V O L K S WA G E N A G ANNUAL REPORT 2005

ANNUAL REPORT 2005

 chronik 2005 >>>

key figures

volkswagen group

Volume Data 2005 2004 %

Vehicle sales (units) 5,192,576 5,142,759 + 1.0
Production (units) 5,219,478 5,093,181 + 2.5
Employees at Dec. 31 344,902 342,502 + 0.7

Financial Data (IFRSs), million 2005 20041) %

Sales revenue 95,268 88,963 + 7.1
Operating profit before special items 3,143 2,037 + 54.3
Special items 351 395 11.1
Operating profit after special items 2,792 1,642 + 70.0
Profit before tax 1,722 1,088 + 58.2
Profit after tax 1,120 697 + 60.7

Cash flows from operating activities 10,810 11,457 5.6

Cash flows from investing activities 10,466 15,078 30.6

Automotive Division2)
Cash flows from operating activities 8,112 8,881 8.7
Cash flows from investing activities 5,721 7,046 18.8
of which: investments in property, plant and equipment 4,316 5,425 20.4
as a percentage of sales revenue 5.0 6.8
capitalized development costs 1,432 1,501 4.6
as a percentage of sales revenue 1.7 1.9
Net cash flow 2,391 1,835 + 30.3
Net liquidity at Dec. 31 706 1,912 x

Return ratios in % 2005 20041)

Return on sales before tax 1.8 1.2
Return on investment after tax (Automotive Division) 2.6 1.3
Return on equity before tax (Financial Services Division) 18.9 20.0
1)
Restated.
2)
Including allocation of consolidation adjustments between the Automotive and Financial Services divisions.

volkswagen ag

Volume Data 2005 2004 %

Vehicle sales (units) 2,151,991 1,993,068 + 8.0
Production (units) 956,108 934,969 + 2.3
Employees at Dec. 31 101,028 102,520 1.5

Financial Data (HGB), million 2005 2004 %

Sales 50,245 47,707 + 5.3
Net income 741 505 + 46.6
Volkswagen AG dividend proposal 450
of which: ordinary shares 322
preferred shares 128

This version of the Annual Report is a translation from the German original. The German text is authoritative.
chronicle 2005 June 29, 2005

the first solar

filling station
in lower saxony
begins operating
in the volkswagen
technology center
In cooperation with
Braunschweig-based
solar energy and heat-
ing specialists Solvis,
April 2 10, 2005 a solar filling station
commences operation
February 21, 2005 on the grounds of the
auto mobil Volkswagen Technology
international Center in Isenbttel
25 years of (ami), leipzig near Gifhorn.
audi quattro
Volkswagen model
The Audi Quattro is 25 initiative continues: two
years young this year. Volkswagen models
A quarter of a century premiere together at the
ago, it was unveiled to AMI the Fox and the
the world in Geneva. new Polo.

january february march april may june

March 3, 2005

international
motor show, geneva
The 75th Geneva Motor
January 5 16, 2005 Show sees the official May 7 15, 2005
public premiere of the

sixth Passat generation.

los angeles auto saln inter-
show, los angeles nacional del
automvil,
Volkswagen Passenger
barcelona
Cars kicks off the
launch of its 2005 SEAT presents the new
models by presenting Leon in Barcelona.
the new Jetta.
May 24, 2005

January 25, 2005

100 million
golf and touran volkswagens
set for success The 100 millionth car
across europe bearing a VW badge
United Kingdom: Golf rolls off the assembly
GTI wins the What line in Wolfsburg.
Car? award. The
Touran is voted Best
Compact Van for the
second time following
2004. Slovenia: the
Golf outstrips the
competition to win
Car of the Year 2005.
 November 11, 2005

financial and
investment
planning lays
September 13, 2005 foundation for

improved earnings
volkswagen The Board of Manage-
financial services ment submits financial
ag establishes rein- and investment plans to
surance company the Supervisory Board;
based on these plans,
Volkswagen Financial
October 22 the Company reiterates
Services AG and Allianz
November 6, 2005 its previously communi-
Versicherungs-AG sign
cated pre-tax earnings
an agreement with a
target of 5.1 billion for
view to further extend-
tokyo motor the Volkswagen Group
ing their longstanding
show, tokyo in 2008.
and successful collab-
oration in the field of In Tokyo, Volkswagen
August 26 automobile insurance. presents the prototype December 9, 2005
September 4, 2005 of the EcoRacer, which
may well go down in
history as one of the publication of the
caravan salon, most fuel-efficient 2005/2006 group
dsseldorf sports cars of its time. sustainability report
Volkswagen Commercial At a press conference,
Vehicles presents the the Volkswagen Group
world premiere of the presents its first sustain-
new Multivan Beach ability report Moving
and California High Generations to the
Roof models. public.

july august september october november december

July 11, 2005 November 22, 2005

first place for volkswagen

the new fox in dominates
adac crash test auto trophy 2005
In the latest crash test September 15 25, 2005 The Volkswagen Group
conducted by automobile sweeps the board at
association ADAC, the the Auto Trophy 2005,
Volkswagen Fox secures international with a total of 23 awards
first place in its price motor show (iaa), for our Volkswagen
segment, demonstrating frankfurt am main Passenger Car, Skoda,
convincingly that low- The new Volkswagen Bentley, Bugatti, Audi,
cost entry-level vehicles Convertible Coup Eos SEAT and Lamborghini
can also have excellent and the Audi Q7 SUV brands, and our
safety features. see their world premiere Commercial Vehicles
in Frankfurt. SEAT business line.

July 19, 2005

unveils the prototype
of the Altea FR.

exports of the
September 25, 2005
new jetta begin

The first Volkswagen

Jettas destined for the volkswagen
European market leave welcomes porsches November 25
the Volkswagen plant intention to acquire December 4, 2005
in Puebla, Mexico. This strategic interest

new model will be sold Porsche AG announces

in over 25 countries essen motor
that it is seeking to
across Europe. show, essen
acquire around 20% of
the voting capital of Two Group models are
Volkswagen AG. A stable unveiled to the world
shareholder structure at the Essen Motor
is very important for the Show: the CrossPolo
long-term nature of a versatile, offroad-style
the automotive business. vehicle and the Audi
S4 Cabriolet.
> > > F O R U S , D E V E L O P I N G I N N O VA T I O N S M E A N S

A S K I N G W H AT M OV E S P E O P L E

> > > F O R O U R C U S T O M E R S , E X P E R I E N C I N G I N N O VA T I O N

M E A N S T H AT A L L T H E I R N E E D S A R E M E T

D I S C O V E R M O R E A B O U T T H E I N N O VA T I O N S

OF THE VOLKSWAGEN GROUP

 Course of the race
>> The Grand Challenge race 0 km
on October 8, 2005
>> Start

Preparing
for the start

o 1 hr

INNOVATIVE TECHNOLOGY
FOR AUTOMATED DRIVING

>> Driving on autopilot a vision becomes reality

ACC the automatic

distance control function
with radar sensor in the
new Passat

Although it was dismissed as impossible since the invention of the motor car, automated However, this agreeable form of transport eventually gave can drive itself in certain situations. After all, which of us
driving will soon be a reality. To a great extent, this builds on the experiences of earlier way to the march of progress. As motor cars gradually has never been stuck in bumper-to-bumper traffic, nerves
generations: before the advent of motorized vehicles, people depended on carts pulled replaced their four-legged forerunners on the roads, drivers torn to shreds by constant stopping and starting? However,
by horses or oxen, which would ideally offer them an automated form of transport. were once again required to take the reins. Nonetheless, automated driving also has its charms in less restricted
Particularly when the cart was homeward bound, the animals knew which way to go and the benefits of motorized transport are beyond dispute: the driving situations. Just imagine you are on a deserted road
the driver could sit back and take more of a supervisory role. ever-improving comfort levels, the greater speed of travel in the middle of the night with the sole aim of getting from
and the superior payload flexibility have made people A to B as quickly as possible. Would it not be wonderful
mobile in a way that would have been utterly unthinkable to be able to lean back, leave all the functions to the vehicle
with horses and oxen. and use the time more productively or more enjoyably?
Nonetheless, automotive development is currently Volkswagen is now a giant step closer to transforming
experiencing something of a return to its roots: the key this dream into reality. Having joined forces with Stanford
pursuits of driving pleasure, safety and environmental University in California, working in a team coordinated by
protection have now been joined by a new goal a car that the Volkswagen AG Electronic Research Laboratory in the
 Course of the race
>> The Grand Challenge race 0 km
on October 8, 2005
>> Start

Preparing
for the start

o 1 hr

INNOVATIVE TECHNOLOGY
FOR AUTOMATED DRIVING

>> Driving on autopilot a vision becomes reality

ACC the automatic

distance control function
with radar sensor in the
new Passat

Although it was dismissed as impossible since the invention of the motor car, automated However, this agreeable form of transport eventually gave can drive itself in certain situations. After all, which of us
driving will soon be a reality. To a great extent, this builds on the experiences of earlier way to the march of progress. As motor cars gradually has never been stuck in bumper-to-bumper traffic, nerves
generations: before the advent of motorized vehicles, people depended on carts pulled replaced their four-legged forerunners on the roads, drivers torn to shreds by constant stopping and starting? However,
by horses or oxen, which would ideally offer them an automated form of transport. were once again required to take the reins. Nonetheless, automated driving also has its charms in less restricted
Particularly when the cart was homeward bound, the animals knew which way to go and the benefits of motorized transport are beyond dispute: the driving situations. Just imagine you are on a deserted road
the driver could sit back and take more of a supervisory role. ever-improving comfort levels, the greater speed of travel in the middle of the night with the sole aim of getting from
and the superior payload flexibility have made people A to B as quickly as possible. Would it not be wonderful
mobile in a way that would have been utterly unthinkable to be able to lean back, leave all the functions to the vehicle
with horses and oxen. and use the time more productively or more enjoyably?
Nonetheless, automotive development is currently Volkswagen is now a giant step closer to transforming
experiencing something of a return to its roots: the key this dream into reality. Having joined forces with Stanford
pursuits of driving pleasure, safety and environmental University in California, working in a team coordinated by
protection have now been joined by a new goal a car that the Volkswagen AG Electronic Research Laboratory in the
 212 km

>> Finish

Stanley is
doing well ...

Stanleys eyes Stanley wins the

four laser scanners, ...and crosses the Grand Challenge 2005.
video cameras and ... and his brain finishing line in Of 23 cars, only 5
radar sensors ... show him the way. front of the judge. complete the course.

2 hrs 3 hrs 4 hrs 5 hrs 6 hrs finished after: 6 hrs 54 mins

Warning indicator Sensor slave

The future:
automated driving
like this Audi RSQ from
24 GHz the film I, Robot
The lane change assistant On/off switch
radar sensor
1. Assistant is active, 2. Information:
no vehicle in the next lane
monitored zone is occupied

Warning indicator Sensor master

Driver signals

3. Warning: danger the driver

still intends to change lanes

The lane keeping assistant:

the camera films a scene
in front of the vehicle
the vehicle is kept in lane
with the help of its electro-
mechanical steering

nearby city of Palo Alto, VW Group Research took part driver-assistance systems and forward-looking technology. selected speed while keeping a specified distance from the lane change and lane keeping assistants would already
in the Grand Challenge 2005 in the USA the only race In this way, we are making significant progress with the vehicle in front. The next stages of development aim make semi-automated driving possible.
in the world with automated test vehicles. The vehicles automated driving in traffic and artificial intelligence to reduce the strain on drivers in traffic jam situations and The vision has begun to take shape automated driving
had to complete a course of over 200 km in the Mojave in automobiles. to help avoid accidents. Future assistance systems will also is possible. Of course, drivers may have no wish to be a
Desert in Nevada within a specified time limit. The series- Driver-assistance systems are electronic aids for drivers intervene in the lateral guidance of the vehicle, notably passenger all the time. A glorious summers day, a sporty
produced Volkswagen Touareg R5-TDI* known as and are the first step on the way from assisted driving the lane change assistant and lane keeping assistant. convertible, an open road and the wind rushing through
Stanley equipped with special technology for detecting through semi-automated driving to fully automated driving. Taking up where rear view mirrors leave off, the lane change your hair with perfect conditions like this, who would
obstacles and determining a suitable path, was the first One assistance system that is already in widespread use assistant helps drivers to change lanes by monitoring want to miss out on all the fun? However, if drivers do wish
of 23 starters to pass the finishing line, in a mere 6 hours is ESP (Electronic Stability Program), which increases safety traffic behind and warns them if there is a risk of another to sit back and leave everything in the hands of their vehicle,
and 54 minutes: Drivers wanted, but not required! by helping drivers to stabilize their vehicles in critical vehicle being obscured by a blind spot. The lane keeping then they should have this option. And this is precisely
Although at first glance this may look like scientists at driving situations. Another established assistance system assistant prevents drivers from drifting out of lane. In where the team at Volkswagen Group Research has its
play, it is part of an extremely important project that allows is ACC (Adaptive Cruise Control). This consists of a highly later stages of development, the ACC combined with sights set.
Volkswagen to demonstrate its expertise in the field of sophisticated cruise control system that keeps to a pre-

* Fuel consumption in l/100 km: 13.6 urban;

8.1 extra-urban; 10.1 combined;
CO2 emissions in g/km: 273.
 212 km

>> Finish

Stanley is
doing well ...

Stanleys eyes Stanley wins the

four laser scanners, ...and crosses the Grand Challenge 2005.
video cameras and ... and his brain finishing line in Of 23 cars, only 5
radar sensors ... show him the way. front of the judge. complete the course.

2 hrs 3 hrs 4 hrs 5 hrs 6 hrs finished after: 6 hrs 54 mins

Warning indicator Sensor slave

The future:
automated driving
like this Audi RSQ from
24 GHz the film I, Robot
The lane change assistant On/off switch
radar sensor
1. Assistant is active, 2. Information:
no vehicle in the next lane
monitored zone is occupied

Warning indicator Sensor master

Driver signals

3. Warning: danger the driver

still intends to change lanes

The lane keeping assistant:

the camera films a scene
in front of the vehicle
the vehicle is kept in lane
with the help of its electro-
mechanical steering

nearby city of Palo Alto, VW Group Research took part driver-assistance systems and forward-looking technology. selected speed while keeping a specified distance from the lane change and lane keeping assistants would already
in the Grand Challenge 2005 in the USA the only race In this way, we are making significant progress with the vehicle in front. The next stages of development aim make semi-automated driving possible.
in the world with automated test vehicles. The vehicles automated driving in traffic and artificial intelligence to reduce the strain on drivers in traffic jam situations and The vision has begun to take shape automated driving
had to complete a course of over 200 km in the Mojave in automobiles. to help avoid accidents. Future assistance systems will also is possible. Of course, drivers may have no wish to be a
Desert in Nevada within a specified time limit. The series- Driver-assistance systems are electronic aids for drivers intervene in the lateral guidance of the vehicle, notably passenger all the time. A glorious summers day, a sporty
produced Volkswagen Touareg R5-TDI* known as and are the first step on the way from assisted driving the lane change assistant and lane keeping assistant. convertible, an open road and the wind rushing through
Stanley equipped with special technology for detecting through semi-automated driving to fully automated driving. Taking up where rear view mirrors leave off, the lane change your hair with perfect conditions like this, who would
obstacles and determining a suitable path, was the first One assistance system that is already in widespread use assistant helps drivers to change lanes by monitoring want to miss out on all the fun? However, if drivers do wish
of 23 starters to pass the finishing line, in a mere 6 hours is ESP (Electronic Stability Program), which increases safety traffic behind and warns them if there is a risk of another to sit back and leave everything in the hands of their vehicle,
and 54 minutes: Drivers wanted, but not required! by helping drivers to stabilize their vehicles in critical vehicle being obscured by a blind spot. The lane keeping then they should have this option. And this is precisely
Although at first glance this may look like scientists at driving situations. Another established assistance system assistant prevents drivers from drifting out of lane. In where the team at Volkswagen Group Research has its
play, it is part of an extremely important project that allows is ACC (Adaptive Cruise Control). This consists of a highly later stages of development, the ACC combined with sights set.
Volkswagen to demonstrate its expertise in the field of sophisticated cruise control system that keeps to a pre-

* Fuel consumption in l/100 km: 13.6 urban;

8.1 extra-urban; 10.1 combined;
CO2 emissions in g/km: 273.
6 Boards Group Topics Financial Communication Divisions Management Report

8 Report of the 18 Innovation 24 Volkswagen shares 36 Business lines and markets 48 Business development
Supervisory Board 20 ForMotion and bonds 38 Volkswagen brand group 62 Net assets, financial
12 The Board of Management 31 Corporate Governance 40 Audi brand group position and earnings
14 Letter to our Shareholders report 42 Commercial Vehicles performance
44 Financial Services 74 Volkswagen AG
(condensed, according to
German Commercial Code)
80 Value-enhancing factors
94 Risk report
102 Report on expected
contents developments

22 34 46 60 72 78 92

volkswagen skoda bentley bugatti audi seat lamborghini

passenger cars

boards
8

report of the supervisory board

12

the board of management

14

letter to our shareholders

18 innovation Innovations that reflect our customers mobility aspirations

group topics

20 formotion ForMotion motivates

>> volkswagen passenger cars innovation

brings opposites together 22

financial communication 24 Global demand for Volkswagens shares and bonds

volkswagen shares
and bonds

31 Transparency builds trust

corporate
governance report

>> skoda innovation means developing great

technology for the smallest details 34

36 Volkswagen Group Automobiles and

divisions business lines

and markets Financial Services are present worldwide

38 ForMotion measures have a positive

volkswagen
brand group impact on results

40 Record unit sales for the Audi brand

audi
brand group lift sales revenue and profits

42 Commercial Vehicles business line

commercial
vehicles in the black again

44 Leading the field in mobility services

financial services

>> bentley innovation born of tradition 46

The Annual Report contains the consolidated financial statements of the

Volkswagen Group, the combined management report of the Volkswagen Group
and of Volkswagen AG, as well as additional information.
 Financial Statements Auditors Report Executive Bodies Additional Information 7

114 Income statement 184 Appointments of 188 Glossary

115 Balance sheet members of the 189 Index
116 Statement of recognized Board of Management 190 Key performance
income and expense 185 Appointments of indicators by business
117 Cash flow statement members of the line and market
118 Notes to the consolidated Supervisory Board
financial statements

100 110

commercial financial services

vehicles

management report
48 New model initiative successful

business
development

>> bugatti innovation creates stability 60

62 Automotive Division operating profit

net assets,
financial position more than doubled
and earnings
performance

>> audi innovation is the future 72

74 Improvement in gross profit on sales

volkswagen ag
(condensed, according to
german commercial code)
and financial result

>> seat innovation is agility 78

80 Passion and performance as a basis

value-enhancing
factors for customer-oriented processes

>> lamborghini innovation is a refusal

to compromise 92

94 Managing risks and exploiting opportunities

risk report

>> commercial vehicles innovation pays 100

102 Innovation will safeguard the automotive future

report on expected
developments

>> financial services innovation means

exploring new ground 110

financial statements 114

114 income statement

115 balance sheet
116 statement of recognized income and expense
117 cash flow statement
118 notes to the consolidated financial statements

182

auditors report

executive bodies 184

184 appointments of members of the board of management

185 appointments of members of the supervisory board

additional information 188

188 glossary
189 index
190 key performance indicators by business line and market
8 Boards Group Topics Financial Communication Divisions Management Report

> Report of the Supervisory Board

The Board of Management
Letter to our Shareholders

Dear Shareholders,

In fiscal year 2005, the Supervisory Board dealt in detail with the current position and the
development of the Volkswagen Group. In compliance with legal requirements and the
German Corporate Governance Code, we provided advice and support to the Board of
Management in the running of the Company. We were consulted directly with regard to
all decisions of fundamental significance to Volkswagen.
The Board of Management provided us with regular, complete and prompt verbal and
written reports on all key issues for the Volkswagen Group relating to the development of
business, the current position of the Group including the risk situation, risk management
and other matters. The Board of Management submitted detailed monthly reports on the
current business position and the forecast for the year as a whole. It provided us with a
verbal or written account of any variations from the defined plans and targets. Together
with the Board of Management, we discussed the reasons for these variations so that
effective measures could be taken.
The Supervisory Board held four ordinary meetings and one extraordinary meeting in
2005. Average attendance by Supervisory Board members was 94%. All members attended
more than half of the meetings. In addition, resolutions regarding urgent business trans-
actions were adopted in writing by means of a circulated document.

committee activities
The Supervisory Board has established three committees, each composed of two
shareholder representatives and two employee representatives. These committees are the
Presidium and the Mediation Committee in accordance with section 27(3) of the Mitbe-
stimmungsgesetz (German Codetermination Act), as well as the Audit Committee. Mem-
bership of the committees at the end of 2005 is indicated in the list of Supervisory Board
members on page 187.
The Presidium of the Supervisory Board was convened prior to each Supervisory
Board meeting. The main topics discussed at these meetings were fundamental issues
relating to corporate policy and management, as well as personnel changes on the Board
of Management.
The Audit Committee held five meetings in 2005. The key topics of its meetings were
the consolidated financial statements and risk management. The Audit Committee also
dealt with the interim reports, matters relating to financial reports and their audit by the
auditors. On July 25, 2005, the Audit Committee held a special meeting due to suspicions
of corruption and fraud, in connection with which the Volkswagen Group dismissed two
employees and called in the public prosecutors office in Braunschweig. At this meeting,
the Internal Audit Department, which had been tasked with clarifying the matters, and
the external audit firm KPMG outlined how the investigation would be organized and
what was known at that time.
The Mediation Committee was not required to convene during the year.
 REPORT OF THE SUPERVISORY BOARD 9

topics discussed by the supervisory board

At our meeting on February 25, 2005, we thoroughly examined and subsequently
approved the annual financial statements of Volkswagen AG and the consolidated
financial statements of the Group prepared by the Board of Management for 2004.
At the Supervisory Board meetings in February, April and September 2005, we
considered the extent to which the Group strategy 2015 had been implemented.
At the Supervisory Board meeting on September 23, 2005, we gave the Board of
Management the task of reviewing all options for the wholly-owned subsidiaries gedas
Aktiengesellschaft and Europcar International S.A.S.U., ranging from strategic expansion
through to an IPO or sale. The independent auditors from KPMG also gave us a verbal
progress report on the status of the investigation into irregularities at Volkswagen. We
examined its results in detail.
An extraordinary Supervisory Board meeting was held on October 10, 2005, at which
we dealt with the investment by Dr. Ing. h.c. F. Porsche Aktiengesellschaft. The Super-
visory Board welcomed its acquisition of around 20% of Volkswagen AG ordinary
shares. In this context, we authorized the Board of Management to conclude a governing
agreement on future operational cooperation with Porsche. To avoid any appearance of
a conflict of interest and any possible influence on the decision concerning cooperation
with Porsche AG, the Chairman of the Supervisory Board did not participate in the
negotiations on the governing agreement between Volkswagen AG and Dr. Ing. h.c. F.
Porsche Aktiengesellschaft at the Supervisory Board meeting on November 11, 2005.
At our meeting on November 11, 2005, we discussed in detail the Volkswagen
Groups financial and investment planning for 2006 to 2008 and approved the Board of
Managements proposals. We also approved the investment program for Volkswagen
AG. Another topic of this meeting was the written progress report on the investigation
being conducted by the independent auditors at KPMG. This report described how
individual employees tried to damage the Volkswagen Group, circumvent expense claim
and other rules and procure benefits going as far as personal gain. According to the
report, VWs functioning control systems thwarted attempts to siphon off Company
funds via front companies and hidden shareholdings. The Company nevertheless
suffered financial losses, partly as a result of the submission of so-called internal
receipts. The Supervisory Board is therefore pushing for events to be fully clarified.
Volkswagen will also be suing the people concerned for damages. As a result of these
events, the Company has installed a Group-wide ombudsman system and tightened
individual approval and control mechanisms.
10 Boards Group Topics Financial Communication Divisions Management Report

> Report of the Supervisory Board

The Board of Management
Letter to our Shareholders

corporate governance and declaration of conformity

The implementation of the German Corporate Governance Code at Volkswagen was the
subject of our meeting on November 11, 2005. In particular, we discussed the changes
made to the German Corporate Governance Code by the relevant Government
Commission on June 2, 2005. We also discussed the remuneration structure for the
Board of Management, which we subsequently confirmed. On December 12, 2005,
together with the Board of Management, we issued the declaration required under
section 161 of the Aktiengesetz (German Stock Corporation Act) regarding compliance
with the recommendations of the Code. This can be accessed at all times on the
Volkswagen AG website at www.volkswagen-ir.de. Further information regarding the
implementation of the recommendations and suggestions of the German Corporate
Governance Code can be found in our Corporate Governance report starting on page 31
and in the notes to the consolidated financial statements on pages 174 to 178.

audit of annual and consolidated financial statements

The Annual General Meeting on April 21, 2004 appointed PwC Deutsche Revision
Aktiengesellschaft Wirtschaftsprfungsgesellschaft as auditors for fiscal year 2005. The
auditors audited the annual financial statements of Volkswagen AG, the consolidated
financial statements of the Volkswagen Group and the combined management report.
They issued unqualified audit opinions on all of these documents. The auditors also
assessed the risk management system, concluding that the Board of Management had
taken the measures required by section 91(2) of the German Stock Corporation Act to
ensure early detection of any risks endangering the continued existence of the Company.
The dependent company report for fiscal year 2005 submitted by the Board of Manage-
ment was also reviewed by the auditors, who issued the following statement: On
completion of our review and assessment in accordance with professional standards, we
confirm that the actual disclosures contained in the report are accurate, and that the
consideration paid by the Company for the transactions listed in the report was not
inappropriately high.
The documentation relating to the financial statements and the auditors reports were
made available to the members of the Audit Committee and the Supervisory Board in
good time for their meetings on February 20 and 24, 2006 respectively. At both meetings,
the auditors reported extensively on the principal findings of their audit and were available
to provide additional information if required.
Our review of the consolidated financial statements of the Group, the annual financial
statements of Volkswagen AG, the combined management report and the dependent
company report did not give rise to any objections. On February 24, 2006, we therefore
concurred with the auditors findings and approved the annual financial statements and
the consolidated financial statements prepared by the Board of Management. The annual
financial statements are thus adopted. We endorsed the proposal on the appropriation of
net profit submitted by the Board of Management.
 REPORT OF THE SUPERVISORY BOARD 11

members of the supervisory board and board of management

On July 12, 2005, the Supervisory Board of Volkswagen AG elected Mr. Bernd Osterloh,
Chairman of Volkswagen AGs Central Works Council, to the Supervisory Boards
Presidium and Audit Committee. He therefore succeeds Dr. Klaus Volkert, who stepped
down from his position on the Supervisory Board on July 8, 2005. On August 31, 2005, Mr.
Bernd Wehlauer was appointed to Volkswagen AGs Supervisory Board as an employee
representative, succeeding Mr. Bernd Osterloh. On January 18, 2006, Mr. Peter Mosch,
Chairman of AUDI AGs Central Works Council, was appointed a member of the Super-
visory Board by court order to succeed Mr. Xaver Meier, who left the Group on December
31, 2005. In addition, on January 28, 2006, Dr. Wendelin Wiedeking, President and CEO
of Dr. Ing. h.c. F. Porsche AG, was appointed a member of the Supervisory Board by court
order to succeed Lord David Simon of Highbury, CBE, who stepped down from the
Supervisory Board on the same date.
Prof. Dr. Weigerber, the member of Volkswagen AGs Board of Management with
responsibility for Production, retired on June 30, 2005 in accordance with the terms
of his contract. On July 8, 2005, Dr. Peter Hartz offered the Supervisory Board his
resignation from the Board of Management on the grounds that, as the member of the
Board of Management responsible for Human Resources, he would accept political
responsibility for irregularities in his area of responsibility. Dr. Peter Hartz retired at the
end of August 4, 2005 with the consent of the Supervisory Board. The Company would
like to thank him for his services.
At our Supervisory Board meeting on November 11, 2005, we appointed Dr. Horst
Neumann as the member of the Board of Management responsible for Human Resources
effective December 1, 2005. Dr. Bernd Pischetsrieder, Chairman of the Board of Manage-
ment of Volkswagen AG, had temporarily assumed responsibility for this role until Dr.
Neumanns appointment to the post, following the departure of Dr. Peter Hartz.
The former Chairman of the Board of Management of Volkswagen AG, Prof. Dr. Kurt
Lotz, died on March 9, 2005 at the age of 92 after a long illness. Under his leadership
from 1967 to 1971, the foundations were laid for the subsequent success of the Golf and
Audi 80/Passat models. On September 3, 2005, Prof. Dr. Werner Holste died at the age of
77. As the member of the Board of Management of Volkswagen AG responsible for
Technical Development, he was a key force in driving the Companys product strategy
between 1968 and 1972. We shall remember both Prof. Dr. Lotz and Prof. Dr. Holste.
We would like to thank the members of the Board of Management, the Works
Council, the management and all the employees of Volkswagen AG and its affiliated
companies for their efforts and achievements over the past year.

Wolfsburg, February 24, 2006

Dr. Ferdinand Pich

Chairman of the Supervisory Board
12 Boards Group Topics Financial Communication Divisions Management Report

Report of the Supervisory Board

> The Board of Management
Letter to our Shareholders

the board of management

Dr.-Ing. e. h. Bernd Pischetsrieder Dr. rer. pol. Wolfgang Bernhard Francisco Javier Garcia Sanz

Chairman of the Board of Management Chairman of the Procurement

of Volkswagen AG Volkswagen brand group

Dr. rer. pol. h. c. Peter Hartz

(until August 4, 2005)

Prof. Dr.-Ing. h. c. mult. Folker Weigerber

(until June 30, 2005)
 THE BOARD OF MANAGEMENT 13

Dr. rer. pol. Horst Neumann Hans Dieter Ptsch Prof. Dr. rer. nat. Martin Winterkorn

Human Resources Finance and Controlling Chairman of the Board of Management

of AUDI AG

innovation is the key to sustainable success.

thats why were working to excite our
customers over the long-term with innovative
solutions that go far beyond the primary
automotive business.
14 Boards Group Topics Financial Communication Divisions Management Report

Report of the Supervisory Board

The Board of Management
> Letter to our Shareholders

Over the past year, we have continued our journey into the automotive future. My
fellow members of the Board of Management and I would like to thank you for your
support during this time. Unfortunately, the Volkswagen Group was affected by
a number of developments which represented setbacks in the progress made in
weatherproofing the Group. On the whole and I say this with confidence we are
nonetheless heading in the right direction. This can be seen from the figures:
With a total of 5,242,793 vehicles delivered to customers, the Volkswagen Group
recorded its best sales performance ever despite the difficult market situation,
especially in the USA and China. The Group was even able to extend its market
leadership, particularly in Western Europe and Germany. This success is primarily
attributable to our updated and extended model ranges and their young, attractive
profile. A record number of new models were launched by the Volkswagen Group in
2005. The most important new models include: Fox, Polo, Golf GT, Golf R32, Golf Plus,
Jetta, Passat saloon, Passat Variant, Audi RS 4, Audi A6 Avant, SEAT Leon, Bentley
Continental Flying Spur, Bugatti Veyron 16.4 and Skoda Octavia RS.
The Financial Services Division demonstrated healthy growth at a high level. The
high volume of contracts, at 5.9 million units in total, is a clear indication of the trust
our customers have in our financial services. With the participation by the Volkswagen
Group in LeasePlan Corporation in 2004 and the sale of the foreign companies of our
Europcar Fleet Services subsidiary to LeasePlan Corporation in 2005, we have made
significant progress in restructuring the major clients and fleet services business. A
further logical step for us as a mobility service provider is the intensified collaboration
with Allianz Versicherungs-AG in the insurance business field.
In the 2004 Annual Report, my fellow members of the Board of Management and
I explained that no fundamental improvement in the global automotive market was to
be expected in 2005. Furthermore, we anticipated additional negative pressures from
external factors, such as higher raw material and steel prices, a tougher competitive
environment and continued unfavorable exchange rates. Unfortunately, as you are no
doubt aware, all of these predictions have come true. Nonetheless, with an operating
 LETTER TO OUR SHAREHOLDERS 15

profit of 3.1 billion before special items, we succeeded in reaching the target that we
had set for ourselves. This was only possible through the ForMotion program, which
made an earnings contribution of 3.5 billion. Of particular note is that we returned to
a positive net liquidity of 706 million in the Automobile Division. My thanks go to the
more than 344,000 employees for the part they played in these achievements.
2005 was not an easy year for any of us. The media coverage of the incidents that
we reported to the authorities in the summer, negotiations on safeguarding Germany
as a production location and the necessary reductions in personnel costs have affected
us all personally. With regard to the first point, we took a proactive and transparent
public approach to clarifying these matters as well as taking steps to ensure that such a
situation cannot arise in the future. We tightened approval and control procedures and
introduced a Group-wide and internationally structured ombudsman system. The other
two points will remain critical in the coming years as well. For my fellow members of
the Board of Management and myself, it is of prime importance that all Volkswagen
Group plants should not only be profitable in the short term, but also on a sustainable
basis. Regrettably, this is not possible without cost reductions. Here, too, my thanks go
to all those who took such a responsible approach to implementing the necessary steps.
A question that was the subject of great attention within the Volkswagen Group,
and in particular also in the media, was the acquisition of a holding in Volkswagen AG
by Dr. Ing. h. c. F. Porsche Aktiengesellschaft. My fellow members of the Board of
Management and I welcome this development. The longstanding and extremely
successful collaboration between the two companies can be continued in the future
on the basis of the governing agreement that has now been signed. A current example
is our technology cooperation in the area of hybrid powertrains, which we intend to
use to meet customer demands for environmentally friendly powertrain concepts in the
vehicles of both companies. In addition, both partners also stand to benefit equally
from further cooperation arrangements in the areas of research, development and
production, which will enable Porsche and Volkswagen to make sustainable cost
savings and therefore to improve their results significantly.
16 Boards Group Topics Financial Communication Divisions Management Report

Report of the Supervisory Board

The Board of Management
> Letter to our Shareholders

The importance of sustainability in our Company is also reflected in the development

of our dividend. The Board of Management and Supervisory Board are proposing to the
Annual General Meeting to pay a slightly higher dividend of 1.15 per ordinary share
and 1.21 per preferred share for fiscal year 2005.
I would now like to turn to a question which is presumably of even greater interest
to you than the past: how does the future look for the Volkswagen Group? Our objectives
were set out in the Group Strategy 2015. Central to this strategy are the needs to
generate sustainable success, to focus on customers and to combine the primary
automobile business and Lifecycle Services into comprehensive automobility. It is true
that much of this road still lies ahead of us. Nonetheless, having finalized a series of
strategic measures over the past year, my fellow members of the Board of Management
and I have every confidence that we will achieve these objectives. As I announced at
the 2005 Annual General Meeting, an important decision was made in this regard
during the year: clear lines have been drawn between brand functions and Group
functions, meaning that responsibilities have been unequivocally defined.
In order to concentrate with greater effect on our core competences in the future,
we will review a number of corporate activities. In connection with this review, we have
already sold our wholly owned subsidiary gedas Aktiengesellschaft to T-Systems AG,
a subsidiary of Deutsche Telekom AG, with effect from January 1, 2006, subject to the
approval of the antitrust authorities.
Furthermore, we have already introduced a number of measures to improve our
cost structures. These range from process optimization across the Group, through the
modular strategy that has significantly increased the proportion of shared components
used in our various models, down to the internal Olympic Program for restructuring
the Groups Chinese activities by 2008, which we have developed together with our
Chinese joint venture companies. In addition, we expect between 2006 and 2008 the
performance enhancement program ForMotion plus to build on the success of
 LETTER TO OUR SHAREHOLDERS 17

ForMotion, and for the rethinking triggered by the program to be a constant factor in the
years to come. However, the joint development and production partnerships that have
been finalized or planned with Porsche, DaimlerChrysler and numerous suppliers have
also made a vital contribution to securing the long-term earnings power of the Group.
One of the key areas of our Group Strategy 2015 is an increased focus on the
customer. In order to increase customer satisfaction, we will improve our service
processes and shorten the order-to-delivery cycle for our vehicles. In addition, we will
continue working to offer our customers attractive products and services beyond the
primary automotive business.
All our activities ultimately aim to meet the changing demands and expectations of
our customers more effectively. This is why we have chosen Innovation as the core
topic of our 2005 Annual Report, in which we focus on examples of these innovations,
ranging from new engine concepts, through vehicle interior designs, to attractive
products and services in the Lifecycle Services business area; they demonstrate the
sheer versatility of this Group. German author Christian Morgenstern wrote that every
creation represents a challenge and we are willing and able to take on the challenges
that await us. So that we can offer our customers fascinating models and services. And
offer our shareholders an investment with potential. We hope that you will continue
accompanying us on our journey into the automotive future.

Sincerely,

Bernd Pischetsrieder
18 Boards Group Topics Financial Communication Divisions Management Report

> Innovation
ForMotion

innovation

Innovations that reflect our customers

mobility aspirations

Changing mobility requirements drive our innovations. In

addition to automobility, we offer our customers innovative
financial solutions, thereby increasing their financial mobility
as well.

innovations with added value for at the same time. In addition to more efficient
customers drivetrains, lightweight design has great potential
Social trends and customer wishes, possibilities for for fuel efficiency and driving pleasure. High-
new technologies, tougher legal requirements and strength and super high-strength steel offer
the pursuit of renewability these are all factors potential for significantly reducing the vehicle
responsible for stoking the fires of innovation. weight.
Ultimately, innovations should invariably offer
customers new added value: irrespective of the product diversification
reason for the innovations, and new functions and Our modular strategy enables us to manufacture
technologies must always offer new customer diversified products at competitive costs, thereby
benefits and/or costs savings. Customers can always allowing us to maintain their individuality. New
tell us their present wishes, but a long-term strategy construction methods are necessary for example
must look for wishes that customers will have in the frame-type construction for low production volumes
future. To be able to offer customers inspiring and lightweight steel construction for high-
products with value-adding innovations, Volks- production volumes to further reduce one-time
wagen within the framework of the Group Strategy expenses. Furthermore, innovative active materials
2015 defined four areas of focus that are of or nanotechnologies give components new
relevance to customer and costs, and on which new functions or enable functional integration within
projects are to be based. components. Examples of this are active vibration
damping or the windscreen transparency function
fuel consumption and lightweight design that allows drivers to use the windscreen as an
Driven by tougher exhaust emission standards and individual anti-dazzle or sun protection, or simply
rising oil prices, the Volkswagen Group is taking to give them added privacy.
various approaches to reducing fuel consumption
and emission levels. Parallel to launching the highly increased user-friendliness for customers
dynamic and low-consumption TSI generation of

The range of functions and the level of electronic
engines and developing hybrid vehicles, Volks- features in our vehicles will increase, and there will
wagen researchers are working on a new diesel also be a growing customer demand for greater
Combined Combustion System. This leads to a user-friendliness. By presenting information clearly
significant reduction in emissions while saving fuel and offering intuitive input options, we can ensure
 INNOVATION 19

that technology will be understood and used by all. European manufacturers, we are leading the
In the research stage, the customer benefits of new universal standardization of Car-to-X commu-
information and warning strategies are already nication. This envisages a self-organizing traffic
evaluated by a comprehensive test group. system with on-board artificial intelligence.

accident prevention and information intangible innovations

networking At Volkswagen, we also see our automotive services
Driver-assistance systems increase vehicle security as innovations. Here, we are focusing on the
and reduce accidents. In addition to ABS and ESP, growing customer interest in the possibility of
newly developed systems help make this possible, mobility packages that offer an extensive range of
such as the first stage of the active Reduced services at a fixed monthly rate. Since 2005, we
Stopping Distance system (RSD) in combination have offered brand-specific service contracts that
with Adaptive Cruise Control (ACC), which comes as combine financing, car insurance and extended
standard in the Passat, a first for a vehicle in the warranty insurance. We use test scenarios to
mid-class. While ACC is a comfort function that can examine how additional service aspects can be
be switched on and off at will, RSD is constantly incorporated in these packages.
vigilant and activates the brake system when there In order to inject a new dynamic to our
is a risk of a crash (brakes move into position, insurance business, we signed a cooperation
resting lightly upon the brake disks), thereby agreement with Allianz AG in September 2005 in
reducing the system reaction time. This helps to which we revised our longstanding cooperation.
either avoid or reduce the severity of accidents. In One of the cornerstones of this strategic partnership
its new Audi Q7 model, the Audi brand introduced is the establishment of our own reinsurance
the side assist feature. This system helps drivers company, Volkswagen Reinsurance AG. This
change lanes by monitoring the areas beside and company permits us to exert a greater influence on
behind the vehicle and by informing the driver via the development and pricing of insurance products.
a signal in the door mirror whenever it detects It also provides additional growth potential with
another vehicle in the next lane. Although all of a manageable level of risk. From a customer
these systems are still geared towards individual perspective, this means, for example, that we will
functions, the future will see them merging to be able to offer automobile insurance with a
become an all-round environment-sensing system. premium that is partly determined by the level of
The scope of future technical possibilities was safety equipment in the vehicle. This helps us come
demonstrated impressively by the Volkswagen one more step closer to our goal of tailoring
Touareg Stanley with its victory in the Grand services to the individual needs and preferences
Challenge a race for automated cars over more of our customers.
than 200 km. Innovations appeal to consumers and thus
For anticipatory driving to be possible, the generate demand. They support us in our efforts to
vehicles own systems must be linked with set ourselves apart from the competition, enabling
information from the infrastructure and from other, us to bring attractive and inspiring products onto
similarly equipped vehicles. Based on radio the market. Our innovations allow us to fulfill
technologies such as wireless LAN, tomorrows our customers wishes for individual mobility on
vehicles will be networked with mobile electronic a sustainable basis.
devices and with one another. Together with other
20 Boards Group Topics Financial Communication Divisions Management Report

Innovation
> ForMotion

formotion

ForMotion motivates

Thanks to the outstanding commitment of our employees,

the performance enhancement brought about by ForMotion
in 2005 significantly surpassed our expectations. With our
follow-up program ForMotion plus, we aim to continue this
success and enhance the performance of the Volkswagen
Group even further.

targets significantly exceeded through ForMotion measures. With an increase of

Our ForMotion performance enhancement program 3.5 billion, we were able to improve upon this
was launched in spring 2004. Since then, all products target substantially. This involved identifying over
and workflows in seven focus areas across the Group 20,000 individual measures, making swift decisions
were examined for improvement potential. From and systematically implementing the necessary
these results, we derived a set of measures for measures. Much of this success was due to the
bringing about sustainable cost reductions, opti- comprehensive, Group-wide program communi-
mizing processes and increasing sales performance. cation, which involved all brands and divisions in
A distinctly positive effect on Volkswagen Groups the new measures and changes. Our thanks go to all
earnings from ForMotion could be seen as early as those involved in ForMotion who made the program
2004. Our target for the past fiscal year was to successful with their exceptional commitment and
improve Volkswagen Group earnings by 3.1 billion creativity.

formotion measures recognized in income 2005

percentage accounted for by individual focus areas

Product costs 28.6

Overheads/Process optimization 27.4

One-time expenditure 22.3

Improved sales performance 8.6

Commercial Vehicles 5.5

Financial Services 4.0

Foreign sales subsidiaries 3.6

0 10 20 30 40 50 60 70 80 90 100
 FORMOTION 21

ForMotion succeeded in heightening awareness follow-up program ForMotion plus at the start of
of both costs and earnings among all employees in 2006. This program is designed for a period of three
line with our Group Guidelines. Nonetheless, the years. Our target is to increase the 2004 profit
economic success of the past fiscal year can only be before tax by 4 billion to 5.1 billion in 2008.
seen as the basis for further performance enhance- However, the impact of ForMotion plus will continue
ment measures. For this reason, we launched a to be felt long after 2008.

the success of the seven formotion focus areas in 2005

01 product costs 05 commercial vehicles

Reduction in product-related costs without affecting the Turnaround achieved by a market oriented further
diversity of the product range, high quality standards development of the product range and systematic cost
and customer benefits from the vehicles. Identified management.
improvement potential transferred to new projects and
other vehicle classes. High synergies in the form of
economies of scale.

02 one-time expenditure 06 financial services

Reduction in investments, development costs and start- Increased interest-bearing business volume through
up costs. Key areas were: lowering of non-product greater share of the automotive value chain from
investments and intensified use of virtual product increased cooperation with brands and dealers.
development techniques.
Improved cost-side competitiveness.

03 overheads/process optimization 07 foreign sales subsidiaries

Increase in cost awareness throughout the Group and Reduction in structure costs of non-European sales
better use of resources. Sustainable reduction in cost companies through process optimization.
levels through optimization of structures and work-
flows. Introduction of staff reduction measures.

04 improved sales performance

Reduction in structure costs through process

optimizations at the Groups European sales companies.
Improved profit situation in genuine parts and earnings contribution
accessories business. Reorganization of customer through formotion 2005
service area.
total 3,547 MILLION
I N N O VAT I O N B R I N G S O P P O S I T E S T O G E T H E R

>> Innovative TSI technology:

Maximum power, minimum consumption

Volkswagen is the brand that puts dreams within reach with its range of international top-sellers,
Volkswagen Passenger Cars has made innovative technology available to the average consumer.
A prime example is the Golf: in 2005, one of the most progressive petrol engines in existence, the
twin charger, made its debut in the Golf GT TSI. It was the first direct-injection petrol engine ever
to have both an integrated supercharger and a turbocharger. With a capacity of just 1.4 l, this engine
still packs a powerful punch 125 kW (170 bhp)* and 240 Nm while keeping average fuel con-
sumption to a mere 7.2 l per 100 km. The twin charger is very much a showpiece of innovative
engine design: at low revs, the supercharger alone ensures that 200 Nm of torque is available even
at 1,250 rpm. Once the revs reach the higher registers, the turbocharger kicks in. In excess of
3,500 rpm, the turbocharger has the necessary power to unleash the full force of the engine. Either
together or individually, the supercharger and turbocharger bring about a low-consumption per-
formance that sets new standards in its engine class.

