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A N N UA L R EP O R T 2018 Key Figures Key Figures 2018 2018 20171 20171 % % V O L K SWA G E N G R O U P V O L K SWA G E N G R O U P Volume Data2 in thousands Volume Data2 in thousands Deliveries to customers (units) Deliveries to customers (units) Vehicle sales (units) Vehicle sales (units) Production (units) Production (units) Employees at Dec. 31 Employees at Dec. 31 Financial Data (IFRSs), € million Financial Data (IFRSs), € million Sales revenue Sales revenue Operating result before special items Operating result before special items Operating return on sales before special items (%) Operating return on sales before special items (%) Special items Special items 10,834 10,834 10,900 10,900 11,018 11,018 664.5 664.5 10,742 10,742 10,777 10,777 10,875 10,875 642.3 642.3 235,849 235,849 17,104 17,104 229,550 229,550 17,041 17,041 7.3 7.3 –3,184 –3,184 7.4 7.4 –3,222 –3,222 +0.9 +0.9 +1.1 +1.1 +1.3 +1.3 +3.5 +3.5 +2.7 +2.7 +0.4 +0.4 –1.2 –1.2 +0.7 +0.7 +14.4 +14.4 +6.0 +6.0 Operating result Operating result 13,920 13,920 13,818 13,818 Operating return on sales (%) Operating return on sales (%) Earnings before tax Earnings before tax Return on sales before tax (%) Return on sales before tax (%) Earnings after tax Earnings after tax 5.9 5.9 15,643 15,643 6.0 6.0 13,673 13,673 6.6 6.6 12,153 12,153 6.0 6.0 11,463 11,463 Automotive Division3 Automotive Division3 Total research and development costs Total research and development costs 13,640 13,640 13,135 13,135 +3.8 +3.8 R&D ratio (%) R&D ratio (%) Cash flows from operating activities Cash flows from investing activities attributable to operating activities4 Cash flows from operating activities Cash flows from investing activities attributable to operating activities4 of which: capex of which: capex capex/sales revenue (%) capex/sales revenue (%) Net cash flow Net cash flow Net liquidity at Dec. 31 Net liquidity at Dec. 31 Return on investment (ROI) in % Return on investment (ROI) in % Financial Services Division Financial Services Division Return on equity before tax5 (%) Return on equity before tax5 (%) V O L K SWA G E N A G V O L K SWA G E N A G Volume Data in thousands Volume Data in thousands Employees at Dec. 31 Employees at Dec. 31 Financial Data (HGB), € million Financial Data (HGB), € million Sales Sales Net income for the fiscal year Net income for the fiscal year Dividends (€) Dividends (€) per ordinary share per ordinary share per preferred share per preferred share 6.8 6.8 18,531 18,531 6.7 6.7 11,686 11,686 18,837 18,837 13,218 13,218 17,636 17,636 12,631 12,631 6.6 6.6 –306 –306 19,368 19,368 11.0 11.0 6.5 6.5 –5,950 –5,950 22,378 22,378 12.1 12.1 +58.6 +58.6 +6.8 +6.8 +4.6 +4.6 –94.9 –94.9 –13.5 –13.5 9.9 9.9 9.8 9.8 2018 2018 2017 2017 % % 119.4 119.4 117.4 117.4 +1.7 +1.7 78,001 78,001 4,620 4,620 4.80 4.80 4.86 4.86 76,729 76,729 4,353 4,353 3.90 3.90 3.96 3.96 +1.7 +1.7 +6.1 +6.1 1 Adjusted 2 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. Prior-year deliveries updated to 1 Adjusted 2 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. Prior-year deliveries updated to reflect subsequent statistical trends. reflect subsequent statistical trends. 3 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 4 Excluding acquisition and disposal of equity investments: €18,242 (€17,512) million. 5 Earnings before tax as a percentage of average equity. 3 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 4 Excluding acquisition and disposal of equity investments: €18,242 (€17,512) million. 5 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 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 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. current reporting period. Moving Globally VOLKSWAGEN GROUP deliveries – in thousand units Moving Globally Key Figures E U R O P E / O T H E R M A R K E T S 2016 2017 2018 4,618 4,738 4,741 +0.1% N O R T H A M E R I C A 2016 2017 2018 939 976 957 –2.0% S O U T H A M E R I C A 2016 2017 2018 422 522 590 +13.1% A S I A - P A C I F I C 2016 2017 2018 4,319 4,506 4,546 +0.9% We are resolutely pursuing the transformation of the Volkswagen Group. By maintaining our course, we will continue to shape individual mobility in the future. 2 Contents 1 2 TO OUR SHAREHOLDERS DIVISIONS 07 10 Letter to our Shareholders The Board of Management of Volkswagen Aktiengesellschaft 12 Report of the Supervisory Board 21 24 26 28 30 32 34 36 38 40 Brands and Business Fields Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Porsche Volkswagen Commercial Vehicles TRATON GROUP Scania 42 MAN 44 46 Volkswagen Group China Volkswagen Financial Services Contents 3 3 4 5 GROUP MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS ADDITIONAL INFORMATION 51 54 56 59 68 86 90 92 95 Goals and Strategies 193 Income Statement 340 Five-Year Review Internal Management System and 194 Statement of Comprehensive Income 341 Financial Key Key Performance Indicators 196 Balance Sheet Performance Indicators Structure and Business Activities 198 Statement of Changes in Equity 342 Glossary Corporate Governance Report 200 Cash Flow Statement 344 Index Remuneration Report Executive Bodies Disclosures Required Under Takeover Law Diesel Issue Business Development 201 Notes 346 Scheduled Dates 329 Responsibility Statement 330 Auditor’s Report 108 Shares and Bonds 114 Results of Operations, Financial Position and Net Assets 129 Volkswagen AG (condensed, in accordance with the German Commercial Code) 133 Sustainable Value Enhancement 156 Report on Expected Developments 163 Report on Risks and Opportunities 188 Prospects for 2019 This annual report was published on the occasion of the Annual Media Conference on March 12, 2019. 1 To our Shareholders TO OUR SHAREHOLDERS 07 10 Letter to our Shareholders The Board of Management of Volkswagen Aktiengesellschaft 12 Report of the Supervisory Board To our Shareholders To our Shareholders Letter to our Shareholders Letter to our Shareholders 7 7 Letter to our Shareholders Letter to our Shareholders There are many reasons to invest in a company. Some look for There are many reasons to invest in a company. Some look for returns – for companies built on solid foundations and with returns – for companies built on solid foundations and with healthy prospects. Others look for companies that embrace healthy prospects. Others look for companies that embrace responsibility for people and the environment. But they all responsibility for people and the environment. But they all look for companies that are valuable, that create value and look for companies that are valuable, that create value and stand for values. This is the type of company Volkswagen stand for values. This is the type of company Volkswagen strives to be. We therefore align our business to the following strives to be. We therefore align our business to the following three pillars: digitalization, electrification and an increase in three pillars: digitalization, electrification and an increase in shareholder value. shareholder value. The 2018 fiscal year has shown that we have added value in The 2018 fiscal year has shown that we have added value in spite of the difficult environment. This value is reflected in spite of the difficult environment. This value is reflected in 10.8 million vehicles delivered – more than ever before. It is 10.8 million vehicles delivered – more than ever before. It is reflected in more than 70 new models launched by our brands. reflected in more than 70 new models launched by our brands. For example SUVs such as the Volkswagen Touareg and T-Roc, For example SUVs such as the Volkswagen Touareg and T-Roc, the ŠKODA Kodiaq and Karoq, the SEAT Arona and the the ŠKODA Kodiaq and Karoq, the SEAT Arona and the Audi Q8. And it is reflected not least in our financial figures: Audi Q8. And it is reflected not least in our financial figures: sales revenue rose to €235.8 billion. Operating profit climbed sales revenue rose to €235.8 billion. Operating profit climbed to €17.1 billion (before special items of €–3.2 billion). And at to €17.1 billion (before special items of €–3.2 billion). And at 7.3 percent, the operating return on sales before special items 7.3 percent, the operating return on sales before special items was at the upper end of the target range. was at the upper end of the target range. The Group is in a solid financial position. Our operating The Group is in a solid financial position. Our operating business has proven resilient, despite the headwinds we had business has proven resilient, despite the headwinds we had to face. In Europe the new WLTP test procedure caused delays to face. In Europe the new WLTP test procedure caused delays in production. There were shifts in distribution, above all in in production. There were shifts in distribution, above all in the second half of the year. Volkswagen Passenger Cars and the second half of the year. Volkswagen Passenger Cars and Audi were particularly negatively affected by the introduction Audi were particularly negatively affected by the introduction of the WLTP. By increasing test capacities and reducing the of the WLTP. By increasing test capacities and reducing the range of variants, we intend to pass through the next level of range of variants, we intend to pass through the next level of the WLTP more smoothly. the WLTP more smoothly. We have also defined extensive countermeasures to improve We have also defined extensive countermeasures to improve the earnings situation. Appropriate programs are under way the earnings situation. Appropriate programs are under way in all the brands. Bentley, Audi and also the core Volkswagen in all the brands. Bentley, Audi and also the core Volkswagen brand in particular will have to work more efficiently. At the brand in particular will have to work more efficiently. At the Volkswagen brand, above all the objective is to shape the Volkswagen brand, above all the objective is to shape the future from its own resources. At the main plant in Wolfsburg future from its own resources. At the main plant in Wolfsburg alone, we therefore want to increase productivity by 25 per- alone, we therefore want to increase productivity by 25 per- cent by 2020. cent by 2020. These efforts are also necessary as political uncertainty and These efforts are also necessary as political uncertainty and an ailing economy are affecting our business in many regions an ailing economy are affecting our business in many regions of the world. This also includes China, where the economy of the world. This also includes China, where the economy dimmed considerably in the second half of the year because dimmed considerably in the second half of the year because of the trade dispute with the USA. Nevertheless, our share of of the trade dispute with the USA. Nevertheless, our share of this core market grew further, and deliveries increased this core market grew further, and deliveries increased slightly to 4.2 million. slightly to 4.2 million. In short, the 2018 result was quite a feat. I offer my sincerest In short, the 2018 result was quite a feat. I offer my sincerest thanks to our more than 660,000 employees for their com- thanks to our more than 660,000 employees for their com- mitment! mitment! And you, our shareholders, will of course also benefit from And you, our shareholders, will of course also benefit from our success. The Board of Management and Supervisory our success. The Board of Management and Supervisory Board are therefore proposing a significant increase of €0.90 Board are therefore proposing a significant increase of €0.90 in the dividend to €4.80 per ordinary share and €4.86 per in the dividend to €4.80 per ordinary share and €4.86 per preferred share. preferred share. 8 8 Letter to our Shareholders Letter to our Shareholders To our Shareholders To our Shareholders Our emphasis is on the electric car, Our emphasis is on the electric car, because from today’s perspective because from today’s perspective it is the best and most efficient choice it is the best and most efficient choice for reducing CO2 in transport. for reducing CO2 in transport. – Herbert Diess – – Herbert Diess – To our Shareholders Letter to our Shareholders 9 Looking ahead, the situation remains challenging. The tech- nological change in our industry – from e-mobility through to digitalization, connectivity, new mobility solutions, and on to automated driving – is going to take a lot of energy and financial resources. We want to shape this development from the top. Therefore, we are realigning our activities. We will increase our efficiency and competitiveness, pick up speed and revise our cost structures. The coming years will be guided by our electric campaign. We are committed to the Paris Agreement and to making our contribution to protecting people and the environment. We’re planning investments of around €30 billion in electric mobility in the next five years. Our emphasis is on the elec- tric car, because from today’s perspective it is the best and most efficient choice for reducing CO2 in transport. By 2025, we will put 50 new electric models on the road. By then, every fourth car in our range will be an electric model. With the Volkswagen ID., we will soon offer the first vehicle with a CO2- neutral supply chain and production. This will also change the face of our plants: Zwickau, Emden and Hanover will be transformed into pure-play electric car plants, forming Europe’s largest electric production network. In China, too, the conversion of the Anting and Foshan plants is in full swing. The production launch of electric cars in North America is planned for 2022. infotainment to fully autonomous driving: software will shape the car of tomorrow. To be globally successful, com- panies need economies of scale, and as a leading company in the sector, Volkswagen has the necessary size. What we are lacking in many areas is software expertise. We are taking steps to acquire these skills by forging alliances with partners, increasing resources at full speed, revising our structures and changing our workflows. We are the first established auto- maker to separate hardware from software development. At the Volkswagen brand, we have therefore established a sepa- rate Board of Management position for software, which will additionally be responsible for the Digital & Software- Services Group division. We are keeping a close eye on our goal to become the global leading provider of sustainable mobility. This will be possible if we continue to improve. We want to achieve sustainable growth and create value. For our customers. For our work- force. For our shareholders. I thank you for your trust and invite you to stay with us as we move forward on this journey. Sincerely, But the transformation of the car will go far beyond drives. It is becoming a highly complex, connected device, like a “tablet on wheels”, if you like. From assistance systems through Herbert Diess 10 The Board of Management To our Shareholders The Board of Management of Volkswagen Aktiengesellschaft Hiltrud Dorothea Werner Integrity and Legal Affair Dr.-Ing. Herbert Diess Chairman of the Board of Management of Volkswagen Aktiengesellschaft and Chairman of the Brand Board of Management of Volkswagen Passenger Cars, Volume brand group, China Andreas Renschler Chairman of the Board of Management of TRATON SE, Truck & Bus brand group To our Shareholders The Board of Management 11 Gunnar Kilian Human Resources Oliver Blume Chairman of the Board of Management of Dr. Ing. h.c. F. Porsche AG, Sport & Luxury brand group Frank Witter Finance & IT Dr.-Ing. Stefan Sommer Components & Procurement Bram Schot Chairman of the Board of Management of AUDI AG, Premium brand group 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 2018, the work of the Supervisory Board of Volkswagen AG and its committees focused on the enhance- ment of the Volkswagen Group management structure. The efforts to address the diesel issue remained another area of emphasis. The Supervisory Board regularly deliberated on the Company’s position and development in the reporting period. We supervised and supported the Board of Man- agement in its running of the business and advised it on issues relating to the management of the Company in accor- dance with our duties under the law, the Articles of Asso- ciation 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. Additionally, we discussed strategic considerations with the Board of Manage- ment at regular intervals. The Board of Management regularly, promptly and com- prehensively informed us 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 man- agement. In this respect, the Board of Management also informed the Supervisory Board of further improvements to the risk and compliance management system. In addition, the Supervisory Board received information about com- pliance-related topics and other topical issues by the Board of Management on an ongoing basis. 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 busi- ness position and the forecast for the current year. Any deviations in performance from the plans and targets previously drawn up were explained in detail by the Board of Management, either in person or in writing. Together with the Board of Management we analyzed the reasons for the deviations so as to enable countermeasures to be derived. At the meetings of the Special Committee on Diesel Engines, the Board of Management presented regular reports on current developments in connection with the diesel issue. In addition, 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 Volks- wagen Group’s strategy and planning, its business develop- ment, and the risk situation and risk management, including integrity and compliance issues in the Volkswagen Group. The Supervisory Board held a total of 14 meetings in fiscal year 2018. The average attendance rate was 90.0%. In addition, resolutions on urgent matters were adopted in writing or using electronic communications media. 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. To our shareholders Report of the Supervisory Board 13 C O M M I T T E E A C T I V I T I E S In order to discharge the duties entrusted to it, the Super- visory Board has established five committees: the Executive Committee, the Nomination Committee, the Mediation Committee established in accordance with section 27(3) of the Mitbestimmungsgesetz (MitbestG – German Codetermi- nation 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 shareholder representatives on the Executive Committee make up the Nomination Com- mittee. The remaining two committees are each composed of two shareholder representatives and two employee represen- tatives. The members of these committees as of December 31, 2018 are given on page 89 of this annual report. The Executive Committee met 13 times in the reporting period. At its meetings, the Executive Committee prepared the resolutions of the Supervisory Board in detail, dealt with the composition of the Board of Management and took decisions on, among other things, contractual issues con- cerning the Board of Management other than remuneration and on consenting to ancillary activities by members of the Board of Management. The Nomination Committee is responsible for proposing suitable candidates for the Supervisory Board to recommend for election to the Annual General Meeting. This committee met on one occasion in 2018. The Mediation Committee did not have to be convened in the reporting period. The Audit Committee held five meetings in the past fiscal year. It focused on the annual and consolidated financial statements, the risk management system including the effectiveness of the internal control system and the internal audit system, and the work performed by the Company’s Compliance organization. In addition, the Audit Committee concerned itself with the Volkswagen 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 completed 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. This Special Committee 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 2018, the Special Committee on Diesel Engines met on four occasions to discuss, among other topics, the regulatory offense proceedings terminated by administrative fine orders issued by the public prosecutor’s offices in Braunschweig and Munich II and the Supervisory Board’s proposed resolutions regarding formal approval of the actions of the members of the Board of Management and Supervisory Board incumbent in fiscal year 2017. Furthermore, as a rule, the shareholder and employee representatives 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 B Y T H E S U P E RV I S O R Y B O A R D The Supervisory Board’s first meeting in the reporting period was held on February 23, 2018. Following a detailed exami- nation, we approved the consolidated financial statements and the annual financial statements of Volkswagen AG for 2017 prepared by the Board of Management. We examined the combined management report, the combined separate nonfinancial report for 2017 and the Report by the Board of Management on Relationships of Volkswagen AG with Affiliated Companies in Accordance with Section 312 of the AktG (dependent company report). Upon completion of our examination of the dependent company report, we came to the conclusion that there were no objections to be raised to the concluding declaration by the Board of Management in the dependent company report. Other agenda items included the current state of affairs with respect to the diesel issue and the agenda for the 58th Annual General Meeting of Volks- wagen AG, particularly the Supervisory Board’s proposed resolutions. 14 14 Report of the Supervisory Board Report of the Supervisory Board To our shareholders To our shareholders Hans Dieter Pötsch Hans Dieter Pötsch Hans Dieter Pötsch The Supervisory Board meeting on April 12, 2018 focused on The Supervisory Board meeting on April 12, 2018 focused on the enhancement of the Volkswagen Group management the enhancement of the Volkswagen Group management structure. In this context, we also resolved on changes in the structure. In this context, we also resolved on changes in the composition of the Board of Management of Volkswagen AG. composition of the Board of Management of Volkswagen AG. Furthermore, we concerned ourselves with the strategic Furthermore, we concerned ourselves with the strategic focus of Volkswagen Truck & Bus GmbH (now TRATON SE) focus of Volkswagen Truck & Bus GmbH (now TRATON SE) and discussed the current state of affairs with respect to the and discussed the current state of affairs with respect to the diesel issue. diesel issue. The Supervisory Board held another meeting on May 2, 2018. The Supervisory Board held another meeting on May 2, 2018. The main items on the agenda were the preparation of the The main items on the agenda were the preparation of the 58th Annual General Meeting of Volkswagen AG held on 58th Annual General Meeting of Volkswagen AG held on May 3, 2018 and the current state of affairs with respect to the May 3, 2018 and the current state of affairs with respect to the diesel issue. diesel issue. The principal topic of discussion at the Supervisory Board The principal topic of discussion at the Supervisory Board meeting on June 13, 2018 was the administrative fine order meeting on June 13, 2018 was the administrative fine order issued by the public prosecutor’s office in Braunschweig issued by the public prosecutor’s office in Braunschweig against Volkswagen AG in connection with the diesel issue. against Volkswagen AG in connection with the diesel issue. The next Supervisory Board meetings were held on June 18 The next Supervisory Board meetings were held on June 18 and 19, 2018. The main points of discussion at both meetings and 19, 2018. The main points of discussion at both meetings were issues relating to the composition of the Board of were issues relating to the composition of the Board of Management of Volkswagen AG; at the meeting held on Management of Volkswagen AG; at the meeting held on June 18, 2018, we also dealt with the current state of affairs June 18, 2018, we also dealt with the current state of affairs with respect to the diesel issue. with respect to the diesel issue. The Supervisory Board held two further meetings on July 9 The Supervisory Board held two further meetings on July 9 and 23, 2018, which likewise addressed the composition of and 23, 2018, which likewise addressed the composition of To our shareholders Report of the Supervisory Board 15 the Board of Management of Volkswagen AG; the issues discussed at the meeting on July 9, 2018 also included the current state of affairs with respect to the diesel issue. The agendas of the Supervisory Board meetings on Septem- ber 17 and 28, 2018 included the current state of affairs with respect to the diesel issue and other steps relating to the corporate structure and capital market readiness of TRATON AG (formerly Volkswagen Truck & Bus GmbH, now TRATON SE) as well as information on management remuner- ation and matters relating to the Board of Management. Starting in autumn 2016, the public prosecutor’s office in Braunschweig launched criminal investigations against a number of individuals based on the provisions of the Betriebs- verfassungsgesetz (BetrVG – German Works Constitution Act) relating to possibly excessive remuneration granted to the Chairman of the General and Group Works Councils of Volks- wagen AG, Mr. Bernd Osterloh, and other works council members. In order to avoid conceivable conflicts of interest, Mr. Osterloh always left the meeting room prior to discus- sions and resolutions adopted by the Supervisory Board that relate to possibly excessive remuneration granted to him, based on the provisions of the German Works Constitution Act. At our meeting on October 2, 2018, we again addressed issues relating to the composition of the Board of Management of Volkswagen AG. No other conflicts of interest were reported or were discern- ible in the reporting period. The main topic of discussion at the Supervisory Board meeting on October 16, 2018 was the administrative fine order issued by the public prosecutor’s office in Munich II against AUDI AG in connection with the diesel issue. On October 25, 2018, the Supervisory Board met again to discuss strategic issues in connection with TRATON AG (now TRATON SE). At the Supervisory Board meeting on November 16, 2018, we discussed in detail the Volkswagen Group’s investment and financial planning for the period from 2019 to 2023. The meeting also focused on strategic issues, including the utilization of production sites and the current state of affairs with respect to the diesel issue. We also submitted the annual declaration of conformity with the Code together with the Board of Management. Moreover, we adopted an information policy to provide the Board of Management with detailed guidance on reporting requirements to the Supervisory Board. In the reporting period, we voted in writing on matters such as the establishment of a branch of Volkswagen AG in Malaysia and on issues relating to the composition and remuneration of the Board of Management of Volks- wagen AG. C O 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 Man- agement 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. C O R P O R AT E G O V E R N A N C E A N D D E C L A R AT I O N O F C O N F O R M I T Y The Supervisory Board meeting on November 16, 2018 focused on the implementation of the recommendations and suggestions of the Code in the Volkswagen Group. We dis- cussed in detail the version of the Code dated February 7, 2017, as published by the government commission on April 24, 2017, and issued the annual declaration of conformity 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 Man- agement and the Supervisory Board are permanently avail- able at www.volkswagenag.com/en/InvestorRelations/corpo- rate-governance/declaration-of-conformity.html. Additional information 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 327 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 O A R D A N D B O A R D O F M A N A G E M E N T Ms. Annika Falkengren stepped down as a member of the Supervisory Board of Volkswagen AG with effect from Febru- ary 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. On May 3, 2018, the Annual General Meeting elected Ms. Heiß as a member of the Super- visory Board of Volkswagen AG for a full term of office. The term of office of Dr. Wolfgang Porsche on the Super- visory Board of Volkswagen AG duly ended at the close of the 58th Annual General Meeting. The Annual General Meeting reelected Dr. Porsche on May 3, 2018 for a further full term of office on the Supervisory Board. 16 Report of the Supervisory Board To our shareholders Effective February 8, 2019, Mr. Uwe Hück stepped down from his position as a member of the Volkswagen AG Supervisory Board. Upon request of the Chairman of the Supervisory in accordance with section 104 AktG, the Board and Braunschweig Registry Court appointed Mr. Werner Weresch to succeed him as a member of the Volkswagen AG Super- visory Board, effective February 21, 2019. The enhancement of the Volkswagen Group management structure also gave rise to changes in the composition of the Board of Management of Volkswagen AG. Mr. Matthias Müller resigned from his position as Chairman of the Board of Man- agement of Volkswagen AG by mutual agreement with effect from April 12, 2018. Dr. Herbert Diess was appointed to succeed him, effective April 13, 2018. Dr. Diess also heads the Volume brand group, which includes the Volks- wagen Passenger Cars brand. Dr. Karlheinz Blessing and Dr. Francisco Javier Garcia also left their positions as members of the Board of Management on April 12, 2018, Dr. Blessing by mutual agreement and Dr. Garcia of his own volition. Mr. Gunnar Kilian was appointed to succeed Dr. Blessing as member of the Board of Management of Volkswagen AG with responsibility for Human Resources effective April 13, 2018. Dr. Stefan Sommer took over from Dr. Garcia Sanz as member of the Board of Management with responsibility for Components and Procurement effective September 1, 2018. Mr. Oliver Blume, Chairman of the Board of Management of Dr. Ing. h.c. F. Porsche AG, was newly appointed to the Group Board of Management with effect from April 13, 2018. Mr. Blume is the member of the Group Board of Management responsible for the Sport & Luxury brand group. With effect from October 2, 2018, Mr. Rupert Stadler left the Board of Management of Volkswagen AG and the Board of Management of AUDI AG. Mr. Abraham Schot was appointed to succeed him as member of the Board of Management of Volkswagen AG and Chairman of the Board of Management of AUDI AG, effective January 1, 2019. Mr. Schot is the member of the Group Board of Management responsible for the Premium brand group. He became interim Chairman of the Board of Management at AUDI AG on June 19, 2018 and first attended the meetings of the Volkswagen AG Board of Management as a guest. AU D I T O F T H E A N N UA L A N D C O 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 3, 2018 elected Pricewaterhouse- Coopers GmbH Wirtschaftsprüfungsgesellschaft (PwC) as auditors for fiscal year 2018. 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 to conduct an external content-related audit of the combined separate non- financial report for 2018. In addition, the auditors analyzed the risk management and internal control systems, concluding that the Board of Man- agement 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 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, 2018 (dependent company report) submitted by the Board of Management was also audited by the auditors, who issued the following opinion: “In our opinion and in accordance with 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 and consolidated financial statements, including the dependent company report, the documentation relating to the combined manage- ment report, and also the audit reports prepared by the auditors and the report from PwC on the external content- related audit of the combined separate nonfinancial report for 2018 in good time for their meetings on February 21, 2019 and February 22, 2019 respectively. The auditors reported extensively at both meetings on the material findings of their audit and were available to provide additional information. Prof. Jochem Heizmann retired from the Board of Manage- ment of Volkswagen AG with effect from January 10, 2019 under a retirement program. His Board responsibility for the China division was transferred to Dr. Diess with effect from January 11, 2019. 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 Our sincere thanks go to all of the departing members of the Supervisory Board and the Board of Management for their work. To our shareholders Report of the Supervisory Board 17 dependent company report as well as the combined separate nonfinancial report, and reported on these at the Supervisory Board meeting on February 22, 2019. Following this, the Audit Committee recommended that the Supervisory Board approve the annual and consolidated 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 Manage- ment in the combined management report corresponds to the assessment by the Supervisory Board. We therefore concurred with the auditors’ findings and approved the annual financial statements and the consoli- dated financial statements prepared by the Board of Manage- ment at our meeting on February 22, 2019, at which the auditors also took part in discussions on the agenda items relating to the annual and consolidated financial statements, the dependent company report and the combined manage- ment report. The annual financial statements are thus adopted. Upon completion of our examination of the dependent company report, there are no objections to be raised to the concluding declaration by the Board of Man- agement in the dependent company report. 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 2018 to attain limited assurance and issued an unqualified report. At our meeting on February 22, 2019, PwC took part in the discussions on the agenda items relating to the combined separate nonfinancial report for 2018. Upon completion of its own independent examination of the combined separate nonfinancial report for 2018, the Supervisory Board did not have any objections. We would like to express our thanks and particular appre- ciation 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 2018. With your immense personal commitment, great loyalty and unwavering readiness to support the changes implemented, you made a decisive contribution in helping the Volkswagen Group to conclude fiscal year 2018 success- fully in spite of the many challenges presented. Wolfsburg, February 22, 2019 Hans Dieter Pötsch Chairman of the Supervisory Board S N O I S I V I D 2 Divisions DIVISIONS 21 24 26 28 30 32 34 36 38 40 Brands and Business Fields Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Porsche Volkswagen Commercial Vehicles TRATON GROUP Scania 42 MAN 44 46 Volkswagen Group China Volkswagen Financial Services Divisions Brands and Business Fields 21 Brands and Business Fields Despite the continued challenging environment, the Volkswagen Group remained on its growth course in the reporting year. Unit sales, sales revenue and profit increased, while special items attributable to the diesel issue continued to weigh on 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. 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 genuine parts, large-bore diesel engines, turbomachinery, special gear units, propulsion components and testing systems businesses. The Ducati brand is allocated to the Audi brand and thus to the Passenger Cars Business Area. The activities of the Financial Services Division, which corresponds to the Financial Services segment, comprise dealer and customer financing, vehicle leasing, direct banking and insurance activities, fleet management and 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 RE A U T O M O T I V E D I V I S I ON Passenger Cars Business Area Commercial Vehicles Business Area Power Engineering Business Area Volkswagen Commercial Vehicles Scania Vehicles and Services MAN Commercial Vehicles MAN Power Engineering Volkswagen Passenger Cars Audi ŠKODA SEAT 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 ON 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 brand 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. K E Y F I G U R E S B Y M A R K E T In fiscal year 2018, the Volkswagen Group generated an operating profit before special items of €17.1 (17.0) bil- lion. Special items which resulted from the diesel issue weighed on the operating profit in the amount of €–3.2 (–3.2 ) billion. Amid fierce competition in a challenging market environment, the Volkswagen Group lifted sales to a new record of 10.9 (10.8) million vehicles. Sales revenue increased by 2.7% to €235.8 billion. In the Europe/Other markets region, we sold 4.7 million vehicles (+0.2 %). Sales revenue amounted to €143.1 (142.8) billion. Negative exchange rate effects were offset by higher volume. The second half of 2018 was negatively impacted by the changeover to the WLTP test procedure. In North America, Group sales stood at 0.9 million vehicles, a decline of 6.8% year-on-year. Sales revenue of €37.7 (37.7) billion was on a level with the previous year. Negative effects resulted from the decline in new vehicle sales and from exchange rates, while improvements in the mix and the financial services business, as well as revenue stemming from retrofitted used vehicles in connection with the diesel issue, had a positive impact. In the markets of the South America region, we increased unit sales by 13.2% to 0.6 million vehicles. Volume and mix improvements increased sales revenue by 4.2% to €10.4 billion; exchange rate trends had a negative impact. In the Asia-Pacific region – including the Chinese joint ventures – we sold a total of 4.6 (4.5) million vehicles in the reporting year. Sales revenue rose by 10.3% to €43.2 billion due to higher volumes and improvements in the components business at our fully consolidated companies. This figure does not include the sales revenue of our equity-accounted Chinese joint ventures. Since the new accounting standard IFRS 9 was applied on January 1, 2018, income and expenses realized from hedging transactions relating to sales revenue in foreign currency have been allocated to sales revenue; in fiscal year 2018, hedging transactions increased the sales revenue of the Volkswagen Group by €1.5 billion. 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 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 Thousand vehicles/€ million 2018 2017 2018 Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Porsche Automotive2 Volkswagen Commercial Vehicles Scania3 MAN Commercial Vehicles MAN Power Engineering VW China4 Other5 Volkswagen Financial Services Volkswagen Group before special items Special items Volkswagen Group Automotive Division6 of which: Passenger Cars Business Area Commercial Vehicles Business Area Power Engineering Business Area Financial Services Division 3,715 1,467 3,573 1,530 957 608 10 253 469 97 137 – 4,101 –912 – – – 10,900 10,900 10,206 694 – – 937 595 11 248 498 92 114 – 4,020 –840 – – – 10,777 10,777 10,077 700 – – 20171 79,186 59,789 16,559 9,892 1,843 21,674 11,909 12,789 11,087 3,283 – 84,585 59,248 17,293 10,202 1,548 23,668 11,875 13,360 12,104 3,608 – –34,408 32,764 –30,288 31,826 – – 235,849 201,067 160,802 36,656 3,608 34,782 – – 229,550 195,817 157,334 35,200 3,283 33,733 2018 2017 3,239 4,705 1,377 254 –288 4,110 780 1,346 332 193 – –1,557 2,612 17,104 –3,184 13,920 11,127 9,220 1,971 –64 2,793 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 Adjusted; see disclosures about the application of new International Financial Reporting Standards on page 114. 2 Porsche (Automotive and Financial Services): sales revenue €25,784 (23,491) million, operating profit €4,291 (4,144) million. 3 Including financial services. 4 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 €4,627 (4,746) million. 5 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. 6 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 Thousand vehicles/€ million Europe/Other markets North America South America Asia-Pacific2 Hedges on sales revenue Volkswagen Group2 V E H I C L E S A L E S S A L E S R E V E N U E 2018 2017 2018 20171 4,739 925 596 4,640 – 10,900 4,731 992 526 4,527 – 10,777 143,089 142,753 37,656 10,405 43,166 1,535 37,686 9,988 39,123 – 235,849 229,550 1 Adjusted; see disclosures about the application of new International Financial Reporting Standards on page 114. 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 24 24 Volkswagen Passenger Cars Volkswagen Passenger Cars Volkswagen Passenger Cars Divisions Divisions Divisions The Volkswagen Passenger Cars brand continued its global product initiative in 2018, The Volkswagen Passenger Cars brand continued its global product initiative in 2018, The Volkswagen Passenger Cars brand continued its global product initiative in 2018, including the world premiere of the new Touareg. Moreover, media representatives including the world premiere of the new Touareg. Moreover, media representatives including the world premiere of the new Touareg. Moreover, media representatives were given a preview of the Modular Electric Drive Toolkit (MEB). were given a preview of the Modular Electric Drive Toolkit (MEB). were given a preview of the Modular Electric Drive Toolkit (MEB). B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T 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+” The Volkswagen Passenger Cars vision is “Moving people and driving them forwards”. The “TRANSFORM 2025+” 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, tech- strategy therefore centers on a global model initiative through which the brand aims to lead innovation, tech- strategy therefore centers on a global model initiative through which the brand aims to lead innovation, tech- nology and quality in the volume segment. nology and quality in the volume segment. nology and quality in the volume segment. Volkswagen Passenger Cars celebrated the world premiere of the new Touareg in the reporting year. With its Volkswagen Passenger Cars celebrated the world premiere of the new Touareg in the reporting year. With its Volkswagen Passenger Cars celebrated the world premiere of the new Touareg in the reporting year. With its expressive design, its extensive equipment, high-quality materials and top-class craftsmanship, it occupies a expressive design, its extensive equipment, high-quality materials and top-class craftsmanship, it occupies a expressive design, its extensive equipment, high-quality materials and top-class craftsmanship, it occupies a top position in the premium SUV segment. The brand also presented the T-Cross, a versatile, practical and top position in the premium SUV segment. The brand also presented the T-Cross, a versatile, practical and top position in the premium SUV segment. The brand also presented the T-Cross, a versatile, practical and urban crossover model, which is set to launch in 2019. In addition, it unveiled the ID. VIZZION concept car, the urban crossover model, which is set to launch in 2019. In addition, it unveiled the ID. VIZZION concept car, the urban crossover model, which is set to launch in 2019. In addition, it unveiled the ID. VIZZION concept car, the electric-driven ID. family's new flagship. The saloon car of tomorrow is self-driving, effortless to operate thanks electric-driven ID. family's new flagship. The saloon car of tomorrow is self-driving, effortless to operate thanks electric-driven ID. family's new flagship. The saloon car of tomorrow is self-driving, effortless to operate thanks to augmented reality, and capable of learning through artificial intelligence. In September 2018, Volkswagen to augmented reality, and capable of learning through artificial intelligence. In September 2018, Volkswagen to augmented reality, and capable of learning through artificial intelligence. In September 2018, Volkswagen gave media representatives from all around the world a first glimpse of its platform strategy for electric gave media representatives from all around the world a first glimpse of its platform strategy for electric gave media representatives from all around the world a first glimpse of its platform strategy for electric vehicles. The aim of the Modular Electric Drive Toolkit (MEB) is to translate electric mobility into mass mobility vehicles. The aim of the Modular Electric Drive Toolkit (MEB) is to translate electric mobility into mass mobility vehicles. The aim of the Modular Electric Drive Toolkit (MEB) is to translate electric mobility into mass mobility at affordable prices. The all-electric ID. family based on the MEB will be manufactured in Zwickau from late at affordable prices. The all-electric ID. family based on the MEB will be manufactured in Zwickau from late at affordable prices. The all-electric ID. family based on the MEB will be manufactured in Zwickau from late 2019. Vehicles with all-electric drive will also roll off the assembly line in Emden. 2019. Vehicles with all-electric drive will also roll off the assembly line in Emden. 2019. Vehicles with all-electric drive will also roll off the assembly line in Emden. Volkswagen Passenger Cars delivered a record 6.2 million vehicles worldwide in 2018 (+0.2%). There was Volkswagen Passenger Cars delivered a record 6.2 million vehicles worldwide in 2018 (+0.2%). There was Volkswagen Passenger Cars delivered a record 6.2 million vehicles worldwide in 2018 (+0.2%). There was strong growth especially in Italy (+11.8%), Russia (+18.5%) and Brazil (+28.6%). The Polo, T-Roc, Tiguan and strong growth especially in Italy (+11.8%), Russia (+18.5%) and Brazil (+28.6%). The Polo, T-Roc, Tiguan and strong growth especially in Italy (+11.8%), Russia (+18.5%) and Brazil (+28.6%). The Polo, T-Roc, Tiguan and Virtus models were especially popular. Virtus models were especially popular. Virtus models were especially popular. The Volkswagen Passenger Cars brand sold 3.7 (3.6) million vehicles in the reporting year. The difference The Volkswagen Passenger Cars brand sold 3.7 (3.6) million vehicles in the reporting year. The difference The Volkswagen Passenger Cars brand sold 3.7 (3.6) million vehicles in the reporting year. The difference between deliveries and unit sales is mainly due to the fact that the vehicle-producing joint ventures in China are between deliveries and unit sales is mainly due to the fact that the vehicle-producing joint ventures in China are between deliveries and unit sales is mainly due to the fact that the vehicle-producing joint ventures in China are not attributed to the companies in the Volkswagen Passenger Cars brand. not attributed to the companies in the Volkswagen Passenger Cars brand. not attributed to the companies in the Volkswagen Passenger Cars brand. The Volkswagen Passenger Cars brand produced 6.3 (6.3) million vehicles worldwide in fiscal year 2018. The The Volkswagen Passenger Cars brand produced 6.3 (6.3) million vehicles worldwide in fiscal year 2018. The The Volkswagen Passenger Cars brand produced 6.3 (6.3) million vehicles worldwide in fiscal year 2018. The Mexican plant in Puebla produced its twelve millionth vehicle. Mexican plant in Puebla produced its twelve millionth vehicle. Mexican plant in Puebla produced its twelve millionth vehicle. S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S At €84.6 billion, the sales revenue of the Volkswagen Passenger Cars brand in 2018 was 6.8% higher than in the At €84.6 billion, the sales revenue of the Volkswagen Passenger Cars brand in 2018 was 6.8% higher than in the At €84.6 billion, the sales revenue of the Volkswagen Passenger Cars brand in 2018 was 6.8% higher than in the previous year. Operating profit before special items amounted to €3.2 (3.3) billion. The increase in vehicle sales previous year. Operating profit before special items amounted to €3.2 (3.3) billion. The increase in vehicle sales previous year. Operating profit before special items amounted to €3.2 (3.3) billion. The increase in vehicle sales and improved product costs had a positive effect. Higher sales expenses resulting from factors such as the and improved product costs had a positive effect. Higher sales expenses resulting from factors such as the and improved product costs had a positive effect. Higher sales expenses resulting from factors such as the environmental bonus, exchange rate effects and upfront expenditures for new products, especially in con- environmental bonus, exchange rate effects and upfront expenditures for new products, especially in con- environmental bonus, exchange rate effects and upfront expenditures for new products, especially in con- nection with the implementation of the electric mobility campaign, weighed on the operating profit. In nection with the implementation of the electric mobility campaign, weighed on the operating profit. In nection with the implementation of the electric mobility campaign, weighed on the operating profit. In addition, the WLTP test procedure presented challenges. The operating return on sales before special items was addition, the WLTP test procedure presented challenges. The operating return on sales before special items was addition, the WLTP test procedure presented challenges. The operating return on sales before special items was 3.8 (4.2)%. The diesel issue gave rise to special items of €–1.9 (–2.8) billion. 3.8 (4.2)%. The diesel issue gave rise to special items of €–1.9 (–2.8) billion. 3.8 (4.2)%. The diesel issue gave rise to special items of €–1.9 (–2.8) billion. 12 million 12 million 12 million Vehicles produced in Mexico Vehicles produced in Mexico Vehicles produced in Mexico Divisions Divisions Divisions Volkswagen Passenger Cars Volkswagen Passenger Cars Volkswagen Passenger Cars 25 25 25 P R O D U C T I O N P R O D U C T I O N 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 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 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 Units Units Units Tiguan Tiguan Tiguan Polo/Virtus Polo/Virtus Polo/Virtus Golf Golf Golf Jetta/Sagitar Jetta/Sagitar Jetta/Sagitar Passat/Magotan Passat/Magotan Passat/Magotan Lavida Lavida Lavida Santana Santana Santana Bora Bora Bora T-Roc T-Roc T-Roc Atlas/Teramont Atlas/Teramont Atlas/Teramont Gol Gol Gol Lamando Lamando Lamando up! up! up! Touran Touran Touran Saveiro Saveiro Saveiro Arteon/CC Arteon/CC Arteon/CC Fox Fox Fox Touareg Touareg Touareg Beetle Beetle Beetle Sharan Sharan Sharan Tharu Tharu Tharu Phideon Phideon Phideon Suran Suran Suran Scirocco Scirocco Scirocco 2018 2018 2018 2017 2017 2017 2018 2018 2018 20171 20171 20171 6,245 6,245 6,245 3,715 3,715 3,715 6,297 6,297 6,297 6,230 6,230 6,230 3,573 3,573 3,573 6,317 6,317 6,317 769,870 769,870 769,870 Deliveries (thousand units) Deliveries (thousand units) Deliveries (thousand units) 755,506 755,506 755,506 Vehicle sales Vehicle sales Vehicle sales 968,284 968,284 968,284 Production Production Production 883,346 883,346 883,346 Sales revenue (€ million) Sales revenue (€ million) Sales revenue (€ million) 84,585 84,585 84,585 79,186 79,186 79,186 Operating result before special items Operating result before Operating result before special items special items Operating return on sales (%) Operating return on sales (%) Operating return on sales (%) 3,239 3,239 3,239 3.8 3.8 3.8 3,301 3,301 3,301 4.2 4.2 4.2 % % % +0.2 +0.2 +0.2 +4.0 +4.0 +4.0 –0.3 –0.3 –0.3 +6.8 +6.8 +6.8 –1.9 –1.9 –1.9 1 Sales revenue adjusted; see disclosures about the application of new International 1 Sales revenue adjusted; see disclosures about the application of new International 1 Sales revenue adjusted; see disclosures about the application of new International Financial Reporting Standards on page 114. Financial Reporting Standards on page 114. Financial Reporting Standards on page 114. 861,331 861,331 861,331 855,179 855,179 855,179 805,752 805,752 805,752 770,447 770,447 770,447 656,249 656,249 656,249 513,556 513,556 513,556 272,080 272,080 272,080 269,390 269,390 269,390 236,977 236,977 236,977 166,034 166,034 166,034 156,410 156,410 156,410 141,076 141,076 141,076 136,512 136,512 136,512 130,417 130,417 130,417 59,233 59,233 59,233 49,735 49,735 49,735 40,596 40,596 40,596 40,387 40,387 40,387 37,846 37,846 37,846 30,459 30,459 30,459 26,986 26,986 26,986 24,102 24,102 24,102 16,356 16,356 16,356 – – – 660,996 660,996 660,996 507,574 507,574 507,574 293,313 293,313 293,313 334,900 334,900 334,900 22,724 22,724 22,724 129,724 129,724 129,724 203,148 203,148 203,148 138,943 138,943 138,943 158,795 158,795 158,795 144,676 144,676 144,676 66,431 66,431 66,431 37,972 37,972 37,972 50,739 50,739 50,739 42,407 42,407 42,407 59,483 59,483 59,483 45,695 45,695 45,695 – – – 13,014 13,014 13,014 21,093 21,093 21,093 8,199 8,199 8,199 6,297,110 6,297,110 6,297,110 6,316,832 6,316,832 6,316,832 Touareg Touareg Touareg D E L I V E R I E S B Y M A R K E T in percent D E L I V E R I E S B Y M A R K E T D E L I V E R I E S B Y M A R K E T in percent in percent Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets North America North America North America North America North America North America South America South America South America South America South America South America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific 30.6 % 30.6 % 30.6 % 30.6 % 30.6 % 30.6 % 9.2 % 9.2 % 9.2 % 9.2 % 9.2 % 9.2 % 7.6 % 7.6 % 7.6 % 7.6 % 7.6 % 7.6 % 52.6 % 52.6 % 52.6 % 52.6 % 52.6 % 52.6 % i i i F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.volkswagen.com www.volkswagen.com F U R T H E R I N F O R M A T I O N www.volkswagen.com F U R T H E R I N F O R M A T I O N www.volkswagen.com F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.volkswagen.com www.volkswagen.com 26 26 26 Audi Audi Audi Divisions Divisions Divisions Audi continued to drive its major model and technology initiative in a difficult market Audi continued to drive its major model and technology initiative in a difficult market Audi continued to drive its major model and technology initiative in a difficult market environment. It presented the e-tron premium SUV, the brand’s first environment. It presented the e-tron premium SUV, the brand’s first environment. It presented the e-tron premium SUV, the brand’s first fully electric series-produced model. fully electric series-produced model. fully electric series-produced model. B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T 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 “Vorsprung” is an active brand promise that is delivered throughout the world, making Audi one of the most “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 2018, the brand had around 20 market launches, thus highly desired brands in the premium segment. In 2018, the brand had around 20 market launches, thus highly desired brands in the premium segment. In 2018, the brand had around 20 market launches, thus continuing the renewal of its model range and further strengthening its product portfolio. Audi presented the continuing the renewal of its model range and further strengthening its product portfolio. Audi presented the continuing the renewal of its model range and further strengthening its product portfolio. Audi presented the new A6, the eighth generation of its successful premium saloon. The A6 features dynamic surfaces, sharp new A6, the eighth generation of its successful premium saloon. The A6 features dynamic surfaces, sharp new A6, the eighth generation of its successful premium saloon. The A6 features dynamic surfaces, sharp contours and striking lines, conveying sporty elegance, cutting-edge technology and sophistication. Audi also contours and striking lines, conveying sporty elegance, cutting-edge technology and sophistication. Audi also contours and striking lines, conveying sporty elegance, cutting-edge technology and sophistication. Audi also presented the new face of its Q family for the first time: the Audi Q8. This combines the elegance of a four-door presented the new face of its Q family for the first time: the Audi Q8. This combines the elegance of a four-door presented the new face of its Q family for the first time: the Audi Q8. This combines the elegance of a four-door luxury coupé with the practical versatility of a large SUV. Its distinguished design is underlined by an imposing luxury coupé with the practical versatility of a large SUV. Its distinguished design is underlined by an imposing luxury coupé with the practical versatility of a large SUV. Its distinguished design is underlined by an imposing octagon-shaped, single-frame radiator grille, an elegant sloping roof line and up to 22-inch wheels. Audi started octagon-shaped, single-frame radiator grille, an elegant sloping roof line and up to 22-inch wheels. Audi started octagon-shaped, single-frame radiator grille, an elegant sloping roof line and up to 22-inch wheels. Audi started its electrification offensive in September 2018 with the world premiere of the e-tron. The SUV is the first all- its electrification offensive in September 2018 with the world premiere of the e-tron. The SUV is the first all- its electrification offensive in September 2018 with the world premiere of the e-tron. The SUV is the first all- electric production model from the brand with the four rings. Its comfort and spaciousness are equivalent to a electric production model from the brand with the four rings. Its comfort and spaciousness are equivalent to a electric production model from the brand with the four rings. Its comfort and spaciousness are equivalent to a traditional premium model. At fast-charging stations, the e-tron is ready for a long-distance drive after 30 traditional premium model. At fast-charging stations, the e-tron is ready for a long-distance drive after 30 traditional premium model. At fast-charging stations, the e-tron is ready for a long-distance drive after 30 minutes. A large number of pre-orders for the e-tron had already been received by the end of the year. By 2025, minutes. A large number of pre-orders for the e-tron had already been received by the end of the year. By 2025, minutes. A large number of pre-orders for the e-tron had already been received by the end of the year. By 2025, Audi plans to offer at least 20 electric models. Audi plans to offer at least 20 electric models. Audi plans to offer at least 20 electric models. In the past fiscal year, Audi faced challenges from a difficult market environment and the new WLTP test In the past fiscal year, Audi faced challenges from a difficult market environment and the new WLTP test In the past fiscal year, Audi faced challenges from a difficult market environment and the new WLTP test procedure. The brand delivered a total of 1.8 million vehicles, a decline of 3.4%. While unit sales in Western procedure. The brand delivered a total of 1.8 million vehicles, a decline of 3.4%. While unit sales in Western procedure. The brand delivered a total of 1.8 million vehicles, a decline of 3.4%. While unit sales in Western Europe were down 13.9%, there were increases especially in China (+10.9%). Europe were down 13.9%, there were increases especially in China (+10.9%). Europe were down 13.9%, there were increases especially in China (+10.9%). Audi sold 1.5 (1.5) million vehicles in 2018. Unit sales by the Chinese joint venture FAW-Volkswagen Audi sold 1.5 (1.5) million vehicles in 2018. Unit sales by the Chinese joint venture FAW-Volkswagen Audi sold 1.5 (1.5) million vehicles in 2018. Unit sales by the Chinese joint venture FAW-Volkswagen amounted to a further 620 (552) thousand Audi vehicles. The Q2, Q5, A4, A7 and A8 models were especially amounted to a further 620 (552) thousand Audi vehicles. The Q2, Q5, A4, A7 and A8 models were especially amounted to a further 620 (552) thousand Audi vehicles. The Q2, Q5, A4, A7 and A8 models were especially popular. Unit sales at Automobili Lamborghini S.p.A. amounted to 6,333 (3,897) vehicles. The increase was popular. Unit sales at Automobili Lamborghini S.p.A. amounted to 6,333 (3,897) vehicles. The increase was popular. Unit sales at Automobili Lamborghini S.p.A. amounted to 6,333 (3,897) vehicles. The increase was mainly due to high demand for the Urus. mainly due to high demand for the Urus. mainly due to high demand for the Urus. Globally, Audi produced 1.9 (1.9) million units in the reporting year. Lamborghini manufactured a total of Globally, Audi produced 1.9 (1.9) million units in the reporting year. Lamborghini manufactured a total of Globally, Audi produced 1.9 (1.9) million units in the reporting year. Lamborghini manufactured a total of 6,571 (4,056) vehicles in 2018. 6,571 (4,056) vehicles in 2018. 6,571 (4,056) vehicles in 2018. S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S 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 of the Audi brand was €59.2 (59.8) billion in fiscal year 2018. Operating profit before special items Sales revenue of the Audi brand was €59.2 (59.8) billion in fiscal year 2018. Operating profit before special items Sales revenue of the Audi brand was €59.2 (59.8) billion in fiscal year 2018. Operating profit before special items was 7.0% lower, at €4.7 billion. Mix improvements, positive exchange rate effects and product cost optimization was 7.0% lower, at €4.7 billion. Mix improvements, positive exchange rate effects and product cost optimization was 7.0% lower, at €4.7 billion. Mix improvements, positive exchange rate effects and product cost optimization were unable to compensate for lower vehicle sales and higher sales costs, both of which primarily reflect the were unable to compensate for lower vehicle sales and higher sales costs, both of which primarily reflect the were unable to compensate for lower vehicle sales and higher sales costs, both of which primarily reflect the impact of the WLTP, as well as higher depreciation and amortization charges due to the large volume of capital impact of the WLTP, as well as higher depreciation and amortization charges due to the large volume of capital impact of the WLTP, as well as higher depreciation and amortization charges due to the large volume of capital expenditure. Audi generated an operating return on sales before special items of 7.9 (8.5)%. Special items expenditure. Audi generated an operating return on sales before special items of 7.9 (8.5)%. Special items expenditure. Audi generated an operating return on sales before special items of 7.9 (8.5)%. Special items resulting from the diesel issue amounted to €–1.2 (–0.4) billion. The financial key performance indicators for resulting from the diesel issue amounted to €–1.2 (–0.4) billion. The financial key performance indicators for resulting from the diesel issue amounted to €–1.2 (–0.4) billion. The financial key performance indicators for the Lamborghini and Ducati brands are included in the financial figures for the Audi brand. the Lamborghini and Ducati brands are included in the financial figures for the Audi brand. the Lamborghini and Ducati brands are included in the financial figures for the Audi brand. 1.8 million 1.8 million 1.8 million Vehicles delivered in 2018 Vehicles delivered in 2018 Vehicles delivered in 2018 Divisions Divisions Divisions Audi Audi Audi 27 27 27 P R O D U C T I O N P R O D U C T I O N P R O D U C T I O N A U D I B R A N D A U D I B R A N D A U D I B R A N D Units Units Units Audi Audi Audi A4 A4 A4 A3 A3 A3 Q5 Q5 Q5 A6 A6 A6 Q3 Q3 Q3 A5 A5 A5 Q7 Q7 Q7 Q2 Q2 Q2 A1 A1 A1 A8 A8 A8 Q8 Q8 Q8 A7 A7 A7 TT TT TT e-tron e-tron e-tron R8 R8 R8 Lamborghini Lamborghini Lamborghini Urus Urus Urus Huracán Coupé Huracán Coupé Huracán Coupé Huracán Spyder Huracán Spyder Huracán Spyder Aventador Roadster Aventador Roadster Aventador Roadster Aventador Coupé Aventador Coupé Aventador Coupé 2018 2018 2018 2017 2017 2017 2018 2018 2018 20171 20171 20171 % % % 344,623 344,623 344,623 304,903 304,903 304,903 298,645 298,645 298,645 254,705 254,705 254,705 167,707 167,707 167,707 111,544 111,544 111,544 110,593 110,593 110,593 108,386 108,386 108,386 80,387 80,387 80,387 24,541 24,541 24,541 22,414 22,414 22,414 20,058 20,058 20,058 12,118 12,118 12,118 2,425 2,425 2,425 1,764 1,764 1,764 Deliveries (thousand units) Deliveries (thousand units) Deliveries (thousand units) 325,307 325,307 325,307 Audi Audi Audi 313,380 313,380 313,380 Lamborghini Lamborghini Lamborghini 289,959 289,959 289,959 Vehicle sales Vehicle sales Vehicle sales 259,618 259,618 259,618 Production Production Production 1,818 1,818 1,818 1,812 1,812 1,812 6 6 6 1,467 1,467 1,467 1,871 1,871 1,871 1,882 1,882 1,882 1,878 1,878 1,878 4 4 4 1,530 1,530 1,530 1,879 1,879 1,879 205,006 205,006 205,006 Sales revenue (€ million) Sales revenue (€ million) Sales revenue (€ million) 59,248 59,248 59,248 59,789 59,789 59,789 Operating result before special items Operating result before Operating result before special items special items Operating return on sales (%) Operating return on sales (%) Operating return on sales (%) 4,705 4,705 4,705 7.9 7.9 7.9 5,058 5,058 5,058 8.5 8.5 8.5 –3.4 –3.4 –3.4 –3.5 –3.5 –3.5 +50.7 +50.7 +50.7 –4.1 –4.1 –4.1 –0.4 –0.4 –0.4 –0.9 –0.9 –0.9 –7.0 –7.0 –7.0 1 Sales revenue adjusted; see disclosures about the application of new International 1 Sales revenue adjusted; see disclosures about the application of new International 1 Sales revenue adjusted; see disclosures about the application of new International Financial Reporting Standards on page 114. Financial Reporting Standards on page 114. Financial Reporting Standards on page 114. 119,595 119,595 119,595 106,515 106,515 106,515 102,084 102,084 102,084 95,346 95,346 95,346 15,854 15,854 15,854 364 364 364 16,968 16,968 16,968 22,174 22,174 22,174 4 4 4 3,179 3,179 3,179 1,864,813 1,864,813 1,864,813 1,875,353 1,875,353 1,875,353 2,565 2,565 2,565 1,669 1,669 1,669 1,121 1,121 1,121 638 638 638 578 578 578 6,571 6,571 6,571 121 121 121 1,822 1,822 1,822 827 827 827 278 278 278 1,008 1,008 1,008 4,056 4,056 4,056 Audi brand Audi brand Audi brand 1,871,384 1,871,384 1,871,384 1,879,409 1,879,409 1,879,409 Ducati, motorcycles Ducati, motorcycles Ducati, motorcycles 53,320 53,320 53,320 56,743 56,743 56,743 A6 A6 A6 D E L I V E R I E S B Y M A R K E T in percent D E L I V E R I E S B Y M A R K E T D E L I V E R I E S B Y M A R K E T in percent in percent Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets North America North America North America North America North America North America South America South America South America South America South America South America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific 43.0 % 43.0 % 43.0 % 43.0 % 43.0 % 43.0 % 15.2 % 15.2 % 15.2 % 15.2 % 15.2 % 15.2 % 1.0 % 1.0 % 1.0 % 1.0 % 1.0 % 1.0 % 40.7 % 40.7 % 40.7 % 40.7 % 40.7 % 40.7 % i i i F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.audi.com www.audi.com F U R T H E R I N F O R M A T I O N www.audi.com F U R T H E R I N F O R M A T I O N www.audi.com F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.audi.com www.audi.com 28 28 28 ŠKODA ŠKODA ŠKODA Divisions Divisions Divisions ŠKODA presented the all-new compact Scala model in 2018. In addition to the ŠKODA presented the all-new compact Scala model in 2018. In addition to the ŠKODA presented the all-new compact Scala model in 2018. In addition to the Kamiq SUV, which was launched in China, additional derivative models of the Kamiq SUV, which was launched in China, additional derivative models of the Kamiq SUV, which was launched in China, additional derivative models of the Kodiaq and the upgraded Fabia were also presented. Kodiaq and the upgraded Fabia were also presented. Kodiaq and the upgraded Fabia were also presented. B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T The models offered by ŠKODA are synonymous with smart understatement, featuring a superior spacious The models offered by ŠKODA are synonymous with smart understatement, featuring a superior spacious The models offered by ŠKODA are synonymous with smart understatement, featuring a superior spacious interior, highest standards of functionality, excellent value for money and a distinct design. Added to that are a interior, highest standards of functionality, excellent value for money and a distinct design. Added to that are a interior, highest standards of functionality, excellent value for money and a distinct design. Added to that are a number of “Simply Clever” ideas and new digital services, all aimed at making customers’ lives easier. In 2018, number of “Simply Clever” ideas and new digital services, all aimed at making customers’ lives easier. In 2018, number of “Simply Clever” ideas and new digital services, all aimed at making customers’ lives easier. In 2018, ŠKODA launched their extensively enhanced Fabia. With the world premiere of the Scala, which will celebrate its ŠKODA launched their extensively enhanced Fabia. With the world premiere of the Scala, which will celebrate its ŠKODA launched their extensively enhanced Fabia. With the world premiere of the Scala, which will celebrate its market debut in 2019, ŠKODA has completely redefined its compact segment. The new compact model is the market debut in 2019, ŠKODA has completely redefined its compact segment. The new compact model is the market debut in 2019, ŠKODA has completely redefined its compact segment. The new compact model is the first series-produced vehicle to reveal the next step in the development of the ŠKODA design language, which first series-produced vehicle to reveal the next step in the development of the ŠKODA design language, which first series-produced vehicle to reveal the next step in the development of the ŠKODA design language, which will shape future ŠKODA models. New sculptural shapes, dynamic elements and attention to detail give the will shape future ŠKODA models. New sculptural shapes, dynamic elements and attention to detail give the will shape future ŠKODA models. New sculptural shapes, dynamic elements and attention to detail give the Scala its strong identity. The Kodiaq GT is the Czech brand’s new top model in China. It is the first vehicle in Scala its strong identity. The Kodiaq GT is the Czech brand’s new top model in China. It is the first vehicle in Scala its strong identity. The Kodiaq GT is the Czech brand’s new top model in China. It is the first vehicle in ŠKODA’s SUV segment that combines the robustness and versatility of an SUV with the sporty elegance and ŠKODA’s SUV segment that combines the robustness and versatility of an SUV with the sporty elegance and ŠKODA’s SUV segment that combines the robustness and versatility of an SUV with the sporty elegance and dynamic features of a coupé. China also saw the launch of the Kamiq. This city SUV offers the ultimate in dynamic features of a coupé. China also saw the launch of the Kamiq. This city SUV offers the ultimate in dynamic features of a coupé. China also saw the launch of the Kamiq. This city SUV offers the ultimate in connectivity for young urban customers who want to be always online even on the go. The dynamic Kodiaq RS connectivity for young urban customers who want to be always online even on the go. The dynamic Kodiaq RS connectivity for young urban customers who want to be always online even on the go. The dynamic Kodiaq RS – the new top model in the brand’s SUV portfolio – is also the first SUV in the sporty RS family. Thanks to its – the new top model in the brand’s SUV portfolio – is also the first SUV in the sporty RS family. Thanks to its – the new top model in the brand’s SUV portfolio – is also the first SUV in the sporty RS family. Thanks to its extraordinary on- and off-road performance and markedly powerful design, it meets all the requirements of a extraordinary on- and off-road performance and markedly powerful design, it meets all the requirements of a extraordinary on- and off-road performance and markedly powerful design, it meets all the requirements of a steadily expanding target group for powerful SUVs. The VISION X and VISION RS vehicle concepts with plug-in steadily expanding target group for powerful SUVs. The VISION X and VISION RS vehicle concepts with plug-in steadily expanding target group for powerful SUVs. The VISION X and VISION RS vehicle concepts with plug-in hybrid technology revealed in 2018 embody ŠKODA’s future orientation and form the basis for the series- hybrid technology revealed in 2018 embody ŠKODA’s future orientation and form the basis for the series- hybrid technology revealed in 2018 embody ŠKODA’s future orientation and form the basis for the series- produced models to be launched in 2019. produced models to be launched in 2019. produced models to be launched in 2019. Global deliveries by the ŠKODA brand in 2018 amounted to 1.3 million vehicles (+4.4%), thus reaching a new Global deliveries by the ŠKODA brand in 2018 amounted to 1.3 million vehicles (+4.4%), thus reaching a new Global deliveries by the ŠKODA brand in 2018 amounted to 1.3 million vehicles (+4.4%), thus reaching a new record. China was once again the largest single market: deliveries there were up by 4.9%. Sales rose by 1.8% in record. China was once again the largest single market: deliveries there were up by 4.9%. Sales rose by 1.8% in record. China was once again the largest single market: deliveries there were up by 4.9%. Sales rose by 1.8% in Western Europe and 9.6% in Central and Eastern Europe. Western Europe and 9.6% in Central and Eastern Europe. Western Europe and 9.6% in Central and Eastern Europe. ŠKODA sold 957 (937) thousand vehicles in 2018, outperforming the previous year’s level. The Kodiaq and ŠKODA sold 957 (937) thousand vehicles in 2018, outperforming the previous year’s level. The Kodiaq and ŠKODA sold 957 (937) thousand vehicles in 2018, outperforming the previous year’s level. The Kodiaq and Karoq models were particularly highly sought-after. The difference between figures for deliveries and unit sales Karoq models were particularly highly sought-after. The difference between figures for deliveries and unit sales Karoq models were particularly highly sought-after. 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 is mainly due to the fact that the vehicle-producing joint ventures in China are not attributed to ŠKODA brand is mainly due to the fact that the vehicle-producing joint ventures in China are not attributed to ŠKODA brand companies. companies. companies. ŠKODA manufactured 1.3 (1.2) million vehicles worldwide in 2018. The one-millionth SUV was produced at ŠKODA manufactured 1.3 (1.2) million vehicles worldwide in 2018. The one-millionth SUV was produced at ŠKODA manufactured 1.3 (1.2) million vehicles worldwide in 2018. The one-millionth SUV was produced at the plant in Kvasiny, Czech Republic. the plant in Kvasiny, Czech Republic. the plant in Kvasiny, Czech Republic. S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S At €17.3 billion, the ŠKODA brand’s sales revenue in 2018 was 4.4% higher than in 2017. Operating profit fell by At €17.3 billion, the ŠKODA brand’s sales revenue in 2018 was 4.4% higher than in 2017. Operating profit fell by At €17.3 billion, the ŠKODA brand’s sales revenue in 2018 was 4.4% higher than in 2017. Operating profit fell by 14.6% to €1.4 billion; the decline mainly resulted from negative exchange rate effects, negative impacts 14.6% to €1.4 billion; the decline mainly resulted from negative exchange rate effects, negative impacts 14.6% to €1.4 billion; the decline mainly resulted from negative exchange rate effects, negative impacts resulting from WLTP, a rise in personnel costs and higher upfront expenditure for new products. Meanwhile, resulting from WLTP, a rise in personnel costs and higher upfront expenditure for new products. Meanwhile, resulting from WLTP, a rise in personnel costs and higher upfront expenditure for new products. Meanwhile, growth in unit sales, product cost optimization and improved price positioning had a positive impact. The growth in unit sales, product cost optimization and improved price positioning had a positive impact. The growth in unit sales, product cost optimization and improved price positioning had a positive impact. The operating return on sales declined from 9.7% in the previous year to 8.0%. operating return on sales declined from 9.7% in the previous year to 8.0%. operating return on sales declined from 9.7% in the previous year to 8.0%. 1 million 1 million 1 million SUVs produced at the Kvasiny plant SUVs produced at the Kvasiny plant SUVs produced at the Kvasiny plant Divisions Divisions Divisions ŠKODA ŠKODA ŠKODA 29 29 29 P R O D U C T I O N P R O D U C T I O N P R O D U C T I O N Š KO D A B R A N D Š KO D A B R A N D Š KO D A B R A N D Units Units Units Octavia Octavia Octavia Rapid Rapid Rapid Fabia Fabia Fabia Karoq/Kamiq/Yeti Karoq/Kamiq/Yeti Karoq/Kamiq/Yeti Kodiaq Kodiaq Kodiaq Superb Superb Superb Citigo Citigo Citigo 2018 2018 2018 2017 2017 2017 2018 2018 2018 2017 2017 2017 % % % 400,210 400,210 400,210 195,270 195,270 195,270 186,213 186,213 186,213 173,816 173,816 173,816 155,499 155,499 155,499 136,985 136,985 136,985 37,095 37,095 37,095 420,802 420,802 420,802 Deliveries (thousand units) Deliveries (thousand units) Deliveries (thousand units) 210,002 210,002 210,002 Vehicle sales Vehicle sales Vehicle sales 209,471 209,471 209,471 Production Production Production 81,963 81,963 81,963 Sales revenue (€ million) Sales revenue (€ million) Sales revenue (€ million) 123,982 123,982 123,982 Operating result Operating result Operating result 147,103 147,103 147,103 Operating return on sales (%) Operating return on sales (%) Operating return on sales (%) 38,749 38,749 38,749 1,285,088 1,285,088 1,285,088 1,232,072 1,232,072 1,232,072 1,254 1,254 1,254 957 957 957 1,285 1,285 1,285 17,293 17,293 17,293 1,377 1,377 1,377 8.0 8.0 8.0 1,201 1,201 1,201 937 937 937 1,232 1,232 1,232 16,559 16,559 16,559 1,611 1,611 1,611 9.7 9.7 9.7 +4.4 +4.4 +4.4 +2.1 +2.1 +2.1 +4.3 +4.3 +4.3 +4.4 +4.4 +4.4 –14.6 –14.6 –14.6 Kamiq Kamiq Kamiq D E L I V E R I E S B Y M A R K E T in percent D E L I V E R I E S B Y M A R K E T D E L I V E R I E S B Y M A R K E T in percent in percent Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets North America North America North America North America North America North America South America South America South America South America South America South America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific 70.2 % 70.2 % 70.2 % 70.2 % 70.2 % 70.2 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.1 % 0.1 % 0.1 % 0.1 % 0.1 % 0.1 % 29.7 % 29.7 % 29.7 % 29.7 % 29.7 % 29.7 % i i i F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.skoda-auto.com www.skoda-auto.com F U R T H E R I N F O R M A T I O N www.skoda-auto.com F U R T H E R I N F O R M A T I O N www.skoda-auto.com F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.skoda-auto.com www.skoda-auto.com 30 30 30 SEAT SEAT SEAT Divisions Divisions Divisions SEAT celebrated the world premiere of the new Tarraco in the reporting year. In SEAT’s SEAT celebrated the world premiere of the new Tarraco in the reporting year. In SEAT’s SEAT celebrated the world premiere of the new Tarraco in the reporting year. In SEAT’s SUV family, the Tarraco is the big brother of the Arona and Ateca, which contributed to SUV family, the Tarraco is the big brother of the Arona and Ateca, which contributed to SUV family, the Tarraco is the big brother of the Arona and Ateca, which contributed to the good results in the reporting year. the good results in the reporting year. the good results in the reporting year. B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T 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. The highlight in fiscal year 2018 was the SEAT delivers solutions “Created in Barcelona” to make mobility easy. The highlight in fiscal year 2018 was the SEAT delivers solutions “Created in Barcelona” to make mobility easy. The highlight in fiscal year 2018 was the world premiere of the new Tarraco. The Spanish brand’s new flagship is based on the Modular Transverse world premiere of the new Tarraco. The Spanish brand’s new flagship is based on the Modular Transverse world premiere of the new Tarraco. The Spanish brand’s new flagship is based on the Modular Transverse Toolkit and complements the model range. It is the largest SUV offered by SEAT, next to the Arona and Ateca. Toolkit and complements the model range. It is the largest SUV offered by SEAT, next to the Arona and Ateca. Toolkit and complements the model range. It is the largest SUV offered by SEAT, next to the Arona and Ateca. The Tarraco combines elegant, progressive design with state-of-the-art technology, dynamic, agile handling, The Tarraco combines elegant, progressive design with state-of-the-art technology, dynamic, agile handling, The Tarraco combines elegant, progressive design with state-of-the-art technology, dynamic, agile handling, and limitless practicality and functionality. Synonymous with the ultimate expression of SEAT sportiness, the and limitless practicality and functionality. Synonymous with the ultimate expression of SEAT sportiness, the and limitless practicality and functionality. Synonymous with the ultimate expression of SEAT sportiness, the company’s CUPRA brand was presented with its own unique personality in 2018. CUPRA is designed to captivate company’s CUPRA brand was presented with its own unique personality in 2018. CUPRA is designed to captivate company’s CUPRA brand was presented with its own unique personality in 2018. CUPRA is designed to captivate car lovers and stands for uniqueness, sophistication and performance. Its first model, the CUPRA Ateca, has car lovers and stands for uniqueness, sophistication and performance. Its first model, the CUPRA Ateca, has car lovers and stands for uniqueness, sophistication and performance. Its first model, the CUPRA Ateca, has been on sale since October 2018. In addition, CUPRA will enter an all-electric racing car in the new eTCR been on sale since October 2018. In addition, CUPRA will enter an all-electric racing car in the new eTCR been on sale since October 2018. In addition, CUPRA will enter an all-electric racing car in the new eTCR multibrand touring car competition, which is to be launched in 2020. multibrand touring car competition, which is to be launched in 2020. multibrand touring car competition, which is to be launched in 2020. SEAT increased its deliveries to customers by 10.5% in fiscal year 2018 to 518 thousand vehicles. Almost all SEAT increased its deliveries to customers by 10.5% in fiscal year 2018 to 518 thousand vehicles. Almost all SEAT increased its deliveries to customers by 10.5% in fiscal year 2018 to 518 thousand vehicles. Almost all markets contributed to this rise, with the most significant increases achieved in Spain (+13.3%), Germany markets contributed to this rise, with the most significant increases achieved in Spain (+13.3%), Germany markets contributed to this rise, with the most significant increases achieved in Spain (+13.3%), Germany (+11.8%), France (+31.3%) and the United Kingdom (+12.0%). (+11.8%), France (+31.3%) and the United Kingdom (+12.0%). (+11.8%), France (+31.3%) and the United Kingdom (+12.0%). At 608 thousand units, the SEAT brand’s unit sales were up 2.2% year-on-year in the reporting period. The At 608 thousand units, the SEAT brand’s unit sales were up 2.2% year-on-year in the reporting period. The At 608 thousand units, the SEAT brand’s unit sales were up 2.2% year-on-year in the reporting period. The A1 and Q3 models produced for Audi are also included in this figure. The Arona was particularly popular. A1 and Q3 models produced for Audi are also included in this figure. The Arona was particularly popular. A1 and Q3 models produced for Audi are also included in this figure. The Arona was particularly popular. SEAT produced 528 thousand vehicles in the past year. This was 10.2% more than in 2017. SEAT produced 528 thousand vehicles in the past year. This was 10.2% more than in 2017. SEAT produced 528 thousand vehicles in the past year. This was 10.2% more than in 2017. S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S 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 the reporting year. Sales revenue was €10.2 billion, exceeding the previous SEAT continued its upward trend in the reporting year. Sales revenue was €10.2 billion, exceeding the previous SEAT continued its upward trend in the reporting year. Sales revenue was €10.2 billion, exceeding the previous year’s record figure by 3.1%. Operating profit rose to €254 (191) million, which was also a new record. Positive year’s record figure by 3.1%. Operating profit rose to €254 (191) million, which was also a new record. Positive year’s record figure by 3.1%. Operating profit rose to €254 (191) million, which was also a new record. Positive volume and mix effects more than offset the negative impact of cost increases and exchange rates. The Seat volume and mix effects more than offset the negative impact of cost increases and exchange rates. The Seat volume and mix effects more than offset the negative impact of cost increases and exchange rates. The Seat brand’s operating return on sales improved to 2.5 (1.9)%. brand’s operating return on sales improved to 2.5 (1.9)%. brand’s operating return on sales improved to 2.5 (1.9)%. 33.4% 33.4% 33.4% Increase in profit in 2018 Increase in profit in 2018 Increase in profit in 2018 Divisions Divisions Divisions SEAT SEAT SEAT 31 31 31 P R O D U C T I O N P R O D U C T I O N P R O D U C T I O N S E AT B R A N D S E AT B R A N D S E AT B R A N D Units Units Units Leon Leon Leon Ibiza Ibiza Ibiza Arona Arona Arona Ateca Ateca Ateca Alhambra Alhambra Alhambra Mii Mii Mii Toledo Toledo Toledo Tarraco Tarraco Tarraco 2018 2018 2018 2017 2017 2017 2018 2018 2018 2017 2017 2017 % % % 159,486 159,486 159,486 120,287 120,287 120,287 110,926 110,926 110,926 90,824 90,824 90,824 19,588 19,588 19,588 14,369 14,369 14,369 10,151 10,151 10,151 2,398 2,398 2,398 163,306 163,306 163,306 Deliveries (thousand units) Deliveries (thousand units) Deliveries (thousand units) 160,377 160,377 160,377 Vehicle sales Vehicle sales Vehicle sales 17,527 17,527 17,527 Production Production Production 518 518 518 608 608 608 528 528 528 77,483 77,483 77,483 Sales revenue (€ million) Sales revenue (€ million) Sales revenue (€ million) 10,202 10,202 10,202 33,638 33,638 33,638 Operating result Operating result Operating result 13,825 13,825 13,825 Operating return on sales (%) Operating return on sales (%) Operating return on sales (%) 254 254 254 2.5 2.5 2.5 468 468 468 595 595 595 479 479 479 9,892 9,892 9,892 191 191 191 1.9 1.9 1.9 +10.5 +10.5 +10.5 +2.2 +2.2 +2.2 +10.2 +10.2 +10.2 +3.1 +3.1 +3.1 +33.4 +33.4 +33.4 13,146 13,146 13,146 – – – 528,029 528,029 528,029 479,302 479,302 479,302 Tarraco Tarraco Tarraco D E L I V E R I E S B Y M A R K E T in percent D E L I V E R I E S B Y M A R K E T D E L I V E R I E S B Y M A R K E T in percent in percent Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets North America North America North America North America North America North America South America South America South America South America South America South America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific 95.3 % 95.3 % 95.3 % 95.3 % 95.3 % 95.3 % 4.5 % 4.5 % 4.5 % 4.5 % 4.5 % 4.5 % 0.2 % 0.2 % 0.2 % 0.2 % 0.2 % 0.2 % 0.1 % 0.1 % 0.1 % 0.1 % 0.1 % 0.1 % i i i F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.seat.com www.seat.com F U R T H E R I N F O R M A T I O N www.seat.com F U R T H E R I N F O R M A T I O N www.seat.com F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.seat.com www.seat.com 32 32 32 Bentley Bentley Bentley Divisions Divisions Divisions With the Bentayga Hybrid, the British luxury brand Bentley is taking the first step With the Bentayga Hybrid, the British luxury brand Bentley is taking the first step With the Bentayga Hybrid, the British luxury brand Bentley is taking the first step toward a fully electric product range. Delays to the start-up of the new Continental GT toward a fully electric product range. Delays to the start-up of the new Continental GT toward a fully electric product range. Delays to the start-up of the new Continental GT weighed on operating profit. weighed on operating profit. weighed on operating profit. B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T 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. Bentley presented the world’s first luxury The Bentley brand is defined by exclusivity, elegance and power. Bentley presented the world’s first luxury The Bentley brand is defined by exclusivity, elegance and power. Bentley presented the world’s first luxury hybrid vehicle during the reporting year. With the Bentayga Hybrid, the British luxury brand Bentley is taking a hybrid vehicle during the reporting year. With the Bentayga Hybrid, the British luxury brand Bentley is taking a hybrid vehicle during the reporting year. With the Bentayga Hybrid, the British luxury brand Bentley is taking a first step on the path toward a fully electric product range. At the heart of the plug-in hybrid model are a highly first step on the path toward a fully electric product range. At the heart of the plug-in hybrid model are a highly first step on the path toward a fully electric product range. At the heart of the plug-in hybrid model are a highly efficient electric motor and a new turbocharged 3.0 l V6 petrol engine. The Bentayga Hybrid can cover approxi- efficient electric motor and a new turbocharged 3.0 l V6 petrol engine. The Bentayga Hybrid can cover approxi- efficient electric motor and a new turbocharged 3.0 l V6 petrol engine. The Bentayga Hybrid can cover approxi- mately 50 km in pure electric mode. With CO2 emissions of 75 g/km, it is currently the brand’s most efficient mately 50 km in pure electric mode. With CO2 emissions of 75 g/km, it is currently the brand’s most efficient mately 50 km in pure electric mode. With CO2 emissions of 75 g/km, it is currently the brand’s most efficient model. Bentley also presented the powerful Bentayga V8 for the first time in the reporting year. It combines model. Bentley also presented the powerful Bentayga V8 for the first time in the reporting year. It combines model. Bentley also presented the powerful Bentayga V8 for the first time in the reporting year. It combines luxury with sharp performance and strong practicality. Its V8 twin-turbo engine with 404 kW (550 PS) of power luxury with sharp performance and strong practicality. Its V8 twin-turbo engine with 404 kW (550 PS) of power luxury with sharp performance and strong practicality. Its V8 twin-turbo engine with 404 kW (550 PS) of power accelerates the vehicle from 0 to 100 km/h in 4.5 s. The new Continental GT had a very positive reception in accelerates the vehicle from 0 to 100 km/h in 4.5 s. The new Continental GT had a very positive reception in accelerates the vehicle from 0 to 100 km/h in 4.5 s. The new Continental GT had a very positive reception in 2018, both from its first customers and in the media. It is very popular worldwide and will be launched in the 2018, both from its first customers and in the media. It is very popular worldwide and will be launched in the 2018, both from its first customers and in the media. It is very popular worldwide and will be launched in the USA and in China in 2019. The new Continental GT Convertible was unveiled at the end of 2018, and deliveries USA and in China in 2019. The new Continental GT Convertible was unveiled at the end of 2018, and deliveries USA and in China in 2019. The new Continental GT Convertible was unveiled at the end of 2018, and deliveries will commence in spring 2019. will commence in spring 2019. will commence in spring 2019. At 10,494 (11,089) vehicles, the Bentley brand’s sales in 2018 did not match the previous year’s record level. At 10,494 (11,089) vehicles, the Bentley brand’s sales in 2018 did not match the previous year’s record level. At 10,494 (11,089) vehicles, the Bentley brand’s sales in 2018 did not match the previous year’s record level. While deliveries fell by 14.0% in the USA, they were up 10.9% in Asia-Pacific. While deliveries fell by 14.0% in the USA, they were up 10.9% in Asia-Pacific. While deliveries fell by 14.0% in the USA, they were up 10.9% in Asia-Pacific. In the 2018 reporting year, Bentley sold 9,559 (10,566) vehicles worldwide. This was below the previous In the 2018 reporting year, Bentley sold 9,559 (10,566) vehicles worldwide. This was below the previous In the 2018 reporting year, Bentley sold 9,559 (10,566) vehicles worldwide. This was below the previous year’s level, primarily as a result of the new generation of the Continental GT. The Bentayga was the most year’s level, primarily as a result of the new generation of the Continental GT. The Bentayga was the most year’s level, primarily as a result of the new generation of the Continental GT. The Bentayga was the most sought-after model. sought-after model. sought-after model. In 2018, the Bentley brand manufactured 9,115 vehicles. The 13.6% decline versus the prior year was mainly In 2018, the Bentley brand manufactured 9,115 vehicles. The 13.6% decline versus the prior year was mainly In 2018, the Bentley brand manufactured 9,115 vehicles. The 13.6% decline versus the prior year was mainly attributable to product cycles. attributable to product cycles. attributable to product cycles. S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S The Bentley brand generated sales revenue of €1.5 billion in the reporting period, a decline of 16.0% year-on- The Bentley brand generated sales revenue of €1.5 billion in the reporting period, a decline of 16.0% year-on- The Bentley brand generated sales revenue of €1.5 billion in the reporting period, a decline of 16.0% year-on- year. Operating result fell to €–288 (55) million. In particular, delays to the start-up of the new Continental GT as year. Operating result fell to €–288 (55) million. In particular, delays to the start-up of the new Continental GT as year. Operating result fell to €–288 (55) million. In particular, delays to the start-up of the new Continental GT as well as exchange rate effects had a negative impact. The operating return on sales amounted to –18.6 (3.0)%. well as exchange rate effects had a negative impact. The operating return on sales amounted to –18.6 (3.0)%. well as exchange rate effects had a negative impact. The operating return on sales amounted to –18.6 (3.0)%. 75 g/km 75 g/km 75 g/km The Bentayga Hybrid’s CO2 emissions The Bentayga Hybrid’s CO2 emissions The Bentayga Hybrid’s CO2 emissions Divisions Divisions Divisions Bentley Bentley Bentley 33 33 33 P R O D U C T I O N P R O D U C T I O N P R O D U C T I O N B E N T L E Y B R A N D B E N T L E Y B R A N D B E N T L E Y B R A N D Units Units Units Bentayga Bentayga Bentayga Continental GT Coupé Continental GT Coupé Continental GT Coupé Flying Spur Flying Spur Flying Spur Mulsanne Mulsanne Mulsanne Continental GT Convertible Continental GT Convertible Continental GT Convertible 2018 2018 2018 2017 2017 2017 2018 2018 2018 2017 2017 2017 % % % 4,072 4,072 4,072 2,841 2,841 2,841 1,627 1,627 1,627 547 547 547 28 28 28 9,115 9,115 9,115 4,849 4,849 4,849 Deliveries (units) Deliveries (units) Deliveries (units) 1,345 1,345 1,345 Vehicle sales Vehicle sales Vehicle sales 2,295 2,295 2,295 Production Production Production 595 595 595 Sales revenue (€ million) Sales revenue (€ million) Sales revenue (€ million) 1,468 1,468 1,468 Operating result Operating result Operating result 10,552 10,552 10,552 Operating return on sales (%) Operating return on sales (%) Operating return on sales (%) 10,494 10,494 10,494 9,559 9,559 9,559 9,115 9,115 9,115 1,548 1,548 1,548 –288 –288 –288 –18.6 –18.6 –18.6 11,089 11,089 11,089 10,566 10,566 10,566 10,552 10,552 10,552 1,843 1,843 1,843 55 55 55 3.0 3.0 3.0 –5.4 –5.4 –5.4 –9.5 –9.5 –9.5 –13.6 –13.6 –13.6 –16.0 –16.0 –16.0 x x x Bentayga Hybrid Bentayga Hybrid Bentayga Hybrid D E L I V E R I E S B Y M A R K E T in percent D E L I V E R I E S B Y M A R K E T D E L I V E R I E S B Y M A R K E T in percent in percent Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets North America North America North America North America North America North America South America South America South America South America South America South America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific 46.1 % 46.1 % 46.1 % 46.1 % 46.1 % 46.1 % 21.2 % 21.2 % 21.2 % 21.2 % 21.2 % 21.2 % 0.1 % 0.1 % 0.1 % 0.1 % 0.1 % 0.1 % 32.6 % 32.6 % 32.6 % 32.6 % 32.6 % 32.6 % i i i F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.bentleymotors.com www.bentleymotors.com F U R T H E R I N F O R M A T I O N www.bentleymotors.com F U R T H E R I N F O R M A T I O N www.bentleymotors.com F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.bentleymotors.com www.bentleymotors.com 34 34 34 Porsche Porsche Porsche Divisions Divisions Divisions Porsche looks back on another successful fiscal year; sales revenue and profit Porsche looks back on another successful fiscal year; sales revenue and profit Porsche looks back on another successful fiscal year; sales revenue and profit exceed the prior-year figures. The first all-electric Porsche is set to launch in 2019 exceed the prior-year figures. The first all-electric Porsche is set to launch in 2019 exceed the prior-year figures. The first all-electric Porsche is set to launch in 2019 under the name Taycan. under the name Taycan. under the name Taycan. B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T 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 Exclusivity and social acceptance, innovation and tradition, performance and everyday usability, design and Exclusivity and social acceptance, innovation and tradition, performance and everyday usability, design and functionality – these are the brand values of sports car manufacturer Porsche. The brand presented the new functionality – these are the brand values of sports car manufacturer Porsche. The brand presented the new functionality – these are the brand values of sports car manufacturer Porsche. The brand presented the new generation of the Macan in 2018. The SUV has been extensively enhanced in terms of design, comfort, generation of the Macan in 2018. The SUV has been extensively enhanced in terms of design, comfort, generation of the Macan in 2018. The SUV has been extensively enhanced in terms of design, comfort, connectivity and driving dynamics. The Porsche Communication Management with a 10.9-inch touchscreen connectivity and driving dynamics. The Porsche Communication Management with a 10.9-inch touchscreen connectivity and driving dynamics. The Porsche Communication Management with a 10.9-inch touchscreen enables access to new digital functions, such as intelligent voice control and the online navigation provided as enables access to new digital functions, such as intelligent voice control and the online navigation provided as enables access to new digital functions, such as intelligent voice control and the online navigation provided as standard. A high-performance sports car also made its debut: the Porsche 911 GT3 RS, which generates 383 kW standard. A high-performance sports car also made its debut: the Porsche 911 GT3 RS, which generates 383 kW standard. A high-performance sports car also made its debut: the Porsche 911 GT3 RS, which generates 383 kW (520 PS) and accelerates from 0 to 100 km/h in 3.2 s. Its top speed is an impressive 312 km/h. The new gener- (520 PS) and accelerates from 0 to 100 km/h in 3.2 s. Its top speed is an impressive 312 km/h. The new gener- (520 PS) and accelerates from 0 to 100 km/h in 3.2 s. Its top speed is an impressive 312 km/h. The new gener- ation of the 911, which was presented at the end of 2018, will launch in 2019, once again setting standards in ation of the 911, which was presented at the end of 2018, will launch in 2019, once again setting standards in ation of the 911, which was presented at the end of 2018, will launch in 2019, once again setting standards in terms of exclusive sportiness. Intelligent controls and chassis elements as well as innovative assistance systems terms of exclusive sportiness. Intelligent controls and chassis elements as well as innovative assistance systems terms of exclusive sportiness. Intelligent controls and chassis elements as well as innovative assistance systems combine the uncompromising dynamism of the classic rear-engine sports car with the demands of the digital combine the uncompromising dynamism of the classic rear-engine sports car with the demands of the digital combine the uncompromising dynamism of the classic rear-engine sports car with the demands of the digital world. Porsche announced in 2018 that the brand’s all-electric model, previously known as the Mission E world. Porsche announced in 2018 that the brand’s all-electric model, previously known as the Mission E world. Porsche announced in 2018 that the brand’s all-electric model, previously known as the Mission E concept car, will be marketed as the Porsche Taycan from the end of 2019. The brand also presented an electric- concept car, will be marketed as the Porsche Taycan from the end of 2019. The brand also presented an electric- concept car, will be marketed as the Porsche Taycan from the end of 2019. The brand also presented an electric- driven crossover utility vehicle: the Mission E Cross Turismo concept study. Its strengths are the exciting driven crossover utility vehicle: the Mission E Cross Turismo concept study. Its strengths are the exciting driven crossover utility vehicle: the Mission E Cross Turismo concept study. Its strengths are the exciting design, striking off-road elements, and innovative display and control interfaces with touchscreen and gaze design, striking off-road elements, and innovative display and control interfaces with touchscreen and gaze design, striking off-road elements, and innovative display and control interfaces with touchscreen and gaze control. control. control. In the reporting period, Porsche delivered 256 thousand sports cars, an increase of 4.0% on the previous In the reporting period, Porsche delivered 256 thousand sports cars, an increase of 4.0% on the previous In the reporting period, Porsche delivered 256 thousand sports cars, an increase of 4.0% on the previous year. China remained the largest single market for Porsche with 80 thousand vehicles (+12.0%). Sales in North year. China remained the largest single market for Porsche with 80 thousand vehicles (+12.0%). Sales in North year. China remained the largest single market for Porsche with 80 thousand vehicles (+12.0%). Sales in North America rose by 3.7%. America rose by 3.7%. America rose by 3.7%. At 253 thousand vehicles, Porsche’s unit sales exceeded the prior-year figure by 1.9% in 2018. In particular, At 253 thousand vehicles, Porsche’s unit sales exceeded the prior-year figure by 1.9% in 2018. In particular, At 253 thousand vehicles, Porsche’s unit sales exceeded the prior-year figure by 1.9% in 2018. In particular, the Panamera and Cayenne achieved impressive growth; sales of the 911 were also up. the Panamera and Cayenne achieved impressive growth; sales of the 911 were also up. the Panamera and Cayenne achieved impressive growth; sales of the 911 were also up. Porsche produced 268 thousand vehicles in the reporting year. This was 5.0% more than in the previous Porsche produced 268 thousand vehicles in the reporting year. This was 5.0% more than in the previous Porsche produced 268 thousand vehicles in the reporting year. This was 5.0% more than in the previous year. year. year. S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S The 2018 fiscal year was once again very successful for Porsche: Porsche Automotive’s sales revenue rose by The 2018 fiscal year was once again very successful for Porsche: Porsche Automotive’s sales revenue rose by The 2018 fiscal year was once again very successful for Porsche: Porsche Automotive’s sales revenue rose by 9.2% to €23.7 (21.7) billion. Operating profit increased by 2.7% year-on-year to €4.1 billion. The rise was partic- 9.2% to €23.7 (21.7) billion. Operating profit increased by 2.7% year-on-year to €4.1 billion. The rise was partic- 9.2% to €23.7 (21.7) billion. Operating profit increased by 2.7% year-on-year to €4.1 billion. The rise was partic- ularly attributable to the increased volume and positive mix effects, while higher research and development ularly attributable to the increased volume and positive mix effects, while higher research and development ularly attributable to the increased volume and positive mix effects, while higher research and development costs, particularly for e-mobility and digitalization had an offsetting effect. The operating return on sales stood costs, particularly for e-mobility and digitalization had an offsetting effect. The operating return on sales stood costs, particularly for e-mobility and digitalization had an offsetting effect. The operating return on sales stood at 17.4 (18.5)%. at 17.4 (18.5)%. at 17.4 (18.5)%. 