Press information
Speech of Dr. Wolf-Dieter Bopst
Innovative products are Osram´s engine of growth
Dr. Wolf-Dieter Bopst
President and CEO of Osram GmbH
Annual Report Press Conference in Munich on November 23, 2004
- The spoken word is binding -
Innovative products are Osram´s engine of growth
Ladies and Gentlemen,
Let me begin by presenting the key figures for the past fiscal year (October 1, 2003 to September 30, 2004). To put it briefly, 2004 was Osram´s most successful fiscal year in the last two decades in terms of operating performance. Moreover, we succeeded in boosting our Group profit margin into the double-digits. The primary source of this growth was our innovative products.
Higher sales despite negative currency effects
Despite negative currency effects of 6 percent, attributable primarily to the U.S. dollar, we achieved a nominal increase in worldwide sales of 2 percent compared to the previous year, for a total of EUR4.240 billion. In other words, we posted nominal growth for the first time after two years. Adjusting the figures to exclude currency effects, we generated respectable sales growth of 8 percent in fiscal year 2004. While we benefited from a slight improvement in the global economy, this success mainly was driven by our innovative products, which made a major contribution to our volume growth of 12 percent. In view of this volume growth, we believe that Osram effectively defended its strong position as one of the world´s two leading lighting manufacturers.
Return on sales hits 10.5 percent
We improved Group profit by a substantial 9 percent to EUR445 million. As a result, the Group profit margin rose from last year´s already high level of 9.8 percent to hit a new record of 10.5 percent in fiscal year 2004. The increase was achieved despite tougher competition and persistently high development input expenses and start-up costs for new products, especially organic light-emitting diodes (OLED) and high-pressure discharge lamps with ceramic burner. As in the past, the result of fiscal year 2004 was burdened by restructuring expenses in Germany and the United States.
Our profitability was mainly due to significant productivity gains amounting to over 8 percent worldwide, which resulted from targeted cost-cutting programs and economies of scale.
Other contributing factors include our strict cost-consciousness in all areas and our expanding manufacturing presence in low-wage countries. Effective management of our patent portfolio also had a positive effect on Group profit. The main contributors were licensing income from white LEDs, and two strategic collaborations with Samsung Corning and Coretronic. We granted licenses to both of these companies for the manufacture and sale of our mercury-free Planon flat lamp.
Consistent asset management led to another significant reduction in average business property assets. A cautious investment strategy helped us to achieve net cash from operating and investing activities of EUR453 million, which was higher than Group profit and further evidence of our company´s good operating performance in fiscal year 2004.
Workforce now exceeds 36,000
Our global workforce increased from 35,563 last year to 36,644 on September 30, 2004. The rise is a result of Osram´s strong volume growth and its expansion, particularly at our production locations in China and Eastern Europe.
2004 highlights Before going into more detail on development in the Asia-Pacific, NAFTA and Europe regions, I would like to present the highlights of the past fiscal year:
- In January 2004, we acquired the Russian fluorescent lamp manufacturer Svet.
- In April 2004, we kicked off job production of organic light-emitting diodes (OLED) at our plant in Malaysia.
- Another success came in late August 2004, when we acquired a minority holding in Felco, a Chinese lamp manufacturer (the transaction will be subject to approval by the Chinese authorities).
- And last but not least, we not only maintained our workforce in Germany, we even expanded it slightly from 8,851 to 8,972.
Now, let´s take a look at Osram´s regional activities.
Asia-Pacific: Dynamic development
As in past years, Asia-Pacific was an extremely dynamic market for us in 2004. We boosted sales by 10 percent to EUR637 million. Excluding currency effects, the growth rate is as high as 16 percent. Consequently, Asia-Pacific´s share of worldwide business rose again, this time to 15 percent.
Highly satisfactory growth rates were achieved in China, Taiwan and Korea. We recorded a very good increase in sales of automotive lamps in Japan. Furthermore, lamps for video projection and the corresponding electronic control systems were extremely successful among our Asian original equipment manufacturer customers.
