagen Group had 615,081 active employees (+2.3%) as of December 31, 2017. In addition, 8,004 employ- ees were in the passive phase of their partial retirement and 19,207 young people were in vocational traineeships. The Volkswagen Group’s headcount was 642,292 employees (+2.5%) at the end of the reporting period. The production- related expansion, the recruitment of specialists within and outside Germany and the expansion of the workforce in the new plants in Mexico, China and Poland were offset by the reduction of around 9,800 employees as a result of the disposal of part of the PGA Group SAS. A total of 287,480 people were employed in Germany (+2.1%), while 354,812 were employed abroad (+2.8%). E M P L O Y E E S B Y D I V I S I O N / B U S I N E S S A R E A as of December 31, 2017 Passenger Cars Commercial Vehicles Power Engineering Financial Services 917 507,917 673 101,673 53 16,553 16,149 49 108 Shares and Bonds Group Management Report Shares and Bonds Volkswagen AG’s ordinary and preferred shares outperformed the market as a whole in 2017 in a volatile environment. The Volkswagen Group successfully returned to the European bond market. E Q U I T Y M A R K E T S A N D P E R F O R M A N C E O F T H E P R I C E O F VO L K SWA G E N ’ S S H A R E S In the period from January to December 2017, prices on the international equity markets rose amid volatile trading. The DAX also recorded an increase compared with the end of 2016. The promising economic performance of important industrialized nations, the improved situation in the US labor market, and the outcome of the elections in some EU member states had a positive impact, as did the adopted US tax reform, which among other factors contributed to financial relief for companies. Uncertainty as regards to the economic policy of the new US government, the election results in Europe, the monetary policy of the US Federal Reserve as well as the European Central Bank, the strong euro and international crises also had a negative impact on share listings at times. In 2017, Volkswagen AG’s preferred and ordinary shares surpassed the rising market trend amid high volatility. Positive stimulus was generated by settlement agreements in the USA in connection with the diesel issue, strong corporate earnings, sizeable cash flow and the successful performance of the Volkswagen Passenger Cars brand. Share prices were negatively impacted by the provisions required in connection with the diesel issue as well as uncertainty about further legal risks arising from the diesel issue, suspected antitrust behavior by German automotive companies and the future regulatory framework for diesel and electric vehicles. VO L K SWA G E N K E Y S H A R E F I G U R E S A N D M A R K E T I N D I C E S F R O M J A N UA RY 1 TO D E C E M B E R 3 1 , 2 0 1 7 High Low Closing Ordinary share Price (€) Date Preferred share Price (€) DAX Date Price Date ESTX Auto & Parts Price Date 173.95 Nov. 30 178.10 Nov. 30 13,479 Nov. 3 610 Nov. 3 128.70 Aug. 10 125.35 Aug. 31 11,510 Feb. 6 508 July 31 168.70 Dec. 29 166.45 Dec. 29 12,918 Dec. 29 593 Dec. 29 Group Management Report Shares and Bonds 109 P R I C E D E V E L O P M E N T F R O M D E C E M B E R 2 0 1 6 T O D E C E M B E R 2 0 1 7 Index based on month-end prices: December 31, 2016 = 100 Volkswagen ordinary shares +23.4% Volkswagen preferred shares +24.8% DAX +12.5% EURO STOXX Automobiles & Parts +13.8% 140 140 130 130 120 120 110 110 100 100 90 90 D J F M A M J J A S O N D D I V I D E N D P O L I C Y Our dividend policy matches our financial strategy. In the interests of all stakeholders, we aim for continuous dividend growth so that our shareholders can participate appropri- ately in our business success. The proposed dividend amount therefore reflects our financial management objectives – in particular, ensuring a solid financial foundation as part of the implementation of our strategy. The Board of Management and Supervisory Board of Volkswagen AG are proposing a dividend of €3.90 per ordi- nary share and €3.96 per preferred share. On this basis, the total dividend for fiscal year 2017 amounts to €2.0 (1.0) bil- lion. The payout ratio is based on the Group’s earnings after tax attributable to Volkswagen AG shareholders. This amounts to 17.3% for the reporting period and stood at 19.7% in the previous year. In our new Group strategy, we aim to achieve a payout ratio of 30%. F U RT H E R I N F O R M AT I O N O N VO L KSWA G E N S H A R E S www.volkswagenag.com/ir D I V I D E N D Y I E L D Based on the dividend proposal for the reporting period, the dividend yield on Volkswagen ordinary shares is 2.3 (1.5)%, measured by the closing price on the last trading day in 2017. The dividend yield on preferred shares is 2.4 (1.5)%. The current dividend proposal can be found in the chapter entitled “Volkswagen AG (condensed, according to the German Commercial Code)”, on page 131 of this annual report. E A R N I N G S P E R S H A R E Basic earnings per ordinary share were €22.63 (10.24) in fis- cal year 2017. Basic earnings per preferred share were €22.69 (10.30). In accordance with IAS 33, the calculation is based on the weighted average number of ordinary and preferred shares outstanding in the reporting period. Since the num- ber of basic and diluted shares is identical, basic earnings per share correspond to diluted earnings per share. See also note 11 to the Volkswagen consolidated financial statements for the calculation of earnings per share. 110 Shares and Bonds Group Management Report S H A R E H O L D E R S T R U C T U R E A T D E C E M B E R 3 1 , 2 0 1 7 as a percentage of subscribed capital VO L K SWA G E N S H A R E DATA Porsche Automobil Holding SE Foreign institutional investors Qatar Holding LLC State of Lower Saxony Private shareholders/Others German institutional investors 30.8 30.8 24.5 24.5 14.6 14.6 11.8 11.8 15.7 15.7 2.7 2.7 S H A R E H O L D E R ST R U C T U R E AT D E C E M B E R 3 1 , 2 0 1 7 Volkswagen AG’s to €1,283,315,873.28 at the end of the reporting period. The shareholder structure of Volkswagen AG as of December 31, 2017 is shown in the chart on this page. subscribed amounted capital The distribution of voting rights for the 295,089,818 ordinary shares was as follows at the reporting date: Porsche Automobil Holding SE, Stuttgart, held 52.2% of the voting rights. The second-largest shareholder was the State of Lower Saxony, which held 20.0% of the voting rights. Qatar Holding LLC was the third-largest shareholder, with 17.0%. The remaining 10.8% of ordinary shares were attributable to other shareholders. the Wertpapierhandelsgesetz Notifications of changes in voting rights in accordance with (WpHG – German Securities Trading Act) are published on our website at www.volkswagenag.com/ir. O U R I N V E STO R R E L AT I O N S T E A M I S AVA I L A B L E F O R Q U E R I E S A N D CO M M E N T S AT A L L T I M E S : W O L F S B U R G O F F I C E ( VO L KSWAG E N A G ) Phone Fax E-mail Internet +49 (0) 5361 9-00 +49 (0) 5361 9-30411 investor.relations@volkswagen.de www.volkswagenag.com/ir LO N D O N O F F I C E Phone +44 20 3705 2045 B E I J I N G O F F I C E Phone +86 106 531 4132 Ordinary shares Preferred shares ISIN WKN Deutsche Börse/Bloomberg DE0007664005 DE0007664039 766400 VOW 766403 VOW3 Reuters VOWG.DE VOWG_p.DE DAX, CDAX, EURO STOXX, EURO STOXX 50, EURO STOXX Automobiles & Parts, Prime All Share, MSCI Euro CDAX, Prime All Share, MSCI Euro, S&P Global 100 Index Berlin, Düsseldorf, Frankfurt, Hamburg, Hanover, Munich, Stuttgart, Xetra, Luxembourg, New York1, SIX Swiss Exchange Primary market indices Exchanges 1 Traded in the form of “sponsored unlisted American Depositary Receipts” (ADRs). Five ADRs correspond to one underlying Volkswagen ordinary or preferred share. I N V E STO R R E L AT I O N S A C T I V I T I E S Investor relations activities in fiscal year 2017 were dominated mainly by communications related to the Volks- wagen Group’s future program TOGETHER – Strategy 2025 as well as the relevant initiatives and programs launched by the Group brands and regions. One of the central activities was a Capital Markets Day held as part of the annual press and investor conference on March 14, 2017 at which detailed information on Volkswagen’s strategy and financial targets was provided. The targets were firmed up at the annual planning session and communicated in November at a conference call. In fiscal year 2017, the Investor Relations team once again provided extensive information to investors and analysts in all key financial markets worldwide about the strategic focus, current business performance and future prospects of the Volkswagen Group. At roughly 700 one-on- one discussions, road shows and conferences, we maintained close contact with capital market participants. Many of these discussions involved an exchange of ideas between investors and analysts and members of the Board of Management and Group senior executives, in addition to some discussions with the Chairman of the Supervisory Board. Additional Volkswagen share data, as well as corporate news, reports and presentations can be downloaded from our website at www.volkswagenag.com/ir. Group Management Report Shares and Bonds 111 VO L K SWA G E N S H A R E K E Y F I G U R E S DIVIDEN D DEVELOPMENT 2017 2016 2015 2014 2013 thousands thousands 295,090 206,205 295,090 206,205 295,090 206,205 295,090 180,641 295,090 170,148 Number of no-par value shares at Dec. 31 Ordinary shares Preferred shares Dividend1 per ordinary share per preferred share Dividend paid1 on ordinary shares on preferred shares € € € million € million € million 3.90 3.96 1,967 1,151 817 2.00 2.06 1,015 590 425 SHARE PRICE DEVELOPMENT 2 2017 2016 Ordinary share Closing Price performance Annual high Annual low Preferred share Closing Price performance Annual high Annual low Beta factor3 Market capitalization at Dec. 31 Equity attributable to Volkswagen AG share- holders and hybrid capital investors at Dec. 31 Ratio of market capitalization to equity KEY FIGURES PER SHARE Earnings per ordinary share4 basic diluted Equity5 Price/earnings ratio6 Ordinary share Preferred share Dividend yield7 Ordinary share Preferred share € % € € € % € € factor € billion € billion factor € € € factor factor % % STOCK EXCHANGE TURNOVER 8 Turnover of Volkswagen ordinary shares Turnover of Volkswagen preferred shares Volkswagen share of total DAX turnover € billion million shares € billion million shares % 168.70 +23.4 173.95 128.70 166.45 +24.8 178.10 125.35 1.12 84.1 108.8 0.77 2017 22.63 22.63 217.13 7.5 7.3 2.3 2.4 2017 3.5 23.6 45.1 312.3 5.4 136.75 – 3.9 144.20 108.95 133.35 – 0.3 138.80 94.00 1.22 67.9 92.7 0.73 2016 10.24 10.24 184.90 13.4 13.0 1.5 1.5 2016 3.3 25.4 41.1 347.0 5.0 0.11 0.17 68 32 35 2015 142.30 – 21.0 247.55 101.15 133.75 – 27.6 255.20 92.36 1.28 69.6 88.1 0.79 2015 – 3.20 – 3.20 175.67 x x 0.1 0.1 2015 6.9 45.4 72.4 444.4 7.1 4.80 4.86 2,294 1,416 878 4.00 4.06 1,871 1,180 691 2014 2013 180.10 – 8.5 197.35 150.70 184.65 – 9.6 203.35 150.25 1.38 86.5 90.0 0.96 2014 21.82 21.82 189.16 8.2 8.4 2.7 2.6 2014 3.2 17.8 45.1 248.3 5.4 196.90 +21.0 196.90 132.60 204.15 +18.6 204.15 138.50 1.32 92.8 87.7 1.06 2013 18.61 18.61 188.58 10.6 10.9 2.0 2.0 2013 3.5 21.4 43.0 252.8 5.7 1 Figures for the years 2013 to 2016 relate to dividends paid in the following year. For 5 Based on the total number of ordinary and preferred shares on December 31 (excluding 2017, the figures relate to the proposed dividend. potential shares from the mandatory convertible note). 2 Xetra prices. 3 See page 127 for the calculation. 4 See note 11 to the consolidated financial statements (Earnings per share) for the 6 Ratio of year-end-closing price to earnings per share. 7 Dividend per share based on the year-end-closing price. 8 Order book turnover on the Xetra electronic trading platform (Deutsche Börse). calculation. 112 Shares and Bonds Group Management Report R E F I N A N C I N G S T R U C T U R E O F T H E V O L K S W A G E N G R O U P as of December 31, 2017 Commercial paper Commercial paper 14% 14% Bonds Bonds 52% 52% Asset-backed securities Asset-backed securities 34% 34% Money and capital market instruments Maturities Currencies (cid:1051) 1 year (cid:1051) 1 year 30% 30% > 1 to < 5 years > 1 to < 5 years 45% 45% EUR EUR 68% 68% USD USD 12% 12% (cid:1052) 5 years (cid:1052) 5 years 25% 25% Others Others 20% 20% 0 10 20 30 40 50 60 70 80 90 100 R E F I N A N C I N G In the course of 2017, the Volkswagen Group was able to increase the number of bonds issued on various money and capital markets compared with the prior year. In particular, senior and unsecured bonds were issued again in Europe, where we successfully placed a benchmark bond for the Automotive Division for the first time since 2015. This had a volume of €8.0 billion. We were also active for the Financial Services Division in this market, issuing three benchmark bonds totaling €7.75 billion. In addition to this, we issued private placements. In June 2017, we boosted net liquidity by placing unse- cured, subordinated hybrid notes with an aggregate principal amount of €3.5 billion. The perpetual notes were issued in two tranches and can only be called by the issuer. One tranche with a volume of €1.5 billion can only be called after five and a half years, while the other tranche of €2.0 billion can only be called after ten years. A further focus of refinancing was the issue of commer- cial paper, especially in Europe and in euros. Asset-backed security (ABS) transactions were another important element of our refinancing activities, amounting to over €4.1 billion in Europe. Bonds and ABS transactions were also issued in local capital markets, including Australia, Brazil, China, India and Mexico. In addition, the Financial Services Division issued a public promissory note with a value of €0.9 billion. The proportion of fixed-rate instruments in the past year was roughly twice as high as the proportion of variable-rate instruments. In all refinancing arrangements, we pursue the goal of excluding risks related to interest rates and currency by entering into derivatives contracts at the same time. The table below shows how our money and capital market programs were utilized as of December 31, 2017, and illustrates the financial flexibility of the Volkswagen Group: PROGRAMS Commercial Paper Bonds of which hybrid issues Asset-backed securities Authorized volume € billion Amount utilized on Dec. 31, 2017 € billion 36.3 127.6 – 71.2 15.0 58.1 11.0 34.9 Group Management Report Shares and Bonds 113 R AT I N G S Standard & Poor’s short-term long-term outlook Moody’s Investors Service short-term long-term outlook V O L K S W A G E N A G V O L K S W A G E N F I N A N C I A L S E R V I C E S A G V O L K S W A G E N B A N K G M B H 2017 2016 2015 2017 2016 2015 2017 2016 2015 A – 2 BBB+ A – 2 BBB+ A – 2 BBB+ A – 2 BBB+ A – 2 BBB+ A – 2 BBB+ A – 2 A – A – 2 A – A – 2 A – stable negative negative stable negative negative negative negative negative P – 2 A3 P – 2 A3 P – 2 A3 P – 2 A3 P – 1 A2 P – 1 A1 P – 1 A3 P – 1 Aa3 P – 1 A1 negative negative negative negative negative negative negative negative negative The €20.0 billion syndicated credit line for Volkswagen AG that was agreed with a banking syndicate in December 2015 was terminated in June 2017 as contractually agreed. After exercising an extension option in 2015, the syndicated credit line of €5.0 billion agreed in July 2011 was extended to April 2020. This credit facility remained unused as of the end of 2017. Syndicated credit lines worth a total of €6.4 billion at other Group companies have also not been drawn down. In addition, Group companies had arranged bilateral, confirmed credit lines with national and international banks in various other countries for a total of €8.5 billion, of which €3.4 billion was drawn down. respectively. In September 2017, the long-term rating for Volkswagen Financial Services AG was lowered by one notch from A2 to A3. The rating for Volkswagen Bank GmbH was downgraded by three notches from Aa3 to A3. The short-term rating of Volkswagen Financial Services AG was lowered by one notch from P–1 to P–2, while that of Volkswagen Bank GmbH remained unchanged at P–1. These changes were due to the completion of the reorganization at Financial Services AG: Volkswagen Bank GmbH is now a subsidiary of Volks- wagen AG. This means that the financing structures of Volks- wagen Bank GmbH and Volkswagen Financial Services AG are examined separately. The outlook for all three companies is still classed as negative. R AT I N G S In 2017, the rating agencies Standard & Poor’s and Moody’s Investors Service conducted the regular update of their credit ratings for Volkswagen AG, Volkswagen Financial Services AG and Volkswagen Bank GmbH. In November 2017, Standard & Poor’s confirmed its short-term and long-term ratings of A–2 and BBB+ for Volks- wagen AG and Volkswagen Financial Services AG, and of A–2 and A– for Volkswagen Bank GmbH. The outlook for Volks- wagen AG and Volkswagen Financial Services AG improved from “negative” to “stable” due to the better than expected operating performance. The outlook for Volkswagen Bank GmbH was left unchanged at “negative”. Moody’s Investors Service left the short-term and long- term ratings of Volkswagen AG unchanged at P–2 and A3 VO L K SWA G E N I N S U STA I N A B I L I T Y R A N K I N G S A N D I N D I C E S Analysts and investors are basing their recommendations and decisions increasingly on companies’ sustainability profiles. They draw primarily on sustainability ratings to evaluate a company’s environmental, social and governance performance. In sustainability rankings and indices such as the Dow Jones Sustainability Indices, FTSE4 Good Indices, Sustain- alytics and oekom research, where we held top positions before the emissions issue, Volkswagen’s ratings have been downgraded or removed. Volkswagen had a score of A– in the CDP (formerly Carbon Disclosure Project) and an A rating in the Water Disclosure Project (WDP). 114 Results of Operations, Financial Position and Net Assets Group Management Report Results of Operations, Financial Position and Net Assets The Volkswagen Group generated significantly higher sales revenue in fiscal year 2017 than in 2016. Despite further charges and high cash outflows in connection with the diesel issue, operating profit exceeded the prior-year figure and net liquidity in the Automotive Division continued at a robust level. The Volkswagen Group’s segment reporting comprises the four reportable segments Passenger Cars, Commercial Vehi- cles, Power Engineering and Financial Services, in compliance with IFRS 8 and in line with the Group’s internal manage- ment and reporting. segment and the reconciliation are combined to form the Passenger Cars Business Area; for commercial vehicles and power engineering, the segment is the same as the business area. The Financial Services Division corresponds to the financial services segment. At Volkswagen, segment result is measured on the basis of the operating result. The reconciliation column contains activities and other operations that do not by definition constitute segments. These include the unallocated Group financing activities. The reconciliation also contains consolidation adjustments between the segments (including the holding company func- tions). Purchase price allocation for Porsche Holding Salzburg and Porsche, Scania and MAN reflects their accounting treat- ment in the segments. The Automotive Division comprises the passenger cars, commercial vehicles and power engineering segments, as well as the figures from the reconciliation. The passenger cars S A L E O F T H I R D - PA RT Y - B R A N D D E A L E R S H I P S O F P O R S C H E H O L D I N G S A L Z B U R G The sale of part of the PGA Group SAS to the Emil Frey Group was executed on June 1, 2017. The sale was made in connec- tion with the strategic development of Porsche Holding Salzburg’s dealer network and the corresponding focus on dealerships exclusively selling Volkswagen Group brand vehicles. This had a positive effect of €0.8 billion on the Group’s net liquidity and, taking into account the disposal of the assets and liabilities, resulted in immaterial income for the Group, which was reported in other operating income. K E Y F I G U R E S F O R 2 0 1 7 B Y S E G M E N T € million Passenger Cars Vehicles Power Engineering Financial Services Total segments Reconciliation Commercial Volkswagen Group Sales revenue Segment result (operating result) as a percentage of sales revenue Capex, including capitalized development costs 188,405 35,200 3,283 33,733 260,621 – 29,939 230,682 12,644 1,892 6.7 5.4 15,713 1,915 – 55 – 1.7 159 2,673 17,153 – 3,335 13,818 7.9 421 6.0 18,208 104 18,313 Group Management Report Results of Operations, Financial Position and Net Assets 115 S P E C I A L I T E M S Special items consist of certain items in the financial state- ments whose separate disclosure the Board of Management believes can enable a better assessment of our economic performance. In fiscal year 2017, negative special items recognized in the operating profit amounted to €– 3.2 (– 7.5) billion. In the reporting period, these related exclusively to charges in the Passenger Cars Business Area in connection with the diesel issue, primarily due to higher expenses attributable to the buyback/retrofit programs for 2.0 l and 3.0 l TDI vehicles in North America and to higher legal risks. In fiscal year 2016, these items amounted to €– 6.4 billion. The prior-year period also contained additional special items in the Passenger Cars Business Area for potentially faulty airbags manufactured and supplied by Takata (€–0.3 bil- lion), as well as for restructuring measures in the Passenger Cars (€– 0.2 billion), Commercial Vehicles (€– 0.1 billion) and Power Engineering (€– 0.2 billion) business areas. In 2016, provisions recognized in connection with the commercial vehicles antitrust proceedings launched by the European Commission also led to special items (€–0.4 billion) in the Commercial Vehicles Business Area. R E S U LT S O F O P E R AT I O N S Results of operations of the Group In 2017, the Volkswagen Group’s sales revenue increased by 6.2% year-on-year to €230.7 billion. In particular, higher volumes and the healthy business performance in the Finan- cial Services Division had a positive effect, while exchange rates had a negative impact. At 80.8 (79.9)% the major share of sales revenue was recorded outside Germany. Gross profit improved by €1.5 billion to €42.5 billion. Adjusted for special items recorded under this item in both periods, gross profit increased to €44.8 (42.5) billion. The gross margin amounted to 18.4 (18.9)%; excluding special items it was 19.4 (19.6)%. In the reporting period, the Volkswagen Group generated an operating profit before special items of €17.0 (14.6) billion; the operating return on sales before special items rose to 7.4 (6.7)%. The increase was mainly the result of positive volume-, mix- and margin-related factors, as well as improve- ments in product costs, while higher fixed costs as a result of expansion and higher depreciation and amortization charges due to the large volume of capital expenditure had an off- setting effect. Negative special items weighed on operating I N CO M E STAT E M E N T B Y D I V I S I O N € million Sales revenue Cost of sales Gross profit Distribution expenses Administrative expenses Net other operating result Operating result Operating return on sales (%) Share of the result of equity-accounted investments Interest result and Other financial result Financial result Earnings before tax Income tax expense Earnings after tax Noncontrolling interests Earnings attributable to Volkswagen AG hybrid capital investors Earnings attributable to Volkswagen AG shareholders V O L K S W A G E N G R O U P A U T O M O T I V E 1 F I N A N C I A L S E R V I C E S 2017 2016 2017 2016 2017 2016 230,682 – 188,140 42,542 – 22,710 217,267 – 176,270 40,997 – 22,700 196,949 – 160,614 36,335 – 21,353 186,016 – 150,860 35,156 – 21,453 – 8,254 2,240 13,818 6.0 3,482 – 3,388 94 13,913 – 2,275 11,638 10 274 – 7,336 – 3,858 7,103 3.3 3,497 – 3,308 189 7,292 – 1,912 5,379 10 225 – 6,554 2,717 11,146 5.7 3,473 – 3,209 265 11,411 – 3,295 8,116 – 257 – 5,730 – 3,306 4,668 2.5 3,433 – 3,217 216 4,884 – 1,149 3,735 – 81 274 225 33,733 – 27,526 6,207 – 1,357 – 1,700 – 477 2,673 7.9 9 – 180 – 171 2,502 1,020 3,522 267 – 31,251 – 25,410 5,841 – 1,248 – 1,606 – 552 2,435 7.8 64 – 91 – 27 2,408 – 763 1,645 91 – 11,354 5,144 8,099 3,591 3,255 1,553 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 116 Results of Operations, Financial Position and Net Assets Group Management Report S H A R E O F S A L E S R E V E N U E B Y M A R K E T 2 0 1 7 in percent S H A R E O F S A L E S R E V E N U E B Y D I V I S I O N / B U S I N E S S A R E A 2 0 1 7 in percent Europe (excluding Germany)/ Other markets Germany North America South America Asia-Pacific 43% % 19% % % 17% 4 % 4 % 17% % Passenger Cars Commercial Vehicles Power Engineering Financial Services % 69% % 15% 1 % 1 % % 15% profit, reducing this item by a total of €– 3.2 (– 7.5) billion. At €13.8 billion, the Volkswagen Group’s operating profit was up €6.7 billion on the previous year. The operating return on sales rose to 6.0 (3.3)%. The financial result declined to €0.1 (0.2) billion. Lower interest expenses and lower expenses from the measurement of derivative financial instruments at the reporting date had a positive effect, while foreign currency measurement had a negative impact. The share of the result of equity-accounted investments was at the prior-year level. This includes the gain on the remeasurement of the investment in HERE following the acquisition of shares by additional investors. In the prior- year period, the income from the sale of the LeasePlan shares had a positive effect. The Volkswagen Group’s profit before tax rose to €13.9 billion in the reporting period, up €6.6 billion on the prior-year figure. The return on sales before tax improved from 3.4% to 6.0%. Profit after tax amounted to €11.6 (5.4) bil- lion. Although income taxes increased, the tax rate of 16.3 (26.2)% was considerably lower in the reporting period. This decline was due to the tax reform in the USA passed at the end of the year, which led to a non-recurring positive non-cash measurement effect on deferred taxes of €1.0 bil- lion. Results of operations in the Automotive Division The Automotive Division’s sales revenue amounted to €196.9 billion in fiscal year 2017, thus exceeding the prior- year figure by €10.9 billion. The improvement resulted primarily from higher vehicles sales, which were offset by negative exchange rate effects. As our Chinese joint ventures are accounted for using the equity method, the Group’s business performance in the Chinese passenger car market is reflected in consolidated sales revenue primarily by deliveries of vehicles and vehicle parts. Cost of sales increased due to larger volumes; in addition, a rise in special items and higher depreciation and amorti- zation charges had a negative impact, while improvements in product costs had a positive effect. Total research and development costs as a percentage of the Automotive Divi- sion’s sales revenue (research and development ratio or R&D ratio) declined to 6.7 (7.3)% in the reporting period as a result of higher sales revenues and lower expenses. In addition to new models, our activities focused above all on the electri- fication of our vehicle portfolio, a more efficient range of engines, and digitalization. Expressed as a percentage of sales revenue, cost of sales rose slightly year-on-year. The gross profit of the Automotive Division improved to €36.3 (35.2) billion. Distribution expenses were on a level with the previous year, which had been impacted by negative special items. Exchange rate effects weighed on the 2017 figure. The ratio of distribution expenses to sales revenue declined. Administra- tive expenses as well as their ratio to sales revenue increased compared with the previous year. At €2.7 billion in fiscal year 2017, the net other operating result exceeded the prior year by €6.0 billion, driven in particular by much lower negative special items in connection with the diesel issue and by exchange rate effects. The operating profit of the Automotive Division improved by €6.5 billion to €11.1 billion. The operating return on sales stood at 5.7 (2.5)%. Negative special items contained in operating profit totaled €– 3.2 (– 7.5) billion. These items were exclusively attributable to the Passenger Cars Business Area in the reporting period, reflecting charges in connection with the diesel issue. Excluding the special items, the Automotive Group Management Report Results of Operations, Financial Position and Net Assets 117 Division’s operating profit rose to €14.4 (12.2) billion. The operating return on sales before special items increased to 7.3 (6.6)%. The main contributors were improvements in volumes, the mix and margins, as well as product cost optimization; these factors were offset by higher fixed costs as a result of expansion and higher depreciation and amorti- zation charges. Operating profit benefited from the business performance of our Chinese joint ventures primarily in the form of deliveries of vehicles and vehicle parts and of license income, as the joint ventures are accounted for using the equity method and therefore included in the financial result. mercial Vehicles Business Area improved by €1.2 billion to €1.9 billion; the operating return on sales climbed to 5.4 (2.2)%. The increase versus the previous year, which had been negatively impacted by special items, was mainly the result of positiv volume- and margin-related factors and the expansion of the service business. R E S U LT S O F O P E R AT I O N S I N T H E P OW E R E N G I N E E R I N G B U S I N E S S A R E A R E S U LT S O F O P E R AT I O N S I N T H E PA S S E N G E R C A R S B U S I N E S S A R E A € million Sales revenue Operating result Operating return on sales (%) 2017 2016 3,283 – 55 – 1.7 3,593 – 217 – 6.0 € million Sales revenue Operating result Operating return on sales (%) 2017 2016 158,466 150,343 9,309 5.9 4,167 2.8 The Power Engineering Business Area’s sales revenue of €3.3 billion in fiscal year 2017 was 8.6% lower than in the previous year. The operating loss declined by €0.2 billion to €–0.1 billion. Lower volumes were offset by positive mix effects. Special items had a negative impact in the previous year. The operating return on sales from – 6.0% to – 1.7%. improved Results of operations in the Financial Services Division In the Financial Services Division, sales revenue increased by 7.9% year-on-year to €33.7 billion in fiscal year 2017, due mainly to the growth in business volumes. As a result, gross profit went up by €0.4 billion to €6.2 bil- lion. Both distribution and administrative expenses increased year-on-year; in addition to higher volumes, the rise in expenses was attributable in particular to digitalization. The ratio of distribution and administrative expenses to sales revenue was unchanged. The net other operating result amounted to €– 0.5 (– 0.6) billion. The 9.8% year-on-year increase in operating profit to €2.7 billion reflects the Financial Services Division’s sustained contribution to the Group’s success. The operating return on sales improved to 7.9 (7.8)%. The return on equity before tax was 9.8%, compared with 10.8% in the previous year. The Passenger Cars Business Area generated sales revenue of €158.5 billion in fiscal year 2017, thus exceeding the prior- year figure by 5.4%, mainly because of volume-related factors. Exchange rates had a negative effect. The operating profit of €9.3 billion generated in the Passenger Cars Business Area was up €5.1 billion on the previous year. Special items included in this item decreased significantly year-on-year to €– 3.2 (– 6.9) billion. Improvements in volumes, the mix and margins, and product cost optimization had a positive influence, while a rise in fixed costs and higher depreciation and amortization charges had a negative impact. The operating return on sales rose to 5.9 (2.8)%. R E S U LT S O F O P E R AT I O N S I N T H E CO M M E R C I A L V E H I C L E S B U S I N E S S A R E A € million Sales revenue Operating result Operating return on sales (%) 2017 2016 35,200 1,892 5.4 32,080 718 2.2 The Commercial Vehicles Business Area recorded sales revenue of €35.2 billion in the reporting period, €3.1 billion more than in the previous year; this increase was driven mainly by larger volumes. The operating profit of the Com- 118 Results of Operations, Financial Position and Net Assets Group Management Report P R I N C I P L E S A N D G OA L S O F F I N A N C I A L M A N A G E M E N T Financial management at the Volkswagen Group covers liq- uidity management, currency, interest rate and commodity risk management, as well as credit and country risk manage- ment. It is performed centrally for all Group companies by Group Treasury, based on internal directives and risk param- eters. The main areas of the MAN and Porsche Holding Salzburg subgroups are integrated into the financial manage- ment of the Group, while Scania is covered to a limited extent. Additionally, these subgroups have their own finan- cial management structures. The goal of liquidity management is to ensure that the Volkswagen Group remains solvent at all times and at the same time to generate an adequate return from the invest- ment of surplus funds. We use cash pooling to optimize the use of existing liquidity between the significant companies in Europe. To do this, the balances, either positive or negative, accumulating in the cash pooling accounts are swept daily into a target account at Group Treasury and thus pooled. Currency, interest rate and commodity risk management is designed to hedge the prices on which investment, produc- tion and sales plans are based using derivative financial instruments. Credit and country risk management aims to limit the Volkswagen Group’s exposure to the risk of loss or default by means of diversification. To achieve this, internal limits are defined on the basis of various credit risks for the volume of business per counterparty when entering into financial transactions. These primarily focus on the capital resources of potential counterparties, as well as the ratings awarded by independent agencies. The relevant risk limits and the authorized financial instruments, hedging methods and hedging horizons are approved by the Group Board of Management Committee for Risk Management, which replaced the Group Board of Management Committee for Liquidity and Foreign Currency in the reporting period. For additional information on the principles and goals of financial management, please refer to page 187 and to the notes to the 2017 consolidated financial statements on pages 282 to 291. F I N A N C I A L P O S I T I O N Financial position of the Group The Volkswagen Group’s gross cash flow amounted to €32.7 billion in fiscal year 2017, 25.5% more than in the previous year. At €– 33.8 (– 16.6) billion, the change in working capital was significantly negative. As expected, there were high cash outflows in connection with the diesel issue in the reporting period, primarily resulting from vehicle recalls and legal risks. As a result, cash flows from operating activities decreased by €10.6 billion to €– 1.2 billion. The new special items recognized in the reporting period had a negative impact on gross cash flow and a positive effect on the change in working capital. The Volkswagen Group’s investing activities attributable to operating activities rose to €18.2 billion, 8.5% more than in the previous year. In the reporting period, the “Acquisition and disposal of equity investments” item particularly includes the acquisition of shares in Navistar as well as the sale of part of the PGA Group. The figure for the previous year had mainly been influenced by the cash inflow from the sale of the shares in LeasePlan. Cash inflows from financing activities amounted to €17.6 (9.7) billion. These primarily include the issuance and redemption of bonds and other financial liabilities. The dual- tranche hybrid notes (€3.5 billion), successfully placed in June 2017, increased net liquidity; this was offset by the dividend paid to the shareholders of Volkswagen AG (€1.0 billion). At the end of the reporting period, the Volkswagen Group’s cash and cash equivalents as reported in the cash flow state- ment amounted to €18.0 (18.8) billion and were thus down on the prior-year reporting date. The Volkswagen Group's net liquidity as of December 31, 2017 was €– 119.1 (– 107.9) billion. Group Management Report Results of Operations, Financial Position and Net Assets 119 C A S H F LOW STAT E M E N T BY D I V I S I O N € million 2017 2016 2017 2016 2017 2016 V O L K S W A G E N G R O U P A U T O M O T I V E 1 F I N A N C I A L S E R V I C E S Cash and cash equivalents at beginning of period Earnings before tax Income taxes paid Depreciation and amortization expense2 Change in pension provisions Other noncash income/expense and reclassifications3 Gross cash flow Change in working capital Change in inventories Change in receivables Change in liabilities Change in other provisions Change in lease assets (excluding depreciation) Change in financial services receivables Cash flows from operating activities Cash flows from investing activities attributable to operating activities of which: investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs capitalized development costs acquisition and disposal of equity investments Net cash flow4 Change in investments in securities, loans and time deposits Cash flows from investing activities Cash flows from financing activities of which: capital transactions with noncontrolling interests Capital contributions/capital redemptions Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at Dec. 315 Securities, loans and time deposits Gross liquidity Total third-party borrowings Net liquidity6 18,833 13,913 – 3,664 22,165 468 – 231 32,651 – 33,836 – 4,198 – 1,660 5,302 – 9,910 – 11,478 – 11,891 – 1,185 20,462 7,292 – 3,315 20,924 235 871 26,007 – 16,576 – 3,637 – 2,155 5,048 5,732 – 12,074 – 9,490 9,430 14,125 11,411 – 3,514 14,948 452 121 23,418 – 11,732 – 3,784 – 937 4,168 – 10,079 – 1,115 15 11,686 15,294 4,884 – 3,526 14,331 224 556 16,468 3,803 – 3,313 – 1,876 4,474 5,616 – 1,157 58 20,271 4,709 2,502 – 149 7,218 15 – 352 9,233 5,168 2,408 211 6,593 11 316 9,539 – 22,104 – 20,379 – 414 – 724 1,134 169 – 10,363 – 11,906 – 12,871 – 324 – 280 574 116 – 10,917 – 9,547 – 10,840 – 18,218 – 16,797 – 17,636 – 15,941 – 583 – 856 – 13,052 – 5,260 – 317 – 19,404 1,710 – 16,508 17,625 – 3,473 – 727 – 796 18,038 26,291 44,329 – 163,472 – 119,143 – 13,152 – 5,750 1,754 – 7,367 – 3,882 – 20,679 9,712 – 3 – – 91 – 1,628 18,833 28,036 46,869 – 154,819 – 107,950 – 12,631 – 5,260 – 124 – 5,950 2,333 – 15,303 3,562 – 12,795 – 5,750 2,283 4,330 – 3,125 – 19,066 – 2,298 – 421 – – 193 – 357 – – 528 – 13,454 – 11,696 – 622 – 1,205 14,063 – – 3 – 2,400 – 1,454 1,073 – 641 – 696 13,428 15,201 28,630 – 6,251 22,378 – 76 – 1,169 14,125 17,911 32,036 – 4,856 27,180 – 86 – 99 4,609 11,090 15,699 – 157,221 – 141,522 – 757 – 1,613 12,009 – 1,454 – 15 – 460 4,709 10,125 14,833 – 149,963 – 135,130 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Net of impairment reversals. 3 These relate mainly to the fair value measurement of financial instruments, application of the equity method and the reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 4 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities (investing activities excluding change in investments in securities, loans and time deposits). 5 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. 6 The total of cash, cash equivalents, securities, loan receivables from related parties and time deposits net of third-party borrowings (noncurrent and current financial liabilities). 120 Results of Operations, Financial Position and Net Assets Group Management Report A U T O M O T I V E D I V I S I O N N E T C A S H F L O W 2 0 1 7 in € billion 25 20 15 10 5 0 -5 -10 23.4 -11.7 -12.6 Gross cash flow Change in working capital Capex Capitalized development costs Other Net cash flow -5.3 -6.0 0.2 Financial position of the Automotive Division The Automotive Division's gross cash flow was €23.4 billion in fiscal year 2017, thus exceeding the prior-year figure by €6.9 billion. The increase in operating profit before special items and the year-on-year decline in special items had a positive effect. At €– 11.7 (3.8) billion, the change in working capital was significantly negative. As expected, there were high cash outflows in the reporting period related to the diesel issue, primarily for vehicle recalls and legal risks. As a result, cash flows from operating activities amounted to €11.7 billion, €8.6 billion less than in 2016. The new special items recognized in fiscal year 2017 had a negative impact on gross cash flow and a positive effect on the change in working capital. Investing activities attributable to operating activities increased by €1.7 billion to €17.6 billion. At €12.6 (12.8) bil- lion, investments in property, plant and equipment, invest- ment property and intangible assets, excluding capitalized development costs (capex) were on a level with the previous year. The ratio of capex to sales revenue declined to 6.4 (6.9)% due primarily to the rise in sales revenue. We invested mainly in our production facilities and in models that we launched in the reporting period or are planning to launch next year. These are primarily vehicles in the Polo, Tiguan, Audi A6, Audi A8 and Audi e-tron series, as well as the Audi A4, Porsche Cayenne, Porsche 911 and the Bentley Continental family. Other investment priorities included the ecological focus of our model range, drivetrain electrification and our modular toolkits. At €5.3 (5.8) billion, capitalized development costs were lower than in the previous year. In the reporting period, the “Acquisition and disposal of equity investments” item mainly includes the acquisition of shares in Navistar and the sale of part of the PGA Group. In the prior-year period, the sale of the shares in LeasePlan had a significantly positive effect on this item. The Automotive Division’s net cash flow reflects the division's strong operating performance, although it declined by €10.3 billion to €– 6.0 billion driven, as expected, by high cash outflows attributable to the diesel issue. A capital increase carried out by Volkswagen AG at Volks- wagen Financial Services AG at the beginning of 2017 in order to finance the growth in business volumes and comply with regulatory capital requirements resulted in outflows of €1.0 billion in the Automotive Division’s financing activities. In May 2017, a dividend totaling €1.0 billion was distributed to the shareholders of Volkswagen AG, €0.9 billion more than in the previous year. The successful placement of dual- tranche hybrid notes with an aggregate principal amount of €3.5 billion via Volkswagen International Finance N.V. in June 2017 resulted in a cash inflow. The notes consist of a €1.5 billion note that carries a coupon of 2.7% and has a first call date after five and a half years, and a €2.0 billion note that carries a coupon of 3.875% and has a first call date after ten years. Both tranches are perpetual and increase equity, net of transaction costs, among other factors. The cash inflows from the hybrid notes were classified as a capital contribution, Group Management Report Results of Operations, Financial Position and Net Assets 121 which increased net liquidity. In addition, financing activities include the issuance and redemption of bonds and other financial liabilities. They amounted to €3.6 billion in 2017, €5.9 billion more than in the prior-year period. On December 31, 2017, the Automotive Division’s net liq- uidity was again at a robust level of €22.4 billion, compared with €27.2 billion at the end of 2016. The Automotive Divi- sion’s net liquidity represents 9.7 (12.5)% of consolidated sales revenue in the reporting period. F I N A N C I A L P O S I T I O N I N T H E PA S S E N G E R C A R S B U S I N E S S A R E A € million 2017 2016 Gross cash flow Change in working capital Cash flows from operating activities Cash flows from investing activities attributable to operating activities Net cash flow 19,410 – 10,122 9,289 – 15,337 – 6,048 13,920 3,454 17,374 – 13,353 4,021 In the reporting period, the Passenger Cars Business Area recorded gross cash flow of €19.4 billion, up €5.5 billion on the prior-year figure, mainly due to earnings-related factors; a significant year-on-year decline in negative special items also had a positive effect. The change in working capital was sig- nificantly negative, decreasing by €13.6 billion year-on-year to €– 10.1 billion. As expected, there were high cash outflows related to the diesel issue in fiscal year 2017, primarily for vehicle recalls and legal risks. Consequently, cash flows from operating activities decreased by 46.5% to €9.3 billion. The new special items recognized in the reporting period had a negative impact on gross cash flow and a positive effect on the change in working capital. Investing activities attrib- utable to operating activities resulted in cash outflows of €15.3 (13.4) billion in the reporting period. The year-on-year increase in capex of €0.3 billion to €11.2 billion was more than offset by the €0.4 billion decline in capitalized develop- ment costs to €4.6 billion. The item included the sale of part of the PGA Group in the reporting period; in the prior-year period, the sale of the LeasePlan shares had a significantly positive impact. Net cash flow amounted to €– 6.0 (4.0) bil- lion. F I N A N C I A L P O S I T I O N I N T H E CO M M E R C I A L V E H I C L E S B U S I N E S S A R E A € million 2017 2016 Gross cash flow Change in working capital Cash flows from operating activities Cash flows from investing activities attributable to operating activities Net cash flow 3,739 – 1,320 2,419 – 2,122 297 2,496 238 2,734 – 2,407 327 The Commercial Vehicles Business Area generated gross cash flow of €3.7 billion in the reporting period, €1.2 billion above the prior-year figure due to earnings-related factors. At €– 1.3 (0.2) billion, the change in working capital was signifi- cantly negative. In the prior-year period, the special items recognized had a negative impact on gross cash flow and a positive effect on the change in working capital. Cash flows from operating activities were slightly down on the 2016 figure, declining to €2.4 (2.7) billion. Despite the acquisition of shares in Navistar and investments in a new cab generation at Scania, investing activities attributable to operating activ- ities were down year-on-year, amounting to €2.1 (2.4) billion; the previous year had been affected by investments in the new plant for light commercial vehicles in Wrzesnia in Poland. At €0.3 (0.3) billion, net cash flow was on a level with the previous year. F I N A N C I A L P O S I T I O N I N T H E P OW E R E N G I N E E R I N G B U S I N E S S A R E A € million Gross cash flow Change in working capital Cash flows from operating activities Cash flows from investing activities attributable to operating activities Net cash flow 2017 268 – 290 – 22 – 177 – 199 2016 52 111 163 – 182 – 19 In fiscal year 2017, the Power Engineering Business Area’s gross cash flow improved to €0.3 (0.1) billion. Funds tied up in working capital increased by €0.4 billion to €– 0.3 billion. The comparison with the prior-year period has to take special items into account. Cash flows from operating activities were down on the previous year, breaking even in the reporting period. At €0.2 (0.2) billion, investing activities attributable to operating activities were on a level with the previous year. Net cash flow declined to €– 0.2 (0.0) billion. 122 Results of Operations, Financial Position and Net Assets Group Management Report CO N S O L I DAT E D B A L A N C E S H E E T B Y D I V I S I O N A S O F D E C E M B E R 3 1 € million Assets Noncurrent assets Intangible assets Property, plant and equipment Lease assets Financial services receivables Investments, equity-accounted investments and other equity investments, other receivables and financial assets Current assets Inventories Financial services receivables Other receivables and financial assets Marketable securities Cash, cash equivalents and time deposits Assets held for sale Total assets Equity and liabilities Equity Equity attributable to Volkswagen AG shareholders Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to Volkswagen AG shareholders and hybrid capital investors Noncontrolling interests Noncurrent liabilities Financial liabilities Provisions for pensions Other liabilities Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders Financial liabilities Trade payables Other liabilities V O L K S W A G E N G R O U P A U T O M O T I V E 1 F I N A N C I A L S E R V I C E S 2017 2016 2017 2016 2017 2016 262,081 254,010 140,912 139,003 121,169 115,007 63,419 55,243 39,254 73,249 30,916 160,112 40,415 53,145 32,040 15,939 18,457 115 62,599 54,033 38,439 68,402 30,537 155,722 38,978 49,673 30,286 17,520 19,265 – 63,211 52,503 3,140 – 7 22,065 80,210 36,113 – 686 17,354 13,512 13,826 90 62,372 51,415 3,385 9 21,822 81,083 34,947 – 660 17,561 14,703 14,532 – 208 2,739 36,114 73,256 8,851 79,902 4,302 53,832 14,686 2,427 4,632 24 227 2,619 35,054 68,393 8,715 74,640 4,031 50,333 12,726 2,817 4,733 – 422,193 409,732 221,121 220,085 201,071 189,647 109,077 92,910 81,605 69,130 27,472 23,780 97,761 85,122 70,857 61,714 26,904 23,408 11,088 7,567 11,088 7,567 – – 108,849 229 152,726 81,628 32,730 38,368 92,689 221 139,306 66,358 33,012 39,936 160,389 177,515 3,795 81,844 23,046 51,705 3,849 88,461 22,794 62,411 81,945 – 339 69,805 6,709 32,189 30,906 69,711 3,795 – 458 20,497 45,877 69,281 – 151 69,982 5,876 32,464 31,643 80,973 3,849 – 1,019 20,753 57,391 26,904 568 82,921 74,919 540 7,462 90,678 – 82,302 2,548 5,828 23,408 373 69,324 60,483 549 8,293 96,542 – 89,481 2,041 5,021 Total equity and liabilities 422,193 409,732 221,121 220,085 201,071 189,647 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. Group Management Report Results of Operations, Financial Position and Net Assets 123 C O N S O L I D A T E D B A L A N C E S H E E T S T R U C T U R E 2 0 1 7 in percent Noncurrent assets Noncurrent assets 62.1 (62.0) 62.1 (62.0) Current assets Current assets 37.9 (38.0) 37.9 (38.0) Equity Equity 25.8 (22.7) 25.8 (22.7) Noncurrent liabilities Noncurrent liabilities 36.2 (34.0) 36.2 (34.0) Current liabilites Current liabilites 38.0 (43.3) 38.0 (43.3) Total assets Total equity and liabilities 0 10 20 30 40 50 60 70 80 90 100 Financial position in the Financial Services Division The Financial Services Division’s gross cash flow declined to €9.2 billion in the reporting period, €0.3 billion lower than in the previous year. Due to larger volumes, funds tied up in working capital increased by €1.7 billion to €22.1 billion. Cash flows from operating activities amounted to €– 12.9 (– 10.8) billion. At €0.6 (0.9) billion, investing activities attributable to operating activities were down on the previous year, which had included the acquisition of shares in the ride-hailing service Gett. The Financial Services Division’s financing activities resulted in cash inflows of €14.1 (12.0) billion in 2017. This included a capital increase of €1.0 billion implemented by Volkswagen AG to finance expected business growth and to comply with stricter regulatory requirements. At the end of 2017, the Financial Services Division’s nega- tive net liquidity, which is common in the industry, stood at €– 141.5 billion, compared with €– 135.1 billion at the end of December 2016. N E T A S S E T S Holding, which are expected to be disposed of (€0.1 billion). The negotiations are still ongoing, and the disposals are expected to be finalized in the first half of 2018. As of the end of fiscal year 2017, the Group had off- balance-sheet commitments in the form of contingent lia- bilities in the amount of €8.4 (6.8) billion, financial guaran- tees in the amount of €0.3 (0.2) billion and other financial obligations in the amount of €24.5 (25.9) billion. Contingent liabilities relate primarily to legal risks in connection with the diesel issue as well as potential liabilities from tax risks in the Commercial Vehicles Business Area in Brazil. The other finan- cial obligations primarily result from purchase commitments for property, plant and equipment, obligations under long- term leasing and rental contracts and irrevocable credit commitments to customers. In addition, they include invest- ments to which the Group has committed itself, in the infra- structure for zero-emission vehicles and in initiatives to pro- mote access to and awareness of this technology. These commitments were made as part of the settlement agree- ments in the USA in connection with the diesel issue. Other financial obligations include an amount of €1.3 billion for this purpose. Consolidated balance sheet structure At the end of the reporting period, the Volkswagen Group’s total assets amounted to €422.2 billion, 3.0% more than as of December 31, 2016. The increase, which was partially offset by exchange rate effects, was primarily due to a rise in busi- ness volumes in the Financial Services Division. The structure of the consolidated balance sheet as of the reporting date is shown in the chart on this page. The Volkswagen Group’s equity increased to €109.1 billion, €16.2 billion more than at the end of the previous reporting period. The equity ratio rose to 25.8 (22.7)%. The “assets held for sale” item contains primarily the anticipated carrying amount of some of the shares in There Automotive Division balance sheet structure At the end of the reporting period, the Automotive Division’s intangible assets and property, plant and equipment both increased slightly year-on-year. Lease assets were down compared with the end of December 2016 as a result of the sale of part of the PGA Group. Equity-accounted investments declined slightly. The positive business results of the Chinese joint ventures, the purchase of the shares in Navistar and the remeasurement of the interest in HERE were offset by dividend payments resolved by the Chinese joint ventures, the remeasurement of investments, as well as the reclas- sification of some of the shares in There Holding, which are 124 Results of Operations, Financial Position and Net Assets Group Management Report now held for sale. At €140.9 (139.0) billion, total noncurrent assets were on a level with the previous year. Current assets amounted to €80.2 (81.1) billion and were virtually unchanged year-on-year; the inventories included in this figure increased by 3.3% for production-related reasons. Total securities stood at €13.5 (14.7) billion and total cash and cash equivalents at €13.8 (14.5) billion, both showing a decline compared with December 31, 2016. At the end of 2017, the Automotive Division’s equity rose by 18.0% year-on-year to €81.6 billion. It was positively impacted by healthy earnings growth despite special items, as well as by effects from the measurement of derivatives recognized outside profit or loss, the hybrid notes issued in June 2017 and lower actuarial losses from the measurement of pension provisions. Currency translation effects and the dividend paid to the shareholders of Volkswagen AG led to a decline in the Automotive Division’s equity. The capital increase implemented in the Financial Services Division also reduced equity in the Automotive Division, where the deduction was recognized. The noncontrolling interests are mainly attributable to RENK AG and AUDI AG. As these were lower overall than the noncontrolling interests attributable to the Financial Services Division, the figure for the Auto- motive Division, where the deduction was recognized, was negative. The equity ratio increased to 36.9 (31.4)%. Noncurrent liabilities of €69.8 (70.0) billion were on a level with December 31, 2016. Noncurrent other liabilities were down, primarily as a result of the positive effects from the measurement of derivatives. The tax reform in the USA passed at the end of the year led to a decline in deferred tax liabilities of €1.0 billion. As of December 31, 2017, current liabilities amounted to €69.7 billion, a decline of 13.9% compared with the end of 2016. Among other things, reclassifications from noncurrent to current liabilities due to shorter remaining maturities led to an increase in current financial liabilities to €– 0.5 (– 1.0) bil- lion. The figures for the Automotive Division also contain the elimination of intragroup transactions between the Auto- motive and Financial Services divisions. As the current finan- cial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Divi- sion, a negative amount was disclosed. The item “Put options and compensation rights granted to noncontrolling interest shareholders” primarily comprises the liability for the obli- gation to acquire the shares held by the remaining free float shareholders of MAN. Current other liabilities were down as a result of the positive effects from the measurement of derivatives. Current other provisions declined significantly due to their use in connection with the diesel issue. At the end of 2017, the Automotive Division’s total assets amounted to €221.1 (220.1) billion and were thus on a level with the previous year. PA S S E N G E R C A R S B U S I N E S S A R E A B A L A N C E S H E E T ST R U C T U R E € million Dec. 31, 2017 Dec. 31, 2016 Noncurrent assets Current assets Total assets Equity Noncurrent liabilities Current liabilities 111,277 60,052 171,329 66,449 55,118 49,762 109,918 61,600 171,518 54,789 56,703 60,026 As of December 31, 2017, noncurrent assets in the Passenger Cars Business Area increased by €1.4 billion to €111.3 billion. While intangible assets and property, plant and equipment were higher, equity-accounted investments declined. Lease assets decreased, primarily due to the partial sale of the PGA Group. Current assets were at the prior-year level, amounting to €60.1 (61.6) billion; the inventories included in this figure increased for production-related reasons. Total securities and cash and cash equivalents were down in the reporting period. On December 31, 2017, total assets were virtually unchanged compared with the previous year, at €171.3 (171.5) billion. At €66.4 billion, the Passenger Cars Business Area’s equity was 21.3% higher than the prior-year figure, mainly due to earnings-related factors and the hybrid note issued in the reporting period. Noncurrent liabilities decreased by 2.8%. The financial lia- bilities and other liabilities included in this item were down significantly. Deferred tax liabilities include the positive effect of the tax reform in the USA. Current liabilities were down 17.1% year-on-year. Current other provisions declined significantly due to their use in connection with the diesel issue. Group Management Report Results of Operations, Financial Position and Net Assets 125 reported total assets of €5.9 billion, down 4.6% on the pre- vious year. At the end of fiscal year 2017, equity amounted to €3.0 bil- lion, an earnings-related decline of 6.1% compared with the end of the previous year. Both noncurrent and current lia- bilities were slightly down year-on-year at the end of the reporting period. Financial Services Division balance sheet structure On December 31, 2017, total assets in the Financial Services Division of €201.1 billion exceeded the prior-year figure by 6.0%. Noncurrent assets increased by a total of 5.4% compared with the end of 2016. Within this item, lease assets and non- current financial services receivables rose in line with the growth in business. Higher volumes led to a 7.1% rise in current assets. Cur- rent financial services receivables were up €3.5 billion, at €53.8 billion. As of the balance sheet date, the Financial Ser- vices Division accounted for around 47.6 (46.3)% of the Volks- wagen Group’s assets. Equity in the Financial Services Division amounted to €27.5 billion at the end of 2017, 15.5% more than on the previous year’s balance sheet date. Equity was pushed up by earnings growth and by the capital increase implemented by Volkswagen AG at the beginning of the year to finance the growth in business and to meet regulatory capital require- ments. The equity ratio rose to 13.7 (12.5)%. Higher noncurrent financial liabilities to fund business growth led to an overall increase of 19.6% in noncurrent lia- bilities compared with December 31, 2016. Current liabilities declined by 6.1%; the current financial liabilities contained in this item fell significantly. At €31.4 (33.3) billion, deposits from direct banking business were lower than at the end of the previous year. CO M M E R C I A L V E H I C L E S B U S I N E S S A R E A B A L A N C E S H E E T ST R U C T U R E € million Dec. 31, 2017 Dec. 31, 2016 Noncurrent assets Current assets Total assets Equity Noncurrent liabilities Current liabilities 27,005 16,908 43,913 12,194 13,975 17,744 26,206 16,197 42,403 11,185 12,531 18,687 In the Commercial Vehicles Business Area, intangible assets were lower and property, plant and equipment higher at the end of December 2017 than at the end of the previous reporting period. Equity-accounted investments increased because of the acquisition of the shares in Navistar. Overall, noncurrent assets grew by €0.8 billion to €27.0 billion. Higher inventories and receivables led to a 4.4% rise in current assets to €16.9 billion. At €43.9 billion, total assets exceeded the prior-year figure by 3.6%. The 9.0% rise in equity to €12.2 billion in the reporting period was mainly attributable to improved earnings. Non- current liabilities increased by 11.5%; the noncurrent finan- cial liabilities contained in this item were up significantly. Driven mainly by a marked decrease in current financial lia- bilities, current liabilities declined by 5.0%. P OW E R E N G I N E E R I N G B U S I N E S S A R E A B A L A N C E S H E E T ST R U C T U R E € million Dec. 31, 2017 Dec. 31, 2016 Noncurrent assets Current assets Total assets Equity Noncurrent liabilities Current liabilities 2,629 3,250 5,879 2,963 711 2,205 2,879 3,285 6,165 3,157 748 2,260 At the end of the reporting period, noncurrent assets in the Power Engineering Business Area were lower than the year- end 2016 figure, driven primarily by a decrease in intangible assets. Current assets were on a level with the previous year. On December 31, 2017, the Power Engineering Business Area 126 Results of Operations, Financial Position and Net Assets Group Management Report VA L U E A D D E D STAT E M E N T The value added statement indicates the added value generated by a company in the past fiscal year as its contri- bution to the gross domestic product of its home country, and how it is appropriated. Due to the improved operating profit before special items and lower negative special items, the value added generated by the Volkswagen Group in the reporting period was up 16.8% year-on-year. Added value per employee increased to €107.7 thousand (+13.9%) in 2017. Employees in the passive phase of their partial retirement as well as vocational trainees are not included in the calculation. VA L U E A D D E D G E N E R AT E D B Y T H E VO L K SWA G E N G R O U P Source of funds in € million Sales revenue Other income Cost of materials Depreciation and amortization Other upfront expenditures Value added Appropriation of funds in € million to Volkswagen AG shareholders (dividend, 2017 dividend proposal) to employees (wages, salaries, benefits) to the state (taxes, duties) to creditors (interest expense) to the Company (reserves) Value added 2017 230,682 18,912 – 151,449 – 22,165 – 17,615 58,364 2017 1,967 38,950 3,433 4,344 9,671 58,364 2016 217,267 17,907 – 140,307 – 20,924 – 23,990 49,953 2016 1,015 37,017 3,486 4,070 4,365 49,953 % 3.4 66.7 5.9 7.4 16.6 100.0 % 2.0 74.1 7.0 8.1 8.7 100.0 Group Management Report Results of Operations, Financial Position and Net Assets 127 R E T U R N O N I N V E STM E N T ( R O I ) A N D VA L U E CO N T R I B U T I O N The Volkswagen Group’s financial target system centers on continuously and sustainably increasing the value of the Company. In order to ensure the efficient use of resources in the Automotive Division and to measure the success of this, we have been using a value-based management system for a number of years, with return on investment (ROI) as a relative indicator and value contribution1, a key performance indi- cator linked to the cost of capital, as an absolute performance measure. The return on investment serves as a consistent target in strategic and operational management. If the return on invest- ment exceeds the market cost of capital, there is an increase in the value of the invested capital and a positive value con- tribution. The concept of value-based management allows the success of the Automotive Division and individual busi- ness units to be evaluated. It also enables the earnings power of our products, product lines and projects – such as new plants – to be measured. Components of value contribution Value contribution is calculated on the basis of the operating result after tax and the opportunity cost of invested capital. The operating result shows the economic performance of the Automotive Division and is initially a pre-tax figure. Using the various international income tax rates of the relevant companies, we assume an overall average tax rate of 30% when calculating the operating result after tax. The cost of capital is multiplied by the average invested capital to give the opportunity cost of capital. Invested capital is calculated as total operating assets reported in the balance sheet (property, plant and equipment, intangible assets, lease assets, inventories and receivables) less non-interest-bearing liabilities (trade payables and payments on account received). Average invested capital is derived from the balance at the beginning and the end of the reporting period. As the concept of value-based management only com- prises our operating activities, assets relating to investments in subsidiaries and associates and the investment of cash funds are not included when calculating invested capital. Interest charged on these assets is reported in the financial result. 1 The value contribution corresponds to the Economic Value Added (EVA®). EVA® is a registered trademark of Stern Stewart & Co. Determining the current cost of capital The cost of capital is the weighted average of the required rates of return on equity and debt. The cost of equity is deter- mined using the Capital Asset Pricing Model (CAPM). This model uses the yield on long-term risk-free Bunds, increased by the risk premium attaching to investments in the equity market. The risk premium comprises a general market risk and a specific business risk. The general risk premium of 6.5% reflects the general risk of a capital investment in the equity market and is oriented on the Morgan Stanley Capital International (MSCI) World Index. The specific business risk – price fluctuations in Volks- wagen preferred shares – has been modeled in comparison to the MSCI World Index when calculating the beta factor. The MSCI World Index is a global capital market benchmark for investors. The analysis period for the beta factor calculation spans five years with annual beta figures on a daily basis and an average subsequently being calculated. A beta factor of 1.12 (1.22) was determined for 2017. CO ST O F C A P I TA L A F T E R TA X AU TO M OT I V E D I V I S I O N % Risk-free rate MSCI World Index market risk premium Volkswagen-specific risk premium (Volkswagen beta factor) Cost of equity after tax Cost of debt Tax Cost of debt after tax Proportion of equity Proportion of debt Cost of capital after tax 2017 2016 1.0 6.5 0.8 0.7 6.5 1.5 (1.12) (1.22) 8.3 1.8 – 0.6 1.3 66.7 33.3 6.0 8.7 1.7 – 0.5 1.2 66.7 33.3 6.2 The cost of debt is based on the average yield for long-term debt. As borrowing costs are tax-deductible, the cost of debt is adjusted to account for the tax rate of 30%. A weighting on the basis of a fixed ratio for the fair values of equity and debt gives an effective cost of capital for the Automotive Division of 6.0 (6.2)% for 2017. 128 Results of Operations, Financial Position and Net Assets Group Management Report R E T U R N O N I N V E STM E N T ( R O I ) A N D VA L U E CO N T R I B U T I O N I N T H E R E P O RT I N G P E R I O D The operating result after tax of the Automotive Division, including the proportionate operating result of the Chinese joint ventures, was €11,756 (7,419) million in fiscal year 2017. The increase was due primarily to the year-on-year decline in special items, as well as to improvements in volumes and in the mix and to optimized product costs. Profit was negatively impacted by higher fixed costs as a result of expansion and by higher depreciation and amortization charges due to the large volume of capital expenditure. Effects on earnings and assets from purchase price allocation are not taken into account as they cannot be influenced operationally by man- agement. Invested capital rose to €97,021 (91,020) million, pri- marily due to higher inventories as well as to additions to investments in property, plant and equipment and capital- ized development costs. The return on investment (ROI) is the return on invested capital for a particular period based on the operating result after tax. The ROI improved year-on-year on the back of the higher operating profit and, at 12.1 (8.2)%, exceeded our minimum rate of return on invested capital of 9% in spite of the adverse effects of the special items on earnings. At €5,821 (5,643) million, the opportunity cost of capital (invested capital multiplied by cost of capital) was up on the prior-year level due to the increase in the invested capital. Operating result after tax was negatively impacted by special items and led to a positive value contribution of €5,935 (1,775) million after the opportunity cost of invested capital. More information on value-based management is con- tained in our publication entitled “Financial Control System of the Volkswagen Group”, which can be downloaded from our Investor Relations website: www.volkswagenag.com/ir. R E T U R N O N I N V E STM E N T ( R O I ) A N D VA L U E CO N T R I B U T I O N I N T H E AU TO M OT I V E D I V I S I O N 1 € million Operating result after tax Invested capital (average) Return on investment (ROI) in % Cost of capital in % Cost of invested capital Value contribution 2017 2016 11,756 97,021 12.1 6.0 5,821 5,935 7,419 91,020 8.2 6.2 5,643 1,775 1 Including proportionate inclusion of the Chinese joint ventures (including the relevant sales and component companies) and allocation of consolidation adjustments between the Automotive and Financial Services divisions. Group Management Report Results of Operations, Financial Position and Net Assets 129 S U M M A RY O F B U S I N E S S D E V E LO P M E N T A N D E CO N O M I C P O S I T I O N The Board of Management of Volkswagen AG considers busi- ness development and the economic position to have been positive overall. In spite of the diesel issue, which continues to keep us very busy, and the persistently challenging market conditions, we increased our deliveries to customers in 2017 as forecast. At 10.7 million vehicles we lifted deliveries to customers by 4.3% , achieving a new record. We saw growth in Europe, North and South America and the Asia-Pacific region. The higher volume was a significant factor in the 6.2% increase in the Group’s sales revenue and thus confirmed the current forecast. As a consequence, operating profit before special items rose to €17.0 billion and the operating return on sales before special items, at 7.4%, was moderately higher than the range forecast at the beginning of the year of 6.0–7.0%. After deducting special items resulting exclusively from the diesel issue, the operating return on sales of 6.0% was at the lower end of this scale, as recently projected. Research and development costs underscore the efforts made to ensure the Company’s future viability; at 6.7%, the R&D ratio in the Automotive Division was inside the expected range. The Automotive Division’s ratio of capex to sales revenue was reduced to 6.4%, which put it within the forecast range as well. Owing to high cash outflows attributable to the diesel issue, the Automotive Division’s net cash flow was negative, as anticipated. The Automotive Division’s net liquidity fell as a result, but was still a robust €22.4 billion at the end of the reporting period. On the back of the increase in earnings, the return on investment (ROI) in the Automotive Division improved markedly to 12.1%, thus exceeding the minimum required rate of return on invested capital. F O R E C A ST V E R S U S A C T UA L F I G U R E S Deliveries to customers Volkswagen Group Sales revenue Actual 2016 Original forecast for 2017 Adjusted forecast for 2017 Actual 2017 10.3 million moderate increase moderate increase 10.7 million €217.3 billion increase of up to 4% > 4% €230.7 billion Operating return on sales before special items Operating return on sales 6.7% 3.3% 6.0–7.0% 6.0–7.0% moderately above 7.0% ~6.0% Operating result before special items €14.6 billion within the forecast range within the forecast range €7.1 billion within the forecast range within the forecast range Operating return on sales before special items Operating return on sales 7.4% 2.8% 6.5–7.5% 6.5–7.5% moderately above 7.5% slightly below 6.5% Operating result before special items €11.1 billion within the forecast range within the forecast range €4.2 billion within the forecast range within the forecast range €150.3 billion increase of up to 4% > 4% €158.5 billion €32.1 billion increase of up to 4% > 4% €35.2 billion 2.2% 3.0–5.0% moderately above 5.0% 5.4% €0.7 billion within the forecast range within the forecast range €1.9 billion €3.6 billion €–0.2 billion €31.3 billion €2.4 billion 7.3% 6.9% significant decline significant decline lower loss lower loss €3.3 billion €–0.1 billion at prior-year level at prior-year level noticeable increase noticeable increase €33.7 billion €2.7 billion 6.0–7.0% 6.0–7.0% 6.0–7.0% 6.0–7.0% Net cash flow in the Automotive Division €4.3 billion significant decline, negative significant decline, negative Net liquidity in the Automotive Division €27.2 billion significant decline significant decline Return on investment (ROI) in the Automotive Division 8.2% noticeable increase, > 9% noticeable increase, > 9% Operating result Passenger Cars Business Area Sales revenue Operating result Commercial Vehicles Business Area Sales revenue Operating return on sales Operating result Power Engineering Business Area Sales revenue Operating result Financial Services Division Sales revenue Operating result R&D ratio in the Automotive Division Capex/sales revenue in the Automotive Division 7.4% 6.0% €17.0 billion €13.8 billion 7.9% 5.9% €12.5 billion €9.3 billion 6.7% 6.4% €–6.0 billion €22.4 billion 12.1% 130 Volkswagen AG Group Management Report Volkswagen AG (Condensed, in accordance with the German Commercial Code) Production and unit sales stable at 2016 level, sales revenue and earnings up on prior-year figures. A N N UA L R E S U LT Special items recognized in fiscal year 2017 were exclusively attributable to the diesel issue, mainly due to higher expenses for the buyback/retrofit programs for 2.0 l TDI vehicles in North America and higher legal risks. These special items had an impact of €–2.0 (–0.8) billion on cost of sales and of €–0.9 (–4.5) billion on other operating income. Moreover, special items of €–0.4 billion had affected distribution expenses in the previous year. In fiscal year 2017, sales were 1.9% higher than in the pre- vious year, at €76.7 billion. Sales generated abroad accounted for a share of 62.5 (61.2)%. The cost of sales increased by 4.5% to €73.4 billion. Gross profit fell to €3.4 (5.1) billion. At €7.1 billion, selling, general and administrative expenses were down €1.2 billion on the prior-year figure. The net other operating result improved by €1.9 billion to €–0.2 (–2.0) billion. At €8.6 (8.7) billion, the financial result stood at the prior- year level. Including the income tax expense of €–0.4 (–0.7) billion, net income for the year amounted to €4.4 billion in the year under review, compared with €2.8 billion in the previous year. I N CO M E STAT E M E N T O F VO L K SWA G E N AG B A L A N C E S H E E T O F VO L K SWA G E N A G A S O F D E C E M B E R 3 1 € million Sales Cost of sales Gross profit on sales Selling, general and administrative expenses Net other operating result Financial result1 Taxes on income Earnings after tax Net income for the fiscal year Retained profits brought forward Appropriations to revenue reserves Net retained profits 1 Including write-downs of financial assets. 2017 2016 € million 2017 2016 76,729 – 73,355 3,375 – 7,104 – 154 8,644 – 409 4,353 4,353 2 – 2,174 2,181 75,310 Fixed assets – 70,180 5,131 Inventories Receivables1 Cash-in-hand and bank balances – 8,352 – 2,035 Total assets Equity 8,725 – 670 2,799 2,799 2 – 1,399 1,402 Special tax-allowable reserves Long-term debt Medium-term debt Short-term debt 1 Including prepaid expenses. 113,703 101,973 4,889 32,303 5,798 156,693 30,438 21 33,060 33,415 59,759 4,387 26,386 9,117 141,863 27,100 23 26,457 30,082 58,200 Group Management Report Volkswagen AG 131 N E T A S S E T S A N D F I N A N C I A L P O S I T I O N Total assets amounted to €156.7 billion at December 31, 2017, up €14.8 billion on the prior-year figure. Investments in tan- gible and intangible fixed assets declined to €1.7 (2.0) billion. Additions to financial assets rose by €11.4 billion to €33.8 bil- lion. This was offset by depreciation and amortization charges and write-downs as well as by asset disposals totaling to €23.8 (17.3) billion. Fixed assets accounted for a share of 72.6 (71.9)% of total assets. Current assets (including prepaid expenses) amounted to €43.0 (39.9) billion in 2017. At €30.4 billion, equity increased due in particular to the improved net income for the year at the end of the reporting period. The equity ratio was 19.4 (19.1)%. Other provisions decreased by €8.7 billion to €22.1 (30.8) billion, due primarily to the utilization of provisions in connection with the diesel issue. Provisions for pensions and similar obligations rose by €0.7 billion to €14.4 billion, pri- marily as a result of a change in the interest rate, while pro- visions for taxes decreased by €0.5 billion to €3.5 billion. The €20.0 billion rise in total liabilities (including deferred income) to €86.3 billion is, above all, attributable to higher liabilities to affiliated companies. Volkswagen AG’s cash funds, comprising cash instruments with a maturity of less than three months, less bank and cash pooling liabilities repayable on demand, declined year-on- year from €–6.2 billion to €–8.5 billion. The interest-bearing portion of debt amounted to €74.0 (55.1) billion. In our assessment, the economic position of Volkswagen AG is just as positive overall as that of the Volkswagen Group. D I V I D E N D P R O P O S A L In fiscal year 2017, net retained profits amounted to €2.2 bil- lion. The Board of Management and Supervisory Board are proposing to pay a total dividend of €2.0 billion, i.e. €3.90 per ordinary share and €3.96 per preferred share. P R O P O S A L O N T H E A P P R O P R I AT I O N O F N E T P R O F I T € 2017 Dividend distribution on subscribed capital (€1,283 million) of which on: ordinary shares preferred shares Appropriation to other revenue reserves Balance (carried forward to new account) Net retained profits 1,967,423,852.40 1,150,850,290.20 816,573,562.20 210,000,000.00 3,299,970.81 2,180,723,823.21 E M P LOY E E PAY A N D B E N E F I T S AT VO L K SWA G E N A G € million Direct pay including cash benefits Social security contributions Compensated absence Retirement benefits Total expense 2017 7,637 1,361 1,161 640 % 70.7 12.6 10.7 5.9 2016 7,138 1,337 1,099 456 % 71.2 13.3 11.0 4.6 10,799 100.0 10,030 100.0 132 Volkswagen AG Group Management Report E X P E N D I T U R E O N E N V I R O N M E N TA L P R OT E C T I O N When measuring expenditure on environmental protection, a distinction is made between investments and operating costs for production-related environmental protection mea- sures. Of our total investments, only those that are spent exclusively or primarily on environmental protection are included in environmental protection investments. We dis- tinguish here between additive and integrated investments. Additive environmental protection measures are separate and independent of other measures relating to the pro- duction process. They can be upstream or downstream of the production process. In contrast to additive environmental protection measures, integrated measures reduce the environ- mental impact already during the production process. In 2017 we invested primarily in soil and water pollution control. The operating costs recognized for environmental pro- tection relate exclusively to production-related measures that protect the environment against harmful factors by avoiding, reducing, or eliminating emissions by the Company. Resources are also conserved. For example, these include expenditures incurred to operate equipment that protects the environment as well as expenditures for measures not relating to such equipment. As in the previous year, the emphasis in 2017 was on sewage and waste management. V E H I C L E S A L E S Volkswagen AG sold a total of 2,584,375 (2,632,144) vehicles in fiscal year 2017. Vehicles sold abroad accounted for a share of 70.0 (69.7)%. P R O D U C T I O N Volkswagen AG produced a total of 1,224,609 vehicles at its vehicle production plants in Wolfsburg, Hanover and Emden in the reporting period (–1.3%). Volkswagen AG’s average daily production was 5,370 (5,423) units. E M P LOY E E S As of December 31, 2017, a total of 117,420 (113,928) people were employed at the sites of Volkswagen AG, excluding staff employed at subsidiaries. Of this figure, 4,953 (4,999) were vocational trainees. 4,380 (2,936) employees were in the passive phase of their partial retirement. Female employees accounted for 17.1 (17.0)% of the workforce. Volkswagen AG employed 5,069 (4,721) part-time workers. The percentage of foreign employees was 6.1 (6.1)%. 83.4 (83.5)% of the employees in Volkswagen AG’s production area had completed vocational or additional training in the reporting period. The proportion of graduates was 18.9 (18.8)% in the same period. The average age of employees in fiscal year 2017 was 43.6 (43.2) years. R E S E A R C H A N D D E V E LO P M E N T Research and development costs for Volkswagen AG under the German Commercial Code increased to €4.8 (4.7) billion in the reporting period. 12,332 (12,380) people were employed in this area at the end of the reporting period. VO L K SWA G E N AG E X P E N D I T U R E O N E N V I R O N M E N TA L P R OT E C T I O N € million Investments Operating costs 2017 17 227 2016 11 223 2015 21 244 2014 19 226 2013 14 224 Group Management Report Volkswagen AG 133 O P E R A T I N G C O S T S F O R E N V I R O N M E N T A L P R O T E C T I O N A T V O L K S W A G E N A G 2 0 1 7 Share of environmental protection areas in percent Sewage management Waste management Air pollution control Soil and water pollution control Climate protection Species and landscape conservation Protection against noise and vibration 31.8 30.6 17.5 9.5 5.5 2.7 2.4 0 10 20 30 40 50 60 70 80 90 100 B U S I N E S S D E V E LO P M E N T R I S K S A N D O P P O RT U N I T I E S AT VO L K SWA G E N A G The business development of Volkswagen AG is exposed to essentially the same risks and opportunities as the Volks- wagen Group. These risks and opportunities are explained in the Report on Risks and Opportunities on pages 164 to 189 of this annual report. R I S K S A R I S I N G F R O M F I N A N C I A L I N ST R U M E N T S Risks for Volkswagen AG arising from the use of financial instruments are the same as those to which the Volkswagen Group is exposed. An explanation of these risks can be found on pages 187 to 188 of this annual report. D E P E N D E N T CO M PA N Y R E P O RT The Board of Management of Volkswagen AG has submitted to the Supervisory Board the report required by section 312 of the AktG and issued the following concluding declaration: “We declare that, based on the circumstances known to us at the time when the transactions with affiliated companies within the meaning of section 312 of the German Stock Corporation Act (AktG) were entered into, our Company received appropriate consideration for each transaction. No transactions with third parties or measures were either undertaken or omitted on the instructions of or in the interests of Porsche or other affiliated companies in the reporting period.” The Annual Financial Statements of Volkswagen AG (in accordance with the HGB) can be accessed from the electronic companies register at www.unternehmensregister.de. 134 Sustainable Value Enhancement Group Management Report Sustainable Value Enhancement Our goal is to run our business responsibly along the entire value chain. Everyone should benefit from this – our customers, our employees, the environment and society. Our future program TOGETHER – Strategy 2025 represents the biggest change process in the Company’s history. The starting point is our vision of being one of the world’s leading providers of sustainable mobility. The main financial key performance indicators for the Volks- wagen Group are described in the “Results of Operations, Financial Position and Net Assets” chapter. Nonfinancial key performance indicators also attest to the efficiency of our Company’s value drivers. These include the processes in the areas of research and development, procurement, produc- tion, marketing and sales, information technology and quality assurance. In all of these processes, we are aware of our responsibility towards our customers, our employees, the environment and society. In this chapter we provide exam- ples of how we are increasing the value of our Company in a sustainable way. S U STA I N A B I L I T Y The Volkswagen Group is committed to sustainable, trans- parent and responsible corporate governance. The biggest challenge we face in implementing this at all levels and at every step in the value chain is the complexity of our Com- pany, with its twelve brands, more than 642 thousand employees and 120 production locations. In order to tackle this challenge in the best way possible, we follow the Sustainable Development Goals (SDGs) formulated by the United Nations and the recommendations of the German Corporate Governance Code. In addition, we coordinate our sustainability activities across the entire Group. We have also put in place a forward-looking system of risk management and a clear framework for dealing with environmental issues in a future-oriented manner, for employee responsibility and for social commitment across our brands and in the regions in which we operate. For us, sustainability means simultaneously striving for economic, social and environmental goals in a way that gives them equal priority. The future program TOGETHER – Strategy 2025 places sustainable growth at the heart of our strategic target dimensions: we want to be an excellent employer and a role model for the environment, safety and integrity, to excite customers and to ensure that we achieve competitive profitability. By 2025, we aim to make the Volkswagen Group the world’s number one in e-mobility. We will therefore set new priorities with Roadmap E. We also want to ensure that we recognize opportunities and risks in the areas of environ- ment, society and governance at an early stage at every step along the value chain. Our corporate social responsibility (CSR) activities will contribute toward enhancing our Com- pany’s reputation and value in the long term. Management and Coordination The Volkswagen Group has created a clear management structure to coordinate the Group’s activities as regards sustainability and CSR. Its highest committee is the Group Board of Management, which acts as the Sustainability Board at the same time. It is regularly briefed by the Group Sus- tainability steering group on issues related to the topics of sustainability and corporate responsibility. The members of the Group Sustainability steering group include executives from central Board of Management business areas and representatives of the Group Works Council and the brands. The steering group’s tasks include identifying the key action areas, making decisions on the strategic sustainability goals, monitoring by means of indicators the extent to which these goals are being met and approving the sustainability report. The sustainability office supports the steering group. Its duties include coordinating all sustainability activities within the Group and the brands. It is also responsible for stake- holder dialog at Group level, for example with sustainability- driven analysts and investors. In addition, CSR project teams work across business areas on topics such as reporting, stakeholder management and sustainability in supplier Group Management Report Sustainable Value Enhancement 135 V O L K S W A G E N G R O U P ’ S K E Y A C T I O N A R E A S Compliance, risk management, governance Supplier management Product and transport safety Stability and profitability Customer satisfaction Integrity Diversity and equality Corporate responsibility Health and occupational safety O N E O F T H E W O R L D ’ S L E A D I N G P R O V I D E R S O F S U S T A I N A B L E M O B I L I T Y Climate protection and decarbonization Nature conservation and biodiversity Training Attractiveness as an employer Human rights Zero impact mobility Resource conservation throughout life cycle Participation and codetermination Environmentally friendly products relationships. This coordination and working structure is also largely established across the brands and is constantly expanding. Since 2009, the Sustainability & CSR coordinators for all brands and regions have come together once a year to promote communication across the Group, create uniform structures and learn from one another. This Group CSR meeting has proven its worth as an integral part of the Group-wide coordination structure. Sustainability Council As part of its efforts to continuously improve and expand its sustainability management, the Volkswagen Group appointed an international Sustainability Council in 2016 made up of renowned experts from the academic world, politics and society. The members of the council establish their own working methods and areas of focus independently and consult with the Board of Management, senior managers and the employee representatives regularly for the purposes of consultation, exchanging information and initiating action. The key issues in 2017 were the challenges created by global CO2 emissions and the regulatory requirements to be met post-2025, as well as the Company’s transformation pro- cess. The Volkswagen Group is initially providing €20 million in funding for projects proposed and promoted by the Sus- tainability Council for the years 2017 and 2018. The first proj- ects relate to innovation and cultural change in the area of sustainable mobility, an international crisis prevention initia- tive as a result of climate change and an academic study on the future shape of the transport and climate policy framework. Materiality analysis Two developments in 2017 continued to influence the detailed analysis as to which issues are material to the Volkswagen Group: the realignment of the Group via the future program TOGETHER – Strategy 2025, and dealing with the conse- quences of the diesel issue. After analyzing and identifying topics that are material to the Company, we derived 18 key action areas that we will use to achieve our goal of being one of the world’s leading pro- viders of sustainable mobility. The analysis was based on external studies, industry analyses and stakeholder surveys carried out by our brands, internal guidelines such as our corporate strategy and Group environmental strategy, and key factors identified by the Volkswagen Group’s strategy committee. As the details of the new Group strategy have not yet been finalized, we are still in the process of specifying the content of the key action areas and defining corresponding values, targets and indicators. As an enterprise with global opera- tions, we also take account of the options available to us for influencing and implementing the SDGs formulated by the United Nations. Principles and guidelines Voluntary commitments and principles that apply through- out the Group form the basis and backbone of our strategic sustainability goals. In addition, our sustainability model provides the framework for sustainable and responsible action. The Volkswagen Group’s revised Code of Conduct published in 2017 applies to the entire Group and helps managers and employees alike to deal with legal and ethical challenges in their day-to-day work. We expressly support the United Nations Global Compact, an agreement between the UN and the business world aimed at enhancing the social and ecological aspects of globali- zation. As long ago as 2002, the Volkswagen Group made a commitment to promoting human rights, labor standards, environmental protection and combating corruption. In 2013, this commitment was extended to include the so-called CEO Water Mandate, the aim of which is to ensure the careful management of water resources. Since the emergence of the diesel issue, we have agreed on a temporary suspension of our membership. Our objective is to ensure that our actions are in line with the declarations of the International Labor Organization (ILO), the principles and conventions of the Organisation for Economic Co-operation and Development (OECD) and the international covenants of the United Nations on basic rights and freedom. 