Business management - goals and strategy

A forward strategy with sustainably high sales and earnings targets keeps ThyssenKrupp on growth course over the long term. Our value-based management approach, which systematically increases the value of our Company, and the more than 7,000 successful projects under our ThyssenKrupp best value enhancement program are paying dividends.

Strategic development

ThyssenKrupp is well equipped for further strategic growth in all areas of activity, though our strategic measures will only take full effect when the deepening economic slowdown has been overcome. Our global presence, innovative products, high service share, motivated employees and good customer relationships are the key factors determining the success of our five segments Steel, Stainless, Technologies, Elevator and Services.

Steel: Strong capabilities with intelligent material solutions

Our Steel segment concentrates on the premium flat-rolled carbon steel market segment and is successfully positioned in its core European market. In recent years the portfolio has been systematically focused on high value-added products along the value chain. Our capabilities include intelligent material solutions, custom processing, and comprehensive service through to the finished product. The constant development of new steel grades and products together with our outstanding technological capabilities in production secure our strong position.

In the coming years we aim to strengthen our market position internationally. The key elements of our growth strategy are the building of a new steel production plant in Brazil with an annual capacity of 5 million tons and a processing plant in the USA, and the expansion of the processing and coating capacities in Germany.

Steel mill in Brazil – key role in growth plans

Of central importance to implementing our growth plans is the steel mill now under construction in Rio de Janeiro/Brazil with a favorable cost base and high quality standards. 22,000 people are currently working on erecting the nine plant sections, each of which represents a major investment in itself. Seven of them are proceeding in line with the ambitious schedule: port, coke plant, raw materials handling, sinter plant, power plant, supply networks and infrastructure. Delays that have occurred have been made good with acceleration measures. Commissioning of the port, coke plant and power plant can take place in the 1st quarter of 2009.

However, it will not be possible to complete the core units – blast furnaces and melt shops – on schedule. Despite ongoing initiatives to accelerate the building work, it looks today as if commissioning of these will not take place until late 2009. Until recently the booming worldwide market for capital goods led to supply bottlenecks in some areas. In addition, the extremely adverse weather conditions compared with the long-term average caused considerable delays.

The investment budget of €3 billion approved in September 2006 is currently expected to increase to around €4.5 billion. Now included in this figure is the economically justified insourcing of energy supplies and slab logistics. In addition, we optimized the technical design for future capacity expansions. Added to this were cost increases for construction supplies and services, increased interest costs, and exchange-rate differences due to the increasing strength of the real in the reporting year. The profitability of the project in combination with the construction project in Alabama/USA and the expansion program in Europe is not jeopardized by this increase. As planned, we are already recruiting employees for the future project and production phase. At the end of September 2008 we employed around 1,250 people here.

Steel and Stainless: Joint launch in Alabama

Construction of the new joint steelmaking and processing plant for Steel and Stainless near Mobile in Alabama, which began in fall 2007, is on schedule. The grading of the ground for the core units has already been completed. Pile driving, reinforcement and concrete work for the foundations is under way. Startup is planned for early 2010. Due in particular to the tight supply situation in the global plant construction sector, the costs are expected to be higher than planned - by around 10% at Steel and a good 30% at Stainless. The profitability of the projects is not at risk.

For the Steel segment, the Mobile plant will include hot-rolling, cold-rolling and coating facilities and will process slabs from the Brazilian mill into high-quality flat products. It will have a hot rolling capacity of more than 5 million tons per year. For the Stainless segment, the planned capacity of the plant is around 1 million tons per year. In the future, the Mexican stainless steel subsidiary ThyssenKrupp Mexinox will also be supplied with starting material from this location.

In parallel with the construction work, our marketing experts from Steel have drawn up a sales plan for developing the North American market and established contacts with key customers. Target groups are the auto and electrical industries, steel service centers and the pipe industry, specifically for the energy sector.

