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					 World Truck
  A strategic review of
finance and operations

    2001 Edition
  By Jonathan Storey




Global sales of trucks in the 6t-plus GVW category grew by 3% to over 1.5m units in 2000. The increase
was driven by improved demand levels in most regions, particularly Asia, South America and eastern
Europe, partly offset by a downturn in Nafta where truck sales had reached record levels the previous
year. Contrary to what many of the truckmakers expected, truck sales in western Europe increased during
2000 but by the final quarter demand was slipping below year-ago levels.

In the heavy truck sector (over-16t) global demand rose by 4% in 2000 to 0.78m units. Again the decline
in Nafta was more than offset by growth in most other regions. In western Europe sales rose by 4% to a
record 250,000 vehicles. Together, Nafta and western Europe accounted for 59% of global demand in the
heavy-truck sector during 2000, down from 71% in 1999.

During 2001 the Nafta truck market has continued declining, with the volatile heavy sector likely to end
the year more than 30% below year-ago levels. Demand has also been falling in western Europe, albeit at
a more sedate pace. The fall in sales within these two regions is being partly offset by growing demand in
Asia, Latin America and eastern Europe. By 2005, demand growth in emerging markets is forecast to
have driven worldwide sales to 1.8m units and the proportion of global truck demand contributed by
Nafta and western Europe is expected to have fallen to 47% from 57% in 2000. This expected pattern of
growth is one factor behind the recent interest among western truckmakers in establishing links with
Asian producers to bolster their presence in the region.

              Figure 1.1: New truck sales worldwide, by region, 1996-2000 & 2005 (000s)

   Region                                1996           1997          1998     1999     2000     2005*
   Western Europe                       254.4          248.2         299.0     335.0    344.7    340.0
   Increase / (Decrease)                (0.6)%         (2.5)%        20.5%     12.0%     2.9%    (1.3)%

   Eastern Europe                         80.2           78.9         66.4      59.7     71.5    118.0
   Increase / (Decrease)               (11.7)%         (1.6)%       (15.8)%   (10.1)%   19.7%    65.2%

   Nafta                                396.6          427.5         484.4     587.3    532.9    514.2
   Increase / (Decrease)               (11.9)%           7.8%        13.3%     21.2%    (9.3)%   (3.5)%

   Asia                                 608.9          513.3         376.4     382.1    438.2    661.3
   Increase / (Decrease)                (0.5)%        (15.7)%       (26.7)%     1.5%    14.7%    50.9%

   Latin America                          64.0           76.0         74.5      61.2     75.1     97.6
   Increase / (Decrease)               (16.9)%          18.8%        (2.0)%   (17.9)%   22.8%    29.9%

   Oceania                                 8.2            7.4           7.3      7.6      7.8      8.4
   Increase / (Decrease)                (4.7)%         (9.8)%        (1.4)%     4.1%     2.6%     7.7%

   Middle East                            42.0           63.7         54.4      47.4     54.6     61.3
   Increase / (Decrease)                  5.0%          51.7%       (14.6)%   (12.9)%   15.2%    12.3%

   Africa                                  9.6            8.9           8.1      6.9      7.6      9.6
   Increase / (Decrease)                  4.3%         (7.3)%        (9.0)%   (14.8)%   10.1%    26.3%

   World                                1,464          1,424         1,371     1,487    1,532    1,810
   Increase / (Decrease)                (5.2)%         (2.7)%        (3.7)%     8.5%     3.0%    18.2%

   * Increase/decrease calculations for 2005 are versus 2000 data

Source: Marketing Systems. Historical data for emerging markets includes estimates


The data presented in Figure 1.2 shows the aggregate operating profit of five European truckmakers:
Iveco, MAN, RVI, Scania and Volvo; plotted against the aggregate unit sales for those companies since
1987. Data for DaimlerChrysler's CV division is not shown due to the lack of a suitable data series (see
DaimlerChrysler discussion). The unit sales and profit data for Iveco and RVI includes the contribution
from sales of vehicles under 6t, just 4,000-5,000 units in RVI's case but 80,000-90,000 units at Iveco.

The chart shows the industry's profit reaching a peak of Eur1.5bn in 1988 before the E           urope-wide
recession of the early nineties caused sales and profits to fall, reaching a nadir in 1993 when an aggregate
loss was recorded.

The European industry's profit rose to a fresh peak in 1995, helped by strong demand in North and South
America. Unit sales declined by 7% in 1996, but aggregate profit fell more sharply, down 57% due to the
intense price competition faced by all the truckmakers. Over the four years to 2000 the industry's profit
grew at an average rate of 26%, and in 2000 the aggregate profit figure rose 6.5% above its 1995 peak as
sales climbed to a record 484,000 vehicles, 34% above the 1995 figure.

It can be seen that over the past twelve years, a 1% rise in unit sales has been associated with an average
rise of 2.2% (average deviation 1.3pts) in operating profit, whereas a 1% fall in sales has been associated
with an average fall in operating profit of 8.1% (average deviation 1.7pts).

                             Figure 1.2: Aggregate unit sales & operating profit of Europe's major truckmakers (1)

                       600                                                                                                                     2,000
                                          Unit sales            Op. Profit



                                                                                                                                                       Op. profit (Euro m)
   Unit sales (000s)





                         0                                                                                                                     -500
                               87            89                91               93              95             97                99

        Year                                      89     90           91       92         93     94      95         96     97          98     99      2000
        Unit Sales (000s)                    347.4     322.4        307.4    285.1   253.0     300.7   360.7   334.9     357.1    415.8     443.2     484.1
        Change                      (%)           5%   (7)%         (5)%     (7)% (11)%         19%    20%     (7)%        7%         16%     7%               9%
        Op'g Profit (Euro m) 1,454.8                   679.9        532.6    183.3   (49.8) 1,089.2 1,714.8    731.4     943.1 1,397.1 1,632.7 1,827.2
   Change     (%)         (3)% (53)% (22)% (66)% (127)%                                        N/A      57% (57)%         29%         48%    17%       12%
(1) Aggregated data for MAN, Iveco, RVI, Scania & Volvo trucks

Source: Marketing Systems


The revenue data for the latest financial years of the major truck-making groups is shown below. We have
attempted to show the results for the truck (6t-plus) and heavy bus divisions only, but inevitably the
figures are not all based on consistent criteria due to different levels of disclosure.

However, the dominance of the European producers is clear, occupying six of the top eight places in
revenue terms, with DaimlerChrysler's (DC's) truck activities generating more than double the revenue of
all its principal rivals except Volvo. If the contributions from DC's other commercial vehicle divisions
(vans and powertrain) are included, its 2000 revenue figure increases from Eur21bn to Eur29bn.

Following Volvo's takeover of RVI at the beginning of 2001, Volvo Global Truck will in future have a
revenue base about 28% smaller than that of DC's truck and bus divisions, going by the 2000 results.

The Japanese truck producers have never been a significant force outside Japan and some Asian markets.
This mainly reflects the significant product differences that have traditionally existed between Japan,
North America and western Europe but also reflects poor strategic planning by company managers. The
slump in truck demand within Japan and other Asian markets at the end of the nineties has clearly shown
the risk of such a narrow sales focus, as the industry has suffered three years of aggregate net losses and
the Japanese truckmakers have all had to negotiate alliances with other producers from positions of

                           Figure 1.3: Revenue of the major truckmakers, 2000

                Nissan Diesel


         MMC med/heavy (e)

          Isuzu med/heavy (e)

                 Hino Trucks








           DC-Truck & buses

                                0      5,000        10,000        15,000       20,000        25,000
                                                     Revenue (Euro mils)

Source: Companies & estimates


Looking at average unit revenue is a proxy for the different product profiles of the truckmakers.
Unsurprisingly it shows the manufacturers primarily engaged in heavy truck production, such as Scania
and Volvo, as receiving the largest unit revenues. If RVI was included in the Volvo data for 2000 its
average unit revenue would drop from Eur109,000 to Eur89,000.

It is worth stressing that this is not a qualitative measure, under which a company with high unit revenue
can be considered better than one at the other end of the scale. It is more a reflection of the different
sectors in which the truckmakers operate and, to some extent, highlights which are a company's key

                           Figure 1.4: Unit revenue of the major truckmakers, 2000

     Isuzu med/heavy (e)

    MMC med/heavy (e)


           Nissan Diesel




      DC-Truck & buses

            Hino Trucks




                           0        20,000     40,000        60,000      80,000   100,000      120,000
                                                            Eur / unit

Source: Companies & estimates

             Figure 1.5: Average operating margins of the major truckmakers, 1996-2000(1)


             Nissan Diesel





              Volvo Truck

                 Fiat CVs





       -2%                   0%              2%          4%          6%       8%            10%
                                                  Operating margin
(1) DaimlerChrysler data reflects 1996-99 only

Source: Companies

               Figure 1.6: Average operating margins of the major truckmakers, 1991-2000




             Nissan Diesel



                 Fiat CVs

              Volvo Truck




       -2%                   0%              2%          4%          6%       8%            10%
                                                  Operating margin

Source: Companies


As Figure 1.2 showed, the European truckmakers benefited from four years of rising sales and rising
profits from 1996 to 2000. The US producers similarly benefited from a sales boom, though their time of
plenty lasted only three years as US truck demand began turning down early in 2000. Consequently both
Navistar and Paccar reported lower earnings for 2000 (down 48% and 19% respectively) after three years
of growth averaging 81%.

In a business as markedly cyclical as the truck industry, it is a company's ability to remain profitable
throughout the demand cycle which is the real sign of having got the fundamentals of the business right
and the performance of the major truckmakers over the last decade suggest there are few which fall into
this category. The current downturn is already highlighting the best performers and is forcing the others to
implement substantial restructuring programmes to reduce their cost bases.

As the preceding charts show, looking over the past five years three producers: Hino, Nissan Diesel and
Isuzu, have recorded negative average operating margins. A further two: Mitsubishi and RVI have
recorded positive average operating margins of less than 1%. Among the remainder only three have
reported average margins above 5%:
•   MAN at 5.2%;
•   Paccar at 7.0%;
•   Scania at 9.0%

This is probably the lowest target any truck producer is likely to set itself as a long term cyclical average.

Over a ten year period the number of companies with negative average operating margins remains at three
but RVI takes the place of Nissan Diesel. The next six firms are all below 5% and Paccar and Scania
again head the field with average margins of 5.5% and 9.9% respectively.

It should be noted that the profit figures used in the charts are as reported by the companies concerned
and in some cases include the profit contribution from non-truck areas of the businesses such as light
commercial vehicles and even passenger cars or SUVs in the case of Isuzu and Mitsubishi. Please see the
individual manufacturer discussions for more details.

Given the slump in demand faced by the Japanese truckmakers over the past few years, it is only to be
expected that their recent average profit indicators begin to suffer. However, their poor showing is not
just a reflection of the recent sales downturn. In aggregate the Japanese truckmakers have reported an
average operating margin of just 1.1% over the eighteen years from 1983 to 2000. The peak aggregate
margin during this time was 2.6%, achieved in 1988, which was also the year in which Hino reported the
peak individual operating margin of 3.8%.

Among the European truckmakers RVI has usually been the worst performer over the past eighteen years.
The division made pre-tax losses in thirteen of those years as it was dragged down first by a lengthy
turnaround at its loss-making North American subsidiary, Mack and then by losses within its European
operations. Although RVI has reported a profit for the last three years after incurring losses in 1996 and
1997, its underlying profitability has lagged that of other western producers. Previous editions of this
report have suggested that if RVI could not perform better in boom conditions, the parent company
should consider disposing of the division before the next downturn. This has now been done through the
sale of the division to Volvo and this probably gives RVI its best chance of long term profitability.


The inadequate rates of return by many truckmakers have been a major factor in the recent wave of
industry consolidation. In the past two years takeovers or partial takeovers have been announced
regarding ERF, Hino, Hyundai, Mitsubishi Motors, RVI, Scania and Western Star. The consolidation
process has nearly run its course now, but there remain some significant players in Europe (MAN) and
Japan (Nissan Diesel) who continue to look susceptible to takeover.

                                       Figure 1.7: Truck production by manufacturer, 2000

             Sisu       0.5
          Roman         0.8
         Norinco        0.8
        Samsung         0.9
 Skoda-Liaz-Tatra       1.7
            Dina        2.2
         Daewoo         2.5
          Temsa         2.8
          Otoyol        3.0
 Chrysler Kamyon         3.8
           AIOS          4.4
           BMC           4.7
          Otosan         4.8
          Uralaz              8.5
              Zil             8.6
             VW               8.8
       CNHDTC                  12.1
             Gaz                14.9
          Kamaz                       23.5
    Nissan Diesel                     24.2
         Hyundai                       27.1
   Ashok Leyland                         32.9
            Hino                             36.3
           Telco                               43.6
          Scania                                     51.4
       Mitsubishi                                    51.6
             GM                                        56.8
            Isuzu                                           64.8
           MAN                                              65.3
           Iveco                                               75.1
            Ford                                                   80.1
       Dongfeng                                                           91.0
         Navistar                                                                107.5
          Paccar                                                                   111.1
     China FAW                                                                        115.0
            VGT                                                                                      169.7
      DC-Trucks                                                                                                      255.0

                    0                           50                        100                  150           200   250
                                                                                 Production (000s)

Source: Companies & Marketing Systems

Figure 1.6 shows thirty-seven different truck producers existing as independent entities in 2000, five of
which produced fewer than 2,000 units during the year and a further eleven produced fewer than 10,000
units. Most of these firms are in some way dependent on larger producers, for technology and/or capital
and a proportion can be expected either to go out of business or be taken over by larger concerns in the
next few years. For example Mexico's Dina has ceased production this year and all six of the Turkish
producers are suffering from the current severe contraction of their domestic market and it is unlikely that
all six will continue to survive.

At the other end of the scale it looks likely that the global truck industry will in future be dominated by
between six and eight producer groups, each with an annual output in excess of 100,000 units. On the
basis of 2000's results DaimlerChrysler, Volvo Global Truck, Navistar and Paccar are already above this
threshold. Two of the Chinese producers could probably reach this level on the basis of domestic demand
growth alone. Merger and acquisition activity is likely to put at least one other group into this category.



New registrations - 2000
New truck registrations in western Europe rose by 2.0% in 2000 to a new peak of just under 385,000
units. The growth reflected:
•    a significant increase in economic growth, at 3.4% compared with 2.4% in 1999;
•    the continuing dominance of the road transport industry in the freight market;
•    real interest rates at historically low levels in most markets, both inside and outside the euro-zone;
•    the ongoing restructuring and maturing of Europe's road haulage industry, partly in response to
     various single market measures.

Figure 2.1 shows that at the beginning of the year demand in western Europe was significantly higher
than year-ago levels - the difference between Q1-2000 and Q1-1999 being 4.7%. As the year progressed
the rate of increase slowed and then reversed in Q4-2000 when new regis trations were 1% below Q4-
1999 levels. This marked a highly significant turning point for truck demand in western Europe which
had been registering year-on-year increases in every quarter since Q2-97.

France and Italy were significant exceptions to the general pattern of demand during 2000. Demand in
both these markets remained above prior year levels for most of the year and was rising strongly in the
fourth quarter. In the five major markets of western Europe, accounting for 78% of the region's new truck
registrations, demand during 2000 evolved as follows.

q    In Germany demand for new trucks was weaker throughout the year and overall new registrations fell
     by 3% to 109,000 units, about 18,000 units short of the peak of 127,000 units reached in the 1991
     reunification boom. The decline was sharpest in the sub-16t sector which dropped by 5.6%,
     compared with a 0.8% fall in the heavy sector.
q    In France new truck registrations increased by 7% to 59,000 units, taking the total growth since 1997
     to 45.5%. This level of demand represented a new peak for the French market, the 1989 peak of
     54,000 trucks having been exceeded for the first time in 1999. The heavy truck sector rose by 8% to a
     record level for the third successive year.

                   Figure 2.1: Quarterly truck & bus registrations in western Europe






                            1999       2000         2001          2002

                       Q1                     Q2                   Q3                     Q4

Source: Marketing Systems

                     Figure 2.2: New truck & bus registrations in western Europe

     Segment & GVW                           1997           1998       1999        2000      2001(F)

     A 2-Axle Rigid 3.51 - 6t              37,326         39,059     42,319      40,051       38,191
     B 2-Axle Rigid 6.01 - 10t             50,242         59,247     62,126      61,893       58,526
     C 2-Axle Rigid 10.01 - 15.9t          24,844         28,267     32,079      32,934       31,828
     Trucks below 16t                     112,412        126,573    136,524     134,878      128,545
     Change (%)                               2.2           12.6        7.9        -1.2         -4.7
     D 2-Axle Rigid 16t +                  41,501         47,084     57,601      53,245       54,812
     E 3 & 4 Axle Rigid                    42,760         52,637     60,958      66,637       61,210
     F Artic's                             88,803        111,247    122,202     129,979      124,620
     Trucks above 16t                     173,064        210,968    240,761     249,861      240,642
     Change (%)                              -1.5           21.9       14.1         3.8         -3.7
     Total trucks                         285,476        337,541    377,285     384,739      369,187
     Change (%)                              -0.1           18.2       11.8         2.0         -4.0
     G Buses                               20,864         24,299     26,780      26,195       23,998
     X Unsegmented                              0              0          0           0            0
     Total CVs                            306,340        361,840    404,065     410,934      393,185
     Change (%)                               0.2           18.1       11.7         1.7         -4.3
     Economic Indicators
        Road freight (tonnes mils)       11,004.0        11,196.4   11,556.0    11,924.3    12,261.3
        Percentage change                     1.3             1.7        3.2         3.2         2.8
        GDP growth (%)                         2.5            2.7        2.4         3.4          1.6
        Real interest rates (%)                2.9            2.7        2.1         2.1          2.1
        Consumer price growth (%)              1.9            1.6        1.2         2.3          2.5
        Unemployment (%)                      10.5            9.7        9.0         8.1          7.6

Source: Marketing Systems

q   In the UK truck demand grew by 4.5% to 54,000 units, following its 2% decline the previous year.
    Demand grew by 5.8% in the sub-16t sector, following an 8.8% decline in 1999. In the heavy sector
    new registrations rose by 3.6%, following a 2.8% rise in 1999. The UK remains one of the few
    markets not to have exceeded its late-1980s peak volumes in either the sub-16t or 16t-plus sectors.
q   In Italy new truck registrations increased by nearly 13% to 42,000 units. This was the fastest rate of
    increase among Europe's major markets and made the Italian truck market larger than that of Spain
    for the first time since 1996. Within the heavy sector demand rose by 10% to a new peak of 26,600
    units (slightly lower than Spain), having exceeded the 1990 peak for the first time in 1999. In the
    sub-16t sector new registrations of 15,000 units were 18% higher than in 1999 but remained below
    their 1989 peak of 16,000 units.
q   In Spain demand for trucks dropped by 5% to 38,000 units. This followed three years in which
    growth averaged 31%. The decline was wholly due to the sub-16t sector where demand fell by 25%
    to 11,000 units. In the heavy sector new registrations increased by 7% to a new peak of 27,000 units,
    maintaining Spain's status as the fourth biggest European market for heavy trucks.

At a west European level the growth was wholly concentrated in the 16t-plus sector which grew by 3.8%
to just under 250,000 units, reaching a new peak for the third successive year. Artics remained the largest
market segment, growing by 6.3% to 130,000 units. This segment accounted for 33.7% of total truck
demand in 2000, up from 23% in 1990.

In the sub-16t sector demand declined by 1.2% to 135,000 units, remaining below the sector's 1991 peak
of 143,000 units. Most of the fall occurred in the 3.5-6t segment which dropped by 5.4%. Last year's
decline principally reflects falls in the Spanish and German markets. Germany accounts for 38% of west
European demand in the sub-16t sector but only 19% of demand in the 16t-plus sector.

                                        Figure 2.3: Truck & bus demand in western Europe (1982-2006)

                  400                     All CVs                3.51-16t                  16t +



  Units (000's)



                             Pre-90 excl. E. Germany

                        82         84       86         88   90      92           94   96       98   2000   2002   2004   2006

Source: Marketing Systems

New registrations - forecast
As noted above, truck demand in western Europe began turning down in Q4-2000 and there was a
widespread expectation that the decline would continue and deepen during 2001. As the year has
progressed the economic outlook has, for the most part, worsened. In view of this general deterioration in
economic fundamentals and the specific effects of the September 11th terrorist attacks in the US, the
forecast for West European truck demand might be expected to be sharply lower. In fact we are expecting
a mild decline of just 4%.

This reflects the fact that in the first eight or nine months of the year demand in some markets, notably
France and the UK, has either continued growing or at least remained at a high level for longer than
expected. For example over the first nine months of the year new CV registrations in France (above 5t)
and the UK (above 3.5t) increased by over 2%.

Apart from the beneficial impact on the forecast for 2001, the fact that major European markets are
moving in opposite directions is significant, as for a period of 2-3 years the growth patterns of the major
markets were converging. This has implications for the forecast for 2002 and beyond.

As can be seen from Figure 2.1 we are expecting the slowdown to accelerate in the final months of the
year with an 8.3% decline in volumes in Q4-2001, but the strength of demand in France and the UK in the
early part of the year will limit the full-year decline. If France and the UK were excluded from the
calculation, the forecast decline would be 6%.

In 2002 we are anticipating declines of around 10% in about half the markets in western Europe, but at a
European level the drop is expected to be limited to 3.5% as an expected recovery in German demand
partly offsets the falls elsewhere. The recovery forecast for Germany reflects the fact that truck demand in
this market turned down earlier than in the other major European markets, having slipped below prior-
year levels in Q1-2000 and forecast to remain there through to the end of 2001. Following these eight
consecutive quarters of falling sales we expect demand to pick up in the early part of 2002.

If the German market was excluded from the calculation, the forecast drop in Western European truck
sales next year would be 7%. This still looks mild compared with the 40% slide in heavy truck demand in
the US this year, but the western European market has always been less volatile than the US, its
maximum drop over the past 20 years was in the 1993 recession when truck demand fell by 21%. Two
key differences between then and now are: first that thus far, an outright recession is not forecast and
second, that 1993 was a time when all the major markets moved in the same direction simultaneously.

Factors supporting a positive view of the demand outlook for Europe include:
•   low interest rates;
•   low inflation;
•   positive economic growth, albeit low;
•   a relatively low oil price, currently some 30% below year-ago levels at $22/barrel.

That said, the risks to this forecast are almost entirely on the downside. At the time of writing the full
economic impact from the events of September 11th and the US retaliatory action can only be guessed at.
Just as we were going to press there were reports that the OECD was lowering its 2001 and 2002 growth
forecasts for the G7 countries. If confirmed, this could alter the shape of our forecast.

By 2003 a number of markets are expected to be experiencing a rise in truck demand boosting the overall
figure for western Europe by 1.4%. The growth in demand is forecast to continue in the following two
years though the 2000 figure of nearly 385,000 trucks is expected to remain the peak for new registrations
during the forecast period.

Market shares sub-16t
In the light to medium sector market leader DaimlerChrysler's (DC) share of the European market fell
sharply in 2000, down by 3.6pts to 31.7%. The decline reflects share losses in most of DC's markets and
the fall in demand for sub-16t vehicles in Germany, DC's largest market. DC's share had risen strongly in
1999 as it benefited from the disruption suffered by some competitors during product changeovers. The
losses in 2000 were partly a reversal of that process as the new competition began to have an impact. We
are expecting a new Vario in 2002 and a new Atego in 2003 to help DC rebuild its share of this sector but
its 1999 share of 35.3% is expected to remain a peak figure during the forecast period.

                        Figure 2.4: Shares of West European truck market (%)

            Manufacturer Group               1997         1998     1999      2000         2005

            DaimlerChrysler                   33.9         33.9    35.3       31.7         32.8
            Iveco                             27.3         26.4    26.5       27.4         26.6
            MAN                               10.1         10.8    10.9       11.6         12.3
            Paccar                             5.8          5.9     4.8        5.4          5.6
            RVI                                7.0          6.3     6.1        7.3          7.2
            Scania                             0.0          0.1     0.1        0.1          0.0
            Volvo                              3.9          3.6     3.0        2.8          3.2
            Other                             11.9         13.1    13.4       13.7         12.2
            Total 3.51-15.9t                 100.0        100.0   100.0      100.0        100.0
            DaimlerChrysler                   21.3         20.7    20.9       19.6         20.6
            Iveco                             11.3         10.9    11.2       11.2         11.8
            MAN                               14.3         14.1    14.7       15.3         15.5
            Paccar                             9.7         10.6    10.1       10.1          9.7
            RVI                               11.3         11.8    11.8       12.0         11.5
            Scania                            15.0         15.0    14.7       15.5         14.3
            Volvo                             15.3         15.2    15.0       14.8         15.0
            Other                              1.9          1.6     1.6        1.5          1.5
            Total 16t plus                   100.0        100.0   100.0      100.0        100.0

Source: Marketing Systems

Iveco's market share increased by 0.9pts to 27.4%. The overall figure reflects a varied performance, with
gains in seven markets and declines in four. The share gains in 2000 were helped by the new
Daily/TurboDaily and we expect Iveco to hang on to its gains this year as demand for the EuroCargo
benefits from the availability of a new engine family. The EuroCargo is due to be renewed the following
year or possibly 2003 and this should help to lift Iveco's share in many markets but we expect it to lose
share in its domestic market which will reduce its share at a European level.

MAN had a fairly even balance of gains and losses, registering share increases in six markets and falls in
five. However, as the gains included a 2.1pts increase in Germany and a 1.6pts rise in the UK
(respectively Europe's largest and second-largest markets for sub-16t vehicles) MAN's overall share of
the west European market rose by 0.7pts to 11.6%. MAN’s market share in the light/medium sector is
expected to decline in the next two to three years before rising again towards the end of the forecast
period in response to product actions.

RVI's market share in the light/medium sector rose by 1.2pts to 7.3% in 2000. The improvement was in
line with our expectations and mostly reflects the impact of the new Midlum range introduced in 2000
and the Mascott, launched the previous year. Despite the new models RVI lost share in its domestic
market but this was more than offset by substantial gains in the UK, where RVI's share more than trebled
to 5.1% and in Germany where its share doubled to 1.4%.

Market Shares - 16t-plus
DC's dominance of western Europe's heavy sector was reduced in 2000 as its share dropped by 1.3pts to
19.6%. DC's share fell in six out of the eleven major markets but it was the substantial fall in Germany
which did most to affect the European figure. In Germany DC's share fell from 42.1% in 1999 to 38.1%
in 2000, with most of the share being taken by MAN. We are expecting a further decline this year, before
product actions help DC to regain some of its lost share in the 2002-2005 period.

Scania was the second best-selling marque in western Europe during 2000 with a share of 15.5%, up from
14.8% in 1999. The increase reflected gains in all but two markets, with particularly significant in-creases
in the UK and the Netherlands.

MAN continued its steady progress during 2000, its share rising to 15.3% from 14.7% in 1999. The
company is now clearly established as one of the major players in Europe, having previously been
overshadowed by the triumvirate of DC, Scania and Volvo. We expect the recently launched TG-A range
and forthcoming new products to help MAN make some further gains and consolidate its position in the
premier league. MAN's acquisition of ERF does not affect the year-on-year comparisons as we have
included ERF data with that of the MAN group in all years.

Volvo's share of the heavy sector was marginally lower during 2000 as its gains and losses in the
individual markets were fairly evenly balanced. We are not expecting the alliance with RVI to have any
significant impact on Volvo's market share during the forecast period, but if the two begin integrating and
optimising their service and distribution networks this could help Volvo to improve its penetration of
southern European markets in particular.

RVI was the fifth best-selling brand in western Europe's heavy sector during 2000 with a share of 12.0%
up from 11.8% in 1999. This small increase helped offset the small decline at Volvo thus maintaining the
Volvo Global Truck share at 26.8% during 2000.


An outline of fundamental drivers of truck demand is shown in Figure 2.5. This helps to analyse the
historical development of the truck market as well as to examine and quantify the major trends which will
determine future truck demand.

                            Figure 2.5: The fundamentals of truck demand

                                         Freight Demand

                                           Market Share

                            Rail                Road                   Other

                                         Existing Capacity

                                    Efficiency Gains / Losses

                                       Required Capacity

Source: Marketing Systems

                                       Figure 2.6: Freight & GDP growth in western Europe (1970-2010)



       Index 1970 = 100



                                            GDP         Tonne/Km (All Modes)





Source: Marketing Systems

Freight demand
Truck demand is fundamentally driven by the levels of demand for goods transport (by all mo des). The
choice of mode for goods transport in Europe is primarily between road and rail, although the preferred
choice for some goods or some regions will be transport by sea, inland waterways, pipeline or air.

The aggregate freight transport figure tends to follow the pattern of GDP growth quite closely (see Figure
2.6) though trade patterns, lifestyle/technology changes and political/legislative factors can all influence
the relationship. For example for several decades there has been a trend towards transporting goods for
longer distances, the establishment of the single market has boosted this trend which is likely to lead to
higher freight volumes without a concomitant increase in GDP.

                                             Figure 2.7: EU freight transport by mode (1970-2000)

                                         Road           Rail          Other
                        1,200                                                          15%                            13%
                        1,000                                                                                         13%
                                                    17%              16%               20%              14%
     Billion tonne/km

                                   21%              24%


                         200       48%                               61%               65%             72%

                                    1970            1980             1985            1990             1995           2000(e)

Market share
Having established the aggregate demand for f   reight transport, this is then subdivided to reflect the
market shares of the road haulage industry, rail and other transport modes. It is the road haulage
industry’s growing market share which has enabled it to grow at rates in excess of GDP for a number of
years. As shown in Figure 34 the market share achieved by the road transport industry within the EU has
grown from 48% in 1970 to 72% in 1995 and an estimated 74% in 2000. This increase occurred over a
period when total freight volumes rose by 72%; thus the increasing market share of road transport led to a
volume increase of some 140% over this period.

We are anticipating that the road haulage industry’s market share will begin to level off towards the end
of the decade, in response to three principal factors:
1. The scope for taking market share from rail or waterways has become more limited as there are
     certain core products which are likely always to be transported by those modes e.g. bulk shipments
     by primary industries.
2.                      In addition the competition from railways is being increased by investment in rail networks,
                        principally in response to environmental concerns. Recently the European Union has taken steps to
                        harmonise the wide range of systems, standards and procedures that apply in the different member
                        states, in a bid to enhance the attraction of the international rail freight to freight hauliers. How-ever,
                        even if such initiatives get underway progress is likely to be so slow as to have no impact within our
                        forecast period.
3.                      Environmental concerns in various countries are beginning to be translated into policies and
                        legislation aimed at curbing the increase in road traffic. For example many countries have bans on
                        trucks in certain areas and/or at certain times of day.

Despite these pressures our exp ectation is that the market share of the road haulage industry will reach a
plateau rather than decline to any significant extent. As that market share will be a share of a rising
market, road freight volumes are expected to continue growing. This is illustrated on the following chart
showing the historical and forecast trends of road haulage compared with other transport modes.

                                    Figure 2.8: Freight modes in western Europe, (road versus other) 1980-2005


    Billion Tonne/Km




                                            Road                        Other






















Source: Marketing Systems & UK Dept. of Transport

This forecast of road freight’s market share is based on the following observations:
q The majority of transport by road takes place over relatively short distances. Within the EU, some
    64% (by weight) of goods transported by road are carried less than 50km; 85% is carried less than
    150km. In 1993 the average length of haul by road within the EU was 90km compared with an av-
    erage of 236km by rail. Railways are not realistic substitutes for the short journeys, typically per-
    formed by trucks, except within specific niches such as taking coal to power stations.
q                      Railways also cannot currently match the speed and flexibility of road transport which has come to
                       be relied upon for just-in-time (JIT) deliveries etc. Despite the efforts of the European Commission
                       referred to previously, the rail industries of the various member states are almost all state-owned,
                       with all the stifling of innovation and resistance to change that so often implies. For example VW has
                       quoted the average speed of its vehicle shipments to European dealers and distributors as follows: the
                       average speed of shipments by road was 40kph compared with 16kph for rail ship-ments. For a
                       whole range of time -critical freight from perishable goods to JIT supplies, these rela-tive speeds
                       would mean rail transport was not a viable alternative.

Existing capacity
Once the level of road haulage demand is established, consideration is given to any changes in the pattern
of demand (e.g. increases in international traffic and just-in-time deliveries or the bans on trucks in city
centres). The existing vehicle parc is then analysed for its capacity to meet the demand (including
segmentation changes and expected efficiency gains or losses) and the level of new registrations is
calculated on the basis of the replacement vehicles and incremental vehicles necessary to achieve the
required capacity.

In the short term, deviations from these long term sales trends are caused by factors such as legislative
changes, haulage industry profitability and pricing actions by manufacturers. As an example Figure 36
shows the development of the EU tractor parc.