136 Sustainable Value Enhancement Group Management Report S T A K E H O L D E R S O F T H E V O L K S W A G E N G R O U P B U S I N E S S Investors and analysts Business partners Competitors P O L I C Y M A K E R S Agencies and authorities Unions Associations NGOs / nonprofit organizations C U S T O M E R S V O L K S W A G E N G R O U P E M P L O Y E E S A C A D E M I A Scientists and experts M E D I A Media organizations S O C I E T Y Religious institutions Residents and communities Cultural, educational and daycare facilities We have also established our own internal guidelines in the shape of the Volkswagen Social Charter, the Charter on Labor Relations, the Charter on Vocational Education and Training, and the Charter on Temporary Work, all of which apply to the Group as a whole. Environmental protection activities are shaped both by the environmental policy and by the prin- ciples for products and production, which apply throughout the Group. Strategic stakeholder management Our stakeholders are individuals, groups, or organizations who materially influence or are influenced by the way in which the Group reaches its corporate decisions and the implications of those decisions. The role of stakeholder man- agement is to manage the many demands placed upon us such that the Group can integrate them into its decision- making processes. This includes sharing knowledge, jointly developing solutions for the problems we face and using transparent criteria to make decisions. Our customers and our employees are our key stake- holders. Around this core, we have defined twelve types of stakeholders in five clusters. This classification is the product of a stakeholder assessment in which we regularly identify the Group’s key stakeholder groups. The aim is to open up decision-making processes and systematically enhance the Group’s sustainability manage- ment through constructive criticism. In this context, we take a holistic approach to stakeholder management. R E S E A R C H A N D D E V E LO P M E N T Forward-looking mobility solutions with brand-defining products and services would be unthinkable without techno- logical innovations. This makes our research and develop- ment work essential for sustainably increasing the value of the Company. Together with our Group brands, we have formulated a strategy for networking development activities across the Group and launched numerous initiatives based on our future program TOGETHER – Strategy 2025. At the heart of this is an efficient, cross-brand development alliance charac- terized by a close network of experts, collaboration on an equal footing, an innovative working environment and the pooling of development activities. With this alliance, we aim to make use of synergy effects across the Group and act as a role model for the environment, safety and integrity. The alliance is playing a major part in the Volkswagen Group’s transformation into a leading provider of sustainable mobil- ity and helping to make the Group fit for the future. Based on this strategic focus, we concentrated in the reporting year on continuing to develop promising mobility solutions, establishing technological expertise to strengthen our competitiveness, expanding our range of products and services and improving the functionality, quality, safety and environmental compatibility of our products and services. Group Management Report Sustainable Value Enhancement 137 C O 2 E M I S S I O N S O F T H E V O L K S W A G E N G R O U P ’ S E U R O P E A N ( E U 2 8 ) N E W P A S S E N G E R C A R F L E E T in grams per kilometer 2017 2016 2015 2014 2013 122 ¹ ¹ 120 121 126 129 0 20 40 60 80 100 120 140 160 1 Subject to official publication by the European Commission in the annual CO2 fleet monitoring report. Fuel and drivetrain strategy The Volkswagen Group’s new passenger car fleet in the EU (excluding Lamborghini and Bentley) emitted an average of 122 g CO2/km1 in the reporting period and was thus well below the 2017 European limit of 130 g CO2/km. The small year-on-year increase is mainly attributable to the new measurement techniques to be applied and the decline in the proportion of diesel vehicles included in deliveries. As small- volume manufacturers, the Lamborghini and Bentley brands each have an independent fleet for the purposes of the European CO2 legislation; Bentley complied with its individual target, Lamborghini was slightly above its target. As part of a Group-wide initiative – and with a view to the legal regulations on emissions – we are currently developing a forward-looking vehicle and drivetrain portfolio: to achieve our goal of sustainable mobility, we have set ourselves the objective of increasing drive system efficiency with each new model generation – irrespective of whether the means of propulsion is a combustion engine, a hybrid, a plug-in hybrid, a purely electric drive, or a fuel cell drive system. We anticipate that by as early as 2025, one in four new Volkswagen Group vehicles worldwide will have a purely electric drive; depending on the market development, this could be up to three million electric vehicles a year. The Volkswagen Group has launched a comprehensive electrifi- cation offensive in the form of Roadmap E. By 2025, we plan to offer our customers around the world more than 80 new electric models, including some 50 purely battery-driven vehicles and 30 plug-in hybrids. By 2030, the Volkswagen Group aims to electrify its entire model portfolio – from high-volume models to premium vehicles. This will mean offering at least one electric version of each of our approxi- mately 300 models across all Group brands. We are therefore planning to invest more than €20 billion in industrializing e-mobility by 2030, involving, amongst other things, the development of two new electric platforms for vehicles with a range of up to 600 km. Examples include the Volkswagen I.D. family of concept vehicles, the Audi e-tron and Porsche’s Mission E. To enable sustainable, affordable mobility for as many people as possible, we will continue to offer the full range of drivetrains – from conventional combustion engines to pure electric drive. From today’s perspective, the combustion engine looks set to serve as the broad basis for drive techno- logy in the coming years. In the interest of using resources responsibly, it is therefore essential for combustion engines to be further optimized. We use clean technologies to purify exhaust gases. All our new diesel vehicles are now fitted with an SCR catalyst as standard. From 2018, all our petrol engine cars will have particulate filters. In addition to electric drives and more efficient combus- tion engines, renewable, reduced-CO2 fuels (in gas or liquid form) will also play an ever-greater role. We are committed to expanding the natural gas (CNG) infrastructure and are extending our model range accordingly. We are also inten- sively researching options for producing fuels from renew- able electricity, enabling carbon-neutral operation of com- bustion engines. Projects such as Audi e-gas (power-to-gas) and SEAT’s SMART Green Gas (waste-to-gas) are examples of our commitment in this area. Last but not least, we are working under Audi’s leadership to make fuel cell technology ready for market. 138 Sustainable Value Enhancement Group Management Report It is more important to us than ever to rigorously pursue our modular approach. We are reducing the number of individual modules so that we can make a large product portfolio economically viable. Over the long term, we will reduce the number of versions of conventional combustion engines in the Group by more than a third, for example. This will create capacity for developing and producing new hybrid and electric drives. Life cycle engineering and recycling Innovations and new technologies for reducing fuel con- sumption are not enough on their own to minimize the effect of vehicles on the environment. That is why we examine the entire product life cycle of our vehicles – from the extraction of raw materials to the production of components and the provision of fuel and energy during vehicle use to their final disposal. We identify the stages of the life cycle at which improvements will have the greatest effect and develop appro- priate solutions. We call this life cycle engineering. Recycling, for example, is an important means of reducing environ- mental impact and conserving resources. When developing new vehicles, we therefore pay attention to the recyclability of the required materials, use high-quality recycled material and avoid pollutants. At the end of their lives, our vehicles are 85% recyclable and 95% recoverable. In implementing the Aluminum Closed Loop project in 2017, we created a closed circuit for aluminum beyond our Company boundaries for the first time. Aluminum scrap was returned directly from our press shops to the supplier for reuse in vehicles. Leveraging synergies increases efficiency When developing vehicles, we cooperate closely with our brands to leverage synergies. The strategy formulated by our development alliance aims, for example, to make the Group more competitive in the long term by deploying resources more effectively and efficiently in the research and develop- ment of new mobility-related technologies, products and services. In our Group-wide development alliance, the brands not only work with each other, but also for each other on key technologies, forming broad networks of expertise to address the topics of the future. In the reporting year, we consolidated the Group’s activities and responsibility for the development, procurement and quality assurance of all battery cells in the Center of Excellence under the umbrella of the Volkswagen Passenger Cars brand. Pilot production will also start here, with the aim of building up manufacturing expertise for our Group. Our modules are also managed centrally to reduce costs, capital expenditure and complexity. With the aid of a Group initiative, we are seeking to reduce expenditure in the toolkits while at the same time implementing a wide-reaching elec- trification offensive and focusing on autonomous systems. We will achieve this through a considerable reduction in com- plexity using streamlined, non-overlapping yet synergistic platforms. The individual Group brands are using the modular toolkits, thus creating synergies between the various models of a model line and across model lines. The streamlined toolkits are creating the financial leeway for development work on the future trends of digitalization and autonomous driving. As part of the TOGETHER – Strategy 2025 program, the high-volume passenger car brands have introduced model line organization through a Group initiative, conse- quently strengthening the brands’ responsibility for the success of vehicle projects, improving project work across different business areas, accelerating decision-making and improving the result-orientation of projects. Under the umbrella of Volkswagen Truck & Bus, MAN and Scania are continuing to work together on core drivetrain components based on the lead engineering principle. They have expanded their development work in the fields of elec- trification and autonomous driving. We are also creating synergy effects by continuing to closely share best practices, for instance in virtual develop- ment and testing. Finally, the centralized development and consolidation of IT systems is helping to promote cooper- ation across brands, make development activities more com- parable and reduce the Group’s IT costs. Sustainable mobility, connectivity and automated driving Mobility is a prerequisite for economic growth. But while the need for constant mobility is rising, natural resources are dwindling. This calls for holistic mobility concepts to mini- mize environmental impact. Such solutions need to be effi- cient, sustainable, customer-oriented and accessible anytime and anywhere. We are researching and developing such pioneering con- cepts and solutions in our Group-wide alliance. In shaping the future of mobility, we are looking not only at the auto- mobile but at all modes of transport and transport infrastruc- tures, at people’s mobility habits and at other relevant factors. Innovative technologies such as connectivity and automated driving are enabling us to take completely new problem-solving approaches. We want to take advantage of these to contribute to a comprehensive mobility system of the future and to help shape our industry’s digital transfor- mation. Group Management Report Sustainable Value Enhancement 139 Another initiative of our future program TOGETHER – Strategy 2025 is the establishment of a cross-brand mobility solutions business. Our mobility business MOIA, which we founded in 2016, is to become one of the leading providers of innovative transport services and will develop profitable, globally applicable business models over the next few years. Strategic investments and partnerships are also being sought. In the reporting year, MOIA conducted service tests for its ride-pooling concept – an organized ride-sharing system with a driver – among other products in Hanover over several months with selected participants, gathering valuable experi- ence. These and other activities will help to make Volkswagen one of the world’s leading providers of efficient and conve- nient smart mobility services by 2025, with a portfolio encompassing all brands and both “mobility-on-demand” and “vehicle-on-demand” services. In December 2017, Volkswagen Truck & Bus launched the digital brand RIO. This cloud-based, multi-vendor platform serves the entire transport and logistics ecosystem. For the first time, everyone in the supply chain – shippers, for- warders, carriers, loaders, dispatchers, drivers and recipients – will be connected. RIO will offer digital solutions for all the players involved in the transport system. It will work closely with customers to tailor solutions to the needs and demands of the market and continuously enhance them. On the road to autonomous driving, the Volkswagen Group has further improved its assistance systems and auto- mated driving functions in 2017 and fitted them in vehicles. The strategic objective is to market highly automated driving functions for private vehicles, shared mobility systems and commercial mobility providers as a core competency of the Group from 2021. With the presentation of the Sedric concept vehicle and a look ahead at the Sedric family – from fully autonomous city vehicles to luxurious long-distance mobi- lity, spectacular sports cars, self-driving urban delivery vehi- cles and heavy trucks – the Volkswagen Group has introduced its vision of an autonomous mobility system. Particularly in cities, these vehicles will enable completely new forms of individual mobility – even for user groups that have so far been excluded. A balanced combination of different vehicle sizes will also reduce the space required for parking and optimize urban transport as a whole. Autonomous driving in the complex urban environment places heavy demands on technology. We are dedicated to meeting these challenges. Led by Audi, the Volkswagen Group founded Autonomous Intelligent Driving GmbH in 2017. This new company will develop a Group-wide system for self- driving vehicles. The reporting year also saw the presentation of the Audi A8 – an innovation highlight with up to 41 driver assistance systems. The AI Traffic Jam Pilot – the first auto- mated driving function in a production vehicle – deserves special mention. In traffic jam situations on multi-lane high- ways it enables Level 3 automated driving as defined by inter- national standards at speeds of up to 60 km/h. This means that drivers no longer need to continuously monitor the system. Depending on national legislation, the driver may also perform other permitted tasks while the vehicle is in motion. This results in a high degree of convenience and safety. Audi will gradually introduce the AI Traffic Jam Pilot into series production in various countries: its introduction requires clarification of the respective national legal frame- work and adjustment and testing of the system accordingly; different national approval processes and deadlines must also be complied with. Using the new AI functions, Porsche is working on improving active driving safety as well as the acceptance of assistance systems and automated driving functions among car drivers. Its current focus is on Grip Prediction, a technical solution to predict how much grip the road surface will offer and adjust driving speed for longitudinal and lateral move- ment. Vehicle data from prototypes, combined with local weather data, is the basis for this. 140 Sustainable Value Enhancement Group Management Report Pooling strengths with strategic alliances The future program TOGETHER – Strategy 2025 plans to transform our core business and to establish a new mobility solutions business area at the same time. It is decisive to the success of this plan that we place our great innovative strength on even broader foundations. Growth in the mobility sector is currently a global phe- nomenon, above all in the economy segment. As part of a Group initiative, Volkswagen is therefore increasingly entering local partnerships to develop and offer economy products in line with the market. This is helping us to identify regional customer needs more precisely, to adjust our product range accordingly and to establish competitive cost structures. In future, we will therefore concentrate to a greater extent on partnerships, acquisitions and venture capital investments, and will manage investment selection centrally so as to generate maximum value for the Group and its brands. Developing battery technology as a core competency has also been defined as a strategic initiative of the Volkswagen Group. The battery accounts for 20 to 30% of the cost of materials in electric vehicles; in future, it will be one of the most important components for differentiating between products. We have already pooled our in-house expertise in battery cells in a Center of Excellence and also plan to accel- erate the development of expertise and technological change through intelligent partnerships. We anticipate that our own electric fleet with lithium-ion batteries will require a battery capacity of more than 150 GWh a year in the period to 2025. To cover this enormous demand, we are inviting tenders for long-term strategic partnerships in China, Europe and the USA with a global order volume of more than €50 billion in the period to 2025. Looking ahead, we are already preparing for the next generation: together with partners, we aim to develop solid-state batteries to market maturity with ranges of more than 1,000 km. In 2017, MAN and the Austrian Council for Sustainable Logistics consortium signed an agreement to jointly develop and test fully electric-powered trucks. The results will feed into the series development of electric trucks for urban delivery traffic. Our mobility business MOIA is currently working with Hamburger Hochbahn AG to develop a new, environmentally friendly mobility service for Hamburg: a shuttle-on-demand service with environmentally friendly electric vehicles is due to launch in 2018 to complement public transport and as an alternative to the private car. We are actively involved in public projects to help shape the framework conditions for the approval and introduction of our own self-driving system. The experience we are gath- ering here will benefit the Group brands and thus also our customers. As part of the joint involvement of our Group brands Volkswagen Passenger Cars, Audi and Porsche in the pan- European High-Power Charging (HPC) joint venture IONITY, a comprehensive charging infrastructure is being built to safe- guard long-distance mobility: by 2020, it is planned to jointly build and operate fast-charging stations at 400 locations along major transport arteries in Europe. Volkswagen Commercial Vehicles launched the Urban Logistics project initiative in the reporting year together with universities and businesses. The project partners are bringing together a wealth of promising ideas – such as intelligent connectivity, smart mobility solutions, digital communi- cation and control technologies and the use of electric- powered delivery vehicles – to create practical solutions for districts or whole cities. Our Material Research team plays a major role in the Open Hybrid LabFactory, a public-private partnership in which various industry and research partners work together to develop lightweight construction solutions for mass produc- tion. Given the growing importance of e-mobility, auto- motive lightweight construction is a key technology for future competitiveness. Less vehicle weight increases the range of electric vehicles. Group Management Report Sustainable Value Enhancement 141 Key R&D figures In fiscal year 2017, we filed 6,566 (6,465) patent applications worldwide for employee inventions, around half of them in Germany. The fact that an increasing share of these patents is for cutting-edge fields impressively underscores our Com- pany’s include driver assistance systems and automation, connectivity, alternative drive systems and lightweight construction. innovative power. These fields The Automotive Division's total research and develop- ment costs in the reporting year were 3.9% lower than in the previous year; their percentage of the Automotive Division’s sales revenue – the R&D ratio – came to 6.7 (7.3)%. Along with new models, the main focus was on the electrification of our vehicle portfolio, a more efficient range of engines and digita- lization. The capitalization ratio was 40.0 (42.1)%. Research and development expenditure recognized in profit or loss in accordance with IFRSs increased to €11.6 (11.5) billion. As of December 31, 2017, our Research and Development departments – including the equity-accounted Chinese joint ventures – employed 49,316 people (+2.6%) Group-wide or 7.7% of the total headcount. R E S E A R C H A N D D E V E LO P M E N T CO ST S I N T H E AU TO M OT I V E D I V I S I O N € million Total research and development costs of which capitalized development costs Capitalization ratio in % Amortization of capitalized development costs Research and development costs recognized in profit or loss Sales revenue Total research and development costs R&D ratio 2017 13,135 5,260 40.0 3,734 11,609 196,949 13,135 6.7 2016 13,672 5,750 42.1 3,587 11,509 186,016 13,672 7.3 142 Sustainable Value Enhancement Group Management Report P R O C U R E M E N T In fiscal year 2017, the main task for Procurement was once again to safeguard the necessary supplies and to help create competitive, innovative products and optimize cost struc- tures. We also continued to digitalize procurement processes and expand cooperation with suppliers under the Volks- wagen FAST (Future Automotive Supply Tracks) initiative. Procurement strategy The Group-wide procurement strategy with the vision, TOGETHER – best in customer value and cost, was put into operation in 2017. Six goals were agreed in consultation with the brands and regions: > Access to supplier innovations > Active cost structures > Forward-looking structures > People, expertise and attractiveness > Supply chain excellence > Group-wide synergies To achieve these goals, more than 100 measures had already been drawn up by the end of 2017 as part of the following initiatives and are now being implemented: > “Value sourcing” aims to systematically integrate suppliers into the development process from an early stage. > “Greenfield costs” refers to commercial and technical activ- ities to optimize component costs. > “Innovation & partnerships” ensures that procurement is an integral part of the processes and decisions related to both topics. > “Software” is driving the necessary changes to processes, structures and competencies resulting from the purchase of software and its increasing importance to the Group’s added value. > “Digital supply chain” encompasses an IT system inte- grating all core procurement processes into a single solu- tion and forming the basis for a digital network including all procurement partners. > “Sustainability” supports the Group’s objective of leading the automotive industry in this area, including the supply chain. > “Employees, strong team, organization” directs attention inward and lays the foundation for the strategy’s success with flat hierarchies, freedom for employees and a culture of respect and trust. several suppliers to enable customers to take advantage of them at an early stage. In addition, it was decided to separate hardware and software in the procurement processes and establish a new organizational division, Connectivity Pro- curement. The first pilot projects with new IT solutions were launched in 2017 as part of the “Digital supply chain” ini- tiative. These are gradually being rolled out throughout the Group. Pilot projects to factor sustainability aspects into the contract award process have also already been initiated. Volkswagen FAST – Supplier network as the basis for success FAST is the central initiative of Group procurement, intro- duced in 2015 with the aim of making the Volkswagen Group and its supply network future-proof. The goal of FAST is to successfully implement the key topics of innovation and globalization by involving suppliers at an earlier stage and more intensively. The FAST initiative enhances the quality and speed of collaboration with our key partners, and thus enables us to coordinate global strategies and points of tech- nological focus even more closely. The common goal is to make impressive technologies available to our customers more quickly and to implement worldwide vehicle projects more effectively and efficiently. From 55 FAST suppliers in 2016, the network grew to 64 suppliers over the past fiscal year. We presented the Group’s key topics and projects at the FAST Summit, which took place in the reporting year for the third time. In addition, at the FAST Forum, relevant decision makers discussed how FAST can be made even more effective for Volkswagen and suppliers. Digitalization of supply We are working systematically to implement a completely digitalized supply chain. This will help us to ensure supply, leverage synergies throughout the Group and become a leader in cost and innovation. We are therefore creating a shared database and using innovative technologies to enable efficient, networked collaboration in real time – both within the Group and with our partners. Since the successful launch of our new Group business platform ONE KBP in April 2017, we have been working together with our suppliers on one platform. A cloud-based, Group-wide data strategy was also agreed in 2017. This will enable us to identify supply risks in the supply chain even faster in future. The first successes of these initiatives are already apparent. Integrating suppliers into several vehicle projects at an early stage, for example, has enabled faster achievement of mate- rial cost targets whilst also improving quality from the mar- ket and customer perspective. We have also ordered imple- mentation of specific innovations for our products from Structure of key procurement markets Our procurement is organized at global level, with a presence in the key markets around the world. This ensures that production materials, investments in property, plant and equipment, and services can be procured worldwide to the quality required on the best possible terms. Networking of Group Management Report Sustainable Value Enhancement 143 the brands’ procurement organizations enables us to leverage synergies across the Group in the various procurement markets. In addition to the brands’ procurement units, the Volks- wagen Group operates eight regional offices. In emerging markets, we identify and train local suppliers to generate cost advantages for all the Group’s production sites. In familiar and established markets, the regional offices support access to the latest technologies and innovations. Supply situation for purchase parts and upstream materials Systematic avoidance of bottlenecks was a constant focus of procurement. Natural disasters such as earthquakes and tornadoes impacted the availability of upstream materials. We were able to avoid adverse impacts on the Group’s pro- duction thanks to Group-wide management of capacity and demand. Management of purchase parts and suppliers Purchase parts management is a core component of the global procurement organization. With our experts in tools and industrialization, along with standardized processes and approaches, purchase parts management makes a substantial contribution to ensuring successful production start-ups for vehicles and powertrains all around the world. Against the backdrop of increased complexity in the automotive indus- try, we also help to safeguard supplies for series production. As part of the pre-production process, we simulate series production at suppliers to identify any gaps in production or quality at an early stage and take countermeasures. Purchase Parts Management works closely with Quality Assurance at the production sites and conducts multi-stage performance testing. Sustainability in supplier relationships Global compliance with sustainability standards in human rights, occupational safety, health and environmental pro- tection and combating corruption is our basic requirement for successful collaboration with our suppliers. It is also a contractual stipulation of the underlying business relation- ship. We continuously enhanced the concept of sustainability in our supplier relationships in 2017. We have added detail to our Volkswagen Group requirements for sustainability in relations with business partners (Code of Conduct for Busi- ness Partners) concerning human rights and occupational safety and extended the reporting options for infringements by suppliers. Another focus in 2017 was to raise awareness of sus- tainability risks among Procurement staff and our suppliers and to inform them on options for averting risk. By the end of the reporting period, around 29,000 supplier locations had completed our online training program. In the Asia-Pacific, South America and European regions, among others, we also trained more than 700 employees at 356 suppliers in face-to- face events on the topic of sustainability and informed them about region-specific challenges. In addition, we raised awareness of sustainability risks in the supply chain with face-to-face events for over 2,000 Procurement employees. We also substantially intensified our supplier checks in the reporting year with regard to sustainability. We commis- sioned sustainability audits from an external service provider at 321 suppliers. In 60 cases, the findings resulted in an action plan to improve the suppliers’ sustainability performance. In addition to these local audits, more than 25,000 supplier loca- tions submitted a self-declaration on the topic of sustain- ability. In around 1,500 cases, their sustainability perfor- mance was improved through specific measures. Setting the course for the future In 2017, procurement was defined by vehicle connectivity and e-mobility, which have led to new groups of materials. The amount of software in our purchase parts is constantly increasing. Procurement is taking on an important role here with cost-effective structuring of licensing agreements and the standardization of software modules. We reacted early by pooling competencies to make our structure even more effective. P R O D U C T I O N Our global, cross-brand production network safeguards the processes from the supplier to the factory and assembly line, and from the factory to dealers and customers. Enduring efficiency is a prerequisite for our competitiveness. We meet challenges of the future with holistic optimizations, pio- neering innovations, flexible supply streams and structures, and an agile team. In fiscal year 2017, the global vehicle production volume surpassed the previous year’s level and reached 10.9 million units. Productivity increased by around 5.9% year-on-year, despite the continuing difficult conditions in many markets. 144 Sustainable Value Enhancement Group Management Report “Intelligently networked” production strategy Production is supporting the future program TOGETHER – Strategy 2025 with their “intelligently networked” func- tional area strategy. By intelligently connecting people, brands and machines, we aim to pool the strengths and potential of our global production and logistics and take advantage of the resulting synergy effects. We are guided in this by four goals: > Versatile production network > Efficient production > Intelligent production processes > Future-ready production We have used nine initiatives to create content clusters in which expert teams work on the strategic topics relevant for production in the Group. Examples include the competitive design of our global production network, the reduction and offsetting of environmental impact throughout the produc- tion process, and digitalization with its implications for production and working processes and for collaboration. The overarching aim is to increase productivity and profitability. With the production strategy, we have laid the founda- tions for the successful and sustainable enhancement of our production. We use regular reviews to ensure that we constantly adapt our activities to the current challenges. Global production network With twelve brands and 120 production locations, aspects such as consistent standards for product concepts, plants, operational equipment and production processes are key to forward-looking production. These standards enable us to achieve synergy effects, respond flexibly to market chal- lenges, make optimal use of a flexible production network and realize multi-brand locations. Currently, almost half of the 40 passenger car locations are already multibrand loca- tions. One example is the Bratislava site, which produces vehicles for the Volkswagen Passenger Cars, Audi, Porsche, SEAT and ŠKODA brands. We will add other multi-brand locations in future, for example, in Tianjin, China. The Volkswagen Group has set itself the goal of becoming one of the world’s leading providers of battery-powered vehicles (BEV) by 2025. The basis for this is the introduction of the Modular Electric Toolkit (MEB), which we will use to expand our range with a new BEV family. In order to design multibrand projects and for e-mobility to be cost-effective in conjunction with existing concepts, it is important to make production highly flexible and efficient. Making maximum use of potential synergy effects is also a decisive factor for the success of future vehicle projects. Using common parts and concepts as well as identical production processes will enable reduced capital expenditure and provide the opportunity to better utilize existing capacities. The future will also see electric vehicle projects at multi- brand locations such as Anting, China. We are constantly enhancing our production concepts and aligning them with new technologies. The targeting pro- cess anchored in our strategy serves to realize ambitious targets in individual projects as part of a cross-divisional approach. The “components” business is also helping to safeguard the Group’s future with its own initiatives. With around 80,000 employees worldwide, it is an integral part of the Group and plays a central role particularly in the core compe- tency of engines and transmissions. The “components” business has been reorganized within the Group as part of a Group initiative. The aim is to boost our competitiveness, optimize investment, raise our efficiency, make a major contribution to the trends of the future, enable a coordinated entry into e-mobility and develop new business areas. Production locations The Volkswagen Group’s production network is comprised of 120 locations in which passenger cars, commercial vehicles and motorcycles, as well as powertrains and components are manufactured. With 71 locations, Europe remains our most important production region for vehicles and components. There are 28 sites in Germany alone. The Asia-Pacific region has 31 loca- tions. We have five locations in North America and nine in South America. The Group operates four locations in Africa. 2017 saw 62 production start-ups: 26 for new products and 36 for product upgrades and derivatives. Capacity utilization of the locations in the Volkswagen Group’s production network is further enhanced by sup- plying them with complete knock-down (CKD) kits for local assembly. Group Management Report Sustainable Value Enhancement 145 V E H I C L E P R O D U C T I O N L O C A T I O N S O F T H E V O L K S W A G E N G R O U P Share of total production 2017 in percent N O R T H A M E R I C A 4 locations (7%) E U R O P E 36 locations (49%) A S I A 18 locations (39%) S O U T H A M E R I C A 6 locations (4%) A F R I C A 4 locations (1%) The Group’s production system With our global Group production system, we aim to contin- uously and sustainably improve our production workflow at all the brands’ and regions’ locations. Our goal is to ensure the excellence of processes in production and production- related environments. We are increasing the amount of attention we give to further strengthening the Group’s production system and increasing its presence. Leadership and individual responsi- bility are the foremost topics, embedded in a culture of appreciation and collaboration. A factory must work at optimal capacity so as to continue manufacturing high-quality products that give customers maximum benefits at competitive prices. This is made possi- ble by the standardization of production processes and oper- ating equipment at an early stage, based on the principle of so- called “concept consistency”. This ensures that common design principles, joining techniques and joining sequences, but also installation and connection concepts are applied in the brands’ development and production areas. The principle of “concept consistency” is fundamental for creating efficient logistics and manufacturing processes. New technologies and product innovations With our manufacturing technologies, we create Group products that fulfill the highest standards of functionality, quality and design. In recent years, for example, vehicles with multicolored paintwork have become popular, particularly those with color-contrasting roofs. Until now, this two-tone paintwork has required the vehicles to pass through the paint shop twice during production. Volkswagen is working with process partners in a joint project to develop a new tech- nology that can significantly reduce the workload for multicolored designs. This technology was implemented for the first time in 2017 at the Pamplona site, initially for the new Polo. Other vehicles and locations are set to follow. In the foreseeable future, the Volkswagen Group will also be able to offer more individually customized paintwork than previously possible thanks to the availability of digital printing. Where the design and introduction of new production technologies are concerned, affected staff are involved in the redesign of workplaces and processes from the outset. This is an important prerequisite if new technologies and solutions are to find the necessary acceptance. 146 Sustainable Value Enhancement Group Management Report K E Y E N V I R O N M E N T A L I N D I C A T O R S F O R P R O D U C T I O N I N T H E V O L K S W A G E N G R O U P ¹ E N E R G Y C O N S U M P T I O N in kilowatt hours per vehicle C O 2 E M I S S I O N S in kilograms per vehicle C O 2 2017 2016 2010 2,069 2,089 2,519 –17.9% ² 2017 2016 2010 810 883 – 26.1% ² 1,096 V O C E M I S S I O N S ³ in kilograms per vehicle V O C D I S P O S A B L E W A S T E in kilograms per vehicle 2017 2016 2010 2.09 2.47 – 49.4% ² 4.13 2017 2016 2010 13.2 15.2 – 43.3% ² 23.3 F R E S H W A T E R C O N S U M P T I O N in cubic meters per vehicle 2017 2016 2010 3.76 3.89 4.54 – 17.1% ² 1 Production of passenger cars and light commercial vehicles. Prior-year figures adjusted. 2 Change 2017 as against 2010. 3 Volatile organic compounds (VOCs). Environmentally efficient production One element of the production strategy is the environ- mentally exemplary production initiative. This involves us working on four key issues in the period leading up to 2025: >(cid:3) Setting and achieving ambitious environmental targets for We are encouraging networking and communication between the brands worldwide in order to leverage synergies. Our environmental experts meet regularly in working groups; in addition, we train our employees on the topic of environ- mental protection. production >(cid:3) Developing a long-term vision for environmental targets in production and rolling it out across the Group >(cid:3) Strengthening employees’ environmental awareness and integrating relevant environmental aspects into processes >(cid:3) Achieving top positions in renowned environmental rank- ings In this context, the Volkswagen Group has set itself the goal of reducing the five key environmental indicators of energy and water consumption, waste for disposal, and CO2 and VOC emissions in production by 45% for each vehicle produced by 2025 – starting from 2010 levels. This objective applies to all of the Group’s production locations and is derived from our environmental requirements for production processes, which are anchored in the Group’s environmental principles. The charts above show the development of these indicators. To identify and implement savings at the locations, the Environmental Task Force – a team from Group Research Environment – analyzes manufacturing processes, site infra- structure and resource and energy flows in production and evaluates their impact on the environment. With experience from more than 30 analyses, the team can systematically reinforce and spur on the transfer of measures. We record and catalog environmental measures in an IT system and make these available for a Group-wide exchange of best practices. In the reporting period, around 1,600 implemented measures in the area of environment and energy were documented in this system. They serve to improve infrastructure and production processes for passen- ger cars and light commercial vehicles. These activities are beneficial from an environmental and economic perspective. Group Management Report Sustainable Value Enhancement 147 With a series of effective, innovative measures, we once again promoted the reduction of environmental indicators in the reporting period while at the same time improving pro- duction processes. The following examples show the extent to which the measures have contributed to strengthening production processes and achieving targets: One important lever for reducing energy consumption is tailoring the operation of all facilities according to demand. Improving ventilation in the halls at the Bratislava site has resulted in savings of 15,000 MWh and 200 tonnes of CO2. Measures have also been implemented in energy gener- ation and consumption. For example, five German locations switched to 100% CO2-free power in the reporting period. This is saving 165,000 tonnes of CO2 per year at the Volks- wagen Passenger Cars and Porsche brands. As part of an upgrade to the paint shop at Volkswagen de México, new electrostatic painting robots were installed. These have reduced paint consumption on the production lines by up to 19%, resulting in a VOC reduction of up to 152 tonnes per year. Green logistics Logistics is contributing to the Volkswagen Group’s focus on the environment by analyzing the emissions of the entire transport chain. The Green Logistics initiative promotes alternative means of transport and sustainable, energy- efficient transport systems, thereby reducing greenhouse gas emissions. Universal environmental principles were defined during the reporting period and used to create strategic guidelines and rules. These are designed to ensure that our environ- mental standards in logistics processes are implemented globally. In logistics, this means, for instance, avoiding transports, shifting goods to more environmentally friendly means of transport, or improving the implementation and use of modern technology and alternative drive systems. An important starting point for reducing CO2 emissions is the selection of the mode of transport. One of the most efficient options in terms of transport capacity is maritime transport. To further improve the environmental sustain- ability of ship transport, Volkswagen Group logistics will put two charter ships powered by liquefied natural gas (LNG) into service in 2019. warders, gas providers and representatives from the German Federal Ministry of Transport and Digital Infrastructure and the Federal Ministry for Economic Affairs and Energy took part. In mid-2017, Volkswagen Sachsen GmbH’s Zwickau plant and the Porsche factory in Leipzig presented fully electric, 40- tonne trucks suitable for highway driving. With automated driving functions, the vehicles are intended for short-cycle, on-time transport. Two trucks were fitted with electric drive systems and batteries in the eJIT (electric-powered just-in- time mobility) research project. The e-trucks reach a speed of 85 km/h and have a range of 70 km. S A L E S A N D M A R K E T I N G As part of our future program, we have developed a sales and marketing strategy aimed at exciting customers on a whole new level under the slogan “customer delight”. We regard ourselves as an innovative and sustainable mobility provider for all commercial and private customers worldwide – with a unique product portfolio encompassing twelve successful brands and innovative financial services. We will implement the TOGETHER sales strategy step by step over the coming years. In the focus area of new sales, for example, we are realizing innovative sales and service concepts together with our sales partners. In the focus area of the customer ecosystem, we are implementing platforms for a seamless and safe digital brand experience at all customer touchpoints – this is enabling us to meet ever-growing customer expectations as well as increased data protection standards. In the focus area of steering, we are optimizing how our brands capitalize profitably on market opportu- nities. Optimal coverage of markets, customer segments and customer budgets are at the heart of a strategic Group initiative. To this end, we are establishing automobile-specific customer segmentation to steer the positioning of our brands. At the same time, we are examining global markets for potential revenue sources. In 2017, we rolled out this methodology in Europe and China and agreed on the region- specific, customer-oriented brand territories for product positioning. Starting in 2018, the new methodology will be applied in the Volkswagen Group’s product processes; other markets will also be included. In September 2017, we held an LNG Truck Day to dispel doubts and reservations regarding the new technology and actively support the expansion of the LNG fuel station network in Germany. Among others, regional freight for- Customer satisfaction and customer loyalty The Volkswagen Group aims its sales activities at exciting its customers. This is our top priority, as excited customers remain loyal to our brands and recommend our products and 148 Sustainable Value Enhancement Group Management Report services to others. In addition to satisfaction with our products and services, we value our customers’ emotional connection to our brands. It is important for us to retain customers and win new ones. To measure our success in this area, we collect data on and analyze three strategic indicators for the major passenger car-producing brands: > Net promoter score. Proportion of customers who would recommend us to others minus the proportion of custom- ers who would not recommend us. In terms of customers’ willingness to recommend them, the Porsche and ŠKODA brands lead the core European markets when compared to other Group brands and competitors. > Loyalty rate. Proportion of customers of our car brands who have bought another Group model. The loyalty of Volkswagen Passenger Cars, Audi, Porsche and ŠKODA cus- tomers has kept these brands in the upper loyalty rankings in comparison with competitors for a number of years. Compared to other manufacturer groups, the Volkswagen Group therefore holds the top spot in terms of loyalty, with a considerable margin over the competition. > Conquest rate. Newly acquired passenger car customers as a proportion of all potential new customers. Here, too, we have a top ranking, primarily thanks to the good scores achieved by the Volkswagen Passenger Cars brand. In the core European markets, the downward trend in brand image and brand trust at the Volkswagen Passenger Cars brand following the diesel issue did not continue in 2017. Instead, the first signs of recovery were evident. Porsche remains in top position in the image ranking. We also use a strategic indicator to measure the satisfac- tion of customers with our products and services in the truck and bus business: > Customer satisfaction. In the markets relevant for the Volkswagen Group, we aim to be one of the industry leaders in terms of the satisfaction rate for our commercial vehicle brands. To evaluate these criteria, we use customer satisfaction studies, which delivered positive satisfaction figures in line with our targets in the reporting period. In the financial services business, we use two strategic indicators: > Customer satisfaction. In addition to looking at customer satisfaction with our products, we measure this by examining reviews of our service staff; both aspects are an indicator for our customer and service focus. The results continued their positive trend in 2017. To achieve our goal of very high customer satisfaction throughout the financial services business by 2025, we regularly evaluate what action is needed and how ideas can be shared and imple- mented across different countries. > Customer loyalty. Trust in and loyalty to our services rely on customer satisfaction with our product range and ser- vice. The loyalty scores that are regularly calculated based on product sales to our customers are currently impressive proof of customers’ trust in our financial services. Ambi- tious targets underscore the focus on customers and on fulfilling their needs at Volkswagen Financial Services. E-mobility and digitalization in Group Sales By 2025, as part of our Roadmap E, we aim to offer our cus- tomers around the world more than 80 new electric models, including around 50 pure battery-driven vehicles and 30 plug-in hybrids. This campaign will be complemented by vehicle-related, customer-focused offers, such as customized charging infrastructure solutions and mobile online services. This is turning the Volkswagen Group from an automotive manufacturer into a mobility service provider, posing com- pletely new sales challenges. We are making highly targeted use of the opportunities of digitalization in sales. Our actions are guided by a clearly defined strategy that requires extensive cooperation between the brands to achieve the greatest possible synergies. Our aim here is to create a completely new product experience for our customers – one which impresses with its seamless customer communications, from the initial interest in purchasing a vehicle, to servicing and ultimately to the sale of the used car. In the process, we are opening up new business models and opportunities in every aspect of the connected vehicle – in particular with regard to mobility and other services. Vehicles are becoming an integral part of the customer’s digital world of experience. We take great care to make all processes transparent so that customers always retain control of their own data. We also gear our internal processes and structures to the pace of digital innovation. The result is project teams oper- ating across different business areas, new forms of coop- eration, a more intensive relationship with the international start-up scene, a consolidation of venture capital expertise – as a form of supporting innovative ideas and business models – as well as new lean systems and cloud-based IT solutions. Fleet customer business Our business relationships with fleet customers are often long-term partnerships. In a volatile environment, this cus- tomer group guarantees more stable vehicle sales than the private customer segment. The Volkswagen Group has an established base of busi- ness fleet customers in Germany and the rest of Europe in Group Management Report Sustainable Value Enhancement 149 particular. Our extensive product range enables us to satisfy their individual mobility needs from a single source. In fiscal year 2017, the share of fleet customers in total registrations in Germany remained stable at 14.1 (14.1)% amid a 2.7% growth in the market. The Volkswagen Group’s share of this customer segment decreased to 44.7 (47.1)%. Outside Germany, we recorded growth in the Group’s share of registrations by fleet customers in Europe to 25.2 (24.5)%. Overall, the Volkswagen Group’s share in Europe remained constant at 28.9 (28.9)%. This shows that fleet customers still have considerable confidence in the Group. After Sales and Service In addition to individual service, the timely provision of genuine parts is essential in ensuring passenger car customer satisfaction in After Sales. The genuine parts supplied by our passenger cars brands and the expertise of the service centers represent the highest level of quality and ensure the safety and value retention of our customers’ vehicles. With our global after-sales network including more than 120 of our own warehouses, we ensure that almost all our authorized service facilities around the world can be supplied within 24 hours. We regard ourselves as a complete provider of all products and services relevant to customers in the after-sales business. Together with our partners, we ensure the world- wide mobility of our customers. The partner businesses offer the entire portfolio of services in all vehicle classes. We are continuously expanding our range of tailored services in order to improve convenience for our customers and increase customer satisfaction. Around the world, our commercial vehicles business also prides itself on products of the highest quality and on customer focus. Our range of trucks, buses and engines is complemented by services that guarantee fuel efficiency, reliability and good vehicle availability. The workshop service and service contracts offer customers a high degree of certainty, in addition to a high level of quality. We are reducing servicing times and costs with a view to reducing vehicles’ total operating costs and helping them retain their value. In the Power Engineering segment, we help our custom- ers ensure the availability of machinery with MAN PrimeServ. The global network of more than 100 PrimeServ locations guarantees excellent customer focus and offers, among other things, replacement parts of genuine parts quality, qualified technical service and long-term maintenance contracts. G R O U P Q UA L I T Y M A N AG E M E N T The quality of our products and services plays a key role in maintaining customer satisfaction. Customers are partic- ularly satisfied and remain loyal when their expectations of a product or service are met or even exceeded. Appeal, relia- bility and service determine quality as it is perceived by the customer throughout the entire product experience. Our objective is to positively surprise and excite our customers in all areas and thus win them over with our outstanding quality. Strategy of Group Quality Management We embody outstanding quality and ensure dependable mobility for our customers worldwide – this is the strategic goal that guides the work of Group Quality Management. Along with the brands’ quality organizations, Group Quality Management plays an active role at all stages of product creation and testing. Through this work, we make an important contribution to successful product start-ups, high customer satisfaction and low warranty and goodwill costs. We have further enhanced the Group Quality Manage- ment strategy as part of our future program TOGETHER – Strategy 2025. Focal areas include digitalization, new technol- ogies and business areas as well as uniform processes, methods and standards at all brands. Increasing progress in digitalization is also a major chal- lenge for the Volkswagen Group: an increasing number of digital products and services are being developed and brought to market. To continue to ensure the familiar level of quality and safety amid this diversity, we must adapt our quality measures accordingly. The increase in functional diversity and complexity of driver assistance systems, extending all the way to autonomous vehicles, means that software is growing in scope. Here we need to enhance the methods we use to support selected critical features of software development and safeguard quality requirements. We are also taking advantage of the progress in digital tech- nology to further optimize our own processes and structures. For example, we use virtual measurement technologies or big data analyses when vehicles on the market encounter quality problems. 150 Sustainable Value Enhancement Group Management Report In this context, Group Quality Management has further developed its strategy in consultation with the Group brands. This comprises the following four goals: > We will excite our customers with outstanding quality by understanding the features of the quality that resonates with them and implementing these in our products. > We will contribute to competitive products with optimal quality costs by ensuring robust processes, thereby reducing the expense involved in testing each vehicle. > In critical business processes, we will reinforce the princi- ple of multiple-party verification and monitor achieve- ment of milestones even more closely. > We will become an excellent employer by promoting every single employee’s personal development even more inten- sively. To achieve our goals, we have been working on a total of 15 quality initiatives since mid-2016. All are focused on the topics that will be decisive to the future success of the quality organizations at the Volkswagen Group. Contributing to the Group’s strategic indicators We use a strategic indicator to measure the contribution of Quality Management at the major passenger car-producing brands. > Tow-in 12 MIS. This figure shows the number of vehicles that need to be towed to a dealer per 1,000 vehicles after 12 months in service. It includes all Group vehicles catego- rized as tow-in by dealers in the German market. In the 2016 production year, the Volkswagen Group’s tow-in sta- tistics in the German market improved slightly compared with 2014 and 2015. Of the six brands featured, Volkswagen Passenger Cars, Audi and ŠKODA saw their performance improve, while the SEAT, Porsche and Volkswagen Com- mercial Vehicles brands recorded a slight downward trend. We also use a strategic indicator to measure our success for trucks and buses: > Claims per vehicle 12 MIS Truck. This figure incorporates the number of claims related to liability for material defects per 1,000 vehicles after 12 months in service. MAN and Scania each collect this data for their products from across the globe. Through systematic quality management, both brands continued to exhibit a downward trend in the reporting period. between the divisions – and introduced important additional processes, including in software security. At the Volkswagen Passenger Cars brand, for example, the development of software will be accompanied by quality milestones from 2017: The principle of multiple-party verification safeguards the systems and components or parts that directly influence a vehicle’s safety, type approval and functioning and there- fore require increased vigilance. At the series production stage, we are working even harder to carry out conformity checks on our products with the participation of all business units involved and to perform assessments on this basis. This applies particularly to emissions and fuel consumption. We are also placing greater emphasis on our quality management system than before, reinforcing the process- driven approach Group-wide across all business areas. Quality management in the Volkswagen Group is based on the ISO 9001 standard: the requirements of this standard must be met to obtain the type approval for producing and selling our vehicles. We conducted numerous system audits in the reporting period to verify that our locations and brands comply with the requirements of the standard, which was revised in 2015. The major focus was on the risk assess- ment for non-compliance with agreed processes. To ensure that these and other new requirements as well as official regulations are implemented and complied with, Group Quality Management is available to support the quality man- agement consultants. With these and other measures, Group Quality Manage- ment is helping to ensure that we not only meet all legal requirements imposed on us as a manufacturer, but that our products do as well. Observing regional requirements Our customers in the different regions of the world have very diverse needs as far as new vehicle models are concerned. Another important task of Group Quality Management is to identify and prioritize these regional factors so that they can be reflected in the development of new products and the production of established vehicle models – together with other important criteria such as the quality of locally avail- able fuel, road conditions, traffic density, country-specific usage patterns and, last but not least, local legislation. We mainly use market studies and customer surveys to deter- mine region-specific customer requirements. Legal and regulatory compliance The diesel issue showed that we must check the compliance intensively. We have therefore of our products more reinforced application of the principle of multiple-party verification – which involves mutual support and control The perceived quality of our vehicles must be at a level commensurate with that of our competitors. We therefore redesigned the vehicle audit during the reporting period and tailored it more closely to regional customer needs. Every brand works together with the individual regions to decide Group Management Report Sustainable Value Enhancement 151 the responsibility of the brands and enables us to invest less in features that do not resonate with customers. To make the results comparable, consistent quality benchmarks apply across all markets and regions. For more than 40 years now, auditors have therefore been deployed around the world to ensure compliance with these benchmarks by carrying out an assessment from the customer’s perspective of the vehicles that are ready for delivery. We continually revise the quality benchmarks on which such audits are based to adapt them to the changing requirements. E M P LOY E E S The Volkswagen Group is one of the world’s largest employers in the private sector. As of December 31, 2017, the Group, including the Chinese joint ventures, employed 642,292 people, 2.5% more than at the end of 2016. The ratio of Group employees in Germany to those abroad remained largely stable over the past year. At the end of 2017, 44.8 (44.9)% of employees worked in Germany. Human resources strategy and principles of the human resources policy With the new human resources strategy “Empower to trans- form”, the Group is continuing with key and successful approaches of its human resource management. These include the pronounced stakeholder focus in corporate governance, comprehensive participation rights for employ- ees, outstanding training opportunities, the principle of long- term service through systematic employee retention and the aspiration to appropriately balance performance and remu- neration. At the same time, the new human resources strategy is setting innovative trends. Hierarchies are being dismantled and modern forms of working such as agile working – whereby most responsibility for the work organi- zation is transferred to the teams – are set to be expanded. In the future, cooperating robots will ease heavy physical work in factories and digital processes will simplify adminis- tration. The Company’s human resources strategy is based on five overarching objectives: > The Volkswagen Group aims to be an excellent employer E M P L O Y E E S B Y C O N T I N E N T in percent, as of December 31, 2017 Germany Rest of Europe America Africa Asia/Australia % 45% % 29% 9 % 9 % 1 % 1 % 16% % To implement its human resources strategy, the Volkswagen Group will roll out a Group-wide diversity management system, among other programs, in the course of 2018. Varying cultural conditions in the global markets and growing economic momentum demand from Volkswagen an ever- broader range of experience, world views, problem solutions and product ideas. The diversity of our staff offers great potential for innovation in this area, which we aim to make better use of in future. Mandatory rules on the percentage of women in management, combined with targets for the internationalization of senior management, are at the heart of diversity management at Volkswagen. In line with its corporate strategy, the Volkswagen Group is also driving the transformation in other fields. For example, various cultural change initiatives are concerned with reinforcing flatter hierarchies, a more open form of collaboration and a greater focus on the big picture within the Company’s divisions. The human resources development system was com- pletely revised in 2017 and now offers more transparent paths into management based on greater individual respon- sibility. The Company’s management principles were also revised and new criteria for appointments defined. with all of its brands and companies worldwide. TOGETHER – Strategy 2025 is also accompanied by new > Highly competent and dedicated employees strive for excellence in terms of innovation, added value and cus- tomer focus. > A sustainable work organization ensures optimal working conditions in factories and offices. > An exemplary corporate culture creates an open work climate that is characterized by mutual trust and collabo- ration. > The Company’s human resources work is highly employee- oriented while also aiming for operational excellence and providing strategic value-added contributions. strategic indicators. For the passenger car-producing brands, we compile and analyze the following information: > Internal employer attractiveness. The indicator is deter- mined by asking respondents, as part of the Group-wide opinion survey, whether they perceive the respective company as an attractive employer. The target for 2025 is 89.1 out of a possible total of 100 index points. A score of 85.2 index points was achieved throughout the Group in the reporting period. 152 Sustainable Value Enhancement Group Management Report > External employer attractiveness. The ability to recruit top talent is of decisive importance, particularly in view of the Company’s transformation into a world-leading provider of sustainable mobility solutions and the associated develop- ment of new business units. Once a year, we check the positioning of the major passenger car-producing brands on the labor markets for graduates and young professionals using of this strategic indicator. Rankings in surveys by renowned institutions, in which we aim to achieve top scores for all Group brands, serve as the basis for this. > Diversity index. As we establish diversity management across the Group, this strategic indicator for the active workforce is used worldwide to report the development of the proportion of women in management and the inter- nationalization of senior management. In particular, it underpins the objective of the human resources strategy, which is aimed at contributing to an exemplary leadership and corporate culture. In 2017, the Group-wide percentage of women in management was 13.8%. We aim to achieve a target of 20.2% by 2025. We aim to increase the level of internationalization in senior management, the upper- most of our three management tiers, from 18.7% in the past fiscal year to 25.0% in 2025. In the truck and bus business, we look at the opinion survey and cross-brand exchange of employees to identify how well strategic targets are being achieved: > Opinion survey. The sentiment rating is used to determine the level of employee satisfaction and identification with the company. The sentiment rating is calculated as the average score from of all responses regularly submitted as part of the opinion survey. The result in 2017 was in line with the previous year’s level. > Cross-brand exchange and rotation. The aim is to con- tinuously intensify collaboration between the commercial vehicle brands. It is also designed to enable the creation of specialist and international networks. We use this indicator to analyze how many employees have worked at another brand through such rotation. An increasing number of staff took advantage of this personnel development oppor- tunity in 2017. One strategic indicator has been defined for the financial services business: > External employer ranking. This involves taking part in an external benchmarking exercised every two to three years. The aim is to enhance working conditions and identify measures to become a top-20 employer by 2025, not just in Europe, but globally. Volkswagen Financial Services AG was most recently represented in various national and intern- ational best-employer rankings in 2016. In 12th place, it was among the top European employers in the “Great Place to Work” employer competition. Training and professional development At Volkswagen, our capacity for innovation and competi- tiveness depends to a large extent on the commitment and knowledge of our staff. Training at Volkswagen is organized very systematically on the basis of the so-called vocational groups. A vocational group includes all employees whose tasks are based on similar technical skills and who require related expertise in order to perform their jobs. The skills profiles lay down the functional and interdisciplinary skills for each job and serve as an orientation for training measures. Volkswagen Group employees have access to a wide range of training measures – from advanced training on general Company-related issues, to specific training within the individual vocational groups, to personal development pro- grams. The educational opportunities and development pro- grams at the Volkswagen Group enable staff to continue to develop throughout their working lives and constantly deepen their knowledge. In this process, they also learn from more experienced colleagues, who act as experts in the vocational group academies – the learning centers of the vocational groups – and pass on their knowledge to others. All training is based on the dual training principle, which combines theoretical content with practical experience on the job and by means of specific tasks. learning New technologies can usefully complement learning and the transfer of expertise. As the central training organization in the Group, the Volkswagen Group Academy incorporates this idea into different projects. One example of this is the Group Management Report Sustainable Value Enhancement 153 Education Lab, where the Volkswagen Group Academy con- ducts training research and analyzes training trends, tests technologies at Volkswagen together with start-ups, thereby introducing new forms of skills development at the Company. Within the Volkswagen Group Academy, the AutoUni provides the Group with knowledge that is relevant for the future by integrating internal senior experts and collab- orating with universities. Its events are offered as programs and as cooperative study modules in a blended learning format, which combines classroom training with online content, and are supplemented by lectures and conferences. Vocational training and cooperative education The core component of training at Volkswagen is vocational training or for young people eligible to enter university, cooperative education (dual study programs combining uni- versity studies with on-the-job training). As of the end of 2017, the Volkswagen Group had trained 19,207 young people in approximately 50 trades. Volkswagen has introduced the principle of dual vocational training at many of the Group’s international locations over the past few years and is continuously working on improvements. Over three-quarters of all the Group’s vocational trainees now learn their trade through dual vocational training. Once a year, Volkswagen honors its highest-achieving vocational trainees in the Group with the Best Apprentice Award. Volkswagen continues to assist in the professional develop- ment of young people at the start of their careers even after their vocational training has been completed. Talent groups, for example, are used to promote particularly talented young specialists. These two-year development and training pro- grams accept the highest-achieving 10% of fully qualified vocational trainees at Volkswagen AG and the Zwickau site each year. Fully qualified vocational trainees also have the option to move to a Group company outside Germany for twelve months as part of the “Wanderjahre” (Year Abroad) program. In the reporting period, 31 Volkswagen Group locations in 17 countries took part in this development program. The AGEBI+ program was designed to promote fully qualified vocational trainees who are eligible for university, thus offering students the opportunity to combine practical experience with a degree program in subjects that are critical for Volkswagen’s future. By joining the European Alliance for Apprenticeships in 2017, Volkswagen is also working to promote vocational training outside the Group. The European Alliance for Appren- ticeships is a platform that brings together government departments from various countries with other key stake- holders such as businesses, social partners, professional bodies, vocational training providers and youth organiza- tions. The common goal is to strengthen the quality, supply, image and mobility of apprenticeships in Europe. Development of university graduates Volkswagen offers two structured entry and development programs for university graduates and young professionals. In the StartUp Direct trainee program, graduate trainees gain an overview of the Company over a two-year period while working in their own department, and take part in supple- mentary training measures. University graduates interested in working internationally can participate in the 18-month StartUp Cross program. The aim of the program is to get to know the Company in all of its diversity and to build up a broad network. During the term of this program, young pro- fessionals become familiarized with several Volkswagen Passenger Cars locations in Germany and other countries by working in various functional areas. Both programs are sup- plemented by several weeks’ experience working in produc- tion. In 2017, Volkswagen AG hired a total of 89 graduate train- ees as part of these programs, 30.3% of whom were women. Graduate trainee programs are also available at the Group’s international locations such as ŠKODA in the Czech Republic or Scania in Sweden. In addition, the Volkswagen Group has been offering young engineers from Southern Europe, where unemployment especially among young academics remains a major problem, the opportunity to gain international work experience through the StartUp Europe trainee program since 2012. Volkswagen has designed this program for university graduates, who work for three months at a Group company in their home country followed by 21 months at a German Group company. P R O P O RT I O N O F WO M E N as of December 31 % Female employees Female vocational trainees1 Female graduate recruits2 Total management1 Management1 Senior management1 Top-Management1 1 Germany, excluding Scania, MAN and Porsche. 