Stainless also aims to expand its business in North America on a sustainable basis through the new plant. The segment has already achieved a share of around 12% of the US stainless market. Most of the material is currently supplied by ThyssenKrupp Mexinox, supplemented by imports from our plants in Germany, Italy and China. Marketing is handled by our sales company in Chicago.

Optimization in Europe

At the same time the expansion of our plants in Europe continues. Steel aims to strengthen its position in its traditional European market by expanding and modernizing its processing and coating facilities in Germany. Around 40% of the slabs produced in Brazil will be shipped across the Atlantic to be processed into high-quality finished products for demanding customers.

Focus on China continues

Despite the key strategic projects in the transatlantic region, the growth market of China remains an important focus for Steel. We are investing here in careful steps mainly in the areas of hot-dip coating, tailored blanks, metal forming and steel service centers. Under a current project, we are building a second hot-dip coating line in the northern Chinese city of Dalian in association with our partner Ansteel. Like the first line, which has been in operation since 2003, it will have an annual capacity of 420,000 tons. It is due to go into operation in 2009 and will meet demand for hot-dip coated products in particular from the Chinese auto industry.

Stainless: Global stainless producer

By constantly developing new applications for its materials, the Stainless segment aims to cement and expand its market position. Our growth strategy is based on three main pillars:

• In stainless flat products the emphasis is on securing competitiveness in our core European market.
• Our position as a global stainless producer is to be strengthened by further penetration of the attractive NAFTA market.
• In the area of high-performance alloys, we intend to expand our business in nickel alloys and titanium.

To achieve these growth targets, Stainless is modernizing and expanding capacity at its operating companies, building the new plant in Alabama/USA, and systematically further developing its performance enhancement programs.

Today the segment is active as a supplier of high-quality materials and as a service provider for these materials through its global network of production and sales companies and service centers. The product range extends from stainless steels to nickel alloys and titanium. That means supplying customers with solutions for diverse applications, offering product support services – for example through various forms of processing – and being an effective local partner. By proactively pursuing our sales offensive for stainless steel, we aim to improve our value added and thus increase our sales and earnings potential over the long term. To achieve this, all companies of the segment are expanding their processing capacities, building further service centers and optimizing their operating performance.

Technologies: Growth offensive through megatrends

The growth strategy of Technologies is geared to the megatrends of climate, environment, infrastructure and mobility, areas in which the segment offers key products and solutions, e.g. slewing bearings for wind turbines, EnviNOx facilities which remove pollutant gases, and lightweight vehicle components.

Technological, engineering and innovative strengths are key to the segment's strategic potential. Around half of all the Group's engineers work here. It is thanks to their customized designs, for example, that around 30% of all raw materials produced by surface mining operations worldwide today rely on mining and handling systems from Technologies. In this way we help safeguard supplies, develop new sources and ensure their cost-efficient exploitation. In the area of environment and energy, we deliver solutions for the use of renewable energies and new technologies to lower emissions and reduce consumption. The increasing volume of shipping traffic worldwide and the wish for individual mobility in the emerging markets also place diverse demands on the segment's innovative capabilities.

In addition, Technologies aims to continuously expand it services business.

Elevator: Sustainable expansion of world market position

The Elevator segment plans to permanently strengthen its position as a leading supplier in the global market for passenger transportation systems. One of the main aims of our systematic growth strategy is to further expand our tight-knit network of branches and service operations. In addition to the high quality of our elevators, escalators, moving walks, passenger boarding bridges and stair lifts, setting up locations close to our customers in regional markets is key to our business success. We therefore plan to establish further branches in new markets and acquire additional regional service companies. Together with a sound knowledge of local market conditions, this provides a promising basis for strengthening our global market position in the coming years. The segment's key growth regions are the emerging countries of Asia, in particular China and India, as well as Eastern Europe with the Russian market.

