VOLKSWAGEN AG

Annual Report 1997 Key Figures Annual Report 1997 Volkswagen Group VOLKSWAGEN AG 1997 1996 %} 1997 1996 (%} Vehicle Sales * un its 4,250,414 3,994,312 + 6.4 1,736,683 1,692,318 + 2.6 Production * un its 4,290,875 3,976,896 + 7.9 1,187,869 1,244,014 4.5 Workforce 31.12. * 279,892 260,811 + 7.3 98,762 95,176 + 3.8 Sales milli on DM 113,245 100,123 + 13.1 54,285 49,891 + 8.8 Net Earnings milli on DM 1,361 678 X 966 630 + 53.3 Dividend of VOLKSWAGEN AG milli on DM 483 315 + 53.2 of wh ich on O rdinary Sha res milli on DM 369 250 + 47.7 of wh ich on Preferred Sha res milli on DM 114 65 + 73.9

Capital Investments milli on DM 9,843 8,742 + 12.6 7,840 3,725 X Add itions to Leasing and Renta l Assets milli on DM 7,734 7,639 + 1.3 Cash Flow excl. Leasing and Rental Assets milli on DM 7,199 7,047 + 2.2 3,857 2,457 + 57.0 inc l. Leasing and Rental Assets milli on DM 12,181 11,088 + 9.9 Depreciation and Write-Down milli on DM 6,094 4,933 + 23.5 2,900 1,993 + 45.5 Depreciation on Leasing and Rental Assets milli on DM 4,982 4,075 + 22.3 • The volume doto for the Volkswogen Group in clude the not full y consol idated vehicle-producing holdings AUTOE UROPA, Shanghai-Volkswagen, FAW-Volkswa gen and Chinchun Motor. As from 1997, VOLKSWAGEN AG production does not include the production of "Volkswagen Sachsen" companies; the previous yea r's figure ha s been adju sted.

Production figures Volkswagen North America Passenger Cars 1997 1996 Audi 1997 1996 Region 1997 1996 Golf 519,754 701,475 A4 283,250 313,927 Jetta (Vento} 143,159 107,041 Polo 455,112 459,811 A3 128,183 51,813 Golf 79,620 88,429 Passat 335,304 205,625 A6 122,083 106,326 Beetle 35,678 33,099 Sharan 58,581 55,676 AB 15,507 11,098 New Beetle 415 Arosa 42,741 Cabriolet, Derby 3 2,509 Vento 38,226 57,609 Coupe 8,754 8,337 258,875 231,078 Alh ambra 16,503 10,513 557,777 491,501 Jetta 192 South America/ Africa Region 1997 1996 Toro, Hil ux 524 7,440 Go I 417,668 397,071 1,466,745 1,498,341 Seat 1997 1996 Parati 58,853 34,681 Ib iza 168,492 153,000 Polo Classic 57,099 9,942 Passat/Sontana 45,132 54,841 Volkswagen Cordoba 91,326 77,436 Caravelle, Kombi 43,157 50,562 Commercial Polo, -Classic, Golf 26,670 36,558 V ehicles** 1997 1996 -Va riant 81,292 44,102 Tol edo 42,596 53,404 Jetta (Vento} · 5,418 11,567 Caravell e, Komb i 71,828 72,777 Marbella 18,139 21,930 Aud i A4 4,080 6,313 Fe li cia 25,581 Inca Kombi 11,070 9,328 Au di A6 890 Cordoba 5,620 Caddy Kombi 7,035 6,651 Logus, Pointer 28,348 Polo 4,863 Beetle 6,623 LT Kombi 3,429 929 Caddy Voyage Saveiro 38,205 35,280 Octavia 933 del ivery van 32,925 32,526 Transporter 10,492 Audi A6 204 Inca 11,443 VW trucks 10,426 Pas sat 98 deli very va n 14,414 16,836 6,672 Omnibus 2,137 1,069 467,289 415,213 Transporter 83,608 68,677 Golf Pickup 1,168 2,112 LT 26,690 10,370 718,592 695,885 Skoda Pickup 2,776 Asia-Pacific 225,630 152,753 Skoda 1997 1996 Region 1997 1996 Felicia 260,826 238,958 Santa no 230,443 200,222 Octavia 60,590 1,168 Jetta 43,950 26,381 Pickup 32,600 20,744 Ca ravelle, Komb i 8,292 9,222 Caddy Pickup 3,154 2,323 Audi 100 2,574 521 357,170 263,193 285,259 236,346 •• As from 1997 including Volkswagen Poznan Sp. z o.o., Poznan, Poland. This version of the Annua l Report is a translatio n from the German original. The German text is authoritative. The Annual Report consists of the fi nancia l stateme nts of the Volkswagen Group, the summary management re port of the Volkswagen Group and of VOLKSWAGEN AG and other information voluntarily made a vailable. ' Table of Contents

Supervisory Board and 4 Letter to Stockholders Board of Management 6 Report of the Supervisory Board

8 Supervisory Board and Board of Management

10 Marque Management Bodies

Report of the 12 Management Report: Board of Management Volkswagen Group and VOLKSWAGEN AG

Information about 26 Product Creation the Fiscal Year 30 Production Optimization and Procurement

38 Marketing

46 People and Management

50 Organization and Information Systems

54 Finance

67 Key Figures of the Marques and Regions

68 Results of Major Companies

Financial Statements of 70 Balance Sheet the Volkswagen Group 71 Statement of Earnings for 1997 72 Notes on the Financial Statements

84 The Volkswagen Group in Figures

88 Scheduled Dates

Th e fourth generation Golf - a new benchmark

3 Letter to Stockholders

Dear Stockholder, decided to postpone the already The start of production of the new area innovative human resources poli­ initiated capital increase. In view of the Golf signifies more than a model cies support and promote our competi­ The year as a whole saw positive devel­ stabilization of share prices on the Euro­ change. It fits perfectly in our planned tive edge. The best example of this is the opments in the world economy. The pean stock markets, on March 9th, 1998 reorientation of the Volkswagen concept ofthe "Breathing Company", in upward trend in the USA was sustained we resolved to continue with the capital marque, which we began one year ago which production is based on orders and the recovery in Western Europe increase. with the Passat. A key feature of the reo­ received. This is made possible only by continued. This also had an effect on Based on developments on the world rientation of our company is the plat­ the flexibility and commitment of all stock markets: national and interna­ market up to the end of 1997, Volks­ form strategy which, in addition to concerned. tional markets achieved record levels. wagen no longer excludes the possibility shorter development lead times, also We have again made progress in However, the second half of the year saw of entering into a takeover and/or parti­ permits more rationalized, and so more terms of quality of results. In the past a marked downturn as a result ofthe cipation within its core business. cost -effective, manufacturing. year the Group achieved a pre-tax financial crisis in Asia and the deteriora­ At the Annual Meeting of Stockhol­ Our attractive model range is and will return on sales of3.4 %. This means we tion in economic conditions in Brazil. ders on June 19th, 1997 the Board of remain the key to the future success of are half-way to our medium-term target The Volkswagen Group further Management was authorized to intro­ the company. In the coming years the of at least 6.5 %. In order to safeguard

Dr. Ferdinand Piech improved its position on world markets duce a stock option plan. An action for Volkswagen Group will continue pur­ the long-term competitiveness and in 1997. With 4,250,414 vehicles deli­ rescission was entered against the reso­ suing its aggressive, customer-oriented value ofthe company, we are concen­ vered to customers worldwide, and sales lution. In its judgement on March 11th, model policy in all market segments and trating on further improving our cost proceeds of 113.2 billion DM, we set 1998 the State Court in Braunschweig niches, as well as energetically advan­ structures, optimizing processes and new records. The strong demand and pronounced the stock option plan null cing its brand strategy. Our aim is to how they are controlled, and increasing consequent expansion of production and void. The Court adjudged that the satisfy our highly discerning customers productivity. The transformation pro­ capacities led to the creation of some rights of the stockholders to information with high-quality products, and to cess goes on. 19,000 new jobs within the Group; as at had not been adequately observed, and attain greater brand loyalty. In the new The success of our corporate policy the end of 1997 the Group employed that the exclusion of stockholders' sub­ model launches which we are was also reflected in the rise in the 279,892 people. The net earnings of scription rights was unjustified in view planning for the coming years, as well prices of our ordinary and preferred 1,361 million DM achieved by the Group of the general motivational effect alone. as high quality we will place great shares. The prices of the two categories as a whole and of 966 million DM It is the view ofVolkswagen that the emphasis on offering our customers of share rose by 57.6% and 57.0% res­ achieved byVOLKSWAGEN AG enable Annual Meeting of Stockholders was shorter waiting times and improved pectively between the end of 1996 and us to propose to the Annual Meeting of provided with full and detailed informa­ delivery reliability. December 30th, 1997. We hope that you, Stockholders the payment of a dividend tion, and the company will be appealing Western Europe, North America and the stockholders ofVOLKSWAGEN AG, of 12 DM per ordinary share and 13 DM against the judgement. Japan are showing signs of reaching will continue to place your trust in the on each preferred share. The past year was very important to their growth limits in the medium term. company as you have in the past. On September 5th, 1997VOLKS­ the Volkswagen Group in terms of future For that reason we are maintaining our WAGEN AG announced an increase in development. Our workforce handled globalization strategy in order to capital. The timing of the capital numerous new model start-ups. New increase our operations in Eastern increase was based on the preliminary models on the market were the Pass at Europe, Latin America and the Asia­ results of our investment plans for the Variant and Polo Variant, the Audi A6, Pacific region, as well as to open up new period 1998 to 2002, which we had the Seat Arosa and the Cordoba Vario. markets. begun in the late Summer. The results We are especially proud of the new Golf. To safeguard the future of our com­ indicated a substantial increase in The fourth-generation Golf sets quality pany with new ideas, we are building investment demand for new products standards never before seen in its class. firmly on the creativity and experience and the associated manufacturing facili­ With its outstanding crash protection, of our employees. The concept of ideas ties. In order to provide a sound finan­ offering levels of safety well above legal management is based on the company Yours sincerely, cial base for the attainment of our requirements, the new Golf passes all suggestion scheme and the tried and investment targets even under difficult European crash tests. proven CIP 2 (Continuous Improvement economic conditions, we decided to Process) workshops. A new element in undertake a capital increase to finance ideas management is the direct involve­ our future activities. As a result of the ment of managers in taking up, imme­ turbulence on the international securi­ diately reviewing and implementing the ties markets, on October 28th, 1997 we ideas put forward by their staff. In this Ferdinand Piech

4 5 Report of the Supervisory Board

The Supervisory Board regularly and Further topics of importance dealt matters, on the fine imposed upon Cromme, Dr. Hans Michael Gaul and comprehensively reviewed the position with at Supervisory Board meetings in VOLKSWAGEN AG by tl1e European Mr. Roland Oetker were appointed to of the company, the course of business the past year were: Commission in respect of the alleged succeed tl1em. and corporate policy in 1997. At four -The matter of alleged possible irregu­ obstruction of vehicle sales from Italian On July 5th, 1997, Dr. Josef Rust scheduled Supervisory Board meetings larities in purchasing transactions be­ dealers to German and Austrian cus­ passed away at tl1e age of90. Dr. Rust verbal and written reports from the tween ABB and Volkswagen, which tomers. A further matter dealt witl1 was was a member of the Advisory Board of Board of Management were received resulted in no further action being the conversion of nominal-amount Volkswagenwerk GmbH from 1951, and and reviewed; in addition, on June 19th judged nece sary. shares into individual share certificates between 1966 and 1974 was Chairman the constituent meeting of the newly -The settlement oftl1e dispute with the with one tenth of the former value. The of the Supervisory Board of VOLKS­ elected Supervisory Board was held. The European Commission regarding aid main items on the agenda were the WAGEN AG. Throughout his many years Board of Management also provided to "Volkswagen Sachsen". financial statements of the Group and of of membership of our Supervisory the Supervisory Board with monthly -The situation in Brazil and progress at VOLKSWAGEN AG for 1997, as well as Board he had a decisive influence on the detailed reports on significant develop­ the Curitiba plant. the accompanying Management Report development of the Volkswagen Group. ments throughout the Group. These -Optimization of the Volkswagen and of the Group and of VOLKSWAGEN AG, In Dr. Rust we have lost one of the great reports included the latest key volume Audi dealership networks. which, together with the accounts, had entrepreneurial personalities of the Dr. Klaus Liesen and financial data of the various mar­ -Delays in deliveries ofVolkswagen previously been examined by the audi­ early years. ques and regions of the Volkswagen models resulting from start-up diffi­ tors and approved witl1out qualification. The former member of the Board of Group, set against budget and against culties. The Supervisory Board accepted the Management of VOLKSWAGEN AG res­ the previous year, as well as a forecast -The out-of-court ettlement with the results of the audit. C&L Deutsche Revi ­ ponsible for Finance and Commercial through to the year-end. Written and "Deutsche Schutzvereinigung fUr sion AktiengesellschaftWirtschaftsprU­ Affairs, Dr. RolfSelowsky, passed away verbal questions from the Supervisory Wertpapierbe itz" (German Stockhol­ fung gesellschaft, Hanover, had been on July 26th, 1997 at the age of67. He Board were answered directly by the ders' Association) regarding the draf­ appointed auditors for the fiscal year brought a high level of experience and Board of Management. The Supervisory ting of dependence reports in relation 1997 at the Annual Meeting of Stockhol­ knowledge to our Company, and carried Board consulted in detail on all deci­ to legal transactions with the State of ders held on June 19th, 1997. out the tasks assigned to him atVolk - sions and undertakings of the Board of Lower Saxony for the years 1993 to The Supervisory Board's examination wagen with great commitment. The Management which were of signifi cance 1995. of the financial statements, the Manage­ Supervisory Board will honour his for the future of the Group. The dependence reports were ment Report and the proposal regarding memory. The Presidium of the Supervisory reviewed by the auditors, who subse­ appropriation of net earnings available The Supervisory Board would like to Board, comprising four of its members, quently issued the following unreserved for distribution gave rise to no objec­ thank the members of the Board of was convened prior to each meeting. attestation: tions. The Supervisory Board approved Management, the Works Councils and The Balance Sheet and Personnel Com­ "Pursuant to the review and appraisal and thereby adopted the financial tate­ all the employees of VOLKSWAGE AG mittee and the Finance and Investment which we have carried out with the due ments, and approved the proposal put and its affiliated companie for their Committee each met once in the course diligence, we hereby confirm that forward by the Board of Management efforts and achievements. of the past year. They each comprise five 1. the.actual contents of the report are regarding appropriation of net earning representatives of the stockholders and correct; available for distribution. The auditors five employee representatives. The four­ 2. the con ideration paid to the com­ were present at the relevant meeting of person Mediation Committee was not pany in connection with the legal the Supervisory Board at which this required to convene. Memberships of transactions set out in the report was item was reviewed, as well as at the pre­ the respective committees are indicated not inappropriately high." ceding meeting of the Balance Sheet in the list of Supervisory Board mem­ The reports were submitted to the and Personnel Committee, and reported bers. Supervisory Board for review at the on the principal results of tl1eir audit. Wolfsburg, March 20th, 1998 Major topics at the meeting of beginning of 1998. On conclusion of its Dr. Car! H. Hahn, Dr. Walther Leisler tl1e Supervisory Board were the stock review, the Supervisory Board has no Kiep and Dr. Otto Graf Lambsdorff re­ option plan and the capital increase by objections to raise against the declara­ signed from the Supervisory Board with VOLKSWAGEN AG. The plans for the tion made by tl1e Board of Management effect from the nual Meeting of Stock­ years 1998 to 2002 were presented, dis­ at the end of the reports. The Supervi­ holders on June 19th, 1997. The Supervi­ cussed in detail and approved at the sory Board duly notes the results of the sory Board wishes to express to them its Autumn meeting. The investment pro­ auditors' review and concurs with them. special thanks for their many years of gramme for VOLKSWAGE AG was At its Spring 1998 meeting the Super­ outstanding service and untiring com­ Dr. KJaus Liesen approved. visory Board consulted, among other mitment to the company. Dr. Gerhard Chairman of the Supervisory Board

6 7 Supervisory Board and Board of Management

Board of Management of Supervisory Board VOLKSWAGEN AG

1 2 3 Dr. jur. Klaus Liesen (66) 1 1 1 Wolfgang Klever (57)21 Bernd Sudholt (51 )'1 Dr. techn. h. c. Dipi.-Ing. ETH Essen Brunswick Wolfsburg Ferdinand Piech (60) Chairman Chairman of the Deputy Chairman of the Chairman Chairman of the Works Council of VOLKSWAGEN AG Group and Joint Works Councils January 1, 1993 Board of Management of Ruhrgas AG Brunswick Plant of VOLKSWAGEN AG Research and Development July 2, 1987* October 1, 1995 July 2, 1992 December 1, 1995 Production Optimization Klaus Zwickel (58) ll21 Dr. rer. pol. Klaus Volkert (55) n21 and Procurement Frankfurt Jtirgen Krumnow (53) 21 Wolfsburg November 30, 1996 Deputy Chairman Frankfurt Chairman of the Group and Joint Member of the Board of Management Chairman of the Member of the Board of Management Works Councils of VOLKSWAGEN AG April 10, 1992 Metalworkers Union of Deutsche Bank AG July 2, 1990 October 21, 1993 June 1, 1994 Bruno Adelt (58) Dr. rer. pol. Bernd W. Voss (58) 31 Controlling JosefBauer (58)31 Roland Oetker (48)'1 Frankfurt and Accounting Ingolstadt Dtisseldorf Member of the Board of Management January 1, 1995 Member of the Works Managing Partner of ROI Verwaltungs­ of Dresdner Bank AG Committee of AUDI AG gesellschaft mbH July 22, 1993 Dr. Robert Btichelhofer (55) July 2, 1987 June 19, 1997 Sales and Marketing Dr. rer. pol. Ekkehardt Wesner (58)'1 April1, 1995 Dr. jur. Gerhard Cromme (55)'1 Dr. jur. Heinrich v. Pierer (57) 21 Wolfsburg Essen Munich Senior Executive of VOLKSWAGEN AG Dr. rer. pol. h. c. Chairman of the Board of Chairman of the Board of Management June 18, 1996 Peter Hartz (56) Management of Fried. Krupp AG of Siemens AG Human Resources Hoesch-Krupp June 27, 1996 October 1, 1993 June 19, 1997 Changes on the Dr.-Ing. E. h. Supervisory Board: Dr. jur. Jens Neumann (52) Dr. jur. Hans Michael Gaul (56) 21 Gilnther SaBmannshausen (67) 21 Group Strategy, Treasury, Legal Matters Dtisseldorf Hanover Dr. rer. pol. Carl H. Hahn (71) 31 and Organization Member of the Member of the Supervisory Board of Wolfsburg January 1, 1993 Board of Management of VEBA AG PreussagAG Former Chairman of the Board June 19, 1997 July 2, 1987 of Management of VOLKSWAGEN AG January 1, 1993 to June 19, 1997 Changes on the Board of Gerhard Glogowski (55)'1 Siegfried Schinowski (57) 21 Management: Hanover Hanover Dr. h. c. Walther Leisler Kiep (72) Minister of the Interior and Deputy Chairman of the Frankfurt Dr. jur. Martin Posth (54) Minister President of the State of Works Council of VOLKSWAGEN AG General partner, Asia-Pacific Lower Saxony Hanover Plant Gradmann & Holler January 13, 1993 to April 5, 1997 November 13, 1996 July 2, 1992 From March 3, 1976 to July 1, 1982 and Human Resources January 26, 1983 to June 19, 1997 August 1, 1988 to January 13, 1993 Wilhelm Hemer (54) 31 Gerhard Schri:ider (53) 1121 Frankfurt Hanover Dr.jur. Trade Union Secretary Minister President of the State of Otto GrafLambsdorff (71)'1 to the Executive Committee of the Lower Saxony Dtisseldorf Metalworkers Union July 17, 1990 President, Deutsche Schutz­ May 3, 1989 vereinigung fur Wertpapierbesitz e. V. Dr. rer. pol. Albert Schunk (56)'1 (German stockholders' association) Gerhard Kakalick (51) 21 Frankfurt July 2, 1987 to June 19, 1997

Kassel Head of the International Department 11 Member of the Presidium ond the Mediation Chairman of the Works Council on the Executive Committee of the Committee in accordance with § 27 subsection 3 of the Cc-Determination Act. of VOLKSWAGEN AG Kassel Plant Metalworkers Union 21 Member of the Finance and Investment Committee. 31 Member of the Balance Sheet and Personnel June 3, 1993 July 5, 1977 Committee.

• This indicates since when the person in question hcs been a member of the body concerned, or the period for which the person was a member.

