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Management report on the group

Subsequent events, opportunities and outlook

World economic growth will continue at a slightly slower pace. Despite increasing economic risks, we expect ThyssenKrupp to maintain its positive performance. In fiscal year 2007/2008 we aim to achieve sales of around €53 billion. For earnings before taxes and major nonrecurring items, our target is upwards of €3 billion.

There were no significant events requiring disclosure after the balance sheet date.


ThyssenKrupp will remain focused on the three business areas Steel, Capital Goods and Services. This is where we see our global strengths, based on competitive products, strong manufacturing expertise, outstanding employees and excellent contacts with our customers. The share of services in sales will increase in all segments, because beyond the products themselves, customers increasingly require advice and services at local level. The internationalization of our business activities will continue to increase in line with the longtime trend. ThyssenKrupp is a global company with a strong position on its home market in Europe.

Global growth will remain robust. However, growth in global gdp is expected to slow from 5.2% in 2007 to just under 5% in 2008. World economic growth will continue thereafter, albeit at a slower pace. The risks to global growth have increased as a result of the uncertainties triggered by the US real estate crisis, the rise in interest rates worldwide and the raw material price trend.

In the euro zone the economic upswing is expected to continue at a slightly slower rate in 2008. Investment in particular will slow from its current very high level. A similar situation is expected in Germany. In addition, we forecast slightly weaker growth impetus from exports. By contrast, the situation on the labor market is expected to have a positive impact, helping increase private consumption especially in Germany.

In the USA the difficult situation on the housing market will dampen private consumption. However, improved exports should lead to a moderate acceleration in growth in 2008. In Japan, moderate growth in line with 2007 is expected in 2008.

Gross domestic product 2008* change compared to previous year in %

Gross domestic product 2008

The developing countries in Asia as well as Central and Eastern Europe will continue to be growth hubs in 2008. The dynamic expansion in China will continue. Strong investment, increasing consumption and high exports will generate double-digit economic growth. With domestic demand strong, the Indian economy will also maintain its high expansion rate in 2008. Most countries of Central and Eastern Europe are also expected to maintain their momentum. Russia will profit from the continued boom in raw materials.

Pleasing prospects in key sales markets

We expect a predominantly favorable trend on the customer markets of importance to ThyssenKrupp.

Our assessment of the outlook for the global steel market remains favorable. In particular demand from China, India and the CIS states will continue to increase at above-average rates in the next few years. Growth is also forecast for the other regions. World demand for rolled steel will be just under 7% higher, corresponding to a rise in crude steel production to over 1.4 billion tons. A further increase in raw materials and energy requirements is expected to impact the cost of steel production. The European steel industry expects the steel market to stabilize at a high level in 2008. In view of the existing inventory surpluses, demand is likely to slow with a corresponding impact on output at the beginning of the 2007/2008 fiscal year. One factor causing uncertainty is the future development of third-country imports into the EU. If the Chinese government's measures to control exports take hold, the situation could start to ease.

In the stainless market, inventory levels at distributors and service centers remain slightly excessive at the beginning of fiscal 2007/2008 but are beginning to fall. We therefore expect orders from distributors and service centers to pick up in the first quarter of the fiscal year. However, the producers' order books are currently still at such a low level that capacity cutbacks can be expected again this quarter. Provided the prices of raw materials and in particular nickel are less volatile, order intake and shipments are expected to return to normal in the course of the fiscal year.

The global automotive industry remains on an upward trend. World auto production is expected to increase by around 3% to 74.7 million vehicles in 2008. Growth will be focused on China, India and the countries of Central and Eastern Europe. In the NAFTA region, auto production is expected to pick up again slightly after the decline in 2007. The Western European OEMs will not quite match the prior-year output figures. German production of cars and trucks is forecast to fall just short of the 6 million mark.

In the mechanical engineering sector, there are signs of cooling in some regions for 2008. While unbroken investment growth continues to drive the rapid expansion in China, the weakening of investment in the industrialized countries will lead to a distinct slowdown. Growth rates in Western Europe are therefore expected to be more than halved. 6% growth is forecast for the German mechanical engineering sector. Backed by the good order situation, the positive performance of the large-scale plant construction sector is set to continue.

In the construction sector, the countries of Asia and Central and Eastern Europe will continue to report the strongest growth. In the USA, the weakness of the real estate market will result in another slight decrease in construction output in 2008. For the German construction sector we expect only slight growth because the positive impetus from the commercial building sector is slackening.

Opportunities: Strategy of growth

Thanks to our internationally oriented strategic positioning, we see good opportunities for taking ThyssenKrupp to a new dimension in the coming years. As well as an increase in sales, this will require qualitative growth combining sustained earning power and high productivity with a strengthening of our technological lead in many of our product areas. By expanding our expertise in products and processes, we can systematically raise the company's profile in highly demanding markets. This is true of all product areas in which our five segments are among the leading players – be it innovative naval shipbuilding, new materials or global industrial services.