One pillar of our global strategy is to invest in growth regions. Active in China and Hong Kong since 1995, Osram is already represented there by majority holdings in three joint ventures. Against this backdrop, our minority holding in Felco represents another step towards expanding our presence in the Asian market. Together with Prosperity Lamps & Components Co. (Prosperity) of Hong Kong, we acquired 13.47 percent of Foshan Electrical & Lighting Co., Ltd. (Felco) from the City of Foshan. The investment is contingent upon approval by Chinese authorities. Felco, listed on the Shenzhen Stock Exchange since November 1993, is the largest local lamp manufacturer in China according to our estimates. The company´s sales in the past fiscal year (ending December 31, 2003) amounted to EUR103 million.
The significance of the Asia-Pacific region is likewise reflected in our personnel statistics: compared to last year, the number of employees rose by over 1,000 to exceed 11,000. Production expansion activities were concentrated in China, where we now have a total workforce of nearly 6,000.
As I mentioned, we kicked off job production of organic light-emitting diodes (OLED) at our plant in Penang, Malaysia, in fiscal year 2004. An order worth roughly EUR1.5 million came in for our new Pictiva product line to be used in a subdisplay for a mobile telephone. Other OLED applications include small displays in organizers, video cameras, car radios and even medical devices. Displays equipped with self-luminous OLEDs are an advantage, because they offer greater contrast and a large viewing angle. They are very flat and thus make it possible to design extremely small and slim devices. Their reaction time is fast, meaning that information, graphics and animated images can be displayed in real time.
As far as we know, Osram is currently the largest manufacturer of polymer-based organic light-emitting diodes. Although OLED sales are still minimal compared to the rest of our opto semiconductor business, we are convinced that our investment in this exciting technology will pay off. OLEDs will be a key market in the future. At the same time, there´s no question we´ll have to be armed with patience.
NAFTA: Success under improved conditions
In view of the improved economic conditions, we were quite successful in the NAFTA countries, meaning the United States, Canada and Mexico. Sales reached some EUR1.7 billion, which is equivalent to 41 percent of our worldwide business. This represents a drop of 3 percent below the previous year´s level due to currency effects. Expressed in U.S. dollars, however, we grew sales by 7 percent and thus succeeded in expanding our share of the market.
The most successful products in the United States were energy-saving lamps, high-quality incandescent lamps, automotive lamps for the aftermarket and specialty lamps in the Display/Optic division. Thanks to the success of design-in activities for the automotive industry, we achieved excellent growth rates with opto semiconductors.
LEDs continued to take the automotive lighting sector by storm. Osram is the world market leader in light sources for motor vehicles, including conventional products and those based on semi-conductor technology. For example, we supply semi-conductor light sources for colored backlighting in the Ford Mustang Concept Car, a vehicle boasting up to 300 horsepower that was premiered at this year´s North American International Auto Show in Detroit. The push of a button is all it takes for the driver to select one of 127 color tones to backlight the instrument panel and set the mood inside the vehicle. The broad range of colors is made possible by the precise activation of red, blue and green LEDs. The color can be variably adapted to the personal preferences and color perception of the driver. Thanks to intelligent heat dissipation methods, these light sources do not need any additional cooling devices and therefore take up less space. Moreover, the improved housing permits very close and flat arrangement of the LEDs on the circuit board, meaning that the light can be distributed more uniformly in all colors. Finally, these cutting-edge light sources reduce power consumption and are totally lead-free.
Europe: Higher sales thanks to opto semiconductors
At EUR1.6 billion, sales in Europe were 5 percent above the previous year´s level. This corresponds to 38 percent of our worldwide business. Above all, opto semiconductors were the main source of growth, in addition to line-voltage tungsten halogen lamps, metal-halide lamps with ceramic burner and electronic control systems. We also generated very good sales with xenon headlamps for motor vehicles.