8 9 Marque Management Bodies

Volkswagen Seat Skoda Audi

Dr. techn. h. c. Dipl.-Ing. ETH Pierre-Alain De Smedt (53) Vratislav Kulhanek (54) Dr.-Ing. Franz-JosefPaefgen (51) Ferdinand Piech (60) Chairman of the Board of Management Chairman of the Board of Management Chairman of the Chairman of the of SEAT, S.A. of SKODA, AUTO a.s. Board of Management of AUDI AG Volkswagen Management Body July l, 1997 April 16, 1997 March 18, 1998 August l, 1993* Procurement Spokesman of the January 1, 1997 Detlef Wittig (55) Board of Management of AUDI AG Dr. Robert Bilchelhofer (55) Deputy Chairman of the Board Deputy Chairman, Commercial Affairs July 1, 1997 to March 18, 1998 Sales of Management of SEAT, S.A. Aprill6, 1997 Marketing and Sales April!, 1995 January l, 1997 to June 30, 1997 Sales and Marketing March 1, 1997 to June 30, 1997 July 1, 1995 Technical Development Francisco Javier Garcia Sanz (40) Josef An ton Habla (49) March 22, 1995 to June 30, 1997 Procurement Production Wilfried Bockelmann (56) Deputy Chairman of the November 30, 1996 June l, 1997 Technical Development Board of Management of AUDI AG Aprill6, 1997 January 1, 1997 to June 30, 1997 Dr. rer. pol. h. c. Erich Krohn (48) Production and Logistics Peter Abele (56) Peter Hartz (56) Finance August l, 1997 to December 31, 1997 Finance and Organization Human Resources April !, 1997 June 1, 1997 October l , 1993 Member without Portfolio Karl-Gilnter Bilsching (56) January l, 1997 to March 31, 1997 Production and Logistics Dr. jur. Georg Flandorfer (51) Dr. phil. Klaus Kocks (45) January 1, 1998 Marketing and Sales Communications Rodrigo Sergio Navarro Segura (35) July 1, 1997 July 1, 1996 Human Resources Dr. jur. Pavel Novacek (49) Jilrgen Gebhardt (53) January l, 1997 Human Resources Production Dr. jur. Jens Neumann (52) April 16, 1991 February 1, 1993 Organization and Systems Detlev Schmidt (53) September 3, 1993 Sales Dr. Ing. Werner Mischke (49) January 1, 1994 Changes on the Technical Development Lothar Sander (47) Skoda Management Body: July 1, 1997 ControUing and Accounting Dr. h. c. Andreas Schleef (54) January l, 1995 Changes on the Seat Volkhard Kohler (54) Human Resources Management Body: Deputy Chairman March 27, 1985 FolkerWeiligerber (56) Commercial Affairs Production, Logistics Dr. techn. h. c. Dipl.-Ing. ETH Ap ril 16, 1991 to April15, 1997 Erich Schmitt (51) March 16, 1993 Ferdinand Piech (60) Purchasing Deputy, Production and Logistics Chairman of the Ro lf Zimmermann (51) June 1, 1997 December l, 1991 to March 16, 1993 Board of Management of SEAT, S.A. Technology and Engineering Purchasing, Finance and Organization January 1, 1997 to June 30, 1997 February l, 1996 to April 15, 1997 November 25, 1992 to May 31, 1997 Dr. rer. nat. Martin Winterkorn (50) Production and Logistics Technical Development Dr. rer. pol. Utz Claassen (34) Aprill6, 1997 to July 31, 1997 Changes on the January l, 1996 Finance Audi Management Body: May 12, 1994 to March 31, 1997 Dr. techn. Herbert Demel (44) Chairman of the Volkswagen Dr. rer. nat. Board of Management of AUDI AG Commercial Vehicles Barthel Schroder (48) March 22, 1995 to June 30, 1997 Technology and Engineering Spokesman of the Bernd Wiedemann (55) May 12, 1994 to May 31, 1997 Board of Management of AUDI AG Chairman of the Management February 4, 1994 to March 21, 1995 Body ofVolkswagen Marketing and Sales Commercial Vehicles February 4, 1994 to March 31, 1995 August l, 1995 Technical Development March 1, 1993 to March 21, 1995 Graham John Morris (48) •This indicates since when the person in question has Marketing and Sales been a member of the body concerned, or the period far which the person was a member. April l, 1995 to February 28, 1997 lO 11 Management Report: Volkswagen Group and VOLKSWAGEN AG

The major world passenger car markets Recovery of world economy Revival of international Vehicle deliveries on the road In Germany deliveries rose by 3.8 % With a 17.2% share, the Volks­ (million units) sustained automobile business to success worldwide to 1,006,675 units. With a 27.5 (27.3) % wagen Group was again the clear 15 The upturn in the world economy conti­ As in the previous year, new car registra­ In the past year the Volkswagen Group share of the passenger car market, the leader on the passenger car market nued in 1997. The growth rate in the tions worldwide rose again in 1997, by a delivered 4,257,365 vehicles to cus­ Volkswagen Group strengthened its in Western Europe. 12 industrial nations was 2.6 (2.5) %. In the total of 2.3 % to 36.6 million units. With tomers. This represented an increase of position as the market leader. Market USA, gross domestic product rose more the further expansion of international 7.3 % over the previous year. All product leadership in the new federal states in 9 than expected by 3.8 (2.8) %. In contrast, production capacities, however, compe­ lines contributed to this positive devel­ the East was extended slightly, from 6 after a positive first quarter the eco­ tition has become more intense. opment: 2,971,823 units were delivered 25.5 % to 26.6 %. nomy of Japan took a sharp downturn, Whereas the automobile markets in byVolkswagen (+ 3.6 %), 546,436 by Audi 3 partly due to the increase in sales tax North America and Japan fell, the mar­ (+ 11.1 %), 402,772 by Seat(+ 17.0 %) 13.0 % up in the and to the ongoing crisis in the financial kets in South America and Central and and 336,334 by Skoda (+ 28.8 %) . The North America region 1993 1994 1995 1996 1997 sector; economic output in Japan there­ Eastern Europe enjoyed more lively proportion of sales outside Germany The USA has been on an upward eco­ fore grew by just 0.8 (3.9) % overall. The demand. The exchange rate turbulence increased to 76.4 %, from a level of nomic trend since 1992. Unemployment dynamic progress seen in South East in East and South East Asia and the 75.6 % in the previous year. and inflation remained low in the year Western Europe Asia in recent times was dampened in ongoing economic problems in Japan under review. The passenger car market USA the second half of the year by sustained led to a weakening of growth in the Asia­ Market leader in Western Europe fell slightly, however(- 2.8 %). This was exchange rate turbulence. The People's Pacific region. and in Germany principally due to buyers moving up Japan Republic of China, with a growth rate of The automobile business in Western With a 17.2 (17.2) % share, the Volks­ into the light truck segment. Audi Audi, in particular, sold strongly on 8.8 %, has to date been able to avoid Europe grew by 4.8 %, as against 6.2 % wagen Group was again the clear leader increased sales by 24.8% to 34,160 the US market. those negative effects almost entirely. in the previous year. Outside Germany, on the passenger car market in Western units, mainly due to the success of the While economic growth in Mexico and the Western European market grew by Europe. Total deliveries rose by 5.6 % to A4. Although faced with a difficult com­ Argentina accelerated, rising by 7.3 % 6.3 %, with 9.9 million units sold. The 2,488,315 units. Volkswagen sales fell by petitive environment, Volkswagen was New car registrations worldwide and 8.0 % respectively, growth in Brazil government incentive schemes to 0.2 % to 1,536,609 units, as a result of able to selll37,885 units, 1.5% more rose by 2.3 % to 36.6 million units. was just 3.2 %. Measures implemented encourage the scrapping of old vehicles the initially limited supplies of the Golf than in the previous year. The Yolks- by the Brazilian Government to counter in Italy and Spain provided a particular and Passat; it achieved a market share of wagen Group had a 5.2 (5.1 )% share of imbalances in foreign trade led to a stimulus for new registrations, which 10.4 (11.1) % of new car registrations. new registrations of imported makes. significant quelling of demand in the increased overall by 40.0 % and 11.1 % Audi increased deliveries by 10.8 % to last two months of 1997. respectively. In France the lack of incen­ 462,070 units, attaining a market share The upturn in Western Europe was tive to purchase new cars as a result of of 3.4 (3.2) %. Seat increased sales by maintained, due to dynamic export the expiry of the government scheme in 16.9 % to 364,248 units; its market share growth and low interest rates; the the Autumn of 1996led to a marked was 2.5 (2.2) %. Skoda delivered 125,388 average economic growth was 2.5 drop in demand of 19.7% in 1997. vehicles to customers(+ 41.6 %), (1.7) %. The still difficult employment New registrations in Germany of representing a 0.9 (0.6)% share of the conditions meant that there was no sus­ 3,792,100 units were a slight 1.2 % above passenger car market. tained revival of consumer demand. In the previous year's level. Of the total, the reforming countries of Central 3,528,200 were passenger cars(+ 0.9 %) Europe, the Czech Republic was able to and 189,000 vans and light trucks up to achieve only a small level of growth, 6 tonnes(+ 7.5 %). The low increase in while the economies of Poland and Slo­ incomes combined with bottlenecks in vakia expanded strongly. supply resulting from new model start­ Vehicles delivered 1997 1996 % The growth in gross domestic ups resulted in only modest market to customers product in Germany rose from 1.4 % in growth. Growth impulses for German Western Europe 2,488,315 2,356,453 + 5.6 the previous year to 2.2 % in 1997, borne manufacturers came primarily from in particular by export business, which export sales to Western Europe, Central of which: was favoured by the fall in value of the and Eastern Europe and North America. Germany 1,006,675 969,361 + 3.8 Deutschmark. Growth in the new fed­ Motor vehicle production increased by Italy 249,877 232,762 + 7.4 eral states in the East was below expec­ 3.7% over the previous year, reaching Spain 232,706 202,713 + 14.8 tations, however. Unemployment 5,022,831 units; exports even increased France 210,572 228,051 - 7.7 reached a post -war record of 4.4 million by 8.9 %, to 3,398,639 units. 207,595 183,427 on a yearly average. Great Britain + 13.2

12 13 Management Report: Volkswagen Group and VOLKSWAGEN AG

Shares of sales (before consolidation) Positive economic growth in Canada will be initiating measures to adjust pro­ The economy of Japan was affected Volkswagen Leasing GmbH, one of by marque and region (in %) led to a strong rise in the passenger car duction and personnel capacities by the increase in sales tax and the the leading companies in the European market(+ 11.8 %). The Group sold accordingly. ongoing crisis in the financial sector, as car leasing sector, concluded 183,100 27,387 units, 1.2 % more than in the pre­ In Argentina, strong economic well as the exchange rate turbulence in new leasing agreements in the reporting vious year. As a result, the company's growth, low inflation and stable interest East and South East Asia. Consequently, year. As per the year end, the company share of the passenger car market was rates initially had a positive effect on the after a good start economic growth held 463,500 outstanding agreements. 3.6 (4.0) %. market as a whole. Demand fell in the came to a standstill over the course of In the customer finance sector, Volks­ Economic growth in Mexico was fourth quarter, partly as a result of the the year. As a result of the weak overall wagen Bank GmbH concluded 366,800 boosted by exports. Domestic demand weak growth in Brazil. The passenger demand on the domestic market, pas­ new customer credit agreements, which also increased substantially. This is car market nevertheless grew by 7.5 % to senger car sales volumes declined by meant that the total outstanding agree­ reflected in the 53.3 % increase in pas­ 321,400 units. However, sales in the final 3.8 % to 4,491,542 units. New car sales ments as per December 31st, 1997 senger car sales volumes. The Volks­ months of the year declined by as much by the Vo lkswagen Group recorded a increased to 868,600 (+ 4.1 %). Re­ wagen Group increased deliveries by as 21.7 %. The various marques of the slight fall of 0.4 % to 58,825 units, repre­ ceivables in respect of dealer financing 43.2 % to 73,823 units, although its share Vo lkswagen Group held a 19.0 (22.2) % senting a 17.6 (15.3) % share of the on the balance-sheet date amounted to of the passenger car market fell to 23.4 share of the market. However, the non­ import sector, which declined by 13.2 % 3.4 billion DM (+ 11.0 %). Furthermore, VW Passenger Cars (25.1) %. availability of some models and strong overall. the continuous upward trend in direct­ competitive pressure meant that Vo lkswagen Group sales in the Asia­ banking operations meant that deposits VW Commercial Vehicles Sales rose by 13.0 % to 273,255 vehi­ cles in the North America region as a deliveries to customers fell by 6.5 % to Pacific region totalled 371,480 units, increased by 67.2% to 3.2 billion DM. Audi whole. A total of 236,324 were sold by 66,678 units. 10.9 % up on the previous year. Volks­ Since Apri11 997 this business has been Seat Volkswagen (+ 11.1 %) and 36,931 by With continuing weak consumer wagen sold 344,675 units(+ 14.2 %) , operating under the separate name of Audi 25,846 (- 10.5 %) and Seat and Skoda Audi (+ 26.8 %). demand, the economic situation in "Volkswagen Bank direct". South Africa remained difficult. After a Skoda together 959 (-77.1 %). In the reporting year, the Vo lkswagen North America Region Stagnation in the strong start to the year, the passenger Financial Services AG Group, and Volks­ South America / Africa Region South America/Africa region car market reached a volume of239,800 Increasing globalization in the wagen Bank GmbH as an individual Asia-Pacific Region In ovember the Brazilian Government units, 4.1 % below the previous year's financial services sector company, fully complied at all times decided on a package of measures to level. The Volkswagen Group held a 20.9 The expansion in the financial services with the requirements of the German Financial Services/ Financing stabilize the economy. The associated (23.1) % share of the market. As a result sector was continued with the founding Credit Act (Kreditwesengesetz). increases in interest rates and the of increased competition, with the of Vo lkswagen Leasing Polska Sp. z o.o. growing uncertainty of consumers as a number of suppliers more than in Poland and the establishment of an result of the crisis in Asia brought about doubling in the last two years, Vo lks­ office ofVolkswagen Bank GmbH in Bel­ a collapse in new registrations of some wagen of South Africa (Pty.) Ltd. sold gium. Operations in Asia were restruc­ 20 % in the last two months of the year 14.5 % fewer units than in the previous tured with the purchase byVolkswagen under review. Over the year, the pas­ year: a total of 55,625 vehicles. Financial Services AG of the remaining senger car market still increased in In the South America/ Africa region as 51 % of shares in VOLKSWAGEN volume by ll. 7 % to 1,567,000 units. a whole deliveries to customers rose by FINANCE JAPAN KK from YOLKS- With a 32.6% share, the Volks­ With a 32.6 (35.5) % share, the Volks­ 0.1 % to 758,355 units, of which 734,934 WAG EN Group Japan K.K. and through wagen Group remained the market wagen Group remained the market were Vo lkswagen models(- 0.2 %), the establishment of a representative leader on the Brazilian passenger leader, but its 2.4 % increase in sales to 10,108 Aud i (+ 5.8 %), and 13,313 Seat office in Beijing. car market. 510,192 units was below the market and Skoda together(+ 13.9 %). Customer-oriented finance and Customer-oriented finance and growth rate. In the light commercial leasing offers brought about a world­ leasing offers brought about a vehicles segment volumes fell by 6.8 % 10.9% up in the Asia-Pacific region wi de increase in the Financial Services worldwide increase in the to 77,113 units; the Group was only just The Chinese economy grew strongly; Division's outstanding credit agree­ Financial Services Division's able to defend its market leadership, inflation was cut substantially down to ments of6.4 %, to a total of2,454,700 outstanding credit agreements. with a 25.8 (30.4) % share. In the 7 to 35 an average of 3 %. Vo lkswagen enjoyed a agreements. A total of 1,074,400 new tonnes class Volkswagen delivered 52.8 % share of the passenger car agreements were signed. 25.1 % of the 10,565 trucks and buses (+ 20.0 %), market, which grew by 20.5 % overall. Group's total deliveries were of leased or Volkswagen was the bestselling attaining a market share of 15.2 (14.8) %. Volkswagen was thus the bestselling customer-financed new vehicles. The make in China. Current prospects indicate that we will make in China. Group sales increased by balance-sheet total of the Financial Ser­ probably have to modify our sales pro­ 16.8 %, to 279,722 units. vices Division increased by 14.2 % to jections for the next two years, and we 40.0 billion DM in the year under review.

14 15 Management Report: Volkswagen Group and VOLKSWAGEN AG

As part of its globalization process, Expenditure on research and deve­ Growth in unit sales and While sales proceeds in Germany 4.2 % to 14,795 in the past year. VOLKS­ As part of its globalization process, lopment by the Volkswagen Group and sales proceeds increased by only 7.6 % to 39.2 billion Volkswagen aims to intensify its interna­ WAGEN AG spent a total of 2.3 billion Volkswagen aims to intensify its VOLKSWAGEN AG (billion OM) The major feature of the past year was DM, outside Germany they rose by tional purchasing activities, although DM (+ 7.2 %) on research and develop­ international purchasing activities. 16.2 % to 74.0 billion DM as a result of aspects such as local content will con­ ment. It employed 7,800 people, 4.5 % 4.5 the continuation of our model offensive. The launches of the PassatVariant, the the higher increase in unit sales vol­ tinue to play a key role. It is also more than in the previous year, in this 4.0 Audi A6, the Seat Arosa and Seat Cor­ umes. 65.4 (63.6) % of total revenue was becoming more and more important to sector. An illustration of our innovative doba Vario and the Polo Variant were generated by exports. involve component suppliers right from strength is the 44 % increase in the num­ 3.5 followed at the IAA in Frankfurt by the VOLKSWAGEN AG sold 1,736,683 the development phase. The implemen­ ber of patents registered, totalling 678. product event of the year: the presenta­ units(+ 2.6 %). With an increase of tation of the current total of three new Further information on the field of 3.0 tion of the new Golf generation. Also, 8.8 %, sales proceeds likewise exceeded platforms would not have been possible research and development is given on without the committed support of our pages 27 to 29 of the Report. 2.5 the Seat Ibiza Cupra and the Skoda the previous year's figure, totalling 54.3 Felicia Fun added niche-market pro­ billion DM. 57.4 (55.6) % of this figure suppliers. 2.0 ducts to their existing ranges. was generated by export business. We would like to thank our partners 4.3 million vehicles produced - Both in terms of unit sales and sales in the components industry for their With 4,290,875 units produced, repre­ 1993 1994 1995 1996 1997 proceeds the Volkswagen Group again Purchasing reaches 68 billion DM cooperation in the past year. senting an increase of 7.9 %, the Volks­ exceeded the previous year's perfor­ The volume of purchasing of the Volks­ wagen Group's output reached a new wagen Group- excluding sales tax- rose Research and development to record level. The proportion of vehicles Volkswagen Group mance, although the new model start-ups meant that our customers' in the year under review to 68.4 (60.1) improve our competitive position manufactured abroad rose from 60.0 % In 1997 the Volkswagen Group spent 4.4 to 62.3 %. The average number of vehi­ VOLKSWAGEN AG demand could not be fully satisfied. billion DM as a result of the expansion Worldwide sales to dealers rose by 6.4 % of production. 52.8 (59.1) % ofthe total billion DM (+ 11.3 %) on research and cles produced per working day stood at to 4,250,414 units; ofthose, 76.6 (76.0) % volume was purchased in Germany. The development. This represented 3.9 17,387 (16,640) units. AtVOLKSWAGEN Research and development (4.0) % of total Group sales proceeds. AG, the number of vehicles produced Both in terms of unit sales and sales were to dealers outside Germany. The volume of purchasing ofVOLKSWAGEN expenditure represented 3.9 % of The key areas of activity, apart from fell by 4.5% to 1,187,869 units, as a proceeds the Volkswagen Group highest volume of unit sales was in the AG also continued to rise, reaching a total Group sales proceeds. improving the development process, result of the new model start-ups. Daily again exceeded the previous year's Golf, with 14.9 % of the total, followed level of25.9 (23 .3) billion DM. Of that were in active and passive vehicle safety, production output fell by 10.6 % to 4,828 performance. by the Passat with 14.1 % and the Polo figure, 18.9 billion DM was attributable with 11.6 %. to raw materials and supplies and mer­ the use of future-oriented materials such units. At 113.2 billion DM (+ 13. 1 %) , sales chandise purchases, and 7.0 billion DM as magnesium and improved plastics, as The past year again saw a number of proceeds reached a new record level to capital goods and services. 77.5 % of well as alternative drive technologies production jubilees. At the end of based on the sustained sales perfor­ the total purchasing volume of VOLKS­ such as electric and hybrid drive sys­ February 1997 the Group reached a mance. Every Group marque con­ WAGEN AG came from German sup­ tems. Other areas covered were new traf­ milestone in China, having delivered tributed to this positive development. pliers. Purchasing for the new Golf too, fic concepts, the possible integration of one million automobiles there. In mid The highest volume of sales was gener­ with some 80 % of the total volume orig­ new communications technologies in March the eight millionth Transporter ated by the Golf, with 12.9 % of total inating in Germany, is a reflection of the the vehicle, telematics and environmen­ rolled off the production line in tal protection. The number of Group Group sales proceeds, the Passat with competence and performance capabili­ Hanover. At the beginning of April in employees working in the research and Mosel, the 500,000th Volkswagen to be 9.6 %, and the Audi A4 with 9.3 %. ties of German suppliers. development functions increased by made in Saxony was delivered.

