Value-Enhancing Factors

Sustainable economic success demands competitive costs, innovative products and efficient processes. Customer satisfaction is the focal point of our efforts. Among the Volkswagen Group’s key advantages are the expertise and commitment of its employees. The responsible use of environmental resources is a priority in all parts of the Group.

The efficiency of a company’s value drivers can be measured by means of financial and non-financial performance indicators. The key financial performance indicators for the Volkswagen Group are presented in detail in the “Net assets, financial position and results of operations” chapter. The following section concerns non-financial value drivers, including processes in the areas of research and development, procurement, production, sales and quality assurance. Furthermore, our employees and our responsible approach to environmental matters contribute to the sustainable increase in our enterprise value.

RESEARCH AND DEVELOPMENT
In 2006, our research and development activities again focused on improving the functionality, quality, safety standards and environmental compatibility of Group products. Not only do we take on board more and more ideas from our employees, but we also involve external partners in our development activities.

PIONEERING, NEW PRODUCTS
The most important product launches last year included the following models, powertrains and systems:
The new Volkswagen Eos Convertible Coupé. This new model epitomizes the high standard of quality that is associated with Volkswagen. Its five-piece CSC roof is a unique and innovative concept that combines the features of a coupé, sun and convertible roof. Thanks to the systematic optimization of the product and the production process, this new design functioned flawlessly from the very first series-produced model.

Additional features for the Touran and Touareg. Both of these successful models were given extensive makeovers in 2006. The Touran was the first Volkswagen to be equipped with the “Park Assist” automatic parking system – the only one of its kind in this form – which makes automatic parking possible in even the narrowest of spaces. Additional security is provided by Bi-Xenon headlights with dynamic curve lighting. The new technical features of the Touareg include ABSplus, which reduces the braking distance substantially on loose ground, as well as driver-assistance systems FrontScan and SideScan. The FrontScan system uses visual and acoustic signals to warn drivers of possible collisions with vehicles in front and activates the brakes in preparation for a possible emergency braking maneuver. Side-Scan monitors the area behind the moving vehicle. By means of warning signals, drivers are made aware of potentially dangerous situations when changing lanes.

TSI engine. Successfully launched in 2005 with the Golf GT, the TSI engine was featured in the Golf Plus and the new Touran for the first time in 2006 together with additional power variants.

New Touran with natural gas option. Following the great success of the Caddy and Touran EcoFuel natural gas models, the new Touran now also comes with a natural gas option as a further contribution towards reducing fuel consumption and emissions⁽¹⁾.

Audi braking guard and the new generation of adaptive cruise control (ACC). As of 2007, the innovative Audi Q7 will feature an enhanced ACC that covers the entire speed range from 0 to 200 km/h. The system can slow the Q7 down to match the speed of the vehicle traveling in front – and right down to a complete stop if necessary. The Audi braking guard, which uses a radar sensor to permanently monitor the lane in front of the Q7, will be available in combination with the ACC. If the system detects a vehicle braking suddenly or traveling at a far lower speed, the system initially warns the driver by means of visual and acoustic signals. If the driver fails to react, the system then jerks the brakes briefly, thereby warning inattentive drivers as well as offering them optimum support through the brake assistant if emergency braking proves to be necessary. However, emergency braking is never triggered by the system itself.

STUDIES ATTRACT ATTENTION WORLDWIDE
As well as launching many new series-produced models in 2006, the Volkswagen Group also presented numerous innovative concept cars and studies. In February, the Volkswagen Passenger Cars brand unveiled the Concept A study in Berlin. The combination of sports car and offroad vehicle offered a foretaste of the design of the new Tiguan, which is scheduled to be launched in 2007. The world premiere of the Iroc study took place in August, also in Berlin. With its own unique design, this reinterpretation of the legendary Scirocco is a clear cut above the design language of existing model ranges. Its long roof and comparatively steep rear end make the Iroc a true sports car.

At the Mondial de l´Automobile, Paris, the Škoda brand attracted considerable attention with its Joyster design study. The three-door compact demonstrates the brand’s evolving design elements and continues the philosophy of simple, yet clever solutions.

The Commercial Vehicles business line won over visitors with its Crafter Atacama at the International Motor Show (IAA) Commercial Vehicles in Hanover in September. This concept vehicle is a striking off-road vehicle that sets itself apart from the original Crafter model by means of original visual modifications, four wheel drive and raised suspension.

