Innovative Vehicle Technology

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Annual Report

2006

Innovative

Vehicle

Technology

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Participation in 2007 Annual General Meeting Shareholders who wish to participate in the Annual General Meeting must be registered in the VPC AB [Swedish Securities Register Center] share register no later than Wednesday April 4, 2007. Such notiﬁ cation must be made no later than noon on Thursday April 5, 2007, to Haldex AB, Box 7200, 103 88 Stockholm, or by telephone to +46 (0)8-545 049 50, or by e-mail to info@haldex.com.

Guide to reading the Annual Report

Haldex is a Swedish company, subject to Swedish laws. All values are expressed in Swedish kronor unless otherwise indicated. Millions of kronor are abbreviated as SEKm. Figures in parentheses refer to 2005. Data concerning markets and the competitive situation repre- sent Haldex’s own assessments unless a speciﬁ c source is identiﬁ ed. These assessments are based on the best and most recently available factual documentation from published sources in the vehicle industry.

Read more about Haldex at www.haldex.com Read more about Haldex on our website, where you can follow our quarterly reporting, read and subscribe to our press releases, monitor our share price and ﬁ nd more information about our business operations.

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Mission

Haldex provides proprietary and innovative technology solutions that improve safety, the environment and vehicle dynamics to the global vehicle industry within speciﬁ c niches.

We strengthen our competitiveness and develop long-term customer relationships through products that oﬀ er high performance and low total costs for the customer throughout the product’s service life, ethical business practices and commitment to long- term partnerships

Vision

Haldex will be the global vehicle indus- try’s ﬁ rst choice as a long-term partner.

We will contribute to social development by providing vehicle technology that satisﬁ es our customers and society. By staying on the cutting edge of technology and developing skilled and motivated employees, we will also achieve proﬁ table growth.

Values

• Customer ﬁ rst

• Respect for the individual

• Elimination of waste

Strategy

• Create growth and improve our competitive capabilities by developing and commercializing new products.

• Create growth by dramatically strengthening our positions in new markets, primarily through expansion in China, India, Brazil and Russia.

• Improve our cost structure by increasing our share of production in low-cost countries.

• Reduce procurement costs, in part by continuing to increase our share of purchases from low-cost countries.

• Improve productivity and quality through intensiﬁ ed use of Th e Haldex Way, our concept for management and process improvement.

• Further improve our organization’s eﬃ ciency through more clearly deﬁ ned lines of control and responsibility.

• Acquire companies and establish programs of cooperation that are consistent with our strategic direction.

Market

Of Group sales in 2006, North America accounted for 46%, Europe for 47% and other markets for 7%. However, the markets in South America and Asia, primarily China, are growing strongly, and their importance to the Group is increasing rapidly.

Legislation focusing on safety, the environment and vehicle dynamics, combined with demands for constant cost-rationaliza- tion measures, are major forces underlying product development in today’s vehicle industry. Demand is also driven by the increase in vehicle production worldwide.

To meet this demand, Haldex is developing an increasingly global market presence. Th e Group currently has 23 production plants in Sweden, Germany, the UK, Hungary, the US, Mexico, Brazil, India and China.

Haldex in brief

Net sales by customer segment

Heavy vehicles Engines

Industrial vehicles Light vehicles

Net sales by business area

CVS Hydraulics

Garphyttan Wire Traction Systems

Operating income by business area

CVS Hydraulics

Traction Systems Garphyttan Wire

Net sales by region

North America Europe

Asia and Middle East South America

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Commercial Vehicle Systems Hydraulic Systems Garphyttan Wire Traction Systems Commercial Vehicle Systems de-

velops, manufactures and markets brake systems for heavy trucks, trailers and buses. The product offering covers all primary com- ponents and subsystems included in complete air brake systems.

The operations are divided into ﬁ ve business units: Actuators, Air Management, Brake Controls, Foundation Brake and Friction Products.

Production takes place in Brazil, India, China, Mexico, the UK, Sweden, Germany, Hungary and the US.

Haldex’s share of the market ser- ved with its current product pro- gram is about 15 percent. Haldex has substantially higher market shares in individual product areas.

Customersconsist of manufac- turers of heavy trucks, buses and trailers, as well as axle manufactu- rers for these vehicles. After- market sales account for nearly half of sales.

The main competitors are Knorr- Bremse, Wabco and Arvin Meritor.

Hydraulic Systems develops, manufactures and markets hydraulic pumps, power systems, fuel transfer pumps for diesel engines and special products to reduce diesel engine emissions.

The division delivers hydraulic lifting systems and drive systems for industrial vehicles.

Production takes place in China, Sweden, Germany and the US.

Haldex’s share of the global mobile hydraulic market is estima- ted at 5 percent. The market share in our main area of activity, gear pumps, is about 20 percent.

Customers consist of manufactu- rers of industrial vehicles, trucks and diesel engines.

The main competitors are Bosch Rexroth, Parker Hanniﬁ n, Eaton and Sauer Danfoss.

