Annual Report Consolidated and Statutory Financial Statements. at December 31, th Fiscal Year

Transcription

1 Annual Report Consolidated and Statutory Financial Statements at December 31, th Fiscal Year

2 Annual Report at December 31, 2003 Stockholders Meeting Agenda Stockholders are invited to attend the ordinary and extraordinary meeting of stockholders to be held at the Fiat Historical Center in Turin, via Chiabrera 20, at 1:00 p.m. on May 8, 2004 on the first call, on May 10 on the second call for the extraordinary session only, and on May 11 on the second call for the ordinary session and on the third call for the extraordinary session, to resolve on the following 1. Consolidated and Statutory Financial Statements at December 31, 2003 and Report on Operations; pertinent and related resolutions. 2. Coverage of Directors civil liability in connection with their office. 3. Motion to amend the Articles of Association and pertinent resolutions connected to: the enactment of Legislative Decrees 6/2003 and 37/2004 (reform of corporate law); reduction of the minimum required equity interest needed to submit a list of candidates for the Company Board of Statutory Auditors; amount of expenses borne by the Company to safeguard common interests of holders of preference and savings shares. Fiat S.p.A. Head Office: 250 Via Nizza, Turin, Italy Paid-in capital: 4,918,113,540 euros Entered in the Turin Company Register Fiscal Code:

3 Contents Stockholders Meeting Agenda Board of Directors and Control Bodies 4 Report on Operations 4 Overview 7 The Fiat Group 8 Highlights of Results 9 Financial and Operating Highlights by Sector 10 Stockholders 12 Fiat Group Relaunch Plan 13 Products and Services 15 Innovation and Technology 17 Environment 18 Human Resources 20 Analysis of the Financial Position and Operating Results of the Fiat Group and Fiat S.p.A. 35 Process of Transition to International Accounting Standards (IAS/IFRS) 37 Corporate Governance 41 Stock Option Plans 42 Transactions among Group Companies and with Related Parties 44 Significant Events occurring Since the End of the Fiscal Year and Business Outlook 45 Operating Performance Sectors of Activity 46 Automobiles 50 Agricultural and Construction Equipment 53 Commercial Vehicles 56 Ferrari and Maserati 58 Components 59 Production Systems 60 Metallurgical Products 61 Services 62 Publishing and Communications 63 Motion to Cover the Loss for Fiscal Fiat Group Consolidated Financial Statements at December 31, Balance Sheet 71 Statement of Operations 73 Notes to the Consolidated Financial Statements 119 Annex to the Notes to the Consolidated Financial Statements 120 The Companies of the Fiat Group 145 Fiat S.p.A. Financial Statements at December 31, Balance Sheet 149 Statement of Operations 151 Notes to the Financial Statements 189 Auditors Reports 191 Reports of the Board of Statutory Auditors 195 Other Items on the Agenda and Related Reports and Motions 195 Coverage of Directors Civil Liability 196 Motion to Amend the Articles of Association and pertinent Resolutions This report has been translated into English from the original version in Italian. In case of doubt the Italian version prevails.

4 Board of Directors and Control Bodies Board of Directors Chairman Umberto Agnelli (1) Chief Executive Officer Giuseppe Morchio (1) Directors Angelo Benessia (2) Luca Cordero di Montezemolo Flavio Cotti (1) John Elkann Luca Garavoglia (2) Franzo Grande Stevens (1) (3) Hermann Josef Lamberti (1) Sergio Marchionne (2) Daniel John Winteler (1) Member of the Nominating and Compensation Committee (2) Member of the Audit Committee (3) Secretary of the Board Board of Statutory Auditors Statutory Auditors Cesare Ferrero Chairman Giuseppe Camosci Giorgio Ferrino Alternate Auditors Giorgio Giorgi Natale Ignazio Girolamo Piero Locatelli External Auditors Deloitte & Touche S.p.A.

5 4 Report on Operations Overview Dear Stockholders, The 2003 results were a net loss of 1.9 billion euros, compared with 4.2 billion euros a year earlier. The progress we have made underscores that we are on the way to recovery and confirms the effectiveness of the tools we have chosen. The 2003 fiscal year can be divided into two distinct periods: the first nine months, during which the Group s performance was penalized by the consequences of the difficult situation encountered in 2002, but reflected a significant improvement in cost containment, and the closing quarter, when all indicators of the operating and financial performance showed clear signs of a turnaround, as the Group began to benefit from the introduction of new models. This improvement enabled us to begin 2004 with strong momentum, which is reflected in the results for the first three months of the current year. The sizable reduction in operating and net loss and the improvement in the result before taxes and net financial position at year-end are the first tangible benefits of the actions undertaken for the industrial and financial relaunch of the Fiat Group. The gains made are all the more significant considering that, in 2003, the Fiat Group underwent the most profound transformation in its history while confronting major external challenges. The Company s financial and industrial crisis was tackled in an international environment characterized by weak economic growth, political instability and intensified competition. The Group, working with determination to overcome these challenges, adopted a clear strategy focused on relaunching its automotive businesses. This approach won the full support of the Group s lending banks and, more generally, the entire Italian business establishment. The painful but necessary choice to dispose of some of the Group s operations, coupled with a capital increase and other financial transactions, generated over 9 billion euros in liquidity.