Production* Units 1997 1996 % Unit sales• 1997 1996 % (by product line) (by product line) Worldwide 4,290,875 3,976,896 7.9 Worldwide 4,250,414 3,994,312 + 6.4 + Germany 1,618,496 1,590,956 1.7 Germany 992,886 958,522 + 3.6 + Abroad 2,672,379 2,385,940 + 12.0 Abroad 3,257,528 3,035,790 + 7.3 Volkswagen Passenger Cars 2,763,933 2,701,751 2.3 Volkswagen Passenger Cars 2,737,199 2,719,873 + 0.6 + Volkswagen Commercial Vehicles 206,526 180,715 + 14.3 Volkswagen Commercial Vehicles 209,654 181,148 + 15.7 Audi 561,130 491,113 + 14.3 Audi 551,871 495,568 + 11.4 Seat 405,281 342,447 + 18.3 Seat 405,326 339,149 + 19.5 Skoda 354,005 260,870 + 35.7 Skoda 346,364 258,574 + 34.0 • Including_ 360,000 (302,000) vehicles of the not fully consolidated vehicle-producing holding s AUTOEUROPA, • Incl ud ing 280,000 (232,000) vehicles of th e not full y consolidated vehicle-producing holdings Shangh01 -Volkswagen, FAW-Volkswagen and Chinchun Motor. Shangh ai-Volkswagen, FAW-Volkswagen and Ch inchun Motor. 16 17 Management Report: Volkswagen Group and VOLKSWAGEN AG

Capital investments and cash flow within Volkswagen creates 19,000 jobs retirement. The amended umbrella and engine ranges, and in modernizing Environmental symposium 1997 the Volkswagen Group excluding leasing worldwide agreement for the first time introduced our manufacturing facilities. The major More than 900 delegates representing and rental assets (billion DM) Product and marketing successes a three-level bonus system (minimum, considerations behind these invest­ over 400 suppliers from Germany, the 10 resulted in the creation of 19,081 new performance-linked and profit-based ments were improving productivity, rest of Europe and North America came jobs within the Group as at the end of bonuses). Costs were cut by the reorga­ quality and environmental protection. to Wolfsburg in February 1997 to attend 8 the year. The average number of nization of pay continuation provisions, The major portion of the capital invest­ the "Priority A- Partners for the Envi­ employees in the Volkswagen Group ments undertaken were by VOLKS­ ronment" environmental symposium 6 by modified entry conditions for new worldwide in 1997 increased by 5.4 % to limited-term appointees, and by the WAGEN AG, AUDI AG, SEAT, S.A., Volks­ and so demonstrate the unity of pur­ 4 274,575. The Group employed 5,939 addition of two basic pay levels to the wagen de Mexico, S.A. de C. V. and Volks­ pose between Volkswagen and its sup­ apprentices. Productivity was improved bottom end of the pay scale. The Time wagen do Brasil Ltda. The investments pliers in matters of environmental pro­ 2 by 2.2 % over the previous year. As a Asset investment instrument, which is were financed largely from the Group's tection as in all others. The key automo­ result of the strong demand and the already the subject of public discussion self-generated funds; 73.1 (80.6)% was tive-related environmental aspects were 1993 1994 1995 1996 1997 associated expansion of production, the in connection with the stock option covered by cash flow. dealt with in group discussions and workforce both in Germany and abroad plan, is currently being introduced. An increase in additions to leasing debates led by specialists from Volks­ and rental assets of 1.3 %, to 7,734 wagen and other companies, as well as Capital investments increased, to 143,872 (+ 3.4 %) and At AUDI AG, a profit -share scheme 130,703 (+ 7.7 %) respectively. Although for all standard-rate employees was million DM, reflects the continuing from relevant associations. The coope­ Cash flow international operations are steadily agreed. From 1998, employees will enjoy expansion of the financial services ration between Volkswagen and its increasing, 52 % ofthe Group's work­ a variable share in company profits in sector. The growth was financed component suppliers will in future be force was employed in Germany in the addition to the basic participation through the international money and systematically strengthened at regular year under review. scheme. The profit share will be based capital markets and by intra-Group workshops. The workforce of the Volkswagen on the degree of attainment of agreed loans, among other means. VOLKSWAGEN AG invested 52 Group totalled 279,892 people(+ 7.3 %) targets in respect of return on sales, pro­ VOLKSWAGEN AG invested a total of million DM in environmental protec­ on the balance-sheet date; YOLKS­ ductivity, quality and attendance rates. 7,840 million DM, as against 3,725 tion, primarily in relation to clean air WAG EN AG employed 98,762 people The first profit share will be paid out in million DM in 1996. Of this figure, 3,053 measures, water protection, waste VOLKSWAGEN AG invested (+ 3.8 %). 1999 in respect of the fi scal year 1998. million DM was invested in fixed assets, management and compliance with 3~053 million OM in fixed assets. In March 1997 the collective agree­ including intangible assets. The 8.3 % automotive engineering regulations. The 1997 collective agreements: ment at SEAT, S.A. was signed. It is to higher investment volume was allocated However, the actual investments made employment safeguards continue run for a term of three years. With a view to the new products and to model are in fact considerably higher. One of On July 14th, 1997, after intensive nego­ to safeguarding jobs, the main focus was facelifts, as well as the optimization of the reasons for this is the increasing tiations, the new collective agreements on more flexible working hours. manufacturing processes. Financial integration of environmental aspects in forVOLKSWAGEN AG were concluded, investments rose to 4,787 million DM. plant and manufacturing equipment, to take effect from August 1st. The Increased capital investments They were attributable mainly to the which cannot be clearly sectioned off agreement included a progressive pay In the past fiscal year the Volkswagen founding of a holding company for par­ from other expenditure. Operating costs increase over a period of 24 months, a Group invested 9,843 million DM, ticipations and the associated capital totalled 164 million DM; they relate to further restructuring of working hours exceeding the previous year's figure by measures and asset contributions, as ongoing expenses incurred in the opera­ to provide still greater flexibility, and an 12.6 %. 71.6 % of capital investments well as to capital injections in Volks­ tion of environmental protection sys­ The key element of the collective extension of the agreed employment were in Germany. This demonstrates the wagen de Mexico, S.A. de C.V. and the tems and equipment. agreement concerned the issue of safeguards until the end of 1999. The fact thatVolkswagen remains com­ purchase of securities. part-time working for older key element was the agreement mitted to its belief in the performance The holding company "Volkswagen Innovative quality management employees approaching retirement. regarding part-time working for older capability of its sites in Germany. The Beteiligungs-Gesellschaft mbH", with its With its new strategy, "Quality Manage­ employees, enabling a progressive main areas of investment were in the registered office in Wolfsburg, was ment 2001- Getting better faster", Volks­ reduction of working hours through to expansion and updating of the model founded on November 28th, 1997 to wagen aims to make quality perform­ provide a restructuring of our inter­ ance a greater factor in the commercial national operations. Our operations in success of the company. The consistent Workforce* Employees 1997 1996 % Spain were also restructured as part of orientation of quality assurance activi­ this process, with the incorporation of ties to the core business processes Worldwide average over year 274,575 260,504 + 5.4 the holdings in Volkswagen Navarra, S.A. enables measures to be taken which Worldwide as per Dec. 31 279,892 260,811 + 7.3 and VOLKSWAGEN FINANCE, S.A. into substantially reduce the expenditure Germany 145,986 137,769 + 6.0 SEAT, S.A. The share capital of SEAT, S.A. necessary to attain the required product Abroad 133,906 123,042 + 8.8 was increased accordingly. quality, even after just a short time. In • Including apprentices and an average workforce over the year of 18,443 (17,734) of the not fully consolidated veh icle-producing holdings AUTOEUROPA, Shanghai-Volkswagen, FAW-Valkswagen and Ch inchun Motor; 18 18,188 (18,268) people as per December 31st. 19 M anagement Report: V olkswagen G roup a nd VOLKSWAGEN A G

Net earnings for the year and this way new potential for improving Agreement concerning Stock option plan WAG EN AG decided to postpone the dividend per share (OM) productivity is created throughout the dependence reports At the Annual Meeting of Stockholders announced capital increase. Following 40 company: In October, VOLKSWAGE AG and the on June 19th, 1997 the Board of Man­ the stabilization of general share prices -in product creation, through perfor­ "Schutzvereinigung fur Wertpapierbe­ agement was authorized to introduce a on the European stock markets, on On March 9th, 1998 the Board of 20 mance-enhanced development cycles sitz e. V." (German Stockholders' Associ­ stock option plan for the Board of Man­ March 9th, 1998 the Board of Manage­ Management resolved to continue and product concepts; ation) reached an out-of-court settle­ agement, Group senior management, ment resolved to continue with the 0 with the capital increase. - in production, through reliable, lean ment regarding the drafting of depen­ and for the management and standard­ capital increase in the amount of the -20 and fast processes; dence reports. Based on the amended rate employees of VOLKSWAGEN AG. first tranche. The resolution passed on -in marketing, through attractive judgement of the German Federal Court This plan includes the provision that, October 14th, 1997 regarding the second -40 vehicle-related services for customers. of Justice in March 1997, reports must after having first acquired Time Asset tranche in the nominal amount of 150 be drawn up where there is a possibility papers, the entitled persons shall sub­ million DM has been rescinded. Furtl1er 1993 1994 1995 1996 1997 New structure for of influence being exerted on the scribe to convertible notes which may, details of the capital increase are given the Asia-Pacific region Annual Meeting of Stockholders and after a period of no less than two years in the stock market prospectus. In order to respond to the growing man­ where, over a substantial period of time, and on payment of a pre-determined Net earnings agement demands of the Asia-Pacific resolutions may be passed by a major price premium, be exchanged for European competition ru les Dividend region, the organizational structure shareholder with a simple majority. The shares. This enables employees to iden­ observed already successfully implemented in the de facto majority of votes at the Annual tify even more closely with the corpo­ On January 28th, 1998 the European North America and South America/ Meeting of Stockholders held by the rate objectives of the company. Commission imposed a fine in the Africa regions was introduced at the State of Lower Saxony since 1990 The resolution was passed to issue con­ amount of 102 million ECUs upon The "Quality Management 2001" beginning of April. The region is now remained in force until1994. The said vertible notes with a total nominal value VOLKSWAGEN AG in respect of the strategy creates new opportunities divided into three regional areas: China, de facto majority was eliminated with of 13.5 million DM, and to create a alleged obstruction of vehicle sales from to improve productivity throughout Japan and Singapore. The Group's CKD effect from the Annual Meeting of Stock­ potential capital stock of 135 million Italian dealers to German and Austrian the Company. and FBU market operations in the holders in June 1995. DM. An action for rescission is pending customers in the years 1993 to 1995. In region outside China and Japan are The Board of Management of against the resolution passed by the its response, VOLKSWAGEN AG pointed managed byVolkswagen Group Singa­ VOLKSWAGEN AG submitted the Annual Meeting of Stockholders in out that the Italian dealers had merely pore Pte. Ltd., which has been operating reports for the years 1993, 1994 and respect of the stock option plan. At a been forbidden to sell to unauthorized as the regional importer since April. 1995 to the Supervisory Board in first hearing on February 18th, 1998 the resellers. Grey-market imports by unau­ accordance with§ 312 of the German parties again set out the positions which thorized resellers are contrary to Euro­ A id to VW Sachsen and the Corporation Act. In respect of each of they had already submitted in writing. pean law. Sales to ultimate consumers VW Baunatal plant the said reports, the Board of Manage­ The State Court in Braunschweig will and to legitimate intermediaries and At the end of November a At the end of ovember the European ment has issued the following con­ pronounce judgement on March 11th, authorized resellers were not barred. settlement was agreed regarding the Commission, the German Federal Min­ cluding declaration: "We hereby declare 1998. VOLKSWAGEN AG will therefore be disputed payment of investment istry of Trade and Industry and YOLKS­ that, according to the circumstances lodging an appeal to the European subsidies for the factory in Saxony. WAG EN AG agreed a settlement to the known to us at the time the legal trans­ Capital increase Court of First Instance against the deci­ matter regarding the disputed payment actions with the affiliated company On October 14th, 1997 the Board of sion of the European Commission. of investment subsidies for the factory under the terms of§ 312 of the Corpora­ Management, witl1 the consent of the in Saxony, which had been pending tion Act were entered into, our company Supervisory Board of VOLKSWAGEN AG, Capital retransfer by SKODA since mid 1996. The compromise solu­ received appropriate consideration in resolved to increase the share capital, The Extraordinary Meeting of Stock­ tion stipulates that Volkswagen Sachsen respect of every legal transaction. In the utilizing the existing approved capital holders of SKODA, automobilova a.s. on GmbH will not appropriate to capital year under report measures were stock, by up to a nominal amount of 300 December 19th, 1997 consented to a investments in Mo el the 84 million DM neither undertaken nor waived on the million DM. The first tranche of a no­ retransfer from capital reserves in the portion of the total aid which it received initiation of or in the interest of the State mina1150 million DM was to be offered amount of 500 million DM (9,640 bi ll ion from the State of Saxony which the of Lower Saxony and other affiliated to the stockholders for purchase at a Czech Crowns). Oftl1at total, the Czech European Commission considers to companies." ratio of 13:1; a second tranche in the stockholder received an amount corres­ have been excessive. At the same time, same amount was to be placed with ponding to 150 million DM and VOLKS­ the Commission approved aid for national and international investors, WAGEN AG an amount corresponding capital investments in the Kassel plant excluding subscription rights. In view of to 350 mill ion DM. The equity portion of totalling some 98 million DM. developments on the international the balance-sheet total was thereby capital markets, on October 28th, 1997 reduced to 37.6 (62.4)% with effect from the Board of Management of VOLKS- December 31st, 1997.

20 21 Management Report: Volkswagen Group and VOLKSWAGEN AG

Planned capital investments Positive development of earnings - Volkswagen East Asia are going through a serious the international automotive business in the automotive sector (billion DM) The broad acceptance of our new Transport GmbH & Co. OHG financial and economic crisis with can be expected to continue its growth so models, together with the improve­ - Volkswagen Bank GmbH global repercussions. For Japan, a low trend in the medium term; opportuni­ The international automotive ments in our cost structures, has - AUTOGERMA S.p.A. level of growth is expected again in ties for growth are offered especially in business can be expected to 45 strengthened the earning power of the - SKODA, automobilova a.s. 1998. In the USA the longest-lasting Eastern Europe, the Asia-Pacific region, continue its growth trend in the company. As a result of the high level of - Volkswagen do Brasil Ltda. upward trend yet seen is expected to be and Latin America. In view of stagnating 40 medium term. sales in particular, the Volkswagen - VOLKSWAGEN Group Japan K.K. sustained. Latin America will benefit markets in Western Europe, North 35 Group achieved after-tax earnings of Net losses were recorded by: from the increasing regional integration, America and Japan, competitive pres­ 1,361 million DM in the past fiscal year, - Volkswagen de Mexico, S.A. de C. V: although prospects are dampened sure in the automotive industry will 30 as against a figure of 678 million DM in - Volkswagen Argentina S.A. somewhat by the slower growth in the continue to rise. But in the growth 1996. Earnings were, however, affected - Volkswagen of South Africa (Pty.) Ltd. US economy, the high levels of debt and regions already mentioned, too, compe­ 1997-2001 1998-2002 by the falls in volume resulting from the - VOLKSWAGEN OF AMERICA, INC. the continuing uncertainty on currency tition will be fuelled by new suppliers new model start-ups. Improvements The results of major companies markets. Brazil, the largest economy in and increasing capacities. over the previous year were achieved by based on national accounting regula­ South America, will continue to have The Volkswagen Group started 1998 Post planning the Volkswagen Commercial Vehicles, tions are set out in the summary on major economic problems in the cur­ with 542,000 orders in hand from Current planning Seat, Audi and Skoda marques, by the pages 68/69. rent year. Western Europe, including Germany. We North America and Asia-Pacific regions, Consequent to the improved In Western Europe, the Stability Pact expect to see a total market volume of and by the Financial Services division. earnings position, the Board of Manage­ and the more firmly based expectations 13.5 million passenger cars in Western Falls in earnings were recorded by Volks­ ment and the Supervisory Board, after with regard to European Monetary Europe, of which 3.65 million in Ger­ wagen Passenger Cars, mainly as a result transferring 483 million DM to free Union will have positive effects; the many. In the USA and Japan we forecast of the new model start-ups, and by the reserves, propose to the Annual Meeting forecast growth rate is around 2.6 %. The 8.3 million and 4.2 million units respec­ South America/ Africa region, due to the of Stockholders the payment of an economies of the reforming countries in tively. economic crisis in South America and increased dividend of 12 DM per ordi­ Central Europe will continue to catch Of the planned capital investment The Board of Management and the the higher level of competition in South nary share and 13 DM on each preferred up. In Germany, increasing revival of volume of some lOO billion DM over the Supervisory Board propose to the Africa. VOLKSWAGEN AG achieved share. Taking into account the tax credit domestic demand could produce a next five years, 64 % will be made within Annual Meeting of Stockholders the higher after-tax earnings of966 million of 5.14 DM per share, eligible holders of growth rate of between 2.5 and 2.8 % in Germany. Just under 44 billion DM will payment of a dividend of 12 OM per DM (1996: 630 million DM). ordinary shares will receive a total of 1998. The economic upturn will not be be invested in the automotive sector, ordinary share and 13 OM on each The following companies in parti­ 17.14 DM per share. Holders of pre­ able to reduce the unemployment rate with the major portion being devoted to preferred share. cular returned net profits in accordance ferred shares will be entitled to 18.57 DM by any significant amount, however. expansion of the product range of the with uniform Group accounting and per share, including the tax credit of Although there are increased risks Volkswagen Group. A major point of valuation methods: 5.57DM. which need to be taken into account, emphasis of our capital investments in -AUDIAG - Volkswagen Leasing GmbH Prospects - VOLKSWAGEN Group United The recovery of the world economy will Kingdom Ltd. continue in 1998, although growth is Capital investments billion DM 1998-2002 1997- 2001 -SEAT, S.A. forecast to be half a percent lower than Group 100.3 83.4 -Coordination CenterVolkswagen S.A. previously expected as a result of the Volkswagen Passenger Cars 18.9 13.7 - Groupe VOLKSWAGEN France s.a. crisis in Asia; the estimated growth rate Volkswagen Commercial Vehicles 2.6 - Volkswagen Navarra, S.A. for 1998 is around 2.5 %. East and South 2.4 Audi 10.2 7.6 Seat 2.1 1.6 Skoda 2.4 Proposal on appropriation of net earnings available for distribution DM 1.8 North America Region 2.3 Dividend di stribution on subscribed capitol of 2,031.7 mDM* 482,663,747 2.1 South America/Africa Region 4.5 of which 3.8 Asio-Pacific Region* 0.1 on ordinary shores 368,987,964 0.1 Not yet assigned to the on preferred shores 113,675,783 marques and regions 0.8 0.1 Balance (carried forward) 3,868,821 Financial Services/ Net earnings available for distribution 486,532,568 other divisions 56.4 50.2 • 0.8 million DM deriving from the capital increase effected in October 1997 (share issue to employees) and 56.2 • Exf cluding capital investments of th e companies in China consolidated at equity in the proportional amount million DM deriving from the exercising of option rights in the year under review carried no dividend rights for the o 1.6 (1.0) billion DM. 22 fiscal year 1997. 23 Management Report: Volkswagen Group and VOLKSWAGEN AG

the next two years will be the extension The updated product range has and improvement of the ranges of brought us closer to our goal of being a engines and gearboxe offered by the global player attracting customer with Group. Over 56 billion OM of invest­ top-quality models and good value for ment is planned for the Financial Ser­ money. Our attractive range of models vices division and the other divisions. offers potential for further sales growth VOL AG Overall, this represents an increase of in the coming years. Against thi back­ 16.9 billion OM over the preceding plan­ ground, and in conjunction witl1 further ning period. It is intended that future cost reductions from the reduced cash flows and the funds generated by number of platforms and a comprehen­ the capital increase will be sufficient to sive reorientation of the dealership implement the planned expansion in organization, we again expect po itive capital inve tment even in times of eco­ development in earnings in 1998. nomic downturn. This will also give us This does, however, require that eco­ greater freedom to choose strategic nomic conditions should develop in a options on a flexible basis. favourable manner. Any unexpected After the expansion and updating of After the expansion and updating of decline in demand or price wars in the the model range in the past year, the model range in the past year, 1998 countries in which we operate, or a sus­ 1998 will also see a large number of will also see a large number of new tained increase in the value of the new products. products. During the first half of 1998 Deutschmark, would have a negative Volkswagen will be launching the New impact on the earnings of the Vo lks­ Beetle onto the orth American market, wagen Group. Additionally, the planned with deliveries to Europe beginning new model start-ups entail not only from the end of the year. Audi will be opportunities, but also risks. launching the A6 Avant in the Spring of The medium-term financial target for 1998, and the sporty S4 and S4 Avant the Group is a pre-tax return on sales of Left to right: Dr. Biichelhofer, Dr. Hartz, Mr. Adelt, Dr. Neumann, Dr. Piikh will round off the A4 series. The first half at least 6.5 %. In the current year we of the year will also see the arrival of the again intend to progress our earnings Skoda Octavia Combi, the new Skoda performance. The cornerstones of our Felicia, and the new Golf Cabrio from effort to attain our goals are our plat­ Continuing positive development in Volkswagen. By the end of 1999 the form and marque strategies, our con­ earnings does, however, require that Volkswagen Group will be offering a car centration on core business field , our economic conditions should also with fuel consumption of just three global presence, and the continuation of develop in a favourable manner. litres per 100 kilometres, with a DJ diesel our transformation process. fuel-injection engine and in lightweight Our tockholder will be assured design. Furthermore, in the coming appropriate participation in the positive years Volkswagen will be demonstrating development of the company's perfor­ a product diversity never before seen, mance in order to offer them satis­ with over 50 models on the market. All factory appreciation of their investment. Group marques will continue to expand their ranges in order to capture niche­ Wolfsburg, March 9th, 1998 market segments and open up whole new markets. The Board of Management

24 25 Product Creation

Safeguarding the future Improving the already high standard with new ideas of our vehicles is the primary aim of our Increasing competition and the safe­ development process. Creative, coordi­ guarding of corporate strategic objec­ nated, quality-promoting designs tives demand an optimization of the reduce possible sources of error and so product creation process. Shorter deve­ optimize production processes. Inter­ lopment lead times while still meeting disciplinary, project-oriented collabora­ increased customer demands- espe­ tion in Simultaneous Engineering Teams cially in terms of the value retention, (SETs) allows us to find efficient pro­ reliability and safety of our vehicles- are blem solutions. Cooperation at an early the challenges to which our develop­ stage of the development process be­ ment team must respond. One of the tween the Development, Marketing, ways in which we are making an exem­ Production, Procurement, Quality and plary contribution to the protection of Finance functions enables us, for our environment is through continued example, to devise production methods improvements in drive system techno­ adapted to the specific vehicle body. The lo gy, as well as through the use of light­ quality, functionality and reliability of weight materials. In addition to alumi­ the development steps are subject to nium and steel, the use of future-ori­ continuous review. ented materials such as magnesium and The subject of vehicle safety is an­ The subject of vehicle safety is a key carbon fibre reinforced plastics is being other key area in product development. area in product development. actively promoted. With their impres­ The use of complex crash simulation sive concept design, originality of ideas methods right from the concept design and finely worked detail, our automo­ phase of new vehicles is the basis for the bil es are demonstrating a new quality superior safety standard of new models. look. High-strength sheet metals, reinforce­ Our worldwide development sites ments at specifically targeted points, as enable us to work continuously on pro­ well as creative design ideas, result in a jects within a global development net­ bodyshell structure with an extremely work, and so reduce development lead rigid passenger cell. In conjunction with times of vehicles through to production front and side airbags fitted as standard, maturity. With improved simulation seat belt tensioners and belt force Jimi­ techniques such as the Digital Mock-Up ters, this safety concept has produced (DMU), it is possible for us to foc us in outstanding results in crash tests on the on specific components or simulate the new Golf, for example. With the four­ overall vehicle. A three-dimensional ani­ wheel drive compatible Electronic Sta­ mation prior to the prototype produc­ bility Programme (ESP), preventing tion stage ensures the feasibility and vehicle understeer or oversteer, Vo lks­ accurate fit of the body components. wagen and Audi are making a contribu­ Thus product quality is assured from an tion to active driving safety. early stage, and development lead times and cost are reduced. Environmental protection is a matter of tradition The recycling of valuable raw materials is a matter oftradition at Volkswagen: the programme for reconditioning of engines and gearboxes has been in exis­ tence for 50 years. Worldwide, 7.2 million

The Wl2- reconditioned engines and 2.2 million the start of a new engine family replacement gearboxes have since been

27 Product Creation

With its new vehicle models sold. Volkswagen is at the forefront of the-art power units. The development Diesel engines and direct injection Volkswagen is also increasingly progress in environmental protection, and modernization of the engine pro­ Based on the high level of develop- deploying state-of-the-art power and is prepared to take responsibility for gramme is focused on reducing con­ ment expertise of our company and the units. the future. Volkswagen has set itself con­ sumption, weight and emissions. The consistent improvement in our direct­ crete goals, in particular, in the areas of cylinder crankcase of the new 1.4litre injection technology, we were the first noise reduction, cutting consumption four-cylinder engine, for example, is diesel engine manufacturer on the and emissions, and recycling. Our made of aluminium. The reduction in market to meet the emission standard of activities include the use of renewable weight achieved in that and other units the Euro-D3 standard. The engine range raw materials and alternative is a major factor in the very low fuel for the new Golf comprises three diesel drive systems and the expansion of our consumption figures attained, as is the units- all of them direct-injection (DI). business process oriented environ­ extremely low-friction camshaft drive The basic version is the l.9litre natural­ mental management programme, as with a roller drag lever. ly aspirated direct-injection diesel well as auditing of all our European sites An entirely new feature is the 12- engine (SDI) delivering 50 kW, followed in accordance with the EU Eco-Audit cylinder engine, presented in October at by the 1.9litre Turbodiesel direct-injec­ Regulation. Our performance and the Tokyo Motor Show. It was built in a tion diesel engine (TDI) delivering 66 voluntary commitment to environ­ space-saving "W" design, with two VR6 and 81 kW With the launch of the mental policies are documented­ engines joined together at an angle of 72 world's first V6 TDI engine in the Audi among other means- by the second degrees. The unit has a capacity of 5.6 AS, this technology has also gained The AI, - Environmental Report of the Volks­ litres, a power output of 309 kW, and acceptance in the exclusive world of the Premieres in Frankfurt and Tokyo - a glimpse of the future wagen marque, published in November. delivers an impressive maximum torque luxury car segment. The increase in fuel Al2 and Wl2 We were the first company in the auto­ of 530 Nm. This engine marks the begin­ injection pressure means that further One of the highlights of the IAA Inter­ motive industry to have our Environ­ ning of the development of a new family improvements in consumption and national Motor Show in Frankfurt was the Al study from Audi. Aluminium mental Report audited by an indepen­ of engines, characterized by the installa­ emission levels are to be expected. This 2 dent certification body, KPMG Certifi­ tion of standard components and by will involve the use both of pump-and­ technology, petrol direct-injection, an cation GmbH. high manufacturing flexibility. The injector elements, which as single­ automated manual gearbox and plenty future implementation of the engine cylinder injection pumps combined of space- just the features that a car of The new generation platform underscores the know-how with injectors create the injection pres­ the future really should be offering. The of spark-ignition engines and development potential of the Vo lks­ sure directly in the cylinder head, and entirely aluminium body provides outstanding rigidity and a crash-resis­ With its new vehicle models Volkswagen wagen Group. common-rail systems, which supply the injection valves by way of a common tant structure. The gross weight of the is also increasingly deploying state-of- high-pressure fuel line. The bottom end basic version, with lots of equipment of the engine range will also be covered and safety features fitted as standard, is by the DI diesel engine for the low-con­ just 750 kg. With consumption figures

sumption "3-litre" car. of just 4.3litres per 100 km, the Al2 The Al2 impresses by its The Seat marque also rounded off its impresses by its environmentally friend­ environmentally friendly technology model range with the sporty direct­ ly technology and new lightness. and new lightness. injection engines. The Seat Arosa SDI In Tokyo Volkswagen presented the and the Volkswagen Polo SDI, with the exotic sports car studyW12, with the 1. 7 litre engine and a power output of 44 new 12-cylinder engine. The styling of kW, are currently our most economical the 4.40 metre long plastic body is by mass production vehicles. Both models Ital Design, and demonstrates the new deliver impressive consumption figures possibilities and the standards Volks­ of 4.4 litres per 100 km based on the wagen has set itself for the future. MVEG cycle (931116/EC), the applicable test method for European type approval. Volkswagen Commercial Vehicles added to its engine range for the 4.6 tonne LT with the 92 kW 2.8 litre TDI engine.

