A Key to our Profitability
Our products never get a second chance. We must deliver flawless products and still meet the tough price conditions in the automotive industry. Achieving superior quality, while reducing scrap rates and other costs is therefore key to our profitability.
"No spills allowed"
Superior quality is a "must" for a reliable, world-class supplier of safety systems. It affects our ability to win new orders, as well as impacting our margins through scrap and other related costs.
For these reasons, we are committed to a "zero defect" principle that emphasizes proactive methods aimed at eliminating root causes, rather than screening out non-conforming products at the end of the production line. There are four "safety nets" in this policy.
First, all new products must pass five checkpoints in Autoliv's Product Development System (APDS): Project planning, Concept definition, Product and process development, Product and process validation, and Product launch. In this way, we proactively prevent problems and ensure we deliver only the best designs to the market.
A CDA-specialist (Corporate Design Authority) maintains in-depth knowledge about each of our product families. The CDA continuously ensures that the latest innovations are integrated into our systems, as well as approving all critical design changes that result from our aggressive cost reduction programs.
Second, we have developed a global Autoliv Supplier Manual (ASM) that defines a mandatory supplier collaboration process. We also require our suppliers to comply with QS 9000 (a special automotive quality standard) or with the new ISO/TS 16949.
Third, in Autoliv's Production System (APS), our production lines are designed to stop automatically if a component is not assembled correctly.
Equally important is the training of our employees, especially our line operators. Emphasis is placed on ensuring that all team members are aware of and understand the critical connection between them and our life-saving products. This awareness is highly motivating for all Autoliv employees and results in a rich flow of proposals for continuous improvements.
Fourth, as part of Autoliv's Quality System, we prevent bad parts from entering our plants, and eliminate bad intermediate products as early as possible. Our manufacturing lines are equipped with sensors, cameras and other instruments, at selected critical stations, for detecting errors as early as possible.
As a supplement, we maintain an advanced product traceability system. Should there be a suspected problem, we are capable of tracing the issue (including components) to the vehicle level. This means that vehicle owners can rest assured that necessary actions will be taken without delay, which contributes to increasing the confidence people place in our safety systems.
Flawless products and deliveries
Because quality ratings determine many buyers' choice of car model, superior quality has become increasingly important for automotive suppliers. Quality, however, is not just about product performance. It also includes many other aspects, such as flawless labeling, precise delivery of the right parts at the right moment, as well as correct color nuance and surface texture on steering wheels and other products where the "look and feel" is important to the car buyer.
We therefore register all deviations and include them in our ppm (parts per million) quality measure. The highest level accepted by our customers is 10 ppm. This represents one non-conforming part per hundred thousand delivered. To give an idea of how tough this target is, it could be compared to the number of days since 1750 (i.e. before, for instance, the founding of the United States). Ten ppm would require that there not be a single bad day in 250 years.
on track to 100%
At the end of 2005, over 90% of Autoliv's facilities were certified to the new automotive standard ISO/TS 16949, adopted in 2002. Combined sales from these facilities represented 98% of consolidated sales, which means that we met our target for 2005.
our path to "zero defects"
Important trends
Autoliv, Inc. ("the Company") provides advanced technology products for the automotive market. In the three-year period 2003-2005 (the time period required by the SEC to be reviewed in this analysis) a number of trends have influenced the Company's operations. The most significant trends have been:
- growing safety content per vehicle
- changes in light vehicle production along with changes in vehicle model and customer mix
- changes in raw material prices and component costs
- pricing pressure from customers
- changes in foreign exchange rates
- Autoliv's increased focus on cash flow and capital efficiency
Safety Content per Vehicle
The most important growth driver for the Company's market is the steady increase in the safety content per vehicle. The Company estimates that this trend has expanded the market by 7% between 2003 and 2005.
Currently, the most important driver for this growth is curtain airbags. The global market for these side airbags has increased to $2 billion in 2005 from $1 billion in 2003. For Autoliv, this market growth has added half a billion dollars to sales in 2005 compared to 2003. It has also helped Autoliv outperform the market during the three-year period and increase its share of the global automotive safety market in line with our growth target for the Company.
Vehicle Production and Mix
The other growth driver for Autoliv's market is global light vehicle production. During the period, it increased faster than expected or by 2% in 2003, 5% in 2004 and 4% in 2005 to 62 million vehicles.
The growth occurred, however, primarily in the emerging markets and not in the Triad (i.e. North America, Europe and Japan). In Autoliv's largest markets light vehicle production declined by 2% in Western Europe and by 1% in North America, between 2003 and 2005. To take advantage of the superior growth in emerging markets, the Company has been positioning itself in Asia and Eastern Europe, through both consolidated subsidiaries and joint ventures. As a result, the Rest of the World (i.e. all markets outside the Triad) continued to grow in importance for Autoliv and accounted for 11% of the Company's revenues in 2005, compared to 10% in 2003 and 6% in 2001.
However, vehicles in emerging markets tend to have lower safety content than vehicles in the Triad. This shift in vehicle production and sales has started to hold back the relatively high average growth rate of the global automotive safety market.
Another factor in this trend is the growing global production of Japanese and other Asian vehicle manufacturers, which has increased by 16% between 2003 and 2005. To take advantage of this trend, Autoliv has made substantial investments in Japan, Korea, Thailand and, increasingly, in China. As a result, in 2005, Asian vehicle manufacturers accounted for 24% of the Company's revenues compared to 19% in 2003, while Autoliv's dependence on the "Big 3" in North America (GM, Ford and Chrysler) declined to 15% from 20% in 2003.
A third important factor has been Autoliv's ability to become a supplier to the best selling car models in Europe. The Company was particularly successful in this respect during the latest model change of the best selling models. Since most of these model shifts took place two to three years ago, they have helped Autoliv achieve superior growth during most of the past three-year period when the models were new. During the next few years, however, they could have a negative impact on sales growth.
For additional information on Autoliv's dependence on certain customers and vehicle models, see page 29.
Years ended Dec. 31    
(Dollars in millions) 200520042003
Consolidated sales $6,2051%$6,14416%$5,301
Light vehicle production
in the Triad* (in thousands)  45,9281%45,6572%44,830
Gross profit $1,268 4%$1,22122%$1,003
Gross margin 20.4% 3%19.9%5%18.9%
Operating income $513 0%$51320%$427
Operating margin 8.3% (1%)8.4%4%8.1%
Net income $293 (10%)$32622%$268
Net margin 4.7% (11%)5.3%4%5.1%
Earnings per share $3.26 (6%)$3.4623%$2.81
Return on equity 12% (8%)13%8%12%
* North America, Europe (incl. Eastern Europe) and Japan