6 5 Report on Operations Overview The definition and implementation of the Relaunch Plan and the early introduction of new products marked the first concrete steps in the process of streamlining the Group s corporate organization and relaunching its businesses. * * * In 2004, the Group s Sectors are continuing the process of industrial restructuring and rationalization that is already underway, while working hard to improve their profitability. The entire Group is committed to the success of this effort. It is a difficult and challenging job that will require Fiat to find structural solutions for any open industrial and commercial issues. The Group s Sectors and companies will be supported in their endeavors by two main factors. The first one is a strong balance sheet, with a liquidity of approximately 7 billion euros. The second is the operating tools that are available today to help all Sectors across the board accelerate the achievement of improved results. These tools include: the individual Sector growth plans resulting from the overall Relaunch Plan; a stronger senior management team; the vast number of new projects (more than 800) that are being implemented under the Relaunch Plan; and the powerful lever of technological innovation, which is benefiting from the new stimulus provided by increased R&D spending. Suffice it to say that in this area alone Fiat plans to invest about 8 billion euros in four years. In 2004, the Group s operations will also fully benefit from the introduction of new models and the positive momentum that they will generate for all of the product lines of the automotive Sectors Fiat Auto primarily, but also CNH and Iveco. Other positive factors include the synergies generated through industrial cooperation projects, the close collaborative relationship established with suppliers and the renewed confidence that the Company is currently enjoying, especially in Italy. We remain firmly committed to working with unflagging determination along the guidelines set out in the Relaunch Plan to achieve its objectives. We will continue our efforts to renew our product range and improve our distribution organizations, investing 9 billion euros in four years. In addition, we will further strengthen our management organization by pursuing a strategy of bringing in top level executives from outside the Group as well as leveraging the competencies available inside. We believe that people, with their wealth of knowledge and their personal commitment, are the most important resource to rely on as we work to build a new Fiat for the twenty-first century. To improve our businesses cost competitiveness, we will complete our previously announced plans to restructure our manufacturing organization, while remaining mindful of the social impact of each of our actions. The environment in which we expect to operate in the months ahead continues to be characterized by mixed prospects. While the global economy is expected to grow by 4%, driven mainly by growth in the United States and Southeast Asia, the gains will be significantly smaller in Europe, and in Italy in particular. As a result, the automotive markets are expected to hold relatively steady or undergo little changes, which will cause carmakers to pursue very aggressive sales strategies. * * * During the first three months of 2004, demand for automobiles and commercial vehicles in the markets where the Group operates showed virtually no change from the previous year, but shipments of agricultural equipment were up significantly in North America. Within this framework, the results for the first quarter confirm that the upward trend that started late in 2003 is continuing. Consequently, we can confirm the goals for the current year as stated in the Relaunch Plan: operating breakeven for the Group, a further reduction in Fiat Auto s losses and better operating results than in 2003 from all other Sectors. Turin, March 26, 2004 Umberto Agnelli Chairman Giuseppe Morchio Chief Executive Officer

7 Fiat Panda Car of Year 2004 Ferrari F2003-GA 2003 World Champion

8 7 Report on Operations The Fiat Group The Fiat Group s automotive manufacturing and service activities serve customers in more than 190 countries around the globe. Below is a description of how the Group is currently structured, after its refocusing on the automotive business carried out in Automotive Activities They account for 77% of total sales (before intercompany eliminations) and 71% of net invested capital. They include the following business lines: Automobiles The Group s automobile operations are managed primarily by its Automobile Sector, which includes Fiat Auto Holdings B.V. and its subsidiaries. The Sector markets automobiles under the Fiat, Lancia and Alfa Romeo brands and light commercial vehicles under the Fiat brand. The Automobile Sector provides financing services to its dealers and suppliers and offers motorists a comprehensive line of mobility services. Ferrari and Maserati are also part of the Fiat Group. They produce luxury sports cars that excel for their exclusive characteristics, technology and performance. Agricultural and Construction Equipment This Sector, which is led by CNH Global N.V., is active in the field of tractors and agricultural equipment through the Case IH, New Holland and Steyr brands and in the construction equipment business through the Case, FiatAllis, Fiat Kobelco, Kobelco, New Holland Construction and O&K brands. The Sector s financial services provide support to end customers and to its dealers. Commercial Vehicles Iveco S.p.A. is the lead company of the Commercial Vehicles Sector. This Sector designs, produces and sells complete lines of commercial vehicles (Iveco and Seddon Atkinson brands), busses (Iveco and Irisbus brands), firefighting vehicles (Camiva, Iveco and Magirus brands) and diesel engines (Iveco Motors brand). The Sector provides a full range of financial services. Other Industrial Sectors These Sectors include Components, Production Systems and Metallurgical Products. Their products and areas of business are listed below: Automotive modules and components for lighting systems, exhaust systems, suspensions and shock absorbers, and engine control units. Industrial automation systems for the automotive industry in the areas of product and process engineering, logistics and management, manufacturing, installation, production startup and maintenance. Engine blocks, cylinder heads and other components for cast-iron engines; cast-iron components for transmissions, gearboxes and suspensions; and magnesium bodywork components. Other non Industrial Sectors These Sectors, which include Services and Publishing and Communications, engage in the following businesses: Services in the areas of personnel administration, temporary staffing, facility management, administrative and corporate finance consulting, information and communication technology, purchasing, and e-procurement. Publication of the La Stampa newspaper, and sale of advertising space for multimedia customers through Publikompass.

