GKN plc
7 Cleveland Row
London
SW1A 1DB
UK

Tel: +44 20 7930 2424
Fax: +44 20 7930 3255
Internet: http://www.gknplc.com

Sir David Lees, Chairman
Marcus Beresford, Chief Executive
Ian Griffiths, Managing Director, Automotive Driveline Division
Michael Kerby, President, Emitec, North America
Richard Clowes, Chief Executive, Off-Highway Systems and Sankey AutoComponents

GKN holds the leading position in the global constant velocity joint (CVJ) market with a 42% market share. It also holds a 16% share of the Sinter Metals market.

GKN's Automotive sector has five divisions:

• Automotive Driveline Division: a first tier world leader for automotive driveline products and systems, with a 42% share of the global market for constant velocity jointed driveshafts. GKN's largest division, ADD has 46 manufacturing sites in 20 countries, with around 32% of sales originating from the Americas. Also embraces the Viscodrive operations that make products for vehicles requiring enhanced traction systems.
  
• Powder Metallurgy Division: comprises Hooganaes, the largest producer of powder metals in the USA and manufacturer of parts for automotive, farm and garden equipment; and Sinter Metals, the world's largest producer of powder metals with a 16% share of the global market operating from 40 locations worldwide with annual sales of around US$800m.
  
• Catalytic Converters: Emitec businesses that are 50/50 joint ventures between GKN and SiemensVDO Automotive. These make metal substrates for catalytic converters with operations in Germany and South Carolina (USA).
  
• Off-Highway Systems Division: supplies OEMs with drivelines, gearboxes, clutches and wheels. It has plants in the UK, Europe and North America plus a Japanese joint venture (Matsui-Walterscheid).
  
• AutoComponents Division: a leading producer of automotive structures with operations in North America and Europe. Comprises GKN AutoStructures Ltd and GKN Sheepbridge Stokes Ltd.

GKN's automotive customers include BMW, Bosch, DaimlerChrysler, Delphi, Ford, General Motors, Honda, Volkswagen and ZF.

In 2001, around 50% of automotive sales originated from Europe, 38% of sales from the Americas and 12% from elsewhere in the world.

Corporate strategy

In recent years GKN has pursued an aggressive growth strategy in order to increase its international presence and broaden its technological capabilities. Through strategic acquisitions and joint-venture agreements it has increased its market share in its core competencies, and penetrated emerging markets such as Asia and South America.

GKN's profits plunged in 2001 due to the downturn in the North American automotive industry. Following the terrorist attacks in the USA in September 2001 and the continuing uncertainty in American and European markets, GKN announced in October 2001 that it was to cut 3% of its workforce (1,250 jobs), mainly in the aerospace sector.

In August 2001, GKN demerged its industrial services activities to its Australian partner, Brambles Industries Ltd. The proceeds from the sale will enable GKN to pursue growth opportunities in the automotive and aerospace sectors. As a result of the restructuring GKN expects to see two thirds of its sales generated within the automotive sector going forward.

Acquisitions

• In February 2001 GKN Sinter Metals bought The PresMet Corp., a privately owned powder metal parts manufacturer based in Massachusetts (USA). The PresMet Corp. manufactures components for steering columns, engines, and transmissions for customers such as DaimlerChrysler, General Electric, TI Automotive and Visteon. It employs 350 people and had sales of £36m (US$52m, 28 February 2001) in fiscal 2000.
  
• GKN announced in March 2000 its plans to buy 95% of Armstrong Wheel and Rim Manufacturing. GKN is paying US$52m.
  
• In October 1999, GKN Sinter Metals acquired powder metal components manufacturer Zenith Sintered Products Inc., with 1998 sales of US$61.4m. About 80% of Zenith's sales are to the automotive industry, producing sprockets, parts for power steering pumps, ABS braking systems, transmissions and transfer cases.
  
• Also in October 1999, GKN Sinter Metals acquired a plant from BorgWarner Automotive Inc (BWA). The deal includes a long-term supply agreement between BWA and GKN Sinter Metals. Full year sales in 1998 for BorgWarner Automotive's Gallipolis facility were US$40m.

Outside North America, GKN has made other acquisitions:

• In March 2002 GKN acquired the remaining 51% of Mahindra Sintered Products Ltd.. (India) from its partner Mahindra and Mahindra Ltd. GKN paid £9.35m (US$13.3m, 31 March 2002) for the stake, which gives it 100% ownership of the largest powder metals components manufacturer in India.
  
• Also in March 2002 GKN acquired more shares in GKN Driveshafts (India) Ltd., increasing its shareholding from 51% to 92.4%.
  
• In the same month GKN paid ¥5.1bn (US$38.5m, 31 March 2002) to acquire a 33.3% stake in Tochigi Fuji Sangyo, a leading Japanese supplier of driveline components. GKN also has the right to buy additional shares in Tochigi Fuji that would increase its total share to 50.4%. The deal expands GKN's presence in Asia and boosts its technological capabilities in torque management. Together the two companies expect to be the world's largest independent suppliers of torque management devices. GKN also acquired a 20.4% stake in Tochigi Fuji Industrial (TFI) from Nissan. TFI specialises in parts for powertrain systems
  
• In November 2000 GKN established its first manufacturing presence in Japan through the acquisition of the production assets of Nissan's constant velocity joint and driveline facility at Tochigi for £56m (US$80m, 30 November 2000). The new wholly owned Japanese subsidiary was named GKN Japan Driveshafts Ltd.
  
• In May 2000, GKN completed the acquisition of a further 30% in its Australian joint-venture, Unidrive, bringing the group's holding to 60%. Unidrive is a leading Australian manufacturer of constant velocity joints, driveshafts and propeller shafts.

