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Economic

GRI 201

ECONOMIC PERFORMANCE 2016

GRI 103 (incl. 103-1, 103-2, 103-3) Management Approach 2016

In 2018, under its new Chief Executive Officer Wolf‑Henning Scheider, ZF established a new strategy, “Next Generation Mobility,” based on the core objectives of the ZF 2025 Strategy and augmenting them with medium‑ and long‑term targets. The strategy is designed to position ZF and its systems expertise in the passenger car, commercial vehicle and industrial applications sectors in terms of technologies for vehicle motion control, integrated safety, automated driving and e‑mobility. ZF's strategic approach is to ensure it can meet both historical and future challenges by continuing to develop existing technology while also entering completely new markets and fields, thus serving both existing and new customers.

In line with this strategic alignment, ZF significantly increased research and development expenditure in the fiscal year 2018.

The top financial key figures ROCE (Return on Capital Employed), ZF Value Added, and Operating Result are used to measure and monitor the financial performance of the ZF Group. For more details see the 2018 Annual Report, p. 31.

GRI 201-1

Direct economic value generated and distributed

The ZF Group succeeded in increasing sales by 1.3 percent to €36,929 million and invested €2,158 million (2017: €2,230 million) in research and development, which is 5.8 percent of Group sales. The ZF Group overall donated €5.61 million (2017: €6.87 million).

The production materials purchasing volume in 2017 totaled €20.1 billion. This includes directed buy volumes. The value of non‑production materials amounted to some €6.1 billion. Overall personnel expenses totaled €4.761 million (2017: €4.669 million), including wages and salaries, social security contributions, benefit expenses. For more details see the consolidated statement of profit or loss in the 2018 Annual Report, p. 31.

Ongoing tax payments by regions 2017 (2016)

Ogoing tax payments by regions 2016 – 2018


in € million
2018 2017 2016
Europe 337 269 217
North America 36 67 45
Asia‑Pacific 94 92 97
Other 9 11 5
Total 476 439 364

GRI 201-2

Financial implications and other risks and opportunities due to climate change

One of the main factors resulting from our production activities is the emission of greenhouse gases. Reducing these emissions is therefore a central element of ZF’s environmental policy and targets, which are managed worldwide by our environmental management system according to ISO 14001. See GRI 300 for more details on ZF’s environmental management approach.

Following the Paris Agreement of 2016, the German Climate Protection Plan 2050 and the COP in Bonn in late 2017, many countries have been working on national regulations and programs to fulfill the conventions. The scope of these impacts on ZF’s businesses is currently not fully foreseeable. Moreover, financial implications cannot be quantified while legal requirements are under discussion and not yet conclusively defined.

Operating costs are likely to rise due to increasingly strict legislation with tougher regulations for plant approvals and operations. In China, for example, the 13th five‑year plan restricts air pollution to fixed limits by region, which results in locations having to make increasing efforts to ensure they comply with national and local legal requirements.


Losses due to extreme weather

Extreme weather situations caused by climate change such as high water and flooding or extreme drought have so far only affected our production locations in isolated cases. Nevertheless, ZF sees these developments as a potential risk with more frequent and more extensive consequences to come. This is why we include early precautions against extreme weather and natural disasters as part of our sustainable corporate development.

We have only seen isolated examples of higher property insurance premiums at locations subject to potential natural hazards such as flooding, storm or extreme drought. These could increase in the future if incidents of damage occur more frequently. These issues are decisive factors when building new plants or purchasing production facilities.



Reliable supply chains in light of climate change

To minimize risks and manage them more effectively, the ZF Group is working on localizing sources. The objective here is to reduce transport costs and actively contribute to lowering CO2 emissions. Furthermore, this can limit the impact of interruptions in the supply chain to the region affected. We are also carrying out initial projects to identify robust methods for determining the emission values and environmental impacts of selected products and materials.