9 8 Report on Operations Highlights of Results Financial and operating highlights of the Fiat Group (in millions of euros) Consolidated revenues 47,271 55,649 58,006 57,555 48,123 Operating result (510) (762) EBITDA 1,950 (1,341) 3,408 5,125 3,836 EBIT (319) (3,955) 528 2,073 1,482 Result before taxes (1,298) (4,817) (497) 1,050 1,024 Net result before minority interest (1,948) (4,263) (791) Group interest in net result (1,900) (3,948) (445) Net financial position positive/(negative) (3,028) (3,780) (6,035) (6,467) (4,031) Stockholders equity before minority interest 7,494 8,679 13,607 15,209 14,767 Group interest in stockholders equity 6,793 7,641 12,170 13,320 12,874 Net invested capital 10,522 12,459 19,642 21,676 18,798 Operating cash flow (Operating result plus depreciation and amortization) 1,759 1,852 3,198 3,907 3,142 Cash flow (Net result before minority interest plus depreciation and amortization) 321 (1,649) 2,089 3,630 2,860 Investments in fixed assets 2,011 2,771 3,438 3,236 2,712 Research and development 1,747 1,748 1,817 1,725 1,406 Operating result/net revenues (ROS) (1.1%) (1.4%) 0.5% 1.5% 1.6% Operating result/average net invested capital (ROI) (4.4%) (4.7%) 1.5% 4.2% 4.8% Net result before minority interest/net revenues (4.1%) (7.7%) (1.4%) 1.0% 1.1% Net result/group interest in average stockholders equity (ROE) (26.3%) (39.9%) (3.5%) 5.1% 2.7% Capital expenditures/depreciation Number of employees 162, , , , ,319 Statistical data by geographical region Number of Number of Number of Number of Companies Employees Facilities R&D Centers Italy , Europe excluding Italy , North America , Mercosur 46 21, Other regions 103 8, Total ,

10 9 Report on Operations Financial and Operating Highlights by Sector Net result before Net revenues Operating result EBIT minority interest (in millions (in millions (in millions (in millions (in millions (in millions (in millions (in millions of euros) of euros) of euros) of euros) of euros) of euros) of euros) of euros) Automobiles (Fiat Auto) 20,010 22,147 (979) (1,343) (1,607) (2,214) (2,058) (2,739) Agricultural and Construction Equipment (CNH) 9,418 10, (192) (211) Commercial Vehicles (Iveco) 8,440 9, (84) (409) (258) (493) Ferrari and Maserati 1,261 1, Components (Magneti Marelli) 3,206 3, (16) (41) (348) (90) (435) Production Systems (Comau) 2,293 2,320 2 (101) (122) (247) (164) (302) Metallurgical Products (Teksid) 844 1, (56) (137) (91) (214) Aviation (FiatAvio) (*) 625 1, Insurance (Toro Assicurazioni) (**) 1,654 4, (203) 52 9 Services (Business Solutions) 1,816 1, (140) (20) (119) Publishing and Communications (Itedi) (5) Miscellaneous and Eliminations (2,679) (3,277) (71) (91) 1,407 (650) Total for the Group 47,271 55,649 (510) (762) (319) (3,955) (1,948) (4,263) Cash flow Capital expenditures Net invested capital Number of employees (in millions (in millions (in millions (in millions (in millions (in millions of euros) of euros) of euros) of euros) of euros) of euros) Automobiles (Fiat Auto) (1,096) (1,780) 1,100 1,116 1,806 1,254 44,563 49,544 Agricultural and Construction Equipment (CNH) ,148 5,140 26,825 28,528 Commercial Vehicles (Iveco) 46 (70) ,310 1,582 31,511 38,113 Ferrari and Maserati ,968 2,896 Components (Magneti Marelli) 83 (245) ,879 20,716 Production Systems (Comau) (108) (238) ,375 18,186 Metallurgical Products (Teksid) (43) (121) ,556 7,368 Aviation (FiatAvio) (*) ,049 Insurance (Toro Assicurazioni) (**) ,098 Services (Business Solutions) 10 (77) 7 14 (31) 478 7,113 7,900 Publishing and Communications (Itedi) Miscellaneous and Eliminations ,102 1,616 3,573 4,171 Total for the Group 321 (1,649) 2,011 2,771 10,522 12, , ,492 (*) Data for the Aviation Sector are shown until the date of its sale (July 1, 2003). (**) Data for the Insurance Sector are shown until the date of its sale (May 2, 2003).