9.2% 9.2% 9.2% Increase in sales revenue in 2018 Increase in sales revenue in 2018 Increase in sales revenue in 2018 Divisions Divisions Divisions Porsche Porsche Porsche 35 35 35 P R O D U C T I O N P R O D U C T I O N 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 P O R S C H E A U TO M OT I V E 1 P O R S C H E A U TO M OT I V E 1 Units Units Units Macan Macan Macan Cayenne Cayenne Cayenne 911 Coupé/Cabriolet 911 Coupé/Cabriolet 911 Coupé/Cabriolet Panamera Panamera Panamera 718 Boxster/Cayman 718 Boxster/Cayman 718 Boxster/Cayman 2018 2018 2018 2017 2017 2017 2018 2018 2018 2017 2017 2017 % % % 93,953 93,953 93,953 79,111 79,111 79,111 36,236 36,236 36,236 35,493 35,493 35,493 23,658 23,658 23,658 98,763 98,763 98,763 Deliveries (thousand units) Deliveries (thousand units) Deliveries (thousand units) 59,068 59,068 59,068 Vehicle sales Vehicle sales Vehicle sales 33,820 33,820 33,820 Production Production Production 256 256 256 253 253 253 268 268 268 246 246 246 248 248 248 256 256 256 37,605 37,605 37,605 Sales revenue (€ million) Sales revenue (€ million) Sales revenue (€ million) 23,668 23,668 23,668 21,674 21,674 21,674 26,427 26,427 26,427 Operating result Operating result Operating result 268,451 268,451 268,451 255,683 255,683 255,683 Operating return on sales (%) Operating return on sales (%) Operating return on sales (%) 4,110 4,110 4,110 17.4 17.4 17.4 4,003 4,003 4,003 18.5 18.5 18.5 +4.0 +4.0 +4.0 +1.9 +1.9 +1.9 +5.0 +5.0 +5.0 +9.2 +9.2 +9.2 +2.7 +2.7 +2.7 1 Porsche (Automotive and Financial Services): sales revenue €25,784 (23,491) million, 1 Porsche (Automotive and Financial Services): sales revenue €25,784 (23,491) million, 1 Porsche (Automotive and Financial Services): sales revenue €25,784 (23,491) million, operating profit €4,291 (4,144) million. operating profit €4,291 (4,144) million. operating profit €4,291 (4,144) million. Macan Macan Macan D E L I V E R I E S B Y M A R K E T in percent D E L I V E R I E S B Y M A R K E T D E L I V E R I E S B Y M A R K E T in percent in percent Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets North America North America North America North America North America North America South America South America South America South America South America South America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific 32.8 % 32.8 % 32.8 % 32.8 % 32.8 % 32.8 % 26.4 % 26.4 % 26.4 % 26.4 % 26.4 % 26.4 % 1.1 % 1.1 % 1.1 % 1.1 % 1.1 % 1.1 % 39.7 % 39.7 % 39.7 % 39.7 % 39.7 % 39.7 % i i i F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.porsche.com www.porsche.com F U R T H E R I N F O R M A T I O N www.porsche.com F U R T H E R I N F O R M A T I O N www.porsche.com F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.porsche.com www.porsche.com 36 36 36 Volkswagen Commercial Vehicles Volkswagen Commercial Vehicles Volkswagen Commercial Vehicles Divisions Divisions Divisions At the IAA Commercial Vehicles trade fair in Hanover, Volkswagen Commercial Vehicles At the IAA Commercial Vehicles trade fair in Hanover, Volkswagen Commercial Vehicles At the IAA Commercial Vehicles trade fair in Hanover, Volkswagen Commercial Vehicles impressed motor show visitors with a wealth of solutions ready for series production impressed motor show visitors with a wealth of solutions ready for series production impressed motor show visitors with a wealth of solutions ready for series production for using e-mobility in commercial contexts. for using e-mobility in commercial contexts. for using e-mobility in commercial contexts. B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T As a leading manufacturer of light commercial vehicles, Volkswagen Commercial Vehicles is making funda- As a leading manufacturer of light commercial vehicles, Volkswagen Commercial Vehicles is making funda- As a leading manufacturer of light commercial vehicles, Volkswagen Commercial Vehicles is making funda- mental, lasting changes to the way goods and services are distributed in cities in order to improve quality of life, mental, lasting changes to the way goods and services are distributed in cities in order to improve quality of life, mental, lasting changes to the way goods and services are distributed in cities in order to improve quality of life, especially in inner city areas. At the IAA Commercial Vehicles 2018 in Hanover, the brand presented a number especially in inner city areas. At the IAA Commercial Vehicles 2018 in Hanover, the brand presented a number especially in inner city areas. At the IAA Commercial Vehicles 2018 in Hanover, the brand presented a number of compelling solutions for using commercial e-mobility in urban areas on a sustainable basis. The e-Crafter of compelling solutions for using commercial e-mobility in urban areas on a sustainable basis. The e-Crafter of compelling solutions for using commercial e-mobility in urban areas on a sustainable basis. The e-Crafter has now become an important component of the Hanover-based car manufacturer’s delivery range. Another has now become an important component of the Hanover-based car manufacturer’s delivery range. Another has now become an important component of the Hanover-based car manufacturer’s delivery range. Another two all-electric vehicles for urban traffic – the ABT e-Caddy and ABT e-Transporter – have also been added. With two all-electric vehicles for urban traffic – the ABT e-Caddy and ABT e-Transporter – have also been added. With two all-electric vehicles for urban traffic – the ABT e-Caddy and ABT e-Transporter – have also been added. With a top speed of 120 km/h, the ABT e-Caddy can cover approximately 200 km on a single battery charge. However, a top speed of 120 km/h, the ABT e-Caddy can cover approximately 200 km on a single battery charge. However, a top speed of 120 km/h, the ABT e-Caddy can cover approximately 200 km on a single battery charge. However, the highlight of Volkswagen Commercial Vehicles’ presence at the IAA was the ID. BUZZ CARGO concept car. The the highlight of Volkswagen Commercial Vehicles’ presence at the IAA was the ID. BUZZ CARGO concept car. The the highlight of Volkswagen Commercial Vehicles’ presence at the IAA was the ID. BUZZ CARGO concept car. The delivery van of tomorrow is all-electric, connected and automated for urban traffic. The successor of the “Bulli” delivery van of tomorrow is all-electric, connected and automated for urban traffic. The successor of the “Bulli” delivery van of tomorrow is all-electric, connected and automated for urban traffic. The successor of the “Bulli” is intended to meet the need for modern, emission-free and sustainable transport of people and goods. With is intended to meet the need for modern, emission-free and sustainable transport of people and goods. With is intended to meet the need for modern, emission-free and sustainable transport of people and goods. With battery ranges of 330 to more than 550 km achieved with the new Modular Electric Drive Toolkit (MEB) and a battery ranges of 330 to more than 550 km achieved with the new Modular Electric Drive Toolkit (MEB) and a battery ranges of 330 to more than 550 km achieved with the new Modular Electric Drive Toolkit (MEB) and a digitalized charging system, the brand will address the future needs of its customer groups. digitalized charging system, the brand will address the future needs of its customer groups. digitalized charging system, the brand will address the future needs of its customer groups. Deliveries by Volkswagen Commercial Vehicles in the past fiscal year amounted to 500 thousand vehicles, Deliveries by Volkswagen Commercial Vehicles in the past fiscal year amounted to 500 thousand vehicles, Deliveries by Volkswagen Commercial Vehicles in the past fiscal year amounted to 500 thousand vehicles, representing a slight increase of 0.4% on the previous year. Sales rose by 2.0% in Europe and 7.5% in South representing a slight increase of 0.4% on the previous year. Sales rose by 2.0% in Europe and 7.5% in South representing a slight increase of 0.4% on the previous year. Sales rose by 2.0% in Europe and 7.5% in South America. America. America. Following Group-internal restructuring in South America, unit sales declined by 5.9% to 469 thousand Following Group-internal restructuring in South America, unit sales declined by 5.9% to 469 thousand Following Group-internal restructuring in South America, unit sales declined by 5.9% to 469 thousand vehicles. The Crafter was especially sought-after. vehicles. The Crafter was especially sought-after. vehicles. The Crafter was especially sought-after. The Volkswagen Commercial Vehicles brand produced 519 thousand vehicles in the reporting year. This The Volkswagen Commercial Vehicles brand produced 519 thousand vehicles in the reporting year. This The Volkswagen Commercial Vehicles brand produced 519 thousand vehicles in the reporting year. This represents a year-on-year increase of 6.0%. The two-millionth Caddy rolled off the assembly line at Volkswagen represents a year-on-year increase of 6.0%. The two-millionth Caddy rolled off the assembly line at Volkswagen represents a year-on-year increase of 6.0%. The two-millionth Caddy rolled off the assembly line at Volkswagen Poznan in March. The main plant in Hanover had two reasons to celebrate in 2018: the 100 thousandth Poznan in March. The main plant in Hanover had two reasons to celebrate in 2018: the 100 thousandth Poznan in March. The main plant in Hanover had two reasons to celebrate in 2018: the 100 thousandth California campervan was produced at the end of May, and in early June staff completed the 500 thousandth California campervan was produced at the end of May, and in early June staff completed the 500 thousandth California campervan was produced at the end of May, and in early June staff completed the 500 thousandth vehicle in the current Transporter series. vehicle in the current Transporter series. vehicle in the current Transporter series. S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S 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 Volkswagen Commercial Vehicles in fiscal year 2018 was €11.9 (11.9) billion. Despite positive Sales revenue at Volkswagen Commercial Vehicles in fiscal year 2018 was €11.9 (11.9) billion. Despite positive Sales revenue at Volkswagen Commercial Vehicles in fiscal year 2018 was €11.9 (11.9) billion. Despite positive mix effects and material cost optimization, operating profit declined to €780 (853) million, primarily as a result mix effects and material cost optimization, operating profit declined to €780 (853) million, primarily as a result mix effects and material cost optimization, operating profit declined to €780 (853) million, primarily as a result of higher upfront expenditure for new products, unfavorable exchange rate trends and the challenges arising of higher upfront expenditure for new products, unfavorable exchange rate trends and the challenges arising of higher upfront expenditure for new products, unfavorable exchange rate trends and the challenges arising from the WLTP. The operating return on sales fell to 6.6 (7.2)%. from the WLTP. The operating return on sales fell to 6.6 (7.2)%. from the WLTP. The operating return on sales fell to 6.6 (7.2)%. 500 thousand 500 thousand 500 thousand Vehicles produced in the current T series Vehicles produced in the current T series Vehicles produced in the current T series Divisions Divisions Divisions Volkswagen Commercial Vehicles Volkswagen Commercial Vehicles Volkswagen Commercial Vehicles 37 37 37 P R O D U C T I O N P R O D U C T I O N 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 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 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 Units Units 2018 2018 2018 2017 2017 2017 2018 2018 2018 2017 2017 2017 % % % Caravelle/Multivan, Kombi Caravelle/Multivan, Kombi Caravelle/Multivan, Kombi 115,525 115,525 115,525 115,553 115,553 115,553 Deliveries (thousand units) Deliveries (thousand units) Deliveries (thousand units) Caddy Kombi Caddy Kombi Caddy Kombi Amarok Amarok Amarok Transporter Transporter Transporter Caddy Caddy Caddy Crafter Crafter Crafter 89,154 89,154 89,154 88,950 88,950 88,950 86,286 86,286 86,286 71,881 71,881 71,881 67,151 67,151 67,151 93,167 93,167 93,167 Vehicle sales Vehicle sales Vehicle sales 80,328 80,328 80,328 Production Production Production 92,876 92,876 92,876 Sales revenue (€ million) Sales revenue (€ million) Sales revenue (€ million) 11,875 11,875 11,875 11,909 11,909 11,909 71,501 71,501 71,501 Operating result Operating result Operating result 36,313 36,313 36,313 Operating return on sales (%) Operating return on sales (%) Operating return on sales (%) 780 780 780 6.6 6.6 6.6 853 853 853 7.2 7.2 7.2 500 500 500 469 469 469 519 519 519 498 498 498 498 498 498 490 490 490 +0.4 +0.4 +0.4 –5.9 –5.9 –5.9 +6.0 +6.0 +6.0 –0.3 –0.3 –0.3 –8.6 –8.6 –8.6 518,947 518,947 518,947 489,738 489,738 489,738 e-Crafter e-Crafter e-Crafter D E L I V E R I E S B Y M A R K E T in percent D E L I V E R I E S B Y M A R K E T D E L I V E R I E S B Y M A R K E T in percent in percent Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets North America North America North America North America North America North America South America South America South America South America South America South America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific 83.8 % 83.8 % 83.8 % 83.8 % 83.8 % 83.8 % 1.9 % 1.9 % 1.9 % 1.9 % 1.9 % 1.9 % 8.9 % 8.9 % 8.9 % 8.9 % 8.9 % 8.9 % 5.4 % 5.4 % 5.4 % 5.4 % 5.4 % 5.4 % i i i F U R T H E R I N F O R M A T I O N www.volkswagen-commercial-vehicles.com F U R T H E R I N F O R M A T I O N www.volkswagen-commercial-vehicles.com F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.volkswagen-commercial-vehicles.com www.volkswagen-commercial-vehicles.com F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.volkswagen-commercial-vehicles.com www.volkswagen-commercial-vehicles.com 38 38 38 TRATON GROUP TRATON GROUP TRATON GROUP Divisions Divisions Divisions In 2018, the TRATON GROUP continued to consistently pursue its goal of becoming a In 2018, the TRATON GROUP continued to consistently pursue its goal of becoming a In 2018, the TRATON GROUP continued to consistently pursue its goal of becoming a global champion of the commercial vehicle industry. Innovative technological solutions, global champion of the commercial vehicle industry. Innovative technological solutions, global champion of the commercial vehicle industry. Innovative technological solutions, sales successes and the expansion of strategic partnerships all contributed to this. sales successes and the expansion of strategic partnerships all contributed to this. sales successes and the expansion of strategic partnerships all contributed to this. B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T With its MAN, Scania, Volkswagen Caminhões e Ônibus and RIO brands, TRATON SE aims to become a global With its MAN, Scania, Volkswagen Caminhões e Ônibus and RIO brands, TRATON SE aims to become a global With its MAN, Scania, Volkswagen Caminhões e Ônibus and RIO brands, TRATON SE aims to become a global champion of the commercial vehicle industry and drive the transformation of the logistics sector. Its mission is champion of the commercial vehicle industry and drive the transformation of the logistics sector. Its mission is champion of the commercial vehicle industry and drive the transformation of the logistics sector. Its mission is to reinvent transport for future generations: “Transforming Transportation”. With this purpose in mind, Volks- to reinvent transport for future generations: “Transforming Transportation”. With this purpose in mind, Volks- to reinvent transport for future generations: “Transforming Transportation”. With this purpose in mind, Volks- wagen Truck & Bus, as the company was known until mid-2018, has given itself the new name TRATON, which wagen Truck & Bus, as the company was known until mid-2018, has given itself the new name TRATON, which wagen Truck & Bus, as the company was known until mid-2018, has given itself the new name TRATON, which stands, among other things, for tradition, transport, transformation and tonnage. Other milestones in the stands, among other things, for tradition, transport, transformation and tonnage. Other milestones in the stands, among other things, for tradition, transport, transformation and tonnage. Other milestones in the reporting year were its conversion into a stock corporation and the achievement of capital market readiness. reporting year were its conversion into a stock corporation and the achievement of capital market readiness. reporting year were its conversion into a stock corporation and the achievement of capital market readiness. Under the TRATON name, the group aims to become a leader in profitability. It made major progress Under the TRATON name, the group aims to become a leader in profitability. It made major progress Under the TRATON name, the group aims to become a leader in profitability. It made major progress towards this objective in 2018. TRATON once again leads the truck market in the core markets of Europe and towards this objective in 2018. TRATON once again leads the truck market in the core markets of Europe and towards this objective in 2018. TRATON once again leads the truck market in the core markets of Europe and Brazil and considerably increased unit sales by 13.7% in the reporting year to 233 (205) thousand vehicles Brazil and considerably increased unit sales by 13.7% in the reporting year to 233 (205) thousand vehicles Brazil and considerably increased unit sales by 13.7% in the reporting year to 233 (205) thousand vehicles globally. Scania’s new generation of trucks and the newly developed MAN Lion’s City Bus both contributed to this globally. Scania’s new generation of trucks and the newly developed MAN Lion’s City Bus both contributed to this globally. Scania’s new generation of trucks and the newly developed MAN Lion’s City Bus both contributed to this success. success. success. TRATON reinforced its claim to innovation in 2018 with pioneering projects. These included the joint pla- TRATON reinforced its claim to innovation in 2018 with pioneering projects. These included the joint pla- TRATON reinforced its claim to innovation in 2018 with pioneering projects. These included the joint pla- tooning project between MAN and DB Schenker on the A9 highway between Munich and Nuremberg and the tooning project between MAN and DB Schenker on the A9 highway between Munich and Nuremberg and the tooning project between MAN and DB Schenker on the A9 highway between Munich and Nuremberg and the fully autonomous Scania tipper truck in an Australian mine. TRATON also made progress in the field of e-mobil- fully autonomous Scania tipper truck in an Australian mine. TRATON also made progress in the field of e-mobil- fully autonomous Scania tipper truck in an Australian mine. TRATON also made progress in the field of e-mobil- ity: Scania has been testing electric city buses in Sweden under everyday driving conditions since March 2018. ity: Scania has been testing electric city buses in Sweden under everyday driving conditions since March 2018. ity: Scania has been testing electric city buses in Sweden under everyday driving conditions since March 2018. MAN operates a test fleet of nine electric trucks for an Austrian consortium, gathering valuable experience in MAN operates a test fleet of nine electric trucks for an Austrian consortium, gathering valuable experience in MAN operates a test fleet of nine electric trucks for an Austrian consortium, gathering valuable experience in urban delivery traffic. In Brazil, Volkswagen Caminhões e Ônibus agreed to supply a beverage company with urban delivery traffic. In Brazil, Volkswagen Caminhões e Ônibus agreed to supply a beverage company with urban delivery traffic. In Brazil, Volkswagen Caminhões e Ônibus agreed to supply a beverage company with 1,600 battery-electric trucks by 2023. All the TRATON GROUP’s electric vehicles use a common electric platform, 1,600 battery-electric trucks by 2023. All the TRATON GROUP’s electric vehicles use a common electric platform, 1,600 battery-electric trucks by 2023. All the TRATON GROUP’s electric vehicles use a common electric platform, which is also found in the chargE school bus produced by the US alliance partner Navistar. which is also found in the chargE school bus produced by the US alliance partner Navistar. which is also found in the chargE school bus produced by the US alliance partner Navistar. At the IAA Commercial Vehicles 2018, the TRATON GROUP announced a new strategic partnership with the At the IAA Commercial Vehicles 2018, the TRATON GROUP announced a new strategic partnership with the At the IAA Commercial Vehicles 2018, the TRATON GROUP announced a new strategic partnership with the US company Solera. The partnership is intended to further expand TRATON’s digital capabilities and encom- US company Solera. The partnership is intended to further expand TRATON’s digital capabilities and encom- US company Solera. The partnership is intended to further expand TRATON’s digital capabilities and encom- passes fleet management, driver services and digital sales solutions for the commercial vehicle industry. passes fleet management, driver services and digital sales solutions for the commercial vehicle industry. passes fleet management, driver services and digital sales solutions for the commercial vehicle industry. TRATON also informed about the further development of the strategic partnership with Hino: the Japanese TRATON also informed about the further development of the strategic partnership with Hino: the Japanese TRATON also informed about the further development of the strategic partnership with Hino: the Japanese commercial vehicle manufacturer and TRATON agreed to establish a joint venture for procurement and to pool commercial vehicle manufacturer and TRATON agreed to establish a joint venture for procurement and to pool commercial vehicle manufacturer and TRATON agreed to establish a joint venture for procurement and to pool their energies in the field of e-mobility. A joint venture to build heavy trucks in China is also planned with the their energies in the field of e-mobility. A joint venture to build heavy trucks in China is also planned with the their energies in the field of e-mobility. A joint venture to build heavy trucks in China is also planned with the Chinese truck producer Sinotruk. With its investment in the manufacturer Navistar, TRATON is working on Chinese truck producer Sinotruk. With its investment in the manufacturer Navistar, TRATON is working on Chinese truck producer Sinotruk. With its investment in the manufacturer Navistar, TRATON is working on leveraging synergies in procurement and technologies in the USA. The aim of all strategic partnerships is to leveraging synergies in procurement and technologies in the USA. The aim of all strategic partnerships is to leveraging synergies in procurement and technologies in the USA. The aim of all strategic partnerships is to strengthen TRATON’s global presence. strengthen TRATON’s global presence. strengthen TRATON’s global presence. 13.7% 13.7% 13.7% Increase in deliveries in 2018 Increase in deliveries in 2018 Increase in deliveries in 2018 Divisions Divisions Divisions TRATON GROUP TRATON GROUP TRATON GROUP 39 39 39 P R O D U C T I O N P R O D U C T I O N P R O D U C T I O N D E L I V E R I E S D E L I V E R I E S D E L I V E R I E S Units Units Units Trucks Trucks Trucks Buses Buses Buses Light Commercial Vehicles Light Commercial Vehicles Light Commercial Vehicles 2018 2018 2018 2017 2017 2017 Units Units Units 2018 2018 2018 2017 2017 2017 207,235 207,235 207,235 188,234 188,234 188,234 Trucks Trucks Trucks 23,141 23,141 23,141 9,043 9,043 9,043 19,217 19,217 19,217 Buses Buses Buses 3,891 3,891 3,891 Light Commercial Vehicles Light Commercial Vehicles Light Commercial Vehicles 239,419 239,419 239,419 211,342 211,342 211,342 202,492 202,492 202,492 183,487 183,487 183,487 22,629 22,629 22,629 7,871 7,871 7,871 19,217 19,217 19,217 2,212 2,212 2,212 232,992 232,992 232,992 204,916 204,916 204,916 Strong brands Strong brands Strong brands D E L I V E R I E S B Y M A R K E T in percent D E L I V E R I E S B Y M A R K E T D E L I V E R I E S B Y M A R K E T in percent in percent Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets North America North America North America North America North America North America South America South America South America South America South America South America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific 71.2 % 71.2 % 71.2 % 71.2 % 71.2 % 71.2 % 1.5 % 1.5 % 1.5 % 1.5 % 1.5 % 1.5 % 20.5 % 20.5 % 20.5 % 20.5 % 20.5 % 20.5 % 6.8 % 6.8 % 6.8 % 6.8 % 6.8 % 6.8 % i i i F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.traton.com www.traton.com F U R T H E R I N F O R M A T I O N www.traton.com F U R T H E R I N F O R M A T I O N www.traton.com F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.traton.com www.traton.com 40 40 40 Scania Scania Scania Divisions Divisions Divisions Scania focused on alternative drive systems for its vehicles in fiscal year 2018 and Scania focused on alternative drive systems for its vehicles in fiscal year 2018 and Scania focused on alternative drive systems for its vehicles in fiscal year 2018 and exceeded the prior-year figures for unit sales, sales revenue and profit. exceeded the prior-year figures for unit sales, sales revenue and profit. exceeded the prior-year figures for 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 B U S I N E S S D E V E L O P M E N T 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 The Swedish brand Scania follows its values “Customer first”, “Respect for the individual”, “Elimination of The Swedish brand Scania follows its values “Customer first”, “Respect for the individual”, “Elimination of waste”, “Determination”, “Team Spirit” and “Integrity”. All the vehicles presented by Scania at the IAA Commer- waste”, “Determination”, “Team Spirit” and “Integrity”. All the vehicles presented by Scania at the IAA Commer- waste”, “Determination”, “Team Spirit” and “Integrity”. All the vehicles presented by Scania at the IAA Commer- cial Vehicles in 2018 had alternative drives. Among them was a hybrid truck for urban delivery traffic that can cial Vehicles in 2018 had alternative drives. Among them was a hybrid truck for urban delivery traffic that can cial Vehicles in 2018 had alternative drives. Among them was a hybrid truck for urban delivery traffic that can run on HVO (hydrotreated vegetable oil) or diesel. The model also has a 130 kW (177 PS) electric motor. Further- run on HVO (hydrotreated vegetable oil) or diesel. The model also has a 130 kW (177 PS) electric motor. Further- run on HVO (hydrotreated vegetable oil) or diesel. The model also has a 130 kW (177 PS) electric motor. Further- more, Scania celebrated the world premiere of its first alternative-fuel coach. Powered by liquefied natural gas more, Scania celebrated the world premiere of its first alternative-fuel coach. Powered by liquefied natural gas more, Scania celebrated the world premiere of its first alternative-fuel coach. Powered by liquefied natural gas (LNG), the Interlink MD has a range of up to 1,000 km and is therefore a modern, future-proof alternative in the (LNG), the Interlink MD has a range of up to 1,000 km and is therefore a modern, future-proof alternative in the (LNG), the Interlink MD has a range of up to 1,000 km and is therefore a modern, future-proof alternative in the coach segment. Scania rounds off its modern engine range with a wide offering of fuel-efficient Euro 6 engines coach segment. Scania rounds off its modern engine range with a wide offering of fuel-efficient Euro 6 engines coach segment. Scania rounds off its modern engine range with a wide offering of fuel-efficient Euro 6 engines that can run on diesel, biodiesel, biogas, bioethanol, compressed natural gas (CNG) and HVO. that can run on diesel, biodiesel, biogas, bioethanol, compressed natural gas (CNG) and HVO. that can run on diesel, biodiesel, biogas, bioethanol, compressed natural gas (CNG) and HVO. The key figures presented in this chapter encompass Scania’s truck and bus, industrial and marine engines The key figures presented in this chapter encompass Scania’s truck and bus, industrial and marine engines The key figures presented in this chapter encompass Scania’s truck and bus, industrial and marine engines and financial services businesses. and financial services businesses. and financial services businesses. Incoming orders at the Scania brand decreased by 10.9% year-on-year in fiscal year 2018 to 97 thousand Incoming orders at the Scania brand decreased by 10.9% year-on-year in fiscal year 2018 to 97 thousand Incoming orders at the Scania brand decreased by 10.9% year-on-year in fiscal year 2018 to 97 thousand vehicles. In Western Europe, incoming orders rose due to Scania’s leading position in Euro 6 engines, long vehicles. In Western Europe, incoming orders rose due to Scania’s leading position in Euro 6 engines, long vehicles. In Western Europe, incoming orders rose due to Scania’s leading position in Euro 6 engines, long experience with consumption-optimized vehicles and wide range of alternative drive systems. Deliveries by the experience with consumption-optimized vehicles and wide range of alternative drive systems. Deliveries by the experience with consumption-optimized vehicles and wide range of alternative drive systems. Deliveries by the Scania brand increased in 2018 to 96 (91) thousand vehicles globally. In Europe, sales considerably outper- Scania brand increased in 2018 to 96 (91) thousand vehicles globally. In Europe, sales considerably outper- Scania brand increased in 2018 to 96 (91) thousand vehicles globally. In Europe, sales considerably outper- formed the previous year’s figures, and encouraging increases were also seen in Brazil. At 8 (8) thousand units, formed the previous year’s figures, and encouraging increases were also seen in Brazil. At 8 (8) thousand units, formed the previous year’s figures, and encouraging increases were also seen in Brazil. At 8 (8) thousand units, the number of buses delivered in 2018 remained at the prior-year level. Demand for services and replacement the number of buses delivered in 2018 remained at the prior-year level. Demand for services and replacement the number of buses delivered in 2018 remained at the prior-year level. Demand for services and replacement parts as well as for Scania Financial Services was again higher in the reporting period than in the previous year. parts as well as for Scania Financial Services was again higher in the reporting period than in the previous year. parts as well as for Scania Financial Services was again higher in the reporting period than in the previous year. Scania manufactured 101 (96) thousand commercial vehicles in fiscal year 2018 (+5.8%), of which 9 (8) thou- Scania manufactured 101 (96) thousand commercial vehicles in fiscal year 2018 (+5.8%), of which 9 (8) thou- Scania manufactured 101 (96) thousand commercial vehicles in fiscal year 2018 (+5.8%), of which 9 (8) thou- sand were buses. sand were buses. sand were buses. S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S The Scania brand generated sales revenue of €13.4 (12.8) billion in fiscal year 2018. Operating profit improved The Scania brand generated sales revenue of €13.4 (12.8) billion in fiscal year 2018. Operating profit improved The Scania brand generated sales revenue of €13.4 (12.8) billion in fiscal year 2018. Operating profit improved by 4.4% to €1.3 billion, particularly as a result of the higher volume, positive mix effects, favorable exchange by 4.4% to €1.3 billion, particularly as a result of the higher volume, positive mix effects, favorable exchange by 4.4% to €1.3 billion, particularly as a result of the higher volume, positive mix effects, favorable exchange rate trends and a better financial services business. Meanwhile, cost increases had a negative impact. The rate trends and a better financial services business. Meanwhile, cost increases had a negative impact. The rate trends and a better financial services business. Meanwhile, cost increases had a negative impact. The operating return on sales amounted to 10.1 (10.1)% in the reporting period. operating return on sales amounted to 10.1 (10.1)% in the reporting period. operating return on sales amounted to 10.1 (10.1)% in the reporting period. 10.1% 10.1% 10.1% Operating return on sales Operating return on sales Operating return on sales Divisions Divisions Divisions Scania Scania Scania 41 41 41 P R O D U C T I O N P R O D U C T I O N P R O D U C T I O N S C A N I A B R A N D S C A N I A B R A N D S C A N I A B R A N D Units Units Units Trucks Trucks Trucks Buses Buses Buses 2018 2018 2018 2017 2017 2017 2018 2018 2018 2017 2017 2017 % % % 92,679 92,679 92,679 8,696 8,696 8,696 101,375 101,375 101,375 87,454 87,454 87,454 8,327 8,327 8,327 95,781 95,781 95,781 Orders received Orders received Orders received (thousand units) (thousand units) (thousand units) Deliveries Deliveries Deliveries Vehicle sales Vehicle sales Vehicle sales Production Production Production Sales revenue (€ million) Sales revenue (€ million) Sales revenue (€ million) Operating result Operating result Operating result Operating return on sales (%) Operating return on sales (%) Operating return on sales (%) 97 97 97 96 96 96 97 97 97 101 101 101 13,360 13,360 13,360 1,346 1,346 1,346 10.1 10.1 10.1 109 109 109 91 91 91 92 92 92 96 96 96 12,789 12,789 12,789 1,289 1,289 1,289 10.1 10.1 10.1 –10.9 –10.9 –10.9 +6.3 +6.3 +6.3 +6.1 +6.1 +6.1 +5.8 +5.8 +5.8 +4.5 +4.5 +4.5 +4.4 +4.4 +4.4 Interlink MD LNG Interlink MD LNG Interlink MD LNG D E L I V E R I E S B Y M A R K E T in percent D E L I V E R I E S B Y M A R K E T D E L I V E R I E S B Y M A R K E T in percent in percent Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets North America North America North America North America North America North America South America South America South America South America South America South America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific 74.0 % 74.0 % 74.0 % 74.0 % 74.0 % 74.0 % 0.8 % 0.8 % 0.8 % 0.8 % 0.8 % 0.8 % 15.3 % 15.3 % 15.3 % 15.3 % 15.3 % 15.3 % 9.9 % 9.9 % 9.9 % 9.9 % 9.9 % 9.9 % i i i F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.scania.com www.scania.com F U R T H E R I N F O R M A T I O N www.scania.com F U R T H E R I N F O R M A T I O N www.scania.com F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.scania.com www.scania.com 42 42 42 MAN MAN MAN Divisions Divisions Divisions With its impressive vehicles, MAN provided straightforward answers to complex With its impressive vehicles, MAN provided straightforward answers to complex With its impressive vehicles, MAN provided straightforward answers to complex questions about e-mobility and digitalization in 2018. questions about e-mobility and digitalization in 2018. questions about e-mobility and digitalization in 2018. B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T 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. In the past fiscal year, Customer focus, enthusiasm for the product and efficiency are the core values at MAN. In the past fiscal year, Customer focus, enthusiasm for the product and efficiency are the core values at MAN. In the past fiscal year, the company put the MAN eTGM distribution truck on the road and presented the eTGE van as a series- the company put the MAN eTGM distribution truck on the road and presented the eTGE van as a series- the company put the MAN eTGM distribution truck on the road and presented the eTGE van as a series- produced vehicle. Both vehicles are designed for urban use. The long-established, Munich-based company is produced vehicle. Both vehicles are designed for urban use. The long-established, Munich-based company is produced vehicle. Both vehicles are designed for urban use. The long-established, Munich-based company is using them to provide straightforward answers to multiple complex questions surrounding e-mobility and using them to provide straightforward answers to multiple complex questions surrounding e-mobility and using them to provide straightforward answers to multiple complex questions surrounding e-mobility and digitalization: The models are fully electric-powered and emission-free, and therefore contribute to improving digitalization: The models are fully electric-powered and emission-free, and therefore contribute to improving digitalization: The models are fully electric-powered and emission-free, and therefore contribute to improving urban air quality. Their low noise level also enables increased use at night. MAN is taking one step further with urban air quality. Their low noise level also enables increased use at night. MAN is taking one step further with urban air quality. Their low noise level also enables increased use at night. MAN is taking one step further with the MAN CitE concept, an electric-powered truck full of creative solutions for urban delivery traffic. Its inno- the MAN CitE concept, an electric-powered truck full of creative solutions for urban delivery traffic. Its inno- the MAN CitE concept, an electric-powered truck full of creative solutions for urban delivery traffic. Its inno- vative equipment, including the 360-degree camera system, means drivers can work safely and comfortably day vative equipment, including the 360-degree camera system, means drivers can work safely and comfortably day vative equipment, including the 360-degree camera system, means drivers can work safely and comfortably day in, day out. The CitE has a range of up to 100 km – more than enough for deliveries in cities. From its bus range, in, day out. The CitE has a range of up to 100 km – more than enough for deliveries in cities. From its bus range, in, day out. The CitE has a range of up to 100 km – more than enough for deliveries in cities. From its bus range, MAN presented the MAN Lion’s City E prototype, which is close to production. Its batteries are crash-safe and MAN presented the MAN Lion’s City E prototype, which is close to production. Its batteries are crash-safe and MAN presented the MAN Lion’s City E prototype, which is close to production. Its batteries are crash-safe and located on the roof to save space. They enable a range of up to 270 km. In 2018, MAN also presented new tailor- located on the roof to save space. They enable a range of up to 270 km. In 2018, MAN also presented new tailor- located on the roof to save space. They enable a range of up to 270 km. In 2018, MAN also presented new tailor- made solutions from MAN DigitalServices. made solutions from MAN DigitalServices. made solutions from MAN DigitalServices. In South America, MAN Commercial Vehicles, through its Volkswagen Caminhões e Ônibus brand, recorded In South America, MAN Commercial Vehicles, through its Volkswagen Caminhões e Ônibus brand, recorded In South America, MAN Commercial Vehicles, through its Volkswagen Caminhões e Ônibus brand, recorded rising demand in the reporting year, driven by the improved economic environment. In Europe, demand was rising demand in the reporting year, driven by the improved economic environment. In Europe, demand was rising demand in the reporting year, driven by the improved economic environment. In Europe, demand was up, too. Orders received increased by 22.2% to 146 thousand vehicles. MAN delivered 137 (114) thousand com- up, too. Orders received increased by 22.2% to 146 thousand vehicles. MAN delivered 137 (114) thousand com- up, too. Orders received increased by 22.2% to 146 thousand vehicles. MAN delivered 137 (114) thousand com- mercial vehicles to customers in the past fiscal year, of which 14 (11) thousand were buses. mercial vehicles to customers in the past fiscal year, of which 14 (11) thousand were buses. mercial vehicles to customers in the past fiscal year, of which 14 (11) thousand were buses. MAN produced a total of 138 (116) thousand commercial vehicles in 2018, including 14 (11) thousand buses. MAN produced a total of 138 (116) thousand commercial vehicles in 2018, including 14 (11) thousand buses. MAN produced a total of 138 (116) thousand commercial vehicles in 2018, including 14 (11) thousand buses. Incoming orders in the Power Engineering Business Area amounted to €4.0 (3.7) billion despite the Incoming orders in the Power Engineering Business Area amounted to €4.0 (3.7) billion despite the Incoming orders in the Power Engineering Business Area amounted to €4.0 (3.7) billion despite the continued difficult situation in the shipping industry and economic difficulties in emerging markets. continued difficult situation in the shipping industry and economic difficulties in emerging markets. continued difficult situation in the shipping industry and economic difficulties in emerging markets. S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S S A L E S R E V E N U E A N D E A R N I N G S Driven by higher volumes, sales revenue at MAN Commercial Vehicles climbed to €12.1 billion in 2018, exceeding Driven by higher volumes, sales revenue at MAN Commercial Vehicles climbed to €12.1 billion in 2018, exceeding Driven by higher volumes, sales revenue at MAN Commercial Vehicles climbed to €12.1 billion in 2018, exceeding the prior-year figure by 9.2%. As a result of the expenditure associated with the restructuring activities in India, the prior-year figure by 9.2%. As a result of the expenditure associated with the restructuring activities in India, the prior-year figure by 9.2%. As a result of the expenditure associated with the restructuring activities in India, operating profit declined to €332 (362) million. The operating return on sales was 2.7 (3.3)%. operating profit declined to €332 (362) million. The operating return on sales was 2.7 (3.3)%. operating profit declined to €332 (362) million. The operating return on sales was 2.7 (3.3)%. In the power engineering segment, MAN recorded an increase in sales revenue to €3.6 (3.3) billion. The In the power engineering segment, MAN recorded an increase in sales revenue to €3.6 (3.3) billion. The In the power engineering segment, MAN recorded an increase in sales revenue to €3.6 (3.3) billion. The operating profit for 2018 was €193 (193) million; positive volume effects were offset by a deterioration in the operating profit for 2018 was €193 (193) million; positive volume effects were offset by a deterioration in the operating profit for 2018 was €193 (193) million; positive volume effects were offset by a deterioration in the mix. The operating return on sales stood at 5.3 (5.9)%. mix. The operating return on sales stood at 5.3 (5.9)%. mix. The operating return on sales stood at 5.3 (5.9)%. 137 thousand 137 thousand 137 thousand Commercial vehicles sold in 2018 Commercial vehicles sold in 2018 Commercial vehicles sold in 2018 Divisions Divisions Divisions MAN MAN MAN 43 43 43 P R O D U C T I O N P R O D U C T I O N P R O D U C T I O N M A N M A N M A N Units Units Units Trucks Trucks Trucks Buses Buses Buses Light Commercial Vehicles Light Commercial Vehicles Light Commercial Vehicles 2018 2018 2018 2017 2017 2017 2018 2018 2018 2017 2017 2017 % % % 114,556 114,556 114,556 100,780 100,780 100,780 Commercial Vehicles Commercial Vehicles Commercial Vehicles 14,445 14,445 14,445 9,043 9,043 9,043 10,890 10,890 10,890 3,891 3,891 3,891 Orders received Orders received Orders received (thousand units) (thousand units) (thousand units) 138,044 138,044 138,044 115,561 115,561 115,561 Deliveries Deliveries Deliveries Vehicle sales Vehicle sales Vehicle sales Production Production Production 146 146 146 137 137 137 137 137 137 138 138 138 120 120 120 114 114 114 114 114 114 116 116 116 Sales revenue (€ million) Sales revenue (€ million) Sales revenue (€ million) 12,104 12,104 12,104 11,087 11,087 11,087 Operating result Operating result Operating result Operating return on sales (%) Operating return on sales (%) Operating return on sales (%) 332 332 332 2.7 2.7 2.7 362 362 362 3.3 3.3 3.3 Power Engineering Power Engineering Power Engineering Sales revenue (€ million) Sales revenue (€ million) Sales revenue (€ million) 3,608 3,608 3,608 3,283 3,283 3,283 Operating result Operating result Operating result Operating return on sales (%) Operating return on sales (%) Operating return on sales (%) 193 193 193 5.3 5.3 5.3 193 193 193 5.9 5.9 5.9 +22.2 +22.2 +22.2 +19.6 +19.6 +19.6 +19.6 +19.6 +19.6 +19.5 +19.5 +19.5 +9.2 +9.2 +9.2 –8.3 –8.3 –8.3 +9.9 +9.9 +9.9 +0.1 +0.1 +0.1 eTGM eTGM eTGM D E L I V E R I E S B Y M A R K E T in percent D E L I V E R I E S B Y M A R K E T D E L I V E R I E S B Y M A R K E T in percent in percent Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets Europe/Other markets North America North America North America North America North America North America South America South America South America South America South America South America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific 69.3 % 69.3 % 69.3 % 69.3 % 69.3 % 69.3 % 2.0 % 2.0 % 2.0 % 2.0 % 2.0 % 2.0 % 24.2 % 24.2 % 24.2 % 24.2 % 24.2 % 24.2 % 4.5 % 4.5 % 4.5 % 4.5 % 4.5 % 4.5 % i i i F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N F U R T H E R I N F O R M A T I O N www.man.eu www.man.eu www.man.eu www.man.eu www.man.eu www.man.eu 44 44 44 Volkswagen Group China Volkswagen Group China Volkswagen Group China Divisions Divisions Divisions Volkswagen Group China Volkswagen Group China Volkswagen Group China Volkswagen Group China We pushed ahead with our product and technology initiative in China in 2018, and We pushed ahead with our product and technology initiative in China in 2018, and We pushed ahead with our product and technology initiative in China in 2018, and further investments in e-mobility and digitalization are planned. We have expanded further investments in e-mobility and digitalization are planned. We have expanded further investments in e-mobility and digitalization are planned. We have expanded our production network with new manufacturing sites. our production network with new manufacturing sites. our production network with new manufacturing sites. B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T Volkswagen continued its product and technology initiative in its biggest single market over the past year. The Volkswagen continued its product and technology initiative in its biggest single market over the past year. The Volkswagen continued its product and technology initiative in its biggest single market over the past year. The new Touareg, which celebrated its world premiere in Beijing, represents our ambitions in the important SUV new Touareg, which celebrated its world premiere in Beijing, represents our ambitions in the important SUV new Touareg, which celebrated its world premiere in Beijing, represents our ambitions in the important SUV segment. In China, this segment now makes up 44% of the market volume of passenger cars. Alongside the segment. In China, this segment now makes up 44% of the market volume of passenger cars. Alongside the segment. In China, this segment now makes up 44% of the market volume of passenger cars. Alongside the Touareg, the following models also debuted: the extended-wheelbase Chinese version of the T-Roc, the new Touareg, the following models also debuted: the extended-wheelbase Chinese version of the T-Roc, the new Touareg, the following models also debuted: the extended-wheelbase Chinese version of the T-Roc, the new Tayron and Tharu models, the Audi Q5L, the locally produced Q2L and the ŠKODA Kodiaq GT. The updated Tayron and Tharu models, the Audi Q5L, the locally produced Q2L and the ŠKODA Kodiaq GT. The updated Tayron and Tharu models, the Audi Q5L, the locally produced Q2L and the ŠKODA Kodiaq GT. The updated Volkswagen Lavida and Bora models were introduced, in addition to the new CC. With the ID. VIZZION concept Volkswagen Lavida and Bora models were introduced, in addition to the new CC. With the ID. VIZZION concept Volkswagen Lavida and Bora models were introduced, in addition to the new CC. With the ID. VIZZION concept vehicle, the future flagship of the all-electric ID. family, we looked ahead to the sustainable mobility of vehicle, the future flagship of the all-electric ID. family, we looked ahead to the sustainable mobility of vehicle, the future flagship of the all-electric ID. family, we looked ahead to the sustainable mobility of tomorrow and beyond. Together with our partners, we plan to invest over €4 billion during 2019 in e-mobility tomorrow and beyond. Together with our partners, we plan to invest over €4 billion during 2019 in e-mobility tomorrow and beyond. Together with our partners, we plan to invest over €4 billion during 2019 in e-mobility and the digitalization of the model range, in new technologies and mobility services, in strengthening develop- and the digitalization of the model range, in new technologies and mobility services, in strengthening develop- and the digitalization of the model range, in new technologies and mobility services, in strengthening develop- ment and production capacity and in new products. We aim to largely extend our range of electric models on ment and production capacity and in new products. We aim to largely extend our range of electric models on ment and production capacity and in new products. We aim to largely extend our range of electric models on the Chinese market by 2020. To do so, we will introduce 30 new models – half of which will be locally produced. the Chinese market by 2020. To do so, we will introduce 30 new models – half of which will be locally produced. the Chinese market by 2020. To do so, we will introduce 30 new models – half of which will be locally produced. We are preparing to enable delivery of approximately 400,000 New Energy Vehicles to customers in China in We are preparing to enable delivery of approximately 400,000 New Energy Vehicles to customers in China in We are preparing to enable delivery of approximately 400,000 New Energy Vehicles to customers in China in 2020 and approximately 1.5 million in 2025. 2020 and approximately 1.5 million in 2025. 2020 and approximately 1.5 million in 2025. We currently manufacture vehicles and components at 23 sites in China. As part of our localization strategy We currently manufacture vehicles and components at 23 sites in China. As part of our localization strategy We currently manufacture vehicles and components at 23 sites in China. As part of our localization strategy for China, we opened new vehicle plants and one component plant in 2018. At the Tianjin plant, 300,000 SUV for China, we opened new vehicle plants and one component plant in 2018. At the Tianjin plant, 300,000 SUV for China, we opened new vehicle plants and one component plant in 2018. At the Tianjin plant, 300,000 SUV models are to roll off the assembly line each year, forming the basis for an SUV campaign. The opening of the models are to roll off the assembly line each year, forming the basis for an SUV campaign. The opening of the models are to roll off the assembly line each year, forming the basis for an SUV campaign. The opening of the second vehicle-manufacturing plant in Foshan, taking total capacity there to 600,000 vehicles a year, plays a second vehicle-manufacturing plant in Foshan, taking total capacity there to 600,000 vehicles a year, plays a second vehicle-manufacturing plant in Foshan, taking total capacity there to 600,000 vehicles a year, plays a pioneering role in our “Roadmap E” electrification strategy. In 2020, we plan to begin manufacturing vehicles pioneering role in our “Roadmap E” electrification strategy. In 2020, we plan to begin manufacturing vehicles pioneering role in our “Roadmap E” electrification strategy. In 2020, we plan to begin manufacturing vehicles based on the Modular Electric Drive Toolkit (MEB) and MEB battery systems at this location. In Qingdao, electric based on the Modular Electric Drive Toolkit (MEB) and MEB battery systems at this location. In Qingdao, electric based on the Modular Electric Drive Toolkit (MEB) and MEB battery systems at this location. In Qingdao, electric vehicles will also be built alongside models with combustion engines in future. In addition, the production of vehicles will also be built alongside models with combustion engines in future. In addition, the production of vehicles will also be built alongside models with combustion engines in future. In addition, the production of battery systems for the MQB platform will be located there. The Group’s first production site specially designed battery systems for the MQB platform will be located there. The Group’s first production site specially designed battery systems for the MQB platform will be located there. The Group’s first production site specially designed to produce MEB vehicles is scheduled to begin operation in Anting near Shanghai in 2020. Foshan and Anting to produce MEB vehicles is scheduled to begin operation in Anting near Shanghai in 2020. Foshan and Anting to produce MEB vehicles is scheduled to begin operation in Anting near Shanghai in 2020. Foshan and Anting will therefore follow closely behind the global MEB production launch in Zwickau in 2019. will therefore follow closely behind the global MEB production launch in Zwickau in 2019. will therefore follow closely behind the global MEB production launch in Zwickau in 2019. On the Chinese market, the Volkswagen Group offers more than 180 imported and locally produced models On the Chinese market, the Volkswagen Group offers more than 180 imported and locally produced models On the Chinese market, the Volkswagen Group offers more than 180 imported and locally produced models from the Volkswagen Passenger Cars, Audi, ŠKODA, Porsche, Bentley, Lamborghini, Volkswagen Commercial from the Volkswagen Passenger Cars, Audi, ŠKODA, Porsche, Bentley, Lamborghini, Volkswagen Commercial from the Volkswagen Passenger Cars, Audi, ŠKODA, Porsche, Bentley, Lamborghini, Volkswagen Commercial Vehicles, MAN, Scania and Ducati brands. We delivered 4.2 (4.2) million vehicles (including imports) to customers Vehicles, MAN, Scania and Ducati brands. We delivered 4.2 (4.2) million vehicles (including imports) to customers Vehicles, MAN, Scania and Ducati brands. We delivered 4.2 (4.2) million vehicles (including imports) to customers in China in the reporting period. The Tiguan, Teramont, Magotan, New Bora, Audi A4 L, Audi A5, ŠKODA Kodiaq, in China in the reporting period. The Tiguan, Teramont, Magotan, New Bora, Audi A4 L, Audi A5, ŠKODA Kodiaq, in China in the reporting period. The Tiguan, Teramont, Magotan, New Bora, Audi A4 L, Audi A5, ŠKODA Kodiaq, Porsche Cayenne and Panamera models were especially popular. In November, the Volkswagen Passenger Cars Porsche Cayenne and Panamera models were especially popular. In November, the Volkswagen Passenger Cars Porsche Cayenne and Panamera models were especially popular. In November, the Volkswagen Passenger Cars brand celebrated the 30 millionth delivery in China since production began there in 1983. brand celebrated the 30 millionth delivery in China since production began there in 1983. brand celebrated the 30 millionth delivery in China since production began there in 1983. 30 million 30 million 30 million Volkswagen models delivered since 1983 Volkswagen models delivered since 1983 Volkswagen models delivered since 1983 Divisions Divisions Divisions Divisions Volkswagen Group China Volkswagen Group China Volkswagen Group China 45 45 45 E A R N I N G S E A R N I N G S E A R N I N G S E A R N I N G S Thousand units Thousand units Thousand units 2018 2018 2018 2017 2017 2017 % % % Thousand units € million € million € million 2018 2017 2018 2018 2018 % 2017 2017 2017 € million Deliveries Deliveries Deliveries Vehicle sales1 Vehicle sales1 Vehicle sales1 Production Production Production 1 Produced locally. 1 Produced locally. 1 Produced locally. 4,207 4,207 4,207 4,101 4,101 4,101 4,116 4,116 4,116 4,184 4,184 4,184 4,020 4,020 4,020 4,041 4,041 4,041 +0.5 +0.5 +0.5 +2.0 +2.0 +2.0 +1.9 +1.9 +1.9 Operating result (100%) Deliveries Operating result (100%) Operating result (100%) Vehicle sales1 Operating result (proportionate) Operating result (proportionate) Operating result (proportionate) Production 1 Produced locally. 4,207 4,101 4,116 4,184 11,427 11,427 11,427 4,627 4,020 4,627 4,627 4,041 +0.5 11,191 11,191 11,191 4,746 +2.0 4,746 4,746 +1.9 Our two joint ventures, SAIC VOLKSWAGEN and FAW-Volks- Our two joint ventures, SAIC VOLKSWAGEN and FAW-Volks- Our two joint ventures, SAIC VOLKSWAGEN and FAW-Volks- wagen, produced a total of 4.1 million vehicles in fiscal year wagen, produced a total of 4.1 million vehicles in fiscal year wagen, produced a total of 4.1 million vehicles in fiscal year 2018. This was 1.9% more than in the previous year. The joint 2018. This was 1.9% more than in the previous year. The joint 2018. This was 1.9% more than in the previous year. The joint ventures produce both established Group models and those ventures produce both established Group models and those ventures produce both established Group models and those specially modified for Chinese customers (e.g. with length- specially modified for Chinese customers (e.g. with length- specially modified for Chinese customers (e.g. with length- ened wheelbases), as well as vehicles developed exclusively ened wheelbases), as well as vehicles developed exclusively ened wheelbases), as well as vehicles developed exclusively for the Chinese market (such as the Volkswagen Lamando, for the Chinese market (such as the Volkswagen Lamando, for the Chinese market (such as the Volkswagen Lamando, Lavida, New Bora, New Jetta, New Santana and Teramont). Lavida, New Bora, New Jetta, New Santana and Teramont). Lavida, New Bora, New Jetta, New Santana and Teramont). The proportionate operating result of the joint ventures in Our two joint ventures, SAIC VOLKSWAGEN and FAW-Volks- The proportionate operating result of the joint ventures in The proportionate operating result of the joint ventures in the reporting year stood at €4.6 billion. The negative impact wagen, produced a total of 4.1 million vehicles in fiscal year the reporting year stood at €4.6 billion. The negative impact the reporting year stood at €4.6 billion. The negative impact of more intense market competition, adverse exchange rate 2018. This was 1.9% more than in the previous year. The joint of more intense market competition, adverse exchange rate of more intense market competition, adverse exchange rate effects as well as the increase in research and development ventures produce both established Group models and those effects as well as the increase in research and development effects as well as the increase in research and development costs were offset by improvements in the mix, higher specially modified for Chinese customers (e.g. with length- costs were offset by improvements in the mix, higher costs were offset by improvements in the mix, higher volumes and product cost optimization. ened wheelbases), as well as vehicles developed exclusively volumes and product cost optimization. volumes and product cost optimization. The figures of the Chinese joint venture companies are for the Chinese market (such as the Volkswagen Lamando, The figures of the Chinese joint venture companies are The figures of the Chinese joint venture companies are not included in the operating profit of the Group as they are Lavida, New Bora, New Jetta, New Santana and Teramont). not included in the operating profit of the Group as they are not included in the operating profit of the Group as they are accounted for using the equity method. Their profits are accounted for using the equity method. Their profits are accounted for using the equity method. Their profits are included solely in the Group’s financial result on a propor- included solely in the Group’s financial result on a propor- included solely in the Group’s financial result on a propor- tionate basis. tionate basis. tionate basis. Tharu Tharu Tharu Tharu L O C A L P R O D U C T I O N L O C A L P R O D U C T I O N L O C A L P R O D U C T I O N Units Units Units 2018 2018 2018 2017 2017 2017 Units Volkswagen Passenger Cars Volkswagen Passenger Cars Volkswagen Passenger Cars 3,145,141 3,145,141 3,145,141 3,156,352 3,156,352 3,156,352 Audi Audi Audi ŠKODA ŠKODA ŠKODA Total Total Total 617,472 617,472 617,472 353,829 353,829 353,829 552,744 552,744 552,744 Audi 332,168 332,168 332,168 ŠKODA 4,116,442 4,116,442 4,116,442 4,041,264 4,041,264 4,041,264 Total 46 46 46 Volkswagen Financial Services Volkswagen Financial Services Volkswagen Financial Services Divisions Divisions Divisions Growth in business enabled Volkswagen Financial Services to increase its earnings in Growth in business enabled Volkswagen Financial Services to increase its earnings in Growth in business enabled Volkswagen Financial Services to increase its earnings in 2018. The digitalization of financial services was expanded further. 2018. The digitalization of financial services was expanded further. 2018. The digitalization of financial services was expanded further. 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 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 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, direct banking and insurance Volkswagen Financial Services comprises dealer and customer financing, leasing, direct banking and insurance Volkswagen Financial Services comprises dealer and customer financing, leasing, direct banking and insurance activities, fleet management and mobility services in 48 countries. Volkswagen Financial Services AG is respon- activities, fleet management and mobility services in 48 countries. Volkswagen Financial Services AG is respon- activities, fleet management and mobility services in 48 countries. Volkswagen Financial Services AG is respon- sible for global coordination of the Group’s financial services activities, the only exceptions being the financial sible for global coordination of the Group’s financial services activities, the only exceptions being the financial sible 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 services business of the Scania brand and of Porsche Holding Salzburg. In Europe, the principal companies are 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. Volkswagen Bank GmbH, Volkswagen Leasing GmbH and Volkswagen Versicherungsdienst GmbH. VW CREDIT, INC. Volkswagen Bank GmbH, Volkswagen Leasing GmbH and Volkswagen Versicherungsdienst GmbH. VW CREDIT, INC. operates financial services activities in North America. operates financial services activities in North America. operates financial services activities in North America. B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T B U S I N E S S D E V E L O P M E N T In 2018, Volkswagen Financial Services continued the digitalization of its business and concluded a three-year In 2018, Volkswagen Financial Services continued the digitalization of its business and concluded a three-year In 2018, Volkswagen Financial Services continued the digitalization of its business and concluded a three-year cooperation agreement with the University of Hildesheim. In addition to promoting knowledge transfer and cooperation agreement with the University of Hildesheim. In addition to promoting knowledge transfer and cooperation agreement with the University of Hildesheim. In addition to promoting knowledge transfer and developing joint research projects in the future field of big data analytics, the university and Europe’s largest developing joint research projects in the future field of big data analytics, the university and Europe’s largest developing joint research projects in the future field of big data analytics, the university and Europe’s largest automotive financial services provider also intend to strengthen contacts at the graduate level. automotive financial services provider also intend to strengthen contacts at the graduate level. automotive financial services provider also intend to strengthen contacts at the graduate level. Furthermore, Volkswagen Financial Services is involved in the Hafven Smart City Hub in Hanover, a Lower Furthermore, Volkswagen Financial Services is involved in the Hafven Smart City Hub in Hanover, a Lower Furthermore, Volkswagen Financial Services is involved in the Hafven Smart City Hub in Hanover, a Lower Saxony-based founders’ initiative for smart cities. This was established as an organization for start-ups and Saxony-based founders’ initiative for smart cities. This was established as an organization for start-ups and Saxony-based founders’ initiative for smart cities. This was established as an organization for start-ups and young people wishing to share their ideas with others and advance them together in networks. The potential young people wishing to share their ideas with others and advance them together in networks. The potential young people wishing to share their ideas with others and advance them together in networks. The potential founders receive coaching and mentoring from the company on selected ideas in areas such as artificial founders receive coaching and mentoring from the company on selected ideas in areas such as artificial founders receive coaching and mentoring from the company on selected ideas in areas such as artificial intelligence, augmented and virtual reality or the Internet of things. intelligence, augmented and virtual reality or the Internet of things. intelligence, augmented and virtual reality or the Internet of things. In 2018, Volkswagen Financial Services invested in Verimi, a European, cross-industry identity platform In 2018, Volkswagen Financial Services invested in Verimi, a European, cross-industry identity platform In 2018, Volkswagen Financial Services invested in Verimi, a European, cross-industry identity platform combining a central login and high security and data protection standards. An overarching identity platform combining a central login and high security and data protection standards. An overarching identity platform combining a central login and high security and data protection standards. An overarching identity platform with a simplified customer login enhances the digital ecosystems at the Volkswagen Group, opens the door to with a simplified customer login enhances the digital ecosystems at the Volkswagen Group, opens the door to with a simplified customer login enhances the digital ecosystems at the Volkswagen Group, opens the door to diverse service offerings and generates real added value at a central interface for our clients – e.g. in relation to diverse service offerings and generates real added value at a central interface for our clients – e.g. in relation to diverse service offerings and generates real added value at a central interface for our clients – e.g. in relation to e-government activities and the digital vehicle file. e-government activities and the digital vehicle file. e-government activities and the digital vehicle file. According to a study commissioned by the Focus Money magazine, the TraviPay parking app developed by According to a study commissioned by the Focus Money magazine, the TraviPay parking app developed by According to a study commissioned by the Focus Money magazine, the TraviPay parking app developed by sunhill technologies GmbH, Volkswagen Financial Services’ smart parking service provider is one of the best sunhill technologies GmbH, Volkswagen Financial Services’ smart parking service provider is one of the best sunhill technologies GmbH, Volkswagen Financial Services’ smart parking service provider is one of the best smartphone apps in Germany. A total of 375 apps from 45 industries were rated. TraviPay beat its competitors smartphone apps in Germany. A total of 375 apps from 45 industries were rated. TraviPay beat its competitors smartphone apps in Germany. A total of 375 apps from 45 industries were rated. TraviPay beat its competitors in the mobility category, in the subcategory for finding a parking space. in the mobility category, in the subcategory for finding a parking space. in the mobility category, in the subcategory for finding a parking space. 6.2% 6.2% 6.2% Increase in profit in 2018 Increase in profit in 2018 Increase in profit in 2018 Divisions Divisions Volkswagen Financial Services Volkswagen Financial Services 47 47 The main refinancing sources for Volkswagen Financial Services are money market and capital market instru- The main refinancing sources for Volkswagen Financial Services are money market and capital market instru- ments, asset-backed securities (ABS) transactions and customer deposits from the direct banking business. ments, asset-backed securities (ABS) transactions and customer deposits from the direct banking business. In April 2018, Volkswagen Financial Services AG issued three bonds with a total volume of €2.25 billion and In April 2018, Volkswagen Financial Services AG issued three bonds with a total volume of €2.25 billion and terms of one and a half, three and five years. In October, it placed three further bonds with a total volume of terms of one and a half, three and five years. In October, it placed three further bonds with a total volume of €2.6 billion and terms of two, five and eight years. Volkswagen Leasing GmbH placed three bonds on the capital €2.6 billion and terms of two, five and eight years. Volkswagen Leasing GmbH placed three bonds on the capital market for a total of €2.5 billion in August. In June, Volkswagen Bank GmbH also issued a euro benchmark bond market for a total of €2.5 billion in August. In June, Volkswagen Bank GmbH also issued a euro benchmark bond in three tranches for a total of €2.0 billion. in three tranches for a total of €2.0 billion. Numerous notes transactions were conducted internationally too, including in Norway, Australia, Sweden, Numerous notes transactions were conducted internationally too, including in Norway, Australia, Sweden, Mexico, Brazil, the UK and Russia. Mexico, Brazil, the UK and Russia. Volkswagen Leasing GmbH was once again active on the market with its ABS transactions in fiscal year Volkswagen Leasing GmbH was once again active on the market with its ABS transactions in fiscal year 2018. The existing “Volkswagen Car Lease 26” program, consisting of securitized German leasing receivables, 2018. The existing “Volkswagen Car Lease 26” program, consisting of securitized German leasing receivables, has a volume of approximately €1.5 billion. In the “Volkswagen Car Lease 27” program, receivables of approxi- has a volume of approximately €1.5 billion. In the “Volkswagen Car Lease 27” program, receivables of approxi- mately €1.0 billion are securitized. mately €1.0 billion are securitized. Volkswagen Bank GmbH securitized loan receivables totaling approximately €1.65 billion in the reporting Volkswagen Bank GmbH securitized loan receivables totaling approximately €1.65 billion in the reporting year with the Driver fourteen and Driver fifteen transactions. year with the Driver fourteen and Driver fifteen transactions. Outside Germany, Volkswagen Financial Services issued various ABS transactions on the market, including Outside Germany, Volkswagen Financial Services issued various ABS transactions on the market, including in Australia, Japan, Spain and Turkey. In Italy, an ABS transaction was placed for the first time with a volume of in Australia, Japan, Spain and Turkey. In Italy, an ABS transaction was placed for the first time with a volume of €500 million. A total of ten bonds were issued. €500 million. A total of ten bonds were issued. Other instruments used as part of the diversified funding strategy are customer deposits, commercial paper Other instruments used as part of the diversified funding strategy are customer deposits, commercial paper and credit lines. and credit lines. TraviPay TraviPay 48 Volkswagen Financial Services Divisions 6.9 million new financing, leasing, service and insurance contracts were signed in fiscal year 2018, 2.3% more than in the previous year. The total number of contracts stood at a new record high of 17.8 million (+3.3%) as of December 31, 2018. The customer financing/leasing area accounted for 10.1 million contracts, up 5.1% year-on- year. In the service/insurance area, the number of contracts increased by 1.0% to 7.7 million. Starting on January 1, 2019, contracts entered into by our international joint ventures will also be included, whereby the new number of contracts would have amounted to 20.3 million contracts on December 31, 2018. 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 33.3 (33.1)%. As of December 31, 2018, Volkswagen Bank managed around 1.4 (1.5) million deposit accounts. Volks- wagen Financial Services employed 14,048 people worldwide as of that date, 7,010 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 Volkswagen Financial Services’ sales revenue amounted to €32.8 billion in the reporting period, thus exceeding the prior-year figure by €2.9%. Operating profit rose by 6.2% to €2.6 billion – a new record. The increase was mainly attributable to 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 2018 2017 % thousands € million € million € million € million € million € million % % € million € million 17,801 5,935 4,149 7,717 40,317 63,690 20,529 41,838 28,926 207,629 26,298 174,255 12.7 10.0 6.6 2,612 2,600 14,048 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 +3.3 +4.6 +5.8 +1.0 +10.7 +9.6 +4.7 +5.8 –4.9 +11.1 +2.6 +12.9 +6.2 +13.1 +0.7 Number of contracts Customer financing Leasing Service/Insurance Lease assets Receivables from Customer financing Dealer financing Leasing agreements Direct banking deposits Total assets Equity Liabilities1 Equity ratio Return on equity before tax2 Leverage3 Operating result Earnings before tax Employees at Dec. 31 1 Excluding provisions and deferred tax liabilities. 2 Earnings before tax as a percentage of average equity (continuing operations). 3 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 Re por t o f th e Vo lkswage n G ro u p an d Vo lkswa gen AG) Inhalt nicht aktuell GROUP MANAGEMENT REPORT 51 54 56 59 68 86 90 92 95 Goals and Strategies Internal Management System and Key Performance Indicators Structure and Business Activities Corporate Governance Report Remuneration Report Executive Bodies Disclosures Required Under Takeover Law Diesel Issue Business Development 108 Shares and Bonds 114 Results of Operations, Financial Position and Net Assets 129 Volkswagen AG (condensed, in accordance with the German Commercial Code) 133 Sustainable Value Enhancement 156 Report on Expected Developments 163 Report on Risks and Opportunities 188 Prospects for 2019 Group Management Report Goals and Strategies 51 Goals and Strategies 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. With the future program TOGETHER – Strategy 2025 announced in 2016, we aim to make the Volkswagen Group 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 more focused, efficient, innovative, customer-oriented and sustainable, and systematically geared towards 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 sustainable 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, safety and society, 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 L O 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 G Y 2 0 2 5 Our Group strategy comprises a raft of far-reaching strategic decisions and specific initiatives aimed at safeguarding the long-term future and generating profitable growth. It is composed of four building blocks which cover strategic Group initiatives. We regularly review the progress of these initiatives so as to analyze the significance, suitability and target achievement of the measures defined. We are thus able to adjust the Group initiatives specifically according to the dynamic changes occurring within our Company. 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. 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 sus- tainable mobility calls for substantial capital expenditure. 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 O A 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 S T R AT E G Y 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. 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 trans- formation of our core business and for the establishment 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 respective business model. After all, the busi- 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 T R A N S F O RM 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 LD M O B I L I T Y S O L U T I O NS 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 ness 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. sites and plants, with the goal of continuously improving our carbon footprint and lowering pollutant emissions. Through innovations and outstanding quality, we aim for maximum product safety. 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. The relevance of the KPIs is reviewed at Group level and their focus continuously monitored and adjusted as necessary. We report on the 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. The strategic KPIs consist of the conquest rate and KPIs pertaining to loyalty, customer satisfaction and quality. Target dimension: excellent employer Skilled and dedicated employees are one of the keys to sustainable 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 environment, safety and integrity Every day, we at the Volkswagen Group assume and exercise responsibility in relation to the environment, safety and society. 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 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, a culture of dealing openly with mis- takes, and integrity. Target dimension: competitive profitability Investors judge us by whether we are able to meet our obligations as regards interest payments and debt repay- ments. 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 goals we have set ourselves are operational excellence in all business processes and becoming the benchmark for the entire industry. The strategic KPIs are operationalized for internal man- agement purposes: target and actual data are derived from Volkswagen Group figures. ST R AT E G I C K P I S : C O 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 Net cash flow in the Automotive Division Payout ratio 2015 6.0% 7.4% 6.9% 2025 7 to 8% ~6% ~6% €8,887 million >€10 billion negative 30% Net liquidity in the Automotive Division €24,522 million, 11.5% Return on investment (ROI) in the ~10% of consolidated sales revenue 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 V O L K S WA G E N G R O U P The Integrate Strategy and Planning Process Group initiative 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 medium-term planning that is con- ducted once a year and generally covers a period of five years is incorporated into the strategic planning as a key man- agement element of the Group. Medium-term planning forms the core of our operational planning and is used to formulate and safeguard the requirements for realizing strategic projects designed to meet Group targets in both technical and economic terms – and particularly 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: func- tions/processes, products and markets. When planning the Company’s future, the individual plan- ning components are determined on the basis of the time- scale 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 target achievement level. Key internal man- agement instruments comprise target/actual comparisons, prior-year comparisons, variance analyses and, where neces- sary, action plans to ensure targets are met. For the current fiscal year, detailed revolving monthly forecasts 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 C O R E P E R F O R M A N C E I N D I C AT O R S I N T H E V O L K SWA G 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: > Deliveries to customers > Sales revenue > Operating result > Operating return on sales > Research and development ratio (R&D ratio) in the Auto- motive Division > Capex/sales revenue in the Automotive Division > Net cash flow in the Automotive Division > Net liquidity in the Automotive Division > Return on investment (ROI) in the Automotive Division Deliveries to customers are defined as handovers of new vehicles to the end customer. This figure shows the popu- larity of our products and is the measure we use to determine our competitive position in the 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, digitalization and new technologies. The R&D ratio underscores the efforts made to ensure the Company’s future viability: the goal of competitive profit- ability geared to sustainable growth. investment property and The ratio of capex (investments in property, plant and intangible assets, equipment, 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, expanding and digitalizing friendly our product range and drivetrains, as well as for adjusting production capacities and improving production processes – in relation to the Auto- motive Division’s sales revenue. for environmentally 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 128, respectively. Detailed descriptions of our activities and additional nonfinancial key performance indicators in the areas of sus- tainability, research and development, procurement, pro- duction, sales and marketing, quality assurance, employees, information technology and the environment can be found in the chapter entitled “Sustainable Value Enhancement” beginning on page 133 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 2018 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, Volkswagen 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 shareholdings in accordance with sections 285 and 313 of the Handelsgesetzbuch (HGB – German Commercial Code), which can be accessed at www.volkswagenag.com/en/ InvestorRelations.html 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 Energie- wirtschaftsgesetz (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 activities comprise the Automotive and Financial Services divisions. All brands within the Automotive Division – with the exception of the Volkswagen Passenger Cars and Volks- wagen 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 vehicle brands is coordinated within the TRATON GROUP. 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, propulsion components and testing systems businesses. The activities of the Financial Services Division comprise dealer and customer financing, vehicle leasing, direct banking and insurance activities, as well as fleet management and mobility 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, Russia and Mexico. Volkswagen AG and the Volkswagen Group are managed by the Volkswagen AG 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 To further enhance its leadership and management model, the Volkswagen Group introduced an additional internal operational structure in spring 2018. Volkswagen is con- vinced that this will allow better use of existing competences and economies of scale, make it possible to leverage synergies more systematically and accelerate decision making. In addition to the Finance & IT, Human Resources and Integrity and Legal Affairs divisions, the Volkswagen Group collaborates across six operating units and the China region, these being the “Volume”, “Premium”, “Sport & Luxury”, “Truck & Bus” brand groups, as well as the Components & Procurement and Financial Services operating units. The “Volume” brand group comprises the Volkswagen Passenger Cars, SEAT, ŠKODA and Volkswagen Commercial Vehicles brands. The Audi, Lamborghini and Ducati brands are brought together in the “Premium” brand group. “Sport & Luxury” is comprised of the Porsche, Bentley and Bugatti brands. The “Truck & Bus” brand group is the umbrella for the Scania and MAN brands. Components & Procurement will function as one unit spanning all of the brands and sup- porting them. The Financial Services business has been combined into a single unit. This prepares the Volkswagen Group for a management structure that is simpler, leaner and more effective, and strengthens the brands, giving them more autonomy. In line with the principle of subsidiarity, decisions will be taken at the lowest competent level, close to business operations. At the same time, spreading the Group’s management duties more broadly means that responsibility is assigned more clearly and definitively. Every member of the Board of Management has assumed additional higher-level duties for the Group. At the same time, the members of the Board of Management of Volkswagen AG have responsibility for a brand group or operating unit, improving collaboration between the brands and the Group as a whole and ensuring that management of the Group is a shared undertaking. Each brand in the Volkswagen Group is managed by a brand board of management, which ensures its independent and self-contained development and business operations. To the extent permitted by law, the board adheres to the Group targets and requirements laid down by the Board of Management of Volkswagen AG, as well as with the agree- ments in the brand groups. 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 by their respective managements on their own responsibility. In addition to the interests of their own companies, the management of each individual company takes into account the interests of the Group, the relevant brand group and 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, invest- ments, risks management and management issues. The portfolio of these committees and the regulation landscape at Group level was revised in the reporting year and, in the course of this, a committee was established to manage the technology strategy. This has reduced complexity and rein- forced governance within the Group. Within our future program TOGETHER – Strategy 2025, the Organization 4.0 Group initiative is also supporting the Company’s transformation. The aim of this initiative is to connect activities across divisions, initiate new organiza- tional approaches and anchor these in the Group for the long term. This will not only enable but actively create holistic stimulus for innovation, entrepreneurship and change. 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 ST M E N T S The control and profit and loss transfer agreement between MAN SE, as the controlled company, and TRATON SE (at that time Volkswagen Truck & Bus AG), a wholly owned subsidiary of Volkswagen 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 agreement replaced, the group based on the de facto exercise of management control with a contractual group, permitting considerably more efficient and less bureaucratic cooperation between the MAN Group and the rest of the Volkswagen Group. In the summer of 2018, the Higher Regional Court in Munich made a final decision in the award proceedings regarding the appropriateness of the cash settlement and the right to compensation for the non- controlling interest shareholders of MAN SE, ruling that the cash settlement amount set out in the contract should be increased to €90.29 per share and the annual compensation to €5.47 gross per share. Following the entry of the final decisions in the commercial register in August 2018, the noncontrolling interest shareholders were entitled to tender their shares in accordance with section 305 of the Aktien- gesetz (AktG – German Stock Corporation Act) within a two- month period. The decision in the award proceedings resulted in a significant increase in the annual compensation to be paid to noncontrolling interest shareholders of MAN SE. In the opinion of the Board of Management at TRATON SE (at 58 Structure and Business Activities Group Management Report 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, the business of Volks- wagen companies is affected by numerous laws in Germany and abroad. In particular, there are legal requirements relating to development, products, production and distri- bution, as well as supervisory, data protection, financial, com- pany, commercial, capital market, anti-trust and tax regula- tions 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/en/InvestorRelations.html that time TRATON AG), this was no longer proportionate to the profit transfer from MAN SE and other benefits stipulated in the control and profit and loss transfer agreement; TRATON SE therefore exercised its right to extraordinary termination in accordance with section 304(4) of the German Stock Corporation Act on August 22, 2018 and terminated the control and profit and loss transfer agreement effective January 1, 2019. As of year-end 2018, TRATON SE held 87.04 (75.73)% of the ordinary shares and 83.05 (46.95)% of the preferred shares in MAN SE. Following the announcement of the termination of the control and profit and loss transfer agreement and the recording thereof in the commercial register on January 3, 2019, the noncontrolling shareholders of MAN SE once again had the right to tender their shares to TRATON SE, pursuant to the provisions of the control and profit and loss transfer agreement, within a two-month period at a cash settlement price of €90.29. 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. 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. Group Management Report Corporate Governance Report 59 Corporate Governance Report Corporate governance is defined as responsible, transparent corporate management and supervision that aim 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 C O R P O R AT E G O V E R N A N C E C O D E – A B L U E P R I N T F O R S U C C E S S F U L C O R P O R AT E G O V 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 enables us to meet the steadily increasing demand for information from national and inter- national stakeholders. D E C L A R AT I O N S O F C O N F O R M I T Y ( VA L I D A S O F T H E D AT E O F T H E D E C L A R AT I O N ) The Board of Management and the Supervisory Board of Volkswagen AG issued the annual declaration of conformity with the Code as required by section 161 of the Aktiengesetz (AktG – German Stock Corporation Act) on November 16, 2018 with the following wording: “The Board of Management and the Supervisory Board declare the following: The recommendations of the Government Commission of the German Corporate Governance Code in the version dated 7 February 2017 (the Code) that was published by the German Ministry of Justice in the official section of the Federal Gazette (Bundesanzeiger) on 24 April 2017 was complied with in the period from the last Declaration of Conformity dated 17 November 2017 and will continue to be complied with, with the exception of the numbers listed below and their stated reasons listed below. > a) 4.2.3(4) (severance payment cap) A severance payment cap will be included in new contracts concluded with members of the Board of Management, but not in contracts concluded with Board of Management members 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(3) sentence 2 (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(3) sentence 2 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 Porsche Automobil Holding SE, his indirect minority 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 deviation is therefore being declared purely as a precautionary measure. > c) 5.4.1(6 to 8) (disclosure regarding election recommen- dations) With regard to the recommendation under number 5.4.1(6- 8) of the Code stating that certain circumstances disclosed by the Supervisory Board when making election recom- mendations to the Annual General Meeting, the stipula- 60 Corporate Governance Report Group Management Report tions of the Code are vague and the definitions unclear. Purely as a precautionary measure, the Board of Manage- ment 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.” The current declaration of conformity is also published on our website, http://www.volkswagenag.com/en/InvestorRela- tions/corporate-governance/declaration-of-conformity.html. 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 appoint- ments to the Board of Management), the suggestions in the current version of the Code have been complied with. The general compensation clauses in the contracts with members of the Board of Management may, if applied accordingly, result in early disbursement of multi-year variable remuneration components. The Supervisory Board will decide the duration of each first-time appointment to the Board of Management on an individual basis, taking the best interests of the Com- pany into account. The suggestion made in number 2.3.2 sentence 2 (accessibility of the voting proxy during the Annual General Meeting) was implemented at the 2018 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 2018 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 each 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. C O O P E R AT I O N B E T W E E N T H E B O A R D O F M A N A G E M E N T A N D T H E S U P E R V I S O R Y B O A R D The Supervisory Board advises and monitors the Board of Management with regard to the management of the Com- 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 K SWA G E N AG www.volkswagenag.com/en/InvestorRelations/corporate-governance/declaration- of-conformity.html 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/en/investor-relations/corporate-governance/corporate- governance-at-man/Corporate-Governance-at-MAN.html 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-ag.com/en/investor-relations/financial reports 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 the 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. Information on the members of the Board of Manage- ment and Supervisory Board, as well as on the Supervisory Board committees can be found on pages 86 to 89. O B J E C T I V E S F O R T H E C O M P O S I T I O N O F T H E S U P E R V I S O R Y B O A R D A N D B O A R D O F M A N A G E M E N T A S W E L L A S T H E 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 compo- sition 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 members of the Supervisory Board should be shareholder representatives with no potential conflicts of interest, particularly conflicts of interest that could arise from an advisory or board position at customers, suppliers, lenders, or other third parties. > In addition, at least four of the shareholder representatives on the Supervisory Board must be persons who are independent as defined in number 5.4.2 of the 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. The independent members of the Supervisory Board within the meaning of number 5.4.2 of the Code are or were as follows: Ms. Hessa Sultan Al-Jaber, Ms. Louise Kiesling, Mr. Hussain Ali Al-Abdulla, Mr. Bernd Althusmann and Mr. Stephan Weil, as well as Ms. Annika Group Management Report Corporate Governance Report 61 Falkengren, who left the Supervisory Board during the reporting year. 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 prod- ucts, > 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, > 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 curriculum vitae of the members of the Supervisory Board are avail- able online at www.volkswagenag.com/en/group/executive- bodies.html. 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 – German Act on the Equal Participation of Women and Men in Leadership Positions in the Private and Public Sectors). Share- holder and employee representatives have resolved that each side will meet this quota separately. The shareholder repre- sentatives have met the quota of at least 30% women and at least 30% men since the 56th Annual General Meeting on June 22, 2016. The employee representatives have met the quota since the end of the 57th Annual General Meeting on May 10, 2017. Both the shareholder and the employee repre- sentatives fulfilled the quota on December 31, 2018. The Supervisory Board set a target quota of 11.1% for the period after December 31, 2016 for the proportion of female members on the Board of Management as required in accordance with the FührposGleichberG. The new deadline set for achievement of this target is December 31, 2021. The proportion of female members on the Group Board of Man- agement as of December 31, 2018 was 12.5%, thus meeting the target quota. 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 man- agement and 16.9% women in the second level of manage- ment for the period up to the end of 2021. As of December 31, 2018, the proportion of women in the active workforce at the first level of management was 10.7 (10.4)% and at the second level of management it was 15.4 (14.0)%. R E M U N E R AT I O N R E P O R T Extensive explanations of the remuneration system and the individual remuneration of the members of the Board of Management and Supervisory Board can be found in the Remuneration Report starting on page 68 of the combined management report, in the notes to Volkswagen’s consoli- dated financial statements on page 329, and on page 62 of the notes to the annual financial statements of Volks- wagen AG. G R O U P C O R P O R AT E G O V 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/en/InvestorRelations/corpo- rate-governance/declaration-of-conformity.html. It also con- tains the description 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/en/InvestorRelations/corporate-governance/declaration- of-conformity.html 62 Corporate Governance Report Group Management Report T O G E T H E R 4 I N T E G R I T Y 2 Integrity and compliance risks are identified, owned, managed and mitigated 4 We encourage, protect and value the reporting of concerns and suspected wrongdoing 1 Integrity and compliance are central to our business strategy Together4Integrity We keep our word 3 Our leaders at all levels across our organization build and sustain a culture of integrity 5 We take action and hold ourselves accountable when wrongdoing occurs I N T E G R I T Y Volkswagen is undergoing one of the furthest-reaching pro- cesses of change in the Company’s history. A strategic objec- tive as part of TOGETHER – Strategy 2025 is to make Volks- wagen a role model of a modern, transparent and successful company when it comes to integrity. With the Board of Management position for Integrity and Legal Affairs, the Group has put in place the organizational prerequisites for centralized integrity management. This Group function is responsible for planning, preparing and implementing programs and projects aimed at raising aware- ness, providing information and reinforcing a shared aware- ness of integrity. Integrity at Volkswagen is defined as acting out of con- viction, with responsibility and steadfastness. Integrity is an inner disposition that acts as an internal moral compass for doing the right thing in gray areas, in the absence of explicit rules or in the event of conflicting objectives. This means complying with our Group principles and the ethical principles established therein and behaving correctly in accordance with rules. This also includes the steadfastness needed to adhere to these principles – regardless of economic and social pressure. Already in 2016, we launched a comprehensive integrity program with information campaigns, opportunities for dialog and initiatives aimed at all employees. This encom- passes measures such as international get-togethers for man- agers and integrity workshops for team spokespeople in production. In addition, we have launched an ambassador program that helps multipliers to make integrity a visible and practical part of everyday working life. We have also worked intensively to create an integrity index. This is due to be piloted in 2019 at the German locations of the Volkswagen Passenger Cars and Audi brands as a joined-up approach to measuring integrity. We firmly believe: only with lasting, dependable integrity will our Company gain and strengthen the trust of its staff, customers, shareholders, business partners and the general public. The Group Board of Management therefore resolved in April 2018 to combine the programs and initiatives on integrity, compliance, risk management and culture under the umbrella program “Together4Integrity”, and thus to reinforce them. With “Together4Integrity” (T4I), the Board of Manage- ment of Volkswagen AG has initiated an umbrella program with which to embed excellence in integrity and compliance throughout the Group – in all brands, regions and companies and in respect of processes, structures, attitudes and behav- ior. The program plays an integral and central role at Volks- wagen. It consolidates, combines and coordinates the Group- wide initiatives that are led by the responsible divisions. It learning, thus also encourages discussion and mutual ensuring continuous improvement. Uniform and consistent implementation according to a firm schedule is planned for all Group companies, prioritized by their size and risk profile. T4I is based on the five principles of the internationally recognized Ethics & Compliance (ECI). These principles relate to strategy, risk management, culture of integrity, speak-up environment and resolute accountability. They are codified as the Group’s aspiration level and are implemented through T4I. The Board of Management posi- tions for Integrity and Legal Affairs and for Human Resources are responsible for the program. The other Board of Man- agement positions act as sponsors, thus ensuring that T4I is successfully implemented in their area of responsibility. Initiative Group Management Report Corporate Governance Report 63 C O M P L I A N C E Acting with integrity, compliance and honesty is an essential prerequisite for the success of the Volkswagen Group. For this reason, compliance with national and international laws and regulations, internal rules and voluntary commitments is among our Company’s most important principles. We are striving to strengthen the trust of our customers, our busi- ness 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 is to further enhance awareness of this. Commitment to compliance at the highest level At the Global Management Meeting in June 2018, Herbert Diess, 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: “We need dependable structures and work processes that ensure impeccable, compliant behavior. But we also need a firmly rooted sense of right and wrong, a better way of handling mistakes, a culture of constructive dissent and a stronger sense of responsibility in the management team.” In an interview in August 2018, Hiltrud Dorothea Werner, member of the Board of Management responsible for Integrity and Legal Affairs, explained the importance of dealing thoroughly and quickly with cases of suspicion and compliance violations in the Company: “The nearer Com- pliance is to people and processes, the better, because pre- venting a problem from becoming a scandal also means acting with speed and investigating thoroughly.” Compliance organization The Group Compliance Committee at top management level is chaired by the member of the Board of Management responsible for Integrity and Legal Affairs and met regularly in the reporting year. This committee ensures that com- pliance and integrity standards are uniformly developed, applied and communicated on a cross-divisional and cross- brand basis. Central divisions within the Group are supported and advised by their own compliance contacts. Additional centers of competence are responsible for the overall direction of compliance work and develop compliance instruments and program components with which the companies can imple- ment the compliance requirements themselves across the Group. During the reporting period, additional resources are set aside for these tasks. The global compliance organization at the Volkswagen Group comprises divisional and regional compliance offices. It supports and advises the respective Group and brand companies with an effective, risk-based, Group-wide com- pliance management system, helping them to conduct their business activities in accordance with the rules and to con- sistently adhere to relevant laws and internal regulations. It also helps companies to identify, evaluate, manage and monitor potential compliance risks. Additional compliance resources were provided across the Group on a risk-oriented basis in the reporting year. Higher-level compliance func- tions are involved in the appointment of new compliance officers and conduct a standardized appointment and induc- tion process. 