The exclusive Wl2 sports car study - new options from Volkswagen

28 29 Production Optimization and Procurement

The transformation in production Production Units 1997 1996 % The highlight of 1997 was the start of (by marque and region} production of the fourth generation Group• 4,290,875 3,976,896 + 7.9 Golf. For the first time, production was Volkswagen Passenger Cars 1,466,745 1,498,341 started virtually simultaneously at four - 2.1 different sites. Production of the Golf Volkswagen Commercial Vehicles 225,630 152,753 + 47.7 incorporates all the elements of lean Audi 557,777 491,501 + 13.5 manufacturing, including alignment of Seat 467,289 415,213 + 12.5 factory planning to the concepts of Skoda 357,170 263,193 + 35.7 modularization and flexibility, and opti­ North America Region 258,875 231,078 mized logistics. + 12.0 South America/Africa Region 718,592 Defect-free appearance, reduced 695,885 + 3.3 gaps, exact fit of all components, abso­ Asia-Pacific Region 285,259 236,346 + 20.7

lute flush mounting and harmonious • Including. 360,000 (302,000) vehicles of the not f~lly consolidoted vehicle-producing holdings AUTOEUROPA, shut-lines are the criteria which make Shangha1-Volkswagen, FAW-Volkswagen and Chmchun Motor. Adjusted for intra-Group assembly sets. the quality of a vehicle visible for all to see. To safeguard that quality, measuring techniques such as cubing, for assessing To achieve further improvements in individual built-on parts, and the quality and to optimize weights, state­ "Meisterbock" for examining the inter­ of-the-art technologies such as internal play of all bolt -on parts on the reference high-pressure forming (a metal forming body, are applied. In this way a body technique using oil or water) and shell is transformed into a finely-crafted tailored blanks are being increasingly body. employed. By such methods the new High flexibility and orientation to door reinforcement frame in the Golf, High flexibility and orientation to customer needs are demands whi ch our pressed out of a panel with three differ­ customer needs are demands which production must meet in addition to ent sheet thicknesses, was able not only our production must meet in addition those of improving quality and produc­ to improve quality and reduced weight, to those of improving quality and tivity. One of the ways in which we res­ but also to provide greater rigidity. Also, productivity. pond to those demands is through the by reducing the number of single parts deployment of new manufacturing costs were cut. equipment, such as highly-mechanized In all marques, the application of large-part transfer presses (suction teamworking was extended. Employees presses). are participating in the design of their Innovative technologies support the workplaces as well as in the organiza­ attainment of our high quality standard. tion of new production start-ups, and The laser welding of the Golf's roof was are taking greater individual responsibi­ a first in mass production. Sensor­ lity. This concept is being implemented guided laser welding is also deployed in by employee qualification measures and production of the B-pillar for the new by the establi shment of team units. Golf. Employees are supported by the special­ ist departments which, in keeping with the production orientation of the entire manufacturing organization, are directly involved in the process on the production lines.

The front headlights of the new Golf - precision in detail

31 Production Optimization and Procurement

The numerous new model start-ups The task of ensuring all processes run our stringent quality standards. That production times achieved to date: a are uncompromisingly subjected to smoothly and throughput times are means that conceptual ideas must be Polo is now built in 15 hours instead of our stringent quality standards. shortened lies with our logistics special- able to be realized without restriction in the previous 24, and the new Passat is ists. Optimization of the logistics chains mass production. The functional quality built in 22 hours instead of 31. aimed at just-in-time supply of mate­ arising from absolute flush mounting rials to the production line and and the improved look resulting from Reorganization of demand-oriented deliveries was further smoother shut-lines are expressions of component production intensified. precision and perfection. Within the Group, the individual com­ The introduction and certification of ponent plants manufacture assemblies Quality is all quality systems at our sites is now large­ such as engines, gearboxes and running Quality is the primary goal in produc­ ly complete. The systems are being con­ gear, as well as individual systems and tion. The numerous new model start­ tinuously developed, in accordance with components such as steering systems, ups are uncompromisingly subjected to national and international require­ drive shafts and alloy castings on a ments. To safeguard the long-term com­ global market level. The further growth petitiveness of our production facilities, and development ofthe component they conform to the higher process plants into powerful business units is a requirements of the VDA standard 6.1. matter of course as far as Volkswagen is concerned: ultimately the business Future productivity potential units will in future also be aiming to The progressive implementation of our exploit opportunities as development platform strategy will enable us to and supply partners to external custom­ reduce production times and to opti­ ers as well as within the Group. The mize the manufacturing processes, and goals of our component manufacturing so cut manufacturing costs. Our quality plants are to exploit the existing poten­ wi ll be improved and extending our tial and to meet the needs of the market model range will be made easier. The With high-quality products and an opti­ reduction in platforms from the current mally coordinated production and logis­ 16 down to a planned total of four will tics system. In this area, too, an entre­ significantly improve our productivity preneurial approach will be essential in potential. The potential for cost saving order to meet the increasing challenges is made clear by the shortening of unit of the market.

Competitive based on insourcing AtVolkswagen the term "insourcing" stands for the process by which ade­ quate added value and new fields of activity are brought into the company in conformance with the demands of com­ mercial efficiency; that is, meeting the competitive criteria of quality, service and price. In this way jobs and know­ how are preserved and created. Exam­ ples of successful product and techno­ logy insourcing are the in-house pro­ duction of door and side panel trims for the new Golf, as well as the increasing use of internal high-pressure forming in component manufacture.

The new Golf 32 shows true greatness 33 .. . Production Optimization and Procurement

The Passat- a fascinating combination of form and function For future projects the procurement Good ideas pay off Success with forward and of complex assemblies and the Once again in 1997, our employees suc­ global sourcing issuing of module supply contracts cessfully hunted down and eliminated Our worldwide procurement opera­ will gain in importance. waste at 3,3 19 Continuous Improve­ tions, too, are characterized by the con­ ment Process (CIP') workshops, as well sistent implementation of our platform as by their contributions to the com­ strategy. It increases the demands pany suggestion scheme. 39,355 sug­ placed on our component suppliers in gestions were rewarded by cash prizes terms of flexibility and mobility. The totalling 26.7 million DM. The reorga­ search for suitable development and nization of ideas management at Volks­ mass production suppliers has been, For future projects the procurement of The most important event forVolks­ wagen will include synchronizing the and will remain, based entirely on the complex assemblies and the issuing of wagen was the launch of the new fourth two activities in future. By means of a successfully established forward and module supply contracts will gain in generation Golf, which is being built in new motivation and rewards system our global sourcing processes. As well as the importance. Since it cannot be expected Wolfsburg, Mosel and Brussels, as well aim is to encourage even greater enthu­ most competitive costs, criteria such as that all suppliers will be able fully to as at Volkswagen Bratislava. By the end siasm and identification with the com­ know-how, innovation, best quality, master the manifold requirements and of the year daily output had reached pany in our workforce. compliance with delivery dates and Problems which these new require­ over 1,000 units. When the start-up internationallogistical competence are ments bring, Volkswagen considers itself phase is completed in 1998, the total becoming ever more important. obliged to provide them with assistance daily output is projected to be over 3,000 As a consequence of the necessary and support in their efforts. units. shortening of development lead times in The expansion of our global opera­ In order to utilize available capacities response to the demands of the market, tions will remain in future a cornerstone for new models, production of the cur­ suppliers are involved in the product of our strategy. We are globalizing wher­ rent GolfVariant- until start of produc­ creation process at a very early stage. ever we expect new markets to arise. tion of its successor- and of the Audi We are responding to the need to globa­ Cabriolet was transferred to Karmann lize our purchasing operations by incor­ GmbH. At the Hanover plant the new porating our international manufactu­ top-coat paint line was commissioned The new ring and assembly sites, and our buying into operation. The line sets new stan­ Passat Variant­ offices in the regions in which we intend dards in terms of cost -effectiveness, very inviting, to expand our market position, even quality and environmental protection, highly versatile more closely into the procurement pro­ and is unique in the industry. It was the cess. first time a wet sanding line had been incorporated into a paintshop, for Key events at the Group's example. production sites In the past fiscal year the successful run-up to planned production capacity of the Pass at saloon at the Em den site Was completed. To increase output, pro­ Volume of purchasing billion OM 1997 % duction of the Passat saloon was also (by marque and region) started later in the year at the Mosel and Group 68.4 100.0 Bratislava plants. Furthermore, the Volkswagen Passenger Cars 27.3 39.9 Em den plant saw the start of production Volkswagen Commercial Vehicles 2.6 of the PassatVariant, with a planned 3.8 daily production of 800 units for 1998. Audi 13.4 19.6 At the beginning of 1997 production Seat 5.8 8.4 of the Seat Arosa was started in Wolfs­ Skoda 3.6 5.3 burg. Primarily as a result of demand for North America Region 3.8 5.5 the new Golf, however, production of South America/Africa Region 8.2 12.0 the Arosa is being transferred to Seat facilities in 1998. Asia-Pacific Region 3.7 5.5

34 35 Production Optimization and Procurement

At Audi, mass production of the new Autumn of 1998 production of the New A6 was started, and already in 1997 a Beetle in Mexico will cover worldwide total of 89,292 units were built. At the demand. Ingolstadt site construction ofthe new Also at the end of the year, the paintshop made good progress; work Shanghai-Volkswagen Automotive Co., Ltd. completed a second engine plant for production of the newVolkswagen four-cylinder generation. This gener­ ation of engines already complies with the exhaust emission regulations planned to be introduced in China as from the year 2000. In the second half of the year FAW-Volkswagen Automotive Co., Ltd. began supplying engine com­ ponents to the Volkswagen Group worldwide.

TheAudi A3- The new Audi A6 - refreshingly unique in design also began on modernizing the At the Mlada Boleslav site, the world­ In the middle of the year construc­ turning visions into reality tooling shop. The concentration Wide Volkswagen marque production tion of the new automobile plant in at one site means that transport planning function is also involved in the Curitiba in the state of Parana, Brazil, and communications channels construction of a new press plant and in was begun. Costing a total of750 million are shorter and more efficient. production ofthe bodyshell for the suc­ US Dollars and involving a cooperation Seat extended its model cessor to the Felicia. An assembly plant project between Volkswagen do Brasil range with the start of produc­ for the Skoda Felicia is planned to be and AUDI DO BRASIL, the new plant tion ofthe Polo Variant and the built in Sarajevo, Bosnia-Herzegovina, will be completed by the beginning of Cordoba Vario in Martorell. The thus reactivating our involvement in the 1999. The plant will initially produce the planned output volumes start­ former Yugoslavia. Audi A3, followed six months later by ing in 1998 are around 42,000 As part of our North America strategy, start of production of the new Golf. and 23,000 units per year res­ starting in 1998 the new Jetta will be When fully operational, the plant will pectively. Martorell is also where Produced in Mexico in addition to the have an annual capacity of some the sporty version of the Ibiza, New Beetle; these two start-ups are a 170,000 units and provide around 3,000 the Cupra, is being built; in the past Future activities and sites key element of this year's activities. In jobs. fiscal year 2,426 units were produced. Starting in 1998, Audi will be building China, the necessary steps are currently At the Mlada Boleslav site, Skoda has the TT Coupe in a joint manufacturing being initiated in preparation for the expanded its engine range with the l.O operation between the Ingolstadt and planned modernization and expansion litre 37 kW unit; the plant's new paint­ Gyor sites. As from 1999, a second of our model range, together with our shop was also commissioned into ope­ aluminium-based model in addition to Partners there. ration. In Kvasiny production of the the AB will be built at the Neckarsulm After having built up additional Felicia Fun was started; output of some plant. An annual capacity of over 50,000 engine production capacities in China 2,500 units is planned for 1998. Prepara­ units is planned for the vehicle, which and South America in recent years, tions were made for production of the also provides the basis for the future Volkswagen is currently planning a Octavia Combi in Vrchlabf and for the low-consumption "3-litre" car. Some further engine plant. This plant, with Felicia Face lift in Mlada Boleslav. 300 million DM has been invested in the a capacity of around 500,000 diesel At the end of 1997 production of the Neckarsulm plant, thus safeguarding engines per year, is to be built in Poland, New Beetle was started in Mexico. The around 1,000 Audi jobs in the long term. and will be launched as part of a joint production is intended initially for the manufacturing operation with the North American market; from the engine plant in Salzgitter.

36 37 Marketing

Worldwide growth in demand Passenger car market shares In 1997 the Volkswagen Group suc­ of the Volkswagen Group % 1997 1996 ceeded in increasing both its worldwide Worldwide 10.4 10.0 sales to dealers, by 6.4 % to 4,250,414 Western Europe total 17.2 17.2 units, and its deliveries to customers, by Germany 27.5 27.3 7.3 % to 4,257,365 units. Its share of the worldwide passenger car market thus Spain 21.1 20.5 rose from 10.0 to 10.4 %. In the medium France 11.3 10.2 term increases in demand are to be Italy 10.0 11.8 expected in particular in the Asia­ Great Britain 8.7 8.5 Pacific, Latin America and Eastern Mexico 23.4 25.1 Europe regions. In the Asia-Pacific 5.2 region we will exploit that potential USA (import market share) 5.1 through current and planned projects, Canada 3.6 4.0 including in Thailand, Malaysia and Brazil 32.6 35.5 Indonesia. Specially developed products South Africa 20.9 23.1 for the highly discerning markets of Argentina 19.0 22.2 Western Europe, North America and China 52.8 54.4 Japan lead us to expect an improvement in our position in those regions too. Japan (import market share) 17.6 15.3 Western Europe was a major factor in our sales success in the past fiscal year. In a highly competitive environment, Brand strategy the Volkswagen Group defended its Against a background of increasing market leadership. On the key markets dynamics on world markets and a wide in the USA and Japan specifically-tar­ diversity of customer wishes, the indivi­ geted activities strengthened our com­ dual character of our various marques is On the key markej s in the USA and petitive position. On a worldwide level, gaining in importance. A key element in Japan specifically-targeted activities product facelifts and upgrades, sup­ marque differentiation is an appropriate strengthened our competitive ported by marketing campaigns such as product policy. The product offensive position. the launch of special models and inten­ very successfully pursued in 1997 is the sified sponsoring activities, helped core element of the more sharply secure the Group's position on the foc used strategic alignment and pro­ market. Attractive financing and leasing filing of the Group's marques. offers provided further incentives to A major aspect is the thorough-going, customers. qualitative reorganization ofthe dealer At this point we should like to express organization. The Volkswagen and Audi our special thanks to our customers for dealer networks have been optimized, the confidence they have shown in the marque specialization by dealers Volkswagen Group. advanced, and new performance stan­ dards agreed. Furthermore, Seat is expanding its presence on new markets and expanding its existing distribution network.

The new transparent showroom concept­ visualising the quality of the marque

39 + Marketing

The new Group strategy is also intended to be clearly seen in visual terms too, however. A new architectural and showroom concept assures both Audi and Volkswagen their own specific identity at all dealerships. The sites reflect the high quality of product and service on offer. AtVolkswagen dealer­ ships the showroom is designed like a marketplace: transparent, open, and inviting communication. A circular dis­ Foot to the floor towards a new play area is surrounded by the asso­ model diversity ciated facilities such as the sales office, In 1997 the Volkswagen Group launched the insurance services department, the a large number of new models, and accessory shop and the cafeteria. The made its product range even more com­ hangar concept at Audi dealerships prehensive and attractive. The highlight for the Volkswagen emphasizes the dynamism and perso­ The highlight of this so eventful year marque was the presentation of the nality of the marque. The modern archi­ for the Volkswagen marque was without fourth generation Golf. tecture underscores the marque's ex­ doubt the presentation of the fourth pertise in technology and design, both generation Golf at the IAA International on the inside and the outside. Motor Show in Frankfurt. With its eco­ nomy, its high quality, its further improved safety system for the driver and front seat passenger, and its out­ standing levels of comfort, the Golf is The new Seat Arosa - full of again setting new standards. With its stylish little Seat Arosa, our Our numerous world premieres were character and generous in size accompanied by two new Variant ver­ Spanish marque offers another compact sions. The new estate version of the model in the small car segment; it is Passat combines elegant design with characterized by sophisticated technical high utility, and is well equipped to rise features and Latin flair. The launch of once again to best in class. With the Polo the Seat Cordoba Vario at the Interna­ Variant, Volkswagen is offering the first tional Motor Show in Barcelona in May estate car in its class in Germany. extended the range of Cordoba variants. The Audi A6 saloon was premiered at It is the first estate car made by the Seat the Geneva International Motor Show marque, offering large amounts oflug­ in March 1997. It combines impressive gage space for holiday travellers and looks with a state-of-the-art overall displaying impressive manoeuvrability. design concept. Its elegant and distinc­ The Cupra, a variant of the successful tive lines set new trends in the upper Ibiza in the form of an on-road version mid range. At the IAA the sporty Audi S4 of the rally kit-car, now also presents an With its 2. 7litre six-cylinder biturbo attractive alternative for sports-minded engine celebrated its world premiere. customers. With the Audi duo - based on the Audi A4 Avant- Audi is for the first time offer­ ing a hybrid drive vehicle. The model, The new Seat Cordoba Vario - fitted with two independent drive more room for family and leisure systems, will initially be offered as part of a limited-edition lease deal. The aim of Audi is to gather experience on the market with this new technology.

The new Seat Ibiza Cupra - 40 looking good 41 the New Beetle, which will be available as from the first half of 1998, and from the higher level of availability of the Passat. Deliveries by Audi were prima­ rily marked by very good A4 sales figures. Since October the new A6 has also been on the market, and has enjoyed a positive response. In Mexico, we aim to win back market shares with the aid of the New Beetle and with imported models. Having been intro­ duced in 1997, the Audi model range is now also on sale in Mexico.