Garphyttan Wire develops, manu- factures and markets advanced spring wire from various alloys for use mainly in combustion engines and transmissions. The main applications are valve springs, transmission springs, piston rings and springs for fuel injection systems.

Production takes place in China, Sweden and the US.

With a global market share of about one-third, Haldex has a leading global position in this product area.

Customersare mainly manufac- turers of springs, with speciali- zed expertise in the automotive industry.

The main competitors are Suzuki, Suncall, Kiswire, American Spring Wire and Tokusen.

Traction Systems develops, manu- factures and markets electronically controllable systems for four-wheel drive systems for cars, known as AWD systems. The system soft- ware can be customized to meet each carmaker’s particular desires in terms of driving characteristics and traction.

Production is concentrated in Swe- den, with some pre-assembly and low-volume production conducted in Hungary.

Themarket share in Europe, based on the number of vehicles produ- ced, is 24 percent, which makes Haldex the European market leader for controllable AWD systems. In the American market, Haldex had a market share of about 2 percent in 2006.

Customers include carmakers such as Volvo, Ford, Land Rover, Volkswagen, Audi, Seat, Skoda and Bugatti. The systems are used in cars, SUVs and so-called crossover vehicles.

The main competitors are Borg- Warner, Getrag, GKN, Magna Power Train and JTEKT.

Sales and share of Group sales Haldex total: SEK 7,890 m

Operating income and share of Group operating income Haldex total: SEK390 m

Personnel and share of Group personnel Haldex total: 4,860 employees

SEK 745 m

9%

SEK 4,765 m

60%

SEK 1,331 m

17%

SEK 1,049 m

13%

SEK 217 m

56%

SEK 90 m

23%

SEK 41 m

11%

SEK 48 m

12%

3,064 employees

65%

901 employees

19%

469 employees

10%

249 employees

5%

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Highlights of 2006

Key ﬁ gures 5 years 2006 2005 Change 2004 2003 2002

Net sales, SEKm 7,890 7,486 5 % 6,759 6,036 6,414

Earnings before tax, SEKm 315 341 -8 % 290 120 112

Earnings after tax, SEKm 310 270 15 % 212 70 78

Earnings per share, SEK 13.96 12.19 15 % 9.50 3.18 3.51

Profi t margin, % 4.9 5.2 – 5.2 3.1 2.9

Proposed dividend, SEK 4.50 4.00 13 % 3.00 1.75 1.50

Return on capital employed, % 11.5 12.3 – 12.8 6.8 6.0

Return on equity, % 16.6 15.9 – 14.8 4.8 4.6

Equity/assets ratio, % 40 40 – 36 39 41

Cash fl ow from operations, SEKm 402 493 -18 % 276 356 572

Investments, SEKm 420 357 16 % 312 297 474

Average number of employees 4,683 4,606 2 % 4,317 4,018 4,022

Earnings

• Sales rose by SEK 404 m (5 percent) to SEK 7,890 m (7,486). Adjust- ed for currency exchange rates, the increase was 6 percent. Order intake increased by SEK 291 m (4 percent) to SEK 7,883 m (7,592).

• Operating income amounted to SEK 390 m (391). Excluding restructuring costs, the result was SEK 419 m (419).

• Operating income improved within the Commercial Vehicle Systems (CVS) and Traction divisions.

• Earnings declined by SEK 41 m within the Garphyttan Wire Division. During the year, a decision was made to implement an action program to improve the division’s profi tability. A restructuring cost of SEK 14 m was charged against second-quarter income. Margins improved during the fourth quarter.

• Earnings after tax amounted to SEK 310 m (270). Earnings per share amounted to SEK 13.96 (12.19).

Important events

• In January, the DaimlerChrysler Group signed a development and delivery contract with Alfdex AB for the Alfdex system. The order is worth approximately SEK 250 m over a fi ve-year period.

Series deliveries began in late 2006.

• Haldex was named supplier of four-wheel drive systems for a new car model within the Ford Group. Production is scheduled to begin in 2008. The order is worth about SEK 400 m over a fi ve-year period.

• Inauguration of new facilities in Suzhou, China. Production start for brake systems, hydraulic products and valve spring wire.

• Series production of compressors for Caterpillar commenced during the second quarter. Annual production rate of 75,000 units was achieved by year-end.

• Series delivery of AWD systems for Land Rover Freelander 2 commenced during the third quarter. The order is worth SEK 800 m over a fi ve-year period.

• Several development and delivery agreements were signed for fuel transfer pumps with three of the world’s leading engine manufacturers. The combined order value is approximately SEK 500 m over a fi ve-year period. Series deliveries started in early 2007.

• Preparations proceeded as planned for deliveries of 4WD systems for a new global car platform, for which orders were secured in 2005 and 2006 at a total value of SEK 2 bn. The production will take place in Guanjuato, Mexico. The plant facilities are under construction.