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 member of the Board of Management respon- sible for Integrity and Legal Affairs and the Group Chief Com- pliance Officer. The Group Chief Compliance Officer reports directly to the member of the Board of Management responsible for Integrity and Legal Affairs and also to the Audit Committee of the Supervisory Board of Volkswagen AG. The heads of the centers of competence report to the Group Chief Compliance Officer on disciplinary and func- tional matters. The compliance officers of the brand com- panies and the head of the regional compliance office for China report to the Group Chief Compliance Officer on functional matters. Meetings and conferences ensure that those responsible for compliance at Group and brand level are connected and communicate regularly. Compliance management system Our compliance management system is aligned with national and international laws and standards. Its objective is to encourage, reinforce and ensure compliant behavior in the Company in a lasting manner. The focus of our compliance organization is on preventing corruption, breaches of trust, embezzlement, fraud and money laundering and thereby on reducing the risk of unlawful actions. The Code of Conduct is the key element for raising awareness among staff of correct behavior and finding the right contact person in cases of doubt. Where laws and regulations have been violated, our whistleblower system is a suitable tool for taking appropriate action. We enhanced the whistleblower system in 2018: mem- bers of management are obligated to report every indication 64 Corporate Governance Report Group Management Report of serious rule-breaking. Failure to do so is itself a serious infringement. The accessibility of the whistleblower system has been further improved with a 24-hour hotline. We place value on communication and training seminars to permanently anchor compliance-related content among the workforce. Compliance work in the Volkswagen Group is based on a systematic process of risk identification and reporting in accordance with the IDW standard AsS 980. We used 2018 to review the content of and the process for the existing com- pliance risk analysis. The objective is to obtain transparency at Group level of the risk exposure of all Group companies 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’s Code of Conduct is established throughout the Group. It is permanently available to all employees on the intranet and also to third parties on the internet and is continually communicated via digital and print media and at events within the Company. The Code of Conduct is a significant part of the com- pliance training completed by all staff, from the Board of Management to employees. Both face-to-face and online training are used. The Code of Conduct is also integrated into operational processes. For example, employment contracts for employees of Volkswagen AG generally include a reference to the Code of Conduct and the obligation to comply with it. Furthermore, 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, performance-related remuneration. In addition to the Volkswagen Group Code of Conduct, there are various Group policies and guidelines on specific compliance issues. 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 potential violations of laws and internal regulations by employees of the Volkswagen Group. It also refers to the committees that support and monitor the work of these contact points. The Company has had a system for reporting breaches of the law or regulations since 2006. In 2017, the whistleblower system was improved and partially reorganized. Processes were further optimized to enable reports to be followed up on even more quickly, fairly and transparently. Among other things, a central investigative office has been set up in the Compliance department. It is responsible for coordinating the whistleblower system within the Volkswagen Group and for processing information concerning Volkswagen AG and its subsidiaries – with the exception of AUDI AG, Dr. Ing. h.c. F. Porsche AG and TRATON SE. These companies each 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 the party affected has top priority in the applicable pro- cedural principles and guarantees. In addition, a Group Guideline sets out the responsibilities in the Group and the specific procedure for the processing of reports. The aim of the whistleblower system is to protect our company and employees from harm using firm principles and a clearly governed, transparent and fair process. Moreover, experience with violations of laws and regulations also helps us to con- stantly enhance our compliance management and prevent similar incidents in future. Information on misconduct can be submitted in any of the major languages used by the Group and is treated confidentially. The people providing the information need not fear any sanctions from the Company for providing the information. In principle, 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, which whistleblowers can use anonymously. We also continue to rely on existing tried-and-tested chan- nels such as ombudspersons (counsels of trust). 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 www.volkswagenag.com/presence/konzern/documents/Code_of_Conduct_2017_ VW_Group_english.pdf W H I ST L E B LOW E R SY ST E M www.volkswagenag.com/en/group/compliance-and-risk-management/whistle- blowersystem.html Phone: +49 5361 9 46300 E-mail: io@volkswagen.de Group Management Report Corporate Governance Report 65 Since August 1, 2018, information on possible rule-breaking has also been reportable via a telephone hotline in addition to the existing reporting channels. Employees, business partners and customers worldwide can submit information 24 hours a day, 365 days a year. Callers are put through to a specially trained contact person with access to an interpreter if required. In addition, a revised Group policy was adopted in August 2018. This enhances the whistleblower system, partic- ularly with its expanded communication options. It was also decided to provide additional resources for the expansion of the whistleblower system. The Compliance organization registered a total of 2,920 reports throughout the Group in 2018. All substantiated reports have been, or will be, investigated, and any miscon- duct penalized. Communication, training and advice Providing information to employees at all levels on com- pliance, raising their awareness of compliant behavior and offering them advice as partners within the Company is a core component of our compliance activities. We use all of our internal communication channels to communicate compliance-related content. These include online and offline media as well as event and training formats. Online communication is primarily via the compliance organization’s own sites on the Volkswagen intranet and via the in-house, Group-wide communication platform “Group Connect”, which is also used for direct dialog with the target groups. There are also articles, interviews and other publi- cations in cross-brand and specific divisions’ media. In the reporting year, compliance-related topics were also featured at various information events for employees and at works meetings at several locations. Communication regarding the whistleblower system was integrated into an event on corpo- rate culture that took place across multiple locations. 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 interactive formats form part of the training provided to employees and managers. In the reporting year, the focus was on enhancing Code of Conduct training and, in particular, on commencing the intro- duction of compulsory training regarding the Code of Conduct for all employees in the Group. Employees can also 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, a culture of error management and behaving with integrity. This is based on an evaluation of the answers to three questions in the opinion survey relating to compliance with regulations and processes, dealing with risks and errors and behaving with integrity. In the case of negative deviations, the affected departments develop and implement measures. In the reporting year, the figure further improved on the already good basis. Strengthening compliance in company processes The act implementing the Fourth EU Money Laundering Directive into German law presented new requirements for Volkswagen 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). The Group policy adopted and published in this context by the Board of Management in 2018 defines the minimum standard to be implemented by all Group com- panies. In 2018, we designed and developed a new IT tool for a risk-based business partner selection process at the Volks- wagen Group. We began pilot testing of the tool at the end of the reporting year. This business partner selection process will be gradually introduced in the Group from 2019. A key objective of this new process is the creation of transparency within the Volkswagen Group to prevent Group companies from entering into business relationships with business partners which other Group companies have previously clas- sified as not acting with integrity. New business models are constantly being considered in the Volkswagen Group as part of the TOGETHER – Strategy 2025 program. These business models focus particularly on digitalization, automation and electrification, but also on the development of and involvement in mobility concepts. The 66 Corporate Governance Report Group Management Report compliance organization helps the strategic business units to implement their forward-looking projects through individual risk assessments and recommendations based on these. In addition, compliance will become more firmly embed- ded in mergers and acquisitions and real estate transactions. Effectiveness review Independent reviews by Group Internal Audit in the corpo- rate units and the regular exchange of information with external bodies help ensure continuous improvement of the compliance management system. There are no indications that our current compliance management system was inef- fective in 2018. I N D E P E N D E N T M O N I TO R In June 2017, in connection with the diesel issue, Larry D. Thompson was appointed as the Independent Compliance Monitor at Volkswagen under the terms of the Plea Agreement with the United States Department of Justice announced on January 11, 2017 and confirmed by a US federal court on April 21, 2017. He also works as Independent Compliance Auditor under the Third Partial Consent Decree concluded separately with the US Department of Justice and the US Environmental Protection Agency (EPA) and the Third California Partial Consent Decree agreed with the US State of California and the environmental authority California Air Resources Board, CARB (for more information on these agreements, please see the Litigation section starting on page 177). Mr. Thompson will perform his duties under the Plea Agreement and Third Partial Consent Decrees for a period of three years, which also includes taking measures to further strengthen the Company’s compliance, reporting and monitoring mechanisms and the implementation of an enhanced compliance and ethics program. Mr. Thompson submitted a report on March 30, 2018 in his capacity as the Independent Compliance Monitor on the basis of the Plea Agreement; in accordance with the pro- visions of the Plea Agreement, the report will not be pub- lished. In addition, in his capacity as the Independent Com- pliance Auditor under the terms of the Third Partial Consent Decrees, Mr. Thompson prepared his first annual report, published on August 27, 2018. R I S K M A N A G E M E N T, A U D I T Carefully managing potential risks to the Company is a key component of our daily work. The Volkswagen Group’s risk management system is oriented toward identifying, assess- ing, 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 163 to 166 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 the 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. It also discusses the annual audit planning, the determi- nation of areas of emphasis for the audit, the agreed fee and the auditor’s obligation to provide information. Group Management Report Corporate Governance Report 67 C O 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/en/InvestorRelations.html. 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 introductory 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 this website. The press releases and other information are pub- lished in both English and German. Immediately after their publication in accordance with legal requirements, the Company’s ad-hoc releases are also pub- lished on the same website under the heading “Financial 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 “Financial News, Ad-hoc Releases & Publications”, menu item “Voting Rights” – you can also access details of the notifications filed in the reporting period in compliance with sections 33 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 86 to 89 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/en/InvestorRelations/news-and-publications.html 68 Remuneration Report Group Management Report 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 remuneration system for the Board of Management. P R I N C I P L E S O F B O A 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 Matters involving the remuneration system and the total remuneration of each individual member of the Volks- wagen AG Board of Management are decided on by the Super- visory Board on the basis of the Executive Committee’s recommendations. The remuneration system implements the requirements of the Aktiengesetz (AktG – German Stock Corporation Act) and the recommendations 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 Remuner- ation) 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 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, independent external remuneration and legal consultants, resulted in an alignment with the 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 situ- ation, and 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, com- parative studies on remuneration are conducted on a regular basis. C O M P O N E N T S O F B O A 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 Board of Management’s remuneration system before going into the components of the remuneration for the reporting period. Overview of the remuneration system The remuneration system of the Board of Management com- prises 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 best 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 (corres- ponding to a fixed 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 Group Management Report Remuneration Report 69 Management amounts to a total of €9,000,000 (fixed remu- neration of €2,125,000, a target amount from the annual bonus of €3,045,000, and a target amount from the perfor- mance share plan of €3,830,000). year term (long-term incentive components) and phantom preferred shares. The components of performance-related/ variable remuneration reflect both positive and negative developments. Annual minimum remuneration of €3.5 million (sum of fixed remuneration, annual bonus, LTI and any special pay- ments) was contractually agreed with Mr. Sommer. Annual minimum remuneration of €3.5 million (sum of fixed and variable remuneration) was contractually agreed with Mr. Blessing. Non-performance-related remuneration The non-performance-related remuneration comprises fixed remuneration and fringe benefits. Since 2018, separate remuneration is no longer provided for appointments assumed at Group companies, but is covered by the fixed remuneration. 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 premiums. Taxes due on these noncash benefits are mainly borne by Volkswagen AG. The fixed 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 assessment period and a long-term incentive (LTI) in the form of a performance share plan with a forward-looking three- The Supervisory Board may cap the performance-related/ variable remuneration components in the event of extra- ordinary developments. 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 transforming the Volkswagen Group by transferring employees to 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. 70 Remuneration Report Group Management Report 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 US 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 US 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 C O 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 R T I O N AT E ) C O 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 2018 % 2017 2018 Maximum threshold 100% level of target Minimum threshold Actual Target achievement (in %) 25.0 17.0 9.0 18.6 110 25.0 17.0 Maximum threshold 100% level of target 9.0 Minimum threshold 18.5 110 Actual Target achievement (in %) 8.0 6.0 4.0 6.0 100 8.0 6.0 4.0 5.9 98 Group Management Report Group Management Report Group Management Report Group Management Report Remuneration Report Remuneration Report Remuneration Report Remuneration Report 71 71 71 71 Performance share plan – long-term incentive (LTI) Performance share plan – long-term incentive (LTI) Performance share plan – long-term incentive (LTI) Performance share plan – long-term incentive (LTI) The LTI is granted to the Board of Management annually in The LTI is granted to the Board of Management annually in The LTI is granted to the Board of Management annually in The LTI is granted to the Board of Management annually in the form of a performance share plan. Each performance the form of a performance share plan. Each performance the form of a performance share plan. Each performance the form of a performance share plan. Each performance period of the performance share plan has a term of three period of the performance share plan has a term of three period of the performance share plan has a term of three period of the performance share plan has a term of three years. At the time the LTI is granted, the annual target years. At the time the LTI is granted, the annual target years. At the time the LTI is granted, the annual target years. At the time the LTI is granted, the annual target amount under the LTI is converted on the basis of the initial amount under the LTI is converted on the basis of the initial amount under the LTI is converted on the basis of the initial amount under the LTI is converted on the basis of the initial into reference price of Volkswagen’s preferred shares into reference price of Volkswagen’s preferred shares into reference price of Volkswagen’s preferred shares into reference price of Volkswagen’s preferred shares performance shares of Volkswagen AG, which are allocated to performance shares of Volkswagen AG, which are allocated to performance shares of Volkswagen AG, which are allocated to performance shares of Volkswagen AG, which are allocated to the respective member of the Board of Management purely the respective member of the Board of Management purely the respective member of the Board of Management purely the respective member of the Board of Management purely for calculation purposes. The conversion is performed based for calculation purposes. The conversion is performed based for calculation purposes. The conversion is performed based for calculation purposes. The conversion is performed based on the unweighted average of the closing prices of Volks- on the unweighted average of the closing prices of Volks- on the unweighted average of the closing prices of Volks- on the unweighted average of the closing prices of Volks- wagen’s preferred shares for the last 30 trading days wagen’s preferred shares for the last 30 trading days wagen’s preferred shares for the last 30 trading days wagen’s preferred shares for the last 30 trading days preceding January 1 of a given fiscal year. At the end of each preceding January 1 of a given fiscal year. At the end of each preceding January 1 of a given fiscal year. At the end of each preceding January 1 of a given fiscal year. At the end of each year, the number of performance shares is determined year, the number of performance shares is determined year, the number of performance shares is determined year, the number of performance shares is determined definitively for one-third of the three-year performance definitively for one-third of the three-year performance definitively for one-third of the three-year performance definitively for one-third of the three-year performance period based on the degree of target achievement for the period based on the degree of target achievement for the period based on the degree of target achievement for the period based on the degree of target achievement for the annual earnings per Volkswagen preferred share (EPS – annual earnings per Volkswagen preferred share (EPS – annual earnings per Volkswagen preferred share (EPS – annual earnings per Volkswagen preferred share (EPS – earnings per share per preferred share in €). A prerequisite for earnings per share per preferred share in €). A prerequisite for earnings per share per preferred share in €). A prerequisite for earnings per share per preferred share in €). A prerequisite for this is that a threshold is reached. this is that a threshold is reached. this is that a threshold is reached. this is that a threshold is reached. 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 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 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 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 Maximum threshold Maximum threshold Maximum threshold 100% level of target 100% level of target 100% level of target 100% level of target Minimum threshold Minimum threshold Minimum threshold Minimum threshold Actual Actual Actual Actual Target achievement (in %) Target achievement (in %) Target achievement (in %) Target achievement (in %) P E R F O R M A N C E P E R I O D 2 0 1 8 – 2 0 2 0 P E R F O R M A N C E P E R I O D 2 0 1 8 – 2 0 2 0 P E R F O R M A N C E P E R I O D 2 0 1 8 – 2 0 2 0 P E R F O R M A N C E P E R I O D 2 0 1 8 – 2 0 2 0 2017 2017 2017 2017 30.00 30.00 30.00 30.00 20.00 20.00 20.00 20.00 10.00 10.00 10.00 10.00 22.69 22.69 22.69 22.69 113 113 113 113 € € € € Maximum threshold Maximum threshold Maximum threshold Maximum threshold 100% level of target 100% level of target 100% level of target 100% level of target Minimum threshold Minimum threshold Minimum threshold Minimum threshold Actual Actual Actual Actual Target achievement (in %) Target achievement (in %) Target achievement (in %) Target achievement (in %) 2018 2018 2018 2018 30.0 30.0 30.0 30.0 20.0 20.0 20.0 20.0 10.0 10.0 10.0 10.0 23.82 23.82 23.82 23.82 119 119 119 119 2018 2018 2018 2018 30.0 30.0 30.0 30.0 20.0 20.0 20.0 20.0 10.0 10.0 10.0 10.0 23.82 23.82 23.82 23.82 119 119 119 119 A cash settlement is made at the end of the three-year term of A cash settlement is made at the end of the three-year term of A cash settlement is made at the end of the three-year term of A cash settlement is made at the end of the three-year term of the performance share plan. The payment amount the performance share plan. The payment amount the performance share plan. The payment amount the performance share plan. The payment amount corresponds to the final number of determined performance corresponds to the final number of determined performance corresponds to the final number of determined performance corresponds to the final number of determined performance shares, multiplied by the closing reference price at the end of shares, multiplied by the closing reference price at the end of shares, multiplied by the closing reference price at the end of shares, multiplied by the closing reference price at the end of the three-year period plus a dividend equivalent for the the three-year period plus a dividend equivalent for the the three-year period plus a dividend equivalent for the the three-year period plus a dividend equivalent for the relevant term. The closing reference price is the unweighted relevant term. The closing reference price is the unweighted relevant term. The closing reference price is the unweighted relevant term. The closing reference price is the unweighted average of the closing prices for Volkswagen’s preferred average of the closing prices for Volkswagen’s preferred average of the closing prices for Volkswagen’s preferred average of the closing prices for Volkswagen’s preferred shares for the 30 trading days preceding the last day of the shares for the 30 trading days preceding the last day of the shares for the 30 trading days preceding the last day of the shares for the 30 trading days preceding the last day of the three-year performance period. three-year performance period. three-year performance period. three-year performance period. € € € € Initial reference price Initial reference price Initial reference price Initial reference price Closing reference price Closing reference price Closing reference price Closing reference price Dividend equivalent Dividend equivalent Dividend equivalent Dividend equivalent 1 Determined at the end of the performance period. 1 Determined at the end of the performance period. 1 Determined at the end of the performance period. 1 Determined at the end of the performance period. 2017 2017 2017 2017 127.84 127.84 127.84 127.84 1 1 1 – – – 1 – 2.06 2.06 2.06 2.06 2018 2018 2018 2018 169.42 169.42 169.42 169.42 1 1 1 – – – 1 – 3.96 3.96 3.96 3.96 The payment amount under the performance share plan is The payment amount under the performance share plan is The payment amount under the performance share plan is The payment amount under the performance share plan is limited to 200% of the target amount. An advance of 20% on limited to 200% of the target amount. An advance of 20% on limited to 200% of the target amount. An advance of 20% on limited to 200% of the target amount. An advance of 20% on the payment amount is paid if the average ratio of capex to the payment amount is paid if the average ratio of capex to the payment amount is paid if the average ratio of capex to the payment amount is paid if the average ratio of capex to sales revenue in the Automotive Division or the R&D ratio of sales revenue in the Automotive Division or the R&D ratio of sales revenue in the Automotive Division or the R&D ratio of sales revenue in the Automotive Division or the R&D ratio of the last three years is smaller than 5%. the last three years is smaller than 5%. the last three years is smaller than 5%. the last three years is smaller than 5%. If the employment contract of a member of the Board of If the employment contract of a member of the Board of If the employment contract of a member of the Board of If the employment contract of a member of the Board of Management concludes prior to the end of the performance Management concludes prior to the end of the performance Management concludes prior to the end of the performance Management concludes prior to the end of the performance period due to extraordinary termination based on good period due to extraordinary termination based on good period due to extraordinary termination based on good period due to extraordinary termination based on good cause, or if the member of the Board of Management starts cause, or if the member of the Board of Management starts cause, or if the member of the Board of Management starts cause, or if the member of the Board of Management starts working for a competitor, (also referred to as “bad-leaver working for a competitor, (also referred to as “bad-leaver working for a competitor, (also referred to as “bad-leaver working for a competitor, (also referred to as “bad-leaver cases”), the unpaid performance shares will expire. For cases”), the unpaid performance shares will expire. For cases”), the unpaid performance shares will expire. For cases”), the unpaid performance shares will expire. For members of the Board of Management who held their seat as members of the Board of Management who held their seat as members of the Board of Management who held their seat as members of the Board of Management who held their seat as of December 31, 2016, this rule only applies in the event of a of December 31, 2016, this rule only applies in the event of a of December 31, 2016, this rule only applies in the event of a of December 31, 2016, this rule only applies in the event of a reappointment or new appointment. reappointment or new appointment. reappointment or new appointment. reappointment or new appointment. In connection with the appointment of the Chairman of In connection with the appointment of the Chairman of In connection with the appointment of the Chairman of In connection with the appointment of the Chairman of the Board of Management, the employment contract of the Board of Management, the employment contract of the Board of Management, the employment contract of the Board of Management, the employment contract of Mr. Diess was terminated by mutual agreement in 2018 and a Mr. Diess was terminated by mutual agreement in 2018 and a Mr. Diess was terminated by mutual agreement in 2018 and a Mr. Diess was terminated by mutual agreement in 2018 and a new employment contract was entered into, although the new employment contract was entered into, although the new employment contract was entered into, although the new employment contract was entered into, although the expiry rule described above applies from the 2018 –2020 expiry rule described above applies from the 2018 –2020 expiry rule described above applies from the 2018 –2020 expiry rule described above applies from the 2018 –2020 performance period onwards. performance period onwards. performance period onwards. performance period onwards. Ms. Werner was appointed as a member of the Board of Ms. Werner was appointed as a member of the Board of Ms. Werner was appointed as a member of the Board of Ms. Werner was appointed as a member of the Board of Management in 2017. Mr. Blume, Mr. Kilian and Mr. Sommer Management in 2017. Mr. Blume, Mr. Kilian and Mr. Sommer Management in 2017. Mr. Blume, Mr. Kilian and Mr. Sommer Management in 2017. Mr. Blume, Mr. Kilian and Mr. Sommer were newly appointed to the Board of Management in 2018. were newly appointed to the Board of Management in 2018. were newly appointed to the Board of Management in 2018. were newly appointed to the Board of Management in 2018. In the introductory phase of the performance share plan In the introductory phase of the performance share plan In the introductory phase of the performance share plan In the introductory phase of the performance share plan (2017–2018), the members of the Board of Management who (2017–2018), the members of the Board of Management who (2017–2018), the members of the Board of Management who (2017–2018), the members of the Board of Management who were Board members as of December 31, 2016 will generally were Board members as of December 31, 2016 will generally were Board members as of December 31, 2016 will generally were Board members as of December 31, 2016 will generally receive advances of 80% of their target amount. Mr. Stadler receive advances of 80% of their target amount. Mr. Stadler receive advances of 80% of their target amount. Mr. Stadler receive advances of 80% of their target amount. Mr. Stadler did not receive an advance payment for the performance did not receive an advance payment for the performance did not receive an advance payment for the performance did not receive an advance payment for the performance period 2018–2020. Mr. Blume will receive corresponding period 2018–2020. Mr. Blume will receive corresponding period 2018–2020. Mr. Blume will receive corresponding period 2018–2020. Mr. Blume will receive corresponding advances for the performance periods 2018–2020 (propor- advances for the performance periods 2018–2020 (propor- advances for the performance periods 2018–2020 (propor- advances for the performance periods 2018–2020 (propor- tionate) and 2019–2021. The two advances will each be paid tionate) and 2019–2021. The two advances will each be paid tionate) and 2019–2021. The two advances will each be paid tionate) and 2019–2021. The two advances will each be paid after the first year of the performance period. A settlement is after the first year of the performance period. A settlement is after the first year of the performance period. A settlement is after the first year of the performance period. A settlement is made based on actual achievement of targets at the end of made based on actual achievement of targets at the end of made based on actual achievement of targets at the end of made based on actual achievement of targets at the end of the relevant three-year performance period. the relevant three-year performance period. the relevant three-year performance period. the relevant three-year performance period. 72 Remuneration Report Group Management Report 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 DS L TI 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 € Herbert Diess Karlheinz Blessing (until April 12, 2018) Oliver Blume (since April 13, 2018) Francisco Javier Garcia Sanz (until April 12, 2018) Jochem Heizmann Gunnar Kilian (since April 13, 2018) Matthias Müller (until April 12, 2018) Andreas Renschler Stefan Sommer (since September 1, 2018) Rupert Stadler (until October 2, 2018) Hiltrud Dorothea Werner (since February 1, 2017) 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 P E R F O R M A N C E P E R I O D 2 0 1 8 – 2 0 2 0 Number of performance shares allocated at the grant date Fair value at the grant date Number of performance shares allocated at the grant date Fair value at the grant date 14,080 14,080 – 14,080 14,080 – 29,959 14,080 – 14,080 12,907 14,080 141,426 2,048,640 2,025,408 – 1,890,944 2,031,040 – 4,309,602 1,891,648 – 2,025,408 1,856,672 2,025,408 20,104,770 19,212 10,624 7,614 10,624 10,624 7,614 22,607 10,624 3,541 10,6241 10,624 10,624 134,956 1 In connection with Mr. Stadler’s departure, the number of performance shares allocated to him was reduced to 4,890 (fair value: €828,464). € Herbert Diess Karlheinz Blessing (until April 12, 2018) Oliver Blume (since April 13, 2018) Francisco Javier Garcia Sanz (until April 12, 2018) Jochem Heizmann Gunnar Kilian (since April 13, 2018) Matthias Müller (until April 12, 2018) Andreas Renschler Stefan Sommer (since September 1, 2018) Rupert Stadler (until October 2, 2018) Hiltrud Dorothea Werner (since February 1, 2017) Frank Witter Total Provision as of Dec. 31, 2018 Intrinsic value as of Dec. 31, 2018 2,617,527 6,573,347 401,323 4,141,211 3,422,628 401,323 10,770,485 5,298,813 97,766 2,658,630 2,166,448 6,366,831 3,056,319 3,802,998 – 3,802,898 3,802,898 – 8,091,750 3,802,898 – 3,531,782 – 3,802,898 Comprehensive income 2018 arising from performance shares 1,547,771 796,447 401,323 49,867 759,638 401,323 1,246,413 1,991,565 97,766 – 938,995 1,542,922 2,678,125 Provision as of Dec. 31, 2017 Intrinsic value as of Dec. 31, 2017 3,673,623 5,202,356 – 5,405,211 4,102,990 – 10,201,381 4,747,249 – 4,698,709 623,526 5,128,707 2,222,245 2,222,245 – 2,222,245 2,222,245 – 4,728,427 2,222,245 – 2,222,245 – 2,222,245 44,916,334 33,694,440 10,574,164 43,783,751 20,284,141 43,783,751 2,840,468 1,799,918 1,349,810 1,799,918 1,799,918 1,349,810 3,829,909 1,799,918 488,446 1,799,9181 1,799,918 1,799,918 22,457,869 Comprehensive income 2017 arising from performance shares 3,673,623 5,202,356 – 5,405,211 4,102,990 – 10,201,381 4,747,249 – 4,698,709 623,526 5,128,707 Group Management Report Remuneration Report 73 The number of performance shares includes the provisional performance shares allocated at the grant date of the perfor- mance share plan. The fair value as at the grant date was determined using a recognized valuation technique. The provision recognized as of December 31, 2018 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 periods 2017–2019 and 2018–2020. The amount therefore depends on the individual contract term and the relevant vesting arrangements for the performance shares. 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, 2018. Only the nonforfeitable (vested) performance 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 Volks- wagen’s preferred shares) preceding December 31, 2018, taking the dividends paid per preferred share during the per- formance period into account. The net value of all amounts recognized in income for the performance shares in fiscal year 2018 is recorded in comprehensive income 2018 arising from performance shares according to the IFRSs. 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 fixed 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 €5,500,000 for each member of the Board of Manage- ment. If the total remuneration cap is exceeded, the variable components 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 ⅔% 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. 74 Remuneration Report Group Management Report 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 dividend equivalents in the amount of the dividends paid on real preferred shares. The shares will generally be reconverted and paid out when the three-year holding period has expired or – in the event that members retire from office early – at the time 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 the date upon which members leave the company, 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 – excluding any 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 accor- dingly to a minimum of €0. The amount disbursed may not be more than twice the amount originally withheld. In fiscal year 2018, Mr. Garcia Sanz and Mr. Müller – Board members participating in the amount withheld – retired from the Board of Management of Volkswagen AG, while their contract of service remained in place. Therefore, they did not receive any early disbursement. Moreover, the three- year holding period still applies. Due to early termination of the contract of service in 2018, Mr. Stadler received a pay- ment from the amount withheld. 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 2018. The fair value as of December 31, 2018 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 December 31, 2018. 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, 2018, taking the initial reference price and the dividends for the relevant fiscal years into account. The net value of all amounts recognized in income for the phantom shares in fiscal year 2018 is recorded in comprehensive income 2018 arising from phantom preferred shares according to the IFRSs. 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 8 € Number of phantom shares Provision Dec. 31, 2018 Provision Dec. 31, 2017 Intrinsic value Dec. 31, 2018 Intrinsic value Dec. 31, 2017 Comprehensive income 2018 arising from phantom preferred shares Comprehensive income 2017 arising from phantom preferred shares Herbert Diess 4,317 512,740 596,428 540,704 620,051 – 83,688 169,732 Francisco Javier Garcia Sanz (until April 12, 2018) Jochem Heizmann Matthias Müller (until April 12, 2018) Andreas Renschler Rupert Stadler (until October 2, 2018) Frank Witter Total 8,633 8,633 10,583 7,914 8,633 1,990 1,025,361 1,025,361 1,256,967 939,964 1,192,718 1,192,718 1,462,126 1,093,382 1,081,283 1,081,283 1,325,521 991,229 1,239,958 1,239,958 1,520,036 1,136,688 – 1,192,718 – 1,239,958 236,357 274,934 249,248 285,824 – 47,418 – 167,356 – 58,128 – 153,418 – 68,178 – 38,577 339,425 339,425 416,094 311,156 339,425 78,241 50,703 4,996,750 7,005,022 5,269,268 7,282,472 – 616,764 1,993,496 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 O A R D O F M A N A G E M E N T I N A C C O R D A N C E W I T H T H E G E R M A N C O M M E R C I A L C O D E € Herbert Diess Karlheinz Blessing (until April 12, 2018) Oliver Blume (since April 13, 2018) Francisco Javier Garcia Sanz (until April 12, 2018) Jochem Heizmann Gunnar Kilian (since April 13, 2018) Matthias Müller (until April 12, 2018) Andreas Renschler Stefan Sommer (since September 1, 2018) Rupert Stadler (until October 2, 2018) Hiltrud Dorothea Werner (since February 1, 2017) Frank Witter Members of the Board of Management who left in the previous year 2 0 1 8 2 0 1 7 Non-performance- Performance- related related Long-term incentive Total Total component component component remuneration remuneration 1,982,182 483,329 1,013,499 469,821 1,605,076 1,027,207 672,083 1,596,305 579,020 687,284 1,522,095 1,413,363 3,055,182 435,831 1,152,506 435,831 1,608,147 1,152,506 983,042 1,608,147 536,049 643,642 1,608,147 1,608,147 2,840,468 1,799,918 1,349,810 1,799,918 1,799,918 1,349,810 3,829,909 1,799,918 488,446 1,799,9181 1,799,918 1,799,918 7,877,832 2,719,078 3,515,815 2,705,570 5,013,141 3,529,523 5,485,033 5,004,370 1,603,515 3,130,844 4,930,160 4,821,428 5,034,323 5,193,502 – 5,009,209 5,139,764 – 10,140,544 5,025,264 – 5,002,721 4,626,272 5,004,967 – – – – 109,361 Total 13,051,264 14,827,178 22,457,869 50,336,310 50,285,927 1 In connection with Mr. Stadler’s departure, the number of performance shares allocated to him was reduced to 4,890 (fair value: €828,464). 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 O A R D O F M A N A G E M E N T I N A C C O R D A N C E W I T H T H E G E R M A N C O R P O R AT E G O V E R N A N C E C O 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 generally received advances on the target amount, which in accordance with the Code are reported in the tables as benefits received for the fiscal year in which the performance shares under the plan were allocated; Mr. Stadler did not receive an advance for the 2018–2020 performance period. Mr. Blume will receive corresponding advances for the performance period 2018–2020 (proportionate) and 2019–2021. 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 new members of the Board of Manage- ment were appointed on different dates throughout 2018, there is an individual grant date for these Board members and, consequently, a different fair value. In the Board of Management remuneration tables in accordance with the Code showing benefits received, entries for the phantom preferred shares from the amount withheld for fiscal year 2015 are only included for Mr. Stadler. No other payments for the phantom preferred shares were made in financial year 2018. 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 O A 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 R A N T E D ) I N A C C O R D A N C E W I T H T H E G E R M A N C O R P O R AT E G O V E R N A N C E C O D E H E R B E R T D I E S S Chairman of the Board of Management of Volkswagen AG, Chairman of the Brand Board of Management of Volkswagen Passenger Cars, Volume brand group € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017–2019) LTI (performance share plan 2018–2020) Total1 Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (minimum) 2018 (maximum) 1,905,414 1,350,000 1,350,000 1,905,414 1,905,414 1,905,414 76,768 1,982,182 3,055,182 2,603,867 – 2,603,867 7,641,230 850,620 78,104 1,428,104 1,557,579 1,440,000 1,440,000 – 78,104 1,428,104 1,350,000 2,048,640 2,048,640 – 4,425,683 4,826,744 814,654 814,654 76,768 1,982,182 2,564,750 2,840,468 – 2,840,468 7,387,400 850,620 76,768 1,982,182 0 0 – 0 76,768 1,982,182 4,616,550 6,509,667 – 6,509,667 1,982,182 13,108,398 850,620 850,620 8,491,850 5,240,337 5,641,398 8,238,020 2,832,802 13,959,018 1 The fixed remuneration agreed with Mr. Diess for fiscal year 2018 is €1,905,414, while the target amount for the annual bonus is €2,564,750, the target amount for the performance share plan is €3,254,833 and the total remuneration cap is €8,725,000. The values were calculated pro rata for the term of office as a full member of the Board of Management up until April 12, 2018 and for the term of office as Chairman of the Board of Management starting April 13, 2018. K A R L H E I N Z B L E S S I N G Human Resources and Organization Left: April 12, 2018 € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017–2019) LTI (performance share plan 2018–2020) Total1 Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (minimum) 2018 (maximum) 382,500 100,829 483,329 435,831 408,000 – 408,000 1,350,000 1,350,000 260,515 1,610,515 1,557,579 1,440,000 1,440,000 – 260,515 1,610,515 1,350,000 2,025,408 2,025,408 – 1,327,160 4,608,094 4,985,923 236,664 686,413 686,413 382,500 100,829 483,329 382,500 1,799,918 – 1,799,918 2,665,747 236,664 382,500 100,829 483,329 0 0 – 0 1,092,496 236,664 382,500 100,829 483,329 688,500 3,600,000 – 3,600,000 4,771,829 236,664 1,563,824 5,294,507 5,672,336 2,902,411 1,329,159 5,008,493 1 Minimum amount for 2018 includes a prorated top-up amount on minimum remuneration of €3.5 million. 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 O A 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 R A N T E D ) I N A C C O R D A N C E W I T H T H E G E R M A N C O R P O R AT E G O V E R N A N C E C O D E O L I V E R B L U M E Chairman of the Board of Management of Dr. Ing. h.c. F. Porsche AG, Sport & Luxury brand group Joined: April 13, 2018 € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2018–2020) Total Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (minimum) 2018 (maximum) 967,500 45,999 1,013,499 1,152,506 1,032,000 1,032,000 3,198,005 588,354 3,786,359 – – – – – – – – – – – – – – – – – – 967,500 45,999 967,500 45,999 1,013,499 1,013,499 967,500 1,349,810 1,349,810 3,330,809 588,354 0 0 0 1,013,499 588,354 967,500 45,999 1,013,499 1,741,500 2,580,000 2,580,000 5,334,999 588,354 3,919,163 1,601,853 5,923,353 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 Left: April 12, 2018 € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017–2019) LTI (performance share plan 2018–2020) Total Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (minimum) 2018 (maximum) 382,500 87,321 469,821 435,831 408,000 – 408,000 1,350,000 1,350,000 210,686 1,560,686 1,557,579 1,440,000 1,440,000 – 210,686 1,560,686 1,350,000 1,890,944 1,890,944 – 1,313,652 4,558,265 4,801,631 250,087 889,410 889,410 382,500 87,321 469,821 382,500 1,799,918 – 1,799,918 2,652,239 250,087 1,563,740 5,447,675 5,691,041 2,902,326 382,500 87,321 469,821 0 0 – 0 469,821 250,087 719,908 382,500 87,321 469,821 688,500 3,600,000 – 3,600,000 4,758,321 250,087 5,008,408 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 O A 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 R A N T E D ) I N A C C O R D A N C E W I T H T H E G E R M A N C O R P O R AT E G O V E R N A N C E C O 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) LTI (performance share plan 2018–2020) Total Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (minimum) 2018 (maximum) 1,350,000 1,351,278 1,351,278 1,350,000 1,350,000 1,350,000 255,076 1,605,076 1,608,147 1,440,000 – 1,440,000 4,653,223 – 199,867 1,551,145 1,557,579 1,440,000 1,440,000 – 199,867 1,551,145 1,350,000 2,031,040 2,031,040 – 4,548,724 4,932,185 – – 255,076 1,605,076 1,350,000 1,799,918 – 1,799,918 4,754,994 – 255,076 1,605,076 0 0 – 0 1,605,076 – 255,076 1,605,076 2,430,000 3,600,000 – 3,600,000 7,635,076 – 4,653,223 4,548,724 4,932,185 4,754,994 1,605,076 7,635,076 G U N N A R K I L I A N Human Resources Joined: April 13, 2018 € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2018–2020) Total Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (minimum) 2018 (maximum) 967,500 59,707 1,027,207 1,152,506 – – 2,179,713 703,228 2,882,941 – – – – – – – – – – – – – – – – – – 967,500 59,707 967,500 59,707 1,027,207 1,027,207 967,500 1,349,810 1,349,810 3,344,517 703,228 0 0 0 1,027,207 703,228 967,500 59,707 1,027,207 1,741,500 2,580,000 2,580,000 5,348,707 703,228 4,047,745 1,730,435 6,051,935 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 O A 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 R A N T E D ) I N A C C O R D A N C E W I T H T H E G E R M A N C O R P O R AT E G O V E R N A N C E C O D E M A T T H I A S M Ü L L E R Chairman of the Board of Management Left: April 12, 2018 € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017–2019)1 LTI (performance share plan 2018–2020)1 Total Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (minimum) 2018 (maximum) 602,083 70,000 672,083 983,042 1,085,167 – 1,085,167 2,740,292 187,207 2,125,000 2,125,000 192,735 2,317,735 3,513,207 3,830,000 3,830,000 – 192,735 2,317,735 3,045,000 4,309,602 4,309,602 – 9,660,942 9,672,337 612,807 612,807 602,083 70,000 672,083 862,750 3,829,909 – 3,829,909 5,364,742 187,207 2,927,498 10,273,749 10,285,144 5,551,949 602,083 70,000 672,083 0 0 – 0 672,083 187,207 859,290 602,083 70,000 672,083 1,552,950 7,660,000 – 7,660,000 9,885,033 187,207 10,072,240 1 Advance of 100% in the introductory phase of the performance share plan, pro rata for 2018. A N D R E A S R E N S C H L E R Chairman of the Board of Management of TRATON SE, Truck & Bus brand group € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017–2019) LTI (performance share plan 2018–2020) Total Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (minimum) 2018 (maximum) 1,350,000 1,350,000 1,350,000 1,350,000 1,350,000 1,350,000 246,305 1,596,305 1,608,147 1,440,000 – 1,440,000 4,644,452 5,249,526 9,893,978 226,037 1,576,037 1,557,579 1,440,000 1,440,000 – 4,573,616 5,361,551 9,935,167 226,037 1,576,037 1,350,000 1,891,648 1,891,648 – 4,817,685 5,361,551 10,179,236 246,305 1,596,305 1,350,000 1,799,918 – 1,799,918 4,746,223 5,249,526 9,995,749 246,305 1,596,305 0 0 – 0 1,596,305 5,249,526 6,845,831 246,305 1,596,305 2,430,000 3,600,000 – 3,600,000 7,626,305 5,249,526 12,875,831 80 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 O A 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 R A N T E D ) I N A C C O R D A N C E W I T H T H E G E R M A N C O R P O R AT E G O V E R N A N C E C O D E S T E F A N S O M M E R Components & Procurement Joined: September 1, 2018 € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2018–2020) Total1 Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (minimum) 2018 (maximum) 450,000 129,020 579,020 536,049 – – 1,295,687 270,997 1,566,684 – – – – – – – – – – – – – – – – – – 450,000 129,020 579,020 450,000 488,446 488,446 450,000 129,020 579,020 0 0 0 1,517,466 1,295,687 270,997 270,997 450,000 129,020 579,020 810,000 1,200,000 1,200,000 2,589,020 270,997 1,788,463 1,566,684 2,860,017 1 Benefits received and the minimum amount for 2018 include a prorated top-up amount on minimum remuneration of €3.5 million. R U P E R T S T A D L E R Chairman of the Board of Management of AUDI AG, Premium brand group Left: October 2, 2018 Benefits received Benefits granted 2018 2017 2017 2018 2018 (minimum) 2018 (maximum) 621,370 65,914 687,284 643,642 – – 1,044,593 2,375,519 379,726 1,350,000 1,350,000 69,734 1,419,734 1,557,579 1,440,000 1,440,000 – – 69,734 1,419,734 1,350,000 2,025,408 2,025,408 – – 621,370 65,914 687,284 621,370 1,799,918 – 1,799,9181 – 621,370 65,914 687,284 0 0 – 0 – 4,417,313 4,795,142 3,108,572 829,730 829,730 379,726 687,284 379,726 621,370 65,914 687,284 1,118,466 3,600,000 – 3,600,000 – 5,405,750 379,726 2,755,245 5,247,043 5,624,872 3,488,298 1,067,010 5,785,476 Multiyear performance-related remuneration 1,044,593 € Fixed remuneration Fringe benefits Total One-year performance-related remuneration LTI (performance share plan 2017–2019) LTI (performance share plan 2018–2020) Phantom shares Total Pension expense Total remuneration 1 In connection with Mr. Stadler’s departure, the number of performance shares allocated to him was reduced to 4,890 (fair value: €828,464). Group Management Report Remuneration Report 81 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 O A 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 R A N T E D ) I N A C C O R D A N C E W I T H T H E G E R M A N C O R P O R AT E G O V E R N A N C E C O 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) LTI (performance share plan 2018–2020) Total Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (Minimum) 2018 (Maximum) 1,350,000 1,237,500 1,237,500 1,350,000 1,350,000 1,350,000 172,095 1,522,095 1,608,147 104,319 1,341,819 1,427,781 – – – – – – 104,319 1,341,819 1,237,500 1,856,672 1,856,672 – 3,130,242 2,769,600 4,435,991 953,404 930,689 930,689 172,095 1,522,095 1,350,000 1,799,918 – 1,799,918 4,672,013 953,404 172,095 1,522,095 0 0 – 0 1,522,095 953,404 172,095 1,522,095 2,430,000 3,600,000 – 3,600,000 7,552,095 953,404 4,083,646 3,700,289 5,366,680 5,625,417 2,475,499 8,505,499 F R A N K W I T T E R Finance & IT € Fixed remuneration Fringe benefits Total One-year performance-related remuneration Multiyear performance-related remuneration LTI (performance share plan 2017–2019) LTI (performance share plan 2018–2020) Total Pension expense Total remuneration Benefits received Benefits granted 2018 2017 2017 2018 2018 (Minimum) 2018 (Maximum) 1,350,000 1,350,000 1,350,000 1,350,000 1,350,000 1,350,000 63,363 1,413,363 1,608,147 1,440,000 – 1,440,000 4,461,510 849,556 71,980 1,421,980 1,557,579 1,440,000 1,440,000 – 71,980 1,421,980 1,350,000 2,025,408 2,025,408 – 4,419,559 4,797,388 692,743 692,743 63,363 1,413,363 1,350,000 1,799,918 – 1,799,918 4,563,281 849,556 63,363 1,413,363 0 0 – 0 1,413,363 849,556 63,363 1,413,363 2,430,000 3,600,000 – 3,600,000 7,443,363 849,556 5,311,066 5,112,302 5,490,131 5,412,837 2,262,919 8,292,919 82 Remuneration Report Group Management Report P O ST - E M P L OYM 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 provision for members of the Board of Management with an existing occupational pension based on final remuneration is calculated as a percentage of the fixed remuneration, starting from 50%. For Mr. Garcia Sanz, Mr. Heizmann, Mr. Renschler and Mr. Stadler, the individual percentages rise by two percentage points for every year of service. For Mr. Müller, the percentage increases by 4.5% as of March 1, 2017 and 2018. 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 fixed level of remuneration was set for Mr. Renschler on his appointment. The Supervisory Board has capped the percentage at 70%. These benefits are not broken down any further into performance-related compo- nents and long-term incentive components. Mr. Heizmann reached a retirement pension entitlement of 70% of his fixed level of remuneration at the end of 2018; the entitlement for Mr. Renschler is 68%. The increase in the fixed remuneration as a consequence of the remuneration system in place from fiscal year 2017 is therefore not taken into account for the incumbent members of the Board of Management of Volks- wagen AG with an existing occupational pension based on final remuneration. 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. For the members of the Board of Management of Volks- wagen AG appointed before February 24, 2017 with a defined contribution pension scheme, a contribution rate of 50% of the fixed remuneration applies. For the members of the Board of Management of Volkswagen AG appointed after February 24, 2017 with a defined contribution pension scheme, a contribution rate of 40% of the fixed remuneration applies. The resulting amount will be credited to the pension account. Ms. Werner, Mr. Blessing, Mr. Blume, Mr. Diess, Mr. Kilian, Mr. Sommer and Mr. Witter received a defined contribution plan, which is based in principle on a works agreement that also applies to the employees of Volkswagen AG covered by collective agreements and includes retirement, invalidity and surviving dependents’ benefits. A pension contribution in the amount of 50% of the fixed level of remuneration for Ms. Werner, Mr. Blessing, Mr. Diess and Mr. Witter and in the amount of 40% of the fixed level of remuneration for Mr. Blume, Mr. Kilian and Mr. Sommer 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 agree- ments. 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 Com- pany, although these cannot be claimed before he reaches the age of 60. On December 31, 2018, the pension obligations for members of the Board of Management in accordance with IAS 19 amounted to €55.8 (125.4) million. €11.9 (12.9) 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 €45.9 (92.4) million. Measured in accor- dance with German GAAP, €9.5 (15.8) million was added to the provision in the reporting period. Retired members of the Board of Management and their surviving dependents received €44.0 (19.9) million, or €44.0 (19.9) 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 €324.0 (269.0) million, or €276.2 (214.9) million measured in accordance with German GAAP. The following rule applies to Board of Management con- tracts 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, or 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. 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 83 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 2018. 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 O A R D O F M A N A G E M E N T I N 2 0 1 8 ( 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 ) € Herbert Diess Karlheinz Blessing (until April 12, 2018) Oliver Blume (since April 13, 2018) Francisco Javier Garcia Sanz (until April 12, 2018) Jochem Heizmann Gunnar Kilian (since April 13, 2018) Matthias Müller (until April 12, 2018) Andreas Renschler Stefan Sommer (since September 1, 2018) Rupert Stadler (until October 2, 2018) Hiltrud Dorothea Werner (since February 1, 2017) Frank Witter Pension expense Present values as of December 311 850,620 (814,654) 236,664 (686,413) 588,354 – 250,087 (889,410) – – 703,228 – 187,207 (612,807) 5,249,526 (5,361,551) 270,997 – 379,726 (829,730) 953,404 (930,689) 849,556 (692,743) 3,410,933 (2,169,255) – (1,623,275) 588,354 – – (22,544,823) 18,098,438 (19,254,055) 703,228 – – (30,065,068) 20,109,236 (16,278,653) 270,997 – – (22,262,176) 1,872,035 (975,823) 10,765,942 (10,214,190) Members of the Board of Management who left in the previous year Total (54,091) 10,519,369 (10,872,088) – 55,819,163 (125,387,318) 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). 84 Remuneration Report Group Management Report > Committee chairpersons receive double this amount, while deputy chairpersons receive one-and-a-half times the com- mittee 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 2018, the members of the Supervisory Board received €4,538,986 (3,786,839). Of this figure, €2,297,500 related to the work of the Supervisory Board and €936,389 related to the work in the committees. S U P E R V I S O R Y B O A 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 is comprised entirely of non-performance-related remunera- tion components. Remuneration for supervisory board work at subsidiaries continues in part to comprise a mix of non- performance-related and performance- related components. The following applies to members of the Supervisory Board of Volkswagen AG with 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 (MitbestG – German Codetermination Act) are not taken into account. Group Management Report Remuneration Report 85 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 R Y B O A R D € Hans Dieter Pötsch Jörg Hofmann3 Hussain Ali Al-Abdulla Hessa Sultan Al-Jaber Bernd Althusmann4 (since December 14, 2017) Birgit Dietze3 Annika Falkengren (until February 5, 2018) Hans-Peter Fischer3 Marianne Heiß (since February 14, 2018) Uwe Hück3 Johan Järvklo3 Ulrike Jakob3 (since May 10, 2017) Louise Kiesling Peter Mosch3 Bertina Murkovic3 (since May 10, 2017) Bernd Osterloh3 Hans Michel Piëch Ferdinand Oliver Porsche Wolfgang Porsche Athanasios Stimoniaris3 (since May 10, 2017) Stephan Weil4 Members of the Supervisory Board who left 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 T O T A L 300,000 200,000 100,000 100,000 100,000 100,000 9,444 100,000 88,056 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 – 100,000 75,000 – – 43,194 50,000 – – 43,194 – – – – 100,000 50,000 125,000 – 150,000 150,000 – 50,000 – 184,500 19,000 8,000 11,000 12,000 17,000 – 14,000 67,050 84,500 14,000 12,000 11,000 146,589 14,000 39,233 172,000 162,500 172,500 130,225 14,000 – 2018 584,500 294,000 108,000 111,000 155,194 167,000 9,444 114,000 198,300 184,500 114,000 112,000 111,000 346,589 164,000 264,233 272,000 412,500 422,500 230,225 164,000 – 2017 –2 295,000 107,000 111,000 4,583 163,000 150,750 109,000 – 180,500 110,000 68,028 111,000 293,107 102,042 226,021 250,600 397,100 411,400 170,778 174,000 351,931 Total 2,297,500 936,389 1,305,097 4,538,986 3,786,839 1 Attendance fees, membership of other Group bodies (non-performance-related: €355,483; performance-related: €534,614). 2 Mr. Pötsch waived his remuneration for fiscal year 2017 in full. 3 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). 4 Under section 5(3) of the Niedersächsisches Ministergesetz (German 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. 86 Executive Bodies Group Management Report Executive Bodies Members of the Board of Management and their appointments Appointments: as of December 31, 2018 or the leaving date from the Board of Management of Volkswagen AG DR.-ING. HERBERT DIESS (60) DR. RER. POL. H.C. Chairman (since April 13, 2018) FRANCISCO JAVIER GARCIA SANZ (61) ANDREAS RENSCHLER (60) Chairman of the Board of Management of TRATON AG2, Chairman of the Brand Board of Management Procurement of Volkswagen Passenger Cars, Volume brand group, China (since January 11, 2019) July 1, 20151 Appointments: July 1, 2001 – April 12, 20181 Appointments (as of April 12, 2018): Hochtief AG, Essen Criteria CaixaHolding S.A., Barcelona Truck & Bus brand group February 1, 20151 Appointments: Deutsche Messe AG, Hanover ABRAHAM SCHOT (57) FC Bayern München AG, Munich PROF. DR. RER. POL. DR.-ING. E.H. Chairman of the Board of Management of AUDI AG, Infineon Technologies AG, Neubiberg JOCHEM HEIZMANN (66) DR. RER. SOC. KARLHEINZ BLESSING (61) January 11, 2007 – January 10, 20191 China Premium brand group January 1, 20191 Human Resources and Organization January 1, 2016 – April 12, 20181 Appointments (as of April 12, 2018): Wolfsburg AG, Wolfsburg OLIVER BLUME (50) Chairman of the Executive Board of Dr. Ing. h.c. F. Porsche AG, Sport & Luxury brand group April 13, 20181 Appointments (as of January 10, 2019): DR.-ING. STEFAN SOMMER (55) Lufthansa Technik AG, Hamburg Components & Procurement OBO Bettermann Holding GmbH Co. KG, Menden September 1, 20181 GUNNAR KILIAN (43) RUPERT STADLER (55) Human Resources April 13, 20181 Appointments: Wolfsburg AG, Wolfsburg MATTHIAS MÜLLER (65) Chairman March 1, 2015 – April 12, 20181 Chairman of the Board of Management of AUDI AG, Premium brand group January 1, 2010 – October 2, 20181 Appointments (as of October 2, 2018): FC Bayern München AG, Munich HILTRUD DOROTHEA WERNER (52) Integrity and Legal Affairs February 1, 20171 FRANK WITTER (59) Finance & IT October 7, 20151 As part of their duty to manage and supervise the Membership of statutory supervisory boards in 1 Beginning or period of membership of the Board of Group’s business, the members of the Board of Germany. Management. Management hold other offices on the supervisory Comparable appointments in Germany and abroad. 2 Formerly Volkswagen Truck & Bus GmbH or boards of consolidated Group companies and other significant investees. Volkswagen Truck & Bus AG; now TRATON SE. Group Management Report Executive Bodies 87 Executive Bodies Members of the Supervisory Board and their appointments Appointments: as of December 31, 2018 or the leaving date from the Supervisory Board of Volkswagen AG HANS DIETER PÖTSCH (67) DR. HUSSAIN ALI AL-ABDULLA (61) DR. BERND ALTHUSMANN (52) Chairman (since October 7, 2015) Minister of State, Qatar Minister of Economic Affairs, Labor, Transport and Chairman of the Executive Board and April 22, 20101 Chief Financial Officer of Porsche Automobil Holding SE Appointments: Digitalization for the Federal State of Lower Saxony December 14, 20171 October 7, 20151 Appointments: AUDI AG, Ingolstadt Gulf Investment Corporation, Safat/Kuwait Appointments: Masraf Al Rayan, Doha (Chairman) Qatar Investment Authority, Doha Deutsche Messe AG, Hanover (Chairman) Container Terminal Wilhelmshaven JadeWeserPort- Autostadt GmbH, Wolfsburg Qatar Supreme Council for Economic Affairs Marketing GmbH & Co. KG, Wilhelmshaven Bertelsmann Management SE, Gütersloh and Investment, Doha (Chairman) Bertelsmann SE & Co. KGaA, Gütersloh Dr. Ing. h.c. F. Porsche AG, Stuttgart TRATON AG2, Munich (Chairman) Wolfsburg AG, Wolfsburg DR. HESSA SULTAN AL-JABER (59) Wilhelmshaven (Chairman) Chairwoman of the Supervisory Board of JadeWeserPort Realisierungs-Beteiligungs GmbH, Malomatia Qatar, Doha Wilhelmshaven (Chairman) JadeWeserPort Realisierungs GmbH & Co. KG, Porsche Austria Gesellschaft m.b.H., Salzburg Chairwoman of the Supervisory Board of Niedersachsen Ports GmbH & Co. KG, Oldenburg (Chairman) Qatar Satellite Company (Es'hailSat), Doha (Chairman) Porsche Holding Gesellschaft m.b.H., Salzburg Member of the Consultative Assembly (Shura Council) (Chairman) of the state Qatar, Doha BIRGIT DIETZE (45) Porsche Retail GmbH, Salzburg (Chairman) VfL Wolfsburg-Fußball GmbH, Wolfsburg June 22, 20161 Appointments: First authorized representative of IG Metall Berlin June 1, 20161 (Deputy Chairman) Malomatia, Doha (Chairwoman) Appointments: Qatar Satellite Company (Es'hailSat), Doha Volkswagen Bank GmbH, Braunschweig JÖRG HOFMANN (63) (Chairwoman) Deputy Chairman (since November 20, 2015) Trio Investment, Doha (Chairwoman) ANNIKA FALKENGREN (56) First Chairman of IG Metall November 20, 20151 Appointments: Robert Bosch GmbH, Stuttgart Managing Partner of Compagnie Lombard Odier SCmA May 3, 2011 – February 5, 20181 DR. JUR. HANS-PETER FISCHER (59) Chairman of the Board of Management of Volkswagen Management Association January 1, 20131 Appointments: Volkswagen Pension Trust e.V., Wolfsburg Membership of statutory supervisory boards in 1 Beginning or period of membership of the Germany. Supervisory Board. Comparable appointments in Germany and abroad. 2 Formerly Volkswagen Truck & Bus GmbH or Volkswagen Truck & Bus AG; now TRATON SE. 88 Executive Bodies Group Management Report MARIANNE HEIß (46) BERTINA MURKOVIC (61) DR. JUR. FERDINAND OLIVER PORSCHE (57) Chief Financial Officer of BBDO Group Chairwoman of the Works Council of Member of the Board of Management of Familie Germany GmbH, Düsseldorf Volkswagen Commercial Vehicles Porsche AG Beteiligungsgesellschaft February 14, 20181 Appointments: AUDI AG, Ingolstadt Porsche Automobil Holding SE, Stuttgart May 10, 20171 Appointments: MOIA GmbH, Berlin BERND OSTERLOH (62) UWE HÜCK (56) Chairman of the General and Group Works Councils of Chairman of the General and Group Works Councils of Volkswagen AG Dr. Ing. h.c. F. Porsche AG July 1, 2015 – February 8, 20191 Appointments (as of February 8, 2019): Dr. Ing. h.c. F. Porsche AG, Stuttgart (Deputy Chairman) January 1, 20051 Appointments: Autostadt GmbH, Wolfsburg TRATON AG2, Munich Wolfsburg AG, Wolfsburg August 7, 20091 Appointments: AUDI AG, Ingolstadt Dr. Ing. h.c. F. Porsche AG, Stuttgart Porsche Automobil Holding SE, Stuttgart TRATON AG2, Munich Porsche Holding Gesellschaft m.b.H., Salzburg Porsche Lizenz- und Handelsgesellschaft mbH & Co. KG, Ludwigsburg DR. RER. COMM. WOLFGANG PORSCHE (75) Chairman of the Supervisory Board of JOHAN JÄRVKLO (45) Porsche Holding Gesellschaft m.b.H., Salzburg Chairman of the Supervisory Board of Secretary-General of the European and Global Group SEAT, S.A., Martorell Dr. Ing. h.c. F. Porsche AG Allianz für die Region GmbH, Braunschweig Porsche Automobil Holding SE; Works Council of Volkswagen AG November 22, 20151 ULRIKE JAKOB (58) ŠKODA Auto a.s., Mladá Boleslav VfL Wolfsburg-Fußball GmbH, Wolfsburg April 24, 20081 Appointments: Volkswagen Immobilien GmbH, Wolfsburg AUDI AG, Ingolstadt Dr. Ing. h.c. F. Porsche AG, Stuttgart (Chairman) Porsche Automobil Holding SE, Stuttgart Deputy Chairwoman of the Works Council of DR. JUR. HANS MICHEL PIËCH (76) Volkswagen AG, Kassel plant Lawyer in private practice (Chairman) May 10, 20171 DR. LOUISE KIESLING (61) Businesswoman April 30, 20151 August 7, 20091 Appointments: AUDI AG, Ingolstadt Familie Porsche AG Beteiligungsgesellschaft, Salzburg (Chairman) Porsche Cars Great Britain Ltd., Reading Dr. Ing. h.c. F. Porsche AG, Stuttgart Porsche Cars North America Inc., Atlanta Porsche Automobil Holding SE, Stuttgart Porsche Holding Gesellschaft m.b.H., Salzburg (Deputy Chairman) Porsche Ibérica S.A., Madrid PETER MOSCH (46) Porsche Cars Great Britain Ltd., Reading Porsche Italia S.p.A., Padua Chairman of the General Works Council of AUDI AG January 18, 20061 Appointments: Porsche Cars North America Inc., Atlanta Schmittenhöhebahn AG, Zell am See Porsche Holding Gesellschaft m.b.H., Salzburg Porsche Ibérica S.A., Madrid AUDI AG, Ingolstadt (Deputy Chairman) Porsche Italia S.p.A., Padua Audi Pensionskasse – Altersversorgung der Schmittenhöhebahn AG, Zell am See AUTO UNION GmbH, VVaG, Ingolstadt Volksoper Wien GmbH, Vienna Membership of statutory supervisory boards in 1 Beginning or period of membership of the Germany. Supervisory Board. Comparable appointments in Germany and abroad. 2 Formerly Volkswagen Truck & Bus GmbH or Volkswagen Truck & Bus AG; now TRATON SE. Group Management Report Executive Bodies 89 ATHANASIOS STIMONIARIS (47) COMMITTEES OF THE SUPERVISORY BOARD Chairman of the Group Works Council of MAN SE AS OF DECEMBER 31, 2018 and of the SE Works Council May 10, 20171 Appointments: MAN SE, Munich Members of the Executive Committee Hans Dieter Pötsch (Chairman) Jörg Hofmann (Deputy Chairman) MAN Truck & Bus AG, Munich (Deputy Chairman) Peter Mosch Rheinmetall MAN Military Vehicles GmbH, Munich TRATON AG2, Munich (Deputy Chairman) Bernd Osterloh Dr. Wolfgang Porsche Stephan Weil STEPHAN WEIL (60) Minister-President of the Federal State of Members of the Mediation Committee established in Lower Saxony February 19, 20131 accordance with section 27(3) of the Mitbestimmungsgesetz (German Codetermination Act) WERNER WERESCH (57) Hans Dieter Pötsch (Chairman) Chairman of the General and Group Works Councils of Jörg Hofmann (Deputy Chairman) Dr. Ing. h.c. F. Porsche AG February 21, 20191 Appointments (as of February 21, 2019): Bernd Osterloh Stephan Weil Dr. Ing. h.c. F. Porsche AG, Stuttgart Members of the Audit Committee Dr. Ferdinand Oliver Porsche (Chairman) Bernd Osterloh (Deputy Chairman) Birgit Dietze Marianne Heiß Members of the Nomination Committee Hans Dieter Pötsch (Chairman) Dr. Wolfgang Porsche Stephan Weil Special Committee on Diesel Engines Dr. Wolfgang Porsche (Chairman) Dr. Bernd Althusmann Peter Mosch Bertina Murkovic Bernd Osterloh Dr. Ferdinand Oliver Porsche Membership of statutory supervisory boards in 1 Beginning or period of membership of the Germany. Supervisory Board. Comparable appointments in Germany and abroad. 2 Formerly Volkswagen Truck & Bus GmbH or Volkswagen Truck & Bus AG; now TRATON SE. 90 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 289a(1) and 315a(1) 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 December 31, 2018. 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 participate 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 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; it resolves on the in particular, appropriation 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. 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 V O T 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 statements of Volkswagen AG, which are available online at https://www.volkswagenag.com/en/InvestorRelations.html. The current notifications regarding changes in voting rights in accordance with the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act) are also published on this website. Group Management Report Disclosures Required Under Takeover Law 91 C O M P O S I T I O N O F T H E S U P E R V I S O R Y B O A 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 60 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 87 to 89 of this annual report. STAT U TO R Y 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 R T 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 T M E N T A N D R E M O VA L O F B O A 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 T O T H E A R T 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 O W E R S O F T H E B O A R D O F M A N A G E M E N T, I N PA R T I C U L A R C O 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 R Y 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. 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 261. 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 C O 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 C O N T R O L F O L L O W I N G A TA K E O V 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 Volkswagen AG in which Volkswagen AG is the acquiring legal entity. 92 Diesel Issue Group Management Report Diesel Issue In agreement with the respective responsible authorities, the Volkswagen Group is making technical measures available worldwide for virtually all diesel vehicles with type EA 189 engines. The regulatory offense proceedings of the public prosecutor’s office in Braunschweig against Volkswagen AG, which began in April 2016, and that of the Munich II public prosecutor’s office against AUDI AG have both been concluded with orders imposing administrative fines. Special items totaling €–3.2 billion had to be accounted for in fiscal year 2018. I R R E G U L A R I T I E S C O 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 discov- ered 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. We have since succeeded in making substantial progress and ending a great number of these proceedings. Detailed infor- mation on the pending court and governmental proceedings can be found in the Report on Risks and Opportunities, starting on page 177. E X T 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 T H E V O L K SWA G E N G R O U P After the first “Notice of Violation” was issued, Volkswagen AG immediately initiated its own internal as well as external investigations; both have since been concluded for the most part. The Supervisory Board of Volkswagen AG formed a special committee that coordinates this board’s activities relating to the diesel issue on its behalf. Furthermore, in September 2015 Volkswagen AG and AUDI AG filed a criminal complaint in Germany against unknown persons. Volkswagen AG and AUDI AG are cooperating with all relevant authorities. The regulatory offense proceedings of the public prose- cutor’s office in Braunschweig against Volkswagen AG, which began in April 2016, and the regulatory offense proceedings of the Munich II public prosecutor’s office against AUDI AG have both been concluded with administrative fine orders. Work in respect of the legal proceedings that are still pending in the USA and the rest of the world is ongoing, still requires considerable efforts, and will continue for some time. Volkswagen AG is being advised by a number of external law firms in this connection. The diesel issue is rooted in a modification of parts of the software of the relevant engine’s control units – which, according to Volkswagen AG’s legal position, is only unlawful under US law – for the type EA 189 diesel engines that Volkswagen 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 months following publication of a study by the International Council on Clean Transportation in May 2014, Volkswagen AG’s Powertrain Development department checked the test set-ups on which the study was based for plausibility, confirming the unusually high NOx emissions from certain US vehicles with type EA 189 2.0 l diesel engines. The California Air Resources Board (CARB) – a part of the environmental regulatory authority of California – was informed of this result, and, at the same time, an offer was made to recalibrate the engine control unit software of type Group Management Report Diesel Issue 93 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 Produkt- sicherheit (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 statements. Instead, at the time the 2014 annual and consolidated finan- cial 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 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 Vio- lation” 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 the type V6 3.0 l diesel engines and con- cluded for the most part. 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 the type V6 3.0 l TDI engines until they were informed by the EPA in November 2015. Within the Volkswagen Group, Volkswagen AG has devel- opment responsibility for the four-cylinder diesel engines such as the type EA 189, and AUDI AG has development responsibility for the six- and eight-cylinder diesel engines such as the type V6 3.0 l and V8 diesel engines. A F F E C T E D V E H I C L E S I N T H E E U / R E ST O F W O R L D With the exception of the USA and Canada, around ten mil- lion vehicles with type EA 189 diesel engines were affected worldwide. In agreement with the respective responsible authorities, the Volkswagen Group is making technical measures avail- able worldwide for virtually all diesel vehicles with type EA 189 engines. AUDI AG has worked intensively for many months to check all relevant diesel concepts for possible discrepancies and retrofit potentials. The measures proposed by AUDI AG have been adopted and mandated in various recall notices issued by the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) for vehicle models with V6 and V8 TDI engines. 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 D A In the USA and Canada three generations of certain vehicles with 2.0 l TDI engines and two generations of certain vehicles with the type 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 retrofit the vehicles so that the emission standards defined in the settlement agreements for these vehicles can be achieved. In the USA, in fiscal year 2018, the EPA and CARB issued the outstanding official approvals needed for the technical solutions for the affected vehicles with 2.0 l TDI and with V6 3.0 l TDI engines. In the case of 2.0 l Generation 2 diesel vehicles with manual transmissions, Volkswagen Group of America, Inc. elected to withdraw the approved emissions modification proposal, whereby owners were given the option of a buyback and lessees were given the option of early lease termination. 94 Diesel Issue Group Management Report 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 in part subject to substantial estimation risks given that the fact finding efforts have not yet been concluded, the complexity of the individual relevant factors and the ongoing coordi- nation with the authorities. Should these legal or estimation risks materialize, this could result in further considerable financial charges. There are no conclusive findings or assessments of facts available to the Board of Management of Volkswagen AG that would suggest that a different assessment of the associated risks (e.g. investor lawsuits) should have been made. A detailed description of these and other risks arising from the diesel issue can be found in the Report on Risks and Opportunities starting on page 177. 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 (–3.2) billion in fiscal year 2018 and were mainly attributable to the legally final administrative fine orders imposed by the public prosecutor’s office in Braunschweig against Volkswagen AG (€1.0 billion) and by the Munich II public prosecutor’s office against AUDI AG (€0.8 billion), higher legal risks and legal defense costs, as well as higher expenses for technical measures. The diesel issue led to total special items of €–29.0 billion in the years 2015 to 2018. Group Management Report Business Development 95 Business Development The robust growth of the global economy continued in fiscal year 2018 with a slight decrease in momentum. Global demand for vehicles was somewhat lower than in the previous year. Amid persistently challenging market conditions, the Volkswagen Group delivered 10.8 million vehicles to customers. D E V E L O P M E N T S I N T H E G L O B A L E C O N O MY The global economy sustained its robust growth in 2018 with a slight decrease in momentum: global gross domestic prod- uct (GDP) rose by 3.2 (3.3)%. Economic momentum nearly matched the prior-year level both in advanced economies and emerging markets. With interest rates remaining com- paratively low and prices for energy and other commodities rising year-on-year on the whole, consumer prices continued to increase worldwide. Growing upheaval in trade policy at international level and geopolitical tensions led to much greater uncertainty. Europe/Other Markets The solid GDP growth in Western Europe slowed to 1.8 (2.3)% as the year went on. The rate of change in the majority of countries in this region decreased compared with the previous year. The Brexit negotiations between the United Kingdom and the European Union (EU), which continued for the entire year, generated uncertainty, as did the related question of what form this relationship would take in the future. The unemployment rate in the eurozone continued to decrease, falling to an average of 8.1 (9.0)%, though rates remained considerably higher in Greece and Spain. At 2.9 (4.0)%, the Central and Eastern Europe region also recorded a slower growth rate in the reporting period than in the previous year. While the comparatively high level of GDP growth in Central Europe slowed down on the whole, economic growth in Eastern Europe remained unchanged. Higher prices for energy and other commodities led to further stabilization of the economic situation in the countries from this region that export raw materials. Russia’s economy improved somewhat with a growth rate of 1.6 (1.5)%. Growth in the Turkish economy slumped substantially to 2.5 (7.3)% after the first half of 2018. South Africa’s GDP rose by just 0.7 (1.3)% in the reporting period, down on the already low figure for the previous year. Ongoing structural deficits, social unrest and political challenges weighed on the economy. Germany Germany’s GDP continued to grow in 2018 on the back of the good labor market, however, momentum diminished year- on-year to 1.5 (2.5)%. Both company and consumer senti- ment darkened as the year progressed. North America Economic growth in the USA picked up in the reporting period, reaching 2.9 (2.2)%. The economy was supported mainly by domestic consumer demand. The unemployment rate in the United States in 2018 was at 3.9 (4.3)%. Based on the stable situation in the labor market and the expected inflation trend, the US Federal Reserve successively raised its key interest rate. The US dollar gained strength against the euro in the course of the year. In neighboring Canada and Mexico, GDP grew at a slower rate than in the previous year, at 2.1 (3.0)% and 2.2 (2.3)%, respectively. 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 4 4 3 3 2 2 1 1 0 0 –1 –1 Global economy Western Europe Germany USA China 2014 2015 2016 2017 2018 South America Brazil’s economy once again recorded slight growth, at 1.4 (1.1)%. However, the situation in South America’s largest economy remained tense due to political uncertainty, among other factors. The economic situation in Argentina deteri- orated increasingly as the year went on. The country was in recession amid persistently high inflation: GDP fell by 1.7 (+2.9)%. In view of this difficult situation, the Argentine government requested financial aid from the International Monetary Fund. Asia-Pacific China’s economy recorded a growth rate of 6.6 (6.9)% in 2018, but its rate of expansion was not quite as strong as in the previous year. The Chinese government responded to the trade disputes with the United States by stepping up state support measures. The Indian economy continued its posi- tive trend, with growth in the reporting period of 7.2 (6.7)%. However, the pace of growth tapered off in the course of the year. Japan’s GDP grew by only 0.8 (1.9)%. 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 2018, the global market volume of passenger cars fell slightly below the prior-year level to 82.8 million vehicles (–1.2%) after increasing for eight years in a row. This decrease was attributable in particular to weaker perfor- mance in the Western Europe and Asia-Pacific regions in the fourth quarter. In the reporting period, stronger demand in Central and Eastern Europe as well as in South America was offset by declining volumes in the Asia-Pacific, Middle East, North America and Western Europe regions. Sector-specific environment The sector-specific environment was influenced significantly by fiscal policy measures, which contributed considerably to the mixed trends in sales volumes in the markets last year. These measures included 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, the total number of new passenger car registrations in the reporting period was down 0.7% in total on the prior-year figure, at 14.2 million. The continuing strong macroeconomic environment, positive consumer sentiment and low interest rates generated a slight increase in the first half of the year. The changeover to the new WLTP (Worldwide Harmonized Light-Duty Vehicles Test Procedure) as of September 1, 2018 led to pull-forward effects in the months of July and August and to significant declines from September until December in some cases. New vehicle registrations were mixed in the largest single markets. Spain (+7.0%) and France (+3.0%) continued to record increases. Both countries benefited from a buoyant macroeconomic 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 7 T O D E C E M B E R 2 0 1 8 Index based on month-end prices: as of December 31, 2017= 100 EUR to GBP EUR to USD EUR to CNY EUR to JPY 105 105 100 100 95 95 90 90 D J F M A M J J A S O N D environment. In Italy, falling demand from both private and commercial customers put a damper on market development (–3.1%), among other things, as a consequence of the political uncertainty during and after the formation of government. The UK passenger car market saw a continuation of the negative trend from the previous year (–6.8%). This was due, among other things, to the uncertain outcome of the Brexit negotiations with the EU. The share of diesel vehicles (passenger cars) in Western Europe slipped to 36.4 (44.4)% in the reporting year. In the Central and Eastern Europe region, the market volume of passenger cars in fiscal year 2018 rose markedly by 11.0% year-on-year to 3.4 million vehicles. New passenger car registrations in the EU member states of Central Europe increased further by 8.0% to 1.4 million units. Passenger car sales in Eastern Europe also achieved a double-digit growth rate (+13.1%), starting from a low level. The Russian market was the main growth driver in the region with an increase of 13.2%. This was mainly attributable to government programs to promote sales as well as to pull-forward effects resulting from a value-added tax increase entering into force on January 1, 2019. The Turkish passenger car market recorded a substantial drop in demand of 32.7%, largely due to the rapidly deteri- orating macroeconomic situation. In South Africa (–0.1%), the number of new passenger car registrations in the reporting period stayed at the comparatively low level seen in recent years. The change in political environment as a result of the new presidency had little positive impact on the overall economy and the automotive market. Germany Amounting to 3.4 million units (–0.2%) in the reporting period, passenger car registrations in Germany sustained the previous year’s high level. This was attributable not only to the buoyant macroeconomic environment but also to manu- facturer discounts in the form of trade-in and scrapping bonuses for older diesel models as well as to an environ- mental bonus for electric-powered vehicles (all-electric and plug-in hybrid drives). The changeover to the WLTP test procedure as of September 1, 2018, which limited model availability in some cases, in total led to a slightly declining overall market, whereas the rise in new registrations for private customers (+2.0%) in particular had a positive effect. Domestic production and exports once again fell short of the comparable prior-year figures in 2018: passenger car production decreased by 9.3% to 5.1 million vehicles, while passenger car exports fell by 8.9% to 4.0 million units. This was primarily caused by declining volumes in Europe resulting to some extent from the changeover to the WLTP. 98 Business Development Group Management Report North America At 20.7 million vehicles, sales of passenger cars and light commercial vehicles (up to 6.35 tonnes) in the North America region in fiscal year 2018 did not match the high prior-year figure (–0.6%). In the US market, demand was almost flat on the 2017 level at 17.3 million units (+0.2%). A favorable labor market and the greater purchasing power of consumers largely compensated for increased financing costs resulting from higher interest rates. The shift in demand from traditional passenger cars (–13.5%) to light commercial vehi- cles such as SUVs and pickup models (+8.1%) also continued in the reporting period. Due to sales figures, which had declined since the second quarter, the Canadian automotive market remained below the record figure of the previous year (–2.6%). In Mexico, sales of passenger cars and light com- mercial vehicles fell short of the prior-year figure (–6.6%) for the second year in a row. South America In the markets of the South America region, the recovery continued in the reporting period – starting from a low level – with demand for passenger cars and light commercial vehicles rising by 6.2% to 4.5 million units. The main driver was the Brazilian automotive market, whose 13.8% growth outperformed the strong momentum of the preceding year. However, the market volume was still around a third lower than the record figure for 2012. Brazil’s vehicle exports declined to 629 thousand units in the course of 2018, a decrease of 17.9% on the previous year’s record high. Particu- larly from mid-year onwards, exports were impacted by the market trend in Argentina, where demand slumped on account of the progressive deterioration of the macroeco- nomic situation (–10.4%). T R E N D S I N T H E M A R K E T S F O R C O 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 2018 was slightly lower than in the previous year. A total of 9.0 (9.2) million vehicles were registered worldwide. Despite the uncertain outcome of the Brexit negotiations between the EU and the UK, new registrations in Western Europe were up 2.8% to 2.0 million units. In Germany, the comparative figure for 2017 was exceeded by 6.0%. The market in Spain grew distinctly and the market in France recorded moderate growth, while Italy and the United King- dom registered a decline. The markets in Central and Eastern Europe grew notice- ably on the whole, with 352 (324) thousand light commercial vehicle registrations including 130 (124) thousand in Russia alone. 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 (–2.7%) in the reporting period. In China, the region’s dominant market and the largest market worldwide, demand for light com- mercial vehicles of 3.0 million units was down 12.0% 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 consequence of the sustained economic growth, new registrations in India increased sharply com- pared to 2017; here, 710 (575) thousand new units were registered. The market volume in Japan rose by 3.2% to 770 thousand vehicles. The number of new vehicle regis- trations in Thailand and Indonesia saw a significant increase versus the previous year. Asia-Pacific After many years of uninterrupted growth, the market volume in the Asia-Pacific region decreased by 2.3% in fiscal year 2018 to 36.1 million units. This was mainly due to the weakness of the Chinese passenger car market (–4.6%). The trade dispute between China and the United States of America in the reporting period weighed on business and consumer confidence, among other things, and led to a marked decline in demand, especially in the second half of the year. By contrast, the Indian market continued growing and achieved a new record with a 4.8% increase in passenger car sales year-on-year. Alongside attractive financing prod- ucts, the positive trend continued to profit from 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 almost matched the volumes recorded in the previous year (–0.4%). Global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes in the markets that are rele- vant for the Volkswagen Group was higher in fiscal year 2018 than in the previous year, with 591 thousand new vehicle registrations (+6.6%). In Western Europe, the number of new truck registrations exceeded the prior-year figure by 2.2% at a total of 297 thou- sand vehicles. In Germany, Western Europe’s largest market, the previous year’s level was also exceeded slightly. While demand in the United Kingdom and in Spain witnessed a decline, it rose in France and Italy. The Central and Eastern Europe region saw demand rise by 6.0% to 169 thousand units on the back of the positive economic performance. The Russian market deteriorated as the year progressed and recorded only slight year-on-year growth over the year as a whole. New registrations there increased by 2.6% to 78 thousand vehicles. Group Management Report Business Development 99 In fiscal year 2018, the market volume in South America rose compared with the previous year. Here, the number of new vehicle registrations rose by 19.5% to 125 thousand units. In Brazil, the region’s largest market, demand for trucks grew very sharply compared with the relatively low figure for the prior-year period as a consequence of the economic recovery. By contrast, Argentina saw new registrations fall by more than a quarter. This was due to weak economic performance with a related weakening of the peso and rising interest rates. Demand for buses in the markets that are relevant for the Volkswagen Group was slightly higher than in the previous year. The markets in Brazil as well as in Central and Eastern Europe contributed in particular to this growth. Demand in Western Europe was slightly down on the previous year’s level. T R E N D S I N T H E M A R K E T S F O R P O W 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 mostly independent of each other. The marine market remained at the previous year’s low level in 2018. Steady demand in merchant shipping was largely based on orders of container ships and LNG carriers. Demand for cruise ships, passenger ferries, fishing vessels and dredgers also remained steady. The special market for government vessels also continued on a stable trajectory. The existing overcapacity in the market continued to curb invest- ment in offshore oil production and thus in new ship construction in this segment. Planned tighter emission standards resulted in a positive trend toward gas-powered or dual fuel-engined ships. China, South Korea and Japan remained the dominant shipbuilding countries, accounting for a global market share of more than 85% measured in terms of the number of ships. Because market volumes are still low, all segments in the marine market are continuing to experience significant competitive pressure and a sharp drop in prices as a result. The market for power generation showed a slight recovery compared with the previous year. Higher demand was registered in all areas of application, for gas in particular. This confirms the shift away from oil-fired power plants towards dual-fuel and gas-fired power plants. Demand for energy solutions remained high, with a strong trend towards greater flexibility and decentralized availability. The econ- omies of key emerging markets recovered somewhat. How- ever, continued strong pressure from competition and pricing was discernible in all projects, having a negative impact on the earnings quality of orders. Furthermore, order placement was often delayed due to persistently difficult financing conditions for customers, particularly on larger projects. In 2018, the market for turbomachinery improved some- what year-on-year. Demand for turbo compressors in the raw materials, oil, gas and processing industry increased slightly but remained volatile owing to political uncertainty. The steam and gas turbine business continued to be dominated by overcapacity on the part of electricity producers; however, signs pointed towards a slight recovery, especially in regions with a low level of electrification. Although pressure from competition and pricing was somewhat lower than in the prior-year period, the overall level remained high due to existing overcapacity and market volatility. The marine and power plant after-sales business for diesel engines performed positively overall and benefited from a continued increase in interest in long-term maintenance contracts and retrofit solutions. The after-sales market for turbomachinery remained under pressure, impacted by a price war and competition to improve efficiency. It is recovering, but only slowly. 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 once again high in 2018 in a slightly shrinking overall market. Service products such as maintenance and servicing agreements or insurance were especially popular, as customers in more advanced automotive financial services markets are putting their focus on optimizing total cost of ownership. In the fleet segment, some customers elicited the support of automotive financial service providers in order to optimize 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 on ownership. In Europe, sales of financial services climbed further in the reporting period, strengthened by higher vehicle sales and strong growth in financing agreements and leases. The used-vehicle market expanded, particularly in Western and Central Europe. Demand for after-sales products such as servicing, maintenance and spare parts agreements as well as automotive-related insurance also developed positively. financial services products enjoyed rising Automotive popularity, particularly in Spain and Italy, while in the United Kingdom and France demand for financial services remained high. In the German market, the share of loan-financed or leased vehicles remained stable at a high level in 2018. Along- 100 Business Development Group Management Report side traditional products, integrated mobility services in the business customer segment and after-sales products were particularly popular. In South Africa, demand for automotive financial services products was stable. Sales of automotive financial services in North America remained at a high level in the past fiscal year. In the USA, the overall market for financial services products once again performed well; above all, demand for leasing through captive financial services products was consistently high. Automotive financial services products were also popular in Mexico. Brazil continued to witness a recovery in 2018 despite the political tensions. Sales of vehicle financing arrangements and the country-specific financial services product Consorcio, a lottery-style savings plan, as well as of insurance and other services rose in the reporting period. The current economic crisis in Argentina brought the positive trend seen in 2017 to a halt. Due to the sharp rise in interest rates, sales of finan- cing and leasing products proved challenging in 2018, though the situation stabilized somewhat at the end of the year. The markets in the Asia-Pacific region turned in a mixed performance during the reporting period. In China, the pro- portion of loan-financed vehicle purchases rose. Despite increasing restrictions on registrations in metropolitan areas, there is considerable potential to acquire new customers for automotive-related financial services, particularly in the interior of the country. Demand for automotive financial services rose in the Indian market. It was stable on the whole in Japan and South Korea. In Australia, amid a slight down- turn in the vehicle market, demand for financial services products remained high. In the commercial vehicles segment, the European market for financial services again performed well; demand for these products was also high in China. The economic situation in Brazil stabilized and the truck and bus business and the related financial services market developed encour- agingly. N E W G R O U P M O D E L S I N 2 0 1 8 The Volkswagen Group launched a large number of attractive new models on the market in fiscal year 2018. The current product portfolio comprises 365 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 continued its global product initiative in the past year. The new Touareg plays a leading role in the premium SUV segment with its expressive design, its equipment and the high-quality mate- rials and craftsmanship. The rollout of the new Polo GTI and the up! GTI put two models on the market that are distin- guished in particular by their driving dynamics and sporti- ness. In China, a total of four new SUV models were launched, including the compact, sporty T-Roc. Further successors to important volume models were also introduced: the Lavida, Bora and Passat NMS. Added to these were other plug-in hybrid models brought out to meet the growing demand for new energy vehicles in China. In the USA, the new Jetta came 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 perspective. South America celebrated 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 this region. The Audi brand launched a successor model in each of its A6 and A7 premium series. Since 2018, the sporty Q8 SUV has been the top model in the Q family. The second model generations of the compact A1 and Q3 model series each celebrated their premieres. All vehicles are winning over cus- tomers in their respective segments with a brand-new virtual cockpit architecture, a large number of innovative driver assistance systems and Audi’s characteristic dynamism. ŠKODA launched its revamped compact Fabia model in the reporting period, which impresses in particular with a more modern exterior. In China, the brand rolled out its third SUV, the Kamiq. It features a spacious interior, emotional design and connectivity solutions. With the Kodiaq GT, the dynamic coupé version of the popular SUV, ŠKODA is pres- enting its new flagship, which will be offered exclusively in the Chinese market. The SEAT brand continued its SUV product initiative in 2018 and unveiled the seven-seater Tarraco. The model fits perfectly into the Spanish brand’s SUV model range alongside the smaller Arona and Ateca models. In addition, SEAT established the new sporty CUPRA line and included the dynamic CUPRA Ateca in its range at the end of the year. After rolling out the new Cayenne in the European market in 2017, Porsche launched this model in the United States, China and other countries during the reporting period. In addition, the product range was supplemented by the Cayenne E-Hybrid. The GTS models of the 718 Boxster and Cayman were also delivered to overseas markets in 2018 for the first time. The 911 GT3 RS, which was likewise launched in 2018, impressed customers with its dynamics. The new Macan came on the Chinese market in the fall and sub- sequently on the European market at the end of the year. Group Management Report Business Development 101 Furthermore, the Panamera model range was expanded by the addition of the GTS models. In 2018, Bentley again set standards in the luxury grand tourer segment with the third generation of the Continental GT. Moreover, the brand expanded its successful Bentayga series by adding the powerful Bentayga V8. Lamborghini established a third series with the Urus super-SUV, significantly expanding its customer base. The Huracán Performante Spyder was also introduced to the mar- ket. Bugatti offered additional options for its super sports car, the Chiron, including the Sky View glass roof. Since 2018, Volkswagen Commercial Vehicles has been offering the Amarok with a new top-of-the-range V6 TDI engine. The battery-electric e-Crafter is the brand’s first zero- emission van and has been specially designed for couriers, express and parcel delivery services. In the reporting period, Scania presented a plug-in hybrid drive that allows fuel savings of up to 15% for its latest gener- ation of trucks. Furthermore, the first long-distance truck with an efficient LNG drive and a range of up to 1,000 km was unveiled. MAN celebrated the rollout of its fully electric eTGE in 2018. The van has a range of around 160 km, which makes it particularly suitable for inner-city distribution logistics. With the XLION special edition, MAN introduced special equip- ment packages for long-distance, distribution and traction trucks. In the bus sector, MAN presented the new Lion’s City G city bus with a newly developed CNG gas-powered engine. In 2018, Ducati launched numerous new models on the market, including the Scrambler 1100, the Monster 821, the Multistrada 1260, the 959 Panigale Corse and the Panigale V4. V O L K SWA G E N G R O U P D E L I V E R I E S In fiscal year 2018, the Volkswagen Group increased its deliveries to customers worldwide by 0.9% year-on-year and achieved a new record of 10,834,012 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. PA S S E N G E R C A R D E L I V E R I E S W O R L D W I D E With its passenger car brands, the Volkswagen Group is pres- ent in all relevant automotive markets around the world. The key sales markets currently include Western Europe, China, the USA, Brazil, Russia and Mexico. The Group recorded encouraging growth in many key markets. V O L K SWA G E N G R O U P D E L I V E R I E S 1 2018 2017 Passenger Cars 10,101,297 10,038,756 Commercial Vehicles 732,715 702,778 Total 10,834,012 10,741,534 % +0.6 +4.3 +0.9 1 Deliveries for 2017 have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. During the reporting period, deliveries of passenger cars to Volkswagen Group customers worldwide rose to 10,101,297 units amid difficult conditions in some countries in Western Europe – mainly as a result of the changeover to the WLTP – and in the Chinese market, which was impacted by macro- economic uncertainty. This was an increase of 62,541 vehicles or 0.6% on the previous year. The Group’s new SUV models made a particular contribution to this rise. As the passenger car market as a whole declined by 1.2% in the same period, the Volkswagen Group’s share of the global market rose to 12.3 (12.0)%. The largest increases in volume in absolute terms were seen in Brazil and Russia. Sales figures were down on the previous year in Germany, the United Kingdom, Mexico and Turkey, among other countries. The Volkswagen Passenger Cars, ŠKODA, SEAT, Porsche and Lamborghini brands delivered record numbers of vehicles. The brands that experienced the largest growth in absolute terms were ŠKODA and SEAT; Audi and Bentley fell short of the respective prior- year levels. 