Industry Development

The following information on inflation and growth rates in 2010 reflects the status of estimates at the time this Annual Report went to press.

As an international automotive supplier, global business with the manufacturers of passenger vehicles and light trucks is our most important market segment. The worldwide original equipment sector for commercial vehicles and the replacement markets for passenger vehicle, light truck and commercial vehicle tires in Western Europe, Central Europe and NAFTA are also especially important. In terms of macroeconomic development in the year under review, all market segments recorded a significant recovery, with the amount of growth varying from region to region.

Light vehicle production
A key factor in our business volume in original equipment for light vehicles (passenger cars, station wagons, and light commercial vehicles weighing less than 6 tons) is global vehicle production. Development in the regions of Europe and North America, which account for 79% of sales, is especially decisive for Continental in this regard.

Fears that the expiration of the government support programs in some key European vehicle markets (in particular Germany, France and Italy) or the NAFTA region could lead to a significant decrease in global sales figures in 2010 have proven to be unfounded. Due in particular to the booming demand in the BRIC countries (Brazil, Russia, India and China), the number of global new light vehicle registrations in 2010 not only recovered, but accelerated on a seasonally-adjusted basis over the course of the year. More than 70 million new light vehicles were registered worldwide overall, a year-on-year increase of more than 7 million.

Almost 40% of the global increase resulted from the demand boom in China, where according to the VDA (German Association of the Automotive Industry), the number of new registrations increased by almost 2.9 million vehicles to more than 11.3 million units, representing an increase of more than 34% year-on-year. New registrations in China have thus almost doubled in the last two years. However, India also recorded rapid growth, with new registrations increasing by 31% to 2.4 million units. In Brazil, measures to promote car sales which extended into 2010 helped the market and led to a double-digit increase to 3.3 million light vehicles sold, thus exceeding the level in Germany for the first time. The Russian light vehicle market ended the year with a sales increase of 30%. The introduction of a car scrapping premium has successfully buoyed demand since March 2010. 1.9 million new vehicles were sold in Russia in 2010, putting this market on the road to recovery although the figures are still about one-third below their respective annual peaks. If the above-mentioned sales regions are taken together, light vehicle sales have increased by more than 29% in the BRIC countries to 18.9 million units. This means that more than one-quarter of all light vehicles sold in the world are sold in this region already.

In the triad markets (Europe, NAFTA and Japan) the number of new registrations also increased by 2.5% to 29.6 million light vehicles according to the VDA. However, the individual regions contributed to this growth at very different rates. Although the number of new registrations was down in Europe by 5% due to the contraction of the German market after the expiration of the scrapping premium in 2010, the NAFTA region recovered from its low point in 2009 to lift the number of new registrations by 11% to 11.6 million. Sales of light trucks jumped by as much as 17%, while car sales rose only 4%. The ratio of these two categories to one another in 2010 thus tipped again in favor of light trucks, which make up more than half of all light vehicle sales. Light vehicle sales in Japan were boosted by government support measures that were issued until September 2010 and pushed sales up by 7% to 4.2 million vehicles. More than 40% of all light vehicles sold worldwide in 2010 were therefore registered in these markets.

Output of light vehicles increased in 2010 to a new record high of almost 72 million units, boosted by the tight inventory situation at the end of 2009 and driven by better-than-expected development of new passenger car registrations. If the figures for the number of new registrations are netted against the number of light vehicles produced worldwide, the global inventory increased by around 1.3 million new vehicles in 2010. However, this development is moderate following the significant decrease in inventories of about 4 million vehicles observed in 2009. The highest increases in terms of production volume were observed in the NAFTA market, where the number of light vehicles produced increased by almost 39% to 11.9 million units. Despite this positive development, the fact that this region is still almost 4 million units below its previous peak figure cannot be disregarded. European light vehicle production increased by 14% to 18.6 million units – also considerably below the peak figures generated in 2007. Current market forecasts assume that both markets will not close the gap to their former records until 2014/2015. The strong boom in demand in Asia was followed by a production increase that was just as strong, jumping 26% to 35.1 million units. In absolute terms, this is an increase of more than 7 million vehicles and contributed more than 53% to global growth. South America (+12%) and the remaining regions (+18%) also generated double-digit increases.

Heavy vehicle production
Due to the extremely low prior-year basis, output of heavy vehicles (commercial vehicles weighing more than 6 tons) increased significantly in 2010 compared with 2009. European production in particular generated growth of 46%. But compared with the 2008 figure of 745,000 vehicles, it is clear how severe the 2009 downturn was. NAFTA recovered more slowly than Europe, but growth was still at 17% at the end of the year. The growth engine for commercial vehicles was again Asia. With growth of 46%, this region contributed more than 75% to the growth generated of almost 1 million newly produced vehicles. More than 70% of all heavy vehicles produced worldwide in 2010 came from Asia. In 2006, it was still 41%.