• One of the CVS plants in North America was divested. Most of the production was relocated to a plant in USA and to China.

The net cost of this restructuring measure was about SEK 15 m.

• Corporate functions were established for Human Resources and Communications. A new head of the CVS Division was appointed.

Proﬁ t margin and net sales Dividend per share and earnings per share

Return on capital employed and return on equity

Profi t margin Net sales

Dividend per share Earnings per share

Return on capital employed Return on equity

HIGHLIGHTS OF 2006

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2 * Haldex annual report 2006

• Th e comprehensive reorganization of our largest division, Commercial Vehicle Sys- tems, CVS, featuring more clearly deﬁ ned areas of responsibility and a smaller management team, was completed according to plan. Th e management function is simpler now, with better synergies between the various CVS units. Th e process was completed during the year with the appointment of Jay Longbottom as new division manager. Jay has successfully managed our Hydraulic Sys- tems division since 2002 and, before joining Haldex, pursued an international career in the US and Europe.

• Th e ongoing project to create a better cost structure is a signiﬁ cant part of the process of change. We are continuing to increase the percentage of production and outsourcing to suppliers in low cost emerging countries.

China is an important market in this per- spective, and at the end of October we inau- gurated two new plants for the production of valve spring wire, brakes and hydraulic products in Suzhou, near Shanghai. Eﬀ orts to improve the cost structure within Fric- tion and Actuators in the CVS division are also yielding results, although progress has been somewhat slower than planned.

• On the same operating cost theme, we decided during the year to discontinue operations at one CVS production plant in the US. Th e operations were relocated to another plant in the US and, to a certain extent, to China; some production operations not included in our core activities were liquidated. A decision was also made during the year to reverse the weak trend of proﬁ tability shown by the Garphyttan Wire division through workforce reduction and improvements in marketing activities, among other actions.

• Our eﬀ orts to reduce procurement costs are starting to generate positive results, although they are being oﬀ set by the

The long-term process of change started in 2005 to strengthen Haldex’s profi tability, combined with measures to generate more short-term effects, continued to be management’s top priority during 2006.

Haldex has

favorable potential to increase

its value added

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Focus on long-term proﬁ tability

REPORT FROM THE CEO

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continued sharp increase in prices for input goods, with particular emphasis on metals. We have simply not been able to pass these price increases on to customers quickly enough. But we are continuing to work hard in our eﬀ orts to gain accep- tance for necessary price adjustments.

• Th e target levels for corporate management and HR work were raised with the establishment of a Human Resources function and the appointment of Per Ericson as Executive Vice President Human Resources. A Group-wide action plan was formulated during the year and its implementation is under way. Th e action plan is summarized under the following head- ings: Management Capabilities, Man- agement of Change, Shared Corporate Culture and Improved HR Procedures.

Its goal is to strengthen the organization’s competencies and competitiveness.

Accordingly, in summarizing our eﬀ orts during the year, the high-priority process of change was pursued at a rapid pace and generated favorable results according to plan.

Key steps were also taken to strengthen our long-term proﬁ tability. Th e Group’s growth was largely in line with the target levels in our guidelines, and the earnings and margin trends improved in two of our four divisions. Although Garphyttan Wire did not achieve its historical earnings level, corrective measures were taken during the year. Due to the problems within Wire, earnings were lower than expected and, as a result, the Group’s earnings were also below our target level. With a return on capital employed of 11.5 percent, an operating margin of 4.9 percent and a capital turnover rate of 2.3, we still have some way to go before we meet our Group objectives.

Our work during 2006 will now form

a solid platform for continued eﬀ orts to strengthen proﬁ tability. Given today’s business environment, Haldex has favorable potential to increase its value added for all stakeholders, thanks to its skills, expertise and market position.

We are correctly positioned for growth

In October 2006, I was in China for the inauguration of our new plants in Suzhou, near Shanghai. I have traveled to China regularly for more than 10 years, including several visits as part of my former job with ABB. Every year, the country’s tremen- dous progress becomes more obvious, as hundreds of millions of people become eﬀ ective producers in a global economy and becomes consumers in a rapidly increasing welfare state. Th e same pattern is emerging in several other emerging countries.

Th ere are strong hopes for an unprece- dented trend of social development in our generation that could bring one billion people into the global market economy. It took 40–50 years for countries that were industrialized in the late-1800s to double their GDP. Today, China, India and several

other Asian countries are achieving the same growth in 10 years. And in Eastern Europe and South America, we have many other rapidly growing markets with major requirements. It is also becoming increasingly urgent for all of us to assume greater responsibility for issues related to global climate, lower energy consumption and a better and safer environment, an area in which the transport sector in particular must make substantial contributions. Th ese issues are being reﬂ ected today in increasingly far-reaching development and man- dated regulations, with requirements that mainly apply to the world’s industrialized countries, but are now also being adopted very quickly by major emerging countries.