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. Deliveries in Europe/Other markets In the reporting period, the passenger car market as a whole in Western Europe fell 0.7% short of the prior-year figure. With 3,138,419 vehicles delivered to customers, the Volks- wagen Group reached the level seen in the previous year (–0.6%) despite a considerable drop in the second half of the year resulting from the changeover to the WLTP. Other adverse effects were attributable to 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. The ŠKODA Kodiaq, Porsche 911 and Porsche Cayenne saw 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 2018 2018 2017 2017 1,100 1,100 1,000 1,000 900 900 800 800 700 700 600 600 J F M A M J J A S O N D encouraging growth. Furthermore, the new Polo, T-Roc, Tiguan Allspace and Arteon models from the Volkswagen Passenger Cars brand, the ŠKODA Karoq and SEAT Arona were very popular. The Touareg from Volkswagen Passenger Cars was successfully launched in the market along with the Audi A1 Sportback, Audi Q3, Audi A6, Audi A7 Sportback, Audi Q8 and ŠKODA Fabia. The Group’s share of the passenger car market in Western Europe was 22.0 (22.0)%. In the significantly growing passenger car markets in the Central and Eastern Europe region, the number of deliveries to Volkswagen Group customers in fiscal year 2018 rose by 6.8% year-on-year. Whereas in Russia and Poland demand for Group models grew strongly in some cases, the number of vehicles sold in the Czech Republic saw a decline. The Polo and the Tiguan from Volkswagen Passenger Cars along with the ŠKODA Rapid and Octavia were the models most in demand. The new T-Roc from Volkswagen Passenger Cars, the ŠKODA Karoq and the SEAT Arona were also very popular SUV models. The Volkswagen Group’s share of the passenger car market in Central and Eastern Europe was 21.2 (22.0)%. In Turkey, the Volkswagen Group delivered 40.5% fewer vehicles than in the previous year in a substantially weaker overall market. In South Africa’s passenger car market, which was almost on a level with the previous year, demand for Volkswagen Group vehicles rose by 3.5%. The best-selling Group model in South Africa was the Polo. Deliveries in Germany In the reporting period, the German passenger car market matched the high prior-year level (–0.2%). The Volkswagen Group delivered 1,121,289 vehicles to customers in its home market, a slight decrease on the prior-year level (–0.9%). In addition to the decreases in the second half of the year caused by the changeover to the WLTP, the fact that customer confidence has not yet been fully restored following the diesel issue weighed on demand, as did customer uncertainty generated by the public discussion on driving bans for diesel vehicles. The Golf continued to top the list of the most popular passenger cars in Germany in terms of registrations. The Polo, Tiguan and Passat Estate from Volkswagen Pas- senger Cars were among the most popular Group models, as were the ŠKODA Kodiaq, ŠKODA Octavia Combi and Audi A4 Avant. The new Polo, T-Roc, Tiguan Allspace and Arteon models from the Volkswagen Passenger Cars brand, the ŠKODA Karoq and the SEAT Arona were also in high demand among customers. 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 2018: the up!, Polo, Golf, Tiguan, Touran, Passat, and Porsche 911. Deliveries in North America Demand for Volkswagen Group models in North America in the reporting period was 2.0% lower than the prior-year figure at 943,621 vehicles in a slightly declining overall pas- senger car and light commercial vehicle market. The Group’s market share was 4.6 (4.7)%. The new Jetta was successfully rolled out. Moreover, the Tiguan Allspace was the most sought-after Group model in North America. 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 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 S I N 2 0 1 8 Vehicles in thousands Polo Golf Jetta Tiguan Passat Lavida ŠKODA Octavia Audi A4 835 832 803 795 655 505 388 345 In the US market, demand for Volkswagen Group models rose by 2.1% in fiscal year 2018 compared with the previous year. In this period, the market as a whole matched the prior-year level. Demand remained higher for models in the SUV and pickup segments than for conventional passenger cars. The Group models achieving the largest increases in absolute terms were the Audi Q5 and Audi A5 Sportback. In addition, the Jetta and the Porsche Macan as well as the new Tiguan Allspace and Atlas SUVs from the Volkswagen Passenger Cars brand were very popular among customers. In Canada, demand for Group models in the reporting period increased by 3.7% year-on-year in a shrinking overall market. The Golf saloon, Jetta and Audi Q5 models and the new Tiguan Allspace and Atlas SUVs from the Volkswagen Passenger Cars brand were particularly popular. In the Mexican market, which was declining on the whole, the Volkswagen Group delivered 16.4% fewer vehicles to customers compared with the previous year. The Vento, Jetta and Tiguan Allspace models recorded the highest demand. Deliveries in South America The South American market for passenger cars and light commercial vehicles continued its recovery path overall in the reporting year. In this region we delivered 497,820 vehi- cles to customers, 11.7% more than a year before. Among others, the Virtus, Jetta and Touareg from the Volkswagen Passenger Cars brand were successfully launched in the market along with the Audi Q3, Audi Q8 and Porsche Boxster. The Volkswagen Group’s share of the passenger car market in South America rose to 11.9 (11.4)%. The Brazilian market also recovered further in the reporting period. The Volkswagen Group benefited from this development and delivered 27.1% more vehicles to customers there than in the previous year. Above all, demand was particularly high for the new Polo and Virtus models from the Volkswagen Passenger Cars brand. Demand for the Gol and Amarok models also developed encouragingly. In Argentina, the Group recorded a 22.3% decline in sales year-on-year amid a considerably weaker overall market. The Gol and Amarok recorded the highest demand among Group models. The new Polo, Virtus and Tiguan Allspace models were also well received by customers. Deliveries in the Asia-Pacific region In 2018, the passenger car markets in the Asia-Pacific region registered their first decline in many years. Despite adverse effects from the Chinese market in particular, the Volkswagen Group handed over 4,503,791 units to customers here, 0.9% more vehicles than a year before. The Volkswagen Group’s market share in the Asia-Pacific region rose to 12.5 (12.1)%. China, the world’s largest single market and the main growth driver of the Asia-Pacific region for many years, experienced a downturn in the reporting period. The Volks- wagen Group increased sales here and delivered 0.5% more vehicles to customers in China than in the prior year. The models that achieved the largest growth in absolute terms were the Magotan from Volkswagen Passenger Cars, the Audi A4 and the Porsche Panamera. In addition, the new Phideon from Volkswagen Passenger Cars and the ŠKODA Octavia Combi were highly sought-after. The new Teramont and Tiguan Allspace SUVs from the Volkswagen Passenger Cars brand, the Audi Q5 and the ŠKODA Kodiaq were also very popular. The T-Roc, Tayron, Tharu, Bora, Lavida, Gran Lavida, Passat and Touareg models from Volkswagen Passenger Cars 104 Business Development Group Management Report as well as the Audi Q2 and ŠKODA’s Karoq and Kamiq models were successfully launched in the market. The Indian passenger car market continued its growth in the reporting period. Demand for models from the Volks- wagen Group fell by 15.4% in this period compared with the previous year. The Polo was the Group’s most sought-after model in India. In Japan, the number of passenger cars delivered to Volks- wagen Group customers exceeded the prior-year figure by 1.8%, while the total market volume remained on the prior- year level. The Polo and Audi Q2 models recorded promising increases in demand. PA S S E N G E R C A R D E L I V E R I E S TO C U ST O 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 2017 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 2018 2017 4,156,065 3,138,419 1,121,289 4,167,753 3,157,107 1,131,417 493,768 291,407 273,548 259,468 713,799 209,261 152,720 131,761 303,847 94,335 82,744 943,621 638,274 186,864 118,483 497,820 346,025 97,224 531,592 270,640 259,920 256,716 668,629 173,491 145,024 142,842 342,017 158,523 79,968 962,980 625,128 223,548 114,304 445,636 272,231 125,153 4,503,791 4,196,702 86,356 61,277 4,462,387 4,173,834 84,827 72,467 10,101,297 10,038,756 6,244,869 1,812,485 1,253,741 517,627 10,494 5,750 256,255 76 6,230,335 1,878,105 1,200,535 468,431 11,089 3,815 246,375 71 (%) –0.3 –0.6 –0.9 –7.1 +7.7 +5.2 +1.1 +6.8 +20.6 +5.3 –7.8 –11.2 –40.5 +3.5 –2.0 +2.1 –16.4 +3.7 +11.7 +27.1 –22.3 +0.9 +0.5 +1.8 –15.4 +0.6 +0.2 –3.5 +4.4 +10.5 –5.4 +50.7 +4.0 +7.0 Group Management Report Business Development 105 C O 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 732,715 commer- cial vehicles to customers worldwide in 2018 (+4.3%). Trucks accounted for 202,492 (+10.4%) units and buses for 22,629 (+17.8%) units. Sales of light commercial vehicles increased by 1.5% year-on-year to 507,594 units. In Western Europe, deliveries were up by 4.3% on the previous year at 445,081 vehicles; of this total, 344,034 were light commercial vehicles, 95,299 were trucks and 5,748 were buses. The Transporter and Caddy were the most sought-after Group models in the Western European markets. We handed over 83,365 vehicles to customers in the markets in Central and Eastern Europe in the period from January to December 2018 (+9.6%); of this figure, 44,530 were light commercial vehicles, 37,400 were trucks and 1,435 were buses. The Transporter and the Caddy were the Group models experiencing the highest demand. In Russia, the region’s largest market, sales climbed in the wake of economic recov- ery by 12.4% year-on-year to 20,567 units. In the Other markets, particularly in Turkey, deliveries of Volkswagen Group commercial vehicles fell by 15.8% to a total of 56,514 units: 38,271 light commercial vehicles, 14,491 trucks and 3,752 buses. Deliveries in North America amounted to 13,074 vehicles (–2.5%), which were handed over almost exclusively to custom- ers in Mexico. In this region, we handed over 9,567 light com- mercial vehicles, 1,256 trucks and 2,251 buses to customers. The Volkswagen Group sold a total of 92,161 units (+21.3%) in South America. Of the units delivered, 44,417 were light commercial vehicles, 40,451 were trucks and 7,293 were buses. The Amarok was particularly popular. Following continued improvement in the economic climate, deliveries rose by 55.7% in Brazil; 17,739 light commercial vehicles, 32,903 trucks and 5,081 buses were handed over to customers here. In the Asia-Pacific region, the Volkswagen Group sold 42,520 vehicles in the reporting period: 26,775 light com- mercial vehicles, 13,595 trucks and 2,150 buses. In total this was 2.2% less than in the previous year. The Transporter and the Amarok were the most popular Group models. In China, sales were on a level with the previous year at 10,353 vehicles (–0.5%). Of this total, 5,695 were light commercial vehicles, 4,247 were trucks and 411 were buses. C O 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 2017 have been updated to reflect subsequent statistical trends. D E L I V E R I E S ( U N I T S ) C H A N G E 2018 2017 584,960 445,081 83,365 56,514 13,074 92,161 55,723 42,520 10,353 732,715 499,723 96,475 136,517 569,962 426,773 76,031 67,158 13,410 75,949 35,781 43,457 10,408 702,778 497,862 90,782 114,134 (%) +2.6 +4.3 +9.6 –15.8 –2.5 +21.3 +55.7 –2.2 –0.5 +4.3 +0.4 +6.3 +19.6 106 Business Development Group Management Report D E L I V E R I E S I N T H E P O W 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. V O 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 includes 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 and Porsche Holding Salzburg. Sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turboma- chinery, which together generated 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 The temporary restrictions on the range of models on sale attributable to the introduction of the WLTP with effect from September 1, 2018 had a negative impact on the order situ- ation in Western Europe in fiscal year 2018. Incoming orders in the reporting period were down 5.9% year-on-year. Devel- opments in the key markets were mixed: while especially Germany and the United Kingdom registered a larger decline, incoming orders rose in Spain, France and Italy. O R D E R S R E C E I V E D F O R C O 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 1.6% lower than in the previous year at 342,386 units. Orders received for mid-sized and heavy trucks and buses increased by 3.5% year-on-year to 233,627 vehicles in 2018. In Western Europe, our main sales market, ongoing positive economic stimulus gave a boost to incoming orders. Orders received in South America were up in response to the eco- nomic recovery in Brazil. O R D E R S R E C E I V E D I N T H E P O W 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 2018 amounted to €4.0 (3.7) billion. Engines & Marine Systems and Turbomachinery generated more than two-thirds of the order volume in a persistently difficult market environment. In the marine business, for example, orders came in for the supply of engines and exhaust gas treatment systems for seven new cruise ships with an aggregate output of 290 MW. In the power plant business, orders were won in Bangladesh for 36 engines with an aggregate output of 724 MW. In the area of turbomachinery, we received a follow-up order for the expan- sion of an underwater compressor station in the North Sea. The Financial Services Division’s products and services remained very popular in fiscal year 2018. At 7.6 (7.3) million, the number of new financing, leasing, service and insurance contracts signed worldwide exceeded the comparable prior- year figure. The ratio of leased or financed vehicles to Group deliveries (penetration rate) in the Financial Services Divi- sion’s markets was 33.7 (33.4)% in the reporting period. As of December 31, 2018, the total number of contracts was 19.6 million, up 6.4% from the year before. The number of contracts in the customer financing/leasing area climbed 5.4% to 10.6 million, while it increased by 7.6% to 9.0 million in the service/insurance area. In the Europe/Other markets region, the number of new contracts signed between January and December 2018 increased by 3.9% to 5.6 million. The penetration rate rose to 48.4 (47.6)%. At the end of the reporting period, the total number of contracts was 14.2 million, an increase of 6.0% as against December 31, 2017. The customer financing/leasing area accounted for 6.7 million contracts (+5.6%). The number of contracts in North America as of December 31, 2018 increased to 2.9 million, 6.0% more than in the previous year. The customer financing/leasing area accounted for 1.9 million contracts (+5.6%). The number of new contracts signed amounted to 935 thousand, an increase of 7.0% versus the previous year. The ratio of leased or financed vehicles to Group deliveries in North America was 66.3 (60.5)%. In South America, 236 (205) thousand new contracts were signed in the past fiscal year. The penetration rate increased to 29.1 (26.6)%. At the end of the reporting period, the total number of contracts was 487 thousand, 9.4% fewer than at the end of 2017. The contracts mainly related to the customer financing/leasing area. In the Asia-Pacific region, the number of new contracts signed rose by 6.7% to 889 thousand units in 2018. The ratio of leased or financed vehicles to Group deliveries was 14.8 (16.1)%. On December 31, 2018, the total number of con- tracts amounted to 2.1 million, up 14.6% on the previous year. The customer financing/leasing area accounted for 1.6 million contracts (+8.3%). Group Management Report Business Development 107 S A L E S T O 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 1.1% to 10,899,869 units (including the Chinese joint ventures) in the reporting year. This was due to higher demand in Brazil, China and Central and Eastern Europe. Outside Germany, the unit sales volumes rose by 1.6%. Owing to the changeover to the WLTP test procedure, which took place in the third quarter of 2018, unit sales in Germany decreased by 2.2%. At 11.3 (11.7%), the proportion of the Group’s total sales accounted for by Germany was lower than in 2017. The Polo, Tiguan, Golf, Lavida and Jetta were our biggest sellers last year. The largest increases in demand were recorded by the Polo, Tiguan, Atlas/Teramont and Phideon models from the Volkswagen Passenger Cars brand, the Audi Q5 and A8, as well as the ŠKODA Kodiaq and Karoq/Kamiq and the SEAT Arona. The Porsche Cayenne and the Crafter from the Volkswagen Commercial Vehicles brand also achieved a strong growth rate. P R O D U C T I O N The Volkswagen Group produced 11,017,621 vehicles world- wide in fiscal year 2018, 1.3% more than in the previous year. In total, our Chinese joint ventures manufactured 1.9% more units than in the year before. In the German market, the production declined by 10.7%, which was largely WLTP- related. The percentage of the Group’s total production accounted for by Germany was lower than in 2017, at 20.9 (23.7)%. I N V E N T O 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 2017. E M P L OY E E S Including the Chinese joint ventures, the Volkswagen Group employed an average of 655,722 people in fiscal year 2018, an increase of 3.4% year-on-year. In Germany, we employed 290,757 people on average in 2018; at 44.3 (44.9)%, their share of the total headcount was slightly below the level of the previous year. The Volkswagen Group had 636,156 active employees (+3.4%) as of December 31, 2018. In addition, 9,096 employ- ees were in the passive phase of their partial retirement and 19,244 young people were in vocational traineeships. The Volkswagen Group’s headcount was 664,496 employees (+3.5%) at the end of the reporting period. The main contributors to this were the volume-related expansion, the recruitment of specialists inside and outside Germany and the expansion of the workforce at our new plants in China. A total of 292,729 people were employed in Germany (+1.8%), while 371,767 were employed abroad (+4.8%). 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, 2018 Passenger Cars Passenger Cars Commercial Vehicles Commercial Vehicles Power Engineering Power Engineering Financial Services Financial Services 521,735 521,735 109,246 109,246 17,046 17,046 16,469 16,469 108 Shares and Bonds Group Management Report Shares and Bonds Volkswagen AG’s ordinary and preferred shares underperformed the market as a whole amid volatility in 2018. The Company successfully reentered the US capital market for the first time since the emergence of the diesel issue. 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 V O L K SWA G E N ’ S S H A R E S In the period from January to December 2018, declining prices overall were seen on the international equity markets amid volatile trading. The DAX recorded a drop compared with the end of 2017. Uncertainty regarding the economic policy of the US govern- ment, the monetary policy of the US Federal Reserve as well as the European Central Bank and the economic risks of some countries had a lasting negative impact on share prices. The promising economic performance of important industri- alized nations and the formation of governments in the individual EU countries had a positive effect. Throughout 2018, Volkswagen AG’s preferred and ordi- nary share prices followed the decreasing market trend amid high volatility. Strong liquidity and the enhancement of the management structure at the Volkswagen Group provided a positive impetus. Share prices were negatively impacted, in particular by uncertainty about the future regulatory frame- work for diesel and electric vehicles, the diesel issue, the US tariff policy and the WLTP test procedure for determining pollutant and CO2 emissions and fuel consumption for pas- senger cars and light commercial vehicles. V O 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 U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 Ordinary share Price (€) Date Preferred share Price (€) DAX Date Points Date ESTX Auto & Parts Points Date High Low Closing 188.00 Jan. 22 188.50 Jan. 22 13,560 Jan. 23 656 Jan. 22 131.10 Oct. 24 133.70 Oct. 24 10,382 Dec. 27 415 139.10 Dec. 28 138.92 Dec. 28 10,559 Dec. 28 420 Dec. 27 Dec. 28 Group Management Report Shares and Bonds 109 P R I C E A N D I N D E X 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 7 T O D E C E M B E R 2 0 1 8 Index based on month-end prices: December 31, 2017 = 100 Volkswagen ordinary shares –17.5% Volkswagen preferred shares –16.5% DAX –18.3% EURO STOXX Automobiles & Parts –29.2% 110 110 100 100 90 90 80 80 70 70 60 60 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 appro- priately in our business success. The proposed dividend amount therefore reflects our financial management objec- tives – 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 €4.80 per ordi- nary share and €4.86 per preferred share for fiscal year 2018. On this basis, the total dividend amounts to €2.4 (2.0) billion. The distribution ratio is based on the Group’s earnings after tax attributable to Volkswagen AG shareholders. This amounts to 20.4% for the reporting period and stood at 17.6% in the previous year. In our Group strategy, we aim to achieve a distribution ratio of 30%. F U RT H E R I N F O R M AT I O N O N VO L K SWA G E N S H A R E S www.volkswagenag.com/en/InvestorRelations.html 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 3.5 (2.3)%, measured by the closing price on the last trading day in 2018. The dividend yield on preferred shares is 3.5 (2.4)%. The current dividend proposal can be found in the chapter entitled “Volkswagen AG (condensed in accordance with the German Commercial Code)”, on page 130 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 €23.57 (22.28) in fis- cal year 2018. Basic earnings per preferred share were €23.63 (22.34). 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 S O F D E C E M B E R 3 1 , 2 0 1 8 as a percentage of subscribed capital V O L K SWA G E N S H A R E D ATA 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, Dusseldorf, Frankfurt, Hamburg, Hanover, Munich, Stuttgart, Xetra, Luxembourg, SIX Swiss Exchange Primary market indices Exchanges Once the approved issue volume of the American Depositary Receipt (ADR) programs had been reached, Volkswagen AG decided not to renew its “level 1 sponsored ADR” programs and notified the custodian bank, JPMorgan Chase Bank, that the programs were being terminated effective August 13, 2018. Porsche Automobil Holding SE Porsche Automobil Holding SE Foreign institutional investors Foreign institutional investors Qatar Holding LLC Qatar Holding LLC State of Lower Saxony State of Lower Saxony Private shareholders/Others Private shareholders/Others German institutional investors German institutional investors 30.8 30.8 25.3 25.3 14.6 14.6 11.8 11.8 15.1 15.1 2.5 2.5 S H A R E H O L D E R ST R U C T U R E A S O F D E C E M B E R 3 1 , 2 0 1 8 At the end of the reporting period, Volkswagen AG’s sub- scribed capital amounted to €1,283,315,873.28. The share- holder structure of Volkswagen AG as of December 31, 2018 is shown in the chart on this page. The distribution of voting rights for the 295,089,818 ordi- nary shares was as follows at the reporting date: Porsche Auto- mobil 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. Notifications of changes in voting rights in accor- dance with the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act) are published on our website at www.volkswagenag.com/en/InvestorRelations/news-and- publications.html. 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 : W O L F S B U R G O F F I C E ( VO L K SWAG 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/en/InvestorRelations.html 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 Group Management Report Shares and Bonds 111 V O L K SWA G E N S H A R E K E Y F I G U R E S Dividend development 2018 2017 2016 2015 2014 Number of no-par value shares at Dec. 31 thousands thousands 295,090 206,205 295,090 206,205 295,090 206,205 295,090 206,205 295,090 180,641 Ordinary shares Preferred shares Dividend1 per ordinary share per preferred share Dividend paid1 on ordinary shares on preferred shares Share price development2 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 Equity attributable to Volkswagen AG share- holders and hybrid capital investors at Dec. 315 Price/earnings ratio6 Ordinary share Preferred share Dividend yield7 Ordinary share Preferred share Stock exchange turnover8 € € € million € million € million € % € € € % € € factor € billion € billion factor € € € factor factor % % Turnover of Volkswagen ordinary shares Turnover of Volkswagen preferred shares Volkswagen share of total DAX turnover € billion million shares € billion million shares % 4.80 4.86 2,419 1,416 1,002 3.90 3.96 1,967 1,151 817 2.00 2.06 1,015 590 425 2018 2017 2016 139.10 –17.5 188.00 131.10 138.92 –16.5 188.50 133.70 1.17 69.7 117.1 0.60 168.70 +23.4 173.95 128.70 166.45 +24.8 178.10 125.35 1.12 84.1 108.8 0.77 2018 2017 23.57 23.57 22.28 22.28 136.75 –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 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 4.80 4.86 2,294 1,416 878 2014 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 21.82 233.63 217.13 184.90 175.67 189.16 5.9 5.9 3.5 3.5 2018 4.3 28.0 54.1 346.6 5.4 7.5 7.3 2.3 2.4 2017 3.5 23.6 45.1 312.3 5.4 13.4 13.0 1.5 1.5 2016 3.3 25.4 41.1 347.0 5.0 x x 0.1 0.1 2015 6.9 45.4 72.4 444.4 7.1 8.2 8.4 2.7 2.6 2014 3.2 17.8 45.1 248.3 5.4 1 Figures for the years 2014 to 2017 relate to dividends paid in the following year. For 5 Based on the total number of ordinary and preferred shares on December 31 (excluding 2018, the figures relate to the proposed dividend. potential shares from the mandatory convertible note). 2 Xetra prices. 3 See page 126 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. 2017 figure adjusted (IFRS 9). 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, 2018 Commercial paper Commercial paper 10% 10% Bonds Bonds 60% 60% Asset-backed securities Asset-backed securities 30% 30% Money and capital market instruments Maturities Currencies ≤ 1 year ≤ 1 year 27% 27% > 1 to < 5 years > 1 to < 5 years 47% 47% EUR EUR 65% 65% USD USD 15% 15% ≥ 5 years ≥ 5 years 26% 26% 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 2018, the Volkswagen Group focused its refinancing activ- ities on diversifying instruments and markets. A further focus of refinancing was the continued issue of commercial paper, especially in the European region and in euros, as well as in the United States. In June 2018, we boosted net liquidity by placing unse- cured, subordinated hybrid notes with an aggregate principal amount of €2.75 billion. The perpetual notes were issued in two tranches and can only be called by the issuer. One tranche with a volume of €1.25 billion has a first call date after six years, while the other tranche of €1.5 billion has a first call date after ten years. The transaction also served to refinance a tranche with a principal amount of €1.25 billion from the hybrid notes issued in 2013; the tranche was terminated in September 2018. Furthermore, a senior, unsecured benchmark bond for the Automotive Division was issued in Europe in four tranches with a volume of €4.25 billion and in two GBP 800 million tranches. Four benchmark bonds with an aggregate volume of €9.35 billion were issued for the Financial Services Divi- sion. In addition to this, private placements were issued in various currencies. Outside the European refinancing market, the Volks- wagen Group was active in the North American capital mar- ket. With an aggregate issue volume of USD 8.0 billion, we succesfully reentered the US capital market for the first time since the emergence of the diesel issue. Notes with a volume of around CAD 2.25 billion were issued in the Canadian refinancing market. Asset-backed securities (ABS) transactions were another important element of our refinancing activities. ABS trans- actions in excess of €7.1 billion were placed in Europe. In addition, ABS transactions were issued in Australia, Japan, Turkey and the USA among other countries. The proportion of fixed-rate instruments in the past year was roughly three times as high as the proportion of variable- rate instruments. In all refinancing arrangements, we aim to exclude inter- est rate and currency risk with the simultaneous use of derivatives. The table below shows how our money and capital market programs were utilized as of December 31, 2018 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, 2018 € billion 35.4 139.6 69.8 13.5 80.1 12.5 40.4 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 2018 2017 2016 2018 2017 2016 2018 2017 2016 A–2 BBB+ stable P–2 A3 A–2 BBB+ A–2 BBB+ stable negative P–2 A3 P–2 A3 A–2 BBB+ stable P–2 A3 A–2 BBB+ A–2 BBB+ A–2 A– A–2 A– A–2 A– stable negative negative negative negative P–2 A3 P–1 A2 P–1 A1 P–1 A3 P–1 Aa3 stable negative negative stable negative negative stable negative negative Volkswagen AG’s syndicated credit line of €5.0 billion agreed in July 2011 was extended in 2015 to April 2020 by exercising an extension option. This credit facility remained unused as of the end of 2018. Of the syndicated credit lines worth a total of €7.6 billion at other Group companies, €1.8 billion has 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 €4.2 billion, of which €1.8 billion was drawn down. R AT I N G S In 2018, 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 and December 2018, Standard & Poor’s con- firmed its short-term and long-term ratings of A–2 and BBB+ for Volkswagen AG and Volkswagen Financial Services AG, and of A–2 and A– for Volkswagen Bank GmbH. The outlook for Volkswagen AG and Volkswagen Financial Services AG was left at “stable” and that for Volkswagen Bank GmbH at “negative”. Moody’s Investors Service left its short-term and long- term ratings for Volkswagen AG and Volkswagen Financial Services AG unchanged at P–2 and A3. In April 2018, the outlook was raised in each case from “negative” to “stable” based on better-than-expected operating performance. In August 2018, the long-term rating for Volkswagen Bank GmbH was raised by two notches from A3 to A1 on the back of changes to German banking law. The short-term rating was left at P–1. The outlook was also raised to “stable”. S U STA I N A B I L I T Y R AT I N G S Analysts and investors are referring increasingly to company sustainability profiles when making their recommendations and decisions. They draw primarily on sustainability ratings to evaluate a company’s environmental, social and gover- nance performance. At the same time, sustainability ratings are instrumental in determining whether we are meeting our goal of being one of the world’s leading providers of sus- tainable mobility. Furthermore, they provide the basis for implementing internal measures. After the diesel issue became public knowledge, the Volkswagen Group was downgraded significantly in the MSCI, RobecoSAM, Sustainalytics, oekomISS, VigeoEiris, EcoVadis and RepRisk sustainability indices and consequently removed from sustainability indices such as the Dow Jones Sustainability Index and the FTSE4Good Index. In fiscal year 2018, Volkswagen continued to have a score of A– in the CDP and also 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’s sales revenue increased in fiscal year 2018 compared with the previous year. Despite further charges and cash outflows in connection with the diesel issue, operating profit was on a level with the previous year, and net liquidity in the Automotive Division continued at a solid 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. At Volkswagen, the 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 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 busi- K E Y F I G U R E S F O R 2 0 1 8 B Y S E G M E N T ness area. The Financial Services Division corresponds to the Financial Services segment. A P P L I C AT I O N O F N E W I N T E R N AT I O N A L F I N A N C I A L R E P O R T I N G STA N D A R D S The application of IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contracts with Customers” became manda- tory as of January 1, 2018. IFRS 9 changes the accounting requirements for classi- fying and measuring financial assets, for impairment of finan- cial assets, and for hedge accounting. Some of the fair value measurement gains and losses on certain derivatives, which were previously reported under the financial result, are now reported directly in sales revenue and other operating income. This will have a more significant impact on operating profit. IFRS 15 specifies new accounting rules for revenue recog- nition. In this context, the way income from the reversal of provisions and accrued liabilities is reported has also been adjusted; these items are now allocated to the functions in which they were originally recognized. € 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 188,088 36,656 3,608 34,782 263,134 –27,285 235,849 12,245 1,971 6.5 5.4 15,599 2,491 –64 –1.8 176 2,793 16,945 –3,025 13,920 8.0 510 5.9 18,776 187 18,962 Group Management Report Results of Operations, Financial Position and Net Assets 115 In addition, expenses for certain sales programs had to be reclassified. The situation described has led, among other things, to adjustments to prior-year figures in the income statement. Cost of sales, distribution and administrative expenses, and the net other operating result required adjustments in connection with the change in the way reversals of provisions are reported; the reclassification of expenses for certain sales programs led to a decrease in sales revenue and distribution expenses. The operating profit was unchanged. The applica- tion of IFRS 9 led to minor adjustments to the financial result and consequently also to profit before tax, income tax expense and profit after tax. 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 the reporting period, negative special items in connec- tion with the diesel issue amounting to €–3.2 (–3.2) billion affected operating profit in the Passenger Cars Business Area. These were mainly attributable to the fines resulting from the final administrative fine orders issued by the Braunschweig public prosecutor’s office (€1.0 billion) and the Munich II public prosecutor’s office (€0.8 billion), to higher legal risks and legal defense costs and an increase in expenses for technical measures. C O M P E N S AT I O N PA I D T O T H E N O N C O N T R O L L I N G I N T E R E ST S H A R E H O L D E R S O F M A N S E In the award proceedings regarding the appropriateness of the cash settlement and the right to compensation for the noncontrolling interest shareholders of MAN SE, the Higher Regional Court in Munich made a final decision at the end of June 2018, ruling that the right to annual compensation per share must be increased. The cash settlement per share, raised in a first instance ruling by the First Regional Court in Munich, was confirmed. In August 2018, the control and profit and loss transfer agreement with MAN SE was terminated by extraordinary notice as of January 1, 2019. Cash outflows for compensation payments and the acquisition of shares tendered amounted to €2.1 billion in the period to December 31, 2018. The “Put options and compensation rights granted to noncontrolling interest shareholders” item reported in the balance sheet was reduced accordingly. I N C O 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 2018 20172 2018 20172 2018 20172 235,849 –189,500 46,350 –20,510 229,550 –186,001 43,549 –20,859 201,067 –161,298 39,769 –19,039 195,817 –158,534 37,283 –19,510 –8,819 –3,100 13,920 5.9 3,369 –1,646 1,723 15,643 –3,489 12,153 17 309 –8,126 –745 13,818 6.0 3,482 –3,628 –146 13,673 –2,210 11,463 10 274 –7,105 –2,497 11,127 5.5 3,310 –1,576 1,734 12,861 –2,657 10,203 –32 309 –6,434 –194 11,146 5.7 3,473 –3,448 25 11,171 –3,230 7,941 –257 274 34,782 –28,201 6,581 –1,471 –1,714 –603 2,793 8.0 58 –70 –12 2,782 –832 1,950 49 – 33,733 –27,467 6,265 –1,349 –1,692 –552 2,673 7.9 9 –180 –171 2,502 1,020 3,522 267 – 11,827 11,179 9,926 7,924 1,900 3,255 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Adjusted 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 8 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 8 in percent Europe (excluding Germany)/ Europe (excluding Germany)/ Other markets Other markets Germany Germany North America North America South America South America Asia-Pacific Asia-Pacific 42% 42% 18% 18% 16% 16% 4 % 4 % 18% 18% Passenger Cars Passenger Cars Commercial Vehicles Commercial Vehicles Power Engineering Power Engineering Financial Services Financial Services 68% 68% 16% 16% 2 % 2 % 15% 15% R E S U LT S O F O P E R AT I O N S Results of operations of the Group The Volkswagen Group recorded sales revenue of €235.8 bil- lion in fiscal year 2018, thus exceeding the prior-year figure by €6.3 billion. Improvements in volumes and in the mix, and the healthy business performance in the Financial Services Division were offset by negative exchange rate effects. The effects of applying the new International Finan- cial Reporting Standards resulted in an overall increase in sales revenue. The Volkswagen Group generated 81.4 (80.7)% of its sales revenue abroad. Gross profit was up on 2017 at €46.3 (43.5) billion. Adjusted for special items recorded under this item in both periods, gross profit amounted to €46.6 (45.8) billion. The gross margin rose to 19.7 (19.0)%; excluding special items it was 19.8 (19.9)%. At €17.1 (17.0) billion, the Volkswagen Group’s operating profit before special items was on a level with the previous year. The operating return on sales before special items amounted to 7.3 (7.4)%. Positive factors included primarily volume improvements, although higher depreciation and amortization charges due to the large volume of capital expenditure, increased research and development costs, and fair value measurement gains and losses on certain deriva- tives, which have had to be reported here since the beginning of the year, had a negative impact. Special items in connec- tion with the diesel issue weighed on operating profit, reducing this item by €–3.2 (–3.2) billion. The Volkswagen Group’s operating profit was €13.9 (13.8) billion and the operating return on sales stood at 5.9 (6.0)%. The financial result increased by €1.9 billion to €1.7 bil- lion. Foreign currency measurement, lower interest expenses and lower expenses from the measurement on the reporting date of derivative financial instruments, which are used to hedge financing transactions, had a positive impact. The effect of the remeasurement of put options and com- pensation rights in connection with the control and profit and loss transfer agreement with MAN SE was negative. The share of profits of equity-accounted investments decreased year-on-year, while there was a rise in the profits generated by the Chinese joint ventures. In the prior-year period, the remeasurement of the interest in HERE following the acquisition of shares by additional investors had a positive impact. The Volkswagen Group’s profit before taxes increased to €15.6 billion in the reporting period; this was 14.4% higher than in the previous year. The return on sales before tax improved to 6.6 (6.0)%. Income taxes resulted in an expense of €3.5 (2.2) billion, which in turn led to a tax rate of 22.3 (16.2)% in fiscal year 2018. In the previous year, the tax reform in the USA passed at the end of 2017 had a non- recurring positive non-cash measurement effect. Profit after tax was €12.2 billion, an improvement of €0.7 billion com- pared with 2017. Results of operations in the Automotive Division Sales revenue in the Automotive Division rose by €5.2 billion to €201.1 billion in the reporting period. Improvements in volumes and in the mix had a positive impact, while the effect of exchange rates was negative. In the second half of the year, the changeover to WLTP (Worldwide Harmonized Light-Duty Vehicles Test Procedure) weighed on performance. As our Chinese joint ventures are accounted for using the equity method, the Group’s performance in the Chinese passenger car market is mainly reflected in consolidated sales revenue only through deliveries of vehicles and vehicle parts. Group Management Report Results of Operations, Financial Position and Net Assets 117 Cost of sales was up, mainly as a result of expansion and due to higher depreciation and amortization charges and research and development costs recognized in profit or loss. Special items recognized here in the reporting period were down on the previous year. Expressed as a percentage of sales revenue, cost of sales before special items was up slightly. Total research and development costs as a percentage of the Automotive Division’s sales revenue (research and develop- ment ratio or R&D ratio) amounted to 6.8 (6.7)% in fiscal year 2018. In addition to new models, our activities focused above all on the electrification of our vehicle portfolio, a more efficient range of engines, digitalization and new technol- ogies. Distribution expenses and their ratio to sales revenue were down on the previous year. This was attributable to reclassifications of expenses to sales revenue as a conse- quence of the new IFRS 15, the sale of the PGA Group in June 2017, as well as exchange rate effects. Administrative expenses and their ratio to sales revenue increased compared with 2017. The main factors contributing to the €2.3 billion decline in other operating income to €–2.5 billion in fiscal year 2018 included an increase in special items recognized in connection with the diesel issue, negative exchange rate effects, and the fair value measurement of gains and losses on certain derivatives to which hedge accounting is not applied, and which have had to be reported here since the beginning of the year. The operating profit of the Automotive Division was at the prior-year level at €11.1 (11.1) billion. Special items recognized in the reporting period, higher depreciation and amortization charges, higher research and development costs recognized in profit or loss and the fair value measurement of gains and losses on certain derivatives that have had to be reported here since the beginning of the year weighed on operating profit. Volume improvements had a positive impact. The operating return on sales amounted to 5.5 (5.7)%. The negative special items of €–3.2 (–3.2) billion included in operating profit are attributable to the diesel issue. Excluding special items, the Automotive Division’s operating profit was €14.3 (14.4) billion and thus on a level with the previous year; the operating return on sales before special items declined slightly to 7.1 (7.3)%. Since the results recorded by the joint ventures are accounted for in the financial result using the equity method, the business growth of our Chinese joint ventures is primarily reflected in the operating profit only through deliveries of vehicles and vehicle parts, and through license income. 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 revenue1 Operating result Operating return on sales (%)1 1 Prior-year figures adjusted. 2018 2017 160,802 157,334 9,220 5.7 9,309 5.9 The Passenger Cars Business Area recorded sales revenue of €160.8 billion in the reporting period, €3.5 billion more than in the previous year; this increase was driven mainly by volume and mix improvements, while exchange rates had a negative effect. At €9.2 (9.3) billion, operating profit was in line with the previous year. Special items in connection with the diesel issue weighed on profit, reducing this item by €–3.2 (–3.2) billion. Moreover, an increase in depreciation and amortization charges, higher research and development costs recognized in profit or loss, and the fair value measurement of gains and losses on certain derivatives, which have had to be reported in operating profit since the beginning of the year, had a negative impact, while the effect of volume improvements was positive. The operating return on sales amounted to 5.7 (5.9)%. R E S U LT S O F O P E R AT I O N S I N T H E C O 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 (%) 2018 2017 36,656 1,971 5.4 35,200 1,892 5.4 The Commercial Vehicles Business Area reported sales reve- nue of €36.7 (35.2) billion in fiscal year 2018. At €2.0 billion, its operating profit was €0.1 billion higher than in the previous year; the operating return on sales was unchanged at 5.4 (5.4)%. The year-on-year increase was mostly driven by higher volumes, positive mix and exchange rate effects, while cost increases had a negative impact. 118 Results of Operations, Financial Position and Net Assets Group Management Report R E S U LT S O F O P E R AT I O N S I N T H E P O W 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 Sales revenue Operating result Operating return on sales (%) 2018 2017 3,608 –64 –1.8 3,283 –55 –1.7 Sales revenue in the Power Engineering Business Area increased by 9.9% year-on-year to €3.6 billion in 2018. The operating loss amounted to €–0.1 (–0.1) billion. Volume improvements were offset by a deterioration in the mix. The operating return on sales stood at –1.8 (–1.7)%. Results of operations in the Financial Services Division The Financial Services Division generated sales revenue of €34.8 billion in the reporting period; the 3.1% rise compared with the previous year was mainly due to higher business volume. Cost of sales rose slightly slower than sales revenue, increasing by €0.7 billion to €28.2 billion. Distribution expenses and their ratio to sales revenue were both higher. Administrative expenses rose slightly, while their ratio to sales revenue was virtually unchanged year-on-year. The growth in volumes and higher IT costs were the main factors in the overall increase in expenses compared with the pre- vious year. The Financial Services Division’s operating profit improved by 4.5% compared with the previous year, increasing to €2.8 billion and thus contributing significantly to consoli- dated net profit. The operating return on sales amounted to 8.0 (7.9)%. At 9.9 (9.8)%, the return on equity before tax was on a level with the previous year. Principles and goals of financial management Financial management in the Volkswagen Group covers liquidity management, the management of currency, interest rate and commodity risks, as well as credit and country risk management. It is performed centrally for all Group com- panies by Group Treasury, based on internal directives and risk parameters. The main areas of the MAN and Porsche Holding Salzburg subgroups are integrated into the financial management of the Group while Scania is included to a limited extent. Additionally, these subgroups have their own financial management structures. The goal of financial 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. In this system, the balances, either positive or nega- tive, accumulating in the cash pooling accounts are swept daily into a target account at Group Treasury and thus pooled. The aim of currency, interest rate and commodity risk management is to hedge the prices on which investment, production and sales plans are based using derivative financial instruments and commodity forwards, and to mitigate interest rate risks incurred in financing transactions. Credit and country risk management uses diversification to limit the Volkswagen Group’s exposure to counterparty risk. To achieve this, counterparty risk management imposes internal limits on the volume of business per counterparty when financial transactions are entered into. Various credit rating criteria are used in this process. These focus primarily 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. For additional information on the principles and goals of financial management, please refer to page 185 and to the notes to the 2018 consolidated financial statements on pages 289 to 310. 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 was €35.6 billion in fiscal year 2018, an increase of 9.1% compared with the prior- year figure. Administrative fines imposed after regulatory offense proceedings, which were recognized as special items in connection with the diesel issue in the reporting period, led to cash outflows. The rise in working capital led to tied-up funds in the amount of €–28.3 (–33.8) billion. The €5.5 billion change reflects the significant decrease in cash outflows attributable to the diesel issue in the reporting period, set against a WLTP-related increase in inventories. As a result, cash flows from operating activities were up by €8.5 billion to €7.3 billion. The Volkswagen Group’s investing activities attributable to operating activities stood at €19.4 billion, 6.4% more than in the previous year. Cash inflows from financing activities amounted to €24.6 (17.6) billion. The figure mainly comprises the issuance and redemption of bonds and other financial liabilities. Financing activities also include the dividends paid to the shareholders of Volkswagen AG, the acquisition of MAN shares tendered following the ruling in the award pro- Group Management Report Results of Operations, Financial Position and Net Assets 119 C A S H F L O W STAT E M E N T B Y D I V I S I O N € million Cash and cash equivalents at beginning of period Earnings before tax Income taxes paid Depreciation and amortization expense3 Change in pension provisions Share of the result of equity-accounted investments Other noncash income/expense and reclassifications4 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 flow 5 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 MAN noncontrolling interest shareholders: compen- sation payments and acquisition of shares tendered Effect of exchange rate changes on cash and cash equivalents Change of loss allowance within cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at Dec. 316 Securities, loans and time deposits Gross liquidity Total third-party borrowings Net liquidity7 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 FINANCIAL SERVICES 2018 20172 2018 20172 2018 20172 18,038 15,643 –3,804 22,561 524 244 445 35,613 –28,341 –5,372 –6,400 3,645 –1,286 –11,647 –7,282 7,272 18,833 13,673 –3,664 22,165 468 274 –265 32,651 –33,836 –4,198 –1,660 5,302 –9,910 –11,478 –11,891 –1,185 13,428 12,861 –3,786 15,581 503 303 502 25,964 –7,433 –5,337 –1,800 2,793 –1,306 –1,590 –191 18,531 14,125 11,171 –3,514 14,948 452 159 202 23,418 –11,732 –3,784 –937 4,168 –10,079 –1,115 15 11,686 4,609 2,782 –19 6,980 21 –58 –56 9,650 4,709 2,502 –149 7,218 15 115 –467 9,233 –20,908 –22,104 –34 –4,600 853 20 –10,056 –7,090 –11,258 –414 –724 1,134 169 –10,363 –11,906 –12,871 –19,386 –18,218 –18,837 –17,636 –549 –583 –12,631 –5,260 –124 –510 – –111 –421 – –193 –5,950 –11,807 –13,454 –13,729 –13,052 –5,234 –705 –5,260 –317 –12,113 –19,404 –2,204 –21,590 24,566 1,710 –16,508 17,625 –28 1,491 –2,117 –173 –1 10,075 28,113 28,036 56,148 – 3,473 –118 –727 – –796 18,038 26,291 44,329 –190,883 –163,472 –134,735 –119,143 –13,218 –5,234 –594 –306 6,129 2,333 –12,708 –15,303 4,274 3,562 –28 1,418 –2,117 –171 –1 9,925 23,354 8,697 32,051 –12,683 19,368 – 2,400 –118 –641 – –696 13,428 15,201 28,630 –6,251 22,378 –8,332 –8,882 20,292 – 73 – –2 0 150 4,759 19,339 24,098 –622 –1,205 14,063 – 1,073 – –86 – –99 4,609 11,090 15,699 –178,200 –157,221 –154,103 –141,522 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Adjusted 3 Net of impairment reversals. 4 These relate mainly to the fair value measurement of financial instruments and the reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 5 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). 6 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. 7 The total of cash, cash equivalents, securities, loans to affiliates and joint ventures 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 8 € billion 26.0 –7.4 25 20 15 10 5 0 –13.2 –5.2 Gross cash flow Change in working capital Capex Capitalized development costs –0.4 Other –0.3 Net cash flow ceedings, the successful placement of dual-tranche hybrid notes in June 2018, and the redemption of the hybrid notes terminated in the third quarter of 2018. At the end of the reporting period, the Volkswagen Group’s cash and cash equivalents as reported in the cash flow statement amounted to €28.1 (18.0) billion and were thus significantly up on the prior-year reporting date. On December 31, 2018, the Volkswagen Group’s net liquidity was €–134.7 billion, compared with €–119.1 billion at the end of 2017. Financial position of the Automotive Division The Automotive Division’s gross cash flow amounted to €26.0 billion in fiscal year 2018, €2.5 billion more than a year earlier. The increase was mainly due to healthy earnings growth. Special items recognized in the reporting period, most of which have already led to cash outflows, and a year- on-year decline in dividends from the Chinese joint ventures had a negative impact. The change in working capital of €–7.4 (–11.7) billion was €4.3 billion lower than in the pre- vious year; it mainly reflects the significant decrease in cash outflows attributable to the diesel issue in the reporting period set against a WLTP-related increase in inventories. As a result, cash flows from operating activities rose by €6.8 bil- lion to €18.5 billion. Investing activities attributable to operating activities increased by €1.2 billion to €18.8 billion. Investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs (capex), were 4.6% higher, at €13.2 billion. The ratio of capex to sales revenue was 6.6 (6.5)%. 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 the Touareg, T-Cross, Audi e-tron, Audi Q3, Audi A6, Porsche 911 and Porsche Taycan model series, and the Bentley Continental family. Other investment priorities included the ecological focus of our model range, product electrification and digitalization, and our modular toolkits. Capitalized development costs of €5.2 (5.3) billion were in line with 2017 levels. Within the “Acquisition and disposal of equity investments” item, the sale of a part of the shares in There Holding was offset mainly by the investment in the Jianghuai newly established Automobile (JAC) and the acquisition of additional shares in Quantum Scape. The prior-year figure had included the acquisition of the shares in Navistar and the disposal of part of the PGA Group. joint venture with Anhui Due mainly to markedly lower cash outflows attributable to the diesel issue, net cash flow in the Automotive Division improved by €5.6 billion to €–0.3 (–6.0) billion compared with the previous year. Cash inflows from financing activities amounted to €4.3 (3.6) billion in fiscal year 2018. In May 2018, a dividend totaling €2.0 billion was distributed to the shareholders of Volkswagen AG, €1.0 billion more than in the previous year. The successful placement of dual-tranche hybrid notes with an aggregate principal amount of €2.75 billion via Volks- wagen International Finance N.V. in June 2018 resulted in a cash inflow. The notes consist of a €1.25 billion note that carries a coupon of 3.375% and has a first call date after six years, and a €1.5 billion note that carries a coupon of 4.625% and has a first call date after ten years. Both tranches are Group Management Report Results of Operations, Financial Position and Net Assets 121 perpetual and, net of transaction costs and other factors, increase equity. €2.75 billion of the hybrid notes were classi- fied as a capital contribution, which increased net liquidity. The redemption of the hybrid notes terminated in the third quarter of 2018 caused a cash outflow of €1.25 billion in the reporting period. Financing activities also include the issu- ance and redemption of bonds and other financial liabilities, as well as the MAN shares tendered as a result of the award proceedings and shares in AUDI AG acquired in the fiscal year. The Automotive Division’s net liquidity was €19.4 billion on December 31, 2018, €3.0 billion lower than at the end of fiscal year 2017. The Automotive Division’s net liquidity stood at 8.2 (9.7)% of consolidated sales revenue in fiscal year 2018. 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 2018 2017 Gross cash flow Change in working capital Cash flows from operating activities Cash flows from investing activities attributable to operating activities Net cash flow 21,808 –5,938 15,870 –16,194 –325 19,410 –10,122 9,289 –15,337 –6,048 In fiscal year 2018, the Passenger Cars Business Area’s gross cash flow improved by €2.4 billion to €21.8 billion. The increase was mainly due to healthy earnings growth; cash outflows associated with special items recognized in the reporting period had an offsetting effect. At €–5.9 (–10.1) bil- lion, the negative impact on the change in working capital was less than in the year before, especially because of sig- nificantly lower cash outflows attributable to the diesel issue; this was set against a WLTP-related increase in inventories. Consequently, cash flows from operating activities went up by €6.6 billion to €15.9 billion. Investing activities attri- butable to operating activities of €16.2 (15.3) billion were up on 2017 levels. Capex grew, while capitalized development costs declined. In the reporting period, the sale of some of the shares in There Holding was offset by the investment in the joint venture with Anhui Jianghuai Automobile (JAC) and the acquisition of additional shares in Quantum Scape. In the prior-year period, the sale of part of the PGA Group had a positive effect on this item. Net cash flow increased to €–0.3 (–6.0) billion. F I N A N C I A L P O S I T I O N I N T H E C O 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 2018 2017 Gross cash flow Change in working capital Cash flows from operating activities Cash flows from investing activities attributable to operating activities Net cash flow 3,847 –1,234 2,613 –2,480 132 3,739 –1,320 2,419 –2,122 297 The Commercial Vehicles Business Area’s gross cash flow was €3.8 (3.7) billion in fiscal year 2018; the slight increase over the previous year was due to higher earnings. The change of funds tied up in working capital decreased by €0.1 billion to €–1.2 billion. As a result, cash flows from operating activities were up on the 2017 figure, increasing to €2.6 (2.4) billion. Investing activities attributable to operating activities stood at €2.5 (2.1) billion. This figure comprises increased capex and higher capitalized development costs mainly for the T7 and Caddy models. The prior-year figure included the acquisition of the shares in Navistar. Net cash flow amounted to €0.1 billion, €0.2 billion lower than a year earlier. F I N A N C I A L P O S I T I O N I N T H E P O W 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 2018 309 –260 49 –162 –113 2017 268 –290 –22 –177 –199 The Power Engineering Business Area generated a gross cash flow of €0.3 (0.3) billion in the reporting period. Funds tied up in working capital amounted to €–0.3 (–0.3) billion. Cash flows from operating activities were slightly higher than in the previous year. Investing activities attributable to operating activities stood at €0.2 (0.2) billion. Net cash flow improved by €0.1 billion to €–0.1 billion. 122 Results of Operations, Financial Position and Net Assets Group Management Report C O N S O L I D AT 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 2018 2017 2018 2017 2018 2017 274,620 262,081 143,153 140,912 131,467 121,169 64,613 57,630 43,545 78,692 30,140 183,536 45,745 54,216 37,557 17,080 28,938 – 63,419 55,243 39,254 73,249 30,916 160,112 40,415 53,145 32,040 15,939 18,457 115 64,404 54,619 5,297 9 18,824 91,371 41,302 –510 13,033 13,376 24,169 – 63,211 52,503 3,140 –7 22,065 80,210 36,113 –686 17,354 13,512 13,826 90 209 3,010 38,249 78,684 11,315 92,165 4,443 54,726 24,524 3,703 4,769 – 208 2,739 36,114 73,256 8,851 79,902 4,302 53,832 14,686 2,427 4,632 24 458,156 422,193 234,524 221,121 223,632 201,071 117,342 109,077 88,850 81,605 28,492 27,472 104,522 97,761 76,624 70,857 27,898 26,904 12,596 11,088 12,596 11,088 – – 117,117 225 172,846 101,126 33,097 38,623 167,968 1,853 89,757 23,607 52,750 108,849 229 152,726 81,628 32,730 38,368 160,389 3,795 81,844 23,046 51,705 89,219 –369 77,692 14,187 32,535 30,970 67,982 1,853 –1,504 20,962 46,671 81,945 –339 69,805 6,709 32,189 30,906 69,711 3,795 –458 20,497 45,877 27,898 594 95,154 86,939 563 7,652 99,986 – 91,261 2,645 6,079 26,904 568 82,921 74,919 540 7,462 90,678 – 82,302 2,548 5,828 Total equity and liabilities 458,156 422,193 234,524 221,121 223,632 201,071 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 8 in percent Noncurrent assets Noncurrent assets 59.9 (62.1) 59.9 (62.1) Current assets Current assets 40.1 (37.9) 40.1 (37.9) Equity Equity 25.6 (25.8) 25.6 (25.8) Noncurrent liabilities Noncurrent liabilities 37.7 (36.2) 37.7 (36.2) Current liabilites Current liabilites 36.7 (38.0) 36.7 (38.0) Total assets Total equity and liabilities 0 10 20 30 40 50 60 70 80 90 100 Financial position in the Financial Services Division In the reporting period, the Financial Services Division’s gross cash flow was €9.6 (9.2) billion. The change in working capital declined by €1.2 billion year-on-year to €–20.9 billion. Cash flows from operating activities amounted to €–11.3 (–12.9) bil- lion. At €0.5 (0.6) billion, investing activities attributable to operating activities were in line with the previous year. The Financial Services Division’s financing activities relate primarily to the issuance and redemption of bonds and other financial liabilities; the total cash inflow to refinance the business volume was €20.3 (14.1) billion. The Financial Services Division’s negative net liquidity, which is common in the industry, stood at €–154.1 billion at the end of the reporting period; at the end of December 2017 it had amounted to €–141.5 billion. N E T A S S E T S Consolidated balance sheet structure The Volkswagen Group’s total assets amounted to €458.2 bil- lion at the end of fiscal year 2018, 8.5% more than at the end of the previous year; the main contributing factor was the increased business volume 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 Volks- wagen Group’s equity was €117.3 (109.1) billion on Decem- ber 31, 2018. The equity ratio was virtually unchanged from the previous year, at 25.6 (25.8)%. The implementation of the new International Financial Reporting Standards led to adjustments to the opening balance sheet of the Volkswagen Group as of January 1, 2018. The amounts as of December 31, 2017 were unchanged, apart from movements within equity. As of the end of fiscal year 2018, the Group had off-balance- sheet commitments in the form of contingent liabilities in the amount of €9.3 (8.4) billion, financial guarantees in the amount of €0.3 (0.3) billion and other financial obligations in the amount of €26.6 (23.5) 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 financial obli- gations primarily result from purchase commitments for property, plant and equipment, obligations under long-term leasing and rental contracts and irrevocable credit commit- ments to customers. In addition, they include investments to which the Group has committed itself in the infrastructure for zero-emission vehicles and in initiatives to promote access to and awareness of this technology. These commit- ments were made as part of the settlement agreements in the USA in connection with the diesel issue. Other financial obli- gations include an amount of €1.3 billion for this purpose. Automotive Division balance sheet structure As of December 31, 2018, the Automotive Division’s intan- gible assets and property, plant and equipment were both up year-on-year. Equity-accounted investments rose slightly. The dividend distributions resolved by the Chinese joint ventures were set against positive business results of the Chinese joint ventures and the acquisition of the shares in Quantum Scape. The decrease in noncurrent other receivables and financial assets was due among other factors to the negative impact from the measurement of derivatives. Overall, there was a slight increase in noncurrent assets, to €143.2 (140.9) billion, compared with the previous balance sheet date. 124 Results of Operations, Financial Position and Net Assets Group Management Report At €91.4 (80.2) billion, current assets were up significantly compared with the end of 2017; the inventories included in this figure increased by 14.4%, mainly for production-related reasons and because of the changeover to the WLTP test procedure. The decrease in current other receivables and financial assets was due mainly to the negative impact from the measurement of derivatives. Cash and cash equivalents were significantly higher than on December 31, 2017, rising to €24.2 (13.8) billion. Equity in the Automotive Division amounted to €88.9 bil- lion at the end of 2018. This 8.9% incease on the previous year’s balance sheet date was mainly a result of the healthy earnings growth and the hybrid notes issued in June 2018. The negative effects from the measurement of derivatives recognized outside profit or loss and currency translation, the dividends paid to the shareholders of Volkswagen AG, the redemption of the hybrid notes terminated in the third quarter of 2018 and the non-recurring impact of the first- time application of the new International Financial Reporting Standards reduced equity in the Automotive Division. The noncontrolling interests are mainly attributable to RENK AG and AUDI AG. As these were lower overall than the noncon- trolling interests attributable to the Financial Services Divi- sion, the figure for the Automotive Division, where the deduction was recognized, was negative. The equity ratio was 37.9 (36.9)%, up on the figure as of December 31, 2017. Noncurrent liabilities went up to €77.7 (69.8) billion, driven mainly by the rise in the noncurrent financial lia- bilities included in this item. Current liabilities declined to €68.0 billion, in total 2.5% down on the end of 2017. The item “Put options and compen- sation rights granted to noncontrolling interest share- holders” primarily comprises the liability for the obligation to acquire the shares held by the remaining free float shareholders of MAN; following the ruling in the award pro- ceedings, the extraordinary notice of termination of the control and profit and loss transfer agreement, and the cash outflows for the cash compensation and the acquisition of shares tendered, this item was adjusted accordingly to €1.9 (3.8) billion. Reclassifications from noncurrent to current liabilities due to shorter remaining maturities were among the factors that led to a rise in current financial liabilities compared with the end of 2017. The figures for the Auto- motive Division also contain the elimination of intragroup transactions between the Automotive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division, a negative amount was disclosed in both periods. Current other provisions included in current other liabilities declined due to their use in connection with the diesel issue. On December 31, 2018, total assets in the Automotive Division amounted to €234.5 billion, 6.1% more than at the end of 2017. 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, 2018 Dec. 31, 2017 Noncurrent assets Current assets Total assets Equity Noncurrent liabilities Current liabilities 112,796 65,882 178,678 70,817 62,445 45,415 111,277 60,052 171,329 66,449 55,118 49,762 Intangible assets and property plant and equipment in the Passenger Cars Business Area were higher than in the pre- vious year. The decrease in noncurrent other receivables and financial assets was due to factors such as the negative impact from the measurement of derivatives. Overall, non- current assets grew by €1.5 billion to €112.8 billion. Current assets increased by a total of €5.8 billion to €65.9 billion; the inventories included in this figure grew for production- related reasons and because of the changeover to the WLTP test procedure. There was a threefold year-on-year increase in cash and cash equivalents to €18.1 (6.1) billion. Total assets stood at €178.7 (171.3) billion at the end of 2018. At €70.8 billion, the Passenger Cars Business Area’s equity exceeded the prior-year figure by 6.6%, due mainly to earnings-related factors and the hybrid notes issued in the reporting period. Noncurrent liabilities were 13.3% higher than at the end of 2017; the financial liabilities included in this item were up significantly. Current liabilities decreased by a total of 8.7%. Current other liabilities and current other provisions were down on the prior-year figure. Group Management Report Results of Operations, Financial Position and Net Assets 125 C O 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 P O W 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 B A L A N C E S H E E T ST R U C T U R E € million Dec. 31, 2018 Dec. 31, 2017 € million Dec. 31, 2018 Dec. 31, 2017 Noncurrent assets Current assets Total assets Equity Noncurrent liabilities Current liabilities 27,858 21,892 49,750 15,081 14,493 20,176 27,005 Noncurrent assets 16,908 Current assets 43,913 Total assets 12,194 Equity 13,975 Noncurrent liabilities 17,744 Current liabilities 2,499 3,597 6,097 2,953 754 2,391 2,629 3,250 5,879 2,963 711 2,205 On December 31, 2018, the Commercial Vehicles Business Area’s intangible assets and property, plant and equipment were higher than at the end of 2017. Equity-accounted invest- ments were up, while other equity investments decreased as a result of an intragroup sale (power engineering business). Overall, noncurrent assets grew by €0.9 billion to €27.9 bil- lion. Current assets amounted to €21.9 (16.9) billion, signifi- cantly up on the previous year’s balance sheet date. The current other receivables and financial assets included in this item increased, while cash and cash equivalents declined; the payments in connection with the intragroup sale of the power engineering business will become due in the first quar- ter of 2019. Total assets climbed by 13.3% to €49.7 billion. Equity in the Commercial Vehicles Business Area stood at €15.1 billion at the end of 2018, 23.7% more than a year earlier. In addition to healthy earnings, this increase was attributable to the intragroup sale of the power engineering business. The item “Put options and compensation rights granted to noncontrolling interest shareholders” fell sharply: the item was adjusted to reflect the ruling in the award proceedings and the extraordinary termination of the control and profit and loss transfer agreement, as well as the cash outflows for the cash compensation and the acquisition of shares tendered. Noncurrent liabilities rose by 3.7%; the noncurrent financial liabilities included in this item were down on the previous year, while noncurrent other liabilities increased. Current liabilities were 13.7% higher than on December 31, 2017. Current other liabilities were signifi- cantly higher. In the Power Engineering Business Area, the decline in non- current assets was mainly attributable to a year-on-year decrease in intangible assets. Higher inventories and receiv- ables led to a 10.7% rise in current assets compared with the previous balance sheet date. At the end of 2018, the Power Engineering Business Area recorded a 3.7% year-on-year increase in total assets to €6.1 billion. On December 31, 2018, equity stood at €3.0 (3.0) billion, and thus on a level with the previous year. Both noncurrent and current liabilities were up in the reporting period com- pared with the 2017 balance sheet date. Financial Services Division balance sheet structure On December 31, 2018, total assets in the Financial Services Division amounted to €223.6 billion, 11.2% more than at the end of 2017. There was a significant rise in both lease assets and non- current receivables, tracking the growth in business. Noncur- rent assets were up by 8.5% in total. Current assets rose by 15.3%, driven by higher volumes. The revised classification of financial instruments required by IFRS 9 led to reclassifications, in particular of financial services receivables to trade receivables, which are included in the “Other receivables and financial assets” item. Total securities increased by €1.3 billion to €3.7 billion. On December 31, 2018, the Financial Services Division accounted for around 48.8 (47.6)% of the Volkswagen Group’s assets. 126 Results of Operations, Financial Position and Net Assets Group Management Report The 3.7% rise in equity to €28.5 billion in the reporting period was mainly attributable to healthy earnings. The equity ratio was 12.7 (13.7)%. Noncurrent liabilities were up 14.8%, mainly because of a rise in noncurrent financial liabilities to refinance the business volume. Current liabilities increased by a total of 10.3% and the current financial liabilities included in this item rose markedly. At €29.9 (31.4) billion, deposits from the direct banking business were lower at the end of 2018 than they had been a year earlier. R E T U R N O N I N V E ST M E N T ( R O I ) A N D VA L U E C O 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 indicator linked to the cost of capital, as an absolute per- formance measure. The return on investment serves as a consistent target in strategic and operational management. 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. The concept of value-based management allows the success of the Automotive Division and individual business 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. 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 determined 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 calculated on a daily basis followed by the subsequent calculation of the average. A beta factor of 1.17 (1.12) was determined for 2018. 1 The value contribution corresponds to the Economic Value Added (EVA®). EVA® is a registered trademark of Stern Stewart & Co. Group Management Report Results of Operations, Financial Position and Net Assets 127 C O ST O F C A P I TA L A F T E R TA X A U 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 2018 2017 0.8 6.5 1.1 1.0 6.5 0.8 (1.17) (1.12) 8.4 2.5 –0.8 1.8 66.7 33.3 6.2 8.3 1.8 –0.6 1.3 66.7 33.3 6.0 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 6.2 (6.0)% for 2018. R E T U R N O N I N V E ST M E N T ( R O I ) A N D VA L U E C O N T R I B U T I O N I N T H E R E P O R T 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 €11,438 (11,756) million in fiscal year 2018. Volume improvements were unable to compensate for the year-on-year decline that was primarily caused by rising depreciation and amortization charges due to the large volume of capital expenditure, higher research and develop- ment costs, as well as the fair value measurement of gains and losses on certain derivatives, which have been reported here since the beginning of the year. Effects on earnings and assets from purchase price allocation are not taken into account as they cannot be influenced operationally by man- agement. In the reporting year, the invested capital rose to €104,424 (97,021) million. The increase was particularly due to higher inventories as well as to additions to investments in property, plant and equipment and capitalized 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 declined year-on-year as a result of the lower operating profit and higher invested capital. However, at 11.0 (12.1)%, it exceeded our minimum rate of return on invested capital of 9% in spite of the adverse effects of the special items on earnings. At €6,474 (5,821) 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 and the higher cost of capital. After deduction of the opportunity cost of invested capital, operating result after tax – which was negatively impacted by special items – led to a positive value contribution of €4,964 (5,935) million. 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/ en/InvestorRelations/news-and-publications/More_Publica- tions.html. R E T U R N O N I N V E ST M E N T ( R O I ) A N D VA L U E C O N T R I B U T I O N I N T H E A U 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 2018 2017 11,438 104,424 11.0 6.2 6,474 4,964 11,756 97,021 12.1 6.0 5,821 5,935 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. 128 Results of Operations, Financial Position and Net Assets Group Management Report S U M M A R Y O F B U S I N E S S D E V E L O P M E N T A N D E C O 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 challenges presented by the diesel issue and public discussion pertaining to diesel vehicles, the persis- tently difficult market conditions and the new WLTP test procedure, we slightly lifted our deliveries to customers to 10.8 million vehicles, thus achieving a new sales record. We saw growth in Europe, South America and the Asia- Pacific region. The Group’s sales revenue rose by 2.7%, within the expected range. Operating profit before special items amounted to €17.1 billion; at 7.3% the operating return on sales before special items was within the range forecast at the beginning of the year of 6.5–7.5%. Due to special items resulting from the diesel issue, the operating return on sales of 5.9% was moderately below the forecast range, as recently projected. F O R E C A ST V E R S U S A C T U A L F I G U R E S Our efforts to ensure the Company’s future viability are reflected in research and development costs; at 6.8% the R&D ratio in the Automotive Division was within the expected range. At 6.6%, the Automotive Division’s ratio of capex to sales revenue was also within the forecast range as well. As expected, the Automotive Division’s net cash flow consider- ably exceeded the comparable prior-year figure, but was negative at €–0.3 billion. This was particularly due to higher- than-expected cash outflows attributable to the diesel issue, owing to fines resulting from the administrative fine order issued by the public prosecutor's offices in Braunschweig and Munich II. In combination with the acquisition of MAN shares tendered, this resulted in a year-on-year decline in net liquidity, which stood at €19.4 billion. The return on investment (ROI) in the Automotive Divi- sion of 11.0% was lower than in 2017 but exceeded the minimum required rate of return on invested capital. Deliveries to customers Volkswagen Group Sales revenue Actual 20171 Original forecast for 2018 Adjusted forecast for 2018 Actual 2018 10.7 million moderate increase moderate increase 10.8 million €229.6 billion increase of up to 5% increase of up to 5% €235.8 billion Operating return on sales before special items Operating return on sales 7.4% 6.0% 6.5–7.5% 6.5–7.5% 6.5–7.5% moderately below 6.5% Operating result before special items €17.0 billion within the forecast range within the forecast range €13.8 billion within the forecast range within the forecast range Operating return on sales before special items Operating return on sales 8.0% 5.9% 6.5–7.5% 6.5–7.5% 6.5–7.5% moderately below 6.5% Operating result before special items €12.5 billion within the forecast range within the forecast range €9.3 billion within the forecast range within the forecast range €157.3 billion increase of up to 5% increase of up to 5% €160.8 billion 7.3% 5.9% €17.1 billion €13.9 billion 7.7% 5.7% €12.4 billion €9.2 billion 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 Net cash flow in the Automotive Division Net liquidity in the Automotive Division Return on investment (ROI) in the Automotive Division €35.2 billion increase of up to 5% increase of up to 5% €36.7 billion 5.4% 5.0–6.0% 5.0–6.0% 5.4% €1.9 billion within the forecast range within the forecast range €2.0 billion €3.3 billion €–0.1 billion €33.7 billion €2.7 billion 6.7% 6.5% €–6.0 billion €22.4 billion 12.1% increase of up to 5% increase of up to 5% lower loss around the prior-year level increase of up to 5% increase of up to 5% at prior-year level at prior-year level 6.5–7.0% 6.5–7.0% significant increase, positive moderate increase slight increase, >9% 6.5–7.0% 6.5–7.0% significant increase, positive moderate decline slight decline, >9% €3.6 billion €–0.1 billion €34.8 billion €2.8 billion 6.8% 6.6% €–0.3 billion €19.4 billion 11.0% 1 Adjusted; see disclosures about the application of new International Financial Reporting Standards on page 114. Group Management Report Volkswagen AG 129 Volkswagen AG (Condensed, in accordance with the German Commercial Code) Unit sales of Volkswagen AG were on a level with the previous year in 2018, while sales and profit increased. A N N U A L R E S U LT Additional special items in connection with the diesel issue amounting to €2.0 billion were recognized in fiscal year 2018. These were mainly attributable to the administrative fine order of €1.0 billion imposed by the Braunschweig public prosecutor’s office, higher legal risks and legal defense costs and an increase in expenses for technical measures. Special items had an impact of €0.1 (–2.0) billion on cost of sales and of €–2.0 (–0.9) billion on other operating income. In the reporting period, sales were 1.7% higher than in the previous year, at €78.0 billion. Sales generated abroad accounted for a share of 64.7 (62.5)%. Due to a decline in special items, cost of sales decreased by 0.9% to €72.7 billion. Gross profit rose accordingly to €5.3 (3.4) billion. At €7.6 billion, distribution, general and administrative expenses were up €0.5 billion on the prior-year figure. The net other operating result was €0.3 billion lower, at €–0.4 (–0.2) billion. The decline was mainly attributable to the year-on-year rise of €1.1 billion in special items. At €8.3 (8.6) billion, the financial result stood at the prior- year level. Including the income tax expense of €–0.9 (–0.4) billion, net income for the year amounted to €4.6 (4.4) billion in fiscal year 2018. I N C O M E STAT E M E N T O F V O L K SWA G E N A G B A L A N C E S H E E T O F V O 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 Distribution, 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 long-term financial assets. 2018 2017 € million 2018 2017 78,001 –72,700 5,301 76,729 Fixed assets –73,355 3,375 Inventories Receivables1 –7,624 –7,104 –415 8,264 –907 4,620 4,620 3 –2,204 2,419 –154 8,644 –409 4,353 4,353 2 –2,174 2,181 Cash-in-hand and bank balances Total assets Equity Special tax-allowable reserves Long-term debt Medium-term debt Short-term debt 1 Including prepaid expenses. 119,713 113,703 5,140 36,965 14,595 176,412 33,090 19 40,348 37,422 65,533 4,889 32,303 5,798 156,693 30,438 21 33,060 33,415 59,759 130 Volkswagen AG Group Management Report 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 €176.4 billion on December 31, 2018, up €19.7 billion on the prior-year figure. Property, plant and equipment was down by €0.2 billion, capital expendi- ture was lower than depreciation charges. Financial assets increased, driven in particular by capital increases at Volks- wagen Finance Luxemburg S.A. (€2.7 billion), Volkswagen Klassik GmbH (€2.3 billion) and Porsche Holding Stutt- gart GmbH (€0.9 billion) and by the increased stake in Volks- wagen Klassik GmbH recognized directly in equity due to an intragroup reorganization (€2.6 billion). Particularly the capital decrease of €3.3 billion implemented at TRATON SE (formerly TRATON AG) had an offsetting effect. Fixed assets accounted for a share of 67.9 (72.6)% of total assets. 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, improved year-on- year from €–8.5 billion to €–0.2 billion. The interest-bearing portion of debt amounted to €87.9 (74.0) 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 2018, net retained profits amounted to €2.4 bil- lion. The Board of Management and Supervisory Board are proposing to pay a total dividend of €2.4 billion, i.e. €4.80 per ordinary share and €4.86 per preferred share. Current assets (including prepaid expenses) amounted to 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 €56.6 (43.0) billion on December 31, 2018. At €33.1 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 18.8 (19.4)%. € Other provisions decreased by €2.1 billion to €20.0 (22.1) billion, due primarily to the utilization of provisions in connection with the diesel issue. Provisions for pensions and similar obligations rose by €1.8 billion to €16.1 billion, pri- marily as a result of a change in measurement inputs, while provisions for taxes increased by €0.2 billion to €3.7 billion. The €17.1 billion rise in total liabilities (including deferred income) to €103.4 billion is, above all, attributable to higher liabilities to affiliated companies. E M P L OY E E PAY A N D B E N E F I T S AT V O L K SWA G E N A G Dividend distribution on subscribed capital (€1,283 million) of which on: ordinary shares preferred shares Balance (carried forward to new account) Net retained profits 2018 2,418,589,589.10 1,416,431,126.40 1,002,158,462.70 338,837.15 2,418,928,426.25 € million Direct pay including cash benefits Social security contributions Compensated absence Retirement benefits Total expense 2018 8,175 1,437 1,350 611 % 70.6 12.4 11.7 5.3 2017 7,637 1,361 1,161 640 % 70.7 12.6 10.7 5.9 11,573 100.0 10,799 100.0 Group Management Report Volkswagen AG 131 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 measures upstream or downstream of the production process. In contrast to additive environmental protection measures, integrated measures reduce the environmental impact already during the production process. In 2018 we invested primarily in soil and water pollution control. The recognized operating costs relate to 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 previous years, the emphasis in 2018 was on sewage and waste management. V E H I C L E S A L E S Volkswagen AG sold a total of 2,597,126 (2,584,375) vehicles in fiscal year 2018. Vehicles sold abroad accounted for a share of 71.0 (70.0)%. P R O D U C T I O N Volkswagen AG produced a total of 1,113,415 vehicles at its vehicle production plants in Wolfsburg, Hanover and Emden in the reporting period (–9.1%). E M P L OY E E S As of December 31, 2018, a total of 119,394 (117,420) people were employed at the sites of Volkswagen AG, excluding staff employed at subsidiaries. Of this figure, 5,009 (4,953) were vocational trainees. 4,785 (4,380) employees were in the passive phase of their partial retirement. Female employees accounted for 17.3 (17.1)% of the workforce. Volkswagen AG employed 5,883 (5,069) part-time workers. The percentage of foreign employees was 6.3 (6.1)%. 83.2 (83.4)% of the employees in Volkswagen AG’s production area were in possession of vocational or additional training in the reporting period. The proportion of graduates was 19.5 (18.9)% in the same period. The average age of employees in fiscal year 2018 was 43.9 (43.6) years. R E S E A R C H A N D D E V E L O P M E N T Volkswagen AG’s research and development costs as defined in the German Commercial Code increased to €5.6 (4.8) bil- lion in the reporting period. 12,796 (12,332) people were employed in this area at the end of the reporting period. V O L K SWA G E N A G 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 2018 13 230 2017 17 227 2016 11 223 2015 21 244 2014 19 226 132 Volkswagen AG Group Management Report 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 8 Share of environmental protection areas in percent Sewage management Waste management Air pollution control Soil and water pollution control Climate protection Protection against noise and vibration Species and landscape conservation 30.8 29.1 17.6 10.6 6.2 3.0 2.7 0 10 20 30 40 50 60 70 80 90 100 B U S I N E S S D E V E L O P M E N T R I S K S A N D O P P O R T U N I T I E S AT V O 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 163 to 187 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 185 to 186 of this annual report. D E P E N D E N T C O M PA N Y R E P O R T 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 German Commercial Code can be accessed from the electronic company register at www.unternehmensregister.de. Group Management Report Sustainable Value Enhancement 133 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 describes this change process in the Company. 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, around 665 thousand employees and 123 production locations. In order to tackle this complexity in the best way possible, our focus is on coordinating our sustainability activities across the entire Group. We have a forward-looking system of risk manage- ment in place, a clear framework for dealing with future environmental issues, and attach great weight to social commitment and employee responsibility. Moreover, we are oriented towards the recommendations of the German Corporate Governance Code. For us, sustainability means simultaneously striving for economic, social and environmental goals in a way that gives them equal priority. The future program TOGETHER – Strat- egy 2025 places sustainable growth at the heart of our Group strategy: 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 at the same time. Our corporate citizenship activities also support us in this endeavor. We understand corporate citizenship as voluntary services that our company performs for society above and beyond our core business. These services address social challenges, but are also designed to promote business objectives such as improving our reputation, credibility and/or attractiveness as an employer. Specifically, they may take the form of financial donations or donations in kind, social sponsoring, opera- tional projects founded on the Company’s initiative but also different forms of corporate volunteering. By 2025, we aim to make the Volkswagen Group the world’s number one in electric mobility. We have therefore set new priorities with Roadmap E. We also need to ensure that we detect risks and opportunities in the areas of environ- ment, society and governance at an early stage at every step along the value chain. Management and Coordination The Volkswagen Group has created a clear management structure to coordinate the Group’s activities as regards sustainability – including corporate citizenship. Its highest committee is the Group Board of Management. It is regularly briefed by the Group Sustainability steering group on all 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 and programs, using indi- cators to monitor the extent to which these goals are being met and approving the sustainability report. 134 Sustainable Value Enhancement Group Management Report T H E 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 AS 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 Sustainability activities are planned and managed by the functional area Group Sustainability. Its duties include coordinating all sustainability activities within the Group, the brands and the regions. These also include stakeholder management at Group level, for example contact with sustainability-driven analysts and investors. In addition, project teams work across business areas on topics such as decarbonization, human rights and sustainability in supplier relationships. This coordination and working structure is also largely established across the brands and is constantly expanding. Activities in fiscal year 2018 focused on strate- gically realigning the functional area Group Sustainability and anchoring sustainability in our core business, as well as on developing a sustainability program that places emphasis on climate protection and sustainable supply chains, among other things. Sustainability Council To support its strategic sustainability goal, the Volkswagen Group appointed a Sustainability Council in September 2016. This is made up of internationally renowned experts from the academic world, politics and society. The Council estab- lishes its own working methods and areas of focus indepen- dently, has extensive rights for the purposes of exchanging information, consultation and initiating action, and consults regularly with the Board of Management, top management and the employee representatives. In 2018, the projects initiated by the Council the year before were commenced: a dialog platform for innovations and cultural change in the area of sustainable mobility, an international program for mitigating the effects of climate change through forecast-based civil protection financing and a scientific study for designing future traffic policy in line with international climate targets. In addition, the Council decided on a further project for the strategic focus of sus- tainability at Volkswagen and the establishment of a visiting professorship for open labs and cultural change at the Einstein Center Digital Future in Berlin. Furthermore, the Sustainability Council formulated recommendations for how technological, political and cultural change should be organized to win back trust and lay the foundations for future success. Materiality analysis Two developments in 2018 continued to influence the detailed analysis as to which issues are material to the Volks- wagen Group: the alingment of the Group as part of the future program TOGETHER – Strategy 2025 and dealing with the consequences of the diesel issue. As the starting point for our analysis, we are oriented towards the Sustainable Development Goals (SDGs) formu- lated by the United Nations, which describe the social chal- lenges facing companies. Based on the results, we defined 18 key action areas for achieving our goal of becoming one of the world’s leading providers of sustainable mobility. In order to identify key topics, we took into account external studies, sector and media analyses, ratings, stakeholder surveys, internal and external guidelines and codes, the Group-wide future program TOGETHER – Strategy 2025 and the indi- vidual departmental strategies. As the details of the 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. Principles and guidelines Voluntary commitments and principles that apply through- out the Group form the basis of our sustainable focus. In addition, our sustainability model provides the framework for sustainable and responsible action. The Volkswagen Group’s Code of Conduct applies to the entire Group and helps managers and employees alike to deal with legal and ethical challenges in their day-to-day work. Group Management Report Sustainable Value Enhancement 135 T H E V O L K S W A G E N G R O U P ’ S S T A K E H O L D E RS M E D IA R E S I D E N T S & L O C A L A U T H O R I T I E S R E S E A R C H E R S & E X P E R TS N G O s / C H A R I T A B LE O R G A N I Z A T I O N S C U S T O M E RS V O L K S W A G EN G R O UP E M P L O Y E E S C O M P E T I T O RS P O L I T I C S & A S S O C I A T I O N S B U S I N E S S P A R T N E R S I N V E S T O R S & A N A L Y S T S 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 globalization. As long ago as 2002, the Volkswagen Group made a commit- ment to promoting human rights, labor standards, environ- mental protection and combating corruption. We are seeking reincorporation of our membership in the United Nations Global Compact, which had been suspended following the diesel issue; talks on this were resumed in 2018. In addition, 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. We have established our own internal guidelines in the form of the Volkswagen Social Charter, the Charter on Labor Relations, the Charter on Vocational Education and Training, and the Charter on Temporary Work. The environmental policy and the environmental principles for products and production, which apply throughout the Group, are manda- tory for environmental protection. Strategic stakeholder management Our stakeholders are individuals, groups, or organizations who have a material influence on or are materially influenced by the way in which the Group reaches its corporate decisions and the implications of those decisions. Our customers and our employees are our key stakeholders. Around this core, we have defined eight types of stakeholders. This classification is the product of a stakeholder analysis in which we regularly identify the Group’s key stakeholder groups. The role of stakeholder management is to enter into dialog with stakeholder groups in order to manage the many demands placed on us and integrate them into decision- making processes. To be able to systematically incorporate our stakeholders’ suggestions and recommendations, we have set up councils such as the Sustainability Council and the Stakeholder Panel. The Panel is comprised of 300 national and international opinion leaders. In addition, we offer our stakeholders a broad range of opportunities for interaction and feedback channels including regular stakeholder discus- sion events, stakeholder surveys and international partner- ships. R E S E A R C H A N D D E V E L O P M E N T Forward-looking mobility solutions with brand-defining products and services would be unthinkable without innovations. This makes our research and development work essential for sustainably increasing the value of the Company. Together with our Group brands, we have launched strategic initiatives for networking development activities across the Group based on our future program TOGETHER – Strategy 2025. At the heart of this is an efficient, cross-brand development alliance characterized by a close network of our experts, collaboration on an equal footing, an innovative working environment and the pooling of development activities. With this, 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 mobility and helping to make the Group fit for the future. Based on this strategic focus, we concentrated in the reporting period on continuing to develop forward-looking 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 prod- ucts and services, for example through cooperation across brands. 136 Sustainable Value Enhancement Group Management Report 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 2018 2017 2016 2015 2014 123 ¹ ¹ 122 120 121 126 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 123 g CO2/km1 in the reporting period and was thus below the 2018 European limit of 130 g CO2/km. The small year-on- year increase is mainly attributable to the new measurement techniques to be applied. 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. The Volkswagen Group closely coordinates technology and prod- uct planning with its brands so as to avoid breaches of fleet fuel consumption limits, since these would entail severe financial penalties. We anticipate that already by the year 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-electric 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 – battery-electric, hybrid or mild hybrid vehicles – of each of our approximately 300 passenger car models across all Group brands. We are therefore developing two new electric platforms for vehicles with a range of up to 600 km. The Volkswagen Group is committed to achieving the Paris climate targets and is pursuing the goal of making its vehicle fleet completely carbon neutral by 2050. To enable sustainable, affordable mobility in the future for as many people around the world as possible, we will offer the full range of drivetrains – from conventional combustion engines to all-electric drive. From today’s perspective, con- ventional combustion engines look set to make up the lion’s share of drive technology in the coming years. In the interest of using resources responsibly, it is therefore essential to further enhance this engine segment and systematically consolidate it for specific markets. Powertrain measures such as far more sophisticated exhaust gas purification or mild hybridization of the vehicles, but also vehicle measures such as optimized aerodynamics or reduced rolling resistance will be necessary to fulfill future emissions standards. In addition to electric drives and more efficient com- bustion engines, renewable, reduced-CO2 fuels (in gas or liquid form) are playing an increasingly important role. We support the expansion of the natural gas (CNG) infrastructure and are conducting intensive research into options for producing fuels from renewable electricity, enabling carbon-neutral operation of combustion engines. Group Management Report Sustainable Value Enhancement 137 Last but not least, we are working under Audi’s leadership to make fuel cell technology ready for market. 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. This will create capacity for the development and production of new hybrid and electric drives. Life cycle engineering and recycling On their own, technological innovations for reducing fuel consumption are not enough 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 appropriate solutions. We call this life cycle engineering. Recycling, for example, is an important means of reducing environmental impact and conserving resources. Already 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. Leveraging synergies increases efficiency When developing vehicles, we cooperate closely with our brands to leverage synergies. The joint strategy of our devel- opment alliance aims, for example, to make the Group more competitive and viable in the long term by deploying resources more effectively and efficiently in the research and development 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 cross-brand networks of expertise to address the topics of the future. For example, we consolidated the Group’s activities and responsibility for the development, procurement and quality assurance of all battery cells centrally in a Center of Excellence under the umbrella of the Volkswagen Passenger Cars brand. There, a pilot line for cell production will be put into operation in 2019 to build up expertise for the Group in cell design, as well as throughout the entire value chain. 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 electrification offensive and focusing on auton- omous systems. We will achieve this through a considerable reduction in complexity using streamlined platforms that synergize but do not overlap. 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 of 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, consequently strengthening the brands’ responsi- bility for the success of vehicle projects, improving project work across different cross-departmental areas, accelerating decision-making and intensifying the focus on results of projects. We are also creating synergy effects by continuing to widely share best practices, for instance in virtual develop- ment and testing. Finally, the centralized development and consolidation of IT systems is also helping to strengthen cooperation across brands, make development activities more comparable and reduce the Group’s IT costs. Sustainable mobility, connectivity and automated driving Mobility is a prerequisite for economic growth. But while the need to always be mobile is rising, natural resources are dwindling. This calls for holistic mobility concepts to minimize the environmental impact. Such solutions need to be efficient, 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 infra- structures, at people’s mobility habits and at other relevant factors. Innovations such as digital connectivity and auto- mated driving allow for completely new problem-solving approaches. We strive to utilize these in order to play our part in a comprehensive mobility system in the future and to help shape our industry’s transformation. Another initiative of our future program TOGETHER – Strategy 2025 focuses on establishing a cross-brand mobility solutions business. Our mobility business MOIA is to become one of the leading providers of innovative transport services and will develop profitable and globally scalable business models. Strategic investments and partnerships are also being sought. Our strategic goal is to make Volkswagen one of the world’s leading providers of efficient and convenient 138 Sustainable Value Enhancement Group Management Report smart mobility services by 2025, with a portfolio encom- passing all brands and both “mobility as a service” and “vehicle on demand” services. On the road to autonomous driving, the Volkswagen Group further improved its assistance systems and auto- mated driving functions in 2018 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. The Volkswagen Group has introduced its vision of an autonomous mobility system in the form of the Sedric family, comprising fully autonomous vehicles for short- and long-distance mobility, as well as sports cars, self-driving delivery vehicles and heavy trucks. In both, cities and rural areas, these vehicles will enable new forms of mobility – particularly for user groups that have so far been excluded from access to mobility. Autonomous driving in complex urban environments places especially heavy demands on technology. We are dedicated to meeting these challenges. Our Autonomous Intelligent Driving GmbH is working on developing a Group- wide system for self-driving vehicles. Given the growing number of digital and software-based vehicle-related components, customer satisfaction with these elements is becoming increasingly important. The goal of a Group initiative is therefore to make Volkswagen one of the best companies worldwide in terms of user experience. Close collaboration among our Group brands in this area provides the basis for this. 