                                              Figure 2.9: EU road tractor parc (1970-2000)



    Units (000's)





                          70   75   80   85     86   87   88   89   90   91   92   93   94   95   96   97   98   99 2000

Source: Marketing Systems & UK Dept. of Transport

Emissions regulations in Europe
Permissible levels of truck exhaust emissions within the EU have become progressively restricted during
the nineties and are scheduled to become tighter still over the next decade. The emissions standards are
known as Euro 1, Euro 2 etc. and the timetable for compliance is as follows:
• Euro 1          - New models from July 1, 1992
                  - All production from October 1, 1993

•   Euro 2                     - All new models from October 1, 1995
                               - All production from October 1, 1996

•   Euro 3                     - All new models from October 1, 2000
                               - All production from October 1, 2001

•   Euro 4                     - From 2005/06

•   Euro-5                     - Further tightening planned for 2008

The tighter standards are not expected to have a significant effect upon long term demand, although in the
short term we have seen market distortions associated with the introduction of the Euro 1, Euro 2 and
Euro 3 regulations as buyers in some markets have brought forward their purchases to avoid the higher
cost of the vehicles using the cleaner technology. This process has also been encouraged by
manufacturers giving greater discounts to clear their stocks of old technology vehicles.

Apart from such short term market effects, the emissions standards are significant in that the costs
associated with developing engines to comply with tighter and tighter standards in Europe and worldwide
are encouraging several producers to enter joint ventures. Examples include RVI and MAN, Mercedes-
Benz and Detroit Diesel, Iveco and Nissan and Iveco and Cummins. Details of these and other joint
ventures are contained in the manufacturer summaries.

Road haulage industry deregulation
As part of the move to the single European market ideal of free movement of people, goods and services
the rules governing the road haulage industries of member states are being harmonised and barriers to
cross-border competition removed.

The deregulation of Europe's road haulage industry has phased out the previous system under which
hauliers were not allowed to ply for hire outside their domestic market other than under a restrictive
licensing system. Following the transitional phase, during which the number of cabotage authorisations
increased by 30% per year, EU hauliers were free to collect or deliver goods anywhere in the community
from July 1, 1998.

The effect of liberalisation is not only expected to increase competition and so lower prices, but also to
increase efficiency by reducing the number of trucks returning empty after delivering to other member
states. Prior to the deregulation process it was estimated that around 30% of trucks on cross-border work
made the return journey with no cargo. As more efficient operation becomes possible we expect
increasing numbers of hauliers to maximise their efficiency by operating heavy trucks, particularly artic's.

During 2000 the Commission published its second report on cabotage operations within the EU over the
1990-1998 period. The report notes that the abolition of quantitative restrictions to access the national
road freight markets by non-resident EU carriers did not lead to any explosion in cabotage activities. In
general, domestic freight services provided by resident carriers are three hundred times higher than the
tonne-km produced in cabotage. The share of cabotage in international freight transport of hauliers
increased from 0.2% in 1990 to 1% in 1997 just before complete liberalisation. Transport freight services
between Member States measured in tonne-km are seventy times greater than the current volume of

Germany emerged as the country with the highest number of such operations, providing 68.3% of all
cabotage services compared to 12.6% in France and 6.9% in Italy for the period between 1990 and 1998.
The statistical breakdown of carriers by nationality reveals that carriers from the Benelux are the most
successful in cabotage as they are reported to perform almost 60% of all cabotage tonne-km in the EU,
Dutch hauliers leading with a share of 31.2%. Greek, Spanish and Portuguese vehicles hold a share of just
2%, French carriers account for 12.7%, followed in order of importance by the Danish (6.7%), the
German (5.3%), the Swedish (5%), the Italian (3%) and the British (3%) hauliers.

Deregulation is also likely to provide added impetus to the restructuring of the European haulage
industry, so that it becomes just that - European - rather than twelve or sixteen largely discrete national
industries. Already it is estimated that half of all freight movements (all modes) in Europe are controlled
by just ten companies, but much of their road freight is subcontracted to small fleets, sometimes just
single owner-drivers. A greater concentration of truck ownership would have adverse implications for the
profit margins of truck producers.



In terms of units produced, DaimlerChrysler (DC) is the world's fifth largest carmaker, and its largest
truckmaker. The company is thus unique in being a globally significant and independent OEM in both the
car and truck sectors of the industry.

Many other OEMs have competed in both sectors over the years but have found the synergies to be few
and failed to achieve critical mass in one or other sector. Consequently, over the past twenty years the
trend among such companies has been for the weaker business to be divested. DC has played a full part in
this process. Various purchases over the years have endowed the company with a portfolio of eight truck
and bus brands, most notably Freightliner, acquired in the 1980s and Sterling, (formerly Ford's North
American heavy truck business) acquired in 1998.

More recently DC has broken new ground in the consolidation of the world's truck industry, by becoming
the first western truckmaker to acquire management control of a major Asian truckmaker i.e. the truck
and bus division of Mitsubishi Motors (MMC). The Japanese firm is a substantial player in Asia's
commercial vehicle markets, selling some 154,000 units in 2000 and commanding a 30% share of the
Japanese market. Notwithstanding MMC's heavy debt burden and its recent losses, the alliance holds the
potential for DC to benefit significantly from increased scale economies plus the expected rise in Asian
commercial vehicle demand in the coming years.

DC's shareholders could be forgiven for greeting such optimistic comments with a hollow laugh, given
the post-merger proble ms that have beset the car side of the business with the Chrysler division reporting
a loss of Eur4.5bn in the first quarter of 2001. However, one key difference with the MMC alliance is that
it was formed at a time when MMC's performance was close to its nadir, as opposed to the acquisition of
Chrysler at a time when it was riding high.

Given the previously mentioned trend for OEMs to focus on either car or truck production it is surprising
how infrequently the issue of DC's presence in both sectors seems to be raised by shareholders or industry
commentators. While the financial performance of the CV division has not been a major cause for
concern, it is usually one of the weaker performers with a average return on net assets over the past three
years of 17%. This is above DC's targeted minimum of 15.5% but not by much, considering that for most
of those three years truck demand in the major markets was booming. The truck division's profit record
suggests it will not weather a downturn comfortably. By contrast the Mercedes -Benz passenger car
division has generated an average return of 26.5% over the past three years.

There seems little industrial logic in keeping the car and truck businesses in the same portfolio and there
are at least two reasons for considering a demerger of the CV division.

q   First that it could unlock shareholder value, something that DC (and Daimler-Benz before it) has
    shown itself keen to do since Jürgen Schremmp became chairman.
q   Second, DC's managerial resources will be fully stretched in the next few years, trying to develop the
    various businesses in which it has acquired stakes into a coherent structure and so secure the targeted
    benefits. There is an argument for improving the focus of senior management by spinning off the CV
    business as an independent unit and concentrating on the car side of the business.

                                                                                                              Figure 3.2: Latest results - DC
DaimlerChrysler                                                                                  Unit              January - September                                         Year to December
                                                                                                                 2000    2001      (%)                                       1999     2000    (%)
Revenue                                                                                         Eur(m)          121,862               112,964          (7.3)                 149,985         162,384                 8.3
Of which:       - MB cars Eur(m)                                                                                 31,835                35,291           10.9                  38,100          43,700                14.7
          - Chrysler group Eur(m)                                                                                52,226                46,450         (11.1)                  64,085          68,372                 6.7
     - commercial vehicles Eur(m)                                                                                21,414                20,974          (2.1)                  26,695          28,818                 8.0
Operating profit                                                                                Eur(m)                 8,540          (1,424) (116.7)                        11,012                 9,752          (11.4)
Of which:        - MB cars                                                                      Eur(m)                 2,160            2,297     6.3                         2,703                 2,145          (20.6)
    - Chrysler car & L/trk                                                                      Eur(m)                 1,937          (4,905) (353.2)                         5,051                   501          (90.1)
    - commercial vehicles                                                                       Eur(m)                   979             (24) (102.5)                         1,067                 1,110             4.0
Operating margin                                                                                percent                  7.0            (1.3)          (8.3)        pts              7.3              6.0           (1.3)   pts
                - MB cars                                                                       percent                  6.8              6.5          (0.3)        pts              7.1              4.9           (2.2)   pts
    - Chrysler car & L/trk                                                                      percent                  3.7           (10.6)         (14.3)        pts              7.9              0.7           (7.1)   pts
    - commercial vehicles                                                                       percent                  4.6            (0.1)          (4.7)        pts              4.0              3.9           (0.1)   pts
Net profit                                                                                      Eur(m)                 6,467            (724) (111.2)                          5,746                7,894           37.4
Unit sales                                                                                      (000's)          3,650.9              3,357.5          (8.0)                 4,864.3         4,749.0                (2.4)
        - MB
Of which: cars & Smart                                                                          (000's)            845.4                922.5            9.1                 1,080.4         1,154.9                  6.9
     - Chrysler car & L/trk                                                                     (000's)          2,397.7              2,068.9         (13.7)                 3,229.0         3,045.2                (5.7)
     - commercial vehicles                                                                      (000's)            407.7                366.1         (10.2)                   554.9           549.0                (1.1)

Source: DaimlerChrysler

                                                                        Figure 3.1: DC commercial vehicles revenue and operating profit trend

       Index (Revenue 1983 = 100, Op. Profit 1996 = minus 100)

                                                                                       Revenue (Eur)                    Op. Profit (Eur)


























Source: DaimlerChrysler


2000 results
In the early part of 2000 DaimlerChrysler was anticipating a reasonable year with little more than a blip
in its third-quarter earnings a a new generation of Chrysler's best-selling product, the minivan, was
introduced. By the end of the year that blip had turned into a major crisis at Chrysler, causing its president
to be dismissed and his successor to introduce a Eur3bn restructuring plan.

For the group as a whole, revenue increased 8.3% during 2000 and reported operating profit fell 11.4% to
Eur9.7bn. This figure includes a net Eur4.5bn of non-recurring gains, mainly from the conversion of Dasa
into EADS and the spin-off of Debis Systemhaus into an alliance with Deutsche Telekom. Recurring
operating profit dropped by 49% to Eur5.2bn. Reported net income rose 37% but on a recurring basis
dropped by 44% to Eur3.5bn.

Following a 12.7% rise in operating profit during 1999, the CV division reported a more modest 4%
increase to Eur1.1bn in 2000. At the nine-month stage, operating profit was 14% higher than the year-
earlier figure but the deterioration in US demand accelerated during the final quarter of the year, causing
DC's unit sales in the Nafta region to drop by 35% from Q4-99 levels.

2001 results
During 2001 a Eur3bn restructuring programme to try and turn around Chrysler has led to major losses at
DC. The first half reported operating loss was Eur2.8bn and the net loss was Eur1.6bn. Strip out various
non-recurring gains and losses the adjusted operating profit figure becomes positive at Eur115m (H1-
2000: Eur5,078m) and the net income is also positive at Eur162m (H1-2000: 3,441m).

The principal non-recurring items were:
•   Eur3,047m expense in connection with restructuring at Chrysler;
•   Eur302m expense in connection with restructuring at MMC;
•   Eur500m gain from the sale of Temic and debitel shares (see Business Structure).

The CV division reported a 5.6% decline in first-half revenue to Eur13.9bn. The H1-2000 figure of
Eur14.7bn is a pro-forma figure to reflect the consolidation of the MTU/Diesel Engine unit within the CV
division, having previously been included in Other.

The revenue decline reflected a 12% drop in worldwide unit sales, as falls of 40% and 10% in North
America and South America respectively, were only partly offset by increased sales in minor markets.
Sales in western Europe remained at the same level as the previous year.

The CV division reported a nine-month operating loss of Eur24m compared with a year-ago profit of
Eur979m. Adjusted for non-recurring items the result was positive at Eur7m. The reported loss reflects a
Q1-2001 loss of Eur138m, partly offset by profits of Eur96m and Eur18m in Q2 and Q3 respectively. The
weak performance is primarily attributable to Freightliner which has been operating at a loss for most of
the year.

On a recurring basis, the CV division expects to remain in the black over the full year. It will be helped by
its exposure to the light/mediu m truck sectors and to the van market - into which it has recently launched
a new compact van, Vaneo.

However, the reported full-year profit will be negative due to a planned charge of Eur360m for
restructuring the North American operations. The measures, announced in October, were drawn up by
Freightliner's new president, Rainer Schmückle, who replaced Jim Hebe in May 2001.


Chrysler (to 1998)
During the late 1970s and early 1980s, Chrysler adopted a similar diversification strategy to those of Ford
& General Motors. It acquired interests in aerospace (Gulfstream) and electronics companies (subsumed
within Chrysler Technology Corporation) as well as expanding its finance and credit division, Chrysler
Financial Corporation (CFC). Chrysler also bought stakes in Mitsubishi Motors Corporation (MMC) and
Peugeot. The links with MMC (which go back to the early 1970s) led to the formation of a joint venture,
Diamond Star Motors, which started production in the US in 1988.

As the automotive business required more and more resources, Chrysler reduced its interests in many of
its non-core businesses in the latter half of the 1980s and into the 1990s, selling the Peugeot stake in
1986, Gulfstream in 1990 and its stake in Diamond Star Motors back to Mitsubishi in 1991. Chrysler’s
equity holding in Mitsubishi Motors itself was gradually reduced, the final tranche being sold in July

The notable exception to this process of divestment was Chrysler’s acquisition in 1987 of American
Motors Corp. for $800m. AMC was the fourth-largest car maker in the US, and prior to the sale 46% of
AMC’s equity was held by Renault. The purchase gave Chrysler access to:
•   the Jeep brand;
•   three assembly plants;
•   1,600 dealerships;
•   a joint venture in Beijing.

Thus, by 1994, Chrysler’s revenue was principally (96%) composed of earnings by the car and truck
division, which included Chrysler Technology Corporation (CTC) and Pentastar Transportation Group
(car rental), each of which accounted for less than 10% of the division’s total revenue, profits or assets.

During 1996, two more electronics companies, Electrospace Systems Inc. and Chrysler Technologies
Airborne Systems Inc., were sold. The remaining company within the CTC division (Pentastar
Electronics) was sold in January 1997. Chrysler sold the car rental company, Thrifty Rent-A-Car, at the
end of 1997.

The Eagle brand was discontinued after the 1998 model-year, due to weak sales.

Daimler-Benz (to 1998)
In the mid-eighties Daimler-Benz began to tread a diversification path similar to that of Chrysler and
other leading carmakers. It acquired companies involved in electronics, rail systems, aircraft, space
systems, defence and others, as then chairman Mr Edzard Reuter pursued his vision of an integrated
technology group. The electronics companies were grouped within the AEG division and those involved
in aerospace within the Deutsche Aerospace (Dasa) division. In general these divisions were
unsuccessful, losing money for a number of years in succession and diluting the attraction of Daimler-
Benz as an investment. Indeed one unhappy shareholder famously described Mr Reuter as the biggest
destroyer of capital in German postwar history.

With the installation of Mr Jürgen Schrempp as chairman in May 1995 long overdue action was taken to
restructure these divisions, including workforce reductions and divestment when no realistic prospect of
long term profitability existed. Thus a substantial part of AEG was quickly sold and Daimler-Benz
withdrew its financial support for Fokker, the loss-making Dutch aircraft manufacturer. The process
continued into 1997 when Daimler-Benz ended its partnership with the French software company Cap
Gemini. In 1998 Daimler-Benz sold the semiconductor business of Temic, its electronics subsidiary.

As well as disposing of non-core businesses Daimler-Benz acted to strengthen its principal activities. For
example the acquisition of Ford's heavy truck division and the purchase of bus manufacturer Thomas
Built in 1998.

In 1998 Daimler-Benz formed a new unit, grouping together its commercial vehicle powertrain activities.
The powertrain business unit is seeking to develop business outside DaimlerChrysler in a similar fashion
to Ford's Visteon and GM's Delphi.

DaimlerChrysler structure
At the end of 2000 DC comprised six principal divisions:
1. Mercedes-Benz passenger cars, including the Smart brand. This was the most profitable division
    during the year as Chrysler's results deteriorated.
2.   Chrysler passenger cars and light trucks, including the Chrysler, Jeep, Dodge and Plymouth brands
     (though Plymouth is being phased out this year). This remains the largest division in terms of
     revenue, unit sales and employees.
3.   Commercial vehicles, now encompassing eight wholly-owned truck and bus brands: American
     LaFrance, Freightliner, Mercedes-Benz, Orion, Setra, Sterling, Thomas Built, and Western Star. The
     division also includes the Powertrain business unit (see below).
4.   Financial services, the company has been focusing its attention on offering financial services to the
     automotive sector, disposing of non-core businesses. During 2001 it has announced a plan to sell its
     stake in Debis Air Finance, one of the world's five largest airline leasing businesses.
5.   Aerospace - commercial and military aircraft, satellites, defence systems and aero-engines. During
     1999 DC agreed to merge its aerospace operations with those of France's Aérospatiale Matra and
     Spain's Casa, to form the European Aeronautic Defence and Space Company (EADS), the world's
     third largest aerospace company. EADS came into existence in the summer of 2000. Since July 2000
     the contribution from EADS has been included in DC's accounts on an equity basis.
6.   Other - at the end of 2000 this encompassed: Adtranz rail systems; the Temic automotive electronics
     business and MTU Diesel Engines for marine and industrial applications. The sale of Adtranz to
     Bombardier was announced in 2000 and completed in May 2001. A 60% stake in Temic was sold to
     Continental in April 2001 and the MTU Diesel Engines business was moved to the CV division's
     Powertrain unit. 'Other' now includes just the MTU Aero Engines business and the part-share in

During 2001 DC has sold its remaining 10% interest in debitel for Eur292m. The sale of 60% of Temic
raised Eur209m.

The commercial vehicle division is structured into five business units:
•   Mercedes-Benz trucks;
•   Mercedes-Benz vans;
•   Mercedes-Benz/Setra buses;
•   Freightliner, Sterling, Thomas Built; Western Star and Orion buses
•   Powertrain business unit.

Acquisitions and alliances
The past eighteen months have been a busy period for the CV division as it has made a number of
acquisitions and alliances.

Hyundai Motor
In June 2000 DC and Hyundai Motor announced an alliance, with a view to co-operating in the
commercial vehicle sector. As part of the agreement DC subsequently took a 10% stake in the Korean
firm and has the option to purchase a further 5% in 2003. Taken in conjunction with the 2% shareholding
of Mitsubishi Motors this could give DC considerable leverage over Hyundai Motor in future. It was not
until June 2001 that the two firms announced details of a joint venture project to assemble diesel engines
in Korea. Please see under Production for more details.

Western Star
In July 2000 Freightliner made an agreed offer to acquire 100% of the outstanding shares of Western Star,
the Canadian maker of rugged heavy-duty trucks. The offer was worth about C$670m. The purchase of
Western Star included its subsidiary, Orion Bus Industries, a leading producer of transit buses in North
America. In 1999, its last full year of independence, Western Star produced 7,200 trucks and 800 buses,
(not including production by ERF which was sold to MAN in March 2000) generating revenue of
C$1.3bn. Western Star's Australian operations were excluded from the sale.

Detroit Diesel
Also in July 2000 came the announcement that DC was making an agreed offer of $423m to acquire the
78.7% of Detroit Diesel's (DDC) shares which it didn't already own. Most of those were held by Penske
Corporation, which owned 48.6% of DDC's equity. The acquisition made DC the world's leading
manufacturer of diesel engines for medium and heavy duty trucks and offers the potential for it to capture
more value from its truck sales in the US, where many truck customers still prefer to specify branded
engines such as Caterpillar, Cummins and Detroit Diesel. DDC sold about 167,000 units in 1999,
generating revenue of $2.4bn.

The acquisition of DDC was followed, in November 2000, by the announcement of a 50/50 joint venture
with Caterpillar to develop, manufacture, market and distribute medium   -duty engines (around 9-litres),
fuel systems and other powertrain components. However this agreement was abandoned in August 2001
and the two firms are expected to focus on fuel systems and heavy duty engines for Freightliner.

Mitsubishi Motors
In March 2000 DC announced plans to acquire a 34% stake in Mitsubishi Motors. At the time MMC was
suffering from a heavy debt burden and the severe downturn in Asian truck demand but it was
subsequently weakened further when it was discovered that for years, the firm had hidden details of faulty
products from the authorities. This further downturn in MMC's fortunes allowed DC to negotiate some
more favourable terms including a price reduction, more influence on MMC's board and an option to
increase its stake in MMC by as much as it wants after three years instead of the ten years originally

Outwardly, the original plan was for the alliance between MMC and Volvo (see the discussions on those
manufacturers) to proceed as planned i.e. MMC was to split its truck and bus division into a separate legal
entity during 2001 and Volvo had the option to acquire up to 19.9% of the new firm.

However, it has to be questioned whether DC ever seriously contemplated letting such a major part of
MMC's business come under the control of a major rival. In last year's edition of this report we
commented that it would clearly be in DC's interest to extend its alliance to include the truck division, not
only to increase its exposure to the Asian truck market but also to thwart a major competitor's plans for
the region. In the end this was exactly what happened. After more than twelve months of uncertainty
Volvo gave up hoping that its planned alliance would proceed and in April 2001 DC paid Volvo $297m
for its 3.3% stake in MMC, taking DC's holding in the Japanese firm to 37.3%.

MMC's Truck & Bus division sold 154,000 trucks and buses in 2000 and had a domestic market share of
30.7 %. The division employs about 17,000 people.

DC has yet to announce detailed plans for co-operating with MMC but the purchase from Volvo includes
the rights to a new light truck that the Swedish firm and MMC had been developing together and DC will
certainly be looking to make use of MMC's Asian distribution network. Longer term DC will obviously
be looking for scale economies through component sharing.

All in all it has the potential to be an excellent move for DC. Our biggest concern would be whether DC
fashion its various acquisitions and alliance partners into an integrated whole. As suggested in the
opening remarks we believe there is a case to be made for giving the CV division greater autonomy to
accelerate this process.


The CV division's unit sales (including vans) fell by 1% during 2000 to 554,900 units. Truck sales (6t-
plus) were particularly affected by the strong downturn in demand for heavy trucks in N. America, falling
worldwide by 12% to 249,000.

In western Europe the Mercedes-Benz Trucks business unit sold 77,700 vehicles over 6t, down 2.1%
from the 1999 figure of 79,400 units. Mercedes-Benz remained the market leader in the 6t-plus sector,
with a 22.1% share. Sales in South America rose by 20% to 26,300 units and Mercedes -Benz remained
market leader in Argentina and Brazil. However, sales of DC’s North American brands dropped by 20%
to 154,000 units.

                            Figure 3.3: DC commercial vehicle sales by market

  Market                                1996             1997            1998     1999       2000
                                        (000s)           (000s)          (000s)   (000s)     (000s)
  Germany                                87                  97          107      114        113
  Share of M-B total                    25.0             23.3            21.8     20.5       20.6

  Other Europe                          109              132             170      173        187
  Share of M-B total                    31.3             31.7            34.7     31.2       34.1

  North America                          75                  80          126      193        154
  Share of M-B total                    21.6             19.2            25.7     34.8       28.1

  Latin America                          42                  55           58       45         51
  Share of M-B total                    12.1             13.2            11.8      8.1        9.3

  Other                                  35                  53           29       30         44
  Share of M-B total                    10.1             12.7             5.9      5.4        8.0
  Total                                 348              417             490      555        549

Source: DaimlerChrysler

                            Figure 3.4: DC market shares, western Europe (%)

          Sector & market                        1997             1998    1999    2000     2005
          Austria                                35.7             37.9     38.1   36.6     34.3
          Belgium & Luxembourg                   36.9             41.0     40.9   35.8     37.8
          France                                 19.1             20.9     25.7   25.9     25.5
          Germany                                50.3             47.8     49.0   46.2     46.5
          Italy                                  12.7             13.0     15.9   13.4     16.1
          Netherlands                            32.9             33.9     34.9   31.6     31.6
          Portugal                                5.8              6.5      9.6    9.9     10.6
          Spain                                  29.4             31.7     26.9   23.4     26.6
          UK                                     24.5             24.1     25.4   20.5     21.9
          Nordic markets                         27.1             28.8     28.4   24.6     27.1
          Other                                  27.7             29.4     41.9   38.8     35.8
          Total W. Europe                        33.9             33.8     35.0   31.5     32.9
          16t plus
          Austria                                20.1             19.0     17.2   15.4     16.8
          Belgium & Luxembourg                   18.8             18.7     16.4   16.8     16.4
          France                                 15.5             15.6     16.2   15.5     15.6
          Germany                                43.5             42.2     42.0   38.2     39.3
          Italy                                  15.1             15.7     15.4   15.2     15.6
          Netherlands                            12.8             12.0     13.3   11.9     12.1
          Portugal                               12.4             12.2     13.0   15.2     13.5
          Spain                                  16.0             14.8     15.3   15.3     14.6
          UK                                      9.6              8.9      9.5    9.9      9.3
          Nordic markets                         13.3             12.4      9.7    8.4      9.6
          Other                                  21.7             18.2     19.8   21.2     19.1
          Total W. Europe                        21.3             20.7     20.9   19.6     20.8

Source: Marketing Systems

Western Europe - sub-16t trucks
In the light to medium sector, market leader DC's share of the European market fell sharply in 2000,
down by 3.5 percentage points to 31.5%. The decline reflects share losses in most of DC's markets and
the fall in demand for sub-16t vehicles in Germany, DC's largest market. DC's share had risen strongly in
1999 as it benefited from the disruption suffered by some competitors during product changeovers. The
losses in 2000 are partly a reversal of that process as the new competition began to have an impact. We
are expecting a new Vario in 2002 and a new Atego in 2003 to help DC rebuild its share of this sector but
its 1999 share of 35% is expected to remain a peak figure through to 2005.

Western Europe - 16t-plus trucks
In the heavy sector Mercedes-Benz is again the leading brand in western Europe with a share of around
20%, but since Volvo's acquisition of RVI, the enlarged company: Volvo Global Trucks is the market
leading group. DC's market share dropped by 1.3pts to 19.6% during 2000 as it underperformed in six out
of the eleven major markets but it was the substantial fall in its German market share which did most to
affect the European figure. In Germany DC's share fell from 42% in 1999 to 38.2% in 2000, with most of
the share being taken by MAN. We are expecting a further decline this year, before product actions help
DC to regain some of its lost share in the 2002-2005 period.

USA market
In the USA the Freightliner, Sterling and Western Star brands accounted for 37.5% of the Class 8 market
during 2000 (1999: 38.5%). Retail sales of these three brands dropped by 21.7% to 79,366 units. In the
Class 4-7 sector sales of the three brands were 5.6% lo wer at 45,090 units, slightly underperforming the
overall market decline of 3.4%.

2001 sales
During the first nine months of 2001 the CV division sold 366,000 units, a 10% decrease from the year-
ago figure. Sales in western Europe were unchanged at 202,000 units as a 5% drop in German sales was
offset by increases elsewhere. The sales mix weakened as a drop in truck sales was offset by increased
demand for vans.

In the USA where DC's sales are concentrated in the heavy truck sectors, sales during the first nine
months dropped by 34% to 70,000 units. Sales fell by 12% to 34,000 units in South America and dropped
by 2% to 60,000 units in the rest of the world.


The Mercedes-Benz truck range in Europe comprises:
•   Sprinter            - Light to medium vans 2.5t-4.6t, built at Düsseldorf;
•   Vario               - Medium to heavy vans and light trucks 4.5 to 7.5t, built at Ludwigsfelde;
•   Atego               - Initially medium trucks 7.5 to 17t, now including multi-axle, built at Worth;
•   Axor                - Fleet artic, built at Worth. Atego derived cab, ‘new’ engine, Actros chassis;
•   Actros              - Heavy trucks built at Worth;
•   Unimog              - Light/medium all terrain and special purpose vehicles built at Gaggenau;
•   Econic              - SPVs aimed at the municipal market, built at Arbon in Switzerland.

The Sprinter van range (2.5-4.6t) was launched in 1995 and heavily facelifted in early 2000. It was
introduced in the USA in Q2-2001 under the Freightliner brand and will be launched in Mexico next year.
The North American Sprinters are being assembled locally at Freightliner's Gaffney plant in South
Carolina. A new generation Sprinter is expected in 2004.

A replacement for the Vario light truck range is under development. The project started as a JV with
Nissan Diesel but the co-operation was terminated when Renault bought its stake in Nissan. A new light
truck is expected to be introduced initially in Brazil. The European version is believed to be about two
years away. The current Vario may be phased out around 2003. How the light truck under development
by MMC fits into this picture has not yet been declared but clearly DC will be looking to avoid
duplication of effort and minimise product overlap where possible.

                                 Figure 3.5: DC European CV range (> 3.5t)

  MODEL       DEBUT     1996      1997     1998     1999     2000      2001     2002      2003     2004     2005 REMARKS
                        I   II    I   II   I   II   I   II   I    II   I   II   I    II   I   II   I   II   I   II

  SPRINTER 1995                                              F                                         N             Replaces T1
                                                                                                                     Up to 4.5 t
  T2          1985               T

  VARIO       1996          I                                                                 T                      Rev. cabs
                                                                                                                     new engines

  NEW LIGHT TRUCK                                                               I                                    European debut
  LN2         1984                                           T

  ATEGO / LKN                         I                          E                        F                          Repl. LN2

  MK / SK     1984                                                         T                                         Old heavy range

  AXOR                                                                     I                                         Atego cab,
                                                                                                                     Actros chassis
  ACTROS / 1996             I                                                       F                           N Rigids 1997
  SKN                                                                                                                Facelift 2001-2

                I: INTRODUCTION       T: TERMINATION         N: NEW MODEL           F: FACELIFT E: NEW ENGINE

Source: Marketing Systems

The Atego received its market launch in early 1998, with artics and multi-axle rigids appearing towards
the end of the year. A facelifted version is expected in 2003.

A new artic, the Axor, was launched in autumn 2001. Aimed at the fleet market the new model uses an
Atego derived cab on an Actros chassis, to give operators increased payload (up to 500kg) compared with
the Actros. It features an OM457 12litre, 6 cylinder, in line engine instead of the 500 Series V6 and V8
Actros units.

A revised Actros - codenamed MP2 - is expected in late 2002 for early 2003 introduction. The updated
model will feature an interior and exterior cab facelift.

DC's truck operations in Europe and North America have traditionally developed and produced vehicles
largely independently of each other. This has been a feature of all the US subsidiaries of European truck
producers. The reasons cited for the lack of component commonality were:
•    that trucks, heavy trucks in particular, are very different on each side of the Atlantic;
•    the fact that North American truckmakers are traditionally much less vertically integrated than those
     in Europe, mostly outsourcing the major components such as engines, gearboxes and axles to the
     specialists like Caterpillar, Cummins, Eaton and Rockwell.

However, as all the truckmakers look to improve their profitability, there is a slow but steady drift
towards greater integration between North American and European operations. This is true of DC,
although the group has not been in the vanguard of this trend.

In DC's case the first significant example of closer integration was the March 1999 introduction of the
German-built Mercedes 900 Series engine as an option in Freightliner's middleweight truck range. The
engine is offered as an alternative, alongside the Caterpillar and Cummins units which buyers can
currently specify. It is widely agreed that a move to offer only an in-house engine, would have been
punished by a sharp drop in sales. This initiative was followed by the introduction of Mercedes -Benz
transmissions and axles to North America in 1999.

In early 2000 the Sterling Acterra (Class 5-8) was launched in North America, equipped with 4-cylinder
and 6-cylinder Mercedes-Benz engines as standard, though Cummins and Caterpillar units are optional. A
further sign of closer integration was the introduction of the Sprinter in 2001.


Europe and North America
DC's commercial vehicle plants are mostly concentrated in Europe and North America. In Europe the
company has 15 production locations for its vans, trucks, buses and components. The principal truck
assembly plant is at Worth, as mentioned above. In February 2001 Worth produced its 100,000th Atego,
three years after the model's launch. In 2003 the Worth plant will take over production of the Unimog
range, currently produced at Gaggenau. The Gaggenau plant will concentrate on producing transmissions
for commercial vehicles.

In North America the acquisitions in recent years have left DC with 23 plants in all:
•   4 Freightliner truck plants;
•   1 Sterling truck plant;
•   9 American LaFrance plants;
•   3 Thomas Built Buses plants;
•   1 Western Star plant;
•   2 Orion bus plants;
•   1 Custom Chassis plant;
•   2 parts manufacturing plants.

A number of North American plants were idled during the second half of 2000, and the North American
workforce is being reduced by about 8,000 people or 38% by the end of 2001. A further 1,100 jobs are to
be cut by October 2001 due to the continuing slump in demand. Following the resignation of Jim Hebe in
May 2001 the new president, Rainer Schmückle is taking a fresh look at efficiency improvements and it is
likely that one or more of the 23 plants will be closed.