Services: Focused expansion strategy

The Services segment continues to pursue its focused growth strategy so as to secure and expand the positions it has already achieved on the global market. The strategy is centered on the core business with raw and industrial materials which is to be significantly expanded. To finance this growth we intend to sell the Industrial Services business unit. This business unit is highly profitable but it has the smallest synergies with our core business. For most of the activities we therefore see better development opportunities with a best owner outside the Group. However, the steel service operations in Germany and Brazil will be retained and combined with other service providers in the segment to form a full-line service provider for the metal producing industry as part of the Special Products business unit, which can then offer customers a portfolio of services along the entire value chain.

With the help of a strategic partner, who will take a substantial minority interest, the Special Products business is to be driven forward in particular in Asia and Eastern Europe.

Foundation stone ceremony for ThyssenKrupp Quarter in Essen

The concentration of the administrative locations at the Essen and Duisburg locations is continuing to schedule. Following the symbolic groundbreaking, the foundation stone of the new ThyssenKrupp Quarter was laid in early September 2008. The first units will be able to start work there in the 2009/2010 fiscal year. Alongside the Group holding company, further segment holding companies and the ThyssenKrupp Academy will be located in Essen to enhance cooperation within the Group.

Business management through value-based management

The Group is managed and controlled using a value-based management system. Our objective is to systematically and continuously increase the value of the enterprise - through profitable growth and a focus on businesses which offer the best development opportunities in terms of competitiveness and performance. Key elements of this management system are an integrated control concept, valuebased performance indicators as well as extensive measures to achieve profitable growth, enhance efficiency and optimize capital employed.

Control concept secures Groupwide transparency

With our integrated control concept we guide and coordinate the activities of all segments. It supports the decentralization of responsibilities, guarantees Groupwide transparency and aims to increase the value of the Group by bridging operational and strategic gaps between the actual and target situation. High-quality systems for the reporting of actual and forecast figures link together strategic and operating elements; these reports are supplemented by regular action-based communications. All management processes are geared to the performance indicators of our value management system which are also used to calculate the variable components of management compensation.

ThyssenKrupp Value Added as central performance indicator

The central performance indicator for our value-based management system is ThyssenKrupp Value Added (TKVA), which measures the value added in a period at all levels of the Group. It is the difference between ROCE (return on capital employed) and WACC (weighted average cost of capital), multiplied by capital employed. Capital employed is defined as invested assets plus net working capital.

In addition to TKVA as a value-based performance indicator, free cash flow is taken into consideration as a cash-based performance indicator to ensure that, especially in growth phases, the Group portfolio comprises a balanced mix of value drivers and cash providers.

An alternative method of calculating TKVA using absolute figures is as follows: earnings before interest and taxes (EBIT) minus cost of capital. Cost of capital represents the expected return on equity and debt. It corresponds to the product of WACC and average capital employed.

The weighted average cost of capital (WACC) is the minimum return demanded by investors and creditors. It is calculated on a pre-tax basis and comprises the weighted average cost of equity and debt as well as the interest rate for pension obligations:

• The cost of equity of our Group is based on the return from a risk-free alternative investment plus a market risk premium and taking into account the specific risk of ThyssenKrupp in relation to the overall market. The weighted average cost of equity calculated on this basis corresponds to a weighted average cost after operating taxes. Since the cost of capital at ThyssenKrupp is calculated on a pre-tax basis, a tax adjustment is carried out.
• The cost of debt (cost of financial debt) is the interest on a risk-free alternative investment plus a company-specific risk premium
• The interest rate for pension accruals is calculated on the basis of the weighted five-year average discount rate for internally financed pension plans and healthcare obligations.

On the basis of the above factors, the weighted average cost of capital for the Group was 8.5% in fiscal 2007/2008. Specific WACC figures are established for the segments which reflect their respective risk structures. In the reporting year, the segment WACC figures were:

Since the business environment is constantly changing, the weighted average cost of capital is regularly reviewed and adjusted if necessary.