Joint-ventures

• In February 2000 GKN established an alliance (Drive Tek, Ltd.) with Dana Corporation to design and market modular driveline assemblies containing constant-velocity (CV) joints for global car and light vehicle applications. The deal led to the exchange of Dana's CV joint operations for GKN's cardan-jointed propeller shaft business. However DriveTek was not as successful in winning business as had been hoped and in March 2002 GKN and Dana put the joint-venture on hold.
  
• In March 2001 Mahindra Sintered Products (GKN's Indian subsidiary) entered into a strategic alliance with MicroMet GmbH (Germany) to produce high grade copper powder in India.

Investments

• In November 2001 GKN's Sinter Metals began construction of a 3,000 square metre production plant in Bonn (Germany). The new plant was scheduled to start manufacture of metal components for the automotive industry in early 2001.
  
• In March 2000 GKN Sinter Metals purchased a 15-acre plot of land in Hortolandia, Sao Paulo (Brazil) in order to construct a 97,000 square foot production plant. GKN decided to establish its first manufacturing presence in Brazil to be close to global customers with local manufacturing facilities as well as to realise import opportunities.

Contracts

In January 2000 GKN AutoStructures Ltd., a unit of the AutoComponents Division, was awarded a contract to supply underbody pressed structures and suspension components for the new Ford Transit. GKN has been responsible for integrating the design, development and testing of the front and rear suspension units plus the process development of underbody pressed and welded parts.

In August 2001, GKN announced that its Automotive Driveline Division had been chosen by Toyota to supply the constant velocity jointed halfshafts for the Camry model being marketed in Thailand, Malaysia, Indonesia, Philippines, Taiwan and Australia, beginning March 2002.

In December 2001 GKN secured more business producing CVJ driveshafts for the 2002 Ford Taurus and Mercury Sable vehicles starting in January 2002.

GKN supplies BMW's new Z4 roadster with rear sideshafts made at the Offenbach plant in Germany. These are shipped to the ZF Lemförder axle assembly plant in Duncan, South Carolina (USA) and completed axle modules are then delivered to BMW's Spartanburg, South Carolina (USA) facility.

• Intelligent Driveline: GKN's Automotive Driveline Division recently developed what it calls "intelligent" driveline, centred round an electronically controlled clutch. The system is an electronically controlled coupling for driveline applications for use as a limited-slip differential. It is integrated into the second axle of the vehicle and takes effect as soon as slip occurs in the first axle. This provides the best possible propulsion to the vehicle, even under variable road conditions. It also eliminates the need for constant activation of the brakes, resulting in reduced brake wear, increased occupant comfort and reduced fuel consumption.
  
• Lightweight Brake Rotors: A division of GKN Sankey AutoComponents has begun replacing cast iron brake components with lightweight rotors made from aluminium alloys and metal matrix composites. To stop the alloys softening at high temperatures, GKN's aluminium brake rotors are reinforced with ceramics.
  
• Visco-Lok: GKN Viscodrive partnered with BMW to develop Visco-Lok, the variable M differential lock. The new differential is fitted on the BMW M3 model and significantly improves traction, even in difficult driving conditions, as well as vehicle handling and stability. Visco-Lok features a unique self-contained shear pump containing silicone fluid, which generates a pressure proportional to the speed difference across the wheels. The pressure actuates the clutch pack and transmits the torque to the appropriate wheel, without any extra hydraulic fluid being required.
  
  

In 2001 GKN's net sales from its continuing engineering operations increased 5% to £4.34bn (US$6.3bn, 31 December 2001) from £4.12bn (US$6.2bn, 31 December 2000) in 2000. Automotive sales increased 6% to £2.844bn (US$4.13bn, 31 December 2001) due to the favourable effect of acquisitions and divestments in 2000 and 2001. The Automotive Driveline Division reported sales of £1.78bn (US$2.58bn, 31 December 2001), up 10% from 2000. Although demand for existing models reduced from the North American OEMs, the launch of a number of new programs, particularly in the growing SUV market, bolstered sales. ADD products featured on high-profile new models such as the Jaguar X-Type, the BMW M3 and the new Range Rover. The Powder Metallurgy division had a difficult year with sales dropping 4% to £612m (US$888m, 31 December 2001) from £638m (US$953m, 31 December 2000) in 2000, primarily due to production cuts by the Big Three. The OffHighway Systems Division managed to increase its market share despite poor market conditions. The AutoComponents Division achieved growth in vehicle structures and the Emitec joint-venture saw strong growth in Germany.
Pre-tax profits plunged 37% to £245m (US$356m, 31 December 2001) from £386m (US$576m, 31 December 2000) in the year before. Most of the decline was accounted for by the automotive division where operating profits fell 39% to £187m (US$271m, 31 December 2001) from £308m (US$460m, 31 December 2000).
In the first half of 2002 sales for GKN fell slightly to £2.25bn (US$3.45bn, 30 June 2002) compared with £2.26bn (US$3.20bn, 30 June 2001) in the same period of the previous year. Automotive sales rose by 1% to £1.52bn (US$2.33bn, 30 June 2002). Group operating income dropped by 8% from £175m (US$247.7m, 30 June 2001) in the first six months of 2001 to £161m (US$246.8m, 30 June 2002) a year later. Pre-tax profits were 5% lower at £136m (US$208.5m, 30 June 2002) compared with £143m (US$202.4m, 30 June 2001) in the first half of 2001. Restructuring charges, currency fluctuations and the challenging economic environment were given as reasons for the lower profits.

Despite the cautius short-term outlook, GKN expects continued long-term growth in the automotive driveline business through growth in developing markets, further outsourcing and new 4WD programme wins. In addition, GKN has entered new automotive areas, such as powder metallurgy, which appear to offer good opportunities for longer-term growth, irrespective of overall cyclical trends.