11 10 Report on Operations Stockholders Financial communications The Group pursues a policy of open communication with individual and institutional investors. In the course of the year, its investor relations program offers presentations, live or through conference call, after the regular publication of Group results or other events requiring direct communications with the market. In addition, the program includes several seminars, which furnish a more in-depth understanding of the operating performance and strategies of the principal Group Sectors, and numerous meetings and roadshows, which permit more direct contact between the financial community and the Group senior management. For holders of Fiat shares: Toll-free telephone number in Italy: Website: s: investor.relations@geva.fiatgroup.com serviziotitoli@fiatgroup.com Average monthly trading volume (in millions of shares) Ordinary Preference Savings For holders of ADRs: Toll-free telephone number in the USA and Canada: Outside the USA and Canada: Website: /03 02/03 03/03 04/03 05/03 06/03 07/03 08/03 09/03 10/03 11/03 12/03 Performance of FIAT stock with respect to MIBTEL index and Eurostoxx Auto since January 1, 2003 (1/1/03=100) Fiat ordinary shares MIBTEL Eurostoxx Auto 20 01/ / / / / / / / / / / /2003 In 2003 the financial markets recovered significantly from their levels in During the first quarter of 2003, stock prices fell due to the instability caused by the conflict in Iraq and the uncertain prospects of economic recovery, which were more than offset by the general improvement that followed in the remainder of the year. In this context, the period of difficulty and great change faced by the Fiat Group affected its stock price, which suffered more than that of its competitors. In the first part of 2003, Fiat stock was impacted by the heavy losses reported for However, presentation of the Relaunch Plan by the new management in June 2003 and the successful subscription of the capital increase generated enough investor confidence as to permit stabilization of the stock price in the second half of 2003.

12 11 Report on Operations Stockholders Minimum and maximum monthly price (in euros) Fiat ordinary shares Stockholder base at December 31, Other stockholders Italian institutional investors International institutional investors IFIL Generali Group Libyan Arab Foreign Inv. Co. Mediobanca Sanpaolo IMI Group 01/03 02/03 03/03 04/03 05/03 06/03 07/03 08/03 09/03 10/03 11/03 12/ Fiat preference shares 01/03 02/03 03/03 04/03 05/03 06/03 07/03 08/03 09/03 10/03 11/03 12/03 Ordinary shares 800,417,598 IFIL 30.06% Generali Group 2.76% Libyan Arab Foreign Inv. Co. 2.70% Mediobanca 2.39% Sanpaolo IMI Group 2.07% International institutional investors 16.26% Italian institutional investors 10.76% Other stockholders 33.00% Highlights per share (in euros) Fiat savings shares 01/03 02/03 03/03 04/03 05/03 06/03 07/03 08/03 09/03 10/03 11/03 12/03 Cash flow per share (**) (2.911) Earnings per share (0.841) (6.660) (2.412) Dividend per share (*) ordinary and preference shares savings shares Stockholders equity per share at 12/ Official price per share ordinary shares preference shares savings shares (*) Reflects the distribution of earnings attributable to the respective year. (**) Net result plus depreciation and amortization.

13 12 Report on Operations Fiat Group Relaunch Plan In June, the Company presented its Industrial and Financial Relaunch Plan. This four-year plan, which lays the basis for full recovery of the Group by focusing the scope of its activity and industrial mission on the automotive business, enabled the Company to adopt decisive measures to resolve problems and accelerate the return to growth. The Plan, which includes detailed operational plans for each of the individual Sectors, set forth the following fundamental Group guidelines: Improving cash-flow generation and profitability is the top priority; A major effort must be made in the areas of product development, innovation and marketing by launching new models, investing heavily in technology and strengthening the distribution networks; The cost structure must be made highly competitive by rationalizing the Group s product design and engineering operations, streamlining its manufacturing organization, increasing efficiency and strongly supporting the development of professional competencies among the engineering, marketing and distribution staff. Results for the full year enabled the Company to confirm its commitment to meeting the objectives of the Relaunch Plan, which are: Achieve operating breakeven in 2004 at the Group level. Achieve a 4% return on sales by 2006 (5.5 percentage points higher than in 2002). Generate positive operating cash-flow (operating result plus depreciation and amortization) in The Group has already reached many of its stated objectives while work in other areas is progressing in line with expectations: Cash generation: Over 9 billion euros were generated from disposals and a capital increase. Operating breakeven: The positive performance of the fourth quarter points in the right direction. Corporate structure: A major effort made to streamline the Group structure, including the disposals completed during the year, will reduce the number of Group companies from over 900 in 2002 to about 600 by the end of Structural cost reduction: Eight of the 12 plants slated for closure have already been shut down or are in the process of being shut down, and staff levels have decreased as expected. Margin improvement: New product launches have been accelerated, and the average age of the product line has been lowered. In addition, newly established cross-sector teams have been active for several months with the aim of increasing Group synergies and accelerating the achievement of results. These teams work in the purchasing, productivity, quality, overhead, and commercial areas. Their purpose is to assist the Company in focusing on the principal variables of the statement of operations and ensure the exchange of best practices. Consequently, the strength of the Group is greater than the sum of strengths of the individual Sectors. Thanks to these teams, a vast number of new projects were launched at the Operating Sectors and Business Units. Over 800 projects were being implemented at the end of 2003 and are expected to produce concrete improvements in the 2004 results. The projects promote the dissemination of an entrepreneurial spirit in the Group, enhance the transparency of expectations, and, ultimately, maximize the possibilities for success. The number of projects and people involved in the turnaround effort has been growing steadily.