Product level

ZF generates a substantial proportion of its sales with products used in the combustion engine driveline. Even though progressive electrification in the passenger car and commercial vehicle drive segment may represent a competing technology, ZF sees promising opportunities in the development of safe and clean mobility through its electric, electronic and mechatronic competence.

Moreover, with our Vision Zero we defined a strategic response impacting many levels and processes within the ZF Group. Aiming for zero emissions and zero accidents leads to new products and services. The development of competitive products has opened up new sales opportunities for ZF. At the same time, a possible increase in fuel or energy prices may result in an increase in logistics costs and a fall in the demand for individual mobility on the part of the market. We can mitigate this risk with innovations in hybrid technology, e‑mobility and lightweight design. For more information about ZF solutions see GRI302‑5.


Further influences

The opportunities and risks for our wind power sector vary widely since business development is still heavily dependent on subsidies, and overall development on emission‑related regulations supporting renewable energies. European companies are facing higher organizational costs due to the obligation and the expanded requirements for statutory and regulatory reporting, e.g. the EU Directive on the disclosure of non‑financial information.

Finally, suitable precautionary measures must be taken to minimize the diverse and often increased risks. We are also addressing identified risks with our environmental management system, and our sustainability program has set corresponding environmental targets.

GRI 201-3

Defined benefit plan obligations and other retirement plans

Provisions for pensions are set up for obligations from vested benefits and current pensions for entitled current and former employees of the consolidated ZF Group and their surviving dependents. Various retirement pension schemes exist in accordance with the legal, economic and tax situation in the respective countries, which – as a rule – are based on the length of service and emoluments of the employees. In general, for company pension schemes a distinction can be made between defined contribution plans (DC) and defined benefit plans (DB). Plan benefits depend upon salary, length of service and the cost of living index. For details about provision for pensions see the 2018 Annual Report, p. 60.

GRI 201-4

Financial assistance received from government

In the fiscal year 2018, €42 million (2017: €18 million) in government grants was received. These were divided as follows: Investment grants were basically received for investments at various locations in the USA, Germany, Czech Republic, Hungary and China. Expense subsidies mainly comprise research subsidies and subsidies for education and vocational training.

GRI 203

INDIRECT ECONOMIC IMPACTS 2016

GRI 103 (incl. 103-1, 103-2, 103-3) Management Approach 2016

We are aware that a company can only achieve business success in an intact economic environment. A company’s focus on success must match the development of the surrounding and dependent companies so that sustainable corporate governance is possible for all. This principle plays a major role in our relationships with business partners, but also in our investments in production materials and capacities. ZF is one of the biggest employers and customers in all the regions in which the company operates. See GRI 102‑9 and GRI 204‑1 for details regarding our expenses for our supplier network, which has significant indirect economic impacts as we apply our “local for local” principle.

Corporate social responsibility at ZF is an important and intrinsic component of the company’s mission statement. In line with this commitment, we therefore contribute a great deal to our local communities by supporting education, sports and recreation, culture, and environmental and community projects. Activities of this nature range from funding endowed chairs at universities, through the ZF Art Foundation supporting artists and musicians, festivals and non‑profit organizations, to sponsoring the elite volleyball players of the VfB Friedrichshafen team or funding many local recreational sports.

Each year, ZF gives the Zeppelin Foundation a dividend. The funds are used in line with the articles of association, especially in the fields of science and research, art and culture, as well as child and youth development. The Dr. Jürgen and Irmgard Ulderup Foundation in Lemförde supports the education and vocational training of young people as well as nature and landscape conservation. Jürgen Ulderup was the founder of the Lemförder Group, a company that is part of the ZF Group today.

GRI 203-1

Infrastructure investments and services supported

ZF makes significant investments in technical professions. We aim to promote interest and enthusiasm for MINT subjects early on among children and adolescents, with particular emphasis on girls. ZF is achieving this objective for instance by actively participating in the Girls’ Day and running Knowledge Workshops (“Wissenswerkstätten”) in several German cities. These popular workshops enable hundreds of children and adolescents every year to gain hands‑on experience in the world of technology.