The move to offer Mercedes-Benz components in North America was one of the activities of the
Powertrains business unit which is seeking external customers for the products and expertise formerly
reserved for Mercedes-Benz products. While securing Freightliner and Sterling as customers looks a bit
of a soft option, the financial advantage (both revenue and scale economy benefits) of selling in-house
versions of major components such as engines should not be sniffed at. With the planned acquisition of
Detroit Diesel the Powertrains unit can be expected to find more external customers over time, especially
in view of the massive costs of developing engines to comply with ever-tighter emissions regulations.

Other regions
In addition to the truck assembly plants in western Europe and North America, DC produces commercial
vehicles at wholly-owned or majority-owned facilities in Argentina, Brazil, South Africa and Turkey.
There are a number of low volume assembly operations in other markets.

In Latin America DC has moved to rationalise its production system, by concentrating truck and bus
assembly in Brazil and van production in Argentina. Formerly the company produced trucks in both
countries. In a further sign of increasing commonality between DC's operations, a new generation of
medium-heavy trucks was recently launched in South America using the Atego cab.

In June 2001 DC and Hyundai announced a $180m joint venture project to assemble Mercedes diesel
engines at a new facility next to Hyundai's commercial vehicle plant at Chonju in South Korea. The
Chonju plant has the capacity to produce about 120,000upa, though last year Hyundai and Kia's combined
worldwide sales of trucks and buses was only 70,000 units. The 50:50 venture will produce OM900
engines for installation in about 75% of Hyundai's commercial vehicle range. The engines offer Hyundai
an off-the-shelf solution to meeting forthcoming emissions standards in Korea and elsewhere. This
project marks the first significant sign of co-operation between DC and Hyundai since DC acquired its
10% stake in the Korean firm.

In addition to the engine project the two companies have agreed to co-operate on initiatives to assist
Hyundai in product development, production and marketing.


Prior to the merger, as part of the restructuring of the Daimler-Benz Group carried out by Mr. Schrempp,
the Mercedes -Benz subsidiary was reintegrated into Daimler-Benz with the aim of reducing management
layers and speeding decision making. Mr. Schrempp also introduced greater clarity and transparency into
the Group’s financial reporting so that the performance of individual business units could be more
accurately assessed. This was a welcome change as the profitability of the comme rcial vehicles division
began to be officially disclosed instead of being subsumed within the combined accounts of the
Mercedes-Benz car and truck div isions as previously.

The accounts of DaimlerChrysler present operating profit figures for the commercia l vehicles division as
well as capital spending, R&D and employee numbers. The division's net revenue is provided along with
a split showing gross revenue (i.e. before elimination of intra-company transfers) for:
•    Mercedes-Benz trucks;
•    Mercedes-Benz vans;
•    Mercedes-Benz / Setra buses;
•    Freightliner (including all the other North American brands);
•    DC powertrain.

There are four sets of statistics showing information for DaimlerChrysler, DaimlerChrysler CVs
(including Mercedes-Benz CVs as was), Daimler-Benz and Mercedes-Benz Group. Prior to 1989/90,
comprehensive information was not available for Mercedes-Benz Group.

In October 1993 Daimler-Benz became the first German company to be listed on the New York Stock
Exchange. The company therefore changed its accounting standards to conform more closely with the US
generally accepted accounting principles (US-GAAP). These adjustments resulted in non-recurring
income of some DM2.6bn, as provisions made under German accounting standards were released to
conform with US-GAAP. The accounts for DaimlerChrysler are prepared in accordance with US-GAAP.

From 1994 the Daimler-Benz and Mercedes-Benz accounts adopted the “Cost of Sales” presentation,
whereby costs are allocated to the functional areas of manufacturing, sales and administration. This is
becoming the international standard format. The 1993 figures have been restated to conform with this
presentation. Other items to note include:

Capital Investment - from 1987 capital investment excludes expenditure upon vehicles for leasing

Cash Flow - as of 1993 this figure was no longer reported for the Mercedes-Benz Group.

Liabilities - prior to 1987 current debt (defined as debts due within one year) and long term debt were not
separated in the accounts, in the interests of completeness a 60/40 split has been used for earlier years,
based on the 88-92 actuals.

Employees - the employee numbers for Mercedes-Benz Cars plus Mercedes-Benz CVs do not reconcile
to the Mercedes -Benz Group figure due to the non-allocation of sales staff and head office/central staff.

CHAPTER 4:                 HINO MOTORS


Hino Motors develops, manufactures and markets diesel trucks and buses in Japan and other (primarily
Asian) markets. In Japan it has been the market leader in the medium to heavy truck sector for more than
twenty years. The domestic market typically accounts for 60-66% of Hino's truck and bus sales. In
revenue terms, the proportion contributed by domestic operations is even higher, due to the income
generated by work performed on behalf of Toyota, Hino's majority shareholder.

During the eighties and early nineties, Hino ranked as one of the world's top producers of trucks above 6t
GVW. With output of 70-80,000 trucks per year the company vied with Navistar of the US for second
place, a long way behind the industry leader, Daimler-Benz (as was). The slump in demand in Japan
during most of the nineties and the sharp downturns in other Asian markets in 1997/98, caused Hino's
output to fall by more than 50% from its 1989-91 peaks and on a world scale it currently ranks outside the

Hino's profit margins were unimpressive before the slump in demand so such a precipitous decline in
sales inevitably caused the company to slide into the red. The year to March 1999 saw its first net loss
since listing on the Tokyo Stock Exchange in 1949. Further net losses were incurred in the following two
years, though the company returned to the black at the operating level in its most recent financial year.
Despite that return to profit, the scale of losses in fiscal 1998 and 1999 meant that over the ten years to
March 2001, Hino made a cumulative operating loss of Y5bn.

During this period of declining performance Hino has had the benefit (if 'benefit' is the right word) of a
long-term principal shareholder, Toyota, to ward off the threat of foreign takeover. The association
between the two firms dates back to the 1960s and recently Toyota has made several injections of funds
into Hino, increasing its equity stake from 20% in 1998 to over 50% during 2001.

We raise the question as to whether the link with Toyota has been truly beneficial because while it has
undoubtedly offered Hino a welcome security blanket, particularly during the recent slump, it appears that
thus protected, Hino's attempts to restructure and regain profitability have lacked the necessary urgency
and vigour.

The validity of this observation has been confirmed by Toyota's plan to revamp Hino, now that it has
acquired majority control. Toyota has installed one of its own vice-presidents, Tadaaki Jagawa, as Hino's
new president. Interestingly, despite the long association between the two companies Mr Jagawa is the
first Toyota employee to be appointed to the position. Mr Jagawa has clearly been given a brief to make
rapid changes to bring Toyota's new subsidiary closer to the profit levels achieved by the rest of the
group. He has talked of a "shift to offensive management" in describing his approach to rehabilitating the

Although detailed restructuring plans had not been announced at the time of writing, Mr Jagawa and
Toyota's president, Fujio Cho, have both indicated that Hino will be looking for international alliances to
bolster its operations. Although technical co-operation is the preferred route there is also a willingness to
consider equity tie-ups.

From our perspective these are welcome changes, probably best summed-up as better late than never.

                                                                 Figure 4.1: Hino revenue & operating profit trend


         Index (Year to March 1985 = 100)






















                                                                 Revenue (Yen)             Op. Profit (Yen)


 Source: Hino

RECENT PERFORMANCE                                                                                                                                  Figure 4.2: Hino net income trend

2000/2001 results                                                                                                                              1,100
In the year to March 2001 Hino reported a
                                                                                                              Index (Yr to March 1985 = 100)

consolidated operating profit of Y5.6bn, on                                                                                                      700
revenue which rose by 7.8% to Y704bn.
Although this was still a weak performance with                                                                                                  300
an operating margin of just 0.8%, the result was
significant for marking a return to profit after two                                                                                            -100








successive years of substantial operating losses.
The improvement principally reflects increased                                                                                                                          Yen

truck sales and the benefits of restructuring as                                                                                                -900                    Eur

labour and material costs were reduced.
Sales of Hino trucks and buses rose by 8% overall
and by 10% in Japan. Car production on behalf of Source: Hino
Toyota rose by 4 per cent to 140,000 units.

Hino also moved into the black at the pre -tax level, reporting a profit of Y3.1bn compared with a prior
year loss of Y25.7bn. The profit was achieved despite interest payments of Y8.4bn, or 1.5 times the
operating profit.

Like most of the other Japanese truckmakers, Hino's net result was adversely affected by non-recurring
charges to cover a shortfall in pension fund reserves under new accounting regulations. Hino booked a
Y21.7bn charge, taking it to a net loss of Y13.3bn compared with a loss of Y21.8bn the previous year.

Hino is anticipating a continuing recovery during the year to March 2002. Revenue is forecast to grow by
6%, boosted by a 16% rise in domestic sales and a 3% increase in exports. An operating profit of Y16bn
is forecast, 2.1% of projected revenue. Net profit is forecast at Y24.5bn, helped by non-recurring gains
from sales of land and Toyota shares.


Hino’s origins date back to 1918. In addition to manufacturing medium and heavy trucks, buses and light-
trucks for Toyota, the company produces industrial engines for compressors, generators and marine
applications etc. The engine production activity accounts for less than 10% of Hino's revenue so the
company is not obliged to disclose any separate financial information on this business. The revenue
generated by production of Toyota vehicles has accounted for around 30% of Hino's revenue in the last
two years.

Links with Toyota
The association with Toyota goes back to 1966. During 1997 Toyota rais ed its stake in the smaller firm
from 16.4% to 20.1% and in March 2000 the stake was raised to 33.8%, giving Toyota effective
management control. Last year's edition of this report commented that "It will be no surprise if Toyota
takes a majority stake in Hino within the next few years" and this is what Toyota has done.

In April 2001 Hino announced it would issue Y66.4bn worth of new shares for private placement with
Toyota, boosting Toyota's stake to 50.1%. Payment for the shares was due at the end of August and
Toyota's executive vice president, Tadaaki Jagawa, is to become Hino's new president. By the end of
March 2002, Hino will sell all of the 5.24m Toyota shares it holds, in order to comply with regulations
that bar a subsidiary from owning shares in its parent.

Hino will use the proceeds from the share placement to beef up its two-ton truck business and offshore
operations and for the development of environment-friendly technologies.

Generally speaking, we are unconvinced of the industrial or comme rcial logic for keeping a carmaker and
truckmaker under the same roof. The trend over the past decades has been in the opposite direction, with
companies such as Ford, GM, Renault, Saab-Scania and Volvo all deciding to focus on one sector or the
other. The reason underpinning this trend is simple: there are few worthwhile scale economies to be
gained from a presence in both sectors. In all the principal areas of expense such as design, development,
production, marketing and distribution; there is no significant potential for cost reduction from synergies -
cars and trucks simply being too different.

Having said that, if a company decides it does want to maintain an interest in both sectors it must be
preferable for that interest to be a controlling one, as Toyota's now is. At least this gives Toyota a
reasonable chance of managing the business to its own standards.

In the case of Hino and Toyota there is more overlap between the two firms than was the case in the
earlier examples. Toyota uses Hino to assemble some of its light commercial vehicles and Hino also
builds trucks of up to 7t GVW which Toyota sells under its own brand name. However, Toyota having a
stake in Hino is not a necessary precondition for either arrangement. Fundamentally Hino has still to fund
the development and renewal of its medium and heavy truck ranges and powertrains. The link with
Toyota does not enable it to spread those development costs over a higher unit volume.

Last year's edition of this report commented that " - - even as a division of Toyota, Hino will be facing
much the same degree of competitive pressure that has forced numerous other truckmakers worldwide to
forge alliances. If Hino's profitability is to improve to anywhere near that of Toyota's car operations, then
it too is likely to need to form alliances.".

Recent comments by Toyota and Hino's new president suggest they have reached the same conclusion. In
July Mr Jagawa said Hino should seek a tie-up with a foreign firm to survive amid intensifying global
competition. He noted that Hino was the only one of Japan's major truckmakers not to have a foreign
alliance of some sort and said he is particularly looking for co-operation in the supply of engines and
other major components. He thought an alliance with a European firm would be particularly attractive.

Prior to Mr Jagawa's arrival Hino was already making efforts to restructure and cut costs. It formed some
collaborative arrangements with its domestic competitors, pooling resources in specific areas. In the early
months of 2000 Hino and Isuzu formed a joint venture to integrate bus production with effect from 2003.
However, Mr Jagawa has called into question the future of this relationship, suggesting it will not proceed
if it is judged to interfere with other possible alliances.

During 2001 Hino, Isuzu, Mitsubishi Motors and Nissan Diesel have agreed on a set of common
specifications for interior and exterior parts for "non-step" buses, which have low floors designed for the
elderly and handicapped. The companies hope to cut costs and expand the use of such buses, after the
introduction of a law designed to facilitate the travel of the elderly and handicapped on public transport in
November 2000.

In May 2001 it was announced that Hino will begin supplying medium      -sized diesel engines to Nissan
Diesel with effect from 2004 when Nissan Diesel will stop its in-house production of such engines. Hino
is expected to supply 13-14,000 units annually.

In addition to such collaborative arrangements Hino has made some internal efficiency improvements. By
March 2000 it had eliminated all temporary workers at its domestic plants and reduced its workforce by
around 30% from a peak of 12,000. The company also consolidated its six regular truck production lines
into three during 2000. Mr Jagawa plans to intensify the efficiency drive by reducing Hino's annual
procurement costs by 30% from the current Y350bn. Mr Jagawa is credited with achieving a similar
reduction in costs of the Toyota Vitz (badged Yaris in Europe).


Hino sold 51,000 units of its trucks and buses in the year to March 2001 a 16% increase from the previous
year's 45,000 units and the second successive year of increase. Domestic new registrations were 12%
higher at 32,995 units and exports were 24.8% higher at 18,043 units

Most of the increase in domestic sales reflects the impact of the Dutro in its first full year of sales, having
been launched in May 1999. New registrations of this model rose by 54% to 8,900 units. New
registrations of medium/ heavy trucks rose by a more modest 5% to 22,200 units and those of buses fell by
13% to 1,900 units.

Hino has long dominated the domestic market for medium and heavy-duty trucks but it is third in the 2-
ton pickup segment, with a share of about 20%, including Toyota-brand trucks made by Hino. The new
president has said he wants to raise Hino's share of the pickup market to 30% as soon as possible.

Hino's exports have traditionally been concentrated in Asia which accounted for over 80% of export sales
in most years, the principal markets being Thailand, Malaysia, Indonesia and Pakistan. Sales in the region
plummeted in the wake of the economic crisis, falling by 75% in 1998/99 to 3,700 units. Demand in the
region improved significantly during 2000, helping Hino's exports to rise by nearly 25%.

Hino intends to exploit its closer ties with Toyota to boost its overseas sales by making use of Toyota's
extensive overseas sales network, as well as using Toyota factories abroad for truck production.


Hino's truck range comprises:

Dutro - a light truck (4.3-7.4t GVW) developed jointly by Hino and Toyota (which badges it Dyna or
Toyoace). This is Hino's first entry into the light truck sector, launched in May 1999. New registrations of
Hino-badged models in the year to March 2001 were 8,900 units.

Space Ranger - launched in March 1999, medium trucks spanning 7.9-17t GVW.

Super Dolphin Profia - the range of heavy duty trucks was renewed in May 1998.


During the year to March 2001 Hino's domestic output increased by 11.8% to just under 50,000 units.
Production of the Hilux pickup truck on behalf of Toyota grew by 4% to 140,000 units.

In April 2001 Hino added a second shift at its plant in Hamura, Tokyo, where it produces the Hilux. The
extra shift will enable output to rise by 20% to around 460 units per day to meet growing export demand.
The company has transferred 250 employees to Hamura from its plant in Hino, Tokyo, where it produces
regular trucks. This will increase the Hamura plant's work force by about 10%.

Elsewhere in the world Hino has various local assembly arrangements, the major ones being:

q   China - in 1993 Hino established a joint venture, Heilongjiang Bus, for the production of touring
    buses. Hino has a 12.5% stake in t e venture. Capacity is 500upa. In December 2000 Hino
    announced a plan to produce and market buses in China with another company, Shenyang Shenfei
    Automobile Manufacturing. Hino has bought a 25% stake in the new firm and will supply design and
    production technology and marketing know-how as well as the right to manufacture and market Hino
    vehicles. Production will be carried out at an existing Shenyang Shenfei plant and at a new plant
    scheduled to open in 2003. In the initial phase, Shenyang Shenfei will produce 1,000 buses a year.
    From 2003, an additional 100 units will be made at the new plant. By 2010, annual production will
    be raised to 3,500 units, including 2,000 Hino models.
q   Indonesia - PT Hino Indonesia Manufacturing assembles trucks and buses. Output has been less than
    100 units in the past couple of years, having reached 3,000-5,000upa before the economic crisis.
q   Pakistan - capacity at Hino-Pak Motors exists for 6,000 trucks and 1,200 buses per year, actual
    production usually 3,000 or below. Hino holds 59% of the equity and Toyota a further 30%.
q   Taiwan - Kuozui Motors was established by Hino in 1984 and Toyota bought a stake in 1986. Toyota
    now holds 38.3% and Hino 18.1%. Kuozoi assembles Hino trucks and the Toyota Dyna as well as
    Toyota passenger cars. Output of Hino models is 2,000-3,000 units annually.
q   Thailand - assembly of trucks, buses and Toyota CVs by Thai Hino Motor Corporation. Hino will
    begin exporting trucks from Thailand to other Asean members in 2004, when it releases a new
    model. The firm hopes to raise annual output at the Thai plant to 20,000 units from the present 3,000.
q   Vietnam - operations started at Hino Motors Vietnam in November 1997. Hino owns 51% of the
    venture, which has assembled less than 100 units in each of the last two years.

Hino trucks are also assembled in: Bangladesh, Costa Rica, Ireland, Kenya, Malaysia, the Philippines,
South Africa; Turkey and Zimbabwe. Volumes are generally tiny and Hino has no equity stake in the


The production on behalf of Toyota has a significant effect on Hino's accounts as revenue from Toyota
has represented some 35% of the total in recent years. This needs to be considered when, for example,
comparing Hino's unit revenues with those of other truck producers.

Beginning with the annual report for the year to March 1996 Hino's accounts are published on a
consolidated basis. The results for the year ended March 30, 1995 have been restated but earlier years
remain on a non-consolidated basis.

CHAPTER 5:                 ISUZU MOTORS


Isuzu is now primarily a producer of trucks, with models spanning the range from SUVs to 26-tonners. In
the last few years it has produced around 0.4m vehicles annually. About 90% of these have been light
trucks, including SUVs and pickups. In Japan Isuzu's Elf range is the market leader in the light-duty truck

In the past Isuzu also produced passenger cars, selling models such as the Gemini, Aska and Piazza in
Japan, North America, Europe and elsewhere. However, as only a medium            -sized car producer with
domestic production volumes seldom exceeding 200,000 units during the 1980s, Isuzu struggled and
often failed to remain profitable. For the period from 1983 to 1992, the company returned a cumulative
deficit at both the operating level and net levels. Its difficulties during this time can be attributed to
having been spread too thinly, trying to offer a wide product range across a wide range of markets without
having been able to secure the sales volumes to achieve the necessary scale economies.

In recognition of these strategic weaknesses, the company decided during 1992 that it would no longer
develop and produce passenger cars independently, concentrating instead on its trucks and sports utility
vehicles, which offered the attractions of:
•    higher profit margins;
•    being an area where Isuzu had existing expertise;
•    existing demand.

The contribution of car sales to Isuzu’s revenues has not entirely disappeared. The company sells Isuzu-
badged Hondas and Honda in turn sells Honda-badged Isuzu products, both in Japan and elsewhere.

Isuzu has a long-term relationship with GM, dating back to 1971 when the US company acquired a 34.2%
stake in Isuzu. Since then the two companies have co-operated in various discrete joint ventures, such as
the IBC operation in the UK (now wholly owned by GM). In recent years, the relationship has become
closer, both formally and operationally:
•    formally – GM’s stake increased to 49% in March 1999;
•    operationally – Isuzu is becoming more closely integrated into GM’s worldwide structure, with
     global responsibility for the development of GM’s diesel engines and commercial truck development.

Isuzu has made operating and net losses during the two years ending March 2001 and even in the six
profitable years which preceded this period its operating margins were low, averaging just over1%. In
response to this lengthy period of underperformance plus some signs of growing dissatisfaction from GM,
Isuzu is significantly accelerating its restructuring programme, planning staff cuts of 26%, closing plants
and exploiting its relationship with GM to the full in order to drive down costs.

In our view there is room for speculation about GM's future intentions for Isuzu's medium/heavy truck
business. The American firm decided to opt out of this sector over twelve years ago, selling its heavy
truck interests to Volvo in 1988, though it retained a minority stake until 1997. The substantial stake in
Isuzu's truck operations sits oddly with this strategy, thus from GM's perspective there is an argument to
be made for disposing of this division.

From Isuzu's perspective the link with GM does little to help its medium/heavy truck business in terms of
either sales or costs. The rapid consolidation of the world's truck industry means Isuzu will soon be facing
competitors with global reach and economies of scale.

Given that Isuzu is not in a position to purchase another truckmaker and GM has already turned its back
on the truck industry, it would be surprising if one or both companies were not considering the benefits of
either a major alliance for, or the disposal of its medium/heavy truck business.

                                        Figure 5.1: Isuzu (cons.) revenue and operating profit trend


     Index (1987 = 100)


















                  -600                               Revenue
                                                     Op. Profit
 Source: Marketing Systems and Isuzu

RECENT PERFORMANCE                                                                             Figure 5.2: Isuzu (cons.) net income trend
2000/2001 results                                                                                                                              Yen

Isuzu made a consolidated operating loss of                                                                                                    Eur
Y27.3bn and a net loss of Y66.8bn in the year to
March 31, 2001.                                                                                                                1987







                                                                                                Index (1987 = 100)

The company was hit by restructuring costs and
expenses aimed at boosting competitiveness, but                                                                      -700
expects these measures to help it return to profit in
its current fiscal year.                                                                               -1,200

The latest loss was significantly smaller than the
previous year's, though Isuzu had originally
forecast a return to profit.
Isuzu has said it expects to post a group operating                                         Source: Isuzu
profit of Y25bn and a net profit of Y1.0bn in the
year to March 2002.


Since abandoning passenger car production in 1992 Isuzu’s business has been organised around three
main divisions:

Light-duty vehicles - these include recreational vehicles (e.g. Bighorn/Trooper), pickups (e.g. Campo),
light trucks such as the Elf Series and microbuses.

Medium/heavy-duty vehicles.

Engines, components and others - the importance of this division has risen as Isuzu pursues its aim of
becoming the number one diesel engine producer worldwide.

In May 2001 Isuzu announced a new three year business plan, known as the V-plan ('V' for 'victory' and
'V-shaped rebound'). The move followed pressure from GM which has become concerned about Isuzu's
continuing weakness following operating losses in five of the last eleven years. Even in the six profitable
years the operating margin has only averaged 1%.

By the end of the year to March 2004 Isuzu plans to have:
•   cut staff by 9,700 or 26% of the current 38,000;
•   switched production of sport utility vehicles to North America;
•   switched production of pickups for overseas markets to Thailand;
•   sold its Tokyo headquarters building;
•   cut procurement costs by 20% through joint purchasing with GM;
•   consolidated domestic sales companies into around 25 from the current 41, in an effort to return all
    sales firms to profitability in 2003/04;
•   reduce by 40% the number of affiliates, currently 109;
•   shut a truck plant in Kawasaki city (by 2005);
•   reduced the number of platforms to three from the current seven.

The changes are expected to reduce group interest-bearing liabilities to Y510bn from the current Y750bn
and result in a group net profit of over Y30bn in 2003/04. The company is aiming for a total capacity
utilisation rate in excess of 90% compared with the current 50%

Not all the changes are aimed at cutting back. Isuzu is also looking to:
•   expand its diesel engine business;
•   develop global models for its LCV and pickup range;
•   make full use of GM's distribution channels to sell Isuzu products and boost its own distribution
    channels by selling GM products;
•   tap into GM's purchasing organisation to reduce the cost of materials and components by 20%;
•   make use of GM's production facilities.

It is clear from the V-plan that the links with GM are principally of benefit to Isuzu's light truck activities,
for the obvious reason that GM is no longer involved in heavy trucks. Indeed it is noticeable that Isuzu's
V-plan makes very little mention of expanding the medium/heavy truck business other than introducing
its truck and bus range in China. As mentioned in the opening comments earlier, we believe GM may
well encourage Isuzu to sell off the truck business entirely and concentrate on those aspects of the
business which have the best fit with the rest of GM's operations.

The workforce reduction programme got off to a flying start in July 2001 when Isuzu announced that its
early retirement scheme had been oversubscribed on the first day, with 740 workers applying for the
scheme compared with the target of 700. Plant workers were not eligible for the programme which was
confined to employees of 32 years old or older with more than 10 years of service at the company. There
are 4,500 such employees. While the company will be pleased at the scheme's ready acceptance by the
workforce there must be at least a small concern over the level of motivation among employees.

During January 2000 Isuzu and Hino announced an agreement to collaborate in the development and
manufacturing of buses in order to reduce costs and improve product competitiveness. The companies
plan to merge their bus production and development operations in 2003.


2000 sales
In the year to December 2000 Isuzu's domestic plants sold 30,162 medium/heavy trucks and buses, 7.4%
more than the previous year's 28,084 units. Domestic sales accounted for 19,293 units with 10,869 going
to export markets.

Sales of domestically produced light duty trucks were 9.4% higher at 106,975 units, including just over
5,000 units provided to Nissan and Nissan Diesel for rebadging. Export markets accounted for 57,358
units with 49,437 units sold in Japan.

Sales of domestically produced recreational vehicles dropped by 9.8% to 135,033 units, principally due to
a fall in exports from 140,805 to 127,585 units. This was offset by a rise in overseas production to
309,325 units from 285,273 units in 1999.

2001 sales
During the 2001 calendar year Isuzu is anticipating a 10.7% drop in sales of its domestically produced
vehicles, to 244,500 units, reflecting a 9% rise in domestic sales more than offset by an 18% drop in
export sales. Most of the decline in exports can be attributed to the switch to overseas production, which
is expected to rise by 3% to 320,000 units but the company is expecting overall sales to drop by 2% to
556,500 units.

The company may well miss this target due to recent problems with exports to China. In June 2001 Isuzu
announced it was suspending exports to China, following the imposition of import tariffs by Beijing on
Japanese vehicles. New orders from China dried up since Beijing slapped a 100% tariff on Japanese-made
vehicles in retaliation for curbs imposed on Chinese farm imports by Japan. Isuzu had been exporting
large trucks to China and plans to resume production if local demand warrants it.

US sales
In calendar 2000 Isuzu's share of the US market for Class 4-7 trucks, rose to 5.3% from 4.8% in 1999 and
2.9% in 1998. Unit sales increased by 5.4% to 13,173 units, with about 60% of sales being concentrated
in Class 4. A Class-5 delivery truck was launched in 1999, using an Isuzu cab and engine on a GMC
chassis. This helped Isuzu's Class 5 sales to rise by 22% during 2000. GMC is also marketing the vehicle
under its brandname. Both vehicles are assembled in the US at GM's Janesville plant.

During the first six months of 2001 Isuzu's Class 4-7 sales in the US rose by 12% to 8,263 units. This
substantially outperformed the overall market which dropped by 18.9% during this period.


Isuzu's truck range comprises:

N-series: light duty (3-8t GVW) trucks badged as Elf in the domestic market. Isuzu counts these vehicles
within its light-duty vehicle division.

F-series: medium weight 2-axle trucks 9-15t GVW, badged Forward in the domestic market.

CV-series: also medium weight 2-axle trucks intended for heavy duty work (15.1-16.8t GVW) with more
robust construction hence smaller payload than the F-series.

CX-series: heavy duty, 3-axle trucks, 26t GVW, badged as Giga in Japan.

EX-series: 2-axle and 3-axle road tractors, also badged Giga in Japan.


Isuzu is aiming to produce 320,000 vehicles overseas in calendar 2001, up by 3% from the 2000 figure of
309,325. The domestic production target is 236,500 units, down by 8% from the 2000 level. The domestic
production target is composed of:
•   35,000 medium/heavy trucks (including 1,200 buses) up by 21% from the 28,898 produced in 2000;
•   109,000 light-duty trucks, up by 8% from 2000;
•   92,500 recreational vehicles including pickups, a drop of 28% from prior year levels reflecting the
    switch of production to overseas plants.

The company's V-plan provides for an expansion of diesel engine production and a refocusing of vehicle
production such that light-duty and medium/heavy trucks will be built in Japan, pickup trucks and a
multi-purpose vehicle in Thailand and SUVs in the US.

Expansion of diesel engine business
The company aims to boost its annual output of diesel engines to 1.8m by the end of fiscal 2005,
•   0.6m at the Polish plant opened in 1999;
•   0.5m in Japan;
•   0.4m elsewhere in Thailand, Indonesia and China;
•   0.3m in the US at the DMAX plant, the joint venture between Isuzu (60%) and GM (40%).

In support of this target Isuzu is to invest Y100bn in diesel engine manufacturing facilities over the five
years to 2005/06. Capacity at the Polish engine plant reached 300,000upa in January 2001, a year ahead
of schedule. In November 2001 the plant will start producing diesel engines for Honda's Civic. The
company will build about 5,000 engines by March 2002, ramping up production to 15,000upa thereafter.
Isuzu will also help Honda to develop its own 2.0-litre passenger car diesel engine, for installation in its
next -generation Accord models in Europe in 2003. Isuzu may be given the production contract for this
new engine but a final decision has not yet been made.

Capacity at the DMAX plant in Ohio is to be raised to 150,000upa by the end of fiscal 2002 then to
300,000upa from 2004. Total investment for the expansion is projected at Y10bn. The plant currently
produces 6.6-litre V8 diesel engines which are used in GM's Silverado and other models. In 2004 a V6
unit is expected to enter production at the plant.

Domestic production structure
The company will close its Kawasaki plant in Kanagawa Prefecture at the end of 2005. That will leave it
with three (or perhaps two) domestic plants: the Fujisawa plant in Kanagawa Prefecture, at which it will
concentrate truck manufacturing; while a plant in Tochigi Prefecture will specialise in truck engine
production. The Hokkaido plant will continue making diesel engine parts to supply Isuzu's overseas
plants, but Isuzu is considering spinning off the Hokkaido plant as an independent entity. With the moves,
Isuzu aims to raise its capacity utilisation ratio to 90% from the current 50%.

Overseas production
Isuzu and GM have agreed to assemble Isuzu's next generation 1-ton pickups at GM's plant at Rayong in
Thailand on a contract basis from 2003. The vehicle has been co-developed by the two companies. Isuzu's
own Thai plant at Samut Prakan will produce the pickup for Thailand, Australia and New Zealand while
the Rayong plant will supply other markets.

In April 2001 production started of F     -Series medium and heavy-duty trucks at Isuzu's Chinese joint
venture Qingling Motors Co. which previously made only light trucks. The F-Series trucks range from 9.5
to 21.5 tons in size and the joint venture aims to produce 1,000 of the new vehicles in the first year, rising
to 2,000 in 2004. Founded in 1985, Qingling Motors makes about 40,000upa of light and pickup trucks.
Isuzu has a 7.4% stake in the company.

The previous month Isuzu became the first Japanese automaker to begin producing midsize and large
buses in China, where annual demand for buses is currently about 40,000 units, or eight times that in
Japan and expected to increase by at least 50% by 2005. Guangzhou Isuzu Bus Co., a joint venture in
Guangdong Province, a    ims to turn out about 100 units of three Isuzu bus models this year, rising to
1,000upa in three years.

Also during the first quarter of 2001 Isuzu began producing the new Axiom SUV. The model is for the
US market only and is produced at Subaru-Isuzu Automotive, the joint venture plant in Lafayette,
Indiana. Axiom output is planned at 24,000upa.


Data is shown in the appendices for consolidated and non-consolidated accounts. The commentary
focuses on the consolidated data where possible but the non-consolidated data has been available for
longer and the level of disclosure used to be better. Since the 1998/99 fiscal year the disclosure of
consolidated data is much improved, in response to changed regulatory requirements.

Isuzu’s accounting year-end changed from October to March in 1995, hence the 1994–95 period covers
the five months from November 1994 to March 1995.

The sales and production data refer to all vehicles including heavy trucks.

CHAPTER 6:                 IVECO


Iveco, the commercial vehicle division of the Fiat Group, was formed in 1975 by the integration of five
truck companies. The Fiat Group's three Italian truck divisions: Fiat Veicoli Industriali, Lancia Veicoli
Industriali and OM were joined by Unic a Fiat Group company in France and Magirus Deutz of Germany,
a Klockner Humboldt Deutz (KHD) company which joined Iveco in return for a 20% equity stake in the
combined group.

