ANNUAL REPORT 2003 TRUST IS A QUESTION OF QUALITY, MORE SO TODAY THAN EVER BEFORE. THE SUCCESS OF OUR BRANDS SPEAKS FOR THE TRUST PLACED IN OUR PRODUCTS, PRODUCTS WHICH ARE BASED ON A SIMPLE PRINCIPLE THAT IS THE FOUNDATION OF OUR ENTIRE CREATIVE PROCESS – A PASSION FOR CARS. A PASSION WE WOULD LIKE TO SHARE WITH YOU. >>> EACH BRAND IS A WORLD OF ITS OWN. 4 Board of Management/Supervisory Board Financial Communication Management Report 06 Report of the Supervisory Board 18 Volkswagen share 30 Business development 10 The Board of Management 24 Value-based management 40 Net assets, financial position and earnings performance 12 Letter to our Shareholders 26 Corporate Governance 46 Volkswagen AG (condensed, according to German Commercial Code) 14 Group values 50 Research and development 53 Business processes 58 Legal matters 60 Risk report 66 Outlook contents 40 ▼ net assets, financial position and earnings performance Sales revenue at prior year level Despite the negative effect of exchange rate movements, the Volkswagen Group generated sales revenue at the level of the previous year. However, earnings reflected unfavourable underlying 12 conditions and special items. ▼ letter to our 18 shareholders ▼ volkswagen share Change and progress An attractive investment Our efforts are targeted at the goal of continuously Despite difficult market enhancing the value of the conditions, the Volkswagen Company as you, our share- share has been attractive for holders, perceive it. analysts and investors. 12 14 18 30 40 50 ▼ ▼ ▼ ▼ ▼ ▼ 14 30 50 ▼ ▼ ▼ group values business development research and development Values create value With new models, fully on course Great innovative strength >> Volkswagen is on the in design, technology and move – from a collection 2003 was not a good year for equipment features of strong individual brands most markets. Nevertheless, to a powerful multi-brand our products were able to Our development work has group hold their own and remain been especially fruitful this >> Seven values map the leaders in many markets. year: new design elements, course competition-beating components, an innovative gearbox – and of course the Golf V. The Annual Report contains the consolidated financial statements of the Volkswagen Group, the management report of the Volkswagen Group and of Volkswagen AG, as well as additional information. Environment/HR Divisions Additional Information 5 72 Sustainability and environmental protection 82 Business lines and markets 112 Scheduled Dates 2004 76 Employees 84 Volkswagen brand group 114 Index 96 Audi brand group 106 Commercial Vehicles 110 Financial Services 66 ▼ outlook 76 ▼ Looking to the future employees with new models Well prepared Individuality is the key – in design and driving enjoyment. >> Fit for the future with High safety standards, on the qualified and motivated other hand, are essential in employees all models. Our investment is >> Incentives reward targeted at new models and performance – the new technologies. Volkswagen way 66 72 76 82 ▼ ▼ ▼ ▼ 82 ▼ business lines and markets Volkswagen – an established multi-brand Group with a presence on many markets >> Volkswagen brand group >> Audi brand group 72 >> Commercial Vehicles ▼ >> Financial Services sustainability and environmental protection Committed to the community and the environment >> Ecological and social action fosters economic success >> Volkswagen’s sustainability strategy draws on innovation and co-operation 6 Boards Financial Communication Management Report Environment/HR Divisions Additional Information > Report of the Supervisory Board The Board of Management Letter to our Shareholders Group values Dear Shareholder, In the course of the financial year 2003 the Supervisory Board was kept regularly informed with detailed reports on the position of the Company and business development. It also provided advice and support to the Board of Management. Furthermore, we were consulted directly in all decisions of fundamental significance to Volkswagen. The Supervisory Board was convened for a total of five meetings in the course of the year under review. The Presidium of the Supervisory Board, comprising four of its members, was convened prior to each scheduled meeting. All members of the Supervisory Board attended more than half of the meetings. The Board of Management provided us with regular, complete and prompt verbal and written reports on issues relating to the development of business, corporate planning and the risk situation, as well as risk management. The neces- sary documentation was furnished to us in good time prior to each meeting by the Board of Management. The Board of Management also provided us with detailed monthly reports on the business activities of the Group. In addition to the latest volume and financial figures, the reports also included comparisons against budget and prior year figures for the Group and the individual brands and regions, as well as updated forecasts for the full year. Reasons for any variations from set budgets and targets were disclosed. Additional questions from the Supervisory Board were answered directly by the Board of Management in writing or verbally. The Audit Committee established in the previous year was convened a total of four times in the course of the financial year 2003. It dealt specifically with matters relating to the Group’s accounts and their auditing by the auditors. The Committee also considered matters relating to risk management. The Mediation Committee was not required to convene. The two committees are each composed of two representatives of the shareholders and two employee representatives respectively, each of the represented groups having equal rights and standing. Membership of the respective committees is indicated in the list of Supervisory Board members in the “Facts and Figures” section of the Annual Report on page 67. The focus of our Supervisory Board meetings was on the current business development of the Group and the general situation in the automotive sector. We also consulted in detail on the new Group structure and the associated strategic orientation of the individual brands. The proposals regarding the medium-term financial and investment planning of the Volkswagen Group for the years 2004 to REPORT OF THE SUPERVISORY BOARD 7 2008 submitted by the Board of Management were routinely presented, discussed in detail and approved by the Supervisory Board at its meeting on November 14, 2003. The Supervisory Board also approved the investment program of Volkswagen AG. That meeting also dealt in detail with the German Corporate Governance Code and the amendments made by the Government Commission in 2003, including their further implementation by Volkswagen. Jointly with the Board of Management, we issued the declaration required in accordance with Section 161 of the German Corporation Act (AktG) regarding compliance with the recommen- dations of the Code. The declaration was published on the Volkswagen AG website. Further details can be found in the “Financial Communication” section of this Report and in the notes to the consolidated financial statements. At the Supervisory Board meeting on February 27, 2004 we consulted in detail on the consolidated financial statements of the Volkswagen Group and the financial statements of Volkswagen AG for the year ending December 31, 2003 as well as on the respective management reports which had been approved by the Audit Committee on February 23, 2004. The documentation relating to the financial statements and the auditors’ reports were issued to the members of the Audit Committee and to the full Supervisory Board in good time prior to the respective meetings. The financial statements had previously been audited and approved without qualification by the auditors appointed by the Annual General Meeting held on April 24, 2003, PwC Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungs- gesellschaft, Hanover. The auditors had further established, in the course of their review of the risk management system, that the Board of Management had taken the measures required by Section 91 subsection 2 of the German Corporation Act (AktG) to ensure early detection of any risk endangering the continued existence of the Company. The Dependency Report for the financial year 2003 submitted by the Board of Management was reviewed by the auditors and appended by the following unqualified certification: “On the basis of our statutory audit and assessment, we confirm that the actual details presented in the report are accurate and that the consideration provided by the Company arising out of the legal transactions detailed in the report was not inappropriately high.” The report was presented to the Supervisory Board for review in February 2004. No objections were raised by the Supervisory Board against the declaration of the Board of Management made at 8 Boards Financial Communication Management Report Environment/HR Divisions Additional Information > Report of the Supervisory Board The Board of Management Letter to our Shareholders Group values the end of the report. We noted and approved the result of the review of the report carried out by the auditors. The auditors were present at the meeting of the Supervisory Board on February 27, 2004, as well as at the preceding meeting of the Audit Committee, and reported on the principal results of their audit of the financial statements of the parent company and the consolidated financial statements of the Group. Our own review of the consolidated financial statements of