* Fuel consumption in l/100 km: 9.6 to 9.8 urban; 5.9 to 6.1 extra-urban; 7.2 to 7.4 combined;
CO2 emissions in g/km: 173 to 178.
I N N O VAT I O N B R I N G S O P P O S I T E S T O G E T H E R

>> Innovative TSI technology:

Maximum power, minimum consumption

Volkswagen is the brand that puts dreams within reach with its range of international top-sellers,
Volkswagen Passenger Cars has made innovative technology available to the average consumer.
A prime example is the Golf: in 2005, one of the most progressive petrol engines in existence, the
twin charger, made its debut in the Golf GT TSI. It was the first direct-injection petrol engine ever
to have both an integrated supercharger and a turbocharger. With a capacity of just 1.4 l, this engine
still packs a powerful punch 125 kW (170 bhp)* and 240 Nm while keeping average fuel con-
sumption to a mere 7.2 l per 100 km. The twin charger is very much a showpiece of innovative
engine design: at low revs, the supercharger alone ensures that 200 Nm of torque is available even
at 1,250 rpm. Once the revs reach the higher registers, the turbocharger kicks in. In excess of
3,500 rpm, the turbocharger has the necessary power to unleash the full force of the engine. Either
together or individually, the supercharger and turbocharger bring about a low-consumption per-
formance that sets new standards in its engine class.

* Fuel consumption in l/100 km: 9.6 to 9.8 urban; 5.9 to 6.1 extra-urban; 7.2 to 7.4 combined;
CO2 emissions in g/km: 173 to 178.
24 Boards Group Topics Financial Communication Divisions Management Report

> Volkswagen shares and bonds

Corporate Governance report

volkswagen shares and bonds

Global demand for Volkswagens

shares and bonds

Volkswagen AG shares were a sought-after investment in 2005.

They outperformed the market in the first nine months of
the year, driven by the systematic measures taken to enhance
the Companys performance and Porsche AGs acquisition
of an interest in Volkswagen AG.

global equity markets Volkswagens preferred shares also rose sharply

In 2005, global equity markets recorded a positive during this period. They ended 2005 up 33.1% at
trend overall. This was driven by robust global 32.50. During the year, the price of the preferred
economic growth and continuing low interest rates. shares ranged between 24.00 and 40.00.
Even uncertainty on the global oil and commodity
markets was unable to hold back this positive trend dividend yield
for long. At the year-end, the DAX closed at 5,408 Based on the dividend proposal for fiscal year 2005,
points, up 27.1% on the prior year. The automotive the dividend yield on Volkswagen AG ordinary
sector index DJ Euro STOXX Automobile also shares is 2.6% and the yield on the preferred shares
developed positively, rising 20.1% in 2005 and 3.7%. Volkswagen shares therefore continue to be
ending the year at 225 points. an attractive investment for both institutional and
private investors. This is particularly true of the
development of the preferred shares. Details of the current dividend
volkswagen share price proposal can be found in the Volkswagen AG
Volkswagen AG shares substantially outperformed chapter (condensed, according to German
this positive market trend. This was due to improved Commercial Code) on page 75 of this Annual
cost structures and the success of the new models. Report.
In addition, the investment in Volkswagen AG by
Dr. Ing. h. c. F. Porsche Aktiengesellschaft led to earnings per share
above-average interest in the Companys shares. Basic earnings per ordinary share were 2.90.
Although the share price then dropped back In accordance with IAS 33, calculation of basic
slightly, it remained at an encouraging level. At the earnings per share is based on the weighted
year-end, Volkswagens ordinary share price was average number of ordinary shares outstanding in
44.61, a strong increase of 33.8% over the price the fiscal year (see also note 8 to the Volkswagen
on December 31, 2004. The ordinary shares peaked consolidated financial statements).
at 54.01 on October 4, 2005 and reached an
annual low of 31.88 on April 28, 2005.
 VOLKSWAGEN SHARES AND BONDS 25

share price development from december 2004 to december 2005

index based on month-end prices: dec. 31, 2004 = 100

180
Volkswagen ordinary shares

Volkswagen preferred shares 160

DAX 140
DJ Euro STOXX Automobile
120

100

80

Dec. Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.

shareholder structure tranche of shares is held by investment consultant

The shareholder structure of Volkswagen AG as of Brandes Investment Partners, LCC, San Diego,
December 31, 2005 is shown in the chart further California, USA, which notified Volkswagen AG that
down this page. the total proportion of ordinary shares held by its
As of December 31, 2005, the subscribed capital clients amounted to 8.58% of all ordinary shares on
of Volkswagen AG comprised 321,929,800 ordinary September 30, 2005. On October 11, 2005,
shares and 105,238,280 preferred shares. As the investment management company The Capital Group
largest single shareholder, Dr. Ing. h. c. F. Porsche Companies, Inc., Los Angeles, USA, held 3.504% of
Aktiengesellschaft held 18.5% of the voting shares the voting capital of Volkswagen AG.
at the balance sheet date. This corresponds to The proportion of subscribed capital held by
14.0% of subscribed capital. The State of Lower foreign institutional investors including Brandes
Saxony held 18.1% of the ordinary shares or 13.6% Investment Partners, LCC and The Capital Group
of subscribed capital. As of December 31, 2005, Companies, Inc. was 31.1% in total (previous
Volkswagen AG held 41,719,353 ordinary treasury year: 38.9%). German institutional investors held
shares, corresponding to 13.0% of all ordinary 7.0% (7.4%).
shares or 9.8% of subscribed capital. A further

shareholder structure at december 31, 2005

in percent of subscribed capital

Foreign institutional investors 31.1

Private shareholders/Other 24.5

Dr. Ing. h. c. F. Porsche AG 14.0

State of Lower Saxony 13.6

Treasury ordinary shares 9.8

German institutional investors 7.0

0 10 20 30 40 50 60 70 80 90 100
26 Boards Group Topics Financial Communication Divisions Management Report

> Volkswagen shares and bonds

Corporate Governance report

seventh tranche of stock option plan notes to the Volkswagen consolidated financial
In the period under review, the Board of Management statements, starting on page 154.
of Volkswagen AG, with the consent of the
Supervisory Board, offered the seventh tranche of volkswagen in sustainability indices
the stock option plan in place since 1999 to eligible Since September 19, 2005, Volkswagen Group
employees covered by collective wage agreements shares have no longer been represented in the
and for whom remuneration is not collectively Dow Jones Sustainability Index (DJSI) World and
agreed, to members of management and to the DJSI STOXX sustainability indices. Although we
Board of Management. Once again, we thus created received a higher score than in the previous year
an incentive for our staff to contribute to increasing in the annual ranking by Swiss research and rating
the value of our Company. During the subscription agency SAM (Sustainable Asset Management),
period between June 1 and July 8, 2005, approxi- it was not enough to maintain a place in these
mately 36,000 of the eligible employees exercised indices, in which Volkswagen had been represented
their right to subscribe. In total, they subscribed since their launch in 1999. We have therefore taken
for 297,561 convertible bonds with a nominal value measures to ensure that the shares are readmitted
of 0.8 million, entitling them to purchase up to to these indices at a future date. Volkswagen shares
2,975,610 ordinary shares during the conversion continue to be represented in the London-based
period from July 9, 2007 to July 1, 2010. This FTSE4Good Europe and FTSE4Good Global
assumes, however, that the price of Volkswagen sustainability indices, whose criteria focus more
ordinary shares at that time exceeds the stipulated on corporate social responsibility. In addition,
staggered conversion prices. Volkswagen shares are represented in the
Due to the positive trend in Volkswagens share sustainability index of Bayerische Hypo- und
price over the last year, around 22,000 employees Vereinsbank AG, which measures the share price
exercised their rights under the convertible bonds performance of 16 selected European companies
from the fifth tranche, which they subscribed to and was launched in 2005.
in 2003. This resulted in 1,639,860 new ordinary Further information on this subject can be
shares or 0.4 million of subscribed capital. Further found on our webseite at www.volkswagen-
details of our stock option plan can be found in the nachhaltigkeit.de

volkswagen share data

Securities identification codes Market indices ordinary shares Market indices preferred shares Exchanges

Ordinary shares DAX, HDAX, CDAX, CDAX, Prime All Share, Berlin, Bremen, Dsseldorf,
ISIN: DE0007664005 Prime All Share, Prime Automobile, Frankfurt, Hamburg, Hanover,
WKN: 766400 Prime Automobile, Classic All Share Munich, Stuttgart, Xetra,
Deutsche Brse/Bloomberg: VOW DJ Euro STOXX Automobile, London, Luxembourg,
Reuters: VOWG.DE FTST Eurotop 100 Index, New York*, Tokyo,
S&P Global 100 Index, SWX Swiss Exchange
Preferred shares FTSE4Good Global Index,
ISIN: DE0007664039 FTSE4Good Europe Index,
WKN: 766403 HVB Sustainability Index
Deutsche Brse/Bloomberg: VOW3
Reuters: VOWG_p.DE

* Traded in the form of sponsored unlisted American Depositary Receipts (ADRs).

Five ADRs correspond to one underlying Volkswagen share.
 VOLKSWAGEN SHARES AND BONDS 27

volkswagen share key figures

Dividend development 2005 2004 2003 2002 2001

Number of no-par value shares at Dec. 31
Ordinary shares thousands 321,930 320,290 320,290 320,290 319,470
Preferred shares thousands 105,238 105,238 105,238 105,238 105,238
Dividend
per ordinary share 1.15 1.05 1.05 1.30 1.30
per preferred share 1.21 1.11 1.11 1.36 1.36
Dividend paid1)
per ordinary shares2) million 322 292 292 362 353
per preferred shares million 128 117 117 143 143

Share price development3) 2005 2004 2003 2002 2001

Ordinary shares
Closing 44.61 33.35 44.15 34.74 52.50
Annual high 54.01 44.65 46.57 62.15 62.40
Annual low 31.88 30.71 28.66 32.96 32.95
Preferred shares
Closing 32.50 24.41 28.75 25.00 34.85
Annual high 40.00 28.97 31.55 40.75 39.80
Annual low 24.00 21.20 21.05 23.60 23.00
Beta factor factor 1.00 1.05 0.95 0.90 0.90
Market capitalization at Dec. 312) billion 15.9 11.9 15.3 12.3 18.2
Equity at Dec. 31 billion 23.6 22.64) 23.8 24.6 24.0
Market capitalization : equity 0.67 0.524) 0.65 0.50 0.76

Key figures per share 2005 20044) 2003 2002 2001

5)
Earnings per ordinary share
basic 2.90 1.79 2.54 6.72 7.67
diluted 2.90 1.79 2.54 6.72 7.62
Operating profit6) 7.24 4.28 4.18 12.42 14.30
Cash flows from operating activities6) 28.05 29.85 21.81 27.29 26.46
Equity7) 55.25 53.19 55.83 57.89 56.50
Price/earnings ratio8) factor 15.4 18.6 17.4 5.2 6.9
Price/cash flow ratio8) factor 1.6 1.1 2.0 1.3 2.0
Dividend yield
ordinary share % 2.6 3.1 2.4 3.7 2.5
preferred share % 3.7 4.5 3.9 5.4 3.9
Price development (excluding dividends)
ordinary share % + 33.8 24.5 + 27.1 33.8 5.7
preferred share % + 33.1 15.1 + 15.0 28.3 + 9.9

Turnover on German stock exchanges9) 2005 2004 2003 2002 2001

Turnover of Volkswagen ordinary shares billion 30.9 24.3 23.9 26.3 23.9
million shares 735.7 682.0 641.1 553.1 467.9
Volkswagen share of total DAX turnover % 3.3 3.1 3.2 3.3 2.7
1)
Figures for the years 2001 to 2004 relate to dividends paid in the following year. For 2005, the figures relate to the proposed dividend.
2)
Excluding 41,719,353 treasury shares.
3)
Xetra prices.
4)
Restated.
5)
See note 8 to the financial statements (Earnings per share) for the calculation.
6)
Based on the weighted average number of ordinary and preferred shares outstanding (basic).
7)
Based on the total number of ordinary and preferred shares on December 31.
8)
Using closing prices of the ordinary shares.
9)
Order book turnover on German exchanges.
28 Boards Group Topics Financial Communication Divisions Management Report

> Volkswagen shares and bonds

Corporate Governance report

worldwide investor relations activities in 2005

Europe/Rest
of the world1)
North America
420
122
Asia/Pacific
26

Contact/Topic Number
Investors 463
Analysts 105
Total 5682)
of which: equities 458
1)
Of which Germany 224.
bonds 110 2)
Of which 124 with participation of members of
Board of Management/senior brand managers.

annual document in accordance with The site also provides a considerable amount of
section 10 of the wppg other information for investors, including selected
We regularly publish information on events at news items and presentations. Visitors to our
the Volkswagen Group that are of importance Investor Relations website can sign up for the
to investors. In accordance with section 10(1) investor relations newsletter, which we send out
of the Wertpapierprospektgesetz (WpPG German at regular intervals to interested parties.
Securities Prospectus Act), publications that have
appeared in the past twelve months (and earlier) corporate presentations on business
can be downloaded from our website at development and strategic topics
www.volkswagen-ir.de. These include the In 2005, we again provided analysts and investors
following publications in particular: with information on the Volkswagen Groups
strategy and current business development by
Ad hoc releases: staging presentations and roadshows in all the
Under Mandatory Publications, major global financial centers. We also held visits
Ad hoc releases and presentation events at our own locations
Directors dealings: worldwide. Investors were particularly interested
Under Corporate Governance, in our plants in Central and Eastern Europe and
Directors Dealings in the market trend there.
Interim reports: Among the high points of the year were the
Under Reports, Interim reports International Investor Conference in Wolfsburg in
 VOLKSWAGEN SHARES AND BONDS 29

March and the strategy presentation in London in of Volkswagen AG. We will also be offering this facility
August. Besides the conference calls used to explain for the Annual General Meeting to be held on May 3,
the interim reports, two further conference calls were 2006. For the first time, our shareholders will be able
held in 2005: one in October when Dr. Ing h.c. F. to follow the entire AGM and issue instructions online.
Porsche Aktiengesellschaft acquired an interest in All shareholders of Volkswagen AG will receive further
Volkswagen and one in July covering fundamental details together with their invitation to the AGM.
aspects of the financial and investment planning for
2006 to 2008. new issues
In the period under review, we worked together The Volkswagen Group has various debt issuance
with Group Treasury and other departments to programs in place on money and capital markets
arrange over 500 events for investors and analysts. worldwide. We make flexible use of these programs,
Members of the Board of Management and depending on our need for new financial resources.
representatives of top management regularly We are gradually tapping new markets so that we
attended these events. An overview of our global are able to meet our short- and medium-term
events is given in the chart on the opposite page. liquidity requirements in particular. In fiscal year
2005, for example, we issued our first bond in new
product-specific events Turkish lira (TRY), which, at the same time, was the
Our Investor Relations team also participated at the first corporate bond issue in this currency.
main international motor shows last year, including In addition to various private placements under
the North American International Auto Show in the established debt issuance programs available to
Detroit, the Geneva Motor Show, the Tokyo Motor us, we also launched a total of four asset-backed
Show and the Frankfurt IAA Motor Show. The focus securities transactions in 2005. We conducted three
was on presentations and stand visits, but we also of these transactions, with a total volume of USD 3.6
held a number of one-on-one meetings. In addition billion, in the USA. With the fourth transaction, in
analysts and investors had the opportunity to test Europe, Volkswagen Bank GmbH raised around
drive the new Golf Plus, Fox, Passat and Jetta 1.0 billion.
models and assess the performance of the Groups By contrast, we only use loan finance to meet
products for themselves. short-term working capital requirements and as a
backup for debt issuance programs.
annual general meeting In June 2005, we took advantage of the buoyant
A total of 33.9% of the shareholders entitled to vote state of the market and agreed a new 12.5 billion
attended Volkswagen AGs 45th Annual General syndicated loan facility with an international
Meeting held in the Congress Centrum Hamburg on syndicate of banks in an effort to secure the
April 21, 2005. A large number of shareholders again Volkswagen Groups financial flexibility for the long
made use of the facility to vote by authorized proxies term. The facility has a five-year term with a one-
30 Boards Group Topics Financial Communication Divisions Management Report

> Volkswagen shares and bonds

> Corporate Governance report

year extension option in each of the first two years. therefore, the credit rating awarded to Volkswagen
The new credit line replaced two loan facilities Bank GmbH by both rating agencies differs from
worth a total of 16 billion, one of which was due those awarded to Volkswagen AG and Volkswagen
in 2005 the other due in 2007. Financial Services AG.
The table below gives an overview of our current
ratings ratings.
In fiscal year 2005, the credit ratings of Volkswagen
AG, Volkswagen Financial Services AG and
Volkswagen Bank GmbH were reviewed by the
leading rating agencies Moodys Investors Service The Investor Relations teams in Wolfsburg and London
are available for queries and recommendations.
and Standard & Poors, which confirmed their
Wolfsburg office
previous short- and long-term credit ratings for Phone +49 53 61 9-8 66 22 IR Hotline
these Group companies. Moodys Investors Service Fax +49 53 61 9-3 04 11

raised its rating outlook for these companies from London office
negative to stable, while Standard & Poors only Phone +44 20 7290 7820
Fax +44 20 7629 2405
upgraded its outlook for Volkswagen Bank GmbH
E-mail investor.relations@volkswagen.de
from negative to stable. For the first time, Internet www.volkswagen-ir.de

ratings

Volkswagen AG Volkswagen Financial Volkswagen Bank GmbH

Services AG
2005 2004 2005 2004 2005 2004
Standard & Poors
short-term A2 A2 A2 A2 A2 A2
long-term A A A A A A
Outlook negative negative negative negative stable negative
Moodys Investors Service
short-term P2 P2 P2 P2 P1 P1
long-term A3 A3 A3 A3 A2 A2
Outlook stable negative stable negative stable negative
 VOLKSWAGEN SHARES AND BONDS | CORPORATE GOVERNANCE REPORT 31

corporate governance report

Transparency builds trust

We see good practice and responsible corporate governance as

the basis for sustainable growth in the value of our Company.
This is why the Board of Management and the Supervisory Board
comply with the recommendations of the current German
Corporate Governance Code as issued on June 2, 2005 to a large
extent.

corporate governance in accordance issued on May 21, 2003. In the past, they had
with the recommendations of the german included the reservation that the remuneration paid
corporate governance code to the members of the Board of Management (article
Volkswagen AGs Board of Management and 4.2.4, clause 2 of the Code) and the remuneration
Supervisory Board orient their activities according paid to the members of the Supervisory Board
to the recommendations of the German Corporate (article 5.4.5, subsection 3, clause 1 of the Code,
Governance Code. This Code incorporates the most now article 5.4.7, subsection 3, clause 1 of the
important statutory provisions, together with the Code) had not been disclosed individually in the
internationally and nationally recognized standards notes to Volkswagens consolidated financial
of corporate governance revised and elaborated by statements. However, the individualized remuneration
the Government Commission. This should ensure of the Chairman of the Board of Management and
good corporate governance. Our aim in complying the Chairman of the Supervisory Board had been
with the Code is also to meet the steadily increasing disclosed in the notes to Volkswagens consolidated
demand for information from different interest financial statements for fiscal year 2004. With the
group by creating transparency and building trust current declaration of conformity, Volkswagen AG
in good practice and responsible corporate is now complying with the recommendation to
governance. By doing so, we will achieve sustain- disclose individually the remuneration paid to all
able increases in our value of our Company and members of the Board of Management and the
thus act in the interests of national and international Supervisory Board, as well as with all the other
investors. recommendations made by the Government
Commission on the German Corporate Governance
declaration of conformity Code as revised and issued on June 2, 2005, with
On December 12, 2005, the Board of Management one exception concerning elections to the
and Supervisory Board of Volkswagen AG submitted Supervisory Board (article 5.4.3, clause 1 of the
their declaration of conformity under section 161 Code). The reason for this is that, when the
of the German Stock Corporation Act. They declaration of conformity was submitted, it had not
declared that they had largely complied with the been decided that Volkswagen AGs Annual General
recommendations of the Government Commission Meetings would in future only elect Supervisory
on the German Corporate Governance Code as Board members on an individual basis rather than
32 Boards Group Topics Financial Communication Divisions Management Report

Volkswagen shares and bonds

> Corporate Governance report

en-bloc or by list voting. The new joint declaration performance should be taken into account in setting
of conformity by the Board of Management and the the remuneration of the Board of Management
Supervisory Board under section 161 of the German (article 4.2.3, clause 2 of the Code) is not currently
Stock Corporation Act has been made available to being implemented by AUDI AG, as the debate in
the public on our website at www.volkswagen-ir.de. professional circles has not yet reached a final
In addition, Volkswagen AG will largely comply conclusion. AUDI AG intends to await the outcome
with the suggestions of the Code. However, it still of this debate.
has no plans to implement the suggestion made The reservation that members are not elected to
in the Code to the effect that one-time variable the Supervisory Board on an individual basis (article
components tied to business performance should be 5.4.3, clause 1 of the Code) also applies at AUDI AG.
taken into account in setting the remuneration of In citing its reasons for this, it explains that list
the Board of Management (article 4.2.3, clause 2 of voting is commonplace in democratic elections.
the Code) and that long-term performance should With regard to the suggestions of the Code, the
be taken into account in setting the remuneration following reservations apply at AUDI AG: AUDI AGs
of the Supervisory Board (article 5.4.7, clause 5 of Annual General Meeting is not broadcast on the
the Code). It intends to await the outcome of the Internet (article 2.3.4 of the Code) so as to protect
debate on this matter in professional circles and the individual shareholders personal rights. There is
emergence of a consensus. In 2006, Volkswagen AG not an opportunity, therefore, to enable absent
will for the first time broadcast the entire Annual shareholders to contact the companys proxies
General Meeting on the Internet (article 2.3.4 of (article 2.3.3, clause 3, sub-clause 2 of the Code)
the Code). It will therefore be possible to contact during the Annual General Meeting. The declaration
Company proxies during the AGM (article 2.3.3, of conformity is published on www.audi.de.
clause 3, sub-clause 2 of the Code).
On December 7, 2005, the Board of Manage- cooperation between the board of
ment and Supervisory Board of AUDI AG declared management and the supervisory board
in their declaration of conformity that they had The Board of Management provided the Supervisory
complied with the recommendations of the Code as Board with regular, complete and timely verbal and
issued on May 21, 2003 and would comply with the written reports on all issues relevant to the
recommendations of the Code as issued on June 2, development of business, corporate planning
2005. However, they included and continue to including the risk situation and risk management.
include the reservation that AUDI AG does not disclose Further information on this subject can be found
individually the remuneration paid to the members in the Report of the Supervisory Board on pages
of the Board of Management (article 4.2.4, clause 8 to 11 of this Annual Report.
2 of the Code) and the remuneration paid to the
members of the Supervisory Board (article 5.4.7, remuneration of the board of management
subsection 3, clause 1 of the Code) so as to protect and the supervisory board
individuals personal rights. As announced last year, we now comply fully with
The suggestion made in the Code to the effect the recommendation of the German Corporate
that long-term performance should be taken into Governance Code that the remuneration paid to all
account in setting the remuneration of the Super- members of the Board of Management and the
visory Board (article 5.4.7, clause 5 of the Code) and Supervisory Board be disclosed individually. We are
that one-time variable components tied to business therefore increasing the transparency of
 CORPORATE GOVERNANCE REPORT 33

components of remuneration in line with the aims of Management of E.ON Ruhrgas AG from 1976 to
of the German Corporate Governance Code. The 1996 and Chairman of its Supervisory Board from
individualized remuneration is disclosed and broken 1996 to 2003. He chaired the Supervisory Board of
down into components in the notes to the 2005 Volkswagen AG from 1987 to 2002 and has been at
consolidated financial statements (page 175). In the helm of several other companies supervisory
addition, information on the main elements of the bodies.
remuneration system for the Board of Management
and the structure of the stock option program can communication and transparency
be found on pages 174 to 177. All disclosures were The Volkswagen Group has published a financial
therefore included in the audit by the auditors. calendar in its Annual Report, in the interim reports
There are no disclosures regarding transactions and on its website at www.volkswagen-ir.de listing
subject to reporting requirements (directors dealings) all the key dates for its shareholders. At the Annual
in accordance with article 6.6 of the Code and General Meeting, we offer the shareholders the
section 15a of the Wertpapierhandelsgesetz (WpHG option to exercise their voting rights in person,
German Securities Trading Act). The notifications through a proxy of their choice, or by nominating
filed in accordance with sections 21 ff. of the WpHG an authorized Company proxy. From 2006 onwards,
during the reporting period are published on our we will also be giving our shareholders the
website at www.volkswagen-ir.de. opportunity to follow the entire AGM on the Internet.
We have adapted the registration and identi-
risk management fication procedures for the coming AGM to bring
By focusing on managing potential risks to the them into line with the Gesetz zur Unternehmens-
Company with care, we also meet the need for good integritt und Modernisierung des Anfechtungs-
corporate governance. Our aim here is to identify rechts (UMAG German Act on Corporate Integrity
risks and optimize risk positions through systematic and Modernization of the Right of Avoidance). A
risk management. In a dynamic process, Volkswagen record date has been introduced based on the
AGs risk management system is continually being resolutions adopted at the 2005 AGM.
adapted to reflect the changing environment. We We publish the Companys ad hoc releases
describe the risk management system in detail in the immediately on our Investor Relations website
chapter entitled Risk report on pages 94 to 99. at www.volkswagen-ir.de, where we also provide
The Supervisory Board has established an Audit further capital market information relating to
Committee, which deals in particular with matters Volkswagen. We publish all information in German
relating to financial reports and risk management. and English.
The Chairman of the Audit Committee, Dr. Klaus The appointments of Board of Management
Liesen, has particular expertise and experience in members and Supervisory Board members to
applying accounting standards and internal control supervisory bodies can be found in the Annual
systems. Dr. Klaus Liesen was Chairman of the Board Report on pages 184 to 187.
I N N O VAT I O N M E A N S D E V E LO P I N G G R E AT
T E C H N O LO G Y F O R T H E S M A L L E S T D E TA I L S

>> Skoda Octavia Combi: Innovation for life

Skoda is one of the oldest automotive manufacturers in the world, having celebrated 100 years
of automobile production in 2005. Skodas success lies in its ability to concentrate on what it does
best designing cars that are simply clever. A prime example of this is the Skoda Octavia Combi
which was launched in 2005, and which boasts 1,620 l stowage space and an array of smart fastening
systems. This exceptionally versatile car wins over drivers across the board with its smart solutions
and attention to detail: the luggage compartment is equipped with up to twelve fixtures for securing
transported items; the loading area cover can be rolled up even when both your hands are full; the
hazard triangle and first-aid kit are stowed away in a special compartment to maximize the available
loading space. In addition, there are practical folding hooks in the side panels of the luggage
compartment to ensure that shopping bags do not topple over when the car is moving. The Skoda
Octavia Combi also features sophisticated technology, first-class workmanship, state-of-the-art drive
concepts, extensive standard equipment, spacious interior design and excellent value for money.
Simply clever.
I N N O VAT I O N M E A N S D E V E LO P I N G G R E AT
T E C H N O LO G Y F O R T H E S M A L L E S T D E TA I L S

>> Skoda Octavia Combi: Innovation for life

Skoda is one of the oldest automotive manufacturers in the world, having celebrated 100 years
of automobile production in 2005. Skodas success lies in its ability to concentrate on what it does
best designing cars that are simply clever. A prime example of this is the Skoda Octavia Combi
which was launched in 2005, and which boasts 1,620 l stowage space and an array of smart fastening
systems. This exceptionally versatile car wins over drivers across the board with its smart solutions
and attention to detail: the luggage compartment is equipped with up to twelve fixtures for securing
transported items; the loading area cover can be rolled up even when both your hands are full; the
hazard triangle and first-aid kit are stowed away in a special compartment to maximize the available
loading space. In addition, there are practical folding hooks in the side panels of the luggage
compartment to ensure that shopping bags do not topple over when the car is moving. The Skoda
Octavia Combi also features sophisticated technology, first-class workmanship, state-of-the-art drive
concepts, extensive standard equipment, spacious interior design and excellent value for money.
Simply clever.
36 Boards Group Topics Financial Communication Divisions Management Report

> Business lines and markets

Volkswagen brand group
Audi brand group
Commercial Vehicles
Financial Services

business lines and markets

Volkswagen Group Automobiles and

Financial Services are present worldwide

group structure key figures by market

The Volkswagen Group consists of two divisions: In fiscal year 2005, the Volkswagen Group generated
Automotive and Financial Services. The Automotive sales revenue of 95.3 billion. This corresponds to a
Division comprises the development of vehicles 7.1% increase compared with the previous year. At
and engines, as well as the production and sale of 3.1 billion, operating profit before special items
passenger cars, commercial vehicles, trucks and was 54.3% above the previous year.
buses. The Financial Service Divisions portfolio of In the Europe/Remaining markets region, sales
services ranges from dealer and customer financing revenue rose by 7.9% to 69.4 billion in 2005. This
and leasing, through banking and insurance activities, improvement was due in particular to higher sales
down to vehicle rentals and the fleet management volume. Operating profit increased by a substantial
business. Within the divisions, activities are combined 1.2 billion year-on-year to 3.9 billion. This increase
into business lines. can be attributed primarily to the increase in volume
Our report reflects the structure of the Group. sales and the success of the ForMotion program.
On the following pages we explain the key volume In North America, there was only a slight year-on-
and financial data relating to the individual business year increase in sales revenue to 13.7 billion (+ 3.1%).
lines. In addition, we present sales revenue and The decline in sales brought about by the Passat
operating profit, based on a geographical analysis, model change, particularly in the USA, was more than
for the Europe/Remaining markets, North America, offset by the trend towards higher-value vehicles.
South America/South Africa and Asia-Pacific regions. The operating profit was impacted by high sales
To enhance comparability, the analysis of opera- promotion costs and a less favorable euro/dollar
ting profit by business line and market is based on exchange rate than in the previous year. The figure for
figures before special items. operating profit was 843 million ( 902 million).

volkswagen group

Division/Segment Automotive Division Financial Services Division

Business Line Volkswagen Audi Commercial Remaining Financial Europcar

brand group brand group Vehicles companies Services

Product Line/Business Field VW Passenger Audi Financing Dealer and Rental business
Cars customer
SEAT Services
financing
Skoda
Lamborghini
Leasing
Bentley
Insurance
Bugatti
Fleet business
 BUSINESS LINES AND MARKETS 37

In South America/South Africa, we increased sales of the Brazilian currency resulted in a decline in the
revenue by an impressive 25.2% to 6.9 billion in earnings quality of vehicle exports and, consequently,
2005. In addition to the appreciation of the Brazilian of sales to the other markets supplied.
real, this improvement was driven mainly by higher Owing to lower sales volume, sales revenue in
unit sales, which in turn were due to the market the Asia-Pacific region fell by 10.3% year-on-year
success of the Fox entry-level model in South to 5.3 billion. A decline in deliveries by Group
America. Unit sales also continued to develop companies to our Chinese joint venture companies
positively in South Africa, so that overall operating and continued unfavorable exchange rates saw
profit rose by 147 million to 171 million compared the operating result decrease to 88 million
with the previous year. Nonetheless, the appreciation (208 million).

key figures by business line

Vehicle sales1) Sales revenue Operating result

thousand vehicles/ million 2005 2004 2005 2004 2005 20042)
Volkswagen brand group 3,557 3,561 49,625 47,338 638 25
Audi brand group 1,241 1,221 28,432 26,646 1,409 1,227
Commercial Vehicles 395 360 7,297 5,994 102 144
Remaining companies3) 319 275 61 52
Financial Services/Europcar 9,595 8,710 933 927
Business lines before special items 5,193 5,143 95,268 88,963 3,143 2,037
Special items 351 395
Volkswagen Group 5,193 5,143 95,268 88,963 2,792 1,642
1)
All figures shown are rounded, so minor discrepancies may arise from addition of these amounts.
2)
Restated.
3)
Primarily AutoVision GmbH, Volkswagen Group Services SCS, Volkswagen International Finance N.V., Volkswagen Investments Ltd., VW Kraftwerk GmbH,
Volkswagen Immobilien, gedas group (including VW Versicherungsvermittlungs-GmbH and Volkswagen Beteiligungs-Gesellschaft mbH in the previous year).

key figures by market

Sales revenue Operating result

million 2005 2004 2005 20041)
Europe/Remaining markets 69,357 64,259 3,903 2,707
North America 13,723 13,308 843 902
South America/South Africa 6,926 5,531 171 24
Asia-Pacific2) 5,262 5,865 88 208
Markets before special items 95,268 88,963 3,143 2,037
Special items 351 395
Volkswagen Group2) 95,268 88,963 2,792 1,642
1)
Restated.
2)
The sales revenue and operating results of the joint venture companies in China are not included in figures for the Group and the Asia-Pacific market.
The vehicle-producing Chinese joint venture companies are consolidated using the equity method, and recorded an operating result (proportional) of
119 million (222 million) impacted by special items.
38 Boards Group Topics Financial Communication Divisions Management Report

Business lines and markets

> Volkswagen brand group
Audi brand group
Commercial Vehicles
Financial Services

volkswagen brand group

ForMotion measures have a

positive impact on results

Entry-level model Fox claims top place in its segments

registration statistics. Passat leads the German mid-class
segment. Skoda Octavia and Bentley Continental GT
continue the success of the previous year.

business development utable to the Bentley Continental GT. Total unit sales
With 3.6 million vehicles of the Volkswagen Passenger for the Volkswagen brand group also include 31,972
Car, Skoda, Bentley and Bugatti brands, sales of (35,497) Ford Galaxy vehicles that were also included
the Volkswagen brand group to the dealership in production figures but not in customer delivery
organization in 2005 were virtually the same as in figures.
the previous year ( 0.1%). Sales of the Volkswagen In fiscal year 2005, the Volkswagen brand group
Passenger Cars brand fell marginally by 1.9% to produced 3.6 million vehicles, 2.3% more than in the
3.0 million vehicles, accounting for 84.7% (86.2%) previous year. Of these, the Volkswagen passenger
of overall brand group sales. In 2005, the Fox in car brand produced 3.1 million units (+ 1.0%).
particular proved increasingly popular. We introduced While plants in Europe, America and South Africa
this entry-model to the European market at the experienced output growth, the Chinese joint venture
beginning of the year following its launch in South companies recorded a decline in production activities.
America in 2004. In Germany, the Fox is already The Skoda brand increased its production by 11.3%
leading the registrations statistics. Demand for the to 494 thousand units. By relocating selected
Golf also continues to be strong, with the vehicle assembly work for the Bentley Continental Flying
accounting for more new car registrations than any Spur to the Automobilmanufaktur Dresden, the
other passenger car in its class in either Germany or Bentley brand set a new production record of 9,560
Western Europe. Sales of the new Jetta and Passat vehicles.
models were not quite able to match the previous
years volume; this is because the full range of models
was not available in all markets. Nonetheless, the
Passat secured the leading position in the German volkswagen brand group
market for mid-class vehicles. With 504 thousand
vehicles sold last year, the Skoda brand posted a 2005 2004 %
clear gain of 12.3%. This improvement gave rise to Deliveries (thousand units) 3,588 3,522 + 1.9
Vehicle sales 3,557 3,561 0.1
the eleventh consecutive record level of registrations
Production 3,588 3,509 + 2.3
for the Skoda brand and was largely attributable to a
Sales revenue ( million) 49,625 47,338 + 4.8
strong increase in demand for the Skoda Octavia. In Operating result 638 25* x
2005, sales of the Bentley brand rose to 8,984 models, as % of sales revenue 1.3 0.1*
a 21.2% increase that was for the most part attrib- * Restated.
 VOLKSWAGEN BRAND GROUP 39

sales revenue and earnings the operating result of the Volkswagen brand group
In fiscal year 2005, sales generated by the Volks- increased to 638 million, thus exceeding the
wagen brand group rose by 4.8% year-on-year to operating loss of the previous year by 663 million;
49.6 billion. This growth was largely due to the however, this level remains extremely unsatisfactory
increased proportion of higher-value models in the for us. The measures implemented under the
volume of vehicles sold. Overall, the previous years ForMotion program made a significant contribution
sales figures were not matched completely as a result to the earnings development. Within the Volkswagen
of the intensified competitive environment in the brand group, the Skoda and Bentley operating results
Chinese market. Excluding the performance of the improved considerably. For the most part, this
Groups Chinese activities, the 2005 sales volume was attributable to higher sales figures and cost
was higher than that of the previous year. In 2005, optimization.

production

Units 2005 2004

Volkswagen Passenger Cars
Golf 732,922 711,883
Passat/Santana 578,141 617,649
Jetta/Bora 431,280 413,385
Polo 352,120 334,143
Gol 284,069 304,327
Fox 204,435 84,173
Touran 191,207 188,643
Touareg 81,003 87,046
Polo Classic/Sedan 59,623 100,331
New Beetle 35,485 38,847
Sharan 32,575 38,583
New Beetle Cabriolet 30,531 41,271
Parati 26,744 31,433
Phaeton 6,001 5,485
Lupo 5,742 24,434
3,051,878 3,021,633

Skoda
Octavia 246,781 181,067
Fabia 224,990 238,830
Superb 21,182 22,899
Fabia Praktik 1,174 1,072
494,127 443,868

Bentley
Continental GT Coup 4,733 6,896
Continental Flying Spur 4,271
Arnage 556 790
9,560 7,686

Volkswagen brand group* 3,587,542 3,508,684

* Includes the not fully consolidated vehicle-producing investments Shanghai-Volkswagen Automotive Company Ltd.
and FAW-Volkswagen Automotive Company Ltd. as well as 31,972 (35,497) Ford Galaxy and 5 () Bugatti Veyron 16.4 units.
40 Boards Group Topics Financial Communication Divisions Management Report

Business lines and markets

Volkswagen brand group
> Audi brand group
Commercial Vehicles
Financial Services

audi brand group

Record unit sales for the Audi brand

lift sales revenue and profits

For the tenth year in a row, the Audi brand set a new
record for unit sales figures. Rising demand for new SEAT
and Lamborghini models.

business development sales revenue and earnings

In fiscal year 2005, the Audi brand group increased The sales revenue of the Audi brand group rose to
sales of Audi, SEAT and Lamborghini brand models 28.4 billion in 2005, an increase of 6.7%. This
by 1.6% to 1.2 million vehicles. This increase resulted was principally due to the increased sales volume of
from growth in the Audi brand. With total sales of the Audi brand, which also prompted a rise in the
824 thousand units, the brand sold 6.4% more proportion of higher-value vehicles in the overall
vehicles to the dealership organization than in the sales of the brand group. In 2005, the operating
previous year, thereby achieving a record level of profit of the Audi brand group grew substantially by
sales. Demand was particularly high for the Audi A3 14.8% to 1.4 billion. This increase resulted mainly
Sportback and the Avant versions of the Audi A4 from the higher unit sales of the high-margin Audi
and the newly launched Audi A6. At 415 thousand vehicles and the optimization of cost structures. The
units, sales of SEAT models fell by 6.7% year-on-year. profits of the SEAT brand were affected by the
However, sales of the new SEAT Leon developed declining sales volume and higher marketing costs.
positively. Although the Lamborghini brand recorded
an encouraging increase in demand for the new
Murcilago Roadster, which was available worldwide
as of 2005, overall sales for the brand were 1,493
vehicles, 7.5% lower than the previous year. audi brand group
The Audi brand groups production fell by 1.5%
year-on-year to 1.2 million vehicles, of which 823 2005 2004 %
thousand models were attributable to the Audi brand Deliveries (thousand units) 1,253 1,223 + 2.4
Vehicle sales 1,241 1,221 + 1.6
itself (+ 4.5%). At 66.9% (63.1%), the Audi brand
Production 1,230 1,248 1.5
accounted for the largest share of the brand groups
Sales revenue ( million) 28,432 26,646 + 6.7
production volume. The SEAT brand produced a Operating result 1,409 1,227* + 14.8
total of 405 thousand vehicles in fiscal year 2005 as % of sales revenue 5.0 4.6*
( 11.7%). Lamborghini production figures fell by * Restated.

14.4% to 1,436 units.