STRATEGIC INNOVATION MANAGEMENT
As innovation management in the Volkswagen Group is geared consistently towards customer demands, its basic technology is already primed for future customer requirements. Although the main focus here is on revolutionary ideas and total vehicle concepts, evolutionary developments are by no means neglected.

The innovation portfolios of the Volkswagen and Audi brand groups and the Commercial Vehicles business line are continually synchronized. This is in order to define key development areas common to all these brands and to bundle activities. On the one hand, innovations are developed internally as strategic measures to safeguard USPs in the market. On the other, involving selected suppliers early on in the development process leverages external innovation sources.

EMPLOYEES SUCCESSFUL WITH PATENTS
In 2006, we secured 1,320 patents for the Volkswagen Group, of which 1,064 were in Germany and 256 abroad. The majority of these patents related to interactive systems that form interfaces between people and technology. The large number of patent applications once again demonstrates the highly innovative nature of our employees.

SYNERGIES THROUGH COOPERATION
Cooperation arrangements with other vehicle manufacturers are becoming more and more important when it comes to tapping smaller market segments. By joining forces with other companies, we can keep development and investment costs low and minimize business risks. In 2006, we continued a number of successful joint projects, for example working with Porsche in the production of the Volkswagen Touareg, Audi Q7 and Porsche Cayenne models. In order to optimize our cooperative work with other manufacturers in future projects, we have clearly defined responsibilities and established new organizational structures.

INTEGRATING EXTERNAL R&D KNOW-HOW
The Volkswagen Group will continue its significant work on the development of new models in the coming years. This not only places substantial demands on our own development capacity, but also highlights the need to integrate the know-how of our suppliers and individual development partners in our innovation work to an even greater extent than before. Only in this way is it possible to successfully complete the increased number of projects in spite of shorter development times and rising quality requirements. At the same time, we can use this approach to concentrate our own resources on core competences in the area of technical development.

Particularly when it comes to developing modules and components, we draw on the expertise of the subsequent system suppliers. When developing vehicle derivatives, the complete series development can be outsourced to a general partner; needless to say, this partner would work in close cooperation with the Volkswagen project team at all times. This bundling of resources allows us to adapt future technical development activities even more flexibly to changing customer, market or legal requirements.

YEAR-ON-YEAR INCREASE IN CAPITALIZED DEVELOPMENT COSTS
2006 saw a year-on-year increase in research and development costs in the Automotive Division. Capitalized development costs also increased compared with the previous year, albeit at a lower rate. For this reason, the capitalization ratio fell to 34.9% (35.1%). The proportion of research and development costs recognized in the income statement in accordance with IFRSs remained unchanged over 2005 at 4.8% of the Automotive Division’s sales revenue.

The Research and Development function employed 21,447 people Group-wide at December 31, 2006 (– 1.9%), corresponding to 6.6% of the total headcount. This figure includes the vehicle production investments Shanghai-Volkswagen Automotive Company Ltd. and FAW-Volkswagen Automotive Company Ltd. These companies are accounted for using the equity method.

RESEARCH AND DEVELOPMENT COSTS IN THE AUTOMOTIVE DIVISION

PROCUREMENT
In 2006, we further developed our supplier management, working more closely together with suppliers with a view to optimizing processes, costs and delivery quality. In addition, much of our work involved investigating procurement sources worldwide.

INTENSIFICATION OF SUPPLIER MANAGEMENT
The supplier workshop meetings introduced in 2005 proved to be very effective. At the two events held in 2006, Procurement and Technical Development employees came together again with selected suppliers to identify improvement potential. This includes technical measures for reducing costs as well as process optimization approaches that are continuously implemented.

In addition to the supplier workshop meetings, the platform for working together with suppliers, primarily with a view to optimizing material costs, was extended to include the areas of quality and innovation management.

In the new “Supplier Quality” forum, employees from Procurement, Quality Assurance and Technical Development join with selected suppliers to define measures for improving the quality of parts and components supplied. This allowed considerable advances in quality to be achieved within a very short space of time.

The “Innovation” forum is a further instrument we have established for strategic cooperation with selected suppliers. The open dialog and mutual trust that characterize this forum are instrumental in finding new approaches for developing innovations together with our supplier partners. Suppliers are involved early on in the product development process in order to generate maximum benefits for the end customer.