14 13 Report on Operations Products and Services Fiat Auto Products. In 2003 Fiat Auto accelerated its efforts to extend and strengthen its product range, especially in the second half of the year. It was able to move up the launch of no less than four new models: the Fiat Panda city car, the Fiat Idea compact MPV, the high-end compact Lancia Ypsilon and the Alfa GT sport coupé. These attractive and innovative new cars were accompanied by face-liftings of the Fiat Punto, the Alfa 156 and the Alfa 166. Although they differ in conception and use, the new models all bring technical and stylistic innovation to their respective categories. This was enthusiastically welcomed by the public, which ensured the immediate commercial success of the vehicles, and by the media. The new cars received in fact numerous awards: from the prestigious Car of the Year award received by Fiat Panda along with another seven titles, to the prizes won by Lancia Ypsilon (3) and the new Alfa 156 (2). One of the keys to the strategy for strengthening the Fiat, Lancia and Alfa Romeo brands is technological innovation. In 2003 this focus led to the introduction of the 1.3 liter Multijet 16-valve engine, a small, compact turbodiesel that represents the second generation of common rail engines and extends the benefits of this technology to the much broader public of compact car owners. Services. In keeping with Fiat Auto s long-time principle of providing customers with a complete mobility service rather than just a means of transport, in 2003 the company strengthened its range of integrated services, especially in the infomobility sector. It also boosted its rental operations, where Fiat Auto works through Savarent and Leasys (the latter jointly owned with ENEL), which are active in long-term rentals, and Targarent, which operates in the short-term hire segment. Moreover, in 2003 Savarent expanded its services to include a less expensive product, Soft Rent, with the aim of reaching private customers. Ferrari and Maserati In 2003 Ferrari confirmed its position of excellence not only on the racetrack, where the Formula 1 team won the Drivers and Constructors world championships for the fourth and fifth consecutive years respectively, but also in markets all over the world. Maserati introduced the Quattroporte, its flagship saloon with a 400-horsepower V8 engine, which combines the qualities of a luxury executive automobile with the authentic grand touring spirit. CNH Global Products. In the agricultural equipment segment, the renewal of the product line led to the introduction of highly innovative products. These included the mid-horsepower New Holland TSA tractor, which is equipped with the revolutionary Fast Steer technology, designed to facilitate turnaround. Other innovations comprised the TNF-A series, with which New Holland has redefined the concept of orchard tractors, and the VM and VL grape harvesters. The latter are a new generation of highly flexible machines that can handle a wide variety of terrain and offer extensive operational scope, as they can be used not only for harvesting but also for all other vineyard operations. The same principle of operational flexibility underlies the Case IH AFX combine harvester, which introduces the single rotor system for both threshing and separation. These products brought CNH an extraordinary number of awards in Europe and America in With more than 40 new product launches in the construction equipment segment, CNH demonstrated that it is one of the most vibrant and aggressive competitors in the sector. Fiat Kobelco, the brand created in mid-2002 to strengthen CNH s position in the world construction equipment market, presented a range of excavators with renewed cabins, hydraulics and, above all, engines. The Case brand extended its product portfolio with the introduction of the TX series of telescopic handlers and new excavators and wheel loaders. Services. In 2003 CNH developed initiatives aimed at strengthening customer relationships, working to monitor customer satisfaction and improve its communication tools. This led to the introduction of new instruments to measure product satisfaction and delivery quality with dealers in selected areas of Europe, and to the development of the Voice of the Market program, which performs a similar function and is scheduled to begin operating this year. In line with the CNH Identity Project, last year visitors were for the first time able to experience a unified CNH environment created within the stands devoted to individual brands at the Intermat and Agritechnica trade fairs. Iveco Products. In the heavy vehicles segment, Iveco introduced the Stralis Active Day and Active Time, which join the Stralis Active Space launched in The new models meet the needs of customers operating short and medium-distance routes. The intermediate range was strengthened with the introduction of the New Eurocargo. The launch began in February and was completed by the end of Since 2002 the Eurocargo has been the European leader in the segment. Irisbus also introduced a wide variety of new models in 2003, including the Evadys touring busses and the smaller Midys. In the intercity bus sector, the company introduced the 10.6 meter version of the Ares, which is now available in a broad variety of lengths up to a maximum of 15 meters. Last year also saw the launch of the Europolis electric bus. During the year Eurofire introduced three new models of rescue vehicle: a 37-meter ladder truck, a new articulated ladder truck

15 14 Report on Operations Products and Services and an aerial platform with a maximum reach of 27 meters, both with computer-controlled stabilization systems. In addition, in 2003 Iveco responded to new demand for decontamination vehicles, delivering a prototype to the Italian Fire Department. The company also continued its search for ever greater performance for airport fire-fighting equipment with the introduction of an 8x8 version of the Dragon range. Services. In 2003 Iveco paid special attention to the development of all of its Customer Service activities. On one front, the company developed a series of new products (ranging from guarantee extensions to planned maintenance programs) that help preserve vehicle values over time. On another, it reinforced all of its spare part procurement and delivery systems. These include a single virtual warehouse stocking more than 220,000 parts, the Vehicle Off Road (VOR) delivery system, which can guarantee delivery of spare parts within twelve hours anywhere in Europe and the Vetrina Ricambi (Spare Parts Window), an Internet tool that provides an online view of the entire stock of a particular dealer and optimizes the transfer of information flows to the RAMSES spare parts management system, which made it possible to reduce dealer stocks by 3%. An important feature of 2003 was the program for dealer skill enhancement, which qualified dealers to handle the new technologies now found in vehicles. This was facilitated with the development of new diagnostic tools, such as the all-new E.A.S.Y. system. Another part of this activity was the innovative DEEC project, in which each dealer will have an expert diagnostician in constant contact with the Iveco technical center.