In Eastern Europe, where we have production locations in Slovakia, the Czech Republic and Russia, we achieved satisfactory growth of 9 percent. Future success in Eastern Europe depends not only on new products, but also on a competitive cost position in the standard products segment. So, the acquisition of Svet, a fluorescent lamp manufacturer in Smolensk, Russia, was a major step forward. Today, Osram is the first international lighting corporation to have its own plant in Russia. We consolidated the company at the beginning of the current fiscal year 2005.
We are very pleased that Svet is already operating at a profit. But it´s no coincidence. The company we acquired was already quite successful in Russia. In addition, our integration team of 12 Germans and 12 Russians tackled the project very effectively and is working swiftly and steadfastly to realign the organization. We have set clear priorities for integration: highest on the list are product quality, production modernization and environmental issues, particularly the reduction of mercury. We have made good progress in all of these areas. Production of T8 fluorescent lamps in Smolensk already meets Osram standards to a large extent. Starting in spring 2005, these lamps will bear the Osram quality seal and be marketed locally under the Osram brand name. In the other product families, we will continue to serve the Russian market with the Svet brand. In order to reach premium quality in both processes and products, we are investing in staff development as well: in addition to management and language courses in cooperation with the local university, we plan to establish a training workshop like the one in Augsburg.
Speed and persistent implementation of realignment concepts together with local management make up a formula for success that already proved its worth back in 1993, when we took over Sylvania´s North American activities although it must be kept in mind that the Sylvania acquisition was on a completely different scale. After all, Sylvania North America was nearly as big as Osram at the time. Basically, our principle is to plan acquisitions very carefully, and then implement them rapidly.
Despite all our expansion activities in growth regions, our business and production operations in Germany still play a significant role in the organization.
Germany: Sales growth with opto semiconductors
Germany is the largest lighting market in Europe. We generated sales of EUR522 million in Germany, or 12 percent of our worldwide business. The general economic situation and stiff price competition, primarily from Asian suppliers, continued to put a damper on our activities. The trend toward innovative, high-quality light sources continued unabated. The 6 percent rise in sales compared to the previous year is exclusively the result of opto semiconductor business, which achieved double-digit growth. LEDs were in very great demand for industrial applications, such as displays and interior/exterior automotive lighting.
Capital expenditures on plant and equipment: Innovations lead the way
EUR121 million - or a good half of the EUR226 million we invested worldwide in plant and equipment - were spent in Germany in the past fiscal year. The greatest portion went to enlarging our opto-chip factory in Regensburg and expanding its production capacity. Opened in 2003, it is the most advanced opto-chip factory in the world. The second construction phase will be largely completed this calendar year. We will then have a total of 30,000 square meters of gross floor space, with 5,500 square meters of clean room. Other significant investments in Germany were made in our automotive lamp production facilities in Herbrechtingen, and in a new, highly flexible production line in Berlin for discharge lamps used in video projection and rear projection televisions.
Over 8,900 employees
As at September 30, 2004, we counted 8,972 employees in Germany or 121 more than in the previous year.
I am often asked how we managed to expand our workforce in Germany over the last 10 years, despite the saturated market and increasingly fierce competition on the world market. In 1994, the headcount exceeded 7,800, today it´s over 8,900. Of course, getting involved in the opto semiconductor business had a lot to do with the increase.
As in the past, retaining jobs and production activities in Germany still requires us to keep a very close eye on manufacturing costs and innovation leadership. Individual, site-specific solutions elaborated together with the respective Works Councils have made a positive contribution. I would briefly like to go into greater detail on the subject of cost management and innovation leadership.
Cost management: Every cent counts
In our business, it has always been true that every cent counts. A glimpse at our history explains why. For a long time, we chiefly produced "ten-a-penny" products like the good old incandescent lamp. Today, we are a high-tech company in the lighting industry, but cost-consciousness is still deeply rooted in our culture. We regularly benchmark our manufacturing costs to survive the fierce competition, particularly with Asian suppliers. In fiscal year 2004, we further optimized our production workflows in many respects and continued to make excellent progress in productivity. Worthy of special mention in this context are the over 90 cost-cutting programs and nearly 50 design to cost and customer needs projects which Osram has in place all over the world.
