Annual Report 2008 GAZ Group 1 Contents Statement of the Chairman of the Management Board ........................................................................ 3 GAZ Group general information .......................................................................................................... 5 GAZ Group profile ........................................................................................................................... 5 GAZ Group mission and strategy..................................................................................................... 7 Organizational structure ................................................................................................................... 9 Key events of 2008......................................................................................................................... 10 Key events of the beginning of 2009.............................................................................................. 17 Main lines of business ........................................................................................................................ 19 Light commercial vehicles (LCV) and medium commercial vehicles (MCV) .............................. 19 Buses............................................................................................................................................... 25 Trucks ............................................................................................................................................. 30 Construction equipment.................................................................................................................. 33 Passenger cars................................................................................................................................. 37 Powertrains ..................................................................................................................................... 38 Auto components............................................................................................................................ 43 Corporate governance......................................................................................................................... 46 GAZ Group’s corporate governance system .................................................................................. 46 Board of Directors .......................................................................................................................... 47 Remuneration ................................................................................................................................. 51 Committees of the Board of Directors............................................................................................52 Executive bodies............................................................................................................................. 53 System of internal controls............................................................................................................. 58 Risk management ........................................................................................................................... 60 Report on the payment of declared (accrued) dividends on the company’s shares........................ 61 Equity capital...................................................................................................................................... 62 Sustainable development .................................................................................................................... 65 Quality control................................................................................................................................ 65 Environmental protection ............................................................................................................... 67 Employees ...................................................................................................................................... 71 Cooperation with the state authorities ............................................................................................ 75 Social responsibility to society....................................................................................................... 76 Contact information............................................................................................................................ 79 Major transactions and interested-party transactions ......................................................................... 80 Major transactions approved by the Board of Directors of OAO GAZ in 2008 ............................ 80 Interested-party transactions approved by the Board of Directors of OAO GAZ in 2008............. 80 Appendix ............................................................................................................................................ 82 Consolidated financial statements for 2008.................................................................................... 82 2 Statement of the Chairman of the Management Board This reporting year was a pivotal one, both for the company and for the Russian automobile industry as a whole. This period will go down in economics textbooks as an unprecedented stage when rapid growth gave way to a dramatic fall in the market. In the fourth quarter of 2008, the effects of the global financial crisis on the automobile industry in Russia and worldwide reached their zenith. The sharp drop in activity in the main consumer sectors, the fall in solvent consumer demand, the lack of access to credit, and the contraction of the market by up to 80% in some segments inevitably affected the company’s financial performance in 2008. These factors reversed the positive trends seen in the first half of the year, in which the revenues of GAZ Group grew by 20% compared to the same period in 2007. For the year as a whole, consolidated revenues dropped by 7%, to 146 billion roubles. However, responding to this rapid deterioration in market conditions, we mobilized our forces to significantly raise our business performance indicators. The results of the crisis management program implemented by GAZ Group confirm that a crisis is not only a period of difficulty, but also of new opportunities opening up for automobile manufacturers. This situation has spurred us to improve our key profitability drivers: increasing worker productivity, reducing costs, streamlining assets and the management system, deep cuts in management personnel, and changes to investment policy. GAZ Group was one of the first in the industry to implement a crisis management program. The measures taken since October 2008 to reduce costs, cut inventories of production materials and finished products, and streamline technological processes allowed us by the end of the year to adjust the production process in line with changes to market demand, cut selling expenses by one third, avoid a glut of inventory, and retain our workforce capacity. The government commission on increasing economic stability declared the crisis management program of GAZ Group to be “one of the most promising that we have looked at”. The implementation of the crisis management program is based on the potential that the company has built up over the previous years, including the results achieved in 2008. Over the past year, the company continued its work to update its model range and expand the product line, which is fundamental to the Group’s competitiveness in the longer term. In 2008 there started the projects of GAZell with improved specifications and the development of the next-generation LCV GAZelle-3. Production of an upgraded UMZ-4216 gasoline engine, used in GAZ Group light commercial vehicles, began in 2008. In 2008 GAZ Group rounded out its full line of buses of all classes and purposes. New models were introduced to the market: the Real compact-class city bus, the KAVZ 4239 medium-size low-floor bus, the GolAZ 6228.10 extra-large suburban bus, and Russia’s first hybrid full-size bus, the LiAZ 5292. In the road-construction equipment segment, the company introduced six new products: the EK-20 wheeled excavator, the ET-20 tracked excavator, the ET-26i tracked transfer loader, the V- 140 front-end loader, the GS-25.11 grader, and the Asf-G-3-08 asphalt layer. The vehicles dispose of imported components, have higher productivity, and improved cabin ergonomics. Preparations were underway to begin mass production of new URAL off-road vehicles, equipped with comfortable interiors that cede nothing to their Western competitors in terms of ergonomics. The year 2008 saw the completion of a large-scale project – the construction of a new manufacturing complex for passenger cars that meets global quality standards. The complex has the capacity to produce about 100,000 vehicles per year. The flexibility of technological processes 3 allows us to re-orient production to different vehicle platforms and different classes. Under conditions of rising exchange rates and higher customs duties, the opportunity to organize the assembly of automobiles within Russia at existing facilities becomes even more attractive to foreign investors, with whom negotiations continue on joint automobile manufacturing projects. In 2008 the products of GAZ Group enterprises received numerous prestigious awards, attesting to consumer recognition of the advantages of our vehicles. The Real bus and the low-floor hybrid LiAZ 5292 were recognized