The rationale for Iveco’s formation was clear: the five companies/divisions were too small and nationally
concentrated to compete effectively at a European level, still less at a global level. Magirus Deutz was an
entirely independent company with its own product range and manufacturing facilities but even Fiat’s
own truck divisions were operated as discrete entities with no product overlap or significant pooling of
resources, so the potential for economies of scale and rationalisation was high.

That rationalisation of products and manufacturing facilities took most of the ensuing two decades to
achieve, partly as a result of having to accommodate the later acquisitions of Ford’s UK truck operations,
Astra in Italy, Pegaso in Spain and Seddon Atkinson in the UK. The launch of the Euro range, starting
with the EuroCargo in 1991 and completed with the introduction of the EuroStar in 1993, marked the full
integration of Iveco’s disparate divisions and as the company enters the 21st century it is beginning the
first major renewal of the Euro range.

Iveco is by far the smaller of Fiat's two vehicle divisions, typically generating revenues about one quarter
the size of Fiat Auto's. However, over the past decade Iveco has usually been the more profitable of the
two divisions. In the ten years to 2000 Iveco's cumulative operating profit was Eur1.62bn or 2.8% of
revenue compared with Eur0.28bn or 0.1% of revenue at Fiat Auto, which incurred operating losses in
four of those ten years.

It is not that long ago that we were making some similar comments about the performance of Volvo Cars
in relation to Volvo Trucks and RVI in relation to Renault Auto. In both cases the parent company has
now bitten the bullet and disposed of the underperforming division, Volvo selling its car division to Ford
and Renault its truck division to Volvo. The question now being asked is whether Fiat is preparing to do
make a similar manoeuvre.

It has certainly given itself the option. In March 2000 Fiat Auto and GM announced an alliance under
which the US carmaker has taken a 20% stake in Fiat Auto in return for 5.1% of GM's equity. Fiat Group
has the option to sell GM the remaining 80% of Fiat Auto in three and a half years' time. This gives the
group a chance not only to see how fruitful the GM alliance is, but also time to improve the competitive
strength and focus of the divisions which would remain if Fiat Auto was sold entirely.

Against that background it is no surprise that the Fiat Group is looking for a major strategic acquisition or
alliance to bolster Iveco's position in the global truck industry. Last year Iveco was the seventh largest
producer worldwide of trucks above 6t GVW and the seventh largest producer of vehicles above 16t
GVW. However, recent consolidation activity means that in volume terms, the gap between Iveco and
producers such as DaimlerChrysler, Paccar and Volvo Global Trucks has widened considerably,
particularly in the heavy sector. Iveco's chief executive, Giancarlo Boschetti, has said he expects his firm
to emerge as one of the world's top-five producers of medium-heavy trucks.

While the logic for an acquisition is compelling, Iveco faces the problem of a dwindling stock of potential
targets, with companies such as MAN and Navistar seeing themselves in the role of buyers or at least
allies, rather than sellers. Iveco is reported to have held talks with both those companies and several
others (Nissan Diesel most recently) about alliance possibilities, but at the time of writing no deals had
been announced. The link between Fiat Auto and GM may put one additional name into the frame, that of
Isuzu, whose medium/heavy truck division (see previous chapter) is its weakest and probably of least
strategic interest to GM.

                                                  Figure 6.1: Iveco revenue & operating profit trend



      Index (1983 = 100)






















                                                        Revenue (NLG)
                                                        Op. Profit (NLG)

Source: Iveco

RECENT PERFORMANCE                                                                                       Figure 6.2: Iveco net income trend

2000 results                                                                                         300
Among western Europe's major truckmakers,
Iveco reported the strongest increase in operating
profit during 2000, with a 57% rise to Eur489m.                                                      200

The improvement was helped by a change in the                                                        100
basis of consolidation but the underlying result
was still 45% above the previous year.
The company's operating margin of 5.7% was









second only to that of Scania. The figure was
inflated by non-recurring gains from asset                                                         -100
disposals but the recurring operating margin of
4.7% still left Iveco in second place in Europe.
The net increase of Eur178m reflects:                                                                                           NLG

•   Eur136m from increased unit sales and a                                                                                     Eur
    more favourable mix;
•   Eur88m from property sales;
•   Eur38m from the first-time consolidation of                                           Source: Iveco
•   Eur28m from a reduction in discount levels

These positive factors were partly offset by cost increases of Eur112m.

Interestingly Iveco reports that its sales mix "improved" because it sold a higher proportion of light
vehicles, as the new Daily made its impact. All other things being equal, profitability would be expected
to improve as the proportion of heavy trucks increased. However, all other things were not equal as Iveco
found that competition in the heavy sector grew particularly tough during the closing months of 2000,
with steep discounts having to be offered.

                                  Figure 6.3: Latest results – Fiat Group

Fiat Group                     / Unit      January - September                Year to December
                                         2000    2001      (%)              1999     2000    (%)
Revenue                        Eur(m)    42,368     43,063        1.6       48,123    57,555      19.6
Of which:       - Fiat Auto Eur(m)       18,784     18,735      (0.3)       24,101    25,361       5.2
                    - Iveco Eur(m)        6,159      6,247        1.4        7,387     8,611      16.6
                    - Other Eur(m)       17,425     18,081        3.8       16,635    23,583      41.8
Operating profit               Eur(m)       500        563       12.6          788       855       8.5
Of which:       - Fiat Auto    Eur(m)       (27)     (117)     333.3         (121)        44          -
                    - Iveco    Eur(m)       264        190     (28.0)          311       489      57.2
Iveco operating margin         percent       4.3       3.0      (1.2) pts       4.2       5.7      1.5 pts
Profit before tax              Eur(m)       682          855    25.4         1,024     1,050       2.5
Unit sales                      000s     1,875.3   1,726.1      (8.0)       2,477.9   2,514.8      1.5
Of which:       - Fiat Auto     000s     1,756.7   1,610.9      (8.3)       2,328.0   2,350.0      0.9
                    - Iveco     000s       118.6     115.2      (2.8)         149.9     164.8      9.9
Source: Fiat

While most other heavy truck brands faced a similar situation, Iveco has been having a particularly tough
time in the heavy truck sector as its Euro range is close to the end of its life. The resulting pressure on
margins is causing the company to bring forward the launch dates for its new generation of models.

2001 results
The trend of improving profit ended in the first quarter of 2001 as Iveco's operating income dropped,
year-on-year by 4.5% to Eur64m. The second quarter saw an acceleration of the decline as profit dropped
by 12.2% and in Q3-2001 profit fell by nearly 60% to Eur40m as unit sales fell by 5.3%.

Iveco's overall revenue for the first nine months of 2001 rose by 1.4% to Eur6.25bn. The increase
reflected an increased contribution from financing and service activities plus higher sales of buses and
special vehicles, partly offset by a drop in sales of other vehicles and engines.

Pricing pressure reduced Iveco's operating margin over the first nine months to 3.0% from 4.3% a year
ago. With truck demand in western Europe set to fall further the company is likely to report a lower
margin for the year as a whole.


As mentioned, Iveco's core structure was established in the period spanning its initial formation in 1975
through to its acquisition in 1990 of Spain's Enasa Pegaso, an acquisition which brought Pegaso-owned
Seddon Atkinson along with it. Since then the core structure has been largely unchanged as Iveco
concentrated its attention on integrating the various companies to form a cohesive entity.

Although it has not undergone any further significant expansion by acquisition, during the late eighties
and the nineties Iveco was active in developing alliances, generally either in order to penetrate new
markets or to share the costs of product development. Examples of the former are included under
'Production Strategy', examples of the latter include joint ventures with:

                               Figure 6.4: Fiat Group revenue by division

     Division                 1996            1997            1998            1999             2000
     Fiat Auto               53.6%           57.0%           54.3%            50.1%           44.1%
     CNH Global              10.6%           11.5%           11.2%            10.9%           18.7%
     Iveco                   13.2%           12.7%           14.5%            15.4%           15.0%
     Other                   22.7%           18.8%           20.0%            23.7%           22.3%
     Total                   100%            100%             100%            100%            100%

Source: Fiat

q    Nissan Diesel in 1991 for the development of a new engine range, badged Cursor by Iveco (see
     Markets & Models).
q    Cummins in 1996, with whom Iveco and Fiat's New Holland formed the European Engine Alliance
     to develop another engine range. The first of these are due to appear in Iveco trucks before the end of
     2000. The new range will include 4-cylinder and 6-cylinder units and will slot in below the Cursor
     range with expected displacements of 3.9-5.9 litres.
q    ZF, with whom Iveco has jointly operated a transmission production plant in Spain since 1993. The
     two firms co-operated in the development of a semi -automatic gearbox, launched by Iveco as the
     Eurotronic in 1997.
q    RVI with whom Iveco has collaborated in the development of a new cab for their respective van
     ranges. The new cab is used in the new Daily.

In 1998 the ties between Iveco and RVI became closer, first with the announcement that their bus and
coach operations were to merge and then the planned merger of the foundry operations of their respective
parent companies. The merged bus and coach operations are called Irisbus, and until this year each
partner had an equal share in the business which sold 9,800 units in 2000, a 12% rise from the previous

However, the European Commission's approval for Volvo's takeover of RVI was conditional upon RVI
disposing of its interest in Irisbus and in May 2001 it was announced that Iveco will take full control of
Irisbus in two stages over the next two years. For four years after the signing of the agreement, Irisbus
Holding Irisbus will retain the right to use the Renault trademark for four years, allowing it to replace the
brand gradually with the Irisbus name and logo as the core trademark of the Group. The Iveco brand will
be similarly phased out.

The Fiat group has undergone substantial change in recent years, as non-core businesses have been
divested and the core business sectors have been boosted by acquisitions and alliances e.g.:
•   the acquisition in 1999 of Case Corporation by New Holland - Fiat's agricultural and construction
    equipment business);
•   the partnership between Fiat Auto and GM.

This refocusing of the group's industrial portfolio has been conducted with the objective of making each
of the retained businesses world leaders within their sphere of activity. So far, Iveco shows little sign of
achieving this status and there has long been speculation as to how Fiat might act to boost its presence in
the world's truck industry. Merger and alliance activity among Iveco's competitors means there are few
potential partners left to talk to. The company's name has frequently been linked to both MAN and
Navistar but Navistar's recent alliance with Ford makes a tie-up with Iveco much less likely and in March
2001 Iveco's chairman, Giancarlo Boschetti, said that the company would not be pursuing talks with
MAN in the foreseeable future due to the high price of MAN's shares.

The link between Fiat Auto and GM has thrown up a fresh possibility for Iveco, that of an alliance with
Isuzu (in which GM has a 49% holding). GM's primary interest in the Japanese firm is its SUVs and
diesel engine expertise, so there may be scope for co-operation with Iveco on the truck side of the
business. The official word is that as yet there has been no contact between the two companies but there
are several good reasons for Iveco to pursue an alliance of some sort.

In the meantime Iveco is implementing its plan to capture a substantially larger share of the service
business (financing, insurance, servicing and maintenance) that attaches to its products, it being
recognised that service industries are generally more profitable than capital-intensive manufacturing

This rationale underpins Iveco's expansion of its finance and leasing network under the Transolver brand.
During 1999, new Transolver companies were established in Germany and Spain. In western Europe,
Transolver provides financing for 25% of the new vehicles sold by Iveco. This side of Iveco’s business
was also expanded by the purchase in December 1999 of a controlling interest in Fraikin Group. Fraikin
is a truck leasing company with 33,700 vehicles under contract (as at December 31, 2000) in France, the
UK, Benelux and Spain. Fraikin also has a network of more than 200 repair shops. This acquisition forms
a major part of Iveco's plan to double its truck fleet to 80,000 vehicles.


Iveco sold 164,800 vehicles in 2000, a rise of 9.9% from the previous year. If the contribution of non-
consolidated joint ventures and licensees is included, sales were 8.1% higher at 207,500 units. Of the
164,800 units sold, 97,500 were LCVs, 24,900 were medium trucks and 33,000 were heavy trucks. The
company also sold 5,600 buses (mostly through Irisbus) and 3,800 specialist trucks.

                    Figure 6.5: Iveco's share of W. European truck markets (%)

          Sector & market                   1997         1998      1999       2000        2005
          Austria                            12.1        14.4       13.3       16.0       15.5
          Belgium & Luxembourg               16.0        16.2       15.9       15.4       16.9
          France                             26.4        23.6       21.8       23.8       23.6
          Germany                            22.7        21.5       21.5       22.5       22.4
          Italy                              61.2        60.3       61.1       62.9       57.8
          Netherlands                        17.2        18.3       22.2       21.7       19.3
          Portugal                           13.7         9.5        8.5       10.0       13.0
          Spain                              27.3        26.5       30.8       26.4       28.1
          UK                                 35.5        33.2       31.3       30.3       29.9
          Nordic markets                     13.1        13.5       16.0       16.8       17.8
          Other                              13.4        15.8       11.2       13.7       14.5
          Total W. Europe                    27.3        26.4       26.4       26.7       26.6
          16t plus
          Austria                             5.5         5.7        5.6        6.2        7.0
          Belgium & Luxembourg                6.6         5.7        5.2        4.4        5.3
          France                              9.8         8.4        8.4        9.3        9.8
          Germany                             6.7         5.9        5.1        4.8        6.5
          Italy                              40.1        40.2       39.1       39.0       39.3
          Netherlands                         3.4         2.9        4.2        2.6        4.2
          Portugal                            7.8         7.3        7.1        6.6        8.3
          Spain                              20.1        19.6       19.5       17.8       19.1
          UK                                 11.6        11.3       10.1        8.9       10.8
          Nordic markets                      3.6         3.7        2.5        2.9        4.8
          Other                               9.6         7.8        9.2        7.7        8.9
          Total W. Europe                    11.3        10.9       11.2       10.9       11.8

Source: Iveco

                                  Figure 6.6: Iveco unit sales by market

   Market                        1996            1997            1998           1999            2000
                                 (000s)          (000s)          (000s)         (000s)          (000s)
   Italy                         32.6            34.4            37.2            41.5           45.8
   Share of Iveco total (%)       27.2           27.7            27.2            27.7            27.8
   France                        15.2            15.1            16.3            20.1           23.1
   Share of Iveco total (%)       12.7           12.2            11.9            13.4            14.0
   Germany                       14.7            14.5            16.6            16.9           18.4
   Share of Iveco total (%)       12.3           11.7            12.1            11.3            11.2
   Great Britain                 13.9            14.6            15.6            13.7           13.1
   Share of Iveco total (%)       11.6           11.8            11.4            9.1             7.9
   Other                         43.3            45.6            51.1            57.7           64.4
   Share of Iveco total (%)       36.2           36.7            37.4            38.5            39.1
   Total                         119.7           124.2          136.8           149.9           164.8
Source: Iveco

In terms of market share Iveco improved its position in western Europe's 3.5-16t sector from 26.4% to
26.7 registering gains in seven of the eleven markets/regions shown in Figure 6.5. The increases mostly
reflect higher sales of the EuroCargo range, which reached its highest level of sales since its 1991 launch.
We continue to expect Iveco to increase its share in a number of markets over the next few years, but at a
European level the effect of these gains will be diluted by the expected decline in the company's share of
its domestic market.

In the heavy truck sector Iveco's share of the west European market dropped by 0.3 percentage points to
10.9% in 2000. As the entire Euro range is renewed over the next couple of years and new engines are
introduced we expect Iveco's share of the European heavy sector to begin improving from around 2002.
Again we expect the company to struggle to increase its domestic share significantly and this will
constrain the rise at a European level. In the table it can be seen that outside Italy Iveco's market share is
on average forecast to be 1.4pts higher in 2005 than 2000, but in Italy the increase is just 0.3pts.

Iveco sold 130,900 trucks in western Europe during 2000, a rise of 9.3%. In eastern Europe sales rose by
26.9% to 8,500 units. In the rest of the world sales rose by 8.5% to 25,400 units, helped in particular by a
strong recovery in Brazil.

In the first quarter of 2001 Iveco sold 37,879 vehicles, a 3.7% drop from Q1-2000. In the second quarter
of 2001, sales of 41,753 vehicles were within 12 units of the Q2-2000 figure. In Q3-2001 sales were
down by 5.3% at 35,600 units. The company reports that declines of 16% in Italy and 12% outside
Europe were partly offset by growth in other European markets.

Iveco has entered a phase of significant product renewal with a number of new or facelifted models
scheduled and all-new engine families being introduced. The first phase of the current product cycle
began in October 1998 when a 7.8-litre version of the new Cursor engine (Cursor 8) was launched in the
EuroStar. The Cursor 10 followed in late 1999, this is a 10.3-litre unit which is installed in the Euro-Tech
and EuroStar models. A 13-litre unit debuted in the EuroTrakker at the beginning of 2001 and will appear
in the EuroStar and EuroTech later in the year.

At the autumn 2000 IAA commercial vehicle show in Frankfurt, Iveco showed its new Tector engine
range, now being installed in the EuroCargo range. The Tector engine has been jointly developed by Fiat
group companies (Iveco and New Holland) and Cummins under the European Engine Alliance.

                                     Figure 6.7: Iveco's product range

 MODEL            DEBUT 1996     1997    1998   1999   2000 2001      2002     2003   2004   2005 REMARKS
                        I II     I II    I II   I II   I II I II      I II     I II   I II   I II

 DAILY            1999       F       F          N                                       F         LIGHT VANS /

                                                                                                  CHASSIS CABS

 EUROTRAN         2003?                                                           N               LIGHT

                                                                                                  (HOME DELIVERY)

 EUROCARGO        1991           E                     E    E/F               N                   MEDIUM

 EUROTECH         1992           E          E E                   N                               MEDIUM-HEAVY

                                                                                                  ROAD TRUCKS

 EUROTRAKKER 1993                          E    E                     N                           HEAVY


 EUROSTAR         1993                     E    E                 N                               HEAVY (ROAD)


Source: Marketing Systems

In July 1999 the EuroCargo EL was launched. This model is intended to serve the urban and suburban
delivery markets and particularly the growing home delivery market. It was this mo del in particular which
helped lift EuroCargo volumes to record levels in 2000.


The principal truck manufacturing companies within Iveco are:

q   Iveco SpA - which produced 43,608 trucks (for buses see Irisbus) from its Italian plants in 2000,
    about 100 more than in 1999.
q   Iveco Pegaso SA - responsible for about 25% of European production of the Daily van which is
    produced at Valladolid. At the Madrid plant Pegaso produces the EuroTrakker and the EuroTech
    which is also produced by Iveco Magirus. Production of 3.5t plus trucks at Pegaso was 14,900 units
    in 2000 about 1,500 fewer than the previous year.
q   Iveco Magirus AG - produces the heavy trucks EuroStar and EuroTech as well as fire-fighting
    vehicles. Output from the plant at Ulm was unchanged at 13,500 units in 2000.
q   Astra Veicoli Industriali SpA - manufactures special purpose vehicles such as dumper trucks for
    quarries and mines at its plant in Piacenza. Astra produced nearly 1,700 vehicles in 2000, up by 36%
    from the previous year.
q   Seddon Atkinson - the UK company produced 508 vehicles in 2000, down from 766 units in 1999.
q   Irisbus - the merged bus and coach operations of Iveco and RVI employed about 6,200 people and
    produced 5,400 vehicles in 2000, down by 12% from the previous year. Irisbus acquired a controlling
    interest in Ikarus, the Hungarian bus producer during 1999.

In the firefighting sector Iveco has been at the forefront of industry consolidation. In 1996 Iveco acquired
BTG, an East German manufacturer of small fire fighting vehicles. Subsequently Iveco formed a joint
venture with RVI through a new holding company called Iveco Eurofire in which Iveco is an 85%
shareholder. In 1997 Iveco Eurofire acquired a manufacturer in Austria and established a new company
called Lohr Magirus Feuerwehrtechnik.

Joint ventures outside West Europe include Naveco, a 50-50 joint venture with Yuejin Motor Corporation
in China for the joint production of up to 60,000 Daily vans and 75,000 engines annually. In 2000 Naveco
produced 17,500 vehicles, a drop from 18,000 the previous year and 20,000 in 1998.

During 2001 a further Chinese joint venture has been announced. The 50:50 venture between Iveco and
the Changzhou Bus Company entails an investment of $36m by Iveco. The new company will turn out
three new ranges of buses - minibuses, town buses and touring coaches - with chassis, engines and
mechanical assemblies developed by Iveco. Production of the first new vehicles is planned for the first
quarter of 2002.

In India, Ashok Leyland in which Iveco holds a 15% stake, sold 34,500 vehicles in 2000, 1,700 fewer
than the previous year. In Turkey Iveco's joint venture (Iveco: 27%) with the Koc group sold 8,100 units,
40% more than the previous year.

Fiat's link with GM has led Iveco to consider establishing a plant in North America to build the Daily van
for distribution in the region, presumably through GM's dealership network.


Statistics are provided for Fiat Group and Iveco.

Iveco is registered in the Netherlands, therefore the native currency shown in the financial statistics is
Dutch guilders. There is good disclosure in the accounts. As Iveco also produces and sells commercial
vehicles of less than 6t GVW and buses, the company's financial data includes the contribution from these
sides of the business.

From 1988 to 1993, the Fiat Group statistics reflect the consolidated results of the industrial companies
only, with financial services included on an equity basis. In 1996, the financial services group Fidis SpA
was merged into Fiat and the related financing activities were transferred to the automotive sectors. The
results from finance activities are now consolidated on a line by line basis and operating profit is
calculated after deducting the interest expense related to financing activity. The data for 1994 and 1995
have been restated.



MAN Nutzfahrzeuge is the truck and bus division of MAN AG, the German industrial conglomerate. It is
the largest division within the group in terms of revenue, employees and (usually) profit contribution. The
truck division is mostly focused on west European markets and typically 60-70% of its output is in the
16t-plus sector.

During 2000 MAN acquired two small truckmakers: ERF the UK producer and Star, based in Poland.
These acquisitions increased to five, the number of brands controlled by the division (MAN, Steyr, ÖAF,
ERF and Star). Also during 2000 MAN announced its plan to take over Gottlob Auwärter, the German
bus manufacturer which sells under the Neoplan brand. The acquisition was approved by the competition
authorities this year.

In view of the recent consolidation within the world's truck industry there has been much speculation over
the last few years as to whether MAN will need to form an alliance or make a more significant acquisition
in order to remain competitive against groups such DC and Volvo with their significantly higher
production volumes and greater exposure to emerging markets. During 2000 MAN added to this
speculation when it said it would consider a capital increase and an initial public offering for MAN
Nutzfahrzeuge to fund a major deal.

Subsequently MAN's name was linked with a variety of other companies, including Iveco, Navistar. and
RVI. However, during 2001 most speculation has centred upon VW, following a report in a German
business magazine that VW has been holding talks with the insurance group Allianz, one of a group of
shareholders controlling 26% of MAN Group's equity and 36% of the voting rights, with a view to
purchasing their stake. The talks have been prompted by a forthcoming change in German tax laws.
Beginning in 2002 German companies will be exempt from tax on capital gains from the sale of holdings
in other companies. This is expected to lead to an unravelling of many of the cross-shareholdings which
have been a feature of Germany's post-war industrial structure.

It is not clear what VW's truck strategy is, beyond wanting a second heavy truck brand in its portfolio
alongside Scania. From the MAN perspective there is little potential for synergies between it and VW's
limited truck operations, though the Scania link offers more possibilities.

                                        Figure 7.1: Latest results - MAN

MAN Group                    / Unit              January - June                July-December
                                              2000     2001 (%)               1999     2000 (%)
Revenue                       Eur(m)         8,291     7,331     (11.6)       6,290    7,524      19.6
Of which:     - MAN Nutz. Eur(m)             3,221     3,242        0.7       2,534    3,048      20.3
                  - Other Eur(m)             5,070     4,089     (19.3)       3,756    4,476      19.2
Pre-tax profit         Eur(m)                  440         155   (64.8)        228       264      15.8
Of which: - MAN Nutz. Eur(m)                   148           6   (95.9)        121        85    (29.8)
               - Other Eur(m)                  292         149   (49.0)        107       179      67.3
MAN Nutz. pre-tax margin      percent           4.6        0.2    (4.4) pts     4.8       2.8    (2.0) pts
Net profit                    Eur(m)           280     105.0     (62.5)       145.0    177.0      22.1
Net margin                    percent           3.4      1.4      (1.9) pts     2.3        -          -
Unit sales                     000s             n/a        n/a        -         28        34      21.1

Sources: Marketing Systems & MAN

                                   Figure 7.2: MAN Nutzfahrzeuge revenue & operating profit trend

                                           Revenue (DM)          Op. Profit (DM)


        Index (1989 = 100)


















2000* is Jul-Dec 2000, when year-end changed to December
Sources: Marketing Systems & MAN

                                                                                                                               Figure 7.3:
RECENT PERFORMANCE                                                                                                  MAN Nutzfahrzeuge - net profit trend

1999/2000 results                                                                                                   300
During 2000 MAN AG changed its fiscal year end                                                                      250

from June 30th to December 31st .
In the fiscal period July 1 - December 31, 2000 the
                                                                                               Index (1989 = 100)

group reported a 22% increase in net profit to                                                                      150

MAN Nutzfahrzeuge reported a 20% increase in                                                                         50
revenue from the corresponding year-ago figure to
Eur3.0bn.                                                                                                               0






Reported unit sales rose by 21% to 34,000 units,                                                                     -50
with approximately one-third of the increase being
attributable to the first-time consolidation of Star
and ERF.                                                                                2000* is Jul-Dec 2000, when year-end changed to December
                                                                                        Source: MAN

Despite the revenue increase, the division reported a 30% decline in its pre-tax profit, reflecting launch
costs for its new truck model (the TG-A) and greater competitive pressures in the European truck market.

 The TG-A seems to have been well received in MAN's main markets and helped the company's order
book to be 7% ahead of prior year levels at the end of December 2000. However, the build -up of TG-A
production did not proceed as smoothly as MAN had planned. Demand for the new model was
unexpectedly strong, so that production had to be boosted. It then became evident that some of the newly-
developed components could not be supplied at the required speed. Many vehicles then had to be stored
until the relevant components could be retro-fitted. This led to increased stocks, delays in delivery and
additional assembly time. The delays were partly alleviated by continuing production of the F2000
beyond its planned termination date - which was an additional unplanned expense.

2001 results
During the first six months of 2001 MAN's group net profit dropped by 65% to Eur155m as all divisions
except financial services reported lowe r earnings.

The truck division only just stayed in the black as pre-tax profit dropped by 96% to Eur6m. The decline
•    tougher competition;
•    weak demand in key markets;
•    the continuing cost of producing the F2000;
•    a Eur36m charge in connection with accounting irregularities at ERF (see Business Structure).

The company is introducing a number of cost-saving measures to ensure a return to profit growth by
2002. These are described under Products & Manufacturing Strategy. For 2001 the company is expecting
earnings to bottom-out in the third quarter. Full-year earnings before tax are expected to be in the region
of Eur40-60m before the impact of charges in connection with ERF. At the operating level we are
expecting full year earnings to be around Eur180m, or 3% of anticipated revenue.


Besides trucks and buses MAN has four principal business divisions:
•   Ferrostaal - a provider of industrial services with three core divisions: Facility Construction &
    Contracting, Industrial Equipment & Systems and Steel Trading & Logistics.
•   MAN Roland - a manufacturer of printing machinery;
•   MAN B&W - diesel engines for marine and other applications.
•   Industrial equipment and facilities - this division includes various businesses, mostly in unrelated
    sectors: MAN Turbomaschinen GHH Borsig; SMS; Renk; MAN Technologie; SHW; DWE.

MAN is aiming to establish its products within the top three best-sellers in their respective markets. The
company also has the objective of increasing its business volume by 50% over the five years to December
2004. Within MAN Nutzfahrzeuge growth is being achieved by a combination of product-led sales
growth and the acquisitions of Star, ERF and Neoplan (see Production Strategy for more details).

                                 Figure 7.4: MAN Group revenue by division

Division/ Yr to June except *            1996          1997     1998     1999        2000        2000*

Commercial vehicles                     39.4%         37.3%     35.7%   37.2%       39.2%        40.0%
Industrial services                     18.9%         20.2%     25.6%   20.1%       17.0%        18.2%
Printing machines                       11.6%         11.6%     10.8%   12.7%       12.2%        11.7%
Diesel engines                           7.5%          7.6%     7.8%     7.7%        7.3%         8.6%
Industrial eq't                         24.2%         22.0%     20.7%   23.3%       23.4%        20.4%
Other & intra-group                     -1.7%          1.4%     -0.6%   -1.1%        0.9%         1.0%
Total                                   100%          100%      100%    100%         100%        100%
2000* is Jul-Dec 2000, when year-end changed to December

Sources: Marketing Systems & MAN

During August 2001 it emerged that there were accounting irregularities at ERF, whose chief executive
and finance director were dismissed. The problem reportedly centres around trade credits to customers
being inflated, depressing real loan figures and raising the amount of payments receivable. As mentioned
MAN has taken an extraordinary pre-tax charge of Eur36m in connection with this problem, which was
still being investigated at the time of writing. Once the problem has been adequately analysed and
quantified, litigation is expected to follow, possibly against the company's auditors.

During July 2001 press reports suggested that MAN's five divisions are to be established as stand-alone
businesses. VW was cited as a prospective buyer of the truck division and the reports further suggested
that Allianz AG, a part of a consortium that holds 25% stake in MAN, is in talks with VW about selling
its stake. The companies have all declined to comment but there is no doubting VW's interest in the truck

VW and MAN are no strangers to one another, having collaborated to design and produce a light truck in
the 1980s.

                        Figure 7.5: MAN Nutzfahrzeuge West European unit sales

   Calendar year                            1996    1997         1998          1999         2000
   Germany                                18,333   18,350       22,322        25,931       27,856
   Share of MAN total                       53%     48%           49%          49%           49%
   Austria                                 2,646   2,641         2,984        3,510         3,416
   Share of MAN total                        8%      7%           7%            7%           6%
   UK                                      3,265   5,881         6,752        7,140         7,672
   Share of MAN total                        9%     16%           15%          13%           14%
   Spain                                   2,066   2,481         3,215        4,509         4,584
   Share of MAN total                        6%      7%           7%            8%           8%
   France                                  2,163   2,138         2,602        3,249         3,668
   Share of MAN total                        6%      6%           6%            6%           6%
   Netherlands                             1,536   1,429         1,754        1,570         1,583
   Share of MAN total                        4%      4%           4%            3%           3%
   Other                                   4,580   4,989         6,111        7,329         7,712
   Share of MAN total                       13%     13%           13%          14%           14%

   Total                                  34,589   37,909       45,740        53,238       56,491
   * 1997, 1998 & 1999 restated to include ERF

Source: Marketing Systems

During the six months to December 2000 MAN sold 31,300 trucks and 2,600 buses, both figures
representing 21% increases from the corresponding year-ago results. The company's truck sales in
Germany rose by 5% to 13,200 units or 42% of total truck sales. Western Europe accounted for 83% of

Western Europe - sub-16t trucks
In the light/medium sector, MAN's share of West European demand grew for the fourth successive year
in the 2000 calendar year, with a useful increase of 0.8 percentage points to 11.6%, the second-highest
rise of the year. The overall increase was helped particularly by a gain of 2.1pts in Germany. Sales of
ERF models have been included with MAN in all years, to ensure comparability.

We are expecting MAN's share in 2000 to represent a peak for the next three years, after which new
product launches should help it to rise even higher.

                         Figure 7.6: MAN market shares, western Europe (%)
          Sector & market                      1997              1998           1999            2000        2005
          Austria                              34.6              28.0              31.4          29.2       30.9
          Belgium & Luxembourg                  7.2               8.1               8.8          10.3       10.5
          France                                3.0               4.3               4.6           4.4        5.1
          Germany                              14.8              16.2              16.8          18.9       18.9
          Italy                                 3.7               3.6               3.6           3.2        3.5
          Netherlands                          12.1              12.6              11.4          11.2       12.0
          Portugal                              3.1               2.8               2.7           4.0        4.1
          Spain                                 8.2               8.3               7.4           8.5        8.4
          UK                                    9.0               9.1               8.6          10.3       10.1
          Nordic markets                        6.1               6.3               6.0           4.3        6.1
          Other                                 3.6               4.2               5.1           5.3        5.7
          Total W. Europe                      10.1              10.8              10.8          11.6       12.0
          16t plus
          Austria                              35.6              34.6              35.9          35.0       33.4
          Belgium & Luxembourg                 11.8              11.1              12.0          13.1       12.1
          France                                5.9               5.5               6.0           6.4        5.8
          Germany                              26.6              26.2              26.7          29.7       28.8
          Italy                                 6.2               6.0               6.4           6.6        5.7
          Netherlands                           9.2               8.8               8.5           8.5        7.9
          Portugal                              4.2               6.2               7.2           8.0        8.0
          Spain                                 8.2               9.2              11.6          11.9       12.0
          UK                                   15.1              15.1              16.3          16.3       16.0
          Nordic markets                        7.5               6.9               7.4           7.7        7.2
          Other                                11.9               7.0               8.2           5.5        7.5
          Total W. Europe                      14.3              14.1              14.6          15.4       15.3

Source: Marketing Sy stems

                                    Figure 7.7: MAN's product range

      MODEL       DEBUT 1996 1997       1998   1999       2000    2001       2002       2003   2004   2005 REMARKS
                        I II I II       I II   I II       I II    I II       I II       I II   I II   I II

      L2000       1993                                                         N                          Repl. G90,

      TG-C        2003                                                              I                     Repl. L2000

      M2000       1996       I             E                     N             T                          Repl. M90,

      TG-B        2002                                                   I                                Repl. M2000

      F2000       1994                     E         E N         T                                        Repl. F90

      TG-A        2000                                I                                                   Repl. F2000


Source: Marketing Systems

Western Europe - 16t-plus trucks
In the heavy sector MAN also gained 0.8 percentage points in 2000, taking it to 15.4% or third position in
the European sales table, just behind Scania on 15.5%. Again MAN's performance was boosted by a
substantial rise in the German market where its share rose by 3.0pts to 29.7%; but it recorded increases in
most other markets also.