 AUDI BRAND GROUP 41

production

Units 2005 2004

Audi
A4 315,616 313,269
A3 224,961 181,274
A6 211,142 180,687
Cabriolet 22,089 31,962
A8 21,515 22,429
A2 10,026 19,745
TT Coup 8,368 14,753
Allroad 4,295 14,842
TT Roadster 3,939 8,852
Q7 1,185
823,136 787,813

SEAT

Ibiza 168,645 183,754

Leon 98,130 90,850
Altea 65,174 67,125
Cordoba 37,568 46,821
Toledo 20,600 38,962
Alhambra 14,902 21,580
Arosa 9,368
405,019 458,460

Lamborghini
Gallardo 947 1,294
Murcilago Roadster 234 80
Murcilago 230 304
Gallardo Spyder 25
1,436 1,678

Audi brand group* 1,229,591 1,247,951

* Includes the not fully consolidated vehicle-producing investment FAW-Volkswagen Automotive Company Ltd.
42 Boards Group Topics Financial Communication Divisions Management Report

Business lines and markets

Volkswagen brand group
Audi brand group
> Commercial Vehicles
Financial Services

commercial vehicles

Commercial Vehicles business line

in the black again

Above-average growth in demand for Volkswagen MPVs,

recreational vehicles and light commercial vehicles.
Heavy trucks continue to lead the market in Brazil.

business development heavy trucks (7 to 45 tonnes) than in the previous

In 2005, the Commercial Vehicles business line again year, thereby remaining market leader in Brazil.
recorded a significant year-on-year increase in sales. Sales of buses were 4,882 (4,790) thousand units.
At 395 thousand units, it sold 9.7% more vehicles As a result of the increase in demand, the
to the dealership organization. Demand for the Caddy Commercial Vehicles business line recorded a 19.6%
continued to be strong in the second year after its rise in production in 2005. A total of 402 thousand
market launch. Worldwide sales amounted to 125,903 vehicles rolled off the assembly lines. The main
vehicles, including both the commercial vehicle production facility in Hanover manufactured 162
model and the Caddy Life passenger car version. thousand (139 thousand) units of the Caravelle/Multi-
This corresponds to a 19.2% increase compared van, Transporter and LT series. At the Poznan plant
with the previous year. The Caravelle/Multivan and in Poland, where the Caddy is also manufactured,
Transporter models also contributed to the success production rose by 28.7% to 156 thousand vehicles
of the Commercial Vehicles business line. Sales of in 2005. At the Resende plant in Brazil, heavy truck
these vehicles rose by 10.4% to 178,285 units, and bus chassis production once again reached
placing them at the top of the registration statistics record levels with 38,156 units (+ 12.8%).
compiled by the Federal Bureau of Motor Vehicles
and Drivers (KBA). The Commercial Vehicles business
line continued to develop positively in Europe as well. commercial vehicles
While the markets grew by an average of 5%, the
Caddy, Caravelle/Multivan and Transporter models 2005 2004 %
Deliveries (thousand units) 401 334 + 20.2
recorded above-average double-digit growth rates.
Vehicle sales 395 360 + 9.7
Worldwide sales of the heavy trucks produced at Production 402 337 + 19.6
the Resende plant in Brazil increased by 3.3% to Sales revenue ( million) 7,297 5,994 + 21.7
35,075 units in 2005. At a total of 30,193 units, the Operating result 102 144 x

Commercial Vehicles business line sold 3.5% more as % of sales revenue 1.4 2.4
 COMMERCIAL VEHICLES 43

sales revenue and earnings operating result, which increased by 246 million
The Commercial Vehicles business line increased its to 102 million. However, the operating result was
sales revenue by 21.7% year-on-year to 7.3 billion. impacted by lower margins from a change in the
The clear growth in sales figures is above all attribut- vehicle mix and the continuing high depreciation
able to the launch of the new Multivan/Transporter charges resulting from the renewal of the product
and Caddy models. range.
The higher sales volume and improved cost
structures led to a substantial improvement in the

production

Units 2005 2004

Caravelle/Multivan, Kombi 100,986 91,019
Transporter 76,970 57,533
Caddy Kombi 67,060 40,553
Caddy 60,785 54,190
Trucks 32,563 29,212
LT 32,359 29,928
Saveiro 21,794 25,125
Omnibus 5,499 4,899
LT Kombi 3,512 3,095
Golf Pickup 817 992
Commercial Vehicles 402,345 336,546
44 Boards Group Topics Financial Communication Divisions Management Report

Business lines and markets

Volkswagen brand group
Audi brand group
Commercial Vehicles
> Financial Services

financial services

Leading the field in mobility services

With the establishment of its own reinsurance company,

the Financial Services Division is able to offer its customers
exceptionally attractive automobile insurance solutions.

structure of the financial growth potential of our fleet management business

services division even more strongly.
The Financial Services Division consists of the Volkswagen Financial Services AG has established
Financial Services and Europcar business lines. its own reinsurance company. In cooperation with
The Financial Services business line comprises the Allianz Versicherungs-AG, this allows Volkswagen
European and Asian business of the Volkswagen Financial Services AG to exert a greater influence
Financial Services AG group and the financial on products and pricing in the field of automobile
services business of the North and South American insurance and to offer its customers tailored insur-
subsidiaries of Volkswagen AG. The Volkswagen ance products. This type of cooperation between an
Financial Services group includes Volkswagen automobile company and an insurer is unique in the
Financial Services AG, Volkswagen Bank GmbH and German market and provides additional growth
Volkswagen Leasing GmbH. The Europcar business potential, with a manageable level of risk.
line comprises the business of the Europcar group. At 2.1 million, the number of new contracts in
the financing, leasing and insurance businesses in
financial services business line 2005 remained on a level with the previous year.
The Financial Services business line further expanded The number of contracts at December 31, 2005,
its activities in 2005: the opening of a branch in increased by 0.9% to 5.9 million. In 2005, the share
Greece at the beginning of the year was a further of vehicles financed or leased as a proportion of total
step for Volkswagen Bank GmbH in the implemen- deliveries in the Volkswagen Group, with unchanged
tation of its expansion strategy. The establishment credit eligibility criteria, was 30.3% (31.3%). There
of financial services company FSVision GmbH in the was also a marked increase in the total number of
past year created a platform in Germany that can contracts recorded by the fleet management business.
also be used by other financial service providers. The number of fleet vehicles managed rose by 4.1%
With the investment by the Volkswagen Group year-on-year to some 237 thousand automobiles.
in LeasePlan Corporation in 2004 and the sale of In our fleet management business, the number of
Europcar Fleet Services foreign companies to contracts recorded by our joint venture company
LeasePlan Corporation N.V. by Volkswagen Financial LeasePlan increased substantially against the end
Services AG on September 29, 2005, we made of 2004.
significant progress in our restructuring measures The direct banking business at Volkswagen Bank
in the areas of key accounts and fleet services. This also developed positively. At December 31, 2005,
has created the conditions necessary to leverage the deposits reached a new high of 8.7 billion (+ 9.0%).
 FINANCIAL SERVICES 45

At the end of the year, a total of 617 thousand direct ment were the systematic focus on customer needs
banking customers had accounts at Volkswagen and the quality strategy implemented by the Group.
Bank. The planned extension of its franchise network now
In fiscal year 2005, the Financial Services allows the Europcar group to offer its services in
business line generated sales revenue of 8.3 billion 145 countries around the globe.
(+ 9.8%). This increase was mainly attributable to In fiscal year 2005, one third of the Europcar
expanded activities in customer financing and in fleet consisted of Group models. The Europcar
the leasing business. Profit before tax improved by business line contributed to the success of new
16.8% to 972 million. Group models by introducing special offers to
coincide with market launches.
europcar business line We are currently examining all possibilities with
Over the past fiscal year, the Europcar business line regard to a strategic expansion, IPO or sale of the
was able to further increase its rental business. Europcar business line.
Despite a difficult market environment, the Europcar In 2005, the Europcar business line increased its
group consolidated its leading position in the Euro- sales revenue by 9.0% year-on-year to 1.3 billion.
pean market. The number of rental days increased The profit before tax generated by the business line
to 36.3 million (+ 11.7%) compared with the previous grew by 20.5% year-on-year to 101 million (figures
year. The key factors behind this positive develop- before allocation of consolidation adjustments).

financial services division

Financial Services Europcar

1)
business line business line
2005 2004 % 2005 2004 %
Number of contracts thousands 5,938 5,883 + 0.9
Customer financing 3,072 2,992 + 2.7
Leasing 1,181 1,233 4.2
Service/Insurance 1,685 1,658 + 1.6
Rental days million 36.3 32.5 + 11.7
Receivables2) from million
Customer financing 25,596 23,387 + 9.4
Dealer financing 9,282 8,974 + 3.4
Leasing agreements 12,311 11,457 + 7.5
Direct banking deposits million 8,735 8,017 + 9.0
Total assets million 60,905 58,721 + 3.7 3,362 2,667 + 26.1
Equity million 5,848 5,107 + 14.5 407 307 + 32.7
Liabilities3) million 52,744 51,526 + 2.4 2,852 2,278 + 25.2
Equity ratio % 9.6 8.7 12.1 11.5
Return on equity4) % 17.7 19.0 36.4 36.1
Leverage5) 9.0 10.1 7.0 7.4
Operating profit million 802 845 5.1 131 82 + 59.8
Profit before tax million 972 832 + 16.8 130 96 + 35.5
Profit after tax million 671 494 + 35.6 105 74 + 42.9
Employees at Dec. 31 7,093 7,443 4.7 5,596 5,325 + 5.1
1)
Including allocation of consolidation adjustments between the Financial Services and Europcar business lines.
2)
Including allocation of consolidation adjustments between the Automotive and Financial Services divisions.
3)
Excluding provisions and deferred tax liabilities.
4)
Profit before tax as % of average equity.
5)
Liabilities as % of equity.
I N N O VAT I O N B O R N O F T R A D I T I O N

>> Bentley Continental Flying Spur:

Superior design through innovation

Walter Owen Bentley had a vision: to combine modern design with exceptional performance and
craftsmanship in a new premium class. Bentley realized his goals and by the 1920s was already
creating automobiles that conveyed a unique, powerful and authentic driving experience. This
vision of innovative and perfect automobiles has characterized the Bentley brand to the present
day. The latest example of Bentley design is the new Continental Flying Spur. This new model
arrived on the market in 2005, two and a half years after the launch of the Coup Continental GT,
and is not only the fastest Bentley saloon of all time, but also the fastest saloon in the world. The
four-wheel drive Continental Flying Spur boasts the same sporty genes as its two-door counterpart,
largely thanks to its twelve-cylinder engine. Packing a powerful punch with 411 kW (560 bhp)*
and twin turbocharger technology, this engine propels the Flying Spur to speeds of up to 312 km/h.
Not to mention the typical Bentley torque a highly impressive 650 Nm from 1,600 rpm.

* Fuel consumption in l/100 km: 26.4 urban; 12.7 extra-urban; 17.7 combined;
CO2 emissions in g/km: 423.
I N N O VAT I O N B O R N O F T R A D I T I O N

>> Bentley Continental Flying Spur:

Superior design through innovation

Walter Owen Bentley had a vision: to combine modern design with exceptional performance and
craftsmanship in a new premium class. Bentley realized his goals and by the 1920s was already
creating automobiles that conveyed a unique, powerful and authentic driving experience. This
vision of innovative and perfect automobiles has characterized the Bentley brand to the present
day. The latest example of Bentley design is the new Continental Flying Spur. This new model
arrived on the market in 2005, two and a half years after the launch of the Coup Continental GT,
and is not only the fastest Bentley saloon of all time, but also the fastest saloon in the world. The
four-wheel drive Continental Flying Spur boasts the same sporty genes as its two-door counterpart,
largely thanks to its twelve-cylinder engine. Packing a powerful punch with 411 kW (560 bhp)*
and twin turbocharger technology, this engine propels the Flying Spur to speeds of up to 312 km/h.
Not to mention the typical Bentley torque a highly impressive 650 Nm from 1,600 rpm.

* Fuel consumption in l/100 km: 26.4 urban; 12.7 extra-urban; 17.7 combined;
CO2 emissions in g/km: 423.
48 Boards Group Topics Financial Communication Divisions Management Report

> Business development

Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

business development

New model initiative successful

In 2005, the global economy grew at a slower pace.

Nonetheless, the global automotive markets recorded a
continuous upward trend. In the case of the Volkswagen
Group, this was due in particular to the large number
of new models launched.

global economy grows at slower pace (4.4%) in spite of favorable export conditions for
The growth of the global economy remained robust in raw materials.
2005. Once again, favorable monetary conditions and
the improved corporate earnings performance had a South America/South Africa
positive effect on economic development. However, With a rate of approximately 2.5% (4.9%), the
sharp increases in the price of oil, steel and other Brazilian economy recorded substantially weaker
raw materials meant that the growth rate of 3.2% growth than the previous year. By contrast,
was roughly one percentage point below that of the economic development in Argentina continued to
previous year. be very dynamic, with the gross domestic product
(GDP) growing by 8.7% (9.0%). The South African
North America economy again enjoyed a strong growth rate of
A combination of countercyclical monetary policy 5.0% (4.5%).
measures and high oil prices reduced growth in the
USA to 3.5% (4.2%). In spite of the rising current Asia-Pacific
account deficit, the US dollar succeeded in In the past year, economic growth diminished
recovering against the euro and the yen. The somewhat in the Asian emerging markets. China,
Canadian economy grew by 3.0% (2.9%). In however, remained the growth center of the East
Mexico, the rate of economic expansion fell to 3.0% Asian region, with a 9.9% (10.1%) increase in GDP.

exchange rate movements from december 2004 to december 2005

index is based on month-end rates, dec. 31, 2004 = 100

USD to EUR 105

JPY to EUR 100

GBP to EUR
95

90

85

80

Dec. Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.
 BUSINESS DEVELOPMENT 49

economic growth
percentage change in gdp

Global economy 5

USA 4
Western Europe
3
Germany
2

2001 2002 2003 2004 2005

The Japanese economy continued its moderate increase in new passenger car
upward trend, achieving its growth rate of 2.5% registrations, particularly in south
(2.6%) primarily through domestic demand. america and the asia-pacific regions
In 2005, worldwide demand for passenger cars
Europe increased by 3.9% to 53.0 million vehicles,
In Western Europe, economic growth remained whereby above-average growth rates were attained
limited. Although exports were boosted by a weaker in particular by South American markets and the
euro in the first half of the year, GDP growth fell to key Asian markets of China and India. The worlds
1.5% (2.4%). The average rate of unemployment in largest market, the USA, again saw an increase in
the euro zone decreased by some 0.3 percentage new passenger car registrations. Global automotive
points against the previous year. Growth in Central production increased by 3.0% to 64.7 million units,
and Eastern Europe also dropped from 6.8% to of which 54.7 million were passenger cars (+ 2.4%).
4.9%, but was nonetheless positive compared with
Western European countries. North America
In the period under review, overall demand in
Germany the North American passenger car market rose
In 2005, the German economy was once again compared with the previous year. Lifted by
unable to overcome its weak growth. Owing in extensive manufacturer sales incentives, new
particular to the rise in unemployment (from 10.8% passenger car registrations in the USA amounted
to 11.8%) and the decline in purchasing power, to 7.7 million units, an increase of 2.1% compared
which in turn stemmed from an increase in inflation with the previous year. High petrol prices were
to 2.0% (1.6%), only a very moderate increase in largely responsible for a decline in sales in the light
consumer spending was recorded. GDP growth fell commercial vehicles segment which, in the USA,
to 0.9% (1.6%). includes Sport Utility Vehicle (SUV), crossover,
50 Boards Group Topics Financial Communication Divisions Management Report

> Business development

Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

minivan and pickup models making a total of Europe/Remaining markets

9.3 million units, 0.9% less than the previous year. In Western Europe, 14.5 million new vehicles were
In Canada, there was a 3.1% increase in new registered in the period under review, meaning that
passenger car registrations to 845 thousand demand for passenger cars remained virtually
vehicles. By contrast, passenger car sales in Mexico unchanged from the previous year ( 0.1%). This
fell by 3.7% to 714 thousand units. was due in particular to the negative impact of
higher fuel prices, poor economic performance and
South America/South Africa continued high unemployment. While the French,
Overall development in South American passenger German and Spanish markets showed positive
car markets was extremely positive. With sales of developments, their British and Italian counterparts
1.6 million passenger cars and light commercial were unable to match the high number of new
vehicles, the Brazilian domestic market saw a passenger car registrations achieved in previous
marked increase of 9.5% compared with 2004. By years. The percentage of Western European new
contrast, truck sales in Brazil experienced a slight passenger car registrations accounted for by diesel
decline ( 3.3%). Vehicle exports exceeded the vehicles rose to a new high of 49.5%. Demand
previous years record substantially, with a total trends for passenger cars varied considerably in the
volume of 606 thousand passenger vehicles individual Central and Eastern European markets,
(+ 21.9%). In Argentina, the total volume of the leading to marginal overall growth in 2005.
passenger car market was 269 thousand vehicles, Although Russia (+ 9.9%), Romania (+ 48.5%) and
36.3% more than the previous year. This means the Ukraine (+ 25.3%) exceeded the previous years
that the positive growth in demand is continuing for level, the overall passenger car market declined in
the third year since the economic crisis. In 2005, new EU member states in some cases significantly,
the South African passenger car market reached a such as Poland ( 26.0%) and Hungary ( 2.7%).
new high of 423 thousand vehicles (+ 27.1%). In the Remaining markets, there was an overall
slight decline in the number of new passenger car
Asia-Pacific registrations, notably in Turkey where sales fell by
Growth in the automotive markets of the Asia- 2.8% to 439 thousand vehicles.
Pacific region also continued in 2005. The Chinese
passenger car market recorded the highest absolute Germany
demand growth in the world, with an increase In Germany, demand for automobiles increased by
of 25.1% to 3.3 million cars. Particularly in the 1.8% to 3.6 million in the year under review. The
second half of 2005, the high growth levels in the launch of new, low-cost models led to an increase
passenger car market can be attributed to the rise in the number of new registrations in the second
in purchasing power among private customers, and third quarters of 2005. On a full-year basis,
combined with the substantially wider range of 2005 saw the best total market performance of the
products available, particularly in the lower price last four years, with the number of new passenger
segments. In Japan, the number of newly registered car registrations rising by 2.3% to 3.3 million
passenger cars fell marginally by 0.4% to 4.7 vehicles. Sales of trucks with a gross vehicle weight
million. Growth in India, the third-largest automotive of up to six tonnes amounted to 182 thousand units
market in Asia, declined substantially compared ( 7.6%). 5.8 million automobiles were produced in
with the high growth rates of the two preceding 2005 (+ 3.4%). Exports by German manufacturers
years; a total of 1.1 million cars were registered also continued to develop extremely positively at
here, or 7.1% more vehicles than in 2004. 4.1 million units (+ 4.0%). This means that record
 BUSINESS DEVELOPMENT 51

volkswagen group deliveries by month

vehicles in thousands

2005 550

2004 500

450

400

350

300

Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.

export levels have been reached for the third year Deliveries in Europe/Remaining markets
in a row. Western Europe (including Germany) is our most
important automobile market, accounting for 56.0%
new model initiative 2005 (54.2%) of deliveries. In particular, the Fox, Passat
In the year under review, the number of new saloon, Skoda Octavia, Audi A3 Sportback, Audi A4,
models launched by the Volkswagen Group reached Audi A6 and the new SEAT Altea contributed to the
a new peak. The new models included: Fox, Polo, increase in sales in this market. Above all, the new
Golf GT, Golf R32, Golf Plus, Jetta, Passat saloon, Passat recorded substantial growth rates, thereby
Passat Variant, Audi RS 4, Audi A6 Avant, SEAT building on the success of its predecessor models.
Leon, Bentley Continental Flying Spur, Bugatti There were also encouraging developments in
Veyron 16.4 and Skoda Octavia RS. deliveries of the Touareg, Multivan/Transporter,
Caddy and Bentley Continental GT models. As a
vehicle deliveries worldwide result, the Volkswagen Group was able to extend its
In fiscal year 2005, the worldwide sales figures of position as market leader in Western Europe in
the Volkswagen Group excluding our Chinese 2005, with the Golf leading the registration
companies rose by 5.4% to 4,670,492 vehicles. statistics.
With the inclusion of vehicle sales by our joint venture In Central and Eastern Europe, deliveries to
companies in China, the delivery volume grew by customers experienced different trends in the
3.2% to 5,242,793 vehicles a record for the Volks- individual markets. While demand for our models
wagen Group. As indicated by the chart above, the experienced a significant overall decline in the
delivery levels to customers since May exceeded Polish and Slovakian markets, there was a sharp
the corresponding levels from the previous year. The increase in other countries, notably Russia,
worldwide market share of the Volkswagen Group Romania and the Baltic countries. Overall, it was
was virtually unchanged over the previous year. possible to generate an increase of 5.6% in
The table on page 52 gives an overview of the deliveries to these markets compared with the
delivery figures in our key markets and our share previous year. For the most part, this can be
of the local passenger car market. The following attributed to the Passat saloon, Touareg, Skoda
sections describe the particular factors affecting the Octavia, Audi A3, Audi A6, SEAT Altea and Caddy
individual markets. models.
52 Boards Group Topics Financial Communication Divisions Management Report

> Business development

Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

In the Remaining markets, we increased deliveries of 30.8% (30.5%). This is primarily due to a
to customers by 7.6% year-on-year. This can be substantial increase in sales of the new Fox, Passat
attributed above all to a 5.7% increase in deliveries saloon and SEAT Altea models. However, the Caddy
in Turkey. and the Skoda Octavia also recorded high double-
digit growth rates. Based on their registration
Deliveries in Germany figures, a total of six Group models lead their
In 2005, we surpassed the million mark with our respective segments: Fox, Polo, Golf, Audi A4,
deliveries to customers in the German passenger Touran and Multivan/Transporter. In addition, the
car market. With an 8.2% increase in deliveries, we Golf heads the list of all newly registered passenger
outperformed the overall market development and cars in Germany.
further extended our market leadership with a share

deliveries to customers by market1)

Deliveries Change Share of passenger car

(units) (%) market (%)
2005 2004 2005 2004
Europe/Remaining markets 3,430,565 3,216,537 + 6.7
Western Europe 2,937,066 2,751,613 + 6.7 18.9 18.0
of which: Germany 1,032,804 954,573 + 8.2 30.8 30.5
United Kingdom 357,931 346,237 + 3.4 13.8 12.8
Spain 352,988 331,447 + 6.5 21.8 20.8
Italy 265,414 241,473 + 9.9 11.0 10.4
France 243,632 218,226 + 11.6 11.0 10.2
Central and Eastern Europe 351,570 333,013 + 5.6 12.0 12.1
of which: Czech Republic 84,362 83,383 + 1.2 53.6 58.9
Poland 54,150 68,317 20.7 20.7 20.2
Remaining markets 141,929 131,911 + 7.6
of which: Turkey 82,415 77,945 + 5.7 11.4 11.4
North America 525,573 572,192 8.1 2.82) 3.12)
2)
of which: USA 311,653 337,166 7.6 1.8 2.02)
Mexico 174,937 196,813 11.1 23.1 25.6
Canada 38,983 38,213 + 2.0 4.5 4.5
South America/South Africa 594,707 533,256 + 11.5 18.9 19.8
of which: Brazil 382,787 361,557 + 5.9 24.0 23.9
Argentina 80,048 66,813 + 19.8 27.1 30.8
South Africa 94,329 72,424 + 30.2 21.5 21.3
Asia-Pacific 691,948 756,650 8.6 5.5 6.6
of which: China3) 572,301 648,490 11.7 17.3 23.6
Japan 68,986 68,986 28.14) 28.74)
Worldwide 5,242,793 5,078,635 + 3.2 9.1 9.3
Volkswagen brand group 3,588,422 3,521,694 + 1.9
Audi brand group 1,252,955 1,223,121 + 2.4
Commercial Vehicles 401,416 333,820 + 20.2
1)
Deliveries and market shares for 2004 have been updated to reflect subsequent statistical trends.
2)
Overall US market, includes passenger cars and light trucks.
3)
Until 2004: deliveries to dealer organization.
4)
Refers to import market.
 BUSINESS DEVELOPMENT 53

worldwide deliveries of the group's

most successful models in 2005
in thousands of vehicles

Golf 745

Passat/Santana 598

Polo 427

Jetta/Bora 427

Audi A4 325

Gol 291

Skoda Fabia 237

Skoda Octavia 233

0 100 200 300 400 500 600 700 800

Deliveries in North America Deliveries in South America/South Africa

Fiscal year 2005 saw the US passenger car market The positive sales development in South America/
still under tremendous competitive pressure due to South Africa continued in the past year with an
the extensive discounting policies of other vehicle increase of 11.5%. In Brazil, it was above all our
producers. Although the Volkswagen Group played entry-level Fox model that registered high double-
a comparatively restrained part in these sales digit growth rates. In the year under review, we
promotion activities, market conditions forced us to delivered 96,768 of these models in Brazil; this
intensify our efforts in this regard compared with corresponds to 25.3% of our entire delivery volume
the previous year. Deliveries to customers fell by a in Brazil. Sales figures for Brazil also include light
total of 7.6% year-on-year. However, a positive commercial vehicles, of which we delivered 12.1%
contribution to our sales volume in the year under fewer than the previous year. Unit sales of our
review was made by the newly launched Jetta, the heavy trucks (in the 7 to 45 tonnes weight classes
Bentley Continental GT, the Audi A4 and the Audi and bus chassis) that are produced in Brazil fell
A6. Accordingly, sales figures for the Volkswagen by 5.2%. Nonetheless, we retained our market
Group in November and especially in December leadership in the heavy trucks segment of the
were significantly greater than those of the same Brazilian market with a share of 27.8% (28.3%). In
months in the previous year. In Canada, our delivery Argentina, there was a marked increase of 19.8% in
volume of 38,983 vehicles was slightly higher than deliveries of Group vehicles. This was primarily due
that of the previous year, with the main growth to the growth in Fox models imported from Brazil,
attributable to the Jetta, Passat and Audi A6 models. deliveries of which almost tripled. We also recorded
In the Mexican market, the sales growth of the New strong growth in the sales of the Gol, Jetta, Audi A3
Beetle, New Beetle Cabriolet, Audi A3 Sportback, Sportback and Audi A4 models. Overall, we were
Audi A4 and in particular the Caddy and Multivan/ able to retain our leading position in the Argentinian
Transporter models could not offset the decline in car market. In Argentina, we delivered 3,251 trucks
sales of the other Group models. and buses (+ 31.5%).
54 Boards Group Topics Financial Communication Divisions Management Report

> Business development

Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

The upward trend in the South African market was With the exception of SEAT, all Group brands
also reflected in the deliveries by the Volkswagen received more orders than in the previous year. Top
Group, with our models recording a dispro- performers in this regard were the Skoda brand
portionately high sales increase of 30.2%. This with a 12.2% growth rate and the Commercial
enabled us to further extend the leading position Vehicles business line (+ 16.0%).
in the market with a share of 21.5% (21.3%). In At December 31, 2005, the Volkswagen Group
particular, demand increased for the Polo, Golf, held orders for 122,912 vehicles within Germany
Caddy and Multivan/Transporter models. and for 226,818 units from the rest of Western
Europe excluding Germany. Together, this
Deliveries in the Asia-Pacific region corresponds to an 8.4% rise in our order level
Our delivery volume fell in the Asia-Pacific region. compared with December 31, 2004.
This is largely due to market developments in China,
which saw growing competitive pressure resulting sales to the dealer organization
from increased sales incentives. Nonetheless, we In fiscal year 2005, the Volkswagen Group
were able to maintain our leading position in the excluding its Chinese companies sold a total of
passenger car segment. Our overall deliveries to 4,760,211 vehicles to the dealership organization
customers in the Japanese passenger car market worldwide. This corresponds to a 4.0% increase
remained on a par with the previous year. Positive compared with the previous year. However, sales in
developments were evident above all in sales of China decreased substantially compared with 2004.
Golf, Touran, Audi A3 Sportback, Audi A6 and Including our Chinese joint venture companies, our
Bentley Continental GT models, all of which worldwide sales volume amounted to 5,192,576
exceeded prior-year figures. In the other Asia- vehicles (+ 1.0%). The majority of our models
Pacific markets including for example Australia 80.4% (81.7%) were sold in countries other than
and Taiwan there was a particularly high level of Germany. Nonetheless, owing to the sales drop in
customer demand for the Golf and the Polo. China, these sales fell by 0.7% to 4,173,479
vehicles. In Germany, demand growth for our
orders received by the volkswagen models was very positive, increasing by 8.4% to
group in western europe 1,019,097 vehicles. As a result, the share of total
The successful launch of our 2005 models was also sales generated in Germany rose to 19.6% (18.3%).
reflected in orders. Demand for Group vehicles in The main sales drivers were the Golf and the
Western Europe (including Germany) recorded a Touran, which are based on a common platform;
positive trend in 2005, with a 6.5% rise year-on- with a total of 904,240 vehicles, they account for
year. Particularly encouraging was the level of 17.4% of total unit sales. The entry-level model Fox
orders from Germany (+ 8.6%), France (+ 12.3%), recorded strong growth rates following its market
Sweden (+ 17.4%) and Ireland (+ 16.2%). launch in Europe in early 2005. High unit sales
 BUSINESS DEVELOPMENT 55

growth was also recorded by the Caravelle/Multivan inventories

and Transporter models. There were also substantial Inventories held by Group companies and the
increases in the sales of our Skoda Octavia, Bentley dealership organization worldwide in 2005
Continental GT, Audi A3 Sportback, Audi A6 and were below the level of the previous year. At
Caddy models. However, sales of the Passat/Santana December 31, 2005, the level of inventories was
and the Jetta/Bora models fell slightly due to the also substantially lower than that of the previous
model changes. Their share of Group sales dropped year. Inventories remained at the level required
from 12.0 to 11.1% and from 8.4 to 7.9% to supply our customers.
respectively.
number of employees
production In fiscal year 2005, the Volkswagen Group, including
In the year under review, the Volkswagen Group the vehicle-producing joint ventures in China,
excluding the Chinese joint ventures produced employed an average of 345,214 people (+ 0.6%).
a total of 4,785,900 vehicles worldwide, equal to 179,365 (+ 0.2%) or 52.0% (52.2%) of these
a year-on-year increase of 5.6%. Including the employees worked at our companies in Germany. At
production volume of our Chinese joint venture the reporting date, the number of people employed by
companies, total production by the Volkswagen the Volkswagen Group was 344,902, a slight increase
Group rose by 2.5% to 5,219,478 vehicles. The on the previous year (+ 0.7%). As well as increased
production of our new models was largely production levels at Skoda and Volkswagen de
responsible for an improvement in production Mexico, this rise was attributable primarily to the
capacity utilization in the European, American and increase in headcount at AutoVision GmbH. The
South African production plants concerned. In the activities of this company include support for the core
year under review, heavy trucks and bus chassis business of Volkswagen AG by providing personnel
production at Volkswagen do Brasil Ltda. in and by serving as an innovation platform. By
Resende, Brazil, once again reached record levels. By implementing the ForMotion measures, it was
contrast, the production volume of the Chinese joint possible to reduce staff levels, in particular at
venture companies dropped by 24.1% compared Volkswagen AG. At the end of the year, a total of
with the previous year. The total production figure 178,689 people worked in our companies in Germany
also includes 31,972 Ford Galaxy units ( 9.9%), (+ 0.8%), while the number of employees outside
which are included in unit sales but not in deliveries Germany was 166,213 (+ 0.6%). In the field of
to customers. The share of vehicles manufactured financial services, the number of employees fell
in Germany rose by 0.6 percentage points to slightly, owing primarily to the sale of the Europcar
36.6% in fiscal year 2005. Our plants worldwide Fleet Services foreign companies.
produced an average of 22,495 vehicles (+ 0.1%) Year-on-year, an additional 205 places for
per working day. apprentices were also created across the Group.
56 Boards Group Topics Financial Communication Divisions Management Report

> Business development

Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

value contribution as a control variable The opportunity cost of capital is the product of
The successful development of our Company is invested capital and the cost of capital. Invested
ensured by innovations and investments. In order capital consists of total operating assets: property,
to remain independent and to be successful in the plant and equipment, intangible assets, inventories
capital markets, we must grow our enterprise value and receivables, less non-interest bearing trade
in a sustainable way. Only on the basis of an payables and payments on account received.
adequate earnings power can we secure the As the concept of value-based management
financial leeway that is necessary if we decide to is applied exclusively to our operating business
finance future projects and innovations using the activities, assets relating to investments in
capital markets. subsidiaries and associates and the investment of
Accordingly, growing our enterprise value is the cash funds are not included when calculating
focal point of our financial objectives. A number of invested capital. Interest earned on this capital must
years ago, we defined value contribution* as a be recognized through the financial result.
control variable linked to the cost of capital which
enables us to measure the performance of the determining the current cost of capital
Automotive Division and its constituent business The cost of capital is calculated as the weighted
units, as well as of our individual products and average of the required rates of return on equity
projects. and debt. The cost of equity is determined using the
Capital Asset Pricing Model (CAPM). This model
components of value contribution uses the yield on long-term Bunds as the risk-free
Value contribution is derived from two factors: rate, and also applies the general and specific risk
operating profit after tax and the opportunity cost premium attaching to investments in the equity
of invested capital. Operating profit is the measure market. The cost of debt is based on the average
we use to assess the economic performance of the yield for long-term debt. In 2005, the effective cost
Automotive Division. In order to arrive at a figure of capital for the Automotive Division derived from
for profit after tax, we calculated an overall average the capital markets on this basis was 7.0%.
tax rate of 35% on the basis of the various
international tax rates.

*The value contribution corresponds to the Economic Value Added (EVA).

EVA is a registered trademark of Stern Stewart & Co.
 BUSINESS DEVELOPMENT 57

value contribution and return on the falling interest rates in the capital markets
investment in the current fiscal year brought about a reduction in the cost of capital.
The value contribution of the Automotive Division in Return on investment (ROI), i.e. the return on
2005 was 1,850 million ( 2,664 million). This invested capital for a particular period, was 2.6% in
year-on-year improvement was mainly due to a 2005 (previous year: 1.3%). The marked increase of
higher operating result, but also to lower capital 1.3 percentage points compared with the previous
costs. There were two reasons for the reduction in year is attributable primarily to the improvement in
capital costs: firstly, the restriction on investments in operating profit and the no more than slight rise in
property, plant and equipment together with active invested capital.
management of working capital helped further More information on the financial control
capital turnover as, compared with the previous variables of the Automotive Division is available on
year, invested capital grew at a considerably slower the Internet at www.volkswagen-ir.de
pace than the increase in sales revenue. Secondly,

cost of capital value contribution

automotive division automotive division

% 2005 2004 million 2005 20041)

Risk-free rate 3.3 3.8 Operating profit shown
DAX market risk premium 6.0 6.0 in segment reporting2) 1,807 590
Volkswagen-specific risk premium 0.3 Share of operating profit
(Volkswagen beta factor) (1.00) (1.05) of Chinese joint ventures 119 222
Cost of equity after tax 9.3 10.1 Tax expense (average rate 35 %) 591 284
Cost of debt 3.7 4.5 Operating profit after tax 1,097 528
Tax (average rate 35 %) 1.3 1.6 Invested capital 42,105 41,458
Cost of debt after tax 2.4 2.9 Return on investment (ROI) in % 2.6 1.3
Proportion of equity 66.7 66.7 Cost of capital in % 7.0 7.7
Proportion of debt 33.3 33.3 Cost of invested capital 2,947 3,192
Cost of capital after tax 7.0 7.7 Value contribution 1,850 2,664
1)
Restated.
2)
See notes to the consolidated financial statements on pages 132 to 133.
58 Boards Group Topics Financial Communication Divisions Management Report

> Business development

Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

outline of the legal structure Association and essential corporate measures,

of the group the issuance of new shares, convertible bonds
Volkswagen AG is the parent company of the and bonds with warrants and the authorization
Volkswagen Group. It develops vehicles and to acquire treasury shares.
engines for the Group, but also produces and sells Further details are governed in particular by
vehicles, in particular Volkswagen brand passenger the German Stock Corporation Act, the Act on the
cars and commercial vehicles. In its function as Privatization of Shares of Volkswagenwerk Gesell-
parent company, Volkswagen AG holds interests in schaft mit beschrnkter Haftung of July 21, 1960,
AUDI AG, SEAT S.A., SKODA AUTO a.s., Volkswagen the German Codetermination Act and the Articles
Financial Services AG and numerous other com- of Association.
panies in Germany and abroad. An overview of the
significant Group companies can be found in the organizational structure of the group
notes to the consolidated financial statements Volkswagen AG and the Volkswagen Group are
(pages 179 to 181). managed by the Volkswagen AG Board of Manage-
The Volkswagen AG Board of Management is ment in accordance with the Volkswagen AG
the ultimate body responsible for managing the Articles of Association and the rules of procedure
Group. The Supervisory Board appoints, monitors for the Volkswagen AG Board of Management
and advises the Board of Management and is issued by the Supervisory Board. The Articles of
consulted directly on all decisions that are of Association and rules of procedure stipulate that
fundamental significance for the Group. One half of certain transactions require the approval of the
the Supervisory Board is made up of shareholder Supervisory Board. In addition, the Board of
representatives, of whom eight are elected by the Management exercises certain of its Group manage-
Annual General Meeting and two appointed by ment functions in the Group Board of Management.
the State of Lower Saxony. The other half of the This body consists of Board members and top
Supervisory Board is elected by the employees. The managers to whom the Board of Management has
Chairman of the Supervisory Board, a shareholder transferred certain management functions. Within
representative elected by the Annual General the framework laid down by law, the Group Manage-
Meeting, has a casting vote in the Supervisory ment Board ensures that Group interests are taken
Board, in accordance with the Mitbestimmungs- into account in decisions relating to the brands
gesetz (German Codetermination Act). and companies of the Volkswagen Group, and
Information on the remuneration structure for coordinates important questions affecting Group
the Board of Management and the Supervisory brands in general.
Board can be found in the notes to the Volkswagen Each brand in the Volkswagen Group is
consolidated financial statements (pages 174 to 178). managed by a senior brand manager. The Group
The Annual General Meeting resolves the targets and requirements laid down by Volkswagen
appropriation of net profit, formally approves the AG or the Group Board of Management must be
actions of the Board of Management and the complied with in accordance with the applicable
Supervisory Board, elects the shareholder legal framework. The rights and obligations of the
representatives to the Supervisory Board and elects statutory supervisory bodies of the relevant brand
the auditors. The Annual General Meeting also companies remain unaffected. Matters that are of
resolves the Articles of Association, the purpose importance to the Group as a whole are submitted
of the Company, amendments to the Articles of to the Group Management Board.
 BUSINESS DEVELOPMENT 59

The companies of the Volkswagen Group are transferred directly to Volkswagen AG. The
managed separately by their respective manage- company continues to hold no voting rights from
ment. In addition to the interests of the company, its treasury shares.
management takes into account the interests of On September 29, 2005, we completed the sale
the Group and of individual brands in accordance of shares of Europcar Interrent Lease S.r.L., Rome,
with the framework laid down by law. Europcar Renting, S.A., Madrid, and Unirent
Comrcio e Alguer de Bens de Equipamento e
major changes in equity investments Consumo, S.A., Lisbon, to LeasePlan Corporation
In 2005, two joint venture companies were N.V., Amsterdam, as announced in the context of
established in China Volkswagen FAW Engine the LeasePlan acquisition.
(Dalian) Company Ltd. on April 13, 2005, and As part of its strategy of focusing on core
Shanghai Volkswagen Powertrain Company Ltd. business, Volkswagen AG sold its wholly-owned
on April 29, 2005. A 60% interest in both of these subsidiary gedas Aktiengesellschaft to T-Systems
companies is held by Volkswagen (China) Invest- AG, a subsidiary of Deutsche Telekom AG; the sale
ment Company Ltd. By producing technologically is effective January 1, 2006, subject to the approval
sophisticated engines for the Chinese vehicle- of the antitrust authorities
production joint venture companies, we are
reinforcing the strategic orientation of our activities summary of business development
in China. In spite of tougher consumption and In spite of the unfavorable operating environment,
exhaust emission standards, we intend to achieve particularly in the passenger car markets in the USA
cost-effective production and to meet the legal and China, fiscal year 2005 was a record year in
requirements governing in-country manufacture terms of deliveries to customers. In the Western
under local management. European and German passenger car markets, we
On October 13, 2005, Volkswagen AG took over were even able to extend our leading position.
the entire assets of its wholly-owned subsidiary This success can be attributed largely to the high
Volkswagen Beteiligungs-Gesellschaft mbH, number of new models launched during the year.
Wolfsburg, as part of a merger without liquidating However, we are fully conscious of the fact that
the company. As a result of this merger, ownership fiscal year 2005 only partially met our expectations.
of the Volkswagen AG ordinary shares held by Nonetheless, we are one important step further on
Volkswagen Beteiligungs-Gesellschaft mbH was our growth path.
I N N O VAT I O N C R E AT E S S TA B I L I T Y

>> Bugatti Veyron 16.4:

Innovation pushes back the limits

September 2005 saw the wheel come full circle: after almost 50 years without a new Bugatti emerg-
ing from the plant at Molsheim in Northeast France, the production of the Veyron 16.4 began on
historical ground. This site, where Ettore Bugatti once created four-wheeled legends, is where
a new era began for an automotive brand that is held by many enthusiasts to be the most fascinating
and innovative of all time. The worlds fastest production vehicle capable of reaching speeds in
excess of 400 km/h features superior safety standards and outstanding drivability. What is more:
with a powerful 16-cylinder engine (736 kW 1,001 bhp)* under its bonnet, the Bugatti Veyron
16.4 is able to redefine the boundaries of the possible. By means of a rear wing that doubles as an
ingenious airbrake, wind resistance is used to optimize vehicle deceleration. Thanks to pioneering
materials such as carbon ceramic for the brake disks, the first Bugatti of the 21st century boasts
the most effective brake system ever to be used in a road vehicle. Seeing this brake system in action
is every bit as fascinating as witnessing the Bugattis superb acceleration capabilities. Working
parallel to the airbrake that is ready to kick in at speeds in excess of 200 km/h, the deceleration
performance of this Bugatti is utterly unique among production vehicles.

* Fuel consumption in l/100 km: 40.4 urban; 14.7 extra-urban; 24.1 combined;
CO2 emissions in g/km: 574.
I N N O VAT I O N C R E AT E S S TA B I L I T Y

>> Bugatti Veyron 16.4:

Innovation pushes back the limits

September 2005 saw the wheel come full circle: after almost 50 years without a new Bugatti emerg-
ing from the plant at Molsheim in Northeast France, the production of the Veyron 16.4 began on
historical ground. This site, where Ettore Bugatti once created four-wheeled legends, is where
a new era began for an automotive brand that is held by many enthusiasts to be the most fascinating
and innovative of all time. The worlds fastest production vehicle capable of reaching speeds in
excess of 400 km/h features superior safety standards and outstanding drivability. What is more:
with a powerful 16-cylinder engine (736 kW 1,001 bhp)* under its bonnet, the Bugatti Veyron
16.4 is able to redefine the boundaries of the possible. By means of a rear wing that doubles as an
ingenious airbrake, wind resistance is used to optimize vehicle deceleration. Thanks to pioneering
materials such as carbon ceramic for the brake disks, the first Bugatti of the 21st century boasts
the most effective brake system ever to be used in a road vehicle. Seeing this brake system in action
is every bit as fascinating as witnessing the Bugattis superb acceleration capabilities. Working
parallel to the airbrake that is ready to kick in at speeds in excess of 200 km/h, the deceleration
performance of this Bugatti is utterly unique among production vehicles.

* Fuel consumption in l/100 km: 40.4 urban; 14.7 extra-urban; 24.1 combined;
CO2 emissions in g/km: 574.
62 Boards Group Topics Financial Communication Divisions Management Report

Business development
> Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

net assets, financial position and earnings performance

Automotive Division operating

profit more than doubled

The ForMotion measures implemented are the first step towards

a fundamental improvement in performance. In the Automotive
Division, we have reduced investments in property, plant and
equipment considerably and strengthened our liquidity position.

adoption of revised and new iass/ifrss the remaining new Standards at the beginning
The International Accounting Standards Board (IASB) of fiscal year 2005: primarily the amended IAS 19
has adopted a series of revisions to existing Inter- Employee Benefits, IAS 32 and IAS 39 on the
national Accounting Standards (IASs) and has issued disclosure, presentation, recognition and
new International Financial Reporting Standards measurement of financial instruments, as well as
(IFRSs). These must be applied for fiscal years IFRS 2 Share-based Payment (further information
beginning on or after January 1, 2005. We had can be found in the notes to the consolidated financial
already applied the revised IAS 1, 21, 36 and 38, and statements on pages 118 to 119). In particular,
the new IFRS 3, prior to the effective date in our 2004 exercise of the option to take actuarial gains and
consolidated financial statements. We implemented losses directly to equity had a material effect.

consolidated balance sheet by division as of december 31

assets
Volkswagen Group Automotive1) Financial Services
2) 2) 2)
million 2005 2004 2005 2004 2005 2004
Noncurrent assets 75,235 72,212 36,701 37,352 38,534 34,860
Intangible assets 7,668 7,490 7,540 7,376 128 114
Property, plant and equipment 22,884 23,795 22,609 23,523 275 272
Leasing and rental assets 9,882 8,484 57 58 9,825 8,426
Financial services receivables 24,958 22,762 243 243 24,715 22,519
Noncurrent investments and other financial assets3) 9,843 9,681 6,252 6,152 3,591 3,529
Current assets 57,846 55,391 32,112 28,862 25,734 26,529
Inventories 12,643 11,440 12,569 11,346 74 94
Financial services receivables 22,412 21,109 177 142 22,235 20,967
Receivables and other assets 10,811 9,688 8,242 7,786 2,569 1,902
Marketable securities 4,017 2,933 3,939 2,879 78 54
Cash and cash equivalents 7,963 10,221 7,185 6,709 778 3,512
Total assets 133,081 127,603 68,813 66,214 64,268 61,389
1)
Including allocation of consolidation adjustments between the Automotive and Financial Services divisions,
primarily intra-Group loans.
2)
Restated.
3)
Including deferred taxes.
 NET ASSETS, FINANCIAL POSITION AND EARNINGS PERFORMANCE 63

Accordingly, pension liabilities are recognized at amounted to 0.8 billion, the equity of the Volks-
their current value. The increase compared with the wagen Group was 23.6 billion at the reporting
previous classification reduced the equity of the date, a year-on-year increase of 4.3%. This increase
Volkswagen Group after recognition of deferred was primarily due to the consolidated net profit for
taxes. The restated prior-year amounts form the 2005 and the positive currency effects resulting
basis of the following discussion of our net assets, from translation of the financial statements of our
financial position and earnings performance. North and South American companies. The increase
was also attributable to the exercise of convertible
consolidated balance sheet structure bonds from the fifth tranche of our stock option
In 2005, the Volkswagen Groups total assets plan. The equity ratio for 2004 was recalculated as
increased by 4.3% to 133.1 billion. The increase 17.8% owing to the retrospective application of
was stronger in the Financial Services Division than accounting policies under IAS 19 and IAS 32. At
in the Automotive Division. the end of 2005, this figure remained unchanged
There were only minimal changes to the structure at 17.8%. Increases resulting from the change in
of the consolidated balance sheet compared to accounting policies related mainly to provisions
December 31 of the previous year. The breakdown for pensions.
of assets, equity and liabilities in the Volkswagen
Group balance sheet can be seen from the chart on automotive division balance
the next page. Changes to the consolidated Group sheet structure
have no material effect on the comparability of the Total assets in the Automotive Division rose by
current and prior-year figures. Despite the actuarial 3.9% year-on-year to 68.8 billion. Noncurrent
losses for pension obligations in 2005, which assets were slightly below the previous years level

consolidated balance sheet by division as of december 31

equity and liabilities

Volkswagen Group Automotive1) Financial Services

2) 2) 2)
million 2005 2004 2005 2004 2005 2004
Equity 23,647 22,681 17,391 17,267 6,256 5,414
Equity attributable to shareholders of Volkswagen AG 23,600 22,634 17,344 17,221 6,256 5,413
Minority interests 47 47 47 46 1
Noncurrent liabilities 56,125 56,230 28,662 28,602 27,463 27,628
Noncurrent financial liabilities 31,014 32,376 6,545 7,527 24,469 24,849
Provisions for pensions 14,003 12,633 13,816 12,481 187 152
Other liabilities3) 11,108 11,221 8,301 8,594 2,807 2,627
Current liabilities 53,309 48,692 22,760 20,345 30,549 28,347
Current financial liabilities 30,992 28,885 4,266 4,122 26,726 24,763
Trade payables 8,476 7,434 6,913 6,218 1,563 1,216
Other liabilities 13,841 12,373 11,581 10,005 2,260 2,368
Total equity and liabilities 133,081 127,603 68,813 66,214 64,268 61,389
1)
Including allocation of consolidation adjustments between the Automotive and Financial Services divisions,
primarily intra-Group loans.
2)
Restated.
3)
Including deferred taxes.
64 Boards Group Topics Financial Communication Divisions Management Report

Business development
> Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

consolidated balance sheet structure 2005

in percent

Noncurrent assets Current assets

56.5 43.5
Total assets

0 10 20 30 40 50 60 70 80 90 100
Total equity
and liabilities
17.8 42.2 40.0
Equity Noncurrent liabilities Current liabilities