2 Volkswagen AG 2017 16.3 28.8 30.3 11.4 13.2 9.2 6.5 2016 16.0 29.5 26.0 11.0 12.8 8.7 4.7 154 Sustainable Value Enhancement Group Management Report Increasing attractiveness as an employer and target-group- A G E S T R U C T U R E I N Y E A R S O F V O L K S W A G E N G R O U P E M P L O Y E E S specific development programs A family-friendly human resources policy is a major com- ponent of Volkswagen’s appeal as an employer and makes an important contribution to achieving greater gender equality. We are therefore working continuously to develop family- friendly working-hour models and to further increase the proportion of women in management positions. In line with German law on the equal participation of women and men in leadership positions, Volkswagen AG is aiming to have a 13.0% proportion of women at the first management level and 16.9% at the second management level by the end of 2021. As of December 31, 2017, the proportion of women in the active workforce at the first level of management was 10.4 (9.8)% and at the second level of management it was 14.0 (13.5)%. Targets have been set for every board-level division in the company to encourage women with high potential in their decision to aim for a career in management in the Company. This approach is supported by many different measures including the cross-brand mentoring programs “Mentoring Program Management”, “Compass” and the “Career with Children” project. A large number of company regulations have come into effect at the Volkswagen Group in recent years to improve balancing the demands of work and home life and to allow for individual arrangements. These include flexible working hours, variable part-time work and shift models, leave of absence programs enabling employees to care for close family members, as well as childcare facilities that are close by and/or company-owned, and mobile working. At Volkswagen AG, which had entered into its works agreement for mobile working in 2016, more than 11,800 employees made use of this flexible working arrangement as of the end of the reporting period. Preventive healthcare and occupational safety Volkswagen’s holistic healthcare management system extends beyond traditional preventive healthcare and occupational safety. It also covers work organization, workstation design, behavioral ergonomics, psychosocial aspects, rehabilitation and reintegration into working life as well as programs for preventing widespread diseases. To maintain and improve employees’ health, performance and fitness levels, a free and comprehensive voluntary screening, the Check-up, is provided for all employees at almost all production sites. Another important area for action at the Volkswagen Group is the ergonomic quality of the workstations. The Com- pany is thus highly committed to continuously improving ergonomics along the entire production chain and in all work as of December 31, 2017; in percent < 20 20–29 30–39 40–49 50–59 60 + 2 % 2 % % 22% 28% % % 25% % 19% 4 % 4 % processes. To this end, we collaborate with scientific partners to combine state-of-the-art ergonomic workstations with innovative work processes. Employee participation Codetermination and employee participation are important pillars of our human resources strategy. Volkswagen aims to promote high levels of expertise and a strong sense of team spirit. This includes employees’ opinions, assessments and constructive criticism being heard. With the opinion survey, a uniform, Group-wide poll, the Company regularly gathers information regarding employee satisfaction. Based on the results, we then implement follow- up processes in which proposals for improvement are developed and monitored until implementation is complete. Over 570,000 employees from 156 locations and companies in 48 countries were invited to take part in the survey. The participation rate was 79%. The average result based on all responses that are regularly received through the opinion survey – the sentiment rating – is an important parameter in the opinion survey; in 2017 it stood at 78.3 out of a possible total of 100 index points. The score achieved was thus on a par with the previous year. Idea management is another important means of boosting employee engagement. Using their creativity, knowledge and initiative, our employees contribute their ideas for improve- ments to streamline workflows, further enhance ergonomics in the workplace, reduce costs and continuously increase efficiency. Idea management enables employees to partici- pate actively in the planning and organizing of their work and is also underpinned by prizes with monetary incentives. (cid:3) Group Management Report Sustainable Value Enhancement 155 I N F O R M AT I O N T E C H N O L O GY ( I T ) With digitalization and networking on the rise, all of our business processes must also be comprehensively provided with digital support. At the same time, the establishment of new locations is placing high demands on networking and coordination. A modern, tailor-made infrastructure and an efficient application landscape are needed to meet these requirements. Our Group-wide Production, Information and Control System (FIS) enables us to produce vehicles efficiently all around the world – at the right time and with the right equip- ment. FIS is a key success factor for flexible, cross-brand manufacturing in the global production network. The growing convergence of different business areas and IT is opening up new opportunities. In production, for example, big data processes help us to analyze faulty machin- ery and take action at an early stage. Virtual concept vehicles make the product development process even faster and more efficient. Applied research in the field of intelligent human- robot collaboration, and IT systems to control mobile assistive robotics and networked infrastructure (Internet of Things) are also important elements of the digitalization of production at the Volkswagen Group. The Company’s internal network Group Connect helps to network all employees. The platform encourages the transfer of expertise and puts experts in touch with one another. The newly established IT City serves as the central loca- tion for the Group’s own IT and digitalization expertise in Wolfsburg. The campus-style office complex has been system- atically designed for agile working. In software development centers, we develop applications for a wealth of different uses, thereby maintaining comprehensive in-house expertise in the rapid, demand-oriented development of IT solutions. Safeguarding data and systems at the Volkswagen Group is another focus of our IT. Over the past fiscal year, we have continued to set up the Information Security Management Systems (ISMS). The Group offers documents, templates and tools to all Group companies and brands in the form of an ISMS toolbox to help them implement their own ISMS. The ISO 27001 standard is one component of this. The key infor- mation security processes have been audited and successfully certified within the ISO 27001 framework. This is the most important standard for information security and extends beyond IT to cover issues such as personal security, com- pliance, physical security and legal requirements. In 2015, Volkswagen AG co-founded the Deutsche Cyber- Sicherheitsorganisation GmbH – (DCSO). DCSO aims to accu- mulate specialist knowledge on cybersecurity and become the preferred service provider to German businesses in this field. It conducts security audits and certifies key suppliers and technologies in order to help German companies (especially small and medium-sized enterprises) detect and defend themselves against cyber-attacks and predict them in future. This work also makes our supply chain more secure. Volkswagen is also capitalizing on digitalization at its in- house IT labs in Wolfsburg, Munich, Berlin, San Francisco and Barcelona. Specialist departments of Group IT, research insti- tutions and technology partners are working closely together at these innovation centers on future trends in information technology, such as artificial intelligence and machine learn- ing, quantum computing, digital ecosystems, intelligent human-robot collaboration and smart mobility. These labs act as test laboratories for the Group, as centers of expertise for these future trends and as liaison offices for start-ups. They enable Volkswagen to experiment with new techno- logies outside the line organization. Here, the experience and strategic expertise of a large company like Volkswagen is com- bined with the pragmatism and speed of young start-ups. E N V I R O N M E N TA L ST R AT E GY Protecting the environment is one of four goals firmly anchored in our future program TOGETHER – Strategy 2025. As a world-leading provider of sustainable mobility, we want to be a role model on environmental issues. We are working towards this goal, taking responsibility for the environment every single day. To this end, we have defined the following target areas: > To continuously improve our carbon footprint > To continuously reduce harmful emissions > To continuously reduce resource consumption We use the decarbonization index (DCI) as a strategic indi- cator to document our progress. This measures the products’ CO2 emissions along the entire value chain. The DCI is calculated from the ratio of the carbon footprint to the number of vehicles produced. It encompasses both direct and indirect CO2 emissions at the individual production sites (Scope 1 and 2) as well as all further CO2 emissions over the life cycle of the vehicles sold – from the extraction of raw materials, to vehicle use and final disposal (Scope 3). The DCI tracking of transparent, comprehensive thus enables progress toward climate-friendly mobility. We are currently defining the DCI target figures for 2025 together with the Volkswagen Group brands. These targets should then con- tribute to the achievement of the two-degree target in the 156 Sustainable Value Enhancement Group Management Report Paris Agreement adopted at the United Nations Climate Change Conference in late 2015. We are also calculating the environmental impact reduc- tion production indicator. We have set a target for the Group and brands to reduce the environmental impact of produc- tion by 45% per vehicle compared with 2010 levels. This key figure includes energy and water consumption, CO2 and VOC emissions and the volume of waste; the charts on page 146 show the development of these indicators. In striving to achieve our goal of becoming a role model, we consider the environmental impact throughout the entire product life cycle: from manufacturing (including the supply chain) to use and disposal. In addition to the global challenges of climate change, our approach looks at other important environmental resources, particularly water, soil, air, energy and raw materials. We use major sustainability ratings as our benchmark and aim to achieve top rankings in these. Organization of Environmental Protection The Group Board of Management is the highest internal decision-making authority on environmental matters. Since 2012, it has simultaneously functioned as the Group’s Sus- tainability Board. The Group-wide management of environ- mental protection is the responsibility of the Group Steering Committee for the Environment and Energy, which is sup- ported by numerous specialist bodies. The brands and companies are responsible for their own environmental organization. They base their own environ- mental policies on the targets, guidelines and principles that apply throughout the Group. The Group Steering Committee for the Environment and Energy coordinates the brands and companies. It reports on progress to the Board of Manage- ment. Environmental officers from throughout the Group meet regularly for the Group Environmental Conference in order to optimize the environmental focus along the entire value chain. Our production sites, including the central development areas, are certified in accordance with ISO 14001 or EMAS (100 of 120 production sites in 2017). Many production locations have also certified their energy management sys- tems in accordance with ISO 50001. Since 2009, the “integra- tion of environmental aspects into the product development at the Volkswagen brand” has also been certified in accor- dance with ISO TR 14062 in Development at the Volkswagen Passenger Cars brand. Biodiversity Biodiversity means the variety of life on our planet, and covers the variety of species, the genetic differences within species and the diversity of ecosystems. We rely on it as the basis for our continued existence: healthy food, clean water, fertile soils and a balanced climate. Due to the global decline in biodiversity, the United Nations has declared the current decade to be the “UN Decade on Biodiversity”. Volkswagen has been committed to protecting biodiver- sity since 2007 and is a founding member of the Biodiversity in Good Company e.V. initiative. In our mission statement, we have committed to supporting the protection of species at all of our locations. For this, we are collaborating with local sup- pliers. Our membership in Biodiversity in Good Company e.V. has been temporarily suspended as a result of the diesel issue. Protecting biodiversity is an integral part of our environ- mental management. We contribute to achieving the targets of the UN Convention on Biological Diversity (CBD) by reducing greenhouse gas emissions and utilizing resources as efficiently as possible. Volkswagen supports networking between the various players in the fields of business, politics, society and academia with a view to increasing public aware- ness of biodiversity conservation and to increase knowledge of the issue. S E PA R AT E N O N F I N A N C I A L G R O U P R E P O RT The combined separate nonfinancial report of Volks- wagen AG and the Volkswagen Group in accordance with sections 289b and 315b Handelsgesetzbuch (HGB – German Commercial Code) for fiscal year 2017 will be available on the website https://www.volkswagenag.com/presence/nachhaltig- keit/documents/sustainability-report/2017/Nichtfinanzieller_ Bericht_2017_d.pdf in German and at https://www.volks- wagenag.com/presence/nachhaltigkeit/documents/sustain- ability-report/2017/Nonfinancial_Report_2017_e.pdf in English by no later than April 30, 2018. R E P O RT O N P O ST - B A L A N C E S H E E T DAT E E V E N T S There were no significant events after the end of fiscal year 2017. Group Management Report Report on Expected Developments 157 Report on Expected Developments The global economy is expected to grow somewhat less strongly in 2018 than in the previous year. We assume that trends in global demand for vehicles will be mixed and that demand will increase at a slightly slower rate than in the reporting period. With its brand diversity, broad product range and pioneering technologies and services, the Volkswagen Group is well prepared for the future challenges in the mobility business and the mixed conditions in regional markets. In the following, we describe the expected development of the Volkswagen Group and the general framework for its business activities. Risks and opportunities that could represent a departure from the forecast trends are presented in the Report on Risks and Opportunities. Our assumptions are based on current estimates by third- party institutions. These include economic research insti- tutes, banks, multinational organizations and consulting firms. D E V E LO P M E N T O F T H E G LO B A L E CO N O MY In our forecasts, we assume that global economic growth will weaken slightly in 2018. We believe risks will arise from pro- tectionist tendencies, turbulence in the financial markets and structural deficits in individual countries. In addition, growth prospects will continue to be hurt by geopolitical tensions and conflicts. We therefore expect somewhat weaker momen- tum than in 2017 in both the advanced economies and the emerging markets. We expect the strongest rates of expan- sion in Asia’s emerging economies. Furthermore, we anticipate that the global economy will also continue to grow in the period from 2019 to 2022. Europe/Other Markets In Western Europe, economic growth is expected to slow down in 2018 compared with the reporting period. Resolving structural problems poses a major challenge, as do the uncertain results and impacts of the Brexit negotiations between the EU and the United Kingdom. For Central Europe, we estimate that growth rates in 2018 will be lower than those of the past fiscal year. In Eastern Europe, the economic situation should stabilize further, providing that the smoldering conflict between Russia and Ukraine does not worsen. Following the increase in the past fiscal year, Russia’s economic output is likely to grow further. Political uncertainty and social tensions resulting primar- ily from high unemployment levels will probably weigh on the South African economy in 2018 and are expected to keep growth down. Germany In Germany, gross domestic product (GDP) is likely to increase less strongly in 2018 than in the reporting period. However, the situation in the labor market is expected to remain stable and bolster consumer spending. North America We expect the economic situation in the USA to further improve in 2018. The US Federal Reserve is likely to imple- ment additional interest rate hikes throughout the course of the year. At the same time, fiscal policy measures are intended to provide support. Growth in Canada is likely to weaken, while remaining nearly unchanged in Mexico. South America The economy in Brazil is very likely to stabilize further in 2018 and record somewhat higher growth than in the reporting period. Despite sustained high inflation, Argentina should achieve a similar increase in GDP to that recorded in the reporting period. 158 Report on Expected Developments Group Management Report Asia-Pacific In 2018, the Chinese economy is expected to continue growing at a relatively high level, but year-on-year this growth will lose momentum. For India, we anticipate an expansion rate at around the 2017 level. The economic situation in Japan is likely to deteriorate compared with the reporting period. T R E N D S I N T H E PA S S E N G E R C A R M A R K E T S We expect trends in the passenger car markets in the indi- vidual regions to be mixed in 2018. Overall, growth in global demand for new vehicles will probably be slower than in the reporting period. The Volkswagen Group is well prepared for the future challenges in the mobility business and the mixed develop- ments in regional automotive markets. Our unique brand portfolio, our presence in all major world markets, broad and selectively expanded product range, and pioneering technol- ogies and services place us in a good competitive position worldwide. Our goal is to offer all customers mobility and innovations suited to their needs and thus ensuring long- term success. We expect that the growth in demand for passenger cars worldwide will continue in the years 2019 to 2022. Europe/Other Markets For 2018, we anticipate that unit sales volumes in Western Europe will fall slightly short of those seen in the reporting period. The level recorded before the financial and debt crisis is unlikely to be achieved again in the medium term. The uncertain outcome of the exit negotiations between the EU and United Kingdom is likely to further exacerbate the continuing uncertainty among consumers precipitated by the financial and debt crisis, putting a damper on demand. In Italy and Spain, the recovery will probably continue in 2018 but at a considerably slower pace; in the French market, we expect growth to be only slightly positive. In the United Kingdom, we expect the market volume to fall moderately short of the previous year’s high level. Passenger car demand in 2018 is expected to significantly exceed the prior-year figures in markets in Central and Eastern Europe. In Russia, the volume of demand will probably rise somewhat more strongly after the considerable recovery over the past fiscal year. We also expect to see further growth in demand in the other markets in this region. We are projecting that the volume of demand in the South African passenger car market in 2018 will be up slightly year-on-year. Germany Following the positive trend of recent years, we forecast that the market volume of the German passenger car market will remain on a level with the previous year in 2018. North America The volume of demand in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America as a whole and in the USA is likely to be slightly lower in 2018 than in the prior year. Demand will probably remain highest for models in the SUV and pickup segments. In Canada, the number of new registrations is projected to be slightly below the previous year’s high level as well. In Mexico, we anticipate that demand will be unchanged year-on-year. South America Owing to their dependence on demand for raw materials, the South American markets for passenger cars and light commercial vehicles are heavily influenced by developments in the global economy. In addition, protectionist tendencies are adversely affecting the performance of the region’s vehicle markets, especially in Brazil and Argentina, which have imposed restrictions on vehicle imports. Nevertheless, we expect demand in the South American markets as a whole to distinctly increase in 2018 compared with the previous year. In Brazil, South America’s largest market, volume is likely to rise markedly again in 2018 after the strong increase in the past fiscal year. We anticipate that demand in the Argentinian market in 2018 will be perceptibly higher year- on-year. Asia-Pacific We believe that the passenger car markets in the Asia-Pacific region will continue their growth in 2018, albeit at a slower pace. In China, the increase in individual mobility require- ments will push up demand, though the rate of growth is likely to be slightly slower than in the previous year. Strong demand is still forecast for attractively priced entry-level models in the SUV segment in particular. In India, we expect demand for passenger cars to moderately exceed the previous year’s level. We anticipate that demand in the Japanese passenger car market will fall slightly in 2018. T R E N D S I N T H E M A R K E T S F O R CO M M E R C I A L V E H I C L E S We expect trends in the markets for light commercial vehicles in the individual regions to be mixed again in 2018. Overall, we expect a slight fall in demand in 2018, and a return to the growth trajectory for the years 2019 to 2022. Due to the uncertainty caused by the United Kingdom’s European Union membership referendum in June 2016, we estimate that demand for light commercial vehicles in Western Europe in 2018 will be slightly below the previous year’s level. The United Kingdom and Italy are expected to record a decline. We anticipate that registrations in Germany will be around the previous year’s level. Group Management Report Report on Expected Developments 159 In the Central and Eastern European markets, registrations of light commercial vehicles in 2018 will probably be percep- tibly higher than in the previous year. In Russia, too, we expect the market volume to rise compared with 2017. In North and South America, the light vehicle market is reported as part of the passenger car market, which includes both passenger cars and light commercial vehicles. The market volume in the Asia-Pacific region in 2018 will probably record a slight year-on-year decline. We are also expecting demand in the Chinese market to fall short of the prior-year level. For India, we are forecasting a considerably higher volume in 2018 than in the reporting period. In the Japanese market, the downward trend is likely to continue at a slower pace. In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group, new registrations in 2018 are set to be slightly up on the level seen in 2017. We antici- pate a slightly positive trend for the period from 2019 to 2022. We assume that demand in Western Europe will taper off slightly year-on-year in 2018. In Germany, we expect the market to remain on a level with the previous year. Central and Eastern European markets should record a moderate increase in demand. In Russia, we anticipate a further recovery in demand in 2018, though the growth rate seen in 2017 will not be repeated. We believe that demand in the Brazilian market in 2018 will grow perceptibly from the low level of the previous year. This is due to the continuing economic recovery. In the bus markets that are relevant for the Volkswagen Group, we expect to see a slight increase in demand in 2018. We anticipate that demand in Western Europe over the same period will be on a level with that seen in 2017. For Central and Eastern Europe, we are forecasting higher demand than in the previous year. In Brazil, new registrations will probably be slighty higher than the prior-year level. For the period 2019 to 2022, we expect slight growth overall in the demand for buses in the markets that are relevant for the Volkswagen Group. T R E N D S I N T H E M A R K E T S F O R P OW E R E N G I N E E R I N G In 2018, we expect the market environment in power engi- neering to remain difficult, with undiminished competitive and price pressures. In 2018, the market volume for two-stroke engines used in merchant shipping is likely to slightly exceed the level seen in the reporting period. Calls for greater energy efficiency and low pollutant emissions will continue to have a significant influence on ship designs in the future. We also expect sustained high demand in the market for four-stroke engines used in cruise ships, ferries, dredgers and government vessels. In the offshore segment, new order volumes look set to be very low due to existing overcapacity, despite the recent slight rise in the oil price. Overall, we expect the marine market to be slightly up on the reporting period. The com- petitive pressure will continue unabated. Demand for energy correlates strongly with macroeco- nomic and demographic trends, especially in emerging mar- kets. The global trend toward decentralized power stations and gas-based applications shows no sign of losing momen- tum. For 2018, we expect demand to be virtually steady but remain at a low level overall. In turbomachinery, we anticipate undiminished high price and competitive pressures in 2018 due to the con- tinuing difficult market environment. This is due to expec- tations that unfavorable economic and political conditions will persist in some relevant markets. We believe that the trend has already bottomed out, however, and therefore expect the market for turbomachinery to return to slight growth in 2018. We anticipate a positive trend in the marine and power plant after-sales business for diesel engines in 2018. In turbo- machinery, we expect a slight upward trend. For the period 2019 to 2022, we expect to see growing demand in the power engineering markets. The extent and timing of this growth will vary in the individual business fields, however. T R E N D S I N T H E M A R K E T S F O R F I N A N C I A L S E R V I C E S We believe that automotive financial services will be very important for vehicle sales worldwide in 2018. We expect demand to continue rising in emerging markets where mar- ket penetration has so far been low, such as China. Regions with already developed automotive financial services markets will see a continuation of the trend towards enabling mobility at the lowest possible total costs. Integrated end-to- end solutions, comprising mobility-related service modules such as insurance and innovative packages of services, will become increasingly important to this. Additionally, we expect demand to increase for new forms of mobility, such as carsharing, and for integrated mobility services including parking, refueling and charging. We anticipate that this trend will also continue in the period from 2019 to 2022. In the mid-sized and heavy commercial vehicles category, we expect rising demand for financial services products in 160 Report on Expected Developments Group Management Report emerging markets. There in particular, financing solutions support vehicle sales and are thus an essential component of the sales process. In the mature markets, we foresee increased demand for telematics services and services aimed at reducing total operating costs in 2018. This trend is also expected to continue in the period 2019 to 2022. commodity prices. We anticipate continued volatility in the commodity markets for the period from 2019 to 2022. Forward-looking, system-based and individual procurement methods enable us to limit risks arising from this volatility in commodity prices. Long-term supply agreements ensure that the Group’s needs are satisfied and thus ensure a high degree of supply reliability. E XC H A N G E R AT E T R E N D S The global economy grew at an increased pace in 2017. Average energy and commodity prices were up year-on-year but remained at a relatively low level. The euro appreciated against the US dollar over the course of the year. Sterling lost further value against the European single currency due to uncertainty surrounding the exit negotiations began between the United Kingdom and the EU and the shape of future relations. The currencies of major emerging markets lost some further ground against the euro from the start of the reporting period. For 2018, we are forecasting that the euro will remain stable against the US dollar, sterling, Chinese renminbi and other key currencies. The expectation is that the Russian ruble, Brazilian real and Indian rupee will remain relatively weak. We currently assume that these trends will continue in the period 2019 to 2022. There is still a general event risk – defined as the risk arising from unforeseen market developments. I N T E R E ST R AT E T R E N D S Interest rates remained extremely low in fiscal year 2017 due to the continuation of expansionary monetary policy and the challenging overall economic environment. In the major Western industrialized nations, key interest rates persisted at a historic low level. While it became apparent in the USA that the extremely loose monetary policy was gradually drawing to an end, the European Central Bank continued to pursue this course. In light of further expansionary monetary policy measures in the eurozone, we therefore expect no more than a slight rise in interest rates in 2018. In the USA, however, we can expect to see a moderate increase in interest rates. For the period 2019 to 2022, we anticipate a gradual rise in interest rates, though the pace will vary from region to region. CO M M O D I T Y P R I C E T R E N D S Political and economic uncertainty in different forms caused the prices for many raw and input materials, such as crude oil, steel, cobalt and rare earths, to move sideways or upwards in 2017, amid high volatility in some cases. In light of these individual factors, we expect mixed developments in the commodity markets in 2018 with an increase in most N E W M O D E L S I N 2 0 1 8 In the course of transforming our core business, we will define the positioning of our Group brands more clearly and optimize the vehicle and drive portfolio with a view to the most attractive and fastest-growing market segments. We will unveil additional SUV models, integrate digitalization into our products even more systematically and provide impor- tant stimuli for the future with e-mobility offerings. The Volkswagen Passenger Cars brand will continue its global product initiative in 2018. The SUV range will be expanded further with the third generation of the Touareg among other models. The GTI family is also growing: with the new Polo GTI and the up! GTI, two models are coming on the market which will set new standards in their segment in terms of driving dynamics and sportiness. One of the focal points of the product offensive in 2018 will be China, where four new SUV models will be launched, including the compact, sporty T-Roc. With the Lavida and the Bora, important high-volume models will be revamped. These will stand alongside a series of new plug-in hybrid models and all-electric vehicles to meet the growing demand for new energy vehicles in China. In the USA, the new Jetta will come on the market. The latest generation of the US bestseller, which is now also based on the Modular Transverse Toolkit, is quite different from its predecessor, both visually and from a technological per- spective. The Arteon, a saloon, will also follow in the course of the year. South America will see the rollout of the Virtus, a notchback saloon based on the Polo; the further rejuvenation and expansion of the product range is an important element of the brand’s realignment in the region. Audi will set standards in the premium segment in 2018 with the new, progressive A7 Sportback. The four-door coupé reinvents the Gran Turismo with dynamic lines, systematic digitalization, a sporty driving experience and flexible use of space. The A4 family will gain a sporty spearhead: the new Audi RS 4 Avant combines high performance with enormous everyday practicality. The versatile Audi A6 featuring a sporty design will also come on the market. Boasting the same qualities as the A7, it has a much bigger interior than its predecessor. A new segment in the premium class will be Group Management Report Report on Expected Developments 161 carved out with the latest member of the Q family, the Q8. The Audi e-tron will be Audi’s first SUV with an all-electric drive to go into series production. ŠKODA will bring its updated compact car, the Fabia, to market. The SEAT brand will continue its product offensive with a large, seven-seater SUV. The model fits perfectly into SEAT’s SUV model range alongside the smaller Arona and Ateca. In addition, SEAT is establishing the new sporty line CUPRA and will launch the dynamic CUPRA Ateca at the end of the year. Porsche is enhancing its 911 product range with the 911 Carrera T and will unveil the new 911 GT3 RS. Bentley will begin delivery in 2018 of the third generation of the Continental GT, which sets new standards for luxury grand touring. Bentley will also present two new derivatives of the successful Bentayga: the Bentayga V8 and Bentayga Hybrid. Lamborghini will launch a third series on the market with the Urus, a super-SUV. The Huracán Performante Spyder will also be gradually made available. The Aventador S Roadster will receive an upgrade. Bugatti will provide additional options for its super sports car, the Chiron. Volkswagen Commercial Vehicles will debut the Amarok V6 TDI with the new top-of-the-range engine and the battery- powered e-Crafter in 2018. In 2018, Scania will unveil further products from its new generation of trucks along with new services. MAN will present a new version of its Adaptive Cruise Control (ACC) for its range of trucks, featuring a stop-and-go function. Ducati will launch five new models on the market in 2018, including the Ducati Panigale V4 and the Multistrada 1260. ST R AT E G I C S A L E S F O C U S The multibrand structure, comprising largely independent, differentiated brands that nevertheless achieve maximum synergies, is one of the defining features of the Volkswagen Group. To enable Group brands to enter into new markets, we will further refine our brand positioning, particularly in the growth regions. We will also significantly enhance our cus- tomer focus. We will improve collaboration with our autho- rized dealers, train our staff – including with respect to the digital transformation – and invest in innovative processes and systems for seamless customer interaction in an increas- ingly digital environment. Our sales strategy is especially focussed on further developing the new and used vehicle businesses, on financial services and on business with original parts and accessories. We are also adding to our range of mobility services. T E C H N I C A L E X P E RT I S E A N D M OT I VAT I O N I N T H E T R A N S F O R M AT I O N P R O C E S S Our staff’s dedication and high level of expertise provide important prerequisites to successfully shape the trans- formation process to becoming one of the world’s leading providers of sustainable mobility, while ensuring our pro- fessional excellence in the field of traditional automobile manufacturing. The dual vocational training and dual study programs form the basis for professional development in the vocational groups at Volkswagen. Employees then obtain further qualifi- cations throughout their working lives. To always meet current requirements, the broad range of training courses is continuously being enhanced. For example, employees are prepared for the changes associated with the advancing digitalization and the use of new technologies under Industry 4.0. An important principle in these efforts is the transfer of knowledge and experience from internal experts to other staff. Training is provided in the form of dual vocational training that closely integrates theoretical and practical forms of learning. I N V E STM E N T A N D F I N A N C I A L P L A N N I N G To continue to build on our pronounced strengths in inno- vation and technology, we will vigorously invest in e-mobil- ity, autonomous driving, new mobility services and digitali- zation in the coming years. The largest share of the invest- ments will be in the development of vehicles with hybrid or all-electric drives. In our current planning for 2018, the majority of capex (investments in property, plant and equipment, investment property and intangible assets, excluding capitalized develop- ment costs) will be spent on new products and the continued rollout and further development of the modular toolkit. The focus is on the electrification and digitalization of our vehi- cles, in particular through the development of the Modular Electric Toolkit (MEB). At the same time, primarily the SUV range will be further expanded. We expect the Automotive Division’s ratio of capex to sales revenue to be in the range of 6.5–7.0%. Besides capex, investing activities will include additions to capitalized development costs. Among other things, these reflect upfront expenditures in connection with the fulfill- ment of environmental standards and the electrification and updating of our model range. The investments in our facilities and models, as well as in the development of alternative drives and modular toolkits, are laying the foundations for profitable, sustainable growth at Volkswagen. These investments also include commitments arising from decisions taken in previous fiscal years. 162 Report on Expected Developments Group Management Report We aim to finance the investments in our Automotive Division from our own capital resources and expect cash flows from operating activities to exceed the Automotive Division’s investment requirements. Cash outflows resulting from the diesel issue will impact on the cash flow again in 2018, but will be substantially lower than in the reporting period. Consequently, we anticipate a positive net cash flow for 2018 that will be up significantly on the prior-year figure. These plans are based on the Volkswagen Group’s current structures. They do not take into account the possible settle- ment payable to other shareholders associated with the control and profit and loss transfer agreement with MAN SE. Our joint ventures in China are included using the equity method and are therefore not included in the above figures. In 2018, these joint ventures plan higher investments in capex than in 2017, which will be financed from the com- panies’ own funds. In the Financial Services Division, we are planning slightly higher investments in 2018 than in the previous year. We expect the growth in lease assets and in receivables from leasing, customer and dealer financing to lead to funds tied up in working capital, of which around 45% will be financed from the gross cash flow. As is common in the sector, the remaining funds needed will be met primarily through unsecured bonds on the money and capital markets, asset- backed securities, customer deposits from direct banking business, as well as through the use of international credit lines. TA R G E T S F O R VA L U E - B A S E D M A N A G E M E N T Based on long-term interest rates derived from the capital market and the target capital structure (fair value of equity to debt = 2:1), the minimum required rate of return on invested for the Automotive Division remains capital defined unchanged at 9%. In spite of the adverse effects of the special items on earnings, we exceeded the minimum rate of return on invested capital in the reporting period, with a return on investment (ROI) of 12.1 (8.2)% (see also page 128). Invested capital will increase in 2018 as a result of investments in new models, in the development of alternative drives and modular toolkits and in future technologies. The return on investment will probably exceed our minimum required rate of return on invested capital and be up slightly year-on-year. fields of digitalization, e-mobility, networked vehicle con- cepts and autonomous driving, which are being driven for- ward by our brands independently or in partnership with others. Starting in fiscal year 2018, we will report the mobility solutions business in the Automotive Division.(cid:3)(cid:3) S U M M A RY O F E X P E C T E D D E V E LO P M E N T S The Volkswagen Group’s Board of Management expects the global economy to record slightly weaker growth in 2018. We believe risks will arise from protectionist tendencies, turbulence in the financial markets and structural deficits in individual countries. In addition, growth prospects will continue to be hurt by geopolitical tensions and conflicts. We therefore expect somewhat weaker momentum than in 2017 in both the advanced economies and the emerging markets. We expect the strongest rates of expansion in Asia’s emerging economies. The trend in the automotive industry closely follows global economic developments. We assume that competition in the international automotive markets will intensify further. We expect trends in the passenger car markets in the individual regions to be mixed in 2018. Overall, growth in global demand for new vehicles will probably be slower than in the reporting period. We anticipate that unit sales volumes in Western Europe will fall slightly short of those seen in the reporting period. In the German passenger car market, we estimate that the market volume will be on a level with the previous year. Passenger car demand is expected to substan- tially exceed the prior-year figures in markets in Central and Eastern Europe. The volume of demand in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America is likely to be slightly lower than in the prior year. We expect demand in the South American markets for passenger cars and light commercial vehicles to grow perceptibly as a whole compared with the previous year. The passenger car markets in the Asia-Pacific region look set to continue their growth trajectory in 2018, albeit at a weaker pace. We expect trends in the markets for light commercial vehicles in the individual regions to be mixed again in 2018. Overall, we envisage a slight dip in demand. In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group and in the relevant markets for buses, new registrations in 2018 are set to rise slightly above the prior-year level. F U T U R E O R G A N I Z AT I O N A L ST R U C T U R E O F T H E G R O U P As part of our future program TOGETHER – Strategy 2025, we are establishing a new mobility solutions business with which we will drive our transformation into one of the world’s leading providers of sustainable mobility. Develop- ment of mobility services is closely tied to the cutting-edge We believe that automotive financial services will con- tinue to be very important for vehicle sales worldwide in 2018. The Volkswagen Group is well prepared for the future challenges in the mobility business and the mixed develop- ments in regional automotive markets. Our unique brand portfolio, our presence in all major world markets, our broad, Group Management Report Report on Expected Developments 163 selectively expanded product range and pioneering tech- nologies and services place us in a good competitive position worldwide. In the course of transforming our core business, we will define the positioning of our Group brands more clearly and optimize the vehicle and drive portfolio with a view to the most attractive and fastest-growing market seg- ments. In addition, we are working to make even more focused use of the advantages of our multibrand group by continuously developing new technologies and our toolkits. The Group’s new structure with more decentralized respon- sibility will strengthen our brands and regions and increase our proximity to customers. Our goal is to offer all customers mobility and innovations that are suited to their needs, ensuring long-term success. We will unveil additional SUV models, integrate digitalization into our products even more systematically and provide important stimuli for the future with e-mobility offerings. We expect that deliveries to customers of the Volkswagen Group in 2018 will moderately exceed the prior-year figure amid continuously challenging market conditions. Challenges will arise particularly from the economic situation, the increasing intensity of competition, exchange rate volatility and the diesel issue. In the EU, there is also a new, more time-consuming test procedure for determining pollutant and CO2 emissions as well as fuel consumption in passenger cars and light commercial vehicles known as the Worldwide Harmonized Light-Duty Vehicles Test Procedure (WLTP). We expect the sales revenues of the Volkswagen Group and its business areas to grow by as much as 5% year-on-year. In terms of the operating profit for the Group and the Passenger Cars Business Area, we forecast an operating return on sales in the range of 6.5–7.5% in 2018. For the Commercial Vehicles Business Area, we anticipate an operating return on sales of between 5.0 and 6.0%. In the Power Engineering Business Area, we expect a lower operating loss than in the previous year. For the Financial Services Division, we are forecasting an operating profit at the prior-year level. In the Automotive Division, the R&D ratio and the ratio of capex to sales revenue will fluctuate in the range of 6.5–7.0% in 2018. Cash outflows resulting from the diesel issue will negatively impact the cash flow again in 2018, but will be substantially lower than in the reporting period. Conse- quently, we anticipate a positive net cash flow for 2018 that will be up significantly on the prior-year figure. Net liquidity will also increase moderately as a result. The return on invest- ment (ROI) will be slightly higher than in the previous year. Our unchanged stated goal is to continue our solid liquidity policy. The commitment and considerable technical expertise of our staff are key prerequisites to successfully shaping the transformation into the world's leading provider of sustain- able mobility. With our future program, TOGETHER – Strategy 2025, we are attaching even greater importance to our respon- sibility in relation to the environment, safety and society. We are also aiming for operational excellence in all business processes and intensifying our focus on profitable growth. 164 Report on Risks and Opportunities Group Management Report Report on Risks and Opportunities ( C O N TA I N S T H E R E P O R T I N A C C O R D A N C E W I T H S E C T I O N 2 8 9 ( 5 ) O F T H E H G B ) Promptly identifying the risks and opportunities arising from our operating activities and taking a forward-looking approach to managing them is crucial to our Company’s long-term success. A comprehensive risk management and internal control system help the Volkswagen Group deal with risks in a responsible manner. In this section, we first explain the objective and structure of the Volkswagen Group’s risk management system (RMS) and internal control system (ICS) and describe these systems with regard to the financial reporting process. We then outline the main risks and opportunities arising in our business activi- ties. O B J E C T I V E O F T H E R I S K M A N A G E M E N T SY ST E M A N D I N T E R N A L CO N T R O L SY ST E M AT VO L K SWA G E N Only by promptly identifying, accurately assessing and effectively and efficiently managing the risks and oppor- tunities arising from our business activities can we ensure the Volkswagen Group’s sustainable success. The aim of the RMS/ICS is to identify potential risks at an early stage so that suitable countermeasures can be taken to avert the threat of loss to the Company, and any risks that might jeopardize its continued existence can be ruled out. Assessing the probability and extent of future events and developments is, by its nature, subject to uncertainty. We are therefore aware that even the best RMS cannot foresee all potential risks and even the best ICS can never completely prevent irregular acts. ST R U C T U R E O F T H E R I S K M A N A G E M E N T SY ST E M A N D I N T E R N A L CO N T R O L SY ST E M AT VO L K SWA G E N The organizational design of the Volkswagen Group’s RMS/ ICS is based on the internationally recognized COSO frame- work for enterprise risk management (COSO: Committee of Sponsoring Organizations of the Treadway Commission). Structuring the RMS/ICS in accordance with the COSO frame- work for enterprise risk management ensures that potential risk areas are covered in full. In the reporting period, Volks- wagen again took an approach to risk management that combines aspects of the ICS and the compliance manage- ment system (CMS). Uniform Group principles are used as the basis for managing risks in a standardised manner. Oppor- tunities are not recorded. With this approach, we not only fulfil legal requirements, particularly with regard to the financial reporting process, but are also able to manage significant risks to the Group holistically, i.e. by incorporating both tangible and intangible criteria. The open approach to dealing with risks in the Company and the quarterly reporting on the current risk situation were focal points in the reporting period in addition to the ad hoc and annual risk assessment. We continued to reinforce the internal control system in the area of product compliance in 2017. This includes the implementation of what are known as the Golden Rules in the areas of control unit software development, emission classification and escalation manage- ment. These rules represent minimum requirements in the organization, processes and tools & systems categories. They serve to shore up governance and compliance. Another key element of the RMS/ICS at Volkswagen is the three lines of defense model, a basic element required, among other bodies, by the European Confederation of Insti- tutes of Internal Auditing (ECIIA). In line with this model, the Volkswagen Group’s RMS/ICS has three lines of defense that are designed to protect the Company from significant risks occurring. Group Management Report Report on Risks and Opportunities 165 T H E T H R E E L I N E S O F D E F E N S E M O D E L S U P E R V I S O R Y B O A R D B O A R D O F M A N A G E M E N T 1st 2nd 3rd line of defense line of defense line of defense Companies and business units Group Risk Management Group Internal Audit First line of defense: operational risk management The primary line of defense comprises the operational risk management and internal control systems at the individual Group companies and business units. The RMS/ICS is an integral part of the Volkswagen Group’s structure and work- flows. Events that may give rise to risk are identified and assessed locally in the divisions and at the investees. Counter- measures are introduced immediately, their effects are assessed and the information is incorporated into the plan- ning in a timely manner. The results of the operational risk management process are incorporated into budget planning and financial control on an ongoing basis. The targets agreed in the budget planning rounds are continually reviewed in revolving planning updates. At the same time, the results of risk mitigation measures that have already been taken are incorporated into the monthly forecasts on further business development without delay. This means that the Board of Management also has access to an overall picture of the current risk situation via the documented reporting channels during the year. The minimum requirements for the operational risk management and internal control system are set out for the entire Group in uniform guidelines. These also include a pro- cess for the timely reporting of material risks. Second line of defense: identifying and reporting systemic and current risks using Group-wide processes In addition to the ongoing operational risk management, the Group Risk Management department each year sends stan- dardized surveys on the risk situation and the effectiveness of the RMS/ICS to the significant Group companies and units worldwide (regular Governance, Risk & Compliance (GRC) process). The feedback is used to update the overall picture of the potential risk situation and assess the effectiveness of the system. Each systemic risk reported is assessed using the expected likelihood of occurrence and various risk criteria (financial and nonfinancial). In addition, the measures taken to manage and control risk are documented at management level. This means that risks are assessed in the context of any risk management measures initiated, i.e. in a net analysis. In addi- tion to strategic, operational and reporting risks, risks arising from potential compliance violations are also integrated into this process. Moreover, the effectiveness of key risk manage- ment and control measures is tested and any weaknesses identified in the process are reported and rectified. All Group companies and units selected from among the entities in the consolidated Group on the basis of materiality and risk criteria were subject to the regular GRC process in fiscal year 2017. In addition to the ad hoc and annual risk assessment, the Board of Management also receives quarterly risk reports. Similar to the annual standard GRC process, the assessment takes risk-minimizing control measures into account (net assessment). All Group brands are included in this process along with Volkswagen Financial Services AG and Volkswagen Bank GmbH. Information on relevant systemic and current risks is regularly reported to the Group Board of Management and the Audit Committee of the Supervisory Board of Volks- wagen AG. The Group Board of Management Committee for Risk Management was set up in the reporting period. The new committee has the following tasks, among others: >(cid:3) to further increase transparency in relation to significant risks to the Group and their management, >(cid:3) to explain specific issues where these constitute a signif- icant risk to the Group, >(cid:3) to make recommendations on the further development of the RMS/ICS, >(cid:3) to support the open approach to dealing with risks and promote an open risk culture. In the past, the Scania brand was not yet included in the Volkswagen Group’s risk management system due to various provisions of Swedish company law. Scania has been inte- grated into quarterly risk reporting since 2016. From 2018, it will also be gradually included in the standard GRC process. Risk management and risk assessment are integral parts of Scania’s corporate management. Risk areas at Scania are evaluated by the brand’s Controlling department and reflected in the financial reporting. 166 Report on Risks and Opportunities Group Management Report A N N U A L S T A N D A R D G O V E R N A N C E , R I S K A N D C O M P L I A N C E P R O C E S S Selection of companies and units Follow-up activities targeting weaknesses Data identified/ assessed in the units Reporting Documentation of effectiveness in the units Third line of defense: checks by Group Internal Audit Group Internal Audit helps the Board of Management to monitor the various divisions and corporate units within the Group. It regularly checks the risk early warning system and the structure and implementation of the RMS/ICS and the CMS as part of its independent audit procedures. R I S K E A R LY WA R N I N G SY ST E M I N L I N E W I T H T H E KO N T R A G The Company’s risk situation is ascertained, assessed and documented in accordance with the requirements of the Gesetz zur Kontrolle und Transparenz im Unternehmens- bereich (KonTraG – German Act on Control and Transparency in Business). The requirements for a risk early warning system are met through the elements of the RMS/ICS described above (first and second lines of defense). Independently of this, the external auditors check both the processes and procedures implemented in this respect and the adequacy of the documentation on an annual basis. The plausibility and adequacy of the risk reports are examined on a random basis in detailed interviews with the divisions and companies concerned that also involve the external auditors. The latter assessed our risk early warning system based on this volume of data and ascertained that the risks identified were pres- ented and communicated accurately. The risk early warning system meets the requirements of the KonTraG. In addition, scheduled examinations as part of the audit of the annual financial statements are conducted at com- panies in the Financial Services Division. As a credit institu- tion, Volkswagen Bank GmbH, including its subsidiaries, is subject to supervision by the European Central Bank, while Volkswagen Leasing GmbH as a financial services institution and Volkswagen Versicherung AG as an insurance company are subject to supervision by the relevant division of the Bundes- anstalt für Finanzdienstleistungsaufsicht (BaFin – the German Federal Financial Supervisory Authority). As part of the sched- uled supervisory process and unscheduled audits, the compe- tent supervisory authority assesses whether the require- ments, strategies, processes and mechanisms ensure solid risk management and solid risk cover. Furthermore, the Prüfungs- verband deutscher Banken (Auditing Association of German Banks) audits Volkswagen Bank GmbH from time to time. Monitoring the effectiveness of the risk management system and the internal control system To ensure its effectiveness, the RMS/ICS is regularly opti- mized as part of our continuous monitoring and improve- ment processes. In the process, equal consideration is given to both internal and external requirements. External experts assist in the continuous enhancement of our RMS/ICS on a case-by-case basis. The results culminate in both regular and event-driven reporting to the Board of Management and Supervisory Board of Volkswagen AG. T H E R I S K M A N A G E M E N T A N D I N T E G R AT E D I N T E R N A L CO N T R O L SY ST E M I N T H E CO N T E XT O F T H E F I N A N C I A L R E P O RT I N G P R O C E S S The accounting-related part of the RMS/ICS that is relevant for the financial statements of Volkswagen AG and the Volks- wagen Group as well as its subsidiaries comprises measures that are intended to ensure the complete, accurate and timely transmission of the information required for the preparation of the financial statements of Volkswagen AG, the consoli- dated financial statements and the combined Group manage- ment report. These measures are designed to minimize the risk of material misstatement in the accounts and in the external reporting. Main features of the risk management and integrated internal control system relevant for the financial reporting process The Volkswagen Group’s accounting is essentially organized along decentralized lines. For the most part, accounting duties are performed by the consolidated companies them- selves or entrusted to the Group’s shared service centers. In principle, the audited financial statements of Volkswagen AG and its subsidiaries prepared in accordance with IFRSs and the Volkswagen IFRS accounting manual are transmitted to the Group in encrypted form. A standard market product is used for encryption. The Volkswagen IFRS accounting manual, which has been prepared using external expert opinions in certain cases, ensures the application of uniform accounting policies based on the requirements applicable to the parent. In particular, it Group Management Report Report on Risks and Opportunities 167 includes more detailed guidance on the application of legal requirements and industry-specific issues. Components of the reporting packages required to be prepared by the Group companies are also set out in detail there and requirements established for the presentation and settlement of intragroup transactions and the balance reconciliation process that builds on this. Control activities at Group level include analyzing and, if necessary, adjusting the data reported in the financial statements presented by the subsidiaries, taking into account the reports submitted by the auditors and the outcome of the meetings on the financial statements with representatives of the individual companies. These discussions address both the reasonableness of the single-entity financial statements and specific significant issues at the subsidiaries. Alongside rea- sonableness reviews, other control mechanisms applied during the preparation of the single-entity and consolidated financial statements of Volkswagen AG include the clear delineation of areas of responsibility and the application of the dual control principle. The Group management report is prepared – in accor- dance with the applicable requirements and regulations – centrally but with the involvement of and in consultation with the Group units and companies. In addition, the accounting-related internal control system is independently reviewed by Group Internal Audit in Germany and abroad. Integrated consolidation and planning system The Volkswagen consolidation and corporate management system (VoKUs) enables the Volkswagen Group to consolidate and analyze both Financial Reporting’s backward-looking data and Controlling’s budget data. VoKUs offers centralized master data management, uniform reporting, an authori- zation concept and maximum flexibility with regard to changes to the legal environment, providing a future-proof technical platform that benefits Group Financial Reporting and Group Controlling in equal measure. To verify data consistency, VoKUs has a multi-level validation system that primarily checks content plausibility between the balance sheet, the income statement and the notes. R I S K S A N D O P P O RT U N I T I E S In this section, we outline the significant risks and oppor- tunities that arise in the course of our business activities. We have grouped them into categories. Unless explicitly mentioned, there were no material changes to the specific risks and opportunities compared with the previous year. The increasing number of partnerships generates both opportunities as well as risks. The diesel issue gives rise to its own risks for the Volks- wagen Group and also has an impact on existing risks. These are described under the respective risk category. We use competitive and environmental analyses and market studies to identify not only risks but also opportu- nities with a positive impact on the design of our products, the efficiency with which they are produced, their success in the market and our cost structure. Where they can be assessed, risks and opportunities that we expect to occur are already reflected in our medium-term planning and our forecast. The following therefore reports on internal and external developments as risks and opportunities that may result in a negative or positive deviation from our forecast. Risks from the diesel issue The Volkswagen Group has recognized provisions arising from the diesel issue, in particular for the service measures, recalls and customer-related measures as well as for legal risks, but also for residual value risks. Further significant financial liabilities may emerge due to existing estimation risks particularly from legal risks, such as criminal, administrative and civil proceedings, technical solu- tions, lower market prices, repurchase obligations and cus- tomer-related measures. Demand may decrease – possibly exacerbated by a loss of reputation or insufficient communication. Other potential consequences include lower margins in the new and used car businesses and a temporary increase in funds tied up in working capital. The funding needed to cover the risks may lead to assets having to be sold due to the situation and equivalent pro- ceeds for them not being achieved as a result. As a result of the diesel issue, the ability to use refi- nancing instruments may possibly be restricted or precluded for the Volkswagen Group. A downgrade of the Company’s rating could adversely affect the terms associated with the Volkswagen Group’s borrowings. We are cooperating with all the responsible authorities to clarify these matters completely and transparently. Additional information about the litigation can be found on pages 93 and 178 to 185 of this annual report. Macroeconomic risks and opportunities We believe that the risks to continued global economic growth arise primarily from turbulence in the financial mar- kets, protectionist tendencies and structural deficits, which 168 Report on Risks and Opportunities Group Management Report pose a threat to the performance of individual advanced economies and emerging markets. The worldwide transition from an expansionary monetary policy into a more restric- tive one also presents risks for the macroeconomic environ- ment. Moreover, uncertainty is associated with the effects of the UK’s planned withdrawal from the EU. Persistently high private- and public-sector debt in many places is also clouding the outlook for growth and may cause markets to respond negatively. Declines in growth in key countries and regions often have an immediate impact on the state of the global economy and therefore pose a central risk. The economic development of some emerging economies is being hampered primarily by dependence on energy and commodity prices, capital inflows and socio-political tensions. Corruption, inadequate government structures and a lack of legal certainty also pose risks. Geopolitical tensions and conflicts are a further major risk to the performance of individual economies and regions. As the global economy becomes increasingly interconnected, it is also vulnerable to local developments. Any escalation of the conflicts in Eastern Europe, the Middle East, or Africa, for example, could cause upheaval on the global energy and commodity markets and exacerbate migration trends. An aggravation of the situation in East Asia could put further strain on the global economy. The same applies to armed conflicts, terrorist activities and the spread of infectious diseases, which may prompt unexpected, short-term responses from the markets. On the whole, we do not anticipate a global recession next year. Due to the risk factors mentioned, however, a decline in global economic growth or a period of below-average growth rates is possible. The macroeconomic environment may also give rise to opportunities for the Volkswagen Group if actual develop- ments differ in a positive way from expected developments. Sector-specific risks and market opportunities The growth markets of Asia, South America, and Central and Eastern Europe are particularly important to the Volkswagen Group in terms of the global trend in demand for passenger cars and commercial vehicles. These markets harbor con- siderable potential; however, the underlying conditions in some countries in these regions make it difficult to increase unit sales figures there. Some have high customs barriers or minimum local content requirements for production, for example. The political crisis and its economic consequences again inhibited market development in Russia in fiscal year 2017. In South America, structural deficits continued to have a negative impact. Restrictions on vehicle registrations could enter into force in further Chinese metropolitan areas in the future. In Europe, there is a risk that some municipalities and cities will impose a driving ban on diesel vehicles in order to comply with emission limits. Also, a global economic slow- down could negatively impact consumer confidence. Further- more, we cannot entirely rule out the possibility of freight deliveries being shifted from trucks to other means of trans- port, and of demand for the Group’s commercial vehicles falling as a result. At the same time, wherever the economic and regulatory situation permits, there are opportunities above and beyond current projections. These arise from faster growth in the emerging markets where vehicle densities are currently still low. The demand that built up in individual established mar- kets during the crisis could also bring a more marked recovery in these markets if the economic environment eases more quickly than expected. Price pressure in established automotive markets due to high market saturation is a particular challenge for the Volkswagen Group as a supplier of volume and premium models. Competitive pressures are likely to remain high in the future. Individual manufacturers may respond by offering incentives in order to meet their sales targets, putting the entire sector under additional pressure, particularly in Western Europe, the USA and China. Western Europe is one of our main sales markets. A drop in prices due to the economic climate triggered by falling demand in this region would have a particularly strong impact on the Company’s earnings. We counter this risk with a clear, customer-oriented and innovative product and pricing policy. Outside Western Europe, delivery volumes are spread widely around the world, with the Chinese market accounting for a large share. In numerous existing and developing mar- kets, we either already have a strong presence or are working hard to build one. Moreover, strategic partnerships are helping us to increase our presence in these countries and regions and cater to requirements there. Economic performance varied from region to region in fiscal year 2017. The resulting challenges for our trading and sales companies, such as efficient inventory management and a profitable dealer network, are considerable and are being met by appropriate measures on their part. However, financing business activities through bank loans remains difficult. Our financial services companies offer dealers financing on attractive terms with the aim of strengthening their business models and reducing operational risk. We have Group Management Report Report on Risks and Opportunities 169 installed a comprehensive liquidity risk management system so that we can promptly counteract any liquidity bottlenecks at the dealers’ end that could hinder smooth business opera- tions. We continue to approve loans for vehicle finance on the basis of the same cautious principles applied in the past, taking into account the regulatory requirements of section 25a(1) of the Kreditwesengesetz (KWG – German Banking Act). Volkswagen may be exposed to increased competition in aftermarkets for two reasons in particular: firstly, because of the provisions of the block exemption regulations, which have applied to after-sales services since June 2010, and, secondly, because of the amendments included in EU Regu- lation 566/2011 of June 8, 2011 regarding access by indepen- dent market participants to technical information. In addition, the European Commission is currently evalu- ating the market with regard to existing design protection. If the proposed abolition of design protection for visible replacement parts were to be approved, this could adversely affect the Volkswagen Group’s genuine parts business. The automotive industry faces a process of transfor- mation with far-reaching changes. Electric drives, connected vehicles and autonomous driving are associated with both opportunities and risks for our sales. In particular, more rapidly evolving customer requirements, swift implemen- tation of legislative initiatives and the market entry of new competitors from outside the industry will require changed products, a faster pace of innovation and adjustments to business models. Below, we outline the greatest potential for growth and market opportunities for the Volkswagen Group. China China, the largest market in the Asia-Pacific region, con- tinued to grow in the reporting period. The Chinese demand for vehicles will continue to rise in the coming years due to the need for individual mobility, albeit at a slower pace than in the past. Demand will also shift from the large coastal cities to the interior of the country. In order to leverage the considerable opportunities offered by the Chinese market – also with regard to e-mobility – and to defend our strong market position in China over the long term, we are continuously expanding our product range to include models that have been specially developed for this market. We are further extending our production capacity in this growing market through additional production facilities. backdrop, the Group is currently consolidating its activities, as India remains an important strategic future market for the Group. USA The volume of the US vehicle market in 2017 fell short of the strong previous year. In 2018, the market volume will probably again be lower than in the reporting period. In the USA, Volkswagen Group of America is systematically pursuing our strategy of becoming a full-fledged volume supplier. An engine plant and the further development of production capacity will allow the Group to better serve the market in the North America region. We are also pressing forward with additional products tailored specifically to the US market. Brazil The economic environment eased in the reporting period and the volume of demand in the vehicle market recovered perceptibly compared with the weak previous year. We anti- cipate a continued upturn in demand in 2018. The growing number of automobile manufacturers with local production has resulted in a sharp increase in price pressure and com- petition. The Brazilian market plays a key role for the Volks- wagen Group. To strengthen our competitive position here, we offer vehicles that have been specially developed for this market and are locally produced, such as the Gol and the Virtus. Russia Russia has the potential to grow into one of the largest automotive markets in the world. Volumes in the Russian vehicle market in 2017 were up on the previous year and we are forecasting a further recovery in 2018. However, the heavy reliance on the currently low oil and gas income, a substantial fall in real incomes, high vehicle prices as a result of the weak currency, the political crisis and the related sanctions imposed by the EU and the USA continue to impact remains the development of demand. The market strategically important to the Volkswagen Group, which is why we are working intensively there. The Middle East Despite economic and political instability, the Middle East region offers growth opportunities. We are leveraging the potential for growth with a range of vehicles that has been specifically tailored to this market, but do not have our own production facilities. India The political and economic situation in India further stabilized in 2017. The vehicle markets continued their recovery. We expect this trend to continue. Against this Power Engineering The underlying trends in the global economy, such as sus- tained growth and a greater international division of labor, 170 Report on Risks and Opportunities Group Management Report are set to continue, as are the resulting increase in global transport routes and volumes, the higher demand for touristic offers such as cruises, and the growing energy needs and the required forces for innovation in relation to global climate policy. We are working systematically to leverage these market opportunities across the world. In the medium term, significant potential can be leveraged by enhancing the after- sales business through the introduction of new products and the expansion of our service network. Going forward, stricter requirements with respect to reliability, the availability of the plants that are already in operation, the increase in environ- mental compatibility and efficient operation, together with the large number of engines and plants, will provide the basis for growth. As part of the capital goods industry, the Power Engineer- ing Business Area is affected by fluctuations in the invest- ment climate. Even minor changes in growth rates or growth forecasts, resulting from geopolitical uncertainties or volatile commodities and foreign exchange markets, for example, can lead to significant changes in demand or the cancellation of already existing orders. The measures we use to counter the considerable economic risks include flexible production concepts and cost flexibility by means of temporary employ- ment, working time accounts and short-time work, and – if necessary – structural adjustments. In the Turbomachinery Business Area, for example, as a consequence of weak demand, industry-wide overcapacity and price pressure in 2017, we implemented sweeping structural adjustments at all major production facilities in Europe to make the business area more competitive. Research and development risk The automotive industry is undergoing a radical transfor- mation process. Multinational corporations like Volkswagen are facing major challenges in the areas of customer/market, technological advances and legislation. Key aspects are the implementation of increasingly stringent emission and con- sumption regulations, taking new test procedures and test cycles (e.g. WLTP) into account, as well as compliance with approval processes (homologation), which are becoming increasingly more complex and time-consuming and may vary by country. The economic success and competitiveness of the Volks- wagen Group depend on how successful we are in promptly tailoring our portfolio of products and services to the changing conditions in time. Due to the intensity of the competition and the speed of technological development, identifying relevant trends at an early stage and reacting accordingly is crucial. We therefore conduct trend analyses, customer surveys and scouting activities among other things and examine the relevance of the results for our customers. We counter the risk that it may not be possible to develop modules, vehicles or services within the specified timeframe, to the required quality standards, or in line with cost specifications by con- tinuously and systematically monitoring the progress of all projects and analyzing third-party industrial property rights, increasingly including in relation to communication technol- ogies. We regularly compare this progress with the project’s original targets; in the event of variances, we introduce appropriate countermeasures in good time. Our end-to-end project organization supports effective cooperation among all areas involved in the process, ensuring that specific requirements are incorporated into the development process as early as possible and that their implementation is planned in good time. Modular toolkit strategy We are continuously expanding our successful modular tool- kits, focusing on future customer requirements, legal require- ments and infrastructural requirements. The Modular Transverse Toolkit (MQB) has created an extremely flexible vehicle architecture that permits dimen- sions determined by the concept – such as the wheelbase, track width, wheel size and seat position – to be harmonized throughout the Group and utilized flexibly. Other dimen- sions, for example the distance between the pedals and the middle of the front wheels, are always the same, ensuring a uniform system in the front of the car. Based on the synergies achieved, we are able to cut both development costs and the necessary one-time expenses and manufacturing times. The toolkits also allow us to produce different models from different brands in various quantities, using the same system in a single plant. This means that our capacities can be used with greater flexibility throughout the entire Group, enabling us to achieve efficiency gains. We are currently transferring this principle of standardi- zation with maximum flexibility to the Modular Electrifi- cation Toolkit (MEB), a concept developed for all-electric drives. The synergy effects and efficiency gains achieved from the modular toolkit strategy will give us the opportunity to into mass production manufacturing bring e-mobility worldwide from 2020 with the use of the first MEB-based vehicle. Opportunities and risks from partnerships As part of our future program TOGETHER – Strategy 2025, we are stepping up our efforts to forge collaborations, both for the transformation of our core business and for the establish- Group Management Report Report on Risks and Opportunities 171 ment of the new mobility solutions business. By entering into partnerships at a local level, we aim to identify regional customer needs more precisely, establish competitive cost structures and develop and offer market-driven products. Going forward, we will concentrate to a greater extent than previously on partnerships, acquisitions and venture capital investments. This will enable us to generate maximum value for the Group and its brands and to expand our expertise, particularly in new areas of business. Volkswagen owns a large number of patents and other industrial property rights and copyrights. Partnerships can lead to patent and licensing infringements and thus to the unauthorized disclosure of company-specific expertise. Volkswagen monitors the sales markets and will also protect its expertise with legal action if necessary. Procurement risks and opportunities Current trends in the automotive industry such as e-mobility and automated driving are resulting in an increased need for financing among suppliers. The Volkswagen Group’s pro- curement risk management system assesses suppliers before they are commissioned to perform projects. Among other things, the procurement function considers the risk of insuf- ficient competition if it concentrates on a few financially strong suppliers when awarding contracts. The procurement risk management system continuously and globally monitors the financial situation of our suppliers and takes targeted measures to avoid supply bottlenecks. The ongoing positive economic trend in Europe, North America and China strengthened our supplier base at an overall good level of capacity utilization and good margin situation. Consistently good financing opportunities and the attractive interest rates provided suppliers with favorable conditions. In the Russian and South American markets, demand grew for the first time in years, providing the possi- bility of stabilization after several years of consolidation of the supplier base. In spite of this, the number of crises and insolvencies among suppliers worldwide increased in 2017. Specialists in restructuring and supply reliability are coordinating the measures to be taken on a Group-wide basis to safeguard production in a timely and sustainable manner. The current trends in the automotive industry will also affect the availability of special raw materials, which are principally used in electrified vehicles. The raw material and demand trend was assessed last year to enable steps to be taken in a timely manner whenever bottlenecks arise. Rising material prices, especially for steel, and shifts in the product mix towards petrol engines present challenges that must be overcome in conjunction with suppliers. Quality problems may necessitate technical intervention involving a considerable financial outlay where costs cannot be passed on to the supplier or can only be passed on to a limited extent. It is not possible at the present time to rule out a potential further increase in recalls of a range of models produced by various manufacturers in which certain airbags manufactured by Takata were installed. This could also affect Volkswagen Group models. In addition to financial difficulties, supply risks may, for example, arise as a result of fires or accidents at suppliers. Supply risks are identified without delay in the procurement function through early warning systems and mitigated imme- diately by applying appropriate measures. Additional measures were taken to safeguard supply and avert future assembly line stoppages caused by suspensions of deliveries. Monitoring of the antitrust investigations into suppliers by Risk Management on grounds of price-fixing agreements was expanded further in 2017. The effects on Volkswagen are being systematically reviewed. Production risk Volatile developments in the global automotive markets, accidents at suppliers, storms and earthquakes caused pro- duction volumes of some vehicle models to fluctuate at some plants. In specific markets, we also recorded a change in incoming orders: the number of orders for diesel vehicles fell, while orders for petrol engines rose. We address such fluc- tuations using tried-and-tested tools, such as flexible working time models. The design of the production network enables us to respond dynamically to varying changes in demand at the sites. “Turntable concepts” even out capacity utilization between production facilities. At multibrand sites, volatile demand can also be smoothed across brands. Short-term changes in customer demand for specific equipment features in our products, and the decreasing predictability of demand, may lead to supply bottlenecks. We minimize this risk by, among other measures, continuously comparing our available resources against future demand scenarios. If we identify bottlenecks in the supply of materials, we can introduce countermeasures far enough in advance. Production capacity is planned several years in advance for each vehicle project on the basis of expected sales trends. These are subject to market changes and generally entail a 172 Report on Risks and Opportunities Group Management Report degree of uncertainty. If forecasts are too optimistic, there is a risk that capacity will not be fully utilized. However, forecasts that are too pessimistic pose a risk of undercapacity, as a result of which it may not be possible to meet customer demand. Particular events beyond our control such as natural disasters or other events such as fires, explosions or the leakage of substances hazardous to health and/or the environ- ment, may adversely affect production to a significant extent. As a consequence, bottlenecks or even outages may occur, thus preventing the planned volume of production from being achieved. We address such risks with, among other things, fire protection measures and hazardous goods man- agement, and, where financially viable, ensure that they are covered by insurance policies. The range of our models is growing, while at the same time product life cycles are becoming shorter; the number of new vehicle start-ups at our sites worldwide is therefore increasing. The processes and technical systems we use for this are complex and there is thus a risk that vehicle deliveries may be delayed. We address this risk by drawing on experience of past start-ups and identifying weaknesses at an early stage so as to ensure that production volumes and quality standards are met during our new vehicle start-ups throughout the Group. In order to prevent downtime in general, lost output, rejects and reworking, we use the TPM (Total Productive Maintenance) method at our production facilities. TPM is a continuous process, that involves the entire workforce. Round-the-clock maintenance of the technical facilities means that they are always operational and guaranteed to function reliably. Risks arising from long-term production In the case of large projects, risks may arise that are often only identified in the course of the project. They may result in particular from contract drafting errors, miscosting, post- contract changes in economic and technical conditions, weaknesses in project management, or poor performance by subcontractors. In particular, omissions or errors made at the start of a project are usually difficult to compensate for or correct, and often entail substantial additional expenses. We endeavor to identify these risks at an even earlier stage and to take appropriate measures to eliminate or minimize them before they occur by constantly optimizing the project control process across all project phases and by using a lessons-learned process and regular project reviews. We can thus further reduce risk, particularly during the bidding and planning phase for large upcoming projects. Risks arising from changes in demand As a result of the diesel issue, the Volkswagen Group may experience decreases in demand, possibly exacerbated by media reports. When dealing with the issue, our highest priority is to provide customers with technical solutions. In addition, we are pressing ahead with the systematic clari- fication of misconduct in the Company. Consumer demand is shaped not only by real factors such as disposable income, but also by psychological factors that cannot be planned for. Unexpected buyer reluctance, possibly further exacerbated by press reports, could stem from house- holds’ worries about the future economic situation, for example. This is particularly the case in saturated automotive markets such as Western Europe, where demand could drop as a result of owners holding on to their vehicles for longer. In the reporting period, it became evident that the effects of the eurozone debt crisis have not yet been overcome. Some automotive markets, particularly in Southern Europe, were able to further recover from their historical lows, however, and exhibited positive growth rates. We are countering the buyer reluctance with our attractive range of models and systematic customer orientation. A combination of buyer reluctance as a result of the crisis and increases in some vehicle taxes based on CO2 emissions – as already exist in some European countries – is driving a shift in demand towards smaller segments and engines in individual markets. We counter the risk that such a shift will negatively impact the Volkswagen Group’s earnings by con- stantly developing new, fuel-efficient vehicles and alternative drive technologies, based on our drivetrain and fuel strategy. Automotive markets around the world are exposed to risks from government intervention such as tax increases, which curb private consumption, or from protectionist ten- dencies. Commercial vehicles are capital goods: even minor changes in growth rates or growth forecasts can significantly affect transport requirements and thus demand. The pro- duction fluctuations arising as a result require a high degree of flexibility from manufacturers. Although production vol- umes are significantly lower, the complexity of the trucks and buses range in fact significantly exceeds the already very high complexity of the passenger cars range. Key factors for com- mercial vehicle customers are total cost of ownership, vehicle reliability and the service provided. In addition, customers are increasingly interested in additional services such as freight optimization and fleet utilization, which we offer in the commercial vehicle segment through the newly estab- lished digital brand RIO, for example. Group Management Report Report on Risks and Opportunities 173 MAN Power Engineering’s two-stroke engines are produced exclusively by licensees, particularly in South Korea, China and Japan. On account of volatile demand in new ship construction, there is excess capacity in the market for marine engines, which may result in a decline in license revenues and bad debt losses. Due to changes in the com- petitive environment, especially in China, there is also the risk of losing market share. We address these risks by con- stantly monitoring the markets, working closely with all licensees and introducing new technologies. Dependence on fleet customer business The fleet customer business is generally more stable than the business with retail customers; in 2017, it continued to be characterized by increasing concentration and internationali- zation. The Volkswagen Group is well positioned with its broad portfolio of products and drive systems, as well as its target- group-focused customer care. There is no concentration of default risks at individual fleet customers or markets. The fact that the market share in Europe remained constant shows that fleet customers still have confidence in the Group. Quality risk Right from the product development stage, we aim to identify and rectify quality problems at the earliest possible point, so as to avoid delays to the start of production. As we are using an increasing number of modular components as part of our modular toolkit strategy, it is particularly important when malfunctions do occur to identify the cause and eliminate the malfunctions as quickly as possible. We further optimized the processes with which we can prevent these defects at our brands and improved our organizational processes during the reporting period so that we are able to counter the associated risks more effectively. Increasing technical complexity and the use of the toolkit system in the Group mean that the need for high-grade sup- plier components of impeccable quality is rising. To ensure the continuity of production, it is also extremely important that our own plants and our suppliers deliver components on time. We ensure long-term quality and supply capability from the very start of the supply chain using a risk management system that we first tested internally and then introduced among suppliers. In this way, Group Quality Management contributes to fulfilling customer expectations and conse- quently to boosting our Company’s reputation, sales figures and earnings. Assuring quality is of fundamental importance especially in the Brazilian, Russian, Indian and Chinese markets, for which we develop dedicated vehicles and where local manu- facturers and suppliers have been established, particularly as it may be very difficult to predict the impact of regulations or official measures. We continuously analyze the conditions specific to each market and adapt quality requirements to them. We counter the local risks we identify by continuously developing measures and locally, thereby effectively preventing quality defects from arising. implementing them Vehicle registration and operation criteria are defined and monitored by national and, in some cases, international authorities. Some countries also have special – and in some cases new – rules aimed at protecting customers in their dealings with vehicle manufacturers. With our established and revised quality assurance processes, we ensure that the Volkswagen Group brands and their products fulfill all applicable requirements and that local authorities receive timely notification of all issues requiring reporting. By doing so, we reduce the risk of customer complaints or other negative consequences. Personnel risk We counter economic risks as well as changes in the market and competitive situation with a range of instruments that help the Volkswagen Group to remain flexible, even with a fluctuating order situation – whether orders decline or demand for our products increases. These include time accounts which are filled when overtime is necessary and reduced through time off in quiet periods, enabling our factories to adjust their capacity to the production volume with measures such as extra shifts, closure days and flexible shift models. The use of temporary workers also allows us to plan more flexibly. All of these measures help the Volkswagen Group to generally maintain a stable permanent workforce even when orders fluctuate. The technical expertise and individual commitment of employees are indispensable prerequisites for the success of the Volkswagen Group. Our end-to-end human resources development strategy gives all employees attractive training and development opportunities, with particular emphasis being placed on strengthening professional skills in the Company’s different vocational groups. By boosting our training programs, particularly at our international locations, we are able to adequately address the challenges of tech- nological change. We are continuously expanding our recruitment tools. Our systematic talent relationship management, for example, enables us to make contact with talented candidates from strategically relevant target groups at an early stage and to build a long-term relationship between them and the Group. 