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STRATEGY: ON GROWTH TRACK

Following a period of consolidation, over the next few years ThyssenKrupp is to pursue a forward strategy aimed at achieving sustainably high earnings. All segments will contribute to this growth. The building of a new corporate headquarters in Essen will signal the strength of the Company going forward and at the same time reduce administrative costs and shorten decision-making paths.

Expansion of services and innovations

We aim both to strengthen our industrial activities and expand our position as a service provider. Our existing market and customer contacts in all segments provide a strong platform from which to offer our business partners further products and services. Through intensive innovation efforts and investment in new products and processes, we will also enhance our products and services to focus them even more sharply on market and customer needs. To this end, the ratio of research and development expenditure to sales is to be increased to 2%. In the reporting year this ratio was 1.6%. We will also focus systematically on the world market and further internationalize our product, production and customer structures.

Sales target €50 billion

We plan to achieve sales of €50 billion, 60% of which will be generated by the production of materials and capital goods. The remaining 40% will come from services. All segments are expanding the service side of their business.

For the steel activities – i.e. carbon and stainless – we plan to achieve sales of €16 billion to €19 billion. In capital goods we expect sales to reach €19 billion to €21 billion and in materials and industrial services the target is €13 billion to €14 billion. This strong expansion is not to be achieved at the expense of profit – a parallel increase in earnings is also planned.

Within a period of around ten years we plan to achieve Group sales of €55 billion.

Growth strategies in the steel business

In the Steel segment's carbon steel business, the growth strategy is focused on the markets of North America and Europe. In the NAFTA region we are aiming for a market share of 5% in high-quality flat products, while in Europe our target is over 13%.

Customers in both regions will be supplied with the 5 million tons of carbon steel slabs produced by our new steel mill in Brazil. The foundation stone for the new €3 billion mill was laid on September 29, 2006. Production is scheduled to start in early 2009. The mill will employ around 3,000 people and create a further 10,000 jobs at suppliers and service providers in the region. Offering optimized costs and quality in line with the Group's high standards, the slabs supplied from the Brazilian state of Rio de Janeiro will secure our market strategies for Europe and the NAFTA region.

In Europe we will strengthen our outstanding market position with additional investments. In Duisburg a new replacement blast furnace will be installed to secure our crude steel base. In addition we are investing €400 million in Duisburg to remove bottlenecks in individual production steps and rationalize the production flow.

In the NAFTA region we are pursuing various options. By acquiring the Canadian steel producer Dofasco we could quickly achieve a strong position on the North American market for high-quality flat products. This takeover is a high priority for us. As an alternative to the acquisition of Dofasco we are looking into establishing a new plant in the USA which could be built and used jointly by the Steel and Stainless segments. At the hub of this facility would be a hot strip mill which would mainly process slabs from the new steel mill in Brazil. The new plant would also feature cold-rolling and hot-dip coating capacities for high-quality carbon steel flat products. The search for a location is currently under way. The location must offer optimum logistics – for slab supplies from Brazil and for the distribution of end products to North American customers.

The Stainless segment, too, aims to expand its international position and continue to participate in the steady growth of the stainless market. The main focus is on the North American market. We are therefore examining the possibility of establishing extensive capacities for stainless flat products at the joint location with the Steel segment in the USA. The stainless steel slabs produced in a 1 mt capacity melt shop could be processed on the hot strip mill. In addition we aim to invest in a cold-rolling facility which will be designed initially to produce 325,000 tons of cold strip and 100,000 tons of pickled hot strip. Our Mexican stainless steel plant ThyssenKrupp Mexinox could then also be supplied with starting material directly from the new plant in the USA.

Stainless is the world market leader in stainless flat products and nickel alloys. Outside Germany it has production capacities in Italy with ThyssenKrupp Acciai Speciali Terni and in China with Shanghai Krupp Stainless, as well as the operations in Mexico.

In addition to the planned expansion, we aim to increase value added both in stainless flat products and in high-performance nickel alloys and titanium. To achieve this goal, a number of investments are planned both for the production plants and in the service center organization. By investing further in nickel alloys and titanium production, we will increase our share of the fast-growing aerospace and energy markets.

Innovative capabilities a strategic strength

Technological competency and constant innovation are the key to the market for capital goods on which the Technologies segment operates. Following its concentration on high-earning business units, Technologies is now well equipped to maintain and further improve on the outstanding positions it has achieved in its individual areas of activity. Over the next few years we will strengthen our market position as an international supplier of leading-edge technology in mechanical engineering, plant construction and shipbuilding. International investments and acquisitions will contribute to this. For example, we plan to expand production of industrial large-diameter bearings in Germany, India, Japan and China.