( 1.7%). However, current assets rose by 11.3%, At December 31, 2005, the Financial Services
primarily due to the increase in inventories because Division reported a year-on-year increase in equity
of the product program and a higher level of of 0.8 billion. This rise was largely due to a capital
securities and cash. increase at Volkswagen Financial Services AG and
In the Automotive Division, equity at the end of to the current profit. Noncurrent liabilities were
2005 was 0.7% more than the level at December virtually on a level with the figure at the end of the
31, 2004. In noncurrent liabilities, there was an previous year ( 0.6%), while the increase in
increase in provisions for pensions, as mentioned deposits at Volkswagen Bank direct to 8.7 billion
earlier. Increases in other provisions and trade was one of the factors contributing to the 7.8% rise
payables led to a rise in current liabilities. in current liabilities. The debt/equity ratio improved
to 8:1 (9:1).
financial services division
balance sheet structure financial position and cash and
In addition to the continued expansion of business cash equivalents in the group
activities, the effects of currency translation resulted The financial position of the Volkswagen Group
in total assets in the Financial Services Division continued to improve in 2005. Following an
increasing by 4.7% year-on-year to 64.3 billion. overview of liquidity development, the two following
This accounts for approximately 48% of total Group sections address the operating factors by division.
assets. There was a marked rise in both current and In fiscal year 2005, the Volkswagen Group
noncurrent financial services receivables. Increased generated a gross cash flow of 10.6 billion, 8.1%
leasing and rental assets together with higher more than in the previous year.
receivables from customer financing, which Following the substantial reduction in funds tied
resulted from additional finance lease receivables, up in working capital in 2004 (by 1.6 billion), we
led to a 10.5% rise in noncurrent assets. Current were able to further reduce working capital by 166
assets fell by 3.0% compared with December 31, million in 2005.
2004, primarily due to the higher level of the
previous year brought about by temporary cash
holdings.
 NET ASSETS, FINANCIAL POSITION AND EARNINGS PERFORMANCE 65

cash flow statement by division

Volkswagen Group Automotive1) Financial Services

2)
million 2005 2004 2005 20042) 2005 20042)
Profit before tax 1,722 1,088 620 160 1,102 928
Income taxes paid 354 21 83 296 271 317
Depreciation and amortization expense 8,654 8,618 7,011 6,799 1,643 1,819
Change in pension provisions 137 300 127 292 10 8
Other noncash income/expense3) 485 142 514 65 29 207
Gross cash flow 10,644 9,843 8,189 7,612 2,455 2,231
Change in working capital 166 1,614 77 1,269 243 345
Change in inventories 720 178 740 172 20 6
Change in receivables 757 4 598 220 159 224
Change in liabilities 429 687 88 145 341 542
Change in other provisions 1,214 753 1,173 732 41 21
Cash flows from operating activities 10,810 11,457 8,1124) 8,8814) 2,698 2,576
Cash flows from investing activities 10,466 15,078 5,721 7,046 4,745 8,032
of which: acquisition of property, plant and equipment 4,434 5,550 4,316 5,425 118 125
capitalized development costs 1,432 1,501 1,432 1,501
change in leasing and rental assets
(excluding depreciation) 2,950 1,942 43 35 2,907 1,907
change in financial services receivables 1,948 4,801 0 78 1,948 4,723
Net cash flow 344 3,621 2,391 1,835 2,047 5,456

Change in investments in securities 820 280 813 263 7 17

Cash flows from financing activities 1,794 6,004 1,147 2,092 647 8,096
Change in cash and cash equivalents due to exchange
rate changes and changes in the scope of consolidation 12 22 44 24 32 2
Net change in cash and cash equivalents 2,258 2,685 475 30 2,733 2,655

Cash and cash equivalents at Dec. 315) 7,963 10,221 7,185 6,710 778 3,511
Securities and loans 5,843 4,112 4,332 3,027 1,511 1,085
Gross liquidity 13,806 14,333 11,517 9,737 2,289 4,596
Total third-party borrowings 62,006 61,261 10,811 11,649 51,195 49,612
Net liquidity 48,200 46,928 706 1,912 48,906 45,016
1)
Including allocation of consolidation adjustments between the Automotive and Financial Services divisions.
2)
Restated.
3)
Relate mainly to fair value measurement of financial instruments and application of the equity method.
4)
Before consolidation of intra-Group transactions 8,719 million (9,282 million).
5)
Cash and cash equivalents comprise bank balances, checks, cash-in-hand and call deposits.
66 Boards Group Topics Financial Communication Divisions Management Report

Business development
> Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

Net cash used in investing activities was reduced 4.3 billion. This improved the capex/sales ratio
dramatically by 30.6% to 10.5 billion, producing substantially from 6.8% to 5.0%. Capitalized
a positive net cash flow at Group level. development costs fell by 4.6% to 1.4 billion.
Through loan repayments and a temporary shift Overall, net cash used in investing activities was
to securities, the level of cash and cash equivalents reduced by 1.3 billion to 5.7 billion. The net cash
in the Group fell by 22.1% to 8.0 billion, while flow generated by the Automotive Division rose by
gross liquidity was just under the previous years almost a third to 2.4 billion.
level at 13.8 billion. Total third-party borrowings 2005 saw a reduction in net cash used in
rose due to year-on-year exchange rate changes, financing activities compared with the previous
particularly the US dollar against the euro, so that year, which was marked by the capital increases
there was a slight deterioration to 48.2 billion implemented at Volkswagen Financial Services AG
( 46.9 billion) in the net liquidity of the Group as part of the LeasePlan acquisition. Although funds
despite the operating improvement. were tied up by the repayment of debts and
temporary investments in securities, the Automotive
financial position in the Division recorded an overall 475 million rise in
automotive division cash and cash equivalents, so that the total figure
The operational progress recorded by the Auto- for cash and cash equivalents at December 31,
motive Division in fiscal year 2005 was reflected in 2005, was 7.2 billion (6.7 billion). Including
the gross cash flow, which increased to 8.2 billion. securities, loans and third-party borrowings, the
This was a 7.6% improvement on the previous year, Automotive Division was able to generate positive
in spite of the higher level of tax refunds in 2004. net liquidity of 706 million.
Following the substantial decrease in working
capital in 2004 (by 1.3 billion), 2005 saw a moderate financial position in the
increase in working capital by 77 million. This was financial services division
due to the increase in inventories as a result of In the Financial Services Division, cash flows from
the diversification of the model range, as well as operating activities increased by 4.7% to 2.7 billion
to growth in receivables. in 2005. In view of the expansion of the leasing
We made tremendous progress in investing business, there was an increase in capital
activities. We were able to further reduce invest- expenditure on leasing and rental assets. However,
ments in the Automotive Division without having the increase in receivables from customer and
to cut back on our new model initiative. Additions dealer financing was lower in 2005, with the result
to property, plant and equipment fell by 20.4% to that net cash used in investing activities in the
 NET ASSETS, FINANCIAL POSITION AND EARNINGS PERFORMANCE 67

Financial Services Division was temporarily reduced earnings performance of the group
to 4.7 billion (8.0 billion). In the previous year, Fiscal year 2005 saw a marked improvement in the
investing activities were also increased by the earnings performance of the Volkswagen Group.
acquisition of shares in LeasePlan. Due to the This is due in particular to the Automotive Division.
reduction in the temporary increase in cash holdings Overall, sales revenue rose by 7.1% year-on-year to
in 2004, borrowings by the division were less than 95.3 billion. At 72.4% (72.5%), the majority of sales
repayments to the market, giving rise to an overall revenue was generated outside Germany. The
outflow of funds from financing activities. Including increase in cost of sales is primarily due to the
securities and loans, gross liquidity amounted to increase in volume. Nonetheless, the success of the
2.3 billion (4.6 billion) at the end of the year. The ForMotion program meant that the cost of sales grew
year-on-year increase in total third-party borrowings at a slower pace than sales, resulting in a substantial
by 1.6 billion to 51.2 billion is attributable to year-on-year increase in the Groups gross margin
exchange rate changes, particularly those relating to from 11.8% to 13.5%. Volkswagen Group operating
the US dollar, the Brazilian real and sterling. As a profit increased by 70.0% to 2.8 billion; the
result, net liquidity in the Financial Services operating return on sales reached 2.9%, compared
Division amounted to a negative 48.9 billion at the with 1.8% in the previous year.
end of the year ( 3.9 billion compared with 2004).

income statement by division

Volkswagen Group Automotive1) Financial Services

2) 2) 2)
million 2005 2004 2005 2004 2005 2004
Sales revenue 95,268 88,963 85,673 80,253 9,595 8,710
Cost of sales 82,391 78,430 75,539 72,207 6,852 6,223
Gross profit 12,877 10,533 10,134 8,046 2,743 2,487
Distribution expenses 8,905 8,167 8,177 7,460 728 707
Administrative expenses 2,383 2,309 1,686 1,644 697 665
Other operating income/expense 1,203 1,585 1,588 1,773 385 188
Operating profit 2,792 1,642 1,859 715 933 927
Financial result 1,070 554 1,239 555 1693) 1
Profit before tax 1,722 1,088 620 160 1,102 928
Income tax expense 602 391 276 31 326 360
Profit after tax 1,120 697 344 129 776 568
1)
Including allocation of consolidation adjustments between the Automotive and Financial Services divisions.
2)
Restated.
3)
Excluding the dividend of one company in the Automotive Division.
68 Boards Group Topics Financial Communication Divisions Management Report

Business development
> Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

segment reporting share of sales revenue by market 2005

in percent

Europe (excluding Germany) 45.2

Germany 27.6

North America 14.4

Asia/Oceania 5.5

South America 5.2

Africa 2.1

0 10 20 30 40 50 60 70 80 90 100

earnings performance of the In 2005, the administrative expenses of the

automotive division Automotive Division amounted to 1.7 billion
In fiscal year 2005, the Automotive Division (+ 2.6%). The ratio of administrative expenses to
generated sales revenue of 85.7 billion. The 6.8% sales revenue remained on a level with the previous
rise in sales revenue was primarily due to higher year at 2.0%.
unit sales volumes and a greater proportion of At 1.6 billion, net other operating income from
higher-value models sold. As in the previous year, the Automotive Division was 10.4% lower than the
the operating result was impacted by special items previous year. This decrease resulted mainly from
from product-related and structural measures as currency effects in hedging foreign currency risks
part of the ForMotion program; however, at 351 and in current accounts.
million (395 million), this is slightly lower than Overall, the operating profit was 1.9 billion
in 2004. Nonetheless, completed and ongoing (0.7 billion), more than twice that of the previous
measures initiated in previous years with a view year. However, both in absolute terms and at 2.2%
to optimizing product costs, process costs and of sales, this level continues to be unsatisfactory.
overheads and to reducing one-time expenditure, The financial result, which primarily includes
combined with the growth in sales, meant that expenses from the scheduled interest cost added
gross profit for the current fiscal year improved back on discounted noncurrent provisions, was well
by approximately a quarter to 10.1 billion. As a below the prior-year figure at 1.2 billion. This
result, the gross margin rose to 11.8% (10.0%). was due in particular to lower income from joint
Distribution expenses rose by 9.6% over the ventures included at equity in the consolidated
previous year to 8.2 billion. This increase can be financial statements and negative effects from the
attributed mainly to the growing competitive fair value measurement of derivative financial
pressure in key markets and the sales promotion instruments.
activities which this necessitated. The ratio of
distribution expenses to sales revenue increased
slightly to 9.5% (9.3%).
 NET ASSETS, FINANCIAL POSITION AND EARNINGS PERFORMANCE 69

earnings performance of the (7.3%) were reduced to below the previous years
financial services division level (7.6%). The other operating result in the
In fiscal year 2005, the Financial Services Division Financial Services Division worsened to 385
increased sales revenue by 10.2% to 9.6 billion. million ( 188 million). This is principally due to
This rise was mainly due to the operating lease higher allowances for doubtful accounts related to
business and the higher interest income from the increase in volume. In 2005, the operating profit
dealer and customer financing. Gross profit in in the Financial Services Division (933 million)
the Financial Services Division rose by 10.3% to again exceeded the already high level of the
2.7 billion. This represents an unchanged high previous year (927 million); this corresponds to
percentage of sales revenue, at 28.6%. Distribution approximately a third of the Volkswagen Groups
expenses amounted to 728 million (707 million). operating profit. The increase in the financial result
Owing to the expansion of business, there was an of the Financial Services Division to 169 million
increase of 697 million (665 million) in (1 million) is also attributable to the fact that
administration expenses. Measured as a proportion LeasePlans result from the previous year was only
of sales revenue, however, administration costs included on a pro rata basis.

key financial figures

% 2005 20041) 2003 2002 2001

Volkswagen Group
Return on sales before tax 1.8 1.2 1.6 4.7 5.2
Return on sales after tax 1.2 0.8 1.2 3.0 3.4
Equity ratio 17.8 17.8 20.2 22.7 23.0
Dynamic gearing (years)2) 0.2 0.2 0.2 0.2 0.2
Automotive Division3)
Change in unit sales + 1.0 + 2.5 + 0.4 2.2 1.1
Change in sales revenue + 6.8 + 5.0 1.4 3.1 + 4.3
Operating profit as a percentage of sales revenue 2.2 0.9 0.9 5.2 6.1
Return on investment after tax4) 2.6 1.3 2.0 7.4 9.4
Cash flows from operating activities as
a percentage of sales revenue 9.5 11.1 7.8 10.6 9.3
Cash flows from investing activities as
a percentage of sales revenue 6.7 8.8 11.1 11.9 10.2
Investments in property, plant and equipment as
a percentage of sales revenue 5.0 6.8 8.6 8.7 8.2
Equity ratio 25.3 26.1 30.2 35.2 34.8
Financial Services Division
Increase in total assets 4.7 17.9 12.8 6.9 15.4
Profit before tax as a percentage of average equity 18.9 20.0 23.8 19.6 14.0
Equity ratio 9.7 8.8 7.5 7.6 8.1
1)
Restated.
2)
Ratio of cash flows from operating activities to current and noncurrent liabilities.
3)
Including allocation of consolidation adjustments between the Automotive and Financial Services divisions.
4)
For details, see Value-based management in the Business development section on page 57.
70 Boards Group Topics Financial Communication Divisions Management Report

Business development
> Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

consolidated profit profit continues to be unsatisfactory, and substantial

In fiscal year 2005, the Volkswagen Group recorded efforts must still be made for individual brands and
a significant year-on-year increase in profit before certain Group markets if we are to return to the
tax by 58.2% to 1.7 billion. The success of the earnings level of 2000 and 2001. The table opposite
ForMotion program was the prime driver behind gives an overview of the development of the
this rise. The return on sales increased by 0.6 Volkswagen Group over the past five years. More
percentage points to 1.8%. After deducting current information about the economic position of the
and deferred income taxes, profit after tax amounted Volkswagen Group by business line and market can
to 1.1 billion (+ 60.7%). be found in the Divisions chapter starting on page 36.

summary of economic position value added statement

The Volkswagen Groups result in 2005 improved The value added statement indicates the added
primarily thanks to the success of our ForMotion value generated in the year by a company as its
program. For example, we made initial progress in contribution to the gross domestic product of its
optimizing our cost structures, particularly in the home country. In fiscal year 2005, the added value
Automotive Division. In addition, the Groups net generated by the Volkswagen Group was up 8.0%
cash flow returned to positive territory, thereby on the previous years figure, or 61,600 per
improving liquidity. However, the level of operating employee (+ 7.0%).

value added generated by the volkswagen group

Source of funds in million 2005 2004*

Sales revenue 95,268 88,963
Other income 4,904 5,176
Cost of materials 62,620 58,239
Depreciation and amortization 8,654 8,618
Other upfront expenditures 9,452 9,277
Value added 19,446 18,005

Appropriation of funds in million 2005 % 2004* %

to shareholders (dividend) 450 2.3 409 2.3
to employees (wages, salaries, benefits) 14,644 75.3 14,038 78.0
to the state (taxes, duties) 1,047 5.4 1,024 5.7
to creditors (interest expense) 2,634 13.5 2,246 12.4
to the Company (reserves) 671 3.5 288 1.6
Value added 19,446 100.0 18,005 100.0
* Restated.
 NET ASSETS, FINANCIAL POSITION AND EARNINGS PERFORMANCE 71

five-year review

2005 2004* 2003 2002 2001

Volume Data (thousands)
Vehicle sales (units) 5,193 5,143 5,016 4,996 5,107
Germany 1,019 940 916 908 969
Abroad 4,174 4,203 4,100 4,088 4,138
Production (units) 5,219 5,093 5,021 5,023 5,108
Germany 1,913 1,832 1,740 1,781 1,886
Abroad 3,306 3,261 3,281 3,242 3,222
Employees (yearly average) 345 343 335 324 324
Germany 179 179 174 168 167
Abroad 166 164 161 156 157

Fin ancial Data in million

Income Statement
Sales revenue 95,268 88,963 84,813 85,293 87,303
Cost of sales 82,391 78,430 74,099 71,082 72,779
Gross profit 12,877 10,533 10,714 14,211 14,524

Distribution expenses 8,905 8,167 7,846 7,560 7,554

Administrative expenses 2,383 2,309 2,274 2,155 2,154
Net other operating income 1,203 1,585 1,011 265 608
Operating profit 2,792 1,642 1,605 4,761 5,424
Financial result 1,070 554 251 775 1,015
Profit before tax 1,722 1,088 1,354 3,986 4,409
Income tax expense 602 391 351 1,389 1,483
Profit after tax 1,120 697 1,003 2,597 2,926

Cost of materials 62,620 58,239 53,849 51,606 53,437

Personnel expenses 14,644 14,038 13,878 13,313 13,213

Balance Sheet at December 31

Noncurrent assets 75,235 72,212 67,363 65,115 60,803
Current assets 57,846 55,391 50,783 43,781 43,621

Total assets 133,081 127,603 118,146 108,896 104,424

Equity 23,647 22,681 23,863 24,692 24,048

of which: minority interests 47 47 104 57 53
Noncurrent liabilities 56,125 56,230 46,270 39,769 32,064
Current liabilities 53,309 48,692 48,013 44,435 48,312

Total equity and liabilities 133,081 127,603 118,146 108,896 104,424

Cash flows from operating activities 10,810 11,457 8,371 10,460 10,038
Cash flows from investing activities 10,466 15,078 15,464 16,016 15,191
Cash flows from financing activities 1,794 6,004 11,423 4,623 6,983
* Financial Data restated.
I N N O VAT I O N I S T H E F U T U R E

>> Audi Q7: High-performance SUV sets new standards

One of the highlights of 2005 for the Audi brand was the world premiere of the Audi Q7 at the IAA
in Frankfurt. Small wonder, given that the inventor of the quattro permanent four-wheel drive presented
the high-performance SUV as one of the sportiest and most exclusive offroad vehicles of its time.
With its array of outstanding features, the Audi Q7 is a classic example of the brands innovative
power. Take for example the adaptive air suspension with its roll stabilization system the air
suspension and the electronically controlled damping system combine to form a perfect synthesis
of fascinating handling and supreme ride comfort. The dynamic benefits of the roll stabilization
system are particularly evident on country roads, since body movements about the longitudinal
axis are reduced to a minimum. Another innovative tour de force is the Audi side assist lane change
assistant, a world first that eliminates the problem of blind spots. The latest generation of Audi
cruise control also makes a contribution to increasing safety thanks to its braking guard, the
automatic distance control slows the SUV down to a standstill in critical situations. In addition,
optimum lighting is ensured by a further two innovations: while Xenon plus and adaptive light
turn night into day, the open sky system a 1.7 meter long panorama glass roof bathes the
vehicle interior in daylight. Each of these systems is a prime example of Audis innovative edge:
Vorsprung durch Technik.
I N N O VAT I O N I S T H E F U T U R E

>> Audi Q7: High-performance SUV sets new standards

One of the highlights of 2005 for the Audi brand was the world premiere of the Audi Q7 at the IAA
in Frankfurt. Small wonder, given that the inventor of the quattro permanent four-wheel drive presented
the high-performance SUV as one of the sportiest and most exclusive offroad vehicles of its time.
With its array of outstanding features, the Audi Q7 is a classic example of the brands innovative
power. Take for example the adaptive air suspension with its roll stabilization system the air
suspension and the electronically controlled damping system combine to form a perfect synthesis
of fascinating handling and supreme ride comfort. The dynamic benefits of the roll stabilization
system are particularly evident on country roads, since body movements about the longitudinal
axis are reduced to a minimum. Another innovative tour de force is the Audi side assist lane change
assistant, a world first that eliminates the problem of blind spots. The latest generation of Audi
cruise control also makes a contribution to increasing safety thanks to its braking guard, the
automatic distance control slows the SUV down to a standstill in critical situations. In addition,
optimum lighting is ensured by a further two innovations: while Xenon plus and adaptive light
turn night into day, the open sky system a 1.7 meter long panorama glass roof bathes the
vehicle interior in daylight. Each of these systems is a prime example of Audis innovative edge:
Vorsprung durch Technik.
74 Boards Group Topics Financial Communication Divisions Management Report

Business development
Net assets, financial position and
earnings performance
> Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

volkswagen ag (condensed, according to german commercial code)

Improvement in gross profit on sales

and financial result

net income for the year deliveries of goods and services. The financial result
In fiscal year 2005, Volkswagen AGs sales rose by rose by 6.4% to 3.6 billion in 2005. Here, the
5.3% year-on-year to 50.2 billion. 60.5% (61.0%) increased income from investments was offset by
of sales were generated outside Germany. Since the higher write-downs of financial assets. Volkswagen
cost of sales rose at a slower pace, at 4.6%, a slightly AGs result from ordinary activities was 941 million
positive gross profit on sales of 20.2 million was at year-end, corresponding to a year-on-year
recorded. The 9.7% rise in selling expenses is increase of 20.2%.
mainly attributable to the increase in sales promotion
measures necessitated by the intensified competitive net assets and financial position
situation. General and administrative expenses rose Volkswagen AGs total assets grew by 6.2% to
by 7.8% year-on-year. The ratio of selling, general 43.7 billion in 2005. There was a 33.5% reduction
and administrative expenses to sales was on a level in investments in tangible and intangible assets,
with the previous year. The other operating result particularly in non product-related items; this is also
decreased by 9.7% to 873 million. This was due in due to the increased implementation of our modular
particular to lower exchange rate effects relating to strategy. These investments related primarily to

income statement of balance sheet of volkswagen ag

volkswagen ag as of december 31

million 2005 2004 million 2005 2004

Sales 50,245 47,707 Fixed assets 21,351 22,439
Cost of sales 50,225 48,031 Inventories 3,146 2,815
Gross profit on sales + 20 324 Receivables 9,056 9,969
Selling, general and Cash and bank balances 10,110 5,903
administrative expenses 3,591 3,280 Total assets 43,663 41,126
Other operating result + 873 + 966 Equity 11,064 10,674
Financial result* + 3,639 + 3,421 Long-term debt 7,634 6,417
Result from ordinary activities + 941 + 783 Medium-term debt 5,863 7,288
Taxes on income 200 278 Short-term debt 19,102 16,747
Net income for the year 741 505
Retained profits brought forward 10 4
Appropriations to revenue reserves 290 90
Net retained profits 461 419
*Including write-downs of financial assets.
 VOLKSWAGEN AG (CONDENSED, ACCORDING TO GERMAN COMMERCIAL CODE) 75

new products at the production plants of Wolfsburg, dividend proposal

Kassel and Emden. Similarly, financial investments 290 million of the net income for the year was
were 27.6% lower than in the previous year, appropriated to other revenue reserves in
without accounting for the 4.0 billion additions accordance with section 58(2) of the AktG (German
from the merger of Volkswagen Beteiligungs- Stock Corporation Act). The Board of Management
Gesellschaft mbH with Volkswagen AG. Overall, and Supervisory Board are proposing to the Annual
fixed assets fell by 4.8% to 21.4 billion compared General Meeting to pay a dividend of 449.6 million
with 2004. from net retained profits, i.e. 1.15 per ordinary
Current assets rose by 19.4% to 22.3 billion. share and 1.21 per preferred share.
This was also due to the treasury shares of Volks-
wagen AG and other securities transferred following
the merger of Volkswagen Beteiligungs-Gesell-
schaft mbH and Volkswagen AG. The reduction in proposal on the appropriation
receivables was offset by an increase in inventories. of net profit
There was a significant increase in cash and bank
balances. 2005
Dividend distribution on
Equity (including special tax-allowable reserves) subscribed capital
rose by 3.7% to 11.1 billion, reflecting earnings (1,093 million) 449,580,332.85

development. The equity ratio fell by 0.7 percentage thereof on: ordinary shares* 322,242,014.05
preferred shares 127,338,318.80
points to 25.3% owing to the increase in total
Balance
assets. Provisions increased by 9.5% year-on-year (carried forward to new account) 11,008,768.21
to 16.9 billion as of December 31, 2005. Liabilities Net retained profits 460,589,101.06

also rose to 15.7 billion (+ 4.6%), of which 11.5 * Excluding 41,719,353 own shares that would carry dividend rights if they were
no longer held by the Company or its dependent companies on the date of
billion (10.9 billion) was interest-bearing. the Annual General Meeting.

employee pay and benefits at volkswagen ag

million 2005 % 2004 %

Direct pay including cash benefits 4,334 63.0 4,220 62.4
Social security contributions 965 14.0 961 14.2
Compensated absence 800 11.6 851 12.6
Old-age pensions 780 11.4 733 10.8
Total expense 6,879 100.0 6,765 100.0
76 Boards Group Topics Financial Communication Divisions Management Report

Business development
Net assets, financial position and
earnings performance
> Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
Report on expected developments

sales to the dealer organization research and development

In fiscal year 2005, Volkswagen AG sold 2,151,991 In Volkswagen AGs annual financial statements
vehicles to the dealer organization. This corresponds prepared in accordance with the Handelsgesetz-
to an 8.0% increase compared with the previous buch (HGB German Commercial Code), research
year. The percentage of vehicles sold outside Germany and development costs fell by 15.8% year-on-year
fell slightly to 66.5% (66.9%). to 2.0 billion. On December 31, 2005, 9,786 people
were employed in this area.
production
Output at Volkswagen AGs vehicle production purchasing volume
plants (Emden, Hanover and Wolfsburg) increased The purchasing volume across the six Volkswagen
by 2.3% to 956,108 vehicles. This rise was due AG sites in Germany increased to 22.8 billion
firstly to the higher number of new Golf Plus and (+ 9.4%), of which 71.4% (72.7%) was sourced
Passat models produced, and secondly to the from German suppliers. Of the total purchasing
success of the Commercial Vehicles business line. volume, 18.4 billion (16.4 billion) was spent on
Average daily production at Volkswagen AG fell production materials and 4.4 billion (4.4 billion)
by 2.4% year-on-year to 4,128 units. on capital goods and services.

number of employees expenditure on environtmental protection

At December 31, 2005, a total of 101,028 people Expenditure on environmental protection consists
were employed at the sites of Volkswagen AG, of investments and operating costs. The increased
excluding staff employed at subsidiaries. This was investment in environmental protection resulted
1.5% fewer than in the previous year. The total mainly from the rise in product-related measures,
number of employees includes 4,462 apprentices. which amounted to 18 million in 2005. Examples
The percentage of female employees was 13.8% of this are diesel particulate filters and investments
(13.4%) of the total headcount of Volkswagen AG. in plant and equipment made in order to comply
The Group employed 3,431 (3.4%) part-time workers. with the Euro 5 emissions standard. A total of
The percentage of foreign employees was 6.9% 9 million was invested in product-related
(7.2%). In total, 64.8% (63.7%) of employees held a environmental protection measures. Operating costs
vocational qualification in an area relevant to VW, relating to environmental protection decreased by
while 11.2% (11.2%) were graduates. The average 3.9% to 194 million.
age of Volkswagen employees in 2005 was 41.1.

volkswagen ag expenditure on environmental protection

million 2005 2004 2003 2002 2001

Investments 27 16 24 32 33
Operating costs 194 202 195 187 191
 VOLKSWAGEN AG (CONDENSED, ACCORDING TO GERMAN COMMERCIAL CODE) 77

operating costs for environmental protection at

volkswagen ag in 2005
share of environmental protection areas as percent

Water pollution control 37.8

Waste management 37.5

Air pollution control 18.0

Soil clean-up 3.7

Noise control 1.8

Conservation/landscape care 1.2

0 10 20 30 40 50 60 70 80 90 100

business development risks dependent company report

at volkswagen ag The Board of Management of Volkswagen AG has
The business development of Volkswagen AG is submitted to the Supervisory Board its report on
exposed to essentially the same risks as the the past fiscal year in accordance with section 312
development of the Volkswagen Group. These risks of the German Stock Corporation Act (AktG),
are explained in the Risk Report on pages 94 to 99 containing the following concluding declaration:
of this Annual Report.
We declare that, based on the circumstances
risks arising from known to us at the time when the transactions with
financial instruments affiliated companies within the meaning of section
Risks for Volkswagen AG arising from the use of 312 of the German Stock Corporation Act (AktG)
financial instruments are the same as those to were entered into, our Company received an
which the Volkswagen Group is exposed. An appropriate consideration for each transaction.
explanation of these risks can be found in the Risk No transactions or measures were either undertaken
Report on pages 98 to 99 of this Annual Report. or omitted on the instructions of or in the interests
of the State of Lower Saxony or other affiliated
companies in the year under review.

The annual financial statements of Volkswagen AG prepared in accordance

with the German Commercial Code (HGB) will be announced in the
Bundesanzeiger (Federal Gazette) and filed with the commercial register at the
Wolfsburg Local Court. They may be obtained free of charge from Volkswagen
AG at the address shown under Contact Information in this Annual Report.
 I N N O VAT I O N I S A G I L I T Y

>> SEAT Leon: Innovation guarantees driving pleasure

Auto emocin is more than just a slogan, it is the heart and soul of the SEAT brand expressed in
two words. Launched in 2005, the SEAT Leon is a prime example of the emotional and sporty design
that is the calling card of this Spanish company. Its Agile Chassis a SEAT-specific attribute that
ensures sporty driving together with the integrated four-arm multilink axle, is one of the outstanding
features of the new SEAT model generation. This combines ultra-precise and agile handling characteristics
with superior comfort levels. In addition, the new SEAT Leon has increased active safety thanks to
a state-of-the-art Electronic Stability Program (ESP) with Driver Steering Recommendation (DSR).
In critical situations, the Electronic Stability Program sends a signal to the steering, prompting the
driver to intuitively counteract any problems. In this way, the Driver Steering Recommendation
succeeds in reducing the braking distance by five to ten percent, particularly on roads with different
coefficients of friction (e.g. dry on the left, rain or snow on the right). Most importantly, it is still
the driver who ultimately decides how to react.
 I N N O VAT I O N I S A G I L I T Y

>> SEAT Leon: Innovation guarantees driving pleasure

Auto emocin is more than just a slogan, it is the heart and soul of the SEAT brand expressed in
two words. Launched in 2005, the SEAT Leon is a prime example of the emotional and sporty design
that is the calling card of this Spanish company. Its Agile Chassis a SEAT-specific attribute that
ensures sporty driving together with the integrated four-arm multilink axle, is one of the outstanding
features of the new SEAT model generation. This combines ultra-precise and agile handling characteristics
with superior comfort levels. In addition, the new SEAT Leon has increased active safety thanks to
a state-of-the-art Electronic Stability Program (ESP) with Driver Steering Recommendation (DSR).
In critical situations, the Electronic Stability Program sends a signal to the steering, prompting the
driver to intuitively counteract any problems. In this way, the Driver Steering Recommendation
succeeds in reducing the braking distance by five to ten percent, particularly on roads with different
coefficients of friction (e.g. dry on the left, rain or snow on the right). Most importantly, it is still
the driver who ultimately decides how to react.
80 Boards Group Topics Financial Communication Divisions Management Report

Business development
Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
> Value-enhancing factors
Risk report
Report on expected developments

value-enhancing factors

Passion and performance as a basis

for customer-oriented processes

We are working to develop tomorrows mobility solutions for

our customers. To this end, we are creating innovative
processes in operational areas. This is made possible by the
commitment and creativity of our employees. Sustainability
is the watchword in all parts of the Group when it comes to
environmental issues.

In addition to the financial performance indicators previously the reserve of the premium segment.
outlined earlier, there are also a number of non- These include the electronic parking brake and the
financial performance indicators that are of key new Press and Drive starting system. Another
importance for the development of the Volkswagen highlight is the automatic distance control feature
Group. In the areas of research and development, known as Adaptive Cruise Control (ACC). And,
procurement, production, sales and quality assurance, needless to say, the safety features are superb:
we have created processes that grow our enterprise every Passat offers excellent occupant protection
value on a sustainable basis. Other value-enhancing as confirmed by external sources, notably the
factors include our employees and a sustainable European New Car Assessment Programme
approach to using resources. (EuroNCAP) test, in which the Passat was awarded
five out of a possible five stars.
main development areas reflected In September 2005, the new Volkswagen Eos
in product rollout Convertible Coup was unveiled to the world at the
In fiscal year 2005, research and development International Motor Show (IAA) in Frankfurt. Its
activities focused primarily on improving functionality, unique, innovative five-piece CSC roof is a coup,
quality, safety standards and the environmental sunroof and cabriolet roof all rolled into one. With
compatibility of Group products. In the case of all its functionality and loving attention to detail, this
new models, advances that we achieved during new four-seater is suitable for everyday driving all
the development process were systematically year round.
implemented in the product: In 2005, we presented a world first with the
In terms of functionality, the Fox is the first Golf GT: its TSI engine is the first series-produced
entry-level model to feature a new body concept passenger car engine to boast a twin charger a
that creates a superior sense of spaciousness in the combination of direct petrol injection and dual
interior in spite of the vehicles compact outer charging with a mechanically driven supercharger
dimensions. In addition to its outstanding design, and a secondary turbocharger that delivers
the new Passat also boasts an array of optimized outstanding performance while keeping
and newly developed features, with numerous consumption levels low. With the launch of the
innovative functions and comfort features that were new Caddy and Touran-EcoFuel natural gas models
 VALUE-ENHANCING FACTORS 81

at the beginning of 2006, we have made another production model will look. Also in Geneva,
valuable contribution to reducing fuel consumption Lamborghini exhibited Concept S an extreme
and emissions. and futuristic interpretation of a roadster.
The innovative Audi Q7, showcased by the Audi At the Tokyo Motor Show in October 2005, the
brand at the IAA, features the new Audi side assist Volkswagen brand presented the prototype of the
an active safety system that helps drivers change EcoRacer, which may well go down in history as one
lanes and warns them when a vehicle could be of the most economical sports cars of its time. It
obscured by a blind spot. The Audi A6 Avant was combines emotional and sophisticated sportiness
also fitted with a new innovation LED rear lights with exceptional fuel-efficiency and versatility a
that respond faster than conventional lights. Audi rare and eminently fascinating marriage of opposites
engineers are also working on an intelligent form of with an average fuel consumption of 3.4 l and a top
rear light that warns drivers behind of an emergency speed of 230 km/h.
braking maneuver and which uses sensors to adapt In Tokyo, the Audi brand treated enthusiasts to a
its light intensity to prevailing light and visibility revelation in the sporty compact class: the Shooting
conditions. Brake Concept study offers a further innovative
interpretation of the current Audi design language
studies point the way to the future and combines the powerful dynamics of a sports car
In addition to the exciting array of newly launched with superb functionality and a new sense of
models, numerous concept cars were also unveiled spaciousness.
in 2005. At the North American International Auto
Show in Detroit in early January, the Volkswagen systematic innovation management geared
Passenger Cars brand presented the Ragster the towards customer requirements
future of that most unique of Volkswagens, the Irrespective of whether innovations are integrated
Beetle. Besides the noticeably lower roof with its into new models to reflect technological advances or
large ragtop, the wings, bumpers, headlights and customer demand, global scouting the practice of
rear lights also underwent a makeover. The Audi visiting markets to sample and take on board local
brand attracted the interest of sporty drivers too: trends is of prime importance in both instances.
the allroad quattro study is based on the new Audi This is because customer preferences vary
A6 Avant and is characterized by substantial ground enormously in our markets across the globe.
clearance, with visible underbody protection and a Individuality is prized everywhere, and the
striking front and rear. As well as this, the vehicle characteristics of different regions must be taken
also comes with the Audi lane assist feature: to into account in order to succeed in the local market.
help avoid accidents, the steering wheel vibrates It was with a view to zoning in more closely on
whenever the driver moves out of lane without this regional influence that, for instance, an
signaling. March saw the Skoda brand take the interdisciplinary team of engineers, sales people,
public by surprise at the Geneva Motor Show with marketing experts and designers was sent to the
its Yeti study a modern, compact and extremely USA for the Moonraker project in 2005. Here,
functional Sports Utility Vehicle. At the same event, they capture the specific American spirit, express
the SEAT brand presented the coup-style prototype it in technological terms and transfer it to the
of the Leon, thus hinting at how the future development departments. Following the success
82 Boards Group Topics Financial Communication Divisions Management Report

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of these scouting activities, we now plan to translate year-on-year reduction in capitalized

them to other relevant markets. development costs
Using a centralized system, we keep track of Research and development costs in the Automotive
innovations based on customer requirements and Division were somewhat lower in the year under
new technological solutions. In this way, we are review than in the previous year. At the same time
able to match innovations with individual models, the progress of development activities for individual
thereby increasing their competitive edge. 2005 projects meant that a smaller proportion was
also saw the introduction of product workshops, capitalized, which in turn led the capitalization
events where employees from all parts of the ratio to fall to 35.1% (36.1%). The research and
company involved in the product development development costs recognized in the income
process come together to optimize not only statement in accordance with IFRSs amounted to
customer-related aspects, but also product costs. 4.8% (4.7%) of the Automotive Divisions sales
revenue.
employees successful with patents Including the vehicle-producing investments
In 2005, we secured 1,340 patents for the Volks- Shanghai-Volkswagen Automotive Company Ltd.
wagen Group, of which 1,024 were in Germany and and FAW-Volkswagen Automotive Company Ltd.,
316 abroad. The large number of patent applications which are accounted for using the equity method,
once again indicates the highly innovative nature the Research and Development function employed
of our employees. The patent applications were 21,856 people Group-wide (+1.9%) at December 31,
in particular related to the area of combustion 2005. This corresponds to 6.3% of the total
engines. headcount.

research and development costs

in the automotive division

million 2005 2004 %

Total research and development costs 4,075 4,164 2.1
of which capitalized 1,432 1,501 4.6
Capitalization ratio in % 35.1 36.1
Amortization of capitalized development costs 1,438 1,134 + 26.8
Research and development costs recognized in the income statement 4,081 3,797 + 7.5
 VALUE-ENHANCING FACTORS 83

supplier management as a key component increased procurement activities in Eastern Europe

of our procurement strategy and are already enjoying additional price and
In 2005, the main focus of our supplier manage- locational advantages. North America also plays
ment activities was on involving suppliers to a an important role in our procurement activities.
greater extent in our cost optimization initiatives. Nonetheless, in addition to traditional markets,
After two years, we brought the PPO program emerging countries such as China, India and Russia
which involved working closely with our suppliers are increasingly attractive for us as supply sources.
to analyse potential along the entire value chain to Their key advantages are that our local production
a successful close. Nonetheless, supplier integration facilities, for example in China, can be supplied
continues to be a key factor in our procurement directly and offer significant potential for optimizing
strategy. For this reason, the first ever supplier costs, particularly with regard to vehicles
workshop meeting was held in the year under manufactured in Europe. When expanding our
review; over a number of days, selected suppliers procurement activities in these countries, we take
worked together with staff from our procurement into account factor costs, exchange rate effects and
and technical development areas with a view to local supplier expertise as regards quality and
optimizing costs. With the additional support of development.
the production, quality assurance and sales areas,
it was possible to identify a nine-digit savings quality assurance embedded
potential and to determine how this could be in the supply chain
achieved. In the year under review, we extended our close
cooperation with suppliers by initiating a new
international markets quality drive in the area of procurement. The aim of
as a procurement source this initiative is to reduce shortcomings in supplied
We see the use of procurement markets worldwide parts that have an impact on customer satisfaction.
as an important means of driving value. Germany In 2005, the focus of our activities was on the
and its West European neighbors continue to be the introduction of ways to inspect the quality of
main sources of procurement for the Volkswagen painted surfaces in the vehicle interior. Overall,
Group, primarily owing to their technical expertise we are using this competition-driven campaign to
and geographical proximity to our production establish a fixed base of suppliers offering solid
locations and extended supplier base. In the wake of and sustainable quality.
the eastward expansion of the EU, we have also
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> Value-enhancing factors
Risk report
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purchasing volume the proven turntable concept in order to react flexibly

The purchasing volume of the Volkswagen Group to fluctuations in demand this means that different
grew by 9.7% to 66.1 billion in the year, of which types of vehicles can be manufactured on the same
52.1% (56.2%) was sourced from domestic production lines, depending on the individual
suppliers. demand levels. For example, the Polo is a multi-
location product that can be manufactured at five
successful production start-ups different plants simultaneously if required.
For the Volkswagen Group, 2005 was characterized
by new model initiatives, with a wide variety of new innovative production processes
products and start-ups. A total of 18 new vehicles Parallel to increasing the flexibility of our production
went into production at our plants across the world. activities over the past year, we have analysed and
Among the most important production start-ups were optimized our production standards with a view to
the Audi Q7 and the Bugatti Veyron 16.4. increasing our productivity and reducing our
production costs. Employees belonging to the
flexible production individual brands and plants have joined forces to
The production output of the Volkswagen Group is develop uniform production standards, the
the result of interaction between 44 production implementation of which is overseen by the Group.
locations worldwide; vehicles are manufactured at a The outcome was a set of standardized production
total of 32 Group locations. Multi-brand locations workflows that serve as a solid basis for a cost-
plants producing models from several Group brands optimized production system.
are becoming more and more important. The In future, we plan to develop new production
advantage of these locations is that they permit us to technology across the Group by implementing a
react very quickly to market trends and to use existing uniform system known as scouting. By adopting
technology and expertise even more intensively. A this approach, which is closely linked to the research
prime example is the production of the Audi Q7 and development scouting process, we can ensure
at the Bratislava plant, where it can draw on the that scientific innovations are used early on in the
technology and expertise used to manufacture the production process.
Touareg. As well as this, we are continuing to use

purchasing volumes by business line and market

billion 2005 2004 %

Volkswagen brand group 43.2 40.0 + 8.1
Audi brand group 20.8 18.3 + 13.6
Commercial Vehicles 2.1 1.9 + 7.9
Volkswagen Group 66.1 60.2 + 9.7
Europe/Remaining markets 53.7 49.4 + 8.6
North America 2.8 2.1 + 33.3
South America/South Africa 5.1 3.7 + 38.1
Asia-Pacific 4.5 5.0 10.4
 VALUE-ENHANCING FACTORS 85

vehicle production locations of the volkswagen group

share of aggregate production 2005 as percent

North America Europe*

1 location (6%) 22 locations (68%)

Asia
3 locations (12%)

South America
5 locations (12%)
South Africa
1 location (2%)

* Of which Germany 8.

numerous production milestones Company. In this respect, customer satisfaction

At the end of May, the 100 millionth vehicle bearing forms the basis for customer loyalty. Objectives such
a VW badge rolled off the assembly line at our main as repeat purchases or sales of further Group
plant in Wolfsburg. In the same month, the SEAT products and services can be derived directly from
plant in Martorell, Spain, celebrated the production here. In all major world markets, we constantly
of its five millionth vehicle. Almost half a year later, monitor customer satisfaction with Group brands.
in November, the Wolfsburg plant announced yet The findings are analysed and evaluated with a view
another production milestone: the 24 millionth to developing appropriate measures to meet these
Volkswagen Golf. Also in November, the Skoda brand objectives. In 2005, the Group and its brands once
delivered its five millionth vehicle since joining the again recorded a level of customer loyalty that
Volkswagen Group in 1991. The beginning of compared very favorably to its competitors.
December saw the continuation of a more recent
success story when the 500,000th Touran left the strong brands are the basis for our success
Auto 5000 GmbH production shop in Wolfsburg. The By systematically implementing its clearly positioned
last major milestone of the year was celebrated by brand portfolio, the Group is able to offer attractive
the Brussels plant, where production figures reached vehicle and lifestyle concepts in all segments. The
the 6.5 million mark. success of the Group-wide brand positioning process
is illustrated by the positive awareness levels enjoyed
satisfied customers remain by the high-volume Volkswagen, Audi, Skoda and
loyal to our brands SEAT brands, particularly in the German market.
The aim of the Volkswagen Group and its brands is to Whereas the Volkswagen brand has been established
establish long-term ties between customers and our worldwide as a producer of quality vehicles in all
products, thereby ensuring the lasting success of our segments, we have succeeded in positioning the
86 Boards Group Topics Financial Communication Divisions Management Report

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Net assets, financial position and
earnings performance
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Risk report
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Audi brand as a premium brand in the international these points, we measure how effectively customer
market. The Skoda brand enhanced its image in all expectations have been met. This market-readiness
relevant areas and, in addition to high confidence review makes a key contribution towards the start-up
levels among consumers, is also seen to offer good quality of products, and is therefore instrumental in
value for money and intelligent, functional vehicle increasing customer satisfaction.
concepts. With the introduction of the SEAT Leon, the Our production processes are continually
SEAT brand has developed into one of the strongest examined in all plants throughout the world. The
personalities in the mid-class. fundamental requirement for a robust process is that
In todays global competition, it is no longer the product should be ready for mass production. In
sufficient to differentiate products purely on the basis order to eliminate production process problems in
of product features. In addition to functional aspects, advance, quality assurance increasingly ensures that
it is the emotions and intangible values rooted in the production issues are reflected in development
brands that allow us to position ourselves effectively activities. Quality assurance within the procurement
against competitors and to keep our customers process, an element that has already been touched
satisfied. Particularly in view of the conquest upon, is of great importance in this regard.
strategies pursued by competitors, our strategic We have direct contact with customers in our
Group-level brand control, which integrates all points dealerships and workshops. The key to customer
of contact with the customer, is a clear competitive satisfaction is attending to their every need at these
advantage. points of contact. Quality assurance comes into play
here, by reinforcing operations with systems and
quality strategy: volkswagen excellence methods, thereby helping to solve problems swiftly.
For the Volkswagen Group, quality assurance goes In addition, it explores factors such as speed of
much further than the traditional examination and response when processing orders, quality of advice
control approach: for us, customer satisfaction is at given to customers and friendliness of staff. This is
the heart of all our efforts. In view of this, the aim is because quality is what is perceived by the customer
not only to guarantee that customer requirements are not just with regard to the product itself, but also
continually met along the entire product develop- to interaction with customers.
ment process, but also that these are integrated into The importance attributed by Volkswagen to
the process as early as possible. To do this, existing improving quality is also evident from the plans to
trends must first be identified, followed by measures incorporate the quality aspect in the management
to ensure the technical implementation of customer incentive system.
requirements.
Quality assurance work is mainly concerned with phased implementation of 2004 volkswagen
three core elements: market-ready products, robust ag collective wage agreement
processes and excellent customer care. In order to In November 2004, a new collective wage agreement
examine the extent to which our products are ready was reached for the employees of Volkswagen AG;
for the market, each model passes a number of we implemented the main components step by
different milestones in its development process. At step in fiscal year 2005. New hirings made after
 VALUE-ENHANCING FACTORS 87

