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Management Report > Report on Expected Developments > Annual Report 2014 > Continental AG

Sources: IMF – World Economic Outlook Update 1/2015, central banks 12/2014, European Commission – Eurostat, Germany Trade & Invest 2014 – New Indian Government Presents Ten-Point Plan, statistical offices of the respective countries, Destatis 2014, own estimates.

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7.4% _6.8% 2015

2014 2015 0.1%

> Tax increase suspended for now: With the re-election of Prime Minister Abe in December 2014, the Japanese population confirmed the course taken by the government (“Abenomics”). The suspension of the tax increase for the time being is expected to lead to a slight increase in growth in 2015.

> Inflation target to be achieved in 2015, too: The inflation rate is expected to achieve the target of 2% again or slightly exceed it in 2015.

> Strong exchange rate fluctuations: Depreciation of the yen in relation to the U.S. dollar will make Japanese exports cheaper; by contrast, the yen is currently displaying an upward trend in relation to the euro.

> Structural problems: The demographic development, a rigid labor market and overregulation are holding back growth.

JAPAN

2014 2015

> Further decrease in growth: Economic growth is expected to slow down again in 2015. However, this decreasing momentum is consistent with the political goal of sustainable growth. With the cur- rently anticipated GDP growth of 6.8%, China is still among the world’s fastest-growing economies.

> Slight rise in inflation: The inflation rate is expected to increase from 2.3% to 2.5%.

> Appreciation of renminbi: The appreciation of the renminbi in relation to the euro is likely to con- tinue in 2015 despite the recent cut in the key interest rate.

> Debt risk: The high level of debt of the regional authorities represents a risk in the medium term. CHINA BRAZIL 0.1% 2014 2014 2015 5.8%

> Further increase in economic growth anticipated: The recent positive development is driven by a 10-point plan by the government elected in 2014, which provides for infrastructure investments and a reduction in bureaucracy, among other goals.

> Inflation to decrease further: The inflation rate, which already decreased significantly over the course of the previous year, could fall slightly again in 2015.

> Slight decrease in interest rate: The key interest rate, which was raised to 8.0% in January 2014, was lowered again to 7.75% in January 2015. Further interest measures are possible in principle due to diminishing pricing pressure.

INDIA

> Continued low economic growth: Only a slight increase in economic growth is expected again in 2015. The weak domestic economy and high interest rates will probably continue to create a diffi- cult environment.

> Slight decrease in inflation rate: According to the latest estimates, inflation could fall to 5.9% in 2015 (2014: 6.3%).

> Rising unemployment: The unemployment rate is expected to increase slightly to 6.1% in 2015 (2014: 5.5%). 0.3% 0.6% 6.3% 2015 3.6%

> U.S. economy to continue recovery: In the U.S.A., growing consumer spending by increasingly well- off private households and a high level of corporate investment are expected to continue to drive growth in 2015.

> Financial policy to remain neutral: The budget deficit is likely to improve slightly due to a rise in economic activity alone.

> U.S. Federal Reserve (Fed) to begin gradual exit from very expansive monetary policy: The eco- nomic upturn and rising employment figures indicate that an interest rate turnaround by the Fed can be expected in the second half of the year at the latest.

U.S.A.

2.4% 2014

Management Report Report on Expected Developments Annual Report 2014 Continental AG 134

Global original equipment business with vehicle manufacturers is crucial to the performance of the Automotive divisions Chassis & Safety, Powertrain, and Interior. This also applies to the Conti- Tech division, which generated about 58% of its sales in the year under review with global automotive original equipment manu- facturers.

By contrast, the development of the global replacement markets for passenger, light truck and commercial vehicle tires is the key success factor for the Tire division, since original equipment busi- ness with automotive manufacturers accounts for only 29% of its sales.

Development of light vehicle production

For the global production of light vehicles (passenger cars, sta- tion wagons and light commercial vehicles weighing less than 6 tons), we currently anticipate growth of around 2% to approxi- mately 89 million units in 2015.

China is once again expected to contribute the largest share of the global increase in production. However, it currently seems likely that the pace of growth will slow further. We anticipate growth of 6% to 8% here in 2015. Owing to the size the market has reached, this would nonetheless be equivalent to between 1.4 million and 1.8 million units. Following the Japanese econo- my’s slide into recession at the end of 2014, we do not currently see any signs of a turnaround and therefore anticipate a further decline in production volumes in 2015. By contrast, India, Indo- nesia and Thailand should be able to expand their light vehicle production in comparison to 2014 as a result of growing de- mand. For Asia as a whole, we anticipate a 4% increase in pro- duction to 47.5 million units in 2015.

We expect NAFTA to post another increase in production in 2015. However, owing to the high level of production that has already been reached, this increase is only likely to come to around 2%. There are sales opportunities arising from the still comparatively old pool of passenger cars in the U.S.A., where the average age of a car is over eleven years old. The recent signifi- cant decline in gasoline prices should also help boost demand.

With regard to light vehicle demand and production in Europe in 2015, we currently expect to see a split between two different developments. For the Western part of Europe we anticipate a slight upturn in domestic demand, combined with generally stagnating export figures. However, declining volumes are ex- pected again in various Eastern European countries and particu- larly in Russia. For Europe as a whole, we expect light vehicle production to increase by just under 1%.