Intense competition in the South America/Africa region South America, and in particular Brazil, has become the regional focus of invest­ ments by the major automobile compa­ The new Skoda Felicia Fun - nies. Much-expanded capacities and key strategic markets such as Thailand, fantastic freedom intense product and price competition Taiwan and Australia, Volkswagen now resulted in a more competitive market. controls its activities in the region The Skoda Octavia - With increased marketing activities and through Volkswagen Group Singapore tradition combined with state­ The Skoda Octavia has gained an easily into an airy four-seater with a With the full geographical coverage of Pte. Ltd. of-the-art technology outstanding level of acceptance on the roofed cab. It underscores Skoda's new its dealership organization, Volkswagen Vo lkswagen extended its lead on the market. At the lAA Skoda presented a innovative approach. was able to defend its market leadership Japanese import market. Expansion of world-first design study for the Octavia The foundation stones for the suc­ in Brazil. In Argentina and South Africa the dealer network is a focus of activities estate. It represents further proof that cess ofVolkswagen Commercial Vehicles the company occupied second place on in Japan too. The launch of the new Skoda automobiles are not only func­ were, firstly, the now full availability of the respective passenger car markets. tional, but can also be extremely ele­ the LT range and, secondly, the further gant. The new Felicia Fun is intended as market penetration of the Caddy. The Improvement of position in the a leisure and fun variant. The practical core range was supplemented by high­ Asia-Pacific region two-seater with a load platform at the specification special editions such as TheVolkswagen Group built on its out­ back can be converted quickly and the Multivan Tops tar and the California standing position in the Asia-Pacific Joker, and the marque was able to gain region. China remains the major selling market share on the ever more competi­ market in the region. The Santana, the Sales to dealers Units 1997 1996 % tive key European markets. Jetta and the Audi 200 were again (by marque and region) among the bestsell ers in their classes in Group* 4,250,414 3,994,312 6.4 + Positive development in the 1997. In order to secure its number-one Volkswagen Passenger Cars 1,829,086 1,757,685 + 4.1 North America region position on the Chinese market, in mid­ Volkswagen Commercial Vehicles 267,177 200,295 + 33.4 The Volkswagen Group was able to year Shanghai-Volkswagen laid the Audi 549,736 489,424 + 12.3 improve its position in orth America. foundations for a new proving ground to Seat 616,843 • 508,449 + 21.3 On a generally declining US passenger provide it with full development capabi­ car market, deliveries by the Group lity for automobiles. The range offered Skoda 372,649 277,200 + 34.4 increased. In addition to the high by the Volkswagen Group is also to be 309,803 300,849 3.0 North America Region + number of Jetta and Cabrio registra­ made more attractive with the launch of South America Region 738,530 752,237 - 1.8 tions, the company also profited espe­ new models in the coming years. FAW Asia-Pacific Region 340,371 295,475 + 15.2 cially from the launch in late Autumn and FAW-Volkswagen founded a sales of the new Passat. A further boost to joint venture in order to optimize the • Including 280,000 (232,000) vehicles of the not fully consolidated vehicle-producing holdings Shanghai-Volkswagen, FAW-Volkswagen and Chinchun Motor. Adjusted for intra-Group supplies. growth is expected in particular from marketing process. To be closer to the

42 43 Marketing

Volkswagen Sound Foundation - a harmonious combination

The Volkswagen Club already Passat saloon and the new Audi A6 were Customer support in the has a membership of more than a the major new product events on this Volkswagen Club million Volkswagen customers. market. Launched in 1995, the Volkswagen Club already has a membership of more than A new car - a new generation - a million Volkswagen customers. A key a new advertising campaign task of the Club is to build up a stable Formula Konig - The Golf is the most popular car in relationship between the customer and powered by Europe. It is driven and admired by a the local Volkswagen Club partner. Free Volkswagen greater diversity of people than any membership, the opportunity to collect other vehicle, but whatever differences loyalty points on purchases of new or Art meets Pop - there are between those people, their used cars and redeem them for rewards, Cultural sponsorship at a high level sense of value is the same when it a wide-ranging service package, the In 1997 the Company's cultural spon­ comes to the Golf. For that reason, we interesting Volkswagen magazine and sorship activities were concentrated on refer to those people as "Generation attractive cooperation partners are the visual arts and the promotion of Golf". The advertising campaign for the major incentives to join the Club. rock and pop talent. Volkswagen made new Golf follows that motto. It presents its first major appearance as an art the new Golf in an emotional and exclu­ sponsor at the "documenta X" in Kassel. sive manner, showing how it has a place With the Volkswagen Sound Foundation right at the heart of the lives of the we have launched an initiative to sup­ people who drive it. port young rock and pop musicians with The Polo­ for sunny material assistance, promotion and moods too advice. Our cooperation with the Customer-oriented management of German music TV channel VIVA is also a Volkswagen Financial Services AG part of the Sound Foundation initiative. In 1997Volkswagen Financial Services AG and its subsidiaries again made a On the fast track in motorsport major contribution to sales promotion The crowning finale to 1997 was our and customer loyalty within the Group Win in the six-hour race atVallelunga, with a broad range of innovative finan­ Italy. Constant lap times and 40 % lower cial products. The fleet management fuel consumption that its petrol-driven systems, for example, are now open to Fast lap times and low fuel competitors brought the l.9litre Golf purchase customers and to fleets out­ consumption brought the Golf TDI TDI victory with eight laps to spare. In side the Group. Volkswagen Bank GmbH victory. the 24-hour race at the Nilrburgring the and Volkswagen Leasing GmbH laun­ same model came second overall. It was ched a particularly attractive motor the first time in the history of that le­ insurance offer exclusively for private gendary circuit that a diesel-powered AutoCredit and leasing customers, vehicle had finished so far up the field. under the name "Premium Light". In rallying, customer teams driving Attractive savings and investment pro­ the kit-car version ofVolkswagen's 191 ducts such as the Direct Savings Plan kW Golf GTI won the British and South were among other interesting new offers African manufacturers' championships, launched by Volkswagen Bank direct. as well as gaining victories in the same category in world championship races. Seat entered a works team, and with its Ibiza kit-car dominated the 2litre class in the world rallying championships from the outset, winning eight of the 12 races and ensuring a masterly defence of its manufacturers' world champion­ ship.

44 45 People and Management

A groundbreaker in innovative option scheme, but only if he or she has human resources policy first accumulated Time Assets. Bringing success to a company and improving its position on the global Personal Development Plan market demands rapid implementation A Personal Development Plan is to be of new innovations. Even more than in introduced for management staff. the past, the success of such efforts is It will be progressively introduced in the down to people. Only with them and course of management planning their ideas, their teamwork and their rounds. personal commitment, can the peak In 1997 the Personal Development level of performance and expertise Plan project launched in the previous necessary to survive on the global year was also extended for other market ultimately be attained. Innova­ employees ofVOLKSWAGEN AG. The tive human resources policies can play a aim is to attain interdisciplinary and major role, and at the same time help to systematic development and qualifica­ secure jobs. Volkswagen will continue to tion ofthe workforce. utilize that potential in future, with schemes to promote more qualification, more individual responsibility, more fle­ Workforce on Dec. 31 Employees 1997 1996 % xibility and mobility, and more motiva­ (by marque and region) tion. It would not have been possible to Group* 279,892 260,811 + 7.3 launch such a large number of new Volkswagen Passenger Cars 112,752 104,733 + 7.7 models without the commitment of Volkswagen Commercial Vehicles 16,949 14,623 + 15.9 each individual person. The Board of Management would like to express its Audi 38,155 34,958 + 9.1 thanks to the entire workforce for their Seat 15,697 15,621 + 0.5 efforts and achievements to date. Skoda 19,611 17,216 + 13.9 The "Time Asset" scheme is a new North America Region 16,182 14,088 + 14.9 instrument for securing jobs. It is South America/Africa Region 40,492 39,919 + 1.4 intended to generate more added value - and also to fund progressive reduction Asia-Pacific Region 14,782 14,825 0.3 of working hours for older employees Financial Services 3,793 3,579 + 6.0 approaching retirement and the safe­ Miscellaneous/financing 1,479 1,249 + 18.4 guarding of jobs from employees' con­ • Including apprentices and the warkfarce of 18,188 (18,268) of the not fully consolidated vehicle-producing tributions. The collective agreement holdings AUTOEUROPA, Shanghai-Volkswagen, FAW-Volkswagen and Chinchun Molar. laid the foundations for progressive Working hours reduction models of this Employee pay and benefits at VOLKSWAGEN AG kind and for the Time Asset. It also esta­ million DM 1997 % 1996 % blishes the preconditions for implemen­ Direct pay incl. fringe tation of the stock option scheme. The benefits in cash 6,478.6 61.1 6,138.9 56.7 stock option scheme means that Payment for hours not worked 1,564.4 14.8 1,565.8 14.5 employees actively share in the growth Social insurance contributions 1,541.6 14.6 1,433.8 13.2 in company value, which is also in the interest of the stockholders. Any Pensions 992.7 9.4 907.3 8.4 employee may participate in the stock Early retirement 9.1 0.1 775.1 7.2 Total 10,586.4 100.0 10,820.9 100.0 The total labour cost includes: Education and training 157.2 1.5 154.9 1.4 Teamwork in our Junior Company­ Welfare services 68.0 0.6 67.2 0.6 developing ideas together

47 People and Management

The first stage of the development Qualification as the path Wolfsburg". Volkswagen Coaching, represented 12.0 % of the total plan was launched covering employees to top performance together with other partners, is thereby workforce in 1997. demonstrating a high level of internal Lifelong learning is essential for success. promoting employment in the region. mobility within the company. This spe­ As a driving force for qualification and Managing health cial group of people includes our inter­ employment, Volkswagen Coaching New programme for the promotion Efficient health management has national taskforce, employees stationed again provided support and assistance of women improved the attendance rate by abroad, and apprentices temporarily to its internal and external clients In order to increase the number of almost 3.5 % in the last six years. deployed at other plants. The scheme is throughout the world in 1997 with a women in specialist and management In 1997 VOLKSWAGEN AG administered, and the employees' deve­ broad range of services. To improve positions, VOLKSWAGEN AG launched a achieved an impressive rate of96.1 %, The Caddy- lopment supported, by the Human management quality the "Junior wide-ranging mentoring programme in coming a major step closer to its set a versatile option Resources Deployment Office, esta­ Management Programme" was deve­ the reporting year. Male senior mana­ target of 97 %. blished on July 1st, 1997. The office fun­ loped. Its aim is to identify employees gers provide targeted career coaching Key areas of activity are ergonomic ctions like an internal labour exchange, with management potential in terms of for female potential managers. As a workplace design and on-site healthcare ensuring that qualified personnel are their business, technical and social medium-term target, women will make services. Our measures in those areas deployed in the right place at the right skills. A further element involves a cha­ up 30 % ofVolkswagen management. helped substantially to improve the time. racter-building programme of project Programmes to help reconcile the motivation and performance of all Our overall target is an work, group coaching, seminar modules demands of career and family were employees, while also cutting costs. attendance rate of 97 %. and customer contact. implemented at all company sites. High levels of qualification are High levels of qualification are the The result of this initiative is that Attendance rate of the essential means of meeting essential means of meeting rising some eight percent of all specialist and VOLKSWAGEN AG (in%) rising demands. demands. On the shop floor the propor­ management posts atVOLKSWAGEN AG 1993 1994 1995 1996 1997 tion of skilled manpower has steadily are now occupied by women. Women 95.4 95.2 95.1 95.8 96.1 increased in recent years, and in 1997 reached 75.3 % atVOLKSWAGEN AG. Over 30 % of employees are now univer­ sity or college graduates. 1,139 appren­ tices were taken on in full employment after successfully passing their exams. New methods of vocational training atVolkswagen are aimed at attaining higher levels of employee qualification of the apprentices and improving the quality oftraining, in particular by keeping in close touch with actual com­ pany operations and by involvement in value-adding processes. One example of this is the "Junior Company" project launched this year, in which the appren­ tices taken on concrete tasks indepen­ dently, on their own responsibility, and as part of a team. In addition to tech­ nical and specialist skills, social skills are also promoted and developed. As part of its labour market policy measures, Volkswagen Coaching pro­ vided support to people starting new businesses, being one of the major shareholders in the newly established

The LT - the intelligent business startup and innovation centre The Caravelle - investment in perform­ "Grtindungs- und Innovationszentrurn in keeping with tradition, ance and quality yet open to change 48 49 Organization and Information Systems

The transformation goes on Information systems are ground­ Today more than ever, successful breakers for new-style processes, and business management also means create new forms of cooperation. They active management of change. This is are also the basis for opening up new not a question of reform in the sense of fields of business and service industries restoring the good aspects of yesterday, relating to the automobile. but of transformation- that is, future­ oriented re-engineering of the present Customer contact on the Internet with the aim of more rapidly improving and by multimedia the added value benefit. Volkswagen deploys new media in its Global competition does not permit marketing process: at the dealer's Global competition does not standing still or hesitation; it demands showroom and, over the Internet, at the permit standing still or hesitation; dynamism and innovation. The prere­ customer's home. The Internet is a new it demands dynamism and quisite for creative, efficient and cost­ channel of communication which innovation. effective added value is globally inte­ permits direct interaction with the grated cooperation between the indivi­ customer. Multimedia communication dual business units in the Group. That (data, pictures, voice and video) means means moving away from traditional, that design and look can be conveyed hierarchically oriented vertical struc­ in addition to the vehicle data. tures towards an interconnected, pro­ ject-related process flow organization, Worldwide integration on the supported by efficient global informa­ Volkswagen Intranet tion and communications systems. The platform and globalization strate­ This change enables the creation of gies are made possible by networked adequate flows of knowledge, goods and processes. A uniform information finance. The productivity and competi­ systems strategy is the basis for tiveness of the Volkswagen Group are improved process flow. The Volkswagen thereby strengthened. communications network (Intranet) interlinks some 30,000 users at all the Information technology company's sites in a fast, economical as a strategic factor for success and secure manner. Information technology is an essential Our aim is to advance development component of the core business, and projects over the Intranet round the integrates the worldwide processes of clock 24 hours a day, with team mem­ product creation, production optimiza­ bers spread around the world. Global tion and procurement, and marketing. It sourcing processes, too, can be made is therefore a key strategic factor for suc­ faster and more efficient. cess in the automotive business.

Telematics - the reliable route to your destination

51 Organization and Information Systems

The information systems strategy G roup-wide use of resources To facilitate Group-wide communica­ in the IS Virtual Company tion and transferability of applications, In organizational terms the IS Virtual and to help add value to Volkswagen's Company is the framework for collabo­ core business, we have defined the fol­ ration between the information systems lowing basic requirements: units of the Volkswagen Group. It incor­ l. Engineering of business processes porates all marques, regions and other 2. Use of standard software Group companies. The IS Virtual Com­ 3. Project management pany is based on project-oriented self­ Before an information system (IS) is organization, using the jointly devised introduced an analysis is undertaken of and adopted IS platform standards. the business process for which the As a result of worldwide use of system is to be developed. The process resources and rapid implementation, is re-engineered. Where it is beneficial the IS Virtual Company guarantees to support such re-engineering with customer-oriented, cost-effective IS information systems, a review is carried solutions devised jointly by the IS units out prior to the start of a new develop­ spread throughout the world. Duplicate ment as to whether suitable standard developments are avoided and the com­ software is already available. A project petitiveness of the company is strength­ management system oriented to short ened. project times controls the new develop­ ments. For dedicated software de­ gedas - Th e trademark for velopments Volkswagen has adopted a innovative information technology Group-wide IS platform strategy which, "Volkswagen-Gesellschaft fur techni­ for example, defines the operating sche Datenverarbeitungssysteme systems and programming languages to GmbH" (VWTechnical Data Processing be used, and offers substantial cost Systems), with its head office in Berlin, The new Polo Variant ­ exlerior elega nce a nd is a 100% subsidiary of VOLKSWAGEN Telematics services - cars and commercial vehicles, and for benefits. interior space The deployment of standard software AG, and has a capital stock of A new Volkswagen field of business local public transport. The new business within the Group is primarily advanced 30 million DM. On January 1, 1998 the Telematics- a combination of telecom­ field includes elements such as safety, in the Finance department (SAP R/3), in company was renamed "gedas GmbH", munications and information techno­ remote diagnosis, infotainment and product creation (CATIA) and for pro­ in order to illustrate its independence. It logy- permits on board services to be dynamic routing; that is, intelligent duction control (PIS). Furthermore, actively offers its services on the market provided in vehicles. On November 1 traffic routing incorporating up-to-the­ Volkswagen actively influences the -in 1997 37% (previous year: 27 %) of the gedas subsidiary "gedas telematics minute traffic information. With this, development of standard industry solu­ its sales in Germany were generated GmbH" was founded. The company Volkswagen is opening up new roads to tions such as SAP-Automotive, a soft­ outside the Volkswagen Group- and is Wi ll develop, manufacture and market greater customer satisfaction and gedas is one of the leading ware package intended for use in the already today one of the leading infor­ onboard telematics services for private loyalty. information technology service product data management and logistics mation technology service companies companies in Germany. fields. in Germany. A key area of its activities is The consolidation of information in IT solutions for the automotive and processing centres in Europe from 15 to manufacturing industries. As well as a medium-term target of just three is offices in Berlin, Dresden, Kassel, another example of improved produc­ Munich, Wiesbaden, Wolfsburg and tivity in the field of information systems. Zwickau, the gedas Group also offers the Since 1994 this has brought about a cost full range of its services in Spain, France reduction of 52 % per MIPS (million and Great Britain for example. Outside instructions per second). Europe, gedas is represented in the USA, Mexico, Brazil and China.

52 53 Finance

Development of end-of-month share prices 600

550

500

450

400

350

300

250

200

150 Vol kswagen ordinary shares DAX Ind ex lOO Dow Jones Ind ex 1993 1994 1995 1996 1997

(Index: as a t 31.12.1992 !J, 100)

DAX and Volkswagen share both The consistent implementation of breaking records our strategy, the broad acceptance of The favourable development of the our new models on the various markets world economy, the strong US Dollar and the increased exports of the Volks­ and low interest and inflation rates all wagen Group were the reasons why the had a positive effect on the German price of the Volkswagen ordinary share stock market. Through to the Summer, was able to outperform the DAX. In the the German Share Index (the DAX) was year under review the share price continually reaching new record levels. remained continuously above the 1996 In July it broke through the 4,000 point high of 637.50 DM, apart from on the In July 1997 the DAX index broke barrier, reaching a high for the year of first two trading days. The high for 1997, through the 4,000 point barrier for 4,438.93 points. reached in July, was 1,484.00 DM. the first time. Exchange rate turbulence in Asia The subscription price for the capital impacted on German stocks in the increase with stockholders' subscription fourth quarter, however, resulting in rights announced byVOLKSWAGEN AG heavy fluctuation of the DAX. Its closing on September 5th, 1997 was set on level of 4,249.69 points at year end 1997 October 24th, 1997 at 1,010.00 DM. The was 47.1 % higher than the year before. spot price of the Volkswagen ordinary share on that date was 1,163.00 DM. However, the stock market turbulence originating in As ia also had its effect on

'itU<.k 1

Nr. The Volkswagen share­ Eine Aktie Well on the up in 1997 Uber Funfzig v0 "''.,utscho Mcrk ~k"s~ '"•• 55 ~G '1 ~nk.. tnnd r ~1\1 n t. W 'ab "'Q u Finance

the development of our share price, and Employee share programme Development of dividends 1993 1994 1995 1996 on Monday, October 27th, 1997 the continued 1997 Number of shares at 31.12. Volkswagen ordinary share price fell to The employees ofVOLKSWAGEN AG 1,115.00 DM. On the following day the were again given the opportunity to Ordinary shares in thousands 27,000 27,000 27,749 27,749 30,89611 price in on-the-floor trading fluctuated acquire a preferred share on attractive Preferred shares in thou sands 6,413 6,472 6,535 8,745 9,73811 between 949.50 DM and 1,013.00 DM; terms in 1997. As a result of the higher Divid end the spot price was 1,010.00 DM. In view market price, the price per share was set per ordinary share DM 2.00 3.00 6.00 9.00 12.00 of these developments, the Board of at 615.30 DM, 329.30 DM higher than in per preferred share DM 2.00 4.00 7.00 Management of VOLKSWAGEN AG the previous year. The higher issue price 10.00 13.00 decided to postpone the further stages was the main reason for the lower level Tax credit of the capital increase. of subscription in the year under review; per ordinary share DM 1.13 1.29 2.57 3.86 5.14 At a closing price of 1,005.00 OM, At a closing price of 1,005.00 DM, 16,130 new shares were purchased. As a per preferred share DM 1.13 1.71 3.00 4.29 5.57 the Volkswagen ordinary share price the Volkswagen ordinary share was a result, the subscribed capital increased was a substantial 57.6 % up on the substantial57.6 % up on the 1996 by 0.8 million DM. 1996 year-end. year-end; in the same period the Key figures per share preferred share rose in value by 57.0 % DVFA-based earnings 1993 1994 1995 1996 1997 to 771 .00 DM. At the end of February The earnings per share under the terms Net earnings DM -58.28 4.50 10.03 19.77 34.4721 31 1998 the price of the ordinary share was of commercial law were again improved Earnings ace. to DVFA/SG DM - 51.00 9.50 22.00 55.00 81.50>1 1,192.50 DM. in the past fiscal year; they totalled 34.47 41 Cash flow DM 109.24 263.94 206.79 205.54 182.2821 Following the stabilization of share (19.77) DM. Earnings according to the Stockholders' equity DM 463.30 425.41 369.09 365.00 352.4111 prices on the European stock markets, DVFA/SG (German Association for Price/earnings ratio on March 9th, 1998 the Board of Financial Analysis and Investment Con- 31 ace. to DVFA/SG Factor - 8.5 44.8 21.9 11.6 12.3 Management of VOLKSWAGEN AG sultancy/Schmalenbach Society), which 41 Price/cash flow ratio Factor 4.0 1.6 2.3 3.1 resolved to continue with the capital express the net earnings adjusted by 5.5 Dividend return increase. special effects and thus represent a pro- % 0.7 1.0 1.8 2.0 1.7 The Supervisory Board and Board of fitability figure suitable for period and Management will propose to the Annual inter-company comparison, were 3.2 Meeting of Stockholders in June 1998 (1.9) billion DM. Including three million Development of the share price 1993 1994 1995 1996 1997 that the structure of the share capital of shares stemming from the capital Ordinary share VOLKSWAGEN AG be amended. Each 50 increase in October 1997, the DVFA- Closing DM 435.00 425.50 DM nominal value share is to be based earnings per share amounted to 481.00 637.5 0 1,005.00 replaced by ten individual share certifi- 81.50 (55.00) DM. The DVFA-based High DM 439.20 548.00 485.70 637.50 1,484.00 cates (shares with no nominal value). result was influenced primarily by Low DM 243.00 404.00 335.50 480.20 632.25 We expect this change to make the changes in the valuation of fixed assets Preferred share Volkswagen share even more attractive and inventories (see also pages 73 and Closing DM 359.00 340.50 347.80 491.00 771.00 to a broader circle of investors. It will 74) . These changes alone made a diffe- High DM 362.50 438.00 354.20 493.50 1,106.00 also be a response to the increasing level rence of 4 7 DM per share. Low of internationalization. DM 210.00 324.00 265.50 346.80 486.00

Sales turnover on German stock markets 1993 1994 1995 1996 1997 Turnover in VW ordinary shares bill ion DM 112.2 111.4 81.1 110.2 192.3 Turnover in DAX quoted shares bill ion DM 1,533.9 1,572.1 1,349.0 1,889.5 2,740.0 Vol kswagen portion % 7.3 7.1 6.0 5.8 7.0 11 l~cluding the 3,000,000 shares originating from the capital increase in October 1997 and the 16,130 new shares issued to employees which do not carry dividend nghts until January 1, 1998 and the 1,124,006 new shares issued in connection with the exercise of option rights. ~ Based on the capital stock carrying dividend rights for 1997 inc luding the capital increase in October 1997. " German Association for Financial Analysis a nd Investment Consultancy/ Schmalenbach Society. '' Cash flow excluding depreciation/ write-up of leasing and rental a ssets (since 1994 determined on th e basis of the recommendations of the Schmalenbach Society).