2001 sales
During the first six months of 2001 MAN was adversely affected by the decline in the German truck
market, though non-German orders remained at prior-year levels reflecting increases in most west
European markets, offset by a fall in Turkey. MAN's share of the European 6t-plus market increased by
0.8 percentage points during the period.


The TG-A range made its debut in all European countries in spring 2000. This represents the first phase
of a project to renew the whole of MAN's range by 2003. The TG-A will be followed by the TG-B,
replacing the M2000 range in 2002 and in 2003 the TG-C is scheduled to replace the L2000. The whole
TG project will cost about DM1.1bn and is MAN's most amb itious project ever.

The TG-A has been networked using a new electronic architecture. Electronic control units respond faster
and more sensitively, the aim being to maximise driver comfort and vehicle efficiency. The TG-A trucks
have planned service intervals of 80,000km.


The TG-A range is built at the Munich and Salzgitter plants in revamped production facilities. The main
components for it come from the MAN's other German plants: the frame and metal pressings from
Gustavsburg and Steyr, engines from Nuremberg, wiring harnesses from Penzberg.

The principal production subsidiaries are described below.

Steyr Nutzfahrzeuge AG - now owned 100% by MAN after it bought Steyr-Daimler-Puch's 15% stake in

Österreichische Automobilfabrik ÖAF-Gräf & Stift AG - produces and sells buses for the Austrian
market and produces most of MAN’s special purpose heavy vehicles.

In December 1999 MAN took over Star, the Polish producer of medium trucks based in Starachowice.
The company built about 1,400 Star-brand trucks in 2000, similar to the previous year. At the end of 2000
Star employed 883 people. A new generation of Star trucks was unveiled in December 2000, making
extensive use of MAN components. MAN is positioning the Star brand below MAN products, and plans
to market it in countries where the complexity of products has to be limited. Star is also being developed
as a source for labour-intensive components to take advantage of Poland's low wage levels.

MAN also has a bus assembly plant in Poland. The newly-built facility near Poznan began production in
January 1998. Output by the plant is targeted at 250 buses per year like the Star plant, is being developed
as a production-source for bus components.

In 1994 MAN purchased a 33% stake in the Turkish company MAN Kamyon VE Otobüs A.S. (MANAS)
and assumed management control of it’s plant in Ankara. MAN is using MANAS as a spring-board for its
expansion in Eastern Europe, where demand for buses in particular is high. In 1996 MAN increased its
control over the Turkish firm by becoming the majority shareholder and MANAS is now a fully
consolidated subsidiary. A high level of demand for buses in East Europe has led to MANAS increasing
its capacity from 400 to 1,000 buses per year.

In January 2000 MAN took over ERF the UK truckmaker. ERF sells mainly in the UK in the heavy truck
sector and produced 2,473 vehicles in 2000. In the short to medium term MAN is aiming for annual
output of 3,000 trucks of 14t-plus GVW. ERF has 1,333 employees, 280 of them in sales companies. In
the UK, Europe's third largest truck market, ERF has a similar market position to MAN in the heavy
sector. MAN's long-term strategy for ERF entails retention of the ERF marque with its own character, this
being guaranteed by its own engineering and a separate sales organisation. MAN also want to exploit
potential synergies to improve the profitability of ERF, one idea is to extend ERF's product range below
14t GVW.

In September 2000 MAN announced the planned acquisition of bus manufacturer Gottlob Auwärter
(brand name Neoplan). The acquisition was approved by the European competition authorities in June
2001. MAN already supplies about half the engines for Neoplan buses and also supplies some bus chassis
for its export models. The combined bus operations of the two firms produced 7,200 buses in 2000 and
are expected to generate revenue of about DM2.5bn. Auwärter employs just under 2000 people and has
five plants in Germany, the assembly plant being in Stuttgart.

In the Commonwealth of Independent States MAN has a joint venture with MAZ. A MAZ-MAN truck
has been developed from MAN's modular component range and the first of these vehicles were produced
in July 1998. Following completion of trial operation the MAZ-MAN joint venture officially commenced
its activities in Minsk, Belarus, on 8th September 1999. MAN holds 51% of the venture, the state-run
"Minsk Automobile Plant" holds 39% and Lada-OMC Holding of Minsk the remaining 10%. The
industrial management has been assumed by MAN.

Since 1992 MAN has been co-operating with Autodromo of Modena, Italy in the field of scheduled-
service buses. 600 of the low-floor buses built on MAN chassis have in the meantime been produced and
sold to transport authorities in Italy.

In South Africa MAN has a wholly-owned assembly facility near Johannesburg. It employs 400 people
and assembles about 500 trucks annually. ERF also has a presence in South Africa through a 30% stake in
a local assembler.

MAN also has a wholly-owned assembly facility in Australia. It employs 150 people and assembles about
100 buses annually.

In March 2001 MAN announced a series of measures to restore profitable growth. The key elements of
the programme were a reduction of the product range by 20%, cutting 1,600-1,800 temporary jobs in
Germany and Austria, integrating Star and ERF and the introduction of profit-centre structures for the
engine plant in Nuremberg and the forging-press works in Gustavberg. Bus operations will also be
restructured following the takeover of Auwärter. During the summer the company announced additional
job cuts, to include permanent staff.


Data is presented for what the company terms the "MAN Nutzfahrzeuge Subgroup", which comprises
MAN Nutzfahrzeuge and its consolidated subsidiaries. The division's consolidated subsidiaries include
ÖAF and Steyr (see under Business Structure).

The company's financial year end was June 30th until June 2000. Thereafter it is December 31st and the
transition period from July 1st to December 31st , 2000 is shown as a short financial year.

In 1998/99 MAN changed its accounts to conform with International Accounting Standards (IAS). The
figures for 1997/98 have been restated. The switch to IAS caused MAN Nutzfahrzeuge's net profit to drop
by DM13m in the restated figures for 1997/98.



Mitsubishi Motors Corporation (MMC) is currently a full-line vehicle producer, with a presence in all the
major vehicle sectors. It is the fourth largest vehicle producer in Japan with output in calendar 2000 of
997,300 units of which 263,200 were vans and trucks and 6,500 buses. Production of trucks above 3.5t
GVW was 94,200 units, of which 64,500 were the Canter light truck range.

Until the last 3-4 years MMC was one of the most consistent, if unspectacular, performers among the
Japanese producers. Over the fifteen years to March 1997 it achieved a peak operating margin of 3.2%
and a low of 1% with the margin in ten years falling in a narrower range of 2   -3%. The company's
performance during this time benefited from a high proportion of its sales being in the profitable
recreational vehicle (RV) sector. MMC gained an early foothold in the RV market with its launching of
the Pajero/Shogun SUV in 1982 and as sales of RVs in Japan, North America and Europe increased
MMC was able to capitalise on its well established brandname.

That the company's profitability was not higher during this time was due to lower profits on some of its
passenger car models and its attempt to compete in all market sectors. MMC offers: mini-cars, mini-vans,
conventional passenger cars in all the mainstream segments, MPVs, SUVs, light trucks, medium trucks,
heavy trucks, small, medium and large buses. In all, MMC's data for domestic production lists forty-one
models in 1999, only one of which was produced at volumes in excess of 100,000 units and average
volumes among the thirty-three cars and LCVs was 27,400 units. A more profitable competitor such as
Honda, was making fewer models and average output per model was close to 50,000 units.

For a long time MMC paid too little attention to the danger of its cost structure. Perhaps it was due to the
protection conferred by the friendly shareholder structure but whatever the reason, the danger was evident
from its relatively low earnings even during the years in which vehicle demand was strong. For the period
from 1983 to 1997, a time when MMC remained consistently profitable at the operating level, its average
interest cover was only 1.2 times, with a maximum value of 1.8 and a minimum of 0.5. The
corresponding average figures for Honda and Toyota were 5.8 times and 13.6 times respectively.

MMC was thus clearly vulnerable to any downturn and when the Asian economic crises hit in 1997/98 it
was no surprise to see the company slip into loss. Among the Japanese carmakers, MMC was among the
worst affected by the downturn due to its exposure to the heavy truck market which fell more sharply than
the car market.

Mr Kawasoe became MMC's president in November 1997 and introduced a vigorous programme of cost-
cutting and rationalisation. He also began seeking project-specific alliances, with the publicly declared
intention of avoiding capital tie-ups. However, the company's continuing difficulties forced it to form two
equity alliances, one with Volvo in 1999 and one with DaimlerChrysler (DC) in 2000.

The Volvo alliance was intended to be confined to MMC's truck and bus business, which was to be split
off as a separate entity in 2001. The DC alliance was supposed to be confined to the car business.
However, it always looked implausible that DC would willingly stand back and watch a competing
truckmaker gain a major ally in Asia. In last year's edition of this report we commented that "there is
considerable room for doubt as to whether MMC's original plan for twin alliances will come to fruition.
As DC's bargaining hand has been strengthened it may try to capture MMC's heavy truck business (a
valuable business for its exposure to emerging Asian markets), as well as the car operations."

So it proved. In April 2001 DC paid Volvo $297m for its 3.3% stake in MMC, taking DC's holding in the
Japanese firm to 37.3%.

                         Figure 8.1: MMC consolidated revenue & operating profit trend

                         Revenue (yen)
                         Op. Profit (yen)

























 Sources: Marketing Systems & MMC

                                                                                                       Figure 8.2:
                                                                                              MMC consolidated net profit trend
2000/2001 results
As expected, MMC's results for the year ended
March 31st 2001 were its worst ever. The impact
of the recall scandal has been far-reaching,                                              0









particularly in terms of the effect on the
company’s image and thus on domestic sales.
Revenue for the year fell 1.7% to Y3,277bn as
unit sales fell 3.6%, reflecting a fall in domestic
sales of 15%.                                                                       -1,000
                                                                                                              Yen              Eur
The company reported an operating loss of
Y73.9bn compared with an operating profit of                                        -1,500
Y22.5bn in the previous year, mainly reflecting
the appreciation of the yen. Both European and
Japanese operations reported an operating loss.                                     -2,000


                                                                               Source: MMC

The combination of restructuring costs to implement the new Turnaround Plan, recall costs and
underfunded retirement payments brought the consolidated net loss to Y278.1bn. The company booked a
non-recurring charge of Y320.5bn to cover one-off costs including its recall expenses and charges in
connection with retirement reserves.

Although the company does not disclose separate figures for its truck operations it has said that the
division broke even during the year as it benefited from:
•    the closure of a transmission plant at Maruko near Tokyo,
•    a reduction in the number of sales companies from 45 to 36;
•    a 14% cut in the workforce.

MMC is optimistic in its projections for the current fiscal year. It is predicting that the company will
break even on a net basis and post an operating profit of Y20bn following a reduction in employee
numbers and savings in procurement costs in line with the Turnaround Plan, which was detailed in the
last issue of this review. Revenue is forecast to rise to Y3,500bn on unit sales that are projected at 1.55m,
inclusive of a projected 8.4% rise in domestic sales. At this point in the year it must be said that the
company’s sales in Japan are showing little sign of growth, in fact, quite the reverse. However, the
company is expecting to raise Y200bn in revenue from sales to Volvo Cars at NedCar, following
Mitsubishi’s purchase of Volvo’s stake.

This year the Turnaround Plan is expected to achieve savings of Y60bn in purchasing costs, and Y40bn in
fixed operation costs. MMC is also expecting to benefit from the yen’s appreciation to the tune of Y10-
20bn, assuming an average exchange rate of Y110 to the dollar and Y105 to the euro. This compares with
Y108 and Y101 respectively last fiscal year.

For next fis cal year MMC is targeting an operating profit margin of 2.5%, and the following year 4.5%.
The company is also forecasting a return to break-even in Europe by the fiscal year beginning April 2003.


MMC is involved solely in the manufacture of trucks, buses and passenger cars. It began as the
automobile division of the large industrial conglomerate, Mitsubishi Heavy Industries, but became
independent in 1970. Mitsubishi Heavy Industries retained a 22.7% shareholding in the firm as at March
2000, the Mitsubishi Corporation held a further 8% and other Mitsubishi companies held over 16% in

As discussed, following a time when both Volvo and DC held stakes in MMC, Volvo has sold its 3.3%
stake to DC, taking DC's stake to 37.3%. The $297m paid by DC to Volvo includes the rights to a new
medium truck that Volvo and MMC were developing together.

DC has yet to announce detailed plans for co-operating with MMC's truck division but in the near-term it
can be expected to make use of MMC's Asian distribution network. Longer term DC will be looking for
scale economies through component sharing.

The first manifestation of this appeared in August 2001 when the two firms announced a plan to co-
operate in developing truck diesel engines for trucks. Development is expected to be completed by 2005,
in time for the introduction of tighter emission regulations in Japan and Europe. The new engines are
expected to 8-litres to 21-litres. The partners are considering whether to include Hyundai Motor in the

To achieve the targets set out in the Turnaround Plan MMC is set to expand parts procurement overseas
to 30% from its current 6%, and to reduce the number of suppliers (currently 650) by 30%. More than one
third of the employee reduction target of 9,500 is to be met by passive methods such as natural
retirements, suspension of recruitment, and a retirement promotion programme.

q   In April the Tokyo District Public Prosecutors Office filed indictments against MMC and four top
    executives, including two former vice-presidents, for failing to report over 10,000 customer
    complaints to regulatory authorities.
q   In June it was reported that MMC were about to appoint outside advisers to oversee the restructuring
    and disposal of many of its subsidiaries. The company has asked investment banks to pitch for the
    challenge of disposing of the complicated network of suppliers in a bid to realise assets that will
    reduce its interest-bearing debt. MMC has fewer real estate and cross-shareholdings to sell than
    Nissan and is also reportedly considering selling off core parts operations such as its transmission
    and axle operations to help lift the burden of debt.


Including minivehicles, MMC sold 269,755 commercial vehicles in Japan during calendar 2000, a 3.4%
rise from the previous year. Exports were 2.9% lower at 80,835 units. Minivehicles comprised 40% of the
total domestic sales figure at 108,450 units and buses accounted for a further 4,272 units, leaving 134,515
trucks. Of these, 21,528 units were classed as medium/heavy trucks with a payload in excess of 3t which
equates to a GVW of about 5-5.5t.

During the first six months of 2001 MMC's domestic sales of commercial vehicles dropped by 19.8% to
106,756 units as the domestic market remained weak.

MMC has been building a more significant sales presence in North America and Europe in recent years.
In calendar 2000 the company sold 3,343 class 4-7 trucks in the US, down from 3,800 the previous year
and 1,400 in 1990. This level of sales gave MMC a 1.33% share of the Class 4-7 market in 2000, a slight
fall from 1.46% in 1999. Over the first six months of 2001 MMC sold 1,575 units to take a 1.4% share of
the declining US market.

MMC's sales in Europe have been boosted in recent years by an arrangement with Volvo, for the Swedish
company to distribute MMC's Canter range, through its European dealerships. This also benefited Volvo
by giving it a market presence in the light truck sector where it was previously represented only at the top
end with a 7.5t truck, the FLC. Now that DC has bought Volvo's stake it plans to distribute the Canter
through its own sales network.

MMC's new registrations in western Europe peaked at 3,928 units in 1999, falling by 19.4% to 3,167
units in 2000 as sales in Spain fell sharply. The Canter range (produced in Portugal) accounted for over
90% of sales.

In Japan MMC's truck range is marketed under the Fuso brand. The range comprises:

Canter - badged with FB, FC, FD, FE, FF or FG prefixes, light duty trucks, 3.3-7.9t GVW.

Fighter - badged with FH, FK, FL, FQ or NX prefixes, medium/heavy range 7.9-19.9t GVW.

Super Great - badged with FP, FS, FT, FU or FV prefixes, heavy range 19.8-24.9t GVW.


In response to the downturn in its profitability, MMC has restructured its production system, closing some
plants at home and abroad. On the CV side of the business MMC has closed a bus plant at Nagoya in
Japan and a truck transmission plant outside Tokyo.

The company is looking to achieve a further Y150bn in cost savings in the four years to March 2004. The
savings were to be achieved by reducing material costs, through greater outsourcing and making use of
the connection with Volvo to secure scale economies. There seems little reason why the targeted savings
should change just because Volvo has been replaced by DC, indeed DC's purchasing power is greater
than that of Volvo so the potential savings should be greater although the schedule might need adjusting.

Apart from rationalising its facilities MC is also looking at its production processes and has decided to
change the way it builds trucks and buses. The company is aiming for a middle ground between building
to order - which it says creates unacceptable lead times for delivery - and building for stock which often
means parts have to be changed in order to tailor a vehicle to the exact specification ordered by the
customer. The new system will see the trucks basically assembled, but the final customisation will not
take place until a customer's order is confirmed.

In Europe Mitsubishi trucks were assembled by a Portuguese firm, Tramagauto, for many years. In 1996
MMC took over this operation as it began a more determined sales push in Europe. Output of vehicles
above 3.5t was 4,246 in 2000, up by 18.5% from the 3,584 units produced in 1999.

Elsewhere in the world MMC has equity stakes in truck assembly ventures in China, the Philippines,
Thailand and Vietnam. Low volume assembly of MMC trucks is also carried out by non-affiliated
enterprises in: Costa Rica, Egypt, Ivory Coast, Kenya, Malaysia, Morocco, Taiwan, Turkey, Venezuela
and Zimbabwe.


MMC's financial year runs to March 31st . Data in the appendices is shown from the consolidated
accounts. Unfortunately there is no breakdown in the reported figures to show the contributions from
different divisions. MMC has stated that the truck division used to contribute 30-40% of revenue. The
figure over the last three years is likely to have fallen to 20-25%.

Data from the consolidated accounts are shown from 1987 onwards. Prior data refers to the non-
consolidated accounts.



Navistar operates in three industry sectors: trucks (including school buses), engines and financial services.
In its financial year ending October 2000 it sold 124,900 trucks and school buses and 304,400 engines to
other manufacturers.

Selling vehicles under the International brand, Navistar is the leader in the USA market for class 5-7
trucks (7.3-14.9t), selling 67,200 units in calendar 2000 for a market share of 33%. In the USA's class 8
market, Navistar sold 34,400 trucks in 2000, for a market share of 16.2%, putting the company in fourth
place on a group basis, behind DaimlerChrysler, Paccar and Volvo Global Truck. The International brand
was the second best-selling brand in the Class-8 sector, behind Freightliner.

Navistar suffered four years of operating and net losses from 1990-1993 as it was hit by a slowdown in
the market and labour problems. Having had a similarly rocky start to the eighties, the company earned
the reputation among investors for profits falling off a cliff when the truck industry goes through a
cyclical downturn. This reputation was reinforced by comparisons with its principal rival, Paccar, which
remained profitable throughout Navistar's years of losses.

Under the leadership of John Horne, who became president in 1990, Navistar's performance has
substantially improved. On the operational side, profitability has been improved by reducing product and
manufacturing complexity and by achieving competitive wage, benefit and productivity levels.

In terms of strategy Navistar has:
•    invested significantly in a new medium  -truck range, launched earlier this year;
•    expanded internationally (to a limited extent);
•    boosted the importance of its engine business,
•    formed a partnership with Ford to build medium-duty trucks.

Navistar contends that its restructured business is now less vulnerable to cyclical downturns. The
operational changes have given t e company more flexibility in its cost structure and the strategic
changes have led to a substantial proportion of earnings being generated by the medium truck and engine
businesses which are seen as offering less volatility than the heavy truck business.

The current downturn in North American truck demand is giving the company the chance to demonstrate
the validity of this contention. In the US demand for Class-8 trucks dropped by 20% in calendar 2000 and
by 39% in the first half of 2001. Over the same periods demand for vehicles in Classes 5-7 dropped by
3% and 24%.

Navistar did slip into loss in the fourth quarter of its 1999/2000 year due to restructuring charges as it
scaled back its operations to match the lower demand levels. It also reported a loss for the first quarter of
its 2000/2001 year but it just managed to scrape a profit in its second quarter. In view of the severe
contraction of the truck market this was a creditable performance and compares favourably with most of
Navistar's North American rivals with the exception of Paccar.

                                   Figure 9.1: Navistar (manufacturing) revenue & operating profit trend
                             400                                                                                                                                                                                5,000
                                             Revenue ($)               Op. Profit ($)

                             350                                                                                                                                                                                4,000


                                                                                                                                                                                                                           Op. profit (1983 = 100)
      revenue (1983 = 100)


                             50                                                                                                                                                                                 -3,000

                              0                                                                                                                                                                                 -4,000






Sources: Marketing Systems & Navistar

RECENT PERFORMANCE                                                                                                                         Figure 9.2: Navistar net profit trend
1999/2000 results
                                                                                                                                                                             $                     Eur
It was widely expected that Navistar's results for its
financial year ending October 2000 would be                                                                                                100
significantly lower than the previous year, but the
size of the fall in the fourth quarter caught the
                                                                                                                Index (1983 = minus 100)

investment community by surprise and the
company's share price dropped by 44% in the three
days following the results announcement.                                                                                                     0



Consolidated revenue for the year dropped by
2.2%, reflecting a fall in the sale of manufactured         -50
products, partly offset by an increased contribution
from the finance and insurance division. The drop
in revenue from manufactured products primarily            -100
•    a decline in demand for Navistar's heavy
     trucks, sales of which were 13.4 per cent lower
     at 45,000 units;                                Source: Navistar
•    difficult pricing conditions.

These adverse factors were partly offset by small increases in sales of medium trucks (up 2 per cent at
56,500 units) and school buses (up 7.8 per cent at 23,400 units). Sales of diesel engines were also higher,
up 5 per cent at 392,900 units.

Navistar responded to the downturn in truck demand by introducing a restructuring programme, the
principal feature of which was the elimination of 3,100 jobs. The company took a non-recurring pre-tax
charge of $306m in its fourth quarter to cover the cost of this programme. That charge resulted in a fourth
quarter net loss of $105m compared with a year-ago net profit of $132m.

Excluding the restructuring charge, fourth quarter net profit would have been 36% lower at $85m. If non-
recurring gains and losses are excluded from the full year comparisons, net profit for the year to October
2000 was $349m compared with $366m in the prior year, a drop of 4.6%.

2000/2001 results
Navistar made a net loss of $35m in the first quarter of its current fiscal year, hit by falling volumes and
weak pricing. The situation improved in the second quarter as the company managed to earn $5m pre-tax
profit and $3m net.

During the third quarter, ending July 31,2001, Navistar remained marginally profitable with a net profit of
$2m compared with $96m in the year-ago period. Revenue was $1.6bn compared with $1.9bn.

Manufacturing gross margins rose to 14.2% in Q3, up from 13.9% in Q2 and 11% in Q1 but down from
the year-ago figure of 17.5%.

For the first nine months of its fiscal year Navistar is showing a net loss of $30m compared with a net
profit of $264m million in the year-ago period. The company is continuing to aim for a full year profit in
the face of a North American truck market which continues to be weak and is expected to remain so for at
least another six to 12 months.


Navistar International Corporation is a holding company and its principal operating subsidiary until
recently was Navistar International Transportation Corp. In March 2000 the operating company's name
was changed to International Truck and Engine Corp. This makes a more explicit link between the
operating company's name and the brandname, International, under which its products are sold. All trucks
and buses are now sold under the International nameplate, whereas previously some buses were badged
Amtran, the badge of American Transportation, acquired by Navistar in 1990.

Navistar was formerly called International Harvester when it was also engaged n the agricultural
equipment business. International Harvester ran into difficulties in the seventies, when it had to file for
protection from creditors under the US Section 11 bankruptcy law. Various assets around the world were
sold, including its UK subsidiary Seddon Atkinson, now owned by Iveco. The agricultural division was
sold in 1985 to Tenneco. The change of name to Navistar occurred in 1986.

Navistar now has five main divisions, some further divided into business units:

1. Heavy trucks
•   Heavy Ve hicle Centre - responsible for conventional road tractors for long haul use.
•   Severe service vehicle centre - dealing with heavy duty trucks for construction, waste and other
    rugged applications.

2. Medium trucks & school bus chassis
•   Medium vehicle centre (Class 5-7 - typically producing delivery trucks and those used by utilities
    and local authorities.
•   Bus vehicle centre - Navistar had a 59.5% share of the school bus market in 1998/99.
•   International operations - co-ordinates assembly of trucks in Brazil and Mexico plus export

3. Engine & foundry - Navistar claims leadership in the production of mid-range (160-300hp) diesel
engines. In 1998 this division won a major contract to supply Ford with V-6 and V-8 diesel engines. Sales
to external customers in 1999/2000 reached 304,400 units, most of which were supplied to Ford. The
division's unit sales have grown by 86% in the past four years.

4. Navistar Financial Corporation - financing for retail customers plus insurance.

5. Parts operations - Navistar states that it has the largest truck parts distribution organisation in North
America, with more than 1,000 dealer locations.

                       Figure 9.3: Navistar revenue & profit contribution by division

                                         Revenue*                                  Operating profit*

                           1997         1998         1999         2000      1997      1998      1999   2000

 Trucks & buses            4,999        6,276        6,628        6,365      129       246       295    179

 Engines                   1,609        1,959        2,379        2,430      138       186       294    331

 Fin. Services               239          286          344            387    67         74       102     98

 Total                     6,847        8,521        9,351        9,182      334       506       691    608
 * Engines and financial services include intersegment transactions

Source: Navistar

Following the engine contract, Navistar's relationship with Ford has developed further. In February 2001
the two firms announced outline plans for a joint venture to build trucks. The JV, subsequently named
Blue Diamond Truck Company, will build medium commercial trucks on a common chassis at Navistar's
plant in Escobedo, Mexico, and explore other opportunities for collaboration on diesel engines.

Navistar's restructuring programme included several actions in addition to the 3,100 job cuts which
accounted for $104m of the overall charge of $306m. Asset write-downs accounted for $93m, lease
terminations $33m, dealer termination and exit costs $39m and inventory write-downs $20m.

Of the 3,100 job losses, about 1,600 are truck production-related positions, the rest are from the other
divisions and head office staff.


In the year to October 2000 Navistar shipped:
•    56,500 medium trucks, up 2.2% from the prior year's 55,300 units;
•    45,000 heavy trucks; down 13.5% from the prior year's 52,000 units;
•    23,400 school buses, up 7.8% from the prior year's 21,700 units.

Most of these vehicles were absorbed by the US and Canadian markets, but around 7,900 (prior year:
5,300) were sold in Mexico, giving Navistar a market share of 22.7%, up from 20% the previous year.
The increase in sales was helped by increasing output from the new plant at Escobedo and by the
expansion of the dealer network.

The company is also aiming for increased sales in Brazil and other Latin American countries. In Brazil
contract assembly of Navistar trucks by Agrale began during 1998 and Navistar established a network of
ten dealers expanding to 14 in 1999. During calendar 2000 just under 600 International brand trucks were
sold in Brazil.

Navistar has also established export locations in South Africa and United Arab Emirates. It sold about
370 trucks in South Africa in 2000.

Navistar's product range is badged as follows:

Heavy road tractors are badged as the International 8000 and 9000i Series. 'Eagle' models are offered
with higher trim and specification.

Heavy duty rigid trucks (the responsibility of the Severe Service Vehicle centre) are badged as
International 2000, 4000 and 5000 Series. The 5000i was launched during the last financial year.

Medium trucks are badged as 1000 and 4000 Series.

Buses are based on a 3000 Series chassis

In February 2001 Navistar launched the first examples of its New Generation Vehicle (NGV) which it
claims is the most significant new truck product development in the company's history, requiring
investment of some $900m. The company plans to launch new versions of the High Performance Trucks
every few months for the next several years. Navistar has said that it sees more opportunities for
synergies between its heavy and medium trucks than by combining with another manufacturer and
attempting to secure scale economies between products in North America, South America, western
Europe and Asia. The counter-argument to this is that other manufacturers are increasing commonality
between ranges and tapping alliances for further economies.

During 2001 new versions of the 4000, 7000 and 8000 Series are being offered. The 4000 began
production in the spring, the 8500 tractor will enter production in October followed by the 7000 Series in
December. In 2002 new versions of the 8000 Series will be offered.


Navistar has traditionally had a higher level of vertical integration than most US truckmakers, making
many powertrain components that other producers would typically buy from outside suppliers. For its
heavy trucks, engines were usually purchased from outside suppliers, while medium trucks were fitted
with Navistar’s own engines. This changed during the 1993/94 financial year when Navistar introduced
the T444E engine as an option for its heavy truck range.

Navistar assembles its trucks and buses at seven plants. Buses are produced at Conway, Arkansas,
Springfield, Ohio and Tulsa, Oklahoma. Trucks are produced at:
•   Chatham, Ontario, where the 9000i is produced;
•   Springfield, Ohio, where the 8000 heavy truck and all the medium-weight range are produced;
•   Garland, Texas, sole source for the 5000i also able to produce some other heavy models;
•   Escobedo, Mexico, which produces the 4000 and 9000 Series models;
•   Caxias, Brazil, Agrale produces medium and heavy trucks under contract.

The plant in Mexico at Escobedo began production in 1998. The plant is now building at the rate of 90
trucks per shift. As well as serving the local market this has given Navistar access to lower cost labour
which is a benefit in its own right but has also proved a useful bargaining tool in the company's
negotiations with its other employees.

In March 1999 Navistar agreed to acquire a 50% stake in Brazilian engine maker Maxion Motores - the
leading supplier in the Mercosur diesel engine market. The joint venture company, renamed Maxion
International Motores, continued to produce Maxion products but also added Navistar's 7.3-l, V8
turbodiesel. In January 2001 Navistar announced it had finalised arrangements to become the sole owner
of the operation. Maxion has manufacturing facilities in Canoas, Rio Grande do Sul, Brazil and Cordoba,

In April 1999 Navistar announced an investment of $250m to build a facility to design and produce diesel
engines in Huntsville, Alabama. The plant is scheduled to begin production of a new generation of V6
diesel engines later this year. The plant will join Navistar's two existing engine production facilities in the
US at Melrose Park, Illinois and Indianapolis, Indiana.

In June 2001 a new school bus manufacturing facility opened in Tulsa, Oklahoma. The plant is building
the International IC school bus, the industry’s first integrated conventional school bus that combines
assembly of the chassis and the bus body, in a continuous operation, under one roof. Output reached 15
units per day by July 2001.


Navistar's financia l year runs to October 31st. From 1988 the data in the appendix is presented for
Navistar Manufacturing with earnings and assets of the financial services division included on an equity
basis. Data from 1988 onwards is presented for Navistar Manufacturing. This data includes the
contribution from financial services on an equity basis. Data for 1986 & 1987 refers to Navistar
Consolidated. Data for 1983 to 1985 refers to International Harvester consolidated.



Nissan Diesel, as it is now called, was established in 1935 under the name of Nihon Diesel Industries to
produce diesel engines and introduced its first line of trucks in 1940. It now offers a range of light,
medium and heavy duty trucks as well as buses, bus chassis, engines, components and special purpose
vehicles. In calendar 2000 Nissan Diesel produced 25,600 units of its own-brand vehicles in Japan, an
increase of over 13% from year-ago levels but still some 58% below its peak output in 1991. Nissan
Diesel's income is supplemented by contract production of light-duty trucks for Nissan Motor Company.

The decline in sales since the early nineties has brought to the fore, many problems with Nissan Diesel's
structure, processes and underlying philosophy. The company, typically referred to in newspaper reports
as 'beleaguered', 'ailing' or 'struggling' provides a good example of how Japan's keiretsu system can
engender ineffective managements and inhibit the fresh, bold thinking necessary to maintain
competitiveness. With Nissan Motor Company as its principal shareholder Nissan Diesel has been
protected from the sort of scrutiny and accountability which would probably have enabled its many
problems to be addressed much earlier.

Nissan Diesel's problems have of course been substantially exacerbated by the Asian downturn and the
continuing low level of truck demand in Japan. However, the company has long been a sloppily managed
inadequate performer which, if subject to normal (or perhaps that should read "western") commercial
pressures, would surely have lost its independence some time ago.