January 1, 2005 are subject to the conditions of Above all, we aim to reduce the workforce through
the new agreement. These conditions include new early termination of employment in the form of part-
remuneration structures and longer working hours. time schemes for employees close to retirement. In
Further details about the remuneration system are addition, we offer early retirement schemes and age-
currently being negotiated by the parties to the based termination agreements for employees born
agreement. In particular, conditions for employees between 1941 and February 1948. In the case of
in upper pay brackets are to be revised. employees in this age bracket who do not opt for
In order to counteract the emerging lack of either of the possibilities mentioned, a system will be
specialist employees, the StiP integrated degree and implemented whereby their working hours and gross
traineeship scheme was expanded substantially in income will be reduced progressively up to the
2005. This scheme makes it possible for high- earliest possible retirement age.
achieving school-leavers to combine their studies As well as this, we offer termination agreements
with hands-on training. If they perform well in their with improved conditions. Employees who have been
final examinations within the specified timeframe, promised reemployment are also entitled to accept
they can proceed to a career with Volkswagen, these termination agreements. In addition, employees
complete with degree and skilled workers certificate such as these have the option of extending the
(Facharbeiterbrief). promise of reemployment from the former maximum
Following negotiations with the Central Works of five years to eight years.
Council and the IG Metall trade union, the Board of With our internal job re-deployment agency
Management resolved to have the Companys PEB-B, we have a flexibility tool that has already been
compact Sports Utility Vehicle produced from 2007 used to relocate 1,990 employees to new areas of
by Auto 5000 GmbH at its Wolfsburg location. As a activity. In the future, this turntable approach will
result, some 1,000 Volkswagen AG trainees will be also be used to deploy staff on a short-term, needs-
given permanent employment contracts at Auto 5000 driven basis.
GmbH. Furthermore, from 2008 onwards, the Emden
plant will produce an upper mid-range model at time asset model and
competitive terms within the framework of the company pension plan
Volkswagen wage agreement. Since 1998, the Time Asset model has offered
Volkswagen Group employees in Germany a more
increased competitiveness flexible means of planning their lifelong working
Personnel costs will be reduced further to allow us time. Accumulated working time and financial
to continue producing competitively priced vehicles resources such as bonus payments are invested in a
in Germany. The package of workforce reduction special fund and later converted into a time credit
measures includes the reorganization of working for early retirement. Owing to the revision of the
hours and the adjustment of personnel capacity demographic working time component from the
within the framework of existing collective wage 2004 collective wage agreement, the level of credit
agreements. rises continually. This tool gives Volkswagen
88 Boards Group Topics Financial Communication Divisions Management Report

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Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
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> Value-enhancing factors
Risk report
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employees the option of leaving the company before Employees who are absent as a result of an illness or
reaching the statutory retirement age either directly accident are integrated into working life again
or in the future. Since first being issued, the Time quickly and effectively with the aid of a systematic
Assets held in trust by Volkswagen Pension Trust e.V. integration management system. Our aim here is to
have earned an average annual yield of 6.1% p.a. increase job satisfaction and productivity among our
At the end of 2005, 22 other Group companies staff and to reduce health-related absences.
apart from Volkswagen AG administered their
company pension plan by means of a pension fund training secures know-how
that is also held in trust by Volkswagen Pension Trust In additional to an extensive range of technology and
e.V. Since the scheme was launched in July 2001, quality seminars and team training, we offer staff
a total of 870 million has been transferred to the development programs tailored for individual target
pension fund. In the year under review, pension groups such as supervisors, planners and developers.
payments from Group assets and appropriations to These programs enable us to meet the increasing
the pension fund corresponded to 6.4% (6.6%) of requirements of both internal and external custom-
the Groups gross cash flow increased by these ers. Our new product start-ups are accompanied by
payments. Further information on pensions can be comprehensive training projects.
found in the notes to the consolidated financial
statements (pages 161 to 165). knowledge management increases ripple
effect of the formotion program
renewability at volkswagen Based on a wide range of established knowledge
In 2005, our employees in Europe submitted a total management tools, we have developed innovative
of 147,858 improvement ideas. The 75,583 ideas concepts as part of the ForMotion program with a
that were implemented increased the quality of our view to boosting employee know-how, generating
products, rendered processes more efficient and new knowledge and communicating this across the
reduced costs by 257.3 million. Some 29.9 million Group. This is because the peerless expertise of
worth of bonuses were awarded to those who our staff is instrumental in ensuring our long-term
submitted practicable ideas as an acknowledgement performance.
of their creativity and active involvement.
dual vocational training
improved performance through At Volkswagen, vocational training is the key to
improved health securing qualified and motivated new talent for our
The Volkswagen Group offers its employees a wide Company. The extensive and varied range of
variety of programs aimed at improving or preserving vocational training reflects the wide spectrum of
their health. For example, health parks and fitness specialist areas within the Volkswagen Group.
centers at plants allow employees to keep fit. In Starting in 2007, the German dual vocational training
addition, early detection programs (cancer screening, system will be influenced significantly by general
thyroid gland screening, etc.) help prevent illness conditions in Europe. Volkswagen is already actively
and avoid the health-related costs that this entails. involved in shaping this process today.
 VALUE-ENHANCING FACTORS 89

health status of manufacturing plants in the volkswagen group

as percent

2005 97.2

2004 97.3

2003 97.1

2002 96.7

2001 96.7

96,4 96,6 96,8 97,0 97,2 97,4

selection and development of management attractive workplace. These cover the issue of all
The Volkswagen management orientation workshop categories that contribute to increasing the success
allows potential management candidates to be of the Volkswagen Group in the long term. Starting in
selected, a procedure that is vital for securing the 2006, the Volkswagen Passenger Car brand will lay
long-term competitiveness of the Group. The even greater emphasis on quality, which will also
selection procedure is based on a comprehensive be reflected in management bonuses.
requirements profile in which our Group Guidelines
also play a central role. regular environmental
protection conferences
target agreement system: Volkswagen Group environmental management
clarity instead of complexity ensures that all environmental protection activities
Management objectives must be measurable, or, at are undertaken in line with our sustainable
the very least, observable. Our target agreement development model. In addition to our environmental
system builds on the strategy process and is firmly policy and environmental management system, the
integrated at all levels of management. Our top main pillars of environmental organization within the
managers in all Group companies set individual Group include our regional conferences. In 2005,
targets together with the executives reporting following events in Mexico and South Africa, our
directly to them and finalize the target proposals regional environmental protection conferences were
within the value chain with their internal customers also held in China, Brazil and Argentina. The aim
and suppliers. Five of the target areas derived from of these conferences is to improve environmental
the Group strategy must be taken into account in protection measures in our plants. In order to
every target agreement: customer and market, achieve this, we increase employee awareness of
innovation, productivity, value orientation and environmental protection, transfer the necessary
90 Boards Group Topics Financial Communication Divisions Management Report

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Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
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Risk report
Report on expected developments

know-how and agree objectives. By using regional Volkswagen at the International Motor Show (IAA) in
conferences in this way, we have an environmental Frankfurt in September 2005. This system combines
control tool that helps us to avoid liability and image the benefits of diesel and petrol engines and may
risks, to minimize pollution at our plants and to cut well prove to be one of the most important new
costs. In the future, we will hold regular regional engine concepts of the coming decades.
conferences every three years at the Group locations. Closely linked to the fuel strategy is our multistage
drivetrain strategy, in which hybrid drives play a
drivetrain and fuel strategy central role in addition to petrol and diesel engines.
Sustainable mobility means reducing dependency on In order to research alternative drive technology and
oil and preventing greenhouse gas emissions. Our to examine the possibilities of series production, we
fuel strategy is geared towards using and developing will intensify our work together with international
a variety of energy sources, notably CO2-neutral universities and strategic partners such as Porsche.
biomass. Accordingly, the Volkswagen Group has Touran and Audi Q7 models with hybrid drives will
pledged its support to the EU Biofuel Directive, be launched in 2008. The Caddy and Touran-EcoFuel
which aims to increase the proportion of renewable models, which are capable of running on either
fuels used across Europe to 5.75% by 2010. At natural gas or petrol, will be available in the first half
present, ethanol and rape methyl ester, known as of 2006.
biodiesel, are fuels that are suitable for use in this In the long term, we are concentrating our efforts
regard. In the medium term, we see the most promise on developing renewable hydrogen for fuel cells, an
in biomass-to-liquid fuel, known as SunFuel. This approach which demonstrates the highest level of
can be used in todays engines and reduces particle sustainability in terms of efficiency and CO2 emissions.
emissions by up to 40% and nitrogen oxide by up to At the World Environment Day 2005 event in San
30%. We also plan to use synthetic fuels such as Francisco, Volkswagen presented the most recent
SynFuel, which can be generated from both natural developments in its Touran HyMotion fuel cell drive.
gas and coal. A prime example of this is the Combined The Audi brand demonstrated its A2H2, also powered
Combustion System (CCS), which was showcased by by fuel cells, in Munich in April 2005.
 VALUE-ENHANCING FACTORS 91

volkswagen emissions strategy average CO2 emissions of its new vehicle fleet to
The primary objective of our emissions strategy is to 140 grams per kilometer by 2008. In addition,
minimize the emission of pollutants such as particles, the Groups Climate Strategy working group is
nitrogen oxide and hydrocarbons. To this end, we developing further ways to cut down on emission
aim to make significant improvements to the engine levels, such as traffic management and driver
combustion process, thereby preempting future legal training.
requirements. In addition, many of our new vehicles The Energy working group develops and
feature either as standard or as an option a diesel coordinates measures for saving energy in our
particulate filter that reduces particle emissions to plants. These include using the heat produced by
a minimum. These include the Golf, Golf Plus, Jetta, electricity generation to keep the plant warm in the
Touran, Passat, Passat Variant, Sharan, Touareg, winter and cool in the summer. As well as using
Phaeton and Caddy models. By 2009, all model fuel more efficiently, this approach reduces both
series in Germany will be equipped with the latest emission levels and energy costs.
particulate filter technology. As of the first quarter of Together with SiCon GmbH, we have developed
2006, it will be possible to retrofit particulate filters a plant for processing shredder residue which
to Golf, Golf Plus, Jetta, Touran, Skoda Octavia, Audi enables us to reuse end-of-life vehicles and
A3, SEAT Toledo, SEAT Altea, SEAT Leon and Caddy electronic waste in an economical and environ-
diesel models currently available in the market. mentally compatible way. This process will increase
Further models will follow. the proportion of end-of-life vehicle components
recycled from the current rate of 80% to
environmental protection measures taken approximately 95%.
As a member of the European Automobile Further information on Volkswagen AG
Manufacturers Association (ACEA), Volkswagen was environmental management is available on our
a party to the voluntary agreement to reduce the website at www.volkswagen-nachhaltigkeit.de
I N N O VAT I O N I S A R E F U S A L T O C O M P R O M I S E

>> Lamborghini Gallardo: Innovation ignites dynamics

In 2003, Lamborghini created the 382 kW (520 bhp)* Gallardo, a high-performance sports car that
set a new yardstick in its segment. Two years later, the speedy two-seater capable of speeds well
in excess of 300 km/h made its debut as an open-top Spyder. As an alternative to the standard
six-speed gearbox, this high-speed wonder is also available with a sequential transmission known
as e gear. The automatic transmission boasts a particularly dynamic form of innovation: the Thrust
Mode (TM), a newly designed launch control. This electronic system allows seamless acceleration,
virtually at the touch of a button. When the launch control is activated, the Earth stands still for a
split second the calm before the mighty storm. On full throttle, the Gallardo zips automatically from
second gear through to sixth perfect grip and maximum thrust all the way. The automatic acceleration
is cut off immediately as soon as the drivers foot leaves the pedal or touches the brakes. Systems
such as the Lamborghini launch control represent the sporty side of innovative driver assistance
systems.

* Fuel consumption in l/100 km: 24.8 urban; 12.4 extra-urban; 17.0 combined;
CO2 emissions in g/km: 400.
I N N O VAT I O N I S A R E F U S A L T O C O M P R O M I S E

>> Lamborghini Gallardo: Innovation ignites dynamics

In 2003, Lamborghini created the 382 kW (520 bhp)* Gallardo, a high-performance sports car that
set a new yardstick in its segment. Two years later, the speedy two-seater capable of speeds well
in excess of 300 km/h made its debut as an open-top Spyder. As an alternative to the standard
six-speed gearbox, this high-speed wonder is also available with a sequential transmission known
as e gear. The automatic transmission boasts a particularly dynamic form of innovation: the Thrust
Mode (TM), a newly designed launch control. This electronic system allows seamless acceleration,
virtually at the touch of a button. When the launch control is activated, the Earth stands still for a
split second the calm before the mighty storm. On full throttle, the Gallardo zips automatically from
second gear through to sixth perfect grip and maximum thrust all the way. The automatic acceleration
is cut off immediately as soon as the drivers foot leaves the pedal or touches the brakes. Systems
such as the Lamborghini launch control represent the sporty side of innovative driver assistance
systems.

* Fuel consumption in l/100 km: 24.8 urban; 12.4 extra-urban; 17.0 combined;
CO2 emissions in g/km: 400.
94 Boards Group Topics Financial Communication Divisions Management Report

Business development
Net assets, financial position and
earnings performance
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to German Commercial Code)
Value-enhancing factors
> Risk report
Report on expected developments

risk report

Managing risks and exploiting opportunities

It is almost impossible to be successful without entering into

risks. For a business to be successful, however, it is even
more important that risks are managed responsibly. Our
comprehensive risk management system assures the security
we need to manage our activities.

aims and features of the managers. This means the Board of Management
risk management system always has an overall picture of the current risk
As a result of its broad-based global services offering, situation. If necessary, appropriate countermeasures
the Volkswagen Group is able to exploit a large can be introduced immediately.
number of economic opportunities. At the same time, The efficacy of our risk management system has
however, this means it is also exposed to risks. The been assessed by the auditors, who established that
aim of our risk management system is therefore to it conforms to the requirements of the Gesetz zur
identify potential risks at an early stage so that suitable Kontrolle und Transparenz im Unternehmensbereich
measures can be taken to avert the threat of loss to (KonTraG German Act on Control and Transparency
the Company, and any risks that might jeopardize the in Business). All measures required to ensure early
continued existence of the Volkswagen Group can be detection of risks that could jeopardize the Companys
ruled out. continued existence were taken.
By using an efficient risk management system,
we are able to promptly identify risks, assess them individual risks
and counter them. In doing so, we are prepared to The following information on individual risks relates
consciously enter into transparent risks that are to our 2006-to-2008 planning period.
proportionate to the benefits expected from the
business. Macroeconomic risk
The risk management system is coordinated We see particular risks to global economic growth
centrally by Group Controlling in conjunction with in persistently high commodity and energy prices
Group Auditing, and its efficacy and adequacy are and the resulting inflationary tendencies, as well as
reviewed on a regular basis. We operate a Group- in ongoing imbalances in foreign trade, which could
wide reporting system aimed at identifying risks at lead to relatively sharp changes in exchange rates.
an early stage. In addition, we regularly monitor the In particular, fresh weakness in the US dollar and a
current risk situation on the basis of written and more restrictive monetary policy in major indus-
verbal surveys by the Group companies risk trialized nations would lead to a clear reduction in
 RISK REPORT 95

growth in these countries. In addition, changes in number of existing and emerging markets and is
legislation, taxes or customs duties in individual therefore well able to balance shifts in volume
countries could have a negative impact on business between the individual markets. In addition, we are
development. able to meet regional requirements by forming
The risks mentioned above could place strategic partnerships.
considerable strains on the Volkswagen Group. Again, in fiscal year 2005, the price pressure
We describe how we manage these risks in the prevailing in major markets forced us to intensify
following paragraphs on the individual risk our sales promotions, although these are still on
categories. a far smaller scale than those offered by our
competitors. We continue to approve loans for
Sector-specific risk vehicle finance on the basis of the same cautious
In fiscal year 2005, global passenger car markets principles applied in the past. If other auto
grew mainly as a result of higher demand in Asia manufacturers were to step up their sales incentives
and South America. We also see further growth even further, we as a supplier of volume models
potential in the countries of Central and Eastern would be particularly hard hit.
Europe. In some of these markets, though, there The tougher conditions imposed on lenders by
are high customs barriers, or there are minimum the Basel Capital Accord (Basel II) make it difficult
requirements for locally produced content. These for our dealerships to finance their operations via
factors are all constraints preventing a larger bank loans. We are responding to this by developing
increase in sales volumes. We are also exposed to our own system of dealer support: via our financial
risks in established markets. These relate mainly to services companies, we offer dealers financing on
price levels due to the wide coverage of the markets attractive terms.
in question. In particular, the massive discounts in
the US car market, which have now spread to Research and Development risk
Western Europe, are increasing the pressure on the A company that develops new products always
entire sector. China is also marked by ongoing price faces the risk that customers will not accept these
cuts as a result of new manufacturers entering the products. The Volkswagen Group counters this
market. risk by expanding the scouting process whereby
Since we sell the majority of our vehicles in information on trends is gathered directly from the
Western Europe, we would be hard hit by a fall in marketplace at an early stage. There is also the
demand or prices in this market. This is why we risk that the Company will not meet its develop-
consider a clear, customer-oriented product and ment targets. We minimize this risk by contin-
pricing policy to be a key success factor. Overall, uously monitoring the progress of our projects
however, our delivery volume outside Western and making changes to reflect the requirements
European is widely diversified across the markets originally set. Due to our wide variety of research
of North America, South America/South Africa, and development activities, risks are not concen-
Asia Pacific and Central and Eastern Europe. The trated on particular patents or licenses.
Volkswagen Group holds a leading position in a
96 Boards Group Topics Financial Communication Divisions Management Report

Business development
Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
> Risk report
Report on expected developments

Procurement risk interruptions to production by taking out appropriate

In our procurement activities, close cooperation with insurance.
suppliers is absolutely essential if our high quality
requirements are to be met. We constantly exchange Risks arising from competitor-
quality-related information with our suppliers via and demand-side changes
our B2B database. We also use the database to To limit the impact on our business of fluctuations
continuously monitor and manage our procurement in demand or changing market conditions, we
activities, thereby reducing the risk of a reduction in constantly analyse customer behavior and our
quality or an interruption to production. However, competitors. If risks arise, we immediately
close contact with our supplies also leads to a certain introduce countermeasures. In addition, our broad,
degree of dependency: if one or other business regularly updated range of models provides
partners were to become insolvent, this would result considerable scope for action in this respect.
in lost earnings for us. In response to this risk, which Furthermore, we continue to extend our product
has increased in recent years, we have set up a range in order to penetrate niche markets and
special risk management system for supplier satisfy individual customer requirements. This high
insolvencies. This system records and monitors the level of diversification enables us to balance market
creditworthiness of suppliers from European risks in particular segments with opportunities in
countries, thereby enabling us to identify suppliers other segments.
at risk of insolvency at an early stage and to take For some years, corporate customers have been
appropriate steps. gaining in importance as a segment of the overall
market, particularly in Germany. With a market
Production risks arising from share of over 40% in Germany, the Volkswagen
changes in buying patterns Group has maintained its dominant position in this
Changes in global demand for passenger cars affects segment. Default risks are not concentrated on
the number of vehicle types produced. An inflexible individual corporate customers.
production process would not be able to meet
demand or reduce surplus capacity quickly enough. Quality risk
We counter these market risks by making our global Within the Volkswagen Group, quality assurance
production capacity flexible. This is achieved, firstly, starts at the very beginning of the value chain. We
through multi-brand sites, dynamic production consider it important to meet the subjective quality
facilities (turntable system) and flexible working criteria of customers worldwide. In order to minimize
time models. Secondly, our modular strategy has quality-related risks from the outset, we apply
created basic vehicle architectures that enable us stringent quality standards from the research and
to use the same parts in different vehicles. This development stage onwards, and when selecting our
standardization allows us to respond flexibly to suppliers. As well as product quality, however,
market events and leads to considerable economies achieving customer satisfaction also requires process
of scale in production costs. We have guarded quality. We therefore carry out regular, intensive
against potential economic risks arising from checks along the entire value chain.
 RISK REPORT 97

Personnel risk Regional Court challenging resolutions adopted

Our employees knowledge and expertise are a by the Annual General Meeting on June 7, 2001,
key factor contributing to the development of the relating to approval of the actions of the members
Volkswagen Group. There is a risk that know-how, of the Board of Management and of the Supervisory
and therefore advantages in the marketplace, Board for fiscal year 2000 and to the authorization
will be lost as a result of employee turnover and to acquire treasury shares issued on that occasion.
workforce reduction. We therefore offer our No ruling has yet been issued.
employees and management staff a broad range On June 29, 2001, the European Commission
of continuing development programs and incentive imposed a fine of 31.0 million on Volkswagen AG
systems to meet their requirements. Our aim in for alleged influencing of dealer pricing at the
doing so is to position the Volkswagen Group as an market launch of the Passat. We lodged an appeal
attractive employer and increase our employees against this ruling with the European Court of First
commitment. Instance on September 10, 2001. On December 3,
2003, the Court declared the fine to be unlawful.
Environmental protection regulations The European Commission then lodged an appeal
On July 1, 2002, the European End-of-Life Vehicles against this ruling with the European Court of
Directive was transposed into German law by way Justice, but no ruling has been made as yet. The
of the Altfahrzeuggesetz (German End-of-Life provisions set up for this purpose remain in place.
Vehicles Act). The act guarantees that end-of-life The European Commission plans to end design
vehicles will be disposed of free of charge through protection for visible vehicle parts. If this project
the collection points designated by manufacturers is actually implemented, it could adversely affect
and importers. This initially applies only to vehicles the Volkswagen Groups genuine parts business.
registered after the law came into force, but from In mid-2005, Volkswagen AG followed up
January 2007, it will be extended to cover all end-of- indications that employees were involved in a
life vehicles. These measures have not yet been network of front companies and had embezzled
fully implemented in certain EU member states. In Company funds. In this context, Volkswagen AG
addition, we are unable to conclusively assess the filed criminal charges with the public prosecutors
impact of the EUs eastward enlargement on the office in Braunschweig at the end of June 2005.
collection of end-of-life vehicles. As a result, no Volkswagen AGs Internal Audit Department and the
clear forecast can be made at present regarding the audit firm KPMG were tasked with conducting an
likely financial burden on the Volkswagen Group in investigation so that the facts of the matter could
certain EU member states. Our existing provisions be fully clarified. According to the findings at the
have been reviewed and adjusted accordingly. In time the consolidated financial statements were
addition, our systems and cooperation arrangements prepared, these activities on the part of Group
for disposing of end-of-life vehicles offer us the employees and third parties resulted in direct
opportunity to manage this risk. pecuniary losses of around 5.0 million. Bearing
in mind the outcome of the prosecuting authorities
Legal cases investigation, which has not yet been completed,
An action was filed by Liverpool Limited Volkswagen intends to sue the parties that have
Partnership, Bermuda, at the Braunschweig acted unlawfully for damages.
98 Boards Group Topics Financial Communication Divisions Management Report

Business development
Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
> Risk report
Report on expected developments

In light of these events, we have tightened the Our operating activities also entail financial risks
Groups approval and control procedures. On arising from changes in interest rates, exchange
January 23, 2006, an ombudsman system was rates and commodity prices. We employ primary
introduced, structured along international lines. and derivative financial instruments to reduce these
Under this system, two lawyers have since been risks. We only enter into derivative transactions
working on behalf of Volkswagen AG to strengthen with prime-rated banks. Interest rates and currencies
Group-wide anti-corruption efforts. are mainly managed centrally by Group Treasury.
The Group guards against interest rate risk and
Risks arising from financial instruments risks arising from fluctuations in the value of
We cover the capital requirements of our growing financial instruments by means of interest rate
financial services business mainly through swaps, cross-currency swaps and other interest rate
borrowings at matching maturities raised in the contracts. Financing extended to subsidiaries within
national and international financial markets. This the Volkswagen Group is usually hedged by matching
will remain our favored financing option in future, the amount and maturity of the refinancing.
while loan finance will be used only for short-term The flexible management of production capacity
working capital requirements and as a backup for at our global locations means that we use natural
debt issuance programs. The Group manages risks hedging to reduce currency risks. We hedge the
arising from cash flow fluctuations through liquidity remaining currency risk by means of financial
reserves and confirmed credit lines. hedging instruments such as forward exchange
A rating downgrade could adversely affect the transactions, currency options and cross-currency
terms attached to the Groups borrowings. The swaps. We use these transactions to limit the
separate rating given to Volkswagen Bank GmbH currency risk associated with anticipated foreign-
by Moodys Investors Service was the first step currency cash flows from operating activities and
towards delinking the rating of the financial intra-Group financing. We hedge cash flows
services business from the ratings of the automotive expected from foreign-currency sales revenues and
business. For the first time, Standard & Poors has materials purchases on a net basis by means of
awarded Volkswagen AG and Volkswagen Bank forward exchange transactions and currency
GmbH different outlook ratings, thereby underlining options. These contracts have terms of up to four
the fact that the financial services business is rated years, depending on market analyses. These
separately. It offers a good opportunity to secure transactions are mainly used to hedge the euro
attractive borrowing terms. For information on our against the US dollar, the pound sterling, the Swiss
current ratings and new issues in the capital market franc, the Japanese yen and the Swedish krone. In
in fiscal year 2005, please see the Financial total, these five currencies make up around 90%
Communication chapter. of our exchange rate risk from cash flows.
 RISK REPORT 99

We limit risks arising from the purchase of raw Therefore, we consider the likelihood of a threat to
materials and relating to the availability and prices the security of our data or information systems to
of these materials by entering into commodity be very low.
futures contracts. We have used appropriate
contracts to hedge some of our requirements for Other factors
aluminum, copper, platinum, rhodium and palladium In addition to the risks already mentioned, there are
over a period of up to 48 months. other factors that cannot be predicted and are
Information on financial assets, securities, therefore difficult to manage. These could have an
derivative financial instruments, loans and trade adverse effect on the further development of the
accounts receivable and payable can be found in Volkswagen Group. They include natural disasters,
the notes to our consolidated financial statements, epidemics and terror attacks.
where we also explain our hedging policy, the
hedging rules and credit and liquidity risks and overall risk
provide figures on the hedging transactions Taking into account all the information known to us
mentioned (pages 168 and 169). at present, no risks exist which could pose a threat
to the continued existence of the Volkswagen Group.
Residual value risk in the
financial services business
In the financial services business, we agree to buy
back selected vehicles at a residual value fixed at
inception of the contract so that we are able to
realize market opportunities. We evaluate these
lease contracts at regular intervals. We take the
necessary precautions in the event of potential
risks.

IT risk
Our IT systems are protected against unauthorized
access from outside by redundant firewall systems.
Virus scanners and restricted physical and data
access rights also provide appropriate protection. report on post-balance sheet date events
The information security measures taken by the No other matters of special note occurred after the
Group are constantly reviewed and updated. In end of the fiscal year, beyond those already
addition, all data resources are backed up daily. mentioned.
I N N O VAT I O N PAY S

>> Caddy Life EcoFuel: Innovation halves costs

With customized solutions for virtually all transport and passenger comfort requirements, the
Commercial Vehicles business line provides its customers with made-to-measure mobility. These
powerful workhorses are primarily powered by fuel-efficient diesel engines. As an alternative to
diesel and to traditional petrol engines the economical and environmentally friendly natural gas
drivetrain is steadily gaining ground. The new Caddy Life EcoFuel is one of the most modern natural
gas vehicles on the market. This versatile and family-friendly MPV will be launched on the market
in the first half of 2006. Unlike solutions consisting of a petrol engine and an additional natural
gas tank, the Caddy Life EcoFuel is a real natural gas car; the petrol tank only serves as a reserve
(tank range of approximately 430 km for natural gas and 170 km for petrol). With its powerful
Euro 4 engine (80 kW 109 bhp)*, it emits 20% less carbon dioxide and 75% less carbon monoxide
in natural gas mode than a comparable petrol engine. When it comes to fuel costs, the Caddy Life
EcoFuel is economy itself: natural gas is substantially cheaper than petrol and diesel. In Germany,
for example, the fuel costs for a Caddy Life EcoFuel are approximately 50% lower than that of a
petrol-driven vehicle. Even compared with a diesel-driven vehicle, the natural gas Caddy still saves
its owners approximately one third of fuel costs.

* Fuel consumption m3/100 km: 12.0 urban; 6.7 extra-urban; 8.7 combined;
CO2 emissions in g/km: 157.
I N N O VAT I O N PAY S

>> Caddy Life EcoFuel: Innovation halves costs

With customized solutions for virtually all transport and passenger comfort requirements, the
Commercial Vehicles business line provides its customers with made-to-measure mobility. These
powerful workhorses are primarily powered by fuel-efficient diesel engines. As an alternative to
diesel and to traditional petrol engines the economical and environmentally friendly natural gas
drivetrain is steadily gaining ground. The new Caddy Life EcoFuel is one of the most modern natural
gas vehicles on the market. This versatile and family-friendly MPV will be launched on the market
in the first half of 2006. Unlike solutions consisting of a petrol engine and an additional natural
gas tank, the Caddy Life EcoFuel is a real natural gas car; the petrol tank only serves as a reserve
(tank range of approximately 430 km for natural gas and 170 km for petrol). With its powerful
Euro 4 engine (80 kW 109 bhp)*, it emits 20% less carbon dioxide and 75% less carbon monoxide
in natural gas mode than a comparable petrol engine. When it comes to fuel costs, the Caddy Life
EcoFuel is economy itself: natural gas is substantially cheaper than petrol and diesel. In Germany,
for example, the fuel costs for a Caddy Life EcoFuel are approximately 50% lower than that of a
petrol-driven vehicle. Even compared with a diesel-driven vehicle, the natural gas Caddy still saves
its owners approximately one third of fuel costs.

* Fuel consumption m3/100 km: 12.0 urban; 6.7 extra-urban; 8.7 combined;
CO2 emissions in g/km: 157.
102 Boards Group Topics Financial Communication Divisions Management Report

Business development
Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
> Report on expected developments

report on expected developments

Innovation will safeguard

the automotive future

Both the global economy and global automotive demand will

continue to grow in 2006, despite high oil and commodity prices.
The Volkswagen Group will support this trend by continuing to
offer its customers innovative automobility.

In the following paragraphs, we outline our forecast very strong in recent years. In South Africa, we
for the future development of the Volkswagen expect GDP growth to remain strong at around
Group. The main risks were explained in the Risk 4.5% due to the favorable conditions for
Report on the previous pages. commodity exports.

macroeconomic trend Asia-Pacific

Our planning for 2006 is based on the assumption The dynamic expansion of the Chinese economy
that global economic growth will be roughly on a will continue, with growth at around 9.0%. In
level with the previous year, despite the continuing Japan, economic growth will remain moderate at
restraining effect caused by high oil prices. We around 2.5%.
believe that East Asia, particularly China, and North
America will continue to be the centers of growth. Europe
In Western Europe, we expect a slight increase in
North America GDP growth to around 2.2% in 2006. For the
In the USA, GDP growth will probably ease to 3.4% countries of Central and Eastern Europe, we predict
due to the countrys more restrictive monetary average economic growth of approximately 5.2%.
policy and high energy prices. We expect the
Canadian economy to grow by 3.3% in 2006. For Germany
Mexico, we predict an increase in economic growth Given that its international competitiveness is
to around 3.7%. improving, the German economy will probably
continue to benefit from the positive trend in the
South America/South Africa global economy. However, we expect growth to
For Brazil, we predict a higher rate of expansion of be very fragile at around 1.5% since there will be
around 3.7%. In Argentina, we expect growth to only a slight increase in domestic demand.
weaken considerably to around 6.0% after being
 REPORT ON EXPECTED DEVELOPMENTS 103

development of automotive markets Europe

Our forecasts for 2006 assume a slight year-on-year In Western Europe, we expect total market volume
increase in global automotive demand. We expect to be slightly weaker ( 0.4%) in 2006. Of the large
new passenger car registrations in Western markets, only France is likely to join Germany in
European to be slightly down year-on-year and the recording a year-on-year increase. In Central and
positive trends in South America and China to Eastern Europe, passenger car sales are expected
weaken slightly. to continue to rise (+ 5.0%).

North America Germany

In the USA, we expect the market as a whole to be We expect a further increase in new registrations
on a level with the previous year. Due to high petrol in the German passenger car market, mainly as a
prices, we expect light commercial vehicles, result of early buying ahead of the increase in VAT
particularly sports utility vehicles, to record sharper planned for 2007.
declines in sales than passenger cars. The Canadian
passenger car market is expected to grow by 0.6%. development of exchange rates
In Mexico, we expect growth of 2.9%. Our planning for fiscal year 2006 regarding unit
sales and factory capacity utilization is based on
South America/South Africa estimates of economic institutes and capital market
For South America, we predict a further increase players. It assumes that the US dollar and the
in new passenger car registrations. However, we pound sterling will weaken slightly against the euro
expect overall growth in automobile sales to be in 2006.
much lower than in the previous year, at 2.3% in
Brazil and 7.7% in Argentina. In South Africa, we development of interest rates
expect demand for passenger cars to decline by Interest rates in the euro zone are likely to rise in
1.1% year-on-year. 2006. In the USA too, we expect a further increase
in interest rates generally.
Asia-Pacific
This year the Asia-Pacific region is likely to remain development of commodity prices
the engine of growth driving global automotive Our planning for 2006 assumes that commodity and
demand. We expect to see the strongest growth in steel prices will stabilize at a high level, with the
demand in China. The higher-than-average increase supply shortage likely to continue. Due to the long-
in private customer business could continue to term agreements negotiated with suppliers, we do
generate double-digit growth rates. For the not expect any exceptional negative cost impacts or
Japanese market, we forecast only a moderate bottlenecks.
increase in new car registrations of around 2.3%.
104 Boards Group Topics Financial Communication Divisions Management Report

Business development
Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
> Report on expected developments

trends in the automotive industry developing the technology for antizipatory driving,
are our opportunity automobile manufacturers are also pressing ahead
The trend in the automotive industry is increasingly with the development of systems needed to ensure
being shaped by the individualization of customer that vehicles can communicate with the infrastructure
requirements. As a result, one of the main tasks and other vehicles using radio communication
facing manufacturers is to diversify their products. technology (car-to-X and car-to-car communication).
They also need to continue to ensure individual The vision is a self-organizing traffic system with
mobility, while at the same time improving vehicle on-board artificial intelligence. These assistance
quality. Above all, this means reducing both local systems are not intended to relieve the driver of
emissions (particularly in large towns and cities) and control, but rather to improve safety and comfort.
global greenhouse gas emissions and using the
resources available in a responsible manner. The our mobility offering for the future
trend in the crude oil market in the course of the year Through its drivetrain and fuel strategy, the
under review has shown how tight the energy market Volkswagen Group is systematically pursuing its
is and what risks lie in a primary energy sector based aim to reduce consumption and emissions. More
mainly on fossil oil. Further sharp increases in detailed information can be found in the chapter
demand for fuel and the climate debate will further entitled Value-enhancing factors on page 90. In the
aggravate the situation. Against this background, course of developing alternative drive technologies,
it is becoming increasingly important to use new, we have entered into various co-operations with the
particularly renewable energy sources, develop aim of presenting vehicles with hybrid drives as
efficient new drive systems and supplement them part of our model range at some time in the near
with optimized, lighter-weight vehicle concepts. future. We aim to launch a hybrid vehicle together
To increase vehicle quality, it is also necessary with Shanghai Volkswagen (SVW) around the time
to make further safety improvements, both for of the 2008 Olympic Games in Beijing. A memo-
passengers and for other road users. Passive safety randum of understanding has been signed with
systems such as safety belts and airbags have already Chinese partners, paving the way for future co-
reduced injuries sustained in accidents. In addition, operation on the development of this alternative
active on-board systems such as ABS and, above all, drive system. We are also working on a new
ESP help to prevent accidents from happening in the generation of four-cylinder turbo diesel engines
first place. Driver-assistance systems that improve in response to the future introduction of tougher
both comfort and safety are currently being added legislation on emissions.
to vehicles, contributing to a significant increase in The Volkswagen Group will meet the growing
vehicle safety. With this aim in mind, models are demands of legislators and the public for reductions
being equipped with environment sensors and in harmful emissions through its own emissions
evaluation software. These enable the vehicles to strategy. This has also been explained in the chapter
see their immediate environment. As well as entitled Value-enhancing factors on page 91.
 REPORT ON EXPECTED DEVELOPMENTS 105

To satisfy the desire of a large number of customers services in the competitive global market of
for environmentally conscious mobility, the Audi commercial fleet services. We have already started
brand now offers diesel particulate filters as standard to achieve results in the form of stronger customer
components in all model series. From 2006 onwards, orientation and process improvements.
particulate filters will gradually become available
for all new vehicles of the Volkswagen Passenger new models
Cars, SEAT and Skoda brands and the Commercial The Groups model program will be greatly
Vehicles business line. We will also be offering expanded in the coming years.
upgrades for a large proportion of the models In 2006, the Volkswagen Passenger Cars brand
already on the market. will stage the global launch of the Eos, the first
Apart from the drive system, a reduction in four-seater convertible with a five-section roof. The
weight is the most effective way to cut emissions. innovative foldable hardtop combines the features
Our study of a two-seater, one-liter car weighing of a coup, sun and convertible roof (CSC roof). The
290 kg highlighted the technical possibilities. The range of Fox, Polo and Golf models is being
new generation of the Passat introduced in 2005 extended to include new derivatives (crossovers).
is one example of how research results have been These meet individual customer requirements for
carried over to mass production. Taking into vehicles that incorporate features typical of an off-
account the difference in size, this vehicles body road product.
shell is 13 kg lighter and more rigid than the In the course of the year, the Skoda brand will
predecessor model. For the first time, therefore, present the Roomster, a spacious and family-friendly
it has been possible to break the weight spiral in compact MPV. The Roomster features a flexible seat
a vehicle with mass-produced technologies. The design that makes for a particularly variable interior.
EcoRacer, which was presented as a fully functioning It also extends the Groups product portfolio in the
prototype at the Tokyo Motor Show 2005, weighs smaller, compact MPV market.
in at just 850 kg, providing a novel and extremely Among the luxury brands, Bentley will present
impressive example of this. the Azure and the GT Cabrio, two exceptional open-
For us, mobility extends far beyond the vehicle top models.
itself. Innovative services in areas such as financing, The Audi brand will launch the new Audi A4
leasing, rental, customer service, navigation and cabriolet and the premium-segment Audi Q7 SUV.
fleet management enable us to provide individual With the single-frame grille on the A4 Cabriolet,
mobility combined with peace of mind. By Audi is consistently pursuing the design theme
acquiring an interest in LeasePlan a year ago, typical of the brand. The Q7 is Audis first SUV and
Volkswagen extended its offering as a mobility sets new standards in this segment in terms of
services provider. In various projects, we analyze sportiness and versatility. The successor to the Audi
potential synergies with a view to promoting the TT Coup rounds off Audis product offensive.
interests of the Group as a provider of mobility
106 Boards Group Topics Financial Communication Divisions Management Report

Business development
Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
> Report on expected developments

investment and financial planning 2006 to 2008

automotive division
in billion

Cash flows from Gross cash flow 25.3 Change in working capital 1.5
operating activities

Cash flows from Development costs 4.4 Other 1.8

investing activities
Investments in property,
Surplus 4.1
plant and equipment 16.5
Net cash flow

0 5 10 15 20 25 30

For the SEAT brand, the first few months of 2006 We expect to be able to further increase our share
will be dominated by the re-launch of the SEAT Ibiza of the German passenger car market in 2006 as
with its sportier exterior and interior design and the sales figures grow. We do not foresee an increase in
launch of the SEAT Altea FR. our share of the passenger car market in Central
The Lamborghini Gallardo sports car will be and Eastern Europe since we expect the rise in our
joined by an open-top version in the form of the sales volume to be below market growth.
Spyder. For the US market, we will be developing a After recording sharp declines in past years, we
mini-van to meet the specific needs of our American expect delivery figures in the North American
customers in cooperation with the Chrysler Group, passenger car market to rise in 2006. We therefore
which belongs to DaimlerChrysler AG. Production predict a slight increase in our share of this
of the vehicle will start in 2008. It will be marketed passenger car market.
under the Volkswagen Passenger Cars brand. The By contrast, the Groups share of the passenger
relevant agreement was signed during the Detroit car market in South America/South Africa is likely
Motor Show in January 2006 to remain on a level with the previous year as sales
rise slightly.
expected deliveries to customers We expect both our deliveries and our share of
and market share the passenger car market in the Asia-Pacific region,
In 2006, we aim to achieve further year-on-year especially in China, to benefit from the positive
growth in global deliveries to customers and gain economic trend there and increase slightly.
additional market share, including from sales in
new segments. investment and financial planning
For the Western European passenger car 2006 to 2008
market, we predict a moderate rise in our deliveries Investments in the Volkswagen Groups Automotive
to customers and an increase in our market share. Divisions will amount to 22.7 billion in the period
 REPORT ON EXPECTED DEVELOPMENTS 107

2006 to 2008. As well as investments in property, The joint venture companies in China are not
plant and equipment, this total amount also includes consolidated and therefore not included in the
additions to capitalized development costs and figures given above. These companies will invest
investments in financial assets. a total of 1.9 billion in the period 2006 to 2008.
Investments in property, plant and equipment This means that investments in China will also be
will account for 16.5 billion of the total amount. considerably lower than the previous budget, in
The ratio of investments in property, plant and line with the current market situation. They will be
equipment to sales revenue (capex/sales ratio) will financed using the joint venture companies own
remain at a competitive level of around 6% after funds.
we were able to reduce it sharply in 2004 and 2005. The Financial Services Division will invest 18.3
This means that we have again reduced the ratio billion in total in the period 2006 to 2008, with
compared with the previous budget and taken a investments in leasing and rental assets (net of
necessary and important step towards achieving our disposals) accounting for 8.7 billion, and the
targets for improvements in earnings and liquidity. increase in receivables from leasing, customer and
At 10.9 billion, the majority of the total amount dealer financing accounting for 8.9 billion. As is
invested in property, plant and equipment in the common in the industry, the planned cash flows
Automotive Division during the planning period will from operating activities of 8.5 billion will not be
be spent on modernizing and extending the product sufficient to finance these investments in full. The
range. Investment will focus on successor models additional capital requirement of 9.8 billion will
and new derivatives in almost every vehicle class, be met mainly by debt issuance programs in the
including new generations of petrol engines and money and capital markets and by customer
automatic gearboxes. deposits from the direct banking business.
We plan to invest 5.6 billion in non-product
related items. Due to quality and cost targets, the targets of value-based management
new products will also require adjustments at the Based on long-term interest rates derived from the
press shop, painting and assembly facilities. Beyond capital market and the target capital structure (fair
production, we will invest mainly in expanding value of equity to debt = 2:1), the minimum required
development, quality assurance, genuine parts rate of return on invested assets defined for the
supply and information technology. Automotive Division remains unchanged at 9%.
We aim to finance investments within the Extensive measures have already been taken in
Automotive Division using internally generated the Automotive Division to restore the earnings
funds. For the planning period, we forecast cash power of prior years. These include the agreements
flows from operating activities of 26.8 billion. This concerning the production of a compact sport utility
will therefore exceed investing activities within the vehicle in Wolfsburg and the new shift models in
Automotive Division by 4.1 billion. The resulting Wolfsburg and Emden. Personnel adjustment
positive net cash flow will further improve the programs introduced at Volkswagen within the
Automotive Divisions liquidity in the coming years. framework of legal regulations and existing
108 Boards Group Topics Financial Communication Divisions Management Report

Business development
Net assets, financial position and
earnings performance
Volkswagen AG (condensed, according
to German Commercial Code)
Value-enhancing factors
Risk report
> Report on expected developments

collective wage agreements will also sharply reduce gesellschaft has been sold to T-Systems AG, a
costs. Further far-reaching operational measures to subsidiary of Deutsche Telekom AG. The sale is
reduce structure costs and enhance the performance subject to the approval of the antitrust authorities.
of our product lines and markets are planned as
part of ForMotion plus. This will contribute to a summary of expected developments
continuous improvement in return on investment Last year, we took a number of decisions to ensure
in the Automotive Division. a sustainable improvement in the earnings strength
of the Volkswagen Group. Our aim is to achieve a
future legal structure of the group consolidated profit before tax of 5.1 billion in 2008
At its meeting on September 23, 2005, the with the help of these measures. This represents a
Supervisory Board authorized Volkswagen AGs Board 4.0 billion increase in profit compared with 2004.
of Management to examine all options for the wholly The momentum from the cultural shift that the
owned subsidiaries gedas Aktiengesellschaft and ForMotion performance enhancement program has
Europcar International S.A.S.U. The options range triggered, and the verve with which the ForMotion
from a strategic expansion through to an IPO or sale. plus follow-up program is being approached, make
This decision relates to the review of all Group the Board of Management confident that this goal
activities. Effective January 1, 2006, gedas Aktien- will be achieved.

