Prof. Dr. Heinz K. Junker Chairman of the Management Board

For MAHLE, 2006 was a year of consolidation and preparation for important expansion moves in the future. Nevertheless, internal organic impetus enabled us to increase our sales by just under 5% to more than EUR 4.3 billion in a difficult market environment. This is primarily due to our good international market presence and our innovative strength as a technological leader in our core businesses.

On a global scale, the automotive industry was able to further increase its production figures, but there was a shift in the respective importance and growth rates of the various regions of the world. Some of our traditional customers in Europe and America have to contend with considerable problems. Stagnating markets, particularly in Western Europe and North America, and simultaneous construction of new output capacities in countries where labor costs are low, lead to considerable excess capacities, triggering a price war and stretching many companies to their limits.

We cannot avoid the effects of this general market development, which affects all companies in the automotive industry's value chain, right down to the end customer. In order to accommodate the increased demands for price reductions on our products and services and, at the same time, continue the development in revenue we have achieved in recent years, we had to intensify our efforts and strive for even higher productivity increases at all MAHLE locations. We are currently on course to achieve this goal.

At the same time, we want to further strengthen our presence in the major growth markets of the automotive industry. We see great potential for long-term organic growth in this area. In addition to our new engine valve production plant in Wölfersheim, Germany, we commissioned new plants for liquid filtration in Timisoara, Romania, and Shanghai, China, in 2006. In the course of the year, other new plants were constructed in Guangzhou, China, for air filtration system production and in Yingkou, China, for the production of bearings and piston rings.

Great effort was required in order to continue the development in revenue recorded in the previous year. Improvements were achieved in both income from ordinary business activities and the net income for the year, which we regard as a satisfactory development in comparison with the industry as a whole. However, we had set ourselves higher goals for the end of the year. In particular, the unexpectedly sharp rise in the cost of materials put a strain on profit. Even with considerable efforts in the area of procurement and purchasing policy, these effects could not be controlled, as almost all raw materials used in our production plants are dictated by global market conditions. In addition, various exchange rate developments had an adverse effect on profit.

The situation at many of our domestic locations continues to appear problematic, despite intensive efforts. We will therefore have no option but to bring in more streamlined cost structures, adapted to potential order levels.

After all, our strategic objective must be to strive for cost leadership on a global scale and, at the same time, consolidate and expand our status as a global technological leader. With this in mind, we began to substantially reinforce our advanced development capacities in 2006. New engine technologies, such as downsizing, super charging, and exhaust gas recirculation, which all help to reduce consumption, CO₂, and exhaust gases, are being researched in both theory and practice. The engine know-how of MAHLE Powertrain (formerly Cosworth Technology) is proving to be very helpful. Our new research and development center in Shanghai, China, commenced operations in April. This strengthens our competence in the increasingly demanding and diversified Asian markets. Similarly, we have further renovated and expanded our development locations in Japan, in order to continually improve the local service for our large Japanese customers. Toward the end of the year, construction work was started on another new research and development center near São Paulo in Brazil. In future, this center will be responsible for carrying out all application developments for the South American market and other special Group tasks, as well as for the topic of flex fuel.

In general, we assume that the process of consolidation in the first supply stage of the automotive industry will intensify in the future. Therefore, it is vital for MAHLE to continuously press ahead toward the long-term strategically defined growth objectives. This can only be achieved with stable development in revenue, both now and in the future. It forms the basis for our future strategic objectives.

In the first quarter of 2007, by acquiring the engine parts group of the American company Dana Corporation, Toledo, Ohio, and additional production plants for engine valves, we took further steps to bring our worldwide market position in the areas of piston rings, bearings, valves, and in the free trade business for engine components in line with our strategic objectives. Furthermore, we expect to aquire the air intake module and air filtration business segment of Siemens VDO Automotive shortly. With additional sales potential of approximately EUR 1 billion, it now makes good sense to integrate 33 new production plants and approximately 8,000 new employees into the global MAHLE production network. Consequently, restructuring expenses and integration costs will put a strain on the development in revenue for 2007. However, if we want to remain the partner of choice for our global customer base, we must further expand our worldwide presence and offer premium-quality products and services using the best technology at attractive prices. We can only achieve these goals by successfully integrating the business segments described and with above-average dedication from all employees in the global MAHLE family. "Driven by performance" is part of our corporate identity and our brand essence. Performance is the driving force for a successful future.

On behalf of the Management Board, I would like to thank all employees for their dedication and commitment in the past business year and our business partners for their good cooperation.

Heinz K. Junker