With our skills and expertise, Haldex is extremely well positioned to meet this demand. We develop and supply products that improve the safety, environmental and driving capabilities of the vehicles used in the transport and infrastructure sectors – the sectors that support economic growth and that must receive a large proportion of the investments required to enhance social standards.

We have focused our growth strategies on the market’s high-growth segments. Brake systems, four-wheel drive systems, hydraulic systems and engine products are focal points for the preferences and requirements of consumers, customers and public authori- ties with respect to the more stringent safety and environmental regulations. At the same, vehicle dynamics are a key diﬀ erentiation factor for the manufacturers.

Some of our successful new products developed during recent years, such as our disc brakes and Alfdex, and several future orders that were booked during 2006, have con- ﬁ rmed that we are on the right track. Haldex signed development and delivery agreements for fuel pumps with three of the world’s leading engine manufacturers, received a large additional order for four-wheel drive from a global car platform, and a new contract for the Alfdex system with Daimler-Chrysler, while also starting production of our new disc brakes for Volvo. All of these developments are answers to market demands for better safety and environmental considerations and vehicle dynamics.

Haldex initiated series deliveries of AWD systems to Land Rover Freelander during 2006.

Strategic cornerstones Growth

• Strengthen position in new markets

• Product development

° Increase supply to heavy duty vehicles

° New generation of AWD

° New technology for diesel engines

• Joint ventures and company acquisitions

Cost improvements

• Increased share of production in low- cost countries

• World-class production

• Reduced purchasing costs

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Th is strategic focus should create opportunities for Haldex to achieve more rapid growth than the automotive industry in general, which is showing average annual growth of 2–3 percent. Th ere are also acquisition opportunities, which we utilized in the beginning of 2007 when we signed an agreement to acquire the Chinese company Shandong Runguang Hydraulics Science & Technology Co. Ltd., one of China’s leading suppliers of hydraulic products for manufacturers of construction machinery. We will continue to seek selective acquisitions.

In concrete terms, our challenge is to grow about 6 percent annually – and to grow profi tably. Over the past 10 years, we have achieved this growth rate by a broad margin. We operate in certain market segments that are relatively cyclical, such as trucks in North America. We must expect substantial upward and downward fl uctuations in parallel with economic trends and demand. However, we have the ability to counteract these fl uctuations through a growing and stronger global presence, a strong aftermarket and our ever-larger port- folio of products and solutions that off er higher value for the customers.

Skills and strategies for customer value

Th e foundation of Haldex’s activities com- prises our knowledge of market trends and customer requirements, and the ability to transform these skills, in cooperation with our customers, through innovative development of proﬁ table products – products that we manufacture and sell eﬀ ectively.

Our product development work focuses on the needs of the high-growth automotive niche segments of the global market.

We have good reason to be proud that a midsize Swedish company such as Haldex has the power to develop world-leading systems for disc brakes and four-wheel drive, as well as new, world-class solutions that enable engine manufacturers to reduce the environmental impact of their products.

We will continue to invest in product development, and we have a number of interesting future projects for the years ahead.

Some examples are a new generation of

four-wheel drive systems, continued investment in sophisticated electronic brake and stabilization systems for trucks and trailers, the next generation of disc brakes, several environmentally compatible engine applications, investments in hybrid technologies and other vehicle dynamics applications, such as telematics, and development of a totally hydraulic driveline with high energy eﬃ ciency. Most of the projects are based on cooperation with customers and international development institutions.

We are driven forward by the customers that buy our products and solutions, many of whom are also our partners in development eﬀ orts. You see many of them every day: Ford, Volvo, Scania, Paccar, Schmitz, DaimlerChrysler, Volkswagen, Hyundai, Audi, Caterpillar and Renault – to name just a few. Th eir conﬁ dence in Haldex is testimony to our success in tough global competition.

Accordingly, it is only natural that customers always come ﬁ rst in the evaluations that form the basis of a company such as Haldex. Our core values are:

• Always putting the customer ﬁ rst; every- thing we do, we do for the customer’s best – knowing that value added for the customer creates added value for Haldex, our employees and the shareholders.

• Respecting the individual; we encourage new initiatives, cooperation and com- munication to strengthen the personal assumption of responsibility.

• Always avoiding waste; everybody has a responsibility to manage our resources in the most eﬀ ective and proﬁ table manner.

Th is is a requirement in our quest to generate more value for ourselves and our stakeholders.

Our fundamental values, our competence and our strengths form the foundation

of Haldex’s business strategies and goals, which focus strongly on improved proﬁ t- ability. Management’s main priorities for the next few years are:

• Continuing the process of change. We will further increase the eﬃ ciency of the regional production base and continue to streamline control and administration procedures. We will also expand production operations in high-growth countries with lower costs, such as China, India, Mexico and Brazil.

• Reducing costs for direct materials through increased and more eﬀ ective procurements from fewer suppliers. We will increase our purchases from low-cost countries and reduce our working capital through improved logistics and inventory management.

• Increasing productivity through even better implementation of our internal eﬃ ciency-enhancement program, the Haldex Way.