To stay competitive on a global level with products entailing high wage costs, our efforts in Germany were supported by the continued expansion of locations in low-wage countries. In the period under review, we completed the transfer of fine wire production in Schwabmünchen and filament production in Berlin-Wedding to Bruntál, in the Czech Republic, as we had announced some time ago.
As a proactive measure, Osram´s executive management this year also entered into a discussion with the Wirtschaftsausschuss (Economic Affairs Committee of Osram) to talk generally about strategies for retaining jobs and production activities in Germany - in good time, before any specific offshoring activities become necessary. We have only just started this fundamental debate, and our goal is to continue to operate successfully in Germany in the years ahead. However, the fact is that we must examine every new investment to determine which of our global locations offers the most favorable conditions, also with regard to the cost situation.
Innovative products secure jobs
To retain production locations in Germany, we need not only competitive manufacturing costs, but also a continuous succession of intelligent, new products. Allow me to explain this concept briefly for each of our German locations by presenting a few examples.
- Augsburg: Lumilux Skywhite
Augsburg is our worldwide competence center for fluorescent lamps and compact fluorescent lamps. It is also where we manufacture our Lumilux Skywhite T8 fluorescent lamp. It has the new color appearance 880, which imitates daylight and allows high-contrast vision with low fatigue.
- Berlin: VIP
The products we manufacture in Berlin include discharge lamps for video projection and rear projection televisions. Our VIP lamp is characterized by an extremely short arc and a long service life. Berlin is our competence center for high-pressure discharge lamps, including xenon headlamps and our likewise very successful metal-halide lamps with ceramic burner for the general lighting segment.
- Eichstätt: Ministar
The development of the Ministar halogen lamp, which is manufactured in Eichstätt and had its world premiere at the Light + Building trade show in April, reflects the trend toward miniaturization. The special feature of the Ministar is that the reflector is integrated in the lamp itself.
- Herbrechtingen: Truckstar
Up to 100 percent more light and nearly double the service life are the main advantages of our Osram Truckstar H7 headlamp for trucks and buses, which is manufactured in Herbrechtingen. In addition to this 24-volt lamp, we are also very successful with our H7 12-volt lamps for motor vehicles, such as the Silverstar, which generates up to 50 percent more light.
- Wipperfürth: Xeradex
The Xeradex, which is manufactured by Radium, our subsidiary in Wipperfürth, is a mercury-free xenon lamp that emits UVC light. It is used in industrial cleaning processes, for example in chip production.
- Regensburg: Ostar high-power LED
In Regensburg, we produce chips for LEDs. The art of LED light is to transmit the light generated in the semiconductor crystal to the outside. Using thin-film technology, we have set new standards when it comes to light output. We just introduced our latest product based on this technology, the Ostar high-power LED, at the Electronica trade show two weeks ago. This small RGB light source emits virtually all of the light generated on the inside. With 120 lumens, it is about four times brighter than the Golden Dragon, which previously was our LED product with the highest light output. Thanks to its extreme brightness and flat dimensions, the Ostar is an attractive product for use in devices such as miniature projection devices, which are installed in projectors the size of a pack of cigarettes. We expect other applications to develop in the medical equipment and automotive sectors as well. Head-up displays and automotive headlamps would benefit greatly from the high light output of these LEDs.
- Schwabmünchen: Phosphor for LEDs
Schwabmünchen supplies the phosphor required for LED production. Manufactured under clean-room conditions, the material makes it possible to produce light-emitting diodes in a wide variety of color tones. Our Schwabmünchen site demonstrates that the high-tech trend has also hit the field of primary products manufacturing.
- Traunreut: Quicktronic Intelligent (QTi)
Our Quicktronic Intelligent (QTi) electronic control systems built in Traunreut make life easier for building developers and light planners. Thanks to these devices, T5 fluorescent lamps of the same length but different wattages can be operated in a single basic luminaire. The ECG with its integrated microprocessor automatically detects the lamp and operates it with the correct electrical parameters.