GLOBAL PROCUREMENT ACTIVITIES
In addition to the traditional markets of Germany and Western Europe, emerging countries such as China, India and Russia are increasingly attractive for us as supply sources. Firstly, they are in a position to supply our local production directly, and secondly, they offer cost advantages for vehicles manufactured in Europe and destined for export. Central to the evaluation of procurement markets are factor costs, exchange rate developments and local supplier expertise as regards quality and development. In order to tap the potential of these markets more effectively, we have stepped up our research and scouting activities throughout the Group. The procurement teams that formerly operated at a local level have been restructured and developed into Regional Sourcing Offices.

PURCHASING VOLUME
The purchasing volume of the Volkswagen Group increased by 4.1% to €68.8 billion in 2006. The proportion attributable to German suppliers was unchanged over 2005 at 52.1%.

PURCHASING VOLUMES BY BUSINESS LINE AND MARKET

VEHICLE PRODUCTION LOCATIONS OF THE VOLKSWAGEN GROUP
SHARE OF TOTAL PRODUCTION 2006 IN PERCENT

PRODUCTION
Last year also saw a number of production start-ups. Parallel to this, the efficiency of production processes was further optimized and new production standards developed with a view to ensuring a consistently high level of quality for our vehicles.

NUMEROUS SUCCESSFUL PRODUCTION START-UPS
The new model initiative continued in 2006, giving rise to numerous start-ups: in addition to diverse product enhancements, a total of 13 new models went into production across the world. The most important of the year’s new models in the Volkswagen brand group included the Volkswagen Eos and the Škoda Roomster, as well as the Bentley Azure and Continental GTC convertibles. In the Audi brand group, the principal new additions to the product portfolio were the Audi TT Coupé and Audi R8. The production start-up of the Crafter, which is manufactured at the DaimlerChrysler plants in Düsseldorf and Ludwigsfelde, was one of the year’s most important events for Volkswagen Commercial Vehicles.

FLEXIBLE PRODUCTION LOCATIONS
The Volkswagen Group has over 46 production locations worldwide, manufacturing vehicles at a total of 32 Group locations. One advantage in this respect is our well-established turntable concept, which allows different types of vehicles to be manufactured on the same production lines, depending on the individual demand levels. Together with the “multi-brand location” concept and the modular strategy that enables the same modules and subassemblies to be used in different vehicles, the turntable concept gives us the necessary flexibility to react to fluctuations in demand at any time.

PRODUCTION PROCESSES FURTHER DEVELOPED
Production processes in the Volkswagen Group are constantly examined to determine potential for improvement. In order to increase productivity and reduce production costs, we have standardized production to a great extent with the aid of our modular strategy. The standards that we have developed for product concepts, production processes and equipment form the basis for a uniform production system across the Group. In addition, benchmark analyses are used in production to identify best practice approaches. Any potential for optimization that is found is acted upon immediately.

In 2006, we continued our efforts to develop new production technology across the Group. For example, the CMT (Cold Metal Transfer) welding and soldering procedure was used in series production. The advantage of this procedure is that the metal parts remain far more dimensionally stable owing to the reduced thermal input. New findings are shared by Technical Development and Production via special electronic platforms or project focus days at individual Group locations.

NEW AGREEMENTS ON OPTIMIZED PROCESSES
The “Volkswagen Way” works agreement signed in July 2006 lays the foundation for far-reaching changes in the workflows and processes of the Volkswagen Passenger Cars and Volkswagen Commercial Vehicles brands. The first step is to implement a standardized production system for the locations in Germany. This will define binding goals for each location and prescribe high standards and methods, compliance with which will be permanently scrutinized. As cooperation between all divisions involved in the product development process will be rendered more effective, this in turn will further increase process and product quality and boost productivity, thereby improving customer and employee satisfaction.

In future, the worldwide development and production of Group components will be coordinated centrally. The objective is to ensure high-tech and competitive components for Group vehicles and to develop business with third parties.

PRODUCTION MILESTONES IN 2006
Another milestone in the history of the Volkswagen Passenger Cars brand was reached in April 2006 when the 14 millionth Passat rolled off the production line at our Emden plant. Two months later, Audi delivered its 1.5 millionth A3. In July, Škoda celebrated its 10 millionth vehicle since beginning automobile production in 1905. In the same month, the Commercial Vehicles business line recorded 7.5 million bus models in the Transporter, Caravelle and Multivan series. In August, the Kassel plant announced the production of the 500,000th direct shift gearbox (DSG). The following month, the number of SEAT models produced in Spain since 1953 reached the 15 million mark.