The data in the appendix shows Nissan Diesel to have generated an average operating margin of 0.8%
over the sixteen years to March 1998 (i.e. before the Asian downturn), with a peak margin of 2.2% during
that time. In only two of the past eighteen years has the company's operating profit been sufficient to
cover its interest payments. Interest-bearing debt at the end of March 2001 had been reduced to Y440bn
from Y480bn a year ago, but even this reduced figure still represented nearly 1.1 times revenue. Return
on equity during the sixteen years to March 1998 averaged 2.7% with a peak of 12.4%. At rival Hino, the
return on equity was more than twice as high.

Nissan Motor Company held a 39.8% stake in the company until the tie-up with Renault, following which
Nissan Motor and Renault each hold stakes of 22.5%. The two carmakers have shown little interest in
prolonging this relationship and Nissan Diesel has been seen as an acquisition target for some while.
Various potential partners have been rumoured to be interested in the firm. Most recently attention has
been focused on Hino and Volvo.

Hino is in the frame because it has made no secret of its desire to expand by acquisition and/or alliance.
Hino's preference is for a tie-up with a foreign firm but Nissan Diesel is a possible target, particularly
since the recent agreement for Hino to supply Nissan Diesel with medium-size engines.

Volvo became interested in Nissan Diesel after its planned alliance with Mitsubishi Motors was
scuppered by DaimlerChrysler. As Volvo already has an equity relationship with Renault, it is in a good
position to negotiate a deal concerning Nissan Diesel.

Irrespective of such developments, over the pas t year or so the company appears (finally) to have got
serious about restructuring in order to reduce its debt burden and improve profitability. This restructuring
not only helped it to return to profit for the first time in four years in the year to March 2001, but also
enabled it to beat its targets for the year.

                                              Figure 10.1: Nissan Diesel revenue & operating profit trend






















  Index (1983 = 100)


                                            Revenue (yen)
                                            Op. Profit (yen)



Source: Nissan Diesel

                                                                                                                       Figure 10.2: Nissan Diesel net profit trend
2000/2001results                                                                                                       1,000
Nissan Diesel reported a consolidated
operating profit for 2000/2001, following a
loss in the previous year - which was the first









year in which consolidated results were
disclosed.                                                                                                         -1,000

The Y12.6bn profit represented a 3.1% return
on revenue which grew by 7.5% to Y404.7bn,                                                                         -2,000
                                                                                                  Index (1983 = 100)

helped higher sales of own-brand trucks and
increased contract production for Nissan

After net interest expense of Y3.4bn, bad debt                                                                     -4,000
write-offs and provisions for underfunded
pension reserves and tax, the company was
left with a net profit of Y0.6bn compared with                                                                     -5,000
a prior year loss of Y0.7bn.
On a non-consolidated basis revenue
                                                                   Yen                                                                                                               Eur
increased by 15.5% to Y276.4bn. The
operating profit of Y8.4bn or 3% of revenue        -7,000
was the first positive result for three years. Source: Nissan Diesel

At the net level, the profit of Y2.8bn was the first positive result in four years and followed a prior year
loss of Y44bn.

The company has benefited from cuts in its workforce and a reduction in purchased material costs.
Further restructuring is planned, including moving to single-sourcing wherever possible and cutting the
number of engines it produces from seven to two by 2005, with medium-size units being purchased from
Hino in future at a rate of about 13-14,000 per year.

For the current fiscal year to March 2002 Nissan Diesel has issued a cautious forecast, indicating
consolidated net profit would remain at around Y600m. This reflects an expected drop in overseas truck
sales. At the time of writing Nissan Diesel's exports are looking weaker than the company was expecting
so the risks to their forecast are probably on the downside.

                                                                    Figure 10.3:
                                                    Nissan Diesel revenue by division, 1999/2000

Nissan      Diesel     manufactures    and                                                     Heavy-duty
distributes in its own name:                                                                    vehicles
•    heavy-duty trucks (payload 8t-plus),         Components /
•    medium-duty trucks (payload 4-5t);              Other
•    buses.                                          37%

It also produces diesel engines for use in
vehicles, generators, marine applications
and industrial machinery. Typical annual                                                         Medium-duty
volumes are 120,000-130,000 units, the                                                            vehicles
main customer being Nissan Motor.                                                                    9%

Light-duty trucks (payload 1-3.5t) are                           engines
produced under contract for Nissan Motor                          10%
Company.                                                                             16%

                                              Source: Nissan Diesel
In early 2000 Nissan Diesel announced a five year restructuring programme, much of it building on the
relationship with Renault. Nissan Diesel and RVI agreed to co-operate in several areas, including:
•    Nissan Diesel to supply diesel engines to Renault from 2003 at the rate of 30,000 per year;
•    Nissan Diesel to sell 1,000 Renault trucks in Japan each year;
•    Renault's South African distributor to sell 1,800 Nissan Diesel vehicles per year;
•    RVI and Nissan Diesel to co-operate in parts procurement with a view to reducing Nissan Diesel's
     procurement costs by 20%.

However, following the takeover of RVI by Volvo, the status of these plans is less clear. Initially there
was the potential for conflict with Volvo's alliance with Mitsubishi Motors but the collapse of that
alliance removed that complication. It seems likely that Volvo will now try to develop its relationship
with Nissan Diesel, to help build its presence in Asia. Despite the Japanese firm's poor track record and
high debt levels, it is currently one of the only significant truckmakers in the region to be looking for a
larger partner. Volvo is not the only possible partner for Nissan Diesel. Domestic rival Hino, is a possible
suitor with whom Nissan Diesel has recently signed an engine supply deal. Iveco also has a track record
of collaboration with Nissan Diesel, the two having shared the development of a new engine family.

Other elements of Nissan Diesel's restructuring programme include a reduction of more than Y80bn in
interest bearing liabilities by the end of the year to March 2005. This was not a particularly aggressive
target, representing just 17% of total debt but at least the company is making substantial progress,
achieving a Y40bn reduction during its last fiscal year and forecasting a further reduction of Y20bn this

In June 2000 the company merged two parts associations to improve efficiency among its affiliated parts
manufacturers. An association of 87 makers of single components like fuel injection systems and tires
was merged with an association of 60 Nissan Diesel subsidiaries and small companies. The new 147-
company association will initially be headed by Zexel Corp. Parts associations meet once a year to share
production technology. By promoting further technology exchanges, Nissan aims to improve quality
while cutting purchasing expense.


In calendar 2000 Nissan Diesel sold 16,494 trucks and buses in its domestic market, a 2.1% rise from the
previous year's figure though still 58% below the 1991 peak of 39,800 units. The total figure comprises
571 buses, 1,407 units of the Condor light-truck (also sold by Nissan Motor) and 14,516 medium/heavy-
duty trucks.

During the first six months of calendar 2001, domestic new registrations of Nissan Diesel trucks slipped
by 3.5% to 8,196 units. However, preliminary data for July indicates a significant increase in sales. At the
beginning of the year the company was forecasting an 11.8% rise in domestic sales to 18,470 units.

During its last fiscal year the company exported 10,938 units as follows:
•   Asia                     4,855
•   Africa                   2,494
•   North America            1,768
•   Oceania                   698
•   Middle East               666
•   South America             383
•   Europe                    74

The company is expecting its overseas sales to drop by 10% during 2001. It looks as though it will
undershoot this target, having seen an 18% drop during the first five months of the year.

 Nissan Diesel's truck range extends from 6t GVW upwards. The light-duty Condor trucks are produced
for Nissan Motor (badged as Atlas) as well as for export by Nissan Diesel. A variety of cab-over and
bonneted cabs are offered as well as special vehicles such as crane carriers. As part of its restructuring
process the company is to reduce the number of models it produces.


Over the past couple of years the company has been rationalising its domestic production, looking at both
facilities and products. The principal actions taken or planned are:

q   Truck production at the Gu nma plant ended in September 1999 and all trucks are now produced at
    the Ageo facility.
q   By spring 2002 the company plans to halve the number of parts it uses in trucks to 300,000, mainly
    by eliminating specialised parts now used in export models. The move should reduce downtime,
    tooling costs, component costs and inventory costs.
q   As part of its drive to reduce procurement costs by 20% by fiscal 2002 the company is substantially
    reducing its supplier base. It has started to use single suppliers for steel sheet, paint and engine oil
    compared to the four or five suppliers previously used for each. Further single-sourcing moves will
q   With effect from May 2002 the company is to revise its production planning methods, drafting a new
    production plan each week instead of every 10 days as currently. The increased frequency will help it
    to keep a tighter rein on inventory levels and improve customer service. The current system requires
    at least 15 days from the time a truck is ordered until it rolls off the assembly line. The new system is
    expected to reduce that lead time to eight days. The cost of developing the new system is estimated at
q   During 2001 Hino, Isuzu, Mitsubishi Motors and Nissan Diesel agreed on a set of common
    specifications for interior and exterior parts for "non-step" buses, which have low floors designed for
    the elderly and handicapped. The companies hope to cut costs and expand the use of such buses, after
    the introduction of a law designed to facilitate the travel of the elderly and handicapped on public
    transport in November 2000.
q   In May 2001 it was announced that Hino will begin supplying medium-sized diesel engines to Nissan
    Diesel with effect from 2004 when Nissan Diesel will stop its in-house production of such engines.
    Hino is expected to supply 13-14,000 units annually.

Nissan Diesel has been slower to establish overseas production capacity than its main domestic
competitors. Low volume assembly of its trucks or buses, some under technical licence, is carried out in
fifteen countries, the affiliated enterprises being in: China (25%), Indonesia (12.5%), Pakistan (15%),
Philippines (1.6%), South Africa (0.3%) and Thailand (30%). The bracketed percentage figures refer to
Nissan Diesel's equity stake in each enterprise.

In August 2001 the company signed an agreement with China's largest diesel engine maker, Dongfeng
Chaoyang Diesel, under which the Chinese firm will make about 20,000upa of a 3.15-litre diesel engine,
based on Nissan Diesel technology. It is hoped that further collaboration will follow.

This agreement came just over a year after Nissan Diesel signed a contract to supply manufacturing and
assembly technology for transmissions used in mid-size trucks to Anhui Jianghuai Automotive Group, a
Chinese manufacturer of trucks and buses. Nissan Diesel will also provide parts, generating annual sales
of about Y200m. The Chinese firm is aiming to produce 1,000 transmissions annually, beginning at the
end of 2000. Nissan Diesel has been providing 5,000 microbus engines a year t Anhui Jianghuai
Automotive since 1998 through Nissan Motor.


Information is presented in the appendices for Nissan Diesel's non-consolidated operations from 1983.
Beginning in the year to March 2000 the company has begun reporting consolidated figures. No
comparable figures for earlier years have been disclosed, which is in keeping with a generally poor level
of disclosure in the annual reports. The full annual report for the year to March 2001 was unavailable at
the time of writing.

CHAPTER 11:                PACCAR INC


Paccar is now the third largest manufacturer of heavy duty trucks in the world, having been ousted from
second place by Volvo's takeover of RVI. It is also the fourth largest producer of trucks in the 6t-plus
category. In 2000 it sold 102,000 trucks of 6t-plus, down from a record 108,000 the previous year.

In the US Paccar is number three in the class-8 segment, having again been pushed from the number 2
position by Volvo Global Trucks. The company used to derive more than 90% of its revenue from sales in
the USA and Canada where it operates under the Kenworth and Peterbilt brandnames. However the
company's geographical spread was altered significantly towards the end of 1996 when it acquired Daf,
the Netherlands based truck producer. Along with Foden, the low-volume, UK based heavy truck
producer acquired by Paccar in 1980, this has given Paccar a 10% share of the west European heavy truck
sector and a 5-6% share of the light/medium sector.

At the time Paccar bought Daf the Dutch firm was operating profitably following its collapse in 1993 and
subsequent restructuring with the assistance of the Dutch government. Daf has since gone from strength
to strength and this has enabled Paccar to build upon its record of having generated a profit every year for
over 60 consecutive years. This would be a creditable achievement in any industry but for a company
exposed to the marked cyclical swings of the truck industry, particularly the North American heavy truck
sector, it is a remarkable feat.

The contrast between Paccar's record and that of Navistar, the only other major US-owned truckmaker
could hardly be more stark. Not only has Paccar been consistently profitable, but it has also generated
some of the highest profit margins in the industry worldwide. As shown in the introductory chapter, over
the past five or ten years, Paccar's profitability has put it in second place in the ranking of major

Paccar's purchase of Daf can be seen as having kicked off the recent round of industry consolidation,
followed as it was by alliances or takeovers involving: DC/MMC, DC/Sterling, DC/Western Star,
MAN/ERF, Volvo/RVI, Volvo/MMC and VW/Scania.

Having got the ball rolling, Paccar has looked in danger of being left behind as the rate of consolidation
gained momentum, especially as other manufacturers take advantage of the buying opportunities being
presented by the troubled Asian truckmakers. In April 2000 the company's chairman acknowledged that
Paccar was considering acquisition opportunities "with a sense of urgency", the comment being sparked
by the news of the Volvo/RVI merger.

There have been no tangible developments since that time although a trade publication reported in
October 2000 that Paccar had made an offer for Navistar's assets. Such a move would clearly be attractive
for Paccar, giving it the size to compete against its recently enlarged competitors in the domestic market
and a significant boost to its sales in weight classes below Class-8.

However, during 2001 Paccar's "sense of urgency" has mostly had to be directed towards dealing with the
rapid deterioration in the US heavy truck market which is bumping along near a ten-year low. The
company has acted quickly to reduce costs, staying profitable during the first six months of 2001 and
expected to remain so over the year as a whole.

Notwithstanding concerns about the current downturn, Paccar's balance sheet remains healthy, with
nearly $950m in cash or near-cash in the truck business and just $166m in interest-bearing debt. Once the
company feels confident that the end of the downturn is in sight it remains in a good position to consider
acquisition targets.

                                                                    Figure 11.1: Latest results - Paccar

 Paccar                                                / Unit                        January - September                                     Year to December
                                                                                     2000     2001 (%)                                       1999     2000 (%)
 Revenue                                                    $(m)                6,248                4,553           (27.1)                9,021                7,919          (12.2)
 Of which:                       - Truck/Other              $(m)                5,896                4,204           (28.7)                8,648                7,437          (14.0)
                                     - Finance              $(m)                  352                  349            (1.0)                  373                  482            29.2
 Pre-tax profit              $(m)                                                    571                 181         (68.3)                      852             630           (26.1)
 Of which: - Truck/Other $(m)                                                        479                 126         (73.7)                      774             554           (28.4)
                  - Finance $(m)                                                      59                  28         (52.4)                       78               76           (2.6)
 Pre-tax margin             percent                                                   9.1                4.0          (5.2) pts                   9.4             8.0           (1.5) pts
              - Truck/Other percent                                                   8.1                3.0          (5.1) pts                   9.0             7.4           (1.5) pts
                  - Finance percent                                                  16.7                8.0          (8.7) pts                  20.9            15.8           (5.1) pts
 Net profit                                                 $(m)                     379                 123         (67.5)                      584             442           (24.3)
 Unit sales                                                 000s                      n/a                   n/a             -              108.0                102.0           (5.6)

Source: Paccar

                                  Figure 11.2: Paccar (Manufacturing) revenue & operating profit trend


                                                 Revenue ($)                Op. Profit ($)
          Index (1983 = 100)























Sources: Marketing Systems & Paccar


2000 results
Following record revenue and profit in 1999, Paccar's earnings fell in 2000 as the US heavy truck market
deteriorated rapidly in the second half of the year.

In the fourth quarter alone, pre -tax earnings from its truck business were down by 66% at $75m as the US
heavy truck sales fell by 40% from year-ago levels.

Over the full year the truck division's revenue dropped by 12% to $7.4bn, reflecting a 5% fall in unit sales
to 102,000; the weaker euro and a tougher pricing environment.

These adverse factors caused operating profit in the truck division to drop by 30% to $544m. The
operating margin fell to a still-healthy 7.3% from 9.1% the previous year.

Pre-tax earnings in the truck business fell by                                Figure 11.3: Paccar net income trend
33% to $506m. In the financial services division
pre-tax income was just 1.8% lower at $76m. At                                1,600
the net level, Paccar's consolidated earnings
dropped by 24% to $441.8m.
2001 results                                                                                        $

                                                         Index (1983 = 100)
Paccar's earnings fell sharply from year-ago                                  1,000
levels during the first nine months of 2001.
Revenue in the manufacturing division fell by
29% to $4.2bn. Within the financial services
division the drop was less than 1% to $349m.                                   400

The decline reflects a 37% fall in US sales of                                 200
Class-8 trucks over the period. Pre-tax income
in the manufacturing division fell by 74% to                                     0









$126m and consolidated net profit dropped by
over 67% to $123m.
                                                   Source: Paccar


The company can trace its roots back to 1915 when the Gerlinger Motor Company launched its first truck.
Renamed Kenworth in 1923 (combining the names of the two founding partners) the company was
bought by Pacific Car & Foundry, later to become Paccar, in 1945. Peterbilt was bought in 1958 and the
small UK truckmaker Foden in 1980.

The purchase of Daf in 1996 gave Paccar its first significant exposure to the European market and was
also significant for going against the trend for European truckmakers to buy US producers (Daimler-Benz
/ Freightliner, Renault / Mack and Volvo / White GMC). In 1998 Paccar also made the widely anticipated
purchase of Leyland Truck Manufacturing (LTM) which had separated from Daf following the collapse
of the Leyland-Daf group in early 1993

Paccar's primary business remains the production and sale of trucks and parts. In 2000 the company was
also involved in:
•    finance and leasing, principally but not exclusively, of its own vehicles;
•    the production of industrial winches;

The truck division and parts business is the most important element, accounting for 93% of group revenue
and 76% of group pre-tax profit in 2000.

The company has had other interests over the years but has increasingly focused on the truck business. In
1999 it sold Al's Auto Supply and Grand Auto Supply, its chain of retail stores selling automotive parts.
The sale resulted in a post-tax gain of $17m.

The sale of the retail parts division in 1999 followed the 1997 disposal of Paccar's oilfield equipment
business, Trico Industries, in 1997. Both disposals are said to have enabled the company to focus on its
core truck business, which begs the question: why not the winch division?

During 1999 Paccar formed two new business units: and e-Paccar, through which it is to
channel investments in information technology to improve customer services (e.g. on-line finance and
insurance) and truck utilisation. In March 2000 the company formed a business-to-
business e-commerce com   pany to develop a web-based market for goods and services in the commercial
vehicle industry.


Nafta region
The US is usually Paccar's largest market in terms of both sales and profitability, though that is unlikely
to be the case this year. Retail sales of the company's Class-8 trucks in the US fell 18% in 2000 to 45,747
units. Sales of Kenworth branded Class-8 vehicles were 20,984 units versus 28,637 in 1999. Peterbilt sold
24,763 units compared with 27,323 the previous year. Paccar's share of the Class 8 market in 2000 was
21.6%, unchanged from the previous year.

The company sold 4,000 Class 7 trucks in the USA in 2000 for a market share of 3.2%, up from 3,743
units and 2.8% in 1999. The increase reflects the company's efforts to expand its Class 7 sales, having
launched new models in the sector during 2000.

In Canada new registrations of Paccar trucks rose 9.3% to 6,025 units in 2000 (1999: 5,500) taking
Paccar's market share to 16.6% from 14%. In Mexico new registrations rose 42% to 7,345 units (1999:
5,177). Paccar's share of Mexico's truck market rose to 21.1% from 19.5% in 1999.

                    Figure 11.4: Paccar's share of W. European truck market (%)

             Sector & market                   1997      1998       1999       2000      2005
             Austria                             3.1       2.5        2.1       1.5        2.2
             Belgium & Luxembourg                7.6       6.6        7.1       7.1        7.1
             France                              2.2       2.0        1.4       1.7        2.1
             Germany                             0.9       0.9        0.7       0.9        1.4
             Italy                               1.9       1.9        1.6       1.7        2.0
             Netherlands                        17.6      14.4       12.0      14.7       17.4
             Portugal                            5.0       3.7        4.3       3.6        5.2
             Spain                               3.0       2.6        1.8       2.9        4.1
             UK                                 23.4      23.3       22.4      23.1       22.6
             Nordic markets                      0.6       1.0        0.4       0.2        1.4
             Other                               4.2       6.3        4.5       5.0        5.6
             Total W. Europe                     5.8       5.9        4.7       5.4        5.7
             16t plus
             Austria                             8.7       8.8        9.0       8.0        8.3
             Belgium & Luxembourg               16.4      16.9       16.7      16.0       16.1
             France                              7.1       8.1        8.5       8.9        9.1
             Germany                             3.9       4.8        4.8       5.2        5.2
             Italy                               3.3       4.3        5.9       5.6        3.9
             Netherlands                        30.2      32.9       31.3      31.3       30.2
             Portugal                           14.2      13.7       14.1      11.3       12.8
             Spain                               8.2       8.8        9.3       9.2        8.9
             UK                                 19.2      20.5       18.9      18.4       19.3
             Nordic markets                      1.3       2.0        1.8       2.1        2.3
             Other                               5.1       6.1        5.7       6.3        7.3
             Total W. Europe                     9.7      10.6       10.1      10.1        9.7
Source: Paccar

Over the first six months of 2001 Paccar's Class-8 retail sales in the US fell by 44% to 15,013 units. The
company has said it anticipates conditions remaining weak for a further 6-12 months, a reflection of the
general economic slowdown plus the impact of a glut of used vehicles working their way through the

Western Europe
Paccar's share of the West European light/medium truck sector fell back from the 6.5% recorded in 1996
to 4.7% in 1999 but recovered to 5.4% in 2000. The recovery was mainly due to growth in both sector
volumes and penetration by Daf in its two principal markets – the UK and the Netherlands. The
company’s share at a European level in 1996 was on a par with their pre-collapse market penetration,
which averaged 6.5% in the five years to 1992. We can conclude that it made a substantial recovery in
this sector, but remains a minor player because it continues to be handicapped by over-dependence upon
just 3 markets – the UK, the Netherlands and Belgium.

We are still expecting Paccar's 1996 sector share to represent a peak it will not match over the forecast
period. However, following the recent introduction and good reception of the new LF models, we do
anticipate a further increase in market share to over 6% in the 2001–2002 period. Sales remain vulnerable
to any major fall in the UK market.

In the 16t-plus sector Paccar has claimed a more than 10% share since 1998 due to a strong performance
by the Daf 95XF, although its penetration slipped back a little in 1999. It appears set to consolidate at
around its 2000 level in 2001. This is comparable to the average share over the five years to 1992. With
its 16t-plus models Daf has achieved a wider market spread than in the lighter sector, having shares of 8%
or better in seven markets including France and Spain. Additional production capacity and the revised
65/75/85CF model range should help it defend its share of the sector.

Daf’s share of the heavy sector has exceeded our initial expectations. The 95XF in particular has been a
considerable success. Nevertheless we are still expecting 1998 to represent peak performance years for
Daf’s sector share within the forecast period due to the increasing intensity of competition. Paccar's
ability to finance dealer and service network expansion could increase growth potential in the medium to
long term.

Other markets
Paccar is represented in Australia through Kenworth Australia which is market leader in the heavy truck
sector with an 18% share. New registrations in 2000 dropped by 12% to 890 units. Elsewhere in the world
Paccar International targets sectors requiring specialised trucks, such as logging, mining and oil
exploration. Less than 1% of Paccar's sales are generated in Asia and South America.

North American models
Kenworth and Peterbilt trucks each have a reputation for robustness, durability and reliability. Peterbilt
models are considered the more upmarket of the two and usually have higher specification and trim

Their most popular models are the long-bonneted road tractors that most people would picture when they
think of an American truck, although there has been a trend in recent years towards more aerodynamic
designs such as the Kenworth T2000.

Customers can choose from a wide variety of options, from the make and technical characteristics of
engines and gearboxes, through to the comfort features inside the cab.

Peterbilt offers the models: 387, 385, 379, 378, 362, 357, 330, 320 and 270 each suiting different
applications. The 330 is a Class-7 vehicle launched in 2000. A Class-6 version was also launched. The
Peterbilt 270, which uses the Daf 45 series cab, was also launched in 2000.

Kenworth offers:
•  T2000 its flagship model introduced in 1996;
•  W900 classically styled bonneted introduced in 1982;
•  T800 & T600 introduced in 1989 and 1992 respectively, the T800 is suited for construction and
   similar applications;
•  T300 introduced in 1994 is a medium  -duty (Class 7) truck;
•  K300 introduced in December 1999, using the Daf 45 series cab.

European models
Daf's current truck range comprises the 45, 55, 65, 75, 85 and 95 series. Until recently the heavy 65 to 95
range was assembled exclusively at Eindhoven but right-hand-drive versions are now assembled by LTM
in the UK. LTM is the sole production source for the lighter 45 and 55 Series (6-18t). The Eindhoven
based vehicles were all updated in 1997/98. The 75 and 85 Series are expected to receive updated cabs in
2001. All vehicles are equipped with Euro 3 compliant engines.

Daf launched the 95XF, a long distance version of the 95 series with a new 12.6 litre engine at the
Brussels show in January 1997. The CF65/75/85 model range received a new chassis and reworked cabs
in late 2000. All vehicles are equipped with Euro 3 compliant engines.

In 1995 Daf filled a gap in its market coverage from 11-18t GVW with the 55 Series, which was
developed by LTM. The LF range, a replacement for the FA55 and the older, lighter FA45 Series, was
launched at the beginning of 2001. The LF45s and 55s are being produced at Leyland. They feature RVI
developed cabs and Cummins four and six cylinder engines.

Foden's truck range is badged Alpha and is concentrated entirely in the heavy sector, starting at 18t. The
range is undergoing a renewal in 2001 and 2002. In August 2001 the company launched the first of the
Next Generation Alpha trucks, 4x2 rigids, 4x2 tractors and 6x2 tractors. Multi-wheelers will be launched
in 2002. The new models make use of the new Daf CF cab.

                                              Figure 11.5: Daf's product range
 MODEL       DEBUT 1996          1997     1998      1999     2000      2001        2002      2003     2004     2005 REMARKS
                        I   II   I   II   I    II   I   II   I   II       I   II   I   II    I   II   I   II   I   II

 45 SERIES 1990             F                                    T                                                      Cummins eng's

 LF 45/55                                                             I                                                 Cab from RVI

                                                                                                                        Iveco-Cummins engines
 50 SERIES 1990                  T

 55 SERIES 1995                                                  T                                                      Repl for 50 Series

                                                                                                                        & DAF 1100-1700
 60 SERIES 1991                  T

 CF65        1993           E             F                            N                                           F FA cab pre-98
                                                                                                                        New chassis 2001
 CF75        1993                         F                            N                                           F FA cab pre-98
                                                                                                                        New chassis 2001
 CF85        1993                         F                            N                                           F FA cab pre-98
                                                                                                                        New chassis 2001
 XF95        1997                N                                                 F

                    I: INTRODUCTION       T: TERMINATION         N: NEW MODEL               F: FACELIFT E: NEW ENGINE

Sources: Marketing Systems & Paccar


As mentioned in the introductory comments, Paccar has a low level of industry integration as it buys in
the major powertrain components (engines, transmission and axles) for its trucks. This helps the company
provide a high degree of product customising to suit individual customer requirements. However, this
approach contrasts with that of Daf which is more vertically integrated.

Paccar is looking to exploit the potential for component sharing between its US and European operations
but it has decided against creating a common cab structure to be used as the basis for bonneted trucks in
Nafta and the cabover style preferred in Europe. The company contends that this would involve too many
compromises, although other manufacturers (e.g. Volvo) are adopting this strategy. However, there are
plenty of opportunities to share the development and manufacturing/purchasing costs in powertrain,
electronics, chassis and suspension systems.

Although common cab designs for European and US operations have been ruled out, Paccar is not
holding back from integrating its two European marques, Daf and Foden, as shown by the sharing of cabs
between Daf's CF and Foden's Alpha range.

Given an increasing level of commonality it was a logical progression to switch production of Foden
models from its under-utilised plant at Sandbach to the Leyland facility. This was done in March 2000. In
1999 the Leyland facility had already started assembling all right-hand-drive units of the 75 and 85 Series
and all versions of the 65 Series, freeing up capacity at Eindhoven for production of the popular 95
Series. The Leyland plant is planned to have an assembly capacity of some 80 units per day or 18,000 per
year by the end of 2001.

Paccar's European facilities produced 40,100 trucks in 2000, of which 31,100 were 16t-plus. Output is
expected to drop below 38,000 units in 2001 in response to falling sales in the region. Daf sells 85%-90%
of its output in West European markets so the level of truck demand in markets outside western Europe is
not a significant consideration.

RVI co-operated with Daf on the development and supply of cabs for trucks in the 6-19t range, and is
supplying cabs for the new LF45/55 range. Cabs for the previous models were sourced externally from

In addition to the truck and engine assembly facilities at Eindhoven in the Netherlands, Daf manufactures
cabs and axles at Westerlo in Belgium. Recent investment has increased truck production capacity in the
Netherlands and the company is confident it could satisfy demand of well over 25,000 units a year from
this source.

Within North America in 2000 Paccar operated five truck assembly plants in the US (Chillicothe, Ohio,
Renton & Seattle in Washington state; Denton in Texas and Madison in Tennessee), one in Canada (Ste
Therese) and one in Mexico (San Luis Mexicali). During 1995 the company acquired full control of its
Mexican subsidiary, Vilpac and renamed it Kenworth Mexicana. Subsequently production of Class 7
trucks was relocated to Mexico and this led to the closure of two plants, Ste Therese and Seattle, both
subsequently reopened to meet capacity demands.

The North American versions of the Daf 55-Series (Kenworth T300 and Peterbilt 270) are assembled at
Ste Therese which officially reopened in September 1999 following an investment of C$135m. The
plant's capacity is 20,000 trucks per year."

In July 2001 the company announced an 8% increase in the build-rate of Class 8 trucks by the Peterbilt
division. It also planned a 22% increase in the build rate of its Class 6/7 trucks produced at Ste. Therese,
with effect from August 2001. The increases reflect lowered inventory levels of Class-8 vehicles in
response to earlier cutbacks and rising demand for the company's new medium trucks. Retail sales of
Paccar's Class-7 vehicles rose by 18.5% over the first six months of the year to 1,776 units.

In February 2001 Paccar announced it had entered into two long-term supply agreements with Cummins,
covering heavy-duty engine for the US and medium-duty engines for the recently introduced Daf LF
Series trucks.

In Australia Kenworth manufactures vehicles locally for the Australian market, producing 650-750 units
in each of the last three years. A new assembly operation in South Africa was established during 1999.


Paccar's financial year ends in December. The data sheets in the appendix show information for Paccar's
manufacturing operations with financial services included on an equity basis. Financial information is
provided for Daf Trucks from 1993-95.

The data for 1983-1986 reflects Paccar's consolidated accounts. The data for 1987 onwards reflects data
for "Manufacturing" only down to and including interest expense entries. From 1987 onwards the balance
sheet items reflect "Manufacturing" data for current assets, current liabilities and long term debt.



The commercial vehicles division was Renault Group's second largest, contributing 17.5% of group
revenue in 2000. The division was formed in 1978 when, under a government initiative, Renault's existing
truck subsidiary, Saviem, was merged with Berliet to form RVI. The US company Mack Trucks became a
consolidated subsidiary of RVI in 1990, the two companies having developed a technical alliance during
the preceding 4-5 years.

RVI (including Mack) produced a record 96,100 trucks in 2000, including 8,300 vehicles below 5t. In
terms of heavy trucks, the company's output of 68,800 vehicles put it in fourth place worldwide.

Previous editions of this report commented that RVI has struggled for most of the two decades it has been
in existence. The division reported a pre -tax loss in thirteen out of the last eighteen years. In several of
those years the positive results of the European operations were more than offset by losses at Mack but
when Mack was profitable RVI was often not, as it has had difficulty establishing itself as a major player
in Europe outside its two principal markets, France and Spain.

The division had begun to perform better over the last three years, although given the boom conditions in
its main markets this was no great achievement. In view of its problems and the fact that its major
competitors were expanding by mergers and alliances, previous editions commented that "Renault would
do well to contemplate the disposal of the entire truck operation and that there have been few, if any,
better times to sell the CV division during the last decade".

This type of thinking underpinned the announcement, in April 2000, that Volvo was to acquire 100% of
RVI's equity in exchange for Renault taking 15% of Volvo's shares. Renault was to buy a further 5% of
Volvo's equity on the open market. The transfer of ownership took place on January 2, 2001, following
approval by the competition authorities in Europe and the US. At the time of the initial agreement RVI's
15% stake in Volvo was worth about Eur1.7bn.