174 Report on Risks and Opportunities Group Management Report In addition to the standard dual vocational training, pro- grams such as our StIP integrated degree and traineeship scheme ensure a pipeline of highly qualified and motivated employees. We counter the risk that knowledge will be lost as a result of employee fluctuation and retirement with inten- sive, department-specific training. By systematically increasing our attractiveness as an employer, we gain talented people in the future-critical areas of IT, design and social media. We have also established a base of senior experts in the Group. With this instrument, we use the valuable knowledge of our experienced specialists who have retired from Volkswagen. Organizing efficient knowledge hubs – for example the acade- mies dedicated to the various vocational groups under the umbrella of the Volkswagen Group Academy – is becoming increasingly important, particularly where departing staff are not directly replaced by specialists. Volkswagen is working on knowledge relays to ensure experience is passed on even when the chain of succession is broken. IT Risk At Volkswagen, a global company geared towards further growth, the information technology (IT) used in all divisions Group-wide is assuming an increasingly important role. IT risks exist in relation to the three protection goals of con- fidentiality, integrity and availability, and comprise in par- ticular unauthorized access to, modification of and extrac- tion of sensitive electronic corporate data as well as limited systems availability as a consequence of downtime and disasters. We address the risk of unauthorized access to, modifi- cation of, or extraction of corporate data with IT security technologies (e.g. firewall and intrusion prevention systems) and a multiple-authentication procedure. Additionally, we increase protection by restricting the allocation of access rights to systems and information and by keeping backup copies of critical data resources. We use technical resources that have been tried and tested in the market, adhering to standards applicable throughout the Company. Redundant IT infrastructures protect us against risks that occur in the event of a systems failure or natural or other disaster. One of our focuses is on continuously enhancing our security measures. The current IT security program, for example, is built on structured rights management, optimi- zation of IT infrastructure, application security and the IT security command center. The role of the latter is to detect cyber-attacks at an early stage and thus help to successfully defeat them using the latest tools. The command center is staffed around the clock in three regions (Europe, America, Asia). Volkswagen complements these technical measures with consistent awareness raising and training for all employees. The high standards we set for the quality of our products also apply to the way in which we handle our customers’ and employees’ data. In particular, the digital services for mobility services must be secured. Our guiding principles are data security, transparency and informational self-determination. Environmental protection regulations The specific emission limits for all new passenger car and light commercial vehicle fleets for brands and groups in the EU for the period up to 2019 are set out in Regulation (EC) No 443/2009 on CO2 emissions from passenger cars and Regulation (EU) No 510/2011 on light commercial vehicles of up to 3.5 tonnes, which came into effect in April 2009 and June 2011, respectively. These regulations are important components of the European climate protection policy and therefore form the key regulatory framework for product design and marketing by all vehicle manufacturers selling in the European market. The average CO2 emissions of manufacturers’ new Euro- pean passenger car fleets have not been allowed to exceed 130 g CO2/km since 2012. Compliance with this requirement was introduced in phases; since 2015 the entire fleet has to meet this limit. Regulation (EU) No 333/2014, which was adopted in 2014, states that the average emissions of Euro- pean passenger car fleets may be no higher than just 95 g CO2/km from 2021 onwards; in 2020, this emissions limit will already apply to 95% of the fleet. The EU’s CO2 regulation for light commercial vehicles requires limits to be met from 2014 onwards, with targets being phased in over the period to 2017. Under this regu- lation, the average CO2 emissions of new vehicle registrations in Europe may not exceed 175 g CO2/km. From 2020 onwards, the limit under Regulation (EU) No 253/2014, which was adopted in 2014, is 147 g CO2/km. In the fourth quarter of 2017, the European Commission published a regulatory proposal for the CO2 regime after 2020. A reduction for the European passenger car and light commercial vehicle fleets of 15% from 2025 and 30% from 2030 are the targets currently proposed. The starting point is the fleet value in 2021. The bill is expected to be voted on conclusively at the end of 2018. Policymakers are already discussing reduction targets for the transport sector for the period to 2050, such as the 60% reduction in greenhouse gas emissions compared to 1990 levels cited in the EU White Paper on transport published in March 2011. These long-term targets can only be achieved through a high proportion of electric vehicles. At the same time, regulations governing fleet fuel con- sumption are also being developed or introduced outside the EU28, for example in Brazil, Canada, China, India, Japan, Group Management Report Report on Risks and Opportunities 175 Mexico, Saudi Arabia, South Korea, Switzerland, Taiwan and the USA. Brazil has introduced a fleet efficiency target as part of a voluntary program for granting a tax advantage. To achieve a 30% tax advantage in this country, vehicle manufac- turers are required to achieve, among other things, average fleet efficiency of around 1.82 megajoules/km by 2017. The fuel consumption regulations in China, which set an average fleet target of 6.9 liters/100 km for the period 2012–2015 (Phase III), were continued into Phase IV for the period 2016–2020, with a target of 5.0 liters/100 km at the end of this period. Preparations for legislation up to 2025 (Phase V) have begun. In addition to this legislation on fleet con- sumption, China will impose a so called “new energy vehicle quota” in the future. This means that from 2019 onwards, battery-powered vehicles, plug-in hybrids and fuel cell vehi- cles will have to account for a certain proportion of a manu- facturer’s new passenger car fleet. Due to the extension of greenhouse gas legislation in the USA (the law was signed in 2012), uniform fuel consumption and greenhouse gas standards will continue to apply in all federal states in the period from 2017 to 2025. The increased regulation of fleet-based CO2 emissions and fuel consumption makes it necessary to use the latest mobil- ity technologies in all key markets worldwide. At the same time, electrified and purely electric drives will also become increasingly common. The Volkswagen Group closely coor- dinates technology and product planning with its brands so as to avoid breaches of fleet fuel consumption limits, since these would entail severe financial penalties. Volkswagen continues to regard diesel technology as an important ele- ment in the fulfillment of CO2 emissions targets. EU legislation allows excess emissions and emission shortfalls to be offset between vehicle models within a fleet of new vehicles. Furthermore, the EU permits some flexibility in fulfilling the emissions targets, for example: > Emission pools may be formed > Relief opportunities may be provided for additional inno- vative technologies contained in the vehicle that apply outside the test cycle (eco-innovations) > Special rules are in place for small-series producers and niche manufacturers > Particularly efficient vehicles qualify for super-credits Whether the Group meets its fleet targets depends crucially on its technological and financial capabilities, which are reflected in, among other things, our drivetrain and fuel strategy (see page 137). In the EU, a new, more time-consuming test procedure – the Worldwide Harmonized Light-Duty Vehicles Test Proce- dure (WLTP) – for determining pollutant and CO2 emissions as well as fuel consumption in passenger cars and light commercial vehicles has applied to new vehicle types since September 2017 and will apply to all new vehicles from September 2018. The Real Driving Emissions (RDE) regulation for passen- ger cars and light commercial vehicles is also one of the main European regulations. The fourth package of legislation is currently being elaborated. New, uniform limits for nitrogen oxide and particulate emissions in real road traffic have applied to new vehicle types across the EU since September 2017. This makes the RDE test procedure fundamentally different from the Euro 6 standard still in force, which stipulates that the limits on the chassis dynamometer are authoritative. The RDE regulation is intended primarily to improve air quality in urban areas and areas close to traffic. It leads to stricter requirements for exhaust gas aftertreatment in passenger cars and light commercial vehicles. The other main EU regulations affecting the automotive industry include: > EU Directive 2007/46/EC establishing a framework for the approval of motor vehicles > EU Directive 2009/33/EC on the promotion of clean and energy-efficient road transport vehicles (Green Procure- ment Directive) > EU Directive 2006/40/EC relating to emissions from air- conditioning systems in motor vehicles > The Car Labeling Directive 1999/94/EC > The Fuel Quality Directive (FQD) 2009/30/EC updating the fuel quality specifications and introducing energy effi- ciency specifications for fuel production > The Renewable Energy Directive (RED) 2009/28/EC intro- ducing sustainability criteria; the proposal for follow-up regulation (REDII) contains higher quotas for advanced biofuels and is currently being discussed in the competent EU bodies > The revised Energy Taxation Directive 2003/96/EC updating the minimum tax rates for all energy products and power The implementation of the above-mentioned directives by the EU member states serves to support the CO2 regulations in Europe. These are aimed not only at vehicle manufactur- ers, but also at other sectors such as the mineral oil industry. Vehicle taxes based on CO2 emissions are having a similar steering effect; many EU member states have already incorpo- rated CO2 elements into their rules on vehicle taxation. There is particular momentum in the debate on the introduction of driving bans for diesel vehicles in Germany. This was triggered by the failure of some municipalities and cities to comply with the limits for nitrogen dioxide (NO2) emissions. In many places, lawsuits have been filed arguing that only driving bans for diesel vehicles will bring about the 176 Report on Risks and Opportunities Group Management Report necessary short-term reduction in NO2 emissions. The debates mentioned above have already caused sales of diesel vehicles to decline. Local driving bans are already in place in a number of countries, though these mainly affect older vehicles. One such example are regulations in Belgium that successively bar older vehicles from larger cities. With a view to the future, large urban areas such as Paris and London are discussing banning vehicles with combustion engines. Heavy commercial vehicles first put into operation from 2014 onwards are already subject to the stricter emission requirements of the Euro 6 standard in accordance with Regulation (EU) No 582/2011. Alongside the CO2 legislation for passenger cars and light commercial vehicles, the EU is preparing more comprehensive regulation of CO2 emissions in heavy commercial vehicles. Simply setting an overarching limit for these vehicles – such as that in place for passenger cars and light commercial vehicles – would require an extremely complex set of rules because of the wide range of variants. For this reason, the European Commission has worked with independent scientific institutions and the European Automobile Manufacturers’ Association (ACEA) to prepare a simulation-based method called the Vehicle Energy Consumption Calculation Tool (VECTO). This can be used to determine the CO2 emissions of heavy commercial vehicles of over 7.5 tonnes based on their typical use (short-haul, regional, distribution and long-haul trips, service on con- struction sites and as municipal vehicles, city buses, intercity buses and coaches). A legislative proposal for the CO2 certific- ation of heavy commercial vehicles and regulations on the reporting and monitoring of CO2 figures was presented in May 2017; the legislation for the declaration of CO2 figures for heavy commercial vehicles came into effect in January 2018. A CO2 declaration will be compulsory for selected vehicle categories from 2019 (initially long-haul and regional distribution vehicles, later also buses and other segments), with the captured data first being used to enable the customer to compare information and for certification and monitoring purposes. Further vehicle categories are likely to be included as time progresses. As part of its strategy to decarbonize transport, the European Commission has also announced that it will be presenting a proposal regarding the introduction of CO2 standards for heavy commercial vehicles by the end of its term of office in 2019. The European Com- mission is currently working on the specific embodiment of such standards and has collected data from manufacturers to define a starting point and mandatory reduction targets for the future. An initial legislative proposal on CO2 standards for heavy commercial vehicles is expected in May 2018. Manufacturers of heavy commercial vehicles are urging the adoption of a system for quantifying CO2 figures that looks at the vehicle as a whole and not simply at the engine or the tractor, and thus also includes the trailers and bodywork. This transparency should increase competition for more fuel- efficient and thus more CO2-efficient commercial vehicles and as a result decrease CO2 emissions. As part of its efforts to reduce the CO2 emissions of heavy commercial vehicles, the European Commission has also amended the provisions regarding the maximum per- missible dimensions and weights of trucks (Directive 1996/53/EC, the Weights and Dimensions Directive) and revised them through EU Directive 2015/719. According to these, cabs with a rounded shape and air conduction devices at the rear of the vehicle will make it possible to improve aerodynamics in future. At the same time, the driver’s field of vision is to be extended by increasing the length of the cab in order to improve safety. In addition, the legislators increased the overall weight permitted for vehicles with alternative drive technologies by up to one tonne. The specific technical requirements for the development of aerodynamic and safe cabs are currently being examined. The European commercial vehicles industry supports the goals of reducing CO2 emissions and improving transport safety. However, it is not just the vehicles themselves that affect future CO2 emissions; individual components also play an important role, such as reduced rolling resistance tires or the aerodynamic trim of the trailer, as do driving behavior, alternative fuels including the required filling stations, transport infrastructure and transport conditions. As part of a field trial that took place up to the end of 2016, longer and heavier vehicles that can decrease fuel consumption and thus CO2 emissions by up to 25% according to scientific studies by the Federal Highway Research Institute, were also driving on German roads. Since the beginning of 2017, these longer vehicles have been used in regular operations on a certified road network. Networking and digitalizing the transport system will also eliminate existing inefficiencies such as inadequate uti- lization of available load capacities, empty trips or unnet- worked route planning: vehicles that move in networked, intermodal transport systems in which flows of traffic are optimized through the use of artificial intelligence save fuel and hence reduce CO2 emissions. Automated driving also presents considerable potential for more sustainable organi- zation of goods transport in road traffic, for example through platooning, in which the driver of the first truck in a convoy of networked, partially self-driving trucks specifies the direction and speed. Driving in the slipstream of other trucks on motorways allows fuel consumption to be reduced con- siderably. However, platooning requires changes in the legal framework and establishment of the necessary infrastruc- ture. In the Power Engineering segment, the International Maritime Organization (IMO) has introduced the Inter- national Convention for the Prevention of Pollution from Ships (MARine POLlution – MARPOL), with which limits on emissions from marine engines will be lowered in phases. A reduction of the sulfur content in marine fuel has been Group Management Report Report on Risks and Opportunities 177 confirmed with effect from January 1, 2020. In addition, the IMO has decided on a number of emission control areas in Europe and in the USA/Canada that will be subject to special environmental regulations. Expansion to further regions such as the Mediterranean or Japan is already being planned; other regions such as the Black Sea, Alaska, Australia or South Korea are also in discussion. In addition, emission limits also apply, for example, under Regulation (EU) 2016/1628 and in accordance with the regulations of the US Environmental Protection Agency (EPA). As regards stationary equipment, there are a number of national rules in place worldwide that limit permitted emissions. On December 18, 2008, the World Bank Group set limits for gas and diesel engines in its “Environmental, Health, and Safety Guidelines for Thermal Power Plants”, which are required to be applied if individual countries have adopted no national requirements of their own, or ones that are less strict than those of the World Bank Group. These are currently being revised. In addition, the United Nations adopted the Convention on Long-range Transboundary Air Pollution back in 1979, setting limits on total emissions as well as nitrogen oxide for the signatory states (including all EU states, other countries in Eastern Europe, the USA and Canada). Enhancements to the product portfolio in the Power Engineering segment focus on improving the efficiency of the equipment and systems. The allocation method for emissions certificates changed fundamentally when the third emissions trading period (2013–2020) began. As a general rule, all emission allowances for power generators have been sold at auction since 2013. For the manufacturing industry and certain power genera- tion installations (e.g. combined heat and power installa- tions), a portion of the certificates are allocated free of charge on the basis of benchmarks applicable throughout the EU. The portion of certificates allocated free of charge will gradu- ally decrease as the trading period progresses: the remaining quantities required will have to be bought at auction. Further- more, installation operators can partly fulfill their obligation to hold emission allowances using certificates from climate change projects (Joint Implementation and Clean Develop- ment Mechanism projects). In certain (sub-)sectors of industry, there is a risk that pro- duction will be transferred to countries outside Europe due to the amended provisions governing emissions trading, a phenomenon referred to as “carbon leakage”. A consistent quantity of certificates will be allocated to these sectors free of charge for the period from 2013 to 2020 on the basis of the pan-EU benchmarks. The automotive industry was included in the new carbon leakage list that came into effect in 2015. As a result, individual plants at European locations of the Volkswagen Group will receive additional certificates free of charge by the end of the third trading period. Already back in 2013, the European Commission decided to initially withhold a portion of the certificates to be auctioned and not to release them for auction until a later date during the third trading period (backloading). The certificates will be directed into a market stability reserve, to be established in 2018. The reserve will serve to correct any imbalance between the supply of and demand for certificates in emissions trading in the fourth trading period. Furthermore, the Euro- pean Commission is planning further modifications in emissions trading when the fourth trading period begins (from 2021) that may lead to a tightening of the system and thus to price increases in the certificates. In addition to the EU member states, other countries in which the Volkswagen Group has production sites are also considering introducing an emissions trading system. Seven corresponding pilot projects are running in China, for example, although they have not so far affected the Volkswagen Group. The Chinese government officially implemented a national emissions trading system at the end of 2017. Initially, the impact will only be on the energy generation sector; a gradual expansion is being planned. Litigation In the course of their operating activities, Volkswagen AG and the companies in which it is directly or indirectly invested become involved in a great number of legal disputes and governmental proceedings in Germany and abroad. In par- ticular, such legal disputes and other proceedings may occur in relation to suppliers, dealers, customers, employees, or investors. For the companies involved, these may result in payment or other obligations. Above all, in cases where US customers assert claims for vehicle defects individually or by way of a class action, highly cost-intensive measures may have to be taken and substantial compensation or punitive damages paid. Corresponding risks also result from US patent infringement proceedings. Risks may also emerge in connection with the adherence to regulatory requirements. This particularly applies in the case of regulatory vagueness that may be interpreted differ- ently by Volkswagen and the authorities responsible for the respective regulations. In addition, legal risks can arise from the criminal activities of individual persons, which even the best compliance management system can never completely prevent. Where transparent and economically viable, adequate insurance coverage was taken out for these risks. For the iden- tifiable and measurable risks, provisions considered appro- priate were recognized and information about contingent liabilities disclosed. As some risks cannot be assessed or can only be assessed to a limited extent, the possibility of loss 178 Report on Risks and Opportunities Group Management Report or damage not being covered by the insured amounts and provisions cannot be ruled out. This particularly applies to legal risk assessment regarding the diesel issue. Diesel issue On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emis- sions had been discovered in emissions tests on certain vehicles of Volkswagen Group with type 2.0 l diesel engines in the USA. It was alleged that Volkswagen had installed undis- closed engine management software installed in 2009 to 2015 model year 2.0 l diesel engines to circumvent NOx emissions testing regulations in the USA in order to comply with certification requirements. The California Air Resources Board (CARB), a unit of the US environmental authority of California, announced its own enforcement investigation into this matter. In this context, Volkswagen AG announced that notice- able discrepancies between the figures achieved in testing and in actual road use had been identified in around eleven million vehicles worldwide with type EA 189 diesel engines. The vast majority of these engines were type EA 189 Euro 5 engines. On November 2, 2015, the EPA issued a “Notice of Viola- tion” alleging that irregularities had also been discovered in the software installed in US vehicles with type V6 3.0 l diesel engines. CARB also issued a letter announcing its own enforcement investigation into this matter. AUDI AG has confirmed that at least three auxiliary emission control devices were inadequately disclosed in the course of the US approval documentation. Around 113 thousand vehicles from the 2009 to 2016 model years with certain six-cylinder diesel engines were affected in the USA and Canada, where regulations governing NOx emissions limits for vehicles are stricter than those in other parts of the world. Numerous court and governmental proceedings were subsequently initiated in the USA and the rest of the world. During the reporting period, we succeeded in ending most significant court and governmental proceedings in the USA by concluding settlement agreements. This includes, in particular, settlements with the US Department of Justice (DOJ). Outside the USA, we also reached agreements with regard to the technical measures with the numerous authorities. implementation of The Supervisory Board of Volkswagen AG formed a special committee that coordinates the activities relating to the diesel issue for the Supervisory Board. The global law firm Jones Day was instructed by Volkswagen AG to carry out an extensive investigation of the diesel issue in light of the DOJ’s and the Braunschweig public prosecutor’s criminal investigations as well as other investigations and proceedings which were expected. Jones Day was instructed by Volkswagen AG to present factual evidence to the DOJ. To resolve US criminal law charges, Volkswagen AG and the DOJ entered into a Plea Agreement, which includes a Statement of Facts containing a summary of the factual allegations which the DOJ considered relevant to the settlement with Volks- wagen AG. The Statement of Facts is based in part on Jones Day’s factual findings as well as the evidence identified by the DOJ itself. Jones Day has completed the work required to assist Volkswagen AG in assessing the criminal charges in the USA with respect to the diesel issue. However, work in respect of the legal proceedings which are still pending in the USA and the rest of the world is ongoing and will require considerable efforts and a considerable period of time. In connection with this work, Volkswagen AG is being advised by a number of external law firms. Furthermore, in September 2015, Volkswagen AG filed a criminal complaint in Germany against unknown persons as did AUDI AG. Volkswagen AG and AUDI AG are cooperating with all responsible authorities in the scope of reviewing the incidents. Potential consequences for Volkswagen’s results of oper- ations, financial position and net assets could emerge primarily in the following legal areas: 1. Coordination with the authorities on technical measures Based on decisions dated October 15, 2015, the Kraftfahrt- Bundesamt (KBA – German Federal Motor Transport Author- ity) ordered the Volkswagen Passenger Cars, Volkswagen Commercial Vehicles and SEAT brands to recall all the diesel vehicles that had been issued with vehicle type approval by the KBA from among the eleven million vehicles affected with type EA 189 engines. The recall concerns the member states of the European Union (EU28). On December 10, 2015 a similar decision was issued regarding Audi vehicles with the EA 189 engine. The timetable and action plan forming the basis for the recall order corresponded to the proposals presented in advance by Volkswagen. Depending on the technical complexity of the concerned remedial actions, this means that the Volkswagen Group has been recalling the affected vehicles, of which there are around 8.5 million in total in the EU28 countries, to the service workshops since Group Management Report Report on Risks and Opportunities 179 January 2016. The remedial actions differ in scope depending on the engine variant. The technical measures cover software and in some cases hardware modifications, depending on the series and model year. The technical measures for all vehicles in the European Union have since been approved without exception. The KBA ascertained for all clusters (groups of vehicles) that implementation of the technical measures would not bring about any adverse changes in fuel consumption figures, CO2 emissions figures, engine power, maximum torque and noise emissions. Once the modi- fications have been made, the vehicles will thus also continue to comply with the legal requirements and the emission standards applicable in each case. The technical measures for all affected vehicles with type EA 189 engines in the European Union were approved without exception, and implemented in most cases. In some countries outside the EU – among others South Korea, Taiwan and Turkey – national type approval is based on prior recognition of the EC/ECE type approval; the techni- cal measures must therefore be approved by the national authorities. With the exception of South Korea and Chile, we were able to conclude this approval process in all countries. There, the majority of approvals were likewise granted; in relation to the pending approvals, Volkswagen is in close contact with the authorities. In addition, there is an intensive exchange of information with the authorities in the USA and Canada, where Volks- wagen’s proposed modifications in relation to the four- cylinder and the six-cylinder diesel engines also have to be approved. Due to NOx limits that are considerably stricter than in the EU and the rest of the world, it is a greater techni- cal challenge here to refit the vehicles so that the emission standards defined in the settlement agreements for these vehicles can be achieved. For many months, AUDI AG has been intensively checking all diesel concepts for possible discrepancies and retrofit potentials. A systematic review process for all engine and gear variants has been underway since 2016. On June 14, 2017, based on a technical error in the param- eterization of the transmission software for a limited number of specific Audi A7/A8 models that AUDI AG itself discovered and reported to the KBA, the KBA issued an order under which a correction proposed by AUDI AG will be submitted. The technical error lies in the fact that, in the cases concerned, by way of exception a specific function that is standard in all other vehicle concepts is not implemented in actual road use. In Europe, this affects around 24,800 units of certain Audi A7/A8 models. The KBA has not categorized this error as an unlawful defeat device. On July 21, 2017, AUDI AG offered a software-based retrofit program for up to 850,000 vehicles with V6 and V8 TDI engines meeting the Euro 5 and Euro 6 emission standards in Europe and other markets except the USA and Canada. The measure will mainly serve to further improve the vehicles’ emissions in real driving conditions in inner city areas beyond the legal requirements. This was done in close cooperation with the authorities, which were provided with detailed reports, especially the German Federal Ministry of Transport and the KBA. The retrofit package comprises voluntary measures and, to a small extent, measures directed by the authorities; these are measures taken within the scope of a recall, which were proposed by AUDI AG itself, reported to the KBA and taken up and ordered by the latter. The voluntary tests have already reached an advanced stage, but have not yet been completed. The measures adopted and mandated by the KBA involved the recall of different diesel vehicles with a V6 or V8 engine meeting the Euro 6 emission standard, for which the KBA categorized certain emission strategies as an unlawful defeat device. From July 2017 to January 2018, the measures proposed by AUDI AG were adopted and mandated in various decisions by the KBA on vehicle models with V6 and V8 TDI engines. Currently, AUDI AG assumes that the total costs of the software-based retrofit program including the amount based on recalls will be manageable and has recognized corre- sponding balance-sheet risk provisions. Should additional measures become necessary as a result of the investigations by AUDI AG and the consultations with the KBA, AUDI AG will quickly implement these as part of the retrofit program in the interest of customers. 2. Criminal and administrative proceedings worldwide (excluding the USA/Canada) In addition to the described approval processes with the responsible registration authorities, in some countries crimi- nal investigations/misdemeanor proceedings (for example, by the public prosecutor’s office in Braunschweig and Munich, Germany) and/or administrative proceedings (for example, by the Bundesanstalt für Finanzdienstleistungs- aufsicht, BaFin – the German Federal Financial Supervisory Authority) have been opened. The public prosecutor’s offices in Braunschweig and Munich are investigating the core issue of the criminal investigations. Whether this will result in fines for the Company, and if so what their amount might be, is currently subject to estimation risks. According to Volks- wagen’s estimates so far, the likelihood of a sanction in the majority of these proceedings is less than 50%. Contingent liabilities have therefore been disclosed in cases where they can be assessed and for which the likelihood of a sanction was deemed not lower than 10%. 180 Report on Risks and Opportunities Group Management Report 3. Product-related lawsuits worldwide (excluding the USA/ Canada) In principle, it is possible that customers in the affected markets will file civil lawsuits against Volkswagen AG and other Volkswagen Group companies. In addition, it is possible that importers and dealers could assert claims against Volks- wagen AG and other Volkswagen Group companies, e.g. through recourse claims. As well as individual lawsuits, class action lawsuits are possible in various jurisdictions (albeit not in Germany). Furthermore, in a number of markets it is possible that consumer and/or environmental organizations will apply for an injunction or assert claims for a declaratory judgment or for damages. In the context of the diesel issue, various lawsuits are currently pending against Volkswagen AG and other Volks- wagen Group companies at present. There are pending class action proceedings and lawsuits brought by consumer and/or environmental associations against Volkswagen AG and other companies of the Volks- wagen Group in various countries such as Argentina, Austra- lia, Belgium, Brazil, China, the Czech Republic, Israel, Italy, Mexico, the Netherlands, Poland, Portugal, Switzerland, Taiwan and the United Kingdom. The class action proceedings are lawsuits aimed among other things at asserting damages or, as is the case in the Netherlands, at a to declaratory damages. With the exception of Brazil, where there has already been a non-binding judgment in the first instance, the amount of these damages cannot yet be quantified more precisely due to the early stage of the proceedings. Volkswagen does not estimate the litigants’ prospect of success to be more than 50% in any of the class action proceedings. that customers are entitled judgment In South Korea, various mass proceedings are pending (in some of these individual lawsuits several hundred litigants have been aggregated). These lawsuits have been filed to assert damages and to rescind the purchase contract including repayment of the purchase price. Due to special circumstances in the market and specific characteristics of the South Korean legal system, Volkswagen estimates the litigants’ prospects of success in the South Korean mass proceedings mentioned above to be inherently higher than in other jurisdictions outside the USA and Canada. On May 12, 2017, one first-instance judgment was delivered in these pro- ceedings in South Korea during the fiscal year, in which the court completely dismissed an action filed to assert criminal damages over pollution. The judgment has since become binding. Contingent liabilities have been disclosed for pending class action and mass proceedings that can be assessed and for which the chance of success was deemed not implausible. Provisions were recognized to a small extent. Furthermore, individual lawsuits and similar proceedings are pending against Volkswagen AG and other Volkswagen Group companies in numerous countries. In Germany, there are around 9,500 individual lawsuits. In Italy, Austria and Spain, lawsuits numbering in the low three-digit range and in France and Ireland individual lawsuits in the two-digit range are pending against Volkswagen AG and other companies of the Volkswagen Group, most of which are aimed at asserting damages or rescinding the purchase contract. In addition, on November 29, 2017, Volkswagen AG was served with an action brought by financialright GmbH asserting the rights assigned to it by a total of approximately 15,000 customers in Germany. This action seeks the payment of around €350 million in return for restitution of the vehi- cles. In Switzerland, a claim for damages was brought against Volkswagen AG in December 2017 from the assigned rights of some 6,000 customers; the stated amount in dispute is approximately 30 million Swiss francs. According to Volkswagen’s estimates so far, the litigants’ prospect of success is below 50% in the vast majority of the individual lawsuits. Contingent liabilities have therefore been disclosed for those lawsuits that can be assessed and for which the chance of success was deemed not implausible. It is too early to estimate how many customers will take advantage of the option to file lawsuits in the future, beyond the existing lawsuits, or what their prospects of success will be. 4. Lawsuits filed by investors worldwide (excluding the USA/ Canada) Investors from Germany and abroad have filed claims for damages against Volkswagen AG – in some cases along with Porsche Automobil Holding SE (Porsche SE) as joint and several debtors – based on purported losses due to alleged misconduct in capital market communications in connection with the diesel issue. The vast majority of these investor lawsuits are currently pending at the District Court (Landgericht) in Braunschweig. On August 5, 2016, the District Court in Braunschweig ordered that common questions of law and fact relevant to the law- suits pending at the District Court in Braunschweig be referred to the Higher Regional Court (Oberlandesgericht) in Braunschweig for a binding declaratory decision pursuant to the German Act on Model Case Proceedings in Disputes Regarding Capital Market Information (Kapitalanleger-Muster- verfahrensgesetz – KapMuG). In this proceeding, common Group Management Report Report on Risks and Opportunities 181 questions of law and fact relevant to these actions shall be adjudicated in a consolidated manner by the Higher Regional Court in Braunschweig (model case proceedings). All lawsuits at the District Court in Braunschweig will be stayed pending up until resolution of the common issues, unless they can be dismissed for reasons independent of the common issues that are adjudicated in the model case proceedings. The reso- lution of the common questions of law and fact in the model case proceedings will be binding for all pending cases in the stayed lawsuits. At the District Court in Stuttgart, further investor lawsuits have been filed against Volkswagen AG, in some cases along with Porsche SE as joint and several debtors. On December 6, 2017, the District Court in Stuttgart issued an order for reference to the Higher Regional Court in Stuttgart in relation to procedural issues, particularly for clarification of juris- diction. On account of the diesel issue, model case proceed- ings against Porsche SE are also pending before the Higher Regional Court in Stuttgart. Further investor lawsuits have been filed at various courts in Germany as well as in Austria and the Netherlands. In Austria, the Supreme Court ruled on July 7, 2017 that the investor lawsuits against Volkswagen AG do not fall within the jurisdiction of the Austrian courts. Consequently, all but one of the investor lawsuits that were formerly pending in Austria have been dismissed or withdrawn. The last pending lawsuit has been dismissed at first instance. Worldwide (excluding USA and Canada), investor lawsuits, judicial applications for dunning procedures and conciliation proceedings, and claims under the KapMuG are currently pending against Volkswagen in connection with the diesel issue, with the claims totaling approximately €9 billion. Volkswagen remains of the opinion that it duly complied with its capital market obligations. Therefore, no provisions have been recognized for these investor lawsuits. Insofar as the chance of success was estimated at not lower than 10%, contingent liabilities have been disclosed. 5. Proceedings in the USA/Canada Following the publication of the EPA’s “Notices of Violation”, Volkswagen AG and other Volkswagen Group companies have been the subject of intense scrutiny, ongoing investigations (civil and criminal) and civil litigation. Volkswagen AG and other Volkswagen Group companies have received subpoenas and inquiries from state attorneys general and other govern- mental authorities and are responding to such investigations and inquiries. In addition, Volkswagen AG and other Volkswagen Group companies in the USA/Canada are facing litigation on a num- ber of different fronts relating to the matters described in the EPA’s “Notices of Violation”. A large number of putative class action lawsuits by cus- tomers and dealers have been filed in US federal courts and consolidated for pretrial coordination purposes in the federal multidistrict litigation proceeding in the State of California. On January 4, 2016, the DOJ, Civil Division, on behalf of the EPA, initiated a civil complaint against Volkswagen AG, AUDI AG and certain other Volkswagen Group companies. The action sought statutory penalties under the US Clean Air Act, as well as certain injunctive relief, and was consolidated for pretrial coordination purposes in the California multi- district litigation. On January 12, 2016, CARB announced that it intended to seek civil fines for alleged violations of the California Health & Safety Code and various CARB regulations. In June 2016, Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates reached settlement agree- ments with the DOJ on behalf of the EPA, CARB and the California Attorney General, private plaintiffs represented by a Plaintiffs’ Steering Committee (PSC) in the multidistrict litigation pending in California, and the U.S. Federal Trade Commission (FTC). These settlement agreements resolved certain civil claims made in relation to affected diesel vehicles with 2.0 l TDI engines from the Volkswagen Passenger Cars and Audi brands in the USA. Volkswagen AG and certain affiliates also entered into a First Partial Consent Decree with the DOJ, EPA, CARB and the California Attorney General, which was lodged with the court on June 28, 2016. On Octo- ber 18, 2016, a fairness hearing on whether final approval should be granted was held, and on October 25, 2016, the court granted final approval of the settlement agreements and the partial consent order. A number of class members have filed appeals to an US appellate court from the order approving the settlements. The settlements include buyback or, for leased vehicles, early lease termination, or a free emissions modification of the vehicles, provided that the EPA and CARB approve the modification. Volkswagen will also make additional cash pay- ments to affected current owners or lessees as well as certain former owners or lessees. Volkswagen also agreed to support environmental pro- grams. The company will pay USD 2.7 billion over three years into an environmental trust, managed by a trustee appointed by the court, to offset excess nitrogen oxide (NOx) emissions. Volkswagen will also invest a total of USD 2.0 billion over ten 182 Report on Risks and Opportunities Group Management Report years in zero emissions vehicle infrastructure as well as corre- sponding access and awareness initiatives. Volkswagen AG and certain affiliates also entered into a separate Partial Consent Decree with CARB and the California Attorney General resolving certain claims under California unfair competition, false advertising, and consumer pro- tection laws related to both the 2.0 l and 3.0 l TDI vehicles, which was lodged with the court on July 7, 2016. Under the terms of the agreement, Volkswagen agreed to pay California USD 86 million. The court entered judgment on the Partial Consent Decree on September 1, 2016 and the USD 86 million payment was made on September 28, 2016. On December 20, 2016, Volkswagen entered into a Second Partial Consent Decree, subject to court approval, with the DOJ, EPA, CARB and the California Attorney General that resolved claims for injunctive relief under the Clean Air Act and California environmental, consumer protection and false advertising laws related to the 3.0 l TDI vehicles. Under the terms of this Consent Decree, Volkswagen agreed to imple- ment a buyback and lease termination program for Genera- tion 1 3.0 l TDI vehicles and a free emissions recall and modi- fication program for Generation 2 3.0 l TDI vehicles, and to pay USD 225 million into the environmental mitigation trust that has been established pursuant to the First Partial Consent Decree. The Second Partial Consent Decree was lodged with the court on December 20, 2016 and approved on May 17, 2017. In addition, on December 20, 2016, Volkswagen entered into an additional, concurrent California Second Partial Consent Decree, subject to court approval, with CARB and the California Attorney General that resolved claims for injunc- tive relief under California environmental, consumer protec- tion and false advertising laws related to the 3.0 l TDI vehicles. Under the terms of this Consent Decree, Volkswagen agreed to provide additional injunctive relief to California, including the implementation of a “Green City” initiative and the intro- duction of three new Battery Electric Vehicle (BEV) models in California by 2020, as well as a USD 25 million payment to CARB to support the availability of BEVs in California. On January 11, 2017, Volkswagen entered into a Third Par- tial Consent Decree with the DOJ and EPA that resolved claims for civil penalties and injunctive relief under the Clean Air Act related to the 2.0 l and 3.0 l TDI vehicles. Volkswagen agreed to pay USD 1.45 billion (plus any accrued interest) to resolve the civil penalty and injunctive relief claims under the Clean Air Act, as well as the customs claims of the US Customs and Border Protection. Under the Third Partial Consent Decree, the injunctive relief includes monitoring, auditing and compliance obligations. This Consent Decree, which was subject to public comment, was lodged with the court on January 11, 2017 and approved on April 13, 2017. Also on January 11, 2017, Volkswagen entered into a settlement agreement with the DOJ to resolve any claims under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and agreed to pay USD 50 million (plus any accrued interest), specifically denying any liability and expressly disputing any claims. On July 21, 2017, the federal court in the multidistrict litigation in California approved the Third California Partial Consent Decree, in which Volkswagen AG and certain affil- iates agreed with the California Attorney General and CARB to in civil penalties and cost pay USD 153.8 million reimbursements. These penalties covered California environmental penalties for both the 2.0 l and 3.0 l TDI vehicles. An agreement in principle had been reached on January 11, 2017. The DOJ also opened a criminal investigation focusing on allegations that various federal law criminal offenses were committed. On January 11, 2017, Volkswagen AG agreed to plead guilty to three federal criminal felony counts, and to pay a USD 2.8 billion criminal penalty. Pursuant to the terms of this agreement, Volkswagen will be on probation for three years and will work with an independent monitor for three years. The independent monitor will assess and oversee the company’s compliance with the terms of the resolution. This includes overseeing the implementation of measures to further strengthen compliance, reporting and monitoring systems, and an enhanced ethics program. Volkswagen will also continue to cooperate with the DOJ’s ongoing investi- gation of individual employees or former employees who may be responsible for criminal violations. Moreover, investigations by various US regulatory and government authorities are ongoing, including in areas relating to securities, financing and tax. On January 31, 2017, Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates entered into a settle- ment agreement with private plaintiffs represented by the Group Management Report Report on Risks and Opportunities 183 PSC in the multidistrict litigation pending in California, and a consent order with the FTC. These agreements resolved certain civil claims made in relation to affected diesel vehicles with 3.0 l TDI engines from the Volkswagen, Audi and Porsche brands in the USA. On February 14, 2017, the court prelimi- narily approved the settlement agreement with private plaintiffs. On May 11, 2017, the court held a fairness hearing on whether approval should be granted and on May 17, 2017, the court granted final approval of the settlement agreement and the partial stipulated consent order. Under the settlements, consumers’ options and compen- sation will depend on whether their vehicles are classified as Generation 1 or Generation 2. Generation 1 (model years 2009-2012) consumers will have the option of a buyback, early lease termination, trade-in, or a free emissions modi- fication, provided that EPA and CARB approve the modifi- cation. Additionally, Generation 1 owners and lessees, as well as certain former owners and lessees, will be eligible to receive cash payments. Generation 2 (model years 2013-2016) consumers will receive a free emissions-compliant repair to bring the vehicles into compliance with the emissions standards to which they were originally certified, as well as cash payments. Volkswagen has received approval from the EPA and CARB for emissions-compliant repairs within the time limits set out in the settlement agreement. Volkswagen will also make cash payments to certain former Generation 2 owners or lessees. In September 2016, Volkswagen announced that it had finalized an agreement to resolve the claims of Volkswagen branded franchise dealers in the USA relating to TDI vehicles and other matters asserted concerning the value of the franchise. The settlement agreement includes a cash payment of up to USD 1.208 billion, and additional benefits to resolve alleged past, current, and future claims of losses in franchise value. On January 18, 2017, a fairness hearing on whether final approval should be granted was held, and on January 23, 2017, the court granted final approval of the settlement agreement. Additionally, in the USA, some putative class actions, some individual customers’ lawsuits and some state or municipal claims have been filed in state courts. Volkswagen reached separate agreements with the attorneys general of 45 US states, the District of Columbia and Puerto Rico, to resolve their existing or potential consumer protec- tion and unfair trade practices claims – in connection with both 2.0 l TDI and 3.0 l TDI vehicles in the USA – for a settle- ment amount of USD 622 million. Five states did not join these settlements and still have consumer claims outstand- ing: Arizona, New Mexico, Oklahoma, Vermont and West Virginia. Volkswagen has also reached separate agreements with the attorneys general of eleven US states (Connecticut, Delaware, Maine, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington) to resolve their existing or potential future claims for civil penalties and injunctive relief for alleged violations of environ- mental laws for a settlement amount of 207 million. The attorneys general of ten other US states (Illinois, Maryland, Minnesota, Missouri, Montana, New Hampshire, New Mexico, Ohio, Tennessee and Texas) and some municipalities have also filed suits in state and federal courts against Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates, seeking civil penalties and injunctive relief for alleged viola- tions of environmental laws. Illinois, Maryland, Minnesota, Missouri, Montana, New Hampshire, Ohio, Tennessee and Texas participated in the state settlements described above with respect to consumer protection and unfair trade prac- tices claims, but those settlements did not include claims for environmental penalties. The environmental claims of two other states – Alabama and Wyoming – have been dismissed as preempted by federal law. Alabama has appealed this dismissal. In addition to the lawsuits described above, for which pro- visions have been recognized, a putative class action has been filed on behalf of purchasers of Volkswagen AG American Depositary Receipts, alleging a drop in price purportedly resulting from the matters described in the EPA’s “Notices of Violation”. A putative class action has also been filed on behalf of purchasers of certain USD-denominated Volks- wagen bonds, alleging that these bonds were trading at artificially inflated prices due to Volkswagen’s alleged mis- statements and that the value of these bonds declined after the EPA issued its “Notices of Violation”. 184 Report on Risks and Opportunities Group Management Report These lawsuits have also been consolidated in the federal multidistrict litigation proceeding in the State of California described above. Volkswagen is of the opinion that it duly complied with its capital market obligations. Therefore, no provisions have been recognized. In addition, contingent liabilities have not been disclosed as they currently cannot be measured. In Canada, civil consumer claims and regulatory investi- gations have been initiated for vehicles with 2.0 l and 3.0 l TDI engines. On December 19, 2016, Volkswagen AG and other Canadian and US Volkswagen Group companies reached a class action settlement in Canada with consumers relating to 2.0 l diesel vehicles. Also on December 19, 2016, Volkswagen Group Canada agreed with the Commissioner of Competition in Canada to a civil resolution regarding its regulatory inquiry into consumer protection issues as to those vehicles. On December 21, 2017, Volkswagen announced an agreement in principle on a proposed consumer settlement in Canada involving 3.0 l diesel vehicles. The court preliminarily approved the settlement agreement on January 12, 2018, and the notice and opt out period began on January 17, 2018. Final approval hearings are scheduled in Quebec and Ontario for April 3 and 5, 2018, respectively. On January 12, 2018, Volkswagen and the Canadian Commissioner of Competition reached a resolution related to civil consumer protection issues relating to 3.0 l diesel vehicles. Also, criminal enforcement-related inves- tigations by the federal environmental regulator and quasi- criminal enforcement-related investigations by a provincial environmental regulator are ongoing in Canada related to 2.0 l and 3.0 l diesel vehicles. On September 15, 2017, a provincial regulator in Canada, the Ontario Ministry of the Environment and Climate Change, charged Volkswagen AG under the province’s environmental statute with one count alleging that it caused or permitted the operation of model year 2010–2014 Volkswagen and Audi brand 2.0 l diesel vehicles that did not comply with prescribed emission standards. Following initial court appearances on November 15, 2017 and February 7, 2018, the matter was put over to April 4, 2018 pending ongoing evidence disclosure. No trial date has been set. Provisions have been recognized for possible obligations stemming from pending lawsuits in Canada. Moreover, in Canada, two securities class actions by investors in Volkswagen AG American Depositary Receipts and shares are pending against Volkswagen AG in the Quebec and Ontario provincial courts. These actions allege misrep- resentations and omissions in financial reporting issued from 2009–2015 stemming from the diesel issue. The pro- posed class periods are for residents in the provinces who purchased the relevant securities between March 12, 2009 and September 18, 2015, and held all or some of the acquired securities until after the alleged first corrective disclosures. Discovery has not begun. In both actions, motions for certification were filed. In the Quebec matter, the motion was heard on February 5 and 6, 2018 and the court’s decision is on reserve. In the Ontario matter, the motion is scheduled for hearing on July 10 and 11, 2018. In addition, putative class action and joinder lawsuits by customers, and a certified environmental class action on behalf of residents, remain pending in certain provincial courts in Canada. An assessment of the underlying situation is not possible at this early stage of those proceedings. 6. Additional proceedings With its ruling from November 8, 2017, the Higher Regional Court of Celle ordered, upon the request of three US funds, the appointment of a special auditor for Volkswagen AG. The special auditor should examine whether there was a breach of duties on behalf of the members of the Board of Manage- ment and Supervisory Board of Volkswagen AG in connection with the diesel issue starting from June 22, 2006 and if this resulted in damages for Volkswagen AG. The ruling from the Higher Regional Court of Celle is formally legally binding. However, Volkswagen AG lodged a constitutional complaint toward the German Federal Constitutional Court regarding the infringement of its constitutionally guaranteed rights. It is currently unclear when the Federal Constitutional Court will reach a decision on this matter. In addition, the District Court of Hanover has filed a second motion for the appointment of a special auditor for Volkswagen AG, which is also aimed at the examination of transactions in connection with the diesel issue. This proceeding will be suspended until the ruling has been announced by the Federal Constitutional Court. 7. Risk assessment regarding the diesel issue To protect against the currently known legal risks related to the diesel issue, provisions of approximately €2.0 billion exist as of December 31, 2017 on the basis of existing information and current assessments. Beyond this, appropriate provisions have been recognized for defense and legal advice expenses. Group Management Report Report on Risks and Opportunities 185 Insofar as these can be adequately measured at this stage, total contingent liabilities in relation to the diesel issue to the aggregate amount of €4.3 billion (previous year: €3.2 billion), of which lawsuits filed by investors account for €3.4 billion (previous year: €3.1 billion), were disclosed in the notes. The provisions recognized for this matter and the contingent liabilities disclosed as well as the other latent legal risks are partially subject to substantial estimation risks given the complexity of the individual factors, the ongoing approval process with the authorities and the fact that the inde- pendent, comprehensive investigations have not yet been completed. In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or about uncertainty regarding the amount or maturity of provisions and contingent liabilities in relation to the diesel issue. This is so as to not compromise the results of the proceedings or the interests of the Company. Additional important legal cases In 2011, ARFB Anlegerschutz UG (haftungsbeschränkt) brought an action against Volkswagen AG and Porsche Automobil Holding SE for claims for damages for allegedly violating disclosure requirements under capital market law in connec- tion with the acquisition of ordinary shares in Volkswagen AG by Porsche in 2008. The damages currently being sought based on allegedly assigned rights amounted to approxi- mately €2.26 billion plus interest. In April 2016, the District Court in Hanover had formulated numerous objects of declaratory judgment that the cartel senate of the Higher Regional Court in Celle will decide on in model case pro- ceedings under the KapMuG. In the first hearing on October 12, 2017, the senate indicated that it currently does not see claims against Volkswagen AG as justified, both in view of a lack of substantiated evidence and for legal reasons. Some of the desired objects of declaratory judgment on the litigants’ side may also be inadmissible, it said. Volkswagen AG sees the statements of the court’s senate as confirmation that the claims made against the company have absolutely no basis. At the time (2010/2011), other investors had also asserted claims – including claims against Volkswagen AG – arising out of the same circumstances in an approximate total amount of €4.6 billion and initiated conciliation proceedings. Volks- wagen AG always refused to participate in these conciliation proceedings; since then, these claims have not been pursued further. In 2011, the European Commission conducted searches at European truck manufacturers on suspicion of an unlawful exchange of information during the period 1997–2011 and issued a statement of objections to MAN, Scania and the other truck manufacturers concerned in November 2014. With its settlement decision in July 2016, the European Commission fined five European truck manufacturers. MAN’s fine was waived in full as the company had informed the European Commission about the irregularities as a key witness. In September 2017, the European Commission then fined Scania €0.88 billion. Scania has appealed to the European Court in Luxembourg and will use all means at its disposal to defend itself. Scania had already recognized a provision of €0.4 billion in 2016. Furthermore, antitrust lawsuits for damages from cus- tomers were received. As is the case in any antitrust pro- ceedings, this may result in further lawsuits for damages. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. The Annual General Meeting of MAN SE approved the con- clusion of a control and profit and loss transfer agreement between MAN SE and Volkswagen Truck & Bus GmbH (for- merly Truck & Bus GmbH), a subsidiary of Volkswagen AG, in June 2013. In July 2013, award proceedings were instituted to review the appropriateness of the cash settlement set out in the agreement in accordance with section 305 of the Aktien- gesetz (AktG – German Stock Corporation Act) and the cash compensation in accordance with section 304 of the AktG. It is not uncommon for noncontrolling interest shareholders to institute such proceedings. In July 2015, the Munich Regional Court ruled in the first instance that the amount of the cash settlement payable to the noncontrolling interest sharehold- ers of MAN should be increased from €80.89 to €90.29 per share; at the same time, the amount of the cash compen- sation was confirmed. The assessment of liability for put options and compensation rights granted to noncontrolling interest shareholders was adjusted in 2015. Both applicants and Volkswagen Truck & Bus GmbH have appealed to the Higher Regional Court in Munich. Volkswagen continues to maintain that the results of the valuation are correct. The appropriateness of the valuation was confirmed by the audit firms engaged by the parties and by the court-appointed auditor of the agreement. Within the scope of the European Commission's ongoing investigations regarding German automakers, antitrust authorities examined documents in the offices of Volks- wagen AG in Wolfsburg and AUDI AG in Ingolstadt as part of an announced review. The Volkswagen Group and the Group 186 Report on Risks and Opportunities Group Management Report brands concerned have been cooperating fully and for a long time with the European Commission and have submitted a corresponding application. It is currently unclear whether the European Commission will instigate formal proceedings. In addition, a few national and international authorities have initiated antitrust investigations. Volkswagen is coop- erating closely with the responsible authorities in these investigations. An assessment of the underlying situation is not possible at this early stage. Since November 2016, Volkswagen has been responding to information requests from the EPA and CARB related to automatic transmissions in certain vehicles with petrol engines. Additionally, fourteen putative class actions have been filed against Audi and certain affiliates alleging that defen- dants concealed the existence of “defeat devices” in Audi brand vehicles with automatic transmissions. All of these putative class actions have been transferred to the federal multidistrict litigation proceeding in the State of California, and plaintiffs filed a consolidated class action complaint on October 12, 2017, which Volkswagen AG and certain of its affiliates moved to dismiss on December 11, 2017. On January 16, 2018, plaintiffs filed an opposition to the motion to dismiss and the court has set a deadline of February 16, 2018 for defendants to file a reply. A hearing is scheduled for May 11, 2018. On December 22, 2017, a mass action on behalf of approximately 75 individual plaintiffs alleging similar claims was filed in a California state court, which was removed to the Northern District of California on January 25, 2018. In Canada, two similar putative class actions, including a national class, have been filed in Ontario and Quebec provincial courts against AUDI AG, Volkswagen AG and US and Canadian affiliates regarding alleged CO2 “defeat devices” in certain petrol Audi models with automatic transmissions. Both of the Canadian actions are in the pre-certification stage. Contingent liabilities have therefore been disclosed in cases where they can be assessed and for which the likelihood of a sanction was deemed not lower than 10%. under the US Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act, state unfair competition and consumer protection statutes, and common law unjust enrichment. The complaints allege that since the 1990s, defendants engaged in a conspiracy to unlawfully increase the prices of German luxury vehicles by agreeing to share commercially sensitive information and to reach unlawful agreements regarding technology, costs, and sup- pliers. Moreover, the plaintiffs allege that the defendants agreed to limit the size of AdBlue tanks to ensure that US emissions regulators did not scrutinize the emissions control systems in defendants’ vehicles, and that such an agreement for Volkswagen was the impetus for the creation of the defeat device. On September 28, 2017, a hearing before the Judicial Panel on Multidistrict Litigation (JPML) was held, and on October 4, 2017 the JPML issued its decision consolidating and transferring these cases to Judge Breyer in the Northern District of California. On December 14, 2017, co-lead counsel were appointed representing the interests of a putative class of indirect purchasers and a putative class of direct pur- chasers, as well as Plaintiffs’ Steering Committee. On Decem- ber 20, 2017, deadlines were set for the filing of initial and responsive pleadings and an initial case status conference scheduled for April 5, 2018, and co-lead counsel were directed to file consolidated class action complaints on behalf of the two putative classes by March 15, 2018. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. From July through October 2017, plaintiffs filed claims in Ontario, Quebec and British Columbia on behalf of putative classes of purchasers of German luxury vehicles against several automobile manufacturers, including Volkswagen Canada Inc., Audi Canada Inc., and other Group companies. The claims assert causes of action under the Competition Act, common law, and Quebec’s civil law and contain similar allegations to the US complaints described in the paragraph above. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. From July through November 2017, plaintiffs filed numerous complaints in various US jurisdictions on behalf of putative classes of purchasers of German luxury vehicles against several automobile manufacturers, including Volkswagen AG and other Group companies. These complaints assert claims In the tax proceedings between MAN Latin America and the Brazilian tax authorities, the Brazilian tax authorities took a different view of the tax implications of the acquisition structure chosen for MAN Latin America in 2009. In Decem- ber 2017, a second instance judgment was rendered in Group Management Report Report on Risks and Opportunities 187 administrative court proceedings, which was negative for MAN Latin America. MAN Latin America will initiate pro- ceedings against this judgment before the regular court in 2018. Due to the difference in the penalties plus interest which could potentially apply under Brazilian law, the estimated size of the risk in the event that the tax authorities are able to prevail overall with their view is laden with uncertainty. However, a positive outcome continues to be expected for MAN Latin America. Should the opposite occur, this could result in a risk of about €0.7 billion for the contested period from 2009 onwards, which has been stated within the contingent liabilities in the notes. In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or about uncer- tainty regarding the amount or maturity of provisions and contingent liabilities in relation to additional important legal cases. This is so as to not compromise the results of the proceedings or the interests of the Company. Strategies for hedging financial risks In the course of our business activities, financial risks may arise from changes in interest rates, exchange rates, raw material prices, or share and fund prices. Management of financial and liquidity risks is the responsibility of the central Group Treasury department, which minimizes these risks using nonderivative and derivative financial instruments. The Board of Management is informed of the current risk situation at regular intervals. We hedge interest rate risk – where appropriate in combi- nation with currency risk – and risks arising from fluctu- ations in the value of financial instruments by means of interest rate swaps, cross-currency interest rate swaps and interest rate contracts with generally matching other amounts and maturities. This also applies to financing arrangements within the Volkswagen Group. Foreign currency risk is reduced in particular through natural hedging, i.e. by flexibly adapting our production capacity at our locations around the world, establishing new production facilities in the most important currency regions and also procuring a large percentage of components locally. We hedge the residual foreign currency risk using hedging instruments. These include currency forwards, currency options and cross-currency interest rate swaps. We use these transactions to limit the currency risk associated with forecasted cash flows from operating activities, intragroup financing and liquidity positions in currencies other than the respective functional currency, for example as a result of restrictions on capital movements. The currency forwards and currency options can have a term of up to six years. We thus hedge our principal foreign currency risks, mostly against the euro and primarily in Argentine pesos, Australian dollars, Brazilian real, Canadian dollars, Chinese renminbi, Czech koruna, Hong Kong dollars, Hungarian forints, Indian rupees, Japanese yen, Mexican pesos, Norwegian krones, Polish zloty, Russian rubles, Singapore dollars, South African rand, South Korean won, sterling, Swedish kronor, Swiss francs, Taiwan dollars and US dollars. Raw materials purchasing entails risks relating to the availability of raw materials and price trends. Potential risks arising from changes in commodity and energy prices in the market are continuously analyzed so that immediate action can be taken whenever these arise. We limit these risks mainly by entering into forward transactions and swaps. We have used appropriate contracts to hedge some of our requirements for commodities such as aluminum, lead, coal, copper, platinum, palladium and rhodium over a period of up to seven years. Similar transactions have been entered into for the purpose of supplementing and improving allocations of CO2 emission certificates. Pages 282 to 291 of the notes to the consolidated financial statements explain our hedging policy, the hedging rules and the default and liquidity risks, and quantify the hedging transactions mentioned. Additionally, we disclose informa- tion on market risk within the meaning of IFRS 7. Risks arising from financial instruments Channeling excess liquidity into investments and entering into derivatives contracts gives rise to counterparty risk. Partial or complete failure by a counterparty to perform its obligation to pay interest and repay principal, for example, would have a negative impact on the Volkswagen Group’s earnings and liquidity. We counter this risk through our counterparty risk management, which we describe in more detail in the section entitled “Principles and Goals of Financial Management” starting on page 118. In addition to counterparty risk, the financial instruments held for hedging purposes hedge balance sheet risks, which we limit by applying hedge accounting. By diversifying when selecting business partners, we ensure that the impact of a default is limited and the Volks- wagen Group remains solvent at all times, even in the event of a default by individual counterparties. Risks arising from trade receivables and from financial services are explained in more detail in the notes to the consolidated financial statements, starting on page 282. 188 Report on Risks and Opportunities Group Management Report Liquidity risk We ensure that the Company remains solvent at all times by holding liquidity reserves, through confirmed credit lines and through our money market and capital market pro- grams. We cover the capital requirements of the financial services business mainly by raising funds at matching matu- rities in the national and international financial markets as well as through customer deposits from the direct banking business. Projects are financed by, among other things, loans pro- vided by supranational or international development banks such as the European Investment Bank (EIB), the Inter- national Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD), or by national development banks such as Kreditanstalt für Wiederaufbau (KfW) and Banco Nacional de Desenvolvimento Econômico e Social (BNDES). Confirmed and unconfirmed lines of credit from banks supplement our broadly diversified refinancing structure. As a result of the diesel issue, the ability to use refinancing instruments may possibly be restricted or precluded for the Volkswagen Group. A downgrade of the Company’s rating could adversely affect the terms associated with the Volks- wagen Group’s borrowings. Information on the ratings of Volkswagen AG, Volks- wagen Financial Services AG and Volkswagen Bank GmbH can be found on page 113 of this report. Residual value risk in the financial services business In the financial services business, we agree to buy back selected vehicles at a residual value that is fixed at inception of the contract. Residual values are set at a realistic amount so that we are able to leverage market opportunities. We evaluate the underlying lease and financing contracts at regular intervals and recognize any necessary provisions if we identify any potential risks. Management of the residual value risk is based on a defined feedback loop ensuring the full assessment, moni- toring, management and communication of risks. This process design ensures not only professional management of residual risks but also that we systematically improve and enhance our handling of residual value risks. As part of our risk management, we use residual value forecasts to regularly assess the appropriateness of the pro- visions for risks and the potential for residual value risk – also with a view to the diesel issue and the current debate on the possible introduction of driving bans for diesel vehicles in major European cities at a future date. In the process, we compare the contractually agreed residual values with the fair values obtainable. These are determined utilizing data from external service providers and our own marketing data. We do not take account of the upside in residual market values when making provisions for risks. More information on residual value risk and other risks in the financial services business, such as counterparty, market and liquidity risk, can be found in the 2017 Annual Report of Volkswagen Financial Services AG and Volkswagen Bank GmbH. Group Management Report Report on Risks and Opportunities 189 Reputational risks The reputation of the Volkswagen Group and its brands is one of the most important assets and forms the basis for long- term business success. Our policy on issues such as integrity, ethics and sustainability is in the public focus. One of the basic principles of running our business is therefore to pay particular attention to compliance with legal requirements and ethical principles. However, we are aware that miscon- duct or criminal acts of individuals and the resulting reputa- tional damage can never be fully prevented. In addition, media reactions can have a negative effect on the reputation of the Volkswagen Group and its brands. This impact could be amplified through insufficient crisis communication. Moreover, the above-described individual risks that may arise in the course of our operating activities may turn into a threat to the Volkswagen Group’s reputation. OV E R A L L A S S E S S M E N T O F T H E R I S K A N D O P P O RT U N I T Y P O S I T I O N The Volkswagen Group’s overall risk and opportunity position results from the specific risks and opportunities shown above. We have put in place a comprehensive risk management system to ensure that these risks are controlled. The most significant risks to the Group may result from a negative trend in unit sales of, and markets for, vehicles and genuine parts, from the failure to develop and produce products in line with demand and from quality problems. Risks relating to the diesel issue still remain for the Volks- wagen Group which, when aggregated, are among the most significant risks. Taking into account all the information known to us at present, no risks exist which could pose a threat to the continued existence of significant Group com- panies or the Volkswagen Group. Other factors Going beyond the risks already outlined, there are other factors that cannot be predicted and whose repercussions are therefore difficult to control. Should these transpire, they could have an adverse effect on the further development of the Volkswagen Group. In particular, these factors include natural disasters, epidemics and terrorist attacks. This annual report contains forward-looking statements on the business development of markets, or any significant shifts in exchange rates relevant to the Volkswagen Group, will the Volkswagen Group. These statements are based on assumptions relating to the have a corresponding effect on the development of our business. In addition, there may be development of the economic and legal environment in individual countries and economic departures from our expected business development if the assessments of the factors regions, and in particular for the automotive industry, which we have made on the basis of influencing sustainable value enhancement, as well as risks and opportunities, presented the information available to us and which we consider to be realistic at the time of going in this annual report develop in a way other than we are currently expecting, or if to press. The estimates given entail a degree of risk, and actual developments may differ additional risks and opportunities or other factors emerge that affect the development of from those forecast. Any changes in significant parameters relating to our key sales our business. 190 Prospects for 2018 Group Management Report Prospects for 2018 The Volkswagen Group is well prepared for the future chal- lenges in the mobility business and the mixed developments in regional automotive markets. Our unique brand portfolio, our presence in all major world markets, our broad, selectively expanded product range and pioneering tech- nologies and services place us in a good competitive position worldwide. In the course of transforming our core business, we will define the positioning of our Group brands more clearly and optimize the vehicle and drive portfolio with a view to the most attractive and fastest-growing market seg- ments. In addition, we are working to make even more focused use of the advantages of our multibrand group by continuously developing new technologies and our toolkits. We expect that deliveries to customers of the Volkswagen Group in 2018 will moderately exceed the prior-year figure amid continuously challenging market conditions. Challenges will arise particularly from the economic situation, the increasing intensity of competition, exchange rate volatility and the diesel issue. In the EU, there is also a new, more time-consuming test procedure for determining pollutant and CO2 emissions as well as fuel consumption in passenger cars and light commercial vehicles known as the Worldwide Harmonized Light-Duty Vehicles Test Procedure (WLTP). We expect the sales revenues of the Volkswagen Group and its business areas to grow by as much as 5% year-on-year. In terms of the operating profit for the Group and the Passenger Cars Business Area, we forecast an operating return on sales in the range of 6.5–7.5% in 2018. For the Commercial Vehicles Business Area, we anticipate an operating return on sales of between 5.0–6.0%. In the Power Engineering Business Area, we expect a lower operating loss than in the previous year. For the Financial Services Division, we are forecasting an operating profit at the prior-year level. The Volkswagen Group’s Board of Management expects the global economy to record slightly weaker growth in 2018. We believe risks will arise from protectionist tendencies, turbulence in the financial markets and structural deficits in individual countries. In addition, growth prospects will continue to be hurt by geopolitical tensions and conflicts. We therefore expect somewhat weaker momentum than in 2017 in both the advanced economies and the emerging markets. We expect the strongest rates of expansion in Asia’s emerging economies. We expect trends in the passenger car markets in the individual regions to be mixed in 2018. Overall, growth in global demand for new vehicles will probably be slower than in the reporting period. We anticipate that unit sales volumes in Western Europe will fall slightly short of those seen in the reporting period. In the German passenger car market, we estimate that the market volume will be on a level with the previous year. Passenger car demand is expected to sub- stantially exceed the prior-year figures in markets in Central and Eastern Europe. The volume of demand in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America is likely to be slightly lower than in the prior year. We expect demand in the South American markets for passenger cars and light commercial vehicles to grow perceptibly as a whole compared with the previous year. The passenger car markets in the Asia-Pacific region look set to continue their growth trajectory in 2018, albeit at a weaker pace. We expect trends in the markets for light commercial vehicles in the individual regions to be mixed again in 2018. Overall, we envisage a slight dip in demand. In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group and in the relevant markets for buses, new registrations in 2018 are set to rise slightly above the prior-year level. We believe that automotive financial services will continue to be very important for vehicle sales worldwide in 2018. Wolfsburg, February 23, 2018 The Board of Management S T N E M E T A T S L A I C N A N I F 4 Consolidated Financial Statements CONSOLIDATED FINANCIAL STATEMENTS 195 Income Statement 196 Statement of Comprehensive Income 198 Balance Sheet 200 Statement of Changes in Equity 202 Cash Flow Statement 203 NOTES 203 Basis of presentation 204 Effects of new and amended IFRSs 205 New and amended IFRSs not applied 207 Key events 208 Basis of consolidation 218 Consolidation methods 219 Currency translation 220 Accounting policies 230 Segment reporting 254 18. Noncurrent and current other receivables 255 19. Tax assets 255 20. Inventories 255 21. Trade receivables 256 22. Marketable securities 256 23. Cash, cash equivalents and time deposits 256 24. Equity 258 25. Noncurrent and current financial liabilities 258 26. Noncurrent and current other financial liabilities 259 27. Noncurrent and current other liabilities 260 28. Tax liabilities 260 29. Provisions for pensions and other post-employment benefits 268 30. Noncurrent and current other provisions 269 31. Put options and compensation rights granted to noncontrolling interest shareholders 233 Income statement disclosures 269 32. Trade payables 233 1. Sales revenue 233 2. Cost of sales 234 3. Distribution expenses 234 4. Administrative expenses 234 5. Other operating income 235 6. Other operating expenses 235 7. Share of the result of equity-accounted investments 236 8. Interest result 236 9. Other financial result 237 10. Income tax income/expense 240 11. Earnings per share 270 Disclosures in accordance with IFRS 7 – Financial Instruments (balance sheet) 281 Other disclosures 281 33. Cash flow statement 282 34. Financial risk management and financial instruments 292 35. Capital management 293 36. Contingent liabilities 294 37. Litigation 305 38. Other financial obligations 306 39. Total audit fees of the Group auditor 307 40. Total expense for the period 241 Disclosures in accordance with IAS 23 – Borrowing Costs 307 41. Average number of employees during the year 241 Disclosures in accordance with IFRS 7 – Financial 307 42. Events after the balance sheet date Instruments (income statement) 308 43. Remuneration based on performance shares and 243 Balance sheet disclosures 243 12. Intangible assets 246 13. Property, plant and equipment 248 14. Lease assets and investment property 250 15. Equity-accounted investments and other equity investments phantom shares (share-based payment) 308 44. Related party disclosures in accordance with IAS 24 312 45. German Corporate Governance Code 313 46. Remuneration of the Board of Management and the Supervisory Board 315 Responsibility Statement 252 16. Noncurrent and current financial services receivables 316 Independent Auditor’s Report 253 17. Noncurrent and current other financial assets Consolidated Financial Statements Income Statement 195 Income Statement of the Volkswagen Group for the period January 1 to December 31, 2017 € million Sales revenue Cost of sales Gross result Distribution expenses Administrative expenses Other operating income Other operating expenses Operating result Share of the result of equity-accounted investments Interest income¹ Interest expenses¹ Other financial result¹ Financial result Earnings before tax Income tax income/expense Current Deferred Earnings after tax of which attributable to Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders Basic earnings per ordinary share in € Diluted earnings per ordinary share in € Basic earnings per preferred share in € Diluted earnings per preferred share in € Note 2017 2016 1 2 3 4 5 6 7 8 8 9 10 11 11 11 11 230,682 –188,140 42,542 –22,710 –8,254 14,500 –12,259 13,818 3,482 951 –2,317 –2,022 94 13,913 –2,275 –3,205 930 11,638 10 274 11,354 22.63 22.63 22.69 22.69 217,267 –176,270 40,997 –22,700 –7,336 13,049 –16,907 7,103 3,497 1,285 –2,955 –1,638 189 7,292 –1,912 –3,273 1,361 5,379 10 225 5,144 10.24 10.24 10.30 10.30 1 The structure within the financial result has been changed. The presentation of finance costs has been replaced with interest income and interest expenses. Prior year figures have been adjusted accordingly. Further disclosures can be found in the “Interest result” section. 