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 into 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. We are therefore concentrating to a greater extent on partnerships, acquisitions and venture capital invest- ments and managing investment selection centrally so as to generate maximum value for the Group and its brands. In light of this aspect, we have formed a large-scale alliance with the Ford Motor Company. The first step involves a collabo- ration regarding the development of vans and mid-sized pickups starting in 2022. This alliance allows us, in addition to making optimal use of manufacturing capacity, to share the development costs and improve the performance and competitiveness of the vehicles. This generates cost savings, while further strengthening our innovative power. Beyond this specific agreement, we are considering collaboration for additional mobility and vehicle concepts. Thanks to our strategic partnership with Microsoft, we are accelerating our transformation into a mobility service provider with a fully connected vehicle fleet and our digital ecosystem “Volkswagen We”. Working together, we aim to press ahead with software development for the automobile of tomorrow and new services for our customers. This enables the comprehensive strengthening and expansion of our IT expertise and solutions. Developing battery technology as a core competency has also been defined in 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 accelerate the building up 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 have defined strategic battery cell suppliers for our most important markets and the first MEB models, and we aim to initiate further long-term strategic partnerships in China, Europe and the USA. Looking ahead, we are already preparing for the next generation: together with partners, we aim to develop solid- state batteries to market readiness. 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 safeguard long-distance mobility: by 2020, we aim to jointly build and operate fast-charging stations at 400 locations along major transport arteries in Europe. As part of forward-looking mobility concepts, the Volks- wagen Group is also working on robot-based service solution Group Management Report Sustainable Value Enhancement 139 for a variety of tasks. Rapid charging of an electric vehicle for example – be it in the user’s garage at home, in underground car parks or in car parks – is something that could be done by a service robot in the future: when the driver gets out of the vehicle in front of the car park, their self-driving electric car autonomously looks for a free parking space and is charged there by “CarLa” – a charging robot that the Volkswagen Group and automation specialist KUKA presented at the Geneva International Motor Show in 2018. In view of the growing importance of e-mobility, light- weight automotive engineering is considered a key technol- ogy for future competitiveness because a lighter vehicle weight increases the range of electric vehicles. 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 production. 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 gathering here will benefit the Group brands and thus also our customers. Key R&D figures In fiscal year 2018, we filed 7,639 (6,566) patent applications worldwide for employee inventions, around half of them in Germany. The fact that an ever increasing share of these patents is for important cutting-edge fields underscores our Company’s innovative power. These fields include driver assistance systems and automation, connectivity, alternative drive systems and lightweight construction. The Automotive Division's total research and develop- ment costs in the reporting period were 3.8% higher than in the previous year; their percentage of the Automotive Divi- sion’s sales revenue – the R&D ratio – came to 6.8 (6.7)%. Along with new models, above all the main focus was on the electrification of our vehicle portfolio, a more efficient range of engines, digitalization and new technologies. The capital- ization ratio was 38.4 (40.0)%. Research and development expenditure recognized in profit or loss in accordance with IFRSs increased to €12.1 (11.6) billion. As of December 31, 2018, our Research and Development departments – including the equity-accounted Chinese joint ventures – employed 51,948 people (+5.3%) Group-wide or 7.8% of the total headcount. R E S E A R C H A N D D E V E L O P M E N T C O ST S I N T H E A U 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 2018 13,640 5,234 38.4 3,710 12,116 201,067 13,640 6.8 2017 13,135 5,260 40.0 3,734 11,609 196,949 13,135 6.7 140 Sustainable Value Enhancement Group Management Report P R O C U R E M E N T In fiscal year 2018, the main task for Procurement was once again to safeguard the supplies and to help create com- petitive, innovative products and optimize cost structures. In addition, we continued to digitalize procurement processes. Procurement strategy A global network of strong business partners and suppliers is paramount for achieving the goals of the Group strategy known as TOGETHER – Strategy 2025. We are implementing our Group-wide vision TOGETHER – Best in Customer Value and Cost with our procurement strategy 2025. This involves using our strengths to deliver products with a high customer value and optimum cost structures that meet the needs of the market. We integrate knowledge from our global supplier networks, secure expertise for the global procurement mar- kets of the future and ensure well-timed industrialization and market implementation in line with cost requirements. Six goals were agreed upon 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 We intend to achieve these goals with initiatives that accom- plished noticeable results in 2018. By simplifying technical component concepts and bringing these into line with global standards, we generated signifi- cant savings. Based on these results, we are now rolling out the approaches to other regions and vehicle projects. Over half of our purchasing projects have already benefited from an extended cost analysis. We have secured important innovations for the Company with our innovation contracts. In the case of new technolo- gies, we selected suitable partners early on to allow inno- vations to be implemented in the market. We are tackling the challenges of the transformation in our procurement markets by setting up a Connectivity, eMobility & Driver Assistance Systems division. The redesign of our procurement process for software and data will pave the way for partnerships that are secure for the future. Implementation of the Group Procurement Suite is a means of revamping our procurement systems, automating procurement operations and facilitating the support of stra- tegic procurement activities through analyses and artificial intelligence. 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. After incorporating additional partners into the FAST program in 2017, we worked with these partners in the reporting period to exploit the benefits of the strategic integration. 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 terms of 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. The corner- stone for the future of Procurement was laid in 2018 in the form of Group Procurement’s digitalization strategy. This strat- egy aims not only to eliminate the weaknesses of Procure- ment’s IT system environment but also to increase the organization’s effectiveness, efficiency and future viability. 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 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 growth 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. Group Management Report Sustainable Value Enhancement 141 Supply situation for purchase parts and upstream materials Systematic safeguarding of the supply of purchase parts is one of Procurement’s goals. As a result of the new WLTP test procedure and the related changes in the production pro- grams, we required a high degree of flexibility from our suppliers. Adverse effects on production in the Group caused by unforeseeable events such as natural disasters were minimized to the best of our ability. Management of purchased parts and suppliers The importance of managing purchased parts and suppliers is steadily growing due to the continued globalization of supply chains. We support and supervise the processes from development to series production of the purchased parts, making a substantial contribution to ensuring production start-ups for vehicles and powertrains all around the world. Our activities in purchased parts management focus on safe- guarding component quality and the industrialization pro- cess at the individual supplier locations. At the same time, increased complexity in the automotive industry requires regular monitoring and safeguarding of supplies for series production. In order to identify any disruptions at an early stage and take necessary countermeasures, we simulate series production at suppliers as part of the pre-production process. Purchased Parts Management works closely with Quality Assurance at the production sites and conducts multi-stage performance testing. Sustainability in supplier relationships Successful relationships with our business partners are based upon observance of human rights, compliance with occupa- tional health and safety standards, active environmental protection and combating corruption. These sustainability standards are defined in the contractually binding Volks- wagen Group requirements for sustainability in relations with business partners (Code of Conduct for Business Partners). Especially in view of the more stringent sustainability requirements being imposed worldwide, training and profes- sional development for our suppliers is a key aspect of our sustainability in supplier relationships concept. By the end of the reporting period, more than 31,000 supplier locations had completed our online training program since 2012. In the Asia-Pacific, South America and European regions, we trained over 900 employees from more than 550 suppliers at face-to-face events addressing topics such as sustainability, and informed them of region-specific challenges. In addition, we raised awareness of sustainability risks in Procurement with face-to-face events attended by over 2,000 Procurement employees. Our supplier checks for verifying compliance with sustain- ability requirements retained their importance in 2018. For this reason, we once again considerably increased the number of checks performed year-on-year and conducted local audits at 947 supplier locations. In 551 cases, an action plan was agreed upon that led to an improvement in sup- pliers’ sustainability performance. Furthermore, checks of more than 28,000 supplier locations were carried out by means of questionaires relating to sustainability since 2012, allowing improvements in sustainability performance to be achieved in more than 2,100 cases during the reporting period. In 2018, we also decided to introduce a comprehensive sustainability rating for the awarding of contracts in which the criteria environment, society and compliance will be systematically reviewed prior to the conclusion of all con- tracts starting in 2019. Only suppliers with a positive sustain- ability rating will have the opportunity to enter into a busi- ness relationship with us. C O M P O N E N T S B U S I N E S S A realignment of the Group-wide components business was decided upon as part of the future program TOGETHER – Strategy 2025. The aim is further improvement in competi- tiveness through cross-brand management of components activities and a value creation strategy coordinated through- out the Group. For traditional technologies and topics of the future, synergies will be leveraged to advance the progressive transition to e-mobility. The expertise of the components business, which employs some 80,000 people worldwide, lies in the develop- ment and manufacture of vehicle components. In order to realign these competencies in a future-oriented way, it was decided as part of the Group strategy to combine compo- nents activities around the world into an independent entity, Volkswagen Group Components. To this end, five new business areas were formed in 2018: Engine and Foundry, Transmissions and Electric Drive Sys- tems, E-Mobility, Chassis and Seats. In each of the five busi- ness areas, the different departments such as Development, Procurement and Production will cooperate closely at an early stage to boost innovative power and competitiveness. To achieve efficiency targets, manufacturing and admin- istration processes will consistently be made leaner; shop floor management, which ensures uniform communication between management, foremen and employees, will be enhanced and savings will be generated by implementing optimization measures at the sites. For its product portfolio, the components business relies on sustainable economic products. Products that are not 142 Sustainable Value Enhancement Group Management Report competitive will be progressively phased out in the medium to long term. E-mobility components will instead become an integral part of the portfolio. Employees who take on new responsibilities in this respect will receive appropriate training. 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, forward- looking innovations, flexible supply streams and structures, and an agile team. In fiscal year 2018, the global vehicle production volume surpassed the previous year’s level, reaching 11.0 million units. Productivity increased by around 5.3% year-on-year, despite the continuing difficult conditions in many markets. “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 strategic goals: > Versatile production network > Efficient production > Intelligent production processes > Future-ready production With division-specific initiatives we have created 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 through- out the production 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 foun- dations for the successful and sustainable enhancement of our production. We use regular reviews to ensure that we constantly align our activities to the current challenges. Global production network With twelve brands and 123 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 multibrand locations. Currently, almost half of the 45 passenger car locations are already multibrand locations. The Bratislava site continues to serve as a prime example, producing vehicles for the Volkswagen Passenger Cars, Audi, Porsche, SEAT and ŠKODA brands. The newest multibrand location is Wolfsburg, where production of the SEAT Taracco began in the autumn of 2018. The Volkswagen Group has set itself the goal of becoming one of the world’s leading providers of battery-electric vehicles by 2025. The basis for this is the introduction of the Modular Electric Drive Toolkit MEB, which we will use to complement our range with additional battery-electric vehicles. In order to design multibrand projects and for electric 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 iden- tical production processes enables reduced capital expen- diture and provides the opportunity to better utilize existing capacities. The future will also see electric vehicle projects at multibrand locations such as Zwickau, Germany and Anting, China. We are constantly enhancing our production concepts and aligning them with new technologies. The targeting process anchored in our strategy serves to realize ambitious targets in individual projects as part of a cross-divisional approach. Production locations The Volkswagen Group’s production network is comprised of 123 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 34 locations. We have five locations in North America and nine in South America. The Group operates four locations in Africa. 2018 saw 52 production start-ups: 29 for new products and successor products and 23 for product upgrades and derivatives. Capacity utilization of the locations in the Volkswagen Group’s production network is further enhanced by sup- plying the locations with complete knock-down (CKD) kits for local assembly. Group Management Report Sustainable Value Enhancement 143 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 2018 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 20 locations (39%) S O U T H A M E R I C A 6 locations (5%) A F R I C A 4 locations (1%) The Group’s production system Our aim is to continuously and sustainably improve our production workflows at all the brands’ and regions’ loca- tions. A key component for achieving excellence in processes in production and production-related environments is the Group production system; we are further consolidating this and increasing the extent to which it is used. Leadership and individual responsibility are the foremost factors, embedded in a culture of respect and collaboration. A factory must work at optimal capacity if it is to achieve the goal of continuing to manufacture high-quality products that give customers maximum benefits at competitive prices. This is made possible by the standardization of production processes and operating equipment early on in the line, based on the principle of 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 pro- duction areas. The principle of concept consistency is used to establish a foundation for creating efficient logistics and manufacturing processes. New technologies and product innovations 3D printing is one of the key technologies for Industry 4.0 and digitalizing the automotive value chain. The process opens up wholly new opportunities in the areas of develop- ment, design and production. Due to the digital nature of the technology, which requires no tools whatsoever, components can be flexibly implemented directly from digital drawings, and completely new designs and component geometries can be created. The technology of 3D printing has been success- fully used for building prototypes for many years now and has advanced rapidly in recent years – also accompanied by new areas of application at Volkswagen. The specific charac- teristic of this technology, an additive manufacturing tech- nique, is its influence along the entire automotive value chain. It is used for early design studies, for building proto- types, for manufacturing tools and operational equipment, for producing parts in small batches and for the manu- facturing of replacement parts in after sales. The materials available for 3D printing range from plastics to fiber com- posite materials and metallic materials. However, there is still a long way to go before large-scale automotive production applications are possible. Here, Volks- wagen leverages the diversity of the Group, achieved through close collaboration between its brands, and cooperates with leading technology providers and research institutions. For example, the Volkswagen Passenger Cars brand has partnered with printer manufacturer HP and component producer GKN Powder Metallurgy to become the first automaker to use HP Metal Jet, the latest 3D printing technology. 144 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 O2 2018 2017 2010 2,037 2,068 2,519 –19.1%² 2018 2017 2010 720 808 –34.3%² 1,096 V O C E M I S S I O N S³ in kilograms per vehicle V OC D I S P O S A B L E W A S T E in kilograms per vehicle 2018 2017 2010 1.93 2.08 –53.3%² 4.13 2018 2017 2010 12.2 16.0 –47.6% ² 23.3 F R E S H W A T E R C O N S U M P T I ON in cubic meters per vehicle 2018 2017 2010 3.86 3.76 4.54 –15.1%² 1 Production of passenger cars and light commercial vehicles. Prior-year figures adjusted. 2 Change 2018 as against 2010. 3 Volatile organic compounds (VOCs). Where the design and introduction of new production technologies is 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. 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: > Setting and achieving ambitious environmental targets for production > Developing a long-term vision for environmental targets in production and rolling it out across the Group > Strengthening employees’ environmental awareness and integrating relevant environmental aspects into processes > 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. 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 environmental protection. To identify and implement site-specific cost-cutting measures, the Environmental Task Force analyzes manufac- turing processes, factory supply systems and resource and energy flows at the Group’s locations and evaluates the impact of the efficiency measures. Based on the experience from the analyses in several brands and regions, the team can systematically reinforce and spur on the transfer of mea- sures. 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 1,500 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 145 With a series of effective, innovative measures, we were once again able to reduce environmental indicator levels in the reporting period, while at the same time improving pro- duction processes. Green logistics Logistics contributes to the Volkswagen Group’s focus on the environment by analyzing the emissions of the entire trans- port chain. The Green Logistics initiative promotes alterna- tive means of transport and sustainable, energy-efficient transport systems. Building on the dialog established between Group Logistics, Scania, forwarders, authorities and oil companies at the LNG Truck Day in September 2017, the concept of LNG- trucks (liquefied natural gas) will now be put into practice. The aim is to have LNG trucks drive on many routes in the future, which will require an appropriate fuel station net- work. Together with its service providers, Group Logistics is planning to deploy approximately 100 LNG trucks in northern Germany in the medium term. The first trucks hit the roads in January 2019. Where transport activities are concerned, maritime transport represents another important starting point for reducing CO2 emissions. In mid-2019, Volkswagen Group Logistics will put two LNG-powered charter ships into service. The low-emission LNG ships will transport vehicle models produced by the Volkswagen Group between Europe and North America. To ensure that our employees can provide the best possible support along the path to achieving our environ- mental targets and can also help shape this path, in-house training courses on green logistics and lectures at univer- sities are a fixed part of the vocational training program. 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. In the 2018 fiscal year, we achieved a milestone in our TOGETHER sales strategy: together with their sales partners and importers, our passenger car brands agreed on a procedure for integrating innovative products and services into the sales network. The priority is safe handling of customer data and the way in which this is processed for digital products and services or in connection with the vehicle purchase. The legal requirements for handling cus- tomer data have been tightened in many countries. At the same time, new Group vehicles that are permanently con- nected to the Internet are about to be launched. We are increasingly investing in distribution systems and processes with the goal of further digitalizing and improving the individual customer experience in all distribution channels. Optimal coverage of markets, customer segments and customer budgets is at the heart of a strategic Group ini- tiative. 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. This methodology has already been established for Europe and China and was rolled out to further markets including the United States and Brazil in 2018. It will be continuously applied in the strategy and product process and regularly reviewed and adjusted as necessary whenever new market requirements arise. 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 services to others. In addition to satisfaction with our prod- ucts and services, we value our customers’ emotional con- nection to our brands. It is important for us to retain cus- tomers and win new ones. To measure our success in this area, we compile and analyze two strategic indicators for the major passenger car-producing brands: > Loyalty rate. Proportion of customers of our passenger car brands who have bought another Group model. The loyalty of Volkswagen Passenger Cars, Audi, Porsche and ŠKODA customers has kept these brands in the upper loyalty rankings in the core European markets in comparison with competitors for a number of years even though the Volks- wagen Passenger Cars and Audi brand have seen a slight decrease in the loyalty rate as a consequence of the diesel issue. Compared to other manufacturer groups, the Volks- wagen Group continues to hold a top spot in the core European markets 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, the Volkswagen Group has a top ranking in comparison with competitors, 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 as a consequence of the diesel issue did not continue in 2018. After the first signs of recovery had been seen in 2017, the figures continued to stabilize in the reporting period. Porsche remains in top position in the image ranking. 146 Sustainable Value Enhancement Group Management Report We also use a strategic indicator to measure the satisfaction of customers with our products and services in the truck 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 again delivered exceedingly positive satisfaction figures in line with our targets in the reporting period. In the financial services business, we use two strategic indicators: > Customer satisfaction. Satisfaction of our customers results from a customer-oriented product range and the service focus of our staff. In the annual assessment, these two aspects serve as suitable indicators for the critical evaluation as to whether we will achieve our customer satisfaction target of 90% in 2025. In 2018, we were within the expected range with a satisfaction rate of 82%. Our goal is to satisfy our customers completely. To do so, we are developing current measures at country level. > Customer loyalty. Trust in and loyalty to our services rely on customer satisfaction with our product range and service. New contract rates are regularly determined based on product sales to our customers – financing and leasing agreements for purchases of new Volkswagen Group vehicles. Currently at 20%, these are proof of customers’ trust in our financial services. With ambitious targets of 50% for 2025, we underscore the focus on fulfilling the needs of our customers. E-mobility and digitalization in Group Sales As part of our Roadmap E, we aim to offer our customers around the world more than 80 new electric models, including around 50 pure battery-electric vehicles and 30 plug-in hybrids by 2025. This campaign will be comple- mented by vehicle-related, customer-focused offerings, 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 completely new challenges for sales. We are making highly targeted use of the opportunities of digitalization in sales, which include an improved customer approach. 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 the custom- ers of our brands – one which impresses with its seamless communications, from the initial interest in purchasing a vehicle, to servicing and ultimately to the sale of the used car. In doing so, we are opening up new business models relating to 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 also gear our internal processes and structures to the methods and new forms of working created by digital innovation. The result is project teams operating across different business areas, new forms of cooperation, 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 Business relationships with fleet customers are often long- term partnerships. In a volatile environment, this customer 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 particular. Our extensive product range enables us to satisfy their individual mobility needs from a single source. In the German passenger car market, which declined as a whole by 0.2% in 2018, the share of fleet customers in total registrations fell to 13.6 (14.1)%. The Volkswagen Group’s share of this customer segment decreased to 44.0 (44.7)%. Outside Germany, the Group’s share of registrations by fleet customers in Europe remained stable at 25.2 (25.2)%. The upward trend until August shows that fleet customers still have considerable confidence in the Group. The temporary limitation of the model range as a consequence of the change- over to the WLTP had a negative impact from September 2018 onwards. After Sales and Service In addition to individual service, the timely provision of genuine parts is essential to ensure 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 130 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 Group Management Report Sustainable Value Enhancement 147 order to improve convenience for our customers and increase customer satisfaction. In the Digital After Sales project, we are modernizing processes and IT systems in After Sales. By adopting an approach that focuses product and service development on the specific needs of both dealers and customers, we aim to reduce the time needed for administrative tasks at the dealers through automated, interrelated services and also stabilize existing IT systems and boost efficiency. Innovative digital after-sales services will additionally improve the customer experience. 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 cer- tainty, in addition to a high level of quality. We are reducing servicing times and costs with a view to the vehicles’ total operating costs and helping to 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 U A L I T Y M A N A G 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 loyal when their expectations of a prod- uct or service are met or even exceeded. Appeal, reliability and service determine quality as it is perceived by the cus- tomer throughout the entire product experience. Our objec- tive is to positively surprise our customers and fill them with enthusiasm in all areas, and thus to 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. Group Quality Management and the brands’ quality organi- zations play an active role at all stages of product emergence and testing, making an important contribution to successful product low warranty and goodwill costs. launches, high customer satisfaction and In consultation with the brands, we developed the Group Quality Management strategy as part of our future program TOGETHER – Strategy 2025. Focal areas include digitalization, new technologies and business fields, as well as uniform processes, methods and standards at all brands. Advancing digitalization is also a major challenge for the Volkswagen Group: an ever increasing number of digital products and services is being developed and brought to market. To continue to ensure our customary level of quality and safety amid this diversity, we must adapt our quality measures accordingly. For example, the increased functional diversity and complexity of the driver assistance systems, extending all the way to autonomous vehicles, means that the software is also growing in scope. We have therefore introduced the processes and structures of what are known as smart quality organizations in the Group and the brands, completing this in the reporting period. Among other things, smart quality organizations refine the methods we use to support the development of software for selected critical features, and with which we can ensure that quality require- ments are met. At the same time, we are taking advantage of the progress in digital technology to further optimize our existing processes and structures. For example, we use virtual measurement technologies or big data analyses when vehicles on the market encounter quality problems. The strategy of Group Quality Management developed in this context comprises the following four goals: > We will impress our customers with our outstanding quality by understanding what exactly they perceive as quality and implementing this 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 principle of multiple-party verification and monitor achievement of milestones even more closely. > We will become an excellent employer by promoting the personal development of every single employee even more intensively. To achieve our goals, we are working on a variety of quality initiatives. All are focused on the topics that are decisive to the success of the quality organizations in the Volkswagen Group. 148 Sustainable Value Enhancement Group Management Report Contributing to the Group’s strategic indicators We use a strategic indicator to measure the contribution of Quality Management in the major passenger car-producing brands. > Tow-in 12 MIS. This indicator shows the number of vehicles that need to be towed to a dealer per 1,000 vehicles after 12 months in service (MIS). It includes all Group vehicles categorized as tow-ins by dealers in the German market. After a continuous fall in the number of Volkswagen Group tow-ins in the German market since 2014, a slight overall increase was recorded again in the 2017 production year. Of the six brands featured, Audi, SEAT and Porsche saw their performance improve year-on-year. The Volkswagen Passenger Cars, ŠKODA and Volkswagen Commercial Vehi- cles brands recorded a slight upward trend. The brands’ ratios for the 2017 production year are within or slightly above the target corridor in each case. Quality is the Volkswagen Group’s top priority. All of the Group brands are therefore striving to continuously reduce the number of vehicles that need to be towed to a dealer. We also use a strategic indicator to measure our success in the truck and bus area: > 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. MAN recorded a slight increase in the number of claims at the beginning of the fiscal year due to a cross-sector problem that has now been resolved. Systematic quality management enabled both brands to keep their figures at a good level for the rest of the year. Legal and regulatory compliance The legal and regulatory compliance of our products is paramount in our work. We have further reinforced appli- cation of the principle of multiple-party verification – which involves mutual support and control between the divisions – and introduced additional important processes, including in software security. With effect from the reporting period, software development is accompanied by quality milestones at all brands, whereby all systems, components and parts that directly influence a vehicle’s safety, type approval and functioning and therefore require particular vigilance are safeguarded through multiple-party verification. At the series production stage, we are also ensuring even more stringently than before that the conformity checks on our products are carried out and assessed with the participation of all business units involved. This applies particularly to emissions and fuel consumption. We are also placing even 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, which was revised in 2015: the requirements of this standard must be met to obtain the type approval needed to produce and sell our vehicles. We con- ducted numerous system audits in the reporting period to verify that our locations and brands comply with the require- ments of the standard. Particular focus was placed on assessing the risk of non-compliance with defined processes. Our quality management consultants pay attention to ensuring that these and other new requirements, as well as official regulations are implemented and complied with; they are supported in this endeavor by Group Quality Manage- ment. With these and other measures, Group Quality Manage- ment is helping to ensure that we as a manufacturer meet the legal requirements, and that our products do so, too. 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 therefore 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 available fuel, road conditions, traffic density, country- specific usage patterns and, last but not least, local legisla- tion. We mainly use market studies and customer surveys to determine region-specific customer requirements. To ensure that the perceived quality of our vehicles is at a level commensurate with that of our competitors, we already realigned our vehicle audit back in 2017 and tailored it more closely to regional customer needs. Every brand works together with the individual regions to decide how its prod- uct is to be positioned there. This enables us to strengthen the responsibility of the brands and invest less in features that do not resonate with customers. To ensure that the audit returns comparable results, consistent quality benchmarks apply across all markets and regions. We are continually adapting these to changing requirements. For more than 40 years now, we have been deploying auditors around the world to assess from the customer’s perspective the vehicles that are ready for delivery and to ensure that these vehicles comply with the benchmarks defined. Group Management Report Sustainable Value Enhancement 149 E M P L OY E E S The Volkswagen Group is one of the world’s largest employers in the private sector. As of December 31, 2018, we employed 664,496 people, including the Chinese joint ventures, 3.5% more than at the end of 2017. The ratio of Group employees in Germany to those abroad remained largely stable over the past year: at the end of 2018, 44.1 (44.8)% of the employees worked in Germany. Human resources strategy and principles of the human resources policy With the human resources strategy “Empower to transform”, the Group is continuing with key and successful approaches to human resource management. These include the pro- nounced stakeholder focus on corporate governance, com- prehensive participation rights for employees, outstanding training opportunities, the principle of long-term service through systematic employee retention and the aspiration to appropriately balance performance and remuneration. At the same time, the new human resources strategy is setting inno- vative trends. Hierarchies are being dismantled, and modern forms of working such as agile working – an approach whereby most responsibility for the work organization is transferred to the teams – are set to be expanded. In the future, collaborative robots will ease heavy physical work in factories and digital processes will simplify administration. In the Human Resources division, we are guided by five overarching objectives: > The Volkswagen Group aims to be an excellent employer with all of its brands and companies worldwide. > Highly competent and dedicated employees strive for excellence in terms of innovation, added value and customer focus. > A forward-looking work organization ensures optimal working conditions in factories and offices. > An exemplary corporate culture creates an open work is characterized by mutual trust and climate that collaboration. > The Company’s human resources work is highly employee- oriented while also aiming for operational excellence and providing strategic value-added contributions. In the course of the 2018 reporting period, we continued to work on our diversity management program that we are rolling out throughout the Company. Given the cultural diversity in our global markets and the growing economic momentum, competitive success requires an ever-broader range of experience, world views, problem-solving and prod- uct ideas. The diversity of our staff provides potential for innovation in this area, which we aim to make better use of in the future. Mandatory rules on the percentage of women in management, combined with targets for the internationali- zation of senior management, are at the heart of diversity management at Volkswagen. 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, 2018 Germany Germany Rest of Europe Rest of Europe America America Africa Africa Asia/Australia Asia/Australia 44% 44% 30% 30% 9 % 9 % 1 % 1 % 16% 16% We are also driving large-scale cultural change to achieve greater openness and transparency in line with our corporate strategy. Seven Volkswagen Group Essentials formulated in 2018 provide shared values and the foundation for cultural change across all brands and companies: > We take on responsibility for the environment and society. > We are honest and speak up when something is wrong. > We break new ground. > We live diversity. > We are proud of the work we do. > We not me. > We keep our word. Group-wide activities such as team dialog encourage employ- ees to analyze the Group Essentials. In 2018, we also began to implement our new approach throughout Human Resources departments across the Group. Going forward, the development paths into manage- ment will be characterized by greater individual responsi- bility, transparency and practical relevance and will include employees from different levels of the hierarchy in the evaluation of candidates. When implementing our Group strategy TOGETHER – Strategy 2025, we paid particular attention in the reporting period to the level of achievement regarding the goals set by the applicable strategic KPIs. 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 com- pany as an attractive employer. The target for 2025 is 89.1 out of a possible total of 100 index points. A score of 84.2 index points was achieved throughout the Group in the reporting period, contrasting with 85.2 points in the pre- vious year. 150 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 fields. Using this strategic indicator, we check the positioning of the major passenger car-pro- ducing brands on the labor markets once a year with regard to graduates and young professionals. 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 top management. In particular, it under- pins the objective of the human resources strategy, which is aimed at contributing to an exemplary leadership and corporate culture. The proportion of women in man- agement amounted to 13.8% in 2018 and was therefore at the prior-year level; we aim to raise this to 20.2% by 2025. We aim to increase the level of internationalization in top management, the uppermost of our three management tiers, to 25.0% in 2025; in the past fiscal year this was 19.2 (18.7)%. 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 of all responses regularly submitted as part of the opinion survey. In the truck and bus business, the 2018 result amounts to 76.4 (74.7) index points and is therefore higher than the previous year’s level. > Cross-brand exchange and rotation. The aim is to contin- uously intensify collaboration between the commercial vehicle brands. It is also designed to enable the creation of specialist and international networks at the same time. We use this indicator to analyze how many employees work at another brand through rotation. In 2018, this opportunity for career development again saw an increase in uptake. One strategic indicator has been defined for the financial services business: > External employer ranking. This involves taking part in an external benchmarking, in general once every two years. The aim is to position ourselves as an attractive employer and identify measures to become a top-20 employer by 2025, not just in Europe, but globally. Volkswagen Financial Services AG was represented in various national and inter- national best-employer rankings the last time it partici- pated in 2016. In 12th place, it was among the top Euro- pean 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 systematically and according to the so-called vocational groups. These comprise all employees whose tasks are based on similar technical skills and who require related expertise in order to perform their jobs. A skills profile lays down the functional and interdisciplinary skills for each job and serves as a guide for training measures. Volkswagen Group employees have access to a wide range of training measures – from further training in general Company-related issues to specific training or personal development programs. Thanks to these opportunities, Volks- wagen employees are able to further develop and steadily deepen their knowledge throughout their working lives. In this process, they are also able to learn from more experi- enced colleagues, who pass on their knowledge as experts in the vocational group academies. Training measures are based on the dual training principle, which combines theoretical content with practical experience on the job by means of specific tasks. New technologies can usefully complement learning and the transfer of expertise. The Volkswagen Group Academy, the central training organization in the Group, incorporates this idea into different projects. One example is the Education Lab, where the Volkswagen Group Academy conducts educa- tional research, analyzes training trends and tests tech- Group Management Report Sustainable Value Enhancement 151 nologies at Volkswagen together with start-ups, thereby generating new ways to develop skills at the Company. One branch of the Volkswagen Group Academy is the AutoUni. It provides the Group with knowledge that is relevant for the future by engaging in-house senior experts and universities. Its events are offered as programs and as cooperative study modules in what is known as a blended learning format, which combines classroom training with online content, supplemented by lectures and conferences. Volkswagen is striking out in new directions with the Faculty 73 program it kicked off in October 2018. From 2019 onwards it will train 100 software developers per academic year who are needed for the digital transformation in the Company. The AutoUni program is designed for employees with basic IT skills as well as in-house and external candidates with other suitable basic qualifications. 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 2018, the Volkswagen Group had trained 19,244 young people in approximately 50 trades. We have introduced the principle of dual vocational training at many of the Group’s inter- national locations over the past few years and are con- tinuously working on improvements. The Group’s vocational trainees predominantly 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. Even after their vocational training has been completed, young people at the start of their careers are encouraged to continue their professional development in our Company. This is why we promote particularly talented young special- ists in talent groups. These two-year development and training programs accept the highest-achieving 10% of fully qualified vocational trainees at Volkswagen AG each year. In addition, fully qualified vocational trainees have the option to work at a Group company outside Germany for twelve months as part of the “Wanderjahre” (Year Abroad) program. In the reporting period, 27 Volkswagen Group locations in 17 countries took part in this program. Last but not least, we developed the AGEBI+ program. It promotes fully qualified vocational trainees who are eligible for university and wish to combine a degree program in subjects that are crucial for Volkswagen’s future with closley related practical experience. 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 two years while working in their own department and take part in supplementary training measures. University graduates interested in working internationally can participate in the 18-month StartUp Cross program. The aim here is to get to know the Company in all its diversity and to build up a broad network. During their participation in the program, young professionals become familiarized with several locations in Germany and other countries by working in various departments. Both programs also include several weeks’ experience working in production. In 2018, Volkswagen AG hired a total of 164 graduate trainees as part of these programs, 28.7% of whom were women. Young people can also take part in graduate trainee programs at the other Group companies as well as at the Group’s international locations, such as ŠKODA in the Czech Republic, SEAT in Spain or Scania in Sweden. Increasing attractiveness as an employer and target-group-specific development programs A family-friendly human resources policy is a major com- ponent of Volkswagen’s appeal as an employer; in particular, it helps to achieve greater gender equality. We work con- tinuously to develop family-friendly working time models and to increase the number of women in management positions. In line with German law on the equal participation of women and men in leadership positions (Führpos- GleichberG – German Act on the Equal Participation of Women and Men in Leadership Positions in the Private and Public Sectors), Volkswagen AG is aiming to have a 13.0% share of women at the first management level and 16.9% at the second management level by the end of 2021. As of December 31, 2018, the proportion of women in the active workforce at the first level of management was 10.7 (10.4)% and at the second level of management it was 15.4 (14.0)%. 152 Sustainable Value Enhancement Group Management Report P R O P O R T I O N O F W O M E N as of December 31 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 as of December 31, 2018; in percent % Employees Vocational trainees1 Graduate recruits2 Total management1 Management1 Senior management1 Top management1 2018 16.5 27.5 28.7 12.1 14.4 9.4 7.0 2017 16.3 28.8 30.3 11.4 13.2 9.2 6.5 1 Germany, excluding Scania, MAN and Porsche. 2 Volkswagen AG For every board-level division in the Company we have set targets for the development of the proportion of women in management to encourage women with high potential to advance within the Company. This approach is supported by many different measures including cross-brand mentoring programs. In recent years, a large number of company regulations have also come into effect in the Group to make it easier for employees to balance the demands of work and home life and allow staff to arrange their own individual working model. These include flexible working hours, variable part- time work and shift models, leave of absence programs enabling employees to care for close family members, child- care services that are connected to the company or are company-owned, and mobile working. At Volkswagen AG, which entered into its works agree- ment for mobile working back in 2016, more than 17,800 employees are making use of a more flexible working arrange- ment as of the end of the reporting period. Preventive healthcare and occupational safety Volkswagen’s holistic healthcare management system also covers work organization, workstation design, behavioral ergonomics, psychosocial aspects, rehabilitation and reinte- gration into working life as well as programs for preventing lifestyle diseases. In addition to conventional preventive healthcare and occupational safety, a free and comprehensive voluntary screening (the Check-up) is provided for all employees at almost all production sites. To maintain and improve employees’ health, fitness levels and performance, the Check- up is followed by measures to promote exercise, healthy eating and mental balance, for example. Another important area for action in the Volkswagen Group is workstation ergonomics. Continuously improving < 20 < 20 20–29 20–29 30–39 30–39 40–49 40–49 50–59 50–59 60 + 60 + 2 % 2 % 21% 21% 29% 29% 25% 25% 19% 19% 4 % 4 % these along the entire production chain and in all work processes is of great importance to us. Together with scientific partners, we are working resolutely to introduce state-of-the-art ergonomic workstations and innovative work processes in as many areas as possible. 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 criticisms being heard. With the opinion survey, a Group-wide poll, the Company not only regularly gathers information regarding employee satisfaction, but also inquires about the shape of our corporate culture and the manner in which, for example, compliance requirements are implemented. Based on the results, follow-up processes are implemented in which mea- sures are developed and implemented. Over 600,000 employ- ees from 175 locations and companies in 50 countries were invited to take part in the survey. The participation rate was 79%. The average result that is regularly received through the opinion survey – the sentiment rating – is an important parameter in the opinion survey; in 2018 it stood at 78.9 out of a possible total of 100 index points. The score achieved in 2018 was thus slightly higher than the previous year’s figure that amounted to 78.3 points. In addition, we also encourage our employees’ commit- ment through idea management: employees can use their creativity and knowledge to contribute their ideas for improvements, thus helping to streamline workflows, further enhance ergonomics in the workplace, reduce costs and continuously increase efficiency. Idea management enables employees to participate actively in the planning and organi- Group Management Report Sustainable Value Enhancement 153 zation of their work. The system also provides monetary incentives by offering set rewards. I N F O R M AT I O N T E C H N O L O G Y ( I T ) Volkswagen is working hard on strengthening its digital competencies with a view to shaping and safeguarding the Company’s future viability. To this end we are continuously upgrading our IT systems so that they are sustainable in the long term and we are progressively moving our systems and applications over to new cloud platforms. Our primary concern is further increasing the efficiency of the IT systems used throughout the Group and standardizing these as far as possible. We are also concentrating on building up our exper- tise and specialist IT knowledge, especially in key digital technologies such as artificial intelligence and the use of new IT technologies in products, services and business processes. Volkswagen is embracing on digitalization, particularly at its in-house IT labs in Wolfsburg, Munich, Berlin, San Francisco and Barcelona. Group IT, research institutions and technology partners are working closely together at these innovation centers on future trends in information technol- ogy, such as artificial intelligence and machine learning, 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 us to work and experiment with new technologies outside the line organization. This allows the experience and strategic expertise of a large company like Volkswagen to be combined with the pragmatism and speed of young start-ups. Highly specialized experts at the IT labs in San Francisco and Munich, for example, are working on exploiting the potential of quantum computers for areas that have a commercial application. The focus here is on optimization of flows of traffic and simulation of materials and alloys. Initial experimental projects are also investigating opportunities for combining the potential of quantum computers with self- learning systems (quantum machine learning). In IT test projects we are using artificial intelligence to develop so-called self-learning systems. These learn through intelligent data analysis and are, for example, designed to assist staff in recurring administrative work steps by preparing these activities independently and giving them to staff for a decision. The growing convergence of different business areas and IT is also opening up opportunities. In production, for exam- ple, big data processes help us to analyze faulty machinery and take action at an early stage. Our experts from Pro- duction and Group IT are therefore working together on a digital platform that combines the systems and equipment in the factory into an integrated overall system. This will allow efficiency to be increased and digital pilot projects to be integrated into the existing architecture much more easily than before. Applied research in the field of intelligent human-robot collaboration and IT systems to control mobile assistive robotics and networked infrastructure (Industrial Internet of Things) are also important elements of the digi- talization of production at the Volkswagen Group. Group IT is likewise contributing its expertise in the field of research and development in conjunction with the different departments. For instance, digitalized work tools such as the virtual concept vehicle make the product development process faster and more efficient. In software development centers we develop cross-brand software for digital ecosystems and for new business pro- cesses in the Group. We thereby maintain in-house expertise in the rapid, demand-oriented development of software and IT solutions. This capability will become increasingly impor- tant as the Group’s digital transformation evolves. The “IT for everyone” initiative aims to give all employees of Volkswagen AG access to digital media and work tools. The objective is to further improve communication and collab- oration among production and administrative employees. An important issue in this connection is the growing volume of official work being performed on mobile devices. The Com- pany’s internal network Group Connect promotes knowledge transfer and networking among all employees. The platform puts experts in touch with one another across brands and internationally. The introduction of the Group Connect application for personal mobile devices further simplifies access for employees of the direct units. Safeguarding data and systems at the Volkswagen Group is another focus of our IT. To also protect our customers against cyber-attacks and ensure that our solutions are in conformity with national and international legislation, we continued setting up an integrated, cross-brand, cross- regional Information Security Management System (ISMS) as part of the Protected Customer program. 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. Key information security pro- cesses have been audited and certified within the inter- national ISO 27001 framework. This is the most important standard for information security and extends beyond IT to 154 Sustainable Value Enhancement Group Management Report also cover issues such as personal security, compliance, physical security and legal requirements. One of the aims of the program, which is set to run until 2021, is also to safeguard the complete life cycle of our vehicles and the digital mobility services. In fiscal year 2018, another focus of IT was on the sys- tematic implementation of the European General Data Pro- tection Regulation (GDPR), which was combined in a Group program and rolled out in all corporate functions. In the course of the sustainable implementation of the GDPR, the data protection processes and procedures in place in the brands will be consolidated and standardized. When new IT solutions are being developed, the requirements will be enforced from the outset. Transparency in the processing and minimization of data are key goals on which we will continue to work. To ensure sustainable observance of the GDPR, the Group program will be gradually transferred to a company- wide data protection management system as well as a data protection organization in 2019. In 2015, Volkswagen AG co-founded Deutsche Cyber- Sicherheitsorganisation GmbH (DCSO). DCSO is accumulating specialist knowledge on cybersecurity and aims to become the preferred service provider to European businesses in this field. DCSO is a competence center and a managed security service provider for protecting companies against criminal hackers, industrial espionage, government attacks and sabo- tage. E N V I R O N M E N TA L ST R AT E G Y Protecting the environment is firmly anchored in the main goals of 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. In striving to achieve our goal of becoming a role model, we consider the environmental impact through- out 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 also looks at other important environmental resources, particu- larly water, soil, air, energy and raw materials. We use major sustainability ratings as our benchmark and aim to achieve top rankings in these. 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 sold. 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 of old vehicles (Scope 3). The DCI thus enables transparent, comprehensive tracking of progress toward climate-friendly mobility. We are currently defining the DCI target figures for 2025 together with the Volkswagen Group brands. The 2°C target of the Paris Agreement adopted at the UN Climate Change Confer- ence in late 2015 serves as an important parameter for us in this endeavor. 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 indicator includes energy and water consumption, CO2 and VOC emissions and the volume of waste; the charts on page 144 show the development of these indicators. 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 supported 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 Management. 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 (101 of 123 production sites in 2018). Many production locations have also certified their energy management systems in accordance with ISO 50001. Since 2009, the “inte- gration of environmental aspects into the product develop- ment at the Volkswagen brand” has also been certified in accordance with ISO TR 14062 in the Technical Development department at the Volkswagen Passenger Cars brand. Group Management Report Sustainable Value Enhancement 155 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 partners and suppliers. We are in the process of developing a suitable evaluation model to show the effect of biodiversity projects and promote biodiversity at our production loca- tions. Our membership in Biodiversity in Good Company e.V. had been temporarily suspended as a result of the diesel issue, but we were reincorporated as an active member at the beginning of 2019. 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 effi- ciently as possible. Volkswagen supports networking between the various players in the fields of business, politics, society and academia with a view to increasing public awareness 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 R T The combined separate nonfinancial report of Volkswagen AG and the Volkswagen Group in accordance with sections 289b and 315b Handelsgesetzbuch (HGB – German Commercial Code) for fiscal year 2018 will be available on the website https://www.volkswagenag.com/presence/nachhaltigkeit/docu- ments/sustainability-report/2018/Nichtfinanzieller_Bericht_ 2018_d.pdf in German and at https://www.volkswagenag.com/ presence/nachhaltigkeit/documents/sustainability-report/ 2018/Nonfinancial_Report_2018_e.pdf in English by no later than April 30, 2019. R E P O R T O N P O ST - B A L A N C E S H E E T D AT E E V E N T S There were no significant events after the end of fiscal year 2018. 156 Report on Expected Developments Group Management Report Report on Expected Developments The global economic growth is expected to slow down somewhat in 2019. We also assume that global demand for vehicles will vary from region to region and remain at the prior-year level on the whole. 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 the 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 L O P M E N T S I N T H E G L O B A L E C O N O MY Our forecasts are based on the assumption that global economic growth will slow down somewhat in 2019. We still believe risks will arise from protectionist tendencies, turbu- lence in the financial markets and structural deficits in individual countries. In addition, growth prospects will be negatively affected by continuing geopolitical tensions and conflicts. We therefore anticipate weaker momentum than in 2018 in both the advanced economies and the emerging markets. We expect the strongest rates of expansion in Asia’s emerging economies. Furthermore, we anticipate that the global economy will also continue to grow in the period from 2020 to 2023. Europe/Other Markets In Western Europe, economic growth is likely to slow down in 2019 compared with the reporting period. Resolving struc- tural problems continues to pose a major challenge, as do the uncertain impacts of the United Kingdom’s planned exit from the EU. In Central Europe, we estimate that growth rates in 2019 will be lower than those for the past fiscal year. The economic situation further, in Eastern Europe should stabilize providing the conflict between Russia and Ukraine does not worsen. The growth of the Russian economy is expected to lose some of its momentum. For Turkey, we expect the growth rate to taper off further amid higher inflation. The South African economy will probably be dominated by political uncertainty and social tensions again in 2019 resulting, in particular, from high unemployment. Growth is therefore likely to remain at a low level. Germany We expect that gross domestic product (GDP) in Germany will increase slower in 2019 than in the reporting period. The situation in the labor market will probably remain stable and bolster consumer spending. North America We assume that the economic situation in the USA will remain stable in 2019. GDP growth should be lower than in the reporting period, however. The US Federal Reserve could further raise the key interest rate throughout 2019. Economic growth is likely to continue to slow down in Canada and Mexico. South America The Brazilian economy will most likely stabilize further in 2019 and record somewhat stronger growth than in the reporting period. Amid sustained high inflation, the eco- nomic situation in Argentina is expected to remain tense. Group Management Report Report on Expected Developments 157 Asia-Pacific In 2019, the Chinese economy is expected to continue growing at a relatively high level, but will lose some of its momentum compared with prior years owing to the trade disputes with the USA. For India, we anticipate an expansion rate on a similar scale to the previous years. In Japan, growth is forecast to remain weak. T R E N D S I N T H E M A R K E T S F O R PA S S E N G E R C A R S A N D L I G H T C O M M E R C I A L V E H I C L E S We expect trends in the markets for passenger cars in the individual regions to be mixed in 2019. Overall, global demand for new vehicles will probably be at the 2018 level. We are forecasting growing demand for passenger cars world- wide in the period from 2020 to 2023. Trends in the markets for light commercial vehicles in the individual regions will be mixed again in 2019; on the whole, we anticipate a slight dip in demand in 2019. We expect a return to the growth trajectory for the years 2020 to 2023. The Volkswagen Group is well prepared for the future challenges pertaining to the automotive mobility business and the mixed developments in regional automotive mar- kets. Our brand diversity, our presence in all major world markets, our broad, selectively expanded product range and pioneering technologies and services place us in a good com- petitive position worldwide. Our goal is to offer all customers mobility and innovations suited to their needs and thus ensuring long-term success. Europe/Other Markets For 2019, we anticipate that the volume of new passenger car registrations in Western Europe will be in line with that seen in the reporting period. The uncertain impact of the United Kingdom’s planned exit from the EU is likely to further exacerbate the ongoing uncertainty among consumers, continuing to put a damper on demand. We expect to see slight growth in the Italian market in 2019, whereas growth momentum in Spain will probably slow somewhat. We anticipate volumes in the French passenger car market to be on a level with the previous year. In the United Kingdom, we estimate that new vehicle registrations in 2019 will be at the prior-year level. For light commercial vehicles we expect demand in Western Europe in 2019 to narrowly miss the prior-year level owing to the uncertain impact of the United Kingdom’s planned exit from the EU. We estimate a marked decline in Italy and a moderate decline in the United Kingdom and France. In Spain, we anticipate a noticeable increase in demand. Sales of passenger cars in 2019 are expected to slightly exceed the prior-year figures in markets in Central and Eastern Europe. In Russia, we anticipate a market volume that is slightly higher than in the previous year following the marked recovery in the reporting period. The number of new registrations should continue to grow in most of the other markets in this region. Registrations of light commercial vehicles in the Central and Eastern European markets in 2019 will probably be some- what lower than in the previous year. In Russia, we expect the market volume to decline perceptibly compared with 2018. We anticipate a further substantial downturn in the pas- senger car market in Turkey. The volume of new registrations in South Africa in 2019 is likely to increase slightly year-on- year. Germany After a positive performance overall in recent years, we expect demand in the German passenger car market to fall slightly year-on-year in 2019. We anticipate that registrations of light commercial vehi- cles will be around the previous year’s level. 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 United States of America is likely to be slightly lower in 2019 than in the prior year. Demand will probably remain highest for models in the SUV and pickup segments. In Canada, the number of new regis- trations is also projected to be on a level with the previous year. By contrast, in Mexico we anticipate that demand will pick up slightly year-on-year. South America Owing to their dependence on demand for raw materials worldwide, the South American markets for passenger cars and light commercial vehicles are heavily influenced by developments in the global economy. We expect to see an overall moderate increase in new registrations in the South American markets in 2019 compared with the previous year. In Brazil, demand volume is expected to rise markedly again in 2019 following the increase in the reporting period. However, we anticipate that demand in Argentina will be perceptibly lower year-on-year. Asia-Pacific In 2019, the passenger car markets in the Asia-Pacific region are expected at the prior-year level. Demand in China should be around the previous year’s level. Attractively priced entry- level models in the SUV segment in particular should continue to see strong demand. For as long as there is no resolution in sight, the trade dispute between China and the United States will continue to weigh on business and 158 Report on Expected Developments Group Management Report consumer confidence. In the Indian market we anticipate somewhat stronger growth than in the previous year. Japan’s market volume is forecast to diminish moderately in 2019. The market volume for light commercial vehicles in 2019 will probably just miss the previous year’s figure. We are expecting demand in the Chinese market to fall noticeably short of the prior-year level. For India, we are forecasting a moderately higher volume in 2019 than in the reporting period. In the Japanese market, demand is likely to be moderately below the previous year’s level. T R E N D S I N T H E M A R K E T S F O R C O M M E R C I A L V E H I C L E S In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group, new registrations in 2019 are set to be slightly up on the level seen in 2018. We antic- ipate a solid increase for the period from 2020 to 2023. We assume that demand in Western Europe will taper off moderately year-on-year in 2019. In Germany, we expect the market to decline slightly compared to the previous year. Central and Eastern European markets should record a moderate increase in demand. In Russia we expect to see a marked rebound in demand in 2019. We assume that demand in the South America region will pick up perceptibly in 2019. In the bus markets that are relevant for the Volkswagen Group, we anticipate a slight increase in demand in 2019 compared with the prior-year level. We forecast moderate growth for the market in Western Europe in the same period. In Central and Eastern Europe, we anticipate a slight drop in demand. In South America, new registrations will probably be moderately higher than the prior-year level. For the period 2020 to 2023, we expect noticeable 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 O W E R E N G I N E E R I N G We expect the market environment in power engineering to remain difficult in 2019, with undiminished price and competitive pressures. In 2019, the market volume for two-stroke engines used in merchant shipping is likely to reach a level similar to that seen in the reporting period. Calls for high energy efficiency and low pollutant emissions will continue to have a signifi- cant influence on ship designs in the future. We expect sustained stable demand in the market for four-stroke engines used in ferries, dredgers and government vessels. In the offshore sector, new order volumes of special applications look set to be on the low side due to existing overcapacity. Overall, we expect the marine market to remain at a similar level to that seen in the reporting period. The competitive pressure will continue unabated. Demand for energy correlates strongly with macro- economic and demographic trends, especially in emerging markets. The global trend toward decentralized power sta- tions and gas-based applications shows no sign of losing momentum. For 2019, we expect demand to rise slightly but remain at a low level overall. In turbomachinery, demand looks set to recover in 2019 due to price increases in our customers’ sales markets. As capacity utilization of their production facilities increases, the number of projects for turbocompressors is likely to rise. In energy generation, demand for steam and gas turbines will probably continue to vary from region to region. Sustained stable demand is expected in the countries with strong industrial growth or a low level of electrification. By contrast, electricity producers in the industrialized countries are still experiencing overcapacity. Possible growth will be satisfied above all by renewable energy sources, whose irregular electricity production requires a significant increase in storage capacity. As a consequence of the shortage of raw materials for batteries, we expect that the development and construction of thermal storage will be pushed, thereby invigorating the market for turbocompressors and turbo- expanders. Overall, the price and competitive pressures will ease somewhat but remain high due to existing overcapacity. We anticipate a positive trend in the marine and power plant after-sales business for diesel engines in 2019. In turbomachinery, we expect a slight upward trend. For the period 2020 to 2023, 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 2019. We expect demand to continue rising in emerging markets where market 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 cost. Integrated end-to- end solutions, which include mobility-related service mod- ules such as insurance and innovative packages of services, Group Management Report Report on Expected Developments 159 will become increasingly important for this. Additionally, we expect demand to increase for new forms of mobility, such as rental services, and for integrated mobility services, for example parking, refueling and charging. We estimate that this trend will continue in the years 2020 to 2023. the United States of America, it is possible that the key interest rate will be raised again, depending on the future development of the economy. For the years 2020 to 2023, we anticipate a rise in interest rates, though the pace will vary from region to region. In the mid-sized and heavy commercial vehicles category, we anticipate rising demand for financial services products in emerging markets. In these countries in particular, financing solutions support vehicle sales and are thus an essential component of the sales process. In the developed markets, we expect to see increased demand for telematics services and services aimed at reducing total cost of ownership in 2019. This trend is also expected to continue in the period 2020 to 2023. E XC H A N G E R AT E T R E N D S The global economy continued its robust growth in 2018 with declining momentum. Average prices for energy and other commodities were up year-on-year but remained at a relatively low level. As the year went on, the euro lost ground against the US dollar. By contrast, the euro/sterling exchange rate remained virtually unchanged in spite of the uncertainty surrounding the outcome of the Brexit negotiations and the question of what form the relationship between the United Kingdom and the EU will take in the future. The currencies of major emerging markets lost further ground against the euro in the reporting period. For 2019, we are forecasting that the euro will strengthen against the US dollar, sterling and the Chinese renminbi. The expectation is that the Russian ruble, Brazilian real and Indian rupee will remain relatively weak. For 2020 to 2023, we currently expect that the euro will then be stable against the key currencies, but that the comparative weakness of the currencies in the above-mentioned emerging markets will probably continue. However, there is still a general event risk – defined as the risk arising from unfore- seen market developments. I N T E R E ST R AT E T R E N D S Interest rates remained low with a few exceptions in fiscal year 2018 due to the continuation of the prevailing expan- sionary monetary policy worldwide and the challenging overall economic environment. In the major Western industrialized nations, key interest rates persisted at a historic low level on the whole. While it became apparent in the USA that the extremely loose monetary policy was gradually drawing to an end, the European Central Bank con- tinued 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 2019. In C O M M O D I T Y P R I C E T R E N D S Geopolitical and economic uncertainty in different forms caused the prices for many raw and input materials to vary in 2018. For example, average prices for raw materials such as iron ore, rare earths, natural rubber and lead fell, while prices for coking coal, crude oil, aluminium, copper and the pre- cious metals palladium and rhodium, among others, rose. For the raw materials lithium and cobalt, which are relevant for e-mobility and also saw higher year-on-year average price levels, market prices eased in the course of the year. Based on analyses of factors of influence and trends in the commodity markets, we expect the prices of most commodities to rise in 2019. For the years 2020 to 2023, we continue to expect volatility in the commodity markets with prices trending upwards. We preventively analyze and limit these risks using system-based procurement methods. Long-term, stable supply agreements ensure that the Group’s needs are satis- fied and guarantee a high degree of supply reliability. N E W M O D E L S I N 2 0 1 9 In 2019, the Volkswagen Passenger Cars brand will expand its range of SUVs worldwide by adding the T-Cross. The compact crossover model impresses with its striking design and an innovative interior concept, and will be available in Europe as well as in South America and China. In addition, the Passat will be revamped and fitted with a large number of new driver assistance systems. In the United States, the GLI, the sporty derivative of the Jetta, will enter the market. A new version of the Passat designed for the US market will also make its debut. The Passat will celebrate its market launch in South America. Plug-in hybrid versions of the Passat and Magotan will be launched in China. Furthermore, the e-Golf and derivatives of the Lavida and the Bora will complement the range of all-electric vehicles. The Teramont coupé and the revamped Sagitar and Magotan will round off the portfolio in China. In early 2019, Audi will roll out the e-tron, the first all- electric model from the brand with the four rings. Other electric models are waiting in the wings. The product upgrades of the A4 and the Q7 will also raise the bar. ŠKODA is redefining the compact class with the Scala. Based on the Modular Transverse Toolkit, the hatchback 160 Report on Expected Developments Group Management Report represents the next step in the development of ŠKODA’s design language. The Kamiq, a completely new crossover model, will also expand the SUV family in Europe. It com- bines the merits of an SUV with the agility of a compact vehicle. SEAT will present the first electric vehicle from the Spanish brand: a derivative of the Mii. Porsche will start its rollout of the eighth generation of the 911 in 2019. This will be kicked off by the models 911 Carrera S and 911 Carrera 4S, followed by cabriolet models and the 911 Speedster. The Cayenne model range will be expanded in 2019 by the addition of the Turbo S with a plug- in hybrid drive and – for the first time ever – coupé models. Around mid-year, the new Macan Turbo will delight the first customers with its performance and everyday practicality. In the second half of the year, Porsche will focus on the market launch of the Taycan, with which the brand will take the next step into the age of e-mobility. Bentley will deliver its first hybrid model in 2019, a derivative of the successful SUV Bentayga. In addition, the powerful Bentayga Speed will make its debut as the series’ latest top model. Further on in the year, this will be followed by the new Flying Spur, which will give customers a new driving experience with impressive performance and inno- vative technologies. From the beginning of 2019, Lamborghini will start delivering the V12 top model Aventador SVJ to customers. Following this, the roadster version of the Aventador SVJ will also become available in the course of the year. The Huracán coupé and Spyder will receive a product upgrade in the form of a new design, higher performance and improved handling. In 2019, Volkswagen Commercial Vehicles will put a product upgrade of the Multivan/Transporter on the market that features a revamped interior and exterior plus new info- tainment functions. Scania will also work steadily on introducing new prod- ucts and services in 2019. MAN will bring out additional engines in 2019 that comply with the Euro 6d emission standard. Ducati will launch numerous new models in 2019, including the Panigale V4 R, two versions of the Multistrada and four new members of the Scrambler family. I N V E ST M E N T A N D F I N A N C I A L P L A N N I N G To ensure the Volkswagen Group’s future viability, we will continue to mobilize our pronounced strengths in inno- vation and technology further and vigorously invest in e-mobility, digitalization, new mobility services and autono- mous driving in the coming years. In our current planning for 2019, 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 vehicles, in particular through the development of the Modular Electric Drive Toolkit (MEB). At the same time, we will primarily expand our SUV range further. We are also investing in the modification of selected locations for the production of electric vehicles. The Automotive Division’s ratio of capex to sales revenue will fluctuate around a level 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 electrifi- cation and updating of our model range. With the investments in our facilities and models, as well as in the development of alternative drives and modular toolkits, we are laying the foundations for profitable, sustain- able growth at Volkswagen. These investments also include commitments arising from decisions taken in previous fiscal years. 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 negatively impact the cash flow again in 2019, but will probably be significantly lower than in the reporting period. Consequently, we anticipate a positive net cash flow for 2019 that will be up significantly on the prior-year figure. The tendering of shares held by MAN’s noncontrolling interest shareholders as a consequence of the judgment issued on the award proceedings and the resulting termi- nation of the control and profit and loss transfer agreement with MAN SE is reflected in the amount of €1.7 billion, reducing net liquidity. Current estimates indicate that the change in the accounting for leases (IFRS 16), which entered into force in January 2019, will give rise to a negative one-off effect on the net liquidity reported by the Automotive Division, amounting to approximately 1% of the Volkswagen Group’s total assets. We therefore expect net liquidity in the Automotive Division in 2019 to be down significantly on the level seen in the reporting period. These plans are based on the Volkswagen Group’s current structures. A possible IPO of TRATON SE and related cash inflows are not taken into account. Our joint ventures in China are included using the equity method and are therefore not included in the figures above. For 2019, the joint ventures plan to invest in e-mobility and the digitalization of their model range, in new technol- Group Management Report Report on Expected Developments 161 ogies and mobility services, in strengthening their develop- ment and manufacturing capacity, and in new products. Their capex will exceed the 2018 level and be financed from the companies’ own funds. In the Financial Services Division, we are planning slightly higher investments in 2019 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 half 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, the issuing of 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 capital defined for the Automotive Division remains 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 11.0 (12.1)% (see also page 127). Invested capital will continue to increase further in 2019 as a result of investments in new models, in the development of alter- native drives and modular toolkits and in future technol- ogies. Invested capital will also rise as a consequence of the change in the accounting for leases (IFRS 16) that entered into force in January 2019. The return on investment (ROI) in the Automotive Division will probably exceed our minimum required rate of return on invested capital and be slightly higher than in the previous year. 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 the changes in the management structure of the Volkswagen Group, the Volkswagen Commercial Vehicles brand will be allocated to the Passenger Cars segment from January 1, 2019 and the segment will be renamed Passenger Cars and Light Commercial Vehicles. Consequently, the Passenger Cars Business Area will then include the Volks- wagen Commercial Vehicles brand in the financial reporting. The Commercial Vehicles segment will continue to comprise the Commercial Vehicles Business Area, but from January 1, 2019, will exclude the Volkswagen Commercial Vehicles brand. The Automotive Division will remain unchanged. The following tables show the forecast-related effects that the reclassification of the Volkswagen Commercial Vehicles brand will have on the Passenger Cars and Commercial Vehicles Business Areas. A D J U ST M E N T O F 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 (%) Actual 2018 Actual 2018 after adjustments1 160,802 9,220 5.7 172,678 10,000 5.8 1 Passenger Cars Business Area including the Volkswagen Commercial Vehicles brand in accordance with the reporting from January 1, 2019. A D J U ST M E N T O F T H E C O 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 (%) Actual 2018 Actual 2018 after adjustments1 36,656 1,971 5.4 24,781 1,191 4.8 1 Commercial Vehicles Business Area excluding the Volkswagen Commercial Vehicles brand in accordance with the reporting from January 1, 2019. turbulence S U M M A R Y O F E X P E C T E D D E V E L O P M E N T S The Volkswagen Group’s Board of Management expects the growth of the global economy to slow somewhat in 2019. We still believe that risks will continue to arise from protectionist tendencies, financial markets and structural deficits in individual countries. In addition, growth prospects will be negatively impacted by continuing geopolitical tensions and conflicts. We therefore expect both the advanced economies and the emerging markets to show weaker momentum than in 2018. We anticipate the strongest rates of expansion in Asia’s emerging economies. the in 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 2019. Overall, global demand for new vehicles will probably be at the prior-year level. We anticipate that the volume of new registrations for passenger cars in Western Europe will be in line with the figure seen in the reporting period. After a positive perfor- mance overall in recent years, we estimate that demand in the German passenger car market will fall slightly year-on- year. Sales of passenger cars in 2019 are expected to slightly 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 162 Report on Expected Developments Group Management Report the prior year. We expect new registrations in the South American markets for passenger cars and light commercial vehicles to grow moderately overall compared with the previous year. The passenger car markets in the Asia-Pacific region are expected at the prior-year level. Trends in the markets for light commercial vehicles in the individual regions will be mixed again in 2019; on the whole, we anticipate 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 mar- kets for buses, new registrations in 2019 are expected to slightly exceed the prior-year level. We believe that automotive financial services will con- tinue to be very important for vehicle sales worldwide in 2019. The Volkswagen Group is well prepared overall for the future challenges pertaining to the automobility business and the mixed developments in regional vehicle markets. Our brand diversity, our presence in all major world markets, our broad, selectively expanded product range and pioneering technologies and services put us in a good competitive position worldwide. As part of the transformation of our core business, we are positioning our Group brands with a stronger focus on their individual characteristics and optimizing the vehicle and drive portfolio. The focus hereby is primarily on our vehicle fleet’s carbon footprint and on the most attractive and fastest-growing market segments. 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. Our goal is to offer all customers mobility and innovations suited to their needs and thus 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 2019 will slightly exceed the prior-year figure amid continuously challenging market conditions. Challenges will arise particularly from the economic situ- ation, the increasing intensity of competition, exchange rate volatility and more stringent WLTP (Worldwide Harmonized Light-Duty Vehicles Test Procedure) requirements. We expect the sales revenues of the Volkswagen Group and its Passenger Cars and Commercial Vehicles 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 2019. For the Commercial Vehicles Busi- ness Area, we anticipate an operating return on sales of between 6.0% and 7.0%. In the Power Engineering Business Area, we expect a loss around the previous year’s level amid a slight rise in sales revenue. For the Financial Services Division, we are forecasting a moderate increase in sales revenues and 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 probably fluctuate in the range of 6.5–7.0% in 2019. Cash outflows resulting from the diesel issue will negatively impact the cash flow again in 2019, but will probably be significantly lower than in the reporting period. Consequently, we anticipate a positive net cash flow for 2019 that will be up significantly on the prior-year figure. Net liquidity in the Automotive Division is likely to be considerably lower, primarily due to a negative one-off effect arising from the change brought by IFRS 16, which will not affect cash outflows. We expect a slight increase in return on investment (ROI) compared with 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. Group Management Report Report on Risks and Opportunities 163 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 ( 4 ) 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 C O N T R O L SY ST E M AT V O L K S WA 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 C O N T R O L SY ST E M AT V O L K S WA 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- 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 RD B O A R D O F M A N A G E M E N T 1st line of defense 2nd line of defense Companies and business units Group Risk Management 3rd line of defense Group Internal Audit work for enterprise risk management ensures that potential risk areas are covered in full. Uniform Group principles are used as the basis for managing risks in a standardized manner. Opportunities are not recorded. 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. 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 164 Report on Risks and Opportunities Group Management Report 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. Countermeasures are introduced immediately, their effects assessed, and the information incorporated into the planning 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 in a timely manner. This means that the Board of Management also has access to an overall picture of the current risk situ- ation 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 process for the timely reporting of material risks. Operational risk management also includes compliance with the Golden Rules in the areas of control unit software development, emission classification and escalation manage- ment. These rules are the minimum requirements in the organization, processes and tools & systems categories. We continued to reinforce the internal control system in the area of product compliance in 2018. 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 addition to strategic, operational and reporting risks, risks arising from potential compliance violations are also inte- grated into this process. Moreover, the effectiveness of key risk management and control measures is tested and any weaknesses identified in the process are reported and rectified. 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 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 2018. 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 Porsche Holding Salzburg, 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. In addition, the Company set up the Group Board of Management Committee for Risk Management in 2017. This met quarterly in the reporting year. The committee has the following tasks, among others: > to further increase transparency in relation to significant risks to the Group and their management, > to explain specific issues where these constitute a significant risk to the Group, > to make recommendations on the further development of the RMS/ICS, > to support the open approach to dealing with risks and promote an open risk culture. The Scania brand was incorporated into the standard GRC process in 2018. The brand has already been included in quarterly risk reporting since 2016. Group Management Report Report on Risks and Opportunities 165 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 compliance management system (CMS) as part of its inde- pendent 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 by means of the RMS/ICS elements 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 presented 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 Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin – the German Federal Financial Supervisory Authority). As part of the scheduled supervisory process and unscheduled audits, the competent 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. Volkswagen Financial Services AG, which is responsible for the leasing, insurance, services and mobility business and the lending business outside Europe, operates a risk early warning and management system. This system ensures that the locally applicable regulatory requirements are adhered to and at the same time enables appropriate and effective risk management at Group level. Important components of it are regularly reviewed as part of the audit of the annual financial statements. Monitoring the effectiveness of the risk management system and the internal control system To ensure the effectiveness of the RMS/ICS, we regularly optimize it as part of our continuous monitoring and im- provement processes. In the process, we give equal con- sideration to both internal and external requirements. On a case-by-case basis, external experts assist in the continuous enhancement of our RMS/ICS. The results culminate in both regular and event-driven reporting to the Board of Manage- ment 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 C O N T R O L SY ST E M I N T H E C O N T E X T O F T H E F I N A N C I A L R E P O R T 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 intended to ensure that the information required for the preparation of the financial statements of Volkswagen AG, the consolidated financial statements and the combined management report of the Volkswagen Group and Volks- wagen AG is complete, accurate and transmitted in a timely manner. 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 and assessment of uniform account- ing policies based on the requirements applicable to the parent. In particular, it 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 166 Report on Risks and Opportunities Group Management Report 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 combined management report of the Volkswagen Group and Volkswagen AG is prepared – in accordance 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 R T U N I T I E S In this section, we outline the significant risks and opportu- nities that arise in the course of our business activities. We into categories. Unless explicitly have grouped them mentioned, there were no material changes to the specific risks and opportunities compared with the previous year. The increasing number of partnerships generates both opportu- nities 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 opportun- ities 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. 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, customer- related measures and possible official or statutory require- ments for diesel vehicles. 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 refinan- cing 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. 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 94 and 177 to 183 of this annual report. Macroeconomic risks and opportunities We believe that risks to continued global economic growth arise primarily from turbulence in the financial markets, increasingly protectionist tendencies and structural deficits, which pose a threat to the performance of individual advanced economies and emerging markets. The worldwide transition from an expansionary monetary policy to a more restrictive one also presents risks for the macroeconomic environment. Persistently high private- and public-sector debt in many places is clouding the outlook for growth and Group Management Report Report on Risks and Opportunities 167 may likewise 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. In particular, the Volkswagen Group would be adversely affected by a disorderly Brexit and by other trade policy measures such as tariffs. The economic development of some emerging economies is being hampered primarily by dependence on energy and commodity prices and capital inflows, but also by socio- political tensions. Corruption, inadequate government struc- tures and a lack of legal certainty also pose risks. Geopolitical tensions and conflicts are a further major risk factor to the performance of individual economies and regions. As the global economy becomes increasingly inter- connected, 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 violent conflicts, terrorist activities and the spread of infec- tious 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/potential Western Europe and China are our main sales markets. A drop in demand in these regions due to the economic climate would have a particularly strong negative impact on the Com- pany’s earnings. We counter this risk with a clear, customer- oriented and innovative product and pricing policy. Outside Western Europe and China, delivery volumes are spread widely across the key regions: Central and Eastern Europe, North America and South America. In addition, we either already have a strong presence in numerous existing and developing markets or are working systematically towards this goal. Particularly in smaller markets with growth potential, we are increasing our presence with the help of strategic partnerships and are catering to requirements there. Price pressure in established automotive markets as a result of 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. The growth markets of Central and Eastern Europe, South America and Asia are particularly important to the Volks- wagen Group. These markets harbor considerable 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. 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. In Europe, there is a risk that further municipalities and cities will impose a driving ban on diesel vehicles in order to comply with emission limits. In China, restrictions on vehicle registrations could enter into force in further metropolitan areas in the future. Furthermore, China will impose a so- called “new energy vehicle quota” from 2019 onwards, which means that battery-electric vehicles, plug-in hybrids and fuel cell vehicles will have to account for a certain proportion of a manufacturer’s new passenger car fleet. To ensure com- pliance with emissions standards, we continuously tailor our range of vehicle models and engines to the conditions in the relevant markets. These requirements may lead to higher costs and consequently to price increases and declines in volumes. The demand that built up in individual established markets in times of crisis could bring a more marked recovery in these markets if the economic environment eases more quickly than expected. Economic performance varied in individual regions in fis- cal year 2018. 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 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, 168 Report on Risks and Opportunities Group Management Report 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 Regula- tion 566/2011 as of June 8, 2011 regarding access by inde- pendent market participants to technical information. In Germany, legislation is currently being prepared to restrict or abolish design protection for repair parts through the introduction of a repair clause. In addition, the European Commission is evaluating the market with regard to existing design protection. A possible restriction or abolition of design protection for visible replacement parts could adversely affect the Volkswagen Group’s genuine parts busi- ness. 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. Furthermore, we cannot entirely rule out the possibility of freight deliveries worldwide being shifted from trucks to other means of transport, and of demand for the Group’s commercial vehicles falling as a result. Below, we outline the greatest growth and market poten- tial for the Volkswagen Group. China In China, the largest market in the Asia-Pacific region, there was a slight year-on-year decline in the passenger car market in the reporting year. Though demand for vehicles will rise in the coming years due to the need for individual mobility, the trade conflict with the USA means that this will be 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. India The political and economic situation in India further stabi- lized in 2018. The vehicle markets continued their growth path. We expect this trend to continue. Against this 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 2018 was in line with the previous year. For 2019, the market volume is expected to be slightly down on the reporting period. In the USA, Volks- wagen Group of America is systematically pursuing our strategy of becoming a full-fledged volume supplier. The expansion of local production capacity – also including a production facility for electric vehicles in the future – 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 somewhat in the reporting year, while Brazil’s political path is uncertain after the presi- dential elections. The volume of demand in the vehicle mar- ket recovered markedly compared with the weak prior year. We anticipate a continued upturn in demand in 2019. The growing number of automobile manufacturers with local production has resulted in a sharp increase in price pressure and competition. The Brazilian market plays a key role for the Volkswagen 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 auto- motive markets in the world. The volume of the Russian vehicle market in 2018 was up markedly on the previous year and we are forecasting that the passenger car market will slightly exceed the reporting year in 2019. However, the heavy reliance on oil and gas income, rising taxes, currency volatil- ity resulting at present in high vehicle prices, the political crisis and the related sanctions imposed by the EU and the USA continue to impact the development of demand nega- tively. The market remains strategically important to the Volks- wagen Group, which is why we are working intensively there. The Middle East Political and economic uncertainty is weighing on the region’s main sales markets, particularly Turkey. Increased Group Management Report Report on Risks and Opportunities 169 tariffs along with the dramatic depreciation of the Turkish lira, which is accompanied by very high inflation and rising interest rates, are weakening demand in the country. Despite the instability, however, the Middle East region offers long- term growth potential. 