It looks like an excellent move for both Renault and Volvo. The combined group will become the second
largest heavy truck producer in the world. On the basis of recent sales patterns Volvo/RVI will be market
leader in the European heavy truck sector. In the US RVI/Volvo was the second best-selling group in the
Class 8 market in 2000.

The expected benefits of the alliance are the familiar ones of scale economies in development,
purchasing, manufacturing, investment and marketing. The new alliance of course rejuvenates some
elements of the broader alliance planned by Renault and Volvo back in 1993, which failed due to
resistance by Volvo's shareholders. Indeed it was only in 1997 that Volvo disposed of the last of its
shareholding in Renault, acquired at the time of the proposed alliance.

The logic for an alliance between the two truck divisions is at least as strong now as it was then, probably
more so, in view of the industry consolidation and heightened levels of competition that have taken place
in the intervening years. The only query we would raise about this agreement is why Renault bothered to
take a stake in Volvo instead of cash. Renault states that:

"As Volvo's largest shareholder, Renault would secure on a long-term basis its presence in the truck
sector, under optimum conditions for both RVI/Mack's customers and employees, as well as for its
shareholders, with strengthened prospects in terms of growth and profitability."

Well, it has secured a long term presence in the truck sector, but why? Why not return the money to
shareholders and let them invest in the truck industry if they so choose? They might prefer more
profitable performers like Paccar or Scania. And Volvo is not just about trucks. Renault's stake will also
secure a presence in Volvo's other divisions: buses, construction equipment, marine & industrial engines
and aerospace.

In the 12-16 mo nths since the deal was announced Volvo's share price has declined by 28%, adding
weight to these criticisms.

However, it should be acknowledged that the situation facing Renault was not that simple. As a company
in which the state still retains a significant stake, it would probably face political resistance had it
disposed of RVI in one swoop. As the above quote hints, Renault's stake in Volvo will give it some
degree of influence over future decisions affecting RVI employees and this will probably have helped to
get the deal approved by state representatives on the board of directors.

It may well be that we see Renault reducing its stake in Volvo in the future, but this is unlikely to happen
within the next two or three years.

                                                            Figure 12.1: RVI revenue & operating profit trend

                                                  Revenue (FFr)
                                                  Op. Profit (FFr)

                                                                                                                                                                               Op. profit (1987 = 100)
       Revenue (1983 = 100)

                              200                                                                                                                                       100


                              100                                                                                                                                       -50


                               0                                                                                                                                        -200

















Source: Renault


2000 results
RVI reported an 8.3% increase in like-for-like revenue in 2000, to Eur7,033m. The increase reflects
higher unit sales in Europe and a favourable euro:dollar exchange rate, partly offset by falling sales and a
weaker pricing environment in the USA.

The company's European sales particularly benefited from the continuing high level of demand in France
and Spain, its two principal markets.

Despite the revenue increase the division's operating profit excluding "other operating income and
expenses" dropped by 11% to Eur195m in 2000. The company reports that cost reductions and favourable
exchange rates were insufficient to offset the impact of an 18% drop in Mack's sales and increased
engineering expense.

In terms of operating profit the 2000 figure of Eur202m or 2.9% of revenue was nearly 3.5 times higher
than the 1999 result of Eur58m or 0.9% of revenue. The 1999 figure was distorted by an Eur180m charge
to fund an early retirement programme.

These results were again poor in comparison to the automobile division where the operating margin was
4% of revenue in 2000, continuing its consistent record of outperforming the CV division. This highlights
again the reason for Renault disposing of its CV division and the correctness of that decision.

2001 res ults                                            Figure 12.2: Renault Group net income trend
Following its takeover by Volvo with effect
from January 2001, earnings figures for RVI are                                     800
                                                                                                         FFr                 Eur
no longer disclosed. Please see the Volvo
discussion for the latest available information.

                                                         Index (1983 = minus 100)
BUSINESS STRUCTURE                                                                  200

Renault's origins date to 1898. It became a                                          0









limited company in 1922 and was nationalised
in 1945 at which time the parent company of                                     -200
the Renault Group became known as Régie
Nationale des Usines Renault. Following the
initial stages of the company's privatisation in                                -600
1994, the parent company's name was shortened
to Renault in 1995.                                                             -800

                                                   Source: Renault

                            Figure 12.3: Renault Group revenue by division

       Division                      1996          1997                                      1998                 1999                 2000
       Automobile                    79.3%         79.8%                                   80.0%                79.1%                78.3%
       Commercial Vehicle            16.3%         16.4%                                   16.7%                17.2%                17.2%
       Finance                       4.4%          3.8%                                      3.4%                 3.7%                 4.5%
       Total                         100%          100%                                    100%                 100%                  100%
Source: Renault

RVI was formed in 1978 when, under a government initiative, Renault's existing truck subsidiary,
Saviem, was merged with Berliet to form RVI. The US company Mack Trucks became a consolidated
subsidiary of RVI in 1990, the two companies having developed a technical alliance during the preceding
4-5 years.

As from the beginning of 1996 the Renault Group comprised three divisions as shown in Figure 12.3.
Before 1996 there was a fourth business area called the Industrial Division. This operated in four sectors:
farm machinery, capital goods, transportation and bearings. As all the division’s activities except
agricultural machinery involve the automobile business, it was decided to subsume this division within
the main automobile division.

The Finance Division carries out sales financing and related activities as well as cash management for the
Renault Group. The division employed 3,460 people at the end of 2000 and in the four years to 1997 it
made a bigger contribution to group operating profit than any other division. In 2000 the operating profit
contribution by this division remained higher than that of RVI.

On the CV side of the business Renault has formed several alliances or strategic ties in recent years:

q   In 1997 RVI and Daf agreed to co-operate in the development of cabs for mid -range trucks. The
    jointly developed cab has now appeared in RVI's Midlum range.
q   Also in 1997 RVI took over the Sisu sales and marketing network and agreed to provide components
    to Sisu.

q   In 1998 RVI and Iveco agreed to pool their bus and coach operations in a 50/50 venture called
    Irisbus. The new company came into being on January 1, 1999. The venture is accounted for by the
    equity method, therefore sales of buses are no longer included in the consolidated figures for RVI.
    Included within Irisbus is RVI's subsidiary, Karosa. RVI took a 34% stake in the Czech bus and
    coach maker in 1994. This was increased to 51% in 1996 when Karosa became a consolidated
    subsidiary. In 1998 the stake was increased to 94%. In July 1999 Irisbus entered into a joint venture
    with Hungarian bus and coachbuilder, Ikarus. IkarusBus is 75% owned by Irisbus

    The European Commission's approval for Volvo's takeover of RVI was conditional upon RVI
    disposing of its interest in Iris bus and in May 2001 it was announced that Iveco will take full control
    of Irisbus in two stages over the next two years. For four years after the signing of the agreement,
    Irisbus Holding Irisbus will retain the right to use the Renault trademark for four years, allowing it to
    replace the brand gradually with the Irisbus name and logo as the core trademark of the Group. The
    Iveco brand will be similarly phased out.

As discussed in the Nissan Diesel chapter, Renault Group has a 22.5% stake in the Japanese firm but
would like to dispose of it.


RVI's total new registrations rose 11% to 103,646 units in 2000. Renault-branded products contributed
67,814 units, up 27.4% from 1999 and Mack contributed 35,832 units, down 10.7%. The group's global
sales of vehicles over 5t was 86,345 units, a 4.7% increase. New registrations of sub-5t vehicles grew by
59% to 17,301 units, boosted by demand for the new Mascott range in its first full year of sales.

RVI’s share of the West European light/medium sector rose strongly in 2000 to 7.2%. The success of the
Midlum replacement for the Midliner was supported by the new Mascott range (below 7t gvw) introduced
in 1999. Sector penetration is expected to improve further to around 8% by 2002, taking the brand's share
back towards the 8.2% recorded in 1996. However RVI remains a relatively small player in this sector.

In the heavy sector RVI also improved its share of the West European market in 2000, rising to 12.1%
from 11.8% the previous year. In part this reflected market weighting factors i.e. RVI being strong in
markets which rose more than average, but the company also made useful gains in Italy, Portugal and

Further progress beyond the 12.1% achieved will be difficult, and we consider that around 12% is likely
to be a ceiling to the brand's penetration in this sector given anything like a normal country market mix.
The Magnum range, even with updates, is likely to lose ground in the face of more advanced competitor
products, although the Premium has undoubtedly revived RVI’s prospects in this sector. We expect RVI
will be hard pushed to maintain its share of the French market as competitors put more resources into
increasing their shares of Europe’s second largest heavy truck market.

Mack’s share of the US class 8 market rose from 12.8% in 1998 to 13.1% in 1999 and 13.3% in 2000.
The division produces short and long haul road vehicles and is the market leader in construction site and
municipal vehicles. Since 1995 it has extended its range with the CH600 Millennium range, targeted at
the premium end of the long haul market. In 1999 Mack introduced the CH Vision, targeted at the
regional haul market.

The Vision can be seen in the context of Mack's attempt to reach 20% of the US Class-8 market by 2004.
Although its share has improved for seven consecutive years, its chances of reaching this target
independently were remote. The majority of Mack's sales occur in the so-called vocational sector -
meaning construction, garbage collection etc. Although Mack is the market leader in this sub-sector, it
accounts for only 30% of Class-8 sales. The remaining 70% of Class-8 sales is made up long haul trucks.

                                     Figure 12.4: RVI unit sales by market

   Market                                   1996            1997            1998         1999     2000
   France                                  16,683          16,127          19,268       20,001   20,834
   Share of RVI total                      29.3%           25.1%           25.2%        24.3%     24.1%
   Spain                                   2,908           4,081           4,952        6,333     6,335
   Share of RVI total                      5.1%            6.4%            6.5%         7.7%      7.3%
   Other Europe                            7,197           7,848           9,713        9,807    14,180
   Share of RVI total                      12.6%           12.2%           12.7%        11.9%     16.4%
   N. America                              23,010          27,115          31,253       38,716   33,923
   Share of RVI total                      40.4%           42.3%           40.9%        47.0%     39.3%
   Other                                   7,113           8,988           11,213       7,596    11,073
   Share of RVI total                      12.5%           14.0%           14.7%        9.2%      12.8%
   Total                                   56,911          64,159          76,399       82,453   86,345
   Excludes <5t trucks and buses/coaches

Source: Renault

                               Figure 12.5: RVI share of W. European markets

           Sector & market                          1997           1998       1999       2000    2005
           Austria                                   1.5             0.7       1.4        3.2     4.6
           Belgium & Luxembourg                      6.5             5.0       5.0        6.6     6.8
           France                                   42.6            43.4      38.5       37.8    37.6
           Germany                                   0.7             0.5       0.7        1.4     1.1
           Italy                                     9.0             9.6       6.6        7.9     9.7
           Netherlands                               3.7             3.6       2.7        5.7     5.3
           Portugal                                  9.2            11.8       9.9        9.6    10.1
           Spain                                    13.6            11.1      13.4       13.2    14.1
           UK                                        2.6             2.0       1.6        5.1     4.9
           Nordic markets                            0.4             0.4       0.9        2.4     2.4
           Other                                     4.9             2.8       2.5        2.9     3.1
           Total W. Europe                           7.0             6.3          6.1     7.2     7.4
           16t plus
           Austria                                   3.1             3.5       3.5        2.8     2.7
           Belgium & Luxembourg                      8.1             8.1       8.3        7.8     7.7
           France                                   38.2            37.8      36.2       35.4    35.1
           Germany                                   1.9             1.9       2.1        2.0     2.1
           Italy                                     9.2             9.8       8.9        9.2     8.3
           Netherlands                               2.5             2.5       2.5        2.6     2.8
           Portugal                                 14.2            16.6      18.6       21.2    18.3
           Spain                                    18.7            18.7      17.4       18.2    18.0
           UK                                        4.8             5.7       6.5        6.5     6.1
           Nordic markets                            1.4             1.8       2.0        2.0     2.5
           Other                                     3.1             2.9       2.7        2.9     3.0
           Total W. Europe                          11.3            11.8      11.8       12.1    11.5

Source: Marketing Systems

                                           Figure 12.6: RVI product range

 MODEL           DEBUT 1996          1997      1998     1999      2000      2001     2002     2003     2004     2005 REMARKS
                            I   II   I    II   I   II   I   II    I    II   I   II   I   II   I   II   I   II   I   II

 MESSENGER       1981                     F             T                                                                Der. from Master
 B Range                                                                                                                 Iveco cab

 MASCOT          1999                                   I                                              F                 Repl. Messeng

 MIDLINER        1986       F E                                        T                                                 New cab &
 S / M Ranges                                                                                                            engines

 MIDLUM          2000                                             I             N                          F             Repl. Midliner

 MANAGER / MAXTER                         T
 G Range         1981

 MAJOR                                    T
 R Range

 H100 PREMIUM 1996          I                                    E                       F                      N        Repl. G, R &
      KERAX   1997                                                                                                       Maxter

 MAGNUM          1990           E         F                      E          F                              T?            Maybe terminated
 AE Range                                                                                                                or repl by Volvo

                 I: INTRODUCTION         T: TERMINATION          N: NEW MODEL        F: FACELIFT E: NEW ENGINE

Source: Marketing Systems

The current W. European range of models produced in France and Spain comprises:
•   ascott (B-Series)    - light truck produced at Batilly;
•   Midlum               - medium truck produced at Blainville;
•   Kerax                - new multi-wheel rigid being produced in Spain;
•   Premium (H100)       - medium/heavy truck produced in France and Spain;
•   Magnum E-Tech        - premium truck produced at Bourg-en Bresse.

RVI has replaced the entire truck product range below the Magnum in the last five years.
•  the Premium range replacements for both G and R Series ranges were introduced in 1996;
•  Kerax (Premium derived multi axle rigids) replaced the Maxter in 1997;
•  the Mascott light truck range replaced the Messenger in mid 1999;
•  the Midlum replaced the Midliner in 2000.

The Magnum was given a revised engine in 2000 and facelifted this year but its future is uncertain. The
low production volume (7,700 in 2000) makes a stand-alone replacement unlikely. A joint development
with a top of the range Volvo model appears likely.

In June 2000 Mack launched two new truck ranges, Freedom and Granite, making extensive use of
components from the Midlum range sold in Europe. The Freedom truck competes in Classes 6 and 7 and
the Granite is a Class 8 vehicle.

RVI has devised a World Truck Convergence strategy under which it aims to base all its heavy truck
models on a single platform. In June 2000 the division announced it had approved a project to create a
common chassis for the Magnum, Premium and Kerax in Europe and the Vision and CH in North

Considered in isolation this sounds an entirely logical strategy, albeit long overdue. But considered in the
context of the (then) planned takeover by Volvo it seems strange that RVI publicly announced a product
strategy which makes no mention of its new owner's plans.


RVI produced 96,067 trucks in 2000, an increase of 9.9% and a company record. Output of vehicles over
5t rose by 6.5% to 87,746 units, reflecting a 22.6% increase in Europe to 53,157 units and a drop of
11.4% in North America to 34,589 units.

Since 1999 RVI has introduced a greater degree of specialisation at its plants. The principal plants and
their activities are as follows:

•   Blainville sur Orner, France    - Midlum and cabs for all models;
•   Bourg-en-Bresse, France         - Magnum and Premium;
•   Limoges       , France          - components & reconditioning of military vehicles;
•   Saint-Priest, France            - driveshafts, axles;
•   Vénissieux, France              - engines, stamping, casting;
•   Villaverde, Spain               - Kerax;
•   Hagerstown, USA                 - engines & transmissions;
•   Macungie, USA                   - MR, LE, DM, DMM, RB and RD ranges
•   Winnsboro, USA                  - CH, CL, Vision.;
•   Brisbane, Australia             - assembly of Mack and RVI models.

Both RVI and Mack have traditionally built most of their key components (engines, transmissions,
drivetrains and axles) in-house. In recent years this pattern has been changing as RVI began a more
critical examination of where its core competences lay and the costs of developing and manufacturing
complex components.

One tangible sign of this new approach is RVI's joint venture with transmission specialist ZF which
effectively outsources gearbox supply to ZF. Renault has a 40% stake in the venture, which began at the
end of 1997, to which it transferred its Bouthéon transmission plant.

Volvo has a similar tradition of in-house manufacture and has similarly been more open to the idea of
outsourcing in recent years. The link between RVI and Volvo may actually increase the degree of vertical
integration, as activities which were judged uneconomic for a single producer, become viable for the two
combined. In the future we can expect extensive commonality between the ranges of the two
manufacturers, but much of the progress will be geared to product replacement cycles and as RVI has so
recently renewed much of its range the visible signs of a link between the two will be limited. One of the
first joint projects is likely to be a new engine range with displacements spanning nine to twelve litres.
Volvo is reported to have such an engine family at an advanced stage of development so this is likely to
be adopted.

In June 1999 RVI signed a memorandum of understanding with the Russian truck manufacturer Amo Zil
and the Moscow Government. The joint production and marketing of medium-heavy trucks in Russia is
planned. Investment is expected to be $100 million.

Apart from the production locations mentioned above, outside Europe Renault trucks are assembled
(mostly at rates of less than 100 per year) in: Algeria, Malaysia, Morocco, Poland, Tunisia and
Zimbabwe. Outside North America Mack trucks are assembled in New Zealand and Venezuela.


Renault's financial year runs to December 31st . The consolidated accounts provide full information upon
Renault Group with more limited disclosure for RVI. Although data is provided for Renault Group in the
appendices the following discussion is concentrated upon the truck division's activities as much as
possible. Renault's annual reports provided commendably comprehensive information on the key
operating statistics.

The statistics in the appendix are presented for Renault Group and RVI.

Since 1993 the financial services division has been included in the group accounts on a consolidated
basis. The affected figures for 1991 and 1992 are restated. Operating profit is calculated after the
deduction of cost of sales financing.

Group operating expenses include restructuring costs of:
•  Eur210m in 2000
•  Eur680m in 1999;
•  Eur245m in 1998;
•  Eur235m in 1997;
•  Eur600m in 1996;
•  Eur40m in 1995;
•  Eur100m in 1994;
•  Eur239m in 1993;
•  Eur190m in 1992;
•  Eur195m in 1991;
•  Eur295m in 1990.

Please note all the above figures are converted from French francs into euros at the fixed rate of FFr6.56
per Eur1.

CHAPTER 13:                SCANIA GROUP


Scania was the fifth largest heavy truck maker in the world in 2000, producing 51,400 trucks. The
company was also the fourth largest manufacturer of heavy buses during the year, producing 4,200 units.

The origins of the company can be traced back to 1891 when Vabis (Vagnfabriks-Aktiebolaget i
Södertelge), produced railway rolling stock. In 1902 Vabis and its competitor Scania, in southern
Sweden, each built their first trucks. The two companies merged in 1911 to form Scania -Vabis. In 1921
the company was reorganised after declaring bankruptcy. During the thirties Scania-Vabis produced more
buses than trucks but by the late forties had decided its future lay primarily in truck production. In 1969 it
merged with Saab to form Saab-Scania.

Scania has grown almost entirely organically, establishing its first plant outside Sweden, in Brazil, during
1957. Seven years later a plant was built at Zwolle in the Netherlands and in 1976 bus and truck
production began in Argentina. International expansion has accelerated in recent years with:
•   a bus plant (now producing trucks also) at Angers in France inaugurated in 1992;
•   an assembly plant in Poland in 1993;
•   an assembly plant in Mexico in 1994;
•   bus assembly in Denmark, where Scania bought local assembler DAB Silkeborg in 1994 - the
    exception to its policy of organic growth.

During 1995 Scania became an independent company again when the Saab-Scania group to which it
belonged was divided into Saab AB and Scania AB. This ended a 25 year period for Scania of being part
of the same group as Saab. Saab-Scania AB had been a wholly owned subsidiary of Investor, the
investment arm of the Wallenberg industrial empire, since 1991.

During 1996 Investor floated 55% of Scania's share capital in a public offering which was three times
oversubscribed and placed a value of SKr36bn on the company. The sale wiped out Scania's net debt at
the end of 1995 of SKr8bn.

The flotation was well timed from Scania's perspective, as it came at a time of peak profitability with an
operating margin of 15.4%. In the following five years the margin was, on average, 6.4pts lower as the
company was adversely affected by various factors including: launch costs for the new 4-Series; price
competition in western Europe; the appreciation of the Swedish krona and the downturn in South

However, even at its reduced profit levels Scania has remained the most profitable of the world's major
truckmakers in most years. The company's consistently strong profit performance can be attributed to
three long term features of its business strategy:

1.   It has a modular construction strategy, yielding scale economies in development, purchasing and
     production as well as production flexibility. Scania used to use about 20,000 components for its
     model range, but with the introduction of the 4-Series the parts count has been reduced to about
     13,000 pieces. Although Scania's competitors have been waking up to the benefits of a modular
     approach in recent years, Scania remains ahead of the game.
2.   Scania competes only in the heavy sector, which has been the fastest growing sector in Europe.
3.   Growth has been organic, rather than by acquisition (DAB Silkeborg excepted).

Considering the company's record as the world's most consistently profitable truckmaker with a solid
record of outperforming its rivals, it has had a surprisingly volatile time over the past few years with
regard to its ownership structure.

In January 1999 Volvo began acquiring Scania's equity in a surprise move that followed Volvo's sale of
its car division to Ford. The average price paid by Volvo (SKr266 per share) represented a 138%
premium to Scania's share price in October 1998. Scania's majority shareholder, Investor, was initially
opposed to the proposed takeover by Volvo but then supported it. However, in early March 2000, the
takeover was blocked by the European Commission on the grounds that the Volvo-Scania combine would
dominate Europe's nordic markets to an unacceptable extent.

The blocking of this takeover led to Scania holding discussions with VW (the two companies have had a
business relationship since 1948) and at the end of March VW announced it was to buy an 18.7% stake
(34% of the voting rights) in Scania for SKr14bn (about SKr370 per share). The shares were sold to VW
by Investor which retains 9.1% of Scania's equity and is committed to maintaining this stake for at least
two years. At Scania's annual general meeting in May 2000, three of VW's senior executives joined
Scania's board. One of the three was VW's chairman, Ferdinand Piëch, who became the chairman of
Scania's board of directors.

At the end of 2000 Volvo held 45% of Scania's equity and 30.6% of the voting rights. As a condition of
the US competition authorities approving Volvo's takeover of RVI, they stipulated that Volvo must divest
its holding in Scania within three years of the approval being given. Until recently a private sale to VW
seemed the most likely disposal route but recent comments by Bernd Pischetsrieder - now confirmed to
succeed Ferdinand Piëch as VW's chairman in 2002 - have led us to question his commitment to VW's
truck industry strategy (see VW discussion), leaving Scania still facing an uncertain future.

                                                  Figure 13.1: Scania revenue & operating profit trend


                                                 Revenue (SKr)                 Op. Profit (SKr)
        Index (1983 = 100)
























Sources: Marketing Systems & Scania


2000 results
Scania's results for 2000 continued to show an improvement from the downturn in profit during 1996 and
1997, though profit levels remained below the 1995 peak and margins declined from 1999 levels.

Revenue grew by 14.2% to SKr53.8bn as sales rose by 12.1% to 56,492 units. Operating profit rose by
just 0.8% to SKr5.08bn, a margin of 9.4% compared with 10.7% in 1999. The increase was entirely due
to a strong fourth quarter performance when a 44% rise in earnings offset the declines registered in the
first three quarters of the year.

Over the full year operating profit in Europe fell by                              Figure 13.2: Scania net profit trend
7% to SKr4.6bn as a 12% rise in sales, an increase
in service-related products and SKr200m in non-                                   1,000
recurring gains were more than offset by:                                                           Native               Eur
•   reduced average unit revenue due to price
    competition and an adverse geographical sales
    mix (SKr500m);

                                                               Index 1993 = 100
•   higher R&D expense (SKr300m);                                                  600
•   increased marketing expense (SKr300m);
•   adverse currency effects (200m);
•   lower earnings from bus and engine operations                                  400
In South America the company recovered from two
years of operating losses, reporting a profit of
SKr9m (1999 loss: SKr328m). The improvement                                          0
principally reflected increased unit sales, improved                                      1993 1994 1995 1996 1997 1998 1999 2000
pricing and cost reductions.
                                                            Source: Scania

Scania's net profit dropped slightly, to SKr3.08bn from SKr3.15bn. The net margin was 5.7% compared
with 6.7% in 1999.

                                       Figure 13.3: Latest results - Scania
 Scania                        / Unit        January - September                                       Year to December
                                              2000      2001    (%)                                   1999     2000     (%)
 Revenue                    SKr(m)          36,203     37,900                          4.7         47,110      53,823          14.2
Of which: - Scania products SKr(m)          31,056     33,579                          8.1         41,625      47,165          13.3
              - VW products SKr(m)           5,147      4,321                       (16.0)          5,485       6,658          21.4
 Operating income           SKr(m)            3,057     2,004                       (34.4)           5,045      5,084            0.8
Of which: - Scania products SKr(m)            2,905     1,924                       (33.8)           4,792      4,809            0.4
              - VW products SKr(m)              152        80                       (47.4)             253        275            8.7
 Operating margin - group    percent             8.4      5.3                        (3.2) pts        10.7         9.4         (1.3) pts
 Op. margin - Scania productspercent             9.4      5.7                        (3.6) pts        11.5       10.2          (1.3) pts
 Net income                    SKr(m)         1,791     1,037                       (42.1)           3,146      3,080          (2.1)
 Net margin                    percent          4.9          2.7                     (2.2) pts         6.7        5.7          (1.0) pts
 Unit sales                     000s           39.4         35.2                    (10.8)            50.4       56.5           12.1
Of which:          - Trucks     000s           36.5         31.9                    (12.7)            46.7       52.3          12.1
                    - Buses     000s            2.9          3.3                      12.7             3.8        4.2          10.9

Sources: Marketing Systems & Scania

2001 results
During the first nine months of 2001 Scania's earnings dropped sharply as its main markets in Europe and
South America grew weaker. Despite an 11% decline in unit sales revenue for the period rose by nearly
5%, helped by favourable currency effects. Group operating income was SKr2.0bn, down 34% from the
year-ago figure of SKr3.1bn. The operating margin of 5.3% was 3.2pts below the year-ago margin of

The decline reflected a weaker performance in both Europe and South America. European earnings
dropped by 26% to SKr2.18bn as:
•   unit sales in western Europe dropped by 13%;
•   the sales mix weakened;
•   R&D expense increased.

The decline in European earnings accelerated in Q3-2001 with a fall of 35% versus the year-ago figure,
following falls of 33% and 12% in Q2-2001 and Q1-2001 respectively.

In South America Scania made an operating loss of SKr476m compared with a year-ago loss of
SKr148m. The decline reflected lower margins, adverse currency effects and increased R&D expense.

The company's net profit for the first nine months was 42% lower at SKr1.04bn, a net margin of 2.7%
compared with 4.9% in the year-ago period.

Scania is clearly heading for a sharp reduction in full year profit. The company's order bookings suggest
there is little prospect of a recovery in demand during the final quarter of the year. Scania is responding
by reducing its European workforce by 1,200 people (around 5% of the total at the end of 2000) and
cutting costs in production, sales and marketing and administration. The bus and coach operations are
being restructured (see Production Strategy).

BUSINESS STRUCTURE                                          Figure 13.3: Scania revenue by division

                                                         Division     1997     1998      1999      2000
Scania is primarily engaged in the manufacture and
distribution of trucks, buses and coaches but it also    Trucks       60%       60%       59%      58%
produces industrial and marine engines and sells
                                                         Buses        8%        8%        8%        7%
VW, Audi, Porsche, Seat and Skoda products in
Sweden.                                                  Engines      1%        1%        1%        1%
                                                     VAG  12%                   13%       12%      12%
These products are sold through Svenska
Volkswagen AB (VAG), a company jointly owned Other        19%                   19%       21%      22%
by Scania AB and Volkswagen AB since 1948. As Total      100%                  100%      100%     100%
shown in Figure 1   3.3 VAG typically contributes
around 12% of group revenue, though its Source: Scania
contribution to operating profit is usually smaller.

The link with VW is of course much stronger now that the German carmaker has an 18.7% stake (34% of
the voting rights) in Scania, as discussed in this chapter's introduction.

At the end of 2000 Volvo held 45% of Scania's equity and 30.6% of the voting rights. As a condition of
the US competition authorities approving Volvo's takeover of RVI, they stipulated that Volvo must divest
its holding in Scania within three years of the approval being given. At the time of writing Scania's shares
are trading at around SKr160, well below the SKr266 paid by Volvo in 1999. Volvo will presumably wait
until the shares are more highly valued before selling, but in any case a private sale to VW seems the
most likely disposal route.

Scania's customer finance operations have become a more significant contributor to group profit in recent
years. In 2000 the division's operating profit rose to SKr179m from SKr140m in 1999. The increase
partly reflected the acquisition of finance companies in Italy and South Korea during the previous year.

During 2000 Scania continued to expand its sales and service organisation, acquiring its distributors in:
Malaysia and Thailand. The previous year it had acquired its importers and distributors in: Italy, Norway,
Finland and Latvia. The process of integrating the distribution network continued in January 2001 when
Scania acquired two distributors in Brazil and Beers a Dutch distributor.


Scania sold more trucks in all its major markets during 2000, with the strongest rise in relative terms
occurring in Asia, up 132% to 3,400 units.

Sales in Latin America were 8% higher at 6,800 units over the full year but the recovery was gathering
momentum in the final quarter of 2000 when Scania's sales in the region rose by 36%.

                              Figure 13.4: Scania European market shares

            Sector & market                   1997         1998      1999   2000       2005
            16t plus
            Austria                           16.9          16.0     14.6    15.2       15.2
            Belgium & Luxembourg              17.6          17.2     18.9    17.6       18.1
            France                             9.2           9.4     10.7    10.5       10.5
            Germany                            7.8           8.8      9.5    10.0        8.4
            Italy                             12.9          11.9     12.0    13.1       12.7
            Netherlands                       19.6          22.3     19.0    21.9       20.6
            Portugal                          18.9          19.1     16.7    17.2       18.4
            Spain                             14.5          15.3     14.1    14.3       13.7
            UK                                20.2          18.6     17.9    20.7       18.8
            Nordic markets                    33.4          33.9     35.8    36.9       33.9
            Other                             19.4          20.4     22.3    23.1       21.0
            Total W. Europe                   15.0          15.0     14.8    15.5       14.3

Source: Scania

Sales in central and eastern Europe during 2000 were 46% higher, as demand recovered to the same level
as before the 1998 downturn. Particularly strong growth was recorded in the Czech Republic, Hungary,
Poland and Russia. The acquisition of the Latvian distributor was mentioned above and follows the
establishment of wholly owned importing companies in Bulgaria, Croatia, Lithuania and Ukraine in 1998
when Scania also set up new dealer facilities in Estonia, Poland and Russia.

Scania's share of the West European heavy sector grew by 0.7 percentage points to 15.5%, its highest
level since 1996. The improvement was broadly based as the company took an increased share in ten of
the twelve markets/regions shown in the table. Its performances in Italy, Netherlands and the UK were
particularly noteworthy.

We are expecting a decline in Scania's market share in western Europe during the next few years, as
several competitors renew their heavy truck ranges.

                                Figure 13.5: Scania unit sales by market

    Market                            1996           1997          1998      1999         2000
    Great Britain                     5,661          5,634         6,028    6,308        7,253
    Share of Scania total             13%             12%           12%      13%          13%
    Germany                           3,032          3,227         4,446    5,627        5,817
    Share of Scania total              7%             7%            9%       11%          10%

    Brazil                            6,810          8,401         6,477    4,961        6,400
    Share of Scania total             16%             18%           13%      10%          11%

    France                            3,042          2,854         3,728    4,711        4,993
    Share of Scania total              7%             6%            8%        9%           9%

    Other W. Europe                  17,282          18,564        22,558   23,013       22,031
    Share of Scania total             40%             40%           45%      46%          39%

    Other                             7,164          8,296         6,433    5,794        9,998
    Share of Scania total             17%             18%           13%      11%          18%

    Total                            42,991          46,976        49,670   50,414       56,492

Source: Scania

During the first nine months of 2001 Scania's truck sales in western Europe dropped by 17% from year-
ago levels to 16,191 units. The company underperformed in most markets, leading to a drop in its market
share to 14% from 15.8% in the year-ago period. The sharpest falls came in the Netherlands and Great
Britain where Scania's new registrations dropped by over 23%. New registrations in Germany fell by

Sales in eastern Europe were 23% higher at 1,089 units and in South America the company sold 9.9%
more trucks at 3,320 units. Sales in other markets were 2% higher at 2,126 units.