Development of heavy vehicle production

After stagnation in the previous year, global production of heavy vehicles should increase again somewhat in 2015 in view of the growing global economy. We are currently forecasting an in- crease of around 2% to 3.2 million units worldwide.

As a result of the positive economic prospects for the U.S.A., we expect production in NAFTA to increase by 5%. For Europe, South America and Asia, we anticipate increases of up to 2%.

Development of passenger car and light truck tire replacement markets

We expect the positive trend in demand for replacement pas- senger car and light truck tires to continue in 2015. Here we are anticipating a global increase in demand of 3%.

Over half of this growth is once again likely to be attributable to the Asian market – still driven by Chinese demand. In Europe, demand should improve further and rise by 2%. For NAFTA we still anticipate slight growth of 1% as a result of price increases in the budget tire segment owing to the decision by the Interna- tional Trade Commission (ITC) with regard to imposing import duties. For South America and the other markets, we currently anticipate little change in volumes. Furthermore, additional de- mand for replacement tires could result from an increase in miles driven due to cheaper gasoline prices in the respective regions. Light vehicles1 in millions of units Heavy vehicles2 in thousands of units Vehicle production 2015 2014 2015 2014 Europe3 _{19.9 19.8 553 543} NAFTA 17.3 17.0 570 542 South America 3.7 3.8 190 187 Asia4 _{47.5 45.9 1,890 1,858} Other markets 0.9 0.9 0 0 Worldwide 89.3 87.4 3,203 3,130

Source: IHS, preliminary figures and own estimates.

1 Passenger cars, station wagons, and light commercial vehicles (<6t). 2 Commercial vehicles (>6t).

3 Western, Central and Eastern Europe, including Russia and Turkey.

4 Asia including Kazakhstan, Uzbekistan, Middle East and Oceania with Australia.

Management Report Report on Expected Developments Annual Report 2014 Continental AG 135

Passenger car and light truck tires in millions of units

Commercial vehicle tires in millions of units

Replacement sales of tires 2015 2014 2015 2014

Europe 326 320 22.8 22.3 NAFTA 283 280 22.2 21.5 South America 66 66 13.3 13.6 Asia 411 387 88.8 87.0 Other markets 41 40 6.7 6.7 Worldwide 1,127 1,093 153.8 151.1

Source: LMC World Tyre Forecast Service, preliminary figures and own estimates.

Development of commercial vehicle tire replacement markets

Global demand for replacement commercial vehicle and trailer tires should increase further in 2015 due to increasing tonnage in most countries and regions. After strong growth in the previ- ous year, we currently anticipate a 2% increase in global sales volumes for commercial vehicle tires.

We expect this growth to be attributable to increases in demand of around 3% for NAFTA and around 2% each for Europe and Asia. For South America and the other markets, we currently anticipate a slight decrease or almost no change in volumes.

Management Report Report on Expected Developments Annual Report 2014 Continental AG 136

Comparison of the past fiscal year against forecast

Continental achieved, and in some cases significantly exceeded, the key figures from the forecast for fiscal 2014 it issued in March 2014. Due primarily to negative exchange rate effects and lower-than-expected replacement tire sales, we were unable to achieve the sales figure of around €35 billion we had fore- cast for the corporation at the beginning of 2014. The negative effect of exchange rates amounted to about €470 million. In both the Automotive Group and the Rubber Group, we achieved our own targets for the adjusted EBIT margin. Net interest expense was better than expected, due in part to the delay in closing the acquisition of Veyance Technologies. The reason for the lower-than-expected tax rate is the recognition of deferred tax assets in the U.S.A. in the amount of €161.2 million and the recognition of deferred tax assets on interest carry- forwards in Germany in the amount of €98.0 million, which are considered likely to be utilized in the future. Both reduced the income tax reported in the statement of income. Free cash flow before acquisitions was higher than we had forecast as a result of the higher EBIT and the positive development in working capital as at the end of the year.

Order situation

The Automotive Group continued to experience a positive trend in incoming orders in the past fiscal year. All together, the Auto- motive divisions Chassis & Safety, Powertrain, and Interior ac- quired orders for a total value of some €30 billion over the en- tire duration of the deliveries for the vehicles. These lifetime sales are based primarily on assumptions regarding production volumes of the respective vehicle or engine platforms, the agreed cost reductions, and the development of key raw mate- rial prices. The volume of orders calculated in this way repre- sents a benchmark for the sales achievable in the medium term that may be subject to deviations if the specified influencing factors change. Should the assumptions prove to be correct, the lifetime sales are a good benchmark for the sales volumes that can be achieved in the Automotive Group in four to five years.

Because the replacement tire business accounts for a large share of the Tire division’s sales, it is not possible to calculate a reliable figure for order volumes. The same applies to the Conti- Tech division, which consists of eight business units operating in various markets and industrial sectors, each in turn with their

own influencing factors. Consolidating the order figures from the various ContiTech business units would thus be meaningful only to a limited extent.