In shipbuilding, the takeover of HDW has opened up new opportunities, especially for our innovative submarines with fuel cell propulsion. The acquisition of a 60% shareholding in Atlas Elektronik has also provided Technologies with strong capabilities in marine electronics. Our own expertise, for example in plant technology, is also in demand for the expansion of the Asian economies.

Combination of Automotive and Technologies

The Technologies segment is now also a market partner for high-quality vehicle components and systems following the combination of our automotive business with the Technologies segment effective October 01, 2006. This integration focuses our automotive activities on core businesses with sustainable earnings potential and concentrates our innovation and marketing capabilities. As part of the planned realignment, our body and chassis activities in North America with around €1 billion sales and 3,500 employees were sold on October 16, 2006. The sale is to be closed by the end of 2006. In other regions we remain on expansion track. In China we have prepared the acquisition of the activities of the crankshaft manufacturer Tianrun, and further moves will follow on this auto market of the future. Following the integration of Automotive into Technologies, the ThyssenKrupp Group will in the future comprise the five segments Steel, Stainless, Technologies, Elevator and Services.

Elevator business remains dynamic

In addition to expanding existing activities, our Elevator segment's strategy is focused on further strategic acquisitions, both in the highly industrialized countries and in the young growth regions of the world. Elevator now has a presence on the Italian market and has expanded its position in Spain and India. Service and production activities are contributing equally to the growth in existing business. An increasingly dense network of branches close to our customers safeguards our market presence. In addition, a global service strategy is designed to secure the high standards of our service activities at all locations worldwide: The strategy sets high standards for the work of our service technicians worldwide and guarantees the quality of services.

Services: Focus on expansion

Our Services segment aims to continue its growth on the market for materials and industrial services. Acquisitions will support the expansion of existing business. The expansion strategy focuses on the NAFTA region, Eastern Europe and also South America and Asia. For example, the acquisition of an interest in the industrial services business of RIP reflects our expectations in South America. RIP is market leader in its sector and is represented at all key industrial locations in Brazil. In the materials area, the segment is vigorously pursuing its Eastern Europe strategy. In Asia it is increasingly setting up joint ventures with local partners.

New ThyssenKrupp Quarter in Essen

To achieve our growth targets efficiently, we aim to optimize decision-making routes and administrative costs in the Group. For this, ThyssenKrupp plans to concentrate its main head office functions at the two locations of Duisburg and Essen over the next few years. The Steel and Stainless segment holding companies are already based in Duisburg. The six office buildings currently used in Bochum, Düsseldorf and Essen have around 150,000 m² of net floor area. Centralization in the new quarter in Essen will reduce the area requirement by around a third. The Group holding company, the holding companies of the three other segments and some operating units will be located there. Design and planning work is currently under way for the new quarter for around 2,000 employees. The move of ThyssenKrupp AG from Düsseldorf to Essen is scheduled for year-end 2008. Further sections of the quarter will be completed by 2010.

A high-quality architectural style is planned for the new quarter which will reflect the Group's innovation and internationality and set new standards in corporate architecture. In addition to the Group's office and administrative buildings, plans for the project include a multi-functional facility featuring the ThyssenKrupp Academy and a conference center, a hotel and further amenities. The form and function of the entire ensemble will be characterized by outstanding, modern and forward-looking architecture.

VALUE-BASED MANAGEMENT

The Group is managed and controlled within the framework of 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. An integrated control concept, value-based performance indicators together with measures to enhance efficiency and growth and optimize capital employed are key elements of our management system.

Control concept secures Groupwide transparency

Our integrated control concept guides and coordinates the activities of all segments, supports the decentralization of responsibilities and guarantees Groupwide transparency. It aims to increase the value of the Group by bridging operational and strategic gaps between the actual and target situation using concrete measures. For this we have established high-quality systems for the up-to-date reporting of actual and forecast figures of both strategic and operating elements. This focus on value creation pervades all management processes. As a measure of business success, the main performance indicators used in value management are also used to calculate the variable components of management compensation.

ThyssenKrupp Value Added as central performance indicator

The central performance indicator for value-based management in the Group is ThyssenKrupp Value Added (TKVA). TKVA 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.

Calculation of ThyssenKrupp Value Added (TKVA)

In addition to TKVA, cash flow is also taken into consideration 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 specific risk is expressed by the so-called beta factor. 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 liabilities) is the interest on a risk-free alternative investment plus a company-specific risk premium. Based on the current market situation and subject to the condition that the current investment-grade status is maintained, we currently base our calculations on a premium of one percentage point.
• The interest rate for pension accruals is calculated on the basis of the weighted 5-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 is currently 9%. Since the business environment is constantly changing, the weighted average cost of capital is regularly reviewed and adjusted if necessary. Specific WACC figures are established for the segments which reflect their respective risk structures.