SALES AND MARKETING
The image and strength of our brands are central to the success of the Volkswagen Group. In 2006, we worked intensively on the positioning of our brands.

INCREASED CUSTOMER SATISFACTION
The satisfaction of our customers is a core objective of our Group Strategy. In view of this, we constantly conduct customer satisfaction surveys relating to Group brands in all major world markets. Based on the survey findings, we develop and implement measures for improvement. Thanks to this, we made considerable progress with the Volkswagen Passenger Cars, Audi, Škoda and SEAT brands in 2006 and intend to pursue this same approach in the future.

SUCCESSFUL CUSTOMER RELATIONSHIP MANAGEMENT
The Autostadt in Wolfsburg is the communications platform for the Volkswagen Group and its brands. Its function is to lay the foundation for long-term relationships by interacting with customers. Surveys have shown that a visit to the Autostadt enhances customers’ perceptions of the individual brands. The focused service orientation and inventive presentation of mobility issues have made the Autostadt into one of the most popular travel destinations in Germany. As well as being home to the Autostadt ZeitHaus – one of the most successful automotive museums in the world – over 200 annual events are held at the Volkswagen Group headquarters, securing its status as a cultural event location. Since it opened its doors six years ago, over 13 million people have visited the Autostadt.

A total of 160,000 vehicles are delivered at the Autostadt every year, meaning that almost one in three Volkswagen customers in Germany chooses to collect his or her new car directly at our headquarters. Accordingly, the Autostadt has a higher volume than any other delivery center in the world. In addition to vehicle handovers at the Autostadt, we also offer customers at other Group locations a unique experience when collecting their new car.

SUCCESS UNDERPINNED BY STRONG BRANDS
Thanks to its clearly positioned brand portfolio, the Volkswagen Group is in a position to offer attractive vehicle concepts in all segments. The effectiveness of this brand positioning is illustrated by the strong awareness levels enjoyed by the Volkswagen, Audi, Škoda and SEAT brands, particularly in the German market. Owing to the intensive competition on automotive markets, it is becoming increasingly important for manufacturers to combine the pure product features of a brand with emotional and intangible values with a view to setting it apart from the rest of the competition. With our strategic Group-level brand control, which takes into account all points of contact with the customer, we are in an excellent position to do so.

More than any other brand, Volkswagen is a global byword today for quality, reliability and German engineering. Particularly in Europe and China, customers have great trust in the brand, as is evidenced by the rising number of deliveries in these markets.

The performance promise “Vorsprung durch Technik” is now virtually synonymous with the steadily growing success of the Audi brand in the highly demanding premium segment. Thanks to Audi’s high-quality, sporty and progressive brand profile, it is perceived by customers as the epitome of progressive technology and pioneering, sporty design.

With Škoda, the Volkswagen Group has a brand that is associated by our customers with outstanding reliability, extremely good value for money and intelligent, functional vehicle concepts. This has also enabled the Škoda brand to continually build on its market position.

Under the “auto emoción” slogan, SEAT is developing more and more into a brand for customers who are looking for a combination of sporty design, competitive purchase price and low running costs.

The Bugatti, Bentley and Lamborghini luxury brands lend the Volkswagen Group additional attributes such as elegance, exclusivity and power to an even greater degree.

With its wide portfolio of products and services, the Commercial Vehicles business line offers customized solutions for all transport and passenger comfort requirements.

REMARKETING USED VEHICLES
The manufacturer used car business is becoming even more important in the light of rising demand for mobility products such as leasing. Last year, we thus began implementing a comprehensive used car business model for the various brands. The objective here is to stabilize the residual value of the vehicles at a high level, thereby protecting customer investments. Stable residual value forms the basis for attractive and competitive leasing and financing offerings in the new car business.

STRUCTURE OF THE FLEET CUSTOMER BUSINESS IN THE VOLKSWAGEN GROUP
In establishing Volkswagen Group Fleet International in 2006, we took a major step towards developing the Volkswagen Group into a mobility service provider. The aim of this new business unit is to bundle the sale of all Group vehicles – from entry-level to luxury class models – with all the financial services that are important to our fleet customers. In this way, customers benefit from greater transparency as well as saving time and costs. In future, Volkswagen Group Fleet International will be the central point of contact for the international fleet business with Group brand vehicles.