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. Power Engineering The underlying trends in the global economy, such as sus- tained growth and a greater international division of labor, are set to continue, despite increased geopolitical and macro- economic risks compared with the previous year. This also applies to the resulting transport routes and volumes and to the demand for touristic offers such as cruises. Growing global energy needs call for innovation in industry and a growing willingness on the part of governments to invest in relation to global climate policy. We are working systematically to leverage market oppor- tunities across the world, for example by positioning our- selves as a solution provider for reduced-carbon drive system and energy generation technologies as well as for storage technologies. Moreover, significant potential can be lever- aged in the medium term by enhancing our after-sales busi- ness 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 Engi- neering business is affected by fluctuations in the investment 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 con- cepts and cost flexibility by means of temporary employ- ment, working time accounts and short-time work, and – if necessary – structural adjustments. 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. On a national and international level there are numerous legal requirements regarding the use, handling and storage of substances and mixtures (including restric- tions concerning chemicals, heavy metals, biocides, persis- tent organic pollutants), which apply to both the manufac- turing of automobiles and the automobile itself. 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. 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. Among other things, we therefore conduct trend analyses and customer surveys 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 continuously and system- atically monitoring the progress of all projects. To avoid patent infringements, we intensively analyze third-party industrial property rights, increasingly in relation to com- munication technologies. We regularly compare the results of all the analyses with the respective project’s targets; in the event of variances, we introduce appropriate countermea- sures in good time. Our end-to-end project organization supports effective cooperation among all areas involved in the process, ensuring that specific requirements are incor- porated into the development process as early as possible and that their implementation is planned in good time. Risks and opportunities from the modular toolkit strategy We are continuously expanding our modular toolkits, focusing on future customer requirements, legal requirements 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 synergy effects thereby achieved, we are able to cut both development costs and the necessary one-time expenses and manu- facturing 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 170 Report on Risks and Opportunities Group Management Report capacities can be used with greater flexibility throughout the entire Group, enabling us to achieve efficiency gains. We are currently transferring this principle of standard- ization with maximum flexibility to the Modular Electric Drive 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 bring e-mobility into mass production manufacturing world- wide from 2020 with the introduction of the first MEB-based vehicle. Higher volumes will, however, increase the risk that quality problems will affect an increasing number of vehicles. 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 establishment of the new mobility solutions business. By entering into partnerships at a local level, we aim to identify regional customer needs more precisely, establish com- petitive 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 also protects its expertise with legal action. 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 positive economic trend in Europe, North America and China weakened over the course of the year. Moreover, shifts in demand from our customers and restrictions in the availability of model variants as a result of the WLTP test procedure posed a challenge to suppliers. These changed circumstances restricted suppliers’ financing opportunities, particularly in areas where alternative technologies are gaining importance. The procurement risk management system continuously and globally monitors the financial situation of our suppliers and takes targeted measures to avoid supply bottlenecks. The number of crises and insolvencies among suppliers worldwide fell in 2018 in line with the global economic situation. 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 continuously analyzed and assessed on an interdisciplinary basis over the reporting year to enable steps to be taken in a timely manner in the event of potential bottlenecks. New bilateral and multilateral trade agreements, including those for steel, for the expected shift in the product mix from diesel to petrol engines and for short-term demand fluctu- ations relating to the WLTP test procedure, present challenges that must be tackled together with suppliers. As a result of the new trade agreement between the USA, Mexico and Canada, there is a risk of additional costs due to more expen- sive deliveries. 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 present to rule out the possibility of a further increase in recalls of various models produced by different 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 arise, for example, 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 immediately by applying derived measures. Additional measures were taken to safeguard supply and avert future assembly line stoppages caused by suspensions of deliveries. Antitrust investigations into suppliers on grounds of price-fixing agreements are being monitored by Risk Man- agement. The effects on Volkswagen are being systematically reviewed. Production risk Volatile developments in the global automotive markets, accidents at suppliers and disruption in the supply chain caused production volumes of individual vehicle models to fluctuate at some plants. In specific markets, we also recorded Group Management Report Report on Risks and Opportunities 171 a change in incoming orders: the number of orders for diesel vehicles fell, while orders for petrol engines rose. We address such fluctuations 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. Legal changes, for instance in the context of the change- over to the WLTP test procedure, may impact production. For one thing, a temporary reduction in the range causes demand to focus on the available variants. Moreover, gaps in production can occur if model variants have not been approved. These fluctuations necessitate measures to stabi- lize production, such as the temporary storage of vehicles until official approval. 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, for example, by 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 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. 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, lost output, rejects and reworking in general, we use the TPM (Total Productive Main- tenance) method at our production facilities. TPM is a con- tinuous 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. 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. 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 mini- mize 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. 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 could stem from households’ 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. We are countering the buyer reluctance with our attractive range of models and systematic customer orientation. 172 Report on Risks and Opportunities Group Management Report A combination of buyer reluctance in some markets as a result of the crisis and increases in some vehicle taxes based on CO2 emissions – as already exist in many European countries – may shift demand towards smaller segments and engines. We counter the risk that such a shift will negatively impact the Volkswagen Group’s earnings by constantly devel- oping new, fuel-efficient vehicles and alternative drive tech- nologies, 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 commercial 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 established digital brand RIO, for example. MAN Power Engineering’s two-stroke engines are pro- duced 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 Viewed over an extended period, the fleet customer business is generally more stable than the business with retail custom- ers; in 2018, it continued to be characterized by increasing concentration and internationalization. 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 high market share in Europe 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 supplier components and software 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 with suppliers. In this way, Group Quality Management contributes to fulfilling cus- tomer expectations and consequently to boosting our Com- pany’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 individually to them. We counter the local risks we identify by continuously developing measures and implementing them locally, thereby effectively preventing quality defects from arising. Vehicle registration and operation criteria are defined and monitored by national and, in some cases, international authorities. Several 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 respective 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 Group Management Report Report on Risks and Opportunities 173 help the Volkswagen Group to remain flexible with a fluctu- ating 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 strategically oriented and holistic human resource development 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. In addition to the standard dual vocational training, programs such as our StIP integrated degree and traineeship scheme ensure a pipeline of highly qualified and motivated employees. By systematically increasing our attractiveness as an employer, we gain talented people in the future-critical areas of IT, design and social media. With tools such as these, we ensure that we can cover our requirement for highly qualified new staff even amid a shortage of skilled labor. We counter the risk that knowledge will be lost as a result of employee fluctuation and retirement with intensive, department-specific training. 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. The advancing digitalization of our human resources processes entails risks arising from the processing of personal data. Volkswagen is aware of its responsibility in the processing of this data. We address these risks as part of our data protection management system by implementing a wide range of measures. One challenge of our collaboration with the monitor lies in the tension, in some regards, between the monitor’s requests for information on the one hand and both German and international data-protection requirements on the other. This is true particularly against the backdrop of the existing scopes of assessment and interpretation regarding data- protection requirements. In the interest of precluding infringe- ments of the law as best as possible – despite a partially unclear legal situation – Volkswagen is advised by external law firms on these issues. IT Risks 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 confi- dentiality, integrity and availability, and comprise in partic- ular unauthorized access to, modification of and extraction of sensitive electronic corporate or customer data as well as limited systems availability as a consequence of downtime and disasters. Handling data with integrity ensures that it is correct and uncorrupted, and that systems function without error. 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 our mobility services must be secured. Our guiding principles are data security, transparency and informational self-deter- mination. We address the risk of unauthorized access to, modifi- cation of, or extraction of corporate and customer data with the use of IT security technologies (e.g. firewall and intrusion prevention systems) and a multiple-authentication procedure. Additionally, we increase protection by restricting the allo- cation of access rights to systems and information and by keeping backup copies of critical data resources. Redundant IT infrastructures protect us against risks that occur in the event of a systems failure or natural or other disasters. We used commercially available technologies to protect our IT landscape, adhering to standards applicable through- out the Company. We future-proof our IT through continual standardization and updates. Continuously increasing auto- mation enhances process reliability and the quality of pro- cessing. The further development and Group-wide use of IT gover- nance processes, particularly the further standardization of the IT risk management process, also helps to identify risks at an early stage and reduce them effectively. The focus of our IT security program is the ongoing enhancement of Group-wide security measures. This cur- rently includes the setting up of an IT security command center. The center’s role is to detect cyber-attacks quickly, 174 Report on Risks and Opportunities Group Management Report helping us to successfully defeat them using the latest tools. Volkswagen complements these technical measures by sys- tematically raising awareness and providing training for employees. 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 new European 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 European 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. Up to and including 2020, European fleet legislation will be complied with on the basis of the New European Driving Cycle (NEDC). After 2021, the NEDC target value will be changed into a WLTP target value through a process defined by lawmakers; this change is not expected to lead to additional tightening of the target value. 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. In December 2018, the European Council, Parliament and Commission agreed on post-2020 fleet legislation, which has yet to be conclusively published in the Official Journal of the European Union. This legislation stipulates a reduction of 15% from 2025 and 37.5% from 2030 for the European new passenger car fleets and a reduction of 15% in 2025 and 31% in 2030 for the new light commercial vehicle fleets. In each case, the starting point is the fleet value in 2021. Policy- makers 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, 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 receive a 30% tax advantage, vehicle manufacturers must, among other things, achieve a specified fleet efficiency. The fuel con- sumption regulations in China, which set an average fleet target of 6.9 liters/100 km for the period 2012–2015, were continued into the period 2016–2020 with a target of 5.0 liters/100 km. Preparations for legislation up to 2025 have begun. In addition to this legislation on fleet consumption, China will impose a so-called “new energy vehicle quota” in the future. This means that from 2019 onwards, battery- electric vehicles, plug-in hybrids and fuel cell vehicles will have to account for a certain proportion of a manufacturer’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 also purely electric drives will 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. 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 to all new vehicles since September 2018. Other challenges arise in connection with stricter Group Management Report Report on Risks and Opportunities 175 processes and requirements regarding WLTP, such as from test criteria and from homologation (achievement of approval). The Real Driving Emissions (RDE) regulation for passen- ger cars and light commercial vehicles is also one of the main European regulations. 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. There are challenges asso- ciated with stricter processes and requirements regarding RDE, such as from test criteria and from homologation (achievement of approval). 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, > Renewable Energy Directive (RED) (2009/28/EC) intro- ducing sustainability criteria; the follow-up regulation (RED2) contains higher quotas for advanced biofuels, > 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 manufac- turers, 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 incorporated CO2 elements into their rules on vehicle taxation. There is particular momentum in the debate on 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) immissions. In many places, lawsuits have been filed and judgments issued. It is argued in this context that only driving bans for diesel vehicles can bring about the necessary short-term reduction in NO2 immissions. The discussion may result in sales volumes of diesel vehicles to decline further and to financial liabilities arising from customer-related measures and possible official or statutory requirements. Local driving bans are already in place in a number of countries, though these mainly affect older vehicles. Regula- tions in Belgium that successively bar older vehicles from larger cities are one corresponding example. 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 has prepared 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 certifi- cation 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 176 Report on Risks and Opportunities Group Management Report announced that it will be proposing CO2 standards for heavy commercial vehicles in order to achieve the targets of the Paris climate agreement. During trilogue negotiations in February 2019, the European Parliament and EU member states agreed on a joint proposal regarding the CO2 regulation for heavy trucks. Accordingly, truck manufacturers have to achieve the intermediate goal by 2025, namely a 15% reduction of CO2 emissions for their new vehicle fleets within the EU. The goal of achieving a reduction provision of 30% shall apply by 2030. The reference year for all reduction goals is 2019. The current proposal also provides for fines if the limits are exceeded. Before these provisions can bindingly enter into force, the Council and the Parliament must approve the resolutions. trucks 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 permis- sible dimensions and weights of (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. 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 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 German 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 utilization of existing 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 and safety to be increased. However, platooning requires changes in the legal framework and establishment of the necessary infrastructure. In the Power Engineering segment, the International Maritime Organization (IMO) has introduced the International Convention for the Prevention of Pollution from Ships (MARine POLlution – MARPOL), with which limits on emis- sions from marine engines will be lowered in phases. A reduction of the sulfur content in marine fuel has been 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 U.S. Environmental Protection Agency (EPA). On specialist bodies and in public, we are emphatically championing a “maritime energy tran- sition”. In a first step, we are supporting the switch to liquefied natural gas (LNG) as a fuel for maritime applications and also offer dual fuel and gas-powered engines for new and retrofitted vessels. For long-term, climate-neutral operation of seagoing vessels, we advocate power-to-X technology, in which excess sustainably generated electricity is converted into carbon-neutral gas or liquid fuel. 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. Group Management Report Report on Risks and Opportunities 177 For the manufacturing industry and certain power genera- tion installations (e.g. combined heat and power instal- lations), 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 gradually decrease as the trading period progresses: the remaining quantities required will have to be bought at auction. Furthermore, installation operators can partly fulfill their obligation to hold emission allowances using certifi- cates from climate change projects (Joint Implementation and Clean Development Mechanism projects). In certain (sub-) sectors of industry, there is a risk that production 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 cer- tificates will be allocated to these sectors free of charge for the period from 2013 to 2020 on the basis of the pan-EU bench- marks. The automotive industry was included in the new carbon leakage list that came into effect in 2015. As a result, individual facilities at Volkswagen Group locations in Europe 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 that was established in 2018. The reserve will serve to offset any imbalance between the supply of and demand for certificates in emissions trading in the fourth trading period. Furthermore, the European 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 for 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. In China, for example, seven corresponding pilot projects are underway, which do not affect the Volkswagen Group. The Chinese government officially implemented a national emissions trading system at the end of 2017. Initially, this will only impact the power generation sector; a gradual expan- sion is being planned. Litigation In the course of their operating activities, Volkswagen AG and the companies in which it is directly or indirectly invested are involved in a great number of legal disputes and govern- mental proceedings in Germany and abroad. Such legal disputes and other proceedings occur in relation to employ- ees, dealers, investors, customers, or suppliers, among others, or in relation to relevant public authorities. For the com- panies involved, these may result in payment or other obli- gations. In particular, substantial compensatory or punitive damages may have to be paid and cost-intensive measures may have to be implemented. In this context, specific quan- tification of the objectively likely consequences is often possible only to a very limited extent, if at all. 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 dif- ferently 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 com- pletely prevent. Where transparent and economically viable, adequate insurance coverage was taken out for these risks. For the identifiable and measurable risks, provisions considered appropriate based on existing information 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 covered by the insured amounts and provisions cannot be ruled out. This applies particularly to legal risk assessment regarding the diesel issue. Diesel issue In the USA Volkswagen AG and certain affiliates reached settlement agreements (including various consent decrees) with the US Department of Justice (DOJ), the US Environ- mental Protection Agency (EPA), the State of California, the California Air Resources Board (CARB), the California Attorney General, the US Federal Trade Commission, and private plaintiffs represented by a Plaintiffs' Steering Committee in a multi- district litigation in California. These settlement agreements resolved certain civil claims made in relation to affected diesel vehicles in the United States of America. Volkswagen AG also entered into agreements to resolve US federal criminal liability and certain civil penalties and claims relating to the diesel issue. As part of its plea agree- ment, Volkswagen AG agreed to plead guilty to three felony counts under US law – including conspiracy to commit fraud, obstruction of justice and using false statements to import cars into the United States of America – and has been sentenced to three years' probation. 178 Report on Risks and Opportunities Group Management Report A description of the diesel issue can be found starting on page 92. In connection with the diesel issue, potential con- sequences for Volkswagen’s results of operations, financial position and net assets could emerge primarily in the following legal areas: Partial Consent Decrees to clarify that Volkswagen may repair certain technical issues with approved emissions modifi- cations through an “AEM Correction” (Approved Emissions Modifications). 1. Coordination with the authorities on technical measures worldwide In agreement with the respective responsible authorities, the Volkswagen Group is making technical measures available worldwide for virtually all diesel vehicles with type EA 189 engines. Within its area of responsibility, the German Federal Motor Transport Authority (Kraftfahrt-Bundesamt or KBA) ascertained for all clusters (groups of vehicles) that imple- mentation of the technical measures would not bring about any adverse changes in fuel consumption figures, CO2 emis- sion figures, engine power, maximum torque, and noise emissions. AUDI AG has worked intensively for many months to check all relevant diesel concepts for possible discrepancies and retrofit potentials. The measures proposed by AUDI AG have been adopted and mandated in various recall notices issued by the KBA for vehicle models with V6 and V8 TDI engines. Currently, AUDI AG assumes that the total cost, including the amount based on recalls, of the ongoing largely software- based retrofit program that began in July 2017 will be manageable and has recognized corresponding balance-sheet risk provisions. The measures submitted by AUDI AG are being examined by the KBA and can only be made available to customers after corresponding approval by the KBA. The Ministry of Environment in South Korea qualified certain emissions strategies in the engine control software of various diesel vehicles with V6 or V8-TDI engines meeting the Euro 6 emission standard as an unlawful defeat device and ordered a recall on April 4, 2018; the same applies to the Dynamic Shift Program (DSP) in the transmission control of a number of Audi models. In the USA, in fiscal year 2018, the EPA and CARB issued the outstanding official approvals needed for the technical solutions for the affected vehicles with 2.0 l TDI and with V6 3.0 l TDI engines. In the case of 2.0 l Generation 2 diesel vehicles with manual transmissions, Volkswagen Group of America, Inc. elected to withdraw the approved emissions modification proposal, whereby owners were given the option of a buyback and lessees were given the option of early lease termination. On October 31, 2018, after discussions with DOJ, EPA, and CARB, the parties agreed to modify the First and Second 2. Criminal and administrative proceedings worldwide (excluding the USA/Canada) Criminal investigations, regulatory offense proceedings, and/or administrative proceedings (in Germany for example by the Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin – Federal Financial Supervisory Authority) have been opened in some countries. The public prosecutor’s offices in Braunschweig and Munich are investigating the core issues of the criminal investigations. The Braunschweig Office of the Public Prosecutor is investigating approximately 40 former) employees and a former member of the Board of Manage- ment for possible fraud, among other things. The investi- gations are ongoing. The defendants and Volkswagen AG were permitted to inspect the investigation files. (current and The regulatory offense proceeding that was opened against Volkswagen AG in this connection in April 2016 has been terminated by the administrative fine order issued against Volkswagen AG by the Braunschweig Office of the Public Prosecutor on June 13, 2018. The administrative fine order is based on a negligent breach in the Powertrain Devel- opment department of the obligation to supervise, relating to the period from mid-2007 to 2015 and a total of 10.7 million vehicles with diesel engines of types EA 189 worldwide and EA 288 (Generation 3) in the USA and Canada. The adminis- trative order imposes a total fine of €1.0 billion, consisting of a penalty payment of €5 million and the forfeiture of economic benefits in the amount of €995 million. After thorough examination, the fine has been accepted and paid in full by Volkswagen AG, rendering the administrative fine order legally final. The administrative fine order termi- nates the regulatory offense proceeding against Volkswagen AG. Further sanctions against or forfeitures by Volkswagen AG and its Group companies are therefore not expected in Germany in connection with the unitary factual situation covered by the administrative order concerning diesel engines of types EA 189 worldwide and EA 288 (Generation 3) in the USA and Canada. As a result, Volkswagen expects that the conclusion of this proceeding will have a substantially positive impact on other governmental proceedings being conducted in Europe against Volkswagen AG and its Group companies. The Braunschweig Office of the Public Prosecutor is con- ducting another proceeding against three (current or former) members of the Board of Management for alleged market Group Management Report Report on Risks and Opportunities 179 manipulation with respect to capital market disclosure obligations in connection with the diesel issue. In this con- text, the Office of the Public Prosecutor has been conducting a regulatory offense proceeding against Volkswagen AG under §30 OWiG (German Regulatory Offenses Act) since July 30, 2018. Volkswagen AG has since been permitted to inspect the public prosecutor's investigation files several times. The investigations are ongoing. The Munich II Office of the Public Prosecutor is con- ducting investigations against 24 persons, including the former Chairman of the Board of Management of AUDI AG (who is also a former member of the Board of Management of Volkswagen AG) and another active member of the Board of Management of AUDI AG. The investigations are ongoing. AUDI AG has appointed two renowned major law firms to clarify the matters underlying the public prosecutor’s accu- sations. The Board of Management and Supervisory Board of AUDI AG are being regularly updated on the current state of affairs. The administrative fine order issued on October 16, 2018 by the Munich II Office of the Public Prosecutor terminates the regulatory offense proceeding conducted against AUDI AG in this connection. The administrative fine order is based on a negligent breach of the obligation to supervise occurring in the organizational unit “Emissions Service/Engine Type Approval”. The administrative order imposes a total fine of €800 million, consisting of a penalty payment of €5 million and the forfeiture of economic benefits in the amount of €795 million. After thorough examination, the fine has been accepted and paid in full by AUDI AG, rendering the admin- istrative fine order legally final. The administrative fine order terminates the regulatory offense proceeding against AUDI AG. Further sanctions against or forfeitures by AUDI AG are therefore not to be expected in Europe in connection with the unitary factual situation underlying the administrative fine order. The Stuttgart Office of the Public Prosecutor has com- menced a criminal investigation relating to the diesel issue against one board member, one employee, and one former employee of Dr. Ing. h.c. F. Porsche AG on suspicion of fraud and illegal advertising as well as an analogous regulatory offense proceeding against Dr. Ing. h.c. F. Porsche AG under §30 OWiG. Dr. Ing. h.c. F. Porsche AG has appointed two renowned major law firms to clarify the matter underlying the public prosecutor’s accusations. The Board of Manage- ment and Supervisory Board of Dr. Ing. h.c. F. Porsche AG are being regularly updated on the current state of affairs. On July 6, 2018, the Federal Constitutional Court rendered its decision on the constitutional complaints filed in con- nection with the search of the premises of the law firm Jones Day, holding that the lower court ruling affirming the pro- visional seizure of client engagement documents and data of Volkswagen AG did not violate constitutional law. The com- panies of the Volkswagen Group will continue to cooperate with the German government authorities with due regard for the ruling of the German Federal Constitutional Court. Whether the criminal and administrative proceedings will ultimately result in fines for the Company, and if so in what amount, is currently subject to estimation risks. According to Volkswagen’s estimates so far, the likelihood that a sanction will be imposed is 50% or less in the majority of these pro- ceedings. Contingent liabilities have therefore been disclosed where the amount of such liabilities could be measured and the likelihood of a sanction being imposed was assessed at not lower than 10%. Provisions were recognized to a small extent. 3. Product-related lawsuits worldwide (excluding the USA/ Canada) In principle, it is possible that customers in the affected markets will file civil lawsuits or that importers and dealers will assert recourse claims against Volkswagen AG and other Volkswagen Group companies. Besides individual lawsuits, various forms of collective actions (i.e. assertion of individual claims by plaintiffs acting jointly or as representatives of a class) are available in various jurisdictions. Furthermore, in a number of markets it is possible for consumer and/or envi- ronmental organizations to bring suit to enforce alleged rights to injunctive relief, declaratory judgment, or damages. Customer class action lawsuits and actions brought by consumer and/or environmental associations are pending against Volkswagen AG and other companies of the Volkswagen Group in various countries including Argentina, Austria, Australia, Belgium, Brazil, Chile, China, the Czech Republic, Germany, Israel, Italy, Mexico, the Netherlands, Poland, Portugal, Spain, South Africa, South Korea, Switzerland, Taiwan, and the United Kingdom. Alleged rights to damages and other relief are asserted in these actions. The actions pending in the aforementioned countries include in particular the following: Various class action lawsuits with opt-out mechanism, one individual lawsuit, and two civil suits by the Australian Competition and Consumer Commission are currently pending in Australia against Volkswagen AG and other Group companies, including the Australian subsidiaries. These pro- ceedings have been joined with each other. Given the opt-out rule, the class actions have the potential to automatically cover all vehicles with type EA 189 engines unless the right to opt out is actively exercised. In all, approximately 100 thou- sand vehicles in the Australian market with type EA 189 engines are affected. An initial court hearing lasting several weeks was held in March 2018 on technical questions; further issues are to be argued in September 2019. 180 Report on Risks and Opportunities Group Management Report In Belgium, the Belgian consumer organization Test Aankoop VZW has filed a class action to which an opt-out mechanism has been held to apply. The class action pertains to vehicles purchased by consumers on the Belgian market after Septem- ber 1, 2014. The asserted claims are based on purported violations of unfair competition and consumer protection law as well as on alleged breach of contract. An initial hearing for oral argument has yet to take place in this matter. The court has extended the statutorily mandated negotiation phase until July 8, 2019. In Brazil two class actions are pending. One of them pertains to approximately 17 thousand vehicles. In this pro- ceeding, a judgment, which is not yet final, has been rendered holding Volkswagen do Brasil liable in an amount of €0.3 billion plus interest. The judgment has been appealed. In the second class action alleged compensation claims are made based on purported breaches of environmental regulations. In Germany, the Verbraucherzentrale Bundesverband e. V. (Federation of Consumer Organizations) filed an action on November 1, 2018 with the Braunschweig Higher Regional Court for model declaratory judgment against Volkswagen AG. The complaint is seeking a ruling that certain preconditions for potential consumer claims against Volkswagen AG are met; however, no specific payment obligations would result from any determinations the court may make. Individual claims then would have to be enforced afterwards in subse- quent separate proceedings. In addition, various actions have been brought against companies of the Volkswagen Group in several German Regional Courts (Landgericht) by financialright GmbH, which is asserting rights assigned to it by a total of approximately 46 thousand customers in Germany, Slovenia, and Switzer- land. In England and Wales, suits filed in court by various law firms have been joined in a single collective action (group litigation). Roughly 117 thousand claimants joined the group litigation prior to expiration of the opt-in deadline on December 19, 2018; around 40 thousand additional plaintiffs not currently covered by the group litigation could still be added. Because of the opt-in mechanism, not all vehicles with type EA 189 engines are automatically covered by the group litigation; potential claimants must instead take action in order to join. A judicial case management conference is scheduled for March 2019. No oral argument on the sub- stantive merits of the claims has as yet taken place. Italian consumer protection law are being asserted in these proceedings. In the Codacons proceeding, the court dis- missed the class action as inadmissible on December 18, 2018. In the Altroconsumo proceeding, the deadline for the filing of claims has passed and those filed are currently being tabulated by an appointed expert. In the Netherlands, Stichting Volkswagen Car Claim has brought an opt-in class action seeking declaratory rulings. Any individual claims would then have to be reduced to judgment afterwards in a separate proceeding. Several lawsuits filed by the Austrian consumer protec- tion organization (VKI – Verein für Konsumentenschutz) and by the Cobin Claims platform are pending in Austria. In these actions, damage claims assigned for collection to VKI or to the Cobin Claims platform are being asserted on behalf of roughly 10 thousand customers. A Portuguese consumer organization has filed a class action with opt-out mechanism in Portugal. There are approx- imately 126 thousand affected vehicles in the Portuguese market. The complaint seeks vehicle return and alleges dam- ages as well. Volkswagen estimates the likelihood that the plaintiffs will prevail to be 50% or less for the majority of the customer class actions and the complaints filed by consumer and/or environmental organizations. Contingent liabilities are disclosed for these proceedings where the amount of such liabilities can be measured and the chance that the plaintiff will prevail was assessed as not implausible. Since most of these proceedings are still in an early stage, it is in many cases not yet possible to quantify the realistic risk exposure. Pro- visions were recognized to a small extent. Furthermore, individual lawsuits and similar proceedings are pending against Volkswagen AG and other Volkswagen Group companies in various countries, most of which are seeking damages or rescission of the purchase contract. In Germany, there are around 46 thousand such individual lawsuits. A total of approximately one thousand additional individual lawsuits are pending in other countries. According to Volkswagen’s estimates, the likelihood that the plaintiffs will prevail is 50% or less in the vast majority of the indi- vidual lawsuits. Contingent liabilities are disclosed for these actions where the amount of such liabilities can be measured and the chance that the plaintiff will prevail was assessed as not implausible. In addition, provisions were recognized to the extent necessary based on the current assessment. In Italy, two class action lawsuits have been filed with the Venice Regional Court by two consumer associations (Altroconsumo and Codacons) acting on behalf of Italian customers. Damage claims based on alleged breach of contract as well as claims based on purported violations of At this time it cannot be estimated how many customers will choose to file lawsuits in the future in addition to those already pending given the action for model declaratory judgment in Germany, among other things, and what their prospect of success will be. Group Management Report Report on Risks and Opportunities 181 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 Regional Court in Braunschweig. On August 5, 2016, the Regional Court in Braunschweig ordered that common questions of law and fact relevant to the lawsuits pending at the Regional Court in Braunschweig be referred to the Higher Regional Court (Oberlandesgericht) in Braun- schweig for binding declaratory rulings pursuant to the Ger- man Act on Model Case Proceedings in Disputes Regarding Capital Market Information (KapMuG – Kapitalanleger-Muster- verfahrensgesetz). In this proceeding, common questions of law and fact relevant to these actions are to be adjudicated in a consolidated manner by the Higher Regional Court in Braunschweig (model case proceedings). All lawsuits at the Regional Court in Braunschweig will be stayed pending resolution of the common issues, unless the cases can be dismissed for reasons independent of the common issues that are to be adjudicated in the model case proceedings. The resolution in the model case proceedings of the common questions of law and fact will be binding for all pending cases that have been stayed in the described manner. In the model case action, hearing for oral argument before the Braun- schweig Higher Regional Court began on September 10, 2018 and was continued in subsequent sessions. Tracking the objects of declaratory judgment, the Court gave indications as to its preliminary assessment. Oral argument is to con- tinue in 2019. At the Regional Court in Stuttgart, further investor lawsuits have been filed against Volkswagen AG, in some cases along with Porsche SE as joint and several debtor. On December 6, 2017, the Regional 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. An action for model declaratory judgment concerning the diesel issue is also pending against Porsche SE before the Stuttgart Higher Regional Court; as the case currently stands, Volkswagen AG is model case defendant in this action as well. Further investor lawsuits have been filed at various courts in Germany and the Netherlands. In Austria, the first-in- stance dismissal of the last investor complaint pending in connection with the diesel issue became binding in the reporting period. 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 AG in connection with the diesel issue, with the claims totaling roughly €9.6 billion. Volks- wagen AG 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 governmental authorities. Volkswagen AG and other Volkswagen Group companies are facing litigation in the USA/Canada on a number of different fronts relating to the matters described in the EPA’s “Notices of Violation”. In that respect, investigations by various US and Canadian regulatory and government author- ities are ongoing, particularly in areas relating to securities, financing and tax. Additionally, in the USA and Canada, certain putative class actions by customers, investors, sales- persons and dealers; individual customers’ lawsuits and claims by state, provincial or municipal authorities have been filed in various courts, including state and provincial courts. A large number of these putative class action lawsuits have been filed in US federal courts and consolidated for pretrial coordination purposes in the federal multidistrict litigation proceeding in the State of California. In the USA, Volkswagen has reached separate agreements with the attorneys general of 49 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. New Mexico still has consumer protection claims outstanding. Volkswagen has also reached separate agree- ments with the attorneys general of thirteen US states (California, Connecticut, Delaware, Maine, Maryland, Massa- chusetts, 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. The attorneys general of eight other US states (Alabama, Illinois, Montana, New Hampshire, New Mexico, Ohio, Tennessee, and Texas) and some municipalities have suits pending in state and 182 Report on Risks and Opportunities Group Management Report federal courts against Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates, alleging violations of environmental laws. The environmental claims of eight states – Alabama, Illinois, Missouri, Minnesota, Ohio, Tennessee, Texas, and Wyoming – as well as Hillsborough County (Florida), Salt Lake County (Utah), and two Texas counties, have been dismissed in full or in part by trial or appellate courts as preempted by federal law. Alabama, Illinois, Ohio, Tennessee, Hillsborough County, and Salt Lake County have appealed or may still appeal the dismissal of their claims. The U.S. Securities and Exchange Commission (the “SEC”) has requested information from Volkswagen regarding potential violations of securities laws in connection with issuances of bonds and asset-backed securities, as a result of nondisclosure of certain Volkswagen diesel vehicles' noncom- pliance with US emission standards. The SEC informed Volkswagen that it had issued a formal order of investigation in January 2017; this investigation is ongoing. The SEC Staff subsequently informed Volkswagen that the SEC might bring an enforcement action against Volkswagen arising out of this investigation. On August 28, 2018, Volkswagen AG and a putative class of purchasers of Volkswagen AG American Depositary Receipts agreed to settle the class’ claims alleging a drop in price purportedly resulting from the matters described in the EPA’s “Notices of Violation” in exchange for a cash payment of USD 48 million. The proposed settlement was granted preliminary approval by the court in November 2018. On December 21, 2017, Volkswagen announced an agreement in principle on a proposed consumer settlement in Canada involving 3.0 l diesel vehicles that was approved by the courts in Ontario and Quebec in April 2018. Also in Canada, a criminal enforcement-related investigation related to 2.0 l and 3.0 l diesel vehicles by the federal environmental regulator is ongoing, and a quasi-criminal enforcement- related offense has been charged by the Ontario provincial environmental regulator related to 2.0 l diesel vehicles. Addi- tionally, in Quebec, a certified environmental class action on behalf of residents is pending. This environmental class action was authorized on the sole issue of whether punitive damages could be recovered. Volkswagen is seeking leave to appeal this authorization ruling. Class action and joinder lawsuits have also been filed in Canada, including alleged consumer protection and securities claims asserting dam- ages among other things. To the extent a matter is not separately described above, an assessment is not yet possible at the current stage of the proceedings or has, in accordance with IAS 37.92, not been presented so as not to compromise the results of the pro- ceedings and the interests of the Company. 6. Additional proceedings With its ruling of 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 is to examine whether there was a breach of duties on the part of the members of the Board of Manage- ment and Supervisory Board of Volkswagen AG in connection with the diesel issue on or after June 22, 2006 and, if so, whether this resulted in damages for Volkswagen AG. The ruling by the Higher Regional Court of Celle is formally unappealable. However, Volkswagen AG has filed a consti- tutional complaint with the German Federal Constitutional Court alleging infringement of its constitutionally guaran- teed rights. It is currently unclear when the German Federal Constitutional Court will reach a decision on this matter. Following the formally unappealable ruling from the Higher Regional Court of Celle, the special auditor appointed by the court indicated that he was not available to conduct the special audit on grounds of age. The US funds then applied to the Regional Court of Hanover to appoint another special auditor. Volkswagen AG is of the opinion that replacing the court-appointed special auditor in this manner is impermis- sible and has requested that the application for the appoint- ment of a new special auditor be denied. A decision by the Regional Court of Hanover is expected in the course of 2019. In addition, a second motion seeking appointment of a special auditor for Volkswagen AG to examine matters relating to the diesel issue has been filed with the Regional Court of Hanover. This proceeding has been suspended until the German Federal Constitutional Court renders its decision in the first special auditor litigation. 7. Risk assessment regarding the diesel issue An amount of around €2.4 billion has been included in the provisions for litigation and legal risks as of December 31, 2018 to protect against the currently known legal risks related to the diesel issue based on existing information and current assessments. Insofar as these can be adequately measured at this stage, contingent liabilities relating to the diesel issue Group Management Report Report on Risks and Opportunities 183 were disclosed in the notes in an aggregate amount of €5.4 billion (previous year: €4.3 billion), whereby approxi- mately €3.4 billion (previous year: €3.4 billion) of this amount results from lawsuits filed by investors in Germany. The provisions recognized and the contingent liabilities disclosed as well as the other latent legal risks in the context of diesel issue are in part subject to substantial estimation risks given that the fact finding efforts have not yet been concluded, the complexity of the individual relevant factors and the ongoing coordination with the authorities. Should these legal or estimation risks materialize, this could result in further considerable financial charges. 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 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 SE in 2008. The damages currently being sought based on allegedly assigned rights amounted to approximately €2.26 billion plus interest. In April 2016, the Regional 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 Court already indicated that it cur- rently does not see claims against Volkswagen AG as justified, both for want of sufficiently specific pleadings and for reasons of law. 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 in question (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 pro- ceedings. Volkswagen AG always refused to participate in these conciliation proceedings; since then, these claims have not been pursued further. In June 2013, the Annual General Meeting of MAN SE approved the conclusion of a control and profit and loss transfer agreement between MAN SE and TRATON SE (at that time Truck & Bus GmbH), a subsidiary of Volkswagen AG. In July 2013, an award proceeding was instituted to review the appropriateness of the cash settlement set out in the agree- ment in accordance with §305 of the Aktiengesetz (AktG – German Stock Corporation Act) and the cash compen- sation in accordance with §304 of the AktG. By ruling of June 26, 2018 (supplemented and amended by the rulings of July 30, 2018 and December 17, 2018), the Munich Higher Regional Court rendered a final decision increasing the annual compensation claim under §304 AktG to €5.47 gross per share (less any corporate income tax and any solidarity surcharge at the respective tax rate applicable to these taxes for the financial year in question). The cash settlement in the amount of €90.29 per share, increased in the first instance by the Munich I Regional Court, was affirmed. The decisions by the Munich Higher Regional Court are final and were published in the German Federal Gazette on August 6, 2018 and January 10, 2019. In Brazil, the Brazilian tax authorities commenced tax proceedings against MAN Latin America; at issue in these proceedings are the tax consequences of the acquisition structure chosen for MAN Latin America in 2009. In Decem- ber 2017, a second instance judgment that was negative for MAN Latin America was rendered in administrative court proceedings. MAN Latin America initiated 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 contingent lia- bilities in the notes. 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 Com- mission fined five European truck manufacturers. MAN’s fine was waived in full as the company had informed the Euro- pean Commission about the irregularities as a key witness. In September 2017, the European Commission fined Scania €0.88 billion. Scania has appealed to the European Court of Justice 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. 184 Report on Risks and Opportunities Group Management Report As part of the cartel investigations in the automotive industry already known to the public, the European Com- mission took the procedural step of initiating formal proceedings against affected undertakings on September 18, 2018. The investigations have been ongoing for some time. As the European Commission’s press statement indicates, the European Commission is now restricting the scope of the investigation to the subject of emissions. The formal ini- tiation of proceedings is standard and is a purely procedural step in the process, which was expected by Volkswagen. The Volkswagen Group and the relevant Group brands have been cooperating fully with the European Commission and will continue to cooperate. In addition, the Italian Competition Authority initiated proceedings to investigate potential competition law infringe- ments (alleged exchange of competitively sensitive infor- mation) by a number of captive automotive finance com- panies, including Volkswagen Bank GmbH. The proceedings were later extended to the relevant parent companies, including Volkswagen AG. In October 2018, Volkswagen Bank GmbH and Volkswagen AG received a statement of objections summarizing the findings by the authority and describing the alleged infringement. Volkswagen AG and Volkswagen Bank GmbH transmitted their respective replies to the Italian Competition Authority in November 2018. In January 2019, the Italian Competition Authority imposed a fine of €163 mil- lion against Volkswagen AG and Volkswagen Bank GmbH. Provisions were recognized by Volkswagen Bank GmbH. Volkswagen AG and Volkswagen Bank GmbH intend to appeal this decision. Lawsuits seeking damages are possible in this proceeding as well. In 2017, plaintiffs filed numerous complaints in various US jurisdictions on behalf of putative classes of purchasers of German luxury vehicles against several automobile manu- facturers, including Volkswagen AG and other Group com- panies, that are now pending in two consolidated class actions in the multidistrict litigation in the State of Cali- fornia. The complaints allege that since the 1990s, defendants engaged in a conspiracy to unlawfully increase the prices of German luxury vehicles in violation of US antitrust and consumer protection law. Plaintiffs in Canada filed claims with similar allegations on behalf of putative classes of luxury vehicles against several purchasers of German automobile manufacturers, including Volkswagen Canada Inc., Audi Canada Inc., and other Group companies. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. In addition, a few national and international authorities have initiated antitrust investigations. Volkswagen is cooper- ating closely with the responsible authorities in these investigations. An assessment of the underlying situation is not possible at this early stage. For certain T6 models (M1 class) with Euro 6 diesel engines registered as passenger cars, the inspection regarding the conformity of the current production of new vehicles with the approved type (conformity of production) identified that certain technical data could not be fully confirmed. To ensure this conformity of production for new vehicles, Volkswagen AG developed a software measure, which was approved by the KBA at the end of February 2018 and was applied to newly produced vehicles as well as to new vehicles (approximately 30 thousand in all) that had not been delivered by then. Volkswagen AG also conducted in-use tests (tests to verify the conformity of vehicles in use to their type approval) to determine whether the roughly 200 thousand T6 used vehi- cles already on the market conform to the technical data. The tests carried out on the proposal of Volkswagen AG were taking place in close collaboration with the KBA, which included this process in a decision dated March 1, 2018. Following further tests in August 2018, at the proposal of Volkswagen AG and in accordance with this decision, there is also a software measure for used T6 vehicles to ensure con- formity with the approved vehicle type. Since November 2016, Volkswagen has been responding to information requests from the EPA and CARB related to automatic transmissions in certain vehicles with gasoline engines. Additionally, putative class actions filed against Audi AG and certain affiliates have been transferred to the federal multidistrict litigation proceeding in the State of California lawsuits allege that defendants and consolidated. The concealed the existence of defeat devices in Audi brand vehicles with automatic transmissions. Other actions alleging similar claims are also pending in the Northern District of California and two provincial courts in Canada. In the summer of 2017, plaintiffs filed a complaint, on behalf of a putative class of purchasers of Volkswagen AG’s American Depositary Receipts, against Volkswagen AG and against Group Management Report Report on Risks and Opportunities 185 three former and one current member of Volkswagen AG’s Board of Management, in the US District Court for the Eastern District of New York. On July 13, 2018, plaintiffs filed an amended complaint, which defendants moved to dismiss. Plaintiffs assert securities claims alleging that defendants made material misstatements and omissions concerning Volkswagen AG’s compliance measures, in particular those relating to competition and antitrust law as well as alle- gations in an antitrust litigation against Volkswagen AG in the Northern District of California. Defendants believe that the alleged claims are without merit. Provisions were recognized by Volkswagen Bank GmbH and Volkswagen Leasing GmbH for possible claims in connection with financial services provided to consumers. In addition, various proceedings are pending worldwide, particularly in the USA, in which customers are asserting purported claims either individually or in class actions. These claims are as a rule based on alleged vehicle defects, including defects alleged in vehicle parts supplied to the Volkswagen Group (for instance, in the Takata case). Risks may also result from patent infringement actions, particularly in Germany and the USA. These actions seeking injunctive relief and damages pertain among other things to patents for semiconductor technology used in vehicles. 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 pro- ceedings 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 other interest rate contracts with generally matching 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 fore- casted 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, British pound sterling, Canadian dol- lars, Chinese renminbi, Czech koruna, Hong Kong dollars, Hungarian forints, Indian rupees, Japanese yen, Mexican pesos, Norwegian kroner, Polish zloty, Russian rubles, Singa- pore dollars, South African rand, South Korean won, Swedish kronor, Swiss francs, Taiwan dollars and US dollars. The purchasing of raw materials entails risks relating to the availability of raw materials and price trends. We con- tinuously analyze potential risks arising from changes in commodity and energy prices in the market so that immedi- ate 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, nickel, platinum, palladium and rhodium over a period of up to six years. We have entered into similar trans- actions in order to supplement and improve allocations of CO2 emission certificates. Pages 289 to 310 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. 186 Report on Risks and Opportunities Group Management Report 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 Finan- cial Management” starting on page 118. The financial instru- ments held for hedging purposes give rise to both counter- party risks and balance sheet risks, which we limit using 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 289. 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) and the Euro- pean Bank for Reconstruction and Development (EBRD), or by national development banks such as Kreditanstalt für Wieder- aufbau (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 refinanc- ing 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 public debate on further driving bans for diesel vehicles in major European cities. 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 can be found in the 2018 Annual Report of Volkswagen Financial Services AG and Volkswagen Bank GmbH. 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 Group Management Report Report on Risks and Opportunities 187 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 by individuals and the resulting repu- tational 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. 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, such occurrences include natural disasters, epidemics, violent conflicts and terrorist attacks. O V 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 R T 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 regulations as well as from quality problems. Risks relating to the diesel issue still remain for the Volkswagen 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 companies or the Volkswagen Group. 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 from those forecast. Any changes in significant parameters relating to our key sales additional risks and opportunities or other factors emerge that affect the development of our business. 188 Prospects for 2019 Group Management Report Prospects for 2019 The Volkswagen Group is well prepared overall for the future challenges pertaining to the automobility business and the mixed developments in regional vehicle markets. Our brand diversity, our presence in all major world markets, our broad, selectively expanded product range and pioneering tech- nologies and services put us in a good competitive position worldwide. As part of the transformation of our core busi- ness, we are positioning our Group brands with a stronger focus on their individual characteristics and optimizing the vehicle and drive portfolio. The focus hereby is primarily on our vehicle fleet’s carbon footprint and on the most attractive and fastest-growing market segments. In addition, we are working to make even more focused use of the advantages of our multibrand group by continuously developing new tech- nologies and our toolkits. We expect that deliveries to customers of the Volkswagen Group in 2019 will slightly exceed the prior-year figure amid continuously challenging market conditions. Challenges will arise particularly from the economic situ- ation, the increasing intensity of competition, exchange rate volatility and more stringent WLTP (Worldwide Harmonized Light-Duty Vehicles Test Procedure) requirements. We expect the sales revenues of the Volkswagen Group and its Passenger Cars and Commercial Vehicles 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 Busi- ness Area, we forecast an operating return on sales in the range of 6.5–7.5% in 2019. For the Commercial Vehicles Business Area, we anticipate an operating return on sales of between 6.0% and 7.0%. In the Power Engineering Business Area, we expect a loss around the previous year’s level amid a slight rise in sales revenue. For the Financial Services Division, we are forecasting a moderate increase in sales revenues and an operating profit at the prior-year level. The Volkswagen Group’s Board of Management expects the growth of the global economy to slow somewhat in 2019. We still believe that risks will continue to arise from protectionist tendencies, turbulence in the financial markets and struc- tural deficits in individual countries. In addition, growth prospects will be negatively impacted by continuing geopoli- tical tensions and conflicts. We therefore expect both the advanced economies and the emerging markets to show weaker momentum than in 2018. We anticipate 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 2019. Overall, global demand for new vehicles will probably be at the prior-year level. We anticipate that the volume of new registrations for passenger cars in Western Europe will be in line with the figure seen in the reporting period. After a positive perfor- mance overall in recent years, we estimate that demand in the German passenger car market will fall slightly year-on- year. Sales of passenger cars in 2019 are expected to slightly 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 new registrations in the South American markets for passenger cars and light com- mercial vehicles to grow moderately overall compared with the previous year. The passenger car markets in the Asia- Pacific region are expected at the prior-year level. Trends in the markets for light commercial vehicles in the individual regions will be mixed again in 2019; on the whole, we anticipate 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 mar- kets for buses, new registrations in 2019 are expected to slightly exceed the prior-year level. We believe that automotive financial services will contin- ue to be very important for vehicle sales worldwide in 2019. Wolfsburg, February 22, 2019 The Board of Management S T N E M E T A T S L A I C N A N I F D E T A D I L O S N O C 4 Consolidated Financial Statements Inhalt nicht aktuell CONSOLIDATED FINANCIAL STATEMENTS 193 Income Statement 194 Statement of Comprehensive Income 196 Balance Sheet 198 Statement of Changes in Equity 200 Cash flow Statement 201 NOTES 201 Basis of presentation 202 Effects of new and amended IFRSs 209 New and amended IFRSs not applied 210 Key events 211 Basis of consolidation 221 Consolidation methods 222 Currency translation 223 Accounting policies 234 Segment reporting 259 18. Noncurrent and current other receivables 259 19. Tax assets 260 20. Inventories 260 21. Trade receivables 261 22. Marketable securities 261 23. Cash, cash equivalents and time deposits 261 24. Equity 263 25. Noncurrent and current financial liabilities 263 26. Noncurrent and current other financial liabilities 264 27. Noncurrent and current other liabilities 265 28. Tax liabilities 265 29. Provisions for pensions and other post-employment benefits 274 30. Noncurrent and current other provisions 275 31. Put options and compensation rights granted to noncontrolling interest shareholders 237 Income statement disclosures 275 32. Trade payables 237 1. Sales revenue 238 2. Cost of sales 239 3. Distribution expenses 239 4. Administrative expenses 239 5. Other operating income 240 6. Other operating expenses 240 7. Share of the result of equity-accounted investments 241 8. Interest result 241 9. Other financial result 242 10. Income tax income/expense 245 11. Earnings per share 276 Disclosures in accordance with IFRS 7 – Financial Instruments (balance sheet) 287 Other disclosures 287 33. Cash flow statement 289 34. Financial risk management and financial instruments 308 35. Capital management 310 36. Contingent liabilities 311 37. Litigation 320 38. Other financial obligations 321 39. Total audit fees of the Group auditor 321 40. Personnel expenses 246 Disclosures in accordance with IAS 23 – Borrowing Costs 322 41. Average number of employees during the year 246 Disclosures in accordance with IFRS 7 – Financial 322 42. Events after the balance sheet date Instruments (income statement) 322 43. Remuneration based on performance shares and 248 Balance Sheet disclosures 248 12. Intangible assets 251 13. Property, plant and equipment 253 14. Lease assets and investment property 255 15. Equity-accounted investments and other equity investments phantom shares (share-based payment) 323 44. Related party disclosures in accordance with IAS 24 327 45. German Corporate Governance Code 327 46. Remuneration of the Board of Management and the Supervisory Board 329 Responsibility Statement 257 16. Noncurrent and current financial services receivables 330 Independent Auditor’s Report 258 17. Noncurrent and current other financial assets Inhalt nicht aktuell Consolidated Financial Statements Income Statement 193 Income Statement of the Volkswagen Group for the period January 1 to December 31, 2018 € 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 income Interest expenses Other financial result 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 € 1 Prior-year figures adjusted (see disclosures on IFRS 9 and IFRS 15). Note 2018 2017¹ 1 2 3 4 5 6 7 8 8 9 10 11 11 11 11 235,849 –189,500 46,350 –20,510 –8,819 11,631 –14,731 13,920 3,369 967 –1,547 –1,066 1,723 15,643 –3,489 –3,533 43 12,153 17 309 229,550 –186,001 43,549 –20,859 –8,126 11,514 –12,259 13,818 3,482 951 –2,317 –2,262 –146 13,673 –2,210 –3,205 995 11,463 10 274 11,827 11,179 23.57 23.57 23.63 23.63 22.28 22.28 22.34 22.34 194 Statement of Comprehensive Income Consolidated Financial Statements Statement of Comprehensive Income Changes in comprehensive income for the period January 1 to December 31, 20171 € 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 Fair value valuation of other participations and securities (equity instruments) that will not be reclassified to profit or loss, 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 Gains/losses on currency translation recognized in other comprehensive income 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 Hedging Fair value changes recognized in other comprehensive income (OCI I) Transferred to profit or loss (OCI I) Cash flow hedges (OCI I), before tax Deferred taxes relating to cash flow hedges (OCI I) Cash flow hedges (OCI I), net of tax Fair value changes recognized in other comprehensive income (OCI II) Transferred to profit or loss (OCI II) Cash flow hedges (OCI II), before tax Deferred taxes relating to cash flow hedges (OCI II) Cash flow hedges (OCI II), net of tax Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income Transferred to profit or loss Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, before tax Deferred taxes relating to fair value valuation of securities and receivables (debt instruments) recognized in other comprehensive income Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax Items that may be reclassified 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 Prior-year figures adjusted (see disclosures on IFRS 9 and IFRS 15). Equity attributable to Volkswagen AG shareholders Total Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to noncontrolling interests 11,463 11,179 274 10 785 –198 588 106 96 789 –2,095 –4 –2,099 –8 –2,107 6,216 –558 5,659 –1,621 4,038 171 – 171 –51 120 –19 –1 –20 7 –13 –346 1,691 4,351 –1,871 2,480 13,943 784 –198 586 106 96 788 –2,094 –4 –2,098 –8 –2,106 6,216 –558 5,658 –1,621 4,038 171 – 171 –51 120 –19 –1 –20 7 –13 –346 1,691 4,350 –1,871 2,479 13,658 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 274 1 0 1 – – 1 –1 – –1 – –1 0 0 0 0 0 – – – – – – – – – – – –1 1 0 1 11 Consolidated Financial Statements Statement of Comprehensive Income 195 Changes in comprehensive income for the period January 1 to December 31, 2018 € 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 Fair value valuation of other participations and securities (equity instruments) that will not be reclassified to profit or loss, 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 Gains/losses on currency translation recognized in other comprehensive income 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 Hedging Fair value changes recognized in other comprehensive income (OCI I) Transferred to profit or loss (OCI I) Cash flow hedges (OCI I), before tax Deferred taxes relating to cash flow hedges (OCI I) Cash flow hedges (OCI I), net of tax Fair value changes recognized in other comprehensive income (OCI II) Transferred to profit or loss (OCI II) Cash flow hedges (OCI II), before tax Deferred taxes relating to cash flow hedges (OCI II) Cash flow hedges (OCI II), net of tax Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income Transferred to profit or loss Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, before tax Deferred taxes relating to fair value valuation of securities and receivables (debt instruments) recognized in other comprehensive income Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax Items that may be reclassified 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 12,153 11,827 309 144 –88 56 19 34 110 –406 61 –345 –8 –353 –568 –1,939 –2,506 715 –1,792 –1,360 377 –983 291 –692 –5 1 –4 1 –3 28 –2,811 –3,612 911 –2,701 9,452 145 –88 57 19 34 110 –406 61 –345 –8 –353 –568 –1,939 –2,506 715 –1,791 –1,360 377 –983 291 –692 –5 1 –4 1 –3 28 –2,812 –3,612 911 –2,701 9,126 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 309 17 –1 0 –1 – – –1 1 0 1 – 1 0 0 0 0 0 – – – – – – – – 0 0 – 0 0 0 0 17 196 Balance Sheet Consolidated Financial Statements Balance Sheet of the Volkswagen Group as of December 31, 2018 € 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, 2018 Dec. 31, 2017 12 13 14 14 15 15 16 17 18 19 19 20 21 16 17 18 19 22 23 64,613 57,630 43,545 496 8,434 1,474 78,692 6,521 2,608 476 10,131 274,620 45,745 17,888 54,216 11,586 6,203 1,879 17,080 28,938 – 183,536 458,156 63,419 55,243 39,254 468 8,205 1,318 73,249 8,455 2,252 407 9,810 262,081 40,415 13,357 53,145 11,998 5,346 1,339 15,939 18,457 115 160,112 422,193 Consolidated Financial Statements Balance Sheet 197 € million Equity and Liabilities Equity Subscribed capital Capital reserve Retained earnings¹ Other reserves¹ 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 1 Prior-year figures adjusted (see disclosures on IFRS 9 and IFRS 15). Note Dec. 31, 2018 Dec. 31, 2017 24 25 26 27 28 29 28 30 31 25 32 28 26 27 28 30 1,283 14,551 91,105 –2,417 12,596 117,117 225 117,342 101,126 3,219 6,448 5,030 33,097 3,047 20,879 1,283 14,551 81,248 678 11,088 108,849 229 109,077 81,628 2,665 6,199 5,636 32,730 3,030 20,839 172,846 152,726 1,853 89,757 23,607 456 9,416 17,593 1,412 23,874 167,968 458,156 3,795 81,844 23,046 430 8,570 15,961 1,397 25,347 160,389 422,193 198 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, 2018 € million Unadjusted balance at Jan. 1, 2017 Changes in accounting policy to reflect IFRS 9 Balance at Jan. 1, 2017 Earnings after tax Other comprehensive income, net of tax Total comprehensive income Disposal of equity instruments Capital increases¹ Dividends payment Capital transactions involving a change in ownership interest Other changes Balance at Dec. 31, 2017 Unadjusted balance at Jan. 1, 2018 Changes in accounting policy to reflect IFRS 9 and 15 Balance at Jan. 1, 2018 Earnings after tax Other comprehensive income, net of tax Total comprehensive income Disposal of equity instruments Capital increases/Capital decreases² Dividends payment Capital transactions involving a change in ownership interest Other changes Balance at Dec. 31, 2018 O T H E R R E S E R V E S Subscribed capital Capital reserve Retained earnings Currency translation reserve 1,283 – 1,283 14,551 – 14,551 – – – – – – – – – – – – – – – – 70,446 57 70,503 11,179 586 11,765 – – –1,015 – –4 –1,117 – –1,117 – –2,106 –2,106 – – – – – 1,283 14,551 81,248 –3,223 1,283 – 1,283 14,551 – 14,551 – – – – – – – – – – – – – – – – 81,367 –282 81,085 11,827 57 11,884 113 – –1,967 –10 0 –3,223 – –3,223 – –353 –353 – – – – – 1,283 14,551 91,105 –3,576 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. 2 Volkswagen AG recorded an inflow of cash funds amounting to €2,750 million, less transaction costs of €19 million, from the hybrid capital issued in June 2018. Additionally, there were noncash effects from the deferral of taxes amounting to €6 million. The hybrid capital is required to be classified as equity instruments granted. The calling of the first tranche of the hybrid capital issued in September 2013 resulted in an outflow of cash funds of €1,250 million in September 2018. In addition, other effects of €14 million had to be recognized in equity. Explanatory notes on equity are presented in the note relating to equity. Consolidated Financial Statements Statement of Changes in Equity 199 H E D G I N G Cash flow hedges (OCI I) Deferred costs of hedging (OCI II) Equity and debt instruments Equity- accounted investments Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to Volkswagen AG shareholders and hybrid capital investors Noncontrolling interests Total equity –457 – –457 – 4,038 4,038 – – – – – 3,581 3,525 56 3,581 – –1,791 –1,791 – – – – – – –57 –57 – 120 120 – – – – – 63 – 63 63 – –692 –692 – – – – – –2 – –2 – 93 93 – – – – – 91 91 –225 –133 – 16 16 –113 – – – – 417 – 417 – –251 –251 – – – – – 166 166 – 166 – 62 62 – – – – – 7,567 – 7,567 274 – 274 – 3,481 –311 – 78 92,689 – 92,689 11,453 2,479 13,932 – 3,481 –1,326 – 73 11,088 108,849 11,088 – 11,088 309 – 309 – 1,501 –403 – 101 108,849 –388 108,461 12,136 –2,701 9,435 – 1,501 –2,370 –10 101 1,790 –629 –230 228 12,596 117,117 221 – 221 10 1 11 – – –5 – 1 229 229 1 229 17 0 17 – – –4 –18 2 225 92,910 – 92,910 11,463 2,480 13,943 – 3,481 –1,332 – 75 109,077 109,077 –387 108,690 12,153 –2,701 9,452 – 1,501 –2,375 –28 102 117,342 200 Cash flow statement Consolidated Financial Statements Cash flow statement of the Volkswagen Group for the period January 1 to December 31, 2018 € million 2018 2017¹ 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 property² Amortization of and impairment losses on capitalized development costs² Impairment losses on equity investments² Depreciation of and impairment losses on lease assets² 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/capital redemptions 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 Prior-year figures adjusted (see disclosures on IFRS 9). 2 Net of impairment reversals. 18,038 15,643 –3,804 11,034 3,668 170 7,689 98 244 347 –5,372 –6,400 3,645 –762 –11,647 –7,282 7,272 –13,729 –5,234 –470 –420 –26 210 282 –1,378 –826 –21,590 1,491 –2,375 –28 35,308 –15,290 5,488 –29 24,566 –173 10,075 28,113 18,833 13,673 –3,664 10,562 3,734 136 7,734 –25 274 –240 –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 28,113 28,036 56,148 –190,883 –134,735 18,038 26,291 44,329 –163,472 –119,143 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 201 Notes to the Consolidated Financial Statements of the Volkswagen Group as of December 31, 2018 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 2018 in compliance with the International Finan- cial Reporting Standards (IFRSs), as adopted by the European Union. We have complied with all the IFRSs adopt- ed 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 February 22, 2019. On that date, the period ended in which adjusting events after the reporting period are recognized. 202 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 begin- ning in fiscal year 2018. Amendments to IAS 40 (Investment Property) have been applicable since January 1, 2018; they clarify when a property is transferred to or from investment property and thus the scope of IAS 40. In addition, amendments to IFRS 1 and IAS 28 are applicable, which the International Accounting Standards Board issued as part of the improvements to International Financial Reporting Standards (Annual Improvement Project 2016). In IFRS 1 (First-time Adoption of IFRSs), short-term exemptions for first-time adopters of the IFRSs have been deleted. In IAS 28 (Investments in Associates and Joint Ventures), guidance on investment entities has been clarified. In addition, IFRS 2 (Share-based Payment) was amended. These amendments relate to the clarification of how transactions with share-based payment are classified and measured. Moreover, amendments to IFRS 4 (Insurance Contracts) have come into effect, which reduce the impact of the different initial application dates of IFRS 9 and IFRS 17. IFRIC 22 (Foreign Currency Transactions and Advance Consideration) also applies; this interpretation clarifies the exchange rates to be used in foreign currency transactions with advance consideration. The amendments referred to above do not materially affect the Volkswagen Group’s net assets, financial position and results of operations. 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 characteris- tics 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 classification and measurement of financial liabilities under IFRS 9 are largely unchanged compared with the accounting re- quirements of IAS 39. The basis for measuring impairment losses and recognizing loss allowances switched from an incurred credit loss model to an expected credit loss model. The change in measurement method leads to an increase in the loss allowance. 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 measurement. Furthermore, IFRS 9 has an 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 options, the prior-year figures were adjusted. This resulted in an effect of €– 0.2 billion on earnings after tax in fiscal year 2017. This also results in far more extensive disclosures in the notes. Consolidated Financial Statements Notes to the Consolidated Financial Statements 203 The tables below show the main effects of the new accounting rules under IFRS 9 on the classification and measurement of financial assets, the impairment of financial assets and hedge accounting. For the class of derivatives in hedge accounting, IFRS 9 did not result in any reclassifications from or to other classes. A D J U ST M E N T S T O B A L A N C E S H E E T A M O U N T S A S O F J A N U A R Y 1 , 2 0 1 8 A S A R E S U LT O F I F R S 9 € million Assets Noncurrent assets Financial services receivables Investments, equity-accounted investments and other equity investments, other receivables and financial assets Current assets Financial services receivables Other receivables and financial assets Marketable securities Cash, cash equivalents and time deposits Equity and liabilities Equity Total Equity Noncurrent liabilities Other liabilities Current liabilities Other liabilities D E C . 3 1 , 2 0 1 7 Before adjustments Adjustments J A N . 1 , 2 0 1 8 After adjustments 73,249 30,916 53,145 32,040 15,939 18,457 –173 52 –122 –206 2 –2 73,076 30,967 53,023 31,834 15,941 18,456 109,077 –391 108,687 38,368 51,705 –67 7 38,302 51,712 In addition to the changes described above, the new rules on the recognition of loss allowances had an impact on the measurement of lease assets. This resulted in an adjustment of €43 million (of which €35 million recognized in lease assets and €7 million in inventories). This transition effect, net of deferred taxes, was recog- nized directly in equity. 204 Notes to the Consolidated Financial Statements Consolidated Financial Statements R E C O N C I L I AT I O N O F T H E C L A S S E S O F F I N A N C I A L A S S E T S A N D F I N A N C I A L 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 F R O M I A S 3 9 T O I F R S 9 A S O F J A N U A R Y 1 , 2 0 1 8 T R A N S F E R S MEASURED AT FAIR VALUE IAS 39 FROM MEASURED AT AMORTIZED COST TO MEASURED AT AMORTIZED COST MEASURED AT FAIR VALUE IFRS 9 Carrying amount Dec. 31, 2017 Fair value Dec. 31, 2017 Fair value Dec. 31, 2017 Carrying amount Jan. 1, 2018 – 243 – 776 – – 936 15,939 – – 774 – – – 766 – – 533 – 44 0 5 – – – – – – – – – – – – – – – – 243 533 776 44 0 941 79 15,861 – – – – – – – – – 774 – – – 766 € million 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 Consolidated Financial Statements Notes to the Consolidated Financial Statements 205 R E C O N C I L I AT I O N O F T H E C L A S S E S O F F I N A N C I A L A S S E T S A N D F I N A N C I A L L I A B I L I T I E S M E A S U R E D AT A M O R T I Z E D C O S T F R O M I A S 3 9 T O I F R S 9 A S O F J A N U A R Y 1 , 2 0 1 8 T R A N S F E R S MEASURED AT AMORTIZED COST IAS 39 Carrying amount Dec. 31, 2017 Fair value Dec. 31, 2017 Fair value Dec. 31, 2017 FROM MEASURED AT FAIR VALUE Carrying amount adjust- ment Jan. 1, 2018 Provision for credit risks ad- justment Jan. 1, 2018 TO MEASURED AT FAIR VALUE MEASURED AT AMORTIZED COST IFRS 9 Carrying amount Jan. 1, 2018 Carrying amount Dec. 31, 2017 Fair value Dec. 31, 2017 Carrying amount Jan. 1, 2018 Fair value Jan. 1, 2018 € million Noncurrent assets Equity-accounted investments Other equity investments Financial services receivables – – – – 43,096 44,093 Other financial assets 4,364 4,391 Current assets Trade receivables Financial services receivables 13,357 13,357 37,142 37,142 Other financial assets 9,153 9,153 Marketable securities – – Cash, cash equivalents and time deposits 18,457 18,457 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 81,200 82,108 1,630 1,633 3,795 81,793 23,046 3,811 81,793 23,046 7,358 7,358 – – – – – – – 79 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 0 – – – – – – – – – – – – – – 78 – – – – – – – – – 533 – – – – – – – 533 42,563 43,560 – 4,364 4,391 44 44 13,313 13,313 0 5 – – – – – – – – 0 5 – – – – – – – – 37,142 37,142 9,148 9,148 78 78 18,457 18,457 81,200 82,108 1,630 1,633 3,795 81,793 23,046 3,811 81,793 23,046 7,358 7,358 The categories of financial instruments have been added as part of the implementation of IFRS 9 (see the sec- tion on “Accounting policies”). The principal movement in this context was the reclassification of lease receiv- ables and liabilities in the “measured at amortized cost” category to “not allocated to any measurement category”. Prior-year values under financial services receivables and financial liabilities have been restated. The carrying amount of lease receivables was €49,166 million (previous year €46,156 million) and their fair value (fair value hierarchy level 3) was €49,791 million (previous year €46,959 million). The carrying amount of lease liabilities was €449 million (previous year €479 million) and their fair value (fair value hierarchy level 2) was €466 million (previous year €510 million). 206 Notes to the Consolidated Financial Statements Consolidated Financial Statements R E C O N C I L I AT I O N O F T H E P R O V I S I O N F O R C R E D I T R I S K S I N R E S P E C T O F F I N A N C I A L A S S E T S F R O M I A S 3 9 T O I F R S 9 A S O F J A N U A R Y 1 , 2 0 1 8 € million To financial assets measured at fair value through profit or loss IFRS 9 Dec. 31, 2017 Adjustments Jan. 1, 2018 To financial assets measured at fair value through other comprehensive income IFRS 9 (equity instruments) Dec. 31, 2017 Adjustments Jan. 1, 2018 To financial assets measured at fair value through other comprehensive income IFRS 9 (debt instruments) Dec. 31, 2017 Adjustments Jan. 1, 2018 To financial assets measured at amortized cost IFRS 9 Dec. 31, 2017 Adjustments Jan. 1, 2018 To lease receivables Dec. 31, 2017 Adjustments Jan. 1, 2018 To assets IFRS 15 Dec. 31, 2017 Adjustments Jan. 1, 2018 To credit commitments Dec. 31, 2017 Adjustments Jan. 1, 2018 To financial guarantees Dec. 31, 2017 Adjustments Jan. 1, 2018 Total Jan. 1, 2018 From financial assets measured at fair value through other comprehensive income IAS 39 From financial assets measured at amortized cost IAS 39 No measurement category under IAS 39 Total 63 –63 – 333 –333 – – 2 2 – – – – – – – – – – – – – – – 2 – – – – – – – – – 3,046 318 3,364 – – – – – – – – – – – – – – – – – – – – – – – – 982 238 1,221 25 3 29 – 11 11 – 5 5 63 –63 – 333 –333 – – 2 2 3,046 318 3,364 982 238 1,221 25 3 29 – 11 11 – 5 5 3,364 1,266 4,631 Consolidated Financial Statements Notes to the Consolidated Financial Statements 207 R E C O N C I L I AT I O N O F T H E C A R R Y 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 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 L O S S F R O M I A S 3 9 T O I F R S 9 € million Carrying amount IAS 39 Dec. 31, 2017 Reclassifications Adjustments IFRS 9 Carrying amount IFRS 9 Jan. 1, 2018 Change in retained earnings Jan. 1, 2018 Financial assets measured at fair value through profit or loss IAS 39 1,712 Additions Available for sale financial assets IAS 39 Financial assets measured at amortized cost IAS 39 Deductions Financial assets measured at amortized cost IFRS 9 Financial assets measured at fair value through other comprehensive income IFRS 9 Financial assets measured at fair value through profit or loss IFRS 9 13,124 –230 12,894 –230 580 – – –9 – – 571 –9 – – 15,177 – – R E C O N C I L I AT I O N O F T H E C A R R Y 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 M E A S U R E D AT F A I R VA L U E T H R O U G H O T H E R C O M P R E H E N S I V E I N C O M E F R O M I A S 3 9 TO I F R S 9 € million Carrying amount IAS 39 Dec. 31, 2017 Reclassifications Adjustments IFRS 9 Carrying amount IFRS 9 Jan. 1, 2018 Change in retained earnings Jan. 1, 2018 Available for sale financial assets IAS 39 16,182 Additions Financial assets measured at amortized cost IAS 39 Deductions Financial assets measured at amortized cost IFRS 9 Financial assets measured at fair value through profit or loss IFRS 9 Financial assets measured at fair value through other comprehensive income IFRS 9 5 79 13,124 – – – 5 79 13,124 2,984 – – – 208 Notes to the Consolidated Financial Statements Consolidated Financial Statements R E C O N C I L I AT I O N O F T H E C A R R Y 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 M E A S U R E D AT A M O R T I Z E D C O ST F R O M I A S 3 9 T O I F R S 9 € million Carrying amount IAS 39 Dec. 31, 2017 Reclassifications Adjustments IFRS 9 Carrying amount IFRS 9 Jan. 1, 2018 Change in retained earnings Jan. 1, 2018 Financial assets measured at amortized cost IAS 39 125,550 Additions Available for sale financial assets IAS 39 Deductions Financial assets measured at fair value through other comprehensive income IFRS 9 Financial assets measured at fair value through profit or loss IFRS 9 Financial assets measured at amortized cost IFRS 9 79 5 580 0 – – 78 5 580 125,044 0 – – 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. The Volkswagen Group applies the modified retrospective transition method. This did not result in material transition effects for the Volkswagen Group as of January 1, 2018, because the existing approach used by the Volkswagen Group is already largely in line with the new guidance. In the MAN subgroup, sales revenue for certain types of contracts are recognized at a later point in time than under the previous accounting treatment. Other provisions and other liabilities were adjusted accordingly. The recognition of prepayments due but not yet transferred by the customer in the form of cash increased total assets by €0.2 billion in the balance sheet as of January 1, 2018 compared with the previous year. Starting in fiscal year 2018, certain items previously recognized in distribution expenses (in particular fi- nancing cost subsidies granted to third parties) are allocated to sales allowances. In addition, from 2018 onward, the reversal of provisions for sales allowances is no longer presented under other operating income, but under sales revenue. As a result, an amount of €0.6 billion has been moved be- tween other operating income and sales revenue. To make the presentation more consistent and easier to compare, the way other income from the reversal of provisions and accrued liabilities is reported was also adjusted in this context; these items were allocated to those functional areas in which they were originally recognized. As a result, cost of sales declined in the report- ing period because of income from the reversal of provisions and accrued liabilities of €2.5 billion (previous year: €2.1 billion). In addition, distribution expenses were down by €0.5 billion (previous year: €0.7 billion) and administrative expenses by €0.2 billion (previous year: €0.1 billion). There was a corresponding €3.3 billion (previous year: €3.0 billion) decrease in other operating income. In addition, it was established in connection with the introduction of IFRS 15 that certain sales programs in certain countries should be allocated to sales allowances rather than distribution expenses. The prior-period distribution expenses were therefore adjusted by €1.1 billion. There was a corresponding decrease in sales revenue. Consolidated Financial Statements Notes to the Consolidated Financial Statements 209 New and amended IFRSs not applied In its 2018 consolidated financial statements, Volkswagen AG did not apply the following accounting pro- nouncements 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 3 IFRS 9 IFRS 10 and IAS 28 Business Combinations: Definition of a Business Financial Instruments: Prepayment Features with Negative Compensation Consolidated Financial Statements and Investments in Associates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture IFRS 16 Leases IFRS 17 Insurance Contracts Presentation of Financial Statements and Accounting Policies, Changes in Accounting Estimates and Errors: Definition of Material IAS 1 and IAS 8 Employee Benefits: Remeasurement on a Plan Amendment, Curtailment or Settlement IAS 19 Investments in Associates and Joint Ventures: Long-term Interests in Associates and Joint Ventures IAS 28 Annual improvements to International Financial Reporting Standards 20173 IFRIC 23 Uncertainty over Income Tax Treatments Oct. 22, 2018 Jan. 1, 2020 No No material impact Oct. 12, 2017 Jan. 1, 2019 Yes None Sep. 11, 2014 deferred2 Jan. 13, 2016 Jan. 1, 2019 May 18, 2017 Jan. 1, 2021 – Yes No None Described in detail below this table No material impact Oct. 31, 2018 Jan. 1, 2020 No No material impact Feb. 7, 2018 Jan. 1, 2019 No No material impact Oct. 12, 2017 Jan. 1, 2019 Yes None Dec. 12, 2017 Jan. 1, 2019 No No material impact Jun. 7, 2017 Jan. 1, 2019 Yes No material impact 1 Effective date from Volkswagen AG’s perspective. 2 The IASB decided on December 15, 2015 to defer the effective date indefinitely. 3 Minor amendments to a number of IFRSs (IFRS 3, IFRS 11, IAS 12 and IAS 23). 210 Notes to the Consolidated Financial Statements Consolidated Financial Statements I F R S 1 6 – L E A S E S IFRS 16 amends the rules for lease accounting and replaces the previous IAS 17 standard and related interpreta- tions. 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. They will instead be required to recognize a right-of-use asset and a lease liability for all leases in the balance sheet. The lease liability is measured on the basis of the outstanding lease payments, discounted using the incremental borrowing rate, while the right-of- use asset is always measured at the amount of the lease liability plus any initial direct costs. During the lease term, the right-of-use asset must be depreciated and the lease liability adjusted using the effective interest method and taking the lease payments into account. Exceptions will be made for short-term leases and leases of low-value assets. For these cases, the Volkswagen Group will make use of the practical expedient provided for in IFRS 16, and opt not to recognize a right-of-use asset or a lease liability arising from such lease agreements; instead it will continue to recognize the lease payments as expenses in profit or loss. 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 own- ership of the leased asset. As of January 1, 2019, the Volkswagen Group will for the first time account for leases in accordance with IFRS 16, using the modified retrospective transition method. This requires the recognition of the lease liability at the present value of the remaining lease payments, discounted using an incremental borrowing rate at the transi- tion date. To simplify, the right-of-use assets are recognized in the amount of the corresponding lease liability, adjusted for any prepaid or accrued lease payments. As a result of the first-time recognition of right-of-use assets and lease liabilities in almost the same amounts, current estimates indicate that the balance sheet total will increase by around 1%. The rise in financial liabilities will have a negative effect on the Volkswagen Group’s net liquidity. No significant effect on equity is expected. Unlike the previous procedure, under which all operating lease expenses were reported under operating profit, the only items allocated to operating profit under IFRS 16 are depreciation charges on right-of-use assets. Interest expense from adding interest on lease liabilities is reported in the financial result. Based on leases in place as of January 1, 2019, current estimates indicate that there will be an improvement in operating profit by an amount in the low three-digit million range. The change in the way operating lease expenses are presented in the cash flow statement will result in a slight improvement in cash flows from operating activities and a corresponding reduction in cash flows from financing activities. This standard also results 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 following publication of a study by the International Council on Clean Transportation in May 2014, Volkswagen AG’s Powertrain Development department checked the test set-ups on which the study was based for plausibility, confirming the unusually high NOx emissions from certain US vehicles with type EA 189 2.0 l diesel engines. The California Air Resources Board (CARB) – a part of the environmental regulatory authority of California – was informed of this result, and, at the same time, an offer was made to recalibrate the engine control unit software of 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 Consolidated Financial Statements Notes to the Consolidated Financial Statements 211 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 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 funda- mentally 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 publica- tion of the “Notice of Violation” by the EPA on September 18, 2015, which, especially at that time, came unex- pectedly to the Board of Management, then presented the situation in an entirely different light. Additional special items in connection with the diesel issue amounting to €3.2 billion (previous year: €3.2 billion) were recognized in the reporting period. The main reasons for the expenses are the administrative fine orders totaling €1.8 billion imposed by the Braunschweig public prosecutor and the Munich II public pros- ecutor’s office in connection with the diesel issue, as well as higher legal risks and legal defense costs and an increase in expenses for technical measures. Apart from the above, there are no conclusive findings or assessments of facts available to the Board of Management of Volkswagen AG that would suggest that a different assessment of the associated risks (e.g. investor lawsuits) should have been made. Further details can be found in the “Diesel Issue” section of the management report. In the award proceedings regarding the appropriateness of the cash settlement and the right to compensation for the noncontrolling interest shareholders of MAN SE, the Higher Regional Court in Munich made a final decision at the end of June 2018, ruling that the right to annual compensation per share must be increased. The cash settlement per share, raised in a first instance ruling by the First Regional Court in Munich, was confirmed. In August 2018, the control and profit and loss transfer agreement with MAN SE was terminated by extraor- dinary notice as of January 1, 2019. Cash outflows for compensation payments and the acquisition of shares tendered amounted to €2.1 billion in the period to December 31, 2018. There was a corresponding decline in the amount of “put options and compensation rights granted to noncontrolling interest shareholders” reported in the balance sheet. Further information can be found in the “Litigation” section. 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 in- volvement 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. 212 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 finan- cial and operating policy decisions (associates), or that are directly or indirectly jointly controlled (joint ven- tures), 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 agree- ments 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. 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 investments¹ Germany Abroad 2018 2017 152 712 70 251 64 79 1,328 156 717 69 238 59 71 1,310 1 The prior-year figures were adjusted to reflect the number of joint ventures. 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.volks- wagenag.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 Consolidated Financial Statements Notes to the Consolidated Financial Statements 213 > Dr. Ing. h.c. F. Porsche AG, Stuttgart > GETAS Verwaltung GmbH & Co. Objekt Augsburg KG, Pullach i. Isartal > GETAS Verwaltung GmbH & Co. Objekt Heinrich-von-Buz-Straße KG, Pullach i. Isartal > HABAMO Verwaltung GmbH & Co. Objekt Sterkrade KG, Pullach i. Isartal > Haberl Beteiligungs-GmbH, Munich > Karosseriewerk Porsche GmbH & Co. KG, Stuttgart > MAHAG GmbH, Munich > MAN Energy Solutions SE, Augsburg > MOIA GmbH, Berlin > 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 > Porsche Niederlassung Leipzig GmbH, Leipzig > Porsche Niederlassung Stuttgart GmbH, Stuttgart > Porsche Nordamerika Holding GmbH, Ludwigsburg > Porsche Siebte Vermögensverwaltung GmbH, Wolfsburg > Porsche Smart Mobility GmbH, Stuttgart > Porsche Zentrum Hoppegarten GmbH, Stuttgart > Raffay Versicherungsdienst GmbH, Hamburg > SEAT Deutschland Niederlassung GmbH, Frankfurt am Main > SKODA AUTO Deutschland GmbH, Weiterstadt > TRATON SE, Munich (previously TRATON AG, Munich) > TB Digital Services GmbH, Munich > VfL Wolfsburg-Fußball GmbH, Wolfsburg > VGRD GmbH, Wolfsburg > Volkswagen AirService GmbH, Braunschweig > 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 214 Notes to the Consolidated Financial Statements Consolidated Financial Statements > Volkswagen Group Services GmbH, Wolfsburg > Volkswagen Immobilien GmbH, Wolfsburg > Volkswagen Klassik 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 Vertriebsbetreuungsgesellschaft mbH, Chemnitz > Volkswagen Vierte Leasingobjekt GmbH, Braunschweig > Volkswagen Zubehör GmbH, Dreieich > Volkswagen Zweite Leasingobjekt GmbH, Braunschweig C O N S O L I D AT 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. 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 fiscal year’s 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 4 – 1 5 3 6 – 9 26 – 9 35 18 8 14 40 The initial consolidation or deconsolidation 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. Consolidated Financial Statements Notes to the Consolidated Financial Statements 215 I N V E ST M 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, 2018, the quoted market price of the shares in Sinotruk amounted to €908 million (pre- vious year: €648 million). 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, 2018, the quoted market price of the shares in Bertrandt amounted to €201 million (previous year: €299 million). There Holding The Audi Subgroup, the BMW Group and Daimler AG each held 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 was shown in the share of profits or losses of equity-accounted investments in the previous year. Since a significant influence continues to exist, HERE International B.V. is included in the financial statement of There Holding B.V. as an associated company using the equity method. There was no change in the Volkswagen Group’s participating interest in There Holding B.V. as a result of the sale. 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 Automo- tive Holding Netherlands B.V. acquired an interest of 5.9 % each in There Holding B.V. The transactions were completed on February 28, 2018. The Audi Subgroup, the BMW Group and Daimler AG sold the equivalent number of shares. As a result, the interest held by the Volkswagen Group declined to 29.4 % as of this date. There was no material effect on financial position or financial performance. A capital reduction was carried out at There Holding B.V. in February 2018. The share attributable to the Volkswagen Group amounted to €96 million. In addition, in June 2018 and November 2018, There Holding B.V. implemented capital increases in which the Volkswagen Group participated. As a result, the shares accounted for using the equity method increased by €62 million and the participating interest was 29.6 % as of December 31, 2018. Navistar Within the framework of a capital increase, TRATON SE, a wholly owned subsidiary of Volkswagen AG, acquired 16.6 % of the shares in Navistar, paying USD 15.76 per share in 2017. 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 state- ments. As of December 31, 2018, an interest of 16.8 % was held in Navistar, and the quoted market price of the shares in Navistar amounted to €377 million (previous year: €595 million). 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 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 2018 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 received4 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 Sinotruk1 Bertrandt2 There Holding Navistar3 25 2,239 6,461 54 5,250 3,395 8,047 558 – 0 558 50 25 2,086 5,449 55 4,420 3,060 5,961 260 – 13 272 6 29 586 469 306 167 583 1,020 25 – 0 25 7 29 600 478 338 157 583 992 21 – 0 21 7 30 1,763 2 – 1 17 1,846 4,528 6,478 3,356 1,764 –3,461 – –351 – –7 –358 – 33 1,906 289 – 0 8,625 310 – 245 555 – 17 1,648 3,470 5,893 3,041 2,195 –3,816 71 –151 513 2 364 – 5,507 95 1 341 437 – 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 Balance sheet amounts refer to the October 31, 2018 reporting date. The income statement amounts for fiscal year 2018 refer to the period from November 1, 2017 to October 31, 2018, while those for fiscal year 2017 refer to the period from March 1, 2017 to October 31, 2017. 