In higher education, ZF finances a large number of endowed professorships in the Lake Constance region and across the world. Cooperation with renowned universities, for example the Zeppelin University and the Baden‑Württemberg Cooperative State University in Friedrichshafen, the University of Ravensburg‑Weingarten, the HTWG Constance – University of Applied Sciences, the RWTH Aachen University or the Tongji University in Shanghai, is part of the young talent promotion program.

As a Corporate Partner, ZF further extended its cooperation with the UNITECH Program in 2018. UNITECH International is a European network of top engineering universities and multinational companies. At present, only nine universities from nine different countries are allowed to propose their twenty best students, of which only ten will be accepted. UNITECH students are people who want to become highly qualified, internationally experienced engineering graduates with access to prime international internships and employment positions. In 2017, ZF was able to recruit several students from the UNITECH talent pool for internships, theses and final positions.

Furthermore, ZF supports several teams of the Formula Student Germany competition. In this engineering design contest, international students compete against each other in various disciplines with race cars which they build themselves. In addition to sharing its expertise, ZF has been supporting these young talents with high-tech racing products, financial assistance and team‑building activities since 2002. In 2018, ZF sponsored 39 university teams. In the up‑and‑coming Formula Student Driverless race category, ZF supported seven teams. In this category, students face a completely new challenge: developing a race car that runs without a driver in autonomous mode – in line with the ZF triad “See – Think – Act”, the leading principle for bringing artificial intelligence to vehicles.


ZF-Innolab

As part of expanding its long‑term commitment to cooperation with universities, ZF established an innovation laboratory at the Friedrichshafen campus of the Duale Hochschule (DHBW) Ravensburg in 2016. At the “ZF‑Innolab” facility, DHBW students, under an apprenticeship contract with ZF, conduct research on topics such as autonomous driving and digital business models. The students at the “ZF‑Innolab” work closely together with ZF engineers from Central R&D in the field of future mobility, especially for automated driving, automated operations and new logistics solutions.

GRI 204

PROCUREMENT PRACTICES 2016

GRI 103 (incl. 103-1, 103-2, 103-3) Management Approach 2016

Good materials management is vitally important for customer satisfaction. Only then can we guarantee the high quality of our products and delivery reliability. This is why trusting and reliable collaboration with our suppliers is a priority for ZF.

The specific requirements for suppliers result from the Advanced Procurement Strategy (APS 25). The APS follows and supports the Group strategy and is based on the ZF Environmental Policy, the ZF Principles of Social Responsibility and the ten principles of the United Nations Global Compact. All suppliers are required to comply with these three sets of principles. Establishing an effective and efficient value creation chain throughout the Group is the declared objective of the APS 25. The strategy also pursues three subordinate goals: increasing ROCE, total quality management and standardization. Its systematic implementation is supported by a process which ensures that sourcing decisions are based on total cost of ownership criteria.

The Board of Management decided to complement the engaged global divisional and business unit management with a strong matrixed regional management in China. Beside other functions, the Regional Materials Management Organization was redefined, effective since January 2018 to drive operational synergies and strengthen local supply.

The cross‑functional Sourcing Decision Board enables us to ensure that along with pricing, environmental aspects are also considered in the selection of suppliers. To minimize impacts of transportation, such as costs or environmental impacts but also aspects of timing, ZF’s strategy is “local for local” – buying where the supplied materials or components are needed. Therefore, we continue to focus our localization activities on Mexico, India, China and Eastern Europe. The objective here is to implement the “local for local” concept with our existing strategic suppliers or to prepare and develop the local supplier base to meet ZF‑specific requirements.


Business partner principles

All new and existing suppliers are under an obligation to endorse our Business Partner Principles (BPP). A standardized process for the request and confirmation of our BPP includes a tool‑based solution to track the information about the current BPP status of each supplier. Acceptance of BPP is taken into consideration in supplier award decisions in the approval process for new suppliers.