Levers of the value management system: Growth, efficiency capital employed

Three levers can be used to increase TKVA: profitable growth, increases in operating efficiency and optimization of capital employed. A major contribution to profitable growth and thus to increasing the value of the enterprise is made by investment projects which generate returns higher than their cost of capital. A key element in increasing operating efficiency is the ThyssenKrupp best value enhancement program, which is described in more detail in ThyssenKrupp best. Capital employed as the third lever to increase TKVA can be optimized by withdrawing from business activities in which, for example, the cost of capital cannot be earned. Alternatively, targeted programs can be implemented to release capital, e.g. programs to optimize net working capital, to reduce capital employed without reducing EBIT.

The following tables show how TKVA and its components developed over the last two fiscal years:

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Components of ThyssenKrupp Value Added (TKVA)

		2006/2007
		EBIT(million €)		Capital employed(million €)		ROCE(%)		WACC(%)		Spread(% points)		TKVA(million €)
Group		3,728		18,000		20.7		9.0		11.7		2,108
Thereof:
Steel		1,761		6,557		26.9		9.5		17.4		1,138
Stainless		871		3,827		22.7		9.5		13.2		507
Technologies		518		2,239		25.0		9.5		15.5		348
Elevator		(75)		1,776		(4.2)		8.5		(12.7)		(226)
Services		787		3,330		23.6		9.0		14.6		487
		2007/2008
		EBIT(million €)		Capital employed(million €)		ROCE(%)		WACC(%)		Spread(% points)		TKVA(million €)		Change TKVA(million €)
Group		3,572		19,478		18.3		8.5		9.8		1,916		(192)
Thereof:
Steel		1,700		7,697		22.1		9.0		13.1		1,007		(131)
Stainless		214		3,698		5.8		9.0		(3.2)		(119)		(626)
Technologies		678		2,693		27.6		9.0		18.6		502		154
Elevator		450		1,695		26.5		8.0		18.5		314		540
Services		834		3,834		21.7		8.5		13.2		508		21

The ThyssenKrupp Group's earnings before interest and taxes decreased by €156 million to €3,572 million in fiscal 2007/2008. The negative impact this had on ROCE was increased by the rise in capital employed. Average capital employed increased by €1,478 million to €19,478 million. The main reason for this was increased capital spending throughout the Group, especially on the major projects in Brazil and the USA; this was partly offset by a reduction in net working capital in the Steel and Stainless segments. Consequently ROCE fell to 18.3% in 2007/2008 from 20.7% the year before; nevertheless the Group's WACC of 8.5% was again significantly exceeded. As the spread was lower, TKVA decreased by €192 million to €1,916 million.

The Steel segment reported earnings before interest and taxes of €1,700 million in 2007/2008, €61 million down from the year before. As capital employed increased significantly in the same period, ROCE decreased from 26.9% to 22.1%. This means that the WACC of 9% was comfortably exceeded. In connection with a decline in the spread, TKVA decreased by €131 million to €1,007 million.

Earnings before interest and taxes in the Stainless segment decreased by €657 million to €214 million. With capital employed slightly lower, ROCE of 5.8% was achieved, compared with 22.7% a year earlier. With the WACC of 9%, the spread was negative. As a result, TKVA decreased by €626 million to €(119) million.

Technologies achieved earnings before interest and taxes of €678 million, €160 million more than the year before. Despite a rise in capital employed, ROCE increased from 25.0% to 27.6% and thus comfortably exceeded the WACC of 9%. TKVA was €154 million higher at €502 million.

In the Elevator segment earnings before interest and taxes were €450 million, €525 million up from the previous year. It should be taken into account that the prior-year earnings before interest and taxes were impacted by the EU fine of €480 million. Capital employed was unchanged at €1,695 million. The growth in ROCE by 30.7 percentage points to 26.5% led to a rise in TKVA to €314 million, compared with €(226) million the year before.

In the Services segment earnings before interest and taxes increased by €47 million to €834 million. Capital employed showed a disproportionate increase of €504 million to €3,834 million. As a result, ROCE was down to 21.7% from 23.6% a year earlier. At €508 million, TKVA was slightly higher year on year.