4 Proportionate dividends are shown net of withholding tax. Consolidated Financial Statements Notes to the Consolidated Financial Statements 217 R E C O 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 R Y I N G A M O U N T O F T H E E Q U I T Y - A C C O U N T E D I N V E ST M E N T S € million 2018 Net assets at January 1² Profit or loss Other comprehensive income Changes in reserves Foreign exchange differences Dividends³ Net assets at December 31 Proportionate equity Consolidation/Goodwill/Others Carrying amount of equity-accounted investments 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 Sinotruk Bertrandt There Holding Navistar1 3,060 558 0 –3 13 –232 3,395 849 –402 447 2,956 260 13 1 –135 –34 3,060 765 –387 378 583 25 0 – – –25 583 168 163 331 587 21 0 – – –25 583 168 163 331 2,209 –351 –7 –87 – – 1,764 522 – 522 1,832 362 2 – – – 2,195 646 – 646 –3,816 310 245 13 –191 –22 –3,461 –582 1,012 430 –4,270 96 341 11 7 – –3,816 –644 946 301 1 Reconciliation presented for Navistar in 2017 as of March 1, 2017, the date of the first time inclusion of Navistar. 2 Value in the opening balance of There Holding adjusted due to IFRS 15. 3 Dividends are shown before withholding tax. 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 U A 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 V O L K SWA G E N G R O U P ’ S P R O P O R T I O N AT E I N T E R E ST € million 2018 2017 Earnings after tax from continuing operations Earnings after tax from discontinued operations Other comprehensive income Total comprehensive income Carrying amount of equity-accounted investments –20 – 1 –20 332 –29 – 0 –29 90 There were no unrecognized losses relating to investments in associates. Furthermore, there were also no con- tingent liabilities or financial guarantees relating to associates. 218 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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, and SAIC-Volkswagen Sales Company Ltd., Shanghai, China, were material at the 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. Consolidated Financial Statements Notes to the Consolidated Financial Statements 219 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 2018 Equity interest (%) Noncurrent assets Current assets of which: cash, cash equivalents and time deposits Noncurrent liabilities of which: financial liabilities2 Current liabilities of which: financial liabilities2 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 received3 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 FAW-Volkswagen Automotive Company SAIC-Volkswagen Automotive Company1 SAIC-Volkswagen Sales Company 40 10,651 10,903 3,764 1,260 – 12,936 – 7,358 41,607 1,335 123 – 4,851 1,186 3,665 – 47 3,712 1,209 40 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 50 8,580 6,689 4,412 1,205 – 8,526 4 5,538 28,863 1,479 64 1 4,588 1,040 3,548 – 1 3,549 1,626 50 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 30 671 3,680 206 110 – 3,692 – 549 33,212 8 5 – 665 167 498 – – 498 148 30 626 4,383 214 61 – 4,402 – 546 33,398 6 – – 669 168 501 – – 501 137 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 Excluding trade liabilities. 3 Proportionate dividends are shown net of withholding tax. 220 Notes to the Consolidated Financial Statements Consolidated Financial Statements R E C O 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 R Y I N G A M O U N T O F T H E E Q U I T Y - A C C O U N T E D I N V E ST M E N T S FAW-Volkswagen Automotive Company SAIC-Volkswagen Automotive Company SAIC-Volkswagen Sales Company € million 2018 Net assets at January 1¹ Profit or loss Other comprehensive income Changes in share capital Changes in reserves Foreign exchange differences Dividends² Net assets at December 31 Proportionate equity Consolidation/Goodwill/Others Carrying amount of equity-accounted investments 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 1 Values in the opening balance adjusted due to IFRS 9. 2 Dividends are shown before withholding tax. 6,851 3,665 47 – – 68 –3,273 7,358 2,943 –593 2,350 7,466 3,538 –49 – – –350 –3,755 6,851 2,740 –456 2,284 5,405 3,548 1 – – –23 –3,393 5,538 2,769 –851 1,918 5,579 3,479 –5 – – –236 –3,403 5,414 2,707 –576 2,131 546 498 – – – –1 –494 549 165 – 165 520 501 – – – –18 –458 546 164 – 164 2017 290 10 0 299 1,881 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 U A 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 V O L K SWA G E N G R O U P ’ S P R O P O R T 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 2018 319 – –2 317 1,939 There were no unrecognized losses relating to interests in joint ventures. Contingent liabilities to joint ventures amounted to €183 million (previous year: €186 million) and financial guarantees to joint ventures amounted to €146 million (previous year: €82 million). Cash funds of €268 million (previous year: €260 million) are de- posited as collateral for asset-backed securities transactions and are therefore not available to the Volkswagen Group. Consolidated Financial Statements Notes to the Consolidated Financial Statements 221 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. The assets were no longer depreciated or amortized. The amount reported was mainly attributable to the sale of property, plant and equipment (€24 million) and the sale of shares in There Holding B.V. (€86 million). The sales did not have any material impact on the Volkswagen Group’s results of operations or net liquidity. 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 val- ue 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 subsid- iaries. Any difference that arises from the acquisition of additional shares of an already consolidated subsidiary is taken directly to equity. Unless otherwise stated, the proportionate equity directly attributable to noncontrol- ling interests is determined at the acquisition date as the share of the fair value of the assets (excluding good- will) 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 adjust- ment 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 have the same maturity. 222 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 equi- ty, 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 2018 2017 2018 2017 43.15687 22.99203 32.89363 18.72636 1.62240 4.44485 1.55930 25.72450 79.90650 1.53285 3.97065 1.50260 25.57900 76.56700 1.58021 4.30729 1.53032 25.64308 80.71466 1.47300 3.60471 1.46444 26.32920 73.50146 125.91000 134.87000 130.40158 126.66763 22.52035 23.61420 22.71496 21.33175 7.87725 4.29780 7.80085 4.17490 7.80766 4.26098 7.62688 4.25727 1,276.90000 1,278.22000 1,299.41384 1,275.94974 79.83765 16.46690 10.25070 0.89690 1.14525 69.33520 14.75715 9.83140 0.88730 1.19875 74.08214 15.62243 10.25830 0.88476 1.18156 65.88875 15.04543 9.63700 0.87626 1.12933 €1 = ARS AUD BRL CAD CZK INR JPY MXN CNY PLN KRW RUB ZAR SEK GBP USD Consolidated Financial Statements Notes to the Consolidated Financial Statements 223 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 measured at fair value 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 normally 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 capital- ized 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 de- velopment 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 functional areas in the income state- ment. Brand names from business combinations usually have an indefinite useful life and are therefore not amor- tized. 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 Engi- neering 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. 224 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 2018 5.5% 6.8% 7.8% 2017 5.8% 6.8% 8.0% 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 composi- tion of the peer groups used to determine beta factors is continuously reviewed and adjusted if necessary. P R O P E R T Y, P L A N T A N D E Q U I P M 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 re- coverable 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. Consolidated Financial Statements Notes to the Consolidated Financial Statements 225 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 re- wards 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 resid- ual 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 pub- lished 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 ST M E N T P R O P E R T 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 cal- culations. 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 O W I N G C O ST S Borrowing costs of qualifying assets 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 C C O U N T E D I N V E ST M 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. 226 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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. 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. IFRS 9 classifies financial assets into the following categories: > financial assets at fair value through profit or loss; > financial assets at fair value through other comprehensive income (debt instruments); > financial assets at fair value through other comprehensive income (equity instruments); and > financial assets at amortized cost. Financial liabilities are classified into the following categories: > financial liabilities at fair value through profit or loss; and > financial liabilities measured at amortized cost. In the Volkswagen Group, the categories presented above are allocated to the “at amortized cost” and “at fair value” classes. 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 AT A M O R T I Z E D C O ST Financial assets measured at amortized cost are held under a business model that is aimed at collecting con- tractual cash flows (“hold” business model). The cash flows of these assets relate solely to payments of principal and interest on the principal amount outstanding. 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; > taking account of any loss allowances, write-downs for impairment and uncollectibility relating to financial assets; and > 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. Financial liabilities measured at amortized cost using the effective interest method relate to liabilities to banks, bonds, commercial paper and notes, loans and other liabilities. Gains or losses resulting from changes in amor- tized cost, including the effects of changes in exchange rates, are recognized through profit or loss. For reasons of materiality, discounting or unwinding of discounting is not applied to current liabilities (due within one year). Financial assets and liabilities measured at amortized cost are > receivables from financing business; > trade receivables and payables; > other receivables and financial assets and liabilities; > financial liabilities; and > cash, cash equivalents and time deposits. Consolidated Financial Statements Notes to the Consolidated Financial Statements 227 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 AT F A I R VA L U E Changes in the carrying amount of financial assets measured at fair value are recognized either through OCI or through profit or loss. The fair value through OCI (debt instruments) category comprises exclusively debt instruments. Changes in fair value are always recognized directly in equity, net of deferred taxes. Certain changes in the fair value of these debt instruments (impairment losses, foreign exchange gains and losses, interest calculated using the effective interest method) are recognized immediately in profit or loss. Financial assets measured at fair value through other comprehensive income (debt instruments) are held under a business model aimed at both collecting contractual cash flows and selling financial assets (“hold and sell” business model). Financial assets that are equity instruments are also measured at fair value. Here Volkswagen exercises the option to recognize changes in fair value are always recognized through other comprehensive income, i.e. gains and losses from the measurement of equity investments are never recycled to the income statement and instead reclassified to revenue reserves on disposal (no reclassification). Any financial assets not measured at either amortized cost or through other comprehensive income are allo- cated to the fair value through profit or loss category. Financial assets at fair value through profit or loss are aimed in particular at generating cash flows by selling financial instruments (“sell” business model). At Volkswagen, this category primarily comprises > hedging relationships to which hedge accounting is not applied and > investment fund units. All financial liabilities at fair value through profit or loss relate to derivatives to which hedge accounting is not applied. 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. In the case of current financial receivables and liabilities, amortized cost generally corresponds to the prin- cipal or repayment amount. 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 IFRS 9 and IFRS 7. Likewise, the accounting policies for financial instruments accounted for pursuant to IAS 39, on which the prior-year figures are based, have not been modified. In this context, please refer to the notes provided in the 2017 annual report. 228 Notes to the Consolidated Financial Statements Consolidated Financial Statements D E R I VAT I V E S A N D H E D G E A C C O 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 fair value 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 measurement of hedging instruments and hedged items are recognized in profit or loss. The Volkswagen Group has opted not to retain IAS 39 hedge accounting for all its hedges. This means that, as of the beginning of fiscal year 2018, the only area where IAS 39 accounting is relevant alongside IFRS 9 is the guidance on portfolio hedges of interest rate risk in the Financial Services Divi- sion. In the case of hedges of future cash flows (cash flow hedges), the hedging instruments are also measured at fair value. The designated effective portion of the hedging instrument is accounted for through OCI I and the non-designated portion through OCI II. They are only recognized in the income statement when the hedged item is recognized in profit or loss. The ineffective portion of cash flow hedges is recognized through profit or loss immediately. Derivatives used by the Volkswagen Group for financial management purposes to hedge against interest rate, foreign currency, commodity price, equity price, or fund price risks, but that do not meet the strict hedge accounting criteria of IFRS 9, are classified as financial assets or liabilities at fair value through profit or loss (also referred to below as derivatives to which hedge accounting is not applied). This also applies to options on shares. External hedging instruments of intragroup hedged items that are subsequently eliminated in the con- solidated financial statements are also assigned to this category as a general rule. Assets and liabilities meas- ured at fair value through profit or loss consist of derivatives or components of derivatives that are not includ- ed in hedge accounting. These relate for example to the non-designated currency forwards used to hedge sales revenue, interest rate hedges, commodity futures and currency forwards relating to commodity futures. R E C E I VA B L E S F R O 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 re- wards are transferred to the lessee. I M PA I R M E N T L O 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 Financial assets are exposed to default risk, which is taken into account by recognizing loss allowances or, if losses have already been incurred, by recognizing impairment losses. Default risk on loans and receivables in the financial services segment is accounted for by recognizing specific loss allowances and portfolio-based loss allowances. In particular, a loss allowance is recognized on these financial assets in the amount of the expected loss in accordance with Group-wide standards. The actual specific loss allowances for the losses incurred are then charged to this loss allowance. A potential impairment is assumed not only for 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, but also for receivables that are not past due. Consolidated Financial Statements Notes to the Consolidated Financial Statements 229 Portfolio-based loss 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. Average historical default probabilities are used in combination with forward-looking parameters for the portfolio concerned to calculate the amount of the impairment loss. Credit risks must be considered for all financial assets measured at amortized cost or fair value through profit or loss (debt instruments), as well as for contract assets in accordance with IFRS 15 and lease receivables within the scope of IAS 17. The rules on impairment also apply to risks from irrevocable credit commitments not recognized in the balance sheet and to the measurement of financial guarantees. As a matter of principle, a simplified process, which takes historical default rates and forward-looking information into account, and specific loss allowances are used to account for impairment losses on receivables outside the Financial Services segment. 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 carry- forwards 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 appropria- tion 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 loss 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 author- ity and relate to the same tax period. I N V E N T O 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 measure- ment 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 C O 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 continu- ing 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 discon- tinued 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 state- ment are adjusted accordingly. 230 Notes to the Consolidated Financial Statements Consolidated Financial Statements P E N S I O N P R O V 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 O V I S I O N S F O R I N C O M E TA X E S Tax provisions contain obligations resulting from current income taxes. Deferred taxes are presented in sepa- rate 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 O V I S I O N S In accordance with IAS 37, provisions are recognized where a present obligation exists to third parties as a re- sult of a past event, where a future outflow of resources is probable and where a reliable estimate of that out- flow 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 0.20 % (previous year: 0.08 %) 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. Insurance contracts that form part of the insurance business are recognized in accordance with IFRS 4. Re- insurance 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. The share of the provisions attributable to reinsurers is calculated in accordance with the contractual agreements with the retrocessionaries and reported under other assets. C O 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 remote, 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 finan- cial 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. Consolidated Financial Statements Notes to the Consolidated Financial Statements 231 R E V E N U E A N D E X P E N S E R E C O G N I T I O N Sales revenue, interest and commission income from financial services and other operating income are recog- nized only when the relevant service has been rendered or the goods have been delivered, i.e. when the custom- er has obtained control of the good or service. Where new and used vehicles and original parts are sold, the Company’s performance invariably occurs upon delivery, because that is the point when control is transferred, and the inventory risk and, for deliveries to a dealer, invariably also the pricing decision pass to the customer. Revenue is reported net of sales allowances (discounts, rebates, or customer bonuses). The Volkswagen Group measures sales allowances and other variable consideration on the basis of experience and by taking account of current circumstances. Vehicles are normally sold on payment terms. A trade receivable is recognized for the period between vehicle delivery and receipt of payment. Any financing component included in the transaction is only recognized if the period between the transfer of the goods and the payment of consideration is longer than one year and the amount to be accrued is significant. Sales revenue from financing and finance lease agreements is recognized using the effective interest meth- od. If non-interest-bearing or low-interest vehicle financing arrangements are agreed, sales revenue is reduced by the interest benefits granted. Sales revenue from operate leases is recognized over the term of the contract on a straight line basis. In contracts under which the goods or services are transferred over a period of time, revenue is recognized, depending on the type of goods or services provided, either according to the stage of completion or, to simplify, on a straight-line basis; the latter is only allowed, if revenue recognition on a straight-line basis does not differ materially from recognition according to the stage of completion. As a rule, the stage of completion is deter- mined 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). Contract costs incurred invariably represent the best way to measure the stage of completion for the performance obligation. If the outcome of a performance obligation satisfied over time is not sufficiently certain, but the company expects, as a minimum, to recover its costs, revenue is only recognized in the amount of contract costs incurred (zero profit margin method). If the expected costs exceed the expected revenue, the expected losses are recognized immediately in full as expenses by recognizing impairment losses on the associated contract assets recognized, and additionally by recognizing provisions for any amounts in excess of the impairment losses. Since long-term construction contracts invariably give rise to contingent receivables from customers for the period to completion or payment by the customer, contract assets are recognized for the corresponding amounts. A trade receivable is recognized as soon as the Company has transferred the goods or services in full. If a contract comprises several separately identifiable components (multiple-element arrangements), these components are recognized separately in accordance with the principles outlined above. If services are sold to the customer at the same time as the vehicle, and the customer pays for them in ad- vance, the Group recognizes a corresponding contract liability until the services have been transferred. Exam- ples of services that customers pay for in advance are servicing, maintenance and certain warranty contracts as well as mobile online services. For extended warranties granted to customers for a particular model, a provision is normally recognized in the same way as for statutory warranties. If the warranty is optional for the customer or includes an additional service component, the sales revenue is deferred and recognized over the term of the warranty. Income from the sale of assets for which a Group company has a buyback 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. Sales revenue is always determined on the basis of the price stated in the contract. If variable consideration (e.g. volume-based bonus payments) has been agreed in a contract, the large number of contracts involved means that revenue has to be estimated using the expected value method. In exceptional cases, the most prob- able amount method may also be used. Once the expected sales revenue has been estimated, an additional check is carried out to determine whether there is any uncertainty that necessitates the reversal of the revenue initially recognized so that it can be virtually ruled out that sales revenue subsequently has to be adjusted downward. Provisions for reimbursements arise mainly from dealer bonuses. 232 Notes to the Consolidated Financial Statements Consolidated Financial Statements In multiple element arrangements, the transaction price is allocated to the different performance obligations of the contract on the basis of relative standalone selling prices. In the Automotive Division, non-vehicle-related services are invariably measured at their standalone selling prices for reasons of materiality. 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. Dividend income is recognized on the date when the dividend is legally approved. G O V 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 re- sources 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 infor- mation on impairment tests and the measurement parameters used for those tests can be found in the expla- nations 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 busi- ness 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 experience taking into account current market data as well as rating categories and scoring information. The more detailed balance sheet disclosures in accordance with IFRS 7 (Financial Instruments) contain further details on how to determine loss allowances. 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 experience or exter- nal opinions. The assumptions applied in the measurement of pension provisions are described in the “Provi- sions 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. Similarly to expenses for the recognition of provisions, income from the reversal of provisions is allocated to the respective functions. War- ranty claims from sales transactions are calculated on the basis of losses to date, estimated future losses and the policy on ex gratia arrangements. Assumptions were made in respect of the provisions recognized in con- nection with the diesel issues. These depend on the series, model year and country concerned and relate in Consolidated Financial Statements Notes to the Consolidated Financial Statements 233 particular to the effort, material costs and hourly wage rates involved. In addition, assumptions are made about future resale prices of repurchased vehicles. These assumptions are based on qualified estimates, which are based in turn on external data, and also reflect additional information available internally, such as values de- rived from 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. 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 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 avail- able 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: 3.3 %) in 2018. Our forecasts are based on the assumption that global economic growth will slow down slightly in 2019. As a result, from today's perspec- tive, 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 devel- opment 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. 234 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 produc- tion and sale of passenger cars, and the corresponding genuine parts business. Given the high degree of tech- nological 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 espe- cially while taking into account the comparability of the type of services as well as the regulatory situation. 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 235 R E P O R T I N G S E G M E N T S 2 0 1 7 1 € 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 168,381 18,892 187,273 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 Interest result and other financial result Equity-accounted investments Investments in intangible assets, property, plant and equipment, and investment property 3,390 –1,964 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 41 229,486 30,004 259,489 21,089 1,280 56 64 229,550 –30,004 –29,939 –147 0 – – 229,550 20,941 1,280 56 2,673 17,153 –3,335 13,818 9 3,482 – 3,482 –180 710 –2,366 8,205 –1,262 – –3,628 8,205 15,713 1,915 159 421 18,208 104 18,313 1 Prior-year figures adjusted (see disclosures on IFRS 15). R E P O R T I N G S E G M E N T S 2 0 1 8 € 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 171,028 17,059 188,088 12,143 629 156 29,388 7,269 36,656 2,524 89 6 Segment result (operating result) 12,245 1,971 Share of the result of equity-accounted investments Interest result and other financial result Equity-accounted investments Investments in intangible assets, property, plant and equipment, and investment property 3,094 214 6,731 213 248 971 3,605 3 3,608 378 – 2 –64 3 2 18 31,592 3,190 34,782 6,523 469 98 2,793 58 –70 712 235,613 27,521 263,134 21,567 1,186 262 16,945 3,369 393 8,434 236 235,849 –27,521 –27,285 –56 110 – –3,025 – 235,849 21,511 1,296 262 13,920 – 3,369 –2,039 – –1,646 8,434 15,599 2,491 176 510 18,776 187 18,962 236 Notes to the Consolidated Financial Statements Consolidated Financial Statements R E C O 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 1 Prior-year figures adjusted (see disclosures on IFRS 9 and IFRS 15). B Y R E G I O N 2 0 1 7 2018 20171 263,134 259,489 981 24 –28,290 235,849 948 25 –30,912 229,550 16,945 17,153 –22 –17 –2,987 13,920 1,723 15,643 10 –16 –3,328 13,818 –146 13,673 € million Germany markets¹ North America South America Asia-Pacific Total Europe/Other Sales revenue from external customers2 44,333 98,420 37,686 9,988 39,123 229,550 Intangible assets, property, plant and equipment, lease assets and investment property 1 Excluding Germany. 2 Prior-year figures adjusted (see disclosures on IFRS 15). B Y R E G I O N 2 0 1 8 89,905 35,936 26,855 2,850 2,837 158,384 € million Germany markets¹ North America South America Asia-Pacific Europe/Other Hedges sales revenue Total Sales revenue from external customers Intangible assets, property, plant and equipment, lease assets and investment property 1 Excluding Germany. 43,526 99,563 37,656 10,405 43,166 1,535 235,849 95,217 36,110 29,332 2,795 2,830 – 166,285 Allocation of sales revenue to the regions follows the destination principle. Since 2018, the allocation of interregional intragroup transactions has been unitary presented according to the economic ownership regarding the segment assets. The prior-year figures have been adjusted accordingly. Consolidated Financial Statements Notes to the Consolidated Financial Statements 237 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 2 0 1 7 1 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Vehicles Genuine parts Used vehicles and third-party products Engines, powertrains and parts deliveries Power Engineering Motorcycles Leasing business Interest and similar income Hedges sales revenue Other sales revenue 138,697 12,539 25,535 3,197 12,049 1,780 11,760 – 601 779 245 – 10,605 187,273 733 – – 1,947 4 – 2,005 35,200 1 Prior-year figures adjusted (see disclosures on IFRS 15). 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 2 0 1 8 – – – – 3,283 – – – – – – – – – – – 25,989 7,035 – 709 3,283 33,733 164,232 15,736 –19,407 –108 144,826 15,628 13,829 –474 13,355 12,493 3,283 601 28,714 7,283 – 13,319 259,489 –1,175 –3 – –4,144 –164 – –4,465 –29,939 11,318 3,280 601 24,570 7,119 – 8,853 229,550 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Vehicles Genuine parts Used vehicles and third-party products Engines, powertrains and parts deliveries Power Engineering Motorcycles Leasing business Interest and similar income Hedges sales revenue Other sales revenue 136,331 12,705 11,379 12,976 – 582 826 230 1,362 11,697 188,088 26,166 3,321 1,825 1,192 – – 1,714 6 89 2,343 36,656 – – – – 3,608 – – – – – – – – – – – 26,667 7,302 – 814 3,608 34,782 162,497 16,026 –15,671 –107 146,826 15,919 13,204 –650 12,554 14,168 3,608 582 29,207 7,537 1,451 14,854 263,134 –1,728 –3 – –4,200 –187 83 –4,824 –27,285 12,440 3,605 582 25,006 7,351 1,535 10,031 235,849 238 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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. Of the sales revenue recognized in the period under review, an amount of €6,333 million was included in contract liabilities as of January 1, 2018. €667 million of the sales revenue recognized in the period under review is attributable to performance obli- gations satisfied in a prior period. In addition to existing performance obligations of €3,614 million in the Power Engineering segment, most of which are expected to be satisfied or for which sales revenue is expected to be recognized by December 31, 2019, the vast majority of the Volkswagen Group’s performance obligations that are unsatisfied as of the report- ing date relate to vehicle deliveries. Most of these deliveries had already been made at the time this report was prepared, or will be made in the first quarter of 2019. The calculation of the amounts for the Power Engineering Business Area took account of both contracts with a term of more than one year and service contracts under which the Volkswagen Group realizes sales revenue in exactly the same amount as the customer benefits from the provision of services by the Company. In the case of variable consideration, sales revenue is only recognized to the extent that there is reasonable assurance that this sales revenue will not subsequently have to be re- versed or adjusted downward. 2. Cost of sales Cost of sales includes interest expenses of €2,270 million (previous year: €1,961 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 €1,165 million (previous year: €1,185 million). The impairment losses totaling €631 million (previ- ous year: €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 im- pairment losses on lease assets in the amount of €534 million (previous year: €485 million) are predominantly attributable to the Financial Services segment. They are based on constantly updated internal and external information that is factored into the forecast residual values of the vehicles. Thereof, €24 million (previous year: €37 million) are reported in current lease assets. To make the presentation more consistent and easier to compare, the way income from the reversal of pro- visions and accrued liabilities is reported was adjusted during the implementation of IFRS 15; these items have been allocated to those functional areas in which they were originally recognized. Prior-year figures adjusted (see disclosures on IFRS 15). Government grants related to income amounted to €466 million in the fiscal year (previous year: €424 million) and were generally allocated to the functional areas. Consolidated Financial Statements Notes to the Consolidated Financial Statements 239 3. Distribution expenses Distribution expenses amounting to €20.5 billion (previous year: €20.9 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. To make the presentation more consistent and easier to com- pare, the way income from the reversal of provisions and accrued liabilities is reported was adjusted during the implementation of IFRS 15; these items have been allocated to those functional areas in which they were origi- nally recognized. Prior-year figures have been restated (see disclosures on IFRS 15). 4. Administrative expenses Administrative expenses of €8.8 billion (previous year: €8.1 billion) mainly include nonstaff overheads and personnel costs, as well as depreciation and amortization charges applicable to the administrative function. To make the presentation more consistent and easier to compare, the way income from the reversal of provisions and accrued liabilities is reported was adjusted during the implementation of IFRS 15; these items have been allocated to those functional areas in which they were originally recognized. Prior-year figures have been re- stated (see disclosures on IFRS 15). 5. Other operating income € million 2018 2017 Income from reversal of loss allowances on receivables and other assets Income from reversal of provisions and accruals¹ Income from foreign currency hedging derivatives within hedge accounting Income from foreign exchange gains Income from other hedges 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 Prior-year figures adjusted (see disclosures on IFRS 15). 1,586 1,144 822 2,530 1,138 483 1,139 14 390 2,383 11,631 1,043 1,398 2,259 2,656 – 502 1,386 16 212 2,041 11,514 Foreign exchange gains mainly comprise gains from changes in exchange rates between the dates of recogni- tion 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. Income from other hedges includes primarily foreign exchange gains from the fair value measurement of financial instruments used to hedge exchange rates and commodity prices and that are not designated in a hedging relationship. Foreign exchange losses are included in other operating expenses. In the previous year, these effects were recognized in the financial result. Under IFRS 9, they are included in operating profit. 240 Notes to the Consolidated Financial Statements Consolidated Financial Statements 6. Other operating expenses € million 2018 2017 Loss allowances on trade receivables including construction contracts Loss allowances on other receivables and other assets Losses from foreign currency hedging derivatives within hedge accounting Expenses from other hedges Foreign exchange losses Expenses from cost allocations Expenses for termination agreements Losses on disposal of noncurrent assets Miscellaneous other operating expenses 315 1,833 856 1,592 2,800 650 36 161 6,488 14,731 – 1,650 1,753 – 2,839 609 35 175 5,197 12,259 The implementation of IFRS 15, requires loss allowances on trade receivables, including receivables from long- term construction contracts, to be presented separately. The prior-year amount is included in the loss allowanc- es on other receivables and other assets item. 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. Expenses from other hedges include primarily foreign exchange losses from the fair value measurement of financial instruments used to hedge exchange rates and commodity prices and that are not designated in a hedging relationship. In the previous year, these effects were recognized in the financial result. Under IFRS 9, they are included in operating profit. Miscellaneous other operating expenses consist of litigation expenses of €3.0 billion (previous year: €1.0 billion) in connection with the diesel issue. 7. Share of the result of equity-accounted investments € million 2018 2017 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 3,551 (3,320) (231) 182 (23) (159) 3,369 3,519 (3,327) (191) 36 (2) (34) 3,482 Consolidated Financial Statements Notes to the Consolidated Financial Statements 241 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 expenses included in lease payments Interest result on other liabilities Net interest on the net defined benefit liability Interest result 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 loans 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 instruments 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 accounting Other financial result 1 Prior-year figures adjusted (see disclosures on IFRS 9). 2018 967 950 17 –1,547 –974 –1 –27 77 –623 –580 2018 77 –54 101 –360 –355 1,161 –1,130 –41 –453 –12 –1,066 2017 951 839 113 –2,317 –1,305 –368 –29 –13 –602 –1,366 2017¹ 35 –76 71 –289 –222 734 –1,107 –475 –1,050 117 –2,262 The implementation of IFRS 9 resulted in some hedging gains or losses being allocated to sales revenue and some to other operating income (see disclosures on IFRS 9). 242 Notes to the Consolidated Financial Statements Consolidated Financial Statements 10. Income tax income/expense C O M P O N E N T S O F TA X I N C O 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 1 Prior-year figures adjusted (see disclosures on IFRS 9). 2018 2017¹ 1,131 2,401 3,533 (79) 429 –472 –43 3,489 614 2,590 3,205 (216) 321 –1,315 –995 2,210 The statutory corporation tax rate in Germany for the 2018 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 %). A tax rate of 29.8 % (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 2018 of €732 million (previous year: €422 million). Previously unused tax loss carryforwards amounted to €20,501 million (previous year: €14,931 million). Tax loss carryforwards amounting to €13,217 million (previous year: €9,660 million) can be used indefinitely, while €636 million (previous year: €3,834 million) must be used within the next ten years. There are additional tax loss carryforwards amounting to €6,648 million (previous year: €1,437 million) that can be used within a period of 15 or 20 years. Tax loss carryforwards of €7,995 million (previous year: €7,222 million) were estimated not to be usable overall. Of these, €315 million (previous year: €343 million) will expire within five years, €2,165 million (previous year: €2,152 million) within 6 to 20 years and €126 million (previous year: €93 million) after 20 years. Tax loss carryforwards of €5,390 million (previous year: €4,634 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 €94 million (previous year: €114 million). Deferred tax expense was reduced by €116 million (previous year: €75 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 €95 million (previous year: €130 million). Deferred tax in- come resulting from the reversal of a write-down of deferred tax assets amounts to €231 million (previous year: €40 million). Tax credits granted by various countries amounted to €385 million (previous year: €500 million). No deferred tax assets were recognized for deductible temporary differences of €1,123 million (previous year: €1,028 million) and for tax credits of €123 million (previous year: €228 million) that would expire in the next 20 years, or for tax credits of €3 million (previous year: €0 million) that will not expire. In accordance with IAS 12.39, deferred tax liabilities of €213 million (previous year: €266 million) for tem- porary differences and undistributed profits of Volkswagen AG subsidiaries were not recognized because con- trol exists. Deferred tax expense resulting from changes in tax rates amounted to €79 million at Group level (previous year: income of €1,044 million). Deferred taxes in respect of temporary differences and tax loss carryforwards of €8,235 million (previous year: €8,344 million) were recognized without being offset by deferred tax liabilities in the same amount. The Consolidated Financial Statements Notes to the Consolidated Financial Statements 243 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 fu- ture, following losses in the reporting period or the previous year. €4,532 million (previous year: €3,655 mil- lion) of the deferred taxes recognized in the balance sheet was credited to equity and relates to other compre- hensive income. €2 million (previous year: €2 million) of this figure is attributable to noncontrolling interests. In the fiscal year under review, there were only immaterial changes arising from items that will not be reclassified to profit or loss and were recognized directly in equity. Changes in deferred taxes classified by balance sheet item are presented in the statement of comprehensive income. The first-time application of IFRS 9 in the past fiscal year resulted in adjustments and reclassifications total- ing €33 million, which were accounted for as a deduction from equity. In fiscal year 2018, tax effects of €6 million resulting from equity transaction costs were recognized in equity. The calling of the first tranche of the hybrid capital issued in September 2013 resulted in a reduction of equity in the amount of €5 million in the reporting period. D E F E R R E D TA X E S C L A S S I F I E D B Y 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 Loss allowances on deferred tax assets from temporary differences Temporary differences, net of loss allowances Tax loss carryforwards, net of loss allowances Tax credits, net of loss 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, 2018 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2017 370 4,677 35 2,458 2,113 3,653 6,429 10,173 –151 29,758 3,246 259 33,262 (21,530) 26,038 2,906 10,131 363 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 10,402 6,996 179 838 7,990 5 33 3,581 – 30,024 – – 30,024 (23,147) 26,038 1,044 5,030 10,055 6,017 43 784 8,889 42 24 4,109 – 29,963 – – 29,963 (22,863) 24,816 489 5,636 244 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 2018 of €3,489 million (previous year: €2,210 million) was €1,188 million lower (previous year: €1,878 million lower) than the expected tax expense of €4,677 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 C O N C I L I AT I O N O F E X P E C T E D T O E F F E C T I V E I N C O 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 Effective tax rate (%) 1 Prior-year figures adjusted (see disclosures on IFRS 9). 2018 2017¹ 15,643 13,673 4,677 4,088 –684 –541 –1,152 –1,237 440 255 61 –69 –406 79 502 –214 3,489 22.3 407 476 5 –50 –212 –1,044 383 –65 2,210 16.2 In the preceding 2017 fiscal year, the effects of changes in the tax rate had been impacted by the tax reform in the USA which brought a reduction in the corporate income tax rate from 35% to 21%, among other things. Consolidated Financial Statements Notes to the Consolidated Financial Statements 245 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. The distribution of dividends is 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. Quantity O R D I N A R Y P R E F E R R E D 2018 2017 2018 2017 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 1 Prior-year figures adjusted (see disclosures on IFRS 9). € Basic earnings per ordinary share Diluted earnings per ordinary share Basic earnings per preferred share Diluted earnings per preferred share 1 Prior-year figures adjusted (see disclosures on IFRS 9). 2018 2017¹ 12,153 11,463 17 309 10 274 11,827 11,179 6,955 6,955 4,872 4,872 6,573 6,573 4,606 4,606 2018 2017¹ 23.57 23.57 23.63 23.63 22.28 22.28 22.34 22.34 246 Notes to the Consolidated Financial Statements Consolidated Financial Statements Additional Income Statement Disclosures in accordance with IAS 23 (Borrowing Costs) Capitalized borrowing costs amounted to €62 million (previous year: €83 million) and related mainly to capital- ized development costs. An average cost of debt of 1.5 % (previous year: 1.5 %) was used as a basis for capitali- zation in the Volkswagen Group. Additional Income Statement Disclosures in accordance with IFRS 7 (Financial Instruments) The tables below show net gains and losses on financial assets and financial liabilities by measurement category, followed by a detailed explanation of key aspects: N E T G A I N S O R L O 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 R Y I N 2 0 1 7 € million Financial instruments at fair value through profit or loss Loans and receivables Available-for-sale financial assets Financial liabilities measured at amortized cost 1 Prior-year figures adjusted (see disclosures on IFRS 9). N E T G A I N S O R L O 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 F R S 9 M E A S U R E M E N T C AT E G O R Y I N 2 0 1 8 € million Financial instruments at fair value through profit or loss Financial assets measured at amortized cost Financial assets at fair value through other comprehensive income (debt instruments) Financial liabilities measured at amortized cost 2017¹ –1,080 2,105 –206 1,689 2,508 2018 –763 6,241 17 –4,963 531 Net gains and losses in the category at "financial instruments at fair value through profit or loss" are mainly 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 financial assets measured at fair value through other comprehensive income (debt instruments) relate to interest income from fixed-income securities. Net gains and losses from financial assets and liabilities measured at amortized cost mainly comprise inter- est income and expenses calculated according to the effective interest method pursuant to IFRS 9, currency translation effects, and the recognition of loss allowances. Interest also includes interest income and expenses from the lending business of the Financial Services Division. Consolidated Financial Statements Notes to the Consolidated Financial Statements 247 The table below presents total interest income and expenses from financial assets and liabilities measured at amortized cost, separately from financial assets measured at fair value through other comprehensive income. TOTA L I N T E R E ST I N C O 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 L O S S I N 2 0 1 7 € million Interest income Interest expenses TOTA L I N T E R E ST I N C O 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 L O S S I N 2 0 1 8 € million Financial Assets and liabilities measured at amortized cost Interest income Interest expenses Financial Assets (debt instruments) measured at fair value through other comprehensive income Interest income Interest expenses I M PA I R M E N T L O 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 I N 2 0 1 7 € million Measured at fair value Measured at amortized cost 2017 4,794 3,509 1,285 2018 5,022 3,183 17 1 2017 3 1,628 1,631 In fiscal year 2018, €2 million (previous year: €3 million) was recognized as an expense and €51 million (previ- ous year: €58 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. 248 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 U A R Y 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 Consolidated Financial Statements Notes to the Consolidated Financial Statements 249 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 U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 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, 2018 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals 16,995 –43 23,443 –131 – – – – 6 – – – Balance at Dec. 31, 2018 16,952 23,318 Amortization and impairment Balance at Jan. 1, 2018 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, 2018 Carrying amount at Dec. 31, 2018 83 –2 – 3 – – – – 84 0 0 0 – – – – – 1 7,115 –20 – 4,192 –4,040 32 7,215 95 –1 0 – 3 –15 – 42 42 28,952 –125 0 1,042 4,040 1,890 32,020 14,999 –55 – 3,665 41 15 1,897 – 16,768 16,868 23,317 7,173 15,251 Total 85,093 –421 18 5,815 41 2,049 88,496 21,674 –137 –1 4,337 57 1 2,005 42 23,883 64,613 8,588 –103 12 581 41 127 8,992 6,496 –79 –1 669 13 1 109 0 6,989 2,003 Other intangible assets comprise in particular concessions, purchased customer lists and dealer relationships, industrial and similar rights, and licenses in such rights and assets. 250 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 2018 2017 13,823 949 1,127 415 404 150 13,823 990 1,127 415 404 153 16,868 16,911 18,825 2,755 18,825 2,866 587 267 290 158 156 280 595 268 290 159 151 289 23,317 23,442 The impairment test for recognized goodwill is based on value in use. Recoverability is not affected by a varia- tion 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 2018 2017 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 13,640 5,234 38.4 3,710 12,116 13,141 5,260 40.0 3,734 11,614 % 3.8 –0.5 – –0.6 4.3 Consolidated Financial Statements Notes to the Consolidated Financial Statements 251 13. Property, plant and equipment C H A N G E S I N P R O P E R T 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 U A R Y 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 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 liabilites 67 16 51 263 87 176 390 139 252 Total 721 242 479 252 Notes to the Consolidated Financial Statements Consolidated Financial Statements C H A N G E S I N P R O P E R T 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 U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 € million Cost Balance at Jan. 1, 2018 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Balance at Dec. 31, 2018 Depreciation and impairment Balance at Jan. 1, 2018 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, 2018 Carrying amount at Dec. 31, 2018 of which assets leased under finance leases Carrying amount at Dec. 31, 2018 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 155,569 –452 189 13,112 –43 3,071 165,305 100,327 –232 18 9,876 574 –1 2,770 117 6,876 –59 6 6,452 –4,703 35 8,537 69 –5 – – 258 –18 0 41 34,335 –98 168 597 858 117 45,450 –216 9 1,103 1,753 1,424 68,909 –79 6 4,960 2,048 1,495 35,743 46,676 74,350 32,286 –130 7 3,222 21 47 1,370 26 34,057 12,618 53,352 –59 1 5,593 273 –25 1,318 14 57,803 16,546 14,621 –39 10 1,062 22 –5 83 36 15,552 20,191 267 263 8,274 107,675 57,630 5 41 0 314 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 2019 2020 – 2023 from 2024 Finance lease payments Interest component of finance lease payments Carrying amount of liabilites 68 18 51 231 73 158 360 119 241 Total 659 210 449 For assets leased under operating leases, payments recognized in the income statement amounted to €1,690 million (previous year: €1,449 million). With respect to internally used assets, €1,544 million (previous year: €1,302 million) of this figure is attributable to minimum lease payments and €13 million (previous year: €55 million) to contingent lease payments. The payments of €133 million (previous year: €92 million) under subleases primarily relate to minimum lease payments. Consolidated Financial Statements Notes to the Consolidated Financial Statements 253 Government grants of €207 million (previous year: €135 million) were deducted from the cost of property, plant and equipment and noncash benefits received amounting to €0 million (previous year: €12 million) were not capitalized as the cost of assets. In connection with land and buildings, real property liens of €1,062 million (previous year: €916 million) are pledged as collateral for partial retirement obligations, financial liabilities and other liabilities. 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 ST M E N T P R O P E R T Y I N T H E P E R I O D J A N U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 7 € million Lease 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 The following payments from noncancelable leases and rental agreements were expected to be received over the coming years: € million Lease payments 2018 2019 – 2022 from 2023 Total 3,392 4,675 46 8,112 254 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 ST M E N T P R O P E R T Y I N T H E P E R I O D J A N U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 € million Lease assets Investment property Total Cost Balance at Jan. 1, 2018 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Balance at Dec. 31, 2018 Depreciation and impairment Balance at Jan. 1, 2018¹ 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, 2018 Carrying amount at Dec. 31, 2018 52,226 609 –138 21,256 –106 16,354 57,493 13,007 60 –57 7,282 510 –8 6,744 103 13,947 43,545 748 12 – 38 2 13 786 279 2 – 16 0 0 8 0 290 496 52,973 621 –138 21,294 –104 16,367 58,279 13,287 62 –57 7,298 511 –8 6,752 103 14,237 44,042 1 Values in the opening balance adjusted (see disclosures on IFRS 9). Lease assets include assets leased out under the terms of operating leases and assets covered by long-term buyback agreements. Investment property includes apartments rented out and leased dealerships with a fair value of €1,106 million (previous year: €993 million). Fair value is estimated using an investment method based on internal calculations (Level 3 of the fair value hierarchy). Operating expenses of €46 million (previous year: €52 million) were incurred for the maintenance of investment property in use. Expenses of €1 million (previ- ous year: €3 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 2019 2020 – 2023 from 2024 Total 4,108 5,187 17 9,312 Consolidated Financial Statements Notes to the Consolidated Financial Statements 255 15. Equity-accounted investments and other equity investments C H A N G E S I N E Q U I T Y - A C C O U N T E D I N V E ST M E N T S A N D O T H E R E Q U I T Y I N V E ST M E N T S I N T H E P E R I O D J A N U A R Y 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 Assets 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 9,523 256 Notes to the Consolidated Financial Statements Consolidated Financial Statements C H A N G E S I N E Q U I T Y - A C C O U N T E D I N V E ST M E N T S A N D O T H E R E Q U I T Y I N V E ST M E N T S I N T H E P E R I O D J A N U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 € million Gross carrying amount at Jan. 1, 2018¹ Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Changes recognized in profit or loss Dividends2 Other changes recognized in other comprehensive income Balance at Dec. 31, 2018 Impairment losses Balance at Jan. 1, 2018 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Reversal of impairment losses Balance at Dec. 31, 2018 Carrying amount at Dec. 31, 2018 1 Values in the opening balance adjusted (see disclosures on IFRS 9 and IFRS 15). 2 Dividends before withholding tax. Equity-accounted investments Other equity investments 8,431 –9 269 247 – 84 3,371 –3,460 62 8,826 238 –1 – 155 – – – 392 8,434 1,827 9 –368 693 0 19 – – 1 2,142 507 –1 –4 172 0 5 1 668 1,474 Total 10,259 0 –99 939 0 103 3,371 –3,460 62 10,968 745 –2 –4 326 0 5 1 1,060 9,908 Equity-accounted investments include joint ventures in the amount of €6,372 million (previous year: €6,459 million) and associates in the amount of €2,062 million (previous year: €1,746 million). Of the other changes recognized in other comprehensive income, €7 million (previous year: €–249 million) is attributable to joint ventures and €55 million (previous year: €–2 million) to associates. They are mainly the result of foreign exchange differences in the amount of €9 million (previous year: €–327 million), pension plan remeasurements in the amount of €31 million (previous year: €112 million) and fair value measurement of cash flow hedges in the amount of €28 million (previous year: €–30 million). Consolidated Financial Statements Notes to the Consolidated Financial Statements 257 16. Noncurrent and current financial services receivables € million Current Noncurrent Dec. 31, 2018 Dec. 31, 2018 Current Noncurrent Dec. 31, 2017 Dec. 31, 2017 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 financing Dealer financing Direct banking Receivables from operating leases Receivables from finance leases 21,487 14,781 284 45,089 2,099 3 66,575 16,879 288 67,500 16,839 288 19,841 17,033 269 40,899 2,194 4 60,739 19,227 272 61,763 19,200 272 36,551 47,191 83,742 84,627 37,142 43,096 80,239 81,236 219 – 219 219 193 – 193 193 17,446 54,216 31,501 78,692 48,948 49,572 132,909 134,418 15,810 53,145 30,153 73,249 45,963 46,766 126,395 128,195 The receivables from customer financing and finance leases contained in financial services receivables of €132.9 billion (previous year: €126.4 billion) decreased by €26 million (previous year: €31 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 re- ceivables, €175 million (previous year: €287 million) was furnished as collateral for financial liabilities and contingent liabilities. The receivables from dealer financing include €24 million (previous year: €51 million) receivable from un- consolidated affiliated companies. 258 Notes to the Consolidated Financial Statements Consolidated Financial Statements The receivables from finance leases – almost all of them for vehicles – were based on the following expected cash flows as of December 31, 2017 and December 31, 2018: € 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 € million 2019 2020 – 2023 from 2024 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 18,768 –1,321 33,611 –2,256 17,446 31,355 156 –9 146 52,534 –3,586 48,948 Accumulated loss allowances for uncollectible minimum lease payments receivable amount to €103 million (previous year: €116 million). 17. Noncurrent and current other financial assets € million Current Noncurrent Dec. 31, 2018 Current Noncurrent Dec. 31, 2017 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 2,047 – 5,513 4,026 11,586 1,932 – 3,441 1,149 6,521 3,979 – 8,953 5,175 18,107 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 Other financial assets include receivables from related parties of €8.8 billion (previous year: €7.7 billion). Other financial assets amounting to €89 million (previous year: €75 million) 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). Consolidated Financial Statements Notes to the Consolidated Financial Statements 259 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 Total Assets related to derivatives not included in hedging relationships Total Dec. 31, 2018 Dec. 31, 2017 109 77 561 54 2,049 2,851 1,128 3,979 228 108 400 86 4,401 5,224 1,712 6,936 Positive fair values of €24 million (previous year: €17 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, 2018 Current Noncurrent Dec. 31, 2017 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 4,189 2,015 6,203 773 1,835 2,608 4,962 3,849 8,811 3,881 1,465 5,346 896 1,356 2,252 4,777 2,821 7,598 Miscellaneous receivables include assets to fund post-employment benefits in the amount of €76 million (pre- vious year: €64 million). This item also includes the share of the technical provisions attributable to reinsurers amounting to €60 million (previous year: €73 million). Current other receivables are predominantly non-interest-bearing. 19. Tax assets € million Current Noncurrent Dec. 31, 2018 Current Noncurrent Dec. 31, 2017 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 − 1,879 1,879 10,131 476 10,606 10,131 2,355 12,486 − 1,339 1,339 9,810 407 10,217 9,810 1,746 11,557 €6,036 million (previous year: €7,456 million) of the deferred tax assets are due within one year. 260 Notes to the Consolidated Financial Statements Consolidated Financial Statements 20. Inventories € million Dec. 31, 2018 Dec. 31, 2017 Raw materials, consumables and supplies Work in progress Finished goods and purchased merchandise Current lease assets Prepayments Hedges on inventories 5,543 4,382 30,553 5,107 168 –8 4,858 4,143 26,514 4,774 127 – 45,745 40,415 At the same time as the relevant revenue was recognized, inventories in the amount of €179 billion (previous year: €173 billion) were included in cost of sales. Loss allowances (excluding lease assets) recognized as expens- es in the reporting period amounted to €902 million (previous year: €878 million). Vehicles amounting to €316 million (previous year: €271 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 Dec. 31, 2018 Dec. 31, 2017 13,356 206 3,958 51 317 9,667 220 3,341 44 86 17,888 13,357 The fair values of the trade receivables correspond to the carrying amounts. In connection with the revised classification of financial instruments required by IFRS 9, receivables from dealer financing of €2.9 billion were reclassified to trade receivables as of January 1, 2018. Consolidated Financial Statements Notes to the Consolidated Financial Statements 261 The trade receivables include contingent receivables from long-term construction contracts recognized using the percentage of completion (PoC) method. They correspond to the contract assets recognized under contracts with customers; they changed as follows: € million Contingent construction contract receivables Balance at Jan. 1 Additions and disposals Changes in consolidated Group Change in loss allowances Changes in estimates and assumptions as well as contract modifications Foreign exchange differences Contingent construction contract receivables at Dec. 31 22. Marketable securities 2018 338 4 – 10 – 0 352 The marketable securities serve to safeguard liquidity. They are short-term fixed-income securities and shares. Most securities are measured at fair value. Noncurrent marketable securities amounting to €997 million (previ- ous year: €1,744 million) were pledged 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. 23. Cash, cash equivalents and time deposits € million Bank balances Checks, cash-in-hand, bills and call deposits Dec. 31, 2018 Dec. 31, 2017 28,522 416 28,938 18,343 114 18,457 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, ex- piring on May 4, 2020, to issue new preferred bearer shares. 262 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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. In June 2018, Volkswagen AG placed unsecured subordinated hybrid notes with an aggregate principal amount of €2.8 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 (€1.3 billion and a coupon of 3.375 %) is after 6 years, and the first call date for the second tranche (€1.5 billion and a coupon of 4.625 %) is after ten years. Interest may be accumulated depending on whether a dividend is paid to Volkswagen AG shareholders. Un- der IAS 32, these 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. IAS 32 only allows these hybrid notes to be classified as debt once the respective hybrid note was called. In July 2018, Volkswagen AG called the first tranche of hybrid notes with an aggregate principal amount of €1.3 billion placed in 2013 via a subsidiary, Volkswagen International Finance N.V., Amsterdam, the Netherlands, (issuer). In this figure, effects of €14 million were considered in equity. C H A N G E I N O R D I N A R Y 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 2018 2017 € 2018 2017 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 pay- ment 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 €2,419 million are eligible for distribution following the transfer of €2,204 million to the revenue reserves. The Board of Management and Supervisory Board will pro- pose to the Annual General Meeting that a total dividend of €2,419 million, i.e. €4.80 per ordinary share and €4.86 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 €3.90 per ordinary share and €3.96 per preferred share was distributed in fiscal year 2018. N O N C O N T R O L L I N G I N T E R E ST S As of December 31, 2018, total noncontrolling interests amounted to €225 million (previous year: €229 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. Consolidated Financial Statements Notes to the Consolidated Financial Statements 263 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 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, 2018 Current Noncurrent Dec. 31, 2017 19,132 22,381 18,455 28,555 1,183 51 89,757 62,416 18,975 15,447 1,455 2,433 399 81,549 41,356 33,903 30,010 3,617 449 101,126 190,883 14,146 22,506 14,487 29,291 1,363 51 81,844 48,971 13,399 15,357 2,114 1,358 428 81,628 63,118 35,905 29,844 31,405 2,721 479 163,472 26. Noncurrent and current other financial liabilities € million Current Noncurrent Dec. 31, 2018 Current Noncurrent Dec. 31, 2017 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 1,439 661 7,316 9,416 1,134 113 1,972 3,219 2,573 774 9,288 12,635 1,212 570 6,788 8,570 1,034 44 1,586 2,665 2,246 614 8,374 11,234 264 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 Total Liabilities related to derivatives not included in hedging relationships Total Dec. 31, 2018 Dec. 31, 2017 65 10 61 17 936 1,088 1,484 2,573 58 19 64 24 542 706 1,540 2,246 Negative fair values of €22 million (previous year: €22 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, 2018 Current Noncurrent Dec. 31, 2017 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 6,936 4,300 11,235 5,427 2,789 8,216 2,273 546 5,299 2,539 17,593 112 43 947 1,046 6,448 2,384 589 6,247 3,585 2,301 564 4,941 2,728 24,041 15,961 249 38 844 2,280 6,199 2,550 601 5,785 5,009 22,160 The liabilities from payments on account received under contracts with customers correspond to contract liabilities under contracts with customers. During the implementation of IFRS 15, adjustments were made to the structure of payments received on account within noncurrent and current other liabilities. In this context, amounts were reclassified from “mis- cellaneous liabilities” to “payments received on account of orders”. The prior-year figures were adjusted by an amount of €3,437 million. Consolidated Financial Statements Notes to the Consolidated Financial Statements 265 The “payments received on account of orders” item includes liabilities from payments on account received under contracts with customers. They changed as follows: C H A N G E S I N L I A B I L I T I E S F R O M PAYM E N T S O N A C C O U N T R E C E I V E D U N D E R C O N T R A C T S W I T H C U ST O M E R S I N 2 0 1 8 € million Liabilities from advance payments received under contracts with customers at Jan. 1 Additions and disposals Changes in consolidated Group Changes in estimates and assumptions as well as contract modifications Foreign exchange differences Liabilities from advance payments received under contracts with customers at Dec. 31 28. Tax liabilities 2018 7,261 2,395 4 – 8 9,669 € million Current Noncurrent Dec. 31, 2018 Current Noncurrent Dec. 31, 2017 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 − 1,412 456 1,867 5,030 3,047 – 8,077 5,030 4,458 456 9,944 − 1,397 430 1,827 5,636 3,030 – 8,666 5,636 4,427 430 10,492 €407 million (previous year: €320 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 remunera- tion 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 recog- nized as pension expenses of the period concerned. In 2018, they amounted to a total of €2,385 million (previ- ous year: €2,214 million) in the Volkswagen Group. Of this figure, contributions to the compulsory state pen- sion system in Germany amounted to €1,745 million (previous year: €1,634 million). In the case of defined benefit plans, a distinction is made between pensions funded by provisions and ex- ternally funded plans. The pension provisions for defined benefits are measured by independent actuaries using the internation- ally 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, longevi- ty and increases in healthcare costs, which were determined for each Group company depending on the eco- nomic environment. Remeasurements arise from differences between what has actually occurred and the prior- 266 Notes to the Consolidated Financial Statements Consolidated Financial Statements year assumptions as well as from changes in assumptions. They are recognized in other comprehensive in- come, net of deferred taxes, in the period in which they arise. 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 €20 million for fiscal year 2019. 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 healthcare. In fiscal year 2018, €14 million (previous year: €17 million) was recognized as an expense for health care costs. The related carrying amount as of December 31, 2018 was €231 million (previous year: €210 million). The following amounts were recognized in the balance sheet for defined benefit plans: € million Dec. 31, 2018 Dec. 31, 2017 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 15,606 10,920 4,686 28,312 23 33,022 33,097 76 15,605 11,192 4,413 28,224 29 32,666 32,730 64 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 V O 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 attrac- tive, 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. Consolidated Financial Statements Notes to the Consolidated Financial Statements 267 German pension plans funded solely by recognized provisions The pension plans funded solely by recognized provisions comprise both contribution-based plans with guar- antees 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. 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 2018 G” (previous year: "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 entitle- ment 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 guaran- teed 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 de- ducted from the obligations. The amount of the pension assets is exposed to general market risk. The investment strategy and its im- plementation 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 conduct- ed 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 gener- ational mortality tables – the “Heubeck 2018 G” (previous year: "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. 268 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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. 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 2018 1.97 3.48 1.50 1.17 – 2017 1.88 3.56 1.50 1.15 – 2018 3.16 2.66 2.41 3.93 5.50 2017 3.52 3.00 2.48 3.25 4.98 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. Consolidated Financial Statements Notes to the Consolidated Financial Statements 269 The following table shows changes in the net defined benefit liability recognized in the balance sheet: € million 2018 2017 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 32,666 1,410 620 399 –957 –105 –530 3 708 –9 842 24 2 10 –5 –30 33,022 32,967 1,372 600 33 –616 –88 117 –6 582 –8 841 7 –1 0 –44 –37 32,666 The change in the amount not recognized as an asset because of the ceiling in IAS 19 contains an interest com- ponent, 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. 270 Notes to the Consolidated Financial Statements Consolidated Financial Statements The change in the present value of the defined benefit obligation is attributable to the following factors: € million 2018 2017 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 43,829 1,410 901 399 –957 –105 19 842 237 24 0 10 –460 –73 43,918 43,689 1,372 883 33 –616 –88 33 841 307 7 –3 0 –41 –290 43,829 Actuarial gains/losses arising from changes in demographic assumptions are mainly the result of the first-time application of the "Heubeck 2018 G" (previous year: "Heubeck 2005 G") mortality tables. Following the regular review of our pension plans, one plan used by South American subsidiaries had to be classified as a defined contribution plan in fiscal year 2018, and this led to a change in the pension obligation reported in the above table. The decrease in the present value of the defined benefit obligation in the amount of €460 million is shown under other changes. This does not have any effect on the amount recognized in the balance sheet, because the present value of plan assets goes down by the same amount. Consolidated Financial Statements Notes to the Consolidated Financial Statements 271 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 8 D E C . 3 1 , 2 0 1 7 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 40,048 48,398 46,147 –8.81 10.20 39,979 48,290 5.07 46,055 41,892 –4.61 41,801 44,382 1.05 44,398 43,507 –0.94 43,304 45,311 3.17 45,106 –8.79 10.18 5.08 –4.63 1.30 –1.20 2.91 The sensitivity analysis shown above considers the change in one assumption at a time, leaving the other as- sumptions unchanged versus the original calculation, i.e. any correlation effects between the individual as- sumptions 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 expec- tancy 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: 19 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 2018 2017 25,783 2,580 15,555 43,918 26,067 2,233 15,530 43,829 272 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 2018 2017 1,160 5,251 37,508 43,918 1,151 4,994 37,685 43,829 2018 2017 11,192 10,749 281 –530 708 9 237 2 0 –455 –46 10,920 283 117 582 25 307 2 –1 3 –258 11,192 Other changes are attributable to the change in the presentation of a plan used by South American subsidiaries. The investment of the plan assets to cover future pension obligations resulted in expenses in the amount of €250 million (previous year: income of €400 million). Employer contributions to plan assets are expected to amount to €769 million (previous year: €617 million) in the next fiscal year. Consolidated Financial Statements Notes to the Consolidated Financial Statements 273 Plan assets are invested in the following asset classes: D E C . 3 1 , 2 0 1 8 D E C . 3 1 , 2 0 1 7 € 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 666 375 1,041 11 –21 1,433 5,443 193 890 80 2 – 4 100 –17 26 118 – 6 568 Total 669 375 1,044 112 –38 1,459 5,561 193 896 648 Quoted prices in active markets No quoted prices in active markets 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 53.3 % (previous year: 49.1 %) of the plan assets are invested in German assets, 27.4 % (previous year: 27.6 %) in other European assets and 19.3 % (previous year: 23.4 %) in assets in other regions. Plan assets include €3 million (previous year: €15 million) invested in Volkswagen Group assets and €12 million (previous year: €18 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 2018 2017 1,410 623 24 2 2,059 1,372 602 7 –1 1,981 The above amounts are generally included in the personnel costs of the functional areas in the income state- ment. Net interest on the net defined benefit liability is reported in interest expenses. 274 Notes to the Consolidated Financial Statements Consolidated Financial Statements 30. Noncurrent and current other provisions € million Balance at Jan. 1, 2017 Foreign exchange differences Changes in consolidated Group Utilization Additions/New provisions Unwinding of discount/effect of change in discount rate Reversals Balance at Dec. 31, 2017 of which current of which noncurrent Balance at Jan. 1, 2018¹ Foreign exchange differences Changes in consolidated Group Utilization Additions/New provisions Unwinding of discount/effect of change in discount rate Reversals Balance at Dec. 31, 2018 of which current of which noncurrent Obligations arising from sales Employee expenses Litigation and legal risks Miscellaneous provisions 33,027 –689 13 17,546 14,990 –50 1,881 27,865 14,821 13,044 27,867 39 –2 10,437 12,179 –108 2,503 27,035 13,986 13,050 4,546 –61 3 1,450 2,030 11 193 4,886 2,069 2,817 4,886 –17 –7 1,632 2,019 5 99 5,155 2,248 2,906 11,717 –119 –13 7,444 2,190 –25 504 5,802 2,999 2,802 5,802 –88 –1 2,396 2,131 –19 516 4,913 2,349 2,563 7,904 –169 –27 2,334 3,217 6 962 7,634 5,458 2,176 7,631 –21 –44 2,415 3,153 9 662 7,651 5,291 2,360 Total 57,193 –1,038 –24 28,774 22,426 –57 3,540 46,186 25,347 20,839 46,185 –88 –53 16,880 19,483 –114 3,780 44,754 23,874 20,879 1 Value in the opening balance adjusted (see disclosures on IFRS 9 and IFRS 15). The obligations arising from sales contain provisions covering all risks relating to the sale of vehicles, compo- nents 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 regarding litigation and legal risks result primarily from the utili- zation of the provisions recognized in connection with the diesel issue. In addition to residual provisions relat- ing 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 pro- ceedings may occur in relation to suppliers, dealers, customers, employees, or investors. Please refer to the “Litigation” section for a discussion of the legal risks. Miscellaneous provisions relate to a wide range of identifiable specific risks, price risks and uncertain obli- gations, which are measured in the amount of the expected settlement value. Miscellaneous provisions additionally include provisions amounting to €562 million (previous year: €534 million) relating to the insurance business. Consolidated Financial Statements Notes to the Consolidated Financial Statements 275 31. Put options and compensation rights granted to noncontrolling interest shareholders This balance sheet item consists primarily of the present value of the cash settlement of €90.29 per share in accordance with section 305 of the Aktiengesetz (AktG – German Stock Corporation Act) offered to MAN share- holders in connection with the control and profit and loss transfer agreement. Further information can be found in the “Litigation” section. 32. Trade payables € million Trade payables to third parties unconsolidated subsidiaries joint ventures associates other investees and investors Dec. 31, 2018 Dec. 31, 2017 22,928 22,661 235 327 113 4 187 64 127 7 23,607 23,046 276 Notes to the Consolidated Financial Statements Consolidated Financial Statements Additional balance sheet disclosures in accordance with IFRS 7 (Financial Instruments) The tables below show the carrying amounts of financial instruments by measurement category: C A R R Y 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 B Y I A S 3 9 M E A S U R E M E N T C AT E G O R Y I N 2 0 1 7 € million Financial assets at fair value through profit or loss Loans and receivables Available-for-sale financial assets Financial liabilities at fair value through profit or loss Financial liabilities measured at amortized cost C A R R Y 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 B Y I F R S 9 M E A S U R E M E N T C AT E G O R Y I N 2 0 1 8 € million Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income (debt instruments) Financial assets at fair value through other comprehensive income (equity instruments) Financial assets measured at amortized cost Financial liabilities at fair value through profit or loss Financial liabilities measured at amortized cost 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; > derivative financial instruments within hedge accounting; > not allocated to any measurement category; and > credit commitments and financial guarantees (off-balance sheet). Dec. 31, 2017 1,712 125,550 16,182 1,540 198,821 Dec. 31, 2018 15,556 3,542 148 143,466 1,484 225,989 R E C O 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. As a result of the initial application of IFRS 9 and IFRS 15, the carrying amounts of contract assets, lease receivables and liabilities and equity-accounted associates and joint ventures have been classified as “not allo- cated to any measurement category” since fiscal year 2018. Apart from those, other amounts (excluding finan- cial instruments) may also be included here for reconciliation to the carrying amounts. The risk variables governing the fair value of the receivables are risk-adjusted interest rates. Financial instruments measured at fair value also include shares in partnerships and corporations. Consolidated Financial Statements Notes to the Consolidated Financial Statements 277 R E C O 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 D E R I V A T I V E N O T F I N A N C I A L A L L O C A T E D T O I N S T R U M E N T S A B A L A N C E M E A S U R E D A T W I T H I N H E D G E M E A S U R E M E N T S H E E T I T E M 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 C A T E G O R Y D E C . 3 1 , 2 0 1 7 € 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 – – – – – 43,096 4,364 13,357 37,142 9,153 – 18,457 – – – 44,093 4,391 13,357 37,142 9,153 – 18,457 – 81,200 82,108 – – – 3,315 – – 1,909 – – – – 774 1,630 1,633 261 – – – 3,795 81,793 23,046 3,811 81,793 23,046 – – – 766 7,358 7,358 446 8,205 1,075 30,153 – – 16,003 – – – 90 428 – – 51 – – 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 The classes of financial instruments have been added as part of the implementation of IFRS 9 (see the section on “Accounting policies”). The principal movement in this context was the reclassification of lease receivables and liabilities in the “measured at amortized cost” category to “not allocated to any measurement category”. Prior-year values under financial services receivables and financial liabilities have been restated. The carrying amount of lease receivables was €49,166 million (previous year: €46,156 million) and their fair value (fair value hierarchy level 3) was €49,791 million (previous year: €46,959 million). The carrying amount of lease liabilities was €449 million (previous year: €479 million) and their fair value (fair value hierarchy level 2) was €466 mil- lion (previous year: €510 million). 278 Notes to the Consolidated Financial Statements Consolidated Financial Statements R E C O 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 8 M E A S U R E D A T F A I R V A L U E D E R I V A T I V E F I N A N C I A L N O T A L L O C A T E D B A L A N C E I N S T R U M E N T S T O A S H E E T I T E M M E A S U R E D A T W I T H I N H E D G E M E A S U R E M E N T 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 C A T E G O R Y D E C . 3 1 , 2 0 1 8 € 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 – 134 286 772 – 22 1,094 16,940 – – – – 46,905 4,240 17,537 36,529 9,179 140 – – 47,789 4,252 17,537 36,529 9,179 140 28,938 28,938 100,727 100,964 – – – 1,510 – – 1,341 – – – 8,434 1,340 31,501 – 352 17,665 1 – – 8,434 1,474 78,692 6,521 17,888 54,216 11,615 17,080 28,938 399 101,126 767 2,085 2,087 368 – 3,219 – – – 1,853 89,707 23,607 1,853 89,707 23,607 – – – 718 8,010 8,010 721 – 51 – – 1,853 89,757 23,607 9,449 Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and 3 finan- cial instruments is measured in the individual divisions on the basis of Group-wide specifications. The mea- surement techniques used are explained in the section on “Accounting policies”. The fair value of Level 3 receiv- ables 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. The inputs used are not observable in an active market. Other financial assets include receivables from tax allocations of €29 million, and other financial liabilities include liabilities from tax allocations of €33 million. Consolidated Financial Statements Notes to the Consolidated Financial Statements 279 The following tables contain 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, 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 € million Dec. 31, 2018 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments Financial services receivables Other financial assets Current assets Financial services receivables Other financial assets Marketable securities Noncurrent liabilities Other noncurrent financial liabilities Current liabilities Other current financial liabilities 134 286 772 22 1,094 16,940 767 718 56 – – – – 16,940 – – 25 – 357 – 880 – 250 419 53 286 415 22 214 – 516 299 280 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 R T I Z E D C O S T B Y L E V E L € million Dec. 31, 2017 Level 1 Level 2 Level 3 Fair value of financial assets measured at amortized cost Financial services receivables¹ 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 liabilities¹ Other financial liabilities Fair value of financial liabilities measured at amortized cost 1 Prior-year figures adjusted. 81,236 13,357 13,544 18,457 126,594 3,811 23,046 163,901 8,992 199,749 – – 170 18,043 18,213 – – 50,970 596 51,566 – 13,184 5,925 414 19,523 – 23,046 111,096 8,184 142,326 81,236 173 7,449 – 88,858 3,811 – 1,835 212 5,857 € million Dec. 31, 2018 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 84,319 17,537 13,432 28,938 144,226 1,853 23,607 190,671 10,097 226,228 – – 378 28,115 28,493 – – 59,089 1,297 60,386 – 17,537 5,033 823 23,394 – 23,607 131,316 8,568 163,491 84,319 – 8,020 – 92,339 1,853 – 266 233 2,352 Other financial assets include receivables from tax allocations of €29 million, and other financial liabilities include liabilities from tax allocations of €33 million. Consolidated Financial Statements Notes to the Consolidated Financial Statements 281 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 C C O U N T I N G B Y L E V E L € 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 € million Dec. 31, 2018 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 1,510 1,341 368 721 – – – – 1,510 1,341 368 721 – – 0 – The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observa- ble 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 that are listed and traded on a public market. Fair values in Level 2, for example of derivatives, are measured on the basis of 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. Fair Values in Level 3 are calculated using valuation techniques that incorpo- rate inputs that are not directly 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 measure- ment purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments, residual value protection models, customer financing receiva- bles, receivables from vehicle financing programs and other equity investments 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. The measurement of vehicle financing pro- grams requires in particular the use of the corresponding vehicle price. 282 Notes to the Consolidated Financial Statements Consolidated Financial Statements The table below provides a summary of changes in level 3 balance sheet items measured at fair value: 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, 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 € million Balance at Jan. 1, 2018 Foreign exchange differences Changes in consolidated Group 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, 2018 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 1 Value in the opening balance adjusted (see disclosures on IFRS 9). 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 Financial assets measured at fair value Financial liabilities measured at fair value 8231 –33 –184 78 27 51 339 –2 –32 990 27 31 58 –4 –5 765 –3 – 204 204 – 28 –183 5 816 –204 –203 –235 0 – Consolidated Financial Statements Notes to the Consolidated Financial Statements 283 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 extrap- olation 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 Decem- ber 31, 2018, earnings after tax would have been €59 million (previous year: €10 million) higher (lower). The equity is not affected. 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 at December 31, 2018 had been 10 % higher, earnings after tax would have been €3 million (previous year: €3 million) higher. If the assumed enterprise values at December 31, 2018 had been 10 % lower, earnings after tax would have been €3 million (previous year: €3 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 buyback 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 of the used cars covered by the residual value protection model had been 10 % higher as of December 31, 2018, earnings after tax would have been €325 million (previous year: €319 million) higher. If the prices of the used cars covered by the residual value protection model had been 10 % lower as of December 31, 2018, earnings after tax would have been €352 million (previous year: €333 million) lower. If the risk-adjusted interest rates applied to receivables measured at fair value had been 100 basis points higher as of December 31, 2018, earnings after tax would have been €1 million lower. If the risk-adjusted inter- est rates as of December 31, 2018 had been 100 basis points lower, earnings after tax would have been €4 million higher. If the corresponding vehicle price used in the vehicle financing programs had been 10 % higher as of December 31, 2018, earnings after tax would have been €8 million higher. If the corresponding vehicle prices used in the vehicle financing programs had been 10 % lower as of December 31, 2018, earnings after tax would have been €8 million lower. If the result of operations of equity investments measured at fair value had been 10% better as of December 31, 2018, the equity would have been €3 million higher. If the result of operations had been 10% worse, the equity would have been €3 million lower. 284 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, 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 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, 2018 3,979 132,909 17,537 17,080 28,938 14,307 0 – 0 – – –15 3,979 –1,819 132,909 17,537 17,080 28,938 14,291 – 0 – – – –171 –77 – – – – 1,989 132,831 17,536 17,080 28,938 14,291 € million Derivatives Financial services receivables Trade receivables Marketable securities Cash, cash equivalents and time deposits Other financial assets Other financial assets include receivables from tax allocations of €29 million. Consolidated Financial Statements Notes to the Consolidated Financial Statements 285 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 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, 2018 1,853 2,573 190,883 23,607 10,111 – 0 – 0 –15 1,853 2,573 190,883 23,607 10,095 – –1,738 – 0 – – –1 –1,953 – – 1,853 834 188,931 23,607 10,095 € 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. Other financial liabilites include receivables from tax allocations of €33 million. 286 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 €27,906 million (previous year: €24,561 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 €32,669 million (previous year: €26,689 million). Collateral of €47,884 million (previous year: €41,799 million) in total was furnished as part of asset-backed securities transactions. The expected payments were assigned to structured entities and the equi- table 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 differ- ent 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, 2018, the fair value of the assigned receivables still recognized in the balance sheet was €32,944 million (previous year: €27,089 million). The fair value of the related liabilities was €30,122 million (previous year: €24,511 million) at that reporting date. Companies of the Volkswagen Financial Services subgroup are contractually obliged, under certain condi- tions, to transfer funds to the structured entities that are included in its financial statements. Since the receiva- bles 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 287 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 in-/outflows from the issuance/repayment of hybrid capital 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 non- cash transactions and are therefore eliminated. In 2018, cash flows from operating activities include interest received amounting to €7,047 million (previ- ous year: €6,641 million) and interest paid amounting to €1,857 million (previous year: €2,332 million). Cash flows from operating activities also include dividend payments received from joint ventures and associates of €3,493 million (previous year: €3,653 million). Dividends amounting to €1,967 million (previous year: €1,015 million) were paid to Volkswagen AG share- holders. € 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, 2018 Dec. 31, 2017 28,938 –825 28,113 18,457 –420 18,038 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. 288 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 transac- tions: € 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 € 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, 2018 Cash-effective changes Foreign exchange differences Changes in consolidated group N O N - C A S H C H A N G E S 63,118 20,018 99,875 479 163,472 7,740 –29 27,730 3,795 –2,132 –160 –121 –193 –414 –1 –607 – 27 167,107 25,477 –581 – 11 – 11 – – 11 Changes in fair values Dec. 31, 2018 –1,395 81,549 1,674 0 279 190 72 541 108,886 449 190,883 1,853 –182 192,555 Consolidated Financial Statements Notes to the Consolidated Financial Statements 289 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 in- struments 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 instru- ments. 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 includ- ed 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 185-186. 2 . C R E D I T A N D D E F A U LT R I S K The credit and default risk arising from financial assets involves the risk of default by counterparties, and there- fore 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. Collateral is held predominantly for financial assets in the “at amortized cost” category. It relates primarily to collateral for financial services receivables and trade receivables. Collateral com- prises vehicles and assets transferred as security, as well as guarantees and real property liens. Cash collateral is also used in hedging transactions. For level 3 and 4 financial assets with objective indications of impairment as of the reporting date, the col- lateral provided led to a reduction in risk by €1.3 billion. Collateral of €15 million has been accepted for assets measured at fair value through profit or loss. 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 correspond- ing amounts are presented in the Liquidity risk section. 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 bank- ing 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 9.7 % at the end of 2018 compared with 7.4 % at the end of 2017. Any existing concentration of risk is assessed and monitored both at the level of individual counterparties or coun- terparty 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 25.4 % at the end of 2018, as against 29.5 % at the end of 2017. There were no other concentrations of credit and default risk exposures in individual countries. 290 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 L O S S A L L O WA N C E S O N F I N A N C I A L A S S E T S F R O M J A N U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 7 € million Balance at Jan. 1, 2017 Exchange rate and other changes Changes in consolidated Group Additions Utilization Reversals Reclassification Balance at Dec. 31, 2017 Specific valuation allowances Portfolio-based valuation allowances 2,092 2,175 –87 –18 853 427 339 20 –46 0 525 – 676 –20 2,094 1,959 2017 4,268 –132 –18 1,378 427 1,014 – 4,054 L O S S A L L O WA N C E The Volkswagen Group consistently uses the expected credit loss model of IFRS 9 for all financial assets and other risk exposures. Regarding this, IFRS 9 differentiates between the general approach and the simplified approach. The ex- pected credit loss model under IFRS 9 takes in both loss allowances for financial assets for which there are no objective indications of impairment and loss allowances for financial assets that are already impaired. For the calculation of impairment losses, IFRS 9 distinguishes between the general approach and the simplified ap- proach. Under the general approach, financial assets are allocated to one of three stages, plus an additional stage for financial assets that are already impaired when acquired (stage 4). Stage 1 comprises financial assets that are recognized for the first time or for which the probability of default has not increased significantly. The expected credit losses for the next twelve months are calculated at this stage. Stage 2 comprises financial assets with a significantly increased probability of default, while financial assets with objective indications of default are allocated to stage 3. The lifetime expected credit losses are calculated at these stages. Stage 4 financial assets, which are already impaired when acquired, are subsequently measured by recognizing a loss allowance on the basis of the accumulated lifetime expected losses. Financial assets classified as impaired on acquisition remain in this category until they are derecognized. The Volkswagen Group applies the simplified approach to trade receivables and contract assets with a sig- nificant financing component in accordance with IFRS 15. The same applies to receivables under operating or finance leases accounted for under IAS 17. Under the simplified approach, the expected losses are consistently determined for the entire life of the asset. Consolidated Financial Statements Notes to the Consolidated Financial Statements 291 The tables below show the reconciliation of the loss allowance for various financial assets and financial guaran- tees and credit commitments: C H A N G E S I N L O S S A L L O WA N C E F O R F I N A N C I A L A S S E T S M E A S U R E D AT A M O R T I Z E D C O ST F R O M J A N U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 € million Stage 1 Stage 2 Stage 3 Simplified approach Stage 4 Total Carrying amount at Jan. 1, 2018 Foreign exchange differences Changes in consolidated group Newly extended/purchased financial assets (additions) Other changes within a stage Transfers to Stage 1 Stage 2 Stage 3 800 –2 4 253 –69 22 –102 –33 802 –7 6 – 132 –67 275 –51 Financial instruments derecognized during the period (disposals) Utilization Changes to models or risk parameters Carrying amount at Dec. 31, 2018 –120 –148 – –1 750 – 4 946 1,002 –35 15 – 195 –13 –39 445 –226 –459 10 896 622 –15 8 176 1 – – – –127 –34 3 634 138 3,364 –4 0 30 16 – – – –33 –1 –2 146 –63 33 459 275 –58 134 361 –653 –493 13 3,372 C H A N G E S I N L O S S A L L O WA N C E F O R F I N A N C I A L G U A R A N T E E S A N D C R E D I T C O M M I T M E N T S F R O M J A N U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 € million Stage 1 Stage 2 Stage 3 Stage 4 Total Carrying amount at Jan. 1, 2018 Foreign exchange differences Changes in consolidated group Newly extended/purchased financial assets (additions) Other changes within a stage Transfers to Stage 1 Stage 2 Stage 3 Financial instruments derecognized during the period (disposals) Utilization Changes to models or risk parameters Carrying amount at Dec. 31, 2018 11 0 – 11 0 0 –1 0 –4 – 0 18 4 0 – – 0 0 0 0 –4 – 0 1 1 0 – – 0 0 0 1 0 0 0 1 0 – – 1 0 – – – –1 – 0 0 16 0 – 12 0 0 0 1 –9 0 0 19 292 Notes to the Consolidated Financial Statements Consolidated Financial Statements C H A N G E S I N L O S S A L L O WA N C E F O R L E A S E R E C E I VA B L E S F R O M J A N U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 € million Carrying amount at Jan. 1, 2018 Foreign exchange differences Changes in consolidated group Newly extended/purchased financial assets (additions) Other changes Financial instruments derecognized during the period (disposals) Utilization Changes to models or risk parameters Carrying amount at Dec. 31, 2018 Simplified approach 1,250 –6 – 450 0 –465 –54 18 1,193 The loss allowance on “assets measured at fair value” amounted to €2 million in January 2018 (Stage 1) and did not change in the course of the fiscal year. The amount contractually outstanding for financial assets that have been derecognized in the current year and are still subject to enforcement proceedings is €293 million. M O D I F I C AT I O N S There were contract modifications to financial assets in the reporting period that did not lead to the derecogni- tion of the asset. They were primarily attributable to credit ratings and relate to financial assets for which loss allowances were measured in the amount of the lifetime credit losses. For trade and lease receivables, the treatment is simplified by considering the credit rating-based modifications where the receivables are more than 30 days past due. Before the modification, amortized cost amounted to €147 million. In the reporting period, contract modifications resulted in net income/net expenses of €2 million. As of the reporting date, the gross carrying amounts of financial assets that have been modified since initial recognition and were simultaneously reclassified from stage 2 or 3 to stage 1 in the reporting period amounted to €19 million. As a result, the measurement of the loss allowance for these financial assets was changed from lifetime expected credit losses to 12-month expected credit losses. Consolidated Financial Statements Notes to the Consolidated Financial Statements 293 M A X I M U M C R E D I T R I S K The table below shows the maximum credit risk to which the Volkswagen Group was exposed as of the report- ing date, broken down by class to which the impairment model is applied: M A X I M U M C R E D I T R I S K B Y C L A S S A S O F D E C E M B E R 3 1 , 2 0 1 8 € million Financial instruments measured at fair value Financial instruments measured at amortized cost Financial guarantees and credit commitments not within the scope of IFRS 7 Total Dec. 31, 2018 3,542 143,466 4,640 49,518 201,166 R AT I N G C AT E G O R I E S The Volkswagen Group performs a credit assessment of borrowers in all loan and lease agreements, using scor- ing 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. Risk class 3 comprises all defaulted receivables. The table below presents the gross carrying amounts of financial assets by rating category as of Decem- ber 31, 2018: G R O S S C A R R Y 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 B Y R AT I N G C AT E G O R Y A S O F D E C E M B E R 3 1 , 2 0 1 8 € million Stage 1 Stage 2 Stage 3 Simplified approach Stage 4 Credit risk rating grade 1 (receivables with no credit risk – standard loans) Credit risk rating grade 2 (receivables with credit risk – intensified loan management) Credit risk rating grade 3 (cancelled receivables – non-performing loans) Total 116,912 8,007 2,243 4,787 – – – – 119,155 12,794 1,719 1,719 58,537 5,687 1,017 65,241 93 37 467 597 294 Notes to the Consolidated Financial Statements Consolidated Financial Statements Furthermore, the default risk exposure for financial guarantees and credit commitments is presented below: D E F A U LT R I S K F O R F I N A N C I A L G U A R A N T E E S A N D C R E D I T C O M M I T M E N T S A S O F D E C E M B E R 3 1 , 2 0 1 8 € million Stage 1 Stage 2 Stage 3 Stage 4 Credit risk rating grade 1 (receivables with no credit risk – standard loans) Credit risk rating grade 2 (receivables with credit risk – intensified loan management) Credit risk rating grade 3 (cancelled receivables – non-performing loans) Total 4,243 76 – 4,318 304 15 – 319 – – 17 17 1 0 4 5 In addition, the credit and default risk relating to financial assets, the credit rating of financial assets that are neither past due nor impaired, and the maturities of financial assets that are past due and not impaired are pre- sented for the previous year in the table below: C R E D I T A N D D E F A U LT R I S K R E L AT I N G T O F I N A N C I A L A S S E T S B Y G R O S S C A R R Y I N G A M O U N T A S O F D E C E M B E R 3 1 , 2 0 1 7 € 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 124,044 10,395 13,403 16,862 164,704 2,888 2,833 102 – 5,822 2,900 562 196 290 3,948 129,832 13,791 13,700 17,152 174,475 Consolidated Financial Statements Notes to the Consolidated Financial Statements 295 C R E D I T R AT I N G O F T H E G R O S S C A R R Y 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 A S O F D E C E M B E R 3 1 , 2 0 1 7 € million Risk class 1 Risk class 2 Dec. 31, 2017 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 20,127 169,928 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 R Y 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 O T I M PA I R E D A S O F D E C E M B E R 3 1 , 2 0 1 7 € million up to 30 days within 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 €134 million (previous year: €109 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 €16.8 billion as of December 31, 2018 (previous year: €19.9 billion), of which €3.4 billion (previous year: €3.4 billion) was drawn down. Local cash funds in certain countries (e.g. China, Brazil, Argentina, South Africa and India) are only available to the Group for cross-border transactions subject to exchange controls. There are no significant restrictions over and above these. 