56 57 Finance

Expansion of Financial Services As a further measure to broaden its Derivative financial instruments computer system. The system ensures Division sustained refinancing base, in March l997VWFS to limit risk the stipulated separation of dealing, The growth of the Financial Services The growth of the Financial Services AG became the first German company High demands were again placed on the monitoring and back-office activities. At Division was demonstrated by the Division was demonstrated by the to issue a Samurai Bond on the Japanese management of interest rate and cur­ the same time it provides maximum increase in the Division's share of the increase in the Division's balance-sheet market. This instrument, with a value of rency positions in the past year. The efficiency in the execution of centralized overall Group balance-sheet total, to total. The growth resulted mainly from 20 billion Yen, has a term of three years limitation of risk by means of derivative Treasury operations within the Group. 39.3%. Europe and the North America region. and was successfully placed with private financial instruments as carried out in The implementation started in the The proportion of the overall Group Japanese clients. Thus, by way of its previous years was continued course of the year under review is sche­ balance-sheet total accounted for by the Arnsterdam-based financing subsidiary unchanged; the derivatives are deployed duled to be completed in 1998. Division increased from 37.0 % at the Volkswagen Financial Services N.V, VW solely to limit the interest rate and cur­ The forward foreign exchange and Forward foreign exchange end of 1996 to 39.3 % as at December FS AG has opened up a new investment rency risks, based on underlying com­ option transactions are valued on a transactions and currency options 31st, 1997. sector. mercial transactions. Forward foreign strict imparity basis throughout the are entered into primarily to hedge The book value of the leasing and In order to strengthen the equity base exchange transactions and currency Volkswagen Group, with the agreed against exchange rate losses in rental assets contained in the Group's of the VW FS AG Group, Volkswagen options are entered into primarily to exchange rates being compared against respect of future sales and material fixed assets totalled 12.8 billion DM at Bank GmbH created additional top-up hedge against exchange rate losses in the market rates on the balance-sheet purchases in foreign currencies. the end of 1997, against 12.1 billion DM capital in two stages. The issues of regis­ respect of future sales and material date. A negative difference in valuation in 1996. The receivables included in tered participating certificates and the purchases in foreign currencies. In order is booked as a provision or value adjust­ "Other assets" as per the balance-sheet intra-Group subordinated loans taken to maintain the high standards set by ment; book profits on valuations are not date in respect of customer and dealer out represent a utilization of the legal the German Federal Banking Supervi­ taken. financing totalled 22.3 billion DM possibilities of equity capital procure­ sory Office (Bundesaufsichtsamt ftir das At the year-end, the nominal values (+ 14.8 %). Of the Group's liabilities to ment in accordance with the German Kreditwesen), to which Volkswagen of the derivative financial instruments banks stated in the consolidated Credit Act (Kreditwesengesetz). voluntarily adheres, it was decided in used were as follows: balance sheet, 12.6 billion DM (+ 5.5 %) 1997 to purchase a unified-platform relate to financial services operations. Other liabilities, provisions and deferred income relating to this sector have a million DM 31.12.1997 31.12.1996 total volume of9.0 billion DM. The Forward foreign exchange transactions 12,447 26,502 stockholders' equity of the Financial Interest swaps and combined Services Division increased by interest/currency swaps 16,289 14,834 665 million DM to 3.1 billion DM; the Interest/currency options 3,771 4,288 equity ratio in the published financial Other forward transactions 40 statements according to commercial law Total 32,507 45,664 was 7.8 %, against 7.0 % in the previous year.

Innovative refinancing concepts of the Financial Services Division The issue byVolkswagen Financial Services AG (VW FS AG) of a programme of Multi-Currency Euro Medium-Term Notes (EMTN) in 1996 was successfully taken up in various currencies and over various terms.

58 59 Finance

Financial ratios marked by The Group's overall stockholders' Key financial and earnings ratios expansion of business equity rose by l.O billion DM to In accordance with the expansion In accordance with the expansion of 14.3 billion DM; the equity ratio 1993 1994 1995 1996 1997 of business, the balance-sheet total business in 1997, the balance-sheet total remained at the previous year's level of Ratio of tangible fixed assets increased to 101.6 billion OM. increased from 94.6 billion DM to 101.6 14.1 %. The increase in outside capital to total assets (%)11 29.1 25.2 21.7 21.8 22.2 was mainly due to the expanding bank­ 21 billion DM. Tangible fixed assets Rate of inventory turnover {factor} 6.9 8.7 9.4 9.7 10.5 increased at a higher percentage rate ing and fi nancing business and to the Equity ratio {%) than current assets, partly due to the increased provisions. significant increase in capital invest­ Financing of the again increased - Automotive 22.2 20.8 19.3 20.5 20.8 ments. In the current assets, inventories capital investments was at a high level. -Financial Services 8.3 6.9 7.0 7.0 7.8 increased in line with production as a Cash fl ow excluding leasing and re ntal result of the numerous new model start­ assets increased by 152 million DM to -Group 19.5 17.6 15.1 14.1 14.1 ups. Principally as a result of the expan­ 7,199 million DM, and fi nanced the Cash flow as o/o of capital investments 3141 75.1 156.1 100.9 80.6 73.1 sion in dealer and customer financing, major part (73 .1 %) of capital invest­ Cash flow as o/o of sales 31 4.7 11.0 7.9 7.0 6.4 receivables increased by 10.6 %. Liquid ments in new products and the asso­ 51 funds including securities classified as ciated manufacturing facilities. As in the Total debt-equity ratio {years} 5.2 2.8 3.4 3.7 3.9 current assets totalled 16.5 billion DM, previous year, the ratio of stockholders' Return on sales before tax {%) -2.1 0.6 1.3 2.0 3.4 slightly below the previous year's level. equity and long-term liabilities to fixed Return on sales after tax {%) - 2.5 0.2 0.4 0.7 1.2 On the equity and liabilities side of assets, which indicates the degree to which the latter are financed by the 11 Percentage of net book values of tota l assets represented by tangible fixed assets (balance-sheet tota l). the balance sheet, stockholders' equity " Quotient of sales proceeds a nd in ventories. 31 Cash flow excl ud in g depreciation/write-up of leasing a nd rental assets (since 1994 determined on the basis of the recommendations of the Schmalenbach Society) increased as a result of the improved net former, was at a comparably high level 41 Capital in vestments excl udi ng a dditions to leasing and rental assets. · earnings and the in-payments against of73.6 %. The ratio of interest-bearing 51 Effective indebtedness (outside borrowings minus liquid funds, secu rit ies classified as current assets and short-term receivables and loans given) in relation to cash flow. the subscribed capital and into the outside borrowings to the balance-sheet capital reserve. Additions to the sub­ total rose by 0.9 percentage points, to scribed capital comprised: 32.2 %. -the issue of shares to employees Balance-sheet structure by Division (before consolidation) amounting to 0.8 million DM, entered

in the Register of Companies on Automotive Financial Services Volkswagen Group October 13th, 1997; million DM 1997 o/o 1996 o/o 1997 o/o 1996 o/o 1997 o/o 1996 o/o -a capital increase against contribution, Fixed assets 31,453 40.0 28,460 38.6 13,264 33.2 12,730 36.4 39,515 38.9 36,143 38.2 utilizing the approved capital stock Current assets 26,704 and amounting to 150 million DM, of 47,161 60.0 45,356 61.4 66.8 22,277 63.6 62,121 61.1 58,425 61.8 which uncalled capital contributions Total assets 78,614 100.0 73,816 100.0 39,968 100.0 35,007 100.0 101,636 100.0 94,568 100.0 totalling 112.5 million DM, entered in Stockholders' equity 16,319 20.8 15,120 20.5 3,111 7.8 2,446 7.0 14,320 14.1 13,320 14.1 the Register of Companies on October Outside capital 62,295 79.2 58,696 79.5 36,857 92.2 32,561 93.0 87,316 85.9 81,248 85.9 24th, 1997; long-term 12,379 15.7 11,726 15.9 1,603 4.0 1,511 4.3 14,750 14.5 13,517 14.3 -subscription to shares resulting fro m medium-term 13,369 17.0 14,449 19.6 15,125 37.8 13,107 37.4 21,903 the exercise of options arising from 21.6 22,450 23.7 still existing option bonds in the total short-term 36,547 46.5 32,521 44.0 20,129 50.4 17,943 51.3 50,663 49.8 45,281 47.9 amount of 56.2 million DM. Total capital 78,614 100.0 73,816 100.0 39,968 100.0 35,007 100.0 101,636 100.0 94,568 100.0

60 61 Finance

Improved earnings Increase in gross liquidity Development of short-term liquidity of the Volkswagen Group The positive trend in earnings The positive trend in earnings of the The short-term liquidity statement of million DM seen in recent years was continued Volkswagen Group seen in recent years the Volkswagen Group - based on the 1997 1996 Net earnings in 1997. was continued in 1997. The successful schema of the Schmalenbach Society ­ + 1.361 + 678 sales of our product range, up by 13.1 % details the sources and appropriation of Depreciation and write-up of fixed ass ets + 5.987 + 4.780 funds. Cash fl ow rose by 1.1 billion DM to 113.2 billion DM, combined with the Depreciation and write-up of leasing and rental assets + 4.982 + 4.042 lesser increase in cost of sales, led to a over the previous year to 12.2 billion Change in medium and long-term provisions + 473 + 2.294 substantial increase in gross profit. The DM. The negative balance of other Other expenses and income not affecting payments ratio of gross profit to sales proceeds internal fi nancing resulted in an overall 622 706 Cash flow increased from 9.6 % in 1996 to 10.9 % total of self-generated funds of + 12.181 + 11.088 in the year under review. The gross 11. 1 billion DM. Capital investments Change in short-term provisions + 922 + 2.070 profit more than covered the selling, dis­ including additions to leasing and rental Change in inventories and trade receivables 3.798 - 4.973 tribution and administration costs in assets led to an outflow of funds to­ Change in liabilities {excluding credit liabilities) + 1.754 + 3.199 1997, although the model changes and talling 13.7 billion DM, resulting in a net Other internal financing 1.122 296 increase in unit sales led to higher sell ­ cash flow of -2.6 billion DM. Taking + Total internal financing ing and distribution costs. The balance account of the positive effect of finan­ + 11.059 + 11.384 of other operating income and expenses cing operations, gross liquidity Disposals of fixed assets and leasing and rental assets + 2.613 + 2.182 was 1.3 billion DM. These items were increased by 121 million DM, totalling Additions to tangible fixed assets * 8.222 7.329 18. 1 billion DM at the end of the year. As reduced overall, in particular as a result Additions to financial assets ** 365 311 of fewer exchange rate influences. The a result of the further expansion in the Additions to leasing and rental assets 7.734 - 7.639 financial result, totalling 2 billion DM, fi nancial services sector in particular, Capital investments - 13.708 - 13.097 again made an increased contribution total third-party borrowings within Net cash flow to the Group's net earnings. The main the Group rose by 2.9 billion DM 2.649 1.713 factors in the 95.1 % increase in profit to 33.0 billion DM. Net liquidity was In payments in respect of capital increases + 335 + 500 from ordinary business, to 3.8 billion thus - 14.9 billion DM. Outpayments to stockholders (dividends) 325 220 DM, were our selling successes and Other equity finance 156 13 improved cost structures. The return on Change in financial liabilities + 2.916 + 2.342 pre-tax sales rose from 2.0 % to 3.4 %. Inflow/outflow of funds in respect of financing operations This was a further step towards our + 2.770 + 2.609 medium-term target of at least 6.5 %; it also shows how much work is still to be Change in gross liquidity + 121 + 896 done, however. Taxes on income Gross liquidity at start of period + 17.932 + 17.036 increased by 92.1 % to 2.5 billion DM; Gross liquidity at end of period + 18.053 + 17.932 the tax load ratio was 64.6 (65.6) %. With • Including intangible assets. net earnings of 1.4 billion DM, the •• Excl ud in g same of the long-term financial investments and excluding equity valuation of th e companies not fully conso lidated into the Group financial statements. return on sales after tax improved fro m 0.7 % to 1.2 %.

Auto- Auto- Fin ancial Financi al Volkswagen Volkswagen Cha nge motive motive Services Services Group G roup million DM 31.12.97 31.12.96 31.12.97 31.12.96 31.12.97 31.12.96 Liquid funds 12,565 12,944 527 184 12,613 13,080 467 Securities 3,678 3,311 202 188 3,880 3,499 + 381 Long-term financial investm ents 2,160 1,903 1,560 1,353 + 207 Gross liquidity 18,403 18,158 729 372 18,053 17,932 + 121 Total third-party borrowings - 15,689 - 14,950 -31,494 -27,080 -32,990 - 30,074 - 2,916 Net liquidity + 2,714 + 3,208 -30,765 -26,708 - 14,937 - 12,142 - 2,795

62 63 Finance

Added value of the Volkswagen Group's added value Structure of the VOLKSWAGEN AG balance sheet Volkswagen Group increased by 8.7% to 27.7 billion DM. Assets million DM 31.12.1997 % 31.12.1996 % The added value indicates the Sales per employee increased from Fixed assets increase in value generated by a com­ 423,000 DM to 453,000 DM. Added value 19,231 45.3 17,515 43.7 pany during a specific period and repre­ per employee improved by 2.9 % over Inventories 3,213 7.6 3,059 7.6 sents its contribution to the gross the previous year, to 111,000 DM. Receivables 12,330 29.1 11,505 28.7 national product. In the past year the Liquid funds 7,659 18.0 7,993 20.0 Total assets 42,433 100.0 40,072 100.0

Sources million DM 1997 1996 Stockholders' equity and liabilities million DM 31.12.1997 % Sales 113,245 100,123 31.12.1996 % Stockholders' equity 12,549 29.6 plus other income 11,512 11,520 11,755 29.3 Long-term liabilities 9,124 21.5 less expenditures 97,047 86,146 8,666 21.6 Medium-term liabilities 7,102 16.7 Added value 27,710 25,497 7,252 18.1 Short-term liabilities 13,658 32.2 12,399 31.0 Total capital 42,433 100.0 Distribution million DM 1997 % 1996 % 40,072 100.0 To : In the form of: stockholders dividend 483 1.7 323 1.3 the workforce wages, salaries, fringe costs 20,686 74.7 20,708 81.2 the State taxes, levies 2,891 10.4 1,665 6.5 2,772 10.0 2,446 9.6 creditors interest Structure of the VOLKSWAGEN AG statement of earnings the company transfer to reserves 878 3.2 355 1.4 January 1 - December 31, 1997 Added value 27,710 100.0 25,497 100.0 million DM 1997 % 1996 % Sales 54,285 100.0 49,891 100.0 Cost of sales 50,488 93.0 46,969 94.1 Introduction of the Euro in 1999 the process of currency management as Gross profit + 3,797 7.0 + 2,922 5.9 The Treaty of Maastricht lays down the well as the possibility that our dealers Selling, distribution introduction of a single European cur­ and suppliers may likewise set their and administration expenses 3,928 7.2 4,040 8.1 rency with effect from January 1st, 1999. prices in Euros. The Volkswagen price Other operating income In our opinion the Euro will result in strategy in response to the changing and expenses + 942 1.7 + 448 0.9 greater price transparency, increased monetary conditions aims at improving Financial results + 1,390 2.6 + 1,798 3.6 international trade, more competition value-for-money by continuously Results from ordinary and, in the long term, more economic increasing the added value of the pro­ business activities + 2,201 4.1 + 1,128 2.3 growth. We intend to take the opportu­ duct. This will then form the basis for Taxes 1,235 2.3 498 1.0 nities it offers, and it was for that reason continuous upward repositioning on the Net earnings + 966 1.8 + 630 1.3 that, as early as 1996, we formed a pro­ market. The consistent implementation ject team to identify need for action and of the platform strategy for vehicles and define the necessary changeover mea­ assemblies establishes the fundamental sures on an interdisciplinary basis in all prerequisites for this. Volkswagen will Our aim as from 1999 is to be our organizational units. Our aim as respond to the introduction of the Euro able to additionally offer the from 1999 is to be able to additionally by pursuing its existing price harmo­ Group's products and services to offer the Group's products and services nization measures accordingly. our customers in Euros. to our customers in Euros. This includes The financial state ments of VOLKSWAGEN AG will be published in the Bundesonzeiger and submitted to the Rhgi ster of Companies at the Wolfsburg District Court. Copie s of the financial stdtements ore available free of c orge from VOLKSWAGEN AG, Finonz-Anolytik und -Publizitiit, Brieffoch 1848-2, D-38436 Wolfsburg, Germany.

64 65 Finance Key Figures of the Marques and Regions

Segmental reporting: Based on selling region, most of the Vehicle sales Production Workforce Sales Capital Sales proceeds by economic region sales proceeds ofthe Volkswagen Group investments 000 units Change OOOunits Change 31.12. Change Broken down by country of origin, were generated in Europe, and just DMm Change DMm Change 1997 % 1997 % 1997 % 1997 % 1997 % The proportion of total revenue Group sales were dominated by Ger­ under half of those in Germany. The Volkswagen Passenger Cars 1,829 + 4.1 1,467 - 2.1 112,752 + 7.7 generated by sales in Germany many, which generated 62.6 (63 .9) % of proportion of total revenue generated 59,924 + 11.4 4,158 + 21.9 fell in comparison with the previous the total. Including the rest of Europe, by sales in Germ any fell in comparison VOLKSWAGEN AG (passenger cars} 1,511 + 1.2 1,004 - 8.0 year as a result of reduced the proportion of total sales generated with the previous year as a result of 83,776 + 4.0 48,311 + 7.8 3,438 + 30.5 deliveries. in that region remained at the previous reduced deliveries. In contrast, the rest Volkswagen Saxony companies year's level of 81.6 %. The proportion of of Europe recorded a substantial rise. 110 + 25.5 110 + 25.5 5,207 + 74.2 3,383 + 56.8 315 44.0 sales originating in North and South Sales proceeds in North America also Volkswagen Bruxelles S.A. 167 - 14.7 167 -14.7 6,057 + 3.2 3,147 - 12.6 166 + 85.4 America together increased only slightly developed positively. The fall in the Volkswagen Navarra, S.A. 277 + 10.0 277 + 10.0 4,877 + 8.1 3,441 + 7.2 62 + 67.1 over the previous year. The shares of Asia-Pacifi c region resulted from Groupe VOLKSWAGEN total sales of the Africa and the Asia­ reduced unit deliveries byVolkswagen France s.a. 204 -10.2 622 - 2.8 5,412 0.7 7 7.3 Pacific regions each fell by 0.1 percen­ do Brasil and by AUDI AG. AUTOGERMA S.p.A. 254 + 12.3 554 + 2.2 5,809 + 12.2 6 29.9 tage points. VOLKSWAGEN Group United Kingdom Ltd. 207 + 12.7 621 + 62.1 6,909 + 43.8 4 + 37.2

Volkswagen Commercial Vehicles* 267 + 33.4 226 + 47.7 16,949 + 15.9 7,657 + 19.6 238 26.7 Audi 550 + 12.3 558 + 13.5 38,155 + 9.1 22,410 + 19.2 1,967 + 36.1 Seat 617 + 21.3 467 + 12.5 15,697 + 0.5 11,950 + 25.5 271** 23.1 Skoda 373 + 34.4 357 + 35.7 19,611 + 13.9 5,157 + 53.6 405 31.6

North America Region 310 + 3.0 259 + 12.0 16,182 + 14.9 9,454 + 26.0 855 + 75.6 Volkswagen de Mexico, S.A. de C.V. 259 + 12.1 259 + 12.0 15,196 + 16.1 5,745 + 35.3 748 + 95.1 VOLKSWAGEN OF AMERICA, INC. 171 + 5.3 729 - 0.5 6,379 + 28.2 106 + 9.3 Volkswagen Canada Inc. 29 + 5.7 257 - 2.3 879 + 12.8 1 - 80.0

South America/Africa Region 739 - 1.8 719 + 3.3 40,492 + 1.4 14,469 + 6.7 743 6.8 Volkswagen do Brasil Ltda. 609 - 0.3 570 + 1.5 31,073 + 3.9 11,768 + 7.5 625 + 0.1 Volkswagen Argentina S.A. 116 + 20.9 91 + 35.3 3,640 + 3.8 2,335 + 25.0 75 -42.9 Volkswagen of South Africa (Pty.} Ltd. 56 -16.0 58 -14.0 5,779 -11.2 1,387 - 1.9 44 + 2.8 Sales originating in the region Sales generated in the region milli on DM 1997 % 1996 % 1997 % 1996 % Asia-Pacific Region 340 + 15.2 285 + 20.7 14,782 - 0.3 2,052 + 0.5 82 X Germany 70,868 62.6 63,924 63.9 39,191 34.6 36,419 36.4 Shanghai-Volkswagen 21,528 19.0 17,762 17.7 44,139 39.0 37,724 37.7 Europe (exc l. Germany} Automotive Company Ltd. 230 + 15.1 230 + 15.1 10,009 - 3.1 5,540 + 25.3 182 3.2 3,807 3.8 11,617 10.3 7,720 7.7 North America* 4,632 4.1 FAW-Volkswagen South America 14,846 13.1 13,231 13.2 12,152 10.7 12,036 12.0 Automotive Company, Ltd. 41 + 56.8 47 + 72.9 3,845 + 3.7 1,020 + 85.8 81 - 71.4 Af ri ca 916 0.8 872 0.9 1,731 1.5 1,693 1.7 VOLKSWAGEN Group Japan K.K. 60 - 0.3 353 + 2.0 2,003 - 1.9 6 - 10.6 As ia-Pacifi c** 455 0.4 527 0.5 4,415 3.9 4,531 4.5 100,123 100.0 Total 113,245 100.0 113,245 100.0 100,123 100.0 Volkswagen Group 4,250 + 6.4 4,291 + 7.9 279,892 + 7.3 113,245 + 13.1 9,843 + 12.6

• Incl ud ing Mexico (previous year's figure a djusted). • As from 1997 including Volkswage n Poznan Sp. z o.o. •• Geographical •• Ex cl uding contributions from Volkswagen Navarra, S.A. and VOLKSWAG EN FI NANCE, S.A.