Opportunity management system at all levels

At all levels of the Group we actively identify and exploit opportunities for the company. In line with the customer-focused organization of ThyssenKrupp, opportunities identified are principally utilized directly by our segments operating on the market. The Group holding company provides the strategic framework and secures the financing and liquidity of the segments. The individual plans are fed into the Group's overall opportunity-based strategic concept which describes the future roadmap of ThyssenKrupp. For more information on opportunities, strategic targets and development lines, please refer to the section on strategy.

Opportunity management also includes the wide range of measures designed to enhance the performance of the Group as a whole through systematic internal efforts. Our continuous improvement process, which has been implemented under the ThyssenKrupp best program for the past six years, will continue to enhance our capabilities and increase the value of the company on a sustained basis in the future. More information is provided in section Business management – Goals and strategy.

Opportunities in all segments

The Steel segment sees its opportunities mainly in the highly profitable market for high-end flat carbon steel. Intelligent material solutions, product-related processing and an extensive range of services will continue to present new opportunities for operating profitably and productively in close cooperation with customers. The high share of sales covered by long-term agreements (60%) is a clear indication of our close ties with customers. This makes the segment's revenues much more resistant to the cyclical fluctuations of the steel market – compared with the general market price level.

The new mills being built in Brazil and the USA will open up new transatlantic opportunities. The integrated steel mill we are currently building in Sepetiba Bay in the state of Rio de Janeiro in Brazil has the capacity to produce 5 million tons of slab. The location also offers space for further expansion. Of the slab produced in Brazil, 3 million tons will be sent to the new plant in Mount Vernon in the US state of Alabama.

At this location the Steel and Stainless segments are building a joint complex with melting, rolling and finishing capacities. The centerpiece of the plant will be a hot strip mill which will be used by both segments. This new plant will open up new opportunities for our carbon and stainless steel products on the US market.

With its wide range of high-tech materials from stainless steel to nickel alloys to titanium, the Stainless segment aims to exploit its opportunities on the world market as a competitive materials specialist. This will involve the expansion of services, for example with a diverse range of processing operations. Stainless aims to further strengthen its presence close to customers by optimizing its global network of sales and service centers. Intensified activities on the attractive NAFTA market are also expected to open up new strategic opportunities.

Considerable growth opportunities are available to the Technologies segment in the mining and processing of raw materials, as strong demand is forecast for the coming years. The segment provides sophisticated solutions for a wide range of applications, including oil sands mining, innovative refinery processes, coal gasification and CO2-free power plants. Another key product are our large-diameter antifriction bearings which are used in wind energy systems. Further growth potential is available in the Asian region. The rapid expansion of the infrastructure and the demand for increasing mobility offer attractive prospects for our business activities.

The Elevator segment aims to expand its current world market position on a sustained basis. An increasingly dense network of branches close to customers is designed to secure the current level of business. Growth opportunities have been identified for example in Asia, where Elevator expects the economic expansion to yield a wealth of new orders. The global service strategy, which ensures consistently high standards in the maintenance of elevators and escalators worldwide, also holds good prospects.

For Services, the opportunities lie in continued international growth, in particular in Eastern Europe, North America and Asia, and also in the further expansion and integration of the segment's services. The segment focuses systematically on materials and industrial services and the supply of raw materials for manufacturing and processing companies. Beyond the supply of materials, the spectrum of services includes processing, warehouse and inventory management, and complex global supply chain management solutions, for example for the aerospace industry. The range is supplemented by various production support services and innovative technical system solutions. The segment is increasingly profiting from the trend among customers to outsource demanding tasks to external, internationally experienced service providers.

Strong prospects offered by globalization

All our segments will further increase the international alignment of their activities in the future. As a technology-based Group, we want to participate in the development of the emerging states in South America, Asia and Europe and support them in building infrastructure. Energy, the environment, mobility – these are areas in which we see major opportunities for contributing to the development of these regions with high-performance materials, innovative components and complete systems solutions.

Climate protection as a market opportunity

On account of the increasing importance of climate protection, the Group is preparing an "Energy, Climate, Innovation" initiative to exploit synergy potential within the Group for reducing our own emissions and developing new marketable products for lowering greenhouse gas emissions in the interests of the environment. With our products we are well positioned in the area of climate protection which will be a major issue in the future.

Tax opportunities

The 2008 corporate tax reform will have a positive impact on ThyssenKrupp AG's taxation from 2007/2008. In conjunction with the other measures introduced, the planned reduction of corporate tax will lower the nominal tax burden in the corporate and trade tax group of ThyssenKrupp AG from 39.4% to around 31% of the domestic profit achieved by this group. The newly introduced limitation of interest deduction is not expected to apply owing to the good level of earnings we expect to achieve on the domestic market. In other European countries in which the Group generates pleasing levels of income, tax rate reductions have also been resolved (e.g. Spain and the Netherlands) or are under discussion (e.g. Italy). As a result, the Group's overall tax rate will decrease considerably with effect from 2007/2008.