296 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 C O U N T E D C A S H F L O W S F R O M F I N A N C I A L I N ST R U M E N T S € million Put options and compensation rights granted to noncontrolling interest shareholders Financial liabilities Trade payables Other financial liabilities Derivatives 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 up to one year within one to five years more than five years 2018 up to one year within one to five years more than five years 2017 1,853 91,891 23,607 8,010 63,059 – – 1,853 84,965 23,380 200,235 0 – 23,607 1,916 42,984 154 10,080 3,036 109,078 3,379 83,867 23,041 7,360 72,635 – – 3,379 69,968 16,113 169,949 5 – 23,046 1,557 47,414 86 332 9,003 120,381 325,758 188,419 129,865 26,570 344,854 190,281 118,945 16,531 When calculating cash outflows related to put options and compensation rights, it was assumed that shares would be tendered at the earliest possible date. The cash outflows on other financial liabilities include outflows on liabilities for tax allocations amounting to €33 million. 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 present- ed would be substantially lower. This applies in particular also if hedges have been closed with offsetting trans- actions. The cash outflows from irrevocable credit commitments are presented in section entitled "Other financial obligations”, classified by contractual maturities. As of December 31, 2018, the maximum potential liability under financial guarantees amounted to €315 million (previous year: €261 million). Financial guarantees are assumed to be due immediately in all cases. Consolidated Financial Statements Notes to the Consolidated Financial Statements 297 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, inter- est rate, commodity price, equity price and fund price risk. Corporate policy is to limit or eliminate such risk by means of hedging. Generally, 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. D I S C L O S U R E S O N G A I N S A N D L O S S E S F R O M F A I R VA L U E H E D G E S Fair value hedges involve hedging against the risk of changes in the carrying amount of balance sheet items. As of the reporting date, both hedging instruments and hedged items are measured at fair value in relation to the hedged risk, and the resulting changes in value are recognized on a net basis in the corresponding income statement item. In the previous year, income from fair value hedges amounted to €7 million. The following table shows the gains and losses from (fair value) hedges by risk type during the fiscal year: D I S C L O S U R E S O N G A I N S A N D L O S S E S F R O M F A I R VA L U E H E D G E S I N 2 0 1 8 € million Hedging interest rate risk Other financial result Other operating result Hedging currency risk Other financial result Other operating result Combined interest rate and currency risk hedging Other financial result Other operating result Hedge ineffectiveness in hedging relationships – 34 – –30 0 5 298 Notes to the Consolidated Financial Statements Consolidated Financial Statements D I S C L O S U R E S O N G A I N S A N D L O S S E S F R O M C A S H F L O W H E D G E S Cash flow hedges are used to hedge against risks of fluctuations in future cash flows. These cash flows may arise from a recognized asset or liability, or from a highly probable forecast transaction. The following table shows the gains and losses from cash flow hedges by risk type: D I S C L O S U R E S O N G A I N S A N D L O S S E S F R O M C A S H F L O W H E D G E S I N 2 0 1 8 € million Hedging interest rate risk Gains or losses from changes in fair value of hedging instruments within hedge accounting Recognized in equity Recognized in profit or loss Reclassification from the cash flow hedge reserve to profit or loss Due to early discontinuation of the hedging relationships Due to realization of the hedged item Hedging currency risk Gains or losses from changes in fair value of hedging instruments within hedge accounting Recognized in equity Recognized in profit or loss Reclassification from the cash flow hedge reserve to profit or loss Due to early discontinuation of the hedging relationships Due to realization of the hedged item Combined interest rate and currency risk hedging Gains or losses from changes in fair value of hedging instruments within hedge accounting Recognized in equity Recognized in profit or loss Reclassification from the cash flow hedge reserve to profit or loss Due to early discontinuation of the hedging relationships Due to realization of the hedged item Hedging commodity price risk Gains or losses from changes in fair value of hedging instruments within hedge accounting Recognized in equity Recognized in profit or loss Reclassification from the cash flow hedge reserve to profit or loss Due to early discontinuation of the hedging relationships Due to realization of the hedged item The table presents effects taken to equity, reduced by deferred taxes. 2018 –38 0 – 2 –1,367 –7 –1 –1,074 8 0 – –8 –5 – – 1 Consolidated Financial Statements Notes to the Consolidated Financial Statements 299 The gain or loss from changes in the fair value of hedging instruments used in hedge accounting corresponds to the basis for determining hedge ineffectiveness. The ineffective portion of a cash flow hedge is the income or expense resulting from changes in the fair value of the hedging instrument that exceed the changes in the fair value of the hedged item. This hedge ineffectiveness is attributable to parameter differences between the hedg- ing instrument and the hedged item. Such income and expenses are recognized in other operating income/ expenses or in the financial result. In fiscal year 2017, ineffectiveness amounting to €–11 million was recog- nized in the income statement. 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 measure- ment, 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 compa- nies 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 in- struments 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. D I S C L O S U R E S O N H E D G I N G I N ST R U M E N T S I N H E D G E A C C O U N T I N G The Volkswagen Group regularly enters into hedging instruments to hedge against changes in the carrying amount of balance sheet items. The summary below shows the notional amounts, fair values and base varia- bles for determining the ineffectiveness of hedging instruments entered into to hedge against the risk of changes in carrying amounts in fair value hedges: D I S C L O S U R E S O N H E D G I N G T R A N S A C T I O N S I N F A I R VA L U E H E D G E S I N 2 0 1 8 € million Notional amount Other assets Other liabilities Fair value changes to determine hedge ineffectiveness Hedging interest rate risk Interest rate swaps and interest rate options contracts 48,609 Hedging currency risk Currency forwards, currency options, cross-currency swaps Combined interest rate and currency risk hedging Cross-currency interest rate swaps 6,811 901 467 222 58 61 75 0 309 95 108 In addition, hedging instruments are entered into to hedge against the risk of fluctuations in future cash flows. The table below shows the notional amounts, fair values and base variables for determining the ineffectiveness of hedging instruments designated as cash flow value hedges. 300 Notes to the Consolidated Financial Statements Consolidated Financial Statements D I S C L O S U R E S O N H E D G I N G T R A N S A C T I O N S I N C A S H F L O W H E D G E S I N 2 0 1 8 € million Notional amount Other assets Other liabilities Fair value changes to determine hedge ineffectiveness Hedging interest rate risk Interest rate swaps Hedging currency risk Currency forwards and cross-currency swaps Currency options Combined interest rate and currency risk hedging 12,477 66,505 17,956 39 1,834 187 Cross-currency interest rate swaps 1,424 44 15 836 91 11 17 2,794 69 35 The change in the fair value to determine ineffectiveness corresponds to the change in fair value of the desig- nated component. D I S C L O S U R E S O N H E D G E D I T E M S I N H E D G E A C C O U N T I N G In addition to disclosures on hedging instruments, disclosures are also required on the hedged items, broken down by risk category and type of designation for hedge accounting. Below follows a list of hedged items designated in fair value hedges, separately from those designated in cash flow hedges: D I S C L O S U R E S O N H E D G E D I T E M S I N F A I R VA L U E H E D G E S I N 2 0 1 8 € million Hedging interest rate risk Financial services receivables Other financial assets Financial liabilities Other financial liabilities Hedging currency risk Trade receivables Financial services receivables Other financial assets Financial liabilities Other financial liabilities Trade payables Other provisions Combined interest rate and currency risk hedging Financial services receivables Other financial assets Financial liabilities Other financial liabilities Carrying amount Cumulative hedge adjustments Hedge adjustments (current period/ fiscal year) Cumulative hedge adjustments from discontinued hedging relationships 19,311 – 31,670 – – – 640 26 – – – – 714 166 – –10 17 220 – – – 28 36 – – – 4 –32 1 – 20 17 127 – – – 77 38 – – – 4 –4 1 – – – – – – 3 – – – – – – – – – Consolidated Financial Statements Notes to the Consolidated Financial Statements 301 D I S C L O S U R E S O N H E D G E D I T E M S I N C A S H F L O W H E D G E S I N 2 0 1 8 € million Hedging interest rate risk Designated components Non-designated components Deferred taxes Total hedging interest rate risk Hedging currency risk Designated components Non-designated components Deferred taxes Total hedging currency risk Combined interest rate and currency risk hedging Designated components Non-designated components Deferred taxes Total hedging combined interest rate and currency risk Hedging commodity price risk Designated components Non-designated components Deferred taxes Total hedging commodity price risk R E S E R V E F O R Changes in fair value to determine hedge ineffectiveness Active cash flow hedges Discontinued cash flow hedges 26 – – 26 2,526 – – 2,526 27 – – 27 – – – – 19 – –1 19 2,524 –885 –478 1,162 2 – 0 1 – – – – 0 – 0 0 0 –9 1 –8 –26 – 8 –18 7 – –2 5 C H A N G E S I N T H E R E S E R V E When accounting for cash flow hedges, the designated effective portions of a hedging relationship are recog- nized in OCI I. Any changes in excess of the fair value of the designated component are recognized as ineffec- tiveness through profit or loss. The table below shows a reconciliation to the reserve: C H A N G E S I N T H E R E S E R V E F O R C A S H F L O W H E D G E S ( O C I I ) F R O M J A N U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 € million Interest rate risk Currency risk Interest rate/ currency risk Commodity price risk Balance at Jan. 1, 2018 Gains or losses from effective hedging relationships Reclassifications due to changes in whether the hedged item is expected to occur Reclassifications due to realization of the hedged item Balance at Dec. 31, 2018 55 –38 – 2 19 3,533 –414 –1 –1,335 1,783 –16 8 – –8 –17 9 –5 – 1 5 Total 3,581 –450 –1 –1,341 1,790 302 Notes to the Consolidated Financial Statements Consolidated Financial Statements If expectations about the occurrence of the hedged item change, the arrangement is reclassified by terminating the hedging relationship prematurely. Changed expectations are primarily caused by a change in projections for hedging sales revenue. Changes in the fair values of non-designated components of a derivative are likewise always recognized immediately through profit or loss. An exception from this principle is any change in the fair value attributable to non-designated time values of options, to the extent that they relate to the hedged item. Moreover, the Volkswagen Group initially recognizes in equity (hedging costs) changes in the fair values of non-designated forward components in currency forwards and currency hedges attributed to cash flow hedges. This means that the Volkswagen Group recognizes changes in the fair value of the non-designated component or parts thereof immediately through profit or loss only if there is ineffectiveness. The tables below show a summary of changes in the reserve for hedging costs resulting from the non- designated portions of options and currency hedges: C H A N G E S I N T H E R E S E R V E F O R H E D G I N G C O ST S – N O N - D E S I G N AT E D T I M E VA L U E S O F O P T I O N S F R O M J A N U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 € million Balance at Jan. 1, 2018 Gains and losses from non-designated time value of options Hedged item is recognized at a point in time Reclassification due to realization of the hedged item Hedged item is recognized at a point in time Balance at Dec. 31, 2018 Currency risk 63 –86 23 –1 C H A N G E S I N T H E R E S E R V E F O R H E D G I N G C O ST S – N O N - D E S I G N AT E D F O R WA R D C O M P O N E N T A N D C R O S S C U R R E N C Y B A S I S S P R E A D ( C C B S ) F R O M J A N U A R Y 1 TO D E C E M B E R 3 1 , 2 0 1 8 € million Balance at Jan. 1, 2018 Gains and losses from non-designated forward elements and CCBS Hedged item is recognized at a point in time Reclassification due to realization of the hedged item Hedged item is recognized at a point in time Reclassification due to changes in whether the hedged item is expected to occur Hedged item is recognized at a point in time Balance at Dec. 31, 2018 Currency risk – –866 238 0 –628 Consolidated Financial Statements Notes to the Consolidated Financial Statements 303 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 attribut- able to investments, financing measures and operating activities. Currency forwards, currency options, currency swaps and cross-currency interest rate 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 2018 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. 304 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, 2018: € million Exchange rate EUR/USD Hedging reserve Earnings after tax EUR/GBP Hedging reserve Earnings after tax EUR/CNY Hedging reserve Earnings after tax EUR/CHF Hedging reserve Earnings after tax EUR/JPY Hedging reserve Earnings after tax EUR/CAD Hedging reserve Earnings after tax CZK/GBP Hedging reserve Earnings after tax EUR/AUD Hedging reserve Earnings after tax EUR/SEK Hedging reserve Earnings after tax EUR/PLN Hedging reserve Earnings after tax EUR/CZK Hedging reserve Earnings after tax EUR/TWD Hedging reserve Earnings after tax EUR/BRL Hedging reserve Earnings after tax EUR/HUF Hedging reserve Earnings after tax GBP/USD Hedging reserve Earnings after tax D E C . 3 1 , 2 0 1 8 D E C . 3 1 , 2 0 1 7 +10% –10% +10% –10% 1,329 –449 960 –205 729 –159 312 12 287 –18 117 –30 135 –1 97 –32 94 –35 –54 –52 65 –38 77 –6 8 –65 0 –63 61 1 –1,272 449 –959 205 –725 159 –298 –12 –285 18 –113 30 –135 1 –97 32 –92 35 54 52 –65 38 –77 6 –8 65 0 63 –61 –1 1,627 –365 1,126 –73 –1,303 193 –1,124 75 515 –58 246 16 271 –40 121 –51 91 0 164 –36 105 –22 0 –60 69 –20 72 –10 6 –20 0 –54 63 –2 –491 62 –232 –20 –244 20 –113 48 –91 0 –164 37 –100 18 0 60 –69 20 –72 10 –6 20 0 54 –63 2 Consolidated Financial Statements Notes to the Consolidated Financial Statements 305 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 liabili- ties. Interest rate swaps and cross-currency interest rate swaps are sometimes 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, 2018, equity would have been €131 mil- lion (previous year: €88 million) lower. If market interest rates had been 100 bps lower as of December 31, 2018, equity would have been €66 million (previous year: €24 million) higher. If market interest rates had been 100 bps higher as of December 31, 2018, earnings after tax would have been €24 million higher (previous year: €76 million lower). If market interest rates had been 100 bps lower as of December 31, 2018, earnings after tax would have been €26 million lower (previous year: €64 million higher). 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, com- modities 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. 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, 2018, earnings after tax would have been €197 million (previous year: €101 million) higher (lower). 4.2.4 Equity and bond price risk The 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 mar- ket 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, risks arising from the special funds are countered by ensuring a broad diversification of products, issuers and regional markets when investing funds, as stipulated by the Investment Guidelines of the Group. 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, 2018, earnings after tax would have been €16 million higher and equity would have been €4 million (previous year: €28 million effect on equity) higher. If share prices had been 10 % lower as of December 31, 2018, earnings after tax would have been €25 million lower and the equity €4 million (previous year: €108 million effect on equity) lower. 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. 306 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 measurement 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, 2018, the value at risk was €122 million (previous year: €167 million) for interest rate risk and €187 million (previous year: €165 million) for foreign currency risk. The entire value at risk for interest rate and foreign currency risk at the Volkswagen Financial Services sub- group was €214 million (previous year: €167 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 Since the implementation of IFRS 9, the Volkswagen Group determines hedge effectiveness mainly on a pro- spective basis using the critical terms match method. Retrospective analysis of effectiveness uses effectiveness tests in the form of the dollar offset method. 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. To this end, the accumulated changes in the fair value of the designated spot component of the hedging instrument and hedged item are compared. If the critical terms do not match, the same procedure is applied to the non-designated component. N OT I O N A L A M O U N T O F D E R I VAT I V E S The summary below presents the remaining maturities profile of the notional amounts of the hedging instru- ments, which are accounted for under the Volkswagen Group’s hedge accounting rules, and of derivatives to which hedge accounting is not applied: N OT I O N A L A M O U N T O F D E R I VAT I V E S I N 2 0 1 7 € million up to one year five years more than five years Dec. 31, 2017 R E M A I N I N G T E R M within one to T O T A L N O T I O N A L A M O U N T Notional amount of hedging instruments used in cash flow hedges Interest rate swaps Currency forwards Currency options Currency swaps Cross-currency interest rate swaps Commodity futures contracts Notional amount of other derivatives Interest rate swaps Interest rate option contracts Currency forwards Other currency options Currency swaps Cross-currency interest rate swaps Commodity futures 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 Consolidated Financial Statements Notes to the Consolidated Financial Statements 307 N OT I O N A L A M O U N T O F D E R I VAT I V E S I N 2 0 1 8 € million up to one year five years more than five years Dec. 31, 2018 R E M A I N I N G T E R M within one to T O T A L N O T I O N A L A M O U N T Notional amount of hedging instruments within hedge accounting Hedging interest rate risk Interest rate swap Hedging currency risk Currency forwards/Cross-currency swaps Currency forwards/Cross-currency swaps in CNY Currency forwards/Cross-currency swaps in GBP Currency forwards/Cross-currency swaps in USD Currency forwards/Cross-currency swaps in other currencies Currency options Currency options in USD Currency options in CNY Currency options in other currencies Combined interest rate and currency risk hedging Cross-currency interest rate swaps Notional amount of other derivatives Hedging Interest rate risk Interest rate swap Hedging Currency risk Currency forwards/Cross-currency swaps Currency forwards/Cross-currency swaps in USD Currency forwards/Cross-currency swaps in other currencies Currency options Currency options Combined interest rate and currency risk hedging Cross-currency interest rate swaps Hedging Commodity price risk Forward commodity contracts aluminum Forward commodity contracts copper Forward commodity contracts other 11,136 43,360 6,590 61,086 6,857 11,524 7,451 16,905 5,903 2,539 1,295 1,090 2,555 6,746 11,412 9,866 3,781 1,523 2,915 1,235 – – – – – – – – 9,412 18,270 18,863 26,770 9,683 4,062 4,210 2,325 20,303 26,293 19,762 66,358 8,626 15,732 215 5,930 923 241 131 3,777 1,804 – 5,594 1,208 445 304 1 0 – 12,403 17,537 215 926 12,450 – – – 2,131 686 436 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 trans- actions. 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 €3,762 million (previous year: €29 million) whose remaining maturity is under one year, as well as credit default swaps in connection with fund investments with a notional amount of €21 billion. 308 Notes to the Consolidated Financial Statements Consolidated Financial Statements Existing cash flow hedges in the notional amount of €53 million (previous year: €361 million) were discon- tinued because of a reduction in the projections. €3 million was transferred from the cash flow hedge reserve to the financial result in the previous year, 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. For cash flow hedges, the Volkswagen Group achieved an average hedging interest rate of 1.65% for hedging interest rate risk. In addition, currency risk was hedged at the following hedging exchange rates for the major currency pairs: EUR/USD at 1.19; EUR/GBP at 0.86; EUR/CNY at 8.20. 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 AUD CHF CNY GBP JPY PLN SEK USD Interest rate for six months Interest rate for one year Interest rate for five years Interest rate for ten years –0.3061 1.9938 –0.5510 3.2700 0.9170 0.0868 1.7892 –0.1043 2.7736 –0.2631 1.9515 –0.5517 3.2174 0.9836 0.0087 1.7754 –0.0659 2.7653 0.1970 2.2188 –0.1390 3.6600 1.3050 0.0238 2.1250 0.5080 2.5942 0.8150 2.5563 0.2950 4.1500 1.4365 0.1763 2.4810 1.1280 2.7330 35. Capital management The Group’s capital management ensures that its goals and strategies can be achieved in the interests of share- holders, 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 abso- lute 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 (prop- erty, 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 sheet 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 €4,964 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 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 prod- ucts 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 11.0 %, Consolidated Financial Statements Notes to the Consolidated Financial Statements 309 which is above our minimum rate of return on invested capital of 9 % and significantly exceeds the current cost of capital of 6.2%. 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 aver- age 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’ regula- tory 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 per- formance. 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 require- ments. 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 % 2018 2017 11,438 104,424 11.0 6.2 6,474 4,964 2,782 27,982 9.9 12.7 11,756 97,021 12.1 6.0 5,821 5,935 2,502 25,626 9.8 13.7 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. 310 Notes to the Consolidated Financial Statements Consolidated Financial Statements 36. Contingent liabilities € million Dec. 31, 2018 Dec. 31, 2017 Liabilities under guarantees Liabilities under warranty contracts Assets pledged as security for third-party liabilities Other contingent liabilities 511 138 18 8,607 9,274 423 60 21 7,909 8,413 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 €558 million (previous year: €768 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 €5.4 billion (previous year: €4.3 billion), of which €3.4 billion (previous year: €3.4 billion) was attributable to investor law- suits. Also included are certain elements of the class action lawsuits and proceedings/misdemeanor proceed- ings relating to the diesel issue 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. The administrative fine proceedings in accordance with section 30, 130 of the Gesetz über Ordnungswidrigkeiten (OWiG – Act on Regulatory Offenses) instituted against Porsche AG on January 21, 2019 are likewise at a very early stage. In the absence of measurable data, no contingent liability has therefore been recognized for these proceedings. In addition, other contingent liabilities include an amount of €0.7 billion for potential liabilities resulting from the risk of tax proceedings instituted by the Brazilian tax authorities against MAN Latin America. 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 contain- ing certain airbags produced by the Takata company. Recalls were also ordered by the local authorities in indi- vidual countries. The recalls also included models manufactured by the Volkswagen Group. Appropriate provi- sions 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 con- nection with the diesel issue and investigations by the European Commission. Further information can be found under the section entitled “Litigation”. Consolidated Financial Statements Notes to the Consolidated Financial Statements 311 37. Litigation In the course of their operating activities, Volkswagen AG and the companies in which it is directly or indirectly invested are involved in a great number of legal disputes and governmental proceedings in Germany and abroad. Such legal disputes and other proceedings occur in relation to employees, dealers, investors, customers, or suppliers, among others, or in relation to relevant public authorities. For the companies involved, these may result in payment or other obligations. In particular, substantial compensatory or punitive damages may have to be paid and cost-intensive measures may have to be implemented. In this context, specific quantification of the objectively likely consequences is often possible only to a very limited extent, if at all. 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 authori- ties 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 based on existing information 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 covered by the insured amounts and provi- sions cannot be ruled out. This applies particularly to legal risk assessment regarding the diesel issue. Diesel issue In the USA Volkswagen AG and certain affiliates reached settlement agreements (including various consent decrees) with the US Department of Justice (DOJ), the US Environmental Protection Agency (EPA), the State of California, the California Air Resources Board (CARB), the California Attorney General, the US Federal Trade Commission, and private plaintiffs represented by a Plaintiffs' Steering Committee in a multi- district litigation in California. These settlement agreements resolved certain civil claims made in relation to affected diesel vehicles in the United States of America. Volkswagen AG also entered into agreements to resolve US federal criminal liability and certain civil penal- ties and claims relating to the diesel issue. As part of its plea agreement, Volkswagen AG agreed to plead guilty to three felony counts under US law – including conspiracy to commit fraud, obstruction of justice and using false statements to import cars into the United States of America – and has been sentenced to three years' pro- bation. A description of the diesel issue can be found starting on page 92. In connection with the diesel issue, 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 worldwide In agreement with the respective responsible authorities, the Volkswagen Group is making technical measures available worldwide for virtually all diesel vehicles with type EA 189 engines. Within its area of responsibility, the German Federal Motor Transport Authority (Kraftfahrt-Bundesamt or 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 emission figures, engine power, maximum torque, and noise emissions. AUDI AG has worked intensively for many months to check all relevant diesel concepts for possible discre- pancies and retrofit potentials. The measures proposed by AUDI AG have been adopted and mandated in vari- ous recall notices issued by the KBA for vehicle models with V6 and V8 TDI engines. 312 Notes to the Consolidated Financial Statements Consolidated Financial Statements Currently, AUDI AG assumes that the total cost, including the amount based on recalls, of the ongoing largely software-based retrofit program that began in July 2017 will be manageable and has recognized corresponding balance-sheet risk provisions. The measures submitted by AUDI AG are being examined by the KBA and can only be made available to customers after corresponding approval by the KBA. The Ministry of Environment in South Korea qualified certain emissions strategies in the engine control software of various diesel vehicles with V6 or V8-TDI engines meeting the Euro 6 emission standard as an unlawful defeat device and ordered a recall on April 4, 2018; the same applies to the Dynamic Shift Program (DSP) in the transmission control of a number of Audi models. In the USA, in fiscal year 2018, the EPA and CARB issued the outstanding official approvals needed for the technical solutions for the affected vehicles with 2.0 l TDI and with V6 3.0 l TDI engines. In the case of 2.0 l Generation 2 diesel vehicles with manual transmissions, Volkswagen Group of America, Inc. elected to withdraw the approved emissions modification proposal, whereby owners were given the option of a buyback and lessees were given the option of early lease termination. On October 31, 2018, after discussions with DOJ, EPA, and CARB, the parties agreed to modify the First and Second Partial Consent Decrees to clarify that Volkswagen may repair certain technical issues with approved emissions modifications through an “AEM Correction” (Approved Emissions Modifications). 2. Criminal and administrative proceedings worldwide (excluding the USA/Canada) Criminal investigations, regulatory offense proceedings, and/or administrative proceedings (in Germany for example by the Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin – Federal Financial Supervisory Autho- rity) have been opened in some countries. The public prosecutor’s offices in Braunschweig and Munich are investigating the core issues of the criminal investigations. The Braunschweig Office of the Public Prosecutor is investigating approximately 40 (current and former) employees and a former member of the Board of Management for possible fraud, among other things. The investigations are ongoing. The defendants and Volkswagen AG were permitted to inspect the investigation files. The regulatory offense proceeding that was opened against Volkswagen AG in this connection in April 2016 has been terminated by the administrative fine order issued against Volkswagen AG by the Braunschweig Office of the Public Prosecutor on June 13, 2018. The administrative fine order is based on a negligent breach in the Powertrain Development department of the obligation to supervise, relating to the period from mid-2007 to 2015 and a total of 10.7 million vehicles with diesel engines of types EA 189 worldwide and EA 288 (Generation 3) in the USA and Canada. The administrative order imposes a total fine of €1.0 billion, consisting of a penalty payment of €5 million and the forfeiture of economic benefits in the amount of €995 million. After thorough examination, the fine has been accepted and paid in full by Volkswagen AG, rendering the administrative fine order legally final. The administrative fine order terminates the regulatory offense proceeding against Volks- wagen AG. Further sanctions against or forfeitures by Volkswagen AG and its Group companies are therefore not expected in Germany in connection with the unitary factual situation covered by the administrative order concerning diesel engines of types EA 189 worldwide and EA 288 (Generation 3) in the USA and Canada. As a result, Volkswagen expects that the conclusion of this proceeding will have a substantially positive impact on other governmental proceedings being conducted in Europe against Volkswagen AG and its Group companies. The Braunschweig Office of the Public Prosecutor is conducting another proceeding against three (current or former) members of the Board of Management for alleged market manipulation with respect to capital mar- ket disclosure obligations in connection with the diesel issue. In this context, the Office of the Public Prosecutor has been conducting a regulatory offense proceeding against Volkswagen AG under § 30 OWiG (German Regula- tory Offenses Act) since July 30, 2018. Volkswagen AG has since been permitted to inspect the public prosecut- or's investigation files several times. The investigations are ongoing. The Munich II Office of the Public Prosecutor is conducting investigations against 24 persons, including the former Chairman of the Board of Management of AUDI AG (who is also a former member of the Board of Ma- nagement of Volkswagen AG) and another active member of the Board of Management of AUDI AG. The investi- gations are ongoing. AUDI AG has appointed two renowned major law firms to clarify the matters underlying the public prosecutor’s accusations. The Board of Management and Supervisory Board of AUDI AG are being regularly updated on the current state of affairs. Consolidated Financial Statements Notes to the Consolidated Financial Statements 313 The administrative fine order issued on October 16, 2018 by the Munich II Office of the Public Prosecutor ter- minates the regulatory offense proceeding conducted against AUDI AG in this connection. The administrative fine order is based on a negligent breach of the obligation to supervise occurring in the organizational unit “Emissions Service/Engine Type Approval”. The administrative order imposes a total fine of €800 million, con- sisting of a penalty payment of €5 million and the forfeiture of economic benefits in the amount of €795 mil- lion. After thorough examination, the fine has been accepted and paid in full by AUDI AG, rendering the admin- istrative fine order legally final. The administrative fine order terminates the regulatory offense proceeding against AUDI AG. Further sanctions against or forfeitures by AUDI AG are therefore not to be expected in Europe in connection with the unitary factual situation underlying the administrative fine order. The Stuttgart Office of the Public Prosecutor has commenced a criminal investigation relating to the diesel issue against one board member, one employee, and one former employee of Dr. Ing. h.c. F. Porsche AG on suspicion of fraud and illegal advertising as well as an analogous regulatory offense proceeding against Dr. Ing. h.c. F. Porsche AG under § 30 OWiG. Dr. Ing. h.c. F. Porsche AG has appointed two renowned major law firms to clarify the matter underlying the public prosecutor’s accusations. The Board of Management and Supervisory Board of Dr. Ing. h.c. F. Porsche AG are being regularly updated on the current state of affairs. On July 6, 2018, the Federal Constitutional Court rendered its decision on the constitutional complaints filed in connection with the search of the premises of the law firm Jones Day, holding that the lower court ruling affirming the provisional seizure of client engagement documents and data of Volkswagen AG did not violate constitutional law. The companies of the Volkswagen Group will continue to cooperate with the German government authorities with due regard for the ruling of the German Federal Constitutional Court. Whether the criminal and administrative proceedings will ultimately result in fines for the Company, and if so in what amount, is currently subject to estimation risks. According to Volkswagen’s estimates so far, the likelihood that a sanction will be imposed is 50 % or less in the majority of these proceedings. Contingent liabi- lities have therefore been disclosed where the amount of such liabilities could be measured and the likelihood of a sanction being imposed was assessed at not lower than 10 %. Provisions were recognized to a small extent. 3. Product-related lawsuits worldwide (excluding the USA/Canada) In principle, it is possible that customers in the affected markets will file civil lawsuits or that importers and dealers will assert recourse claims against Volkswagen AG and other Volkswagen Group companies. Besides individual lawsuits, various forms of collective actions (i.e. assertion of individual claims by plaintiffs acting jointly or as representatives of a class) are available in various jurisdictions. Furthermore, in a number of mar- kets it is possible for consumer and/or environmental organizations to bring suit to enforce alleged rights to injunctive relief, declaratory judgment, or damages. Customer class action lawsuits and actions brought by consumer and/or environmental associations are pending against Volkswagen AG and other companies of the Volkswagen Group in various countries including Argentina, Austria, Australia, Belgium, Brazil, Chile, China, the Czech Republic, Germany, Israel, Italy, Mexico, the Netherlands, Poland, Portugal, Spain, South Africa, South Korea, Switzerland, Taiwan, and the United King- dom. Alleged rights to damages and other relief are asserted in these actions. The actions pending in the aforementioned countries include in particular the following: Various class action lawsuits with opt-out mechanism, one individual lawsuit, and two civil suits by the Australian Competition and Consumer Commission are currently pending in Australia against Volkswagen AG and other Group companies, including the Australian subsidiaries. These proceedings have been joined with each other. Given the opt-out rule, the class actions have the potential to automatically cover all vehicles with type EA 189 engines unless the right to opt out is actively exercised. In all, approximately 100 thousand vehicles in the Australian market with type EA 189 engines are affected. An initial court hearing lasting several weeks was held in March 2018 on technical questions; further issues are to be argued in September 2019. 314 Notes to the Consolidated Financial Statements Consolidated Financial Statements In Belgium, the Belgian consumer organization Test Aankoop VZW has filed a class action to which an opt-out mechanism has been held to apply. The class action pertains to vehicles purchased by consumers on the Belgi- an market after September 1, 2014. The asserted claims are based on purported violations of unfair competition and consumer protection law as well as on alleged breach of contract. An initial hearing for oral argument has yet to take place in this matter. The court has extended the statutorily mandated negotiation phase until July 8, 2019. In Brazil two class actions are pending. One of them pertains to approximately 17 thousand vehicles. In this proceeding, a judgment, which is not yet final, has been rendered holding Volkswagen do Brasil liable in an amount of €0.3 billion plus interest. The judgment has been appealed. In the second class action alleged com- pensation claims are made based on purported breaches of environmental regulations. In Germany, the Verbraucherzentrale Bundesverband e. V. (Federation of Consumer Organizations) filed an action on November 1, 2018 with the Braunschweig Higher Regional Court for model declaratory judgment against Volkswagen AG. The complaint is seeking a ruling that certain preconditions for potential consumer claims against Volkswagen AG are met; however, no specific payment obligations would result from any deter- minations the court may make. Individual claims then would have to be enforced afterwards in subsequent separate proceedings. In addition, various actions have been brought against companies of the Volkswagen Group in several German Regional Courts (Landgericht) by financialright GmbH, which is asserting rights assigned to it by a total of approximately 46 thousand customers in Germany, Slovenia, and Switzerland. In England and Wales, suits filed in court by various law firms have been joined in a single collective action (group litigation). Roughly 117 thousand claimants joined the group litigation prior to expiration of the opt-in deadline on December 19, 2018; around 40 thousand additional plaintiffs not currently covered by the group litigation could still be added. Because of the opt-in mechanism, not all vehicles with type EA 189 engines are automatically covered by the group litigation; potential claimants must instead take action in order to join. A judicial case management conference is scheduled for March 2019. No oral argument on the substantive merits of the claims has as yet taken place. In Italy, two class action lawsuits have been filed with the Venice Regional Court by two consumer associa- tions (Altroconsumo and Codacons) acting on behalf of Italian customers. Damage claims based on alleged breach of contract as well as claims based on purported violations of Italian consumer protection law are being asserted in these proceedings. In the Codacons proceeding, the court dismissed the class action as inadmissible on December 18, 2018. In the Altroconsumo proceeding, the deadline for the filing of claims has passed and those filed are currently being tabulated by an appointed expert. In the Netherlands, Stichting Volkswagen Car Claim has brought an opt-in class action seeking declaratory rulings. Any individual claims would then have to be reduced to judgment afterwards in a separate proceeding. Several lawsuits filed by the Austrian consumer protection organization (VKI Verein für Konsumenten- schutz) and by the Cobin Claims platform are pending in Austria. In these actions, damage claims assigned for collection to VKI or to the Cobin Claims platform are being asserted on behalf of roughly 10 thousand custo- mers. A Portuguese consumer organization has filed a class action with opt-out mechanism in Portugal. There are approximately 126 thousand affected vehicles in the Portuguese market. The complaint seeks vehicle return and alleges damages as well. Volkswagen estimates the likelihood that the plaintiffs will prevail to be 50 % or less for the majority of the customer class actions and the complaints filed by consumer and/or environmental organizations. Contingent liabilities are disclosed for these proceedings where the amount of such liabilities can be measured and the chance that the plaintiff will prevail was assessed as not implausible. Since most of these proceedings are still in an early stage, it is in many cases not yet possible to quantify the realistic risk exposure. Provisions were recog- nized to a small extent. Furthermore, individual lawsuits and similar proceedings are pending against Volkswagen AG and other Volkswagen Group companies in various countries, most of which are seeking damages or rescission of the purchase contract. In Germany, there are around 46 thousand such individual lawsuits. A total of approxi- mately one thousand additional individual lawsuits are pending in other countries. According to Volkswagen’s estimates, the likelihood that the plaintiffs will prevail is 50 % or less in the vast majority of the individual lawsuits. Contingent liabilities are disclosed for these actions where the amount of such liabilities can be mea- Consolidated Financial Statements Notes to the Consolidated Financial Statements 315 sured and the chance that the plaintiff will prevail was assessed as not implausible. In addition, provisions were recognized to the extent necessary based on the current assessment. At this time it cannot be estimated how many customers will choose to file lawsuits in the future in additi- on to those already pending given the action for model declaratory judgment in Germany, among other things, and what their prospect 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 Regional Court in Braunschweig. On August 5, 2016, the Regional Court in Braunschweig ordered that common questions of law and fact rele- vant to the lawsuits pending at the Regional Court in Braunschweig be referred to the Higher Regional Court (Oberlandesgericht) in Braunschweig for binding declaratory rulings pursuant to the German Act on Model Case Proceedings in Disputes Regarding Capital Market Information (Kapitalanleger-Musterverfahrensgesetz – KapMuG). In this proceeding, common questions of law and fact relevant to these actions are to be adjudicated in a consolidated manner by the Higher Regional Court in Braunschweig (model case proceedings). All lawsuits at the Regional Court in Braunschweig will be stayed pending resolution of the common issues, unless the cases can be dismissed for reasons independent of the common issues that are to be adjudicated in the model case proceedings. The resolution in the model case proceedings of the common questions of law and fact will be binding for all pending cases that have been stayed in the described manner. In the model case action, hearing for oral argument before the Braunschweig Higher Regional Court began on September 10, 2018 and was conti- nued in subsequent sessions. Tracking the objects of declaratory judgment, the Court gave indications as to its preliminary assessment. Oral argument is to continue in 2019. At the Regional Court in Stuttgart, further investor lawsuits have been filed against Volkswagen AG, in some cases along with Porsche SE as joint and several debtor. On December 6, 2017, the Regional Court in Stuttgart issued an order for reference to the Higher Regional Court in Stuttgart in relation to procedural issues, particu- larly for clarification of jurisdiction. An action for model declaratory judgment concerning the diesel issue is also pending against Porsche SE before the Stuttgart Higher Regional Court; as the case currently stands, Volks- wagen AG is model case defendant in this action as well. Further investor lawsuits have been filed at various courts in Germany and the Netherlands. In Austria, the first-instance dismissal of the last investor complaint pending in connection with the diesel issue became binding in the reporting period. 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 AG in connection with the diesel issue, with the claims totaling roughly €9.6 billion. Volkswagen AG remains of the opinion that it duly complied with its capital market obligations. Therefore, no provisions have been recog- nized for these investor lawsuits. Insofar as the chance of success was estimated at not lower than 10%, contin- gent 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 litiga- tion. Volkswagen AG and other Volkswagen Group companies have received subpoenas and inquiries from state attorneys general and other governmental authorities. Volkswagen AG and other Volkswagen Group companies are facing litigation in the USA/Canada on a num- ber of different fronts relating to the matters described in the EPA’s “Notices of Violation”. In that respect, inves- tigations by various US and Canadian regulatory and government authorities are ongoing, particularly in areas relating to securities, financing and tax. Additionally, in the USA and Canada, certain putative class actions by customers, investors, salespersons and dealers; individual customers’ lawsuits and claims by state, provincial or municipal authorities have been filed in various courts, including state and provincial courts. A large number of these putative class action lawsuits have been filed in US federal courts and consolidated for pretrial coordi- nation purposes in the federal multidistrict litigation proceeding in the State of California. 316 Notes to the Consolidated Financial Statements Consolidated Financial Statements In the USA, Volkswagen has reached separate agreements with the attorneys general of 49 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. New Mexico still has consumer pro- tection claims outstanding. Volkswagen has also reached separate agreements with the attorneys general of thirteen US states (California, Connecticut, Delaware, Maine, Maryland, 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. The attorneys gene- ral of eight other US states (Alabama, Illinois, Montana, New Hampshire, New Mexico, Ohio, Tennessee, and Texas) and some municipalities have suits pending in state and federal courts against Volkswagen AG, Volks- wagen Group of America, Inc. and certain affiliates, alleging violations of environmental laws. The environmen- tal claims of eight states – Alabama, Illinois, Missouri, Minnesota, Ohio, Tennessee, Texas, and Wyoming – as well as Hillsborough County (Florida), Salt Lake County (Utah), and two Texas counties, have been dismissed in full or in part by trial or appellate courts as preempted by federal law. Alabama, Illinois, Ohio, Tennessee, Hills- borough County, and Salt Lake County have appealed or may still appeal the dismissal of their claims. The U.S. Securities and Exchange Commission (the “SEC”) has requested information from Volkswagen regarding potential violations of securities laws in connection with issuances of bonds and asset-backed securi- ties, as a result of nondisclosure of certain Volkswagen diesel vehicles' noncompliance with US emission stan- dards. The SEC informed Volkswagen that it had issued a formal order of investigation in January 2017; this investigation is ongoing. The SEC Staff subsequently informed Volkswagen that the SEC might bring an enforce- ment action against Volkswagen arising out of this investigation. On August 28, 2018, Volkswagen AG and a putative class of purchasers of Volkswagen AG American Deposi- tary Receipts agreed to settle the class’ claims alleging a drop in price purportedly resulting from the matters described in the EPA’s “Notices of Violation” in exchange for a cash payment of USD 48 million. The proposed settlement was granted preliminary approval by the court in November 2018. On December 21, 2017, Volkswagen announced an agreement in principle on a proposed consumer settle- ment in Canada involving 3.0 l diesel vehicles that was approved by the courts in Ontario and Quebec in April 2018. Also in Canada, a criminal enforcement-related investigation related to 2.0 l and 3.0 l diesel vehicles by the federal environmental regulator is ongoing, and a quasi-criminal enforcement-related offense has been charged by the Ontario provincial environmental regulator related to 2.0 l diesel vehicles. Additionally, in Quebec, a certified environmental class action on behalf of residents is pending. This environmental class action was authorized on the sole issue of whether punitive damages could be recovered. Volkswagen is seeking leave to appeal this authorization ruling. Class action and joinder lawsuits have also been filed in Canada, including alleged consumer protection and securities claims asserting damages among other things. To the extent a matter is not separately described above, an assessment is not yet possible at the current stage of the proceedings or has, in accordance with IAS 37.92, not been presented so as not to compromise the results of the proceedings and the interests of the Company. 6. Additional proceedings With its ruling of 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 is to examine whether there was a breach of duties on the part of the members of the Board of Management and Supervisory Board of Volkswagen AG in connection with the diesel issue on or after June 22, 2006 and, if so, whether this resulted in damages for Volkswagen AG. The ruling by the Higher Regional Court of Celle is formally unappealable. How- ever, Volkswagen AG has filed a constitutional complaint with the German Federal Constitutional Court alle- ging infringement of its constitutionally guaranteed rights. It is currently unclear when the German Federal Constitutional Court will reach a decision on this matter. Following the formally unappealable ruling from the Higher Regional Court of Celle, the special auditor appointed by the court indicated that he was not available to conduct the special audit on grounds of age. The US funds then applied to the Regional Court of Hanover to appoint another special auditor. Volkswagen AG is of the opinion that replacing the court-appointed special auditor in this manner is impermissible and has requested that the application for the appointment of a new special auditor be denied. A decision by the Regional Court of Hanover is expected in the course of 2019. Consolidated Financial Statements Notes to the Consolidated Financial Statements 317 In addition, a second motion seeking appointment of a special auditor for Volkswagen AG to examine matters relating to the diesel issue has been filed with the Regional Court of Hanover. This proceeding has been suspen- ded until the German Federal Constitutional Court renders its decision in the first special auditor litigation. 7. Risk assessment regarding the diesel issue An amount of around €2.4 billion has been included in the provisions for litigation and legal risks as of Decem- ber 31, 2018 to protect against the currently known legal risks related to the diesel issue based on existing information and current assessments. Insofar as these can be adequately measured at this stage, contingent liabilities relating to the diesel issue were disclosed in the notes in an aggregate amount of €5.4 billion (previ- ous year: €4.3 billion), whereby approximately €3.4 billion (previous year: €3.4 billion) of this amount results from lawsuits filed by investors in Germany. The provisions recognized and the contingent liabilities disclosed as well as the other latent legal risks in the context of diesel issue are in part subject to substantial estimation risks given that the fact finding efforts have not yet been concluded, the complexity of the individual relevant factors and the ongoing coordination with the authorities. Should these legal or estimation risks materialize, this could result in further considerable financial charges. 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 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 SE in 2008. The damages currently being sought based on allegedly assigned rights amounted to approximately €2.26 billion plus interest. In April 2016, the Regional 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 Court already indicated that it currently does not see claims against Volkswagen AG as justi- fied, both for want of sufficiently specific pleadings and for reasons of law. 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 in question (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 initi- ated conciliation proceedings. Volkswagen AG always refused to participate in these conciliation proceedings; since then, these claims have not been pursued further. In June 2013, the Annual General Meeting of MAN SE approved the conclusion of a control and profit and loss transfer agreement between MAN SE and TRATON SE (at that time Truck & Bus GmbH), a subsidiary of Volks- wagen AG. In July 2013, an award proceeding was instituted to review the appropriateness of the cash settlement set out in the agreement in accordance with § 305 of the Aktiengesetz (AktG – German Stock Corporation Act) and the cash compensation in accordance with § 304 of the AktG. By ruling of June 26, 2018 (supplemented and amended by the rulings of July 30, 2018 and December 17, 2018), the Munich Higher Regional Court rendered a final decision increasing the annual compensation claim under § 304 AktG to €5.47 gross per share (less any corporate income tax and any solidarity surcharge at the respective tax rate applicable to these taxes for the financial year in question). The cash settlement in the amount of €90.29 per share, increased in the first instance by the Munich I Regional Court, was affirmed. The decisions by the Munich Higher Regional Court are final and were published in the German Federal Gazette on August 6, 2018 and January 10, 2019. 318 Notes to the Consolidated Financial Statements Consolidated Financial Statements In Brazil, the Brazilian tax authorities commenced tax proceedings against MAN Latin America; at issue in these proceedings are the tax consequences of the acquisition structure chosen for MAN Latin America in 2009. In December 2017, a second instance judgment that was negative for MAN Latin America was rendered in administrative court proceedings. MAN Latin America initiated 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 contingent liabilities in the notes. 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 fined Scania €0.88 billion. Scania has appealed to the Euro- pean Court of Justice 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. As part of the cartel investigations in the automotive industry already known to the public, the European Commission took the procedural step of initiating formal proceedings against affected undertakings on Sep- tember 18, 2018. The investigations have been ongoing for some time. As the European Commission’s press statement indicates, the European Commission is now restricting the scope of the investigation to the subject of emissions. The formal initiation of proceedings is standard and is a purely procedural step in the process, which was expected by Volkswagen. The Volkswagen Group and the relevant Group brands have been coopera- ting fully with the European Commission and will continue to cooperate. In addition, the Italian Competition Authority initiated proceedings to investigate potential competition law infringements (alleged exchange of competitively sensitive information) by a number of captive automotive finance companies, including Volkswagen Bank GmbH. The proceedings were later extended to the relevant parent companies, including Volkswagen AG. In October 2018, Volkswagen Bank GmbH and Volkswagen AG received a statement of objections summarizing the findings by the authority and describing the alleged infringement. Volkswagen AG and Volkswagen Bank GmbH transmitted their respective replies to the Italian Competition Authority in November 2018. In January 2019, the Italian Competition Authority imposed a fine of €163 million against Volkswagen AG and Volkswagen Bank GmbH. Provisions were recognized by Volkswagen Bank GmbH. Volkswagen AG and Volkswagen Bank GmbH intend to appeal this decision. Lawsuits seeking damages are possible in this proceeding as well. In 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, that are now pending in two consolidated class actions in the multidistrict litiga- tion in the State of California. The complaints allege that since the 1990s, defendants engaged in a conspiracy to unlawfully increase the prices of German luxury vehicles in violation of US antitrust and consumer protection law. Plaintiffs in Canada filed claims with similar allegations 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. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. Consolidated Financial Statements Notes to the Consolidated Financial Statements 319 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. For certain T6 models (M1 class) with Euro 6 diesel engines registered as passenger cars, the inspection regarding the conformity of the current production of new vehicles with the approved type (conformity of production) identified that certain technical data could not be fully confirmed. To ensure this conformity of production for new vehicles, Volkswagen AG developed a software measure, which was approved by the KBA at the end of February 2018 and was applied to newly produced vehicles as well as to new vehicles (approximately 30 thou- sand in all) that had not been delivered by then. Volkswagen AG also conducted in-use tests (tests to verify the conformity of vehicles in use to their type approval) to determine whether the roughly 200 thousand T6 used vehicles already on the market conform to the technical data. The tests carried out on the proposal of Volks- wagen AG were taking place in close collaboration with the KBA, which included this process in a decision dated March 1, 2018. Following further tests in August 2018, at the proposal of Volkswagen AG and in accordance with this decision, there is also a software measure for used T6 vehicles to ensure conformity with the approved vehicle type. Since November 2016, Volkswagen has been responding to information requests from the EPA and CARB related to automatic transmissions in certain vehicles with gasoline engines. Additionally, putative class actions filed against Audi AG and certain affiliates have been transferred to the federal multidistrict litigation proceeding in the State of California and consolidated. The lawsuits allege that defendants concealed the existence of defeat devices in Audi brand vehicles with automatic transmissions. Other actions alleging similar claims are also pending in the Northern District of California and two provincial courts in Canada. In the summer of 2017, plaintiffs filed a complaint, on behalf of a putative class of purchasers of Volks- wagen AG’s American Depositary Receipts, against Volkswagen AG and against three former and one current member of Volkswagen AG’s Board of Management, in the US District Court for the Eastern District of New York. On July 13, 2018, plaintiffs filed an amended complaint, which defendants moved to dismiss. Plaintiffs assert securities claims alleging that defendants made material misstatements and omissions concerning Volks- wagen AG’s compliance measures, in particular those relating to competition and antitrust law as well as alle- gations in an antitrust litigation against Volkswagen AG in the Northern District of California. Defendants believe that the alleged claims are without merit. Provisions were recognized by Volkswagen Bank GmbH and Volkswagen Leasing GmbH for possible claims in connection with financial services provided to consumers. In addition, various proceedings are pending worldwide, particularly in the USA, in which customers are asserting purported claims either individually or in class actions. These claims are as a rule based on alleged vehicle defects, including defects alleged in vehicle parts supplied to the Volkswagen Group (for instance, in the Takata case). Risks may also result from patent infringement actions, particularly in Germany and the USA. These actions seeking injunctive relief and damages pertain among other things to patents for semiconductor technology used in vehicles. 320 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 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 customers¹ long-term leasing and rental contracts 7,347 946 41 186 2,655 1,026 1,394 479 – 21 0 2,389 – – – – 44 2,133 8,740 1,425 41 207 2,699 5,548 Miscellaneous other financial obligations 2,476 1,469 929 4,874 1 Prior-year figures adjusted. € million 2019 2020 – 2023 from 2024 Dec. 31, 2018 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 8,362 1,022 39 326 3,010 1,190 1,621 85 – – 70 0 – – – 5 2,847 2,334 9,983 1,107 39 326 3,085 6,372 Miscellaneous other financial obligations 2,971 1,762 966 5,699 As part of the implementation of IFRS 9, obligations under irrevocable credit commitments to customers were analyzed. This led to an adjustment of the data applied. The prior-year figures were adjusted in the amount of € –997 million. Consolidated Financial Statements Notes to the Consolidated Financial Statements 321 Other financial obligations from long-term leasing and rental contracts are partly offset by expected income from subleases of €1,535 million (previous year: €1,467 million). Other financial obligations include an amount of €1.3 billion for investments to which the Group has committed itself, in the infrastructure for zero-emission vehicles and in initiatives to promote access to and awareness of these technologies. These commitments were made as part of the settlement agreements in the USA in connection with the diesel issue. 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 Wirtschaftsprüfungsgesell- schaft. € million Financial statement audit services Other assurance services Tax advisory services Other services 2018 2017 20 6 1 26 52 17 2 1 13 33 The financial statement audit services were 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 ser- vices provided by the auditors in the reporting period focused on advice on how to implement new legal stand- ards and on support for measures in connection with the diesel issue. 40. Personnel expenses € million Wages and salaries Social security, post-employment and other employee benefit costs 2018 2017 33,368 7,791 41,158 31,432 7,518 38,950 322 Notes to the Consolidated Financial Statements Consolidated Financial Statements 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 2018 2017 256,684 302,554 559,238 (8,791) 17,905 577,143 78,579 655,722 253,469 288,478 541,947 (7,156) 17,891 559,838 74,558 634,396 42. Events after the balance sheet date There were no events with a significant effect on net assets, financial position and results of operations after the end of fiscal year 2018. 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. The remuneration system of the Board of Man- agement comprises non-performance-related and performance-related components. 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. The group of beneficiaries of the performance share plan was expanded at the end of 2018 by including members of top management. At the beginning of 2019, they will be granted performance shares for the first time for the 2019-2021 performance period. The way the performance shares allocated to them work is essen- tially the same as the performance shares allocated to members of the Board of Management. 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 beneficiary as a pure calculation position. After the end of the three-year term of the performance share plan, a cash set- tlement 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 is 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 276,382 performance shares were allocated to the members of the Board of Management. The total target amounts of the members of the top management tier for the 2019-2021 performance peri- od came to €95.2 million on aggregate. Consolidated Financial Statements Notes to the Consolidated Financial Statements 323 The fair value of the obligation arising from the performance shares amounted to €48.4 million as of Decem- ber 31, 2018 (previous year: €43.8 million). The compensation cost of €18.2 million (previous year: €43.8 mil- lion) was recognized under personnel costs. If the beneficiaries of the performance share plan had left the Company as of December 31, 2018, the obligation (intrinsic value) would have amounted to a total of €33.7 mil- lion (previous year: €20.3 million). P H A N T O 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 current and former members of the Board of Management amounted to €5.0 million as of December 31, 2018 (previous year: €7.0 million). In 2018, Mr. Stadler received a cash payment of the value of 8,633 shares in an amount of €1.0 million as part of the termination of his con- tract of service. The decrease in the fair value of all phantom shares by €1.0 million (previous year: increase in fair value by €2.0 million) was recognized as income (previous year: expense). If the other members of the Board of Management had also left the Company as of December 31, 2018, the obligation (intrinsic value) would have amounted to a total of €5.3 million (previous year: €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 con- trol 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 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 Com- prehensive Agreement and its related implementation agreements: > 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 disadvantages that exceed the obligations recognized in the financial statements of those companies relating to periods up to and including July 31, 2009. In return, Volkswagen AG has under- taken to reimburse Porsche SE for any tax advantages of Porsche Holding Stuttgart, Porsche AG and their legal predecessors and subsidiaries relating to tax assessment periods up to July 31, 2009. Based on the results of the external tax audit for the assessment periods 2006 to 2008, which has now been completed, and based on information for the 2009 assessment period available at the date of preparing these consolidated financial 324 Notes to the Consolidated Financial Statements Consolidated Financial Statements statements, a compensation obligation in the low triple-digit million euro range 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 compen- sation 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 in- vestment 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. 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 subsidi- aries against certain 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 subsidi- aries 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 8, 2019, 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, 2018. 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). Consolidated Financial Statements Notes to the Consolidated Financial Statements 325 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 R T I E S € million 2018 2017 2018 2017 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 3 4 0 1,137 16,724 194 1 0 10 7 2 0 1,039 14,294 214 1 0 11 3 2 0 1,649 491 1,267 2 1 8 1 2 0 1,300 1,225 733 0 0 9 € million Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2017 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, its majority interests and joint ventures 4 0 0 1,319 11,989 112 1 – 1 13 0 0 1,480 9,889 76 1 – 2 1 205 78 1,869 2,671 487 – 100 2 0 254 72 1,773 2,168 572 – 63 1 The tables above do not contain the dividend payments of €3,493 million (previous year: €3,653 million) re- ceived from joint ventures and associates and dividends of €601 million (previous year: €308 million) paid to Porsche SE. Receivables from joint ventures are primarily attributable to loans granted in an amount of €7,606 million (previous year: €6,277 million) as well as trade receivables in an amount of €4,045 million (previous year: €3,354 million). Receivables from non-consolidated subsidiaries also result primarily from loans granted in an amount of €741 million (previous year: €1,038 million) as well as trade receivables in an amount of €214 million (previous year: €224 million). Impairment losses of €56 million (previous year: €56 million) were recognized on the outstanding related party receivables. In fiscal year 2018, expenses of €29 million (previous year: €36 million) were incurred in this context. 326 Notes to the Consolidated Financial Statements Consolidated Financial Statements In addition, the Volkswagen Group has furnished guarantees to external banks on behalf of related parties in the amount of €239 million (previous year: €220 million). In the reporting period, the Volkswagen Group made capital contributions of €298 million (previous year: €203 million) to related parties. The changes in supplies and services rendered to joint ventures and their majority interests are primarily at- tributable to deliveries to the Chinese joint ventures. 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 condi- tions 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 €64.8 million (previous year: €67.0 million) granted to Board of Management members. 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 phantom shares Post-employment benefits Termination benefits 2018 2017 32,417,428 33,967,996 10,022,492 45,777,248 10,519,369 10,872,088 12,994,964 6,940,142 65,954,253 97,557,473 Benefits paid on the basis of performance shares include the cost of €10.6 million (previous year: €43.8 million) attributable to the performance 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 per- formance share plan for 2017 and 2018, but also of a pro-rated amount for future share plans to be granted during the current employment contract. In fiscal year 2018, the share price performance led to the recognition of income of €0.6 million (previous year: expense 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 coun- cils, 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. Volkswagen AG currently as- sumes that the proceedings will be completed in fiscal year 2019. 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 Mr. Garcia Sanz and Mr. Stadler in connection with their early departure from the Board of Management. The payment of a poten- tial severance payment to Mr. Stadler depends on the development and outcome of the criminal proceedings. Disclosures on the pension provisions for members of the Board of Management and more detailed expla- nations of the remuneration of the Board of Management and the Supervisory Board can be found in the sec- tion entitled “Remuneration of the Board of Management and the Supervisory Board” and in the remuneration report, which is part of the management report. Consolidated Financial Statements Notes to the Consolidated Financial Statements 327 45. German Corporate Governance Code On November 16, 2018, 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/en/InvestorRelations/corporate- governance/declaration-of-conformity.html. On November 29, 2018, 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 2018, the Executive Board and Supervisory Board of MAN SE issued their declaration of con- formity with the German Corporate Governance Code as required by section 161 of the AktG and made it per- manently available to the shareholders at www.corporate.man.eu/en/investor-relations/corporate-governance/ corporate-governance-at-man/Corporate-Governance-at-MAN.html. The Executive and Supervisory Boards of RENK AG issued a declaration of conformity in December, 2018 and made it permanently available to the shareholders at www.renk-ag.com/en/investor-relations/financial- reports. 46. Remuneration of the Board of Management and the Supervisory Board € 2018 2017 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 13,051,264 14,337,116 14,827,178 15,844,041 22,457,869 20,104,770 50,336,310 50,285,927 4,004,372 3,516,389 534,614 270,450 4,538,986 3,786,839 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 O A 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. Since 2018, appointments assumed at Group companies have not been remunerated separately; instead they are deemed to be included in the remuneration. The fringe benefits relate to noncash benefits granted and include in particular the use of operating assets such as company cars and the payment of insur- ance 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 L O N G - T E R M I N C E N T I V E C O M P O N E N T O F T H E B O A R D O F M A N A G 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 remuneration system in 2018 (134,956 performance shares) had a fair value of €22.5 million (previous year: €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 mem- bers 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 328 Notes to the Consolidated Financial Statements Consolidated Financial Statements share price performance by means of phantom shares. The resulting effects on remuneration were reported as appropriate in previous years. In fiscal year 2018, expenses totaling €10.6 million (previous year: €43.8 million) were recognized for the performance shares, while income for the phantom shares totaled €0.6 million (previous year: expense of €2.0 million). 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. S U P E R V I S O R Y B O A 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 reor- ganization 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 then 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 com- ponents. P E N S I O N E N T I T L E M E N T S On December 31, 2018, the pension provisions for members of the Board of Management amounted to €55.8 million (previous year: €125.4 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 higher increase. In connection with their departure from the Board of Management Mr. Blessing, Mr. Garcia Sanz, Mr. Müller and Mr. Stadler were promised the following amounts: For Mr. Blessing a non-performance-related component of €3.8 million, a performance-related component of €4.2 million and a long-term incentive component of €3.9 million were recognized. For Mr. Garcia Sanz a non-performance-related component of €1.6 million, a performance-related component of €1.8 million and a long-term incentive component of €1.6 million were recognized. For Mr. Müller For Mr. Stadler a non-performance-related component of €4.0 million, a performance-related component of €6.6 million and a long-term incentive component of €7.2 million were recognized. a non-performance-related component of €3.2 million, a performance-related component of €1.9 million and a long-term incentive component of €1.8 million were recognized. The payment of the amounts mentioned above for Mr. Stadler is linked to the development and outcome of the criminal proceedings. For the amounts promised, in general, Volkswagen AG and AUDI AG are jointly and severally liable. For former members of the Board of Management and their surviving dependents €44.0 million (previous year: €19.9 million) were granted. Pension provisions in accordance with IFRSs for this group of individuals amounted to €324.0 million (previous year: €269.0 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 68. A comprehensive assessment of the individual remuneration components, including the LTI, in the form of the performance share plan can also be found there. Consolidated Financial Statements Responsibility Statement 329 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 22, 2019 Volkswagen Aktiengesellschaft The Board of Management Herbert Diess Oliver Blume Gunnar Kilian Andreas Renschler Abraham Schot Stefan Sommer Hiltrud Dorothea Werner Frank Witter 330 Independent Auditor’s Report Consolidated Financial Statements Independent Auditor’s Report On completion of our audit, we issued an unqualified auditor's report dated February 22, 2019 in German lan- guage. The following text is a translation of this auditor’s report. The German text is authoritative: To VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS AND OF THE GROUP MANAGEMENT REPORT A U 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 balance sheet as at December 31, 2018, and the income state- ment and the statement of comprehensive income, the statement of changes in equity and the cash flow statement for the financial year from January 1 to December 31, 2018, 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 manage- ment report, for the financial year from January 1 to December 31, 2018. In accordance with the German legal requirements, 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 our opinion, on the basis of the knowledge obtained in the audit, > 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 re- quirements, give a true and fair view of the assets, liabilities, and financial position of the Group as at De- cember 31, 2018, and of its financial performance for the financial year from January 1 to December 31, 2018, and > the accompanying group management report as a whole provides an appropriate view of the Group’s posi- tion. 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 re- port. 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 A U 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 ac- cordance 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 respon- sibilities 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 audi- tor’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 331 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 allegations made and claims filed, the underlying causes, the non-involvement 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 mem- bers 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 2018 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 modi- fied in respect of this matter. K E Y A U D I T M AT T E R S I N T H E A U D I T O F T H E C O N S O L I D AT 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, 2018. 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: ❶ Accounting treatment of risk provisions for the diesel issue ❷ Recoverability of goodwill and brand names ❸ Recoverability of capitalized development costs ❹ Completeness and measurement of provisions for warranty obligations arising from sales ❺ Financial instruments – hedge accounting Our presentation of these key audit matters has been structured in each case as follows: ① Matter and issue ② Audit approach and findings ③ Reference to further information Hereinafter we present the key audit matters: ❶ Accounting treatment of risk provisions for the diesel issue ① Companies of the Volkswagen Group are involved in investigations by government authorities in numer- ous countries (in particular in Europe, the United States and Canada) 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 custom- ers, dealers and holders of securities. Further direct and indirect effects concern in particular impairment of assets and customer-specific sales programs. 332 Independent Auditor’s Report Consolidated Financial Statements The Volkswagen Group recognizes the expenses directly related to the diesel issue in its operating income. The special items expensed in financial year 2018 amount to €3.2 billion and relate to fines paid (€1.8 bil- lion) and to further additions to reserves for legal risks and legal defense cost as well as technical measures. In addition to provisions, contingent liabilities for legal risks in the amount of €5.4 billion are reported as of December 31, 2018. 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 negotia- tions and pending approval procedures by authorities, and developments in market conditions. This mat- ter was of particular significance for our audit due to the material amounts of the provisions as well as the scope of assumptions and discretion on the part of the executive directors. ② In order to audit the recognition and measurement of provisions for field activities and vehicle repur- chases arising as a result of the diesel issue, we critically examined the processes put in place by the com- panies of the Volkswagen Group to make substantive preparations to address the diesel issue, and as- sessed the progress made in implementing the technical solutions developed to remedy it. We compared this knowledge with the technical and legal substantiations of independent experts, as presented to us. We used in particular 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 and the repur- chases. 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 offi- cial documents as well as in particular the work delivered and opinions prepared by experts commis- sioned 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 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 group 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 fi- nancial 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. ③ 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 Is- sue” and “Report on Risks and Opportunities”, sub-sections “Risks from the Diesel Issue” and “Litigation” in the group management report. ❷ Recoverability of goodwill and brand names ① The intangible assets reported in the consolidated financial statements of VOLKSWAGEN AKTIENGESELL- SCHAFT include €23.3 billion in goodwill and €16.9 billion 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 the executive directors and acknowledged by the Supervisory Board and extrapolated based on assumptions about long-term growth rates. The dis- count rate used is the weighted average cost of capital for the relevant reporting segment. The result of this measurement depends to a large extent on the executive directors’ assessment with regard to the fu- ture 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 com- plexity of the measurement models, this matter was of particular importance for our audit. Consolidated Financial Statements Independent Auditor’s Report 333 ② 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 the executive directors 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 measure- ment model. Furthermore, due to the materiality of the goodwill and brand names, we also performed our own sensitivity analyses for the subgroups 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 assump- tions used by the executive directors to be in line with our expectations and to lie also within a range that we consider reasonable. ③ The Company's disclosures on goodwill and brand names are contained in section entitled “Intangible assets” in the notes to the consolidated financial statements. ❸ Recoverability of capitalized development costs ① In the consolidated financial statements of VOLKSWAGEN AKTIENGESELLSCHAFT capitalized development costs amounting to €22.4 billion are reported under the "Intangible assets" balance sheet item. In accord- ance with IAS 38, research costs are treated as expenses incurred, while development costs for future se- ries 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 require- ment, over the period from capitalization until completion of development the Company assesses wheth- er 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 recog- nized 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 de- termined using the discounted cash flow method based on the Group’s five-year financial planning pre- pared by the executive directors. 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. 334 Independent Auditor’s Report Consolidated Financial Statements 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 €0.04 billion. The result of this measurement depends to a large extent on the executive directors’ 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. ② As part of our audit we assessed whether, overall, the assumptions underlying the measurements particu- larly 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 the executive di- rectors’ 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 measure- ment model applied and evaluated the mathematical accuracy of the calculations. Furthermore, we per- formed our own additional sensitivity analysis for those cash-generating units with little headroom (pre- sent 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 the executive directors 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 as- sessed that these were properly assigned to the assets allocated to the cash-generating unit. In our view, the measurement inputs and assumptions used by the executive directors, and the measurement model, were properly derived for the purposes of conducting impairment tests. ③ Company's disclosures on capitalized development costs and the associated impairment testing are con- tained in sections entitled “Accounting policies” and “Intangible assets” in the notes to the consolidated financial statements. ❹ Completeness and measurement of provisions for warranty obligations arising from sales ① In the consolidated financial statements of the Volkswagen Group €27.0 billion in provisions for obliga- tions 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 genu- ine 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 significance for our audit because the recogni- tion and measurement of this material item is to a large extent based on estimates and assumptions made by the Company's executive directors. ② With the knowledge that estimated values result in an increased risk of accounting misstatements and that the measurement decisions made by the executive directors have a direct and significant effect on consolidated net profit/loss, we assessed the appropriateness of the carrying amounts, including by com- paring 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 eval- uated the entire cal-culations (including discounting) for the provisions using the applicable measure- ment 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 the executive directors were sufficiently documented and supported to justify the recognition and measure- ment of the provisions for warranty obligations arising from sales. Consolidated Financial Statements Independent Auditor’s Report 335 ③ The Company's disclosures on other provisions are contained in sections entitled “Accounting policies” and “Noncurrent and current other provisions” in the notes to the consolidated financial statements. ❺ Financial instruments – hedge accounting ① 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. The ex- ecutive directors’ hedging policy is documented in corresponding internal guidelines and serves as the basis for these transactions. Currency risk arises primarily from sales and procurement transactions and financing denominated in foreign currencies. The means of limiting this risk include entering into cur- rency forwards, currency options and cross-currency interest rate swaps. The companies enter into inter- est 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 in- terest 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 €4.0 billion as of the balance sheet date, while the nega- tive fair values amount to €2.6 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 IFRS 9 (cash flow hedges), 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. Changes in the value of derivative financial instruments caused by changes in the spot price are shown under the cash flow hedge reserve, as usual. Changes in the value of hedging instruments caused by changes in forward rates, and in the case of options caused by changes in fair value respectively, and changes in the value of the so called cross-currency basis spread are shown under the line item “cost of hedging reserve”, which was newly introduced under IFRS 9. As of the balance sheet date, a cumulative amount of €1.2 billion was recognized in equity (cash flow hedge reserve of €1.8 billion and in the cost of hedging reserve €–0.6 billion) net of deferred taxes 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 IFRS 9, 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 items (fair value hedges). At the time of transitioning from hedge accounting under IAS 39 to IFRS 9 at the beginning of the fi- nancial year, Volkswagen exercised as far as possible the option of implementing the transition prospec- tively, without restating prior-period figures. For currency options, the transition was carried out retro- spectively with restating prior-period figures, as required by the standard. Changes in the fair value of currency options recognized in the income statement in the prior period were reclassified retrospectively to the cost of hedging reserve. From our point of view these matters were of particular significance for our audit due to the high complexity and number of transactions as well as the extensive accounting and disclosure requirements of IFRS 9 and IFRS 7. ② As part of our audit, we assessed, with the assistance of our internal specialists, the changes to processes and systems in connection with the introduction if IFRS 9, among other things. A particular focus was placed on assessing how the effects from transition and the changes to prior-period figures in relation to the introduction of IFRS 9 were determined. Both the treasury management system and the correspond- ing adjustments in the consolidation system were subject to separate examinations. In addition, we as- sessed the contractual and financial parameters and evaluated the accounting treatment, including the ef- fects 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, in- cluding 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 calcula- tion employed on the basis of market data. In addition to evaluating the internal control system, we ob- tained 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 ret- 336 Independent Auditor’s Report Consolidated Financial Statements rospective assessment of past hedging levels. In doing so, we were able to satisfy ourselves that the esti- mates and assumptions made by the executive directors were substantiated and sufficiently documented. ③ 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”, “Ad- ditional balance sheet disclosures in accordance with IFRS 7 (Financial Instruments)” in the notes to the 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 follow- ing non-audited parts of the group management report: 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 The other information comprises further the remaining parts of the annual 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 assur- ance 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 is materially inconsistent with the consolidated financial statements, with the group management report or our knowledge obtained in the audit, or 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 com- ply, in all material respects, with IFRSs as adopted by the EU and the additional requirements of German com- mercial 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 perfor- mance 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 materi- al 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 337 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 prepara- tion 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 accord- ance with § 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Stand- ards 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. We exercise profes- sional 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 re- sulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. 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 or- der to design audit procedures that are appropriate in the circumstances, but not for the purpose of ex- pressing an audit opinion on the effectiveness of these systems. Evaluate the appropriateness of accounting policies used by the executive directors and the reasonableness of estimates made by the executive directors and related disclosures. 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 condi- tions 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 disclo- sures are inadequate, to modify our respective audit opinions. Our conclusions are based on the audit evi- dence 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. 338 Independent Auditor’s Report Consolidated Financial Statements 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, liabili- ties, 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. 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. 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. 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 reason- ably 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 pre- cludes public disclosure about the matter. Consolidated Financial Statements Independent Auditor’s Report 339 OT H E R L E G A L A N D R E G U L AT O R Y 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 3, 2018. We were engaged by the su- pervisory board on May 4, 2018. 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 re- port to the audit committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report). G E R M A N P U B L I C A U 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 22, 2019 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft Harald Kayser Wirtschaftsprüfer (German Public Auditor) Frank Hübner Wirtschaftsprüfer (German Public Auditor) 340 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 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 2018 20171 2016 2015 2014 10,900 1,236 9,664 11,018 2,303 8,715 656 291 365 235,849 –189,500 46,350 –20,510 –8,819 –3,100 13,920 1,723 15,643 –3,489 12,153 10,777 1,264 9,513 10,875 2,579 8,296 634 285 350 229,550 –186,001 43,549 –20,859 –8,126 –745 13,818 –146 13,673 –2,210 11,463 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 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 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 41,158 38,950 37,017 36,268 33,834 274,620 183,536 458,156 117,342 225 172,846 167,968 458,156 262,081 160,112 422,193 109,077 229 152,726 160,389 422,193 254,010 155,722 409,732 92,910 221 139,306 177,515 409,732 236,548 145,387 381,935 88,270 210 145,175 148,489 381,935 220,106 131,102 351,209 90,189 198 130,314 130,706 351,209 Cash flows from operating activities 7,272 –1,185 9,430 13,679 10,784 Cash flows from investing activities attributable to operating activities Cash flows from financing activities 19,386 24,566 18,218 17,625 16,797 9,712 15,523 9,068 16,452 4,645 1 Adjusted; see disclosures about the application of new International Financial Reporting Standards on page 114. Additional Information Financial Key Performance Indicators 341 Financial Key Performance Indicators % Volkswagen Group Gross margin Personnel expense ratio Operating return on sales Return on sales before tax Return on sales after tax Equity ratio 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 return on sales 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 2018 20171 2016 2015 2014 19.7 17.5 5.9 6.6 5.2 25.6 +1.1 +2.7 6.8 5.5 19.0 17.0 6.0 6.0 5.0 25.8 +3.7 +5.3 6.7 5.7 18.9 17.0 3.3 3.4 2.5 22.7 +3.8 +1.1 7.3 2.5 26,707 11.0 26,094 12.1 18,999 8.2 9.2 9.4 6.6 8.2 23.3 17.6 5.0 37.9 11.2 9.9 12.7 6.0 9.0 6.5 9.7 23.7 16.3 5.1 36.9 6.0 9.8 13.7 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 –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 +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 1 Adjusted; see disclosures about the application of new International Financial Reporting Standards on page 114. 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 ass. 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. 342 Glossary Additional Information Glossary Selected terms at a glance Liquefied Natural Gas (LNG) Test procedure LNG is needed so that natural gas engines can be Levels of fuel consumption and exhaust gas Big Data used in long-distance trucks and buses, since this emissions for vehicles registered in Europe were Big data is a term used to describe new ways of is the only way of achieving the required energy previously measured on a chassis dynamometer analyzing and evaluating data volumes that are density. too vast and too complex to be processed using with the help of the “New European Driving Cycle (NEDC)”. Since fall 2017, the existing test manual or conventional methods. Modular Electric Drive Toolkit (MEB) procedure for emissions and fuel consumption The modular system is being developed for the used in the EU is being gradually replaced by the Compliance manufacturing of electric vehicles. The MEB Worldwide Harmonized Light-Duty Vehicles Test Adherence to statutory provisions, internal com- establishes parameters for axles, drive systems, Procedure (WLTP). This has been in place for new pany policies and ethical principles. high-voltage batteries, wheelbases and weight vehicle types since fall 2017 and will apply to all ratios to ensure a vehicle optimally fulfills the new vehicles since fall 2018. The aim of this new Compressed Natural Gas (CNG) requirements of e-mobility. The first vehicle test cycle is to state CO2 emissions and fuel Burning this compressed natural gas releases based on the MEB should go into series produc- consumption in a more practice-oriented man- approximately 25% less CO2 than petrol because tion in 2020. of its low carbon and high energy content. ner. A further important European regulation is the Real Driving Emissions (RDE) for passenger Corporate Governance As an extension of the modular strategy, this monitors emissions using portable emission International term for responsible corporate platform can be deployed in vehicles whose measuring technology in real road traffic. Modular Transverse Toolkit (MQB) cars and light commercial vehicles, which also management and supervision driven by long- architecture permits a transverse arrangement of term value added. the engine components. The modular perspective Turntable concept enables high synergies to be achieved between Concept of flexible manufacturing enabling the Hybrid drive the vehicles in the Volkswagen Passenger Cars, production of different models in variable daily Drive combining two different types of engine Volkswagen Commercial Vehicles, Audi, SEAT and volumes within a single plant, as well as offering and energy storage systems (usually an internal ŠKODA brands. the facility to vary daily production volumes of combustion engine and an electric motor). one model between two or more plants. Plug-in hybrid Hybrid notes Performance levels of hybrid vehicles. Plug-in Vocational groups Hybrid notes issued by Volkswagen are classified hybrid electric vehicles (PHEVs) have a larger For example, electronics, logistics, marketing, or in their entirety as equity. The issuer has call battery with a correspondingly higher capacity finance. A new teaching and learning culture is options at defined dates during their perpetual that can be charged via the combustion engine, gradually being established by promoting maturities. They pay a fixed coupon until the the brake system, or an electrical outlet. This training in the vocational groups. The specialists first possible call date, followed by a variable increases the range of the vehicle. are actively involved in the teaching process by rate depending on their terms and conditions. passing on their skills and knowledge to their Industry 4.0 Systematic assessment of companies in terms of Describes the fourth industrial revolution and their credit quality. Ratings are expressed by Zero-Emissions Vehicle (ZEV) Rating colleagues. the systematic development of real-time and means of rating classes, which are defined Vehicles that operate without exhibiting any intelligent networks between people, objects and differently by the individual rating agencies. harmful emissions from combustion gases. systems, exploiting all of the opportunities of information technology along the entire value added chain. Intelligent machines, inventory systems and operating equipment that inde- pendently exchange information, trigger actions and control each other will be integrated into production and logistics at a technical level. This offers tremendous versatility, efficient resource utilization, ergonomics and the integration of customers and business partners in operational processes throughout the entire value chain. Examples of zero-emissions vehicles include purely battery-powered electric vehicles (BEV) or fuel cell vehicles. Additional Information Glossary 343 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. 344 Index Additional Information Index A G Q Accounting policies 223 ff Global Compact 135 Quality assurance 141 ff, 172 Group structure 194 f B Balance sheet Basis of consolidation 122 ff, 139 f, 242 ff I 211 ff IFRSs R Ratings 202 ff Refinancing 113 112 f Board of Management 1 ff, 60 ff, 68 ff, 327 Income statement 115 ff, 129, 193 Remuneration 61, 68 ff, 322 f 21 ff Information technology 153, 173 Report on post-balance sheet date events 155 Investment policy 160 Research and development 131, 135, 169 Brands C CO2 emissions Consolidation methods Core performance indicators Corporate Governance Currency D Deliveries Dividend policy, yield Dividend proposal E Earnings per share Employees Environmental protection Environmental strategy Equity F Cash flow statement 119 ff, 200, 287 K 145 f, 174 ff Key figures 221 55 L 59 ff, 327 Litigation 96, 159, 222 M Return on investment (ROI) and value contribution U3 Risk management 55, 126 f, 162 66, 163 ff S 177 ff, 311 ff Sales and marketing Segment reporting Shareholders 145 ff 114, 234 ff 90, 110 90 ff, 108 ff Declaration of conformity 59 ff Models 100 f, 160 Statement of comprehensive income 194 f Market development 159 ff, 187 ff Shares U4, 101 ff 109 N 130, 262 Nonfinancial key performance indicators 133 ff Strategy Summaries Supervisory Board Sustainability 51 ff, 147 ff, 154 ff 128, 161 f, 187 56 ff, 84 ff, 327 ff 113, 133 ff O 109, 245 Orders received 107, 131, 151 ff, 162, 274 41, 43, 106 T 131, 154 f, 174 ff 154 ff 198 f, 257 ff P Procurement Production 140 ff, 170 25 ff, 107, 131, 142 ff, 170 f Proposal on the appropriation of net profit Prospects 130 188 Target-performance comparison 128 Test procedure 96 ff, 116 ff, 141, 170 ff V Value added Vehicle sales 59, 133 ff 23, 107, 131 Financial data, overview Financial risk management 326 f 289 ff Scheduled Dates 2019 FI N ANC IA L CALE N DAR March 12 Volkswagen AG Annual Media Conference and Investor Conference, Wolfsburg May 2 Interim Report January – March May 14 Volkswagen AG Annual General Meeting (CityCube Berlin) July 25 Half-Yearly Financial Report October 30 Interim Report January – September Contact Information Contents Contact Information PUBLISHED BY Volkswagen AG Financial Publications, Letterbox 1848-2 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 FINANCIAL REPORT Produced in-house with fi esys P RI NT ER Kunst- und Werbedruck, Bad Oeynhausen PAP E R Enviro Clever U P HOTO GRAP HY Dietmar Theis (p. 8, 10, 11) Hartmut Nägele (p. 10, 11, 14) Klaus Hepp (p. 11) Katrin Ebner (p. 11) carbon neutral natureOffice.com | DE-149-524362 print production ISSN 958.809.585.20 Printed in Germany
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