The volume data of th e not fully consolidated vehicle-producing holdings AUTOEUROPA, Shanghai-Vo lkswagen, FAW -Volkswagen and Chinchun Motor are inc luded. 66 67 Results of Major Companies (milli on DM)

11 1 Company Subscribed Results after taxes Company Subscribed Results after taxes l capital capital 31.12.1997 1997 1996 31.12.1997 1997 1996

21 VOLKSWAGEN AG 2,032 966 630 VOLKSWAGEN OF AMERICA, INC. 534 - 24 63 31 23) Volkswagen Sachsen GmbH 10 47 Volkswagen Canada Inc. 2 7 14

Sachsische Automobilbau GmbH 10 24 207 Volkswagen de Mexico, S.A. de C.V. 288 57 31

Volkswagen Bruxelles S.A. 105 15 95

Volkswagen Bratislava, spol. s r.o. 108 6 10

Groupe SWAGEN France s.a. 25 104 150 Volkswagen do Brasil Ltda. 900 49 292

AUTOGERMA S.p.A. 143 32 53 Volkswagen Argentina S.A. 322 55 16

VOLKSWAGEN Group United Kingdom Ltd. 23 188 83 Volkswagen of South Africa (Pty.) Ltd. 25 -llO 18

------

31 31 61 61 AUDI AG 215 360 250 Shanghai-Volkswagen 260 348 258 98.99% VOLKSWAGEN AG Automotive Company Ltd. 50 % VOLKSWAGEN AG

FAW-Volkswagen Automotive Company, Ltd. 649 1661 Q6l 30% VOLKSWAGEN AG, 10% AUDI AG Q4l SEAT, S.A. 131 63 VOLKSWAGEN Group Japan K.K. 300 44 56

" The figures are based an financial statements drown up according to n atio.n ~ l regula tions. ~ Includ i ng uncalled outstanding capital contributions totall1ng DM 112.5 m1ll1on. 31 Before profit assumption. - Producing Companies '1The subscribed capital of SEAT, S.A. totals 20 mill ion Pesetas (DM 241,000). - Distributing Companies " From January 1, 1998 the company name is SKODA, AUTO a .s. 61 Pro rata result. - Other Companies

69 68 Volkswagen Group Financial Statements for the Fiscal Year Ended December 31, 1997

Balance Sheet of the Volkswagen Group, December 31, 1997- million OM- Statement of Earnings of the Volkswagen Group for the fiscal year ended December 31, 1997- million OM-

Assets Note Dec.31,1997 Dec.31,1996 Note 1997 1996 Fixed assets (1) Sales (14) 113,245 100,123 Intangible assets 111 120 Cost of sales 100,926 90,504 Tangible assets 22,594 20,631 Gross profit + 12,319 + 9,619 Financial assets 4,006 3,274 Selling and distribution expenses 9,027 8,301 Leasing and rental assets 12,804 12,118 General administration expenses 2,782 2,660 39,515 36,143 Other operating income (15) 6,694 7,487 Current assets Other operating expenses (16) 5,404 5,760 Inventories (2) 10,827 10,368 Results from participations (17) + 509 + 509 Receivables and other assets (3) 34,615 31,205 Interest results (18) + 1,580 + 1,209 Securities (4) 3,880 3,499 Write-down of financial assets and Cash on hand, deposits at German Federal Bank securities classified as current assets 43 131 and Post Office Bank, cosh in banks 12,613 13,080 Results from ordinary business activities + 3,846 + 1,972 61,935 58,152 Taxes on income 2,485 1,294 Prepaid and deferred charges (5) 186 273 Net earnings (19) + 1,361 + 678 Balance-sheet total 101,636 94,568

Stockholders' equity and liabilities Stockholders' equity Subscribed capital of VOLKSWAGEN AG (6) 2,032 1,825 Ordinary shares 1,545 Non-voting preferred shores 487 Potential capital 289 Uncalled outstanding capital contributions -113 Called-up capital 1,919 Capital reserve (7) 5,186 4,946 Revenue reserves (8) 5,235 4,378 Net earnings available for distribution 487 318 Minority interests 323 468 13,150 11,935 Special items with an equity portion (9) 1,161 1,374 Special item for investment subsidies (10) 9 11 Provisions (11) 37,423 36,026 Liabilities (12) 46,983 41,996 Deferred income (13) 2,910 3,226 Balance-sheet total 101,636 94,568

70 71 Notes on the Financial Statements of the Volkswagen Group for the Fiscal Year Ended December 31, 1997

Financial statements in accordance with commercial law 26 German and eight foreign companies in which participa­ Translation of currencies Tangible assets and leasing and rental assets are valued at The consolidated financial statements of the Volkswagen Group tions are held and on which VOLKSWAGEN AG or other Group For the purpose of the consolidated financial statements, addi­ acquisition or manufacturing cost minus depreciation. Invest­ have been prepared in accordance with the provisions of the companies exert a significant influence are included in the con­ tions to tangible assets in the individual financial statements of ment subsidies are always deducted. Manufacturing cost is German Commercial Code, with due regard to the provisions of solidated financial statements as associated companies. foreign companies and the amounts brought forward in respect of determined on the basis of the directly attributable cost of the Corporation Act. A list detailing all interests held by the Vol.kswagen Group is companies consolidated for the first time are translated at the materials and labour cost as well as proportionate material In order to improve clarity, we have combined certain items in deposited in the Wolfsburg register of companies under HRB 215. average rates for the months of acquisition. Depreciation and dis­ overheads and production overheads including depreciation. the balance sheet and statement of earnings. These items are It can also be obtained direct from VOLKSWAGEN AG.* posals are translated at middle rates weighted in line with the Administration expenses are not taken into account. shown separately in the notes on the financial statements. In the monthly additions (historical rates). The regular depreciation is based mainly on the following interest of improved international comparability, the statement of Consolidation principles With the exception of loans, financial assets are translated at useful lives: earnings has been prepared according to the cost of sales method. The assets and liabilities of the German and foreign companies the rates applying on the date of acquisition and are carried for­ Buildings 25-50 years included in the consolidated financial statements are shown in ward on this basis. Loans are translated at the middle rate for the Buildings and site utilities 10-18 years Scope of consolidation accordance with the uniform accounting and valuation methods balance-sheet date. Technical equipment and machinery 5-8 years The fully consolidated Group companies comprise all companies used within the Vol.kswagen Group. In the case of the associated Short-term leasing and rental assets, together with the related Power generators 14 years in which VOLKSWAGEN AG has a direct or indirect interest of over companies, their own accounts and valuations are used as the liabilities, are translated at the middle rate for the balance-sheet Factory and office equipment including special tools, jigs and 50 % or which are under unified management control of the basis for determining the proportionate stockholders' equity, date. fixtures 3-8 years parent company. Apart from VOLKSWAGEN AG, this involves 29 except in cases where the figures for foreign Group companies In order to secure our foreign currency cash flows- principally To the extent permissible for tax purposes, Group companies German Group companies and 77 foreign Group companies. have to be adjusted to bring them into line with German ac­ from expected future sales, material purchases and credit trans­ in Germany charge regular depreciation on movable assets using In the reporting year the newly established Volkswagen Beteili­ counting regulations. actions- against exchange rate and interest rate fluctuations, the declining-balance method with a scheduled changeover to the gungs-Gesellschaft mbH, Wolfsburg, was included for the first Capital consolidation for the companies included in the conso­ derivative financial instruments including forward foreign straight-line method at a later date, taking account of multi-shift time as a fully consolidated company. The shares of six fully con­ lidated financial statements for the first time and determination exchange and option transactions as well as interest rate trans­ operation. The straight-line method is applied to assets on which solidated companies and one joint venture company previously of figures for associated companies are carried out at the time of actions such as caps and forward rate agreements are deployed, special depreciation is charged. held byVOLKSWAGEN AG were transferred to the new company. acquisition on the basis of the revaluation method. mainly on a centralized basis byVOLKSWAGEN AG. For the first time, for the purposes of simplification, deprecia­ Three previously non-consolidated foreign affiliates and two for­ Differences arising from the acquisition of shares in consoli­ These transactions are valued on a strict imparity basis. Assets tion on additions to movable assets in Germany during the first eign affiliates previously valued on the basis of the proportionate dated and associated companies are capitalized and written off or liabilities backed by combined interest/currency swaps (cross half of the year is based on the full annual rate and depreciation stockholders' equity, of which one was renamed, are now fully over five years. currency interest swaps) are translated at contractually agreed on additions during the second half of the year is based on half consolidated. Four foreign companies have been formally Receivables, liabilities, expenses and income arising between rates. the annual rate. This change of method had a negative effect on removed from the scope of consolidation as a result of merger. the individual consolidated companies are eliminated. Group The other assets and liabilities are translated at the middle rate the Group result amounting to 874 million DM in 1997. The valua­ Two previously fully consolidated companies in North America inventories are adjusted to eliminate intra-Group profits and for the balance-sheet date. tion in the Group financial statements follows the valuation in the are now entered at acquisition cost after their operations were losses. In contrast to the previous year, interim balances on intra­ The change in currency translation differences which results individual financial statements. transferred to existing Group companies and the two companies Group sales of tangible fixed assets are no longer eliminated, as from the exchange rate development in the current year is treated Differences between the values required under commercial Jaw subsequently entered into liquidation. The changes in the scope they were undertaken at market terms and their past effects were as having an effect on the result. and those permitted under tax law are shown on the stockholders' of consolidation result in no substantial changes to the asset, minor. Average monthly rates are used for the most part in the state­ equity and liabilities side of the balance sheet under the special financial and earnings positions of the Vol.kswagen Group. Consolidation operations affecting results are subject to appor­ ment of earnings. However, write-downs of financial assets are items with an equity portion. Two companies have been withdrawn from the category of tionment of deferred taxes. Deferred tax liabilities in connection taken over on a historical basis. The depreciation of tangible Holdings in affiliated and associated companies- if not companies within the Volkswagen Group which are valued on the with consolidation operations are set off against the assets-side assets which is included in cost of sales, selling and distribution valued on the basis of the equity method- and other participa­ basis of the proportionate stockholders' equity. They are now balance of deferred taxes from the individual companies' financial expenses and general administration expenses is likewise trans­ tions are shown at acquisition cost or the lower applicable value. entered at acquisition cost. One of the two companies has entered statements, although these last-mentioned deferred taxes are not lated at historical rates. The net earnings/losses of foreign subsi­ Long-term financial investments are shown at acquisition into liquidation. A newly established affiliate has acquired the shown in the balance sheets. diaries are determined by translating the relevant amounts in cost or at the lower applicable value. shares of a financial services company, both companies being Otherwise, the methods of consolidation applied in the pre­ local currency at the rate applying on the balance-sheet date, Interest-free and low-interest-bearing loans are stated at cash valued at equity. Accordingly, six domestic and five foreign affi­ vious year were retained. taking into account balance-sheet currency translation effecting value; interest-bearing loans at the nominal value. liates are now valued on the basis of the proportionate stock­ results. Within inventories, raw materials and supplies as well as mer­ holders' equity. chandise are valued at average acquisition cost or the lower 17 German and 22 foreign affiliates are not consolidated. The Accounting and valuation principles replacement cost. companies in question are subsidiaries which are omitted under The accounting and valuation methods used in the previous year the provisions of§ 296 subsection 2 of the German Commercial have been retained, apart from the changes cited. Code. Intangible assets are shown at acquisition cost and written Six joint ventures in Germany and 19 abroad are included in down over 3 years as regular straight-line depreciation. In con­ the consolidated financial statements on the basis of the propor­ trast, newly acquired goodwill is written off over five years, tionate stockholders' equity. A further six joint ventures are starting in the year of acquisition. valued at acquisition cost. • The full address is given on page 88.

72 73 Notes on the Financial Statements of the Volkswagen Group for the Fiscal Year Ended December 31, 1997 Notes on the Balance Sheet

In contrast to the previous year, work in progress and finished Liabilities are shown at the amount at which they must be (1) Fixed assets Additions to fixed assets were as follows: goods are stated at the minimum applicable value allowed by repaid or the amount required for fulfillment of the obligation in A breakdown of the fixed-asset items condensed in the balance million DM 1997 1996 commercial law; that is to say, direct materials and labour minus question. In contrast to the principle applied in the financial sheet and their development during the year under report can be value adjustments. This provides improved safeguards against statements ofVOLKSWAGEN AG, li abilities in foreign currencies found on pages 76 and 77. Intangible assets 76 74 risks on the selling and buying markets. This change of valuation are valued at the middle rates applying on the balance-sheet date The book value of the Volkswagen Group's fixed assets, totalling Tangible assets 8,147 7,255 had a negative effect on the Group result amounting to 976 or the rates agreed in respect of these liabilities. 39,515 million DM, comprises intangible, tangible, financial and million DM in 1997. The figures given for contingent liabilities correspond to the leasing and rental assets. Financial assets 1,620 1,413 Provision is made for all discernible storage and inventory risks extent of the liability. 9,843 8,742 by way of adequate value adjustments. In the statement of earnings, expenses are allocated to the Leasing Receivables and other assets are stated at the nominal fields of production, selling/distribution and general administra­ and rental assets 7,734 7,639 amount. Provision is made for discernible individual risks and tion on the basis of cost-accounting rules. 17,577 16,381 general credit risks by way of appropriate value adjustments. In Cost of sales comprises all expenses relating to production and contrast to the principle applied in the financial statements of material procurement, all expenses relating to merchandise, re­ The additions to fixed assets also include the amounts brought VOLKSWAGEN AG, receivables in foreign currencies are valued at search and development costs and expenses in connection with forward in respect of companies consolidated for the first time. the middle rates applying on the balance-sheet date or the rates warranties and product liability. The difference between full cost Increases in value of associated companies valued on the basis agreed in respect of these receivables. and the lower limit for tax balance sheet entry in valuation of of the proportionate stockholders' equity are shown in the Addi­ Acquired foreign exchange and interest option rights are stated inventories is also stated here. tions column. at acquisition cost or at lower market values up to their due date. Selling and distribution expenses comprise labour cost and Securities classified as current assets are stated at acquisition cost cost of materials for our selling and distribution departments as or at the lower applicable value on the balance-sheet date, unless well as costs in connection with freight, advertising, sales promo­ Extraordinary depreciation was charged as follows: the retention of lower values from previous years is permissible. tion, market research and service. Provisions for pensions and similar obligations are based on General administration expenses comprise the labour cost million DM 1997 1996 actuarial computation and the going-value method in accordance and cost of m aterials for the administration departments. Tangible assets 19 131 with§ 6a of the Income Tax Act for German companies, and on Other taxes totalling 406 million DM (1996: 371 million DM) Holdings in affiliated and comparable principles for foreign companies. are allocated to the individual functional areas. associated companies and In order to establish more effective provision for the future other participations 63 108 financial burden arising from pension payments, an interest rate Long-term financial of 5 % - in contrast to the principle applied in the financial state­ investments and loans 32 23 ments of VOLKSWAGEN AG- is applied. Provisions for long­ 114 262 service gratuities in Germany are discounted at 5.5 %, taking account of regulations governing valuation for tax purposes. Extraordinary depreciation on tangible assets was charged for The provisions for warranty obligations are based on historical the most part on decommissioned production facilities. In the and estimated loss in relation to vehicles sold. case of financial assets, the lasting depletion of the proportionate Allowance is made, on the basis of reasonable commercial net worth of one associated company and of one joint venture judgement, for discernible risks and uncertain liabilities by way of company were the principal factors necessitating adjustment of adequate allocations to provisions. The provisions cover all risks the book values of the relevant holdings. arising from future claims. For the valuation of forward foreign exchange transactions, the agreed rate for the transaction is compared against the corresponding forward rate on the same due date as of the balance-sheet date. Provision is made for any unrealized losses arising therefrom. Positive differences (book profits) are not taken into account. Profits and losses are not set off. To determine possible risks arising from forward rate agree­ ments (interest rate hedging transactions), the contractually stipulated interest rate is compared against the agreed market reference rate (e.g. LIBOR). Provision is made for the cost to us of any compensation obligations deriving therefrom. Any claims for compensation in our favour are not entered.

74 75 Notes on the Balance Sheet

Development of Fixed Assets of the Volkswagen Group - million OM -

Gross Book Values Value Adjustments

Acquisition Amou nts brought Additions Transfers Di sposals Acquisition Accumulated Am ounts brought Depreciation Transfers Disposals Write-ups Accumulated Book values Book values or manu­ forward in res­ or manufac­ depreciation fo rwa rd in res­ current year depreciation facturing pect of compa­ turing cost pect of compa­ cost nies consolidated Dec. 31, nies consolidated Dec. 31, Dec. 31, Dec. 31, Jan. l, 1997 for the first time 1997 Jan. l , 1997 for the fi rst ti me 1997 1997 1996 Intangible Assets Concessions, industrial and simila r rights and li cences in such rights 818 11 66 30 183 742 730 3 50 l 151 633 109 88 Goodwill 5 5 l l 4 Pa yments an account 67 2 22 7 40 39 0 l 38 2 28 890 11 68 8 195 782 770 3 so 0 152 671 111 120

Tangible Assets land, land rights and buildings incl. build ings on land owned by others 17,627 93 465 230 130 18,285 9,137 12 598 0 59 7 9,681 8,604 8,490 Technical equipment a nd machi nery 26,662 12 1,928 1,168 938 28,832 22,396 3 2,624 8 912 24,119 4,713 4,266 O ther equipment and factory and office equipment 26,348 5 3,317 1,061 1,286 29,445 21,462 2 2,725 8 1,221 22,960 6,485 4,886 Payments on account and construction in progress 3,074 8 2,337 - 2,476 67 2,876 85 l 0 2 84 2,792 2,989 73,711 118 8,047 17 2,421 79,438 53,080 17 5,948 0 2,194 7 56,844 22,594 20,631

Fi nancial Assets Holdings in affiliated compa nies 135 68 50 153 l 4 0 5 148 134 loans to affiliated compa nies 10 20 10 20 20 10 Holdin gs in associated companies 1,858 573 0 17 2,414 581 59 0 640 1,774 1,277 Pa rticipations 235 0 2 0 111 126 213 0 101 112 14 22 loans to associated companies and companies linked through participation l l 0 0 0 0 0 l l ong-term financial investments 1,369 l 757 535 1,592 15 0 17 0 32 1,560 1,354 Other loans SOl 0 185 503 78 15 4 11 78 425 423 Other financial assets 88 14 l 101 35 l 36 65 53 4,197 1 1,619 908 4,909 923 0 96 105 11 903 4,006 3,274 78,798 130 9,734 9 3,524 85,129 54,773 20 6,094 0 2,451 18 58,418 26,711 24,025

Leasing and Rental Assets 18,635 7,734 9 5,16121 21,217 6,517 4,982 0 8,413 12,804 12,118 39,515 36,143 u Including exchange rate differences the amount of - 9 million DM. ~ Including exchange rate differences the amount of - 822 million DM. • Including exchange rate d ifferences the amount of 236 million DM.

76 77 Notes on the Balance Sheet

(2) Inventories share. The selling price for 15,439 shares to employees was fixed at been exercised by December 31 , 1997. The warrants still in circu­ Aid to the Motor Industry" for special depreciation under§ 4 of DM 615.30 per share, the difference being debited to the result for lation entail option rights for the purchase of 1,052,865 shares. A the Development Area Act has not yet been granted. Dec.31,1997 Dec.31,1996 million DM the year. A further 682 shares have been issued to employees of further potential capital stock can be utilized up to a total of DM Two foreign companies have created special items with an Row materials and supplies 2,485 2,220 subsidiaries at the original issue price. 37 million (736,925 preferred shares) by October 27, 1998 by the equity portion on the basis of corresponding regulations. Work in progress 2,111 2,178 In addition, 1,123 preferred shares were acquired on the stock holders of the 363 ,062 warrants attaching to the option bonds Finished goods and merchandise 6,217 5,956 market at a price of DM 811.25 per share and sold on to entitled issued in 1988. There is an additional potential capital stock of (10) Special item for investment subsidies Payments on account 14 14 employees at a purchase price ofDM 615.30. DM 200 million arising from the issue of up to 4 million ordinary The special item for investment subsidies, amounting to DM 9 10,827 10,368 The difference was treated as expenditure. Of the eight pre­ and/or preferred shares. This potential capital increase will only million (1996: DM 11 million) stems from the financial statements ferred shares held at December 31,1996 stemming from the be carried out to the extent that the holders of the option bonds of two foreign companies. capital increase in 1996, four shares were sold to an employee at and convertible bonds to be issued up to May 31, 2000, with a (3) Receivables and other assets the original price of DM 286.00 per share. The remaining four nominal value of up to DM 1.5 billion, exercise their subscription (11) Provisions shares were sold on the stock market. At an average price ofDM rights. million DM Dec.31,1997 Dec.31, 1996 million DM Dec.31,1997 Dec.31,1996 1,037.52 per share, the sale brought a profit, which was taken. Trade receivables 5,191 4,976 The reserve required by law for treasury stock exists in the (7) Capital reserve Provisions for pensio ns and similar -of wh ich amounts amount of the relevant balance-sheet value. The capital reserve exclusively comprises premiums on capital obligations 14,578 13,651 due in more than one year (3) (4) "Other securities" relate primarily to readily cash-convertible increases and the issue of option bonds. A total of DM 239 million Provisions in respect of taxes 2,619 2,188 Receivables from capital-market papers held by various Group companies. was transferred to the capital reserve in 1997 in connection with affiliated companies 476 329 the increase in subscribed capital of VOLKSWAGEN AG through Other provisions 20,226 20,187 -of which trade receivables (287) (184) (5) Prepaid and deferred charges the exercising of options and the issue of shares to employees. 37,423 36,026 -of which amounts This item comprises for the most part those amounts not yet dis­ of which due in more than one year (45) (28) solved and charged to interest expenses in respect of contra items (8) Revenue reserves short-term 14,913 13,988 Rece ivables from companies in to the transfers to the capital reserve made in connection with medium-term 9,795 10,460 million DM Dec. 31,1997 Dec.31,1996 wh i ~h participations are held 329 1,377 the issue of warrants with low-interest bonds. The amount in long-term 12,715 11,578 -of which trade receivables (161) (265) question here is DM 57 million (1996: DM 74 million). Legal reserve 60 60 -of which amounts Reserve for In accordance with § 249 subsection 2 of the Commercial 5 due in more than one year (-) (17) (6) Subscribed capital treasury stock 5 Code, provisions for expenses which are non-deductible for tax Other assets 28,619 24,523 Following the capital increases effected in the fiscal year - utili ­ Other revenue reserves 5,170 4,313 purposes have once again been created in the consolidated finan­ zing part of the existing potential capital stock and authorized -of which amounts 5,235 4,378 cial statements in respect of various Group companies to make due in more than one year (11,305) (8,043) capital stock- through the issue to employees of 16,130 non­ allowance for specific financial burdens which have already been voting preferred shares at a price ofDM 50 per share, with a total 34,615 31,205 A total ofDM 483 million was transferred from the net earnings occasioned, among other things in connection with model value of DM 806,500, and through the issue of 3 million ordinary of the parent company to the "Other revenue reserves" in accord­ changes and ongoing restructuring measures. This adjustment of shares at a price ofDM 50 per share, with a total value ofDM 150 Significant items of "other assets" are the receivables relating to ance with§ 58 subsection 2 of the German Corporation Act. provisions led to reduced expenses in 1997. Without these mea­ million, and of976,871 non-voting preferred shares at a price of financing and leasing operations. sures, pre-tax earnings would have been 10 % lower (1996: 3 % DM 50 per share, with a total value of DM 48,843,550, and (9) Special items with an equity portion higher). 147,135 ordinary shares at a price of DM 50 per share, with a total "Other provisions" includes warranty provisions (DM 6.0 million DM Dec.31,1997 Dec.31,1996 (4) Securities value of DM 7,356, 750 through the exercising of options, the sub­ billion), personnel provisions (DM 4.1 billion for early retirement, scribed capital now amounts to DM 2,032 million. Of the sub­ Reserves for long-service awards and other workforce-related costs), provi­ million DM Dec.31,1997 Dec.31,1996 tax purposes 39 38 scribed capital, DM 112.5 million of the capital increase ofDM sions for selling and distribution expenses (DM 2.4 billion), and Tr eosury stock 5 5 150 million has not yet been called-up. The subscribed capital is Depreciation for provisions for legal risks and court costs (DM 1.5 billion). Other securities 3,875 3,494 composed of30,896,132 ordinary bearer shares with nominal tax purposes 1,122 1,336 3,880 3,499 value ofDM 50 and 9,738,415 non-voting preferred shares with 1,161 1,374 nominal value ofDM 50. In addition, there is an authorized VOLKSWAGEN AG holds treasury stock in the form of 76,4 76 capital stock of DM 150 million and a second authorized capital The Volkswagen Group has reserves in accordance with§ 6 b of shares, comprising 76,467 ordinary shares and nine preferred stock of DM 93 million- each expiring on May 31, 2000 - for the the Income Tax Act/Section 35 of the Income Tax Guidelines. shares with a total nominal value of DM 3,823,800; this corres­ issue of preferred shares to employees. Depreciation for tax purposes comprises value adjustments in ponds to 0.2 % of the subscribed capital. The ordinary shares were A potential capital stock of DM 53 million can be utilized in full accordance with§ 4 of the Development Area Act, § 3 subsection 2 acquired in 1971 in connection wi th a conversion offer to Audi by August 1, 2001 by the holders of the warrants attaching to the of the Border Area Promotion Act, § 6 b of the Income Tax stockholders on the occasion of a capital increase. The preferred option bond issued in 1986. Of the 30,000 warrants for the Act/ Section 35 of the Income Tax Guidelines, § 7 d of the Income shares represent the residual stock in connection with the issue of purchase of one share, the 30,000 warrants for the purchase of Tax Act,§ 14 of the Berlin Promotion Act, § 82 d of the Income Tax 16,130 shares with a value ofDM 50 each - giving a total nominal seven shares, and the 12,000 warrants for the purchase of 80 Directive, § 82 a of the Income Tax Directive and § 80 of the value of DM 806,500 (= 0.04 % of the subscribed capital) -to shares (together with 1,200,000 options for the purchase of one Income Tax Directive. The European Union authorization employees in October 1997. The issue price was DM 915.30 per share at DM 50.00 per share), a total of 147,135 option rights had required in accordance with the "Community Framework for State