Earnings situation expected to remain positive

If the economic forecasts prove accurate, we anticipate a continued positive performance overall in 2007/2008 and 2008/2009. Risks may arise from the development of exchange rates, in particular the euro/US dollar parity, as well as energy and raw material costs.

Sales: We currently expect sales in the current fiscal year to be in the region of €53 billion. The forecast for the individual segments is as follows:

For 2008/2009 we expect sales to remain positive provided no unforeseen economic downturn impacts our busine

Our mid-term sales target is €60 billion. In the longer term, especially after completion of the major investments of Steel and Stainless in North America and those of the other segments in other regions, our sales target is in the region of €65 billion.

Earnings and dividend: For 2007/2008 we plan to achieve earnings before taxes and major nonrecurring items of over €3 billion.

For 2008/2009 we expect the positive sales trend to be reflected in earnings.

In the medium term our sustainable goal for earnings before taxes and major nonrecurring items is €4 billion. Over the longer term, especially after completion of the major investments of Steel and Stainless in North America and those of the other segments in other regions, our target is €4.5 billion to €5 billion.

We will continue to pay a fair dividend in line with our aim of securing dividend continuity.

Employees: On the basis of current planning we will have more than 196,000 employees at September 30, 2008, an increase of 3%. In the following fiscal year, the headcount is expected to rise by a further 2%. However, the growth in employment will take place almost exclusively outside Germany because as a result of globalization our Group is increasingly setting up production and service sites close to our customers.

We will maintain the high standard of our apprentice training schemes. We will continue to train beyond our own requirements in the coming years to give as many young people as possible the chance to find work. The Group's total personnel expense in 2007/2008 will again be in excess of €9 billion; in the following fiscal year it could rise further.

Research and development: In the current fiscal year we will once again spend more than €800 million on the development of new products and processes and enhancement of existing ones. A further increase is planned in the following fiscal year. This demonstrates the importance of innovations for our company. To make the most effective use of the expertise available throughout the Group, we will continue to provide targeted support for cross-segment research and development activities in the form of numerous projects in 2007/2008. One example is InCar, a development project of Steel and Technologies aimed at setting up an integrative technology platform.

To further strengthen our innovation capabilities and exploit the available potential, we plan to launch a new Groupwide innovation program in 2007/2008. Based on the transfer of knowledge and experience in the Group, the program will help make more systematic use of synergies. This integrated approach is designed to enhance the effectiveness and efficiency of our research and development activities and speed up the process of transforming the talents and knowledge of our employees into innovations. Highly qualified employees are particularly important for these tasks. We will therefore recruit more employees – in particular trained engineers and scientists – for our research and development departments in 2007/2008.

Procurement: In 2007/2008 and 2008/2009 materials expense will again amount to more than 50% of sales due partly to persistently high raw material prices. In addition, the proportion of purchased products and services has increased further because we procure not only simple components but increasingly also more complex products and services from high-performance external suppliers. In view of our long-term, international supplier relationships, we do not anticipate any bottlenecks in supplies of raw materials, components, operating materials or services. With the support of our strategic supplier management system, we will identify and select the best suppliers and build long-term partnerships with them.

Energy: We anticipate a further rise in the oil and natural gas price level in 2007/2008. Electricity costs are also likely to increase. In subsequent years electricity could become even more expensive as the increased costs of coal, oil, gas and emission rights take effect. As a result, the procurement costs of energy-intensive products, e.g. industrial gases for our steel plants, will increase. To counter the rising cost of natural gas, we will endeavor to continue to conclude long-term agreements and widen our access to the market. Additional costs will also be incurred because in the second period of the European emissions trading scheme (2008 – 2012) we are likely to need more emission permits than we have received.

Environmental protection: Spending on ongoing environmental protection programs is expected to total over €500 million in both fiscal 2007/2008 and fiscal 2008/2009. Most of this will go towards reducing air and water pollution. For the new plants being built in Brazil and the USA we have budgeted for significant investment in pollution control equipment. All segments will expand their recycling activities; this reduces raw material costs and protects natural resources. One key area is the reduction of greenhouse gas emissions. For this we will continue to switch to production processes and equipment using as little energy as possible in all our operations.

Expected financial and liquidity situation

At around €10.3 billion, the volume of investment approved by the Supervisory Board is significantly higher than the average level of previous years due to the investments in Brazil and the USA. For 2007/2008 we plan to invest €4.9 billion in tangible, intangible and financial assets, €3.4 billion above depreciation. ThyssenKrupp has adequate funds to finance these investments. Our ambitious investment program for the following fiscal year is also on a solid financial basis.

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