WACC for the segments in %

Application of the value management system

Three levers can be used to increase TKVA: profitable growth, increases in operating efficiency, and optimization of capital employed. Value through profitable growth is created in particular by new projects, provided they generate returns higher than their cost of capital. A major contribution to increasing operating efficiency is made by the ThyssenKrupp best value enhancement program, which is described in more detail here.

Capital employed as the third lever to increase TKVA can be optimized by withdrawing from business activities in which the cost of capital cannot be earned. Alternatively, targeted programs can be implemented to release capital, i.e. to reduce capital employed without reducing EBIT.

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

Components of ThyssenKrupp Value Added (TKVA)
* Earnings including discontinued operations before taxes and interest income/expense
			2004/2005
			EBIT*   (million €)		Capital employed (million €)		ROCE (%)		WACC (%)		Spread (% points)		TKVA (million €)
Group			2,652		18,388		14.4		9.0		5.4		997
Thereof:
Steel			1,167		5,965		19.6		9.5		10.1		600
Stainless			353		2,996		11.8		9.5		2.3		68
Automotive			240		2,982		8.0		9.5		(1.5)		(43)
Technologies			(179)		982		(12.9)		9.5		(22.4)		(220)
Elevator			381		1,614		23.6		8.5		15.1		244
Services			335		3,089		10.8		9.0		1.8		57
			2005/2006
			EBIT* (million €)		Capital employed (million €)		ROCE (%)		WACC (%)		Spread (%-points)		TKVA (million €)		Change TKVA (million €)
Group			3,044		17,056		17.9		9.0		8.9		1,510		513
Thereof:
Steel			1,477		5,937		24.9		9.5		15.4		913		313
Stainless			489		3,048		16.0		9.5		6.5		199		131
Automotive			(52)		2,938		(1.8)		9.5		(11.3)		(331)		(288)
Technologies			311		1,427		31.6		9.5		22.1		316		536
Elevator			423		1,876		22.6		8.5		14.1		264		20
Services			553		2,884		19.2		9.0		10.2		294		237

The Group's earnings before taxes and interest increased by €392 million to €3,044 million in 2005/2006. The improvement in ROCE associated with this was reinforced by a reduction in capital employed. Average capital employed decreased by €1,332 million to €17,056 million. ROCE thus increased from 14.4% to 17.9%; the Group's WACC of 9.0% was thus again significantly exceeded.

TKVA increased by €513 million to €1,510 million. The improvement in the Group's profitability and TKVA is due particularly to the large increase in operating earnings but also to the divestment program to refocus the Group strategically.

In the Steel segment, earnings before interest and taxes increased by €310 million to €1,477 million thanks to the positive price and volume trends. With capital employed virtually unchanged, increased from 19.6% to 24.9%. The WACC of 9.5% was thus significantly exceeded and TKVA of €913 million was achieved. This is an improvement of €313 million from the prior year.

Earnings before interest and taxes at Stainless increased by €136 million to €489 million mainly as a result of the demand recovery that began in almost all market segments in early 2006, which in turn was accompanied by a steady increase in base prices. With capital employed slightly higher, ROCE increased from 11.8% to 16.0%. The WACC of 9.5% was exceeded, resulting in TKVA of €199 million. This represents an increase of €131 million from the prior period.

At Automotive, earnings before interest and taxes decreased by €292 million to €(52) million. This deterioration was mainly due to impairment charges in connection with the proposed divestments in North America but also reflected impairment charges and restructuring programs in various other areas of the segment. In addition, steel price increases could not be passed on to customers in full. With capital employed slightly lower, ROCE decreased from 8.0% in the prior year to (1.8)% in 2005/2006 and was thus below the WACC of 9.5%. TKVA decreased by €288 million to €(331) million.

Earnings before interest and taxes at Technologies increased by €490 million to €311 million in the reporting period. ROCE improved from (12.9)% to 31.6%. Significant operating improvements were achieved in all business units. The disposal of low-profit operations in the course of 2004/2005 and 2005/2006 also had a positive impact. With a WACC of 9.5%, TKVA reached €316 million, an increase of €536 million from the prior period.

In the Elevator segment, earnings before interest and taxes increased by €42 million to €423 million. However, capital employed rose by €262 million to €1,876 million, resulting in a slight decrease in ROCE by 1 percentage point to 22.6%. TKVA increased to €264 million compared with €244 million a year earlier.

In the Services segment, earnings before interest and taxes increased by €218 million to €553 million. This was mainly due to the improved situation on the international material markets but also reflected the absence of loss-making businesses sold in the meantime. Capital employed decreased by €205 million to €2,884 million. The two effects resulted in an increase in ROCE from 10.8% to 19.2%. TKVA improved by €237 million to €294 million.

