volvo car group annual report 2016 TABLE OF CONTENTS OVERVIEW 1 This is Volvo Car Group 2 2016 in brief 4 CEO comment 6 Our year 8 Our world 10 Challenges and opportunities STRATEGY 14 Corporate strategy 17 Brand strategy 18 People strategy 21 Sustainability commitment 22 Strategic focus areas CREATING VALUE 24 Value chain 27 Design, Products and Technology 41 Purchasing, Manufacturing and Logistics 47 Consumer Experiences and Re-usage 52 Market Highlights 54 – Western Europe 56 – China 58 – The US 61 People 69 Society 73 Board of Directors’ report 82 Consolidated Financial Statements 88 Notes to the Consolidated Financial Statements 123 Parent Company Financial Statements 125 Notes to the Parent Company Financial Statements 130 Auditor’s Report 132 Board of Directors 134 Executive Management 136 Sustaina bility Management and Governance 140 Sustainability Scorecard 146 GRI Index 148 Our Heritage volvo car group Our history dates back to 1927 when the Swedish company Volvo Car Corporation was founded and the fi rst Volvo car rolled off the production line. Volvo Car Group is headquartered in Gothenburg, Sweden. Volvo cars are produced at factories in Torslanda in Sweden, Ghent in Belgium, Chengdu and Daqing in China and Kuala Lumpur in Malaysia. Volvo Car Group is owned by Zheijang Geely Holding Group Ltd. (Geely Holding) and three institutional inves- tors. In 2016, around 2,300 Volvo dealers sold 534,332 cars in more than 100 countries around the world. During 2016, Volvo Car Group employed on average about 30,000 people. Ever since we put the fi rst Volvo on the road back in 1927, we have continuously developed, creating world changing innovations along the way. “ The car industry is changing rapidly, and an agile Volvo Cars has the possibility to take advantage of opportunities in areas like electrifi cation, new mobility concepts, and autonomous driving. ” HÅKAN SAMUELSSON PRESIDENT AND CEO, CEO COMMENTS PAGE 4 READ MORE ABOUT VOLVO CAR GROUP ON PAGE 73 ANNUAL REPORT 2016 | VOLVO CAR GROUP 1 2016 in brief NET REVENUE EBIT RETAIL SALES MSEK MSEK UNITS 200,000 12,000 600,000 500,000 150,000 9,000 400,000 100,000 6,000 300,000 200,000 50,000 3,000 100,000 0 0 0 12 13 14 15 16 12 13 14 15 16 12 13 14 15 16 For the full year 2016, Volvo Car Group generated Operating income (EBIT) increased to MSEK In 2016, Volvo Cars reported retail sales of 534,332 net revenue of MSEK 180,672 (164,043), an 11,014 (6,620), resulting in an operating (503,127) units, an increase of 6.2 per cent. increase of 10.1 per cent compared to 2015. margin of 6.1 (4.0) per cent. 2 VOLVO CAR GROUP | ANNUAL REPORT 2016 6.2% 10.1% Retail sales up to 534,332 Net revenue in creased to (503,127) units MSEK 180,672 (164,043) 11,014 6,515 Operating income (EBIT) Cash flow from operating and investing of MSEK 11,014 (6,620) activities MSEK 6,515 (7,234) RETAIL SALES BY REGION SALES BY CARLINE KEY FIGURES 2016 2016 MSEK 2016 2015 Net revenue 180,672 164,043 Research and development expenses –9,374 –8,803 Operating income, EBIT 11, 014 6,620 Net income 7,460 4,476 EBITDA 21,541 16,019 Cash flow from operating and investing activities 6,515 7,234 EBIT margin, % 6.1 4.0 EBITDA margin, % 11. 9 9.8 Western Europe, 39% S, 14% Equity ratio, % 26.8 26.2 China, 17% V, 34% US, 15% XC, 52% Net debt (Net cash if negative) –18,873 –7,721 Sweden, 13% Other markets, 16% VOLVO CAR GROUP | ANNUAL REPORT 2016 ANNUAL REPORT 2016 | VOLVO CAR GROUP 3 CEO COMMENT ceo comment Volvo Cars continued the global transformation as the company launched new cars and new technologies, reinforcing leadership in safety and autonomous driving. The result was a third consecutive year of record sales, with over bonds in the company’s history. We also issued preference shares 534,000 units sold. Revenue grew by 10 per cent, resulting in a to three institutional investors, further widening our funding base. significantly increased operating profit of 11 BSEK. I am particu- The car industry is changing rapidly, and an agile Volvo Cars has larly pleased that we managed a positive cash flow despite ongoing the possibility to take advantage of opportunities in areas like heavy investments in future products and technologies. This is a electrification, new mobility concepts, and autonomous driving. good reflection of all of our employees’ strong efforts throughout Rather than being disrupted, we choose to be part of this transfor- the year. mation. Throughout 2016 we forged new partnerships that posi- In 2016 we reported growth in all three regions. We confirmed tion us at the forefront of the change underway in the industry. our very positive development in the US, while a strong perfor- An important focus is our three-pillar autonomous driving strat- mance in the last six months led to