• Reducing the gap between Haldex and the competition through greater concen- tration on growth in new markets, better marketing and continued development of products that oﬀ er high value for our customers.

Focus on effi ciency and growth

During 2006, we noted favorable growth of 6–8 percent in the production of heavy commercial vehicles in the US and Europe, with growth of slightly more than 20 percent in Asia, and similar growth ﬁ gures for trailers. Th e market for construction machinery and forklifts also showed healthy growth, and passenger car production remained stable.

Th e general growth potential is promis- ing for our product areas during the next two to three years. Th e exception is the market for heavy commercial vehicles in the US, which is expected to decline during 2007, due to large-scale advance purchases during 2006 before the introduction of new emission requirements. However, this market is expected to recover relatively quickly, and we believe the decline will mainly impact sales of trucks. Haldex will be able to oﬀ set this decline through its substan-

We have a number of interesting future projects

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tial presence in the trailer segment and the aftermarket, and through new product launches such as disc brakes and compressors.

Forecasts of global growth in the heavy commercial vehicle segment are in the range of 2–3 percent annually, and 3–4 percent for passenger cars, with much higher growth projected in emerging countries such as China, India and Brazil and countries in Eastern Europe. We also expect very strong growth in demand for controllable four-wheel drive. Forecasts project growth of 20–30 percent annually.

Accordingly, there is favorable demand potential for our brake products, hydraulic and engine components and four-wheel drive, which will be strengthened by an increasingly sharp focus on reduced fuel consumption and lower emissions as well as improved performance and vehicle dynamics.

Haldex’s management will continue to assign a high priority to cost and effi ciency strategies during 2007, but will also gradually increase the emphasis on growth initiatives. We are striving to achieve much higher business volumes in China, India, Russia and other growth markets, based on increased local production and intensifi ed sales eff orts in the local markets.

We will concentrate strongly on having our four-wheel drive systems in- stalled by a growing number of vehicle manufacturers on more continents, and particularly in the US – the world’s largest market for four-wheel drive systems. Th e Group’s disc brakes provide new growth opportunities that we intend to pursue as part of eﬀ orts to improve our position in the truck market and other segments. We have our spearhead products Alfdex and Varivent, which are only at the beginning of their careers. We also expect Garphyttan Wire to utilize its new production base in China to recover market shares and ﬁ nd new product applications. We also see opportunities arising through commercialization of our many, ongoing development projects. Th e improved management and human resources activities will result in a strong corporate culture characterized by personal assumption of responsibility and the ability to adapt to change.

Against this background, and our high-priority eff orts to strengthen profi tability, I believe that Haldex has good potential for long-term, profi table growth.

Joakim Olsson President and CEO

Haldex is focusing on increasing productivity within rapidly growing sectors

• Electronically controllable four-wheel-drive systems for cars

• Electronic braking and stabilization systems for trucks and trailers

• Electronically controllable hydraulic systems for controlling the movement of industrial vehicles

• Hybrid technology

• Engine applications The vehicle market 2006

North America Europe

Heavy trucks + 11% + 8%

Trailers + 7% + 7%

Passenger cars + 3% + 3%

Forklift trucks + 6% + 8%

Construction machinery + 4% - 4%

Market outlook

• Global production of heavy trucks during 2007 is expected to decline 12 percent, driven by a tem- porary downturn of 45 percent in North America.

Stable market conditions are anticipated in Europe, and growth in Asia is expected to be strong.

• Global production of trailers is expected to increase by 2–3 percent during 2007, with stable market conditions in North America, an increase in Euro- pean production and strong market conditions in Asia, driven by growth in China.

• Light vehicle production is expected to decline in North America during the fi rst half of 2007, followed by some improvement during the second half.

Production in Europe is expected to remain largely unchanged, compared with 2006.

• A continued positive investment climate in the Western World and Asia will lead to continued strong demand for construction machinery and forklift trucks. A certain decline is expected in the American market during 2007 due to weaker housing construction.

Sources: ACT, J.D. Powers, Haldex

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Strategy, business orientation and ﬁ nancial objectives

STRATEGY, BUSINESS ORIENTATION AND FINANCIAL OBJECTIVES

The vision that Haldex will be the global automotive industry’s fi rst choice as a long-term partner is based on carefully formulated strategies. These strategies, in turn, are based on Haldex’s values, whereby we put the customer fi rst, respect the individual and eliminate all forms of waste.

Safety, environment and vehicle dynamics

Th e Haldex Group oﬀ ers proprietary vehicle technology solutions that meet three primary customer requirements: safety, environment and vehicle dynamics. Th e focus on these considerations and requirements enables Haldex to outperform the underlying automotive market as a whole in terms of growth. Demand from vehicle users, combined with increasingly stringent safety and environmental requirements from legi-slators, is resulting in strong driving forces for the development of the products and solutions oﬀ ered by Haldex.