QUALITY ASSURANCE
Product and service quality are the key to customer satisfaction and, in turn, to customer loyalty. Quality builds trust. It has a decisive influence on the image of our brands and is a key criterion for customer purchase decisions.

PRODUCT QUALITY
Reliability is an excellent indication of product quality, particularly in the long-term perspective. This being the case, the key indicators “repairs during the life of the vehicle” and “warranty and goodwill payments” are the most important control elements in quality assurance across the Group. In order to evaluate these key indicators, the Volkswagen Passenger Cars brand initiated the Product Quality forum in 2005. Here, teams from Research and Development, Production and Quality Assurance come together to ensure that the target agreements based on the two key indicators are met for each individual model. The monthly reviews act as an early warning system as well as ensuring rapid communication between the areas in question. These offer an early overview of the status of the key indicators, meaning that swift countermeasures can be taken to avoid potential mistakes.

The importance of key quality indicators in the entire company is illustrated by the fact that the management bonus system is linked to the achievement of agreed targets. This spurs on the continuous efforts to improve the quality of products for our customers.

The aim of continuously improving key quality indicators is firmly established throughout the Group and is backed up by regular communication. Every year, the Group also presents the Volkswagen Excellence Award for the processes that make the greatest contribution to improving key indicators. In 2006, this award went to the Audi production plant in Ingolstadt and the SEAT gearbox production facility in Prat, Spain.

SERVICE QUALITY
In order to bring about continual improvements in service quality as well, Quality Assurance assists authorized dealers and workshops in designing faster and more cost-effective repairs and services. Even when products are still in the development process, repair solutions are prepared together with Research and Development and evaluated financially for our customers.

From vehicle handover through service intervals to repairs, the quality of customer care is an important instrument for increasing customer loyalty. After the initial purchase, workshop visits are one of the few opportunities for direct contact with customers.

Accordingly, Quality Assurance provides all authorized workshops with access to a global database that allows problems to be diagnosed and resolved quickly. New information obtained in the area of customer service is integrated into production and new product development by means of our established quality improvement process.

EMPLOYEES
At the end of fiscal year 2006, the Volkswagen Group employed a total of 324,875 people. It is thanks to the commitment of each of our employees that we were able to launch numerous new models in the markets and to set a new sales volume and production record.

In order to survive in the face of ever-growing competition, we need an outstanding team that sets itself apart not only through its expertise and commitment but also through its fitness. This is underpinned by our human resources work.

INVESTMENT IN THE FUTURE
Securing new talent for Volkswagen is a core element in our human resources policy that is instrumental in increasing the competitiveness of the Group on a sustainable basis. Employee training is an investment in the future and vocational training ensures that Volkswagen will have qualified and motivated employees in the future, too. At the end of the year, a total of 9,199 young people were being trained as new additions to our outstanding team.

The attractive and varied range of vocational training reflects the wide spectrum of specialist areas within the Volkswagen Group. In our training center at VW do Brazil, for example, we are currently providing 119 young people with two years of training as mechanics with a view to deploying these skills in high-tech production processes at a later stage. In our center for practical training at VW Slovakia, 40 mechatronics/electronics apprentices are specializing in automation technology.

In May 2006, the Volkswagen Group once again presented its “Best Apprentice Award” to the most outstanding of its apprentices worldwide. Prizes were presented to 20 young apprentices from ten countries and three continents. Having completed their apprenticeship, these young people then entered special programs specifically developed by the relevant Group companies.

The StiP integrated degree and traineeship scheme was established in order to recruit new specialist talent for Volkswagen AG in scientific fields, and will be expanded substantially in coming years. This personnel development scheme is an integrated combination of different types of learning, whereby participants complete vocational training, study theoretical aspects at universities and implement this knowledge in hands-on situations. Throughout the entire study period, alternate semesters are spent at the university and in the workplace. In this way, extensive knowledge is transferred between experienced specialists and young employees during the training period. Students generally attain a certificate from the IHK (Chamber of Commerce) as well as a bachelor’s degree or diploma within four years, and are then available to join line departments as highly-trained, team-oriented employees. In future, Volkswagen AG will continue to invest in training and, in line with the new collective wage agreement, will take on an annual total of 1,250 apprentices up to 2009, including those in the StiP integrated degree and traineeship scheme.

TRAINING ENHANCES EXPERTISE
The rapid development of technology and the need for increasingly efficient work processes present growing challenges for Volkswagen Group employees. In view of this, Volkswagen Coaching GmbH provides employees with an extensive range of qualification measures geared towards practical requirements and implements them.