double-digit growth in China. In egy. Firstly, we co-operate with Uber to develop a car with all the Europe we also reported continued growth, especially in important backup systems necessary for autonomous driving. Secondly, we key markets such as the United Kingdom and Germany. are establishing a joint venture with Autoliv – Zenuity – developing the software for autonomous driving. Finally, we are considering the consumer perspective through Drive Me, an advanced and ambitious autonomous vehicle test. This year, we will start the roll out of autonomous XC90s to approximately 100 families in Goth- enburg, Sweden. They will use the cars in their everyday life, pro- viding feedback to our engineers. “ 2016 was a positive mile- Sustainability is a central part of our strategy and thereby key to our future success. This was reflected in the launch of the Sustain- stone year for Volvo Cars ” ability Programme, Omtanke, which includes our commitment to bring 1 million electrified vehicles to the roads by 2025. Our pur- pose as a company is to provide safe, sustainable and convenient HÅKAN SAMUELSSON PRESIDENT AND CHIEF EXECUTIVE OFFICER mobility, creating an attractive organisation and making a positive contribution to society. From that perspective, I’m pleased to reit- erate Volvo Cars’ support for the UN Global Compact, of which Volvo Cars is one of the founding members. We will continue our transformation in 2017. After the complete introduction of the 90 series SPA cars the stage is set for further On the production side, we changed model lines in the Torslanda launches of 60 and 40 cars as well as business concepts to com- plant at the same time as we increased capacity and ramped up mercialise new technologies. volumes. Combined with very strong demand for our new 90 cars, 2016 was a positive milestone year for Volvo Cars’ development this affected our delivery times. To further expand capacity, we are and I would like to thank all employees for their valuable contribu- building our first ever manufacturing plant in the US, in Charleston, tions, developing Volvo Cars as a true player in the premium car South Carolina, which is planned for completion in 2018. We also segment. expanded our manufacturing in China with the start of the S90 production in Daqing. We are developing China into a global man- ufacturing and export hub. We have also taken further steps to increase our financial flexibility. Our continued success allowed us to access the capital Håkan Samuelsson markets in 2016 and successfully issue the first two corporate President and Chief Executive Officer 4 VOLVO CAR GROUP | ANNUAL REPORT 2016 CEO COMMENT FOCUS 2016 FOCUS 2017 Transformation continues Record volume and revenue Volume and profit improvement Industrial transformation continues Product renewal New product launches – the XC60 and XC40 Maintained strong profit level VOLVO CAR GROUP | ANNUAL REPORT 2016 ANNUAL REPORT 2016 | VOLVO CAR GROUP 5 our year 2016 – Executing on strategy We completed the renewal of our top-of-the-line range – the 90 Series – and started operating two plants producing these models based on our Scalable Product Architecture (SPA). The new models were well-received, with the XC90 driving our overall sales growth. We also announced partnerships with Uber and Autoliv in autonomous driving and revealed our target of selling up to 1 million electrified cars by 2025. JANUARY MARCH MAY Our premium Sedan, the S90, Our XC90 was awarded SUV of We accessed capital markets was launched at the North the Year at the UK Car of the and issued a MEUR 500 bond American International Auto Year Awards We unveiled two new concept Show in Detroit We called on the automotive cars for our new range of The XC90 was crowned North industry to standardise electric smaller cars American Truck of the Year car charging JAN FEB MAR APR MAY JUN FEBRUARY APRIL JUNE Our premium Estate – the V90, Omtanke, our new sustainability We received the Brand Design was revealed in Stockholm programme was launched Language Award 2016 Our exclusive four-seat XC90 We announced a target of selling The first V90s rolled off Excellence made its European up to 1 million electrified cars by the production line at our Torslanda debut at the Geneva Motor 2025 plant Show The S90 Excellence was unveiled New route for 2017 – 2018 Volvo at the Beijing Auto Show Ocean Race was announced 6 VOLVO CAR GROUP | ANNUAL REPORT 2016 our year AUGUST OCTOBER DECEMBER We finalised the acquisition of an Moody’s upgraded our credit We issued preference shares additional 40 per cent shares in rating to Ba2 from Ba3 worth of BSEK 5 to a group of Volvofinans Bank New senior management Swedish institutional investors We announced a partnership structure was introduced 30 Volvo cars served as