Growth opportunities are strengthened further by the importance of vehicle

dynamics in positioning and diff erentiating between vehicle manufacturer brands. With Haldex’s brake systems, four-wheel drive systems, hydraulic systems and engine products, we are able to off er technical solutions of the highest quality to the world’s leading vehicle manufacturers. In accordance with the company’s vision of becoming a reliable, long-term primary choice, our products are often developed in close cooperation with customers to meet their specifi c requirements and applications. Haldex creates value for the world’s leading vehicle manufacturers, which provides opportunities for continued strong growth and expansion.

Strategies

Haldex is strengthening its skills, growth and profi tability through:

• Product development

• Stronger positions in new markets

• Increased production in low-cost countries

• Reduced purchasing costs

• Improved productivity – Haldex Way

• More effective organization

• Strategic acquisitions

• Niche strategy – safety, environment and vehicle dynamics

Values

• Customer fi rst

• Elimination of waste

Objectives

Haldex’s overall objective is to create value for the shareholders by focusing on competence, stable growth and

increased profi tability. The goal will be achieved through a distinct customer focus, growth in niche sectors offering

higher growth potential than the automotive market in general and determined strategies for cost savings and

greater effi ciency.

Financial objectives

The Group as a whole has two overall objectives:

• 15 percent return on capital employed

• 6 percent annual growth

In addition, the Group has the following objectives:

• 7 percent operating margin

• Capital turnover rate of 2.5

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Strategies for growth and profi tability

Profi tability has the highest priority in the Group’s strategy. In parallel, continued robust growth is an important prerequisite for success. To achieve its fi nancial objectives for growth and profi tability, Haldex applies the following strategies:

Growth

• Niche strategy for increased growth, through a focus on products with higher growth potential than for the vehicle market as a whole. For Haldex, this involves products that improve safety, the environment and vehicle dynamics.

• Strengthening our position in new markets is essential for growth.

Th is will be achieved through goal-oriented expansion, primarily in China, but also in other countries such as India, Brazil, Russia and countries in Eastern Europe.

• Increased competitiveness through product development is a central element in Haldex’s strategy. Th is involves both new product development and eﬀ orts to create new applications for our existing products.

• We continuously analyze opportunities for strategic company acquisitions, while simultaneously launching other forms of cooperation. Acquisitions of complementary technologies and opportunities to more quickly establish positions in new markets are important goals in Haldex’s acquisition strategy.

Proﬁ tability

• As part of eﬀ orts to increase proﬁ tability, Haldex strives to reduce purchasing costs. Accordingly, low-cost countries now account for a growing proportion of procurements.

• Th e cost structure is being improved by increasing production operations in low-cost countries, thus reducing costs and bringing important parts of production closer to our strategic markets.

• Productivity is being improved through continued implementation and development of the Haldex Way management and process improvement system.

• Th e organization’s eﬃ ciency is being improved through more clearly deﬁ ned control and lines of responsibility.

• Making sure that large development projects are proﬁ table.

Mission

Haldex offers proprietary and innovative vehicle technology solutions that improve

safety and environmental considerations and vehicle dynamics in certain niches of

the global vehicle industry. We strengthen our competitiveness and create long-term

customer relations through high-performance products, low total costs for the

customer throughout the product’s service life, ethical business practices and a

commitment to long-term partnerships.

Vision

Our vision is that Haldex will be the global automotive industry’s fi rst choice as a long- term business partner. We shall contribute to social improvements by providing vehicle technology that satisfi es both customers and society. We shall also achieve profi table growth by staying at the cutting edge of technology and developing skilled and motivated employees.

Brake systems

Hydraulics

Spring wire

AWD systems Environment

Vehicle dynamics Safety

Heavy vehicles

Industrial vehicles

Engines

Passenger cars

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Our strategic strengths

Haldex’s mission and strategic orientation position the Group for growth. Th ere are new markets with strong growth and substantial requirements in Asia, Eastern Eu- rope and South America. Th e scope of current social development in countries such as China and India is historically unique.

At the same time, climate issues and other challenges are placing greater demands on all of us to assume a global responsibility for lower energy consumption and a better and safer environment. In parallel with increased global commerce, the Western World’s infrastructure is being expanded and upgraded. For Haldex, this trend is cre- ating strong sources of business growth. We develop and deliver products that improve safety, the environment and the dynamics of vehicles used in the transport and infra-

structure sectors. In the world’s new and expansive markets, investments in these sectors are vital for growth and social welfare.

In traditional industrialized countries, the transport and vehicle sectors must assume a greater responsibility for a better environment and increased safety. With strategic strengths in safety, environment and vehicle dynamics, and our highly skilled employees, Haldex is extremely well positioned to meet demand from the global vehicle industry.