The range of technical training on offer is determined by tailored qualification concepts. A prime example of this is the establishment of a vehicle production facility in Russia, where specific technical and cultural conditions needed to be taken into account, as well as the employees’ level of knowledge. Extensive qualification measures were also required for the production start-up of the Tiguan in Wolfsburg in order to – among other things – familiarize all those involved with the new work processes.

IDEAS BEAR FRUIT
In 2006, our employees in Europe submitted a total of 124,391 improvement ideas. The 69,840 suggestions that were implemented helped to increase the quality of our products and the efficiency of our processes and to reduce costs by a total of €306.8 million. Bonuses worth some €32.6 million were awarded to those whose ideas were implemented as an acknowledgement of their creativity and active involvement.

IMPROVED PERFORMANCE THROUGH HEALTH AND FITNESS
In 2006, the health status of manufacturing plants in the Volkswagen Group was 97.2%, the same level as in the previous year.

“HerzCheck” – meaning “heart check” – is an important element of the more comprehensive “Volkswagen Check-Up” which is a standard feature in all plants. The risk profile determined using this procedure is also relevant for many other illnesses. Going forward, the aim of Volkswagen Check-Up is to systematize proven early detection programs and to supplement them with additional important programs. In doing so, we draw on the experience of Audi AG, which has already introduced a similar program.

Furthermore, employees who are absent as a result of an illness or accident are integrated into working life again quickly and effectively with the aid of a systematic integration management system. With these measures, we aim to increase job satisfaction and productivity among our staff and to further reduce health-related absences.

IMPROVED COMPETITIVENESS
The main task for Human Resources in 2006 was to establish a basis for deploying employees even more efficiently.

The planned restructuring measures were implemented at Volkswagen AG’s six traditional plants (Wolfsburg, Braunschweig, Salzgitter, Kassel, Hanover, Emden). The collective wage agreement reached in October 2006 was another important step towards bringing productivity, capacity utilization and labor costs to a competitive level again.

At the core of this agreement is an increase of working hours to up to 33 hours per week for production employees and up to 34 hours per week for administrative employees without a direct pay increase. Production volumes were set for each location in order to secure capacity utilization, and thus employment.

The collective wage agreement also contains a new model for employee profit-sharing. In future, the amounts distributed to employees may – depending on reported profit – be substantially greater than in previous years. This model increases employees’ awareness of their own performance and serves as partial compensation for the unpaid increase in working hours. In addition, the collective wage agreement includes a one-off payment into the company pension scheme for employees.

In order to improve the competitiveness of the Company, labor costs and work processes are constantly optimized, which also necessitated personnel adjustment measurements in 2006. In accordance with the principle whereby the assent of both parties is required, all employees covered by the collective wage agreement will have the option of leaving the Company on the basis of termination agreements. However, the approval of the relevant department was required before such agreements could be signed. By December 31, 2006, a total of 5,937 employees had signed a termination agreement. The majority of these employees went into business on their own, found a new position outside the Group or commenced training or studies. In 2006, as well as offering severance payments, we extended the opportunities to participate in the part-time scheme for employees near to retirement (Altersteilzeit) to include those born between 1952 and 1954.

HEALTH STATUS OF MANUFACTURING PLANTS IN THE VOLKSWAGEN GROUP
AS PERCENT

In addition, we had increased the length of this part-time scheme to up to seven years at the end of 2005. In 2006, 2,013 employees moved into the passive phase of their early retirement. A total of 6,189 employees born between 1952 and 1954 have already signed binding early retirement agreements under this scheme. These employees will leave the company by 2013 and begin the passive stage of their early retirement.

FLEXIBLE DEPLOYMENT OF PERSONNEL
With the internal job re-deployment agency PEB-B, the Volkswagen Group has established a flexible tool for matching available positions with employee potential. This turntable approach enables us to relocate employees to new areas of activity, both internal and external. We will continue to develop this instrument in order to meet changing requirements.

INTERNATIONAL RESTRUCTURING PROGRAMS
Restructuring programs for improving competitiveness have also been implemented at our international locations.

Owing to surplus capacity in Europe, it was necessary to scale down operations at our Brussels plant. To this end, we offered employees termination agreements, for which there was great demand, meaning that prospects for the remaining employees were good, including for the bridging period 2007 and 2008. Furthermore, older employees were offered the option of taking voluntary early retirement.

