Untitled Document

Another Successful Year

"Return on equity is now back to the levels of the late 1990s. These improvements reflect the combined effects of strong top-line growth and our never-ending cost- cutting efforts."

Dear Shareholder,

Despite a 2% decline in light vehicle production in our major markets, 2003 became the best year ever for Autoliv and demonstrated the strength of our Company and its strategies.
We are now taking the next steps in these strategies by:
- increasing investments in Asia and other new markets,
- expanding capacity for side curtain airbags, electronics and other new products,
- moving even more production to low-labor-cost countries,
- consolidating our supplier base and taking other cost-savings initiatives and
- exploring the potential in active safety and other exciting R&D-areas.

This should generate sustainable profit growth which could enable us to raise dividends and/or buy back stock, thereby continuing to create value for you as a shareholder.

  In 2003, Autoliv continued its strong performance from 2002. Sales rose by 19%, reaching a record-breaking $5.3 billion. Net income improved by 53% to $268 million - also a record high - and cash flow hit $253 million after acquisitions and capital expenditures.

  Organically (i.e. excluding acquisitions and currency effects), sales were up 5%, mainly driven by a strong performance in side airbags, electronics and seat belts, and by rapid expansion in Asia. Since light vehicle production declined, Autoliv's growth was entirely self-generated.

  In creating shareholder value, we focus on increasing earnings and returns on shareholders' equity. Reported earnings per share rose by 57% (partly due to a one-time license income and currency effects that boosted earnings per share by 26%.) The return on equity, in excess of 12%, is now back to the levels of the late 1990s. These improvements mainly reflect the combined effects of strong top-line growth and our never-ending cost-cutting efforts.

  Over the last five years, we have closed or sold a dozen plants. We have moved production to low-labor-cost countries. Currently, we have 35% of our employees in these countries, compared to less than 10% five years ago. We have redesigned our products and reduced direct material costs by more than 3% per year, i.e. faster than the price decline of our products.

  As a result, we have bucked the falling margin trend since the "airbag boom" in the 1990s and have improved our operating margin for two consecutive years. During these two years, Autoliv has generated a quarter of a billion dollars in free cash each year. This free cash has enabled us to pay $51 million in dividends during 2003, to return another $43 million in 2003 to shareholders by buying back shares, and to raise the dividend by 82% in 14 months in three steps, including the dividend declared in February 2004.

  Now the challenge is to keep this momentum.

Planting the Seeds for Future Growth

To maintain our technological leadership, net spending in R,D&E increased by 33% to 5.8% of sales. At the leading scientific conference of our industry, we introduced a new concept consisting of a new airbag and a new seat belt system (see page 11). We have developed a special airbag for convertibles, and we have laid the foundation for expansion into Active Safety by landing the first order for our Night Vision system. In Active Safety, we have also made significant technological progress in Pre-Crash Radar and Pre-Crash Dipping Nose (see page 11).

We have also strengthened Autoliv's system capabilities. In 2003, this was evidenced by rapidly rising sales of steering wheels (up 20% organically) and electronics (up 15% organically). In these segments, Autoliv has had much lower market shares than in airbags and seat belts. This is now changing as customers increasingly buy all safety systems from a single supplier as a package for a vehicle platform.

In line with our cost-saving strategy, we introduced a program that will, in a few years, reduce the number of suppliers from over 2,000 to less than 500. We also introduced another program to reduce the number of product versions (by more than 50% in seat belts) and introduced a global, web-based purchasing system to take full advantage of global purchasing synergies. Furthermore, we have expanded in low-labor-cost countries and consolidated production into fewer facilities.

Quality excellence was evidenced by several awards, such as a Global Supplier Award from DaimlerChrysler, the Component Award and the Gold Award from Chrysler, and Toyota's Award for Excellent Value Improvements.

Global presence is a competitive edge for Autoliv that becomes increasingly important as vehicle manufacturers merge and form global alliances. In 2003, we acquired the remaining shares in our Japanese seat belt joint venture and started construction of a new airbag plant with a technical center in China. In Korea, we acquired more land in order to expand a plant that we opened less than two years ago. As a result of last years' investments in Asia, we are increasingly awarded global contracts by Asian vehicle manufacturers. In 2004, this will cause our average supply value to Asian vehicles produced in North America to surpass our supply value to a typical vehicle from our traditional U.S. customers (i.e. Ford, General Motors and Chrysler). In addition, we expect to double our consolidated sales in Asia within three years and exceed one billion dollars by 2005.

Our dedicated and motivated employees have achieved these results. They have done a tremendous job over many years, for which I am both proud and grateful. We are committed to continually developing their skills, knowledge and potential - to the benefit of both the employee and our Company.

Outlook

Our belief in the bright prospects for Autoliv, communicated in previous annual reports, has been validated by some significant announcements during 2003.

The Alliance of Automobile Manufacturers in the U.S. announced "a new voluntary industry safety commitment … for enhanced side-impact protection through the use of features such as side airbags and airbag curtains …." The commitment requires all new vehicles offered in the U.S. by participating manufacturers to meet the new front-to-side crash protection criteria by September 2009. Two years prior to this deadline, 50% of these vehicles are to meet the self commitment.

In June, a committee of the U.S. Senate introduced draft legislation for rollover protection "based on the combined ejection-mitigation capabilities of safety technologies, including advanced side glazing, side curtains, and side impact air bags." If approved, the proposed regulation would become effective at the end of 2008 for all new light vehicles.

The EU Commission announced a new directive introducing a new pedestrian protection test for all new vehicle models by 2005, leading up to an even more stringent test in 2010.

  These announcements - in combination with a steady increase in consumers' demand for safer vehicles - should give Autoliv solid long-term growth opportunities. Long-term, our increasing presence in Asia and our global contracts with Asian manufacturers should provide additional growth opportunities.

  In 2004, we expect light vehicle production rates to be almost flat. We expect to continue to increase R,D&E expenditures faster than sales due to the strong order intake. This means that, for yet another year, all improvements in Autoliv's earnings and cash flow must result from our own programs and actions.

  These efforts should enable us to deliver a third record- breaking year in a row, although it is not realistic to expect such sharp improvements as in 2002 and 2003.

Lars Westerberg

Profitability

Returns on equity and capital employed are now, at 12% and 14%, respectively, back to the levels of the 1990s.

Employee Allocation

Over the past five years, the number of employees in low-labor-cost countries has increased from 1,500 to over 11,000 employees. The number of employees in these countries corresponds to 35% of total employees compared to less than 10% in 1999.

Supply value in North America

In 2004, Autoliv's average supply value to Asian vehicles produced in North America will surpass our supply value to a typical vehicle from Ford, General Motors or Chrysler. However, a recent OEM self commitment for side-impact protection should start to increase the supply value to these customers as well.