Global presence and world-leading customers

With sales of SEK 7.9 bn and 4,600 employees, Haldex is one of the smaller companies in the global vehicle industry. Nevertheless, we have a global presence and our customers include world-leading vehicle manufacturers, which represents a strategic strength for the

Group. Haldex has production operations distributed among 23 production plants and nine development units in North America, South America, Europe and Asia. We are favorably positioned and able to oﬀ er proprietary products that focus on environment, safety and vehicle dynamics. All of these features and characteristics are strategically important to our customers and provide signiﬁ cant growth potential. Haldex is positioned on the cutting edge of technology in all areas, but without being an inventor.

We develop and commercialize innovations, often in partnership with our customers, to provide maximum customer value. Serv- ing world-leading customers in all product areas subjects the company to considerable demands, but also means that Haldex is a leading global manufacturer and market driver within its market segments.

Our largest customers

Daewoo Bus, DaimlerChrysler, Dongfeng Motor, Eicher, Ford, First Auto Works, General Motors, Hino, Hyundai, Isuzu, INTERNATIONAL, IVECO, Kamaz, MAN, Oshkosh, Paccar, Renault Trucks, Scania, TATA, Volkswagen, Volvo.

Associated, Dana, Federn Brand, Otto Joos, Mahle, Matthew Warren/Automatic, Muhr&Bender, Peterson, Scherdel, United Spring.

Caterpillar, Cummins, DAF, DaimlerChrysler, Detroit Diesel, Renault Trucks, Scania, Volvo.

Behrens, Bär, Dautel, D’Hollandia, Ray Smith, Scania, Sorensen, Zepro, Volvo.

Bobcat, Caterpillar, Dynapac, Genie, Grove, Komatsu, O&K, Vögele, Weyhausen, Volvo.

Atlet, Crown, Jungheinrich, Linde (Still, OM Pimespo), NACCO (Hyster, Yale), Rocla, Toyota (BT, Raymond, Prime Mover).

Audi, Bugatti, Ford, Land Rover, Seat, Skoda, Volkswagen, Volvo.

Arvin Meritor, Bendix Spicer, Bosch, CICM, Dana, Gigant, Great Dane, Guerra&Facchini, Hendrickson, Jindo, Knorr-Bremse, Kögel, Krone, Randon, SAF, Schmitz, Stoughton, TRW, Utility, Wabasch.

Axles & trailers

Cars

Forklift trucks

Industrial vehicles

Tailgate lifting devices

& bogie axles

Engines

Spring manufacturers Trucks & buses

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Competence – innovative product development and world-leading products

A critical success factor for Haldex is the Group’s proprietary competence and capacity to transform innovations into proﬁ table, world-leading products. Investments in product development have been increased gradually through the development of disc brakes and four-wheel drive systems. During 2006, product development accounted for nearly 5 percent of sales.

Product development is a key factor in Haldex’s strategy of off ering products for rapid-growth niche sectors of the global vehicle industry. An important prerequisite is the ability to develop technical solutions to meet customer requirements that are a few years ahead of their time, while also off ering opportunities to conduct product planning activities that enable the company to sell new products eff ectively and with good profi tability. With our model for innovative product development, Haldex will be able to launch a variety of new and interesting products in the market during the next few years.

Productivity, effi ciency and leadership

Haldex has noted continuous proﬁ tability and growth in sales for many years. Key factors in this achievement have been increased productivity and a management philosophy that facilitates the development of the Group’s business activities and its employees’

skills and expertise. Eﬀ orts to achieve continuous improvements in productivity, quality and leadership are managed within the frame-

work of Haldex Way, the Group’s overall management and process improvement system.

Haldex Way

Haldex Way focuses on customer satisfaction and the achievement of world-class production. Th e objective of Haldex Way is to create a continuous link in ﬂ ows between customers, subcontractors and product development. Haldex Way is an overall management philosophy for the entire value chain, including products, information and future requirements.

The concept for Haldex Way is based on three fundamental values:

• Customer ﬁ rst

• Elimination of all waste

Customer requirements are the controlling factor for these values.

Our customers’ needs form the platform for what we produce – motivated employees are a basic prerequisite for the production of qualitative products – and we strengthen our competitiveness by eliminating all forms of waste. Management within Haldex must go hand-in-hand with the principles of Haldex Way and serve in a manner that provides support, leadership and development.

Operating margin Annual sales growth

Return on capital employed

Capital turnover rate

Financial objectives

Due to the nature of Group operations, the fi nancial objectives are expressed as average values over a business cycle.

The Group has two overall objectives:

• 15 percent return on capital employed

• 6 percent annual growth

The Group also has the following second- ary goals:

• 7 percent profi t margin

• Capital turnover rate of 2.5

The objectives apply to the Group as a whole. Targets for the different business areas may vary depending on capital structure, degree of refi nement or other business-related conditions.

Return on capital employed has been less than 15 percent for the past fi ve years.

The long-term process of change started during 2005 to strengthen Haldex’s profi tability remains one of management’s main priorities.

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10 * Haldex annual report 2006 RESEARCH AND DEVELOPMENT

Product development with value for the customer

Haldex’s strong vehicle technology solutions focuses on improving safety, the environment and vehicle dynamics and most impor- tantly, listening to our customers and striving to exceed their expectations.