The aim of the restructuring program which began in fall 2005 and was continued in 2006 at Shanghai Volkswagen is to increase productivity in both production and administrative areas. The main focus of this program is on training measures for production employees and workshops for continually improving processes. In the administrative area, the aim is to increase productivity to the “best in class” level. With personnel adjustment measures and the optimization of personnel structure by means of outsourcing, important progress had already been made by the end of 2006. The restructuring program is nearly complete and has contributed to the turnaround of Shanghai Volkswagen.

At Volkswagen do Brasil, a far-reaching restructuring agreement was reached with unions last summer for the largest locations, Anchieta and Taubaté. This agreement forms the basis for a sustainable restructuring of the company. The agreement ends the job guarantee given in 2001, thereby allowing the workforce to be adjusted by over 4,000 employees by the end of 2008. In addition, the agreement covers the basis for cost savings through new remuneration structures, flexible working time accounts and newly defined employee benefits. Employees have also agreed to contribute to substantial productivity increases.

ENVIRONMENTAL MANAGEMENT IN THE GROUP
Our Group environmental policy is characterized by an integrated approach that determines the impact of products and production processes on the environment in advance and takes these into account in the early planning stage. Our overriding objective is to develop solutions that are economically and ecologically sound, thereby minimizing the use of resources and reducing costs in the long term.

The Group’s environmental principles take into account our strategic guidelines as well as technical specifications, for example in the area of production. This ensures that comparable environmental standards exist in the Group’s production processes worldwide. All brands are responsible for implementing these standards in their respective locations.

DIVERSE ENVIRONMENTAL PROTECTION PROJECTS UNDERTAKEN BY GROUP BRANDS
In 2006, in line with the Group’s environmental principles, the brands undertook a variety of environmental protection projects:
With the market launch of the Polo BlueMotion, the Volkswagen Passenger Cars brand started a sustainability initiative aimed at preserving the world’s resources. In future, the designation BlueMotion will be used to indicate the most economical version of a model.

Detailed measures such as longer gear ratios, aerodynamic fine tuning and engine modifications reduce consumption, emissions and ultimately the cost of running a vehicle, without compromising its dynamics.

The Škoda Roomster model was added to the production schedule in the Škoda plant in Kvasiny. This entailed expanding the production area, logistics area and the infrastructure substantially. The environmental compatibility of all investments made in this connection was examined, meaning that all environmentally relevant facilities and processes constitute “Best Available Technology” (BAT). For example, the production facility is equipped with a natural gas heating system with heat recovery, a modern waste water treatment plant and noise abatement barriers to minimize the effect of noise pollution on the Kvasiny community. This will ensure permanent compliance with environmental protection regulations and the Group’s environmental principles.

With its victory in the Le Mans 24 Hours race, Audi furnished impressive proof that fuel efficiency and driving dynamics are not necessarily mutually exclusive: the Audi R10 TDI was the first vehicle with a diesel engine and particulate filter to win the legendary race, setting a new distance record at the same time.

At its Martorell plant, the SEAT brand introduced a water-based painting process that reduces solvent emissions by 60%. In addition, there was also an increase in productivity and – in terms of quality and paint usage – process efficiency.

For historical reasons, the commercial vehicle plant in Hanover is located close to residential areas. Although it is not possible to avoid the noise and odor pollution created by the production process, the effects on the local residents can be reduced. A neighborhood dialog meeting – which is also open to public authorities, societies and citizen groups – is held twice a year to discuss the interests of residents and the company. This event encourages transparency and mutual trust, as well as helping to secure approval for planned plant changes more quickly by discussing these at an early stage.

ENVIRONMENTAL PROTECTION PROJECTS AND INITIATIVES
The aim of the “Lifecycle Engineering for Industrial Buildings” research project is to examine and evaluate not only the relevant economic, social and environmental, but also the technical aspects of constructing and operating industrial buildings. The findings should, for example, help Group companies and suppliers to select the best production location and the best plant structure for an industrial building or a specific type of plant technology. The project is supported by the environmental foundation Deutsche Umweltstiftung. Volkswagen works closely together with regional companies and institutes and with the City of Wolfsburg.