196 Statement of Comprehensive Income Consolidated Financial Statements Statement of Comprehensive Income Changes in comprehensive income for the period January 1 to December 31, 2016 Equity attributable to Volkswagen AG shareholders Total Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to noncontrolling interests 5,379 5,144 225 € million Earnings after tax Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax –5,249 –5,248 Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax Cash flow hedges Fair value changes recognized in other comprehensive income Transferred to profit or loss Cash flow hedges, before tax Deferred taxes relating to cash flow hedges Cash flow hedges, net of tax Available-for-sale financial assets Fair value changes recognized in other comprehensive income Transferred to profit or loss Available-for-sale financial assets, before tax Deferred taxes relating to available-for-sale financial assets Available-for-sale financial assets, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax Items that may be reclassified subsequently to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income 1,591 –3,658 –1 –3,658 –136 3 –133 3 –130 3,555 1,322 4,877 –1,422 3,455 155 –135 20 –6 14 –130 3,209 –616 167 –449 4,930 1,591 –3,657 –1 –3,658 –135 3 –133 3 –129 3,555 1,322 4,877 –1,422 3,455 155 –135 20 –6 14 –130 3,210 –614 166 –448 4,696 – – – – – – – – – – – – – – – – – – – – – – – – – 225 10 –1 1 0 – 0 –1 – –1 – –1 0 0 0 0 0 – – – – – – –1 –2 1 –1 9 Consolidated Financial Statements 197 Changes in comprehensive income for the period January 1 to December 31, 2017 € million Earnings after tax Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax Cash flow hedges Fair value changes recognized in other comprehensive income Transferred to profit or loss Cash flow hedges, before tax Deferred taxes relating to cash flow hedges Cash flow hedges, net of tax Available-for-sale financial assets Fair value changes recognized in other comprehensive income Transferred to profit or loss Available-for-sale financial assets, before tax Deferred taxes relating to available-for-sale financial assets Available-for-sale financial assets, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax Items that may be reclassified subsequently to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income Equity attributable to Volkswagen AG shareholders Total Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to noncontrolling interests 11,638 11,354 274 10 785 –198 588 96 683 –2,095 –4 –2,099 –8 –2,107 6,137 –558 5,579 –1,597 3,982 56 62 118 –25 93 –346 1,622 4,133 –1,828 2,305 13,943 784 –198 586 96 682 –2,094 –4 –2,098 –8 –2,106 6,137 –558 5,579 –1,597 3,982 56 62 118 –25 93 –346 1,622 4,132 –1,828 2,304 13,658 – – – – – – – – – – – – – – – – – – – – – – – – – 274 1 0 1 – 1 –1 – –1 – –1 0 0 0 0 0 – – – – – – –1 1 0 1 11 198 Balance Sheet Consolidated Financial Statements Balance Sheet of the Volkswagen Group as of December 31, 2017 € million Assets Noncurrent assets Intangible assets Property, plant and equipment Lease assets Investment property Equity-accounted investments Other equity investments Financial services receivables Other financial assets Other receivables Tax receivables Deferred tax assets Current assets Inventories Trade receivables Financial services receivables Other financial assets Other receivables Tax receivables Marketable securities Cash, cash equivalents and time deposits Assets held for sale Total assets Note Dec. 31, 2017 Dec. 31, 2016 12 13 14 14 15 15 16 17 18 19 19 20 21 16 17 18 19 22 23 63,419 55,243 39,254 468 8,205 1,318 73,249 8,455 2,252 407 9,810 62,599 54,033 38,439 512 8,616 996 68,402 8,256 2,009 392 9,756 262,081 254,010 40,415 13,357 53,145 11,998 5,346 1,339 15,939 18,457 115 160,112 422,193 38,978 12,187 49,673 11,844 5,130 1,126 17,520 19,265 – 155,722 409,732 Consolidated Financial Statements Balance Sheet 199 € million Equity and Liabilities Equity Subscribed capital Capital reserves Retained earnings Other reserves Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to Volkswagen AG shareholders and hybrid capital investors Noncontrolling interests Noncurrent liabilities Financial liabilities Other financial liabilities Other liabilities Deferred tax liabilities Provisions for pensions Provisions for taxes Other provisions Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders Financial liabilities Trade payables Tax payables Other financial liabilities Other liabilities Provisions for taxes Other provisions Total equity and liabilities Note Dec. 31, 2017 Dec. 31, 2016 24 25 26 27 28 29 28 30 31 25 32 28 26 27 28 30 1,283 14,551 81,367 560 11,088 108,849 229 109,077 81,628 2,665 6,199 5,636 32,730 3,030 20,839 1,283 14,551 70,446 –1,158 7,567 92,689 221 92,910 66,358 4,488 5,664 4,745 33,012 3,556 21,482 152,726 139,306 3,795 81,844 23,046 430 8,570 15,961 1,397 25,347 160,389 422,193 3,849 88,461 22,794 500 9,438 15,461 1,301 35,711 177,515 409,732 200 Statement of Changes in Equity Consolidated Financial Statements Statement of Changes in Equity of the Volkswagen Group for the period January 1 to December 31, 2017 € million Balance at Jan. 1, 2016 Earnings after tax Other comprehensive income, net of tax Total comprehensive income Capital increases Dividends payment Capital transactions involving a change in ownership interest Other changes Balance at Dec. 31, 2016 Balance at Jan. 1, 2017 Earnings after tax Other comprehensive income, net of tax Total comprehensive income Capital increases¹ Dividends payment Capital transactions involving a change in ownership interest Other changes Balance at Dec. 31, 2017 Subscribed capital Capital reserves Retained earnings O T H E R R E S E R V E S Currency translation reserve 1,283 14,551 – – – – – – – – – – – – – – 69,039 5,144 –3,657 1,487 – –68 – –13 –987 – –129 –129 – – – – 1,283 14,551 70,446 –1,117 1,283 14,551 – – – – – – – – – – – – – – 70,446 11,354 586 11,940 – –1,015 – –4 –1,117 – –2,106 –2,106 – – – – 1,283 14,551 81,367 –3,223 1 Volkswagen AG recorded an inflow of cash funds amounting to €3,500 million, less a discount of €4 million and transaction costs of €23 million, from the hybrid capital issued in June 2017. Additionally, there were noncash effects from the deferral of taxes amounting to €8 million. The hybrid capital is required to be classified as equity instruments granted. Explanatory notes on equity are presented in the note relating to equity. Consolidated Financial Statements Statement of Changes in Equity 201 Cash flow hedge reserve Available-for-sale financial assets Equity-accounted investments Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to Volkswagen AG shareholders and hybrid capital investors –3,912 – 3,455 3,455 – – – – –457 –457 – 3,982 3,982 – – – – 3,525 –16 – 14 14 – – – – –2 –2 – 93 93 – – – – 91 542 – –131 –131 – – – 6 417 417 – –251 –251 – – – – 7,560 225 – 225 – –291 – 73 7,567 7,567 274 – 274 3,481 –311 – 78 88,060 5,369 –448 4,921 – –359 – 66 92,689 92,689 11,628 2,304 13,932 3,481 –1,326 – 73 Noncontrolling interests Total equity 210 88,270 10 –1 9 – –6 – 8 221 221 10 1 11 – –5 – 1 5,379 –449 4,930 – –364 – 74 92,910 92,910 11,638 2,305 13,943 3,481 –1,332 – 75 166 11,088 108,849 229 109,077 202 Cash flow statement Consolidated Financial Statements Cash flow statement of the Volkswagen Group for the period January 1 to December 31, 2017 € million 2017 2016 Cash and cash equivalents at beginning of period Earnings before tax Income taxes paid Depreciation and amortization of, and impairment losses on, intangible assets, property, plant and equipment, and investment property¹ Amortization of and impairment losses on capitalized development costs¹ Impairment losses on equity investments¹ Depreciation of and impairment losses on lease assets¹ Gain/loss on disposal of noncurrent assets and equity investments Share of the result of equity-accounted investments Other noncash expense/income Change in inventories Change in receivables (excluding financial services) Change in liabilities (excluding financial liabilities) Change in provisions Change in lease assets Change in financial services receivables Cash flows from operating activities Investments in intangible assets (excluding development costs), property, plant and equipment, and investment property Additions to capitalized development costs Acquisition of subsidiaries Acquisition of other equity investments Disposal of subsidiaries Disposal of other equity investments Proceeds from disposal of intangible assets, property, plant and equipment, and investment property Change in investments in securities Change in loans and time deposits Cash flows from investing activities Capital contributions Dividends paid Capital transactions with noncontrolling interest shareholders Proceeds from issuance of bonds Repayments of bonds Changes in other financial liabilities Lease payments Cash flows from financing activities Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at end of period Cash and cash equivalents at end of period Securities, loans and time deposits Gross liquidity Total third-party borrowings Net liquidity 1 Net of impairment reversals. 18,833 13,913 –3,664 10,562 3,734 136 7,734 –25 274 –480 –4,198 –1,660 5,302 –9,443 –11,478 –11,891 –1,185 –13,052 –5,260 –277 –561 496 24 411 1,376 335 –16,508 3,473 –1,332 – 30,279 –17,877 3,109 –28 17,625 –727 –796 18,038 20,462 7,292 –3,315 10,100 3,586 130 7,107 –222 377 716 –3,637 –2,155 5,048 5,966 –12,074 –9,490 9,430 –13,152 –5,750 –119 –309 –7 2,190 351 –1,245 –2,638 –20,679 – –364 –3 14,262 –23,601 19,455 –36 9,712 –91 –1,628 18,833 18,038 26,291 44,329 –163,472 –119,143 18,833 28,036 46,869 –154,819 –107,950 Explanatory notes on the cash flow statement are presented in the section relating to the cash flow statement. Consolidated Financial Statements Notes to the Consolidated Financial Statements 203 Notes to the Consolidated Financial Statements of the Volkswagen Group as of December 31, 2017 Basis of presentation Volkswagen AG is domiciled in Wolfsburg, Germany, and entered in the commercial register at the Braunschweig Local Court under No. HRB100484. The fiscal year corresponds to the calendar year. In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volks- wagen AG prepared its consolidated financial statements for 2017 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. We have complied with all the IFRSs adopted by the EU and required to be applied. The accounting policies applied in the previous year were retained, with the exception of the changes due to the new or amended standards. In addition, we have complied with all the provisions of German commercial law that we are also required to apply, as well as with the German Corporate Governance Code. For information on notices and disclosures of changes regarding the ownership of voting rights in Volkswagen AG in accordance with the Wertpapierhandels- gesetz (WpHG – German Securities Trading Act), please refer to the annual financial statements of Volkswagen AG. The consolidated financial statements were prepared in euros. Unless otherwise stated, all amounts are given in millions of euros (€ million). All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. The income statement was prepared using the internationally accepted cost of sales method. Preparation of the consolidated financial statements in accordance with the above-mentioned standards requires management to make estimates that affect the reported amounts of certain items in the consolidated balance sheet and in the consolidated income statement, as well as the related disclosure of contingent assets and liabilities. The consolidated financial statements present fairly the net assets, financial position and results of operations as well as the cash flows of the Volkswagen Group. The Board of Management completed preparation of the consolidated financial statements on Feb- ruary 23, 2018. On that date, the period ended in which adjusting events after the reporting period are recognized. 204 Notes to the Consolidated Financial Statements Consolidated Financial Statements Effects of new and amended IFRSs Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning in fiscal year 2017. From January 1, 2017, IAS 7 (Statement of Cash Flows) requires entities to make additional disclosures on changes arising from cash flows and noncash changes in financial liabilities arising from financing activities as reported in the statement of cash flows. Since January 1, 2017, the amendments to IAS 12 (Income Taxes) have clarified the recognition of deferred tax assets for unrealized losses in the case of assets carried at fair value. The IASB amended IFRS 12 (Disclosures of Interests in Other Entities) as part of its 2016 annual improvements project, with effect from January 1, 2017. This clarifies that, as a matter of principle, disclosures in accordance with IFRS 12 must also be made for the entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities even if these are classified as held for sale, held for distribution to owners or as discontinued operations. The amendments presented and other amendments do not materially affect the Volkswagen Group’s net assets, financial position and results of operations. Consolidated Financial Statements Notes to the Consolidated Financial Statements 205 New and amended IFRSs not applied In its 2017 consolidated financial statements, Volkswagen AG did not apply the following accounting pronouncements that have already been adopted by the IASB, but were not yet required to be applied for the fiscal year. Standard/Interpretation Published by the IASB Application mandatory1 Adopted by the EU Expected impact IFRS 2 IFRS 4 Classification and Measurement of Share-based Payment Transactions June 20, 2016 January 1, 2018 Insurance Contracts: Application of IFRS 9 for Insurers September 12, 2016 January 1, 2018 IFRS 9 Financial Instruments IFRS 9 Prepayment Features with Negative Compensation Consolidated Financial Statements and Investments in Associates and Joint Ventures: Sales or Contributions of Assets between an Investor and its Associate/Joint Venture Revenue from Contracts with Customers Clarifications to IFRS 15 – Revenue from Contracts with Customers IFRS 10 and IAS 28 IFRS 15 IFRS 15 IFRS 16 Leases July 24, 2014 October 12, 2017 January 1, 2018 January 1, 2019 September 11, 2014 May 28, 2014 April 12, 2016 January 13, 2016 Deferred2 January 1, 20183 January 1, 2018 January 1, 2019 January 1, 2021 IFRS 17 Insurance Contracts May 18, 2017 Investments in Associates: Long-term Interests in Associates and Joint Ventures IAS 28 IAS 40 Transfers of Investment Property Annual Improvements to International Financial Reporting Standards 20164 Annual Improvements to International Financial Reporting Standards 20176 October 12, 2017 December 8, 2016 January 1, 2019 January 1, 2018 December 8, 2016 January 1, 20185 December 12, 2017 January 1, 2019 No Yes Yes No – Yes Yes Yes No No No None None Detailed descriptions after the tabular overview None None Detailed descriptions after the tabular overview Additional transitional expedients, otherwise no material impact Detailed descriptions after the tabular overview No material impact None No material impact Yes No material impact No No material impact IFRIC 22 IFRIC 23 Foreign Currency Transactions and Advance Consideration December 8, 2016 Uncertainty over Income Tax Treatments June 7, 2017 January 1, 2018 January 1, 2019 No No 1 Effective date from Volkswagen AG’s perspective. 2 The IASB decided on December 15, 2015 to defer the effective date indefinitely. 3 Deferred until January 1, 2018 (IASB decision of September 11, 2015). 4 Minor amendments to a number of IFRSs (IFRS 1 and IAS 28). 5 This relates to the effective date of the amendments to IFRS 1 and IAS 28. 6 Minor amendments to a number of IFRSs (IFRS 3, IFRS 11, IAS 12 and IAS 23). Translation of advance payments denominated in foreign currency into the functional currency at the spot rate on the day of payment No material impact 206 Notes to the Consolidated Financial Statements Consolidated Financial Statements I F R S 9 – F I N A N C I A L I N ST R U M E N T S IFRS 9 changes the accounting requirements for classifying and measuring financial assets, for impairment of financial assets, and for hedge accounting. Financial assets are classified and measured on the basis of the entity’s business model and the characteristics of the financial asset’s cash flows. A financial asset is initially measured either “at amortized cost”, “at fair value through other comprehensive income”, or “at fair value through profit or loss”. The change in method for classifying and measuring financial assets is expected to have a transition effect of €0.3 billion. The effect, net of deferred taxes, of the first-time application increases the retained earnings directly in equity. The classification and measurement of financial liabilities under IFRS 9 are largely unchanged compared with the current accounting requirements of IAS 39. The basis for measuring impairment losses and recognizing loss allowances will switch from an incurred credit loss model to an expected credit loss model. The change in measurement method will lead to a €0.3 billion to €0.5 billion increase in the loss allowance on initial application. These amounts, net of deferred taxes, reduce the retained earnings directly in equity. The increase in the loss allowance results firstly from the requirement to recognize a loss allowance even for financial assets not classified as non-performing and whose credit risk has not increased significantly since initial recognition. Secondly, the increase results from the requirement to recognize loss allowances on the basis of the entire expected remaining life of the contractual asset for financial assets for which there has been a significant increase in credit risk since initial recognition. In the case of hedge accounting, IFRS 9 contains both extended designation options and the need to implement more complex recognition and measurement methods. In addition, IFRS 9 also eliminates the quantitative limits for effectiveness testing. IFRS 9 will have a particularly significant impact on the entity’s reclassification practice. Depending on market trends, there is an expectation that operating profit or loss will be affected by hedging transactions to a greater extent. Due to the retrospective application of the guidance on designating option transactions, a transition effect of €0.1 billion is expected. The effect, net of deferred taxes, of the first-time application increases the retained earnings directly in equity. Since the new guidance for hedging with currency forwards will be applied prospectively, these hedges will not result in any initial application effect. This will also result in far more extensive disclosures in the notes. I F R S 1 5 – R E V E N U E F R O M CO N T R A C T S W I T H C U STO M E R S IFRS 15 specifies new accounting rules for revenue recognition. In the MAN subgroup, sales revenue is expected to be recognized at a later point in time than under the current accounting treatment for certain types of contract. Other provisions and other liabilities will be adjusted accordingly. The recognition of prepayments due but not yet transferred by the customer in the form of cash will additionally inflate the balance sheet by an amount in the three-digit million range. In addition, from next year onward, the Volkswagen Group will no longer present the reversal of sales allowances under other operating income, but under sales revenue. The Volkswagen Group will apply the modified retrospective transition method. This is not expected to result in material transition effects for the Volkswagen Group, because the existing approach used by the Volkswagen Group is already largely in line with the new guidance. This will also result in far more extensive disclosures in the notes. Consolidated Financial Statements Notes to the Consolidated Financial Statements 207 I F R S 1 6 – L E A S E S IFRS 16 changes the accounting treatment for leases. The main objective of IFRS 16 is to recognize all leases. It establishes that lessees are no longer required to classify their leases as either finance leases or operating leases. In the future, they will instead be required to recognize a right-of-use asset and a lease liability for all leases in the statement of financial position. Exceptions will only be made for short-term leases and leases of low-value assets. During the lease term, the right-of-use asset must be depreciated and the lease liability adjusted using an effective interest method and taking the lease payments into account. The new lessee accounting model will therefore tend to increase noncurrent assets and noncurrent liabilities. In the income statement this change is expected to improve the operating result and reduce the financial result. Lessor accounting essentially follows the current guidance of IAS 17. In the future, lessors will continue to classify their leases as finance leases or operating leases on the basis of the risks and rewards incidental to ownership of the leased asset. This will also result in far more extensive disclosures in the notes. Key events On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emissions had been discovered in emissions tests on certain vehicles of Volkswagen Group with type 2.0 l diesel engines in the USA. In this context, Volkswagen AG announced that noticeable discrepancies between the figures achieved in testing and in actual road use had been identified in around eleven million vehicles worldwide with type EA 189 diesel engines. On November 2, 2015, the EPA issued a “Notice of Violation” alleging that irregularities had also been discovered in the software installed in US vehicles with type V6 3.0 l diesel engines. In the months after the International Council on Clean Transportation (ICCT) study was published in May 2014, the test set-ups on which the ICCT study was based were repeated in-house at Volkswagen AG and confirmed the unusually high NOx emissions from certain type EA 189 2.0 l diesel engines in the USA. The California Air Resources Board (CARB) – a part of the environmental authority of California – was informed of this result, and, at the same time, an offer was made to recalibrate the type EA 189 diesel engines in the USA as part of a service measure that was already planned in the USA. This measure was evaluated and adopted by the Ausschuss für Produktsicherheit (APS – Product Safety Committee), which initiates necessary and appropriate measures to ensure the safety and conformity of Volkswagen AG’s products that are placed in the market. There are no findings that an unlawful “defeat device” under US law was disclosed to the APS as the cause of the discrepancies or to the persons responsible for preparing the 2014 annual and consolidated financial state- ments. Instead, at the time the 2014 annual and consolidated financial statements were being prepared, the persons responsible for preparing the 2014 annual and consolidated financial statements remained under the impression that the issue could be solved with comparatively little effort as part of a service measure. In the course of the summer of 2015, however, it became successively apparent to individual members of Volkswagen AG’s Board of Management that the cause of the discrepancies in the USA was a modification of parts of the software of the engine control unit, which was later identified as an unlawful “defeat device” as defined by US law. This culminated in the disclosure of a “defeat device” to EPA and CARB on September 3, 2015. According to the assessment at that time of the responsible persons dealing with the matter, the scope of the costs expected by the Volkswagen Group (recall costs, retrofitting costs and financial penalties) was not fundamentally dissimilar to that of previous cases involving other vehicle manufacturers, and, therefore, appeared to be controllable overall with a view to the business activities of the Volkswagen Group. This assessment by the Volkswagen Group was based, among other things, on the advice of a law firm engaged in the USA for approval issues, according to which similar cases in the past were resolved amicably with the US authorities. The publication of the “Notice of Violation” by the EPA on September 18, 2015, which, especially at that time came unexpectedly to the Board of Management, then presented the situation in an entirely different light. 208 Notes to the Consolidated Financial Statements Consolidated Financial Statements Extensive inquiries were also conducted at AUDI AG in relation to the potential use of unlawful “defeat devices” under US law in type V6 3.0 l diesel engines. The investigation conducted by Jones Day for Volkswagen AG also comprehensively covered this issue. The AUDI AG Board of Management members in office back at the relevant time have stated that they had no knowledge of the use of unlawful “defeat device” software under US law in V6 3.0 l TDI engines until they were informed by the EPA in November 2015. Within the Volkswagen Group, Volkswagen AG has development responsibility for the four-cylinder diesel engines such as the type EA 189, and AUDI AG has development responsibility for the six-cylinder diesel engines such as the type V6 3.0 l diesel engines. Nothing from the publications made up to the time this report was prepared or from the ongoing investi- gations and interviews on the diesel issue has presented the Volkswagen AG Board of Management with any conclusive findings or assessments of fact that would result in a different assessment of the associated risks (e.g. investor lawsuits). Additional expenses of €3.2 billion were recognized in fiscal year 2017. This is due to an increase of €2.2 billion in expenses for warranties and of €1.0 billion in expenses for legal risks. The main reason for this rise in provisions is that the buyback/retrofit programs for 2.0 l TDI vehicles in North America, which have to be implemented under the settlement deal, are more complex. Continuous monitoring of the program has shown that the scheme is more comprehensive and technically more challenging than expected; this also entails an extension to the program period. Further information on the litigation in connection with the diesel issue can be found in the “Litigation” section. Further details can be found in the “Diesel Issue” section of the management report. Basis of consolidation In addition to Volkswagen AG, the consolidated financial statements comprise all significant German and non-German subsidiaries, including structured entities that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed, or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. In the case of the structured entities consolidated in the Volkswagen Group, Volkswagen is able to direct the material relevant activities remaining after the change in the structure even if it is not invested in the structured entity concerned and is thus able to influence the variable returns from its involvement. The structured entities are used primarily to enter into asset-backed securities transactions to refinance the financial services business and to invest surplus liquidity in special securities funds. Consolidation of subsidiaries begins at the first date on which control exists, and ends when such control no longer exists. Subsidiaries whose business is dormant or insignificant, both individually and in the aggregate, for the fair presentation of the net assets, financial position and results of operations as well as the cash flows of the Volkswagen Group are not consolidated. They were carried in the consolidated financial statements at cost net of any impairment losses and reversals of impairment losses required to be recognized. Significant companies where Volkswagen AG is able, directly or indirectly, to significantly influence financial and operating policy decisions (associates), or that are directly or indirectly jointly controlled (joint ventures), are accounted for using the equity method. Joint ventures also include companies in which the Volkswagen Group holds the majority of voting rights, but whose articles of association or partnership agreements stipulate that important decisions may only be resolved unanimously. Insignificant associates and joint ventures are carried at cost net of any impairment losses and reversals of impairment losses required to be recognized. Consolidated Financial Statements Notes to the Consolidated Financial Statements 209 The composition of the Volkswagen Group is shown in the following table: Volkswagen AG and consolidated subsidiaries Germany Abroad Subsidiaries carried at cost Germany Abroad Associates, joint ventures and other equity investments Germany Abroad 2017 2016 156 717 69 238 61 88 1,329 149 919 74 251 47 70 1,510 The list of all shareholdings that forms part of the annual financial statements of Volkswagen AG can be downloaded from the electronic companies register at www.unternehmensregister.de and from www.volkswagenag.com/ir. The following consolidated German subsidiaries with the legal form of a corporation or partnership meet the criteria set out in section 264(3) or section 264b of the Handelsgesetzbuch (HGB – German Commercial Code) due to their inclusion in the consolidated financial statements and have as far as possible exercised the option not to publish annual financial statements: > Audi Berlin GmbH, Berlin > Audi Frankfurt GmbH, Frankfurt am Main > Audi Hamburg GmbH, Hamburg > Audi Hannover GmbH, Hanover > Audi Leipzig GmbH, Leipzig > Audi Stuttgart GmbH, Stuttgart > Autostadt GmbH, Wolfsburg > Bugatti Engineering GmbH, Wolfsburg > Dr. Ing. h.c. F. Porsche AG, Stuttgart > Haberl Beteiligungs-GmbH, Munich > Karosseriewerk Porsche GmbH & Co. KG, Stuttgart > MAHAG GmbH, Munich > MOIA GmbH, Berlin > Porsche Connect GmbH, Stuttgart > Porsche Consulting GmbH, Bietigheim-Bissingen > Porsche Deutschland GmbH, Bietigheim-Bissingen > Porsche Dienstleistungs GmbH, Stuttgart > Porsche Engineering Group GmbH, Weissach > Porsche Engineering Services GmbH, Bietigheim-Bissingen > Porsche Erste Beteiligungsgesellschaft mbH, Stuttgart > Porsche Financial Services GmbH & Co. KG, Bietigheim-Bissingen > Porsche Financial Services GmbH, Bietigheim-Bissingen > Porsche Holding Stuttgart GmbH, Stuttgart > Porsche Leipzig GmbH, Leipzig > Porsche Lizenz- und Handelsgesellschaft mbH & Co. KG, Ludwigsburg > Porsche Logistik GmbH, Stuttgart > Porsche Niederlassung Berlin GmbH, Berlin > Porsche Niederlassung Berlin-Potsdam GmbH, Kleinmachnow > Porsche Niederlassung Hamburg GmbH, Hamburg 210 Notes to the Consolidated Financial Statements Consolidated Financial Statements > Porsche Niederlassung Leipzig GmbH, Leipzig > Porsche Niederlassung Stuttgart GmbH, Stuttgart > Porsche Nordamerika Holding GmbH, Ludwigsburg > Porsche Siebte Vermögensverwaltung GmbH, Wolfsburg > Porsche Zentrum Hoppegarten GmbH, Stuttgart > Raffay Versicherungsdienst GmbH, Hamburg > SKODA AUTO Deutschland GmbH, Weiterstadt > VFL Wolfsburg-Fußball GmbH, Wolfsburg > VGRD GmbH, Wolfsburg > Volkswagen AirService GmbH, Braunschweig(cid:3) > Volkswagen Automobile Berlin GmbH, Berlin > Volkswagen Automobile Chemnitz GmbH, Chemnitz > Volkswagen Automobile Frankfurt GmbH, Frankfurt am Main > Volkswagen Automobile Hamburg GmbH, Hamburg > Volkswagen Automobile Hannover GmbH, Hanover > VOLKSWAGEN Automobile Leipzig GmbH, Leipzig > Volkswagen Automobile Region Hannover GmbH, Hanover > Volkswagen Automobile Rhein-Neckar GmbH, Mannheim > Volkswagen Automobile Stuttgart GmbH, Stuttgart > Volkswagen Beteiligungsverwaltung GmbH, Wolfsburg > Volkswagen Dritte Leasingobjekt GmbH, Braunschweig > Volkswagen Erste Leasingobjekt GmbH, Braunschweig > Volkswagen Fünfte Leasingobjekt GmbH, Braunschweig > Volkswagen Gebrauchtfahrzeughandels und Service GmbH, Langenhagen > Volkswagen Group IT Services GmbH, Wolfsburg > Volkswagen Group Real Estate GmbH & Co. KG, Wolfsburg > Volkswagen Group Services GmbH, Wolfsburg > Volkswagen Immobilien GmbH, Wolfsburg > Volkswagen Konzernlogistik GmbH & Co. OHG, Wolfsburg > Volkswagen Original Teile Logistik GmbH & Co. KG, Baunatal > Volkswagen Osnabrück GmbH, Osnabrück > Volkswagen R GmbH, Wolfsburg > Volkswagen Sachsen GmbH, Zwickau > Volkswagen Sechste Leasingobjekt GmbH, Braunschweig > Volkswagen Siebte Leasingobjekt GmbH, Braunschweig > Volkswagen Truck & Bus GmbH, Braunschweig > Volkswagen Vertriebsbetreuungsgesellschaft mbH, Chemnitz > Volkswagen Vierte Leasingobjekt GmbH, Braunschweig > Volkswagen Zubehör GmbH, Dreieich > Volkswagen Zweite Leasingobjekt GmbH, Braunschweig Consolidated Financial Statements Notes to the Consolidated Financial Statements 211 CO N S O L I DAT E D S U B S I D I A R I E S Part of the PGA Group SAS, Paris, France, was sold by POFIN Financial Services Verwaltungs GmbH, Freilassing, to the Emil Frey Group on June 1, 2017. The sale is in connection with the strategic development of Porsche Holding Salzburg’s dealer network and the corresponding focus on dealerships exclusively selling Volkswagen Group brand vehicles.(cid:3) The transaction encompasses dealerships in Poland, the Netherlands, Belgium and in some cases also in France. This had a positive effect of €0.8 billion on net liquidity and, taking into account the disposal of the assets and liabilities, resulted in an insignificant income amount for the Volkswagen Group, which is reported in other operating income. Overall, the transaction led to the disposal of assets in the amount of €2.5 billion and liabilities in the amount of €2.1 billion. The assets mainly consist of noncurrent leased assets (€0.6 billion) and inventories (€1.0 billion). The liabilities principally comprise noncurrent and current other liabilities (€0.9 billion) and trade payables (€0.7 billion). The other changes in the consolidated Group are shown in the following table: Number Germany Abroad Initially consolidated Subsidiaries previously carried at cost Newly acquired subsidiaries Newly formed subsidiaries Deconsolidated Mergers Liquidations Sales/other 10 1 1 12 1 4 0 5 10 1 15 26 6 11 211 228 The initial inclusion of these subsidiaries, either individually or collectively, did not have a significant effect on the presentation of the net assets, financial position and results of operations. The unconsolidated structured entities are immaterial from a Group perspective. In particular, they do not give rise to any significant risks to the Group. I N V E STM E N T S I N A S S O C I AT E S From a Group perspective, the associates Sinotruk (Hong Kong) Ltd., Hongkong, China (Sinotruk), Bertrandt AG, Ehningen (Bertrandt), There Holding B.V., Rijswijk, the Netherlands (There Holding), and Navistar International Corporation, Lisle, USA (Navistar), were material at the reporting date. Sinotruk Sinotruk is one of the largest truck manufacturers in the Chinese market. There is an agreement in place between Group companies and Sinotruk regarding a long-term strategic partnership, under which the Group participates in the local market. In addition to the partnership with Sinotruk in the volume segment, exports of MAN vehicles to China are also helping to expand access to the small, but fast-growing premium truck market. Sinotruk’s principal place of business is in Hongkong, China. As of December 31, 2017, the quoted market price of the shares in Sinotruk amounted to €648 million (previous year: €466 million). 212 Notes to the Consolidated Financial Statements Consolidated Financial Statements Bertrandt Bertrandt is an engineering partner to companies in the automotive and aviation industry. Its portfolio of services ranges from developing individual components through complex modules to end-to-end solutions. Bertrandt’s principal place of business is in Ehningen. As of December 31, 2017, the quoted market price of the shares in Bertrandt amounted to €299 million (previous year: €284 million). There Holding The Audi Subgroup, the BMW Group and Daimler AG each hold a 33.3% interest in There Holding B.V., Rijswijk, the Netherlands, which was established in 2015. In December 2016, There Holding B.V. signed a contract with Intel Holdings B.V., Schiphol-Rijk, the Netherlands, for the sale of 15% of the shares in HERE International B.V., Rijswijk, the Netherlands. The transaction with Intel Holdings B.V. was completed on January 31, 2017. This resulted in a loss of control within the meaning of IFRS 10 at the There Holding B.V. level. The deconsolidation gave rise to a proportionate effect for the Volkswagen Group of €183 million, which is shown in the share of the result of equity-accounted investments. Since a significant influence continues to exist, HERE International B.V. is included in the financial statement of There Holding B.V. as an associate using the equity method. There is no change in the Volkswagen Group’s participating interest in There Holding B.V. as a result of the sale. Moreover, in December 2016, an agreement for the sale of 10% of the shares in HERE International B.V. was signed with a consortium consisting of NavInfo Co. Ltd., Beijing, China, Tencent Holdings Ltd., Shenzhen, China, and GIC Private Ltd., Singapore, Singapore. The completion of the transaction with the consortium was dependent on the approval of the relevant authorities. In the third quarter of 2017, a decision was taken not to pursue the transaction any further, because it could no longer be envisaged during the official review process that the necessary approvals would be obtained. In December 2017, agreements for the sale of shares in There Holding B.V. were signed with Robert Bosch Investment Nederland B.V., Boxtel, the Netherlands, and Continental Automotive Holding Netherlands B.V., Maastricht, the Netherlands. In this process, Robert Bosch Investment Nederland B.V. and Continental Automotive Holding Netherlands B.V. are acquiring an interest of 5.9% each in There Holding B.V. Audi, BMW and Daimler are selling their shareholdings in the same amount. The transactions are expected to be completed in the first quarter of 2018, subject to approvals by the authorities. The share attributable to Volkswagen is reported under assets held for sale. The transactions are not expected to have a material effect on the financial position and results of operations. Navistar At the beginning of September 2016, Volkswagen Truck & Bus GmbH, a wholly owned subsidiary of Volks- wagen AG, and the US-based commercial vehicle manufacturer Navistar International Corporation, Lisle, USA (Navistar), announced that they had signed an agreement to forge a wide-ranging alliance. The cooperation primarily involves working together on technical components and in procurement. The transaction closed on February 28, 2017. Within the framework of a capital increase, Volkswagen Truck & Bus acquired 16.6% of the shares in Navistar, paying USD 15.76 per share. The purchase price came to €0.3 billion. Due to Volkswagen’s representation on the Board of Directors of Navistar and the agreed cooperation, the investment in Navistar is reported as an equity-accounted investment in the consolidated financial statements. The interest held in Navistar was increased to 16.9% by the balance sheet date. As of December 31, 2017, the quoted market price of the shares in Navistar amounted to €595 million. (cid:3) Consolidated Financial Statements Notes to the Consolidated Financial Statements 213 S U M M A R I Z E D F I N A N C I A L I N F O R M AT I O N O N M AT E R I A L A S S O C I AT E S O N A 1 0 0 % B A S I S : € million 2017 Equity interest (%) Noncurrent assets Current assets Noncurrent liabilities Current liabilities Net assets Sales revenue Earnings after tax from continuing operations Earnings after tax from discontinued operations Other comprehensive income Total comprehensive income Dividends received 2016 Equity interest (%) Noncurrent assets Current assets Noncurrent liabilities Current liabilities Net assets Sales revenue Earnings after tax from continuing operations Earnings after tax from discontinued operations Other comprehensive income Total comprehensive income Dividends received Sinotruk1 Bertrandt2 There Holding Navistar3 17 1,648 3,470 5,893 3,041 –3,816 5,507 95 1 341 437 – 25 2,086 5,449 55 4,420 3,060 5,961 260 – 13 272 6 25 2,075 4,034 123 3,029 2,956 4,116 46 – 11 57 2 29 600 478 338 157 583 992 21 – 0 21 7 29 603 492 340 168 587 992 28 – –1 27 7 33 1,906 289 – 0 2,195 71 –151 513 2 364 – 33 2,802 592 1,044 518 1,832 1,240 –167 – –4 –171 – 1 Balance sheet amounts refer to the June 30 reporting date and income statement amounts refer to the period from July 1 to June 30. 2 Balance sheet amounts refer to the September 30 reporting date and income statement amounts refer to the period from October 1 to September 30. 3 Due to the first-time inclusion of Navistar and the fact that it has a different fiscal year, the income statement disclosures for the current fiscal year relate to the period from March 1, 2017 to October 31, 2017. Balance sheet disclosures relate to the balance sheet date as of October 31. 214 Notes to the Consolidated Financial Statements Consolidated Financial Statements R E CO N C I L I AT I O N O F T H E F I N A N C I A L I N F O R M AT I O N TO T H E C A R RY I N G A M O U N T O F T H E E Q U I T Y - A CCO U N T E D I N V E STM E N T S : € million 2017 Net assets at January 1 Profit or loss Other comprehensive income Changes in reserves Foreign exchange differences Dividends Net assets at December 31 Proportionate equity Consolidation/Goodwill/Others Carrying amount of equity- accounted investments 2016 Net assets at January 1 Profit or loss Other comprehensive income Changes in reserves Foreign exchange differences Dividends Net assets at December 31 Proportionate equity Consolidation/Goodwill/Others Carrying amount of equity- accounted investments Sinotruk Bertrandt There Holding Navistar1 –4,270 96 341 11 7 – –3,816 –644 946 301 2,956 260 13 1 –135 –34 3,060 765 –387 378 3,083 46 11 30 –198 –17 2,956 739 –411 328 587 21 0 – – –25 583 168 163 331 585 28 –1 – – –25 587 170 163 333 1,832 362 2 – – – 2,195 646 – 646 2,003 –167 –4 – – – 1,832 611 – 611 1 Due to the first-time inclusion of Navistar, the reconciliation of the net carrying amount relates to the period from March 1, 2017 to December 31, 2017. S U M M A R I Z E D F I N A N C I A L I N F O R M AT I O N O N I N D I V I D UA L LY I M M AT E R I A L A S S O C I AT E S O N T H E B A S I S O F T H E VO L K SWA G E N G R O U P ’ S P R O P O RT I O N AT E I N T E R E ST: € million 2017 2016 Earnings after tax from continuing operations Earnings after tax from discontinued operations Other comprehensive income Total comprehensive income Carrying amount of equity-accounted investments –29 – 0 –29 90 2 – –1 0 277 Unrecognized losses relating to investments in associates totaled €– million (previous year: €5 million). There were no contingent liabilities or financial guarantees relating to associates. Consolidated Financial Statements Notes to the Consolidated Financial Statements 215 I N T E R E ST S I N J O I N T V E N T U R E S From a Group perspective, the joint ventures FAW-Volkswagen Automotive Company Ltd., Changchun, China, SAIC-Volkswagen Automotive Company Ltd., Shanghai, China, SAIC-Volkswagen Sales Company Ltd., Shanghai, China (SAIC-Volkswagen Sales Company), and Global Mobility Holding B.V., Amsterdam, the Netherlands (Global Mobility Holding), were material at the reporting date or the prior-year reporting date due to their size. FAW-Volkswagen Automotive Company FAW-Volkswagen Automotive Company develops, produces and sells passenger cars. There is an agreement in place between Group companies and the joint venture partner China FAW Corporation Limited regarding a long-term strategic partnership. The principal place of business is in Changchun, China. SAIC-Volkswagen Automotive Company SAIC-Volkswagen Automotive Company develops and produces passenger cars. There is an agreement in place between Group companies and the joint venture partner Shanghai Automotive Industry Corporation regarding a long-term strategic partnership. The principal place of business is in Shanghai, China. SAIC-Volkswagen Sales Company SAIC-Volkswagen Sales Company sells passenger cars for SAIC-Volkswagen Automotive Company. There is an agreement in place between Group companies and the joint venture partner Shanghai Automotive Industry Corporation regarding a long-term strategic partnership. The principal place of business is in Shanghai, China. Global Mobility Holding Through its 50% interest in the joint venture Global Mobility Holding B.V., Amsterdam, the Netherlands (GMH), the Volkswagen Group held a 50% indirect stake in the joint venture’s subsidiary, LeasePlan Corporation N.V., Amsterdam, the Netherlands (LeasePlan). GMH’s business activity consisted of holding the interest in LeasePlan. LeasePlan is a Dutch financial services group whose core business is leasing and fleet management. On July 23, 2015, GMH sold its 100% interest in LeasePlan to a consortium of international investors. The final approvals for the sale of LeasePlan to the consortium of investors were issued by the competent authorities in January 2016. Legal transfer of the LeasePlan shares was completed on March 21, 2016. The total value of the transaction was approximately €3.7 billion plus interest in the amount of €31.5 million. In 2016, this had a positive effect of €2.2 billion on investing activities attributable to operating activities and net liquidity and, taking into account the disposal of equity-accounted investment in GMH, resulted in an income amount of €0.2 billion for the Volkswagen Group, which is reported in the financial result. On completion of the transaction, the existing credit line of €1.3 billion provided by the Volkswagen Group was canceled. 216 Notes to the Consolidated Financial Statements Consolidated Financial Statements S U M M A R I Z E D F I N A N C I A L I N F O R M AT I O N O N T H E M AT E R I A L J O I N T V E N T U R E S O N A 1 0 0 % B A S I S : € million 2017 Equity interest (%) Noncurrent assets Current assets of which: cash, cash equivalents and time deposits Noncurrent liabilities of which: financial liabilities Current liabilities of which: financial liabilities Net assets Sales revenue Depreciation and amortization Interest income Interest expenses Earnings before tax from continuing operations Income tax expense Earnings after tax from continuing operations Earnings after tax from discontinued operations Other comprehensive income Total comprehensive income Dividends received 2016 Equity interest (%) Noncurrent assets Current assets of which: cash, cash equivalents and time deposits Noncurrent liabilities of which: financial liabilities Current liabilities of which: financial liabilities Net assets Sales revenue Depreciation and amortization Interest income Interest expenses Earnings before tax from continuing operations Income tax expense Earnings after tax from continuing operations Earnings after tax from discontinued operations Other comprehensive income Total comprehensive income Dividends received FAW-Volkswagen Automotive Company SAIC-Volkswagen Automotive Company1 Global Mobility Holding2 SAIC-Volkswagen Sales Company 40 50 10,071 13,018 7,385 1,470 – 14,768 – 6,851 40,828 1,212 72 – 4,907 1,369 3,538 – –49 3,489 1,502 40 9,341 12,962 7,073 1,774 – 13,063 1 7,466 40,875 1,120 82 – 5,546 1,576 3,970 – 37 4,007 1,634 8,266 9,304 6,198 0 – 12,157 6 5,414 28,767 1,279 36 35 4,555 1,086 3,469 10 –5 3,473 1,702 50 7,254 8,521 5,265 1,437 – 8,759 0 5,579 26,064 1,091 40 4 4,589 1,127 3,462 – 21 3,483 1,661 30 626 4,383 214 61 – 4,402 – 546 33,398 6 – – 669 168 501 – – 501 137 30 517 3,739 212 22 – 3,713 – 520 1,879 30,707 12 168 70 142 38 105 – –20 85 – 4 – – 614 154 460 – – 460 127 1 SAIC-Volkswagen Sales Company sells passenger cars for SAIC-Volkswagen Automotive Company. Therefore, the sales revenue reported for SAIC-Volkswagen Automotive Company was mostly generated from its business with SAIC-Volkswagen Sales Company. 2 GMH transferred the LeasePlan shares to third parties on March 21, 2016 (see further disclosures in this section). Consolidated Financial Statements Notes to the Consolidated Financial Statements 217 R E CO N C I L I AT I O N O F T H E F I N A N C I A L I N F O R M AT I O N TO T H E C A R RY I N G A M O U N T O F T H E E Q U I T Y - A CCO U N T E D I N V E STM E N T S : € million 2017 Net assets at January 1 Profit or loss Other comprehensive income Changes in share capital Changes in reserves Foreign exchange differences Dividends Net assets at December 31 Proportionate equity Consolidation/Goodwill/Others Carrying amount of equity-accounted investments 2016 Net assets at January 1 Profit or loss Other comprehensive income Changes in share capital Changes in reserves Foreign exchange differences Dividends Net assets at December 31 Proportionate equity Consolidation/Goodwill/Others Carrying amount of equity-accounted investments 1 As of March 21, 2016. FAW-Volkswagen Automotive Company SAIC-Volkswagen Automotive Company Global Mobility Holding SAIC-Volkswagen Sales Company 7,466 3,538 –49 – – –350 –3,755 6,851 2,740 –456 2,284 7,825 3,970 37 – – –281 –4,085 7,466 2,987 –339 2,647 5,579 3,479 –5 – – –236 –3,403 5,414 2,707 –576 2,131 5,618 3,462 21 – – –200 –3,321 5,579 2,790 –415 2,375 3,927 105 –20 – – –20 – 3,9911 1,996 –1,996 – 520 501 – – – –18 –458 546 164 – 164 506 460 – – – –21 –425 520 156 – 156 S U M M A R I Z E D F I N A N C I A L I N F O R M AT I O N O N I N D I V I D UA L LY I M M AT E R I A L J O I N T V E N T U R E S O N T H E B A S I S O F T H E VO L K SWA G E N G R O U P ’ S P R O P O RT I O N AT E I N T E R E ST: € million Earnings after tax from continuing operations Earnings after tax from discontinued operations Other comprehensive income Total comprehensive income Carrying amount of equity-accounted investments 2017 290 10 0 299 1,881 2016 304 – 3 307 1,890 There were no unrecognized losses relating to interests in joint ventures. Contingent liabilities to joint ventures amounted to €186 million (previous year: €183 million) and financial guarantees to joint ventures amounted to €82 million (previous year: €– million). Cash funds of €260 million (previous year: €173 million) are deposited as collateral for asset-backed securities transactions and are therefore not available to the Volkswagen Group. 218 Notes to the Consolidated Financial Statements Consolidated Financial Statements I F R S 5 – N O N - C U R R E N T A S S E T S H E L D F O R S A L E As of December 31, 2017, assets in a total amount of €115 million were classified as assets “held for sale” and reported in a separate line item of the balance sheet in accordance with IFRS 5. The assets “held for sale” were measured at the lower of carrying amount and fair value, less expected costs to sell. These assets are no longer depreciated. The amount reported is mainly attributable to the planned sale of property, plant and equipment (€24 million) and the planned sale of shares in There Holding B.V. (€86 million). The sales will not have any material impact on the Volkswagen Group’s results of operations or net liquidity. The sales are expected to be completed in the first half of fiscal year 2018. Consolidation methods The assets and liabilities of the German and foreign companies included in the consolidated financial state- ments are recognized in accordance with the uniform accounting policies used within the Volkswagen Group. In the case of companies accounted for using the equity method, the same accounting policies are applied to determine the proportionate equity, based on the most recent audited annual financial statements of each company. In the case of subsidiaries consolidated for the first time, assets and liabilities are measured at their fair value at the date of acquisition. Their carrying amounts are adjusted in subsequent years. Goodwill arises when the purchase price of the investment exceeds the fair value of identifiable net assets. Goodwill is tested for impairment once a year to determine whether its carrying amount is recoverable. If the carrying amount of goodwill is higher than the recoverable amount, an impairment loss must be recognized. If this is not the case, there is no change in the carrying amount of goodwill compared with the previous year. If the purchase price of the investment is less than the identifiable net assets, the difference is recognized in the income statement in the year of acquisition. Goodwill is accounted for at the subsidiaries in the functional currency of those subsidiaries. Any difference that arises from the acquisition of additional shares of an already consolidated sub- sidiary is taken directly to equity. Unless otherwise stated, the proportionate equity directly attributable to noncontrolling interests is determined at the acquisition date as the share of the fair value of the assets (excluding goodwill) and liabilities attributable to them. Contingent consideration is measured at fair value at the acquisition date. Subsequent changes in the fair value of contingent consideration do not generally result in the adjustment of the acquisition-date measurement. Acquisition-related costs that are not equity transaction costs are not added to the purchase price, but instead recognized as expenses in the period in which they are incurred. The consolidation process involves adjusting the items in the separate financial statements of the parent and its subsidiaries and presenting them as if they were those of a single economic entity. Intragroup assets, liabilities, equity, income, expenses and cash flows are eliminated in full. Intercompany profits or losses are eliminated in Group inventories and noncurrent assets. Deferred taxes are recognized for consolidation adjustments, and deferred tax assets and liabilities are offset where taxes are levied by the same tax authority and relate to the same tax period. Consolidated Financial Statements Notes to the Consolidated Financial Statements 219 Currency translation Transactions in foreign currencies are translated in the single-entity financial statements of Volkswagen AG and its consolidated subsidiaries at the rates prevailing at the transaction date. Foreign currency monetary items are recorded in the balance sheet using the middle rate at the closing date. Foreign exchange gains and losses are recognized in the income statement. This does not apply to foreign exchange differences from loans receivable that represent part of a net investment in a foreign operation. The financial statements of foreign companies are translated into euros using the functional currency concept, under which asset and liability items are translated at the closing rate. With the exception of income and expenses recognized directly in equity, equity is translated at historical rates. The resulting foreign exchange differences are recognized in other comprehensive income until disposal of the subsidiary concerned, and are presented as a separate item in equity. Income statement items are translated into euros at weighted average rates. The rates applied are presented in the following table: Argentina Australia Brazil Canada Czech Republic India Japan Mexico People’s Republic of China Poland Republic of Korea Russia South Africa Sweden United Kingdom USA B A L A N C E S H E E T M I D D L E R A T E I N C O M E S T A T E M E N T O N D E C E M B E R 3 1 A V E R A G E R A T E 2017 2016 2017 2016 22.99203 16.80096 18.72636 16.33207 1.53285 3.97065 1.50260 25.57900 76.56700 1.46150 3.43720 1.42280 27.02400 71.65500 1.47300 3.60471 1.46444 26.32920 73.50146 1.48880 3.86217 1.46659 27.03433 74.37058 134.87000 123.50000 126.66763 120.31663 23.61420 21.84800 21.33175 20.66535 7.80085 4.17490 7.33320 4.41530 7.62688 4.25727 7.35067 4.36416 1,278.22000 1,269.11000 1,275.94974 1,284.79543 69.33520 14.75715 9.83140 0.88730 1.19875 64.67550 14.48480 9.56720 0.85850 1.05600 65.88875 15.04543 9.63700 0.87626 1.12933 74.23443 16.28336 9.46712 0.81897 1.10675 €1 = ARS AUD BRL CAD CZK INR JPY MXN CNY PLN KRW RUB ZAR SEK GBP USD 220 Notes to the Consolidated Financial Statements Consolidated Financial Statements Accounting policies M E A S U R E M E N T P R I N C I P L E S With certain exceptions such as financial instruments at fair value through profit or loss, available-for-sale financial assets and provisions for pensions and other post-employment benefits, items in the Volkswagen Group are accounted for under the historical cost convention. The methods used to measure the individual items are explained in more detail below. I N TA N G I B L E A S S E T S Purchased intangible assets are recognized at cost and amortized over their useful life using the straight-line method. This relates in particular to software, which is amortized over three years. In accordance with IAS 38, research costs are recognized as expenses when incurred. Development costs for future series products and other internally generated intangible assets are capitalized at cost, provided manufacture of the products is likely to bring the Volkswagen Group an economic benefit. If the criteria for recognition as assets are not met, the expenses are recognized in the income statement in the year in which they are incurred. Capitalized development costs include all direct and indirect costs that are directly attributable to the development process. The costs are amortized using the straight-line method from the start of production over the expected life cycle of the models or powertrains developed – generally between two and ten years. Amortization recognized during the year is allocated to the relevant functions in the income statement. Brand names from business combinations usually have an indefinite useful life and are therefore not amortized. An indefinite useful life is usually the result of a brand’s further use and maintenance. Goodwill, intangible assets with indefinite useful lives and intangible assets that are not yet available for use are tested for impairment at least once a year. Assets in use and other intangible assets with finite useful lives are tested for impairment only if there are specific indications that they may be impaired. The Volkswagen Group generally applies the higher of value in use and fair value less costs to sell of the relevant cash-generating unit (brands or products) to determine the recoverable amount of goodwill and indefinite-lived intangible assets. Measurement of value in use is based on management’s current planning. This planning is based on expectations regarding future global economic trends and on assumptions derived from those trends about the markets for passenger cars and commercial vehicles, market shares and the profitability of the products. The planning for the Financial Services segment is likewise prepared on the basis of these expectations, and also reflects the relevant market penetration rates and regulatory requirements. The planning for the Power Engineering segment reflects expectations about trends in the various individual markets. The planning includes reasonable assumptions about macroeconomic trends (exchange rate, interest rate and commodity price trends) and historical developments. The planning period generally covers five years. For information on the assumptions applied to the detailed planning period, please refer to the Report on Expected Developments, which is part of the Management Report. For subsequent years, plausible assumptions are made regarding future trends. The planning assumptions are adapted to reflect the current state of knowledge. Estimation of cash flows is generally based on the expected growth trends for the markets concerned. The estimates for the cash flows following the end of the planning period are generally based on a growth rate of up to 1% p.a. (previous year: up to 1% p.a.) in the Passenger Cars segment, and on a growth rate of up to 1% p.a. (previous year: up to 1% p.a.) in the Power Engineering and Commercial Vehicles segments. Consolidated Financial Statements Notes to the Consolidated Financial Statements 221 Value in use is determined for the purpose of impairment testing of goodwill, indefinite-lived intangible assets and finite-lived intangible assets – mainly capitalized development costs – using the following pretax weighted average cost of capital (WACC) rates, which are adjusted if necessary for country-specific discount factors: WACC Passenger Cars segment Commercial Vehicles segment Power Engineering segment 2017 5.8% 6.8% 8.0% 2016 5.4% 6.5% 7.7% The WACC rates are calculated based on the risk-free rate of interest, a market risk premium and the cost of debt. Additionally, specific peer group information on beta factors and leverage are taken into account. The composition of the peer groups used to determine beta factors is continuously reviewed and adjusted if necessary. P R O P E RT Y, P L A N T A N D E Q U I PM E N T Property, plant and equipment is carried at cost less depreciation and – where necessary – write-downs for impairment. Investment grants are generally deducted from cost. Cost is determined on the basis of the direct and indirect costs that are directly attributable. Special tools are reported under other equipment, operating and office equipment. Property, plant and equipment is depreciated using the straight-line method over its estimated useful life. The useful lives of items of property, plant and equipment are reviewed on a regular basis and adjusted if required. Depreciation is based mainly on the following useful lives: Buildings Site improvements Technical equipment and machinery Other equipment, operating and office equipment, including special tools Useful life 20 to 50 years 10 to 20 years 6 to 12 years 3 to 15 years Impairment losses on property, plant and equipment are recognized in accordance with IAS 36 where the recoverable amount of the asset concerned has fallen below the carrying amount. Recoverable amount is the higher of value in use and fair value less costs to sell. Value in use is determined using the principles described for intangible assets. The discount rates for product-specific tools and investments are the same as the discount rates for capitalized development costs given above for each segment. If the reasons for impairments recog- nized in previous years no longer apply, the impairment losses are reversed up to a maximum of the amount that would have been determined if no impairment loss had been recognized. In accordance with the principle of substance over form, assets that have been formally transferred to third parties under a sale and leaseback transaction including a repurchase option also continue to be accounted for as separate assets. 222 Notes to the Consolidated Financial Statements Consolidated Financial Statements Where leased items of property, plant and equipment are used, the criteria for classification as a finance lease as set out in IAS 17 are met if all material risks and rewards incidental to ownership have been transferred to the Group company concerned. In such cases, the assets concerned are recognized at fair value or at the present value of the minimum lease payments (if lower) and depreciated using the straight-line method over the asset’s useful life, or over the term of the lease if this is shorter. The payment obligations arising from the future lease payments are discounted and recorded as a liability in the balance sheet. Where Group companies are the lessees of assets under operating leases, i.e. if not all material risks and rewards are transferred, lease and rental payments are recorded directly as expenses in profit or loss. L E A S E A S S E T S Vehicles leased out under operating leases are recognized at cost and depreciated to their estimated residual value using the straight-line method over the term of the lease. Impairment losses identified as a result of an impairment test in accordance with IAS 36 are recognized and the future depreciation rate is adjusted. The forecast residual values are adjusted to include constantly updated internal and external information on residual values, depending on specific local factors and the experiences gained in the marketing of used cars. This requires management to make assumptions in particular about vehicle supply and demand in the future, as well as about vehicle price trends. Such assumptions are based either on qualified estimates or on data published by external experts. Qualified estimates are based on external data – if available – that reflects additional information that is available internally, such as historical experience and current sales data. I N V E STM E N T P R O P E RT Y Real estate and buildings held in order to obtain rental income (investment property) are carried at amortized cost; the useful lives applied to depreciation generally correspond to those of the property, plant and equip- ment used by the Company itself. The fair value of investment property must be disclosed in the notes if it is carried at amortized cost. Fair value is generally estimated using an investment method based on internal calculations. This involves determining the income value for a specific building on the basis of gross income, taking into account additional factors such as land value, remaining useful life and a multiplier specific to property. C A P I TA L I Z AT I O N O F B O R R OW I N G CO ST S Borrowing costs that are directly attributable to the acquisition of qualifying assets on or after January 1, 2009 are capitalized as part of the cost of these assets. A qualifying asset is an asset that necessarily takes at least a year to get ready for its intended use or sale. E Q U I T Y - A CCO U N T E D I N V E STM E N T S The cost of equity-accounted investments is adjusted to reflect the share of increases or reductions in equity at the associates and joint ventures after the acquisition that is attributable to the Volkswagen Group, as well as any effects from purchase price allocation. Additionally, the investment is tested for impairment if there are indications of impairment and written down to the lower recoverable amount if necessary. The recoverable amount is determined using the principles described for indefinite-lived intangible assets. If the reason for impairment ceases to apply at a later date, the impairment loss is reversed to the carrying amount that would have been determined had no impairment loss been recognized. Consolidated Financial Statements Notes to the Consolidated Financial Statements 223 F I N A N C I A L I N ST R U M E N T S Financial instruments are contracts that give rise to a financial asset of one company and a financial liability or an equity instrument of another. Regular way purchases or sales of financial instruments are accounted for at the settlement date – that is, at the date on which the asset is delivered. IAS 39 classifies financial assets into the following categories: > financial assets at fair value through profit or loss; > held-to-maturity financial assets; > loans and receivables; and > available-for-sale financial assets. Financial liabilities are classified into the following categories: > financial liabilities at fair value through profit or loss; and > financial liabilities measured at amortized cost. We recognize financial instruments at amortized cost or at fair value. The amortized cost of a financial asset or liability is the amount: > at which a financial asset or liability is measured at initial recognition; > minus any principal repayments; > minus any write-down for impairment or uncollectibility; > plus or minus the cumulative amortization of any difference between the original amount and the amount repayable at maturity (premium, discount), amortized using the effective interest method over the term of the financial asset or liability. In the case of current receivables and liabilities, amortized cost generally corresponds to the principal or repayment amount. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is determined using other observable inputs as far as possible. If no observable inputs are available, fair value is determined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models, and, as far as possible, verified by confirmations from the banks that handle the transactions. The fair value option for financial assets and financial liabilities is not used in the Volkswagen Group. Financial assets and financial liabilities are generally presented at their gross amounts and only offset if the Volkswagen Group currently has a legally enforceable right to set off the amounts and intends to settle on a net basis. Subsidiaries, associates and joint ventures that are not consolidated for reasons of materiality do not fall within the scope of IAS 39 and IFRS 7. Other equity investments that are required by IAS 39.46(c) to be measured at cost, net of any impairment losses to be recognized, are presented as “measured at fair value”. LOA N S A N D R E C E I VA B L E S , F I N A N C I A L L I A B I L I T I E S A N D H E L D - TO - M AT U R I T Y F I N A N C I A L A S S E T S Loans, receivables and financial liabilities, as well as held-to-maturity financial assets, are measured at amortized cost, unless hedged. Specifically, these relate to: > receivables from financing business; > trade receivables and payables; > other receivables and financial assets and liabilities; > financial liabilities; and > cash, cash equivalents and time deposits. 224 Notes to the Consolidated Financial Statements Consolidated Financial Statements AVA I L A B L E - F O R - S A L E F I N A N C I A L A S S E T S Available-for-sale financial assets are either allocated specifically to this category or are financial assets that cannot be assigned to any other category. Available-for-sale financial assets (debt instruments) are carried at fair value. Changes in fair value are recognized directly in equity, net of deferred taxes. Prolonged changes in the fair value of debt instruments (impairment losses, foreign exchange gains and losses, interest calculated using the effective interest method) are recognized in profit or loss. Other equity investments (shares representing an ownership interest of less than 20% as a rule) are also classified as available-for-sale financial assets. They are recognized at cost in the consolidated financial statements if there is no active market for those shares and fair values cannot be reliably ascertained without undue cost or effort. The lower present value of the estimated future cash flows is recognized if there are indications of impairment. There is currently no intention to sell these financial assets. Foreign exchange gains and losses attributable to equity instruments are recognized in other comprehensive income. D E R I VAT I V E S A N D H E D G E A CCO U N T I N G Volkswagen Group companies use derivatives to hedge balance sheet items and future cash flows (hedged items). Appropriate derivatives such as swaps, forward transactions and options are used as hedging instru- ments. The criteria for the application of hedge accounting are that the hedging relationship between the hedged item and the hedging instrument is clearly documented and that the hedge is highly effective. The accounting treatment of changes in the fair value of hedging instruments depends on the nature of the hedging relationship. In the case of hedges against the risk of change in the carrying amount of balance sheet items (fair value hedges), both the hedging instrument and the hedged risk portion of the hedged item are measured at fair value. Several risk portions of hedged items are grouped into a portfolio if appropriate. In the case of a fair value portfolio hedge, the changes in fair value are accounted for in the same way as for a fair value hedge of an individual underlying. Gains or losses from the remeasurement of hedging instruments and hedged items are recognized in profit or loss. In the case of hedges of future cash flows (cash flow hedges), the hedging instruments are also measured at fair value. Gains or losses from remeasurement of the effective portion of the derivative are initially recognized in the reserve for cash flow hedges directly in equity, and are only recognized in the income statement when the hedged item is recognized in profit or loss; the ineffective portion of a cash flow hedge is recognized immediately in profit or loss. Derivatives used by the Volkswagen Group for financial management purposes to hedge against interest rate, foreign currency, commodity, or price risks, but that do not meet the strict hedge accounting criteria of IAS 39, are classified as financial assets or liabilities at fair value through profit or loss (also referred to below as derivatives not included in hedging relationships). This also applies to options on shares. External hedging instruments of intragroup hedged items that are subsequently eliminated in the consolidated financial state- ments are also assigned to this category as a general rule. Assets and liabilities measured at fair value through profit or loss consist of derivatives or components of derivatives that are not included in hedge accounting. These relate primarily to the interest component of currency forwards used to hedge sales revenue, commodity futures and currency forwards relating to commodity futures. Gains and losses from the remeasurement and settlement of financial instruments at fair value through profit or loss are reported in the financial result. Consolidated Financial Statements Notes to the Consolidated Financial Statements 225 R E C E I VA B L E S F RO M F I N A N C E L E A S E S Where a Group company is the lessor – generally of vehicles – a receivable in the amount of the net investment in the lease is recognized in the case of finance leases, in other words where substantially all the risks and rewards are transferred to the lessee. OT H E R R E C E I VA B L E S A N D F I N A N C I A L A S S E T S Other receivables and financial assets (except for derivatives) are recognized at amortized cost. I M PA I R M E N T LO S S E S O N F I N A N C I A L I N ST R U M E N T S Default risk on loans and receivables in the financial services business is accounted for by recognizing specific valuation allowances and portfolio-based valuation allowances. More specifically, in the case of significant individual receivables (e.g. dealer finance receivables and fleet customer business receivables) specific valuation allowances are recognized in accordance with Group-wide standards in the amount of the incurred loss. A potential impairment is assumed in the case of a number of situations such as delayed payment over a certain period, the institution of enforcement measures, the threat of insolvency or overindebtedness, application for or the opening of bankruptcy proceedings, or the failure of reorganization measures. Portfolio-based valuation allowances are recognized by grouping together insignificant receivables and significant individual receivables for which there is no indication of impairment into homogeneous portfolios on the basis of comparable credit risk features and allocating them by risk class. As long as no definite infor- mation is available as to which receivables are in default, average historical default probabilities for the portfolio concerned are used to calculate the amount of the valuation allowances. As a matter of principle, specific valuation allowances are recognized on receivables outside the Financial Services segment. Valuation allowances on receivables are regularly recognized in separate allowance accounts. An impairment loss is recognized on available-for-sale financial assets if there is objective evidence of permanent impairment. In the case of equity instruments, evidence of impairment is taken to exist, among other things, if the fair value decreases below cost significantly (by more than 20%) or the decrease is prolonged (by more than 10% of the average market prices over one year). If impairment is identified, the cumulative loss is recognized in the reserve and charged to profit and loss. In the case of equity instruments, reversals of impairment losses are taken directly to equity. Impairment losses are recognized on debt instruments if a decrease in the future cash flows of the financial asset is expected. An increase in the risk-free interest rate or an increase in credit risk premiums is not in itself evidence of impairment. D E F E R R E D TA X E S Deferred tax assets are generally recognized for tax-deductible temporary differences between the tax base of assets and liabilities and their carrying amounts in the consolidated balance sheet, as well as on tax loss carryforwards and tax credits provided it is probable that they can be used in future periods. Deferred tax liabilities are generally recognized for all taxable temporary differences between the tax base of assets and liabilities and their carrying amounts in the consolidated balance sheet. Deferred tax liabilities and assets are recognized in the amount of the expected tax liability or tax benefit, as appropriate, in subsequent fiscal years, based on the expected enacted tax rate at the time of realization. The tax consequences of dividend payments are generally not taken into account until the resolution on appropriation of earnings available for distribution has been adopted. Deferred tax assets that are unlikely to be realized within a clearly predictable period are reduced by valuation allowances. Deferred tax assets for tax loss carryforwards are usually measured on the basis of future taxable income over a planning period of five fiscal years. Deferred tax assets and deferred tax liabilities are offset where taxes are levied by the same taxation authority and relate to the same tax period. 226 Notes to the Consolidated Financial Statements Consolidated Financial Statements I N V E N TO R I E S Raw materials, consumables and supplies, merchandise, work in progress and self-produced finished goods reported in inventories are carried at the lower of cost or net realizable value. Cost is determined on the basis of the direct and indirect costs that are directly attributable. Borrowing costs are not capitalized. The measurement of same or similar inventories is generally based on the weighted average cost method. N O N C U R R E N T A S S E T S H E L D F O R S A L E A N D D I S CO N T I N U E D O P E R AT I O N S Under IFRS 5, noncurrent assets or groups of assets and liabilities (disposal groups) are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Such assets are carried at the lower of their carrying amount and fair value less costs to sell, and are presented separately in current assets and liabilities in the balance sheet. Discontinued operations are components of an entity that have either been disposed of or are classified as held for sale. The assets and liabilities of operations that are held for sale represent disposal groups that must be measured and reported using the same principles as noncurrent assets held for sale. The income and expenses from discontinued operations are presented in the income statement as profit or loss from discontinued operations below the profit or loss from continuing operations. Corresponding disposal gains or losses are contained in the profit or loss from discontinued operations. The prior-year figures in the income statement are adjusted accordingly. P E N S I O N P R OV I S I O N S The actuarial valuation of pension provisions is based on the projected unit credit method stipulated by IAS 19 for defined benefit plans. The valuation is not only based on pension payments and vested entitlements known at the balance sheet date, but also reflects future salary and pension trends, as well as experience-based staff turnover rates. Remeasurements are recognized in retained earnings in other comprehensive income, net of deferred taxes. P R OV I S I O N S F O R I N CO M E TA X E S Tax provisions contain obligations resulting from current income taxes. Deferred taxes are presented in separate items of the balance sheet and income statement. Provisions are recognized for potential tax risks on the basis of the best estimate of the liability. S H A R E - B A S E D PAYM E N T The share-based payment consists of phantom shares and performance shares. The obligations arising from the share-based payment are accounted for as cash-settled plans in accordance with IFRS 2. The cash-settled share- based payments are measured at fair value until maturity. Fair value is determined using a recognized valuation technique. The compensation cost is allocated over the vesting period. OT H E R P R OV I S I O N S In accordance with IAS 37, provisions are recognized where a present obligation exists to third parties as a result of a past event, where a future outflow of resources is probable and where a reliable estimate of that outflow can be made. Provisions not resulting in an outflow of resources in the year immediately following are recognized at their settlement value discounted to the balance sheet date. Discounting is based on market interest rates. An average discount rate of 0.08% (previous year: 0.04%) was used in the Eurozone. The settlement value also reflects cost increases expected at the balance sheet date. Provisions are not offset against claims for reimbursement. We recognize insurance contracts that form part of the insurance business in accordance with IFRS 4. Reinsurance acceptances are accounted for without any time delay in the year in which they arise. Provisions are generally recognized based on the cedant’s contractual duties. Estimation techniques based on assumptions about future changes in claims are used to calculate the claims provision. Other technical provisions relate to the provision for cancellations. Consolidated Financial Statements Notes to the Consolidated Financial Statements 227 The share of the provisions attributable to reinsurers is calculated in accordance with the contractual agreements with the retrocessionaries and reported under other assets. CO N T I N G E N T L I A B I L I T I E S If the criteria for recognizing a provision are not met, but the outflow of financial resources is not improbable, such obligations are disclosed in the notes to the consolidated financial statements (see the “Contingent liabilities” section). Contingent liabilities are only recognized if the obligations are more certain, i.e. the outflow of financial resources has become probable and their amount can be reliably estimated. L I A B I L I T I E S Noncurrent liabilities are recorded at amortized cost in the balance sheet. Differences between historical cost and the repayment amount are amortized using the effective interest method. Liabilities to members of partnerships from puttable shares are recognized in the income statement at the present value of the redemption amount at the balance sheet date. Liabilities under finance leases are carried at the present value of the lease payments. Current liabilities are recognized at their repayment or settlement value. R E V E N U E A N D E X P E N S E R E CO G N I T I O N Sales revenue, interest and commission income from financial services and other operating income are recognized only when the relevant service has been rendered or the goods have been delivered, that is, when the risk has passed to the customer, the amount of sales revenue can be reliably determined and settlement of the amount can be assumed. Revenue is reported net of sales allowances (discounts, rebates, or customer bonuses). Sales revenue from financing and lease agreements is recognized using the effective interest method. If non-interest-bearing or low-interest vehicle financing arrangements are agreed, sales revenue is reduced by the interest benefits granted. Customer financing and finance lease income is determined using the effective interest method and recognized under sales revenue. Sales revenue from extended warranties or maintenance agreements is recognized when deliveries take place or services are rendered. In the case of prepayments, deferred income is recognized proportionately by reference to the costs expected to be incurred, based on experience. Revenue is recognized on a straight-line basis if there is insufficient experience. If the expected costs exceed the accrued sales revenue, a loss is recognized from these agreements. If a contract comprises several separately identifiable components (multiple-element arrangements), these components are recognized separately in accordance with the principles outlined above. Income from assets for which a Group company has a buy-back obligation is recognized only when the assets have definitively left the Group. If a fixed repurchase price was agreed when the contract was entered into, the difference between the selling price and the present value of the repurchase price is recognized as income ratably over the term of the contract. Prior to that time, the assets are carried as inventories in the case of short contract terms and as lease assets in the case of long contract terms. Cost of sales includes the costs incurred to generate the sales revenue and the cost of goods purchased for resale. This item also includes the costs of additions to warranty provisions. Research and development costs not eligible for capitalization in the period and amortization of development costs are likewise carried under cost of sales. Reflecting the presentation of interest and commission income in sales revenue, the interest and commission expenses attributable to the financial services business are presented in cost of sales. Construction contracts are recognized using the percentage of completion (PoC) method, under which revenue and cost of sales are recognized by reference to the stage of completion at the end of the reporting period, based on the contract revenue agreed with the customer and the expected contract costs. As a rule, the stage of completion is determined as the proportion that contract costs incurred by the end of the reporting period bear to the estimated total contract costs (cost-to-cost method). In certain cases, in particular those involving innovative, complex contracts, the stage of completion is measured using contractually agreed milestones (milestone method). If the outcome of a construction contract cannot yet be estimated reliably, contract revenue is recognized only in the amount of the contract costs incurred to date (zero profit method). In the balance sheet, contract components whose revenue is recognized using the percentage of completion method are reported as trade receivables, net of prepayments received. Expected 228 Notes to the Consolidated Financial Statements Consolidated Financial Statements losses from construction contracts are recognized immediately in full as expenses by recognizing impairment losses on recognized contract assets, and additionally by recognizing provisions for amounts in excess of the impairment losses. Dividend income is recognized on the date when the dividend is legally approved. G OV E R N M E N T G R A N T S Government grants related to assets are deducted when arriving at the carrying amount of the asset and are recognized in profit or loss over the life of the depreciable asset as a reduced depreciation expense. If the Group becomes entitled to a grant subsequently, the amount of the grant attributable to prior periods is recognized in profit or loss. Government grants related to income, i.e. that compensate the Group for expenses incurred, are recognized in profit or loss for the period in those items in which the expenses to be compensated by the grants are also recognized. Grants in the form of nonmonetary assets (e.g. the use of land free of charge or the transfer of resources free of charge) are disclosed as a memo item. E ST I M AT E S A N D A S S U M P T I O N S B Y M A N A G E M E N T Preparation of the consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and income and expenses, as well as the related disclosure of contingent assets and liabilities of the reporting period. The estimates and assumptions relate largely to the following matters: The impairment testing of nonfinancial assets (especially goodwill, brand names, capitalized development costs and special tools) and equity-accounted investments, or investments accounted at cost, and the measure- ment of options on shares in companies that are not traded in an active market require assumptions about the future cash flows during the planning period, and possibly beyond it, as well as about the discount rate to be applied. The estimates made in order to separate cash flows mainly relate to future market shares, the trend in the respective markets and the profitability of the Volkswagen Group’s products. In addition, the recoverability of the Group’s lease assets depends in particular on the residual value of the leased vehicles after expiration of the lease term, because this represents a significant portion of the expected cash flows. More detailed information on impairment tests and the measurement parameters used for those tests can be found in the explanations on the accounting policies for intangible assets. If there are no observable market inputs, the fair values of assets acquired and liabilities assumed in a business combination are measured using recognized valuation techniques, such as the relief-from-royalty method or the residual method. Impairment testing of financial assets requires estimates about the extent and probability of occurrence of future events. As far as possible, estimates are derived from past experience taking into account current market data as well as rating categories and scoring information. In the case of financial services receivables, both specific and portfolio-based valuation allowances are recognized. The more detailed balance sheet disclosures on IFRS 7 (Financial Instruments) contain an overview of these specific and portfolio-based valuation allow- ances. Accounting for provisions is also based on estimates of the extent and probability of occurrence of future events, as well as estimates of the discount rate. As far as possible, these are also based on past experience or external opinions. The assumptions applied in the measurement of pension provisions are described in the “Provisions for pensions and other post-employment benefits” section. Remeasurements are recognized in other comprehensive income and do not affect profit or loss reported in the income statement. Any change in the estimates of the amount of other provisions is always recognized in profit or loss. The provisions are regularly adjusted to reflect new information obtained. The use of expected values means that additional amounts must frequently be recognized for provisions, or that unused provisions are reversed. Reversals of provisions are recognized as other operating income, whereas expenses relating to the recognition of provisions are allocated directly to the functions. Warranty claims from sales transactions are calculated on the basis of losses to date, estimated future losses and the policy on ex gratia arrangements. This requires assumptions to be made about the nature and extent of future guarantee and ex gratia claims. Assumptions were made in respect of the provisions recognized in connection with the diesel issues. These depend on the series, model year and country concerned and relate in particular to the effort, material costs and hourly wage rates involved, or to vehicle values in the case of repurchases. In addition, assumptions are made about future Consolidated Financial Statements Notes to the Consolidated Financial Statements 229 resale prices of repurchased vehicles. They are based on qualified estimates, which are based in turn on external data, and also reflect additional information available internally, such as values derived from past experience. An overview of other provisions can be found in the “Noncurrent and current other provisions” section. Further information on the legal proceedings and on the legal risks associated with the diesel issue can be found in the “Litigation” section. The put options and compensation rights of free float shareholders recognized within liabilities depend in particular on the outcome of the MAN award proceedings. The liability was based on estimates of the length of the award proceedings and the amount of the put options and compensation rights. The length was estimated based on the fact that proceedings take seven years on average. The amount of the put options and compensation rights of MAN’s free float shareholders is derived from the cash settlement in accordance with section 305 of the Aktiengesetz (AktG – German Stock Corporation Act). Government grants are recognized based on an assessment as to whether there is reasonable assurance that the Group companies will fulfill the attached conditions and the grants will be awarded. This assessment is based on the nature of the legal entitlement and past experience. Estimates of the useful life of finite-lived assets are based on past experience and are reviewed regularly. Where estimates are modified the residual useful life is adjusted and an impairment loss is recognized, if necessary. Measuring deferred tax assets requires assumptions regarding future taxable income and the timing of the realization of deferred tax assets. The estimates and assumptions are based on underlying assumptions that reflect the current state of available knowledge. Specifically, the expected future development of business was based on the circumstances known at the date of preparation of these consolidated financial statements and a realistic assessment of the future development of the global and sector-specific environment. Our estimates and assumptions remain subject to a high degree of uncertainty because future business developments are subject to uncertainties that in part cannot be influenced by the Group. This applies in particular to short- and medium-term cash flow forecasts and to the discount rates used. Developments in this environment that differ from the assumptions and that cannot be influenced by management could result in amounts that differ from the original estimates. If actual developments differ from the expected developments, the underlying assumptions and, if necessary, the carrying amounts of the assets and liabilities affected are adjusted. Global gross domestic product (GDP) rose by 3.2% (previous year: 2.5%) in 2017. In our forecasts, we assume that global economic growth will weaken slightly in 2018. As a result, from today’s perspective, we are not expecting material adjustments in the following fiscal year in the carrying amounts of the assets and liabilities reported in the consolidated balance sheet. Estimates and assumptions by management were based in particular on assumptions relating to the development of the general economic environment, the automotive markets and the legal environment. These and further assumptions are explained in detail in the Report on Expected Developments, which is part of the Group Management Report. 