EUR211 million for research and development
As you well have gathered so far, innovations are the engine of our success. For this reason, we invested 5 percent of sales in research and development, thus matching the level of the previous year. The total investment in fiscal year 2004 came to EUR211 million. The goal of our research work is to make light sources more energy-efficient and environmentally friendly, while simultaneously meeting the high demands of lamp designers and original equipment manufacturers. One focus of our R&D investments was our OSRAM Opto Semiconductors subsidiary, where R&D expenditure made up 12 percent of sales. Speed as a competitive advantage The time factor is another aspect of increasing importance in our business. This applies particularly to design-in activities, in which we must rapidly incorporate customer needs into our engineering work. For example, we collaborate with Asian video projector manufacturers who are active around the clock seven days a week. They expect us to provide extremely fast solutions to their needs and problems. There´s no question about it: this is a major challenge, and German working hours can sometimes pose a problem.
Against this backdrop, we are very proud to have received the Supplier Excellence Award 2003 from Texas Instruments. Of the company´s more than 25,000 suppliers, only 27 worldwide received the coveted award. Evaluated on the basis of technology, quality, environmental responsibility, reliability, punctuality and, most importantly, responsiveness to questions and problems, our products and services were given an excellent performance rating.
This extremely dynamic environment prompted our small but exclusive Photo-Optic division to realign its structures and change its name to "Display/Optic" at the start of the current fiscal year. The division is no longer organized by technologies, but rather by applications, which puts it much closer to the customer. The four Business Units representing our core applications Display Systems, Entertainment, Cinema and Semiconductor & Medical - are responsible for business activities worldwide. The new name, "Display/Optic," more accurately reflects our current and future product portfolio. Some of you may remember when hobby photographers could buy flash cubes from Osram. That was a long time ago!
Osram, a high-tech company in the lighting industry
Today, Osram is a high-tech company in the lighting industry across all divisions. We know that we can only safeguard and expand our leading position in the world market by means of consistent innovation strategies. Some 40 percent of our sales are generated by innovative products, over a third of sales are contributed by electronic control systems, electronically operated lamps and opto-electronic semiconductors. By contrast, the good old classical incandescent lamp contributed only about 4 percent to sales in fiscal year 2004.
Outlook
To conclude, I would like to give you a brief outlook on the future. In view of the uncertain economic forecasts for the coming year, it would not be prudent to make definite predictions for fiscal year 2005. What is certain, however, is that we intend to adhere to our long-term strategy:
- To consistently globalize business,
- To resolutely promote innovation and venture into new growth sectors, and
- To continuously strive for cost leadership.
At the same time, it is still crucial for us to be able to react quickly and flexibly to changes in the market.
We are generally confident that Osram will not only grow sales adjusted for currency effects again in fiscal year 2005, but that we will also further consolidate our earning situation and leading position in the world market.
This presentation contains forward-looking statements and information - that is, statements related to future, not past, events. These statements may be identified either orally or in writing by words as "expects", "anticipates", "intends", "plans", "believes", "seeks" "estimates", "will" or words of similar meaning. Such statements are based on our current expectations and certain assumptions, and are, therefore, subject to certain risks and uncertainties. A variety of factors, many of which are beyond Osrams´ control, affect its operations, performance, business strategy and results and could cause the actual results, performance or achievements of Osram worldwide to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. For us, particular uncertainties arise, among others, from changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products or technologies by other companies, lack of acceptance of new products or services by customers targeted by Osram worldwide, changes in business strategy and various other factors. More detailed information about certain of these factors is contained in Siemens´ filings with the SEC, which are available on the Siemens website, www.siemens.com and on the SEC´s website, www.sec.gov. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the relevant forward-looking statement as anticipated, believed, estimated, expected, intended, planned or projected. Osram does not intend or assume any obligation to update or revise these forward-looking statements in light of developments which differ from those anticipated.