In mid-2006, Volkswagen AG joined the Clean Energy Partnership (CEP). The global demonstration project for emission-free mobility, involving a total of eleven companies, tests the suitability of hydrogen as a fuel for everyday use and determines its systems compatibility. Through its commitment to this project, Volkswagen AG seeks to promote sustainable and environmentally responsible mobility and to gain key insights from the use of hydrogen technology under conditions similar to customer usage. Volkswagen is adding a Touran HyMotion to the CEP fleet. The CEP is part of the German federal government’s national sustainability strategy and will be in operation until December 2007. The project findings will be presented to the public as soon as the experiences of test customers, technicians and filling station operators have been evaluated.

DRIVETRAIN AND FUEL STRATEGY
Particularly when it comes to developing powertrains, Volkswagen adheres closely to the requirements of sustainable mobility. We help to reduce local emissions and gases that are harmful to the global environment, and also to lessen dependency on oil.

With regard to petrol engines, our use of TSI technology – a petrol direct injection with integrated supercharger – builds on the successful TDI engine concept. TSI engines have consumption levels of up to 20% less than other fuel injection engines while retaining the same exceptional driving dynamics. A further example of highly efficient drive technology is the direct shift gearbox (DSG), which is considerably more effective than conventional automatic gearboxes, and reduces fuel consumption by 15%.

Hybrid drives play a central role in our drivetrain strategy in addition to petrol and diesel engines. Together with strategic partners and international universities, we are working intensively to integrate hybrid drives in future series projects. With the presentation of the Audi Q7 hybrid at the International Motor Show 2005 (IAA) in Frankfurt, the Volkswagen Group demonstrated its formidable potential in this area.

There is a high demand for the Touran and Caddy-EcoFuel models that were launched in the course of 2006; these are capable of running on either natural gas or petrol. In natural gas mode, they emit up to 25% less CO2. Sulfur dioxide, soot and other particle emissions are almost completely eliminated.

In the long term, we are concentrating our efforts on developing renewable hydrogen for fuel cells, an approach with the highest level of sustainability in terms of fuel-efficiency and emissions. In 2006, important progress was made in our high-temperature fuel cell research: thanks to the use of electrodes permitting a higher operating temperature for fuel cells, the new system is smaller, more efficient and less expensive than any fuel cells to date.

The main focus of our fuel strategy is on the diversification of energy sources. This means that a variety of materials will be used to generate fuels that are sold in existing filling stations and which can be used in modern vehicles all around the world. Biomass, which is virtually CO2-neutral, plays a central role in this regard. In addition to oil and natural gas, it can be used to generate synthetic fuels, similar to modern diesel fuels.

However, these fuels – particularly those based on biomass – are virtually free of sulfur and aromatics compared with conventional diesel fuel. This means that they are fully compatible with other drivetrain components while significantly reducing both emissions and dependency on fossil fuels. Our next step will be to use new manufacturing processes to give fuels special properties that correspond to specific engine requirements. This will pave the way for new combustion systems that will reduce fuel consumption and emissions even further. The Combined Combustion System (CCS) developed by Volkswagen is based on the use of these fuels. This system combines the benefits of diesel and petrol engines and may well prove to be one of the most important new engine concepts of the coming decades.

OUTSTANDING ENVIRONMENTAL PROTECTION
Owing to the low emission and consumption values of its models, Volkswagen was named the most environmentally friendly automobile manufacturer in the “Alternative Powertrain Study” conducted for the first time in 2006 by the J.D. Power market research institute. The institute analyzed 37 car brands in the USA from a number of environmental aspects. Volkswagen performed extremely well in this study, with three models – Golf, Jetta and New Beetle – in the top 30 lowest-emission petrol and hybrid passenger cars; in addition, our diesel fleet was singled out as being particularly innovative.

For the Volkswagen-SiCon process developed together with SiCon GmbH, the EU Commission presented Volkswagen with the “European Business Award for the Environment” in June 2006. In this process, materials are recovered from the end-of-life vehicle recycling process and returned to the economic cycle as secondary raw materials. This environmentally friendly utilization of end-of-life vehicles as a source of raw materials helps to preserve natural resources.

Further information on Volkswagen AG environmental management is available on our website at www.volkswagen-nachhaltigkeit.de.

⁽¹⁾Caddy Life EcoFuel: fuel consumption in kg/100 km: 8.2 urban; 4.7 extra-urban; 6.0 combined; CO2 emissions in g/km: 157.
Touran EcoFuel: fuel consumption in kg/100 km: 8.1 urban; 4.5 extra-urban; 5.8 combined; CO2 emissions in g/km: 153.