16 15 Report on Operations Innovation and Technology Overall, approximately 13,000 people at 109 centers in Italy and abroad worked on the Group s research and development projects in Total R&D expenditures came to 1,747 million euros, or 4% of manufacturing revenues. Efforts continued during the year to strengthen and rationalize the Group companies pursuit of innovation. In particular, cooperation between the Fiat Research Center (FRC) and Elasis was more intense than ever, ensuring that the two research facilities can interact more effectively and achieve a greater degree of synergy. This commitment led to several projects to which each center contributes its own unique skills. Fiat Research Center In 2003, the Fiat Research Center and its staff of around 950 employees achieved results which had a significant impact on product and process innovation, helping improve the Group companies industrial competitiveness. Thanks to its research, the FRC transferred over 250 deliverables to clients during the year and earned a number of awards, including: The award received at the 32 nd Barcelona International Motor Show for the Center s highly innovative UNIAIR electronic valve control technology. The Oscar Masi award for industrial innovation assigned to the Gasdriver vehicle. This vehicle, which combines a robotized transmission, natural gas-powered engine and an electric motor/generator, was voted best product in the Energy technologies for sustainable development category. Scientific output was particularly prolific, as witnessed by the 97 patents filed during the year. With these additions, the number of active patents held by the Fiat Research Center rose to 891. The major achievements of 2003 are reviewed below: 90 HP 1.3-liter 16-valve diesel engine. The Fiat Research Center contributed to the development of a new version of the small Multijet diesel powerplant which was specifically designed to increase maximum torque by 17% and power output by 28%, all while complying with the future Euro 4 emissions limits. The new engine will be taken into consideration for future applications on mid-size and small cars of the Fiat Group. Fiat Seicento Hydrogen. The second version of the hydrogenpowered Seicento was developed with fundings from the Italian Ministry of the Environment. Road tests on the vehicle confirmed the new fuel cell propulsion system s high efficiency. Infonebbia fog warning system. The Fiat Research Center and ANAS, the Italian national highway administration, promoted the Integrated Traffic Safety project based on cooperation between smart vehicles and highways. This project will set up two development test sites equipped with Intelligent Transportation Systems (ITS) and a mini-fleet of vehicles. The objective: help the driver, prevent traffic accidents resulting from fog and, if they occur, minimize their consequences. In critical situations, Safety Cars equipped with innovative systems will guide the other vehicles at a safe speed. LED taillamp technology. The Fiat Research Center demonstrated the feasibility of its patented LED (Light Emitting Diode) technology by developing a 7 mm thick taillamp unit that is expected to offer a number of advantages over conventional components, including minimum thickness, low cost for both the device and for the system as a whole, and greater design freedom. Diesel particulate filter. Using DPFs, or Diesel Particulate Filters, brings particulate emissions of diesel engines to levels similar to those of their spark ignition counterparts. Together with Fiat-GM Powertrain, the Fiat Research Center has developed a filter system that, unlike the designs currently in use, requires no maintentance or additives, and makes full use of the MultiJet powerplant s potential. Elasis Elasis, with a staff of more than 800 employees, operates in the field of research on automotive products and processes, and is provided with sophisticated testing equipment and computer-aided design tools. It is thus a basic asset for a Group pursuing a strategy of continuous innovation. Being able to participate in projects enjoying national or EU funding (where 16 grant applications representing a total value of 83 million euros were submitted in 2003) helps Elasis cooperate with the public research system. It also stimulates the development of the basic knowledge which is essential for effective applied research. In this context, Elasis takes part in the initiatives sponsored and approved by the Italian Ministry of Education, Universities and Research. In 2003, Elasis thus joined with the Ministry and the Campania regional administration in setting up the Naples Materials Science Center (Distretto Tecnologico sui Materiali). Exploiting its know-how and ability to integrate design, experimentation, and technological skills, Elasis is developing a new concept of highly versatile automobile. In 2003, Elasis continued to develop methods for extending its Virtual Product Development (VDP) capabilities. Among significant achievements, Elasis simulated all of the crash tests called for by current European regulatory requirements, and developed a virtual reality facility where researchers can go through all the motions of disassembling a car. For its work on vehicles, Elasis is investigating innovative architectures that will serve as the building blocks for new products with versatile interior layouts, all-wheel drive systems, modular chassis frames and highly accessible body shells. In powerplant design, Elasis continued to expand the know-how it can bring to bear on small-displacement spark ignition engines, reducing their fuel consumption and exhaust emissions. In particular, introducing innovations such as the

17 16 Report on Operations Innovation and Technology two-ring piston and a new valve actuation control on several versions of the FIRE engine significantly reduced on-vehicle fuel consumption. Significant progress was also made in optimizing NVH (Noise, Vibration and Harshness) and in developing new manual and robotized transmissions. Elasis also continued to hone its skills and make major investments in the electronic control systems that are playing an increasingly vital role in today s cars. During the year, Elasis wrapped up many of these skills in a single package with its development of a one-of-a-kind simulation bench a true virtual car that slashes the time needed to fine-tune control systems and debug on-board electronics. The full benefits of engineering research can only be achieved by leveraging the power of an advanced ICT system. This is why Elasis has deployed an ICT function capable of supporting engineering activities and generating research in the area. During the year, for example, a knowledge management portal was set up in order to capitalize on the center s store of engineering knowledge. Elasis s work is by no means restricted to vehicle research, but also addresses the many mobility and traffic safety issues that revolve around the automobile. As part of this wider purview, the center s research also focuses on experimental materials, technologies and telematics systems. Similarly, Elasis strives to broaden its understanding of safety-related problems through joint research initiatives with public agencies and infrastructure operators. Major projects of this kind saw Elasis partnered with the Province of Milan, the Province of Perugia, the Municipality of Salerno and Southern Italy s highway concessionaire Autostrade Meridionali.