78 79 Notes on the Balance Sheet Notes on the Statement of Earnings

(12) Liabilities (14) Sales (16) Other operating expenses

million DM Payable within Payable within Payable within 1997 1996 million DM 1997 1996 up to 1 year over 5 years Dec.31,1997 Dec.31,1996 up to 1 year million Share million Share Other Bonds 1,212 1,000 4,338 3,966 368 DM % DM % operating expenses 5,404 5,760 - of which convertible (605) (-) (1,590) (947) (-) Germany 39,191 34.6 36,419 36.4 - of which transfers Liabilities to banks 15,630 407 21,209 20,253 14,892 Europe (excl. Germany) 44,139 39.0 37,724 37.7 to special items with an equity portion (81) (350) Payments on account received 1,079 1,080 969 969 North America 11,617 10.3 7,720 7.7 South America 12,152 10.7 12,036 12.0 Trade payables 7,555 2 7,651 6,990 6,862 In addition to transfers to the special items with an equity por­ 1,731 1.5 1,693 1.7 Notes payable 27 348 636 633 Africa tion, other operating expenses include in particular expenses Amounts payable to affiliated companies 147 147 104 104 Asia Pacific 4,415 3.9 4,531 4.5 from exchange rate changes in respect of supplies and servi ces, Amounts payable to companies in which Total 113,245 100.0 100,123 100.0 including valuation of our forward currency transactions on a participatians are held 244 244 630 630 of which strict imparity basis (DM 1.8 billion). depreciation of current Other liabilities 8,833 626 11,966 8,448 5,674 Volkswagen vehicles 49,399 43.6 45,657 45.6 assets (DM 0.8 billion). and expenses for various risks. Deprecia­ - of which taxes (1,125) (-) (1,129) (732) (727) Audi vehicles 21,401 18.9 18,008 18.0 tion for tax purposes was charged in the amount ofDM 73 million (1996: DM 341 million). solely in respect of fixed assets. -of which in respect of social security (577) (0) (578) (507) (507) Seat vehicles 6,164 5.4 4,878 4.9 34,727 2,035 46,983 41,996 30,132 Skoda vehicles 4,005 3.5 2,575 2.6 Commercial vehicles 9,427 8.3 7,887 7.9 (17) Results from participations Spares 7,527 6.6 6,993 7.0 The liabilities in the amount ofDM 32,758 million (1996: DM Other financial obligations Leasing and million DM 1997 1996 29,641 million) bear interest. rental business 10,084 8.9 9,029 9.0 million DM Dec.31,1997 Dec.31,1996 Income from participations 598 517 Of the liabilities shown in the consolidated balance sheet, a Obligations in respect Other sales 5,238 4.8 5,096 5.0 -of which from affiliated total ofDM 1,260 million (1996: DM 1,538 million) is secured, for of capital contributions 227 250 companies (14) (7) the most part, through charges on real estate. In the case of supply Annual obligations in respect In accordance with the overall commercial operations and - of which from associated of goods, the usual retention of title exists. of long -term leasing and rental organization of the Volkswagen Group, sales from Mexico are companies (81) (64) 691 579 contracts included in the North America region, and no longer together -of which from valuation (13) Deferred income with Latin America. The previous year's figure has been adjusted. of holdings in associated The deferred income in the amount ofDM 2,910 million (1996: Financial obligations totalling DM 227 million in respect of companies (503) (445) DM 3,226 million) mainly comprises values arising from the capital contributions exist in 1998 in relation to our joint project Income from profit (15) Other operating income forfaiting of future leasing instalments. with Ford in Portugal and our commitments in Israel. assumption agreements 1 3 The other fmancial obligations in respect of leasing and rental Expenses from million DM 1997 1996 Contingencies and commitments contracts include payment obligations towards one leasing com­ holdings in associated Other million DM Dec.31,1997 Dec.31,1996 pany in the form of future leasing instalments on the basis of companies 79 2 operating income 6,694 7,487 Contin gent liabilities with average terms; these obligations amount to DM 302 million for Expenses from -of which income from respect to notes 1,217 269 1998 and are matched by corresponding claims on customers. loss assumptions 11 9 elimination of special items 509 Contingent liabilities with Obligations towards third parties may arise from the demerger with an equity portion (294) (627) 509 respect to guarantees 222 232 of the Autolatina companies, matched by cl aims on the former eo­ Contingent liabilities with shareholder in the same amount. Apart from income from elimination of special items with an respect to warranties 753 1,044 The obligations in respect of capital investment projects have equity portion, other operating income resulted from the elimi­ Pledges on company assets to remained at the usual level. nation of provisions (DM 1.9 billion) and from exchange rate 32 secure another party's liabilities 11 changes in respect of supplies and services (DM 0.7 billion). Also 2,224 1,556 included are profits from asset disposals and write-ups (DM 0.5 billion) and income from the elimination of value adjustments on The trust assets and liabilities not included in the consolidated receivables (DM 0.2 billion). balance sheet in respect of the savings associations and trust companies belonging to the South American subsidiaries amount to DM 2,994 million (1996: DM 2,376 million).

80 81 Notes on the Statement of Earnings Other Particulars

(18) Interest results Total expenses for the period Average number of employees during the year million DM 1997 1996 million DM 1997 1996 1997 1996 The members of the Board of Management and the Supervi­ sory Board, together with changes in the membership of these Income from Performance-linked other securities and Cost of material wage-earners 138,646 127,392 bodies, are listed on pages 8 and 9 of this Annual Report. long-term loans 99 122 The remuneration of the members of the Board ofManage­ Raw materials Time-rate wage-earners 49,714 50,590 Other interest and supplies, ment for the fiscal year 1997 in respect of the Volkswagen Group Salaried staff 61,833 58,796 and similar income 4,253 3,533 purchased totalled DM 15,592,423. 250,193 236,778 - of which from goods and purchased Retired members of the Board of Management and their survi­ affiliated companies {6) (7) services 68,184 61,536 Apprentices 5,939 5,992 ving dependants received DM 24,720,313. Pension payments to Interest and 256,132 242,770 this group of people are covered by provisions amounting to DM Labour cost similar expenses 2,772 2,446 Not fully consolidated vehicle- 137,258,961. -of which to Wages and salaries 15,707 15,040 producing holdings 18,443 17,734* The remuneration of the members of the Supervisory Board affiliated companies {6) (4) Social insurance, 274,575 260,504 amounted to DM 958,000. pension costs and 1,580 1,209 • 1996 including 87 apprentices. Loans totalling DM 311,000 have been granted to members of benefits 4,979 5,668 the Supervisory Board (amount redeemed in 1997: DM 68,400). (19) Net earnings -of which in respect of pensi ons (1,557) (2,631) The loans have an interest rate of 4 % and an agreed term of 12.5 The difference between the net earnings and the net earnings 20,686 20,708 years. available for distribution has been absorbed in the consolidated revenue reserves. The consolidated net earnings available for distribution consequently correspond to the parent company's Wolfsburg, March 9, 1998 net earrungs available for distribution. The net earrungs have been influenced by expenses attri­ VOLKSWAGEN AKTIENGESELLSCHAFf butable to other fiscal years amounting to DM 602 million (1996: The Board of Management DM 767 million) and income not relating to the period under report totalling DM 2,131 million (1996: DM 1,841 million). Of the out-of-period income, DM 1,921 million relates to the elimination of provisions. The net earnings of the Volkswagen Group have been increased as a result of tax-related measures. These mainly involve the Independent auditors' report necessary elimination of special items in accordance with§ 3 "The consolidated financial statements, which we have audited in subsection 2 of the Border Area Promotion Act and§ 4 of the accordance with professional standards, comply with the German Development Area Act, which were matched by special deprecia­ legal provisions. With due regard to the generally accepted tion in accordance with§ 4 of the Development Area Act. Without accounting principles, the consolidated financial statements give these measures profits of the Volkswagen Group would have been a true and fair view of the Group's assets, li abilities, financial 7% less (1996: approximately one fifth less). In 1998 the scheduled position and profit or loss. The Group management report is liquidation of the special items is expected to have a positive consistent with the consolidated financial statements." effect on net earnings in the amount of some DM 68 million. Changes in valuations have reduced earnings by DM 1,850 million. Hanover, March 9, 1998 Net earnings include minority interests in profit totalling DM 25 million (1996: DM 19 million) and minority shares in losses C&L Deutsche Revision totalling DM 3 million (1996: none). Aktiengesellschaft Wirtschaftspriifungsgesellschaft

Eichner Dr. Heine Wirtschaftspriifer Wirtschaftsprii fer

82 83 The Volkswagen Group in Figures

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Sales {million DM) 59,221 65,352 68,061 76,315 85,403 76,586 80,041 88,119 100,123 113,245 Sales {million DM) Change on previous year in % 8 10 4 12 12 -10 5 10 14 13 Change on previous year in % Domestic 22,653 23,682 26,929 36,360 39,508 34,326 32,907 34,504 36,419 39,191 Domestic Abroad 36,568 41,670 41,132 39,955 45,895 42,260 47,134 53,615 63,704 74,054 Abroad Export of domestic Group companies 24,395 27,601 28,323 28,093 33,884 26,797 27,090 32,038 37,624 43,580 Export of domestic Group companies Net contribution Net contribution of foreign Group companies 15,961 18,256 18,242 18,809 15,412 23,104 26,944 30,311 36,199 42,377 of foreign Group companies

11 Vehicle Sales {thousand units) 2,854 2,941 3,030 3,237 3,433 2,962 3,108 3,607 3,994 4,250 Vehicle Sales (thousand units) 11 Change on previous year in % 3 3 3 7 6 -14 5 X 11 6 Change on previous year in % Domestic 848 849 945 1,264 1,211 914 901 937 958 993 Domestic Abroad 2,006 2,092 2,085 1,973 2,222 2,048 2,207 2,670 3,036 3,257 Abroad

Production {thousand units)11 2,848 2,948 3,058 3,238 3,500 3,019 3,042 3,595 3,977 4,291 Production {thousand units) 11 Change on previous year in % 3 4 4 6 8 -14 1 X 11 8 Change on previous year in % Domestic 1,694 1,783 1,816 1,814 1,929 1,411 1,425 1,526 1,591 1,619 Domestic Abroad 1,154 1,165 1,242 1,424 1,571 1,608 1,617 2,069 2,386 2,672 Abroad

Cost of Materials {million DM) 32,888 37,533 40,469 47,039 54,817 47,530 48,230 52,166 61,536 68,184 Cost of Materials (million DM) Change on previous year in % 5 14 8 16 17 -13 2 8 18 11 Change on previous year in % As% of sales 56 57 59 62 64 62 60 59 61 60 As% of sales

Workforce (thousand employees)11' 1 252 251 261 277 273 253 238 257 261 275 Workforce {thousand employees)'i'i Change on previous year in % -3 -1 4 6 -1 -7 -6 X 1 5 Change on previous year in % Domestic 165 161 166 167 164 150 141 143 139 144 Domestic Abroad 87 90 95 110 109 103 97 114 122 131 Abroad

Labour Cost {million DM) 15,144 16,107 17,056 18,872 20,753 18,887 18,364 19,005 20,708 20,686 Labour Cost (million DM) Change on previous year in % 0 6 6 11 10 -9 -3 3 9 -0 Change on previous year in % As% of sales 26 25 25 25 24 25 23 22 21 18 As% of sales

Capital Investments {million DM)'1 4,251 5,606 5,372 9,910 9,254 4,840 5,651 6,863 8,742 9,843 Capital Investments (million DM) 31 Change on previous year in % -7 32 -4 84 -7 -48 17 21 27 13 Change on previous year in % Domestic 3,546 4,477 3,016 6,311 4,853 2,675 3,899 4,053 6,098 7,048 Domestic Abroad 705 1,129 2,356 3,599 4,401 2,165 1,752 2,810 2,644 2,795 Abroad

Additions to Leasing Additions to Leasing and Rental Assets (million DM) 3,447 4,069 4,419 4,961 6,139 5,438 5,781 7,278 7,639 7,734 and Rental Assets (million DM) Change on previous year in % 4 18 9 12 24 -11 6 26 5 1 Change on previous year in %

Cash flow (million DM) 41 5,018 5,412 5,701 7,133 7,004 3,636 8,819 6,922 7,047 7,199 Cash flow (million DM) 41 Change on previous year in % 3 8 5 25 -2 -48 X -22 2 2 Change on previous year in %

Result after Taxes (million DM) 780 1,038 1,086 1,114 147 -1,940 150 336 678 1,361 Result after Taxes {million DM)

Dividend of VOLKSWAGEN AG {million DM) 306 336 369 369 66 67 107 207 315 483 Dividend of VOLKSWAGEN AG (million DM) O rdinary shares {million DM) 240 264 297 297 54 54 81 162 250 369 Ordinary shares {million DM) Preferred shares {million DM) 66 72 72 72 12 13 26 45 65 114 Preferred shares {million DM) The volume dolo of the not fully consolidated vehicle-producing holdings AUTOEUROPA, Shanghai-Volkswagen, FAW-Volkswagen and Chinchun Motor have been included as from 1995. ~ Workforce (excluding apprentices) as average over year; as from 1.995 including apprentices as average over year. • Investments in intangible assets, tangible fixed assets and financial assets. " Cash flow excluding depreciation/write-up of leasing and rental assets (since 1994 determined on the basis of the recommendations of the Schmalenbach Society).

84 85 The Volkswagen Group in Figures

Balance-Sheet Structure {mill ion DM) Change Balance-Sheet Structure (million DM) December 31 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1997/96 in% December 31 Assets Assets lnt an ~i b l e assets 76 134 261 372 631 646 101 91 120 111 - 8.1 Intangible assets Tan ~i b l e assets 13,836 15,493 16,826 21,126 24,050 23,067 20,429 18,271 20,631 22,594 9.5 Tangible assets Financial assets 1,304 1,621 1,418 2,655 2,747 1,823 2,608 3,198 3,274 4,006 22.4 Financial assets Leasing and renta l assets 5,427 5,561 5,834 6,293 7,393 7,517 8,234 10,297 12,118 12,804 5.7 Leasing and rental assets Fixed Assets 20,643 22,809 24,339 30,446 34,821 33,053 31,372 31,857 36,143 39,515 9.3 Fixed Assets Inventories 6,506 7,301 8,703 9,049 9,736 11,026 9,246 9,392 10,368 10,827 4.4 Inventories Receivables Receivables and other assets 11,848 14,472 15,065 19,011 21,394 22,943 24,554 27,498 31,478 34,801 10.6 and other assets Securities 488 2,360 2,764 2,329 1,497 1,119 2,595 2,156 3,499 3,880 10.9 Securities Li quid funds 10,809 9,929 11,842 9,255 7,836 11,157 13,317 13,174 13,080 12,613 - 3.6 Liquid funds Current Assets 29,651 34,062 38,374 39,644 40,463 46,245 49,712 52,220 58,425 62,121 6.3 Current Assets Total Assets 50,294 56,871 62,713 70,090 75,284 79,298 81,084 84,077 94,568 101,636 7.5 Total Assets Stockholders' Equity and Liabilities Stockholders' Equity and Liabilities Subscribed capital 1,500 1,500 1,650 1,656 1,664 1,671 1,674 1,714 1,825 1,919* 5.2 Subscribed capital Reserves of the G ro up 9,040 9,667 11,491 12,098 11,800 9,521 9,202 8,595 9,324 10,421 11.8 Reserves of the Group Minority interest 405 439 145 164 859 905 733 490 449 301 -32.9 Minority interest Net earnin~s a va il able fo r d istribution 308 339 374 373 71 71 111 209 318 487 53.1 Net earnings available for distribution Minority interest Minority interest in result a fter ta xes 42 54 33 12 68 98 1 -18 19 22 16.3 in result after taxes Special items with an equity portion 2,452 2,925 2,882 3,823 3,659 3,191 2,498 1,649 1,374 1,161 -15.5 Special items with an equity portion Specia l item fo r investment subsidies 9 12 13 19 18 23 20 15 11 9 -13.2 Special item for investment subsidies Stockholders' Equity 13,756 14,936 16,588 18,145 18,139 15,480 14,239 12,654 13,320 14,320 7.5 Stockholders' Equity Provisions for pensions 6,314 6,652 7,283 8,089 9,113 9,553 10,160 11,531 13,651 14,578 6.8 Provisions for pensions Provisions for taxes 1,358 2,001 1,828 2,032 1,773 1,784 1,762 1,902 2,188 2,619 19.7 Provisions for taxes Other provisions 9,418 10,454 10,680 10,161 11,323 14,575 16,476 18,309 20,187 20,226 0.2 Other provisions Provisions 17,090 19,107 19,791 20,282 22,209 25,912 28,398 31,742 36,026 37,423 3.9 Provisions Liabilities payable with in Liabilities payable within more than 5 years 1,929 1,934 1,840 3,813 4,557 4,289 4,426 2,293 1,939 2,035 4.9 more than 5 years 1 to 5 years 2,121 3,289 3,339 3,900 6,222 8,707 9,271 11,782 11,991 12,108 1.0 1 to 5 years up to 1 year 15,398 17,605 21,155 23,950 24,157 24,910 24,750 25,606 31,292 35,750 14.2 up to 1 year Liabilities 19,448 22,828 26,334 31,663 34,936 37,906 38,447 39,681 45,222 49,893 10.3 Liabilities Outside Capital 36,538 41,935 46,125 51,945 57,145 63,818 66,845 71,423 81,248 87,316 7.5 Outside Capital Total Capital 50,294 56,871 62,713 70,090 75,284 79,298 81,084 84,077 94,568 101,636 7.5 Total Capital Statement of Earnings {million DM) Statement of Earnings (million DM) {Condensed} Janua2:-Dece mber (Condensed} January-December Sales 59,221 65,352 68,061 76,315 85,403 76,586 80,041 88,119 100,123 113,245 13.1 Sales Cost of sales 51,315 56,196 61,890 69,472 79,155 71,117 72,720 80,699 90,504 100,926 11.5 Cost of sales Selling and ~ener a l administration expe nses 6,321 7,151 7,308 7,599 7,977 8,278 8,786 9,457 10,961 11,809 7.7 Selling and general administration expenses Other opera ting income less Other operating income less other operatin~ expenses 38 209 2,615 1,302 1,612 782 1,315 2,152 1,727 1,290 -25.3 other ope rating expenses Financial results 513 773 914 1,239 719 391 611 998 1,587 2,046 28.9 Financial results Results from ordina ry busi ness activities 2,136 2,987 2,392 1,785 602 - 1,636 461 1,113 1,972 3,846 95.1 Results from ordinary business activities Taxes on income 1,356 1,949 1,306 671 455 304 311 777 1,294 2,485 92.1 Taxes on income Results after taxes 780 1,038 1,086 1,114 147 -1,940 150 336 678 1,361 X Results after taxes • 1997 reduced by unca lled outstanding capital contributions totalling 1 12.5 mill ion DM.

86 87 Scheduled dates:

Interim Report January to March 1998: Beginning of May 1998 Annual Meeting of Stockholders: June 4th 1998 Dividend Payment: June 5th Interim Report January to June 1998: Beginning of August Interim Report January to September 1998: Beginning of November 1999 Annual Meeting of Stockholders: June 2nd

Published by:

VOLKSWAGEN AG Finanz-Analytik und -Publiziti:it Brieffach 1848-2 D-38436 Wolfsburg Tel. : +49 5361 90 Fax: +49 5361 928282

The Annual Report for 1997 is published in English and German. Should you require further information on the Report, please contact the above office. The German edition of the Report will also be available from mid-April on the Internet: http:/ /www.boersenforum.de

ISS 0933-7504

858.809.441.20 Printed in Germany

The Annual Report is printed on non-chlorinated, acid-free paper.