230 Notes to the Consolidated Financial Statements Consolidated Financial Statements Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands (operating segments) is managed by its own board of management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with. Segment reporting comprises four reportable segments: Passenger Cars, Commercial Vehicles, Power Engineering and Financial Services. The activities of the Passenger Cars segment cover the development of vehicles and engines, the production and sale of passenger cars, and the corresponding genuine parts business. Given the high degree of techno- logical and economic interlinking in the production network of the individual brands, the Passenger Cars reporting segment combines the Volkswagen Group’s individual car brands to a single reportable segment. Furthermore, there is collaboration within key areas such as procurement, research and development or treasury. The Commercial Vehicles segment primarily comprises the development, production and sale of light commercial vehicles, trucks and buses, the corresponding genuine parts business and related services. Just as in the case of the car brands, there is collaboration within the areas procurement, development and sale. The aim is to achieve further forms of interlinking. The activities of the Power Engineering segment consist of the development and production of large-bore diesel engines, turbo compressors, industrial turbines and chemical reactor systems, as well as the production of gear units, propulsion components and testing systems. The activities of the Financial Services segment comprise dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility services. In this segment, combinations occur especially while taking into account the comparability of the type of services as well as the regulatory situation permits. Purchase price allocation for companies acquired is allocated directly to the corresponding segments. At Volkswagen, segment profit or loss is measured on the basis of the operating result. In the segment reporting, the share of the result of joint ventures is contained in the share of the result of equity-accounted investments in the corresponding segments. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. Investments in intangible assets, property, plant and equipment, and investment property are reported net of investments under finance leases. As a matter of principle, business relationships between the companies within the segments of the Volkswagen Group are transacted at arm’s length prices. Consolidated Financial Statements Notes to the Consolidated Financial Statements 231 R E P O RT I N G S E G M E N T S 2 0 1 6 € million Sales revenue from external customers Intersegment sales revenue Total sales revenue Depreciation and amortization Impairment losses Reversal of impairment losses Segment result (operating result) Share of the result of equity-accounted investments Net interest result and other financial result Equity-accounted investments Investments in intangible assets, property, plant and equipment, and investment property R E P O RT I N G S E G M E N T S 2 0 1 7 Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group 160,461 17,354 177,815 10,846 886 152 5,235 3,147 –1,674 7,349 25,385 6,695 32,080 2,293 126 0 718 25 –379 418 3,590 3 3,593 368 3 – –217 – –8 – 27,884 3,367 31,251 6,224 491 92 2,435 64 –91 849 217,320 27,418 244,739 19,731 1,506 245 8,171 3,236 –54 217,267 –27,418 –27,472 –159 –137 –139 –1,068 – 217,267 19,572 1,368 106 7,103 261 3,497 –2,152 8,616 –1,157 – –3,308 8,616 15,891 2,433 194 357 18,875 27 18,902 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Sales revenue from external customers Intersegment sales revenue Total sales revenue Depreciation and amortization Impairment losses Reversal of impairment losses 169,513 18,892 188,405 11,363 704 14 27,632 7,568 35,200 2,557 2 1 Segment result (operating result) 12,644 1,892 Share of the result of equity-accounted investments Net interest result and other financial result Equity-accounted investments Investments in intangible assets, property, plant and equipment, and investment property 3,390 –1,920 6,724 83 –220 753 3,280 3 3,283 371 0 – –55 1 –2 18 30,191 3,541 33,733 6,797 574 41 230,618 30,004 260,621 21,089 1,280 56 64 230,682 –30,004 –29,939 –147 0 – – 230,682 20,941 1,280 56 2,673 17,153 –3,335 13,818 9 3,482 – 3,482 –180 710 –2,321 8,205 –1,067 – –3,388 8,205 15,713 1,915 159 421 18,208 104 18,313 232 Notes to the Consolidated Financial Statements Consolidated Financial Statements R E CO N C I L I AT I O N € million Segment sales revenue Unallocated activities Group financing Consolidation Group sales revenue Segment result (operating result) Unallocated activities Group financing Consolidation Operating result Financial result Consolidated result before tax B Y R E G I O N 2 0 1 6 2017 2016 260,621 244,739 948 25 –30,912 230,682 17,153 10 –16 –3,328 13,818 94 13,913 749 42 –28,263 217,267 8,171 86 22 –1,176 7,103 189 7,292 € million Germany Europe/Other markets¹ North America South America Asia- Pacific Total Sales revenue from external customers 43,634 94,445 35,454 7,973 35,761 217,267 Intangible assets, property, plant and equipment, lease assets and investment property 84,525 40,717 23,958 3,320 3,064 155,583 1 Excluding Germany. B Y R E G I O N 2 0 1 7 € million Germany Europe/Other markets¹ North America South America Asia- Pacific Total Sales revenue from external customers 44,333 98,420 38,818 9,988 39,123 230,682 Intangible assets, property, plant and equipment, lease assets and investment property 1 Excluding Germany. 89,594 37,050 26,076 2,851 2,812 158,384 Allocation of sales revenue to the regions follows the destination principle. Consolidated Financial Statements Notes to the Consolidated Financial Statements 233 Income statement disclosures 1. Sales revenue ST R U C T U R E O F G R O U P S A L E S R E V E N U E € million Vehicles Genuine parts Used vehicles and third-party products Engines, powertrains and parts deliveries Power Engineering Motorcycles Leasing business Interest and similar income Other sales revenue 2017 2016 145,958 15,628 13,355 11,318 3,280 601 24,570 7,119 8,853 137,293 15,220 13,324 9,770 3,590 589 22,306 6,695 8,481 230,682 217,267 For segment reporting purposes, the sales revenue of the Group is presented by segment and market. Other sales revenue comprises revenue from workshop services and license revenue, among other things. Sales revenue from construction contracts amounted to €965 million (previous year: €1,069 million) and mainly related to the Power Engineering segment. 2. Cost of sales Cost of sales includes interest expenses of €1,961 million (previous year: €1,930 million) attributable to the financial services business. This item also includes impairment losses on intangible assets (primarily development costs), property, plant and equipment (primarily other equipment, operating and office equipment), and lease assets in the amount of €1,185 million (previous year: €1,369 million). The impairment losses amounting to a total of €700 million recognized during the reporting period on intangible assets and items of property, plant and equipment result in particular from lower values in use of various products in the Passenger Cars segment, from market and exchange rate risks, and in particular from expected declines in volumes. The impairment losses on lease assets in the amount of €485 million (including €37 million reported in current lease assets), which are attributable predominantly to the Financial Services segment, are based on constantly updated internal and external information that is factored into the forecast residual values of the vehicles. Government grants related to income amounted to €424 million in the fiscal year (previous year: €435 million) and were generally allocated to the functions. 234 Notes to the Consolidated Financial Statements Consolidated Financial Statements 3. Distribution expenses Distribution expenses amounting to €22.7 billion (previous year: €22.7 billion) include nonstaff overheads and personnel costs, and depreciation and amortization applicable to the distribution function, as well as the costs of shipping, advertising and sales promotions. 4. Administrative expenses The administrative expenses of €8.3 billion (previous year: €7.3 billion) mainly include nonstaff overheads and personnel costs, as well as depreciation and amortization applicable to the administrative function. 5. Other operating income € million 2017 2016 Income from reversal of valuation allowances on receivables and other assets Income from reversal of provisions and accruals Income from foreign currency hedging derivatives Income from foreign exchange gains Income from sale of promotional material Income from cost allocations Income from investment property Gains on asset disposals and the reversal of impairment losses Miscellaneous other operating income 1,043 4,384 2,259 2,656 502 1,386 16 212 2,041 14,500 847 3,738 1,739 2,842 440 1,222 14 363 1,843 13,049 Income from the reversal of provisions and accrued liabilities is mainly attributable to a reduction in provisions. A further breakdown can be found in the “Noncurrent and current other provisions” section. Foreign exchange gains mainly comprise gains from changes in exchange rates between the dates of recognition and payment of receivables and liabilities denominated in foreign currencies, as well as exchange rate gains resulting from measurement at the closing rate. Foreign exchange losses from these items are included in other operating expenses. Consolidated Financial Statements Notes to the Consolidated Financial Statements 235 6. Other operating expenses € million 2017 2016 Valuation allowances on receivables and other assets Losses from foreign currency hedging derivatives Foreign exchange losses Expenses from cost allocations Expenses for termination agreements Losses on disposal of noncurrent assets Miscellaneous other operating expenses 1,650 1,753 2,839 609 35 175 5,197 12,259 1,787 2,964 3,077 542 424 144 7,970 16,907 Miscellaneous other operating expenses consist of litigation expenses of €1.0 billion (previous year: €5.1 billion) in connection with the diesel issue. In the previous year, they had also included provisions of €0.4 bil- lion for the antitrust proceedings that the European Commission opened against European truck manufacturers including MAN and Scania. The prior-year expenses for termination agreements result primarily from the restructuring expenses for the South American market and at MAN. In addition, the changes in the currency hedging derivatives are due to the exchange rate changes between the trade price and the price on realization; this applies in particular to the US dollar, the Chinese renminbi and sterling. 7. Share of the result of equity-accounted investments € million 2017 2016 Share of profits of equity-accounted investments of which: from joint ventures of which: from associates Share of losses of equity-accounted investments of which: from joint ventures of which: from associates 3,519 (3,327) (191) 36 (2) (34) 3,482 3,563 (3,534) (29) 66 – (66) 3,497 236 Notes to the Consolidated Financial Statements Consolidated Financial Statements 8. Interest result € million Interest income Other interest and similar income Income from valuation of interest derivatives Interest expenses Other interest and similar expenses Expenses from valuation of interest derivatives Interest cost included in lease payments Interest result on other liabilities Net interest on the net defined benefit liability Interest result 1 Prior-year figures adjusted. 2017 2016¹ 951 839 113 –2,317 –1,305 –368 –29 –13 –602 1,285 915 370 –2,955 –1,400 –448 –29 –347 –731 –1,366 –1,670 To enhance comparability, the structure within the financial result has been changed. The presentation of finance costs has been replaced with the interest result. The new structure has led to changes in various items in the financial result. Specifically, the realized expenses from loan receivables and liabilities in foreign currency reported in the finance cost item in previous years have been reclassified to other financial result. In addition, income and expenses from the measurement and realization of interest rate risk, which were previously reported in income and expenses from fair value changes relating to hedging transactions within hedge accounting are now presented in the interest result. The prior-year figures for other financial result have been adjusted accordingly by an amount of €1.6 billion. 9. Other financial result € million Income from profit and loss transfer agreements Cost of loss absorption Other income from equity investments Other expenses from equity investments Income from marketable securities and loans1, 2 Realized income of loan receivables and payables in foreign currency Realized expenses of loan receivables and payables in foreign currency Gains and losses from remeasurement and impairment of financial instruments1 Gains and losses from fair value changes of derivatives not included in hedge accounting Gains and losses from fair value changes of derivatives included in hedge accounting1 Other financial result¹ 1 Prior-year figures adjusted. 2 Including disposal gains/losses. 2017 35 –76 71 –289 –222 734 –1,107 –475 –810 117 –2,022 2016 33 –24 110 –155 –58 882 –810 –303 –1,148 –166 –1,638 Consolidated Financial Statements Notes to the Consolidated Financial Statements 237 10. Income tax income/expense CO M P O N E N T S O F TA X I N CO M E A N D E X P E N S E € million Current tax expense, Germany Current tax expense, abroad Current income tax expense of which prior-period income (–)/expense (+) Deferred tax income (–)/expense (+), Germany Deferred tax income (–)/expense (+), abroad Deferred tax income (–)/expense (+) Income tax income/expense 2017 2016 614 2,590 3,205 (216) 385 –1,315 –930 2,275 885 2,388 3,273 (188) –736 –625 –1,361 1,912 The statutory corporation the 2017 assessment period was 15%. Including trade tax and the solidarity surcharge, this resulted in an aggregate tax rate of 29.9% (previous year: 29.9%). in Germany rate tax for A tax rate of 29.9% (previous year: 29.9%) was used to measure deferred taxes in the German consolidated tax group. The local income tax rates applied for companies outside Germany vary between 0% and 45%. In the case of split tax rates, the tax rate applicable to undistributed profits is applied. The realization of tax benefits from tax loss carryforwards from previous years resulted in a reduction in current income taxes in 2017 of €422 million (previous year: €146 million). Previously unused tax loss carryforwards amounted to €14,931 million (previous year: €17,686 million). Tax loss carryforwards amounting to €9,660 million (previous year: €11,494 million) can be used indefinitely, while €3,834 million (previous year: €4,237 million) must be used within the next ten years. There are additional tax loss carryforwards amounting to €1,437 million (previous year: €1,956 million) that can be used within a period of 15 or 20 years. Tax loss carryforwards of €7,222 million (previous year: €6,380 million) were estimated not to be usable overall. Of these, €343 million (previous year: €276 million) will expire within five years, €2,152 million (previous year: €2,341 million) within 6 to 20 years and €93 million (previous year: €38 million) after 20 years. Tax loss carryforwards of €4,634 million (previous year: €3,725 million) that are estimated not to be usable will not expire. The benefit arising from previously unrecognized tax losses or tax credits of a prior period that is used to reduce current tax expense in the current fiscal year amounts to €114 million (previous year: €135 million). Deferred tax expense was reduced by €75 million (previous year: €211 million) because of a benefit arising from previously unrecognized tax losses and tax credits of a prior period. Deferred tax expense resulting from the write-down of a deferred tax asset amounts to €130 million (previous year: €297 million). Deferred tax income resulting from the reversal of a write-down of deferred tax assets amounts to €40 million (previous year: €304 million). Tax credits granted by various countries amounted to €500 million (previous year: €756 million). No deferred tax assets were recognized for deductible temporary differences of €1,028 million (previous year: €1,533 million) and for tax credits of €228 million (previous year: €353 million) that would expire in the next 20 years, or for tax credits of €0 million (previous year: €65 million) that will not expire. In accordance with IAS 12.39, deferred tax liabilities of €266 million (previous year: €326 million) for temporary differences and undistributed profits of Volkswagen AG subsidiaries were not recognized because control exists. Due to the change in the statutory provisions in Germany, a refund claim for corporation tax was recognized as a current tax asset for the first time in fiscal year 2006. As of the balance sheet date, the previous year’s refund claim (€134 million) had been amortized in full. 238 Notes to the Consolidated Financial Statements Consolidated Financial Statements Deferred tax income resulting from changes in tax rates amounted to €1,044 million at Group level (previous year: expense of €120 million). This is primarily attributable to the effects of the tax reform in the United States. Deferred taxes in respect of temporary differences and tax loss carryforwards of €8,344 million (previous year: €9,890 million) were recognized without being offset by deferred tax liabilities in the same amount. The deferred tax assets of companies within the German tax group were recognized due to positive results in the past and are included in this analysis. The companies concerned are expecting positive tax income in the future, following losses in the reporting period or the previous year. €3,655 million (previous year: €5,486 million) of the deferred taxes recognized in the balance sheet was credited to equity and relates to other comprehensive income. €2 million (previous year: €3 million) of this figure is attributable to noncontrolling interests. In the fiscal year under review, changes of €–3 million arising from items that will not be reclassified to profit or loss were recognized directly in equity. Changes in deferred taxes classified by balance sheet item are presented in the statement of comprehensive income. In fiscal year 2017, tax effects of €8 million resulting from equity transaction costs were recognized in equity. D E F E R R E D TA X E S C L A S S I F I E D BY B A L A N C E S H E E T I T E M The following recognized deferred tax assets and liabilities were attributable to recognition and measurement differences in the individual balance sheet items and to tax loss carryforwards: € million Intangible assets Property, plant and equipment, and lease assets Noncurrent financial assets Inventories Receivables and other assets (including Financial Services Division) Other current assets Pension provisions Liabilities and other provisions Valuation allowances on deferred tax assets from temporary differences Temporary differences, net of valuation allowances Tax loss carryforwards, net of valuation allowances Tax credits, net of valuation allowances Value before consolidation and offset of which noncurrent Offset Consolidation Amount recognized D E F E R R E D T A X A S S E T S D E F E R R E D T A X L I A B I L I T I E S Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2016 363 4,567 35 2,653 1,879 3,884 6,652 9,603 –327 29,307 2,090 273 31,670 (18,858) 24,816 2,956 9,810 302 4,387 26 2,223 2,107 2,768 6,776 10,746 –368 28,967 3,365 337 32,670 (21,736) 25,198 2,284 9,756 10,055 6,017 43 784 8,889 42 24 4,109 – 29,963 – – 29,963 (22,863) 24,816 489 5,636 9,884 8,315 24 792 7,273 92 22 2,750 – 29,152 – – 29,152 (23,681) 25,198 791 4,745 Consolidated Financial Statements Notes to the Consolidated Financial Statements 239 In accordance with IAS 12, deferred tax assets and liabilities are offset if, and only if, they relate to income taxes levied by the same taxation authority and relate to the same tax period. The tax expense reported for 2017 of €2,275 million (previous year: €1,912 million) was €1,885 million lower (previous year: €268 million lower) than the expected tax expense of €4,160 million that would have resulted from application of a tax rate for the Group of 29.9% (previous year: 29.9%) to the earnings before tax of the Group. R E CO N C I L I AT I O N O F E X P E C T E D TO E F F E C T I V E I N CO M E TA X € million Profit before tax Expected income tax income (–) / expense (+) (tax rate 29.9%; previous year: 29.9%) Reconciliation: Effect of different tax rates outside Germany Proportion of taxation relating to: tax-exempt income expenses not deductible for tax purposes effects of loss carryforwards and tax credits permanent differences Tax credits Prior-period tax expense Effect of tax rate changes Nondeductible withholding tax Other taxation changes Effective income tax expense 2017 2016 13,913 4,160 7,292 2,180 –541 –446 –1,237 –1,226 407 476 5 –50 –212 –1,044 383 –73 2,275 409 35 12 –137 234 139 437 275 1,912 The tax expense recognized in the fiscal year was reduced by €1,007 million on the basis of the tax reform passed in the United States, which envisages a reduction in the corporate income tax rate from 35% to 21%, among other things. The reduction resulted mainly from the remeasurement of deferred taxes of subsidiaries in the United States. 240 Notes to the Consolidated Financial Statements Consolidated Financial Statements 11. Earnings per share Basic earnings per share are calculated by dividing earnings attributable to Volkswagen AG shareholders by the weighted average number of ordinary and preferred shares outstanding during the reporting period. Since the basic and diluted number of shares is identical, basic earnings per share also correspond to diluted earnings per share. Article 27(2) No. 1 of the Articles of Association of Volkswagen AG sets out that, even in the event of a deficit, a preferred dividend of €0.11 per preferred share must be paid out in the subsequent fiscal years based on the cumulative arrangement if no dividend is paid for the year under review; consequently, this must be factored into the calculation of earnings per share for the current fiscal year. The dividend proposal that is based on Volkswagen AG’s net income for the year under the German Commercial Code is not relevant for the calculation of earnings per share in accordance with IAS 33. The distribution of further dividends in accordance with Article 27(2) Nos. 2 and 3 of the Articles of Association of Volkswagen AG, whereby, in the case of a full distribution, the dividend paid for each preferred share is €0.06 higher than that paid for each ordinary share, is only included in the calculation of earnings per share if there is a profit after tax attributable to the shareholders of Volkswagen AG. Quantity O R D I N A R Y P R E F E R R E D 2017 2016 2017 2016 Weighted average number of shares outstanding – basic 295,089,818 295,089,818 206,205,445 206,205,445 Weighted average number of shares outstanding – diluted 295,089,818 295,089,818 206,205,445 206,205,445 € million Earnings after tax Noncontrolling interests Earnings attributable to Volkswagen AG hybrid capital investors Earnings attributable to Volkswagen AG shareholders Basic earnings attributable to ordinary shares Diluted earnings attributable to ordinary shares Basic earnings attributable to preferred shares Diluted earnings attributable to preferred shares € Basic earnings per ordinary share Diluted earnings per ordinary share Basic earnings per preferred share Diluted earnings per preferred share 2017 2016 11,638 10 274 11,354 6,676 6,676 4,678 4,678 5,379 10 225 5,144 3,021 3,021 2,123 2,123 2017 2016 22.63 22.63 22.69 22.69 10.24 10.24 10.30 10.30 Consolidated Financial Statements Notes to the Consolidated Financial Statements 241 Additional Income Statement Disclosures in accordance with IAS 23 (Borrowing Costs) Capitalized borrowing costs amounted to €83 million (previous year: €83 million) and related mainly to capitalized development costs. An average cost of debt of 1.5% (previous year: 1.5%) was used as a basis for capitalization in the Volkswagen Group. Additional Income Statement Disclosures in accordance with IFRS 7 (Financial Instruments) C L A S S E S O F F I N A N C I A L I N ST R U M E N T S Financial instruments are divided into the following classes at the Volkswagen Group: > financial instruments measured at fair value, > financial instruments measured at amortized cost and > financial instruments not falling within the scope of IFRS 7. Financial instruments not falling within the scope of IFRS 7 include in particular investments in associates and joint ventures accounted for using the equity method. N E T G A I N S O R LO S S E S F R O M F I N A N C I A L I N ST R U M E N T S B Y I A S 3 9 M E A S U R E M E N T C AT E G O RY € million Financial instruments at fair value through profit or loss Loans and receivables¹ Available-for-sale financial assets Financial liabilities measured at amortized cost 2017 2016 –840 2,105 –206 1,689 2,748 –1,203 3,434 –39 –3,480 –1,288 1 Prior-year figures adjusted. Further details can be found in the disclosures in the section entitled “Noncurrent and current financial services receivables”. Net gains and losses from financial assets and liabilities at fair value through profit or loss are composed of the fair value measurement gains and losses on derivatives, including interest and gains and losses on currency translation. Net gains and losses from available-for-sale financial assets primarily comprise income and expenses from marketable securities including disposal gains/losses, impairment losses on investments and currency translation effects. Net gains and losses from loans and receivables and from financial liabilities carried at amortized cost comprise interest income and expenses in accordance with the effective interest method under IAS 39, including currency translation effects. Interest also includes interest income and expenses from the lending business of the financial services operations. 242 Notes to the Consolidated Financial Statements Consolidated Financial Statements TOTA L I N T E R E ST I N CO M E A N D E X P E N S E S AT T R I B U TA B L E TO F I N A N C I A L I N ST R U M E N T S N OT M E A S U R E D AT F A I R VA L U E T H R O U G H P R O F I T O R LO S S € million Interest income¹ Interest expenses 2017 2016 4,794 3,509 1,285 4,670 3,534 1,136 1 Prior-year figures adjusted. Further details can be found in the disclosures in the section entitled “Noncurrent and current financial services receivables”. I M PA I R M E N T LO S S E S O N F I N A N C I A L A S S E T S B Y C L A S S € million Measured at fair value Measured at amortized cost 2017 2016 3 1,628 1,631 18 1,707 1,725 Impairment losses relate to write-downs of financial assets, such as valuation allowances on receivables and marketable securities. Interest income on impaired financial assets amounted to €56 million in the fiscal year (previous year: €48 million). In fiscal year 2017, €3 million (previous year: €3 million) was recognized as an expense and €58 million (previous year: €67 million) as income from fees and commissions for trust activities and from financial assets and liabilities not measured at fair value that are not accounted for using the effective interest method. Consolidated Financial Statements Notes to the Consolidated Financial Statements 243 Balance sheet disclosures 12. Intangible assets C H A N G E S I N I N TA N G I B L E A S S E T S I N T H E P E R I O D J A N UA RY 1 TO D E C E M B E R 3 1 , 2 0 1 6 Capitalized development costs for products under development Capitalized development costs for products currently in use Other intangible assets € million Brand names Goodwill Cost Balance at Jan. 1, 2016 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals 17,062 –37 23,646 –86 – – – – 9 – – 10 Balance at Dec. 31, 2016 17,024 23,559 Amortization and impairment Balance at Jan. 1, 2016 Foreign exchange differences Changes in consolidated Group Additions to cumulative amortization Additions to cumulative impairment losses Transfers Disposals Reversal of impairment losses Balance at Dec. 31, 2016 Carrying amount at Dec. 31, 2016 76 5 – 3 – – – – 84 – 0 – – 10 – 10 – 0 6,781 –12 – 4,857 –4,324 17 7,285 37 0 – – 16 0 14 – 39 23,681 –90 – 893 4,324 1,442 27,366 12,968 –80 – 3,278 293 – 1,419 1 15,040 16,941 23,558 7,246 12,326 Total 79,699 –89 37 6,135 12 1,925 83,870 18,553 9 7 4,187 375 –3 1,855 1 21,271 62,599 8,529 137 29 385 12 456 8,637 5,472 84 7 906 55 –3 412 0 6,109 2,527 244 Notes to the Consolidated Financial Statements Consolidated Financial Statements C H A N G E S I N I N TA N G I B L E A S S E T S I N T H E P E R I O D J A N UA RY 1 TO D E C E M B E R 3 1 , 2 0 1 7 Capitalized development costs for products under development Capitalized development costs for products currently in use Other intangible assets € million Brand names Goodwill Cost Balance at Jan. 1, 2017 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals 17,024 –30 – – – – 23,559 –91 –18 – – 7 Balance at Dec. 31, 2017 16,995 23,443 Amortization and impairment Balance at Jan. 1, 2017 Foreign exchange differences Changes in consolidated Group Additions to cumulative amortization Additions to cumulative impairment losses Transfers Disposals Reversal of impairment losses Balance at Dec. 31, 2017 Carrying amount at Dec. 31, 2017 84 –3 – 3 – – – – 83 0 0 0 – 7 – 7 – 0 7,285 –44 – 4,080 –4,197 10 7,115 39 0 – – 57 – – – 95 27,366 –183 – 1,180 4,197 3,607 28,952 15,040 –122 – 3,345 332 – 3,595 – 14,999 16,911 23,442 7,020 13,953 Total 83,870 –539 –130 5,788 –7 3,890 85,093 21,271 –263 –84 4,178 397 2 3,827 – 21,674 63,419 8,637 –192 –112 528 –7 266 8,588 6,109 –138 –84 831 1 2 226 – 6,496 2,093 Other intangible assets comprise in particular concessions, purchased customer lists and dealer relationships, industrial and similar rights, and licenses in such rights and assets. Consolidated Financial Statements Notes to the Consolidated Financial Statements 245 The allocation of the brand names and goodwill to the operating segments is shown in the following table: € million Brand names by operating segment Porsche Scania Vehicles and Services MAN Truck & Bus MAN Diesel & Turbo Ducati Other Goodwill by operating segment Porsche Scania Vehicles and Services MAN Truck & Bus MAN Diesel & Turbo Ducati ŠKODA Porsche Holding Salzburg Other 2017 2016 13,823 990 1,127 415 404 153 13,823 1,017 1,127 415 404 155 16,911 16,941 18,825 2,866 18,825 2,947 595 268 290 159 151 289 608 249 290 150 197 293 23,442 23,558 The impairment test for recognized goodwill is based on value in use. Recoverability is not affected by a variation in the growth forecast with respect to the perpetual annuity or in the discount rate of +/– 0.5 percentage points. Research and development costs developed as follows: € million 2017 2016 Total research and development costs of which: capitalized development costs Capitalization ratio in % Amortization of capitalized development costs Research and development costs recognized in profit or loss 13,141 5,260 40.0 3,734 11,614 13,672 5,750 42.1 3,587 11,509 % –3.9 –8.5 – 4.1 0.9 246 Notes to the Consolidated Financial Statements Consolidated Financial Statements 13. Property, plant and equipment C H A N G E S I N P R O P E RT Y, P L A N T A N D E Q U I P M E N T I N T H E P E R I O D J A N UA RY 1 TO D E C E M B E R 3 1 , 2 0 1 6 € million Cost Balance at Jan. 1, 2016 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Balance at Dec. 31, 2016 Depreciation and impairment Balance at Jan. 1, 2016 Foreign exchange differences Changes in consolidated Group Additions to cumulative depreciation Additions to cumulative impairment losses Transfers Disposals Reversal of impairment losses Balance at Dec. 31, 2016 Carrying amount at Dec. 31, 2016 of which assets leased under finance leases Carrying amount at Dec. 31, 2016 Land, land rights and buildings, including buildings on third-party land Technical equipment and machinery Other equipment, operating and office equipment Payments on account and assets under construction Total 31,036 39,836 58,243 7,717 136,832 228 42 742 1,639 154 33,534 429 26 1,843 2,296 1,076 498 30 5,150 1,879 1,203 43,353 64,595 12,789 28,148 45,645 305 14 2,918 143 21 1,011 7 30,531 12,822 397 16 4,707 291 15 1,071 0 49,999 14,596 90 6 1,000 67 17 81 – 13,887 19,647 318 51 1 5,025 –5,758 28 7,008 79 5 – – 8 –46 0 7 39 6,969 1,206 98 12,760 55 2,461 148,490 86,661 796 36 8,625 508 7 2,164 13 94,456 54,033 9 45 – 372 Future finance lease payments due, and their present values, are shown in the following table: € million 2017 2018 – 2021 from 2022 Finance lease payments Interest component of finance lease payments Carrying amount of liabilities 79 26 53 306 100 206 480 200 279 Total 865 326 539 Consolidated Financial Statements Notes to the Consolidated Financial Statements 247 C H A N G E S I N P R O P E RT Y, P L A N T A N D E Q U I P M E N T I N T H E P E R I O D J A N UA RY 1 TO D E C E M B E R 3 1 , 2 0 1 7 € million Cost Balance at Jan. 1, 2017 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Balance at Dec. 31, 2017 Depreciation and impairment Balance at Jan. 1, 2017 Foreign exchange differences Changes in consolidated Group Additions to cumulative depreciation Additions to cumulative impairment losses Transfers Disposals Reversal of impairment losses Balance at Dec. 31, 2017 Carrying amount at Dec. 31, 2017 of which assets leased under finance leases Carrying amount at Dec. 31, 2017 Land, land rights and buildings, including buildings on third-party land Technical equipment and machinery Other equipment, operating and office equipment Payments on account and assets under construction 33,534 43,353 –440 –303 630 1,063 149 –824 –71 1,355 2,509 873 64,595 –1,056 –117 5,056 1,829 1,399 34,335 45,450 68,909 30,531 –560 –62 3,211 –9 –16 807 2 32,286 13,164 49,999 –790 –80 5,152 254 –1 1,183 0 53,352 15,557 13,887 –153 –117 1,058 3 14 71 0 14,621 19,714 286 Total 148,490 –2,473 –501 12,516 –11 2,452 155,569 94,456 –1,508 –259 9,421 303 –3 2,068 15 100,327 55,243 7,008 –152 –11 5,474 –5,411 31 6,876 39 –5 – – 55 0 7 13 69 6,807 6 46 – 339 Options to purchase buildings and plant leased under the terms of finance leases exist in most cases, and are also expected to be exercised. Future finance lease payments due, and their present values, are shown in the following table: € million 2018 2019 – 2022 from 2023 Finance lease payments Interest component of finance lease payments Carrying amount of liabilities 67 16 51 263 87 176 390 139 252 Total 721 242 479 For assets leased under operating leases, payments recognized in the income statement amounted to €1,449 million (previous year: €1,498 million). With respect to internally used assets, €1,302 million (previous year: €1,320 million) of this figure is attributable to minimum lease payments and €55 million (previous year: €60 million) to contingent lease payments. The payments of €92 million (previous year: €118 million) under subleases primarily relate to minimum lease payments. 248 Notes to the Consolidated Financial Statements Consolidated Financial Statements Government grants of €135 million (previous year: €218 million) were deducted from the cost of property, plant and equipment and noncash benefits received amounting to €12 million (previous year: €12 million) were not capitalized as the cost of assets. Real property liens of €916 million (previous year: €762 million) are pledged as collateral for financial liabilities related to land and buildings. 14. Lease assets and investment property C H A N G E S I N L E A S E A S S E T S A N D I N V E STM E N T P R O P E RT Y I N T H E P E R I O D J A N UA RY 1 TO D E C E M B E R 3 1 , 2 0 1 6 € million Leasing assets Investment property Total Cost Balance at Jan. 1, 2016 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Balance at Dec. 31, 2016 Depreciation and impairment Balance at Jan. 1, 2016 Foreign exchange differences Changes in consolidated Group Additions to cumulative depreciation Additions to cumulative impairment losses Transfers Disposals Reversal of impairment losses Balance at Dec. 31, 2016 Carrying amount at Dec. 31, 2016 45,118 321 64 20,628 3 14,652 51,483 11,945 74 15 6,743 455 0 6,097 92 13,044 38,439 761 12 66 33 –70 21 780 257 2 1 17 0 –4 4 – 268 512 45,879 333 130 20,661 –67 14,673 52,262 12,202 76 16 6,760 455 –4 6,101 92 13,312 38,950 The following payments from noncancelable leases and rental agreements were expected to be received over the coming years: € million Lease payments 2017 2018 – 2021 from 2022 Total 3,649 4,759 56 8,464 Consolidated Financial Statements Notes to the Consolidated Financial Statements 249 C H A N G E S I N L E A S E A S S E T S A N D I N V E STM E N T P R O P E RT Y I N T H E P E R I O D J A N UA RY 1 TO D E C E M B E R 3 1 , 2 0 1 7 € million Leasing assets Investment property Total Cost Balance at Jan. 1, 2017 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Balance at Dec. 31, 2017 Depreciation and impairment Balance at Jan. 1, 2017 Foreign exchange differences Changes in consolidated Group Additions to cumulative depreciation Additions to cumulative impairment losses Transfers Disposals Reversal of impairment losses Balance at Dec. 31, 2017 Carrying amount at Dec. 31, 2017 51,483 –3,093 –873 21,319 6 16,616 52,226 13,044 –803 –228 7,327 448 0 6,775 41 12,972 39,254 780 –36 – 18 12 26 748 268 –5 0 15 3 1 4 – 279 468 52,262 –3,129 –873 21,336 18 16,641 52,973 13,312 –808 –228 7,343 451 1 6,779 41 13,251 39,722 Lease assets include assets leased out under the terms of operating leases and assets covered by long-term buy- back agreements. Investment property includes apartments rented out and leased dealerships with a fair value of €993 million (previous year: €1,150 million). Fair value is estimated using an investment method based on internal calculations (Level 3 of the fair value hierarchy). Operating expenses of €52 million (previous year: €46 million) were incurred for the maintenance of investment property in use. Expenses of €3 million (previous year: €1 million) were incurred for unused investment property. The following payments from noncancelable leases and rental agreements are expected to be received over the coming years: € million Lease payments 2018 2019 – 2022 from 2023 Total 3,392 4,675 46 8,112 250 Notes to the Consolidated Financial Statements Consolidated Financial Statements 15. Equity-accounted investments and other equity investments C H A N G E S I N E Q U I T Y - A CCO U N T E D I N V E STM E N T S A N D OT H E R E Q U I T Y I N V E STM E N T S I N T H E P E R I O D J A N UA RY 1 TO D E C E M B E R 3 1 , 2 0 1 6 € million Gross carrying amount at Jan. 1, 2016 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Changes recognized in profit or loss Dividends Other changes recognized in other comprehensive income Balance at Dec. 31, 2016 Impairment losses Balance at Jan. 1, 2016 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Reversal of impairment losses Balance at Dec. 31, 2016 Carrying amount at Dec. 31, 2016 Equity-accounted investments Other equity investments 10,985 –100 –11 525 – 2,193 3,250 –3,598 –131 8,727 81 –1 – 30 – – – 110 8,616 1,333 –1 –103 191 – 3 – – – 1,417 358 1 –57 120 – 1 0 420 996 Total 12,318 –101 –114 716 – 2,197 3,250 –3,598 –131 10,143 439 0 –57 150 – 1 0 531 9,613 Consolidated Financial Statements Notes to the Consolidated Financial Statements 251 C H A N G E S I N E Q U I T Y - A CCO U N T E D I N V E STM E N T S A N D OT H E R E Q U I T Y I N V E STM E N T S I N T H E P E R I O D J A N UA RY 1 TO D E C E M B E R 3 1 , 2 0 1 7 € million Gross carrying amount at Jan. 1, 2017 Foreign exchange differences Changes in consolidated Group Additions Transfers Held for sale Disposals Changes recognized in profit or loss Dividends Other changes recognized in other comprehensive income Balance at Dec. 31, 2017 Impairment losses Balance at Jan. 1, 2017 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Reversal of impairment losses Balance at Dec. 31, 2017 Carrying amount at Dec. 31, 2017 Equity-accounted investments Other equity investments 8,727 –129 –13 348 – –86 7 3,495 –3,640 –251 8,443 110 –1 – 129 – – – 238 8,205 1,417 –17 –90 519 0 – 34 – – 30 1,825 420 –3 –15 129 – 24 1 507 1,318 Total 10,143 –146 –104 867 0 –86 40 3,495 –3,640 –221 10,268 531 –4 –15 258 – 24 1 745 9,523 Equity-accounted investments include joint ventures in the amount of €6,459 million (previous year: €7,068 million) and associates in the amount of €1,746 million (previous year: €1,548 million). The additions of equity-accounted investments are mainly attributable to the acquisition of the investment in Navistar in the amount of €0.3 billion (previous year: acquisition of investment in Gett and measurement of shares in GMH at the selling price). In the previous year, the disposals resulted from the divestment of LeasePlan by GMH. Further details can be found in the disclosures in the section entitled “Basis of consolidation”. Of the other changes recognized (previous year: in other comprehensive €–132 million) is attributable to joint ventures and €–2 million (previous year: €1 million) to associates. They are mainly the result of foreign exchange differences in the amount of €–327 million (previous year: €–156 million), pension plan remeasurements in the amount of €112 million (previous year: €–1 million) and losses on the fair value measurement of cash flow hedges in the amount of €–30 million (previous year: €33 mil- lion). income, €–249 million 252 Notes to the Consolidated Financial Statements Consolidated Financial Statements 16. Noncurrent and current financial services receivables € million Current Noncurrent Dec. 31, 2017 Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 Dec. 31, 2016 C A R R Y I N G A M O U N T F A I R V A L U E C A R R Y I N G A M O U N T F A I R V A L U E Receivables from financing business Customer financing¹ Dealer financing Direct banking Receivables from operating leases Receivables from finance leases¹ 1 Prior-year figures adjusted. 19,841 17,033 269 40,899 2,194 4 60,739 19,227 272 61,763 19,200 272 19,630 15,531 254 38,907 2,108 2 58,537 17,639 256 60,119 17,626 256 37,142 43,096 80,239 81,236 35,415 41,018 76,433 78,002 193 – 193 193 197 – 197 197 15,810 53,145 30,153 73,249 45,963 46,766 126,395 128,195 14,060 49,673 27,384 68,402 41,445 42,240 118,075 120,438 The receivables from customer financing and finance leases contained in financial services receivables of €126.4 billion (previous year: €118.1 billion) decreased by €31 million (previous year: €7 million) as a result of a fair value adjustment from portfolio hedging. The receivables from customer and dealer financing are secured by vehicles or real property liens. Of the receivables, €287 million (previous year: €251 million) was furnished as collateral for financial liabilities and contingent liabilities. The receivables from dealer financing include €51 million (previous year: €51 million) receivable from unconsolidated affiliated companies. In the consolidated financial statements, some of the receivables previously reported as customer financing in individual markets are now presented as receivables from finance leases. The prior-year figures have been restated, resulting in a €12.2 billion reduction in receivables from customer financing and a corresponding €12.2 billion increase in receivables from finance leases as of December 31, 2016. The adjustments as of Janu- ary 1, 2016 amounted to €11.9 billion. In addition, the expected cash flows from finance leases have been adjusted accordingly. The receivables from finance leases – almost entirely in respect of vehicles – were or are expected to generate the following cash flows as of December 31, 2016 and December 31, 2017: € million 2017 2018 – 2021 from 2022 Total Future payments from finance lease receivables Unearned finance income from finance leases (discounting) Present value of minimum lease payments outstanding at the reporting date 15,117 –1,058 29,352 –2,094 14,059 27,258 137 –11 126 44,605 –3,162 41,443 Consolidated Financial Statements Notes to the Consolidated Financial Statements 253 € million 2018 2019 – 2022 from 2023 Total Future payments from finance lease receivables Unearned finance income from finance leases (discounting) Present value of minimum lease payments outstanding at the reporting date 16,952 –1,142 32,280 –2,261 15,810 30,018 145 –11 135 49,377 –3,414 45,963 Accumulated valuation allowances for uncollectible minimum lease payments receivable amount to €116 million (previous year: €94 million). 17. Noncurrent and current other financial assets € million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 C A R R Y I N G A M O U N T C A R R Y I N G A M O U N T Positive fair value of derivatives Marketable securities Receivables from loans, bonds, profit participation rights (excluding interest) Miscellaneous financial assets 2,845 – 5,367 3,786 11,998 4,091 3 2,531 1,829 8,455 6,936 3 7,898 5,615 20,453 2,317 – 5,352 4,175 11,844 3,274 46 2,338 2,598 8,256 5,591 46 7,690 6,773 20,099 Other financial assets include receivables from related parties of €7.7 billion (previous year: €6.9 billion). Other financial assets and noncurrent marketable securities amounting to €1,819 million (previous year: €1,870 mil- lion) were furnished as collateral for financial liabilities and contingent liabilities. There is no original right of disposal or pledge for the furnished collateral on the part of the collateral taker. In addition, the miscellaneous financial assets include cash and cash equivalents that serve as collateral (mainly under asset-backed securities transactions). 254 Notes to the Consolidated Financial Statements Consolidated Financial Statements The positive fair values of derivatives relate to the following items: € million Transactions for hedging foreign currency risk from assets using fair value hedges foreign currency risk from liabilities using fair value hedges interest rate risk using fair value hedges interest rate risk using cash flow hedges foreign currency and price risk from future cash flows (cash flow hedges) Hedging transactions Assets related to derivatives not included in hedging relationships Dec. 31, 2017 Dec. 31, 2016 228 108 400 86 4,401 5,224 1,712 6,936 239 186 592 65 3,032 4,114 1,477 5,591 The positive fair value of transactions for hedging price risk from future cash flows (cash flow hedges) amounted to €– million (previous year: €36 million). Positive fair values of €17 million (previous year: €1 million) were recognized from transactions for hedging interest rate risk (fair value hedges) used in portfolio hedges. Further details on derivative financial instruments as a whole are given in the section entitled “Financial risk management and financial instruments". 18. Noncurrent and current other receivables € million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 C A R R Y I N G A M O U N T C A R R Y I N G A M O U N T Other recoverable income taxes Miscellaneous receivables 3,881 1,465 5,346 896 1,356 2,252 4,777 2,821 7,598 4,037 1,093 5,130 841 1,169 2,009 4,878 2,261 7,139 Miscellaneous receivables include assets to fund post-employment benefits in the amount of €64 million (previous year: €46 million). This item also includes the share of the technical provisions attributable to reinsurers amounting to €73 million (previous year: €73 million). Current other receivables are predominantly non-interest-bearing. Consolidated Financial Statements Notes to the Consolidated Financial Statements 255 19. Tax assets € million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 C A R R Y I N G A M O U N T C A R R Y I N G A M O U N T Deferred tax assets Tax receivables (cid:1042) 1,339 1,339 9,810 407 10,217 9,810 1,746 11,557 (cid:1042) 1,126 1,126 9,756 392 10,148 9,756 1,518 11,274 €7,456 million (previous year: €6,294 million) of the deferred tax assets are due within one year. 20. Inventories € million Dec. 31, 2017 Dec. 31, 2016 Raw materials, consumables and supplies Work in progress Finished goods and purchased merchandise Current lease assets Prepayments 4,858 4,143 26,514 4,774 127 40,415 4,396 4,408 25,719 4,276 178 38,978 At the same time as the relevant revenue was recognized, inventories in the amount of €173 billion (previous year: €166 billion) were included in cost of sales. Valuation allowances (excluding lease assets) recognized as expenses in the reporting period amounted to €878 million (previous year: €1,310 million). Vehicles amounting to €271 million (previous year: €263 million) were assigned as collateral for partial retirement obligations. 21. Trade receivables € million Trade receivables from third parties unconsolidated subsidiaries joint ventures associates other investees and investors The fair values of the trade receivables correspond to the carrying amounts. Dec. 31, 2017 Dec. 31, 2016 9,667 220 3,341 44 86 9,110 179 2,847 47 4 13,357 12,187 256 Notes to the Consolidated Financial Statements Consolidated Financial Statements The trade receivables include receivables from construction contracts accounted for using the percentage of completion (PoC) method. These are calculated as follows: € million Dec. 31, 2017 Dec. 31, 2016 Contract costs and proportionate contract profit/loss of construction contracts Progress billings Exchange rate effects PoC receivables, gross Prepayments received PoC receivables, net 1,122 –38 –3 1,081 –739 342 955 –91 2 865 –652 213 Other payments received on account of construction contracts in the amount of €270 million (previous year: €225 million), for which no construction costs have yet been incurred, are recognized under other liabilities. 22. Marketable securities The marketable securities serve to safeguard liquidity. Marketable securities are quoted, mainly short-term fixed-income securities and shares allocated to the available-for-sale financial assets category. 23. Cash, cash equivalents and time deposits € million Bank balances Checks, cash-in-hand, bills and call deposits Dec. 31, 2017 Dec. 31, 2016 18,343 114 18,457 19,093 171 19,265 Bank balances are held at various banks in different currencies and include time deposits, for example. 24. Equity The subscribed capital of Volkswagen AG is composed of no-par value bearer shares with a notional value of €2.56. As well as ordinary shares, there are preferred shares that entitle the bearer to a €0.06 higher dividend than ordinary shares, but do not carry voting rights. Authorized capital of up to €110 million created by a resolution of the Annual General Meeting on April 19, 2012 for the issue of new ordinary bearer shares or preferred shares expired on April 18, 2017. Apart from an amount of €83 million, the authorized capital was utilized. The Annual General Meeting on May 5, 2015 resolved to create authorized capital of up to €179 million, expiring on May 4, 2020, to issue new preferred bearer shares. Consolidated Financial Statements Notes to the Consolidated Financial Statements 257 In June 2017, Volkswagen AG placed unsecured subordinated hybrid notes with an aggregate principal amount of €3.5 billion via a subsidiary, Volkswagen International Finance N.V. Amsterdam, the Netherlands (VIF). The perpetual hybrid notes were issued in two tranches and can be called by VIF. The first call date for the first tranche (€1.5 billion and a coupon of 2.700%) is after 5.5 years, and the first call date for the second tranche (€2.0 billion and a coupon of 3.875%) is after ten years. Interest may be accumulated depending on whether a dividend is paid to Volkswagen AG shareholders. Under IAS 32, the hybrid notes must be classified in their entirety as equity. The capital raised was recognized in equity, less a discount and transaction costs and net of deferred taxes. The interest payments payable to the noteholders will be recognized directly in equity, net of income taxes. C H A N G E I N O R D I N A RY A N D P R E F E R R E D S H A R E S A N D S U B S C R I B E D C A P I TA L Balance at January 1 Capital increase Balance at December 31 S H A R E S 2017 2016 € 2017 2016 501,295,263 501,295,263 1,283,315,873 1,283,315,873 – – – – 501,295,263 501,295,263 1,283,315,873 1,283,315,873 The capital reserves comprise the share premium totaling €14,225 million (previous year: €14,225 million) from capital increases, the share premium of €219 million from the issuance of bonds with warrants and an amount of €107 million appropriated on the basis of the capital reduction implemented in 2006. No amounts were withdrawn from the capital reserves. D I V I D E N D P R O P O S A L In accordance with section 58(2) of the Aktiengesetz (AktG – German Stock Corporation Act), the dividend payment by Volkswagen AG is based on the net retained profits reported in the annual financial statements of Volkswagen AG prepared in accordance with the German Commercial Code. Based on these annual financial statements of Volkswagen AG, net retained profits of €2,181 million are eligible for distribution following the transfer of €2,174 million to the revenue reserves. The Board of Management and Supervisory Board will propose to the Annual General Meeting that a total dividend of €1,967 million, i.e. €3.90 per ordinary share and €3.96 per preferred share, be paid from the net retained profits. Shareholders are not entitled to a dividend payment until it has been resolved by the Annual General Meeting. A dividend of €2.00 per ordinary share and €2.06 per preferred share was distributed in fiscal year 2017. N O N CO N T R O L L I N G I N T E R E ST S As of December 31, 2017, total noncontrolling interests amounted to €229 million (previous year: €221 million). The noncontrolling interests in equity are attributable primarily to shareholders of RENK AG and AUDI AG and are immaterial individually and in the aggregate. 258 Notes to the Consolidated Financial Statements Consolidated Financial Statements 25. Noncurrent and current financial liabilities The details of noncurrent and current financial liabilities are presented in the following table: € million Bonds Commercial paper and notes Liabilities to banks Deposits business Loans and miscellaneous liabilities Bills of exchange Finance lease liabilities C A R R Y I N G A M O U N T C A R R Y I N G A M O U N T Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 14,146 22,506 14,487 29,291 1,363 – 51 48,971 13,399 15,357 2,114 1,358 – 428 63,118 35,905 29,844 31,405 2,721 – 479 18,831 23,173 14,180 31,019 1,204 – 53 33,191 18,004 10,816 2,759 1,102 – 486 52,022 41,178 24,996 33,779 2,306 – 539 81,844 81,628 163,472 88,461 66,358 154,819 26. Noncurrent and current other financial liabilities € million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 C A R R Y I N G A M O U N T C A R R Y I N G A M O U N T Negative fair values of derivative financial instruments Interest payable Miscellaneous financial liabilities 1,212 570 6,788 8,570 1,034 44 1,586 2,665 2,246 614 8,374 11,234 3,428 581 5,428 9,438 2,630 48 1,810 4,488 6,058 630 7,239 13,926 Consolidated Financial Statements Notes to the Consolidated Financial Statements 259 The negative fair values of derivatives relate to the following items: € million Transactions for hedging foreign currency risk from assets using fair value hedges foreign currency risk from liabilities using fair value hedges interest rate risk using fair value hedges interest rate risk using cash flow hedges foreign currency and price risk from future cash flows (cash flow hedges) Hedging transactions Liabilities related to derivatives not included in hedging relationships Dec. 31, 2017 Dec. 31, 2016 58 19 64 24 542 706 1,540 2,246 74 286 147 11 4,135 4,652 1,406 6,058 The negative fair value of transactions for hedging price risk from future cash flows (cash flow hedges) amounted to €– million (previous year: €21 million). Negative fair values of €22 million (previous year: €85 million) were recognized from transactions for hedging interest rate risk (fair value hedges) used in portfolio hedges. Further details on derivative financial instruments as a whole are given in the section entitled “Financial risk management and financial instruments". 27. Noncurrent and current other liabilities € million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 C A R R Y I N G A M O U N T C A R R Y I N G A M O U N T Payments received on account of orders Liabilities relating to other taxes social security wages and salaries Miscellaneous liabilities 4,084 2,301 564 4,941 4,071 15,961 694 249 38 844 4,375 6,199 4,779 4,042 2,550 601 5,785 8,446 2,611 536 4,495 3,777 22,160 15,461 572 204 35 750 4,103 5,664 4,614 2,815 571 5,245 7,880 21,125 260 Notes to the Consolidated Financial Statements Consolidated Financial Statements 28. Tax liabilities € million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 C A R R Y I N G A M O U N T C A R R Y I N G A M O U N T Deferred tax liabilities Provisions for taxes Tax payables (cid:1042) 1,397 430 1,827 5,636 3,030 – 8,666 5,636 4,427 430 10,492 (cid:1042) 1,301 500 1,801 4,745 3,556 – 8,301 4,745 4,857 500 10,102 €320 million (previous year: €328 million) of the deferred tax liabilities are due within one year. 29. Provisions for pensions and other post-employment benefits Provisions for pensions are recognized for commitments in the form of retirement, invalidity and dependents’ benefits payable under pension plans. The benefits provided by the Group vary according to the legal, tax and economic circumstances of the country concerned, and usually depend on the length of service and remuneration of the employees. Volkswagen Group companies provide occupational pensions under both defined contribution and defined benefit plans. In the case of defined contribution plans, the Company makes contributions to state or private pension schemes based on legal or contractual requirements, or on a voluntary basis. Once the contributions have been paid, there are no further obligations for the Volkswagen Group. Current contributions are recognized as pension expenses of the period concerned. In 2017, they amounted to a total of €2,214 million (previous year: €2,084 million) in the Volkswagen Group. Of this figure, contributions to the compulsory state pension system in Germany amounted to €1,634 million (previous year: €1,552 million). In the case of defined benefit plans, a distinction is made between pensions funded by provisions and externally funded plans. The pension provisions for defined benefits are measured by independent actuaries using the internationally accepted projected unit credit method in accordance with IAS 19, under which the future obligations are measured on the basis of the ratable benefit entitlements earned as of the balance sheet date. Measurement reflects actuarial assumptions as to discount rates, salary and pension trends, employee turnover rates, longevity and increases in healthcare costs, which were determined for each Group company depending on the economic environment. Remeasurements arise from differences between what has actually occurred and the prior-year assumptions as well as from changes in assumptions. They are recognized in other comprehensive income, net of deferred taxes, in the period in which they arise. Consolidated Financial Statements Notes to the Consolidated Financial Statements 261 Multi-employer pension plans exist in the Volkswagen Group in the United Kingdom, Switzerland, Sweden and the Netherlands. These plans are defined benefit plans. A small proportion of them are accounted for as defined contribution plans, as the Volkswagen Group is not authorized to receive the information required in order to account for them as defined benefit plans. Under the terms of the multi-employer plans, the Volkswagen Group is not liable for the obligations of the other employers. In the event of its withdrawal from the plans or their winding-up, the proportionate share of the surplus of assets attributable to the Volkswagen Group will be credited or the proportionate share of the deficit attributable to the Volkswagen Group will have to be funded. In the case of the defined benefit plans accounted for as defined contribution plans, the Volkswagen Group’s share of the obligations represents a small proportion of the total obligations. No probable significant risks arising from multi-employer defined benefit pension plans that are accounted for as defined contribution plans have been identified. The expected contributions to those plans will amount to €25 million for fiscal year 2018. Owing to their benefit character, the obligations of the US Group companies in respect of post-employment medical care in particular are also carried under provisions for pensions and other post-employment benefits. These post-employment benefit provisions take into account the expected long-term rise in the cost of health- care. In fiscal year 2017, €17 million (previous year: €19 million) was recognized as an expense for health care costs. The related carrying amount as of December 31, 2017 was €210 million (previous year: €232 million). The following amounts were recognized in the balance sheet for defined benefit plans: € million Dec. 31, 2017 Dec. 31, 2016 Present value of funded obligations Fair value of plan assets Funded status (net) Present value of unfunded obligations Amount not recognized as an asset because of the ceiling in IAS 19 Net liability recognized in the balance sheet of which provisions for pensions of which other assets 15,605 11,192 4,413 28,224 29 32,666 32,730 64 15,104 10,749 4,355 28,585 26 32,967 33,012 46 S I G N I F I C A N T P E N S I O N A R R A N G E M E N T S I N T H E VO L K SWA G E N G R O U P For the period after their active working life, the Volkswagen Group offers its employees benefits under attractive, modern occupational pension arrangements. Most of the arrangements in the Volkswagen Group are pension plans for employees in Germany classified as defined benefit plans under IAS 19. The majority of these obligations are funded solely by recognized provisions. These plans are now largely closed to new members. To reduce the risks associated with defined benefit plans, in particular longevity, salary increases and inflation, the Volkswagen Group has introduced new defined benefit plans in recent years whose benefits are funded by appropriate external plan assets. The above-mentioned risks have been largely reduced in these pension plans. The proportion of the total defined benefit obligation attributable to pension obligations funded by plan assets will continue to rise in the future. The significant pension plans are described in the following. German pension plans funded solely by recognized provisions The pension plans funded solely by recognized provisions comprise both contribution-based plans with guarantees and final salary plans. For contribution-based plans, an annual pension expense dependent on income and status is converted into a lifelong pension entitlement using annuity factors (guaranteed modular pension entitlements). The annuity factors include a guaranteed rate of interest. At retirement, the modular pension entitlements earned annually are added together. For final salary plans, the underlying salary is multiplied at retirement by a percentage that depends on the years of service up until the retirement date. 262 Notes to the Consolidated Financial Statements Consolidated Financial Statements The present value of the guaranteed obligation rises as interest rates fall and is therefore exposed to interest rate risk. The pension system provides for lifelong pension payments. The companies bear the longevity risk in this respect. This is accounted for by calculating the annuity factors and the present value of the guaranteed obli- gation using the latest generational mortality tables – the “Heubeck 2005 G” mortality tables – which already reflect future increases in life expectancy. To reduce the inflation risk from adjusting the regular pension payments by the rate of inflation, a pension adjustment that is not indexed to inflation was introduced for pension plans where this is permitted by law. German pension plans funded by external plan assets The pension plans funded by external plan assets are contribution-based plans with guarantees. In this case, an annual pension expense dependent on income and status is either converted into a lifelong pension entitlement using annuity factors (guaranteed modular pension entitlement) or paid out in a single lump sum or in installments. In some cases, employees also have the opportunity to provide for their own retirement through deferred compensation. The annuity factors include a guaranteed rate of interest. At retirement, the modular pension entitlements earned annually are added together. The pension expense is contributed on an ongoing basis to a separate pool of assets that is administered independently of the Company in trust and invested in the capital markets. If the plan assets exceed the present value of the obligations calculated using the guaranteed rate of interest, surpluses are allocated (modular pension bonuses). Since the assets administered in trust meet the IAS 19 criteria for classification as plan assets, they are deducted from the obligations. The amount of the pension assets is exposed to general market risk. The investment strategy and its implementation are therefore continuously monitored by the trusts’ governing bodies, on which the companies are also represented. For example, investment policies are stipulated in investment guidelines with the aim of limiting market risk and its impact on plan assets. In addition, asset-liability management studies are conducted if required so as to ensure that investments are in line with the obligations that need to be covered. The pension assets are currently invested primarily in fixed-income or equity funds. The main risks are therefore interest rate and equity price risk. To mitigate market risk, the pension system also provides for cash funds to be set aside in an equalization reserve before any surplus is allocated. The present value of the obligation is the present value of the guaranteed obligation after deducting the plan assets. If the plan assets fall below the present value of the guaranteed obligation, a provision must be recognized in that amount. The present value of the guaranteed obligation rises as interest rates fall and is therefore exposed to interest rate risk. In the case of lifelong pension payments, the Volkswagen Group bears the longevity risk. This is accounted for by calculating the annuity factors and the present value of the guaranteed obligation using the latest generational mortality tables – the “Heubeck 2005 G” mortality tables – which already reflect future increases in life expectancy. In addition, the independent actuaries carry out annual risk monitoring as part of the review of the assets administered by the trusts. To reduce the inflation risk from adjusting the regular pension payments by the rate of inflation, a pension adjustment that is not indexed to inflation was introduced for pension plans where this is permitted by law. Consolidated Financial Statements Notes to the Consolidated Financial Statements 263 Calculation of the pension provisions was based on the following actuarial assumptions: % Discount rate at December 31 Payroll trend Pension trend Employee turnover rate Annual increase in healthcare costs G E R M A N Y A B R O A D 2017 1.88 3.56 1.50 1.15 – 2016 1.79 3.46 1.50 1.13 – 2017 3.52 3.00 2.48 3.25 4.98 2016 3.82 3.32 2.44 3.63 4.88 These assumptions are averages that were weighted using the present value of the defined benefit obligation. With regard to life expectancy, consideration is given to the latest mortality tables in each country. The discount rates are generally defined to reflect the yields on prime-rated corporate bonds with matching maturities and currencies. The iBoxx AA 10+ Corporates index was taken as the basis for the obligations of German Group companies. Similar indices were used for foreign pension obligations. The payroll trends cover expected wage and salary trends, which also include increases attributable to career development. The pension trends either reflect the contractually guaranteed pension adjustments or are based on the rules on pension adjustments in force in each country. The employee turnover rates are based on past experience and future expectations. The following table shows changes in the net defined benefit liability recognized in the balance sheet: € million 2017 2016 Net liability recognized in the balance sheet at January 1 Current service cost Net interest expense Actuarial gains (–)/losses (+) arising from changes in demographic assumptions Actuarial gains (–)/losses (+) arising from changes in financial assumptions Actuarial gains (–)/losses (+) arising from experience adjustments Income/expenses from plan assets not included in interest income Change in amount not recognized as an asset because of the ceiling in IAS 19 Employer contributions to plan assets Employee contributions to plan assets Pension payments from company assets Past service cost (including plan curtailments) Gains (–) or losses (+) arising from plan settlements Changes in consolidated Group Other changes Foreign exchange differences from foreign plans Net liability recognized in the balance sheet at December 31 32,967 1,372 600 33 –616 –88 117 –6 582 –8 841 7 –1 0 –44 –37 27,464 1,066 729 17 5,862 –283 349 –4 680 –7 833 –24 4 0 –42 25 32,666 32,967 264 Notes to the Consolidated Financial Statements Consolidated Financial Statements The change in the amount not recognized as an asset because of the ceiling in IAS 19 contains an interest component, part of which was recognized in the financial result in profit or loss, and part of which was recognized outside profit or loss directly in equity. The change in the present value of the defined benefit obligation is attributable to the following factors: € million 2017 2016 Present value of obligations at January 1 Current service cost Interest cost Actuarial gains(–)/losses (+) arising from changes in demographic assumptions Actuarial gains(–)/losses (+) arising from changes in financial assumptions Actuarial gains(–)/losses (+) arising from experience adjustments Employee contributions to plan assets Pension payments from company assets Pension payments from plan assets Past service cost (including plan curtailments) Gains (–) or losses (+) arising from plan settlements Changes in consolidated Group Other changes Foreign exchange differences from foreign plans Present value of obligations at December 31 43,689 1,372 883 33 –616 –88 33 841 307 7 –3 0 –41 –290 43,829 37,215 1,066 1,075 17 5,862 –283 31 833 308 –24 –64 0 –4 –62 43,689 Consolidated Financial Statements Notes to the Consolidated Financial Statements 265 Changes in the relevant actuarial assumptions would have had the following effects on the defined benefit obligation: Present value of defined benefit obligation if € million Change in percent € million Change in percent D E C . 3 1 , 2 0 1 7 D E C . 3 1 , 2 0 1 6 Discount rate Pension trend Payroll trend Longevity is 0.5 percentage points higher is 0.5 percentage points lower is 0.5 percentage points higher is 0.5 percentage points lower is 0.5 percentage points higher is 0.5 percentage points lower increases by one year 39,979 –8.79 39,761 –8.99 48,290 10.18 48,249 10.44 46,055 5.08 45,985 5.25 41,801 –4.63 41,601 –4.78 44,398 1.30 44,297 1.39 43,304 –1.20 43,145 45,106 2.91 44,986 –1.25 2.97 The sensitivity analysis shown above considers the change in one assumption at a time, leaving the other assumptions unchanged versus the original calculation, i.e. any correlation effects between the individual assumptions are ignored. To examine the sensitivity of the defined benefit obligation to a change in assumed longevity, the estimates of mortality were reduced as part of a comparative calculation to the extent that doing so increases life expectancy by approximately one year. The average duration of the defined benefit obligation weighted by the present value of the defined benefit obligation (Macaulay duration) is 19 years (previous year: 20 years). The present value of the defined benefit obligation is attributable as follows to the members of the plan: € million Active members with pension entitlements Members with vested entitlements who have left the Company Pensioners 2017 2016 26,067 2,233 15,530 43,829 25,622 2,222 15,846 43,689 266 Notes to the Consolidated Financial Statements Consolidated Financial Statements The maturity profile of payments attributable to the defined benefit obligation is presented in the following table, which classifies the present value of the obligation by the maturity of the underlying payments: € million Payments due within the next fiscal year Payments due between two and five years Payments due in more than five years Changes in plan assets are shown in the following table: € million Fair value of plan assets at January 1 Interest income on plan assets determined using the discount rate Income/expenses from plan assets not included in interest income Employer contributions to plan assets Employee contributions to plan assets Pension payments from plan assets Gains (+) or losses (–) arising from plan settlements Changes in consolidated Group Other changes Foreign exchange differences from foreign plans Fair value of plan assets at December 31 2017 2016 1,151 4,994 37,685 43,829 1,126 4,801 37,762 43,689 2017 2016 10,749 9,769 283 117 582 25 307 2 –1 3 346 349 680 25 308 68 – 38 –258 11,192 –82 10,749 Consolidated Financial Statements Notes to the Consolidated Financial Statements 267 The investment of the plan assets to cover future pension obligations resulted in income in the amount of €400 million (previous year: €695 million). Employer contributions to plan assets are expected to amount to €617 million (previous year: €594 million) in the next fiscal year. Plan assets are invested in the following asset classes: D E C . 3 1 , 2 0 1 7 D E C . 3 1 , 2 0 1 6 € million Quoted prices in active markets No quoted prices in active markets Cash and cash equivalents Equity instruments Debt instruments Direct investments in real estate Derivatives Equity funds Bond funds Real estate funds Other funds Other instruments 585 337 1,578 2 38 1,532 5,233 207 864 40 5 – 0 101 –60 34 114 – 4 577 Total 590 337 1,578 104 –23 1,567 5,348 207 868 617 Quoted prices in active markets No quoted prices in active markets 269 360 1,658 2 –15 1,531 5,310 192 591 32 – – 0 107 – 43 108 – 2 559 Total 269 360 1,659 109 –15 1,574 5,418 192 593 591 49.1% (previous year: 48.1%) of the plan assets are invested in German assets, 27.6% (previous year: 26.7%) in other European assets and 23.4 % (previous year: 25.2%) in assets in other regions. Plan assets include €15 million (previous year: €19 million) invested in Volkswagen Group assets and €18 million (previous year: €9 million) in Volkswagen Group debt instruments. The following amounts were recognized in the income statement: € million Current service cost Net interest on the net defined benefit liability Past service cost (including plan curtailments) Gains (–) or losses (+) arising from plan settlements Net income (–) and expenses (+) recognized in profit or loss 2017 2016 1,372 602 7 –1 1,981 1,066 731 –24 4 1,777 The above amounts are generally included in the personnel costs of the functions in the income statement. Net interest on the net defined benefit liability is reported in interest expenses. 268 Notes to the Consolidated Financial Statements Consolidated Financial Statements 30. Noncurrent and current other provisions € million Balance at Jan. 1, 2016 Foreign exchange differences Changes in consolidated Group Utilized Additions/New provisions Unwinding of discount/effect of change in discount rate Reversals Balance at Dec. 31, 2016 of which current of which noncurrent Balance at Jan. 1, 2017 Foreign exchange differences Changes in consolidated Group Utilized Additions/New provisions Unwinding of discount/effect of change in discount rate Reversals Balance at Dec. 31, 2017 of which current of which noncurrent Obligations arising from sales Employee expenses Litigation and legal risks Miscellaneous provisions 31,326 174 23 9,265 12,180 123 1,533 33,027 19,521 13,506 33,027 –689 13 17,546 14,990 –50 1,881 27,865 14,821 13,044 4,148 35 1 1,344 1,736 196 227 4,546 1,900 2,646 4,546 –61 3 1,450 2,030 11 193 4,886 2,069 2,817 8,409 93 3 1,583 5,605 –84 726 11,717 8,624 3,092 11,717 –119 –13 7,444 2,190 –25 504 5,802 2,999 2,802 7,075 100 124 2,103 3,419 3 713 7,904 5,666 2,238 7,904 –169 –27 2,334 3,217 6 962 7,634 5,458 2,176 Total 50,958 402 151 14,295 22,939 238 3,199 57,193 35,711 21,482 57,193 –1,038 –24 28,774 22,426 –57 3,540 46,186 25,347 20,839 The obligations arising from sales contain provisions covering all risks relating to the sale of vehicles, components and genuine parts through to the disposal of end-of-life vehicles. They primarily comprise warranty obligations, calculated on the basis of losses to date and estimated future losses. They also include provisions for discounts, bonuses and similar allowances which are incurred after the balance sheet date, but for which there is a legal or constructive obligation attributable to sales revenue before the balance sheet date. Provisions for employee expenses are recognized for long-service awards, time credits, partial retirement arrangements, severance payments and similar obligations, among other things. The decline in provisions for obligations arising from sales and for litigation and legal risks result primarily from the utilization of the provisions recognized in connection with the diesel issue. In addition to residual provisions relating to the diesel issue, the provisions for litigation and legal risks contain amounts related to a large number of legal disputes and official proceedings in which Volkswagen Group companies become involved in Germany and internationally in the course of their operating activities. In particular, such legal disputes and other proceedings may occur in relation to suppliers, dealers, customers, employees, or investors. Please refer to the “Litigation” section for a discussion of the legal risks. Consolidated Financial Statements Notes to the Consolidated Financial Statements 269 Miscellaneous provisions relate to a wide range of identifiable specific risks, price risks and uncertain obligations, which are measured in the amount of the expected settlement value. Miscellaneous provisions additionally include provisions amounting to €534 million (previous year: €490 million) relating to the insurance business. 31. Put options and compensation rights granted to noncontrolling interest share-holders This balance sheet item consists primarily of the present value of the cash settlement in accordance with section 305 of the Aktiengesetz (AktG – German Stock Corporation Act) offered to MAN shareholders in connection with the control and profit and loss transfer agreement, including the basic interest rate in accordance with section 247 of the Bürgerliches Gesetzbuch (BGB – German Civil Code) assumed until the end of the award proceedings. The Annual General Meeting of MAN SE approved the conclusion of a control and profit and loss transfer agreement between MAN SE and Volkswagen Truck & Bus GmbH, a subsidiary of Volkswagen AG, in June 2013. The agreement sets out that the noncontrolling interest shareholders of MAN SE are entitled to either a cash settlement in accordance with section 305 of the AktG amounting to €80.89 per tendered ordinary or preferred share, or cash compensation in accordance with section 304 of the AktG in the amount of €3.07 per ordinary or preferred share (after corporate taxes, before the shareholder’s individual tax liability) for each full fiscal year. In July 2013, award proceedings were instituted to review the appropriateness of the cash settlement set out in the agreement in accordance with section 305 of the Aktiengesetz (AktG – German Stock Corporation Act) and the cash compensation in accordance with section 304 of the AktG. In July 2015, the Munich Regional Court ruled in the first instance that the amount of the cash settlement payable to the noncontrolling interest shareholders of MAN should be increased from €80.89 to €90.29; at the same time, the amount of the cash compensation was confirmed. The ruling is not yet legally effective, and both parties to the proceedings have since appealed. Volkswagen continues to maintain that the results of the valuation are correct. The appropriateness of the valuation was confirmed by the audit firms and by the court-appointed auditor of the agreement. As a precaution, the measurement was adjusted in 2015 to the higher settlement payable. 32. Trade payables € million Trade payables to third parties unconsolidated subsidiaries joint ventures associates other investees and investors Dec. 31, 2017 Dec. 31, 2016 22,661 22,311 187 64 127 7 182 157 141 3 23,046 22,794 270 Notes to the Consolidated Financial Statements Consolidated Financial Statements Additional balance sheet disclosures in accordance with IFRS 7 (Financial Instruments) C A R RY I N G A M O U N T O F F I N A N C I A L I N ST R U M E N T S BY I A S 3 9 M E A S U R E M E N T C AT E G O RY € million Financial assets at fair value through profit or loss Loans and receivables¹ Available-for-sale financial assets Financial liabilities at fair value through profit or loss Financial liabilities measured at amortized cost Dec. 31, 2017 Dec. 31, 2016 1,712 125,550 16,182 1,540 198,821 990 122,376 17,707 2,358 188,791 1 Prior-year figures adjusted. Further details can be found in the disclosures in the section entitled “Noncurrent and current financial services receivables”. R E CO N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. Financial instruments measured at fair value also include shares in partnerships and corporations. There is no active market for these instruments. Since the future cash flows cannot be reliably determined, fair value cannot be determined using measurement models. The shares in these companies are carried at cost. Consolidated Financial Statements Notes to the Consolidated Financial Statements 271 R E CO N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 1 6 M E A S U R E D A T F A I R V A L U E M E A S U R E D A T W I T H I N H E D G E S C O P E O F A T A M O R T I Z E D C O S T A C C O U N T I N G I F R S 7 D E C . 3 1 , 2 0 1 6 I N S T R U M E N T S N O T W I T H I N S H E E T I T E M D E R I V A T I V E F I N A N C I A L B A L A N C E € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments Other equity investments Financial services receivables Other financial assets Current assets Trade receivables Financial services receivables Other financial assets Marketable securities Cash, cash equivalents and time deposits Noncurrent liabilities Noncurrent financial liabilities Other noncurrent financial liabilities Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders Current financial liabilities Trade payables Other current financial liabilities – 187 – 251 – – 740 17,520 – – – – 68,402 4,982 12,187 49,673 9,527 – – – 70,766 5,008 12,187 49,673 9,527 – 19,265 19,265 66,358 66,932 – – – 3,023 – – 1,577 – – – 885 1,859 1,863 1,745 – – – 3,849 88,461 22,794 3,861 88,461 22,794 – – – 1,473 6,010 6,010 1,956 8,616 809 – – – – – – – – – – – – – 8,616 996 68,402 8,256 12,187 49,673 11,844 17,520 19,265 66,358 4,488 3,849 88,461 22,794 9,438 272 Notes to the Consolidated Financial Statements Consolidated Financial Statements R E CO N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 1 7 M E A S U R E D A T F A I R V A L U E M E A S U R E D A T W I T H I N H E D G E S C O P E O F A T A M O R T I Z E D C O S T A C C O U N T I N G I F R S 7 D E C . 