This report contains forward-looking statements on the business development Consequently, any unexpected fall in demand or economic stagnation in our
of the Volkswagen Group. These statements are based on assumptions key sales markets, such as Western Europe (and especially Germany) or in the
relating to the development of the economies of individual countries, and in USA, Brazil or China, will have a corresponding impact on the development of
particular of the automotive industry, which we have made on the basis of the our business. The same applies in the event of a significant shift in current
information available to us and which we consider to be realistic at the time of exchange rates relative to the US dollar, sterling, yen, Brazilian real, Chinese
going to press. The estimates given entail a degree of risk, and the actual renminbi and Czech koruna.
developments may differ from those forecast.
 REPORT ON EXPECTED DEVELOPMENTS 109

prospects for 2006 the measures to reduce materials costs and

We are expecting slight growth in global demand optimize production processes implemented as
for automobiles in 2006. We do not anticipate any part of ForMotion plus will help achieve a year-on-
significant change in the key passenger car markets year improvement in 2006 operating profit before
of Western Europe, the USA and China. The strains special items. In the Automotive Division, we will
from the high energy prices will continue to be felt. continue our rigorous management of investments
Driven by our new model initiative, we aim to fur- and development expenditure, without adversely
ther increase worldwide deliveries to customers over affecting our product projects. Our goal is to
the record figures for 2005, despite the stiffer compe- achieve a capex/sales ratio of around 6% in 2006.
tition. The newly launched models have been available In addition, we expect the Automotive Division
on all markets since the fourth quarter of 2005. to record a positive net cash flow and a further
The Volkswagen Groups 2006 sales revenue will improvement in net liquidity.
increase slightly compared with 2005. In particular,

Wolfsburg, February 10, 2006

The Board of Management

Bernd Pischetsrieder Wolfgang Bernhard Francisco Javier Garcia Sanz

Horst Neumann Hans Dieter Ptsch Martin Winterkorn

 I N N O VAT I O N M E A N S
EXPLORING NEW GROUND

Financial Services

>> Tailored insurance products:

Innovation extends peace-of-mind mobility

Our Financial Services Division specializes in peace-of-mind mobility as can be vouched for by over ance. New ground was also broken by the establishment of Volkswagen Reinsurance AG, a move
six million customers worldwide. These financial services companies offer drivers individual finance, that signaled a new development in the successful collaboration with Allianz AG that has been thriving
leasing and insurance packages. In addition, there are direct banking products, short-term rentals for more than 50 years. On the basis of this cooperation, Volkswagen Financial Services AG has
and comprehensive fleet management solutions for key accounts. This makes us the largest automobile established itself as the number one in the European automobile insurance brokerage market, with
financial services provider in Europe, operating in 35 different countries. Our position as a leading approximately 1.6 million insurance contracts. With the establishment of this reinsurance company,
mobility services provider is attributable to the high level of innovation at our financial services Volkswagen Financial Services AG will exert a greater influence on the future development and
companies. Just a few examples: the Volkswagen Bank GmbH subsidiary was the first automotive pricing of insurance products, and is therefore in a position to offer exceptionally attractive insurance
bank in Germany to be granted a full banking license and to set up a direct bank. In the insurance solutions to its customers. In this way, the Financial Services Division makes a lasting contribution
sector, Volkswagen Financial Services AG has ventured into new territory with unemployment insur- to customer acquisition and customer loyalty along the entire value chain.
 I N N O VAT I O N M E A N S
EXPLORING NEW GROUND

Financial Services

>> Tailored insurance products:

Innovation extends peace-of-mind mobility

Our Financial Services Division specializes in peace-of-mind mobility as can be vouched for by over ance. New ground was also broken by the establishment of Volkswagen Reinsurance AG, a move
six million customers worldwide. These financial services companies offer drivers individual finance, that signaled a new development in the successful collaboration with Allianz AG that has been thriving
leasing and insurance packages. In addition, there are direct banking products, short-term rentals for more than 50 years. On the basis of this cooperation, Volkswagen Financial Services AG has
and comprehensive fleet management solutions for key accounts. This makes us the largest automobile established itself as the number one in the European automobile insurance brokerage market, with
financial services provider in Europe, operating in 35 different countries. Our position as a leading approximately 1.6 million insurance contracts. With the establishment of this reinsurance company,
mobility services provider is attributable to the high level of innovation at our financial services Volkswagen Financial Services AG will exert a greater influence on the future development and
companies. Just a few examples: the Volkswagen Bank GmbH subsidiary was the first automotive pricing of insurance products, and is therefore in a position to offer exceptionally attractive insurance
bank in Germany to be granted a full banking license and to set up a direct bank. In the insurance solutions to its customers. In this way, the Financial Services Division makes a lasting contribution
sector, Volkswagen Financial Services AG has ventured into new territory with unemployment insur- to customer acquisition and customer loyalty along the entire value chain.
112

declaration by the board of management of volkswagen ag

The Board of Management of Volkswagen AG is warning function stipulated by law is implemented

responsible for preparing the consolidated financial by a Group-wide risk management system that
statements and the Group management report. enables the Board of Management to identify
Reporting is governed by International Financial potential risks at an early stage and to initiate
Reporting Standards (IFRSs) as adopted in the EU appropriate countermeasures where necessary.
and the Interpretations of the International Financial In accordance with the resolution adopted by the
Reporting Interpretations Committee (IFRIC). Annual General Meeting, the independent auditors
The Group management report was prepared in PricewaterhouseCoopers Aktiengesellschaft
compliance with the provisions of the German Wirtschaftsprfungsgesellschaft, Hanover, have
Commercial Code (HGB). Volkswagen AG is required audited the consolidated financial statements and
by section 315a of the HGB to prepare its consolidated the Group management report, and have issued
financial statements in accordance with the standards their unqualified auditors report reproduced in
issued by the International Accounting Standards the notes to the financial statements.
Board (IASB). The consolidated financial statements, the
The accuracy of the consolidated financial Group management report, the audit report and
statements and of the Group management report the measures to be taken by the Board of
is safeguarded by internal control systems, the Management to ensure early identification of
implementation of uniform Group-wide directives going concern risks have been reviewed in detail
and by employee training and continuing education by the Supervisory Board Audit Committee and
measures. Compliance with legal requirements and by the Supervisory Board of Volkswagen AG
internal Group directives, and the reliability and in the presence of the auditors. The result of
proper functioning of the control systems, are this review is presented in the report of the
continuously reviewed across the Group. The early- Supervisory Board.
 Financial Statements Auditors Report Executive Bodies Additional Information 113

114 Income statement 184 Appointments of 188 Glossary

115 Balance sheet members of the 189 Index
116 Statement of recognized Board of Management 190 Key performance
income and expense 185 Appointments of indicators by business
117 Cash flow statement members of the line and market
118 Notes to the consolidated Supervisory Board
financial statements

contents

Financial Statements
114 182 184 188

financial statements auditors report

executive bodies
additional information

Auditors Report
Executive Bodies
financial statements 114

114 income statement

115 balance sheet
116 statement of recognized income and expense
117 cash flow statement
118 notes to the consolidated financial statements

Additional Information
182

auditors report

executive bodies 184

184 appointments of members of the board of management

185 appointments of members of the supervisory board

additional information 188

188 glossary
189 index
190 key performance indicators by business line and market
114 Financial Statements Auditors Report Executive Bodies Additional Information

> Income statement

> Balance sheet
Statement of recognized income and expense
Cash flow statement
Notes to the consolidated financial statements

income statement of the volkswagen group

for the period january 1 to december 31, 2005

Restated
million Note 2005 2004
Sales revenue 1 95,268 88,963
Cost of sales 2 82,391 78,430
Gross profit + 12,877 + 10,533
Distribution expenses 8,905 8,167
Administrative expenses 2,383 2,309
Other operating income 3 4,552 4,461
Other operating expenses 4 3,349 2,876
Operating profit + 2,792 + 1,642
Share of profits and losses of Group companies accounted for using the equity method 5 + 78 + 255
Other financial result 6 1,148 809
Financial result 1,070 554
Profit before tax + 1,722 + 1,088
Income tax expense 7 602 391
Current tax expense 876 851
Deferred tax income + 274 + 460
Profit after tax + 1,120 + 697
Minority interests +0 +4
Profit attributable to shareholders of Volkswagen AG + 1,120 + 693
Earnings per share basic in
Ordinary shares 8 + 2.90 + 1.79
Preferred shares 8 + 2.96 + 1.85
Earnings per share diluted in
Ordinary shares 8 + 2.90 + 1.79
Preferred shares 8 + 2.96 + 1.85
 INCOME STATEMENT | BALANCE SHEET 115

balance sheet of the volkswagen group

as of december 31, 2005

Financial Statements
Restated
million Note Dec. 31, 2005 Dec. 31, 2004
Assets
Noncurrent assets
Intangible assets 9 7,668 7,490
Property, plant and equipment 10 22,884 23,795
Leasing and rental assets 11 9,882 8,484

Auditors Report
Investment property 11 167 182
Investments in Group companies accounted for using the equity method 12 4,198 4,221
Other equity investments 12 336 293
Financial services receivables 13 24,958 22,762
Other receivables and financial assets 14 2,270 2,298
Deferred tax assets 15 2,872 2,687

Executive Bodies
75,235 72,212
Current assets
Inventories 16 12,643 11,440
Trade receivables 17 5,638 5,357
Financial services receivables 13 22,412 21,109

Additional Information
Current tax receivables 15 317 469
Other receivables and financial assets 14 4,856 3,862
Marketable securities 18 4,017 2,933
Cash and cash equivalents 19 7,963 10,221
57,846 55,391
Total assets 133,081 127,603

Equity and Liabilities

Equity 20
Subscribed capital 1,093 1,089
Capital reserves 4,513 4,451
Retained earnings 17,994 17,094
Equity attributable to shareholders of Volkswagen AG 23,600 22,634
Minority interests 47 47
23,647 22,681
Noncurrent liabilities
Noncurrent financial liabilities 21 31,014 32,376
Other noncurrent liabilities 22 1,591 1,355
Deferred tax liabilities 23 1,622 2,254
Provisions for pensions 24 14,003 12,633
Provisions for taxes 23 2,257 2,065
Other noncurrent provisions 25 5,638 5,547
56,125 56,230
Current liabilities
Current financial liabilities 21 30,992 28,885
Trade payables 26 8,476 7,434
Current tax payables 23 150 57
Other current liabilities 22 6,205 6,326
Other current provisions 25 7,486 5,990
53,309 48,692
Total equity and liabilities 133,081 127,603
116 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
> Statement of recognized income and expense
> Cash flow statement
Notes to the consolidated financial statements

statement of recognized income and expense of the volkswagen group

for the period january 1 to december 31, 2005

million 2005 2004

Actuarial gains or losses 1,231 787
Available-for-sale financial instruments (securities):
Fair value changes taken directly to equity 416
Transferred to profit or loss 168
Cash flow hedges:
Fair value changes taken directly to equity 399 104
Transferred to profit or loss 11 55
Foreign exchange differences 956 189
Deferred taxes 587 300
Income and expense recognized directly in equity 150 627
Profit after tax attributable to shareholders of Volkswagen AG 1,120 693
Total recognized income and expense for the period 1,270 66
Effect of changes in accounting policies taken directly to equity 501

Explanatory notes on equity are presented in note 20.

 STATEMENT OF RECOGNIZED INCOME AND EXPENSE | CASH FLOW STATEMENT 117

cash flow statement of the volkswagen group

for the period january 1 to december 31, 2005

Financial Statements
Restated
million 2005 2004
Cash and cash equivalents at beginning of period 10,221 7,536
Profit before tax 1,722 1,088
Income taxes paid 354 21
Depreciation and amortization expense* 5,614 5,648
Amortization of capitalized development costs 1,438 1,134

Auditors Report
Impairment losses on equity investments* 6 62
Depreciation of leasing and rental assets and investment property* 1,596 1,774
Change in provisions 1,351 1,053
Loss on disposal of noncurrent assets 40 21
Share of profit or loss of Group companies accounted for using the equity method 294 56
Other noncash income/expense 151 177

Executive Bodies
Change in inventories 720 178
Change in receivables (excluding financial services) 757 4
Change in liabilities (excluding financial liabilities) 429 687
Cash flows from operating activities 10,810 11,457
Acquisition of property, plant and equipment, and intangible assets 4,434 5,550

Additional Information
Additions to capitalized development costs 1,432 1,501
Acquisition of subsidiaries and other equity investments 150 2,287
Disposal of equity investments 166 1,045
Issuance of bonds 22 319
Change in leasing and rental assets and investment property 2,950 1,942
Change in financial services receivables 1,948 4,801
Proceeds from disposal of noncurrent assets (excluding leasing
and rental assets and investment property) 304 277
Change in investments in securities 820 280
Investing activities 11,286 14,798
Capital contributions 66
Dividends paid 414 419
Other changes in equity 13 7
Proceeds from issue of bonds 5,754 13,718
Repayment of bonds 9,804 5,507
Change in other financial liabilities 3,233 1,439
Finance lease payments 3 21
Change in loans 639 335
Cash flows from financing activities 1,794 6,004
Changes in cash and cash equivalents due to changes in the scope of consolidation 67 3
Effect of exchange rate changes on cash and cash equivalents 79 19
Net change in cash and cash equivalents 2,258 2,685
Cash and cash equivalents at end of period 7,963 10,221

Cash and cash equivalents 7,963 10,221

Securities and loans 5,843 4,112
Gross liquidity 13,806 14,333
Total third-party borrowings 62,006 61,261
Net liquidity 48,200 46,928
* Offset with impairment reversals.

Explanatory notes on the cash flow statement are presented in note 27.
118 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

notes to the consolidated financial statements of the volkswagen group

for the fiscal year ended december 31, 2005

basis of presentation

Volkswagen AG has published its 2005 consolidated financial statements in accordance

with International Financial Reporting Standards (IFRSs) as adopted by the EU and the
interpretations of the International Financial Reporting Interpretations Committee (IFRIC).
All pronouncements of the International Accounting Standards Board (IASB) required
to be applied for periods beginning on or after January 1, 2005 have been applied. The
significant effects of new or amended Standards are described in the following. Prior-
year figures have had to be restated due to changes in the accounting policies in fiscal
year 2005. The financial statements give a true and fair view of the net assets, financial
position and earnings performance of the Volkswagen Group.
The consolidated financial statements were prepared in euros. Unless otherwise
stated, all amounts are given in millions of euros ( million).
The income statement was prepared using the internationally accepted cost of
sales method.
Preparation of the consolidated financial statements in accordance with the
pronouncements of the IASB requires management to make estimates that affect the
reported amounts of certain items in the consolidated balance sheet and in the
consolidated income statement, as well as the related disclosure of contingent assets
and liabilities.
Volkswagen AG is required by section 315a of the HGB to prepare its consolidated
financial statements in accordance with the standards issued by the International
Accounting Standards Board (IASB). All disclosures and explanatory notes required by
German commercial law above and beyond the scope of those required by IFRSs have
been published.

effects of new and amended standards

IFRS 2 Share-based Payment

The convertible bonds granted by Volkswagen AG are measured at fair value at the
date they are granted to the employees in accordance with IFRS 2. The convertible
bonds carried at fair value are recognized in personnel expenses and in equity.

IAS 19 Employee Benefits

An amendment to IAS 19 introduces another recognition option for actuarial gains and
losses. This new option allows actuarial gains and losses to be recognized directly in
equity in the period in which they occur. Volkswagen has made use of this option so
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 119

Financial Statements
that it can present information about the current level of its pension liabilities that is
more decision-useful. The amounts recognized directly in equity are presented in the
statement of recognized income and expense.
Recognizing actuarial gains and losses in equity rather than in profit or loss
represents a change in accounting policy in accordance with IAS 8. This therefore

Auditors Report
required the restatement of actuarial gains and losses as of January 1, 2004, resulting
in an increase in pension provisions by 937 million. The opening carrying amount
of retained earnings was reduced by a corresponding amount, net of the related
deferred tax effects. In addition, the actuarial gains and losses allocated to the income
statement functions in 2004 also had to be reversed. This increased operating profit
by 22 million.

Executive Bodies
IAS 32 Financial Instruments: Disclosure and Presentation
Shares in partnerships whose members have a right to redeem their interests are
classified as debt (financial liabilities) by IAS 32. Such shares must be measured in

Additional Information
profit or loss at the redemption amount. In the Volkswagen Group, this Standard
affected the shares of minority shareholders of Volkswagen Original Teile Logistik
GmbH & Co. KG, which were reclassified as liabilities and measured at the redemption
amount.
The new accounting treatment of shares in partnerships required the retrospective
adjustment of the annual financial statements. For fiscal year 2004, this reduced
profit by 33 million.

IAS 39 Financial Instruments: Recognition and Measurement

The amendment to IAS 39 required a change in the method for determining
impairment losses on financial instruments. In the Volkswagen Group, this particularly
affected the Financial Services Division. The amendment stipulates that existing risks
must be covered by specific valuation allowances in the amount of the loss already
incurred, or on the basis of experience-based loss probabilities for portfolios of assets.
The amounts in the opening balance sheet as of January 1, 2005 were adjusted directly
in equity.
The amended IAS 39 requires changes in the fair value of available-for-sale
financial assets to be taken directly to equity. Changes in the fair value of these
financial instruments are therefore presented in a separate reserve in equity.
Prior-period figures were not adjusted retrospectively because the nature and
availability of data for previous periods did not allow retrospective application.
120 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

reconciliation of 2004 profit

million Dec. 31, 2004

Profit after tax of Volkswagen Group before
restatement 716
Earnings effect of IAS 19 (pension provisions) 22
Effect of deferred taxes 8
Earnings effect of IAS 32 (shares in partnerships) 33
Profit after tax of Volkswagen Group
after restatement 697

scope of consolidation

In addition to Volkswagen AG, which is domiciled in Wolfsburg and registered at

the Braunschweig local court under the number HRB 100484, the consolidated
financial statements include all significant companies at which Volkswagen AG is
able, directly or indirectly, to control the financial and operating policies in such a
way that the Group companies obtain benefits from the activities of these companies
(subsidiaries). Consolidation begins at the first date on which control is possible,
and ends when such control is no longer possible.
Subsidiaries whose business is dormant or of low volume and that are
insignificant for the presentation of a true and fair view of the net assets, financial
position and earnings performance of the Volkswagen Group are not consolidated.
They are recognized in the consolidated financial statements at the lower of cost or
fair value. The aggregate equity of these subsidiaries amounts to 1.3% (previous
year: 0.8%) of Group equity. The aggregate profit after tax of these companies
amounts to 3.7% (previous year: 0.2%) of the profit after tax of the Volkswagen
Group.
Companies where Volkswagen AG is able, directly or indirectly, to significantly
influence financial and operating policy decisions (associates), as well as joint
ventures, are accounted for using the equity method. Insignificant companies are
carried at cost. Joint ventures also include companies in which the Volkswagen Group
holds the majority of voting rights, but whose articles of association or partnership
agreements stipulate that important decisions may only be resolved unanimously
(minority protection).
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 121

Financial Statements
The following carrying amounts are attributable to the Group from its proportionate
interest in joint ventures:

million 2005 2004

Noncurrent assets 7,191 5,975

Auditors Report
Current assets 5,516 4,143
Noncurrent liabilities 3,378 2,880
Current liabilities 6,535 5,009
Income 3,950 4,402
Expenses 3,946 4,136

Executive Bodies
The composition of the Volkswagen Group is shown in the following table:

2005 2004
Volkswagen AG and fully consolidated subsidiaries

Additional Information
Germany 49 50
abroad 144 149
Subsidiaries carried at cost
Germany 42 43
abroad 80 85
Associates and joint ventures
Germany 35 37
abroad 53 50
403 414

The number of fully consolidated subsidiaries changed in the year under review
due to the initial consolidation of two German and four foreign companies. Five
companies were merged in the course of restructurings. Another two companies
were deconsolidated following the discontinuation of their business activities.
The fully consolidated company COSWORTH TECHNOLOGY LTD., Northampton,
and the unconsolidated company COSWORTH TECHNOLOGY INC., Novi, Michigan,
were sold effective January 1, 2005. COSWORTH TECHNOLOGY LTD., Northampton,
was therefore deconsolidated.
The interests in the fully consolidated companies Europcar Interrent Lease
S.r.L., Rome, including its subsidiaries, Europcar Renting, S.A., Madrid, and
Unirent Comrcio e Aluguer de Bens de Equipamento e Consumo, S.A., Lisbon,
were sold to the LeasePlan group. Following approval by the antitrust authorities,
these companies were deconsolidated at the end of September 2005, producing
disposal gains of 124 million.
122 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

Volkswagen Beteiligungs-Gesellschaft mbH was also formally deconsolidated after

it had been merged with Volkswagen AG.
The change in the consolidated group had no material effect on the comparability
of the consolidated financial statements.
The consolidated financial statements also include investment funds and other
special purpose entities whose net assets are attributable to the Group under the
principle of substance over form.
An agreement on the sale of the gedas group, Berlin, was signed on December
15, 2005. The responsible antitrust authorities have not yet approved this sale. The
assets and liabilities are not presented separately in accordance with IFRS 5 since
this would not enhance the decision-usefulness of the consolidated financial
statements.
A list of all shareholdings is filed with the Braunschweig local court under the
number HRB 100484. It may also be obtained directly from Volkswagen AG,
Finanz-Analytik und -Publizitt, Brieffach 1848-2, 38436 Wolfsburg, Germany.
The following fully consolidated German subsidiaries with the legal form of a
corporation or partnership meet the criteria set out in section 264(3) or section
264b of the German Commercial Code (HGB) and have exercised the option not to
publish annual financial statements:

Audi Synko GmbH, Ingolstadt

Audi Vertriebsbetreuungsgesellschaft mbH, Ingolstadt
Auto 5000 GmbH, Wolfsburg
AutoVision GmbH, Wolfsburg
Automobilmanufaktur Dresden GmbH, Dresden
Bugatti Engineering GmbH, Wolfsburg
quattro GmbH, Neckarsulm
Volkswagen Gebrauchtfahrzeughandels und Service GmbH, Hanover
Volkswagen Individual GmbH, Wolfsburg
VW Kraftwerk GmbH, Wolfsburg
Volkswagen Sachsen GmbH, Zwickau
Volkswagen Sachsen Immobilienverwaltungs GmbH, Zwickau
VOLKSWAGEN Synko GmbH, Wolfsburg
VOTEX GmbH, Dreieich
EUROPCAR INTERNATIONAL S.A. und Co. OHG, Hamburg
Kommanditgesellschaft MTH Motor-Technik-Handelsgesellschaft m.b.H. &
Co., Hamburg
Raffay GmbH + Co., Hamburg
Volkswagen Transport GmbH & Co. OHG, Wolfsburg
Volkswagen Original Teile Logistik GmbH & Co. KG, Baunatal
VW Wohnungs GmbH & Co. KG, Wolfsburg
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 123

Financial Statements
consolidation methods

The assets and liabilities of the German and foreign companies included in the
consolidated financial statements are recognized in accordance with the uniform
accounting policies used within the Volkswagen Group. In the case of companies

Auditors Report
accounted for using the equity method, the same accounting policies are applied to
determine the proportionate equity, based on the most recent audited annual financial
statements of each company.
In the case of subsidiaries consolidated for the first time, assets and liabilities
are measured at their fair value at the date of acquisition. Goodwill arises when the
purchase price of the investment exceeds the identifiable assets and liabilities.

Executive Bodies
Goodwill is tested for impairment once a year (Impairment-only Approach) to
determine whether the carrying amount of goodwill is recoverable. If the carrying
amount of goodwill is higher than the recoverable amount, an impairment loss must
be recognized. If this is not the case, there is no change in the carrying amount of

Additional Information
goodwill compared with the previous year. If the purchase price of the investment is
less than the identified assets and liabilities, the difference is recognized in the income
statement in the year of acquisition. Goodwill is accounted for at the subsidiaries in
the functional currency of those subsidiaries.
The assets acquired are recognized at their fair value and depreciated or amortized
over their applicable useful lives. If the asset has an indefinite useful life, any need
to recognize impairment losses is determined using the same method as for goodwill.
Receivables and liabilities, and expenses and income between consolidated
companies are eliminated. Intercompany profits or losses are eliminated in Group
inventories and noncurrent assets. Deferred taxes are recognized for consolidation
adjustments recognized in the income statement, with deferred tax assets and
liabilities offset where taxes are levied by the same tax authority and relate to the
same tax period.
The consolidation methods and accounting policies applied in the previous year
were retained, with the exception of the changes due to the new or amended
Standards.

currency translation

Transactions in foreign currency are translated in the single-entity financial statements

of Volkswagen AG and its consolidated subsidiaries at the rates prevailing at the
transaction date. Foreign currency monetary items are recorded in the balance sheet
using the middle rate on the balance sheet date. Foreign exchange gains and losses
are recognized in the income statement. Companies belonging to the Volkswagen
Group outside Germany are generally foreign entities whose financial statements
124 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

are translated into euros using the functional currency concept. Asset and liability
items are translated at the closing rate. With the exception of income and expenses
recognized directly in equity, equity is translated at historical rates. The resulting
foreign exchange differences are taken directly to equity until disposal of the subsidiary
concerned, and are presented as a separate item in equity.
Income statement items are translated into euros at weighted average rates using
the modified closing rate method. The rates applied are presented in the following
table:

Balance sheet Income statement

Middle rate on December 31 Average rate
1= 2005 2004 2005 2004
Argentina ARS 3.57630 4.05060 3.63920 3.65990
Australia AUD 1.61090 1.74590 1.63260 1.68920
Brazil BRL 2.76080 3.61500 3.03920 3.63730
United Kingdom GBP 0.68530 0.70505 0.68391 0.67857
India INR 53.09400 59.21050 54.81600 56.25550
Japan JPY 138.90000 139.65000 136.87040 134.39790
Canada CAD 1.37250 1.64160 1.50970 1.61700
Mexico MXN 12.56760 15.08370 13.55330 14.01770
Poland PLN 3.86000 4.08450 4.02260 4.53290
Republic of Korea KRW 1,184.42000 1,410.05000 1,274.38350 1,422.94960
Russia RUB 33.92000 37.75740 35.19960 35.80080
Sweden SEK 9.38850 9.02060 9.28010 9.12520
Slovak Republic SKK 37.88000 38.74500 38.59480 40.03390
South Africa ZAR 7.46420 7.68970 7.91680 8.01780
Czech Republic CZK 29.00000 30.46400 29.78530 31.90840
USA USD 1.17970 1.36210 1.24480 1.24320
Peoples Republic of China CNY 9.52040 11.27340 10.20250 10.29010

accounting policies

Intangible assets
Purchased intangible assets are recognized at cost and amortized over their useful
life using the straight-line method. This relates in particular to software, which is
amortized over three years.
In accordance with IAS 38, research costs are recognized as expenses when
incurred.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 125

Financial Statements
Development costs for future products and other internally generated intangible assets
are capitalized at cost, provided manufacture of the products is likely to bring the
Volkswagen Group an economic benefit. If the criteria for recognition as assets are
not met, the expenses are recognized in the income statement in the year in which
they are incurred.

Auditors Report
Cost includes all costs directly attributable to the development process as well
as appropriate portions of development-related overheads. Borrowing costs are not
capitalized. The costs are amortized using the straight-line method from the start of
production over the expected life cycle of the models or components developed
generally between five and ten years.
Amortization recognized during the year is allocated to the relevant functions in

Executive Bodies
the income statement.
Goodwill and intangible assets with indefinite useful lives are tested for impairment
at least once a year; intangible assets with finite useful lives are tested for impairment
only if there are specific indications that they may be impaired. The Volkswagen Group

Additional Information
applies value in use to determine the recoverable amount of goodwill and indefinite-
lived intangible assets. This is based on managements current planning. The planning
assumptions are adapted to reflect the current state of knowledge. They include
reasonable assumptions on macroeconomic trends and historical developments.
Estimation of cash flows is generally based on the expected growth trends for the
automobile markets concerned.

Property, plant and equipment

Property, plant and equipment is carried at cost less depreciation and where
necessary write-downs for impairment. Investment grants are generally deducted
from cost. Cost is determined on the basis of the direct costs as well as proportionate
material and production overheads, including depreciation. The cost of repairs and
borrowing costs are recorded as current expenses. Property, plant and equipment is
depreciated using the straight-line method over its estimated useful life.
Depreciation is based mainly on the following useful lives:

Useful life
Buildings 25 to 50 years
Site improvements 10 to 18 years
Technical equipment and machinery 6 to 12 years
Other equipment, operating and office equipment,
including special tools 3 to 15 years
126 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

Impairment losses on property, plant and equipment are recognized in accordance

with IAS 36 where the recoverable amount of the asset concerned has fallen below
the carrying amount. Recoverable amount is the higher of value in use and fair value
less costs to sell. If the reasons for impairments recognized in previous years no
longer apply, the impairment losses are reversed accordingly.
Where leased items of property, plant and equipment are used, the criteria for
classification as a finance lease as set out in IAS 17 are met if all material risks and
rewards incidental to ownership have been transferred to the Group company
concerned. In such cases, the assets concerned are recognized at cost or at the
present value of the minimum lease payments (if lower) and depreciated using the
straight-line method over the assets useful life, or over the term of the lease if this
is shorter. The payment obligations arising from the future lease payments are
discounted and recorded as a liability in the balance sheet.
Where consolidated companies are the lessees of assets under operating leases,
lease and rental payments are recorded directly as expenses in the income statement.

Leasing and rental assets

Vehicles leased out under operating leases are recognized at cost and depreciated
to their estimated residual value using the straight-line method over the term of the
lease.

Investment property
Real estate and buildings held in order to obtain rental income (investment property)
are carried at cost less cumulative depreciation and impairment losses; the useful
lives applied to depreciation correspond to those of the property, plant and equipment
used by the Company itself. The fair value of investment property must be disclosed
in the notes if it is carried at amortized cost. Fair value is estimated using an income
capitalization approach.

Financial instruments
Financial instruments are contracts that give rise to a financial asset of one company
and a financial liability or an equity instrument of another. Regular way purchases
or sales of financial instruments are accounted for at the settlement date that is, at
the date on which the asset is delivered.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 127

Financial Statements
IAS 39 classifies financial assets into the following categories:
financial assets at fair value through profit or loss;
held-to-maturity financial assets;
originated loans and receivables; and
available-for-sale financial assets.

Auditors Report
Financial liabilities are classified into the following categories:
financial liabilities at fair value through profit or loss; and
financial liabilities carried at amortized cost.
We recognize financial instruments at amortized cost or at fair value.
The amortized cost of a financial asset or liability is the amount:
at which a financial asset or liability is measured at initial recognition;

Executive Bodies
minus any principal repayments;
minus any write-down for impairment or uncollectibility;
plus or minus the cumulative amortization of any difference between the original
amount and the amount repayable at maturity (premium), amortized using the

Additional Information
effective interest method over the term of the financial asset or liability.
In the case of current receivables and liabilities, amortized cost generally corresponds
to the principal or repayment amount.
Fair value generally corresponds to the market or quoted market price. If no
active market exists, fair value is determined using valuation techniques, such as by
discounting the future cash flows at the market interest rate, or by using recognized
option pricing models, and verified by confirmations from the banks that handle the
transactions.

Originated financial instruments

Originated loans, receivables and liabilities, as well as held-to-maturity investments,
are measured at amortized cost, unless hedged. Specifically, these relate to:
receivables from financing business;
trade receivables and payables;
other receivables and financial assets and liabilities; and
financial liabilities.
Available-for-sale financial assets (securities) are carried at fair value. Changes in
fair value are recognized directly in equity, net of deferred taxes.
128 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

Shares in subsidiaries and other equity investments are also classified as

available-for-sale financial assets. However, they are generally carried at cost, since
no active market exists for those companies and fair values cannot be reliably
ascertained without undue cost or effort. Fair values are recognized if there are
indications that fair value is lower than cost.

Derivatives and hedge accounting

Volkswagen Group companies use derivatives to hedge balance sheet items and future
cash flows (hedged items). Derivatives, such as swaps, forward transactions and
options, are used as the primary hedging instruments. A criterion for the application
of hedge accounting is that the hedging relationship between the hedged item and
the hedging instrument is clearly documented and evidenced.
The accounting treatment of changes in the fair value of hedging instruments
depends on the nature of the hedging relationship. In the case of hedges against the
risk of change in the carrying amount of balance sheet items (fair value hedges),
both the hedging instrument and the hedged risk portion of the hedged item are
measured at fair value. Gains or losses from remeasurement are recognized in profit
or loss. In the case of hedges of future cash flows (cash flow hedges), the hedging
instruments are also measured at fair value. Gains or losses from remeasurement of the
effective portion of the derivative are initially recognized in the reserve for cash flow
hedges directly in equity, and are only recognized in the income statement when the
hedged item is recognized in profit or loss. The ineffective portion of a hedge is
recognized immediately in profit or loss.
Derivatives used by the Volkswagen Group for financial management purposes
to hedge against interest rate, foreign currency, or price risks, but that do not meet
the strict criteria of IAS 39, are classified as financial assets or liabilities at fair value
through profit or loss. External hedges of intra-Group hedged items that are
subsequently eliminated in the consolidated financial statements are also assigned
to this category.

Receivables from finance leases

Where a Group company is the lessor generally of vehicles a receivable in the
amount of the net investment in the lease is recognized in the case of finance leases,
in other words where essentially all risks and rewards incidental to ownership are
transferred to the lessee.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 129

Financial Statements
Other receivables and financial assets
Other receivables and financial assets (except for derivatives) are recognized at
amortized cost. Appropriate valuation allowances take account of identifiable specific
risks and general credit risks.

Auditors Report
Deferred taxes
Deferred taxes are recognized for all temporary differences between the tax base of
assets and liabilities and their carrying amounts in the consolidated balance sheet.
Deferred tax assets are recognized for tax loss carryforwards provided it is probable
that they can used in future periods.
Deferred tax liabilities and assets are recognized in the amount of the expected

Executive Bodies
tax liability or tax benefit, as appropriate, in subsequent fiscal years, based on the
expected enacted tax rate at the time of realization. The tax consequences of
dividend payments are not taken into account until the resolution on appropriation
of earnings available for distribution has been adopted.

Additional Information
Deferred tax assets that are unlikely to be realized within a clearly predictable
period are reduced by valuation allowances.
Deferred tax assets and deferred tax liabilities are offset where taxes are levied
by the same taxation authority and relate to the same tax period.

Inventories
Raw materials, consumables and supplies, merchandise, work in progress and self-
produced finished goods reported in inventories are carried at cost. Cost includes
direct costs and an appropriate share of the necessary material and production
overheads, as well as production-related depreciation directly attributable to the
production process. Administrative expenses are included to the extent that they are
attributable to production. Borrowing costs are not capitalized. Inventories are
measured at net realizable value where this is lower than cost at the balance sheet
date. The measurement of same or similar inventories is based on the weighted
average cost method.

Pension provisions
The actuarial valuation of pension provisions is based on the projected unit credit
method in respect of post-employment benefits in accordance with IAS 19. The
valuation is based not only on pension payments and vested entitlements known at
the balance sheet date, but also reflects future salary and pension trends. Actuarial
gains and losses are recognized directly in equity, net of deferred taxes.
130 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

Provisions for taxes

Tax provisions contain obligations resulting from current taxes. Deferred taxes are
presented in separate items of the balance sheet and income statement.

Other provisions
In accordance with IAS 37, provisions are recognized where a present obligation
exists to third parties as a result of a past event; where a future outflow of resources
is probable; and where a reliable estimate of that outflow can be made.
Provisions not resulting in an outflow of resources in the year immediately
following are recognized at their settlement value discounted to the balance sheet
date. Discounting is based on market interest rates. The settlement value also reflects
cost increases expected at the balance sheet date.
Provisions are not offset against claims for reimbursement.

Liabilities
Noncurrent liabilities are recorded at amortized cost in the balance sheet. Differences
between historical cost and the repayment amount are amortized using the effective
interest method.
Liabilities to members of partnerships from the provision of capital are carried at
the fair value of the redemption amount at the balance sheet date.
Liabilities under finance leases are carried at the present value of the lease
payments.
Current liabilities are recognized at their repayment or settlement value.

Revenue and expense recognition

Sales revenue, interest and commission income from financial services and other
operating income are recognized only when the relevant service has been rendered
or the goods delivered, that is, when the risk has passed to the customer. Income
from assets for which a Group company has a buy-back obligation is recognized
only when the assets have definitively left the Group. Prior to that time, they are
carried as inventories. Cost of sales includes the costs incurred to generate the sales
revenues and the cost of goods purchased for resale. This item also includes the
costs of additions to warranty provisions. Research and development costs not
eligible for capitalization in the period and amortization of development costs are
likewise carried under cost of sales. Reflecting the presentation of interest and
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 131

Financial Statements
commission income in sales revenue, the interest and commission expenses
attributable to the financial services business are presented in cost of sales.
Distribution expenses include personnel and material costs, and depreciation and
amortization applicable to the distribution function, as well as the costs of shipping,
advertising, sales promotion, market research and customer service. Administrative

Auditors Report
expenses include personnel costs and overheads as well as depreciation and
amortization applicable to administrative functions. Government grants are generally
deducted from the cost of the relevant assets. Personnel expenses are recognized
in respect of the issue of convertible bonds to employees conveying the right to
purchase shares of Volkswagen AG. Dividend income is generally recognized on the
date at which the dividend is legally approved.

Executive Bodies
Estimates and assumptions by management
Preparation of the consolidated financial statements requires management to make
certain estimates and assumptions that affect the reported amounts of assets and

Additional Information
liabilities, and income and expenses, as well as the related disclosure of contingent
assets and liabilities of the reporting period. Such estimates and assumptions relate
primarily to the assessment of the recoverability of intangible assets, the standard
definition throughout the Group of useful lives of items of property, plant and
equipment and of leasing and rental assets, the collectibility of receivables, and the
recognition and measurement of provisions. The estimates and assumptions are
based on underlying assumptions that reflect the current state of available knowledge.
Specifically, the expected future development of business was based on the
circumstances known at the date of preparation of these consolidated financial
statements and a realistic assessment of the future development of the global and
sector-specific environment. Developments in this environment that differ from the
assumptions and that cannot be influenced by management could result in amounts
that differ from the original estimates. If actual developments differ from the expected
developments, the underlying assumptions and, if necessary, the carrying amounts
of the assets and liabilities affected are adjusted.
At the date of preparation of these consolidated financial statements, the underlying
assumptions and estimates were not exposed to any material risks. At present,
management does not therefore believe that there will be a requirement in the
following fiscal year for any material adjustment to the carrying amounts of assets
and liabilities reported in the consolidated balance sheet.
132 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

segment reporting

by division

Automotive Financial Services Consolidation Volkswagen Group

million 2005 2004 2005 2004 2005 2004 2005 2004
Sales to third parties 86,382 80,785 8,886 8,178 95,268 88,963
Intersegment sales revenue 1,482 1,322 709 532 2,191 1,854
Segment sales revenue 87,864 82,107 9,595 8,710 2,191 1,854 95,268 88,963
Impairment losses* 646 462 33 184 679 646
Reversals of impairment losses* 17 1 31 1 48 2
Operating profit 1,807 590 933 927 52 125 2,792 1,642
Share of profits and losses of
Group companies accounted
for using the equity method 45 212 123 43 78 255
Cash flows from operating activities 8,719 9,282 2,698 2,576 607 401 10,810 11,457
Segment assets 69,455 66,996 61,459 58,628 5,964 6,156 124,950 119,468
Investments in Group companies
accounted for using the equity method 2,842 2,926 1,356 1,295 4,198 4,221
Segment liabilities 57,204 54,189 55,944 54,067 7,743 7,711 105,405 100,545
Investments in property, plant and equipment
and other intangible assets 4,316 5,425 118 125 4,434 5,550
Capitalized development costs 1,432 1,501 1,432 1,501
Investments in leasing and rental assets
and investment property 51 70 8,087 6,762 8,138 6,832
Investing activities 6,501 7,631 4,752 8,015 33 848 11,286 14,798
* Intangible assets, property, plant and equipment, leasing and rental assets, investment property and inventories.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 133

Financial Statements
by market 2005

Germany Rest of North South Africa Asia/ Consol- Total

million Europe America America Oceania idation

Auditors Report
Sales to third parties 26,297 43,062 13,724 4,956 1,968 5,261 95,268
Investments in property, plant and equipment,
and other intangible assets 2,664 1,210 286 183 54 16 21 4,434
Segment assets 71,533 47,467 21,697 5,600 929 3,025 25,301 124,950

Executive Bodies
by market 2004

Germany Rest of North South Africa Asia/ Consol- Total

million Europe America America Oceania idation
Sales to third parties 24,504 39,755 13,308 3,949 1,582 5,865 88,963

Additional Information
Investments in property, plant and equipment,
and other intangible assets 3,541 1,376 417 120 71 14 11 5,550
Segment assets 72,022 43,606 17,444 3,652 686 2,693 20,635 119,468

The internal organizational and management structure and the internal reporting
lines to the Board of Management and the Supervisory Board form the basis for
identifying the primary format of segment reporting within the Volkswagen Group
by the two divisions Automotive and Financial Services. The secondary reporting
format is geographically based.
As a matter of principle, business relationships between the companies within
the segments of the Volkswagen Group are transacted at arms length prices.
134 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

income statement disclosures

>1 sales revenue

structure of group sales revenue

million 2005 2004

Vehicles 74,294 68,055
Genuine parts 5,961 5,849
Other sales revenue 6,454 7,113
Rental and leasing business 5,595 5,187
Interest and similar income from financial services business 2,964 2,759
95,268 88,963

For segment reporting purposes, the sales revenue of the Group is presented by
division and market.

>2 cost of sales

Cost of sales includes interest expenses of 1,826 million (previous year:

1,568 million) attributable to the financial services business.

>3 other operating income

million 2005 2004

Income from reversal of valuation allowances
on receivables and other assets 374 460
Income from reversal of
provisions and accruals 1,057 909
Income from realized foreign
currency hedging derivatives 259 593
Income from foreign exchange gains 698 485
Income from sale of promotional material 179 157
Income from cost allocations 812 673
Income from investment property 63 70
Gains on asset disposals 102 133
Miscellaneous other operating income 1,008 981
4,552 4,461
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 135

Financial Statements
Foreign exchange gains mainly comprise gains from changes in exchange rates
between the dates of recognition and payment of receivables and liabilities
denominated in foreign currencies, as well as exchange rate gains resulting from
measurement at the closing rate. Foreign exchange losses from these items are
included in other operating expenses.

Auditors Report
>4 other operating expenses

million 2005 2004

Valuation allowances on receivables and other assets 823 754

Executive Bodies
Realized losses from derivative
currency hedging instruments 396 313
Foreign exchange losses 628 521
Expenses from cost allocations 225 145
Miscellaneous other operating expenses 1,277 1,143

Additional Information
3,349 2,876

>5 share of profits and losses of group companies accounted

for using the equity method

million 2005 2004

Share of profits of Group companies accounted for
using the equity method 267 345
of which from: joint ventures (174) (260)
associates (93) (85)
Share of losses of Group companies accounted for
using the equity method 189 90
of which from: joint ventures (188) (83)
associates (1) (7)
78 255
136 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

>6 other financial result

million 2005 2004

Income from profit and loss transfer agreements 16 21
Cost of loss absorption 1 1
Miscellaneous other income from equity investments 11 27
of which from: subsidiaries (9) (25)
other equity investments (2) (2)
Other expenses from equity investments 51 70
of which from: subsidiaries (4) (3)
other equity investments (47) (67)
Other expenses from equity investments 25 23
Income from securities and loans 220 167
of which from subsidiaries (1) (3)
Other interest and similar income 423 414
Other interest and similar expenses 816 695
Gains from fair value remeasurement of
ineffective hedging derivatives 118 154
Gains from fair value remeasurement of
assets and liabilities 32 261
Losses from fair value remeasurement of
ineffective hedging derivatives 222 196
Losses from fair value remeasurement of
assets and liabilities 7 37
Interest cost included in lease payments 10 13
Interest result 262 55
Interest cost on pension provisions 714 743
Interest cost on other provisions 147 98
Miscellaneous other financial result 861 841
Other financial result 1,148 809

Gains and losses on hedged items and the related hedging derivatives within
the meaning of IAS 39 are presented net in Gains and losses from the fair value
remeasurement of ineffective hedging derivatives.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 137

Financial Statements
>7 income tax expense

components of tax expense

million 2005 2004

Auditors Report
Current tax expense, Germany 364 418
Current tax expense, abroad 657 548
Current tax expense 1,021 966
of which prior period (76) (38)
Income from reversal of tax provisions 145 115
Current income tax expense 876 851
Deferred tax income Germany 203 498

Executive Bodies
Deferred tax income/expense abroad 71 38
Deferred tax income 274 460
Income tax expense 602 391

Additional Information
The statutory corporation tax rate in Germany for the 2005 assessment period was
25%. This resulted in an aggregate tax rate, including trade tax and the solidarity
surcharge, of 38.3%. In fiscal year 2005, deferred taxes were measured at a tax rate
of 38.3%. The local income tax rates applied for companies outside Germany vary
between 0% and 42.0%. In the case of split tax rates, the tax rate applicable to
undistributed profits is applied.
The realization of tax benefits from tax loss carryforwards from previous years
resulted in a reduction in current income taxes in 2005 by 155 million (previous
year: 114 million).
Previously unused tax loss carryforwards amounted to 3,837 (previous year:
3,595 million). Tax loss carryforwards amounting to 1,890 million (previous
year: 1,682 million) can be used indefinitely, while 222 million (previous year:
253 million) must be used within the next ten years. There are additional tax
loss carryforwards amounting to 1,725 million (previous year: 1,660 million)
that can be used within a period of 15 to 20 years. It was estimated that tax loss
carryforwards of 615 million (previous year: 692 million) will not be usable.
The increase in unused tax loss carryforwards results primarily from the tax
results of the Brazilian companies.
138 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

Deferred taxes were recognized where income from subsidiaries was tax-exempt
in the past due to specific local regulations, but the tax effects on discontinuation of
the temporary tax exemption have become foreseeable. Tax benefits amounting to
303 million (previous year: 305 million) were recognized because of tax credits
granted by various countries to compensate for the loss of tax relief where the amounts
involved were unlimited.
No deferred tax assets were recognized for deductible temporary differences of
51 million (previous year: 54 million) and for tax credits of 206 million (previous
year: 5 million).
Deferred tax income resulting from changes in tax rates amounted to 10 million
(previous year: 16 million).
1,182 million (previous year: 595 million) of the deferred taxes recognized in
the balance sheet was taken directly to equity without being recognized in the
income statement. Exercise of the option under IAS 19 to take actuarial losses directly
to equity resulted in an increase in equity from the recognition of deferred taxes of
469 million (previous year: 305 million) in 2005. Changes in deferred taxes on
reserves for cash flow hedges increased equity by 194 million (previous year:
reduction by 5 million). The deferred taxes required to be recognized on the fair
value measurement of securities reduced equity by 76 million.
If taxed and untaxed components of equity were to be fully distributed,
unrecognized recoverable corporation tax would amount to 1,165 million (previous
year: 1,162 million). The provisions of the German Tax Relief Reduction Act enacted
in April 2003 only applied until fiscal year 2005. Starting with fiscal year 2006, this
Act stipulates that corporation tax relief will again be granted on dividends. The
proposed dividend for fiscal year 2005 will therefore trigger tax relief of 75 million.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 139

Financial Statements
The following recognized deferred tax assets and liabilities are attributable to
recognition and measurement differences in the individual balance sheet items
and to tax loss carryforwards:

Deferred tax assets Deferred tax liabilities

million Dec. 31, 2005 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2004

Auditors Report
Intangible assets 145 120 2,283 2,331
Property , plant and equipment, and
leasing and rental assets 4,519 4,170 3,116 2,770
Noncurrent financial instruments 173 231 48 52
Inventories 164 161 107 123
Receivables and other assets
(including Financial Services Division) 824 610 5,158 4,591

Executive Bodies
Other current financial assets 28 89 84 39
Pension provisions 2,065 1,639 6 8
Other provisions 2,004 1,602 104 58
Liabilities 1,639 1,250 543 616
Tax loss carryforwards 1,058 1,136 0 0

Additional Information
Valuation allowances on
deferred tax assets 2 181 0 0
Gross value 12,617 10,827 11,449 10,588
of which noncurrent (8,691) (7,609) (8,600) (7,908)
Offset 10,608 8,968 10,608 8,968
Consolidation 863 828 781 634
Amount recognized 2,872 2,687 1,622 2,254
140 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

In accordance with IAS 12, deferred tax assets and liabilities are offset if, and only if,
they relate to income taxes levied by the same taxation authority and relate to the
same tax period.
The tax expense of 602 million reported for 2005 (previous year: 391 million)
was 58 million (previous year: 26 million) lower than the expected tax expense of
660 million that would have resulted from application of a tax rate applicable to
undistributed profits of 38.3% to the profit before tax of the Group.

reconciliation of expected to effective income tax expense

million 2005 2004

Profit before tax 1,722 1,088
Expected income tax expense
(tax rate 38.3%; previous year: 38.3%) 660 417
Reconciliation:
Effect of different tax rates outside Germany 186 216
Proportion of taxation relating to:
tax-exempt income 146 131
expenses not deductible for tax purposes 237 297
temporary differences and losses
for which no deferred taxes were recognized 119 265
Tax credits 64 201
Prior-period current tax expense 24 20
Effect of tax rate changes 10 16
Other taxation effects 4 4
Effective income tax expense 602 391
Effective tax rate (%) 34.9 35.9
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 141

Financial Statements
>8 earnings per share

Basic earnings per share are calculated by dividing profit attributable to share-
holders of Volkswagen AG by the weighted average number of ordinary and
preferred shares outstanding during the reporting period. Earnings per share are

Auditors Report
diluted by potential shares. These include stock options, although these are only
dilutive if they result in the issuance of shares at a value below the average market
price of the shares. There was no dilutive effect because the annual average price of
Volkswagen ordinary shares was below the conversion price for the exercise of
conversion rights.