The BPP represent values that ZF recognizes, supports and communicates to partners. As guidelines, they specify fundamental sustainability requirements for cooperation with our business partners. They address various topics such as human rights, labor standards, occupational safety and health protection, environmental protection, responsible raw materials procurement, business ethics and compliance. ZF reserves the right to scrutinize business relationships and we consider it our duty to take appropriate action if we identify deviations or violations.

External service providers in Germany must sign a declaration of compliance to the collective agreements guaranteeing fair wages, normal working hours and a rejection of unregistered labor and tax evasion. This declaration also applies to subcontractors engaged by ZF and includes the proviso that ZF may check compliance at any time.


Improving supply chains

In line with the principles endorsed by APS 25 we have integrated environmental and social standards (including safety and health) into supplier management and the supplier selection process – evaluating potential new suppliers using supplier self‑assessments and audits. The long‑term goal is a purchasing strategy that dispenses with procuring materials from critical sources.

During the approval process, ZF requires new potential suppliers to submit a self‑assessment using the Supplier Self‑Assessment Sustainability template based on the Business Partner Principles.

ZF uses an adapted version of the so‑called Self‑Assessment Questionnaire on CSR and Sustainability developed by the European Automotive Working Group on Supply Chain Sustainability. The advantage of using a standardized Self‑Assessment Questionnaire for all participants (OEM and Tier 1) is to avoid duplication and to improve efficiency for the suppliers. This Self‑Assessment Questionnaire is a part of our Supplier Approval Process.

In 2016, ZF started to use a special tool to manage supplier inquiries about supplier contact data, the existence of a product safety officer, HSE (Health, Safety and Environment), general company data and certificates. The annual update of the master data is handled by our service provider via a managed service. The tool is mandatory for all strategic and accepted suppliers.

GRI 204-1

Proportion of spending on local suppliers

77 percent (2017: 83%) of our global purchases for nonproduction materials (excluding investments) in the reporting year are to be made locally. The local procurement of production materials is calculated using a key indicator based on total spending including directed buy and internal supply. The average over all divisions for 2018 amounted to 54 percent (2017: 54%) for production materials.

GRI 205

ANTI-CORRUPTION 2016

GRI 103 (incl. 103-1, 103-2, 103-3) Management Approach 2016

Compliance is an essential element of successful management and good corporate governance. It supports reliable and respectful dealings with customers, business partners, employees and the environment. Compliance also constitutes the basis of lasting cooperation in an atmosphere of trust.

We rise to the challenge posed by globalization. This requires law‑abiding, honest and responsible behavior on behalf of our employees at all levels and in all areas as the core value of our corporate culture. ZF communicates the relevant rules proactively to its employees, for example through the Code of Conduct (CoC) or other compliance regulations.

In July 2018, with approval of the Board of Management, Corporate Compliance implemented a new ZF Code of Conduct. This applies to the entire ZF Group and replaces the previous ZF Code of Conduct and the Standards of Conduct of the Active & Passive Safety Technology Division. The new ZF Code of Conduct was introduced to all employees via email by Mr. Scheider and Mr. Holeksa, members of the Board of Management.

The Code of Conduct defines binding principles for correct, law‑abiding, and ethical behavior. Subjects covered include adherence to laws, fair competition, human rights, anti‑corruption, business and social responsibility, product compliance, occupational safety, data protection and transparency. The Code of Conduct is a core element of the Compliance Management System (CMS) and is therefore available in more than 25 languages. As managers at every level are responsible for the compliance culture within the company, they must confirm they have received the CoC and promise to follow its principles


Compliance regulations

Compliance and legal regulations include rules governing anti‑corruption and antitrust law. They also include the correct approach to handling favors, gifts and hospitalities. The following topics are covered by the regulations:

  • Responsibilities, tasks and authorities of the Compliance Organization
  • Rules for lawful and responsible behavior
  • Ban on corruption
  • Business partner integrity
  • Rules on handling favors, gifts and hospitality
  • Correct behavior in competition
  • Contacting Corporate Compliance Office and reporting incidents
  • Conflicts of interest


ZF Compliance Management System

The ZF Compliance Management System (CMS) has created the framework for meeting the respective legal requirements worldwide. The objective of the CMS is to ensure compliance with internal and external regulations. The CMS focuses on preventing and investigating violations in the areas of

  • Corruption,
  • Antitrust law (in coordination with the ZF legal group),
  • Code of Conduct,
  • Fraud and
  • Reputational damage.

A primary goal of the CMS is to meet the following requirements: independence and effectiveness of the Compliance Organization, integration of compliance into business processes, transparent decision‑making processes and corresponding HR processes (sanctions). The pillars of the CMS are: prevent, detect and respond. The Compliance Organization is set up in line with the organizational structure of the ZF Group.

In joint ventures where ZF is the majority shareholder, the ZF board representatives must ensure that either the ZF compliance management or a comparable compliance management system is in place.


Compliance tools

  • The ComplianceHelpdesk is a preventive tool for systematically clarifying and documenting general compliance questions. ZF employees can contact the ComplianceHelpdesk whenever they are faced with a compliance‑related question in their day‑to‑day business activities.
  • The preventive elements of the ZF CMS are complemented by a case management system. This is connected for example to the ZF Trustline, an electronic notification system that employees and third parties can use to anonymously report suspected serious misconduct. Such cases might include violations of competition and anti‑trust law, or cases of corruption and conflicts of interest.
  • ZF developed an internal risk analysis process for compliance risks. The objective of this analysis is to identify and assess, on the basis of the risk profile of ZF, compliance‑relevant risks at an early stage and to counteract them.

ZF Compliance Organization

Prevent Detect & respond
Risk analysis Notification
Regulations Investigation
Communication Monitoring
Training Remediation & sanctioning
ComplianceHelpdesk
Business partner due diligence

Business partners can pose a compliance risk if their actions or failure to act can be attributed to ZF. All business functions of our company therefore must take appropriate measures – preferably before business relations with a partner are initiated – to ensure that business partners are adequately assessed and instructed. A business partner due diligence process was established in 2015. For more details on ZF’s risk management approach see Annual Report 2018, p. 28.

GRI 205-1

GRI 205-2

Communication and training about anti-corruption policies and procedures

News and the sharing of information on compliance issues raise awareness among employees and communicate values and expectations on employee conduct.

A range of communication measures ensure that compliance is firmly anchored within ZF’s culture. All employees, including the Board of Management, have constant access to compliance topics through our corporate intranet “Zoom”, the compliance intranet/blog and other channels. As a main communication channel, the intranet also provides access to necessary compliance contacts and essential documents. To ensure that compliance news reaches the management teams of the individual ZF locations, compliance officers and compliance delegates periodically update the management team regarding compliance issues, so that management staff will pass this information on to their employees.

In the reporting year, the revised Code of Conduct was communicated to employees by internal publication via the Corporate News, the company intranet and other internal postings. The Code is made available to all new hires, who sign an Employee Compliance Certification Form acknowledging receipt of the Code of Conduct and accepting their responsibilities as outlined by the Code. They are also advised on how to ask questions about the Code and how to report any possible violations.

Training opportunities

The roll‑out of the Code was supplemented by an online course on the topics covered. While it was made available to all employees, for approximately 17,000 management employees and the Board of Management this course was mandatory. The course was deployed in English, German, Latin American Spanish, Simplified Chinese and Brazilian Portuguese.

Additional compliance topics will be deployed in this same manner for 2019, including Anti‑corruption/Anti‑bribery. The objective of these online courses is to firmly anchor compliance in employees’ consciousness and prevent wrong‑doing. The courses convey knowledge and promote ability to act in critical situations. Target groups can be addressed in accordance with the necessities of a topic.