Replacement business for passenger and light truck tires
In our replacement business with passenger and light truck tires, the markets in Western and Central Europe and NAFTA are particularly important. Both of these markets recorded non-typical year-on-year growth in the replacement business. As one of the few automobile- related markets, the European replacement tire market was only 3% below its 2007 record of 289 million tires sold. The total increase was 7.7%.

Favored mainly by strong sales of winter tires, the number of replacement tires sold climbed by more than 7% to 280 million tires in 2010. Not least of all, the harsh winter in many areas of Europe and the introduction of the winter tire requirement in Germany helped the market grow at this unusually high rate. After weak sales in 2008 and 2009, the number of passenger tires sold in North America also grew by almost 5% to 255 million units. Over the course of the year, a significant increase in miles driven by U.S. drivers was one factor with a positive influence on demand. The total number of vehicle miles driven as of November 2010 increased by 1% to 19 billion according to the Department of Transportation (DOT). Including the reinvigorated growth in the original equipment business, demand for passenger vehicle tires increased by more than 8% in this region also. In South America and Asia, where Continental also operates several tire factories, the number of tires sold on the replacement market also increased significantly by 11% and 9% respectively. Both regions noted new records in the number of tires sold on the replacement market.

Replacement business for truck tires
In line with the positive development on the other markets, the replacement market for truck tires also increased considerably in 2010, growing to a total of 12%. Europe and NAFTA recorded particularly strong growth figures. The European market alone increased by 19% to 17.9 million units, while the NAFTA market rose by 14% to 18.0 million units. Once again, these statistics were also positively affected by the significant growth rates in Asia. With 66 million truck tires sold, Asia represents around 50% of all tires sold on the truck tire replacement market worldwide.

Raw material markets
Important raw materials for our production include metals such as copper, steel, nickel and aluminum. Petroleum-based raw materials and natural rubber are also used in tire manufacturing. Following enormous increases in 2009, prices for natural rubber, petroleum- based raw materials and some metals increased again in the year under review due to flourishing global economic activity. Prices for aluminum ($2.5/kg; up 11%), copper ($9.6/kg; up 30%) and nickel ($24.3/kg; up 32%) had increased dramatically by the end of 2010 as compared with the end of 2009. The price for heat-treated steel ($0.5/kg; up 2.0%) was the only rate that has changed little since the prior year. The average prices for these metals were 25% to 48% higher than in the previous year, but the average prices for nickel, aluminum and heat-treated steel were 6% to 9% lower than the 2007 to 2009 average. The average copper price was the exception at 18% above the three-year average.

Another basic material for our production materials is metals that we buy only in a more refined form such as turned, punched and drawn parts. The sharp increase in demand for steel in 2010 and significant price increases for raw materials such as iron ore and coking coal led to sustained price increases for primary materials made of steel. In some cases, these price increases were passed on to Continental in the second half of the year by the suppliers of turned, punched and drawn parts. The rapid increase in demand for products and components in the automobile industry in 2010 led to a number of supply bottlenecks for the delivery of electronic and/or electromechanical components. In many cases, production downtime at vehicle manufacturers could be avoided only by accelerated logistics and led to corresponding higher freight costs.

Natural rubber is an extremely important individual raw material for the Rubber Group on the whole, and the Tire divisions in particular. It is traded on the commodity markets of Singapore and Tokyo. Continental buys various types of natural rubber, mainly from Thailand, Malaysia and Indonesia. The price trend is generally level. After natural rubber (TSR 20) reached a price of around $2,940 per ton at the end of 2009 (up by more than 90% from the end of 2008), further significant price increases occurred in 2010 that led to continuous new record highs. In the fourth quarter of 2010 in particular, the TSR 20 price increased dramatically by more than $1,160 per ton in comparison to the average price in the first nine months of 2010. On December 31, 2010, TSR 20 listed at $5,045.77 per ton – at the same time a new all-time record and representing an increase of 72% year-on-year. The average increase amounted to as much as 83% ($3,442.97 per ton in 2010). The average price for TSR 20 in the year under review was therefore about 54% above the three-year average from 2007 to 2009 of $2,240.49 per ton.

In addition to natural rubber as a raw material used directly, crude oil is the most important basic building block of many production materials such as synthetic rubber, carbon black and some chemicals. Sometimes multi-stage production processes are performed by primary suppliers to make the crude oil into the materials purchased by Continental. The boom on the crude oil market since 2004 peaked on July 3, 2008, with one barrel of North Sea grade Brent costing $145.86. Due to the financial crisis, the market also suffered a severe price decline. As of December 31, 2008, the price for Brent was only $41.71 per barrel. In 2009, the price for Brent had already increased by more than 90% to about $79.51 per barrel. The year under review saw another price rise of 20% to $95.50 per barrel. Compared to $62.22 per barrel in the previous year, the average price increased by 29% to $80.17 per barrel.

The price rises in raw materials traded in U.S. dollars were slightly increased again due to the approximately 4.9% average decrease in the euro compared to the dollar in the year under review. All in all, the high price for natural rubber in particular had a negative effect on our results.

Price trends

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