A key prerequisite for providing successful solutions is having an in-depth knowledge and understanding customer requirements and working together as partners. Having insight and expertise regar- ding products, systems and external factors including impending legislation rein- forces Haldex as an established partner to the world’s leading vehicle manufacturers.

Haldex is an innovative company for which the development of new products is a key to our success. In comparison with other companies of a similar size, Haldex invests considerable resources in product development.

Roughly 30 percent of our products have been developed during the past ﬁ ve years. In 2006, product development amounted to slightly less than 5 percent of consolidated sales. In recent years, there have been nume- rous examples of development projects in which Haldex has successfully industrialized new products.

Decentralized product development

Product development work within the Haldex Group is founded on extensive decentralization. Development is conducted within each business area and in close cooperation with customers and partners. Th e customer base and products diﬀ er consider- ably between product areas. Th e development of new systems for four-wheel drive in cars, electromechanical brakes for heavy vehicles or crankcase-gas cleaning in diesel engines involves diverse products, customers and markets. Speed and ﬂ exibility in product development necessitates a decentralized work method internally in the Group and close cooperation with our customers. Th is particularly applies to rapidly growing markets, such as China, India and Russia.

Th e Group’s product development is cen- trally monitored to provide a clear overview

and maximize effi ciency. Th e underlying factor is a common model for project management to ensure that the principle behind our Group-wide management system, the Haldex Way, is also applied to product development. Specifi cally, this relates to constantly striving for effi cient development processes and continuous improvements.

Value for the customer

Haldex is well established in the international automotive world and has the world’s leading vehicle manufacturers as customers.

Vehicle manufacturers recognize Haldex as a company with the expertise and capacity to industrialize innovations.

Legislation for increased traﬃ c safety and a better environment, as well as improved driving characteristics, together with the need for continuous cost rationalizations, form the driving force behind product development within the automotive industry.

Historically, we have proven that we are a trusted partner in developing products that meet customer demands. Haldex’s strength in the product development cycle lies in its ability to satisfy customer needs based on a platform structure.

Th e basis is either proprietary innovations, ideas for improvements or an external innova- tion for which we have acquired the rights and that we have subsequently developed. By working closely with our customers, we create an application that adds value for customers and economies of scale for Haldex (with

Fixed Caliper Dual Disc is the next generation of disc brakes. The system offers a variety of benefi ts, such as better performance, lower weight, longer life and easier handling of spare parts.

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RESEARCH AND DEVELOPMENT

Haldex owning the underlying technology). Th e concept not only places demands on project management and the ability to adapt, but it also places considerable demands on integrity.

Th e customer must understand that the application – the speciﬁ c product – is unique.

Th e industrialization of innovations requires both knowledge and an early commitment from the customer in the development work. Th is particularly applies to external innovations that Haldex acquires and develops into industrial products. It is important that these innovations have reached a prominent development level and have the potential to attract the market needed to fully take advantage of Haldex’s expertise. Th is must be done in order to integrate the product into the customer’s operations.

First-rate knowledge of our customers’ business and cor- rect positioning in the product development cycle are vital cornerstones in Haldex’s development work.

Cooperation within research and development

To ensure that Haldex retains its position in the future as an advanced partner and progressive product development, we actively participate in a number of national and international research and development projects.

Work on the development of electromechanical disc brakes and electronic braking systems, the Brake by Wire system, is performed within the framework of a broad international collaboration. It is conducted with leading vehicle manufacturers and within the European Union’s SPARC (Secure Pro- pulsion using Advanced Redundant Control) development project. In the latter project, Haldex (along with 20 other

companies) is part of a consortium led by Daimler Chrysler.

Together with Saab Automobile, Scania, Volvo Cars and Volvo Trucks, Haldex is participating in the IVSS (Inte- grated Vehicle Safety Systems) research project. Th e project, which is supported by the Swedish Road Administration, focuses on the development of advanced and intelligent electronic safety systems. Within IVVS, Haldex is participating in two speciﬁ c projects involving the validation of software and the estimation of friction between tires and the road.

Within the framework of the activities conducted by the Program for Automotive Research (PFF), Haldex is participating in the “Green Car” research program – a joint program concerning the development of more environmentally compatible vehicles. Th e program is founded on an agreement between the Swedish government and national vehicle manufacturers. Haldex contributes the knowledge and experience gained through the development of Alfdex, along with other elements.

Haldex has also developed partnerships with universi- ties and institutes of higher education, including Chalm- ers University of Technology, the Royal Swedish Institute of Technology and Linköping University in Sweden. In cooperation with Luleå University of Technology in Swe- den, Haldex conducts research on lubrication and friction properties with the objective of optimizing performance and the service life in oil and disc systems of four-wheel drive systems. To monitor developments within hybrid technology, a research project has been initiated with the Faculty of Engineering at Lund University and a number of car manufacturers. Th e goal is to develop competitive