3 1 , 2 0 1 7 I N S T R U M E N T S N O T W I T H I N S H E E T I T E M D E R I V A T I V E F I N A N C I A L B A L A N C E € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments Other equity investments Financial services receivables Other financial assets Current assets Trade receivables Financial services receivables Other financial assets Marketable securities Cash, cash equivalents and time deposits Assets held for sale Noncurrent liabilities Noncurrent financial liabilities Other noncurrent financial liabilities Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders Current financial liabilities Trade payables Other current financial liabilities – 243 – 776 – – 936 15,939 – – – – – 73,249 4,364 13,357 53,145 9,153 – 18,457 – – – 75,049 4,391 13,357 53,145 9,153 – 18,457 – 81,628 82,567 – – – 3,315 – – 1,909 – – – – 774 1,630 1,633 261 – – – 3,795 81,844 23,046 3,811 81,844 23,046 – – – 766 7,358 7,358 446 8,205 1,075 – – – – – – – 90 – – – – – – 8,205 1,318 73,249 8,455 13,357 53,145 11,998 15,939 18,457 90 81,628 2,665 3,795 81,844 23,046 8,570 Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. The measurement techniques used are explained in the section on “Accounting policies”. The fair value of put options and compensation rights granted to noncontrolling interest shareholders is calculated using a present value model based on the cash settlement determined by the Munich Regional Court in the award proceedings, including cash compensation, as well as the minimum statutory interest rate and a risk-adjusted discount rate for a matching maturity. For further information, please see section entitled "Put options and compensation rights granted to noncontrolling interest shareholders”. The fair value of Level 3 receivables was measured by reference to individual expectations of losses; these are based to a significant extent on the Company’s assumptions about counterparty credit quality. Financial services receivables are allocated to Level 3 because their fair value was measured using inputs that are not observable in an active market. Consolidated Financial Statements Notes to the Consolidated Financial Statements 273 The following table contains an overview of the financial assets and liabilities measured at fair value by level: F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D AT F A I R VA L U E B Y L E V E L € million Dec. 31, 2016 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments Other financial assets Current assets Other financial assets Marketable securities Noncurrent liabilities Other noncurrent financial liabilities Current liabilities Other current financial liabilities 187 251 740 17,520 885 1,473 76 – – 17,520 – – – 216 734 – 722 1,406 111 34 6 – 163 67 € million Dec. 31, 2017 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments Other financial assets Current assets Other financial assets Marketable securities Noncurrent liabilities Other noncurrent financial liabilities Current liabilities Other current financial liabilities 243 776 936 15,939 774 766 103 – – 15,939 – – – 705 933 – 242 533 140 71 3 – 532 233 274 Notes to the Consolidated Financial Statements Consolidated Financial Statements F A I R VA L U E O F F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D AT A M O RT I Z E D CO ST B Y L E V E L € million Dec. 31, 2016 Level 1 Level 2 Level 3 Fair value of financial assets measured at amortized cost Financial services receivables Trade receivables Other financial assets Cash, cash equivalents and time deposits Fair value of financial assets measured at amortized cost Fair value of financial liabilities measured at amortized cost Put options and compensation rights granted to noncontrolling interest shareholders Trade payables Financial liabilities Other financial liabilities Fair value of financial liabilities measured at amortized cost 120,438 12,187 14,535 19,265 166,425 3,861 22,794 155,394 7,873 189,921 – – 550 18,838 19,389 – – 39,391 537 39,928 – 120,438 11,977 6,695 426 19,099 – 22,794 114,198 7,159 144,151 210 7,289 – 127,937 3,861 – 1,804 177 5,842 € million Dec. 31, 2017 Level 1 Level 2 Level 3 Fair value of financial assets measured at amortized cost Financial services receivables Trade receivables Other financial assets Cash, cash equivalents and time deposits Fair value of financial assets measured at amortized cost Fair value of financial liabilities measured at amortized cost Put options and compensation rights granted to noncontrolling interest shareholders Trade payables Financial liabilities Other financial liabilities Fair value of financial liabilities measured at amortized cost 128,195 13,357 13,544 18,457 173,553 3,811 23,046 164,411 8,992 200,259 – – 170 18,043 18,213 – – 50,970 596 51,566 – 128,195 13,184 5,925 414 19,524 – 23,046 111,606 8,184 142,836 173 7,449 – 135,817 3,811 – 1,835 212 5,857 Consolidated Financial Statements Notes to the Consolidated Financial Statements 275 D E R I VAT I V E F I N A N C I A L I N ST R U M E N T S W I T H I N H E D G E A CCO U N T I N G BY L E V E L € million Dec. 31, 2016 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets Current assets Other financial assets Noncurrent liabilities Other noncurrent financial liabilities Current liabilities Other current financial liabilities 3,023 1,577 1,745 1,956 – – – – 3,019 1,577 1,745 1,956 4 – 0 – € million Dec. 31, 2017 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets Current assets Other financial assets Noncurrent liabilities Other noncurrent financial liabilities Current liabilities Other current financial liabilities 3,315 1,909 261 446 – – – – 3,315 1,909 261 445 – – – 0 The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of observable market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves and commodity prices that are observable in the relevant markets and obtained through pricing services. Level 3 fair values are calculated using valuation techniques that incorporate inputs that are not observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments and residual value protection models are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity-specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. 276 Notes to the Consolidated Financial Statements Consolidated Financial Statements C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D AT F A I R VA L U E B A S E D O N L E V E L 3 € million Balance at Jan. 1, 2016 Foreign exchange differences Total comprehensive income recognized in profit or loss recognized in other comprehensive income Additions (purchases) Sales and settlements Transfers into Level 2 Balance at Dec. 31, 2016 Total gains or losses recognized in profit or loss Net other operating expense/income of which attributable to assets/liabilities held at the reporting date Financial result of which attributable to assets/liabilities held at the reporting date € million Balance at Jan. 1, 2017 Foreign exchange differences Total comprehensive income recognized in profit or loss recognized in other comprehensive income Additions (purchases) Sales and settlements Transfers into Level 2 Balance at Dec. 31, 2017 Total gains or losses recognized in profit or loss Net other operating expense/income of which attributable to assets/liabilities held at the reporting date Financial result of which attributable to assets/liabilities held at the reporting date Financial assets measured at fair value Financial liabilities measured at fair value 119 0 24 17 7 23 –9 –6 152 17 – – 17 14 251 0 97 100 –3 – –89 –30 230 –100 – – –100 –74 Financial assets measured at fair value Financial liabilities measured at fair value 152 –9 68 72 –4 47 –11 –31 215 72 – – 72 32 230 –1 526 526 0 115 –104 –2 765 –526 – – –526 –525 Consolidated Financial Statements Notes to the Consolidated Financial Statements 277 The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no extrapolation is required. There were no transfers between other levels of the fair value hierarchy. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of December 31, 2017, earnings after tax would have been €10 million (previous year: €6 million) higher (lower) and equity would have been €– million (previous year: €3 million) higher (lower). The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on earnings after tax. If the assumed enterprise values had been 10% higher, earnings after tax would have been €3 million (previous year: €1 million) higher. If the assumed enterprise values had been 10% lower, earnings after tax would have been €3 million (previous year: €1 million) lower. Residual value risks result from hedging agreements with dealers under which earnings effects caused by market-related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volkswagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices for the used cars covered by the residual value protection model had been 10% higher as of December 31, 2017, earnings after tax would have been €319 million (previous year: €249 million) higher. If the prices for the used cars covered by the residual value protection model had been 10% lower as of Decem- ber 31, 2017, earnings after tax would have been €333 million (previous year: €249 million) lower. 278 Notes to the Consolidated Financial Statements Consolidated Financial Statements O F F S E T T I N G O F F I N A N C I A L A S S E T S A N D L I A B I L I T I E S The following tables contain information about the effects of offsetting in the balance sheet and the potential financial effects of offsetting in the case of instruments that are subject to a legally enforceable master netting arrangement or a similar agreement. A M O U N T S T H A T A R E N O T S E T O F F I N T H E B A L A N C E S H E E T Gross amounts of recognized financial assets Gross amounts of recognized financial liabilities set off in the balance sheet Net amounts of financial assets presented in the balance sheet Financial instruments Collateral received Net amount at Dec. 31, 2016 5,591 – 5,591 –3,425 –175 1,990 118,470 12,188 17,520 19,265 14,709 –395 –2 – – –14 118,075 12,187 17,520 19,265 14,695 – 0 – – 0 –65 –7 – – – 118,010 12,179 17,520 19,265 14,695 € million Derivatives Financial services receivables Trade receivables Marketable securities Cash, cash equivalents and time deposits Other financial assets A M O U N T S T H A T A R E N O T S E T O F F I N T H E B A L A N C E S H E E T Gross amounts of recognized financial assets Gross amounts of recognized financial liabilities set off in the balance sheet Net amounts of financial assets presented in the balance sheet Financial instruments Collateral received Net amount at Dec. 31, 2017 6,936 0 6,936 –1,036 –197 5,704 126,877 13,356 15,939 18,457 13,780 –482 0 – – –20 126,395 13,356 15,939 18,457 13,760 – 0 – – – –67 –1 – – – 126,328 13,355 15,939 18,457 13,760 € million Derivatives Financial services receivables Trade receivables Marketable securities Cash, cash equivalents and time deposits Other financial assets Consolidated Financial Statements Notes to the Consolidated Financial Statements 279 A M O U N T S T H A T A R E N O T S E T O F F I N T H E B A L A N C E S H E E T Gross amounts of recognized financial liabilities Gross amounts of recognized financial assets set off in the balance sheet Net amounts of financial liabilities presented in the balance sheet Financial instruments Collateral pledged Net amount at Dec. 31, 2016 3,849 6,058 154,819 22,796 8,278 – – – –2 –409 3,849 6,058 154,819 22,794 7,869 – –3,427 – 0 – – –24 –3,041 – – 3,849 2,607 151,778 22,794 7,869 A M O U N T S T H A T A R E N O T S E T O F F I N T H E B A L A N C E S H E E T Gross amounts of recognized financial liabilities Gross amounts of recognized financial assets set off in the balance sheet Net amounts of financial liabilities presented in the balance sheet Financial instruments Collateral pledged Net amount at Dec. 31, 2017 3,795 2,254 163,472 23,046 9,483 – –7 – 0 –495 3,795 2,246 163,472 23,046 8,988 – –904 – 0 – – –12 –2,795 – – 3,795 1,330 160,677 23,045 8,988 € million Put options and compensation rights granted to noncontrolling interest shareholders Derivatives Financial liabilities Trade payables Other financial liabilities € million Put options and compensation rights granted to noncontrolling interest shareholders Derivatives Financial liabilities Trade payables Other financial liabilities The “Financial instruments” column shows the amounts that are subject to a master netting arrangement but were not set off because they do not meet the criteria for offsetting in the balance sheet. The “Collateral received” and “Collateral pledged” columns show the amounts of cash collateral and collateral in the form of financial instruments received and pledged for the total assets and liabilities that do not meet the criteria for offsetting in the balance sheet. 280 Notes to the Consolidated Financial Statements Consolidated Financial Statements C H A N G E S I N C R E D I T R I S K VA L UAT I O N A L LOWA N C E S O N F I N A N C I A L A S S E T S € million Balance at Jan. 1 Exchange rate and other changes Changes in consolidated Group Additions Utilization Reversals Reclassification Balance at Dec. 31 Specific valuation allowances Portfolio-based valuation allowances Specific valuation allowances 2017 Portfolio-based valuation allowances 2016 2,092 2,175 –87 –18 853 427 339 20 –46 0 525 – 676 –20 2,094 1,959 4,268 –132 –18 1,378 427 1,014 – 4,054 2,142 1,970 4,112 90 –25 663 429 404 56 –12 0 727 – 453 –56 2,092 2,175 78 –25 1,390 429 857 0 4,268 The valuation allowances mainly relate to the credit risks associated with receivables from the financial services business. A S S E T - B A C K E D S E C U R I T I E S T R A N S A C T I O N S Asset-backed securities transactions with financial assets amounting to €24,561 million (previous year: €24,191 million) entered into to refinance the financial services business are included in bonds, commercial paper and notes, and liabilities from loans. The corresponding carrying amount of the receivables from the customer and dealer financing and the finance lease business amounted to €26,689 million (previous year: €26,184 million). Collateral of €41,799 million (previous year: €43,847 million) in total was furnished as part of asset-backed securities transactions. The expected payments were assigned to structured entities and the equitable liens in the financed vehicles were transferred. These asset-backed securities transactions did not result in the receivables from financial services business being derecognized, as the Group retains nonpayment and late payment risks. The difference between the assigned receivables and the related liabilities is the result of different terms and conditions and the share of the securitized paper and notes held by the Volkswagen Group itself, as well as the proportion of vehicles financed within the Group. Most of the public and private asset-backed securities transactions of the Volkswagen Group can be repaid in advance (clean-up call) if less than 9% or 10%, as appropriate, of the original transaction volume is out- standing. The assigned receivables cannot be assigned again or pledged elsewhere as collateral. The claims of the holders of commercial paper and notes are limited to the assigned receivables and the receipts from those receivables are earmarked for the repayment of the corresponding liability. As of December 31, 2017, the fair value of the assigned receivables still recognized in the balance sheet was €27,089 million (previous year: €27,856 million). The fair value of the related liabilities was €24,511 million (previous year: €24,424 million) at that reporting date. Companies of the Volkswagen Financial Services subgroup are contractually obliged, under certain conditions, to transfer funds to the structured entities that are included in its financial statements. Since the receivables are transferred to the special purpose entity by way of undisclosed assignment, the situation may occur in which the receivable has already been reduced in a legally binding manner at the originator, for example if the obligor effectively offsets it against receivables owed to it by a company belonging to the Volkswagen Group. In this case, collateral must be furnished for the resulting compensation claims against the special purpose entity, for example if the rating of the Group company concerned declines to a contractually agreed reference value. Consolidated Financial Statements Notes to the Consolidated Financial Statements 281 Other disclosures 33. Cash flow statement Cash flows are presented in the cash flow statement classified into cash flows from operating activities, investing activities and financing activities, irrespective of the balance sheet classification. Cash flows from operating activities are derived indirectly from earnings before tax. Earnings before tax are adjusted to eliminate noncash expenditures (mainly depreciation, amortization and impairment losses) and income. Other noncash income and expense results mainly from measurement effects in connection with financial instruments and to fair value changes relating to hedging transactions (see section entitled “Other financial result”). This results in cash flows from operating activities after accounting for changes in working capital, which also include changes in lease assets and in financial services receivables. Investing activities include additions to property, plant and equipment and equity investments, additions to capitalized development costs and investments in securities, loans and time deposits. Financing activities include outflows of funds from dividend payments and redemption of bonds, inflows from the capital increases and issuance of bonds, and changes in other financial liabilities. Please refer to the “Equity” section for information on the inflows from the issuance of hybrid capital in June 2017 in the amount of €3,473 million contained in the capital contributions. The changes in balance sheet items that are presented in the cash flow statement cannot be derived directly from the balance sheet, as the effects of currency translation and changes in the consolidated Group are noncash transactions and are therefore eliminated. In 2017, cash flows from operating activities include interest received amounting to €6,641 million (previous year: €6,364 million) and interest paid amounting to €2,332 million (previous year: €2,716 million). Cash flows from operating activities also include dividend payments received from joint ventures and associates of €3,653 million (previous year: €3,613 million). Dividends amounting to €1,015 million (previous year: €68 million) were paid to Volkswagen AG shareholders. € million Cash, cash equivalents and time deposits as reported in the balance sheet Time deposits Cash and cash equivalents as reported in the cash flow statement Dec. 31, 2017 Dec. 31, 2016 18,457 –420 18,038 19,265 –431 18,833 Time deposits are not classified as cash equivalents. Time deposits have a contractual maturity of more than three months. The maximum default risk corresponds to its carrying amount. 282 Notes to the Consolidated Financial Statements Consolidated Financial Statements The following table shows the classification of changes in financial liabilities into cash and non-cash transactions: € million Bonds Other total third-party borrowings Finance lease liabilities Total third-party borrowings Put options and compensation rights granted to noncontrolling interest shareholders Other financial assets and liabilities Financial assets and liabilities in financing activities Jan. 1, 2017 Cash-effective changes Foreign exchange differences Changes in consolidated group Changes in fair values Dec. 31, 2017 N O N - C A S H C H A N G E S 52,022 12,402 –1,018 102,259 539 154,819 3,849 87 3,501 –28 15,875 –118 –274 –5,273 –25 –6,316 – 17 – –370 –16 –386 – – –289 –240 9 –520 64 10 63,118 99,875 479 163,472 3,795 –160 158,755 15,483 –6,299 –386 –446 167,107 34. Financial risk management and financial instruments 1 . H E D G I N G G U I D E L I N E S A N D F I N A N C I A L R I S K M A N A G E M E N T P R I N C I P L E S The principles and responsibilities for managing and controlling the risks that could arise from financial instruments are defined by the Board of Management and monitored by the Supervisory Board. General rules apply to the Group-wide risk policy; these are oriented on the statutory requirements and the “Minimum Requirements for Risk Management by Credit Institutions”. Group Treasury is responsible for operational risk management and control of risks from financial instruments. The main functions of the MAN and PHS subgroups are included in Group Treasury’s operational risk management and control for risks relating to financial instruments, while the Scania subgroup is only included to a limited extent. Subgroups have their own risk management structures. The Risk Management Group Executive Committee is regularly informed about current financial risks. In addition, the Group Board of Management and the Supervisory Board are regularly updated on the current risk situation. For more information, please see the management report on page 187-188. 2 . C R E D I T A N D D E F AU LT R I S K The credit and default risk arising from financial assets involves the risk of default by counterparties, and therefore comprises at a maximum the amount of the claims under carrying amounts receivable from them and the irrevocable credit commitments. The maximum potential credit and default risk is reduced by collateral held and other credit enhancements in the amount of €78,934 million (previous year: €77,465 million). Collateral is held exclusively for financial assets in the “measured at amortized cost” category. It relates primarily to collateral for financial services receivables and trade receivables. Collateral comprises vehicles and assets transferred as security, as well as guarantees and real property liens. Cash collateral is also used in hedging transactions. The risk arising from nonderivative financial instruments is also accounted for by recognizing bad debt losses. Significant cash and capital investments, as well as derivatives, are only entered into with national and international banks. Risk is additionally limited by a limit system based primarily on the equity base of the counterparties concerned and on credit assessments by international rating agencies. Financial guarantees issued also give rise to credit and default risk. The maximum potential credit and default risk is calculated from the amount Volkswagen would have to pay if claims were to be asserted under the guarantees. The corresponding amounts are presented in the Liquidity risk section. Consolidated Financial Statements Notes to the Consolidated Financial Statements 283 There were no material concentrations of risk at individual counterparties or counterparty groups in the past fiscal year due to the global allocation of the Group’s business activities and the resulting diversification. There was a slight change in the concentration of credit and default risk exposures to the German public banking sector as a whole that has arisen from Group-wide cash and capital investments as well as derivatives: the portion attributable to this sector was 7.4% at the end of 2017 compared with 13.0% at the end of 2016. Any existing concentration of risk is assessed and monitored both at the level of individual counterparties or counterparty groups and with regard to the countries in which these are based, in each case using the share of all credit and default risk exposures accounted for by the risk exposure concerned. For China, credit and default risk exposures accounted for 29.5% at the end of 2017, as against 27.9% at the end of 2016. There were no other concentrations of credit and default risk exposures in individual countries. C R E D I T A N D D E F AU LT R I S K R E L AT I N G TO F I N A N C I A L A S S E T S BY G R O S S C A R RY I N G A M O U N T € million Measured at amortized cost Financial services receivables Trade receivables Other receivables Measured at fair value Neither past due nor impaired Past due and not impaired Impaired Dec. 31, 2017 Neither past due nor impaired Past due and not impaired Impaired Dec. 31, 2016 124,044 10,395 13,403 16,862 2,888 2,833 102 – 2,900 129,832 115,747 562 196 290 13,791 13,700 17,152 9,421 14,391 17,907 3,001 2,596 110 – 3,003 121,751 607 162 259 12,624 14,663 18,166 164,704 5,822 3,948 174,475 157,466 5,706 4,031 167,203 There are no past due financial instruments measured at fair value in the Volkswagen Group. In fiscal year 2017, marketable securities measured at fair value with a cost of €86 million (previous year: €83 million) were individually impaired. In addition, portfolio-based impairment losses are recognized in respect of the financial services receivables presented above that are not past due and not individually impaired, as well as of the financial services receivables presented above that are past due and not individually impaired. The assets in the class used for hedging are neither past due nor impaired. 284 Notes to the Consolidated Financial Statements Consolidated Financial Statements C R E D I T R AT I N G O F T H E G R O S S C A R RY I N G A M O U N T S O F F I N A N C I A L A S S E T S T H AT A R E N E I T H E R PA ST D U E N O R I M PA I R E D € million Risk class 1 Risk class 2 Dec. 31, 2017 Risk class 1 Risk class 2 Dec. 31, 2016 Measured at amortized cost Financial services receivables Trade receivables Other receivables Measured at fair value 104,143 10,259 13,313 22,086 149,802 19,901 124,044 136 90 – 10,395 13,403 22,086 99,153 9,284 14,238 22,021 16,595 115,747 137 153 – 9,421 14,391 22,021 20,127 169,928 144,694 16,885 161,580 The Volkswagen Group performs a credit assessment of borrowers in all loan and lease agreements, using scoring systems for the high-volume business and rating systems for corporate customers and receivables from dealer financing. Receivables rated as good are contained in risk class 1. Receivables from customers whose credit rating is not good but have not yet defaulted are contained in risk class 2. The financial assets measured at fair value include derivative financial instruments within hedge accounting in an amount of €5.2 billion (previous year: €4.1 billion); they are allocated to risk class 1. M AT U R I T Y A N A LY S I S O F T H E G R O S S C A R RY I N G A M O U N T S O F F I N A N C I A L A S S E T S T H AT A R E PA ST D U E A N D N OT I M PA I R E D € million up to 30 days 30 to 90 days more than 90 days Dec. 31, 2016 P A S T D U E B Y G R O S S C A R R Y I N G A M O U N T Measured at amortized cost Financial services receivables Trade receivables Other receivables Measured at fair value 2,205 1,080 49 – 3,334 788 720 36 – 1,544 8 795 24 – 828 3,001 2,596 110 – 5,706 Consolidated Financial Statements Notes to the Consolidated Financial Statements 285 € million up to 30 days 30 to 90 days more than 90 days Dec. 31, 2017 P A S T D U E B Y G R O S S C A R R Y I N G A M O U N T Measured at amortized cost Financial services receivables Trade receivables Other receivables Measured at fair value 2,148 1,164 43 – 3,355 728 689 21 – 1,438 12 980 37 – 1,029 2,888 2,833 102 – 5,822 Collateral that was accepted for financial assets in the current fiscal year was recognized in the balance sheet in the amount of €109 million (previous year: €120 million). This mainly relates to vehicles. 3 . L I Q U I D I T Y R I S K The solvency and liquidity of the Volkswagen Group are ensured at all times by rolling liquidity planning, a liquidity reserve in the form of cash, confirmed credit lines and the issuance of securities on the international money and capital markets. The volume of confirmed bilateral and syndicated credit lines stood at €19.9 billion as of December 31 2017, of which €3.4 billion was drawn down. Local cash funds in certain countries (e.g. China, Brazil, Argentina, India and South Africa) are only available to the Group for cross-border transactions subject to exchange controls. There are no significant restrictions over and above these. The following overview shows the contractual undiscounted cash flows from financial instruments. M AT U R I T Y A N A LY S I S O F U N D I S CO U N T E D C A S H F LOW S F R O M F I N A N C I A L I N ST R U M E N T S R E M A I N I N G R E M A I N I N G C O N T R A C T U A L M A T U R I T I E S C O N T R A C T U A L M A T U R I T I E S € million under one year within one to five years over five years 2017 under one year within one to five years over five years 2016 Put options and compensation rights granted to noncontrolling interest shareholders Financial liabilities Trade payables Other financial liabilities Derivatives 3,379 83,867 23,041 7,360 72,635 – – 69,968 16,113 5 1,557 47,414 – 86 332 190,281 118,945 16,531 3,379 169,949 23,046 9,003 120,381 325,758 3,382 90,044 22,788 6,009 77,294 – – 3,382 60,603 10,955 161,602 6 – 22,794 1,789 59,007 83 119 7,880 136,420 332,079 199,517 121,405 11,157 When calculating cash outflows related to put options and compensation rights, it was assumed that shares would be tendered at the earliest possible repayment date. 286 Notes to the Consolidated Financial Statements Consolidated Financial Statements Derivatives comprise both cash flows from derivative financial instruments with negative fair values and cash flows from derivatives with positive fair values for which gross settlement has been agreed. Derivatives entered into through offsetting transactions are also accounted for as cash outflows. The cash outflows from derivatives for which gross settlement has been agreed are matched in part by cash inflows. These cash inflows are not reported in the maturity analysis. If these cash inflows were also recognized, the cash outflows presented would be substantially lower. This applies in particular also if hedges have been closed with offsetting transactions. The cash outflows from irrevocable credit commitments are presented in section entitled "Other financial obligations”, classified by contractual maturities. As of December 31, 2017, the maximum potential liability under financial guarantees amounted to €261 mil- lion (previous year: €173 million). Financial guarantees are assumed to be due immediately in all cases. 4 . M A R K E T R I S K 4.1 Hedging policy and financial derivatives During the course of its general business activities, the Volkswagen Group is exposed to foreign currency, interest rate, commodity price, equity price and fund price risk. Corporate policy is to limit or eliminate such risk by means of hedging. All necessary hedging transactions with the exception of the Scania, MAN and Porsche Holding GmbH (Salzburg) subgroups are executed or coordinated centrally by Group Treasury. The following table shows the gains and losses on hedges: € million Hedging instruments used in fair value hedges Hedged items used in fair value hedges Ineffective portion of cash flow hedges 2017 307 –300 –11 2016 670 –739 6 The ineffective portion of cash flow hedges represents the income and expenses from changes in the fair value of hedging instruments that exceed the changes in the fair value of the hedged items but that are documented to be within the permitted range of 80% to 125% overall when measuring effectiveness. Such income or expenses are recognized directly in the financial result. During the fiscal year, €554 million increasing earnings (previous year: €1,222 million reducing earnings) was transferred from the cash flow hedge reserve to the other operating result, €11 million increasing earnings (previous year: €10 million reducing earnings), was transferred to the financial result, and €7 million (previous year: €90 million), both reducing earnings, was transferred to cost of sales and the financial result. Consolidated Financial Statements Notes to the Consolidated Financial Statements 287 The Volkswagen Group uses two different methods to present market risk from nonderivative and derivative financial instruments in accordance with IFRS 7. For quantitative risk measurement, interest rate and foreign currency risk in the Volkswagen Financial Services subgroup are measured using a value-at-risk (VaR) model on the basis of a historical simulation, while market risk in the other Group companies is determined using a sensitivity analysis. The value-at-risk calculation indicates the size of the maximum potential loss on the portfolio as a whole within a time horizon of 40 days, measured at a confidence level of 99%. To provide the basis for this calculation, all cash flows from nonderivative and derivative financial instruments are aggregated into an interest rate gap analysis. The historical market data used in calculating value at risk covers a period of 1,000 trading days. The sensitivity analysis calculates the effect on equity and profit or loss by modifying risk variables within the respective market risks. 4.2 Market risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) 4.2.1 Foreign currency risk Foreign currency risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) is attributable to investments, financing measures and operating activities. Currency forwards, currency options, currency swaps and cross-currency swaps are used to limit foreign currency risk. These transactions relate to the exchange rate hedging of all material payments covering general business activities that are not made in the functional currency of the respective Group companies. The principle of matching currencies applies to the Group’s financing activities. Hedging transactions entered into in 2017 as part of foreign currency risk management were amongst others in Argentine pesos, Australian dollars, Brazilian real, sterling, Chinese renminbi, Hong Kong dollars, Indian rupees, Japanese yen, Canadian dollars, Mexican pesos, Norwegian kroner, Polish zloty, Russian rubles, Swedish kronor, Swiss francs, Singapore dollars, South African rand, South Korean won, Taiwan dollars, Czech koruna, Hungarian forints and US dollars. All nonfunctional currencies in which the Volkswagen Group enters into financial instruments are included as relevant risk variables in the sensitivity analysis in accordance with IFRS 7. If the functional currencies concerned had appreciated or depreciated by 10% against the other currencies, the exchange rates shown below would have resulted in the following effects on the hedging reserve in equity and on earnings after tax. It is not appropriate to add together the individual figures, since the results of the various functional currencies concerned are based on different scenarios. 288 Notes to the Consolidated Financial Statements Consolidated Financial Statements The following table shows the sensitivities of the main currencies in the portfolio as of December 31, 2017. € million Exchange rate EUR/USD Hedging reserve Profit/loss after tax EUR/GBP Hedging reserve Profit/loss after tax EUR/CNY Hedging reserve Profit/loss after tax EUR/JPY Hedging reserve Profit/loss after tax EUR/CHF Hedging reserve Profit/loss after tax EUR/AUD Hedging reserve Profit/loss after tax EUR/CAD Hedging reserve Profit/loss after tax EUR/SEK Hedging reserve Profit/loss after tax CZK/GBP Hedging reserve Profit/loss after tax EUR/CZK Hedging reserve Profit/loss after tax EUR/TWD Hedging reserve Profit/loss after tax GBP/USD Hedging reserve Profit/loss after tax EUR/KRW Hedging reserve Profit/loss after tax EUR/PLN Hedging reserve Profit/loss after tax PLN/CZK Hedging reserve Profit/loss after tax BRL/USD Hedging reserve Profit/loss after tax D E C . 3 1 , 2 0 1 7 D E C . 3 1 , 2 0 1 6 +10% –10% +10% –10% 1,627 –365 1,126 –73 –1,303 193 –1,124 75 515 –58 271 –40 246 16 164 –36 121 –51 105 –22 91 0 69 –20 72 –10 63 –2 55 –3 – –60 58 0 –16 41 –491 62 –244 20 –232 –20 –164 37 –113 48 –100 18 –91 0 –69 20 –72 10 –63 2 –59 6 – 60 –58 0 16 –41 1,929 –338 1,202 –58 665 6 318 –7 380 –9 178 –23 145 –54 91 –24 106 0 31 –43 36 –10 106 2 77 –8 –107 –21 14 0 –20 82 –2,294 649 –1,189 51 –662 25 –318 7 –375 2 –182 26 –154 63 –89 23 –106 0 –31 43 –36 10 –106 –2 –82 13 108 21 –14 0 20 –82 Consolidated Financial Statements Notes to the Consolidated Financial Statements 289 4.2.2 Interest rate risk Interest rate risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) results from changes in market interest rates, primarily for medium- and long-term variable interest receivables and liabilities. Interest rate swaps and cross-currency interest rate swaps are entered into to hedge against this risk primarily under fair value or cash flow hedges, and depending on market conditions. Intragroup financing arrangements are mainly structured to match the maturities of their refinancing. Departures from the Group standard are subject to centrally defined limits and monitored on an ongoing basis. Interest rate risk within the meaning of IFRS 7 is calculated for these companies using sensitivity analyses. The effects of the risk-variable market rates of interest on the financial result and on equity are presented, net of tax. If market interest rates had been 100 bps higher as of December 31, 2017, equity would have been €88 million (previous year: €60 million) lower. If market interest rates had been 100 bps lower as of December 31, 2017, equity would have been €24 million (previous year: €60 million) higher. If market interest rates had been 100 bps higher as of December 31, 2017, earnings after tax would have been €76 million (previous year: €10 million) higher. If market interest rates had been 100 bps lower as of December 31, 2017, earnings after tax would have been €64 million (previous year: €24 million) lower. 4.2.3 Commodity price risk Commodity price risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) primarily results from price fluctuations and the availability of ferrous and non-ferrous metals, precious metals, commodities required in connection with the Group’s digitalization and electrification strategy, as well as of coal, CO2 certificates and rubber. Commodity price risk is limited by entering into forward transactions and swaps. Up to the end of 2016, hedge accounting in accordance with IAS 39 was applied in some cases to the hedging of commodity risk associated with aluminum and coal. Since the beginning of 2017, hedge accounting has not been applied to these hedging relationships. Commodity price risk within the meaning of IFRS 7 is presented using sensitivity analyses. These show the effect on earnings after tax of changes in the risk variable commodity prices. If the commodity prices of the hedged nonferrous metals, coal and rubber had been 10% higher (lower) as of December 31, 2017, earnings after tax would have been €101 million (previous year: €82 million) higher (lower). If the commodity prices of the hedges included in hedge accounting had been 10% higher (lower) as of December 31, 2016, equity would have been €48 million higher (lower). As of the end of 2017, hedge accounting was not applied to these hedging relationships. 4.2.4 Equity and bond price risk The Spezialfonds (special funds) launched using surplus liquidity and the equity interests measured at fair value are subject in particular to equity price and bond price risk, which can arise from fluctuations in quoted market prices, stock exchange indices and market rates of interest. The changes in bond prices resulting from variations in the market rates of interest are quantified in sections 4.2.1 and 4.2.2, as are the measurement of foreign currency and other interest rate risks arising from the special funds and the equity interests measured at fair value. As a rule, we counter the risks arising from the special funds by ensuring a broad diversification of products, issuers and regional markets when investing funds, as stipulated by our Investment Guidelines. In addition, we hedge exchange rates when market conditions are appropriate. As part of the presentation of market risk, IFRS 7 requires disclosures on how hypothetical changes in risk variables affect the price of financial instruments. Potential risk variables here are in particular quoted market prices or indices, as well as interest rate changes as bond price parameters. If share prices had been 10% higher as of December 31, 2017, equity would have been €28 million (previous year: €4 million) higher. If share prices had been 10% lower as of December 31, 2017, equity would have been €108 million (previous year: €28 million) lower. 290 Notes to the Consolidated Financial Statements Consolidated Financial Statements 4.3 Market risk at Volkswagen Financial Services subgroup Exchange rate risk in the Volkswagen Financial Services subgroup is mainly attributable to assets that are not denominated in the functional currency and from refinancing within operating activities. Interest rate risk relates to refinancing without matching maturities and the varying interest rate elasticity of individual asset and liability items. The risks are limited by the use of currency and interest rate hedges. Microhedges and portfolio hedges are used for interest rate hedging. Fixed-rate assets and liabilities included in the hedging strategy are recognized at fair value, as opposed to their original subsequent measure- ment at amortized cost. The resulting effects in the income statement are offset by the corresponding gains and losses on the interest rate hedging instruments (swaps). Currency hedges (currency forwards and cross- currency interest rate swaps) are used to mitigate foreign currency risk. All cash flows in foreign currency are hedged. As of December 31, 2017, the value at risk was €167 million (previous year: €95 million) for interest rate risk and €165 million (previous year: €199 million) for foreign currency risk. The entire value at risk for interest rate and foreign currency risk at the Volkswagen Financial Services subgroup was €167 million (previous year: €197 million). 5 . M E T H O D S F O R M O N I TO R I N G H E D G E E F F E C T I V E N E S S In the Volkswagen Group, hedge effectiveness is assessed prospectively using the critical terms match method and using statistical methods in the form of a regression analysis. Retrospective analysis of effectiveness uses effectiveness tests in the form of the dollar offset method or a regression analysis. Under the dollar offset method, the changes in value of the hedged item expressed in monetary units are compared with the changes in value of the hedging instrument expressed in monetary units. Where regression analysis is used, the change in value of the hedged item is presented as an independent variable, and that of the hedging instrument as a dependent variable. Hedge relationships are classified as effective if they have sufficient coefficients of determination and slope factors. Consolidated Financial Statements Notes to the Consolidated Financial Statements 291 N OT I O N A L A M O U N T O F D E R I VAT I V E S € million under one year R E M A I N I N G T E R M within one to five years T O T A L N O T I O N A L A M O U N T T O T A L N O T I O N A L A M O U N T over five years Dec. 31, 2017 Dec. 31, 2016 Notional amount of hedging instruments used in cash flow hedges: Interest rate swaps Currency forwards Currency options Cross-currency swaps Cross-currency interest rate swaps Commodity future contracts Notional amount of other derivatives: Interest rate swaps Interest rate option contracts Currency forwards Other currency options Cross-currency swaps Cross-currency interest rate swaps Commodity future contracts 3,490 32,329 8,128 – 387 – 20,483 – 19,592 10 20,825 3,350 798 8,999 35,538 11,435 – 165 – 38 – – – – – 48,067 20,125 – 2,942 – 1,451 6,025 477 – 2 – – 293 – 12,527 67,867 19,563 – 551 – 88,675 – 22,535 10 22,276 9,667 1,275 17,054 84,754 26,081 2,295 1,951 679 84,612 – 28,436 45 12,207 8,839 1,235 Both derivatives closed with offsetting transactions and the offsetting transactions themselves are included in the respective notional amount. The offsetting transactions cancel out the effects of the original hedging transactions. If the offsetting transactions were not included, the respective notional amount would be significantly lower. In addition to the derivatives used for hedging foreign currency, interest rate and price risk, the Group held options and other derivatives on equity instruments at the reporting date with a notional amount of €29 million (previous year: €45 million) whose remaining maturity is under one year. Existing cash flow hedges in the notional amount of €361 million (previous year: €811 million) were discontinued because of a reduction in the projections. €3 million (previous year: €5 million) was transferred from the cash flow hedge reserve to the financial result, reducing earnings. In addition, hedges were to be terminated due to internal risk regulations. Items hedged under cash flow hedges are expected to be realized in accordance with the maturity buckets of the hedges reported in the table. The fair values of the derivatives are estimated using market data at the balance sheet date as well as by appropriate valuation techniques. The following term structures were used for the calculation: in % EUR CHF CNY CZK GBP JPY KRW SEK USD Interest rate for six months –0.3214 –0.5535 Interest rate for one year –0.2826 –0.4924 Interest rate for five years 0.3170 –0.1410 Interest rate for ten years 0.8840 0.2690 4.9281 4.7799 4.7400 4.6300 0.4824 0.4543 1.6200 1.8450 0.5446 0.6229 1.0325 1.2735 0.0281 0.0295 0.1013 0.2613 1.7108 –0.3815 1.8385 –0.3298 2.1275 2.2000 0.4980 1.2000 1.7499 1.9011 2.2400 2.3920 292 Notes to the Consolidated Financial Statements Consolidated Financial Statements 35. Capital management The Group’s capital management ensures that its goals and strategies can be achieved in the interests of shareholders, employees and other stakeholders. In particular, management focuses on generating the minimum return on invested assets in the Automotive Division that is required by the capital markets, and on increasing the return on equity in the Financial Services Division. In the process, it aims overall to achieve the highest possible growth in the value of the Group and its divisions for the benefit of all the Company’s stakeholder groups. In order to maximize the use of resources in the Automotive Division and to measure the success of this, we have for a number of years been using a value-based management system, with value contribution as an absolute performance measure and return on investment (ROI) as a relative indicator. Value contribution is defined as the difference between operating profit after tax and the opportunity cost of invested capital. The opportunity cost of capital is calculated by multiplying the market cost of capital by average invested capital. Invested capital is calculated by taking the operating assets reported in the balance sheet (property, plant and equipment, intangible assets, lease assets, inventories and receivables) and deducting non- interest-bearing liabilities (trade payables and payments on account received). Average invested capital is derived from the balance at the beginning and the end of the reporting period. Despite the charges relating to the special items recognized in the operating result, the Automotive Division disclosed a positive value contribution of €5,935 million in the reporting period which, due to the improvement in the operating result before special items and an only slight increase in the cost of capital, was significantly higher than the prior-year figure. The return on investment (ROI) is defined as the return on invested capital for a particular period based on the operating result after tax. If the return on investment exceeds the market cost of capital, there is an increase in the value of the invested capital and a positive value contribution. In the Group, a minimum required rate of return on invested capital of 9% is defined, which applies to both the business units and the individual products and product lines. Our goal of generating a sustained return on investment of over 15% is anchored in Strategy 2025. The return on investment therefore serves as a consistent target in operational and strategic management and is used to measure target attainment for the Automotive Division, the individual business units, and projects and products. The return on investment achieved for the Automotive Division was 12.1%, which is above our minimum rate of return on invested capital of 9% and significantly exceeds the current cost of capital of 6.0%. Due to the specific features of the Financial Services Division, its management focuses on return on equity, a special target linked to invested capital. This measure is calculated as the ratio of earnings before tax to average equity. Average equity is calculated from the balance at the beginning and the end of the reporting period. In addition, the goals of the Financial Services Division are to meet the banking supervisory authorities’ regulatory capital requirements, to procure equity for the growth planned in the coming fiscal years and to support its external rating by ensuring capital adequacy. To ensure compliance with prudential requirements at all times, a planning procedure integrated into internal reporting has been put in place at the Volkswagen Bank, allowing the required equity to be continuously determined on the basis of actual and expected business performance. In the reporting period, this again ensured that regulatory minimum capital requirements were always met both at Group level and at the level of subordinate companies’ individual, specific capital requirements. Consolidated Financial Statements Notes to the Consolidated Financial Statements 293 The return on investment and value contribution in the Automotive Division as well as the return on equity and the equity ratio in the Financial Services Division are shown in the following table: € million Automotive Division¹ Operating result after tax Invested capital (average) Return on investment (RoI) in % Cost of capital in % Opportunity cost of invested capital Value contribution² Financial Services Division Earnings before tax Average equity Return on equity before tax in % Equity ratio in % 2017 2016 11,756 97,021 12.1 6.0 5,821 5,935 2,502 25,626 9.8 13.7 7,419 91,020 8.2 6.2 5,643 1,775 2,408 22,342 10.8 12.5 1 Including proportionate inclusion of the Chinese joint ventures and allocation of consolidation adjustments between the Automotive and Financial Services Divisions; excluding effects on earnings and assets from purchase price allocation. 2 The value contribution corresponds to the Economic Value Added (EVA®). EVA® is a registered trademark of Stern Stewart & Co. 36. Contingent liabilities € million Dec. 31, 2017 Dec. 31, 2016 Liabilities under guarantees Liabilities under warranty contracts Assets pledged as security for third-party liabilities Other contingent liabilities 423 60 21 7,909 8,413 419 75 20 6,305 6,819 The trust assets and liabilities of the savings and trust entities belonging to the South American subsidiaries not included in the consolidated balance sheet amount to €768 million (previous year: €944 million). In the case of liabilities from guarantees, the Group is required to make specific payments if the debtors fail to meet their obligations. The other contingent liabilities primarily comprise potential liabilities arising from matters relating to taxes and customs duties, as well as litigation and proceedings relating to suppliers, dealers, customers, employees and investors. The contingent liabilities recognized in connection with the diesel issue totaled €4.3 billion, of which €3.4 billion was attributable to investor lawsuits. Also included are certain elements of the class action lawsuits relating to the diesel issue as well as criminal proceedings/misdemeanor proceedings as far as these can be quantified. As some of these proceedings are still at a very early stage, the plaintiffs have in a number of cases so far not specified the basis of their claims and/or there is insufficient certainty about the number of plaintiffs or the amounts being claimed. These lawsuits meet the definition of a contingent liability but cannot, as a rule, be disclosed because it is impossible to measure the amount involved. 294 Notes to the Consolidated Financial Statements Consolidated Financial Statements In addition, other contingent liabilities include an amount of €0.7 billion for potential liabilities from tax risks at MAN Latin America. In the tax proceedings involving MAN Latin America and the Brazilian tax authorities, the Brazilian tax authorities take a different position with regard to the tax effects of the acquisition structure for MAN Latin America chosen by MAN in 2009. It is not currently considered likely that a claim will be made against MAN Latin America in connection with these liabilities. On May 5, 2016, the U.S. National Highway Traffic Safety Administration (NHTSA) announced, jointly with the Takata company, a further extension of the recall for various models from different manufacturers containing certain airbags produced by the Takata company. Recalls were also ordered by the local authorities in individual countries. The recalls also included models manufactured by the Volkswagen Group. Appropriate provisions have been recognized. Currently, the possibility of further extensions to the recalls that could also affect Volkswagen Group models cannot be ruled out. It is not possible at the moment to provide further disclosures in accordance with IAS 37.86 in relation to this matter because the technical investigations and consultations with the authorities are still being carried out. As permitted by IAS 37.92, in order not to prejudice the outcomes of the proceedings and the interests of the Company, we have not made any further disclosures about estimates in connection with the financial effects of, and disclosures about, uncertainty regarding the timing or amount of contingent liabilities in connection with the diesel issue and investigations by the European Commission. Further information can be found under the section entitled “Litigation”. 37. Litigation In the course of their operating activities, Volkswagen AG and the companies in which it is directly or indirectly invested become involved in a great number of legal disputes and governmental proceedings in Germany and abroad. In particular, such legal disputes and other proceedings may occur in relation to suppliers, dealers, customers, employees, or investors. For the companies involved, these may result in payment or other obligations. Above all, in cases where US customers assert claims for vehicle defects individually or by way of a class action, highly cost-intensive measures may have to be taken and substantial compensation or punitive damages paid. Corresponding risks also result from US patent infringement proceedings. Risks may also emerge in connection with the adherence to regulatory requirements. This particularly applies in the case of regulatory vagueness that may be interpreted differently by Volkswagen and the authorities responsible for the respective regulations. In addition, legal risks can arise from the criminal activities of individual persons, which even the best compliance management system can never completely prevent. Where transparent and economically viable, adequate insurance coverage was taken out for these risks. For the identifiable and measurable risks, provisions considered appropriate were recognized and information about contingent liabilities disclosed. As some risks cannot be assessed or can only be assessed to a limited extent, the possibility of loss or damage not being covered by the insured amounts and provisions cannot be ruled out. This particularly applies to legal risk assessment regarding the diesel issue. Diesel issue On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emissions had been discovered in emissions tests on certain vehicles of Volkswagen Group with type 2.0 l diesel engines in the USA. It was alleged that Volkswagen had installed undisclosed engine management software installed in 2009 to 2015 model year 2.0 l diesel engines to circumvent NOx emissions testing regulations in the USA in order to comply with certification requirements. The California Air Resources Board (CARB), a unit of the US environmental authority of California, announced its own enforcement investigation into this matter. Consolidated Financial Statements Notes to the Consolidated Financial Statements 295 In this context, Volkswagen AG announced that noticeable discrepancies between the figures achieved in testing and in actual road use had been identified in around eleven million vehicles worldwide with type EA 189 diesel engines. The vast majority of these engines were type EA 189 Euro 5 engines. On November 2, 2015, the EPA issued a “Notice of Violation” alleging that irregularities had also been discovered in the software installed in US vehicles with type V6 3.0 l diesel engines. CARB also issued a letter announcing its own enforcement investigation into this matter. AUDI AG has confirmed that at least three auxiliary emission control devices were inadequately disclosed in the course of the US approval documentation. Around 113 thousand vehicles from the 2009 to 2016 model years with certain six-cylinder diesel engines were affected in the USA and Canada, where regulations governing NOx emissions limits for vehicles are stricter than those in other parts of the world. Numerous court and governmental proceedings were subsequently initiated in the USA and the rest of the world. During the reporting period, we succeeded in ending most significant court and governmental proceedings in the USA by concluding settlement agreements. This includes, in particular, settlements with the US Department of Justice (DOJ). Outside the USA, we also reached agreements with regard to the implementation of the technical measures with numerous authorities. The Supervisory Board of Volkswagen AG formed a special committee that coordinates the activities relating to the diesel issue for the Supervisory Board. The global law firm Jones Day was instructed by Volkswagen AG to carry out an extensive investigation of the diesel issue in light of the DOJ’s and the Braunschweig public prosecutor’s criminal investigations as well as other investigations and proceedings which were expected. Jones Day was instructed by Volkswagen AG to present factual evidence to the DOJ. To resolve US criminal law charges, Volkswagen AG and the DOJ entered into a Plea Agreement, which includes a Statement of Facts containing a summary of the factual allegations which the DOJ considered relevant to the settlement with Volkswagen AG. The Statement of Facts is based in part on Jones Day’s factual findings as well as the evidence identified by the DOJ itself. Jones Day has completed the work required to assist Volkswagen AG in assessing the criminal charges in the USA with respect to the diesel issue. However, work in respect of the legal proceedings which are still pending in the USA and the rest of the world is ongoing and will require considerable efforts and a considerable period of time. In connection with this work, Volkswagen AG is being advised by a number of external law firms. Furthermore, in September 2015, Volkswagen AG filed a criminal complaint in Germany against unknown persons as did AUDI AG. Volkswagen AG and AUDI AG are cooperating with all responsible authorities in the scope of reviewing the incidents. Potential consequences for Volkswagen’s results of operations, financial position and net assets could emerge primarily in the following legal areas: 1. Coordination with the authorities on technical measures Based on decisions dated October 15, 2015, the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) ordered the Volkswagen Passenger Cars, Volkswagen Commercial Vehicles and SEAT brands to recall all the diesel vehicles that had been issued with vehicle type approval by the KBA from among the eleven million vehicles affected with type EA 189 engines. The recall concerns the member states of the European Union (EU28). On December 10, 2015 a similar decision was issued regarding Audi vehicles with the EA 189 engine. The timetable and action plan forming the basis for the recall order corresponded to the proposals presented in advance by Volkswagen. Depending on the technical complexity of the concerned remedial actions, this means that the Volkswagen Group has been recalling the affected vehicles, of which there are around 8.5 million in total in the EU28 countries, to the service workshops since January 2016. The remedial actions differ in scope depending on the engine variant. The technical measures cover software and in some cases hardware modifications, depending on the series and model year. The technical measures for all vehicles in the European Union have since been approved without exception. The KBA ascertained for all clusters (groups of vehicles) that implementation of the technical measures would not bring about any adverse changes in fuel consumption figures, CO2 emissions figures, engine power, maximum torque and noise emissions. Once the modifications have been made, the vehicles will thus also continue to comply with the legal requirements and the emission standards applicable in each case. The technical measures for all affected vehicles with type EA 189 engines in the European Union were approved without exception, and implemented in most cases. 296 Notes to the Consolidated Financial Statements Consolidated Financial Statements In some countries outside the EU – among others South Korea, Taiwan and Turkey – national type approval is based on prior recognition of the EC/ECE type approval; the technical measures must therefore be approved by the national authorities. With the exception of South Korea and Chile, we were able to conclude this approval process in all countries. There, the majority of approvals were likewise granted; in relation to the pending approvals, Volkswagen is in close contact with the authorities. In addition, there is an intensive exchange of information with the authorities in the USA and Canada, where Volkswagen’s proposed modifications in relation to the four-cylinder and the six-cylinder diesel engines also have to be approved. Due to NOx limits that are considerably stricter than in the EU and the rest of the world, it is a greater technical challenge here to refit the vehicles so that the emission standards defined in the settlement agreements for these vehicles can be achieved. For many months, AUDI AG has been intensively checking all diesel concepts for possible discrepancies and retrofit potentials. A systematic review process for all engine and gear variants has been underway since 2016. On June 14, 2017, based on a technical error in the parameterization of the transmission software for a limited number of specific Audi A7/A8 models that AUDI AG itself discovered and reported to the KBA, the KBA issued an order under which a correction proposed by AUDI AG will be submitted. The technical error lies in the fact that, in the cases concerned, by way of exception a specific function that is standard in all other vehicle concepts is not implemented in actual road use. In Europe, this affects around 24,800 units of certain Audi A7/A8 models. The KBA has not categorized this error as an unlawful defeat device. On July 21, 2017, AUDI AG offered a software-based retrofit program for up to 850,000 vehicles with V6 and V8 TDI engines meeting the Euro 5 and Euro 6 emission standards in Europe and other markets except the USA and Canada. The measure will mainly serve to further improve the vehicles’ emissions in real driving conditions in inner city areas beyond the legal requirements. This was done in close cooperation with the authorities, which were provided with detailed reports, especially the German Federal Ministry of Transport and the KBA. The retrofit package comprises voluntary measures and, to a small extent, measures directed by the authorities; these are measures taken within the scope of a recall, which were proposed by AUDI AG itself, reported to the KBA and taken up and ordered by the latter. The voluntary tests have already reached an advanced stage, but have not yet been completed. The measures adopted and mandated by the KBA involved the recall of different diesel vehicles with a V6 or V8 engine meeting the Euro 6 emission standard, for which the KBA categorized certain emission strategies as an unlawful defeat device. From July 2017 to January 2018, the measures proposed by AUDI AG were adopted and mandated in various decisions by the KBA on vehicle models with V6 and V8 TDI engines. Currently, AUDI AG assumes that the total costs of the software-based retrofit program including the amount based on recalls will be manageable and has recognized corresponding balance-sheet risk provisions. Should additional measures become necessary as a result of the investigations by AUDI AG and the consultations with the KBA, AUDI AG will quickly implement these as part of the retrofit program in the interest of customers. 2. Criminal and administrative proceedings worldwide (excluding the USA/Canada) In addition to the described approval processes with the responsible registration authorities, in some countries criminal investigations/misdemeanor proceedings (for example, by the public prosecutor’s office in Braunschweig and Munich, Germany) and/or administrative proceedings (for example, by the Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin – the German Federal Financial Supervisory Authority) have been opened. The public prosecutor’s offices in Braunschweig and Munich are investigating the core issue of the criminal investigations. Whether this will result in fines for the Company, and if so what their amount might be, is currently subject to estimation risks. According to Volkswagen’s estimates so far, the likelihood of a sanction in the majority of these proceedings is less than 50%. Contingent liabilities have therefore been disclosed in cases where they can be assessed and for which the likelihood of a sanction was deemed not lower than 10%. Consolidated Financial Statements Notes to the Consolidated Financial Statements 297 3. Product-related lawsuits worldwide (excluding the USA/ Canada) In principle, it is possible that customers in the affected markets will file civil lawsuits against Volkswagen AG and other Volkswagen Group companies. In addition, it is possible that importers and dealers could assert claims against Volkswagen AG and other Volkswagen Group companies, e.g. through recourse claims. As well as individual lawsuits, class action lawsuits are possible in various jurisdictions (albeit not in Germany). Furthermore, in a number of markets it is possible that consumer and/or environmental organizations will apply for an injunction or assert claims for a declaratory judgment or for damages. In the context of the diesel issue, various lawsuits are currently pending against Volkswagen AG and other Volkswagen Group companies at present. There are pending class action proceedings and lawsuits brought by consumer and/or environmental associations against Volkswagen AG and other companies of the Volkswagen Group in various countries such as Argentina, Australia, Belgium, Brazil, China, the Czech Republic, Israel, Italy, Mexico, the Netherlands, Poland, Portugal, Switzerland, Taiwan and the United Kingdom. The class action proceedings are lawsuits aimed among other things at asserting damages or, as is the case in the Netherlands, at a declaratory judgment that cus- tomers are entitled to damages. With the exception of Brazil, where there has already been a non-binding judgment in the first instance, the amount of these damages cannot yet be quantified more precisely due to the early stage of the proceedings. Volkswagen does not estimate the litigants’ prospect of success to be more than 50% in any of the class action proceedings. In South Korea, various mass proceedings are pending (in some of these individual lawsuits several hundred litigants have been aggregated). These lawsuits have been filed to assert damages and to rescind the purchase contract including repayment of the purchase price. Due to special circumstances in the market and specific characteristics of the South Korean legal system, Volkswagen estimates the litigants’ prospects of success in the South Korean mass proceedings mentioned above to be inherently higher than in other jurisdictions outside the USA and Canada. On May 12, 2017, one first-instance judgment was delivered in these proceedings in South Korea during the fiscal year, in which the court completely dismissed an action filed to assert criminal damages over pollution. The judgment has since become binding. Contingent liabilities have been disclosed for pending class action and mass proceedings that can be assessed and for which the chance of success was deemed not implausible. Provisions were recognized to a small extent. Furthermore, individual lawsuits and similar proceedings are pending against Volkswagen AG and other Volkswagen Group companies in numerous countries. In Germany, there are around 9,500 individual lawsuits. In Italy, Austria and Spain, lawsuits numbering in the low three-digit range and in France and Ireland individual lawsuits in the two-digit range are pending against Volkswagen AG and other companies of the Volkswagen Group, most of which are aimed at asserting damages or rescinding the purchase contract. In addition, on November 29, 2017, Volkswagen AG was served with an action brought by financialright GmbH asserting the rights assigned to it by a total of approximately 15,000 customers in Germany. This action seeks the payment of around €350 million in return for restitution of the vehicles. In Switzerland, a claim for damages was brought against Volkswagen AG in December 2017 from the assigned rights of some 6,000 customers; the stated amount in dispute is approximately 30 million Swiss francs. According to Volkswagen’s estimates so far, the litigants’ prospect of success is below 50% in the vast majority of the individual lawsuits. Contingent liabilities have therefore been disclosed for those lawsuits that can be assessed and for which the chance of success was deemed not implausible. It is too early to estimate how many customers will take advantage of the option to file lawsuits in the future, beyond the existing lawsuits, or what their prospects of success will be. 298 Notes to the Consolidated Financial Statements Consolidated Financial Statements 4. Lawsuits filed by investors worldwide (excluding the USA/ Canada) Investors from Germany and abroad have filed claims for damages against Volkswagen AG – in some cases along with Porsche Automobil Holding SE (Porsche SE) as joint and several debtors – based on purported losses due to alleged misconduct in capital market communications in connection with the diesel issue. The vast majority of these investor lawsuits are currently pending at the District Court (Landgericht) in Braunschweig. On August 5, 2016, the District Court in Braunschweig ordered that common questions of law and fact relevant to the lawsuits pending at the District Court in Braunschweig be referred to the Higher Regional Court (Oberlandesgericht) in Braunschweig for a binding declaratory decision pursuant to the German Act on (Kapitalanleger-Muster- Model Case Proceedings verfahrensgesetz – KapMuG). In this proceeding, common questions of law and fact relevant to these actions shall be adjudicated in a consolidated manner by the Higher Regional Court in Braunschweig (model case proceedings). All lawsuits at the District Court in Braunschweig will be stayed pending up until resolution of the common issues, unless they can be dismissed for reasons independent of the common issues that are adjudicated in the model case proceedings. The resolution of the common questions of law and fact in the model case proceedings will be binding for all pending cases in the stayed lawsuits. in Disputes Regarding Capital Market Information At the District Court in Stuttgart, further investor lawsuits have been filed against Volkswagen AG, in some cases along with Porsche SE as joint and several debtors. On December 6, 2017, the District Court in Stuttgart issued an order for reference to the Higher Regional Court in Stuttgart in relation to procedural issues, particularly for clarification of jurisdiction. On account of the diesel issue, model case proceedings against Porsche SE are also pending before the Higher Regional Court in Stuttgart. Further investor lawsuits have been filed at various courts in Germany as well as in Austria and the Netherlands. In Austria, the Supreme Court ruled on July 7, 2017 that the investor lawsuits against Volkswagen AG do not fall within the jurisdiction of the Austrian courts. Consequently, all but one of the investor lawsuits that were formerly pending in Austria have been dismissed or withdrawn. The last pending lawsuit has been dismissed at first instance. Worldwide (excluding USA and Canada), investor lawsuits, judicial applications for dunning procedures and conciliation proceedings, and claims under the KapMuG are currently pending against Volkswagen in connection with the diesel issue, with the claims totaling approximately €9 billion. Volkswagen remains of the opinion that it duly complied with its capital market obligations. Therefore, no provisions have been recognized for these investor lawsuits. Insofar as the chance of success was estimated at not lower than 10%, contingent liabilities have been disclosed. 5. Proceedings in the USA/Canada Following the publication of the EPA’s “Notices of Violation”, Volkswagen AG and other Volkswagen Group companies have been the subject of intense scrutiny, ongoing investigations (civil and criminal) and civil litigation. Volkswagen AG and other Volkswagen Group companies have received subpoenas and inquiries from state attorneys general and other govern- mental authorities and are responding to such investigations and inquiries. In addition, Volkswagen AG and other Volkswagen Group companies in the USA/Canada are facing litigation on a number of different fronts relating to the matters described in the EPA’s “Notices of Violation”. A large number of putative class action lawsuits by customers and dealers have been filed in US federal courts and consolidated for pretrial coordination purposes in the federal multidistrict litigation proceeding in the State of California. On January 4, 2016, the DOJ, Civil Division, on behalf of the EPA, initiated a civil complaint against Volks- wagen AG, AUDI AG and certain other Volkswagen Group companies. The action sought statutory penalties under the US Clean Air Act, as well as certain injunctive relief, and was consolidated for pretrial coordination purposes in the California multidistrict litigation. On January 12, 2016, CARB announced that it intended to seek civil fines for alleged violations of the California Health & Safety Code and various CARB regulations. In June 2016, Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates reached settlement agreements with the DOJ on behalf of the EPA, CARB and the California Attorney General, private plaintiffs represented by a Plaintiffs’ Steering Committee (PSC) in the multidistrict litigation pending in California, and the U.S. Federal Trade Commission (FTC). These settlement agreements resolved certain civil claims made in relation to affected diesel vehicles with 2.0 l TDI engines from the Volkswagen Passenger Cars and Audi brands Consolidated Financial Statements Notes to the Consolidated Financial Statements 299 in the USA. Volkswagen AG and certain affiliates also entered into a First Partial Consent Decree with the DOJ, EPA, CARB and the California Attorney General, which was lodged with the court on June 28, 2016. On October 18, 2016, a fairness hearing on whether final approval should be granted was held, and on October 25, 2016, the court granted final approval of the settlement agreements and the partial consent order. A number of class members have filed appeals to an US appellate court from the order approving the settlements. The settlements include buyback or, for leased vehicles, early lease termination, or a free emissions modification of the vehicles, provided that the EPA and CARB approve the modification. Volkswagen will also make additional cash payments to affected current owners or lessees as well as certain former owners or lessees. Volkswagen also agreed to support environmental programs. The company will pay USD 2.7 billion over three years into an environmental trust, managed by a trustee appointed by the court, to offset excess nitrogen oxide (NOx) emissions. Volkswagen will also invest a total of USD 2.0 billion over ten years in zero emissions vehicle infrastructure as well as corresponding access and awareness initiatives. Volkswagen AG and certain affiliates also entered into a separate Partial Consent Decree with CARB and the California Attorney General resolving certain claims under California unfair competition, false advertising, and consumer protection laws related to both the 2.0 l and 3.0 l TDI vehicles, which was lodged with the court on July 7, 2016. Under the terms of the agreement, Volkswagen agreed to pay California USD 86 million. The court entered judgment on the Partial Consent Decree on September 1, 2016 and the USD 86 million payment was made on September 28, 2016. On December 20, 2016, Volkswagen entered into a Second Partial Consent Decree, subject to court approval, with the DOJ, EPA, CARB and the California Attorney General that resolved claims for injunctive relief under the Clean Air Act and California environmental, consumer protection and false advertising laws related to the 3.0 l TDI vehicles. Under the terms of this Consent Decree, Volkswagen agreed to implement a buyback and lease termination program for Generation 1 3.0 l TDI vehicles and a free emissions recall and modification program for Generation 2 3.0 l TDI vehicles, and to pay USD 225 million into the environmental mitigation trust that has been established pursuant to the First Partial Consent Decree. The Second Partial Consent Decree was lodged with the court on December 20, 2016 and approved on May 17, 2017. In addition, on December 20, 2016, Volkswagen entered into an additional, concurrent California Second Partial Consent Decree, subject to court approval, with CARB and the California Attorney General that resolved claims for injunctive relief under California environmental, consumer protection and false advertising laws related to the 3.0 l TDI vehicles. Under the terms of this Consent Decree, Volkswagen agreed to provide addi- tional injunctive relief to California, including the implementation of a “Green City” initiative and the intro- duction of three new Battery Electric Vehicle (BEV) models in California by 2020, as well as a USD 25 million payment to CARB to support the availability of BEVs in California. On January 11, 2017, Volkswagen entered into a Third Partial Consent Decree with the DOJ and EPA that resolved claims for civil penalties and injunctive relief under the Clean Air Act related to the 2.0 l and 3.0 l TDI vehicles. Volkswagen agreed to pay USD 1.45 billion (plus any accrued interest) to resolve the civil penalty and injunctive relief claims under the Clean Air Act, as well as the customs claims of the US Customs and Border Protection. Under the Third Partial Consent Decree, the injunctive relief includes monitoring, auditing and compliance obligations. This Consent Decree, which was subject to public comment, was lodged with the court on January 11, 2017 and approved on April 13, 2017. Also on January 11, 2017, Volkswagen entered into a settlement agreement with the DOJ to resolve any claims under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and agreed to pay USD 50 million (plus any accrued interest), specifically denying any liability and expressly disputing any claims. 300 Notes to the Consolidated Financial Statements Consolidated Financial Statements On July 21, 2017, the federal court in the multidistrict litigation in California approved the Third California Partial Consent Decree, in which Volkswagen AG and certain affiliates agreed with the California Attorney General and CARB to pay USD 153.8 million in civil penalties and cost reimbursements. These penalties covered California environmental penalties for both the 2.0 l and 3.0 l TDI vehicles. An agreement in principle had been reached on January 11, 2017. The DOJ also opened a criminal investigation focusing on allegations that various federal law criminal offenses were committed. On January 11, 2017, Volkswagen AG agreed to plead guilty to three federal criminal felony counts, and to pay a USD 2.8 billion criminal penalty. Pursuant to the terms of this agreement, Volkswagen will be on probation for three years and will work with an independent monitor for three years. The independent monitor will assess and oversee the company’s compliance with the terms of the resolution. This includes overseeing the implementation of measures to further strengthen compliance, reporting and monitoring systems, and an enhanced ethics program. Volkswagen will also continue to cooperate with the DOJ’s ongoing investigation of individual employees or former employees who may be responsible for criminal violations. Moreover, investigations by various US regulatory and government authorities are ongoing, including in areas relating to securities, financing and tax. On January 31, 2017, Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates entered into a settlement agreement with private plaintiffs represented by the PSC in the multidistrict litigation pending in California, and a consent order with the FTC. These agreements resolved certain civil claims made in relation to affected diesel vehicles with 3.0 l TDI engines from the Volkswagen, Audi and Porsche brands in the USA. On February 14, 2017, the court preliminarily approved the settlement agreement with private plaintiffs. On May 11, 2017, the court held a fairness hearing on whether approval should be granted and on May 17, 2017, the court granted final approval of the settlement agreement and the partial stipulated consent order. Under the settlements, consumers’ options and compensation will depend on whether their vehicles are classified as Generation 1 or Generation 2. Generation 1 (model years 2009-2012) consumers will have the option of a buyback, early lease termination, trade-in, or a free emissions modification, provided that EPA and CARB approve the modification. Additionally, Generation 1 owners and lessees, as well as certain former owners and lessees, will be eligible to receive cash payments. Generation 2 (model years 2013-2016) consumers will receive a free emissions-compliant repair to bring the vehicles into compliance with the emissions standards to which they were originally certified, as well as cash payments. Volkswagen has received approval from the EPA and CARB for emissions-compliant repairs within the time limits set out in the settlement agreement. Volkswagen will also make cash payments to certain former Generation 2 owners or lessees. In September 2016, Volkswagen announced that it had finalized an agreement to resolve the claims of Volkswagen branded franchise dealers in the USA relating to TDI vehicles and other matters asserted con- cerning the value of the franchise. The settlement agreement includes a cash payment of up to USD 1,208 bil- lion, and additional benefits to resolve alleged past, current, and future claims of losses in franchise value. On January 18, 2017, a fairness hearing on whether final approval should be granted was held, and on January 23, 2017, the court granted final approval of the settlement agreement. Consolidated Financial Statements Notes to the Consolidated Financial Statements 301 Additionally, in the USA, some putative class actions, some individual customers’ lawsuits and some state or municipal claims have been filed in state courts. Volkswagen reached separate agreements with the attorneys general of 45 US states, the District of Columbia and Puerto Rico, to resolve their existing or potential consumer protection and unfair trade practices claims – in connection with both 2.0 l TDI and 3.0 l TDI vehicles in the USA – for a settlement amount of USD 622 million. Five states did not join these settlements and still have consumer claims outstanding: Arizona, New Mexico, Oklahoma, Vermont and West Virginia. Volkswagen has also reached separate agreements with the attorneys general of eleven US states (Connecticut, Delaware, Maine, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington) to resolve their existing or potential future claims for civil penalties and injunctive relief for alleged violations of environmental laws for a settlement amount of 207 million. The attorneys general of ten other US states (Illinois, Maryland, Minnesota, Missouri, Montana, New Hampshire, New Mexico, Ohio, Tennessee and Texas) and some municipalities have also filed suits in state and federal courts against Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates, seeking civil penalties and injunctive relief for alleged violations of environmental laws. Illinois, Maryland, Minnesota, Missouri, Montana, New Hampshire, Ohio, Tennessee and Texas participated in the state settlements described above with respect to consumer protection and unfair trade practices claims, but those settlements did not include claims for environmental penalties. The environmental claims of two other states – Alabama and Wyoming – have been dismissed as preempted by federal law. Alabama has appealed this dismissal. In addition to the lawsuits described above, for which provisions have been recognized, a putative class action has been filed on behalf of purchasers of Volkswagen AG American Depositary Receipts, alleging a drop in price purportedly resulting from the matters described in the EPA’s “Notices of Violation”. A putative class action has also been filed on behalf of purchasers of certain USD-denominated Volkswagen bonds, alleging that these bonds were trading at artificially inflated prices due to Volkswagen’s alleged misstatements and that the value of these bonds declined after the EPA issued its “Notices of Violation”. These lawsuits have also been consolidated in the federal multidistrict litigation proceeding in the State of California described above. Volkswagen is of the opinion that it duly complied with its capital market obligations. Therefore, no provisions have been recognized. In addition, contingent liabilities have not been disclosed as they currently cannot be measured. In Canada, civil consumer claims and regulatory investigations have been initiated for vehicles with 2.0 l and 3.0 l TDI engines. On December 19, 2016, Volkswagen AG and other Canadian and US Volkswagen Group companies reached a class action settlement in Canada with consumers relating to 2.0 l diesel vehicles. Also on December 19, 2016, Volkswagen Group Canada agreed with the Commissioner of Competition in Canada to a civil resolution regarding its regulatory inquiry into consumer protection issues as to those vehicles. On December 21, 2017, Volkswagen announced an agreement in principle on a proposed consumer settlement in Canada involving 3.0 l diesel vehicles. The court preliminarily approved the settlement agreement on January 12, 2018, and the notice and opt out period began on January 17, 2018. Final approval hearings are scheduled in Quebec and Ontario for April 3 and 5, 2018, respectively. On January 12, 2018, Volkswagen and the Canadian Commissioner of Competition reached a resolution related to civil consumer protection issues relating to 3.0 l diesel vehicles. Also, criminal enforcement-related investigations by the federal environmental regulator and quasi-criminal enforcement-related investigations by a provincial environmental regulator are ongoing in Canada related to 2.0 l and 3.0 l diesel vehicles. On September 15, 2017, a provincial regulator in Canada, the Ontario Ministry of the Environment and Climate Change, charged Volkswagen AG under the province’s environmental statute with one count alleging that it caused or permitted the operation of model year 2010–2014 Volkswagen and Audi brand 2.0 l diesel vehicles that did not comply with prescribed emission standards. Following initial court appearances on November 15, 2017 and February 7, 2018, the matter was put over to April 4, 2018 pending ongoing evidence disclosure. No trial date has been set. Provisions have been recognized for possible obligations stemming from pending lawsuits in Canada. 