18 17 Report on Operations Environment In 2003, the Fiat Group Sectors put a range of products on the market whose environmental impact was lower than ever before in all three key areas of fuel economy, emissions control and efficiency. Corresponding improvements were made in manufacturing processes. For both products and processes, these achievements stem from the kind of innovation that can only be made possible by continuing research. The Group s research work, so essential to developing effective, competitive technologies, is spearheaded by the Fiat Research Center, Elasis, and the Center for the Study of Transportation Systems. Major achievements and initiatives in 2003 are detailed in the Environmental Report, submitted together with the Fiat Group s Annual Report for the twelfth year running. A few of the highlights of the past year are illustrated below: Traditional Engines. Product engineering work was completed on the 1.3-liter 16-valve Multijet diesel engine, which already meets Europe s future emissions limits. The new powerplant has been installed on innovative cars such as the Ypsilon, Idea and Panda. Iveco started testing of its new V-6, V-12 and V-16 diesel engines, as well as its new Cursor engine for the US market, which also complies with the upcoming Euro 4 standards. The new medium Eurocargo truck was also introduced in This unit s new Tector engine, which boasts low emissions and fuel consumption, has been developed in 3-, 4- and 6-cylinder configurations for application on agricultural and construction equipment, also with the aim of meeting the new standard requirements of the US market. Natural Gas-Powered Vehicles. NGVs continued to gain ground, thanks in no small measure to the Group s foresight in providing buyers with the most complete lineup of natural gas vehicles on the market today. This range was further extended in 2003 with the introduction of the Punto Natural Power, while production of the ultra-low emissions 6-cylinder Tector and Cursor engines designed for busses and city-dwelling trucks also got under way. Agricultural and Construction Equipment. New Holland and Case used common platforms to renew almost half of the models in the two makers ranges of agricultural and construction equipment. All of the new machines are significantly more compatible with the environment than their predecessors. Renewal of both ranges will be completed in Electric and Hybrid Propulsion Systems. In 2003, earlier prototype vehicles were joined by the new Panda Hydrogen. Further advances were also made in public transit applications, where trials are now being carried out on two new fuel cell-powered busses in Turin and Madrid. Production processes. The Fiat Research Center continued to work with Sectors on dry machining process that will reduce cutting fluid usage, thus bringing down costs and improving environmental performance. For its part, the Fiat Research Center stepped up its testing of alternative fibers which will make a major contribution to reducing overall vehicle weight. Ongoing process improvements. Thanks to the extension of the Group s environmental management systems and the continuous improvement programs implemented at its production processes, 2003 witnessed further increases in our waste recycling performance, with the percentage of waste sent to controlled landfills dropping yet again. Volatile organic compound (VOC) solvent emissions from Fiat Auto, CNH and Iveco paint shops were also reduced. Overview of the main environmental achievements of the Fiat Group s Italian industrial facilities over more than a decade Recycled waste 61.0% 77.8% 82.8% Waste to controlled landfills 37.0% 7.6% 7.4% Solvent emissions from paint shops (g/m 2 )