Portfolio management uses performance indicators

The results of the analysis of the performance indicators feed directly into our portfolio management. This involves structural measures with a primarily strategic character. We decide which businesses are to be expanded to realize our TKVA targets, and which activities we should withdraw from in a timely and profitable way. We also develop new businesses by entering into promising new markets on favorable terms. All these measures create the basic requirements for the ability to pay dividends and for sustainable, profitable growth in our core businesses.

Value management training

A communication and training initiative launched in 2006 helps firmly anchor value management in the Group. To date, over 4,000 decision makers from all segments have attended training seminars. Most of them were held in Europe, but training has also been provided in China, the USA, Mexico, Brazil, Japan and South Korea. Tailoring the seminars to specific segments and target groups ensured a high level of relevance and practical value.

ThyssenKrupp best

Increasing the value of the Company for our stockholders, enhancing our performance for our customers, and eliminating weaknesses in our operating structures – these goals were achieved again in 2007/2008 by ThyssenKrupp best. For seven years now, the program has been supporting the process of continuous improvement in the Group and providing the necessary guidance and tools. The following modules form the basis for the program's success: Organization & Commitment; Screening & Initiatives; Training & Tools; Reporting & Controlling; Communication, Know-how Transfer & Employee Involvement. All employees can get involved, take part in projects and share their new-found knowledge. In the reporting year alone, more than 1,100 new projects were launched.

Worldwide success

Since the program was initiated in 2001, ThyssenKrupp best has significantly increased the value of the Group. At September 30, 2008 the program comprised 7,337 projects. A further 1,620 projects were under way at discontinued operations.

In fiscal 2007/2008 more than 50% of the projects were carried out at Group subsidiaries outside Germany. Companies at more than 400 locations in almost 50 countries have contributed projects to the program. The majority of projects – around 70% – were carried out in Europe, primarily Germany, Spain and the United Kingdom. Over 20% of the projects took place on the American continent – successful project teams have now been formed in the USA, Canada, Mexico, Brazil and Colombia. Value enhancement projects were also launched in China, South Korea and other countries in the Asia/ Pacific region, accounting for 7% of all best projects. The increase in projects organized on a cross-country basis is particularly encouraging.

The transfer of knowledge from one Group subsidiary to another is a key success factor of ThyssenKrupp best. Successful project ideas are communicated to different segments and areas, revised, and transferred to other companies. In addition to the program's internet-based platform best plaza, numerous events are held to encourage knowledge sharing among Group companies. We successfully continued the "Best Practice Fair" series in 2007/2008 with events featuring e.Procurement and Six Sigma.

Initiatives focused on key areas

In the ThyssenKrupp best initiatives, we bring together the results and experience gained in projects and provide tools for project work. We communicate training modules and additional in-depth knowledge. Acting as multipliers, numerous experts systematically drive the initiatives forward in the segments by helping the Group companies identify and exploit potential for improvement and promoting knowledge transfer in the Group.

In addition to the purchasing initiative, which has strengthened purchasing throughout the Group on a lasting basis since 2005, in 2007 we launched the Sales & Service initiative, which has already produced initial results. The initiative is aimed at exploiting the potential for sustained improvement in sales and services, focusing on products, customers and services as well as internal processes and organizational structures.

2008 ThyssenKrupp best Award

In the reporting year, three project teams from the Steel, Technologies and Services segments won the now traditional ThyssenKrupp best Award. Projects were judged on the basis of methodology, implementation, scope, transferability and overall potential. First prize was awarded to a company from the Services segment for their project aimed at maximizing customer potential in mature markets. Second prize went to a ThyssenKrupp best team from the Technologies segment for a project to optimize global sourcing. Third prize was won by a project team from the Steel segment who achieved significant cost savings by developing alternatives to existing alloying concepts for specific steel grades.