302 Notes to the Consolidated Financial Statements Consolidated Financial Statements Moreover, in Canada, two securities class actions by investors in Volkswagen AG American Depositary Receipts and shares are pending against Volkswagen AG in the Quebec and Ontario provincial courts. These actions allege misrepresentations and omissions in financial reporting issued from 2009–2015 stemming from the diesel issue. The proposed class periods are for residents in the provinces who purchased the relevant securities between March 12, 2009 and September 18, 2015, and held all or some of the acquired securities until after the alleged first corrective disclosures. Discovery has not begun. In both actions, motions for certification were filed. In the Quebec matter, the motion was heard on February 5 and 6, 2018 and the court’s decision is on reserve. In the Ontario matter, the motion is scheduled for hearing on July 10 and 11, 2018. In addition, putative class action and joinder lawsuits by customers, and a certified environmental class action on behalf of residents, remain pending in certain provincial courts in Canada. An assessment of the underlying situation is not possible at this early stage of those proceedings. 6. Additional proceedings With its ruling from November 8, 2017, the Higher Regional Court of Celle ordered, upon the request of three US funds, the appointment of a special auditor for Volkswagen AG. The special auditor should examine whether there was a breach of duties on behalf of the members of the Board of Management and Supervisory Board of Volkswagen AG in connection with the diesel issue starting from June 22, 2006 and if this resulted in damages for Volkswagen AG. The ruling from the Higher Regional Court of Celle is formally legally binding. However, Volkswagen AG lodged a constitutional complaint toward the German Federal Constitutional Court regarding the infringement of its constitutionally guaranteed rights. It is currently unclear when the Federal Constitutional Court will reach a decision on this matter. In addition, the District Court of Hanover has filed a second motion for the appointment of a special auditor for Volkswagen AG, which is also aimed at the examination of transactions in connection with the diesel issue. This proceeding will be suspended until the ruling has been announced by the Federal Constitutional Court. 7. Risk assessment regarding the diesel issue To protect against the currently known legal risks related to the diesel issue, provisions of approximately €2.0 billion exist as of December 31, 2017 on the basis of existing information and current assessments. Beyond this, appropriate provisions have been recognized for defense and legal advice expenses. Insofar as these can be adequately measured at this stage, total contingent liabilities in relation to the diesel issue to the aggregate amount of €4.3 billion (previous year: €3.2 billion), of which lawsuits filed by investors account for €3.4 billion (previous year: €3.1 billion), were disclosed in the notes. The provisions recognized for this matter and the contingent liabilities disclosed as well as the other latent legal risks are partially subject to substantial estimation risks given the complexity of the individual factors, the ongoing approval process with the authorities and the fact that the independent, comprehensive investigations have not yet been completed. In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or about uncertainty regarding the amount or maturity of provisions and contingent liabilities in relation to the diesel issue. This is so as to not compromise the results of the proceedings or the interests of the Company. Consolidated Financial Statements Notes to the Consolidated Financial Statements 303 Additional important legal cases In 2011, ARFB Anlegerschutz UG (haftungsbeschränkt) brought an action against Volkswagen AG and Porsche Automobil Holding SE for claims for damages for allegedly violating disclosure requirements under capital market law in connection with the acquisition of ordinary shares in Volkswagen AG by Porsche in 2008. The damages currently being sought based on allegedly assigned rights amounted to approximately €2.26 billion plus interest. In April 2016, the District Court in Hanover had formulated numerous objects of declaratory judgment that the cartel senate of the Higher Regional Court in Celle will decide on in model case proceedings under the KapMuG. In the first hearing on October 12, 2017, the senate indicated that it currently does not see claims against Volkswagen AG as justified, both in view of a lack of substantiated evidence and for legal reasons. Some of the desired objects of declaratory judgment on the litigants’ side may also be inadmissible, it said. Volkswagen AG sees the statements of the court’s senate as confirmation that the claims made against the company have absolutely no basis. At the time (2010/2011), other investors had also asserted claims – including claims against Volkswagen AG – arising out of the same circumstances in an approximate total amount of €4.6 billion and initiated conciliation proceedings. Volkswagen AG always refused to participate in these conciliation proceedings; since then, these claims have not been pursued further. In 2011, the European Commission conducted searches at European truck manufacturers on suspicion of an unlawful exchange of information during the period 1997–2011 and issued a statement of objections to MAN, Scania and the other truck manufacturers concerned in November 2014. With its settlement decision in July 2016, the European Commission fined five European truck manufacturers. MAN’s fine was waived in full as the company had informed the European Commission about the irregularities as a key witness. In September 2017, the European Commission then fined Scania €0.88 billion. Scania has appealed to the European Court in Luxembourg and will use all means at its disposal to defend itself. Scania had already recognized a provision of €0.4 billion in 2016. Furthermore, antitrust lawsuits for damages from customers were received. As is the case in any antitrust proceedings, this may result in further lawsuits for damages. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. The Annual General Meeting of MAN SE approved the conclusion of a control and profit and loss transfer agree- ment between MAN SE and Volkswagen Truck & Bus GmbH (formerly Truck & Bus GmbH), a subsidiary of Volkswagen AG, in June 2013. In July 2013, award proceedings were instituted to review the appropriateness of the cash settlement set out in the agreement in accordance with section 305 of the Aktiengesetz (AktG – German Stock Corporation Act) and the cash compensation in accordance with section 304 of the AktG. It is not uncommon for noncontrolling interest shareholders to institute such proceedings. In July 2015, the Munich Regional Court ruled in the first instance that the amount of the cash settlement payable to the noncontrolling interest shareholders of MAN should be increased from €80.89 to €90.29 per share; at the same time, the amount of the cash compensation was confirmed. The assessment of liability for put options and compensation rights granted to noncontrolling interest shareholders was adjusted in 2015. Both applicants and Volkswagen Truck & Bus GmbH have appealed to the Higher Regional Court in Munich. Volkswagen continues to maintain that the results of the valuation are correct. The appropriateness of the valuation was confirmed by the audit firms engaged by the parties and by the court-appointed auditor of the agreement. Within the scope of the European Commission's ongoing antitrust investigations regarding German automakers, authorities examined documents in the offices of Volkswagen AG in Wolfsburg and AUDI AG in Ingolstadt as part of an announced review. The Volkswagen Group and the Group brands concerned have been cooperating fully and for a long time with the European Commission and have submitted a corresponding application. It is currently unclear whether the European Commission will instigate formal proceedings. In addition, a few national and international authorities have initiated antitrust investigations. Volkswagen is cooperating closely with the responsible authorities in these investigations. An assessment of the underlying situation is not possible at this early stage. 304 Notes to the Consolidated Financial Statements Consolidated Financial Statements Since November 2016, Volkswagen has been responding to information requests from the EPA and CARB related to automatic transmissions in certain vehicles with petrol engines. Additionally, fourteen putative class actions have been filed against Audi and certain affiliates alleging that defendants concealed the existence of “defeat devices” in Audi brand vehicles with automatic transmissions. All of these putative class actions have been transferred to the federal multidistrict litigation proceeding in the State of California, and plaintiffs filed a consolidated class action complaint on October 12, 2017, which Volkswagen AG and certain of its affiliates moved to dismiss on December 11, 2017. On January 16, 2018, plaintiffs filed an opposition to the motion to dismiss and the court has set a deadline of February 16, 2018 for defendants to file a reply. A hearing is scheduled for May 11, 2018. On December 22, 2017, a mass action on behalf of approximately 75 individual plaintiffs alleging similar claims was filed in a California state court, which was removed to the Northern District of California on January 25, 2018. In Canada, two similar putative class actions, including a national class, have been filed in Ontario and Quebec provincial courts against AUDI AG, Volkswagen AG and US and Canadian affiliates regarding alleged CO2 “defeat devices” in certain petrol Audi models with automatic transmissions. Both of the Canadian actions are in the pre-certification stage. Contingent liabilities have therefore been disclosed in cases where they can be assessed and for which the likelihood of a sanction was deemed not lower than 10%. From July through November 2017, plaintiffs filed numerous complaints in various US jurisdictions on behalf of putative classes of purchasers of German luxury vehicles against several automobile manufacturers, including Volkswagen AG and other Group companies. These complaints assert claims under the US Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act, state unfair competition and consumer protection statutes, and common law unjust enrichment. The complaints allege that since the 1990s, defen- dants engaged in a conspiracy to unlawfully increase the prices of German luxury vehicles by agreeing to share commercially sensitive information and to reach unlawful agreements regarding technology, costs, and sup- pliers. Moreover, the plaintiffs allege that the defendants agreed to limit the size of AdBlue tanks to ensure that US emissions regulators did not scrutinize the emissions control systems in defendants’ vehicles, and that such an agreement for Volkswagen was the impetus for the creation of the defeat device. On September 28, 2017, a hearing before the Judicial Panel on Multidistrict Litigation (JPML) was held, and on October 4, 2017 the JPML issued its decision consolidating and transferring these cases to Judge Breyer in the Northern District of California. On December 14, 2017, co-lead counsel were appointed representing the interests of a putative class of indirect purchasers and a putative class of direct purchasers, as well as Plaintiffs’ Steering Committee. On December 20, 2017, deadlines were set for the filing of initial and responsive pleadings and an initial case status conference scheduled for April 5, 2018, and co-lead counsel were directed to file consolidated class action complaints on behalf of the two putative classes by March 15, 2018. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. From July through October 2017, plaintiffs filed claims in Ontario, Quebec and British Columbia on behalf of putative classes of purchasers of German luxury vehicles against several automobile manufacturers, including Volkswagen Canada Inc., Audi Canada Inc., and other Group companies. The claims assert causes of action under the Competition Act, common law, and Quebec’s civil law and contain similar allegations to the US complaints described in the paragraph above. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. In the tax proceedings between MAN Latin America and the Brazilian tax authorities, the Brazilian tax authorities took a different view of the tax implications of the acquisition structure chosen for MAN Latin America in 2009. In December 2017, a second instance judgment was rendered in administrative court proceedings, which was negative for MAN Latin America. MAN Latin America will initiate proceedings against this judgment before the regular court in 2018. Due to the difference in the penalties plus interest which could potentially apply under Brazilian law, the estimated size of the risk in the event that the tax authorities are able to prevail overall with their view is laden with uncertainty. However, a positive outcome continues to be expected for MAN Latin America. Should the opposite occur, this could result in a risk of about €0.7 billion for the contested period from 2009 onwards, which has been stated within the section entitled “Contingent liabilities”. Consolidated Financial Statements Notes to the Consolidated Financial Statements 305 In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or about uncertainty regarding the amount or maturity of provisions and contingent liabilities in relation to additional important legal cases. This is so as to not compromise the results of the proceedings or the interests of the Company. 38. Other financial obligations € million 2017 2018 – 2021 from 2022 Dec. 31, 2016 P A Y A B L E P A Y A B L E P A Y A B L E T O T A L Purchase commitments in respect of property, plant and equipment intangible assets investment property Obligations from loan commitments to unconsolidated subsidiaries irrevocable credit and lease commitments to customers long-term leasing and rental contracts 7,170 1,243 13 126 4,551 995 1,585 386 – 2 0 2,489 – – – – 44 2,261 8,756 1,629 13 128 4,595 5,745 Miscellaneous other financial obligations 2,569 1,416 1,072 5,056 € million 2018 2019 – 2022 from 2023 Dec. 31, 2017 P A Y A B L E P A Y A B L E P A Y A B L E T O T A L Purchase commitments in respect of property, plant and equipment intangible assets investment property Obligations from loan commitments to unconsolidated subsidiaries irrevocable credit commitments to customers long-term leasing and rental contracts 7,347 946 41 186 3,436 1,026 1,394 479 – 21 201 2,389 – – – – 59 2,133 8,740 1,425 41 207 3,695 5,548 Miscellaneous other financial obligations 2,476 1,469 929 4,874 306 Notes to the Consolidated Financial Statements Consolidated Financial Statements Other financial obligations from long-term leasing and rental contracts are partly offset by expected income from subleases of €1,467 million (previous year: €1,664 million). To enhance comparability, irrevocable credit commitments to customers are reported without leasing com- mitments from fiscal year 2017 onward. As of December 31, 2016, the corresponding amount was €2.1 billion. Other financial obligations include an amount of €1.3 billion for investments in zero emissions vehicle infrastructure to which the Volkswagen Group had committed itself in the settlement agreements in the USA in connection with the diesel issue and in corresponding access and awareness initiatives for these technologies. 39. Total audit fees of the Group auditor Under the provisions of the Handelsgesetzbuch (HGB – German Commercial Code), Volkswagen AG is obliged to disclose the total audit fee of the Group auditor, PricewaterhouseCoopers GmbH Wirtschaftsprüfungs- gesellschaft. € million Financial statement audit services Other assurance services Tax advisory services Other services 2017 2016¹ 17 2 1 13 33 19 4 0 4 27 1 Some services, which were previously reported as other assurance services, are now classified as audit services. Prior-year figures have been adjusted accordingly. The fee paid to the auditors in 2017 was mostly attributable to the audit of the consolidated financial statements of Volkswagen AG and of annual financial statements of German Group companies as well as to reviews of the interim consolidated financial statements of Volkswagen AG and of interim financial statements of German Group companies. The auditors provided assurance services and tax advice only to a small extent. Other services provided by the auditors in the reporting period focused on advice on how to implement new legal standards and on support for measures in connection with the diesel issue. Consolidated Financial Statements Notes to the Consolidated Financial Statements 307 40. Total expense for the period € million Cost of materials 2017 2016 Cost of raw materials, consumables and supplies, purchased merchandise and services 151,449 140,307 Personnel expenses Wages and salaries Social security, post-employment and other employee benefit costs 41. Average number of employees during the year Performance-related wage-earners Salaried staff of which in the passive phase of partial retirement Vocational trainees Employees of Chinese joint ventures 42. Events after the balance sheet date There were no significant events after the end of fiscal year 2017. 31,432 7,518 38,950 29,971 7,046 37,017 2017 2016 253,469 288,478 541,947 (7,156) 17,891 559,838 74,558 634,396 236,204 292,240 528,444 (5,915) 17,962 546,406 72,940 619,346 308 Notes to the Consolidated Financial Statements Consolidated Financial Statements 43. Remuneration based on performance shares and phantom shares (share-based payment) At the beginning of 2017, the Supervisory Board of Volkswagen AG resolved to adjust the remuneration system of the Board of Management with effect from January 1, 2017. All members of the Board of Management voted in favor of switching to the new remuneration system in the course of fiscal year 2017. The new remuneration system of the Board of Management comprises non-performance-related and performance-related com- ponents. The performance-related remuneration consists of a performance-related annual bonus with a one- year assessment period and a long-term incentive (LTI) in the form of a performance share plan with a forward- looking three-year term (share-based payment). In addition, a bonus was converted into phantom preferred shares (phantom shares) in 2016. P E R F O R M A N C E S H A R E S Each performance period of the performance share plan has a term of three years. At the time the LTI is granted, the annual target amount under the LTI is converted, on the basis of the initial reference price of Volkswagen’s preferred shares, into performance shares of Volkswagen AG, which are allocated to the respective member of the Board of Management as a pure calculation position. After the end of the three-year term of the performance share plan, a cash settlement shall take place. The payment amount corresponds to the number of determined performance shares, multiplied by the closing reference price at the end of the three-year period plus a dividend equivalent for the relevant term. The payment amount under the performance share plan shall be limited to 200% of the target amount. If 100% of the targets agreed in each case are achieved, the target amount is €1.8 million for each member of the Board of Management and €3.8 million for the Chairman of the Board of Management. A total of 141,426 performance shares were allocated to the members of the Board of Management for 2017. The fair value of the obligation as of December 31, 2017 amounts to €43.8 million. The compensation cost of €43.8 million is recognized under personnel costs. If the members of the Board of Management had left the Company as of December 31, 2017, the obligation (intrinsic value) would have amounted to a total of €20.3 mil- lion. P H A N TO M S H A R E S At its meeting on April 22, 2016, Volkswagen AG’s Supervisory Board accepted the offer made by the members of the Board of Management to withhold 30% of the variable remuneration for fiscal year 2015 for the Board of Management members active on the date of the resolution and to make its disposal subject to future share price performance by means of phantom shares. The amount withheld led to the creation of 50,703 phantom preferred shares. The fair value of the obligation to the members of the Board of Management as of Decem- ber 31, 2017 amounted to €7.0 million. The change in the fair value of €2.0 million was recognized under personnel costs. If all members of the Board of Management had left as of December 31, 2017, the obligation (intrinsic value) would have amounted to a total of €7.3 million. For further details on performance shares and phantom shares, please refer to our disclosures in the remuneration report, which is part of the Group management report. 44. Related party disclosures in accordance with IAS 24 Related parties as defined by IAS 24 are natural persons and entities that Volkswagen AG has the ability to control or on which it can exercise significant influence, or natural persons and entities that have the ability to control or exercise significant influence on Volkswagen AG, or that are influenced by another related party of Volkswagen AG. All transactions with related parties are conducted on an arm’s length basis. At 52.2%, Porsche SE held the majority of the voting rights in Volkswagen AG as of the reporting date. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, 2009. As a result, Porsche SE cannot appoint the majority of the members of Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Consolidated Financial Statements Notes to the Consolidated Financial Statements 309 Volkswagen AG’s ordinary shares. However, Porsche SE has the power to participate in the operating policy decisions of the Volkswagen Group and is therefore classified as a related party as defined by IAS 24. The contribution of Porsche SE’s holding company operating business to Volkswagen AG on August 1, 2012 has the following effects on the agreements between Porsche SE, Volkswagen AG and companies of the Porsche Holding Stuttgart Group that existed prior to the contribution and were entered into on the basis of the Comprehensive Agreement and its related implementation agreements: > Volkswagen AG continues to indemnify Porsche SE against certain financial guarantees issued by Porsche SE to creditors of the companies belonging to the Porsche Holding Stuttgart Group up to the amount of its share in the capital of Porsche Holding Stuttgart, which amounts to 100% since the contribution as of August 1, 2012. Porsche Holding Finance plc, Dublin, Ireland, was contributed to the Volkswagen Group in the course of the transfer of Porsche SE’s holding company operating business. Until June 2017, the indemnification also included financial guarantees issued by Porsche SE to creditors of Porsche Holding Finance plc in relation to interest payments on, and the repayment of, bonds in the aggregate amount of €250 million. As part of the contribution of Porsche SE’s holding company operating business to Volkswagen AG, Volkswagen AG undertook to assume standard market liability compensation effective August 1, 2012 for guarantees issued to external creditors, whereby it is indemnified internally. > Volkswagen AG continues to indemnify Porsche SE internally against claims by the Einlagensicherungsfonds (German deposit protection fund) after Porsche SE submitted an indemnification agreement required by the Bundesverband Deutscher Banken (Association of German Banks) to the Einlagensicherungsfonds in August 2009. Volkswagen AG has also undertaken to indemnify the Einlagensicherungsfonds against any losses caused by measures taken by the latter in favor of a bank in which Volkswagen AG holds a majority interest. > Under certain conditions, Porsche SE continues to indemnify Porsche Holding Stuttgart, Porsche AG and their legal predecessors against tax liabilities that exceed the obligations recognized in the financial state- ments of those companies relating to periods up to and including July 31, 2009. In return, Volkswagen AG has undertaken to pay to Porsche SE any tax benefits or tax refunds of Porsche Holding Stuttgart, Porsche AG and their legal predecessors and subsidiaries for tax assessment periods up to July 31, 2009. Based on the results of the external tax audit for the assessment periods 2006 to 2008 that has now been completed, a compensation obligation running into the low triple-digit millions of euros would arise for Volkswagen AG. New information emerging in the future from the external tax audit that commenced at the end of 2015 for the 2009 assessment period could result in an increase or decrease in the potential compensation obligation. Under the terms of the Comprehensive Agreement, Porsche SE and Volkswagen AG had granted each other put and call options with regard to the remaining 50.1% interest in Porsche Holding Stuttgart held by Porsche SE until the contribution of its holding company operating business to Volkswagen AG. Both Volkswagen AG (if it had exercised its call option) and Porsche SE (if it had exercised its put option) had undertaken to bear the tax burden resulting from the exercise of the options and any subsequent activities in relation to the equity investment in Porsche Holding Stuttgart (e.g. from recapture taxation on the spin-off in 2007 and/or 2009). If tax benefits had accrued to Volkswagen AG, Porsche Holding Stuttgart, Porsche AG, or their respective subsidiaries as a result of recapture taxation on the spin-off in 2007 and/or 2009, the purchase price to be paid by Volkswagen AG for the transfer of the outstanding 50.1% equity investment in Porsche Holding Stuttgart if the put option had been exercised by Porsche SE would have been increased by the present value of the tax benefit. This arrangement was taken over under the terms of the contribution agreement to the effect that Porsche SE has a claim against Volkswagen AG for payment in the amount of the present value of the realizable tax benefits from any recapture taxation of the spin-off in 2007 as a result of the contribution. It was also agreed under the terms of the contribution that Porsche SE will indemnify Volkswagen AG, Porsche Holding Stuttgart and their subsidiaries against taxes if measures taken by or not taken by Porsche SE result in recapture taxation for 2012 at these companies in the course of or following implementation of the contribution. In this case, too, Porsche SE is entitled to assert a claim for payment against Volkswagen AG in the amount of the present value of the realizable tax benefits that arise at the level of Volkswagen AG or one of its subsidiaries as a result of such a transaction. 310 Notes to the Consolidated Financial Statements Consolidated Financial Statements Further agreements were entered into and declarations were issued in connection with the contribution of Porsche SE’s holding company operating business to Volkswagen AG, in particular: > Porsche SE indemnifies its contributed subsidiaries, Porsche Holding Stuttgart, Porsche AG and their subsidiaries against liabilities to Porsche SE that relate to the period up to and including December 31, 2011 and that exceed the obligations recognized in the financial statements of those companies for that period. > Porsche SE indemnifies Porsche Holding Stuttgart and Porsche AG against obligations arising from certain legal disputes; this includes the costs of an appropriate legal defense. > Moreover, Porsche SE indemnifies Volkswagen AG, Porsche Holding Stuttgart, Porsche AG and their subsidiaries against half of the taxes (other than taxes on income) arising at those companies in conjunction with the contribution that would not have been incurred in the event of the exercise of the call option on the shares of Porsche Holding Stuttgart that continued to be held by Porsche SE until the contribution. Volkswagen AG therefore indemnifies Porsche SE against half of such taxes that it incurs. In addition, Porsche Holding Stuttgart is indemnified against half of the land transfer tax and other costs triggered by the merger. > Additionally, Porsche SE and Porsche AG agreed to allocate any subsequent VAT receivables or liabilities from transactions in the period up to December 31, 2009 to the company entitled to the receivable or incurring the liability. > A range of information, conduct and cooperation obligations were agreed by Porsche SE and the Volkswagen Group. According to a notification dated January 2, 2018, the State of Lower Saxony and Hannoversche Beteiligungs- gesellschaft Niedersachsen mbH, Hanover, held 20.00% of the voting rights of Volkswagen AG on December 31, 2017. As mentioned above, the General Meeting of Volkswagen AG on December 3, 2009 also resolved that the State of Lower Saxony may appoint two members of the Supervisory Board (right of appointment). The following tables present the amounts of supplies and services transacted, as well as outstanding receivables and liabilities, between consolidated companies of the Volkswagen Group and related parties. R E L AT E D PA RT I E S € million 2017 2016 2017 2016 S U P P L I E S A N D S E R V I C E S R E N D E R E D S U P P L I E S A N D S E R V I C E S R E C E I V E D Porsche SE and its majority interests Supervisory Board members Board of Management members Unconsolidated subsidiaries Joint ventures and their majority interests Associates and their majority interests Pension plans Other related parties State of Lower Saxony, its majority interests and joint ventures 7 2 0 1,039 14,294 214 1 0 11 12 3 0 890 13,728 190 4 0 6 1 2 0 1,300 1,225 733 0 0 9 2 5 0 973 1,377 912 0 0 6 Consolidated Financial Statements Notes to the Consolidated Financial Statements 311 € million Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2016 R E C E I V A B L E S F R O M L I A B I L I T I E S ( I N C L U D I N G O B L I G A T I O N S ) T O Porsche SE and its majority interests Supervisory Board members Board of Management members Unconsolidated subsidiaries Joint ventures and their majority interests Associates and their majority interests Pension plans Other related parties State of Lower Saxony, itsmajority interests and joint ventures 13 0 0 1,480 9,889 76 1 – 2 323 0 0 1,036 8,808 53 1 – 2 0 254 72 1,773 2,168 572 – 63 1 1 297 39 1,188 1,784 495 8 64 1 The tables above do not contain the dividend payments of €3,653 million (previous year: €3,613 million) received from joint ventures and associates and dividends of €308 million (previous year: €17 million) paid to Porsche SE. Receivables from joint ventures are primarily attributable to loans granted in an amount of €6,277 million (previous year: €5,769 million) as well as trade receivables in an amount of €3,354 million (previous year: €2,855 million). Receivables from non-consolidated subsidiaries also result mainly from loans granted in an amount of €1,038 million (previous year: €479 million) and from trade receivables in an amount of €224 million (previous year: €196 million). Impairment losses of €56 million (previous year: €35 million) were recognized on the outstanding related party receivables. In fiscal year 2017, expenses of €36 million (previous year: €18 million) were incurred in this context. In addition, the Volkswagen Group has furnished guarantees to external banks on behalf of related parties in the amount of €220 million (previous year: €112 million). In the reporting period, the Volkswagen Group made capital contributions of €203 million (previous year: €391 million) to related parties. The changes in supplies and services received from and rendered to joint ventures and their majority interests are primarily attributable to deliveries to the Chinese joint ventures. The decrease in receivables from Porsche SE is attributable to a loan repayment. As in the previous year, obligations to members of the Supervisory Board relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. Obligations to the Board of Management comprise outstanding balances for the annual bonus and the fair values of the performance shares and phantom shares in the amount of €67.0 million (previous year: €26.1 million) granted to Board of Management members. 312 Notes to the Consolidated Financial Statements Consolidated Financial Statements In addition to the amounts shown above, the following expenses were recognized for the members of the Board of Management and Supervisory Board of the Volkswagen Group in the course of their activities as members of these bodies: € Short-term benefits Benefits based on performance shares and virtual shares Post-employment benefits Termination benefits 2017 2016 33,967,996 45,456,678 45,777,248 10,872,088 6,940,142 –670,296 9,347,409 – 97,557,473 54,133,791 Benefits paid on the basis of performance shares include the cost of €43.8 million attributable to the per- formance shares granted to Board of Management members under the remuneration system applicable as from 2017. Pursuant to the guidance of IFRS 2, this requires inclusion of not only the performance share plan for 2017, but also of a pro-rated amount for future share plans to be granted during the current employment contract. Overall, benefits based on phantom shares resulted in income in 2016, because the income from reversing the provision for performance-based Board of Management remuneration (€1.5 million) due to the waiver for fiscal year 2015 exceeded the cost attributable to the performance of the share price up to December 31, 2016 (€0.8 mil- lion). In fiscal year 2017, the share price performance led to the recognition of expenses of €2.0 million for the phantom shares. The employee representatives and the representative of the senior executives on the Supervisory Board are also entitled to a regular salary as set out in their employment contracts. For members of German works councils, this is based on the provisions of the Betriebsverfassungsgesetz (BetrVG – German Works Constitution Act). Investigations by the authorities are currently under way to determine whether the remuneration of some works council members can be justified. As a precaution, components of the remuneration of some works council members has been retained in this context until the matter is clarified. (cid:3) The post-employment benefits relate to additions to pension provisions for current members of the Board of Management. The termination benefits relate to the severance payment made to Ms. Hohmann-Dennhardt in connection with her early departure from the Board of Management. Disclosures on the pension provisions for members of the Board of Management and more detailed explanations of the remuneration of the Board of Management and the Supervisory Board can be found in the section entitled “Remuneration of the Board of Management and the Supervisory Board” and in the remu- neration report, which is part of the management report. 45. German Corporate Governance Code On November 17, 2017, the Board of Management and Supervisory Board of Volkswagen AG issued their declaration of conformity with the German Corporate Governance Code as required by section 161 of the Aktiengesetz (AktG – German Stock Corporation Act) and made it permanently available to the shareholders of Volkswagen AG on the Company’s website at www.volkswagenag.com/ir. On November 30, 2017, the Board of Management and Supervisory Board of AUDI AG likewise issued their declaration of conformity with the German Corporate Governance Code and made it permanently available to the shareholders at www.audi.com/cgk-declaration. In December 2017, the Executive Board and Supervisory Board of MAN SE issued their declaration of conformity with the German Corporate Governance Code as required by section 161 of the AktG and made it permanently available to the shareholders at www.corporate.man.eu/en. The Executive and Supervisory Boards of RENK AG issued a declaration of conformity on December 5, 2017 and made it permanently available to the shareholders at www.renk.biz/corporated-governance.html. Consolidated Financial Statements Notes to the Consolidated Financial Statements 313 46. Remuneration of the Board of Management and the Supervisory Board € 2017 2016 Board of Management remuneration Non-performance-related remuneration Performance-related remuneration Long-term incentive component Supervisory Board remuneration Non-performance-related remuneration Performance-related remuneration 14,337,116 18,093,835 15,844,041 21,453,778 20,104,770 – 50,285,927 39,547,612 3,516,389 270,450 3,786,839 709,346 4,687,220 5,396,565 N O N - P E R F O R M A N C E - R E L AT E D R E M U N E R AT I O N O F T H E B OA R D O F M A N A G E M E N T The non-performance-related remuneration of the Board of Management comprises fixed remuneration and fringe benefits. In addition to the basic level of remuneration, the fixed remuneration also includes differing levels of remuneration for appointments assumed at Group companies. The prior-year figure also includes an amount of €6.3 million to compensate Ms. Hohmann-Dennhardt for lost entitlements resulting from the change in employer. The fringe benefits result from the grant of noncash benefits and include in particular the use of operating assets such as company cars and the payment of insurance premiums. Taxes due on these noncash benefits were mainly borne by Volkswagen AG. P E R F O R M A N C E - R E L AT E D R E M U N E R AT I O N A N D LO N G - T E R M I N C E N T I V E CO M P O N E N T O F T H E B OA R D O F M A N AG E M E N T Performance-related remuneration includes the annual bonus with a one-year assessment period. The long- term incentive component contains the long-term incentive (LTI) in the form of a performance share plan with a forward-looking three-year term. The performance shares granted to the incumbent members of the Board of Management under the new remuneration system in 2017 were recognized at their fair value of €20.1 million at the grant date; this amount represents remuneration under German GAAP. At its meeting on April 22, 2016, Volkswagen AG’s Supervisory Board accepted the offer made by the members of the Board of Management to withhold 30% of the variable remuneration for fiscal year 2015 for the Board of Management members active on the date of the resolution and to make its disposal subject to future share price performance by means of phantom shares. The resulting effects on remuneration were reported as appropriate in previous years. In fiscal year 2017, expenses of €43.8 million were recognized for the performance shares and of €2.0 mil- lion for the phantom shares. If these expenses exceed the fair value of the performance shares at the grant date, they do not represent remuneration under German GAAP and are therefore not included in the tables above. As in the previous year, no interest-free advances were paid to members of the Board of Management. 314 Notes to the Consolidated Financial Statements Consolidated Financial Statements S U P E R V I S O RY B OA R D R E M U N E R AT I O N As a result of its regular review of the Supervisory Board remuneration, the Supervisory Board proposed a reorganization of the system of Supervisory Board remuneration to the 2017 Annual General Meeting, which was approved on May 10, 2017 with 99.98 % of the votes cast. The remuneration of the members of the Supervisory Board of Volkswagen AG no longer contains any performance-related remuneration components but consists entirely of non-performance-related remuneration components. Remuneration for supervisory board work at subsidiaries continues to comprise a mix of non-performance-related and performance-related components. The remuneration disclosed for members of the Supervisory Board for 2016 shows the amounts determined on the basis of the old system of Supervisory Board remuneration. The members of the Supervisory Board declared to the Management Board that they would waive the portion of their remuneration for fiscal year 2016 that exceeds the amount that would have resulted for fiscal year 2016 from implementing the system of Supervisory Board remuneration resolved by the Annual General Meeting on May 10, 2017 with retroactive effect to January 1, 2017. The total amount waived for 2016 by all members of the Supervisory Board is €1.2 million. Mr. Pötsch additionally waived an amount of €0.1 million of his variable remuneration for fiscal year 2016 and waived his remuneration for fiscal year 2017 in full. The reason for this waiver is the agreement made in connection with Mr. Pötsch’s transfer from the Management Board to the Supervisory Board as of October 8, 2015, which specified that the amount of Supervisory Board remuneration received up to December 31, 2017 would be deducted from the compensation payment to which he would have been entitled for the period from October 8, 2015 to December 31, 2017. P E N S I O N E N T I T L E M E N T S On December 31, 2017, the pension provisions for members of the Board of Management in accordance with IFRSs amounted to €125.4 million (previous year: €113.5 million). Current pensions are index-linked in accordance with the index-linking of the highest collectively agreed salary insofar as the application of section 16 of the Gesetz zur Verbesserung der betrieblichen Altersversorgung (BetrAVG – German Company Pension Act) does not lead to a larger increase. Former members of the Board of Management and their surviving dependents received €19.9 million (previous year: €11.1 million). This includes the amounts promised to Ms. Hohmann-Dennhardt in connection with her departure from the Board of Management. Ms. Hohmann-Dennhardt received non-performance- related remuneration of €2.1 million and performance-related remuneration of €4.9 million for the period from February 1, 2017 to December 31, 2018. Pension provisions in accordance with IFRSs for this group of individuals amounted to €269.0 million (previous year: €270.0 million). The individual remuneration of the members of the Board of Management and the Supervisory Board is explained in the remuneration report in the management report on page 67. A comprehensive assessment of the individual bonus components and of the LTI in the form of the performance share plan can also be found there. Consolidated Financial Statements Responsibility Statement 315 Responsibility Statement 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 or loss 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 material opportunities and risks associated with the expected development of the Group. Wolfsburg, February 23, 2018 Volkswagen Aktiengesellschaft The Board of Management Matthias Müller Matthias Müller Karlheinz Blessing Karlheinz Blessing Herbert Diess Herbert Diess sco Javier Garcia Sanz Francisco Javier Garcia Sanz eizmann Jochem Heizmann Andreas Renschler Andreas Renschler Rupert Stadler Hiltrud Dorothea Werner Hiltrud Dorothea Werner ank Witter Frank Witter 316 Independent Auditor’s Report Consolidated Financial Statements Independent Auditor’s Report On completion of our audit, we issued the following unqualified auditor’s report dated February 23, 2018. This report was originally prepared in German. In case of ambiguities the German version takes precedence: To VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS AND OF THE GROUP MANAGEMENT REPORT AU D I T O P I N I O N S We have audited the consolidated financial statements of VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, and its subsidiaries (the Group), which comprise the income statement and the statement of comprehensive income, the balance sheet, the statement of changes in equity and the cash flow statement for the financial year from January 1 to December 31, 2017, and notes to the consolidated financial statements, including a summary of significant accounting policies. In addition, we have audited the group management report of VOLKSWAGEN AKTIENGESELLSCHAFT, which is combined with the Company’s management report, for the financial year from January 1 to December 31, 2017. We have not audited the content of those parts of the group management report listed in the “Other Information” section of our auditor’s report in accordance with the German legal requirements. In our opinion, on the basis of the knowledge obtained in the audit, (cid:120) the accompanying consolidated financial statements comply, in all material respects, with the IFRSs as adopted by the EU, and the additional requirements of German commercial law pursuant to § [Article] 315e Abs. [paragraph] 1 HGB [Handelsgesetzbuch: German Commercial Code] and, in compliance with these requirements, give a true and fair view of the assets, liabilities, and financial position of the Group as at December 31, 2017, and of its financial performance for the financial year from January 1 to December 31, 2017, and the accompanying group management report as a whole provides an appropriate view of the Group’s position. In all material respects, this group management report is consistent with the consolidated financial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development. Our audit opinion on the group management report does not cover the content of those parts of the group management report listed in the “Other Information” section of our auditor’s report. (cid:120) Pursuant to § 322 Abs. 3 Satz [sentence] 1 HGB, we declare that our audit has not led to any reservations relating to the legal compliance of the consolidated financial statements and of the group management report. B A S I S F O R T H E AU D I T O P I N I O N S We conducted our audit of the consolidated financial statements and of the group management report in accordance with § 317 HGB and the EU Audit Regulation (No. 537/2014, referred to subsequently as “EU Audit Regulation”) and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Our responsibilities under those requirements and principles are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report” section of our auditor’s report. We are independent of the group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these requirements. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions on the consolidated financial statements and on the group management report. Consolidated Financial Statements Independent Auditor’s Report 317 E M P H A S I S O F M AT T E R – D I E S E L I S S U E We draw attention to the information provided and statements made in section “Key Events” of the notes to the consolidated financial statements and in section “Diesel Issue” of the group management report with regard to the diesel issue including information about the underlying causes, the noninvolvement of members of the board of management as well as the impact on these financial statements. Based on the results of the various measures taken to investigate the issue presented so far, which underlie the consolidated financial statements and the group management report, there is still no evidence that members of the Company’s board of management were aware of the deliberate manipulation of engine management software before summer 2015. Nevertheless, should as a result of the ongoing investigation new solid knowledge be obtained showing that members of the board of management were informed earlier about the diesel issue, this could eventually have an impact on the consolidated financial statements and on the group management report for financial year 2017 and prior years. The provisions for warranties and legal risks recorded so far are based on the presented state of knowledge. Due to the inevitable uncertainties associated with the current and expected litigation it cannot be excluded that a future assessment of the risks may be different. Our opinions on the consolidated financial statements and on the group management report are not modified in respect of this matter. K E Y AU D I T M AT T E R S I N T H E AU D I T O F T H E CO N S O L I DAT E D F I N A N C I A L STAT E M E N T S Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the financial year from January 1 to December 31, 2017. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our audit opinion thereon; we do not provide a separate audit opinion on these matters. In our view, the matters of most significance in our audit were as follows: (cid:6938)(cid:3) Accounting treatment of risk provisions for the diesel issue (cid:6939)(cid:3) Recoverability of goodwill and brand names (cid:6940)(cid:3) (cid:6941)(cid:3) Completeness and measurement of provisions for warranty obligations arising from sales (cid:6942)(cid:3) Impairment of capitalized development costs Financial instruments – hedge accounting Our presentation of these key audit matters has been structured in each case as follows: (cid:311) Matter and issue (cid:312) Audit approach and findings (cid:313) Reference to further information Hereinafter we present the key audit matters: (cid:6938)(cid:3) Accounting treatment of risk provisions for the diesel issue (cid:311) Companies of the Volkswagen Group are involved in investigations by government authorities in numerous countries (in particular in Europe, the United States, Canada and South Korea) with respect to irregularities in the exhaust gas emissions from diesel engines in certain vehicles of the Volkswagen Group. Different measures are being implemented in various countries for affected vehicles. These include hardware and/or software solutions, vehicle repurchases or the early termination of leases and, in some cases, cash payments to vehicle owners. Furthermore, payments are being made as a result of criminal proceedings and civil law settlements with various parties. In addition, there are civil lawsuits pending from customers, dealers and holders of securities. Further direct and indirect effects concern in particular impairment of assets (intangible assets, property, plant and equipment, and inventories) and customer-specific sales programs. 318 Independent Auditor’s Report Consolidated Financial Statements The Volkswagen Group recognizes the expenses directly related to the diesel issue in its operating income. The expenses incurred in fiscal year 2017 amount to EUR 3.2 billion and relate in their entirety to further additions to reserves for field activities and repurchases (EUR 2.2 billion) as well as legal risks (EUR 1.0 billion). In addition to provisions, contingent liabilities for legal risks in the amount of EUR 4.3 billion are reported as of December 31, 2017. The reported provisions and contingent liabilities are exposed to considerable estimation risk due to the wide-ranging investigations and proceedings that are ongoing, the complexity of the various negotiations and pending approval procedures by authorities, and developments in market conditions. This matter was of particular importance for our audit due to the material amounts of the provisions as well as the scope of assumptions and discretion on the part of management. (cid:312) In order to audit the recognition and measurement of provisions for field activities and vehicle repurchases arising as a result of the diesel issue, we critically examined the processes put in place by the companies of the Volkswagen Group to make substantive preparations to address the diesel issue, and assessed the progress made in implementing the technical solutions developed to remedy it. We compared this knowledge with the technical and legal opinions of independent experts, as presented to us. We used an IT data analysis solution to examine the quantity structure underlying the field activities and repurchases. We assessed the inputs used to measure the repair solutions that have been defined to date or are still in development and the planned repurchases. We used this as a basis to evaluate the calculation of the provisions. In order to audit the recognition and measurement of the provisions for legal risks and the disclosure of contingent liabilities for legal risks resulting from the diesel issue, we assessed both the available official documents such as those from the US Department of Justice, as well as in particular the work delivered and opinions prepared by experts commissioned by the Volkswagen Group. As part of a targeted selection of key procedures and supplemented by additional samples, we inspected the correspondence relating to the litigation and, in talks with officials from the affected companies and the lawyers involved, and including our own technical and legal experts, we discussed the assessments made. Taking into consideration the information provided and statements made in the section entitled “Key events” in the notes to the consolidated financial statements and in the section entitled “Diesel Issue” in the combined management report with regard to the diesel issue including information about the underlying causes, the non-involvement of members of the board of management as well as the impact on these financial statements, we believe that, overall, the assumptions and inputs underlying the calculation of the risk provisions for the diesel issue are appropriate to properly recognize and measure the provisions. (cid:313) The Company's disclosures on the diesel issue are contained in the sections entitled “Key events” and “Litigation” in the notes to the consolidated financial statements, and in the sections entitled “Diesel Issue” and “Report on Risks and Opportunities”, subsections “Risks from the Diesel Issue” and “Litigation” in the combined management report. (cid:6939) Recoverability of goodwill and brand names in The the consolidated intangible assets reported (cid:311) financial statements of VOLKSWAGEN AKTIENGESELLSCHAFT include EUR 40.4 billion in goodwill and purchased brand names (intangible assets with indefinite useful lives). The Company allocates goodwill and brand names to the subgroups and brands, respectively, within the Volkswagen Group. As part of the regular impairment testing of goodwill and brand names, the Company compares the carrying amount of the subgroups and brands, respectively, against their respective recoverable amount. In general, the recoverable amount is calculated on the basis of the value in use. The value in use is calculated using discounted cash flow models on the basis of the Volkswagen Group's five year operating plan prepared by management and acknowledged by the Supervisory Board and extrapolated based on assumptions about long term growth rates. The discount rate used is the weighted average cost of Consolidated Financial Statements Independent Auditor’s Report 319 capital for the relevant reporting segment. The result of this measurement depends to a large extent on management's assessment with regard to the future cash inflows of the respective subgroups and brands, respectively, and on the discount rate used, and is therefore subject to considerable uncertainty. Against this background and due to the underlying complexity of the measurement models, this matter was of particular importance for our audit. (cid:312) As part of our audit, we assessed, among other things, the method used to perform impairment tests and the calculation of the weighted cost of capital. We evaluated the appropriateness of the future cash inflows used in the measurement, including by comparing this data with the five-year operating plan prepared by management and acknowledged by the Supervisory Board, and through reconciliation with general and sector- specific market expectations. We also evaluated that the costs for Group functions not recognized in a segment were properly included in the impairment test for the respective subgroup and brand, respectively. With the knowledge that even relatively small changes in the discount rate applied can have a material impact on the recoverable amounts calculated in this way, we also focused our testing in particular on the parameters used to determine the discount rate applied, and evaluated the measurement model. Furthermore, due to the materiality of the goodwill and brand names, we also performed our own sensitivity analyses for the sub- groups and brands, respectively, (comparison of carrying amounts and recoverable amounts) and determined that the respective goodwill and brand names were sufficiently covered by the discounted future cash flows. Overall, we consider the measurement inputs and assumptions used by management to be in line with our expectations and to lie also within a range that we consider reasonable. The Company’s disclosures on goodwill and brand names are contained in section entitled “Intangible (cid:313) assets” in the notes to the consolidated financial statements. (cid:6940) Impairment of capitalized development costs (cid:311) In the consolidated financial statements of VOLKSWAGEN AKTIENGESELLSCHAFT capitalized development costs amounting to EUR 21.0 billion are reported under the "Intangible assets" balance sheet item. In accordance with IAS 38, research costs are treated as expenses incurred, while development costs for future series products are capitalized provided that sale of these products is likely to bring an economic benefit. Until amortization begins, developments must be tested for impairment in accordance with IAS 36 at least once a year based on the cash-generating units to which they are allocated. To meet this requirement, over the period from capitalization until completion of development the Company assesses whether the costs incurred are covered by future cash flows. Once amortization begins, an assessment must be carried out at each reporting date as to whether there are indications of impairment. If this is the case, an impairment test must be performed and any impairment loss recognized. For impairment losses recognized in prior periods, an annual assessment must be carried out as to whether there are indications that the reason for the impairment has ceased to apply. The Volkswagen Group generally applies the present value of the future cash flows (value in use) from the relevant cash-generating units to test these intangible assets for impairment. The value in use is determined using the discounted cash flow method based on the Group’s five-year financial planning prepared by management. The discount rate used is the weighted average cost of capital (WACC). The weighted average cost of capital applied in the Volkswagen Group includes the weighted average cost of equity and debt before taxes. The impairment identified during the impairment testing was recognized under the "Cost of sales" line item in the income statement as impairment losses amounting to EUR 0.4 billion. 320 Independent Auditor’s Report Consolidated Financial Statements The result of this measurement depends to a large extent on management's assessment of future cash inflows and the discount rate used, and is therefore subject to considerable uncertainty. Against this background and due to the complex nature of the valuation, this matter was of particular significance in the context of our audit. (cid:312) As part of our audit we assessed whether, overall, the assumptions underlying the measurements particularly in the form of future cash inflows, and the discount rates used provide an appropriate basis by which to test the individual cash-generating units for impairment. We based our assessment, among other things, on a comparison with general and sector-specific market expectations as well as management's detailed explanations regarding key planning value drivers. We also evaluated that the costs for Group functions were properly included in the impairment tests of the respective cash-generating units. With the knowledge that even relatively small changes in the discount rate applied can in some cases have material effects on values, we also focused our testing on the parameters used to determine the discount rate applied, and evaluated the measurement model. We also assessed the consistency of the measurement model applied and evaluated the mathematical accuracy of the calculations. Furthermore, we performed our own additional sensitivity analysis for those cash-generating units with little headroom (present value exceeds carrying amount) in order to gauge the impairment risk and enable us to adapt our audit procedures accordingly. With respect to completed development projects, we inquired management about whether or not there were indications of impairment or that reasons for impairment had ceased to apply, and critically examined these assumptions based on our knowledge of the Group's legal and economic environment. In the case of impairment losses or a reversal of impairment losses, we assessed that these were properly assigned to the assets allocated to the cash-generating unit. In our view, the measurement inputs and assumptions used by management, and the measurement model, were properly derived for the purposes of conducting impairment tests. (cid:313) Company’s disclosures on capitalized development costs and the associated impairment testing are contained in sections entitled “Accounting policies” and “Intangible assets” in the notes to the consolidated financial statements. (cid:6941)(cid:3) Completeness and measurement of provisions for warranty obligations arising from sales (cid:311) In the consolidated financial statements of the Volkswagen Group EUR 27.9 billion in provisions for obligations arising from sales are reported under the "Other provisions" balance sheet item. These obligations primarily relate to warranty claims arising from the sale of vehicles, motorcycles, components and genuine parts. Warranty claims are calculated on the basis of losses to date, estimated future losses and the policy on ex gratia arrangements. An estimate is also made of the discount rate. In addition, assumptions must be made about the nature and extent of future warranty and ex gratia claims. These assumptions are based on qualified estimates. From our point of view, this matter was of particular importance for our audit because the recognition and measurement of this material item is to a large extent based on estimates and assumptions made by the Company's management. (cid:312) With the knowledge that estimated values result in an increased risk of accounting misstatements and that the measurement decisions made by management have a direct and significant effect on consolidated net profit/loss, we assessed the appropriateness of the carrying amounts, including by comparing these figures with historical data and using the measurement bases presented to us. Furthermore, we assessed that the interest rates with matching terms were properly derived from market data. We evaluated the entire calculations (including discounting) for the provisions using the applicable measurement inputs and assessed the planned timetable for utilizing the provisions. In doing so, we were able to satisfy ourselves that the estimates applied and the assumptions made by management were sufficiently documented and supported to justify the recognition and measurement of the provisions for warranty obligations arising from sales. Consolidated Financial Statements Independent Auditor’s Report 321 The Company’s disclosures on other provisions are contained in sections entitled “Accounting policies” and (cid:313) “Noncurrent and current other provisions” in the notes to the consolidated financial statements. (cid:6942) Financial instruments – hedge accounting (cid:311) The companies of the Volkswagen Group use a variety of derivative financial instruments to hedge in particular against currency and interest rate risks arising from their ordinary business activities. Management’s hedging policy is documented in corresponding internal guidelines and serves as the basis for these transaxtions. Currency risk arises primarily from sales and procurement transactions and financing denominated in foreign currencies. The means of limiting this risk include entering into currency forwards, currency options and cross-currency interest rate swaps. The companies enter into interest rate hedges for the purpose of achieving an economically sensible ratio of variable to fixed interest rate exposures. Interest rate risk is minimized by entering into interest rate swaps and cross-currency interest rate swaps. Derivatives are measured at fair value as of the balance sheet date. The positive fair values of all of the derivatives used for hedging purposes amount to EUR 6.9 billion as of the balance sheet date, while the negative fair values amount to EUR 2.2 billion. Insofar the financial instruments used by the Volkswagen Group are effective hedges of future cash flows in the context of hedging pursuant to the requirements of IAS 39, the effective portion of the changes in fair value is recognized in other comprehensive income over the duration of the hedging relationships until the maturity of the hedged cash flows (cash flows hedges). As of the balance sheet date, a cumulative EUR 3.5 billion under consideration of income taxes was recognized in equity as the effective portion of fair value changes. Insofar derivative financial instruments are used to hedge against changes in the carrying amount of balance sheet items pursuant to the requirements of IAS 39, changes in the fair value of both the hedged items and the hedging instruments are recognized on a net basis in the corresponding income statement item (fair value hedges). From our point of view these matters were of particular importance for our audit due to the high complexity and number of transactions as well as the extensive accounting and disclosure requirements of IAS 39. (cid:312) As a part of our audit and with the support of our internal specialists from Corporate Treasury Solutions, among other things we assessed the contractual and financial parameters and evaluated the accounting treatment, including the effects on equity and profit or loss, of the various hedging relationships. Together with our specialists, we also evaluated the Company’s internal control system with regard to derivative financial instruments, including the internal activities to monitor compliance with the hedging policy. In addition, for the purpose of auditing the fair value measurement of financial instruments, we also assessed the methods of calculation employed on the basis of market data. In addition to evaluating the internal control system, we obtained bank confirmations for the hedging instruments in order to assess completeness. With regard to the expected cash flows and the assessment of the effectiveness of hedges, we essentially conducted a retrospective assessment of past hedging levels. In doing so, we were able to satisfy ourselves that the estimates and assumptions made by management were substantiated and sufficiently documented. (cid:313) The Company’s disclosures on hedge accounting are contained in sections entitled “Accounting policies”, “Noncurrent and current other financial assets”, “Noncurrent and current other financial liabilities”, “Additional balance sheet disclosures in accordance with IFRS 7 (Financial Instruments)” in the notes to the consolidated financial statements. 322 Independent Auditor’s Report Consolidated Financial Statements OT H E R I N F O R M AT I O N The executive directors are responsible for the other information. The other information comprises the following non-audited parts of the group management report: (cid:120) the statement on corporate governance pursuant to § 289f HGB and § 315d HGB included in section “Corporate Governance Report” of the group management report the corporate governance report pursuant to No. 3.10 of the German Corporate Governance Code the separate non-financial report pursuant to § 289b Abs. 3 HGB and § 315b Abs. 3 HGB (cid:120) (cid:120) The other information comprises further the remaining parts of the annual report, which we obtained prior to the date of our auditor’s report – excluding cross-references to external information – with the exception of the audited consolidated financial statements, the audited group management report and our auditor’s report. Our audit opinions on the consolidated financial statements and on the group management report do not cover the other information, and consequently we do not express an audit opinion or any other form of assurance conclusion thereon. In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other information (cid:120) is materially inconsistent with the consolidated financial statements, with the group management report or our knowledge obtained in the audit, or (cid:120) otherwise appears to be materially misstated. Responsibilities of the Executive Directors and the Supervisory Board for the Consolidated Financial Statements and the Group Management Report The executive directors are responsible for the preparation of the consolidated financial statements that comply, in all material respects, with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to § 315e Abs. 1 HGB and that the consolidated financial statements, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position, and financial performance of the Group. In addition the executive directors are responsible for such internal control as they have determined necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the executive directors are responsible for assessing the Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic alternative but to do so. Consolidated Financial Statements Independent Auditor’s Report 323 Furthermore, the executive directors are responsible for the preparation of the group management report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the consolidated financial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, the executive directors are responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a group management report that is in accordance with the applicable German legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the group management report. The supervisory board is responsible for overseeing the Group’s financial reporting process for the preparation of the consolidated financial statements and of the group management report. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and whether the group management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our audit opinions on the consolidated financial statements and on the group management report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with § 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and this group management report. (cid:120) We exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements and of the group management report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our audit opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. (cid:120) Obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of arrangements and measures (systems) relevant to the audit of the group management report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an audit opinion on the effectiveness of these systems. 324 Independent Auditor’s Report Consolidated Financial Statements (cid:120) Evaluate the appropriateness of accounting policies used by the executive directors and the reasonableness of estimates made by the executive directors and related disclosures. (cid:120) Conclude on the appropriateness of the executive directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclosures in the consolidated financial statements and in the group management report or, if such disclosures are inadequate, to modify our respective audit opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to be able to continue as a going concern. (cid:120) Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements present the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and financial performance of the Group in compliance with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to § 315e Abs. 1 HGB. (cid:120) Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express audit opinions on the consolidated financial statements and on the group management report. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinions. (cid:120) Evaluate the consistency of the group management report with the consolidated financial statements, its conformity with German law, and the view of the Group’s position it provides. (cid:120) Perform audit procedures on the prospective information presented by the executive directors in the group management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by the executive directors as a basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate audit opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter. Consolidated Financial Statements Independent Auditor’s Report 325 OT H E R L E G A L A N D R E G U L ATO RY R E Q U I R E M E N T S Further Information pursuant to Article 10 of the EU Audit Regulation We were elected as group auditor by the annual general meeting on May 10, 2017. We were engaged by the supervisory board on May 11, 2017. We have been the group auditor of the VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, without interruption since the financial year 1948/1949. We declare that the audit opinions expressed in this auditor’s report are consistent with the additional report to the audit committee pursuant to Article 11 of the EU Audit Regulation (longform audit report). G E R M A N P U B L I C AU D I TO R R E S P O N S I B L E F O R T H E E N G A G E M E N T The German Public Auditor responsible for the engagement is Frank Hübner. Hanover, February 23, 2018 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft Norbert Winkeljohann Wirtschaftsprüfer (German Public Auditor) Frank Hübner Wirtschaftsprüfer (German Public Auditor) 326 Five-Year Review Additional Information Five-Year Review Volume Data (thousands) Vehicle sales (units) Germany Abroad Production (units) Germany Abroad Employees (yearly average) Germany Abroad Financial Data (in € million) Income Statement Sales revenue Cost of sales Gross profit Distribution expenses Administrative expenses Net other operating result Operating result Financial result Earnings before tax Income tax expense Earnings after tax Cost of materials Personnel expenses Balance Sheet (at December 31) Noncurrent assets Current assets Total assets Equity of which: noncontrolling interests Noncurrent liabilities Current liabilities Total equity and liabilities 2017 2016 2015 2014 2013 10,777 1,264 9,513 10,875 2,579 8,296 642 287 355 230,682 188,140 42,542 22,710 8,254 2,240 13,818 94 13,913 2,275 11,638 151,449 38,950 262,081 160,112 422,193 109,077 229 152,726 160,389 422,193 10,391 1,257 9,135 10,405 2,685 7,720 619 280 339 217,267 176,270 40,997 22,700 7,336 –3,858 7,103 189 7,292 1,912 5,379 140,307 37,017 254,010 155,722 409,732 92,910 221 139,306 177,515 409,732 10,010 1,279 8,731 10,017 2,681 7,336 604 276 329 213,292 179,382 33,911 23,515 7,197 –7,267 –4,069 2,767 –1,301 59 –1,361 143,700 36,268 236,548 145,387 381,935 88,270 210 145,175 148,489 381,935 10,217 1,247 8,970 10,213 2,559 7,653 583 265 318 202,458 165,934 36,524 20,292 6,841 3,306 12,697 2,097 14,794 3,726 11,068 132,514 33,834 220,106 131,102 351,209 90,189 198 130,314 130,706 351,209 9,728 1,187 8,541 9,728 2,458 7,270 563 255 308 197,007 161,407 35,600 19,655 6,888 2,613 11,671 757 12,428 3,283 9,145 127,089 31,747 202,141 122,192 324,333 90,037 2,304 115,672 118,625 324,333 Cash flows from operating activities –1,185 9,430 13,679 10,784 12,595 Cash flows from investing activities attributable to operating activities Cash flows from financing activities 18,218 17,625 16,797 9,712 15,523 9,068 16,452 4,645 14,936 8,973 Additional Information Financial Key Performance Indicators 327 Financial Key Performance Indicators % Volkswagen Group Gross margin Personnel expense ratio Operating result as a percentage of sales revenue Return on sales before tax Return on sales after tax Equity ratio Dynamic gearing1 (years) Automotive Division2 Change in unit sales year-on-year3 Change in sales revenue year-on-year Research and development costs as a percentage of sales revenue Operating result as a percentage of sales revenue EBITDA (in € million)4 Return on investment (ROI)5 Cash flows from operating activities as a percentage of sales revenue Cash flows from investing activities attributable to operating activities as a percentage of sales revenue Capex as a percentage of sales revenue Net liquidity as a percentage of sales revenue Ratio of noncurrent assets to total assets6 Ratio of current assets to total assets7 Inventory turnover8 Equity ratio Financial Services Division Increase in total assets Return on equity before tax9 Equity ratio 2017 2016 2015 2014 2013 18.4 16.9 6.0 6.0 5.0 25.8 0.0 + 3.7 + 5.9 6.7 5.7 26,094 12.1 5.9 9.0 6.4 9.7 23.7 16.3 5.2 36.9 6.0 9.8 13.7 18.9 17.0 3.3 3.4 2.5 22.7 0.1 + 3.8 + 1.1 7.3 2.5 18,999 8.2 10.9 8.6 6.9 12.5 23.4 15.9 5.5 31.4 8.3 10.8 12.5 15.9 17.0 –1.9 –0.6 –0.6 23.1 0.1 –2.0 + 3.6 7.4 –3.4 7,212 –0.2 12.9 8.1 6.9 11.5 23.1 15.2 5.8 32.6 13.9 12.2 11.9 18.0 16.7 6.3 7.3 5.5 25.7 0.1 + 5.0 + 1.4 7.4 6.1 23,100 14.9 12.2 8.7 6.5 8.7 22.3 14.3 6.2 36.9 15.1 12.5 11.3 18.1 16.1 5.9 6.3 4.6 27.8 0.1 + 4.1 + 1.3 6.7 5.6 20,594 14.5 11.8 9.3 6.3 8.6 21.3 13.4 6.5 39.8 3.9 14.3 10.5 1 Ratio of cash flows from operating activities to current and noncurrent financial liabilities. 2 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 3 Including the Chinese joint ventures. These companies are accounted for using the equity method. 4 Operating result plus net depreciation/amortization and impairment losses/reversals of impairment losses on property, plant and equipment, capitalized development costs, lease assets, goodwill and financial assets as reported in the cash flow statement. 5 For details, see Value-based management on page 127. 6 Ratio of property, plant and equipment to total assets. 7 Ratio of inventories to total assets at the balance sheet date. 8 Ratio of sales revenue to average monthly inventories. 9 Earnings before tax as a percentage of average equity. 328 Glossary Additional Information Glossary Selected terms at a glance Hybrid drive Modular Transverse Toolkit (MQB) Drive combining two different types of engine As an extension of the modular strategy, this Big Data and energy storage systems (usually an internal platform can be deployed in vehicles whose Big data is a term used to describe new ways of combustion engine and an electric motor). architecture permits a transverse arrangement of analyzing and evaluating data volumes that are the engine components. The modular perspective too vast and too complex to be processed using Hybrid notes enables high synergies to be achieved between manual or conventional methods. Hybrid notes issued by Volkswagen are classified the vehicles in the Volkswagen Passenger Cars, in their entirety as equity. The issuer has call Volkswagen Commercial Vehicles, Audi, SEAT and Compliance options at defined dates during their perpetual ŠKODA brands. Adherence to statutory provisions, internal com- maturities. They pay a fixed coupon until the pany policies and ethical principles. first possible call date, followed by a variable Plug-in hybrid rate depending on their terms and conditions. Performance levels of hybrid vehicles. Plug-in Compressed Natural Gas (CNG) hybrid electric vehicles (PHEVs) have a larger Burning this compressed natural gas releases Industry 4.0 battery with a correspondingly higher capacity approximately 25% less CO2 than petrol because Describes the fourth industrial revolution and that can be charged via the combustion engine, of its low carbon and high energy content. the systematic development of real-time and the brake system, or an electrical outlet. This intelligent networks between people, objects and increases the range of the vehicle. Corporate Governance systems, exploiting all of the opportunities of International term for responsible corporate information technology along the entire value Rating management and supervision driven by long- added chain. Intelligent machines, inventory Systematic assessment of companies in terms of term value added. systems and operating equipment that inde- their credit quality. Ratings are expressed by pendently exchange information, trigger actions means of rating classes, which are defined Direct Shift Gearbox (DSG) and control each other will be integrated into differently by the individual rating agencies. Gearbox that consists of two gearboxes with a production and logistics at a technical level. This dual clutch and so combines the agility, driving offers tremendous versatility, efficient resource Turntable concept pleasure and low consumption levels of a manual utilization, ergonomics and the integration of Concept of flexible manufacturing enabling the gearbox with the comfort of an automatic. customers and business partners in operational production of different models in variable daily Driving Cycles the facility to vary daily production volumes of Levels of fuel consumption and exhaust gas Liquefied Natural Gas (LNG) one model between two or more plants. processes throughout the entire value chain. volumes within a single plant, as well as offering emissions for vehicles registered in Europe were LNG is needed so that natural gas engines can be previously measured on a chassis dynamometer used in long-distance trucks and buses, since this Vocational groups with the help of the “New European Driving is the only way of achieving the required energy For example, electronics, logistics, marketing, or Cycle (NEDC)”. Since fall 2017, the existing test density. procedure for emissions and fuel consumption finance. A new teaching and learning culture is gradually being established by promoting used in the EU is being gradually replaced by the Modular Electric Toolkit (MEB) training in the vocational groups. The specialists Worldwide Harmonized Light-Duty Vehicles Test The modular system is being developed for the are actively involved in the teaching process by Procedure (WLTP). This has been in place for new manufacturing of electric vehicles. The MEB passing on their skills and knowledge to their vehicle types since fall 2017 and will apply to all establishes parameters for axles, drive systems, colleagues. new vehicles from fall 2018. The aim of this new high-voltage batteries, wheelbases and weight test cycle is to state CO2 emissions and fuel ratios to ensure a vehicle optimally fulfills the Zero-Emissions Vehicle (ZEV) consumption in a more practice-oriented man- requirements of e-mobility. The first vehicle Vehicles that operate without exhibiting any ner. A further important European regulation is based on the MEB should go into series produc- harmful emissions from combustion gases. the Real Driving Emissions (RDE) for passenger tion in 2020. Examples of zero-emissions vehicles include cars and light commercial vehicles, which also monitors emissions using portable emission measuring technology in real road traffic. purely battery-powered electric vehicles (BEV) or fuel cell vehicles. Additional Information Glossary 329 Capitalization ratio Return on equity before tax The capitalization ratio is defined as the ratio of The return on equity shows the ratio of profit before capitalized development costs to total research and tax to average shareholders’ equity of a period, development costs in the Automotive Division. It expressed as a percentage. It reflects the company’s shows the proportion of primary research and devel- profitability per share and indicates the interest rate opment costs subject to capitalization. earned on equity. Distribution ratio Return on sales before tax The distribution ratio is the ratio of total dividends The return on sales is the ratio of profit before tax to attributable to ordinary and preferred shares to sales revenue in a period, expressed as a percentage. It earnings after tax attributable to the shareholders of shows the level of profit generated for each unit of Volkswagen AG. The distribution ratio provides infor- sales revenue. The return on sales provides infor- mation on how earnings are distributed. mation on the profitability of all business activities before deducting income tax expense. Dividend yield The dividend yield is the ratio of the dividend for the Tax rate reporting year to the closing price per share class on The tax rate is the ratio of income tax expense to the last trading day of the reporting year; it represents profit before tax, expressed in percent. It shows what the interest rate earned per share. The dividend yield percentage of the profit generated has to be paid over is used in particular for measuring and comparing as tax. shares. Equity ratio The equity ratio measures the percentage of total assets attributable to shareholders’ equity as of a reporting date. This ratio indicates the stability and financial strength of the company and shows the degree of financial independence. Gross margin Gross margin is the percentage of sales revenue attributable to gross profit in a period. Gross margin provides information on profitability net of cost of sales. Price-earnings ratio The price-earnings ratio is calculated by dividing the share price per share class at the end of the year by the earnings per share. It reflects a company’s profita- bility per share; a comparison over several years shows how its performance has developed over time. 330 Index Additional Information Index A G Q(cid:3) Accounting policies 220 ff General economic development 95, 157, 168 Quality assurance 149 ff, 173 B Global Compact Group structure 135 21, 59 ff, 114, 162 R Balance sheet 122 ff, 130 f, 198 f, 244 ff Basis of consolidation 208 ff I Ratings Refinancing Board of Management 7 ff, 15 ff, 84 IFRSs 203 ff Remuneration 113, 167 112 f 67 ff, 314 f Brands C 21 ff Income statement 115 ff, 130, 195, 234 ff Report on post-balance sheet date events 156, 308 Information technology 155, 174 Research and development 132, 136, 170 Investment planning 162 Return on investment (ROI) and Cash flow statement 119 ff, 202, 282 CO2 emissions Consolidation methods 137 f, 146 f, 174 ff K 218 Key figures Core performance indicators 55 Corporate Governance 12, 59 ff, 313 L value contribution Risk management 127 f, 162, 293 f 164 ff U3, 23 S Sales and marketing 147 ff, 161, 172 f 97, 160, 187 f, 219 Litigation 177 ff, 295 ff Segment reporting Declaration of conformity 15, 59 ff, 313 Market development 22 f, 157 ff, 168 ff 100 f, 160 f M(cid:3) U4, 101 ff Models 109 131, 258 N(cid:3) 163, 170, 175, 190 Nonfinancial key performance indicators 134 ff Currency D Deliveries Dividend policy, yield Dividend proposal Driving Cycles E Earnings per share Shareholders Shares Statement of comprehensive income Strategy Summaries Supervisory Board Sustainability T 114, 231 ff 88, 110 88, 108 ff 196 f 51 ff 129, 162 f, 189 12 ff, 85 ff 134 ff O 109, 241 Orders received 41, 43, 106 Target-performance comparison 129 Employees 107, 132, 151 ff, 161, 173 f, 308 Environmental protection Environmental strategy Equity F 132, 138 f, 146 f, 174 ff 155 ff 200 f, 257 ff P Procurement Production 142 ff, 171 25 ff, 107, 132, 143 ff, 171 f V Value added Vehicle sales Proposal on the appropriation of net profit Prospects 131 190 Financial data, overview 326 f Financial risk management 118, 187, 283 ff 126 23, 107, 132 Scheduled Dates 2018 FI N ANC IA L CALE N DAR March 13 Volkswagen AG Annual Media Conference and Investor Conference, Berlin April 26 Interim Report January – March May 3 Volkswagen AG Annual General Meeting (CityCube Berlin) August 1 Half-Yearly Financial Report Oktober 30 Interim Report January – September Contact Information Contents Contact Information P U B LI SH ED BY Volkswagen AG Financial Publications, Letterbox 1848-2 38436 Wolfsburg, Germany Phone + 49 (0) 5361 9-0 Fax + 49 (0) 5361 9-28282 Volkswagen AG Group Communications, Letterbox 1970 38436 Wolfsburg, Germany Phone + 49 (0) 5361 9-0 Fax + 49 (0) 5361 9-28282 This annual report is published in English and German. Both versions of the report are available on the Internet at www.volkswagenag.com/ir. The German version is legally binding. I NV ESTO R RE L ATI ONS Volkswagen AG Investor Relations, Letterbox 1849 38436 Wolfsburg, Germany Phone + 49 (0) 5361 9-0 Fax + 49 (0) 5361 9-30411 E-mail investor.relations@volkswagen.de Internet www.volkswagenag.com/ir CO NC E P T, DE SI GN A N D REALIZAT IO N C3 Creative Code and Content GmbH E NG LISH TRAN SL AT ION Leinhäuser Language Services GmbH, Unterhaching FI N ANC IA L RE P ORT Produced in-house with firesys P RI NT ER Kunst- und Werbedruck, Bad Oeynhausen PAP E R Everprint Premium P HOTO GRAP HY Urban Zintel (p. 8, 10– 11) Hartmut Nägele (p. 14) carbon neutral natureOffice.com | DE-149-503155 print production ISSN 858.809.578.20 Printed in Germany 

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