Executive Bodies
Ordinary Preferred
Quantity 2005 2004 2005 2004
Weighted average number of
shares outstanding
basic 279,126,053 278,570,587 105,238,280 105,238,280

Additional Information
Dilutive potential ordinary
shares
stock option plan
bonds with warrants
Weighted average number of
shares outstanding
diluted 279,126,053 278,570,587 105,238,280 105,238,280

million 2005 2004

Profit after tax 1,120 697
Minority interests 0 4
Profit attributable to shareholders of Volkswagen AG 1,120 693
Basic earnings
of which relating to: ordinary shares 809 499
preferred shares 311 194
Diluted earnings
of which relating to: ordinary shares 809 499
preferred shares 311 194

in 2005 2004
Earnings per share basic
Ordinary shares 2.90 1.79
Preferred shares 2.96 1.85
Earnings per share diluted
Ordinary shares 2.90 1.79
Preferred shares 2.96 1.85
142 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

balance sheet disclosures

>9 intangible assets

changes in intangible assets between january 1 and december 31, 2004

Concessions, Goodwill Capitalized Capitalized Other Total

industrial and costs for development intangible
similar rights, products costs for prod- assets
and licenses, under ucts currently
in such rights development in use
and assets

million
Historical cost
Balance at Jan. 1, 2004 49 1,359 2,210 7,626 1,210 12,454
Foreign exchange differences 1 20 13 13 1 18
Changes in consolidated Group 1 1
Additions 3 2 1,039 462 139 1,645
Transfers 2 27 1,578 1,577 2 26
Disposals 2 1,183 16 1,145 234 2,580
Balance at Dec. 31, 2004 51 225 1,642 8,533 1,113 11,564
Amortization and impairment
Balance at Jan. 1, 2004 33 1,168 98 3,329 681 5,309
Foreign exchange differences 1 6 2 3
Changes in consolidated Group 0 0
Additions to cumulative
amortization 8 1,134 173 1,315
Additions to cumulative
impairment losses 6 2 8
Transfers 16 9 7
Disposals 2 1,184 17 1,132 233 2,568
Reversal of impairment losses
Balance at Dec. 31, 2004 44 81 3,337 612 4,074
Carrying amount
at Dec. 31, 2004 7 225 1,561 5,196 501 7,490

The value in use determined for intangible assets in measuring recoverable amounts
is based on a discount rate equal to the return on investment required within the
Volkswagen Group. Sensitivity analyses have shown that it would be unnecessary to
recognize impairment losses on goodwill and indefinite-lived intangible assets,
including in the case of realistic variations in key assumptions.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 143

Financial Statements
changes in intangible assets between january 1 and december 31, 2005

Concessions, Goodwill Capitalized Capitalized Other Total

industrial and costs for development intangible
similar rights, products costs for prod- assets

Auditors Report
and licenses, under ucts currently
in such rights development in use
and assets

million
Historical cost
Balance at Jan. 1, 2005 51 225 1,642 8,533 1,113 11,564
Foreign exchange differences 4 8 29 144 20 205

Executive Bodies
Changes in consolidated Group 4 4
Additions 8 5 1,071 361 186 1,631
Transfers 3 1,024 1,016 24 19
Disposals 3 3 514 64 584
Balance at Dec. 31, 2005 63 238 1,715 9,540 1,283 12,839
Amortization and impairment

Additional Information
Balance at Jan. 1, 2005 44 81 3,337 612 4,074
Foreign exchange differences 4 60 15 79
Changes in consolidated Group 0 0
Additions to cumulative
amortization 7 1,316 165 1,488
Additions to cumulative
impairment losses 1 5 117 0 123
Transfers 1 1 2
Disposals 3 511 81 595
Reversal of impairment losses
Balance at Dec. 31, 2005 54 86 4,319 712 5,171
Carrying amount
at Dec. 31, 2005 9 238 1,629 5,221 571 7,668

Of the total research and development costs incurred in 2005, 1,432 million
(previous year: 1,501 million) met the criteria for capitalization under IFRSs.

The following amounts were recognized as expenses:

million 2005 2004

Research and non-capitalized development costs 2,643 2,663
Amortization of development costs 1,438 1,134
Research and development costs recognized in the
income statement 4,081 3,797
144 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

> 10 property, plant and equipment

changes in property, plant and equipment between january 1 and december 31, 2004

Land, land Technical Other Payments Total

rights and equipment equipment, on account
buildings, and operating and assets
including machinery and office under
buildings on equipment construction
third-party
land
million
Historical cost at Jan. 1, 2004 12,802 21,997 26,711 2,289 63,799
Foreign exchange differences 43 112 22 5 138
Changes in consolidated Group 0 2 1 3 6
Additions 282 1,156 2,725 1,282 5,445
Transfers 251 872 834 1,983 26
Disposals 21 506 1,051 22 1,600
Balance at Dec. 31, 2004 13,357 23,633 29,198 1,574 67,762
Depreciation and impairment
Balance at Jan. 1, 2004 5,814 15,076 19,057 0 39,947
Foreign exchange differences 2 43 25 16
Changes in consolidated Group 0 0 0 0
Additions to cumulative
depreciation 455 1,828 2,893 5,176
Additions to cumulative
impairment losses 23 90 168 3 284
Transfers 0 0 6 1 7
Disposals 11 481 957 0 1,449
Reversal of impairment losses 0 0
Balance at Dec. 31, 2004 6,279 16,556 21,130 2 43,967
Carrying amount at Dec. 31, 2004 7,078 7,077 8,068 1,572 23,795
of which assets leased under
finance lease contracts
Carrying amount at Dec. 31, 2004 194 1 23 218
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 145

Financial Statements
changes in property, plant and equipment between january 1 and december 31, 2005

Land, land Technical Other Payments Total

rights and equipment equipment on account
buildings, and operating and assets

Auditors Report
including machinery and office under
buildings on equipment construction
third-party
land
million
Historical cost at Jan. 1, 2005 13,357 23,633 29,198 1,574 67,762
Foreign exchange differences 257 604 602 54 1,517
Changes in consolidated Group 7 1 4 12

Executive Bodies
Additions 227 724 2,216 1,078 4,245
Transfers 149 639 544 1,349 17
Disposals 100 1,076 1,444 27 2,647
Balance at Dec. 31, 2005 13,897 24,525 31,120 1,330 70,872
Depreciation and impairment
Balance at Jan. 1, 2005 6,279 16,556 21,130 2 43,967

Additional Information
Foreign exchange differences 105 413 434 952
Changes in consolidated Group 2 1 2 5
Additions to cumulative
depreciation 472 1,831 2,910 5,213
Additions to cumulative
impairment losses 16 118 112 0 246
Transfers 1 14 15 2 0
Disposals 54 1,023 1,300 2,377
Reversal of impairment losses 1 17 18
Balance at Dec. 31, 2005 6,820 17,865 23,303 0 47,988
Carrying amount at Dec. 31, 2005 7,077 6,660 7,817 1,330 22,884
of which assets leased under
finance lease contracts
Carrying amount at Dec. 31, 2005 184 1 20 205

Call options on buildings and plant leased under the terms of finance leases exist in
most cases, and are normally exercised. Interest rates on the leases vary between
2.9% and 11.0%, depending on the market and the date of inception of the lease.
Future finance lease payments due, and their present values, are shown in the
following table:

million 2006 2007 2010 from 2011 Total

Finance lease payments 112 97 148 357
Interest component of finance
lease payments 13 33 31 77
Present value of finance
lease payments 99 64 117 280

For assets leased under operating leases, payments recognized in the income statement
amounted to 315 million in the year under review (previous year: 386 million).
146 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

> 11 leasing and rental assets and investment property

Leasing and Investment Total

rental assets property
million
Historical cost
Balance at Jan. 1, 2004 10,414 619 11,033
Foreign exchange differences 498 18 480
Changes in consolidated Group
Additions 6,773 59 6,832
Transfers 2 2 0
Disposals 5,722 366 6,088
Balance at Dec. 31, 2004 10,965 332 11,297
Depreciation and impairment
Balance at Jan. 1, 2004 1,964 163 2,127
Foreign exchange differences 127 1 126
Changes in consolidated Group
Additions to cumulative depreciation 1,583 10 1,593
Additions to cumulative impairment losses 183 1 184
Transfers 1 1
Disposals 1,120 25 1,145
Reversal of impairment losses 1 1 2
Balance at Dec. 31, 2004 2,481 150 2,631
Carrying amount at Dec. 31, 2004 8,484 182 8,666

Leasing and Investment Total

rental assets property
million
Historical cost
Balance at Jan. 1, 2005 10,965 332 11,297
Foreign exchange differences 1,117 2 1,119
Changes in consolidated Group 0 0
Additions 8,131 7 8,138
Transfers 2 2
Disposals 7,532 24 7,556
Balance at Dec. 31, 2005 12,681 315 12,996
Depreciation and impairment
Balance at Jan. 1, 2005 2,481 150 2,631
Foreign exchange differences 294 0 294
Changes in consolidated Group 0 0
Additions to cumulative depreciation 1,586 7 1,593
Additions to cumulative impairment losses 33 33
Transfers 1 1
Disposals 1,565 8 1,573
Reversal of impairment losses 30 30
Balance at Dec. 31, 2005 2,799 148 2,947
Carrying amount at Dec. 31, 2005 9,882 167 10,049
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 147

Financial Statements
Leasing and rental assets include assets leased out under the terms of operating
leases.
Investment property includes leased dealerships and apartments rented out,
with a fair value of 446 million. Operating expenses of 47 million were incurred
for the maintenance of investment property in use. Expenses of 1 million were

Auditors Report
incurred for unused investment property.

The following payments from non-cancelable leases and rental agreements are
expected to be received over the coming years:

Executive Bodies
million 2006 2007 2010 from 2011 Total
1,103 1,186 32 2,321

> 12 investments in group companies accounted for using the equity

Additional Information
method and other equity investments

Shares in Other Total

Group equity
companies investments
accounted for
using
the equity
method
million
Historical cost
Balance at Jan. 1, 2004 3,746 445 4,191
Foreign exchange differences 26 0 26
Changes in consolidated Group
Additions 1,423 87 1,510
Transfers 0 0
Disposals 792 70 862
Reversal of impairment losses 14 14
Balance at Dec. 31, 2004 4,351 476 4,827
Impairment losses
Balance at Jan. 1, 2004 407 141 548
Foreign exchange differences 1 1 0
Changes in consolidated Group
Additions to cumulative depreciation
Additions to cumulative impairment losses 15 70 85
Transfers
Disposals 291 29 320
Reversal of impairment losses 0 0 0
Balance at Dec. 31, 2004 130 183 313
Carrying amount at Dec. 31, 2004 4,221 293 4,514
148 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

Shares in Other Total

Group equity
companies investments
accounted for
using
the equity
method
million
Historical cost
Balance at Jan. 1, 2005 4,351 476 4,827
Foreign exchange differences 62 10 72
Changes in consolidated Group 1 1
Additions 465 142 607
Transfers 72 72 0
Disposals 562 39 601
Reversal of impairment losses 2 2
Balance at Dec. 31, 2005 4,388 520 4,908
Impairment losses
Balance at Jan. 1, 2005 130 183 313
Foreign exchange differences 2 1 3
Changes in consolidated Group
Additions to cumulative impairment losses 64 4 68
Transfers
Disposals 0 4 4
Reversal of impairment losses 6 0 6
Balance at Dec. 31, 2005 190 184 374
Carrying amount at Dec. 31, 2005 4,198 336 4,534

The investments in companies accounted for using the equity method include
joint ventures in the amount of 2,800 million (previous year: 2,843 million).
Significant joint ventures and associates are detailed in the listing of significant
Group companies at the end of the notes to the consolidated financial statements.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 149

Financial Statements
> 13 noncurrent and current financial services receivables

Carrying Fair value Carrying Fair value

amount amount
million current noncurrent Dec. 31, 2005 Dec. 31, 2005 current noncurrent Dec. 31, 2004 Dec. 31, 2004
Receivables from
financing business

Auditors Report
customer financing 9,034 16,562 25,596 25,642 8,106 15,281 23,387 23,556
dealer financing 8,537 745 9,282 9,282 8,306 668 8,974 8,971
direct banking 77 104 181 179 53 53 53
17,648 17,411 35,059 35,103 16,465 15,949 32,414 32,580
Receivables from
operating lease business 79 79 79 194 194 194
Receivables from

Executive Bodies
finance leases 4,685 7,547 12,232 12,225 4,450 6,813 11,263 11,255
22,412 24,958 47,370 47,407 21,109 22,762 43,871 44,029

Noncurrent receivables from the customer financing business mainly bear fixed

Additional Information
interest at rates of between 0.6% and 20.4%, depending on the market concerned.
They have terms of up to 60 months. The noncurrent portion of dealer financing is
granted at interest rates of between 3.1% and 8.8%, depending on the country.
The receivables from customer and dealer financing are secured by vehicles or
real property liens.
The receivables from dealer financing include an amount of 85 million
(previous year: 73 million) receivable from subsidiaries.
The receivables from finance leases almost entirely in respect of vehicles are
expected to generate the following cash flows:

million 2006 2007 2010 from 2011 Total

Future payments from
finance lease receivables 5,098 8,201 13 13,312
Unearned finance income from
finance leases (discounting) 413 666 1 1,080
Carrying amount of receivables
from finance leases 4,685 7,535 12 12,232
Present value of unguaranteed
residual values
Present value of minimum lease
payments outstanding at the
balance sheet date 4,685 7,535 12 12,232

Outstanding finance lease receivables are reduced by valuation allowances of

201 million.
150 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

> 14 noncurrent and current other receivables and financial assets

Carrying Fair value Carrying Fair value

amount amount
million current noncurrent Dec. 31, 2005 Dec. 31, 2005 current noncurrent Dec. 31, 2004 Dec. 31, 2004
Other receivables from
subsidiaries 255 11 266 266 66 10 76 76
joint ventures 1,247 566 1,813 1,819 892 457 1,349 1,349
associates 17 17 17 7 7 7
other companies
in which an
investment is held 16 125 141 140 73 127 200 200
Recoverable income taxes 1,155 30 1,185 1,186 1,002 28 1,030 1,030
Positive fair values
of derivatives 401 769 1,170 1,170 723 956 1,679 1,679
Other assets 1,765 769 2,534 2,520 1,099 720 1,819 1,804
4,856 2,270 7,126 7,118 3,862 2,298 6,160 6,145

Other assets include plan assets to fund post-employment benefits in the amount of
30 million (previous year: 75 million).
There are no material restrictions on title or right of use in respect of other
receivables and financial assets. Default risks are accounted for by means of
valuation allowances. Allowances for doubtful accounts amounting to 272 million
(previous year: 291 million) were recognized.
Other receivables and financial assets include loans to joint ventures, associates
and other equity investments, and bear interest at rates of up to 14.8% (previous
year: 3.7%).
Other receivables from subsidiaries include loans with terms of between one and
15 years, which were lent at interest rates of between 2.4% and 9.32%.
Current other receivables are predominantly non-interest-bearing.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 151

Financial Statements
Derivatives have the following positive fair values:

million Dec. 31, 2005 Dec. 31, 2004

Transactions for hedging against
foreign currency risk from assets using fair value hedges 13 308
foreign currency risk from liabilities using fair value hedges 40 84

Auditors Report
interest rate risk using fair value hedges 671 710
interest rate risk using cash flow hedges 88 33
foreign currency risk from future cash flow
(cash flow hedges) 68 262
Hedging transactions 880 1,397
Assets arising from ineffective hedging derivatives 290 282

Executive Bodies
1,170 1,679

Further details on derivatives as a whole are given in note 28 Financial instruments.

Additional Information
> 15 tax assets

Carrying Carrying
amount amount
million current noncurrent Dec. 31, 2005 current noncurrent Dec. 31, 2004
Deferred tax assets 2,872 2,872 2,687 2,687
Current tax receivables 317 317 469 469
317 2,872 3,189 469 2,687 3,156

> 16 inventories

million Dec. 31, 2005 Dec. 31, 2004

Raw materials, consumables and supplies 2,163 1,943
Work in progress 1,355 1,289
Finished goods and purchased merchandise 9,100 8,177
Payments on account 25 31
12,643 11,440

Of the total inventories, 2,373 million (previous year: 1,952 million) is recognized
at net realizable value. The production cost of inventories is recognized as an
expense and included in cost of sales in the amount of 74,550 (previous year:
70,984). Valuation allowances recognized as expenses in the reporting period
amount to 277 million (previous year: 170 million).
152 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

> 17 trade receivables

million Dec. 31, 2005 Dec. 31, 2004

Trade receivables from
third parties 5,252 4,853
subsidiaries 151 178
joint ventures 176 248
associates 52 74
other companies in which an investment is held 7 4
5,638 5,357

The fair values of the trade receivables correspond to the carrying amounts. Valuation
allowances of 116 million (previous year: 162 million) were recognized.

> 18 securities

The securities serve to safeguard liquidity. Securities classified as current assets are
quoted, mainly short-term fixed-income securities, and shares.

> 19 cash and cash equivalents

million Dec. 31, 2005 Dec. 31, 2004

Bank balances 7,750 9,937
Checks, cash-in-hand and call deposits 213 284
7,963 10,221

Bank balances are held at various banks in different currencies.

 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 153

Financial Statements
> 20 equity

Sub- Capital Retained earnings Equity Minority Total

scribed reserves attribu- interests equity
capital Reserve table to
for Reserve Fair value share-
Accumu- Currency actuarial for reserve holders
lated translation gains and cash flow for of VW AG

Auditors Report
million profit reserve losses hedges securities
Balance before restatement
at Jan. 1, 2004 1,089 4,451 20,391 2,212 40 23,759 104 23,863
Change in accounting
policies IAS 19 and IAS 32 157 608 765 49 814
Balance after restatement
at Jan. 1, 2004 1,089 4,451 20,234 2,212 608 40 22,994 55 23,049
Capital increase

Executive Bodies
Dividend payment 409 409 10 419
Recognized income
and expense 693 189 787 49 234 2 232
Deferred taxes 305 5 300 300
Other changes 17 17 0 17

Additional Information
Balance at Dec. 31, 2004 1,089 4,451 20,501 2,401 1,090 84 22,634 47 22,681

Balance before restatement

at Jan. 1, 2005 1.089 4,451 20,501 2,401 1,090 84 22,634 47 22,681
Change in accounting
policies IAS 39 33 33 33
Balance after restatement
at Jan. 1, 2005 1,089 4,451 20,534 2,401 1,090 84 22,667 47 22,714
Capital increase 4 62 66 66
Dividend payment 409 409 5 414
Recognized income
and expense 1,120 956 1,231 410 248 683 2 685
Deferred taxes 469 194 76 587 587
Other changes 6 6 3 9
Balance at Dec. 31, 2005 1,093 4,513 21,251 1,445 1,852 132 172 23,600 47 23,647

The subscribed capital of Volkswagen AG is denominated in euros. The shares are

no-par value bearer shares. Each share has a notional value of 2.56. As well as
ordinary shares, there are preferred shares that entitle the bearer to a 0.06 higher
dividend than ordinary shares, but do not carry voting rights.
The subscribed capital is composed of 321,929,800 no-par value ordinary shares
and 105,238,280 preferred shares, and amounts to 1,093 million (previous year:
1,089 million). Based on the resolution by the Annual General Meeting on June 7,
2001, authorized capital of up to 130 million, expiring on June 6, 2006, was
approved for the issue of new ordinary bearer shares. Based on the resolution by
the Annual General Meeting on April 22, 2004, further authorized capital of up to
154 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

400 million, expiring on April 21, 2009, was approved. There is also contingent
capital of 100 million for the issue of up to 39,062.500 ordinary or preferred
shares. This contingent capital increase will be implemented only to the extent
that the holders of convertible bonds issued before June 1, 2004 exercise their
conversion rights.

Shares
2005 2004 2005 2004
Balance at January 1 425,528,220 425,528,220 1,089,352,243 1,089,352,243
Issued shares
(bonds with warrants) 1,639,860 4,198,042
Balance at December 31 427,168,080 425,528,220 1,093,550,285 1,089,352,243

The 41,719,353 Volkswagen AG ordinary shares held by Volkswagen Beteiligungs-

Gesellschaft mbH in the previous year were transferred to Volkswagen AG as a
result of the merger.
The capital reserves comprise the share premium of 4,294 million from capital
increases and the share premium of 219 million from the issue of bonds with
warrants.

stock option plan

The Board of Management, with the consent of the Supervisory Board, exercised
the authorization given by the Annual General Meeting on June 19, 1997 to
implement a stock option plan. Contingent capital of 28.6 million is available for
this purpose. Additional contingent capital of 35.5 million has been created for the
issue of ordinary shares based on the authorization given by the Annual General
Meeting on April 16, 2002. The contingent capital increase will be implemented
only to the extent that the holders of the convertible bonds issued on the basis of
the authorization given by the Annual General Meeting to implement a stock option
plan exercise their conversion rights.
The stock option plan entitles the beneficiaries the Board of Management,
Group senior executives and management, as well as employees of Volkswagen AG
for whom remuneration is collectively agreed to purchase options on shares of
Volkswagen AG by subscribing for convertible bonds at a price of 2.56 each. Each
bond is convertible into ten ordinary shares.
The stock options are not accounted for until the exercise date. The conversion
price then received for the new shares is credited to subscribed capital or capital
reserves.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 155

Financial Statements
With the consent of the Supervisory Board, the Board of Management implemented
the seventh tranche of the stock option plan in fiscal year 2005. The initial
conversion price of the seventh tranche, reflecting the price of Volkswagen shares
at the time the resolution was adopted in 2005, was set at 37.99 per Volkswagen
ordinary share. It will increase in each of the following years by five percentage

Auditors Report
points. After a 24-month lock-up period, the conversion rights can be exercised
between July 9, 2007 and July 1, 2010. The conversion price will be 41.79 for the
first conversion period starting on July 9, 2007.

The conversion prices and periods of the tranches still outstanding are shown in
the following table:

Executive Bodies
conversion prices and periods for each
tranche of the stock option plan

Additional Information
in 2nd tranche 3rd tranche 4th tranche 5th tranche 6th tranche 7th tranche
Base conversion price per share 41.82 59.43 51.52 36.54 38.68 37.99
Conversion price
as from July 14, 2002 46.00
as from publication of quarterly
report as of September 30, 2002 48.09
as from July 14, 2003 65.37
as from publication of quarterly
report as of September 30, 2003 50.18 68.34
as from June 19, 2004 56.67
as from publication of quarterly
report as of September 30, 2004 52.28 71.32 59.25
as from July 12, 2005 40.19
as from publication of quarterly
report as of September 30, 2005 74.29 61.82 42.02
as from July 10, 2006 42.55
as from publication of quarterly
report as of September 30, 2006 64.40 43.85 44.48
as from July 9, 2007 41.79
as from publication of quarterly
report as of September 30, 2007 45.68 46.42 43.69
as from publication of quarterly
report as of September 30, 2008 48.35 45.59
as from publication of quarterly
report as of September 30, 2009 47.49
Beginning of conversion period July 14, 2002 July 14, 2003 June 19, 2004 July 12, 2005 July 10, 2006 July 9, 2007
End of conversion period July 6, 2005 July 6, 2006 June 11, 2007 July 4, 2008 July 2, 2009 July 1, 2010
156 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

The total value at December 31, 2005 of the convertible bonds issued at 2.56 per
convertible bond was 4,751,124.48 (= 1,855,908 bonds), conveying the right to
purchase 18,559,080 ordinary shares. The liabilities from convertible bonds are
recognized under other liabilities. In the fiscal year, 656,391 convertible bonds with
a value of 1,680,360.96 were returned after expiration of the second tranche and
by employees who have since left the Company. Changes in the rights to stock
options granted are shown in the following table:

changes in rights to stock options granted

(2nd 7th tranche)

Nominal Number of Number of

value of conversion potential
convertible rights shares
bonds
Rights Shares
Balance at January 1, 2005 6,089,533.44 2,378,724 23,787,240
In fiscal year
granted 761,756.16 297,561 2,975,610
exercised 419,804.16 163,986 1,639,860
returned 1,680,360.96 656,391 6,563,910
Balance at December 31, 2005 4,751,124.48 1,855,908 18,559,080

measurement of convertible bonds of tranches five to seven

Those convertible bonds granted after publication of the draft Standard on Novem-
ber 7, 2002 were measured in accordance with the transitional provisions of IFRS 2.
The fair value of the convertible bonds is estimated using a binomial option
pricing model based on the issuance and conversion conditions described above. In
terms of the optionees conversion behavior, it was assumed that they will convert
when the share price is 50% higher than the conversion price. The assumptions
used and the fair value estimated are presented in the following table:

5th tranche 6th tranche 7th tranche

Volatility (%) 27.50 27.50 27.50
Risk-free rate (%) 3.00 3.49 2.57
Dividends (%) 3.20 3.20 3.20
Fair value per convertible bond () 48.25 39.66 48.71
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 157

Financial Statements
The fair value of the convertible bonds is recognized ratably as a personnel expense
over the two-year lock-up period. This produced expenses of 15 million in 2005.
Changes in the number of convertible bonds in issue and their exercise prices
are shown in the following table:

Auditors Report
changes in and exercise price of issued convertible bonds

Average Convertible
exercise price bonds
per convertible
bond*
Quantity
Balance at January 1, 2005 413.10 696,271

Executive Bodies
In fiscal year
granted 417.90 297,561
exercised 409.86 5,709
returned 403.03 163,986
Balance at December 31, 2005 421.48 824,137

Additional Information
of which available for exercise 420.20 198,062
* Conversion price per ten shares.

For 208,145 convertible bonds, the average conversion price increased by

18.30 in 2005.

Exercise price Convertible

per convertible bonds
bond*
2005 Quantity
5th tranche 420.20 198,062
6th tranche 425.50 328,634
7th tranche 417.90 297,441
824,137
* Conversion price per ten shares.

163,986 convertible bonds were converted in fiscal year 2005 at a weighted

average share price on exercise of 455.07.

Dividend proposal
In accordance with section 58(2) of the German Stock Corporation Act (AktG), the
dividend payment by Volkswagen AG is based on the accumulated profit reported
in the annual financial statements of Volkswagen AG. Based on the annual financial
statements of Volkswagen AG, accumulated profit of 461 million is eligible for
distribution. The Board of Management and Supervisory Board of Volkswagen AG will
propose to the Annual General Meeting that a dividend of 1.15 per ordinary share
158 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

and 1.21 per preferred share be paid, for a total of 450 million, and that the
remaining amount of 11 million be carried forward to new account.

Minority interests
The minority interest in equity is attributable primarily to shareholders of AUDI AG.

> 21 noncurrent and current financial liabilities

The details of noncurrent and current financial liabilities are presented in the
following table:

Carrying Carrying
amount amount
million current noncurrent Dec. 31, 2005 current noncurrent Dec. 31, 2004
Bonds 7,778 20,448 28,226 8,722 22,848 31,570
Commercial paper and notes 7,584 4,421 12,005 6,508 3,618 10,126
Liabilities to banks 6,564 2,748 9,312 5,423 2,979 8,402
Deposits from direct banking business 7,499 1,236 8,735 6,923 1,094 8,017
Loans 1,172 1,977 3,149 1,127 1,639 2,766
Bills of exchange 14 14 0 0
Finance lease liabilities 99 181 280 56 195 251
Financial liabilities to
subsidiaries 268 3 271 107 3 110
joint ventures 6 6 11 11
associates 3 3 2 2
other companies in which
an investment is held 5 5 6 6
30,992 31,014 62,006 28,885 32,376 61,261

Of the liabilities reported in the consolidated balance sheet, a total of 359 million
is secured, for the most part by real estate liens.
The amounts payable to affiliated companies, joint ventures and associates are
subject to market interest rates of up to 2.5%.
Asset-backed securities transactions amounting to 12,782 million (previous
year: 10,178 million) entered into to refinance the financial services business are
included in bonds, commercial paper and notes, and liabilities from loans.
Receivables of 14,731 million (previous year: 11,514 million) from the customer
financing and leasing businesses are pledged as collateral.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 159

Financial Statements
The terms of the bonds, commercial paper and notes, liabilities to banks and loans,
together with their carrying amounts and fair values, are shown in the following table:

data for originated financial liabilities, excluding hedging instruments

Auditors Report
Currency Interest Interest Weighted Nominal Carrying amount at Dec. 31, 2005
terms lock-in interest rate, amount in million
ending based on
carrying amount million < 1 year 1 5 years > 5 years Total
AUD floating/fixed < 1 year 5.6 % 195 194 194
BRL floating/fixed < 1 year 9.9 % 343 343 343
CZK floating/fixed < 1 year 2.5 % 266 266 266
EUR floating/fixed < 1 year 2.8 % 24,834 19,006 5,653 125 24,784

Executive Bodies
GBP floating/fixed < 1 year 4.8 % 2,181 2,181 2,181
JPY floating/fixed < 1 year 0.4 % 1,508 1,027 477 1,504
MXN floating/fixed < 1 year 9.6 % 354 354 354
SEK floating/fixed < 1 year 1.9 % 507 485 21 506
SKK floating/fixed < 1 year 8.5 % 126 126 126

Additional Information
TRY floating/fixed < 1 year 16.5 % 151 152 152
USD floating/fixed < 1 year 3.9 % 7,026 4,044 2,880 3 6,927
AUD fixed 1 5 years 5.2 % 157 155 155
BRL fixed 1 5 years 15.4 % 1.696 868 829 1,697
CZK fixed 1 5 years 3.6 % 119 119 119
EUR fixed 1 5 years 3.8 % 7.612 3 7,611 60 7,674
JPY fixed 1 5 years 1.0 % 1.051 0 1,050 1,050
MXN fixed 1 5 years 6.2 % 385 384 384
NOK fixed 1 5 years 4.9 % 63 64 64
TRY fixed 1 5 years 14.8 % 173 173 173
USD fixed 1 5 years 3.8 % 4,070 1,421 2,595 4,016
CZK floating 1 5 years 2.2 % 172 172 172
EUR floating 1 5 years 2.7 % 895 12 883 895
MXN floating 1 5 years 9.2 % 213 213 213
EUR fixed > 5 years 4.9 % 5,149 9 36 5,286 5,331
USD fixed > 5 years 5.3 % 103 102 102
USD floating > 5 years 5.0 % 173 19 99 55 173
other 2,353 482 99 1,870 2,451
Total financial liabilities 61,875 30,992 23,513 7,501 62,006
Fair value at Dec. 31, 2005 62,015
Fair value at Dec. 31, 2004 61,322
160 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

> 22 noncurrent and current other liabilities

Carrying Carrying
amount amount
million current noncurrent Dec. 31, 2005 current noncurrent Dec. 31, 2004
Payments on account
received in respect of orders 832 10 842 950 8 958
Other liabilities to
subsidiaries 5 0 5 37 0 37
joint ventures 12 12 5 5
associates 0 0 7 7
other companies in which an investment is held 1 1 1 1
Negative fair values of derivative
financial instruments 545 240 785 211 209 420
Liabilities relating to
other taxes 900 237 1,137 1,103 178 1,281
social security 409 3 412 387 5 392
wages and salaries 1,018 121 1,139 835 93 928
Miscellaneous liabilities 2,483 980 3,463 2,790 862 3,652
6,205 1,591 7,796 6,326 1,355 7,681

Fair values do not differ materially from the recognized carrying amounts.

Derivatives have the following negative fair values:

million Dec. 31, 2005 Dec. 31, 2004

Transactions for hedging against
foreign currency risk from assets using fair value hedges 60 43
foreign currency risk from liabilities using fair value hedges 187 97
interest rate risk using fair value hedges 20 17
interest rate risk using cash flow hedges 19 43
foreign currency risk from future cash flows
(cash flow hedges) 411 121
Hedging transactions 697 321
Liabilities arising from ineffective hedging derivatives 88 99
785 420

Further details on the derivative financial instruments as a whole are given in note 28
Financial instruments.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 161

Financial Statements
> 23 tax liabilities

Carrying Carrying
amount amount
million current noncurrent Dec. 31, 2005 current noncurrent Dec. 31, 2004
Deferred tax liabilities 1,622 1,622 2,254 2,254
Provisions for taxes 2,257 2,257 2,065 2,065

Auditors Report
Current tax payables 150 150 57 57
150 3,879 4,029 57 4,319 4,376

> 24 provisions for pensions and other post-employment benefits

Executive Bodies
Provisions for pensions are recognized for benefits in the form of retirement, invalidity
and dependents benefits payable under pension plans. The benefits provided by the
Group vary according to the legal, tax and economic circumstances of the country
concerned, and usually depend on the length of service and remuneration of the

Additional Information
employees.
Group companies provide occupational pensions under both defined contribution
and defined benefit plans. In the case of defined contribution plans, the Company
makes contributions to state or private pension schemes based on legal or contractual
requirements or on a voluntary basis. Once the contributions have been paid, there
are no further obligations for the Company. Current contributions are recognized as
pension expenses of the period concerned. In 2005, they amounted to 767 million
(previous year: 757 million) in the Volkswagen Group. In Germany, contributions
to the compulsory state pension system amounted to 730 million (previous year:
742 million).
Most pension plans are defined benefit plans, with a distinction made between
unfunded and funded plans.
The pension provisions for defined benefits are measured using the internationally
accepted projected unit credit method in accordance with IAS 19, under which the
future obligations are measured on the basis of the ratable benefit entitlements earned
as of the balance sheet date. Measurement reflects assumptions as to trends in the
relevant variables affecting the level of benefits. All defined benefit plans require
actuarial calculations.
Owing to their benefit character, in particular the obligations of the US Group
companies in respect of post-employment medical care are also carried under
provisions for pensions and other post-employment benefits. These post-employment
benefit provisions take into account the expected long-term rise in the cost of
healthcare.
162 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

Since 1996, the occupational pension arrangements of the Volkswagen Group in

Germany have been based on a specially developed pension model classified as a
defined benefit plan under IAS 19. With effect from January 1, 2001, this model was
further developed into a pension fund, with the annual remuneration-linked contri-
butions being invested in funds by VW Pension Trust e.V. By investing in funds, this
model offers an opportunity for increasing benefit entitlements, while at the same time
fully safeguarding them. For this reason, almost all Group companies in Germany have
now joined the fund. Since the fund investments held by the trust meet the criteria of
IAS 19 for classification as plan assets, they are deducted from the obligation.
Where the foreign Group companies provide collateral for obligations, this mainly
takes the form of shares, fixed-income securities and real estate. These do not include
any financial instruments issued by companies of the Volkswagen Group, or any
investment property used by Group companies.
The following amounts were recognized in the balance sheet for defined benefit plans:

million Dec. 31, 2005 Dec. 31, 2004

Present value of funded obligations 2,959 2,455
Fair value of plan assets 2,690 2,068
Deficit/surplus 269 387
Present value of unfunded obligations 13,618 12,169
Unrecognized past service cost 39 31
Amount not recognized as an asset
because of the limit in IAS 19 47 33
Net liability recognized in the balance sheet 13,973 12,558
of which: Provisions for pensions and
other post-employment benefits 14,003 12,633
Other assets 30 75

The present value of the obligations is calculated as follows:

million 2005 2004

Present value of obligations at January 1 14,624 12,953
Current service cost 340 391
Interest cost 714 742
Actuarial losses 1,382 834
Employee contributions to plan assets 6 7
Pension payments from company assets 484 457
Pension payments from plan assets 58 52
Past service cost 35 65
Gains/losses from plan curtailments and settlements 39 14
Changes in consolidated Group 40 3
Other changes 30 173
Foreign exchange differences 137 21
Present value of obligations at December 31 16,577 14,624
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 163

Financial Statements
Changes in the composition of the plan assets are shown in the following table:

million 2005 2004

Fair value of plan assets at January 1 2,068 1,522
Expected return on plan assets 152 125
Actuarial gains 151 47

Auditors Report
Employer contributions to plan assets 249 238
Employee contributions to plan assets 6 7
Pension payments from plan assets 58 52
Changes in consolidated Group 30 1
Other changes 27 186
Foreign exchange differences 125 6

Executive Bodies
Fair value of plan assets at December 31 2,690 2,068

Investment of the plan assets to cover future pension obligations resulted in actual
gains in the amount of 303 million (previous year: 172 million).

Additional Information
The rate for the expected long-term return on plan assets is based on the long-
term returns actually generated for the portfolio, historical overall market returns
and a forecast of expected returns on the securities classes held in the portfolio. The
forecasts are based on returns expected for comparable pension funds for the
remaining period of service, as the investment horizon, as well as on the experience
of managers of large portfolios and of experts in the investment industry.
Employer contributions to plan assets are expected to amount to 250 million
next year.
Plan assets consist of the following components:

in % 2005 2004
Equities 42.1 55.8
Fixed-income securities 47.7 31.4
Cash 3.1 2.4
Real estate 3.4 3.8
Other 3.7 5.9

Actuarial gains or losses arise from changes in the number of beneficiaries and
differences between actual trends (for example, in income and pension increases or
changes in interest rates) and the assumptions on which calculations were based.
Actuarial gains or losses are taken directly to equity (see explanations on the effects
of new and amended Standards on page 118).
164 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

Pensions amounting to 484 million (previous year: 457 million) were paid in the
fiscal year.
The following amounts were recognized in the income statement:

million 2005 2004

Current service cost 340 391
Interest cost 714 742
Expected return on plan assets 152 125
Past service cost 32 19
Gains on curtailment and settlement 39 14
Effect on profit or loss of application
of limit under IAS 19.58(b) 14
Net income and expenses recognized
in profit or loss 909 1,013

The above amounts are generally included in the personnel costs of the functions.
Interest cost on pension provisions is carried under Other financial result (note 6).
The net liability recognized in the balance sheet has changed as follows:

million 2005 2004

Net liability recognized in the balance sheet at January 1 12,558 11,485
Changes in consolidated Group 10 2
Net expense recognized in the income statement 909 1,013
Benefit payments from corporate assets
and contributions to funds 733 695
Actuarial losses 1,231 787
Other changes 6 19
Foreign exchange differences 12 15
Net liability recognized in the balance sheet at December 31 13,973 12,558

The experience adjustments, meaning the effects of differences between expected

and actual actuarial assumptions, are shown in the following table:

million 2005 2004

Differences between expected and actual developments:
as % of fair value of the obligation 0.25 2.63
as % of fair value of plan assets 2.12 0.27
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 165

Financial Statements
Calculation of the pension provisions was based on the following assumptions:

Germany Abroad
in % 2005 2004 2005 2004
Discount rate at December 31 4.25 5.00 1.00 13.00 1.00 11.00
Expected return on plan assets 5.00 5.75 4.50 16.11 4.20 11.00

Auditors Report
Salary trend 1.50 2.25 1.75 1.50 7.50 1.00 6.50
Pension trend 1.00 1.50 1.50 1.70 5.24 2.00 5.00
Employee turnover rate 1.40 1.40 1.68 7.00 1.75 9.00
Annual increase in
healthcare costs 5.00 6.50 3.00 7.50

Executive Bodies
> 25 noncurrent and current other provisions

Obligations Employee Other Total

arising expenses provisions

Additional Information
million from sales
Balance at January 1, 2004 6,838 1,922 2,054 10,814
Foreign exchange differences 61 7 20 88
Changes in Group structure 0 0 0 0
Utilized 3,485 683 736 4,904
Additions/New provisions 4,649 741 1,164 6,554
Interest cost 84 8 4 96
Reversals 613 43 279 935
Balance at January 1, 2005 7,412 1,938 2,187 11,537
Foreign exchange differences 204 31 143 378
Changes in Group structure 0 4 15 19
Utilized 3,792 611 580 4,983
Additions/New provisions 4,747 986 1,160 6,893
Interest cost 124 22 2 148
Reversals 497 57 276 830
Balance at December 31, 2005 8,198 2,305 2,621 13,124

The obligations arising from sales contain provisions covering all risks relating to
the sale of vehicles, components and genuine parts through to the disposal of end-
of-life vehicles. They primarily comprise warranty claims, calculated on the basis of
losses to date and estimated future losses. They also include provisions for discounts,
bonuses and similar allowances incurred after the balance sheet date, but for which
there is a legal or constructive obligation attributable to sales revenue before the
balance sheet date.
166 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

Provisions for employee expenses are recognized for long-service awards, time
credits, the part-time scheme for employees near to retirement, severance payments
and similar obligations, among other things.
Other provisions relate to a wide range of identifiable risks and uncertain
obligations and are measured in the amount of the expected settlement value.
57% of the other provisions are expected to result in cash outflows in the
following year, 34% between 2007 and 2010, and 9% thereafter.

> 26 trade payables

million Dec. 31, 2005 Dec. 31, 2004

Trade payables to
third parties 8,354 7,290
subsidiaries 44 50
joint ventures 65 77
associates 6 9
other companies in which an investment is held 7 8
8,476 7,434

Fair values do not differ materially from the recognized carrying amounts.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 167

other disclosures

Financial Statements
> 27 cash flow statement

The cash and cash equivalents contained in the cash flow statement comprise only
cash and cash equivalents reported in the balance sheet.
Cash flows are presented in the cash flow statement classified into cash flows

Auditors Report
from operating activities, investing activities and financing activities, irrespective
of the format of the balance sheet.
Cash flows from operating activities are derived indirectly from profit before
tax. Profit before tax is adjusted to eliminate noncash expenses (mainly depreciation
and amortization) and income. This results in cash flows from operating activities
after accounting for changes in working capital.

Executive Bodies
Investing activities include additions to property, plant and equipment, and
noncurrent financial assets, as well as to capitalized development costs. The
changes in leasing and rental assets and in financial services receivables are also
included here.

Additional Information
Financing activities include outflows of funds from dividend payments and
redemption of bonds, as well as inflows from the issue of bonds and changes in
other financial liabilities.
The changes in balance sheet items used for the cash flow statement cannot be
derived directly from the balance sheet, as the effects of currency translation and
changes in the consolidated Group are noncash transactions and are therefore
eliminated.
The changes in cash and cash equivalents due to changes in the scope of
consolidation relate to cash and cash equivalents of deconsolidated companies.
In 2005, cash flows from operating activities include interest received amounting
to 3,361 million and interest paid amounting to 2,729 million. In addition, the
share of profits and losses of Group companies accounted for using the equity method
(note 5) includes dividends amounting to 346 million.
168 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

> 28 financial instruments

1. Hedging policy and financial derivatives

During the course of its operating and financing activities, the Volkswagen Group is
exposed to fluctuations in exchange rates and interest rates. Corporate policy is to limit
or eliminate such risk by means of hedging. All necessary hedging transactions are
coordinated or executed centrally by Group Treasury.