The results of the analysis of the performance indicators feed directly into portfolio management at ThyssenKrupp. This involves structural measures with a primarily strategic character. Specifically it involves selecting and growing businesses with which the targeted TKVA improvements are to be realized, and withdrawing in a timely and profitable way from activities which do not achieve adequate TKVA improvements. In addition, it involves creating new businesses by entering into promising new markets on favorable terms. In this way we create the basic requirements for the ability to pay dividends and for sustainable, profitable growth in our core businesses.

To further anchor value management in the strategic and operating decisions of the Group, we launched a broad-based communication and training initiative in March 2006. Under this program, several thousand ThyssenKrupp employees are receiving targeted training in the use of this value management system.

THYSSENKRUPP BEST

The goals of our value enhancement program ThyssenKrupp best are to improve the Group's performance, build on its strengths and remove any weaknesses. For five years now the program has been contributing to improving earnings. In the reporting year alone, 1,453 new projects were launched to make our Company even better. The program is more successful than ever.

Almost 6,000 projects worldwide

At September 30, 2006, ThyssenKrupp best comprised altogether 5,995 national and international projects with over 19,500 concrete measures and over 36,000 individual steps. Since the program was first launched in 2001, 3,239 projects have already been successfully completed. Almost 500 projects have been removed from the program because the Group has sold or closed the corresponding activities. Work focused on operating efficiency, sales/services, purchasing, performance quality and capital productivity. Further projects sought to further integrate employees and executives or intensify knowledge transfer within the Group.

In line with the concept of the program, the projects can in many cases be transferred to other areas or segments of the Group. The "Claims management in plant construction" project, for example, was further developed and optimized jointly by various Group subsidiaries; the processes developed are now in use in several segments.

The program is firmly established worldwide, with over 60% of projects taking place outside Germany. Teams are working on efficiency-enhancement projects at more than 400 locations in 38 countries. Some 3,500 projects were conducted in Europe, chiefly in Germany, France, Italy, Spain and the United Kingdom. Almost 2,000 projects took place on the American continent – in the USA, Canada, Mexico, Brazil and Colombia. Over 350 projects were launched in the Asia/Pacific region – mostly in China and Korea. Almost 200 projects were organized on a cross-country basis. In addition to the Group subsidiaries in Europe and North, Central and South America, an increasing number of Asian companies are participating in the program.

The responsible Executive Board members of ThyssenKrupp AG and the segment holding companies worked to drive the program forward. By visiting projects in Germany and abroad, they again underlined the high importance attached to the program in the Group.

ThyssenKrupp best projects worldwide 2005/2006

Purchasing initiative adds new impetus

New impetus was added by the successful purchasing initiative, which achieved considerable cost reductions in the reporting year and now comprises more than 920 projects. Following the pilot phase, in which the first projects were launched and successfully concluded, the Groupwide roll-out began in 2005. The successes have been achieved through systematic worldwide use of strategic and operating methods made available centrally by Corporate Materials Management and rolled out in cooperation with all segments. For example, teams from the technology, quality, logistics and purchasing areas used the Global Sourcing methodology to investigate numerous product categories and identify new supply sources.

At the Best Practice Day Purchasing in November 2005, managers from all segments were able to find out about project ideas and purchasing tools and discuss applications in their segments with purchasers and technology experts. One focus was on cross-company project ideas, supported by purchasing tools such as supplier management, global sourcing and e-procurement. Many of these ideas were translated into projects in 2006.

Awards for successful teams

In the year under review, ThyssenKrupp best Awards were again presented to the best project teams. All segments and the Group holding company were eligible to enter, and projects were judged by a panel on the basis of their financial results, scope and methodology. Since one of ThyssenKrupp best's key aims is to intensify knowledge transfer within the Group, judging focused above all on the extent to which project results can be transferred to other areas of the Group. Due to the excellent standard of work, four project teams won ThyssenKrupp best Awards. The coveted first prize was won by a team from the Technologies segment for its project entitled "Expansion of service activities" in project and order management for the cement and minerals industry. Second prize went to a project team from Services which explored new ways of reducing financial liabilities. Joint third prize was awarded to teams from Stainless and Elevator for the reduction of maintenance costs and the establishment of the SEED School. For more information on the SEED School, please go here.

MANAGEMENT COMPENSATION

The overall compensation of Executive Board members comprises a number of compensation components: These are a fixed salary, bonus, long-term incentive components as well as additional benefits and pension plans. More details and a breakdown of individual compensation amounts can be found in the Compensation Report in the section "Corporate Governance at ThyssenKrupp". This Compensation Report, which has been examined by the auditors, forms part of the management report.