Scania’s product range has long been based upon modular concepts whereby a small number of
components can be offered in a wide variety of permutations to suit individual operator needs. Following
the introduction of the Series-4 cab the product range is currently based upon:
q Five engine series (9, 11, 12, 14 litres and a V8 15.5-litre unit launched in 2000) with a choice of
     thirteen power outputs. The old 14-litre V8 will cease production in October 2001 and the range of
     power outputs will reduce as Euro-3 emission standards come into force as currently Scania offers
     some Euro-2 engines alongside Euro-3 units.
q   Four chassis classes (C - construction, D - urban/regional distribution, G - heavy duty & L - long
q   Three variants of the Series 4 cab (P - low forward control, R - high forward control and T -
    conventional bonneted). The bonneted cab is mostly identical to the forward control cabs from the A-
    pillar rearwards, except for some sheet metal changes to the doors. Various combinations of day-
    cabs, sleeper-cabs, crew-cabs etc. are available.
q   Various gearbox, axle gear and axle combinations and suspension systems.

Now that Scania has VW as the majority shareholder, the two companies are expected to collaborate in
the development of a new middleweight truck, a project which the two had discussed before the equity
link was established. Little information is known about the project but reports suggest a 12-14t truck is
being developed, that it will be produced at Scania's Sao Paolo plant in Brazil and initially it will be sold
only in South America.

If such a model is developed it seems likely it will also be sold in emerging markets, where the
infrastructure and finance systems required to support heavy trucks are not yet in place. With this in mind
there is a strong possibility that the new range would not be offered in western Europe, particularly if it is
designed without the refinements that are necessary for European markets but inappropriate for
developing markets. It should also be remembered that the 10-15.9t segment in western Europe is the
smallest of the six main truck segments.

The 12-14t weight band sounds very narrow and it would not be surprising if it turns out to be wider than


The company produced a record 55,581 trucks, buses and coaches in 2000, exceeding the previous year's
output by 12.3% and the previous production record (set in 1998) by 11%. Scania's European plants
produced 46,353 units (1999: 42,322 units), of which 44,235 (39,794) were trucks. Productivity within
European operations grew by 9.6% during the year. The South American operations produced 9,228 units
(7,160) of which 7,174 (5,985) were trucks.

Like Volvo Scania produces the majority of its vehicles outside Sweden. Its principal truck and bus
assembly plants are as follows:

•   Zwolle, Netherlands - trucks, 2000 output: 21,659 units;
•   Södertälje, Sweden - trucks, capacity was expanded in 2000 output12,117 units;
•   Angers, France - trucks and buses, 2000 output: 10,702 units;
•   Sao Paulo, Brazil - trucks and buses, 2000 output: 7,812 units;
•   Tucumán, Argentina - trucks, 2000 output: 1,084 units;
•   Slupsk, Poland - truck and bus assembly, 2000 output: 1,857 units;
•   Silkeborg, Denmark - buses, 2000 output: 18 units.

Scania vehicles are also assembled in low volume in, Australia, Botswana, China, Egypt, Estonia, Kenya,
Malaysia, Morocco, Mexico, Pakistan, South Africa, South Korea, Tunisia and Zimbabwe.

During 2000, the company announced a decision to establish its own local truck and bus assembly facility
in Thailand. The plant is being built on a site in Rayong, and should be completed this year. Thailand is
recovering from the economic crisis that caused a drop in CV demand from around 30,000 units annually
to 2,500 units in 1999. Scania's move followed Volvo's decision to start assembling heavy trucks at its
Bangkok plant. The new assembly plant will supply vehicles mainly to the Thai market. However,
depending on how the economies of the Asean region develop, Thai-built trucks and buses may also be
exported to other markets in the region.

In November 2000 Scania began producing buses at a new assembly plant in St. Petersburg, Russia.
Capacity at the plant is planned at 250 buses per year, with output in 2001 targeted at 100 units.

During 2001 Scania has begun restructuring its bus operations, splitting it between the chassis building
activity and coachbuilding. The chassis operations are being integrated more closely with truck
operations, reflecting the fact that many components are shared. A stand-alone coachbuilding unit with its
own reporting structure is being created and the company is aiming to increase the share of fully-built
buses in its overall sales - a response to increasing customer demands for a single supply source rather
than the traditional arrangement of buying a chassis and selecting one of the dedicated coachbuilders to
carry out the body and trim operations. Scania hopes the new structure will reduce the time to assemble a
bus to an average 800 hours, from the current 1,200 hours.

In 1998 Scania began transferring engine and axle assembly from Zwolle, Netherlands to Södertälje
(engines) and Falun (axles) in Sweden. This process continued into 1999. In October 1999 a component
plant at Lulea, Sweden was turned into a limited company, Ferruform, and has begun competing for
external customers. Also in 1999 a special vehicle plant at Laxa, Sweden, was bought out by its


The data is presented for Scania Group. For the years prior to the formation of Scania as a separate entity,
data is drawn from the Saab-Scania AB annual reports but the level of disclosure was limited. Statistics
for Saab-Scania AB are provided until 1994.

CHAPTER 14:                VOLVO TRUCKS & BUSES


Towards the end of the nineties the Volvo group began reducing the breadth of its portfolio of industrial
holdings and increasing its depth, concentrating on the automotive and transport vehicle industries,
having previously acquired interests in a number of unrelated industry sectors (see Business Structure).
This rationalisation process was taken a stage further in early 1999 when the car division was sold and
Volvo's focus was narrowed to the following commercial transport industries:
•   trucks;
•   buses;
•   construction equipment;
•   marine and industrial engines;
•   aerospace equipment.

Volvo Trucks is now the group's largest division in terms of revenue and usually profit, though during
2000 the construction equipment division contributed the highest profit.

Volvo is predominantly a producer of heavy trucks, which account for more than 90% of its production.
In 2000 the company was the world's third largest producer of heavy trucks, turning out 76,812 units from
eighteen final assembly locations around the world. Volvo also produced 5,194 trucks below 16t.

The truck division had been investigating alliance opportunities for most of the nineties having had to
abort a planned merger with Renault in 1993, following shareholders' objections. The search was given
added impetus by the sale of the car division, which left Volvo looking an attractive bid target with its
large cash pile representing around 34% of its market capitalisation during 1999. However, the added
urgency to form alliances led Volvo to make an ill-considered and initially unwelcome bid for Scania in
January 1999. In the following months it became an agreed bid but the deal was blocked by Europe's
competition authority forcing Volvo to withdraw its bid in March 2000.

Volvo spent little time in seeking an alternative alliance and within two months of aborting the Scania
bid, the proposed purchase of RVI from Renault was being announced. The deal provided for Volvo to
acquire 100% of RVI's equity in exchange for Renault taking 15% of Volvo's shares. Renault was to buy
a further 5% of Volvo's equity on the open market, taking its overall stake to 20%. At the time of the
initial agreement Renault's 15% stake in Volvo was worth about Eur1.7bn.

The rationale for such a move was little changed from that which applied when Renault and Volvo tried
to merge in 1993. That merger would have had Volvo taking the lead role in the truck sector and Renault
in cars and the logic for combining forces in the truck sector remains at least as compelling today as it did
then. In strategic terms it is probably a better deal for Volvo than a Scania takeover, with less product and
market overlap.

The timing was not ideal, as Volvo bought RVI at the top of the market, just as truck demand in North
America was beginning to turn down. However, had Volvo delayed it could have lost the opportunity and
itself been the object of a takeover bid. The price of about SKr14bn was reasonable at the time,
considering that VW paid a similar amount for an 18.7% stake in Scania, which, at the operating level,
has been about three times more profitable than RVI in the past two years.

The deal was approved by the European and US competition authorities in 2000 and became effective on
January 2, 2001. It makes the Volvo truck group (now called 'Volvo Global Trucks') the second-largest
producer of heavy trucks in the world and the combined group makes more heavy trucks in Europe than
any other producer.

Having finally succeeded in bolstering its strategic weight in Europe and North America, Volvo's Asian
strategy promptly began to unravel. In April 2001 it was forced to sell its stake in Mitsubishi Motors to
DaimlerChrysler, in recognition of DC's increasing control over the Japanese firm.

Following the ending of its alliance with Mitsubishi Motors, Volvo is widely expected to develop a
relationship with Nissan Diesel, partly due to Nissan Diesel's equity links with Renault (now a 20%
stakeholder in Volvo) and partly because Nissan Diesel is seen as the only Japanese truckmaker open to

However, a deal with Nissan Diesel is not a foregone conclusion. We can think of three main arguments
against such a development.

First, Nissan Diesel's levels of debt make it an unattractive prize - though in theory this could be fully
reflected in the company's price.

Second, Volvo may prefer to get on with integrating RVI and to develop its Asian sales by itself or with
local partners outside Japan. After all, Volvo sold more trucks in non-Japan Asia last year than Nissan
Diesel did.

Third, Volvo has a lousy record as a dealmaker. The aborted deals with Renault in 1993, Scania in 2000
and Mitsubishi Motors in 2001, must surely give the company some pause for thought before attempting

                                     Figure 14.1: Volvo truck & bus revenue & operating profit trend


                             1,000                 Revenue (SKr)
                                                   Op. Profit (SKr)
        Index (1983 = 100)





















                             -200                                                                                                                                        2001



Source: Marketing Systems & Volvo


2000 results
Volvo's truck division sold 81,830 units in 2000 (down 4% from 1999) and the bus division sold a further
11,015 units (16% more than in 1999). The truck division suffered a 56% fall in operating income to
SKr1.4bn during 2000 as its revenue fell by 1% to SKr62.2bn. This was the truck division's lowest
operating profit since 1996.

The sales decline was wholly due to a 31% fall to 23,610 units in Volvo's North American unit sales,
partly offset by increased sales in all other regions:
•    West Europe - up 6% at 42,054 units;
•    East Europe - up 41% at 4,089 units;
•    South America - up 16% at 4,534 units;
•    Asia - up 104% at 5,556 units;
•    Other - up 22% at 1,987 units.

                                         Figure 14.2: Latest results - Volvo
 Volvo                           / Unit        January - September                Year to December
                                                                 Var.                                 Var.
                                                2000      2001    (%)             1999       2000     (%)
Revenue                          SKr(m)       87,155    131,982    51.4        125,019    130,070       4.0
Of which: - Global Trucks        SKr(m)       44,545     86,444    94.1         63,010     62,196     (1.3)
                    - Buses      SKr(m)       12,277     12,631     2.9         14,713     17,187      16.8
           - Other & elim's      SKr(m)       30,333     32,907     8.5         47,296     50,687       7.2
Op. income (ex restructuring)    SKr(m)        4,998      2,413 (51.7)           6,726      6,154     (8.5)
Of which:          - Trucks      SKr(m)          729        449 (38.4)           3,247      1,414    (56.5)
                    - Buses      SKr(m)          278      (293) (205.4)            224        440      96.4
                     - Other     SKr(m)        3,991      2,257 (43.4)           3,255      4,300      32.1
Trucks operating margin          percent          1.6        0.5  (1.1) pts         5.2        2.3    (2.9) pts
Buses operating margin           percent          2.3      (2.3)  (4.6) pts         1.5        2.6      1.0 pts
Net income                       SKr(m)        3,522      (980) (127.8)         32,222      4,709    (85.4)
Net margin                       percent          4.0      (0.7)  (4.8) pts       25.8         3.6   (22.2) pts
Unit sales                        000s         142.1      120.4 (15.3)            94.6       92.8     (1.8)
Of which: - Volvo Trucks          000s          61.2       49.2 (19.7)            85.1       81.8     (3.8)
               - RVI Trucks       000s          45.4       45.8     0.9             n/a        n/a         -
             - Mack Trucks        000s          27.5       18.3 (33.6)              n/a        n/a         -
             - Volvo Buses        000s            8.0        7.2 (10.9)             9.5      11.0      15.9

Source: Volvo

As well as the fall in unit sales, the truck division's profits were adversely affected by strong price
competition, increased R&D expense and the weakness of the euro. However, restructuring actions in the
early part of 2000 and its introduction of a new truck in North America (the VHD) helped to limit its
profit decline in the final quarter of the year.

The bus division reported a near doubling of operating income to SKr440m from SKr224m in 1999,
helped by higher sales and lower material costs.

2001 results
During the first nine months of 2001 restructuring charges of SKr2,725m caused Volvo group to fall to a
net loss of SKr980m compared with a net profit of SKr3,522m in the year-ago period. Most divisions
reported lower profits, the exceptions being the Marine and Aero businesses.

Analysis of the truck division's performance is complicated by several factors:
•  the first-time inclusion of RVI in the results;
•  restructuring charges of SKr1.32bn 2001 and SKr1.28bn taken in Q1 and Q3 respectively;
•  non-recurring gains from the sale of the MMC stake.

The division's revenue increased by 94% to SKr86.4bn, reflecting the first-time inclusion of RVI sales
which (including Mack) were 12.1% down from year-ago levels at 64,072 units. Sales of Volvo-brand
trucks dropped by 19.7% to 49,154 units.

At the operating level VGT earned an underlying profit of Skr449m, a 38% decrease from a year-ago.
However, that figure excludes restructuring charges of SKr2.6bn. Among other things the charges cover
the costs of closing one of Mack's North American plants (Winnsboro) and integrating Volvo and RVI's
purchasing and engine development processes. Further restructuring costs of SKr1.4-1.5bn are expected
to be charged by the end of 2003.

It seems fair enough to exclude this charge from the headline figures as Volvo has done, to give a like-
for-like comparison with the year-ago result. However, the profit figure of SKr449m includes a non-
recurring gain of SKr574m from the sale of Volvo 's MMC shares in Q2. Excluding this figure shows
Volvo to have made a recurring operating loss of SKr125m. The decline reflects:
•    the 19.7% decline in sales of Volvo -brand trucks, in particular a 41% fall in Nafta sales;
•    reduced margins;
•    excess capacity.

The truck division has responded to the downturn by taking 83 down-days at Mack's plants and 30 at
Volvo's North American plants. On a like -for-like basis the division's workforce was reduced by 4,520
employees or 12% during the first nine months.

The bus division reported a nine-month operating loss of SKr293m, compared with a year-ago profit of
SKr278m. The deterioration principally reflects a 10.9% fall in unit sales to 7,162 vehicles, the decline in
Europe being 22%.


In the wake of the abandoned merger with Renault, Mr Pehr Gyllenhammar who was at the head of Volvo
Group for more than two decades, was forced out. His successor, Mr Sören Gyll, made fundamental
changes to the strategy and structure of the company, a process continued by Mr Leif Johansson, formerly
chief executive of Electrolux who replaced Mr. Gyll in 1997. Following the sale of the car division Volvo
is now concentrating on the five core businesses listed earlier.

The background to the decision to dispose of the car division was its record of low profitability,
consistently lower than the truck division, and the limited options for improvement for a relatively small
player (400,000 units in 1998) in an industry dominated by companies making upwards of 2m units

Volvo's final links with the car division were severed in June 2001 when it sold (subject to regulatory
approval) its 50% stake in AB Volvofinans to Ford Credit for SKr871m. Volvofinans is primarily
engaged in providing credit for passenger car buyers.

In May 2001 Volvo and Navistar announced plans for the Swedish firm to supply Navistar with 12-litre
engines. Initially the engines will be produced at Volvo Powertrain's plant in Skövde, Sweden. However,
Volvo eventually intends producing the engines in North America.

Over the past eighteen months, most of Volvo's corporate activity has mostly been focused on finding a
partner for the truck division. A summary of the relationships with Mitsubishi Motors, Scania and RVI is
provided below.

                             Figure 14.3: Volvo Group revenue by division
    Division                            1996       1997        1998               1999         2000
    Car Group                            52.4            51.1       47.5           0.0          0.0
    Truck Group                          25.3            25.1       26.8          50.4          47.8
    Buses                                 5.3            5.6         6.5          11.8          13.2
    Volvo Construction                    8.0            8.8         8.9          15.1          15.4
    Marine / industrial engines           2.4            2.4         2.3           4.6          5.1
    Aero Group                            2.6            4.0         3.9           8.0          8.2
    Fin. Services                         3.5            2.7         3.3           6.9          7.4
    Other & Eliminations                 0.4           0.3           0.9          3.2           2.8
    Total                               100.0         100.0         100.0        100.0         100.0

Source: Volvo

Volvo / MMC
Until recently Volvo held a 3.3% stake in MMC. In 1999 the firms announced a plan for MMC to split its
truck and bus division into a separate company during 2001 and Volvo was to acquire up to 19.9% of the
new company. The firms were developing a medium-heavy truck together and co-operating in various
other ways.

As soon as DC formed an alliance with MMC we began to question whether the Volvo-MMC alliance
had a viable future. Despite the insistence of all three companies that the alliance would continue we were
of the opinion that it would be in neither DC's nor Volvo's interests for this to happen. In last year's
edition of this report we commented that "there is considerable room for doubt as to whether MMC's
original plan for twin alliances will come to fruition. As DC's bargaining hand has been strengthened it
may try to capture MMC's heavy truck business (a valuable business for its exposure to emerging Asian
markets), as well as the car operations."

So it proved. In April 2001 DC paid Volvo SKr3.2bn for its 3.3% stake in MMC, taking DC's holding in
the Japanese firm to 37.3%. The price included the rights to the medium truck programme being
undertaken by Volvo and MMC.

Volvo / Scania
Volvo's truck division had been investigating alliance opportunities for a long time and this activity was
given added impetus by the sale of the car division, which left Volvo looking an attractive bid target with
its large cash pile representing around 34% of its market capitalisation during 1999. However, the added
urgency to form alliances led Volvo to make an ill-considered and initially unwelcome bid for Scania in
January 1999. In the following months, it became an agreed bid but in early 2000 the deal was blocked by
Europe’s competition authority, which forced Volvo to withdraw its bid in March 2000. The main reason
for the bid being blocked was the dominance that a Volvo/Scania combine would have over Europe’s
Nordic markets.

At the time of writing Volvo retains 45.5% of Scania's share capital and (nominally) 30.6% of the voting
rights. As a condition of the European Commission's approval of the RVI takeover, Volvo is not allowed
to exercise any ownership influence and is obliged to sell the shares by the end of 2003. Volvo paid
SKr24.35bn for its stake, which at current market prices is worth about SKr15.2bn. Clearly it will be
hoping not to make a significant loss on the sale but with all potential buyers aware of the 2003 deadline
and some potential purchasers probably put off by VW's stake in Scania, Volvo is not in a strong position.

Volvo / RVI
The takeover of RVI was described in the introductory comments.

Following the formation of Volvo Global Trucks (VGT) to co-ordinate and optimise the development of
the three brands (Mack, RVI and Volvo) Tryggve Sthen. was appointed its president. The co-ordination
of the three brands is being performed by a separate unit within VGT known as 3P (Purchasing, Product
planning and Product development).

RVI was a good fit for Volvo in terms of geographical sales distribution and product range.

RVI offers exposure to markets where Volvo was relatively weak, such as southern Europe where RVI
typically takes a 23% share of the heavy truck market compared with Volvo's 13%. The only market
where the two companies are relatively equally matched in terms of heavy truck market share is in North
America. However, even here the overlap is actually relatively low as about half of Volvo-brand sales are
to the long-haulage sector while Mack trucks are primarily used in heavy construction and regional

In terms of product, about 40% of RVI's output is light/medium trucks compared with just 10% of
Volvo's and even where the brands nominally overlap in the heavy sector, they quite often compete in
different niches as in North America.

As well as having to dispose of its Scania shares as a condition of the European Commission's approval
for the RVI takeover, the US competition authority made its approval conditional upon Volvo divesting
its Xpeditor low-cab-over-engine (LCOE) truck product line. Xpeditor markets the WX and WXLL range
of vehicles, which are used for vocational applications, such as refuse collection. These products
represent about 8% of Volvo's North American sales.

Another consequence of the takeover was that Volvo became one of the world's four largest producers of
heavy diesel engines - defined by Volvo as being in excess of 8-litres. In recognition of this the company
has formed a new business unit Volvo Powertrain, which will supply the whole group with engines and
other powertrain components. It will also look for opportunities outside the Volvo group - the previously
mentioned deal to supply Navistar with engines is an early example of success in this regard.

Volvo is expecting the takeover to generate annual savings of SKr3.5bn after two years, with purchasing
efficiencies accounting for about half that figure. Longer term, an incremental annual saving of SKr3bn is
being suggested as the consequence of integration between the two companies’ product ranges. To put
these figures into context, Volvo Trucks incurred operating expenses of SKr61bn in 2000.

                         Figure 14.4: Volvo's share of European markets (%)

          Sector & market                    1997         1998      1999       2000        2005
          Austria                              2.1         2.7        3.4        4.0        3.7
          Belgium & Luxembourg                11.7        11.4        9.2       11.0       10.4
          France                               5.9         4.4        4.7        4.4        4.8
          Germany                              1.9         1.9        1.2        0.9        1.1
          Italy                                3.3         3.0        2.5        2.2        2.7
          Netherlands                         10.6        11.5       10.6        8.9        9.0
          Portugal                             7.4         5.8        6.1        4.9        4.7
          Spain                                2.5         2.8        2.0        2.9        3.1
          UK                                   3.4         3.2        2.9        2.3        3.1
          Nordic markets                      11.9        11.2        9.2        8.6        9.9
          Other                                2.0         2.7        3.8        3.0        3.0
          Total W. Europe                      3.9         3.7        3.0        2.8         3.2
          16t plus
          Austria                              9.7        12.0       13.4       16.4       15.9
          Belgium & Luxembourg                20.6        22.3       22.6       24.2       24.3
          France                              13.5        14.5       13.3       13.2       13.4
          Germany                              7.5         7.7        7.3        8.2        8.1
          Italy                               12.9        11.9       12.1       11.1       14.3
          Netherlands                         18.0        15.6       16.8       16.8       18.7
          Portugal                            28.3        24.9       23.3       20.4       20.7
          Spain                               13.6        12.5       12.1       12.6       12.8
          UK                                  16.5        18.3       19.3       17.7       18.2
          Nordic markets                      36.2        35.9       37.9       36.6       35.8
          Other                               24.2        20.7       19.1       19.9       21.1
          Total W. Europe                     15.3        15.2       14.9       14.8       15.1

Source: Volvo

                              Figure 14.5: VGT's share of European markets (%)

          Sector & market                        1997          1998     1999       2000    2005
          Austria                                  3.6          3.4       4.8        7.2     8.3
          Belgium & Luxembourg                    18.2         16.4      14.2       17.6    17.2
          France                                  48.6         47.9      43.1       42.2    42.4
          Germany                                  2.6          2.4       1.8        2.3     2.2
          Italy                                   12.3         12.6       9.1       10.1    12.4
          Netherlands                             14.3         15.1      13.3       14.6    14.3
          Portugal                                16.6         17.6      16.1       14.5    14.8
          Spain                                   16.1         14.0      15.4       16.1    17.2
          UK                                       6.0          5.3       4.5        7.4     8.0
          Nordic markets                          12.3         11.6      10.1       11.0    12.3
          Other                                    7.0          5.6       6.3        5.9     6.1
          Total W. Europe                         11.0         10.0         9.1     10.0    10.7
          16t plus
          Austria                                 12.8         15.5      16.8       19.2    18.6
          Belgium & Luxembourg                    28.7         30.4      30.9       32.0    32.0
          France                                  51.7         52.3      49.5       48.6    48.5
          Germany                                  9.4          9.6       9.4       10.1    10.2
          Italy                                   22.1         21.8      21.0       20.3    22.6
          Netherlands                             20.5         18.1      19.3       19.4    21.5
          Portugal                                42.5         41.5      41.9       41.6    39.0
          Spain                                   32.3         31.2      29.5       30.8    30.8
          UK                                      21.4         24.0      25.9       24.3    24.3
          Nordic markets                          37.5         37.7      39.9       38.6    38.3
          Other                                   27.3         23.5      21.8       22.8    24.1
          Total W. Europe                         26.6         27.0      26.7       26.9    26.6
Source: Volvo

                                Figure 14.6: Volvo truck & bus sales by market

                                           1996           1997        1998        1999     2000
       N. America                         17,600          22,010      32,040      37,940   27,479
       Share of Volvo total                 25%            28%         34%         40%      30%
       Great Britain                       7,280          5,870       7,110       6,880    7,014
       Share of Volvo total                 10%            8%          8%          7%       8%
       Brazil                              4,740          5,430       5,180       3,690    4,642
       Share of Volvo total                 7%             7%          6%          4%       5%
       France                              4,930          4,310       5,770       5,982    6,497
       Share of Volvo total                 7%             6%          6%          6%       7%
       Germany                             3,400          3,230       3,985       4,402    4,741
       Share of Volvo total                 5%             4%          4%          5%       5%
       Other                              33,140          36,860      39,395      35,696   42,472
       Share of Volvo total                 47%            47%         42%         38%      46%
       Total                              71,090          77,710      93,480      94,590   92,845

Source: Volvo


Volvo delivered 81,830 trucks in 2000, a 3.8% drop from the 1999 figure. Invoiced sales in western
Europe (different to new registrations) grew by 6.1% to 42,050 units but in North America sales dropped
by 31% to 23,610 units. Sales increased in all other regions, by 41% in eastern Europe to 4,090 units, by
16% in South America to 4,530 units and by 104% in Asia to 5.560 units.

In the West European light/medium sector Volvo's market share fell again in 2000, to 2.8%. The
introduction of the FLC light truck, in autumn 1996 gave a temporary boost to Volvo's performance in
this sector but competition from products such as the Atego and the Mitsubishi Canter (formerly sold
through Volvo's European distribution network but now sold by DaimlerChrysler) has caused its share to
slip. Volvo's representation in this sector is expected to increase during the next two years in response to
the facelifting of the FL range during 2000.

Longer term it seems likely that Volvo will look to use an RVI product to increase its exposure to this
sector, as the French firm typically enjoys a sector share about double that of Volvo. The two brands
together were the fourth best-selling group in the sub-16t sector, during 2000, the same position that RVI
occupied without Volvo.

As expected, in the heavy sector Volvo's share of the west European market fell slightly in 2000 to
14.8%. The decline was not particularly significant and we expect it to recover this year.

Looking at the combined market share of the Volvo and RVI brands it can be seen that the alliance is the
European market leader in the heavy truck sector with a share in 2000 of 26.9%, which compares with
DC's 19.6%.

                              Figure 14.6: Volvo's European product range

MODEL      DEBUT     1996   1997     1998    1999     2000      2001    2002   2003   2004    2005 REMARKS
                     I II   I II     I II    I II     I II      I II    I II   I II   I II    I II

FLC        1996        I               E                    T                                         7.5-10.0T GVW

FL6        1985                                         F                                        N?   Was to be 2004

                                                                                                      in JV with MMC

FS7        1991                                                   T

FL7/10/12 1985                         N/E              T                                             Replacement (FM)

                                                                                                      is based on FH

FM         1998                        I                                         F

FH12/16    1993                        F                          F/E             E N                 SUCC. F SERIES


Source: Volvo

In the US Volvo branded trucks took a smaller share than Mack of the Class 8 market in 2000, at 10.7%
(unchanged from 1999) compared with Mack's 13.3% (1999:13%). The two brands together would have
been in second place in 2000.

During the first nine months of 2001 the number of Volvo-brand trucks sold dropped by 29.7% to 49,154
units. Sales were down by:
•    41% to 10,357 units in North America;
•    15.9% to 27,046 units in western Europe;
•    10.6% to 3,518 units in Asia.

These declines were partly offset by gains in eastern Europe, South America and elsewhere.

RVI's worldwide unit sales dropped by 12% to 64,072 units, reflecting a 34% fall in North America to
18,270 units and a 1% drop in Europe to 40,836 units, partly offset by gains in the rest of the world.


Within Europe, Volvo currently produces trucks based upon three ranges of cabs, the FL (facelifted in
April 2000) the FM and FH. The cabs themselves and all major components are produced at plants in
Sweden, while final assembly (until 2000) was carried out at three locations in West Europe: Gent in
Belgium, Göteborg in Sweden and Irvine in Great Britain. In 1998 it was decided to close the Irvine plant.
Production was subsequently wound down and during 2000 assembly was transferred to Göteborg and

The facelifting of the FL saw the end of the FLC badge, used on Volvo's lightest truck (7.5-10t). The FL
is available in weights from 7.5-18t but the Perkins 4-cylinder engine used in the FLC has been dropped
in favour of a Volvo 6-cylinder unit.

The FM series, launched in 1998 shares 78% of its components with the FH series. The FM replaced the
FL7, FL10 and FL12, a range introduced some fourteen years previously.

The loss of its alliance with MMC meant Volvo also lost the medium truck project the two firms were
jointly pursuing. However, in RVI it has acquired a company with an already established presence in this
sector of the market and recently updated versions of medium (Midlum) and light (Mascott) product

During 2001 Volvo has shown a new 16-litre engine which it plans to begin producing in 2003. Demand
for the existing 16-litre unit has always been fairly low, but Volvo sees opportunities to install it in Mack
and RVI models as well as perhaps selling it to outside firms.

In western Europe final assembly of the FL6/FS7 takes place at Gent in Belgium. The FL and FH Series
are assembled at Göteborg in Sweden, Gent and Irvine in the UK (until 2000). The plant at Gent is the
largest, producing 30,486 units in 2000 (1999:25,350); Göteborg produced 17,873 units (1999: 15,348);
Irvine produced just 317 units in its final months (1999:2,090).

In North America Volvo is represented by Volvo Trucks North America (VTNA). Until 1997 the
operation was known as Volvo GM Heavy Truck Corporation, and was 87% owned by V       olvo and 13%
by General Motors. In 1997 Volvo took 100% control after the US company had run up substantial losses.

In autumn 2000 Volvo launched a new model in North America, the VHD, which is intended primarily
for the construction sector but also for refuse collection and other demanding duties. The VHD cost
SKr900m to develop and is based on the VN range.

Apart from western Europe and North America production occurs in the following countries (all
production figures refer to 2000):

Eastern Europe
•   Wroclaw, Poland        - 1,110 units.

South America
•  Curitiba, Brazil    - 4,555 units;
•  Lima, Peru - 243 units.

Asia / Middle East
•   Teheran, Iran- 1,438 units;
•   Brisbane, Australia - 771 units;
•   Kuala Lumpur, Malaysia         - 515 units;
•   Bangalore, India      - 347 units;
•   Jeddah, Saudi Arabia - 188 units;
•   Bangkok, Thailand - 146 units.

•   Gaborone, Botswana - 340 units;
•   Tunis, Tunisia         - 210 units;
•   Cairo, Egypt - 52 units
•   Casablanca, Morocco - 20 units.

During 2000 Volvo announced that it will end truck production at its Polis h plant which is located in
Wroclaw. The plant will instead be used by Volvo's Construction Equipment division.

Also during 2000 Volvo began assembling heavy trucks in Bangkok, Thailand. Production for the year
was on target at 146 units of the FM model and is planned to increase to 350 units in 2001. Investment in
the plant is just $1m.

In December 2000 Volvo announced it is to open an assembly plant just outside Moscow. The joint
venture with the Russian company JSFC Sistema will build a new facility in Zelenograd. The first trucks
should roll off the production line in the middle of 2001. The plant's capacity will initially by 200-
300upa. Volvo claims to be the leading western brand in Russia's heavy truck market with over 6,000
vehicles registered. The company has twenty service centres in Russia.

In March 2001 Volvo a new co-operative agreement with Saipa Diesel in Iran was approved by Iran's
Ministry of Industry. The joint venture aims to produce 1,500 FH12 and NH12 models a year. Since the
early 1970s, Volvo Trucks has supplied more than 40,000 heavy trucks to Iran.
At the time of the RVI takeover Volvo said it planned to maintain separate brand names, and sales
organisations, which sounds sensible enough; but also to maintain separate assembly plants tied to each
brand, which doesn't.

It is to be hoped that the idea of separate plants for separate brands was offered as a sweetener to ensure
the deal was accepted. It should not become a dogmatic policy which inhibits the new alliance from
extracting all the scale economy benefits possible. Those readers familiar with the car industry may be
aware that PSA Peugeot Citroën has relatively recently abandoned its policy of making Citroën and
Peugeot models in different plants, recognising that this was an unnecessary constraint which of itself, did
nothing to preserve different brand identities.


As Volvo Trucks and Volvo Buses are only divisions of the Volvo Group, the disclosure of financial
information is relatively limited. Nevertheless information such as revenue, operating income, R&D and
capital spending is available for all years and this enables the following discussion to concentrate
primarily upon the these divisions' performance and activities.

Data sheets are presented for Volvo Group and Volvo Trucks and Buses.

In the 1995 accounts, units sold refers to invoiced units rather than retail sales as previously. Data back to
1991 has been altered to conform.

A new Annual Report Act became effective in Sweden on January 1, 1996 and has changed the
presentation of Volvo's accounts from 1997. Most of the changes are presentational but in the income
statement the cost of sales calculation is changed, resulting in different (higher) gross profit figures.
Operating profit and other profit figures are unchanged. In Volvo's 1996 accounts it published an income
statement showing 1994, 1995 and 1996 data in conformity with the new standards and this data has been
adopted in the appended data sheets.

Beginning in 1999 Volvo adopted new Swedish accounting standards on the treatment of tax. The tax and
net profit data for 1997 and 1998 has been restated.

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