2. Hedging rules
General rules apply to the Group-wide foreign currency and interest rate hedging
policy; these are oriented on the Minimum Requirements for the Performance
of Trading Transactions by Credit Institutions. Counterparties in these hedging
transactions are prime-rated national and international banks, whose creditworthiness
is continuously assessed by the leading rating agencies.

2.1 Foreign currency risk

Currency forwards, currency options, currency swaps and cross-currency swaps
are used to limit the foreign currency risk. These transactions relate to the exchange
rate hedging of all cash flows denominated in foreign currencies arising from
operating activities, as well as to matching currencies for financing activities.
We hedge expected foreign-currency sales revenues and materials purchases
by means of forward exchange transactions and currency options, depending on
the market assessment. In 2005, hedging related primarily to the US dollar, sterling,
Japanese yen and Swedish krone.

2.2 Interest rate risk

Interest rate risk i.e. possible fluctuations in the value of a financial instrument
due to changes in market interest rates primarily affects medium- and long-term
fixed-interest receivables and liabilities. Interest rate swaps, cross-currency swaps
and other types of interest rate contracts are entered into to hedge against this risk,
depending on market conditions. Interest rate risk is hedged by fair value and
cash flow hedges using the hedging instruments described above. Intercompany
financing arrangements are normally structured to match their refinancing.

2.3 Commodity risk

The Volkswagen Group is exposed to commodity risks relating to sharp price
fluctuations and availability. It eliminates or limits these risks by entering into
commodity futures transactions. Hedging relates to substantial volumes of the
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 169

Financial Statements
commodities aluminum and copper, as well as the precious metals platinum,
rhodium and palladium.

notional amount of derivatives

Auditors Report
Remaining term Notional Notional
amount amount
under within one over Total Total
million one year to five years five years Dec. 31, 2005 Dec. 31, 2004
Interest rate swaps 6,593 28,608 6,040 41,241 37,787
Interest rate option contracts 100 100 500
Cross-currency swaps 1,480 1,836 119 3,435 5,304
Currency forwards 14,070 5,540 19,610 6,119

Executive Bodies
Currency options 6,618 152 6,770 1,316
Currency swaps 2,291 2,291 1,953
Commodity futures contracts 163 253 416 501

Additional Information
The fair values of the derivatives are estimated using market data at the balance
sheet date as well as by appropriate valuation techniques. The following term
structures were used for the calculation:

in % EUR USD GBP JPY CAD SEK

Interest rate for six months 2.580 4.660 4.490 0.010 3.640 1.970
Interest rate for one year 2.790 4.770 4.500 0.090 3.920 2.280
Interest rate for five years 3.190 4.820 4.540 0.926 4.136 3.370
Interest rate for ten years 3.421 4.886 4.463 1.596 4.295 3.535

3. Liquidity risk
A liquidity forecast with a fixed planning horizon, unused lines of credit and globally
available debt issuance programs within the Volkswagen Group safeguard liquidity at
all times.

4. Risk of default
The risk of default arising from financial assets involves the risk of default by a
counterparty, and therefore at most in the amount of the positive fair values
receivable from them. The risk arising from primary financial instruments is
accounted for by recognizing bad debt losses. Since derivatives are only entered
into with prime-rated banks, and the risk management system imposes trading
limits per partner, the actual risk of default is negligible.
170 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

> 29 contingent liabilities

million Dec. 31, 2005 Dec. 31, 2004

Liabilities from guarantees 114 95
Liabilities from warranty contracts 32 110
Pledges on company assets as security for third-party liabilities 13 5
Other contingent liabilities 105 76
264 286

The trust assets and liabilities of the savings and trust entities belonging to the
South American subsidiaries not included in the consolidated balance sheet amount
to 775 million (previous year: 566 million).
In the course of the acquisition of a 100% equity interest in LeasePlan
Corporation N.V., Amsterdam, and the subsequent sale of 50% of the shares to
two co-investors, Volkswagen AG reached an agreement with the co-investors
on put options entitling these investors to sell their shares to Volkswagen AG. These
put options can be exercised (a) at any time or (b) under certain conditions within
a fixed period. The price of the shares should be the higher of (a) the fair value of
the shares as calculated by an expert using a standard valuation method and (b)
the co-investors initial investment. The fair value of the put options is contained in
Other liabilities.

> 30 litigation

Neither Volkswagen AG nor any of its Group companies is party to any legal or
arbitration proceedings that may have a material effect on the economic position
of the Group, or has had such an effect within the last two years. Nor are any such
proceedings foreseeable. Appropriate provisions are established by the Group
company concerned for any potential costs arising from other legal or arbitration
proceedings pending, or the company has adequate insurance cover.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 171

Financial Statements
> 31 other financial obligations

Payable Payable Payable Total Total

million 2006 2007 2010 from 2011 Dec. 31, 2005 Dec. 31, 2004
Purchase commitments in respect of
property, plant and equipment 1,683 318 2,001 1,603
intangible assets 142 80 222 137

Auditors Report
investment property 0 0
Obligations from
agreed loans 74 74 130
long-term leasing and rental contracts 298 670 1,100 2,068 1,777
Other financial obligations 121 17 3 141 145

Executive Bodies
> 32 auditors fees recognized as expenses

Under the provisions of the German Commercial Code (HGB), Volkswagen AG

Additional Information
is obliged to disclose the audit fees of the Group auditors in Germany that are
recognized as expenses.

thousand 2005
Audits of financial statements 4,756
Other assurance or valuation services 292
Tax advisory services 289
Other services 1,889
Total expenses 7,226

> 33 total expense for the period

million 2005 2004

Cost of materials
Cost of raw materials, consumables and supplies,
purchased merchandise and services 62,620 58,239

Personnel expenses
Wages and salaries 11,825 11,337
Social security
and other pension costs 2,819 2,701
14,644 14,038
172 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

> 34 average number of employees during the year

2005 2004
Performance-related wage-earners 168,863 165,729
Time-rate wage-earners 48,352 48,970
Salaried staff 98,688 98,374
315,903 313,073
Apprentices 7,928 8,017
323,831 321,090
Vehicle-producing investments
not fully consolidated 21,383 21,926
345,214 343,016

> 35 significant events after the balance sheet date

There were no significant events up to February 10, 2006.

> 36 related party disclosures in accordance with ias 24

Related parties as defined by IAS 24 are parties that the reporting entity has the
ability to control or over which it can exercise significant influence, or parties that
have the ability to control or exercise significant influence over the reporting entity.
Dr. Ing. h. c. F. Porsche AG holds 18.5% of the voting rights of Volkswagen AG.
The State of Lower Saxony holds 18.2% of the voting rights of Volkswagen AG
and is represented by two delegate members on the Supervisory Board. Transactions
with private companies owned by the State of Lower Saxony are conducted on an
arms length basis.
All business relationships with unconsolidated subsidiaries, joint ventures and
associates are transacted on an arms length basis.
Members of the Board of Management and Supervisory Board of Volkswagen AG
are members of supervisory and management boards of other companies with which
Volkswagen AG has relations in the normal course of business. All transactions with
these companies are conducted on an arms length basis.
The majority of the supplies and services transacted between fully consolidated
member companies of the Volkswagen Group and related companies (unconsolidated
subsidiaries, joint ventures, associates and Porsche AG) and persons are presented
in the following table:
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 173

Financial Statements
related companies and persons

Interest Supplies and services Supplies and services

rendered received
million in % 2005 2004 2005 2004
FAW-Volkswagen Automotive Company, Ltd., Changchun 40 1,260 1,787 3 1
Shanghai-Volkswagen Automotive Company Ltd., Shanghai 50 406 1,059 2 2

Auditors Report
Volkswagen Dogus Tketici Finansmani, Maslak-Istanbul 51 0 0 0 0
Volkswagen Bordnetze GmbH, Wolfsburg 50 9 0 319 372
Volkswagen Coaching Gesellschaft mbH, Wolfsburg 100 97 107 140 140
YANASE Audi Sales Company Ltd., Tokyo 33 141 142 36 23
Hahn + Lang Automobile GmbH & Co. KG, Stuttgart 51 169 128 39 0
Din Bil Stockholm AB, Stockholm 100 186 153 0

Executive Bodies
IAV GmbH Ingenieurgesellschaft Auto und Verkehr, Berlin 50 5 6 141 156
AVG Automobil Vertriebsgesellschaft mbH, Hanover 100 9 1 5 4
Autostadt GmbH, Wolfsburg 100 29 14 116 112
Din Bil Gteborg AB, Gteborg 100 111 92
VDF Holding Gruppe, Istanbul 51

Additional Information
Automobile Rhein-Neckar GmbH, Mannheim 100 53 35 9
Din Bil Syd AB, Malm 100 74 61
VAD (Tianjin) Company Limited, Tianjin 100 58 32 1
Wolfsburg AG, Wolfsburg 50 31 15 28 93
Dr. Ing. h. c. F. Porsche Aktiengesellschaft, Stuttgart 921 40

Interest Receivables Payables

from to
million in % 2005 2004 2005 2004
FAW-Volkswagen Automotive Company, Ltd., Changchun 40 318 407 46 31
Shanghai-Volkswagen Automotive Company Ltd., Shanghai 50 297 391 0 9
Volkswagen Dogus Tketici Finansmani, Maslak-Istanbul 51 509 176 0
Volkswagen Bordnetze GmbH, Wolfsburg 50 0 0 21 41
Volkswagen Coaching Gesellschaft mbH, Wolfsburg 100 0 9 20 31
YANASE Audi Sales Company Ltd., Tokyo 33 53 61 5 5
Hahn + Lang Automobile GmbH & Co. KG, Stuttgart 51 23 6 0 0
Din Bil Stockholm AB, Stockholm 100 25 29 7
IAV GmbH Ingenieurgesellschaft Auto und Verkehr, Berlin 50 0 0 37 63
AVG Automobil Vertriebsgesellschaft mbH, Hanover 100 157 24 0 0
Autostadt GmbH, Wolfsburg 100 0 0 4 4
Din Bil Gteborg AB, Gteborg 100 15 18 4
VDF Holding Gruppe, Istanbul 51 107 4
Automobile Rhein-Neckar GmbH, Mannheim 100 24 3 0
Din Bil Syd AB, Malm 100 10 12 2
VAD (Tianjin) Company Limited, Tianjin 100 24 5 1 0
Wolfsburg AG, Wolfsburg 50 13 6 2 10
Dr. Ing. h. c. F. Porsche Aktiengesellschaft, Stuttgart 38 0
174 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

german corporate governance code

On December 12, 2005 the Board of Management and Supervisory Board of

Volkswagen AG issued their declaration of conformity with the German Corporate
Governance Code as required by section 161 of the German Stock Corporation Act
and made it permanently available to the shareholders of Volkswagen AG on the
Companys website at www.volkswagen-ir.de
On December 7, 2005 the Board of Management and Supervisory Board of
AUDI AG likewise issued their declaration of conformity with the German Corporate
Governance Code and made it permanently available to the shareholders at
www.audi.de

remuneration of the board of management

The remuneration of the members of the Board of Management conforms to the

requirements of the German Stock Corporation Act as well as to the recommen-
dations and, to a large extent, the suggestions set out in the German Corporate
Governance Code. The Presidium of the Supervisory Board discussed the
remuneration system at its meeting on September 22, 2005; no changes were
proposed to the Supervisory Board.
The members of the Board of Management receive a fixed remuneration of
5,042,002 (previous year: 4,214,837). The fixed remuneration also includes
differing levels of remuneration for the assumption of appointments at Group
companies and non-cash benefits, in particular in respect of use of company cars
and insurance cover. Taxes due on the non-cash benefits are mainly borne by
Volkswagen AG.
The fixed components of the package ensure a basic level of remuneration
enabling the members of the Board of Management to perform their duties in the
interests of the Company and to fulfill their obligation to act with proper business
prudence without needing to focus on merely short-term performance targets.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 175

Financial Statements
On the other hand, variable components, dependent among other criteria on the
financial performance of the Company, serve to balance the interests of the Board
of Management and the other stakeholders. The additional annual variable amount
paid to each member of the Board of Management contains annually recurring
components tied to the business success of the Company. It is primarily oriented on

Auditors Report
the results achieved and the financial position of the Company.
The inclusion of one-time variable components tied to business performance in
the remuneration of management continues to be debated in professional circles.
Consequently, Volkswagen AG still does not implement this recommendation, but
will await the outcome of the discussions.

Executive Bodies
remuneration of the members of
the board of management 2005

Fixed Variable Stock Total

Additional Information
options
in exercised
Bernd Pischetsrieder 835,074 2,000,000 2,835,074
Wolfgang Bernhard1) 756,686 850,000 1,606,686
Francisco Javier Garcia Sanz 832,962 770,000 1,602,962
Peter Hartz2) 496,329 437,511 933,840
Horst Neumann3) 69,187 65,000 134,187
Hans Dieter Ptsch 825,246 770,000 1,595,246
Folker Weigerber4) 411,328 368,000 779,328
Martin Winterkorn 815,190 970,000 1,785,190
Total 5,042,002 6,230,511 11,272,513
1)
From February 1, 2005.
2)
Until August 4, 2005.
3)
From December 1, 2005.
4)
Until June 30, 2005.
176 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

Stock options serve as variable components of remuneration providing long-term

incentives. They are linked to the development of the price of Volkswagen ordinary
shares. As part of the seventh tranche of the stock option plan, each member of the
Board of Management was entitled in fiscal year 2005 to subscribe for a maximum
of 500 non-transferable convertible bonds at a price of 2.56 per bond, conveying
the right to acquire a maximum of 5,000 ordinary shares. The precondition for
participation in this stock option plan was a contribution of between 5,000 and
25,000 in Time Assets, depending on the number of convertible bonds being
acquired. The stock option plan is essentially structured as follows: the basis for
determining the conversion price (base conversion price) of a tranche is the average
Xetra closing price of Volkswagen ordinary shares on the five trading days prior to
the respective decision on the issue of convertible bonds. Conversion is possible for
the first time after a lock-up period of 24 months, and then for a period of five years
as from the date of issue of the convertible bonds. The conversion price is initially
set at 110% of the base conversion price, and then increases by five percentage
points each year. The members of the Board of Management may exercise their
conversion rights only three times a year, within four-week windows beginning on
public reporting dates of Volkswagen AG. The stock option plan is thus based on
demanding, relevant comparative parameters as set out in the German Corporate
Governance Code. Further details are contained in the agenda of the Annual General
Meeting held on April 16, 2002, at which the authorization to implement the stock
option plan was given. The details of the stock option plan are explained in note 20
Equity.
The stock option plan is designed to provide the members of the Board of
Management like all other employees with an element of their total remuneration
package oriented on an increase in the share price. In this way, it aims to enhance
value added and enterprise value. Furthermore, the stock option plan is also a
commonly employed instrument in recruiting and assuring the long-term loyalty of
members of the Board of Management. There is no possibility of subsequently
modifying the performance targets or comparative parameters underlying the stock
option plan.
Inappropriate levels of payment arising from the stock options are not to be
expected, because of their link to the development of the price of Volkswagen
ordinary shares and the limitation of the number of stock options in each tranche. As
recommended by the German Corporate Governance Code, the Supervisory Board
will establish a cap on such payments in consultation with the members of the Board
of Management in the event of extraordinarily high unforeseen increases.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 177

Financial Statements
stock option grants 2005

Brought Subscribed Exercised Returned1) Former Contributed Held at Fair value

forward Board of Dec. 31 of options
Jan. 1 Management in
members
Bernd Pischetsrieder 2,500 500 3,000 110,750

Auditors Report
Wolfgang Bernhard2) 500 500 37,700
Francisco Javier Garcia Sanz 3,500 500 1,000 3,000 110,750
Peter Hartz3) 3,500 500 1,000 3,000
Horst Neumann4) 500 500 37,700
Hans Dieter Ptsch 1,000 500 1,500 105,700
Folker Weigerber5) 3,500 1,000 2,500
Martin Winterkorn 3,500 500 1,000 3,000 110,750

Executive Bodies
Total 17,500 3,000 4,000 5,500 500 11,500 513,350
1)
After expiry of the conversion period.
2)
From February 1, 2005.
3)
Until August 4, 2005.
4)
From Dezember 1, 2005.
5)
Until June 30, 2005.

Additional Information
Members of the Board of Management are entitled to pension and disability
payments subject to certain preconditions. On December 31, 2005 the pension
provisions for members of the Board of Management amounted to 9,969,145.
Retired members of the Board of Management and their surviving dependents
received 10,837,010 (previous year: 9,842,143). Provisions for pensions for this
group of people were recognized in the amount of 90,945,161 (previous year:
84,391,688).

remuneration of the supervisory board

The remuneration of the members of the Supervisory Board of Volkswagen AG
amounts to 2,324,569 (previous year: 2,143,500) and is dependent on the
dividend to be paid for fiscal year 2005. It is composed of fixed components
(including attendance fees) of 245,226 (previous year: 231,000) and variable
components of 2,079,343 (previous year: 1,912,500), in accordance with the
provisions of the Articles of Association prevailing at the time.
178 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

remuneration of the members of

the supervisory board 2005

Fixed Variable Total

in
Ferdinand K. Pich 23,000 247,500 270,500
Jrgen Peters 17,000 165,000 182,000
Andreas Blechner 11,000 82,500 93,500
Gerhard Cromme 10,000 82,500 92,500
Elke Eller 11,000 82,500 93,500
Michael Frenzel 11,000 82,500 93,500
Hans Michael Gaul 10,000 82,500 92,500
Walter Hirche 10,000 82,500 92,500
Olaf Kunz 11,000 82,500 93,500
Gnter Lenz 11,000 82,500 93,500
Klaus Liesen 17,000 165,000 182,000
Xaver Meier 11,000 82,500 93,500
Ulrich Ne 11,000 82,500 93,500
Roland Oetker 11,000 82,500 93,500
Bernd Osterloh 13,092 111,260 124,352
Heinrich von Pierer 10,000 82,500 92,500
The Lord David Simon of Highbury, CBE 9,000 82,500 91,500
Jrgen Stumpf 11,000 82,500 93,500
Klaus Volkert1) 7,317 73,104 80,421
Bernd Wehlauer2) 5,817 38,729 44,546
Christian Wulff 14,000 123,750 137,750
Total 245,226 2,079,343 2,324,569
1)
Until August 15, 2005.
2)
From September 1, 2005.

Loans of 23,714 have been granted to members of the Supervisory Board (amount
redeemed in 2005: 5,551). The loans bear interest at a rate of 4.0% and have an
agreed term of up to 12.5 years.

Wolfsburg, February 10, 2006

Volkswagen Aktiengesellschaft
The Board of Management
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 179

significant group companies

Financial Statements
automotive division

Equity
Name, location interest in %
Volkswagen AG, Wolfsburg
Volkswagen Sachsen GmbH, Zwickau 100.00
Volkswagen Bruxelles S.A., Brussels/Belgium 100.00

Auditors Report
VOLKSWAGEN SLOVAKIA, a.s., Bratislava/Slovak Republic 100.00
SITECH Sitztechnik GmbH, Wolfsburg 100.00
Volkswagen Navarra, S.A., Arazuri (Navarra)/Spain 100.00
AUTOEUROPA-AUTOMVEIS LDA., Palmela/Portugal 100.00
Volkswagen Motor Polska Sp. z o.o., Polkowice/Poland 100.00
Volkswagen-Audi Espaa, S.A., El Prat de Llobregat (Barcelona)/Spain 100.00

Executive Bodies
Volkswagen Original Teile Logistik GmbH & Co. KG, Baunatal 52.45
VOLKSWAGEN Group United Kingdom Ltd., Milton Keynes/United Kingdom 100.00
Groupe VOLKSWAGEN France s.a., Villers-Cotterts/France 100.00
Volkswagen Transport GmbH & Co. OHG, Wolfsburg 100.00
VW Kraftwerk GmbH, Wolfsburg 100.00

Additional Information
Automobilmanufaktur Dresden GmbH, Dresden 100.00
Volkswagen Poznan Sp. z o.o., Poznan/Poland 100.00
Svenska Volkswagen Aktiebolag, Sdertlje/Sweden 100.00
Auto 5000 GmbH, Wolfsburg 100.00
VOLKSWAGEN OF AMERICA, INC., Auburn Hills, Michigan/USA 100.00
Volkswagen Canada Inc., Ajax, Ontario/Canada 100.00
VOLKSWAGEN Group Japan K.K., Toyohashi/Japan 100.00
Volkswagen Tokyo K.K., Tokyo/Japan 100.00
VOLKSWAGEN GROUP AUSTRALIA PTY LTD., Sydney/Australia 100.00

AUDI AG, Ingolstadt 99.14

AUDI HUNGARIA MOTOR Kft., Gyr/Hungary 100.00
Audi Volkswagen Korea Ltd., Seoul/Korea 100.00
Audi Volkswagen Middle East FZE, Dubai 100.00
Automobili Lamborghini Holding S.p.A., SantAgata Bolognese/Italy 100.00
AUTOGERMA S.p.A., Verona/Italy 100.00
Audi Japan K.K., Tokyo/Japan 100.00
180 Financial Statements Auditors Report Executive Bodies Additional Information

Income statement
Balance sheet
Statement of recognized income and expense
Cash flow statement
> Notes to the consolidated financial statements

automotive division

Equity
Name, location interest in %
SEAT, S.A., Barcelona/Spain 100.00
SEAT Deutschland GmbH, Mrfelden-Walldorf 100.00
Gearbox del Prat, S.A., El Prat de Llobregat (Barcelona)/Spain 100.00

SKODA AUTO a.s., Mlad Boleslav/Czech Republic 100.00

SkodaAuto Deutschland GmbH, Weiterstadt 100.00
SKODA AUTO INDIA PRIVATE LIMITED, Aurangabad/India 100.00
SKODA AUTO Slovensko s.r.o., Bratislava/Slovak Republic 100.00
SKODA AUTO Polska, S.A., Poznan/Poland 51.00

BENTLEY MOTORS LIMITED, Crewe/United Kingdom 100.00

Volkswagen de Mexico, S.A. de C.V., Puebla/Pue./Mexico 100.00

Volkswagen Argentina S.A., Buenos Aires/Argentina 100.00

Volkswagen do Brasil Ltda. Industria de Veiculos Automotores,

So Bernardo do Campo, SP/Brazil 100,00
Volkswagen of South Africa (Pty.) Ltd., Uitenhage/South Africa 100.00

Shanghai-Volkswagen Automotive Company Ltd., Shanghai/P.R. China1) 50.00

FAW-Volkswagen Automotive Company, Ltd., Changchun/P.R. China1) 40.00
Volkswagen (China) Investment Company Ltd., Beijing/P.R. China 100.00

Volkswagen Group Services SCS, Brussels/Belgium 100.00

Volkswagen International Finance N.V., Amsterdam/The Netherlands 100.00
Volkswagen Investments Ltd., Dublin/Ireland 100.00
gedas group, Berlin 100.00

SCANIA Aktiebolag, Sdertlje/Sweden2) 18.70

 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 181

Financial Statements
financial services division

Equity
Name, location interest in %
VOLKSWAGEN FINANCIAL SERVICES AG, Braunschweig 100.00
Volkswagen Leasing GmbH, Braunschweig 100.00
Volkswagen Bank GmbH, Braunschweig 100.00

Auditors Report
Volkswagen-Versicherungsdienst GmbH, Wolfsburg 100.00
VOLKSWAGEN FINANCE, S.A., Alcobendas (Madrid)/Spain 100.00
Volkswagen Finance S.A., Villers-Cotterts/France 100.00
Volkswagen Financial Services (UK) Ltd., Milton Keynes/United Kingdom 100.00
Volkswagen Financial Services N.V., Amsterdam/The Netherlands 100.00
Volkswagen Financial Consultant Service K.K., Tokyo/Japan 100.00

Executive Bodies
VOLKSWAGEN FINANCIAL SERVICES JAPAN LTD., Tokyo/Japan 100.00
SkoFIN s.r.o., Prague/Czech Republic 100.00

Global Mobility Holding B.V., Amsterdam/The Netherlands1),3) 50.00

LeasePlan Corporation N.V., Amsterdam/The Netherlands

Additional Information
Volkswagen Pon Financial Services B.V., Amersfoort/The Netherlands1) 60.00

VW CREDIT, INC., Auburn Hills, Michigan/USA 100.00

Volkswagen Financial Services, S.A. de C.V., Puebla/Pue./Mexico 100.00

Financial services companies in Brazil, So Paulo/Brazil 100.00

Financial services companies in Argentina, Buenos Aires/Argentina 100.00

Europcar International S.A.S.U., Guyancourt/France 100.00

EUROPCAR INTERNATIONAL S.A. und Co. OHG, Hamburg 100.00
EUROPCAR ITALIA S.p.A., Rome/Italy 100.00
EUROPCAR IB, S.A., Madrid/Spain 100.00

1)
Joint ventures are accounted for using the equity method.
2)
The interest in SCANIA conveys 34.0% of the voting rights
and thus differs from the equity interest. The company is
accounted for using the equity method.
3)
Global Mobility Holding B.V., Amsterdam, holds all shares
of LeasePlan Corporation N.V., Amsterdam.
182 Financial Statements Auditors Report Executive Bodies Additional Information

auditors report

On completion of our audit, we issued the following unqualified auditors report

dated February 15, 2006:

Auditors report

We have audited the consolidated financial statements prepared by VOLKSWAGEN

AKTIENGESELLSCHAFT, Wolfsburg, comprising the income statement, the balance
sheet and the statements of recognized income and expense and cash flows as well
as the notes to the consolidated financial statements, together with the group
management report for the business year from January 1 to December 31, 2005.
The preparation of the consolidated financial statements and the group management
report in accordance with the IFRSs, as adopted by the EU, and the additional
requirements of German commercial law pursuant to (article) 315a Abs.
(paragraph) 1 HGB (Handelsgesetzbuch: German Commercial Code) are the
responsibility of the Companys Board of Management. Our responsibility is to
express an opinion on the consolidated financial statements and on the group
management report based on our audit.
We conducted our audit of the consolidated financial statements in accordance
with 317 HGB and German generally accepted standards for the audit of financial
statements promulgated by the Institut der Wirtschaftsprfer (Institute of Public
Auditors in Germany) (IDW). Those standards require that we plan and perform the
audit such that misstatements materially affecting the presentation of the net
assets, financial position and results of operations in the consolidated financial
statements in accordance with the applicable financial reporting framework and in
the group management report are detected with reasonable assurance. Knowledge
of the business activities and the economic and legal environment of the Group
and expectations as to possible misstatements are taken into account in the
determination of audit procedures. The effectiveness of the accounting-related
internal control system and the evidence supporting the disclosures in the
consolidated financial statements and the group management report are examined
 AUDITORS REPORT 183

Financial Statements
primarily on a test basis within the framework of the audit. The audit includes
assessing the annual financial statements of those entities included in consolidation,
the determination of the entities to be included in consolidation, the accounting
and consolidation principles used and significant estimates made by the Companys
Board of Management, as well as evaluating the overall presentation of the

Auditors Report
consolidated financial statements and the group management report. We believe
that our audit provides a reasonable basis for our opinion.
Our audit has not led to any reservations.
In our opinion, based on the findings of our audit, the consolidated financial
statements comply with the IFRSs as adopted by the EU the additional requirements
of German commercial law pursuant to Article 315a paragraph 1 HGB and give a

Executive Bodies
true and fair view of the net assets, financial position and results of operations of the
Group in accordance with these requirements. The group management report is
consistent with the consolidated financial statements and as a whole provides a
suitable view of the Groups position and suitably presents the opportunities and

Additional Information
risks of future development.

Hanover, February 15, 2006

PricewaterhouseCoopers
Aktiengesellschaft
Wirtschaftsprfungsgesellschaft

Prof. Dr. Winkeljohann Gadesmann

Wirtschaftsprfer Wirtschaftsprfer
184 Financial Statements Auditors Report Executive Bodies Additional Information

> Appointments of members of the Board of Management

> Appointments of members of the Supervisory Board

executive bodies

appointments of members of the board of management

: december 31, 2005

at

dr.-ing. e. h. dr. rer. pol. h. c. prof. dr. rer. nat.

bernd pischetsrieder (57) peter hartz (64) martin winterkorn (58)
Chairman (since April 17, 2002) Human Resources Chairman of the Board of
Human Resources (August 5, October 1, 1993 August 4, 2005* Management of AUDI AG
2005 November 30, 2005) July 1, 2000*
July 1, 2000* Appointments:

FC Bayern Mnchen AG, Munich
Appointments: dr. rer. pol. horst neumann (56)

Infineon Technologies AG, Munich

Dresdner Bank AG, Frankfurt am Main Human Resources

Salzgitter AG, Salzgitter

Metro AG, Dsseldorf
December 1, 2005*
TV Sddeutschland Holding AG, Munich

Mnchener Rckversicherungs-
Gesellschaft AG, Munich
Tetra Laval Group, Pully, Board Member

hans dieter ptsch (54)

Finance and Controlling
dr. rer. pol. January 1, 2003*
wolfgang bernhard (45) Appointments:

Allianz Versicherungs-AG, Munich
Chairman of the Volkswagen brand

BASF AG, Ludwigshafen
group (since May 1, 2005)

Bizerba GmbH & Co. KG, Balingen
February 1, 2005*

prof. dr.-ing. h. c. mult.

francisco javier
folker weigerber (64)
garcia sanz (48)
Production
Procurement
March 1, 2001 June 30, 2005*
July 1, 2001*

As part of their duty to manage and supervise the Groups

business, the members of the Board of Management hold
other offices on the supervisory boards of consolidated
Group companies and other significant investees.

Membership of statutory supervisory boards in

Germany.
Comparable appointments in Germany and abroad.

* The date signifies the beginning or period of

membership of the Board of Management.
 APPOINTMENTS OF MEMBERS OF THE BOARD OF MANAGEMENT | APPOINTMENTS OF MEMBERS OF THE SUPERVISORY BOARD 185

Financial Statements
appointments of members of the supervisory board

at december 31, 2005

hon.-prof. dr. techn. h. c. dr. jur. gerhard cromme (62) dr. jur. michael frenzel (58)

Auditors Report
dipl.-ing. eth Chairman of the Supervisory Board Chairman of the Board of
ferdinand k. pich (68) of ThyssenKrupp AG Management of TUI AG
Chairman June 19, 1997* June 7, 2001*
April 16, 2002* Appointments: Appointments:

Allianz AG, Munich
AWD Holding AG, Hanover
Appointments:

Axel Springer AG, Berlin
AXA Konzern AG, Cologne

Dr. Ing. h. c. F. Porsche AG, Stuttgart

Executive Bodies

Deutsche Lufthansa AG, Cologne
Continental AG, Hanover
Porsche Ges.m.b.H, Salzburg

E.ON AG, Dsseldorf
E.ON Energie AG, Munich
Porsche Holding GmbH, Salzburg

Hochtief AG, Essen  Hapag-Lloyd AG, Hamburg (Chairman)

Siemens AG, Munich  Hapag-Lloyd Flug GmbH, Hanover

ThyssenKrupp AG, Dsseldorf (Chairman) (Chairman)


Additional Information
jrgen peters (61) BNP Paribas S.A., Paris TUI Deutschland GmbH, Hanover (Chairman)

Deputy Chairman Compagnie de Saint Gobain, Norddeutsche Landesbank, Hanover

Paris/La Dfense Preussag North America, Inc.,
1st Chairman of Industrie-
Suez S.A., Paris Greenwich (Chairman)
gewerkschaft Metall (IG Metall TUI China Travel Co. Ltd., Beijing
German Metalworkers Union)
November 1, 2003*
elke eller (43)
Appointments: dr. jur. hans michael gaul (63)
IG Metall, Executive Committee 01

Salzgitter AG, Salzgitter (Dep. Chairman)
Executive Director of the Otto Member of the Board of
Brenner Foundation Management of E.ON AG
August 20, 2001* June 19, 1997*
andreas blechner (48)
Appointments: Appointments:
Chairman of the Works Council
Allianz Versicherungs-AG, Munich

ThyssenKrupp Nirosta GmbH, Krefeld
at the Volkswagen AG Salzgitter
ThyssenKrupp Stainless GmbH, Duisburg
Degussa AG, Dsseldorf

DKV Deutsche Krankenversicherung AG,
plant
Cologne
April 16, 2002*

RAG Aktiengesellschaft, Essen

STEAG AG, Essen
 E.ON Energie AG, Munich
 E.ON Ruhrgas AG, Essen
E.ON Nordic AB, Malm
E.ON Sverige AB, Malm

Membership of statutory supervisory boards in

Germany.
 Group appointments to statutory supervisory boards.
Comparable appointments in Germany and abroad.

* The date signifies the beginning or period of

membership of the Supervisory Board.
186 Financial Statements Auditors Report Executive Bodies Additional Information

Appointments of members of the Board of Management

> Appointments of members of the Supervisory Board

walter hirche (63) dr. jur. klaus liesen (74) roland oetker (56)
Minister of Economic Affairs, Labour Honorary Chairman of the President of Deutsche
and Transport for the Federal State Supervisory Board of E.ON Schutzvereinigung fr
of Lower Saxony Ruhrgas AG Wertpapierbesitz e.V.
April 8, 2003* July 2, 1987* June 19, 1997*
Appointments: Appointments: Appointments:

Deutsche Messe AG, Hanover (Chairman)
E.ON AG, Dsseldorf
Degussa AG, Dsseldorf

TUI AG, Hanover
IKB Deutsche Industriebank AG, Dsseldorf

Mulligan BioCapital AG, Hamburg (Chairman)

Deutsche Post AG, Bonn
olaf kunz (46) Dr. August Oetker KG-Gruppe, Bielefeld
Member of the Executive Committee xaver meier (60)
of IG Metall with responsibility for Chairman of the General Works
Codetermination and Corporate Law Council of AUDI AG
bernd osterloh (49)
April 16, 2002* July 1, 1999 December 31, 2005*
Chairman of the Group and General
Appointments: Appointments:
Works Councils of Volkswagen AG

AUDI AG, Ingolstadt (Dep. Chairman)

Bosch Sicherheitssysteme GmbH, Stuttgart
BRG-Jahreswagenvermittlung e.G., January 1, 2005*

Volkswagen Original Teile Logistik
Beteiligungs-GmbH, Baunatal Ingolstadt Appointments:

Auto 5000 GmbH, Wolfsburg

Autostadt GmbH, Wolfsburg

Wolfsburg AG, Wolfsburg
gnter lenz (46) peter mosch (33) Volkswagen Coaching GmbH, Wolfsburg

Chairman of the Works Council Chairman of the General Works

for the Commercial Vehicles Council of AUDI AG
Business Line January 18, 2006*
July 1, 1999*
Appointments:

Auto 5000 GmbH, Wolfsburg ulrich ne (62)
Chairman of the Board of
Management of Volkswagen
Management Association (VMA)
July 1, 2004*
 APPOINTMENTS OF MEMBERS OF THE SUPERVISORY BOARD 187

Financial Statements
dr. jur. dr.-ing. e. h. bernd wehlauer (51) committees of the

Auditors Report
heinrich v. pierer (65) Deputy Chairman of the Group supervisory board
Chairman of the Supervisory and General Works Councils of
Board of Siemens AG Volkswagen AG Members of the Presidium and
June 27, 1996* September 1, 2005* Mediation Committee in accordance
Appointments: with section 27(3) of the

Deutsche Bank AG, Frankfurt am Main Mitbestimmungsgesetz (German

Executive Bodies

Hochtief AG, Essen
dr. wendelin wiedeking (53) Codetermination Act)

Mnchener Rckversicherungs-
Gesellschaft AG, Munich President and CEO of Hon.-Prof. Dr. techn. h. c. Dipl.-Ing.

Siemens AG, Munich (Chairman) Dr. Ing. h. c. Porsche AG ETH Ferdinand K. Pich (Chairman)

ThyssenKrupp AG, Dsseldorf Bernd Osterloh
January 28, 2006*

Additional Information
Appointments (as of February 6, 2006): Jrgen Peters
Porsche Cars North America Inc., Christian Wulff
the lord david simon of Wilmington
Porsche Cars Great Britain Ltd, Reading
highbury, cbe (66)
Porsche Italia S.p.A., Padua
April 16, 2002* Porsche Ibrica S.A., Madrid Members of the Audit Committee
Appointments: Porsche Japan K.K., Tokyo Dr. jur. Klaus Liesen (Chairman)
Senior Advisor, Morgan Stanley Porsche Financial Services Inc., Wilmington
Bernd Osterloh
International Ltd., London Porsche Enterprises Inc., Wilmington
Director, Suez Group, Paris Porsche Business Services, Inc., Wilmington
Hon.-Prof. Dr. techn. h. c. Dipl.-Ing.
Director, Unilever plc., London Novartis AG, Basel ETH Ferdinand K. Pich
Director, Unilever N.V., Rotterdam Bernd Wehlauer

christian wulff (46)

jrgen stumpf (51) Prime Minister for the Federal
Chairman of the Works Council at State of Lower Saxony
the Volkswagen AG Kassel plant April 8, 2003*
January 1, 2005*

dr. rer. pol. h. c.

klaus volkert (63)
July 2, 1990 August 15, 2005*

Membership of statutory supervisory boards in

Germany.
 Group appointments to statutory supervisory boards.
Comparable appointments in Germany and abroad.

* The date signifies the beginning or period of

membership of the Supervisory Board.
188 Financial Statements Auditors Report Executive Bodies Additional Information

> Glossary
> Index
Key performance indicators by business line and market

glossary

selected terms at a glance

ACC (Adaptive Cruise Control) Hybrid drive

Enhanced cruise control system incorporating a distance control Drive combining two different types of engine and energy
function that uses radar sensors. ACC identifies potential accident storage system (usually an internal combustion engine and an
risks and activates the brakes as a precaution. electric motor).

B2B supplier platform MPV

Online marketplace for cooperation with suppliers. Multi Purpose Vehicle

Car-to-car or car-to-X communication Press and Drive

Wireless transfer of information from vehicle to vehicle or Convenient starting function whereby a transmitter is used to
between vehicles and traffic lights, signs or barriers. activate and deactivate the central locking system and once
inserted into the dashboard start the engine.
Corporate Governance
International term for responsible corporate management and Scouting
supervision driven by long-term value added. Seeking out trends directly in the marketplace.

CSC roof SUV

Foldable hardtop combining the features of a coup, sun and Sports Utility Vehicle
convertible roof.
TSI technology
ESP (Electronic Stability Program) Technology combining direct petrol injection with a twin super-
System that detects and counteracts skidding movements of a charger, in which a mechanically-driven supercharger operates
vehicle by reducing wheel locking when braking, preventing the until an exhaust-driven turbocharger takes over.
tires from spinning, or distributing braking power between the
front and rear axles. Turntable concept
Manufacturing flexibility enabling the production of different
ForMotion plus models in variable daily volumes within a single plant, as well as
Successor program to the ForMotion program launched in 2004 offering the facility to vary daily production volumes of one model
that aims to enhance the performance of the Volkswagen Group. between two or more plants
 GLOSSARY | INDEX 189

index

Financial Statements
A G Q
Accounting policies 124 General economic development 48, 94, 102 Quality assurance 83, 86, 96
Annual General Meeting 29, 58 Group structure 58, 108
R
B H Ratings 30, 98
Balance sheet by division 62, 63 Health status 89 Report on post-balance sheet date events 99

Auditors Report
Balance sheet of Volkswagen AG 74 Research and development 80, 95
I Research and development costs 76, 82
C Income statement by division 67 Result by business line 37
Cash and cash equivalents 64 Income statement of Volkswagen AG 74 Result by market 37
Cash flow 65, 106 Inventories 55 Risk management 33, 94
Cash flow statement by division 65 Investment and financial planning 106

Executive Bodies
Consolidation methods 123 S
Corporate Governance 10, 31, 174 K Sales 54, 76, 85
Cost of capital 56 Key financial figures 69 Sales revenue by business line 37
Sales revenue by market 37
D L Scope of consolidation 120
Declaration by the Board of Management 112 Legal cases 97 Segment reporting 132

Additional Information
Declaration of conformity 10, 31 Shareholder structure 25
Deliveries 51, 106 M Share movement 24, 25
Demand for passenger cars 49, 96, 103 Market shares 52, 106 Share of sales revenue by market 68
Dependent company report 77 Models 51, 53, 105 Significant Group companies 179
Dividend proposal 75 Stock option plan 26, 154
Dividend yield 24 N Summary 59, 70, 108
New issues 29 Supplier management 83
E Non-financial performance indicators 80
Earnings per share 24 Number of employees 55, 76 V
Economic growth 49 Value added 70
Effects of amended or new IFRSs 62, 118 O Value-based management 56, 107
Employee pay and benefits 75 Operating result 37, 67, 190 Value contribution 57
Employees 86, 97 Orders received 54
Environmental protection 76, 89, 97
Exchange rate movement 48 P
Procurement 83, 96
F Production 84, 96
Financial position 64 Production figures 39, 41, 43, 55, 76
Five-year review 71 Proposal on the appropriation of net profit 75
Foreign currency risk 98 Prospects 109
Purchasing volume 76, 84
190 Financial Statements Auditors Report Executive Bodies Additional Information

Glossary
Index
> Key performance indicators by business line and market

key performance indicators by business line and market

volume data of the automotive division

Deliveries Vehicle sales Production

thousand vehicles* 2005 2004 2005 2004 2005 2004
Volkswagen brand group 3,588 3,522 3,557 3,561 3,588 3,509
Audi brand group 1,253 1,223 1,241 1,221 1,230 1,248
Commercial Vehicles 401 334 395 360 402 337
Total 5,243 5,079 5,193 5,143 5,219 5,093
* All figures shown are rounded, so minor discrepancies may arise from addition of these amounts.

volume data of the financial services division

thousand units/million days 2005 2004 %

Outstanding agreements Financial Services business line 5,938 5,883 + 0.9
Customer finance 3,072 2,992 + 2.7
Leasing 1,181 1,233 4.2
Services/insurance 1,685 1,658 + 1.6
Rental days Europcar business line 36.3 32.5 + 11.7

key financial figures by business line

Sales revenue Operating result Return on sales1)

2)
million/% 2005 2004 2005 2004 2005 20042)
Volkswagen brand group 49,625 47,338 638 25 1.3 0.1
Audi brand group 28,432 26,646 1,409 1,227 5.0 4.6
Commercial Vehicles 7,297 5,994 102 144 1.4 2.4
Remaining companies3) 319 275 61 52
Financial Services/Europcar 9,595 8,710 933 927 9.7 10.6
Business lines before special items 95,268 88,963 3,143 2,037
Special items 351 395
Volkswagen Group 95,268 88,963 2,792 1,642 2.9 1.8
1)
Operating profit as a percentage of sales revenue.
2)
Restated.
3)
Primarily AutoVision GmbH, Volkswagen Group Services SCS, Volkswagen International Finance N.V., Volkswagen Investments Ltd.,
VW Kraftwerk GmbH, Volkswagen Immobilien, gedas group (including VW Versicherungsvermittlungs-GmbH and Volkswagen
Beteiligungs-Gesellschaft mbH in the previous year).

key financial figures by market

Sales revenue Operating result

million 2005 2004 2005 20041)
Europe/Remaining markets 69,357 64,259 3,903 2,707
North America 13,723 13,308 843 902
South America/South Africa 6,926 5,531 171 24
Asia-Pacific2) 5,262 5,865 88 208
Markets before special items 95,268 88,963 3,143 2,037
Special items 351 395
Volkswagen Group2) 95,268 88,963 2,792 1.642
1)
Restated.
2)
The sales revenue and operating results of the joint venture companies in China are not included in figures for the Group and the Asia-Pacific market.
The vehicle-producing Chinese joint venture companies are consolidated using the equity method, and recorded an operating result (proportional) of
119 million (222 million) impacted by special items.
contact information

published by
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Phone +49 5361 9-0
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This Annual Report is published in English and German.

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printed by
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ISSN 0944-9817 / 1058.809.491.20 Printed in Germany
scheduled dates 2006

April 1 9, 2006

auto mobil
international,
leipzig

April 14 23, 2006

international
auto show,
new york

April 28
May 7, 2006

salo internacional
do automvel de
portugal, lisbon

january february march april may june

March 2 12, 2006 May 26

June 4, 2006

international
motor show, saln internacional
geneva del automvil,
madrid

Financial Calendar 2006

>> march 7, 2006

Annual Press Conference/
Publication of the 2005 Annual Report

>> march 8, 2006

International Investor Conference

>> april 28, 2006

Interim Report January to March

>> may 3, 2006

Annual General Meeting
(Congress Center Hamburg)

>> july 27, 2006

Interim Report January to June

>> october 27, 2006

Interim Report January to September
 October 14 23, 2006
December 1 10, 2006

australian
international los angeles
motor show, sydney auto show,
los angeles
August 26
September 3, 2006 October 21
November 6, 2006 December 1 10, 2006

international
caravan salon, tokyo motor show, essen motor show,
dsseldorf tokyo essen

july august september october november december

September 21 28, 2006

iaa commercial
vehicles, hanover

September 30
October 15, 2006

mondial de
lautomobile,
paris
<<< scheduled dates 2006

overview of the group

Automotive Division

volkswagen audi commercial remaining

brand group brand group vehicles companies

> financing

> services

Financial Services Division

> dealer and customer > rental business

financing

> leasing

> insurance

> fleet business

 V O L K S WA G E N A G ANNUAL REPORT 2005
ANNUAL REPORT 2005