19 18 Report on Operations Human Resources At December 31, 2003, the Group had 162,237 employees, compared with 186,492 at the end of The Group hired approximately 11,500 new employees in 2003 approximately 3,400 in Italy and approximately 8,100 in other countries. A total of approximately 22,700 employees (10,200 in Italy and 12,500 in other countries) left the Company. Business acquisitions and disposals resulted in a net decrease of 13,100 employees. The largest reductions stemmed from the disposals of FiatAvio S.p.A., the Toro Assicurazioni Group, Fraikin and Fidis Retail Italia. Organizational and Management Changes All Sectors continued to work on streamlining their organizations and making them responsive to changes in the business environment. The priority specifically assigned to the deployment of an effective corporate governance system resulted in the establishment, at the senior management level, of an Internal Audit Function by Fiat S.p.A. and the Group s operating companies. The definition and implementation of the Group Relaunch Plan required the strengthening of the Business Development and Strategies Department and the establishment of a Corporate Initiatives Function by Fiat S.p.A. Responsibilities similar to those entrusted to the Corporate Initiatives Function were also established at the Sector level. An important chapter of the Relaunch Plan deals with the strategic objective of increasing the Group s competitiveness by strengthening its management organization. In 2003, Fiat S.p.A. and the Sector parent companies hired more than 90 management employees from outside the Group, including seven who were selected to fill senior management positions. In addition, the Group worked to enhance the value of its management personnel by advancing to key positions executives who showed that they possessed the requisite skill sets. ENHANCING THE VALUE OF HUMAN RESOURCES The high skill level possessed by the Group s staff is demonstrated by the large number of professionals it includes (25,269 in total, 42% of whom work outside Italy). Hiring Qualified Resources. In 2003, the Group hired a total of about 400 recent college graduates. In addition, it was deeply involved in the Automotive Engineering School at Turin s Politecnico University and provided support for its activities. Students are expected to begin graduating from this specialized degree program in Leadership. The program used to assess and develop leadership became operational in About 800 managers participated in the assessment phase and were provided with feedback about their leadership style. Management Review. The development of internal resources is ensured by the management review process. More than 7,000 employees have gone through this process, which is designed to provide a quantitative and qualitative analysis of their management skills. People Satisfaction. The survey cycle launched in October 2002 was completed in Improvement programs based on this survey are being implemented by the Sectors and operating companies. Professional Development and Training. In 2003, the Group invested 95 million euros (2% of its total payroll) in training and professional development programs designed to support the operations of its companies around the world. About 71,000 employees received training and development support. Isvor Fiat, which acts as the corporate university of the Fiat Group, also offers its services to noncaptive clients. In 2003, Isvor Fiat provided training, consulting and professional support programs representing a total of 29,200 classroom days. An additional 37,800 employees were enrolled in 340 courses and received a total of 798,000 hours of distance- and openlearning support. Fiat Grants and Scholarships. The Fiat Grants and Scholarships Program, which was created in 1996 and is available to the children of active Group employees both in Italy and abroad, is continuing with considerable success. In 2003, Fiat awarded 545 grants, including 183 to students in Italy and 362 to students in other countries (*), at a total cost of 978,000 euros. (*) Brazil, France, Poland, Spain and the United States. INDUSTRIAL RELATIONS Most of the activity in the area of industrial relations involved managing the restructuring programs launched in 2002 and updated in 2003 to make them consistent with the objectives of the Fiat Group Relaunch Plan. Staff reductions were carried out through the social shock-absorber programs available under existing laws and through social impact plans, most of which agreed with the unions, that cushion the impact of downsizing measures on Group employees. In Italy, Fiat Auto and certain Magneti Marelli and Comau factories stopped using the Cassa Integrazione Straordinaria (Special Temporary Layoff Benefits Fund) within the authorized 12-month period. A portion of the employees covered by the Cassa Integrazione Straordinaria returned to work, except for about 500 employees from the Fiat Auto plant in Arese for whom the Ministry of Labor granted authorization to use the Cassa Integrazione Straordinaria until December 31, The remaining redundancies left the Companies under mobility allowance, the so-called mobilità di accompagnamento alla pensione, i.e. long-term unemployment benefit for workers who are expected to reach retirement age during their mobility benefit period.

20 19 Report on Operations Human Resources Mobility allowances were also used to achieve the downsizing targets set forth in the staff restructuring plans of the other Group Sectors. One of the tools that can be used in this area is long-term mobility allowances. These allowances, which were made available under a law enacted in April 2003, are provided over a longer period than regular mobility benefits. A total of 2,400 employees of Fiat Group companies and 181 Teksid employees were eligible for coverage under this benefit program. Outside Italy, staff redundancies were handled primarily through programs developed with the agreement of local trade unions. The companies involved were: Irisbus (closure of a plant in Mataró, near Barcelona, and of the Ikarus factory in Hungary); CNH (restructuring of the Berlin facility and definition of a social impact program for the closure of the Crepy factory in 2004); Magneti Marelli (staff reductions at the Magneti Marelli Lighting plant in Cannock, UK); and Comau (completion of the redundancy procedure for Comau Estil). As required under the applicable EU Directive, restructuring issues, especially those that have a transnational impact, were the subject of information and consultation with the members of the Fiat Group European Works Council at the meeting of the Restricted Committee in mid-march 2003 and at the annual meeting on November 6 and 7, On that occasion, the Company provided extensive information about its Relaunch Plan, particularly with regard to its impact on employment levels and the measures that will be used to handle redundancies. In Italy, collective bargaining negotiations focused on the National Collective Labor Agreement for Metalworking Employees, which expired in December The new contract, which was renewed after about four months of negotiations, was signed by Federmeccanica, an organization representing metalworking businesses, and all of the unions (FIM-CISL, UILM- UIL and FISMIC), except for FIOM CGIL, which refused to sign. The new contract, which covers about 70,000 Group employees in Italy, sets wages for two years and work rule provisions for four years. Under this agreement, employees were granted monthly wage increases averaging 90 euros before taxes (45 euros on July 1, 2003, 24 euros on February 1, 2004 and 21 euros on December 1, 2004). The incremental compensation for the first six months of 2003 was set at 220 euros before taxes, payable in two lump-sum installments (115 euros in June 2003 and 105 euros in January 2004). When fully implemented in 2005, the contract package will have an impact on labor costs of about 5% (about 2% in 2003 and 2.4% in 2004). FIOM s refusal to sign led it to adopt a posture of ongoing unrest. This resulted in several strikes, but they were joined by only a limited percentage of workers. The same low participation occurred when strikes were called to protest redundancy agreements. Outside Italy, the main labor agreements included the signing of annual collective contracts by most Fiat Group companies operating in France. These contracts provide for annual wage increases of about 2%. In Poland, where staff compensation did not change in 2002, the employees of Fiat Auto received a wage increase of about 3%. In Brazil, Fiat Automoveis SA-FIASA and the local labor unions reached an agreement in June on the payment of an annual bonus tied to company results and negotiated a wage increase that is payable in advance of the renewal of the industry-wide labor agreement.